Chapter 25 - 1 25 Capital Investment Analysis Student...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 1 25 Capital Investment Analysis Student Version 1-2 25-2 2 1 1 Explain the nature and importance of capital investment analysis. 25-2 1-3 25-3 3 Capital investment analysis (or capital budgeting ) is the process by which management plans, evaluates, and controls investments in fixed assets. Capital Investment Analysis 1 1-4 25-4 4 1. Management plans, evaluates , and controls investments in fixed assets. 2. Capital investments involve a long-term commitment of funds. 3. Investments must earn a reasonable rate of return . 4. Capital investment decisions are some of the most important decisions that management makes. Nature of Capital Investment Analysis 1 1-5 25-5 5 1 2 Evaluate capital investment proposals using the average rate of return and cash payment methods. 25-5 1-6 25-6 6 Average Rate of Return Method The average rate of return , sometimes called the accounting rate of return , measures the average income as a percent of the average investment. The average rate of return is computed as follows: Average rate of return Estimated Average Annual Income Average Investment = (Initial Cost + Residual Value)/2 2 1-7 25-7 7 Machine cost $500,000 Expected useful life 4 years Residual value none Expected total income $200,000 Average rate of return Estimated Average Annual Income Average Investment = Average rate of return $200,000/4 ($500,000 + $0)/2 = = 20% Purchase of Machine Example 2 1-8 25-8 8 Cash Payback Method The expected period of time that will pass between the date of an investment and the complete recovery in cash (or equivalent) of the amount invested is the cash payback period . 2 1-9 25-9 9 When annual net cash flows are equal, the cash payback period is computed as follows: Cash payback period Initial Cost Annual Net Cash Flow = 2 1-10 25-10 10 Cost of new machine $200,000 Cash revenue from machine per year 50,000 Expenses of machine per year 30,000 Depreciation per year 20,000 Purchase of New Machine Example Net cash inflow per year: Cash revenue from machine $50,000...
View Full Document

This note was uploaded on 01/31/2011 for the course BUS 101 taught by Professor Pernia during the Spring '10 term at Essex County College.

Page1 / 43

Chapter 25 - 1 25 Capital Investment Analysis Student...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online