Chapter 19
Managerial Accounting
Other Capital
Budgeting Issues
Prepared by Diane Tanner
University of North Florida
Inflation
 Inflation causes revenues and costs to increase in
future years
 Future cash flows that do not include inflationary
effects are underestimated
 Which results in smaller present values of future amounts
 May cause worthwhile investment opportunities to be
rejected
 Why?
 NPV will appear lower than if inflation was included
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Soft Benefits in Capital Budgeting
 Considerations go beyond financial results
 Difficult to quantify
 May include
(1) A company's reputation
(2) Maintaining a competitive advantage
(3) Employee moral
Performance Evaluation
• If managers are evaluated on short-term
profitability……..
– Managers focuses on maximizing short-term profit
 Causes by a conflict between capital budgeting &
performance evaluation
Good for the Manager
Good for the Company
Maximize
Accounting Income
Maximize
Shareholder Wealth
Short-term focus
Growth-orientation
Conflict Between Capital Budgeting and
Performance Evaluation
Dewey Cheatham is currently generating a return of
11% in his department. The corporate RRR is 8%.
Cheatham is pondering a capital budgeting investment
expected to generate a 10% return.
• Should the manager undertake the investment?
• Will the manager undertake the investment?
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Performance Evaluation Remedy
 Evaluate managers on other performance
factors
 Such as
 Give managers stock ownership in the company
 Motivates them to focus on both the long and shortrun when making decisions in an effort to add value to
the company
 Incorporate the evaluation of capital budgeting
projects with overall profitability
The End
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