Environmental Management Accounting Procedures and Principles

Environmental Management Accounting
Procedures and Principles
and principles behind capital budgeting. The environmental manager is struggling to speak “a
foreign language”, in monetary instead of physical terms but without a complete assessment of
annual corporate environmental costs as proposed in chapters 4 and 5; only a fraction of total
costs will be visible.
Conc lusi ons f r om several c as e s tudi es emphasi ze the need f or :
• I mproved c onsi st enc y bet ween phys i cal and monetary dat a and r el ated depar tment s;
• Materi al fl ow ac count ing as a bas is f or good cost ac count ing; and
• Adequate tr eat ment of c ont ingent cost s for t he as ses sment of inv es tment dec i si ons .
8.1. Capital budgeting basics
The basic idea of capital budgeting is to compare different investment alternatives.
Investment appraisal is used to determine the cost savings of an investment with regard to its
goals. The economical variables for assessment in static financial analysis include:
• Initial investment costs;
• Operating costs and earnings;
• Profit;
• Return on investment; and
• Payback period.
All methods of investment appraisal assume that all inputs and outputs of an investment
decision are quantifiable and can be monetarized.
In dynamic financial analysis, the expected future monetary inflows and outflows are
discounted to the time of the investment and calculated into internal discount rate or annuity.
The opportunity costs of capital (the lower value of cash flows which do not occur today, but
only in the future) are considered by discounting them with the interest rate of financial
markets. The sum of all discounted future cash flows determines the net present value of a
project or investment, which is compared to the value of the old equipment and to the interest
rate of financial markets. A planned investment has to be more profitable then gaining interest
on a bank deposit.
Payback methods for capital budgeting do not consider cash flows beyond the payback
period. Many companies adopt internal rules that only project with a payback period of two or
three years or less will be accepted, regardless of possible longer-term benefits. Discounted
cash flow methods in principle consider all relevant future cash flows until the project ends, but
as many companies apply excessively high interest rates, which result in a negligible present
value for medium and long-term costs and savings, only the first three years or so count
significantly for the investment decision.
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