Title: Capital Budgeting Techniques
Course: BAC300: Management Accounting I (PEBL) > Section: LESSON SEVEN: Capital Budgeting Techniques

1.1  Introduction

In this first lesson, we lay the foundation for the entire course by defining the concept entrepreneurship and other related terms. Throughout our teaching experiences, we have found that an understanding of the basic principles behind the subject and their applications increases the students’ motivation for the subject. We therefore introduce you to the theories upon which entrepreneurship study is based and encourage you to engage in in-depth discussions of these concepts and theories. Since the term entrepreneurship is closely associated with small businesses, we introduce the concept of small business too. The purpose of this lesson is to enable you understand fundamental concepts and theories of entrepreneurship.

7.1 Introduction

Lesson-level overview | Lesson/week/section | 7.
Lesson name: | Capital Budgeting Techniques
Aim of the lesson: | This lesson exposes you to steps in capital budgeting as well as various Capital budgeting techniques that can enable you evaluate projects
This lesson covers:
- Steps in capital budgeting.
- Capital budgeting techniques.
- Evaluation of projects using capital budgeting techniques.
Intended learning outcomes:
At the end of this lesson, you will be able to:

1. Explain the steps in capital budgeting.
2. Select an appropriate capital budgeting technique to evaluate projects.
3. Apply a select capital budgeting technique to evaluate projects.

Overview of student activity:
1.Pre-lesson activity – Watching a video on capital budgeting process and making short notes before face to face class

2. Engaging in e-tivities 7.1, 7.2, 7.3 that involve  reading linked resources and watching videos on steps in capital budgeting and criteria for selecting capital budgeting techniques

3. Calculations of Accounting Rate of Return

4. Interactions on the discussion forums

Constructive alignment of lesson level outcomes with module level outcomes, learning activities and assessment

(Pressing <Tab> at the end of the table will provide additional rows in the table, if required.)
Intended Lesson learning outcomes: | No of module-level outcome | Activity where students engage with this outcome | Where and how is this outcome assessed?
At the end of this lesson, you will be able to:
Explain the steps in capital budgeting. | 3 | 7.1 | 7.1 (a) Short answer question
Select an appropriate capital budgeting technique to evaluate projects | 3 | 7.2 | 7.2 (a) Essay question
Apply a select capital budgeting technique to evaluate projects. | 3 | 7.3 | 7.3 (a) and (b) Calculation  questions

Detailed explanation of ALL student and teacher engagement with the lesson:

(This should be presented in the order that the activities take place.  So if students do work online before coming to the lecture, that should be shown ahead of what happens in class.

If there is more than one opportunity for face-to-face contact, or more than one online task, there should be a separate section for each instance, and they should be presented in the template in the same order that students encounter them.)

Content – such as lecture material – can EITHER be shown here OR added as clearly identifiable addenda to the document.  If you plan to use addenda, you should ensure that these are cross-referenced in this section.)
Module-level outcomes addressed:
Lesson seven addresses module learning outcome 3, management accounting techniques in business decisions.
Purpose of the lesson/week/section:
This lesson helps you understand the steps in capital budgeting as well as capital budgeting techniques that you can apply to evaluate of projects.
Over to you: (a description of the process of the section)
You will start by watching a video on capital budgeting process and making short notes in your portfolio before face to face class. You will then engage in e-tivities 7.1, 7.2, 7.3 that involve  read some resource and watch video as well as answering questions on steps in capital budgeting. Thereafter, you will read more on criteria of selecting capital budgeting techniques before finally being exposed to calculations of Accounting Rate of Return and management decisions that can be made on the basis of such calculations.
Pre-lesson activity: | Number of hours | 1
Capital budgeting process more or less similar to decision making process with proposal generation, review and analysis, decision making, implementation and follow-up. Watch video on capital budgeting process and make short notes on capital budgeting  process to help you complete e-tivity 6.1 in discussion forum 6.1.
Face to face time: (if applicable) | Number of hours | 1
1. Explain the learning outcomes
2. Introduce the lesson
3. Explain the content

E-tivity 7.1

Online activity: | Number of hours | 1
What should students do?
E-tivity 7.1

Using this of steps in capital budgeting above, watch the video and read material  and then;

a) Explain steps in capital budgeting.

b) Once you have posted your answers on the discussion forum, read what three of your colleagues in the tutorial group have posted and note the steps in capital  budgeting. Add any new step to your notes.
Where do they do it? | On the discussion forum 7.1
By when should they do it? | Before the next lesson.
E-moderator/tutor role
1. Ensure that learners are focused on the contents and context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on e-tivity 7.1 tasks.
4. Close the e-tivity.
How are the learning outcomes in this lesson assessed? | Number of hours | 1
Short answer question
How does this section link to other sections of the module?
It is the capital budgeting process and forms the basis for further interactions.

