{"id":237,"date":"2021-01-26T22:28:48","date_gmt":"2021-01-26T22:28:48","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&#038;p=237"},"modified":"2021-08-15T20:48:15","modified_gmt":"2021-08-15T20:48:15","slug":"decision-making-process","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/chapter\/decision-making-process\/","title":{"raw":"Costs for Capital Budgeting Analysis","rendered":"Costs for Capital Budgeting Analysis"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Understand operating and implementation costs in a capital budgeting analysis<\/li>\r\n<\/ul>\r\n<\/div>\r\n<img class=\"alignright wp-image-1562\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/12224637\/adeolu-eletu-unRkg2jH1j0-unsplash-300x199.jpg\" alt=\"Man looking at analytics on a tablet\" width=\"450\" height=\"298\" \/>In the prior section, we broke the capital budgeting process into three phases, each with three steps:\r\n\r\nPhase 1 - Screening\r\n<ol>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Begin with the larger picture<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Identify and evaluate potential opportunities<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Screen opportunities<\/li>\r\n<\/ol>\r\nPhase 2 - Analysis\r\n<ol>\r\n \t<li>Estimate operating and implementation costs<\/li>\r\n \t<li>Estimate cash flow<\/li>\r\n \t<li>Assessment<\/li>\r\n<\/ol>\r\nPhase 3 - Implementation\r\n<ol>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Select the project<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Implement the project<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Re-evaluate the decision<\/li>\r\n<\/ol>\r\nLet\u2019s dive a bit deeper into Phase 2: Preparing a Capital Budgeting Analysis.\r\n\r\nTo illustrate the steps in capital budgeting analysis, we will use a hypothetical example of the purchase of a small van to be used by Cynthia Becker for making local, short-haul deliveries\u2014the portion of the trip that online retailers call the \u201clast mile.\u201d Becker plans to acquire the van, use it for four years, and then sell it for fair value on the resale market. She plans to use the sales proceeds as a down payment on a replacement van at that time.\r\n\r\nShe started with Phase 1, step 1 when she established her business and her strategic plan. For step 2, she looked at her needs as an independent delivery service and made a list of different vehicles she could use. In step 3, she settled on a particular van. Now she moves into Phase 2.\r\n<h3>Phase 2\u2014Step 1: Estimate operating and implementation costs<\/h3>\r\n<strong>Implementation costs<\/strong> are the total initial investment, which is the total cost of the asset being acquired or the total investment necessary to fund the project. In our example, Becker has estimated total costs to be:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>Capital Investment<\/caption>\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Amount<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Van<\/td>\r\n<td class=\"r\">$\u00a0 35,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cargo lift\/Custom paint<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 5,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales tax at 8%<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 3,200<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Vehicle registration<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 600<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 43,800<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nFor Becker\u2019s capital investment project, she has projected the following costs:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>Annual Cash Flows<\/caption>\r\n<thead>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\">YR 1<\/th>\r\n<th class=\"r\" scope=\"col\">YR 2<\/th>\r\n<th class=\"r\" scope=\"col\">YR 3<\/th>\r\n<th class=\"r\" scope=\"col\">YR 4<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Fuel<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 8,000<\/td>\r\n<td class=\"r\">$\u00a0 \u00a08,000<\/td>\r\n<td class=\"r\">$\u00a0 \u00a08,000<\/td>\r\n<td class=\"r\">$\u00a0 \u00a08,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Maintenance<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 1,000<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 2,000<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 3,000<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 4,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Repairs<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 -<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 -<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 4,000<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 -<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Tires\/etc.<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 750<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 750<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 750<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 750<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Total cash out<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 9,750<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 10,750<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 15,750<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 12,750<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Delivery Revenue<\/td>\r\n<td class=\"r line-double\">$\u00a0 \u00a026,000<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-double\">$\u00a0 26,000<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-double\">$\u00a0 26,000<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-double\">$\u00a0 26,000<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\nNow, check your understanding of estimating operating and implementation costs.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\n[ohm_question hide_question_numbers=1]221569[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Understand operating and implementation costs in a capital budgeting analysis<\/li>\n<\/ul>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-1562\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/12224637\/adeolu-eletu-unRkg2jH1j0-unsplash-300x199.jpg\" alt=\"Man looking at analytics on a tablet\" width=\"450\" height=\"298\" \/>In the prior section, we broke the capital budgeting process into three phases, each with three steps:<\/p>\n<p>Phase 1 &#8211; Screening<\/p>\n<ol>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Begin with the larger picture<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Identify and evaluate potential opportunities<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Screen opportunities<\/li>\n<\/ol>\n<p>Phase 2 &#8211; Analysis<\/p>\n<ol>\n<li>Estimate operating and implementation costs<\/li>\n<li>Estimate cash flow<\/li>\n<li>Assessment<\/li>\n<\/ol>\n<p>Phase 3 &#8211; Implementation<\/p>\n<ol>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Select the project<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Implement the project<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Re-evaluate the decision<\/li>\n<\/ol>\n<p>Let\u2019s dive a bit deeper into Phase 2: Preparing a Capital Budgeting Analysis.