Chapter_10 - Chapter 10: Investment decisions l l l What is...

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Chapter 10: Investment decisions l What is an investment? l Investment appraisal criteria l Advantages and disadvantages of the five investment appraisal methods l Other factors affecting investment decisions l Risk and uncertainty and decision-making- sensitivity analysis
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an investment requires expenditure on something today that is expected to provide a benefit in the future the decision to make an investment is extremely important because it implies the expectation that expenditure today will generate future cash gains in real terms that greatly exceed the funds spent today What Is An Investment? What Is An Investment?
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What Is An Investment? (2) l To meet the wealth maximization objective: The managers make optimal decisions that are based on the best information available and use of the most appropriate appraisal techniques.
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The Five Main Investment Appraisal Criteria Methods The Five Main Investment Appraisal Criteria Methods
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Accounting Rate Of Return (ARR) l ARR is a simple measure, sometime used l It is a form of return on capital employed l It is based on profit rather than cash flows l It ignores the time value of money. % 100 * Investment Initial project the over profit accounting Average ARR =
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the number of years it takes the cash inflows from a capital investment project to equal the cash outflows Payback Payback
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Key Principles Underlying Investment Selection Criteria for NPV, IRR, and discounted payback (1) l Cash is King l Time Value of Money l Discounted Cash Flow
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CASH IS KING real funds flows can be seen in cash but not in accounting profit interest charges become payable as soon as money is made
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This note was uploaded on 09/14/2010 for the course ACCOUNTING 311 taught by Professor Peter during the Summer '10 term at St. Louis CC.

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Chapter_10 - Chapter 10: Investment decisions l l l What is...

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