In this article, the traditional cost-volume-profit (CVP) model is expanded to incorporate the cost of capital. Using the principles of activity-based costing, the opportunity cost of invested funds is traced to a product and is used to determine its operating income after taxes less the cost of capital or economic income each period. When a product's economic income over its useful life is discounted to when production will begin, it is equivalent to a product's net present value (NPV) (see Hartman, 2000; Shrieves and Wachowicz, 2001). The NPV equation, or model, developed in this manner is based on accounting, rather than cash flow, variables. Consequently, it provides a framework for performing CVP analysis. As demonstrated in the article, the CVP model incorporating the cost of capi...
This paper presents the results of a survey of U.S. hospital capital budgeting practices. Capital budgeting allows managers to perform cost benefit analysis on proposed long-term investment projects. For hospitals and health care systems, such analysis may help organizations fulfill their missions while remaining financially secure. This paper extends the work of previous surveys on hospital capital budgeting by Kamath and Elder (1989) and Kamath and Oberst (1992) by including small as well as large hospitals and by analyzing the relationships between capital budgeting practices and key hospital characteristics such as managed care level, Medicare level, hospital size, and membership in a multi-hospital system. A key finding of this research is that multi-hospital system membership is a...
The Environmental Protection Agency (EPA) is proposing a Federal Implementation Plan (FIP) to address regional haze in the State of Montana. EPA developed this proposal in response to the State's decision in 2006 to not submit a regional haze State Implementation Plan (SIP) revision. EPA is proposing to determine that the FIP satisfies requirements of the Clean Air Act (CAA or ``the Act'') that require states, or EPA in promulgating a FIP, to assure reasonable progress towards the national goal of preventing any future and remedying any existing man-made impairment of visibility in mandatory Class I areas. In addition, EPA is also proposing to approve a revision to the Montana SIP submitted by the State of Montana through the Montana Department of Environmental Quality on February 17, 2...
...V. EPA's Analysis of Montana's Regional Haze. A. Affected Class ... initials CCM mean or refer to EPA Control Cost Manual. xi. The initials CCOFA mean or refer t...The initials CRF mean or refer to Capital Recovery Factor. xxiii. The initials DAA mean ...
The idea of the "cost of capital" is fundamental to what managerial finance and accounting professionals do, directly or indirectly, as part of their participation on cross-functional decision teams. They need to understand and apply techniques for estimating the cost of capital for long-term capital budgeting: 1. merger and acquisition analysis, 2. use of Economic Value Added (EVA) as a firm-wide financial performance indicator, 3. incentive systems for financial control, using residual income for evaluating financial performance, 4. equity valuation analyses, 5. and accounting for purchased goodwill. This study offers readers an overview of theoretical and empirical issues involved in estimating a firm's weighted average cost of capital (WACC), and it reviews and applies several metho...
... of this case is to describe realistic capital budgeting issues within a large organization. The ... such as product pricing and investment cost savings when combined with the cost associated wit.... Additionally, the quantitative analysis in the Exhibit includes various IRR results under ...
A cost analysis of Oklahoma City leaving the EMSA Trust to put ambulance services under the city fire department's management suggests a nearly even financial trade-off, but a thin margin of error could prove to be expensive. And the analysis by the Public Financial Management Inc. consulting firm also assumes Tulsa and other Emergency Medical Services Authority Trust members across the state would agree to the dissolution of the service structure as it now stands. A no vote could drive up costs even higher if Oklahoma City lost its capital investment by pulling out without full support of the group.
As part of its Employee Benefits Cost Analysis, Elite Capital Management Group uses a weighted average method to determine future employee benefits costs over the next 15 to 20 years. This total is then translated into today's dollars using a net present value calculation. Matthew Butler, president of Elite Capital Management Group, says the company portfolios are totally flexible and liquid. So a credit union investor could ask for a check for funds in its portfolio and expect the money straightaway. Because of their discipline and investment methodology, their program is a great way for the credit union to balance the scales between safety and soundness and putting capital to best use. The out-of-pocket savings to the credit union are significant, says Butler.
An overview of the financial theory used for valuing stocks and businesses is provided as a guide for financial officers contemplating organizational restructurings involving divestitures and acquisitions. Valuation terms such as price-to-earnings ratios (P/E), discounted cash flow (DCF) and weighted average cost of capital (WACC) are explained. Specifically, the uses of such valuation concepts in the analysis of performance and share values are clarified. Among these concepts, the P/E ratio remains the standard benchmark for establishing the market value of a company's shares. It is usually computed by comparing the P/E ratios of similar companies, either by using invested capital multiples or common equity multiples. The DCF, on the other hand, is used for valuing shares on the basis ...
Calvin Luther's column, "Lowering the cost of home heating" (BDN, June 19), made valid points, though to be more rigorous the cost of capital should be included. I expect that the ground source heat pump will have both the highest and most variable capital cost, though at least in some cases it may remain the cheapest alternative. The analysis should maintain the capital cost as a desegregated component, as some users may find that a capital cost is more benign from an environmental standpoint than an energy cost, or may face a different cost of capital than that used in the analysis and may wish to take that into account. Some potential users may face issues with respect not only to cost of capital but availability.
This paper develops some results regarding the economic value added and real options. We use Merton's (1987) model of capital market equilibrium with incomplete information to introduce information costs in the pricing of real assets. This model allows a new definition of the cost of capital in the presence of information uncertainty. Using the methodology in Bellalah (2001, 2002) for the pricing of real options, we extend the standard models to account for shadow costs of incomplete information.
..., but also in the latest outgrowth in DCF analysis; the Economic Value Added. EVA simply means that t...
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