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Reading_Assignment_for_Chapter_25 - and cash outflows so...

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Reading Assignment #10- Chapter 25 1. Define the term capital budgeting and give a real life example of how it might be used. Capital budgeting is the process of analyzing alternative long-term investments and deciding which assets to acquire or sell.( I am not sure what you mean by real life example) 2. What methods can be used to make capital budgeting decisions? Managers use several methods to make capital budgeting decisions, the most common methods are Payback period (PBP) and accounting rate of return. 3. What is the ‘payback method’ and how is it calculated? PBP is the expected time to recover the initial investment amount. PBP=cost of investment / Annual net cash flow. 4. What is the ‘net present value method’ and how is it calculated? Net present value analysis applies the time value of money to future cash inflows
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Unformatted text preview: and cash outflows so management can evaluate a project’s benefits and costs at one point in time. NPV is computed by discounting the future net cash flows from the investment at the projects required rate of return and then subtracting the initial amount invested 5. What are the strengths and weaknesses of the 1) payback method, 2) net present value method and 3) internal rate of return method. Payback method ignores time value of money and cash flows after payback period. Net present is difficult to compare dissimilar project. IRR ignores varying risks over life of project. Accounting Rate of Return, ignores time value of money and annual rates over the life of the project....
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