chapter 14

chapter 14 - Capital Budgeting Decisions Chapter Fourteen...

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Chapter 14 Page 1  Accounting 2102 Capital Budgeting Decisions Chapter Fourteen
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Chapter 14 Page 2 Accounting 2102 Capital Expenditures Importance Significant cash outflow Useful beyond current year Two decisions involved 1. Acceptance or rejection 3. Capital rationing
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Chapter 14 Page 3 Accounting 2102 time value of money First Decision . . . ACCEPT or REJECT FOUR common methods of analysis 1. Accounting Rate of Return (aka Simple Rate of Return) 3. Cash Payback Period 5. Net Present Value (NPV) 7. Internal Rate of Return (IRR) let’s look at each method individually . . .
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Chapter 14 Page 4 Accounting 2102 Method 1 . . . Accounting Rate of Return measures profitability of decision using accounting net income (ANI) (depreciation and income taxes are subtracted from NI to arrive at ANI) accounting rate of return = estimated annual average ANI ÷ initial investment cost Advantages Easy, based on income statement Disadvantages Doesn’t consider cash flow compare accounting rate of return to company set hurdle rate . . . if accounting rate of return > hurdle rate → accept . . . if accounting rate of return < hurdle rate → reject
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Chapter 14 Page 5 Accounting 2102 Method 2 . . . Cash Payback Period determines amount of time necessary to recoup initial investment payback period = initial cost ÷ annual cash flow Advantages Easy, deals with cash, great screening tool for start up and cash poor companies Disadvantages Ignores time value of money compare payback period to company set “recoup” period . . . if payback period > recoup period → reject . . . if payback period < recoup period → accept
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This note was uploaded on 05/08/2008 for the course ACCT 2102 taught by Professor Farmer during the Spring '08 term at UGA.

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chapter 14 - Capital Budgeting Decisions Chapter Fourteen...

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