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Unit 9 Capital Investment Decisions

Unit 9 Capital Investment Decisions - BFA103 FINANCIAL...

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BFA103 FINANCIAL ACCOUNTING AND DECISION MAKING TUTOR NOTES Unit 9 – Capital Investment Decisions Discussion Questions 11.1 Typical characteristics of investment decisions: (a) Significant cash outflows. (b) Projected returns (cash or accrual) over an extended period of time. (c) A high opportunity cost to abandon or bail out. 11.4 On purely economic grounds a dollar earlier is preferred to a dollar later, because the dollar received earlier can be invested at a risk-free interest rate to accumulate to a larger future sum. eg $1.00 invested for one period at 10% p.a. is equal to $1.10 in one period time. Exercises 11.1 Included in textbook 11.2 $ (a) (i) Annual changes in revenue nil Annual changes in cash expenses 9,500 (down) Annual depreciation expense 5,000 (up) ($30,000 ÷ 6) Annual change in net profit 4,500 (up) Annual change in tax (30%) 1,350 (up) Annual change in net profit after tax 3,150 (up) (ii) Average investment $30,000 ÷ 2 = $15,000 Accounting rate of return = Average return ÷ investment = $3,150 ÷ $15,000 = 21.0% (b) Cash payback = Cash outflow ÷ average cash inflow = $30,000 ÷ $8,150* = 3.68 years
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