Chap14gnposting

# Chap14gnposting - This chapter finishes off the budgeting...

This preview shows pages 1–3. Sign up to view the full content.

Chapter 14: Capital Budgeting Decisions 61 Chapter 14: Capital Budgeting Decisions Investment decisions regarding facilities needed to carry out the business’ objectives: Minor investments Major investments Long-term investments in assets Alternative courses of action Approaches to capital budgeting: Discounted cash flow methods: Preferred methods Net present value Considers all cash flows along Internal rate of return with the time value of money Simple rate of return Inferior methods that we may see used Payback method but have significant weaknesses. This chapter finishes off the budgeting topic from Chapter 9. We are focusing on methods used to evaluate investments in long-term assets. We are going to look at the above four methods. Our focus is on the two discounted cash flow methods. However, we want you to be aware of the last two and understand their weaknesses.

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

View Full Document
Chapter 14: Capital Budgeting Decisions 62 Simple (annual) Rate of Return Method Incremental expected net income from the investment Net investment today in the asset Example: Assume a firm is considering replacing an old machine with a new one and the following information is available: Cost of the new machine \$ 10,000 Estimated useful life 5 years Estimated salvage value \$ 1,000 Estimated total additional NOI over the 5 years \$ 4,000 Current market value of machine being replaced \$ 2,000 Average Annual NOI = = \$800 Investment today = \$10,000 - \$2,000 = \$8,000 Simple rate of return = \$ \$ , 800 8 000 = 10% Compare return with the firm’s cost of capital (minimum desired rate of return) to determine whether project is viable. SRR > the firm’s cutoff rate, project is acceptable. SRR < the firms’ cutoff rate, project is unacceptable. Advantage:
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 05/28/2011 for the course ACC 272 taught by Professor Bird during the Spring '08 term at University of Michigan.

### Page1 / 7

Chap14gnposting - This chapter finishes off the budgeting...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online