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CIMA BA2 Notes Chapter 14 - Long-term decision making
CIMA BA2 Notes Chapter 14 - Long-term decision making
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0BA 2 - Fundamentals of Management Accounting
Long-term decision making
Chapter fourteen
BA 2 Long-term decision making. Quantia Learning
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BA 2 Long-term decision making. Quantia Learning
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Here we will look at long term decision making, specifically
capital investment decisions.
Capital investment decisions normally represent the most
important decisions that an organisation makes, since they
normally commit a substantial proportion of the organisation's
resources to actions that are likely to be long-term or
irreversible. Many different capital investment projects exist
including: replacement of assets, cost reduction schemes,
new product/service developments and product/service
expansions. Some may be statutory; others may be carried
out for growth or environmental reasons.
To appraise a potential capital project:
• Estimate the costs and benefits from the investment
• Select an appraisal method and use it to assess if the investment is financially worthwhile
• Decide whether or not to go ahead with the project.
It is important to note that the costs and benefits from the
investment are estimates. Many take place in the future
and many assumptions are made in calculating these
figures. The costs and benefits for the investment are
called cash flows. Remember that all the rules of
relevant cost also apply to investment decisions, only
relevant cash flows should be used.
Appraisal methods
There are a number of appraisal methods which are used to assess how financially worthwhile
investments are. The three techniques covered in the level are:
• Payback.
• Net present value (NPV).
• Internal rate of return (IRR).
The different methods can give different answers and in practice, most organisations use more
than one appraisal method.
BA 2 Long-term decision making. Quantia Learning
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