E-tivity 7.2

= Total number of hours | 4 |
Online activity: | Number of hours | 1
What should students do?
E-tivity 7.2

The figure above shows discounting and non-discounting capital budgeting techniques.

Selection of capital budgeting technique is important in capital budgeting decisions. Read materials on link1 and link2 and then;

(a) Explain criteria of selecting capital budgeting techniques.

(b) Once you have posted your answers on the discussion forum, read what three of your colleagues in the tutorial group have posted and note any other criteria of selecting capital budgeting technique. Add any new criteria to your notes.
Where do they do it? | On the discussion forum 7.2
By when should they do it? | Three days before next lesson.
E-moderator/tutor role
1. Ensure that learners are focused on the contents and context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on e-tivity 7.2 tasks.
4. Close the e-tivity.
How are the learning outcomes in this Lesson assessed? | Number of hours | 1
Essay questions
How does this section link to other sections of the module?
It is a continuation of capital budgeting process and forms the basis for further interactions.

E-tivity 7.3

Online activity: | Number of hours | 1
What should students do?
E-tivity 7.3

Watch video1, video2, video3, video4 and read materials on the link1 and link2,and then evaluate the following questions:

(a) Management has invested in a project for the last 3 years. The expected return from the project is 30%, they want continue investing in the similar project in the next 5 years. The cost of investment is sh. 1,000,000. The annual profits before taxes and depreciation for the project are expected to be as follows:

Years | 1 | 2 | 3 | 4 | 5
Profit BTD sh. | 300,000 | 360,000 | 400,000 | 440,000 | 400,000

The project is to be depreciated at a rate of 10% diminishing return and the company is within 30% tax bracket.

(i) Calculate Accounting Rate of Return (ARR %)

(ii) Advice on the decision management should make.

(b) A five-star hotel is considering investing in two mutually exclusive projects in Nyali or Malindi. The estimated cost of investment in either of the project is sh. 10,000,000 and required rate of return is 10% per annum. The projects are expected to generate cash inflows as follows in sh:

Years | 1 | 2 | 3 | 4 | 5 | 6 | 7
Nyali | 2,500,000 | 3,000,000 | 3,600,000 | 4,200,000 | 3,800,000 | 3,500,000 | 2,800,000
Malindi | 2,500,000 | 2,500,000 | 2,500,000 | 2,500,000 | 2,500,000 | 2,500,000 | 2,500,000

(i) Evaluate the two projects using:

(ii) Payback period (PBP)

(iii) Discounted payback period (DPBP)

(iv) Net Present Value (NPV)

(v) Profitability Index (PI)

(vi) Internal Rate of Return (IRR)

(c) Once you have posted your answers on the discussion forum, read what three of your colleagues in the tutorial group have posted and verify your answers and make corrections to your answer if necessary.
Where do they do it? | On the discussion forum 7.3
By when should they do it? | Before the next lesson.
E-moderator/tutor role
1. Ensure that learners are focused on the contents and context of discussion.
2. Stimulate further learning and generation of new ideas.
3. Provide feedback on e-tivity 7.3 tasks.
4. Close the e-tivity.
How are the learning outcomes in this Lesson assessed? | Number of hours | 1
Quantitative question
How does this section link to other sections of the module?
It lays foundation for the next lesson

Some important questions

Some important questions
Which learning resources/ references will scaffold the students’ learning?
1. MitchelL, F., Moyne, C. Patty, G. & Dixon, C. (2019) Principles of Accounting, Vol 2: managerial accounting, OpenStax , Houston, Texas, chapter 11.
  1. Kurt, H., Sierra, C. Joe, & H. (2012) Managerial Accounting, Saylor Foundation.
  2. Miranda L (2020) Introduction Capital budgets.
  3. Alldredge, D. (2017) Capital budgeting techniques.
How are students enabled to access the resources? | Resources are shared in the module that is loaded in the Learning Management System (LMS) and all students have access to it. The same module is placed on the OER Africa website.
Where in this lesson are students expected to work collaboratively? | Discussion forum 7.1,7.2 and 7.3
How has an inclusive approach been incorporated in this lesson?
1. Use of multimedia resources in the module and differentiated learning activities.
2. Use university computer labs, all resources are downloadable for offline use and discounted data bundles are available to students.
3. Use of accessibility button for learners with special needs on the LMS.
How will feedback on lesson be obtained from students? | Through the posts in the discussion forum 7.1,7.2 and 7.3
How will student feedback be used to improve lesson? | By incorporating suggestions in the course for the current and subsequent cohorts.
At which point(s) will students receive formative feedback on the work they have done in the lesson? | Before the next lesson.