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Managerial Accounting Test 4 Review

Managerial Accounting Test 4 Review - Managerial Accounting...

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Managerial Accounting Test 4 Review Strategic Investment- a choice among alternative courses of action and the allocation of resources to those alternatives most likely to succeed after anticipating 1) changes in natural, social and economic conditions and 2) actions of competitors. Due Diligence- is exercising all reasonable care to identify potential problems and opportunities of a proposed investment. The most common sources of problems are legal and environmental liabilities that an organization might inherit unknowingly when purchasing an existing business or property. Possible Future events affecting investment decisions o Natural Events o Economic Events o Social, Political, and Legal Events 3 approached to modeling the effects of likely future events include sensitivity analysis, scenario analysis, and expected value analysis. Expected Value Analysis- summarizes the combined effects of relevant future events on decision outcomes, weighted by the probabilities or odds that the events will occur. Expected Value Analysis- depends on measures of probability of the actual occurrence of each relevant future event. Two general approaches exist to measure probabilities. o Assess the degree of belief or confidence about future events o Count the historical frequency or distribution of occurrence of similar past events. Evaluating an investment involves generating the following internal information forecast: o Resources and activities necessary to operate the investment for all levels of uncertain future events over the life of the investment. o Expected annual and total sales activities often indicate the scale and breadth of operations that must be planned for the life of the investment. o Resources necessary to acquire the investment o Revenues, expenses, and net cash flows associated with annual sales and related production activities.
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o Expected value of the investment. Most organizations use DCF methods to analyze alternative investments. However, some organizations use non-DCF methods such as the Payback Period , which is the time necessary to recover the investment cost from nondiscounted cash flows. DCF analysis combines estimates of current and future cash flows associated with an investment and discounts the cash flows to account for the opportunity costs of committing funds to the investment. Investment Projects can have three types of cash flows o Investment Cash Flows-three types of asset acquisition New Equipment Costs Future reinvestment of refurbishing costs Proceeds from or costs of disposing of existing assets. Tax effects from a loss or gain on the sale of replaced assets. Tax Credits o Periodic Operating Cash Flows- incremental cash inflows and outflows, most commonly revenues and expenses.
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