chapter%20140 - Chapter 14 Capital Investment Decisions 1...

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September 7, 2011 Accounting 2102 1 Chapter 14 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 September 7, 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 September 7, 2011 Accounting 2102 3
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Capital Budgeting Independent Decision Making Tools Nondiscounting Method Payback Period Discounting Methods Net Present Value Internal Rate of Returns September 7, 2011 Accounting 2102 4
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Nondiscounting Method 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 September 7, 2011 5 Accounting 2102
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chapter%20140 - Chapter 14 Capital Investment Decisions 1...

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