<\/p>\n<p>To illustrate the steps in capital budgeting analysis, we will use a hypothetical example of the purchase of a small van to be used by Cynthia Becker for making local, short-haul deliveries\u2014the portion of the trip that online retailers call the \u201clast mile.\u201d Becker plans to acquire the van, use it for four years, and then sell it for fair value on the resale market. She plans to use the sales proceeds as a down payment on a replacement van at that time.<\/p>\n<p>She started with Phase 1, step 1 when she established her business and her strategic plan. For step 2, she looked at her needs as an independent delivery service and made a list of different vehicles she could use. In step 3, she settled on a particular van. Now she moves into Phase 2.<\/p>\n<h3>Phase 2\u2014Step 1: Estimate operating and implementation costs<\/h3>\n<p><strong>Implementation costs<\/strong> are the total initial investment, which is the total cost of the asset being acquired or the total investment necessary to fund the project. In our example, Becker has estimated total costs to be:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>Capital Investment<\/caption>\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Amount<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Van<\/td>\n<td class=\"r\">$\u00a0 35,000<\/td>\n<\/tr>\n<tr>\n<td>Cargo lift\/Custom paint<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 5,000<\/td>\n<\/tr>\n<tr>\n<td>Sales tax at 8%<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 3,200<\/td>\n<\/tr>\n<tr>\n<td>Vehicle registration<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 600<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 43,800<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>For Becker\u2019s capital investment project, she has projected the following costs:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>Annual Cash Flows<\/caption>\n<thead>\n<tr>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\">YR 1<\/th>\n<th class=\"r\" scope=\"col\">YR 2<\/th>\n<th class=\"r\" scope=\"col\">YR 3<\/th>\n<th class=\"r\" scope=\"col\">YR 4<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Fuel<\/td>\n<td class=\"r\">$\u00a0 \u00a0 8,000<\/td>\n<td class=\"r\">$\u00a0 \u00a08,000<\/td>\n<td class=\"r\">$\u00a0 \u00a08,000<\/td>\n<td class=\"r\">$\u00a0 \u00a08,000<\/td>\n<\/tr>\n<tr>\n<td>Maintenance<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 1,000<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 2,000<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 3,000<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 4,000<\/td>\n<\/tr>\n<tr>\n<td>Repairs<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 &#8211;<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 &#8211;<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 4,000<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 &#8211;<\/td>\n<\/tr>\n<tr>\n<td>Tires\/etc.<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 750<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 750<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 750<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 750<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Total cash out<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 9,750<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 10,750<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 15,750<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 12,750<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Delivery Revenue<\/td>\n<td class=\"r line-double\">$\u00a0 \u00a026,000<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-double\">$\u00a0 26,000<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-double\">$\u00a0 26,000<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-double\">$\u00a0 26,000<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>Now, check your understanding of estimating operating and implementation costs.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p><iframe loading=\"lazy\" id=\"ohm221569\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=221569&theme=oea&iframe_resize_id=ohm221569\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-237\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Introduction to Budgeting. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Man looking at analytics on a tablet. <strong>Provided by<\/strong>: Unsplash. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/unsplash.com\/photos\/unRkg2jH1j0\">https:\/\/unsplash.com\/photos\/unRkg2jH1j0<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/cc0\">CC0: No Rights Reserved<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":364389,"menu_order":4,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Introduction to Budgeting\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Man looking at analytics on a tablet\",\"author\":\"\",\"organization\":\"Unsplash\",\"url\":\"https:\/\/unsplash.com\/photos\/unRkg2jH1j0\",\"project\":\"\",\"license\":\"cc0\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-237","chapter","type-chapter","status-publish","hentry"],"part":37,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/237","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/users\/364389"}],"version-history":[{"count":11,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/237\/revisions"}],"predecessor-version":[{"id":2664,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/237\/revisions\/2664"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/parts\/37"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/237\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/media?parent=237"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=237"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/contributor?post=237"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/license?post=237"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}