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Chapter 9 - Capital Investments

Chapter 9 - Capital Investments - Managerial Accounting...

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Managerial Accounting Chapter 9 Robert Nicholson, CPA, MS DO NOT USE PRESENT VALUE TECHNIQUE CASH PAYBACK METHOD Answers the question "when will I get my money back" 1) Total Investment = Number of years it will take to get your investment back Annual Cash 2) Compare the number of years to a "standard". If return of capital (ROC) is sooner than standard "accept" If the ROC is longer than standard - reject To calculate "cash flows" it is common to simply add the deprecaition expense to the "income from operations" ACCOUNTING RATE OF RETURN (AROR) Objective: Calculate the ROR on a capital investment - say 20%. You compare that to a "minimum standard". If the ROR is greater than or equal to the "minimum standard" you accept the project. If the ROR is lower than the MROR you reject the project AROR < than the MROR (reject) = to or > than MROR (accept) AROR = 20% MROR = 19% < than the MROR (reject) = to or > than MROR (accept) Answer: accept If the AROR was 19% - accept If the AROR was 18% - reject Formula: Estimated Average Annual Income Average Investment

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