cornerstones chp 12 - Chapter 12 Capital Investment...

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May 26, 2011 Accounting 2102 1 Chapter 12 Capital Investment Decisions
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What are capital capital investment investment decisions? decisions involving a long term commitment and significant cash outflow the process of making the decision is often referred to as capital budgeting . . . two common types of capital budgeting decisions: 1. independent projects 2. mutually exclusive projects May 26, 2011 Accounting 2102 2
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“Givens” in Capital Budgeting projected cash flows should equal after tax net cash flows selected investments should . . . earn back the original capital outlay cover the opportunity cost of the funds invested maximize the wealth of the owners of the company May 26, 2011 Accounting 2102 3
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Capital Budgeting Decision Making Tools Decision Making Tools Nondiscounting Models Payback Period Accounting Rate of Return Discounting Models Net Present Value Internal Rate of Returns May 26, 2011 Accounting 2102 4
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Nondiscounting Methods Payback Period Payback Period determines amount of time necessary to recoup initial investment calculation varies depending on cash flow pattern Advantages Disadvantages compare payback period to company set “recoup” period  . . . if payback period > recoup period → reject . . . if payback period < recoup period → accept May 26, 2011 5 Accounting 2102
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Accounting Rate of Return (ARR) Accounting Rate of Return (ARR) measures the profitability of investment using income
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This note was uploaded on 05/26/2011 for the course ACCT 2102 taught by Professor Farmer during the Spring '08 term at University of Georgia Athens.

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cornerstones chp 12 - Chapter 12 Capital Investment...

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