Many business decisions require some level of analysis. Differential analysis is one technique for short-term projects. Capital budgeting or capital investment analysis is used for other types of decisions involving long-term, capital intensive projects.

Skills

The purpose of this discussion is to help you practice the following skills that are essential to your success in this course, in this field and in professional life beyond school:

• Explain the benefit of differential analysis
• Discuss various capital budgeting methods

Knowledge

This discussion will also help you to become familiar with the following important content knowledge in this discipline:

• Differential analysis, differential revenue, differential cost, differential income
• Relevant revenues and cost, sunk cost
• Capital budgeting methods
• Present value

Tasks

• Lucca Inc. is a popular family owned pizzeria and the owners are considering selling its existing gas pizza oven and replacing it will a new wood-burning pizza oven for its business. The cost of the new over would be $10,000. The new oven is more efficient, has a larger capacity, and it would reduce the time to cook a pizza.
• Lucca Inc. is also considering expanding its operations by purchasing another pizzeria located in nearby area with minimal competition. It would cost $200,000. Expected annual cash flow is $75,000 and the expected annual net income is $55,000.

• Based on the two potential investments above, discuss which analysis method you would use to evaluate the viability of each decision. (Address each investment independently)
• What additional information could be relevant to help with your analysis.

Answer rating: 100% (QA)

Differential analysis also called incremental analysis is used to analyse and evaluate short term projects Whereas Capital budgeting techniques are us... View the full answer