longtermdecisionsACC200 2009

# longtermdecisionsACC200 2009 - Chapter Objectives Long-term...

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Chapter Objectives – Long-term (Capital Investment) Decisions Discuss the importance of focusing on cash flows in capital investment decisions Understand the typical cash inflows and outflows associated with an investment project and how they affect capital investment decisions Evaluate capital investment decisions using net present value (NPV) and internal rate of return (IRR) Discuss the key assumptions of the NPV and IRR methods Compute the profitability index and rank investment projects using NPV, IRR and the profitability index Compute the payback period of an investment and understand the limitations of the method Compute the after-tax cost and benefits of cash expenses and receipts Compute the after-tax NPV and IRR of an investment.

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Management Decision Cycle FINANCING DECISIONS INVESTING DECISIONS OPERATING DECISIONS FUNDING OPERATING PROFIT INVESTMENTS
Long-Term Investing Decisions Capital Investment Decisions Focus Cash Flows Time Value of Money

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Time Value of Money The time value of money takes into consideration the ability of money to earn interest over time Interest Simple Interest Compound Interest Annually Semi-annually Quarterly Monthly Daily
Time Value of Money Value of an Investment How much would an investment of \$100 be worth in five years if it earns 10 percent a year for the five years? 1 1 2 2 3 3 4 4 PV=\$100 PV=\$100 Earns at 10% a year Earns at 10% a year FV=\$161.05 FV=\$161.05 Today Today Future Future

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Time Value of Money Calculations Calculations can be made using Formula Tables Hand-held calculators Computers
Time Value of Money Future Value of a Lump Sum Future Value of \$100 Today Compounded for Five Years at 10 Percent Interest: 1 1 2 2 3 3 4 4 PV=\$100 PV=\$100 Compound at 10% Compound at 10% FV=\$161.05 FV=\$161.05 Today Today Future Future

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## This note was uploaded on 04/21/2009 for the course ACC 200 taught by Professor Buckless during the Spring '08 term at N.C. State.

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longtermdecisionsACC200 2009 - Chapter Objectives Long-term...

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