ACCT101-Handout15

ACCT101-Handout15 - Acct 101 L12, L13, L16 Handout #15...

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Acct 101 L12, L13, L16 Handout #15 1 Capital Budgeting and Managerial Decisions Capital budgeting: to earn a satisfactory rate of return. Payback Period (time period expected to recover the initial investment amount) = flow cash net Annual investment of Cost Shorter the better Differences in the timing of net cash flows within the payback period are not reflected. Investments that provide cash more quickly are more desirable. All cash flows after the point where its costs are fully recovered are ignored. Not Using Time Value of Money Accounting Rate of Return = investment average Annual income net tax - after Annual Only related to returns from other investments with similar lives and risk. Amount invested is based on book values for future periods. May produce same results for different project with cash flows yield in different years. Net Present Value (If NPV >= 0, then asset is expected to recover its cost; project is accepted.) If investment opportunities have same cost and same risk, the one with highest positive net present value is preferred. When the projects have different risks, the NPVs should be computed
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This note was uploaded on 12/07/2009 for the course ACCT ACCT 101 taught by Professor H during the Fall '08 term at HKUST.

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ACCT101-Handout15 - Acct 101 L12, L13, L16 Handout #15...

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