16 35 accounting rate of return method method the

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Unformatted text preview: Method Method The following formula is used to calculate the accounting rate of return: Accounting rate of return = Average incremental incremental revenues - Average incremental expenses, including depreciation & income taxes income Initial investment 16-36 Accounting-Rate-of-Return Method Method Meyers Company wants to install an espresso Meyers Company wants to install an espresso bar in its restaurant. bar in its restaurant. The espresso bar: The espresso bar: – Cost $140,000 and has a 10-year life. – Cost $140,000 and has a 10-year life. – Will generate incremental revenues of $100,000 and – Will generate incremental revenues of $100,000 and iincremental expenses of $80,000 including ncremental expenses of $80,000 including depreciation. depreciation. What is the accounting rate of return on the What is the accounting rate of return on the iinvestment project? nvestment project? 16-37 Accounting-Rate-of-Return Method Method Accounting = rate of return $100,000 - $80,000 $140,000 $140,000 = 14.3% 14.3% The accounting rate of return method is not recommended The accounting rate of return method is not recommended ffor a variety of reasons, the most important of which for a variety of reasons, the most important of which or for is that it ignores the time value of money. iis that it ignores the time value of money. is s 16-38 Estimating Cash Flows: Estimating The Role of Activity-Based Costing ABC systems generally improve the ability of ABC systems generally improve the ability of an analyst to estimate the cash flows an analyst to estimate the cash flows associated with a proposed project. associated with a proposed project. 16-39 Justification of Investments in Advanced Manufacturing Systems Systems Time Time horizons horizons are too are too short short Hurdle Hurdle rates are rates are too high too high Benefits Benefits difficult to difficult to quantify quantify Bias Bias towards towards incremental incremental projects projects Greater Greater cash flow cash flow uncertainty uncertainty 16-40 Inflation Effects Inflation Nominal Dollars Real dollars 16-41 End of Chapter 16 End 16-42...
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This note was uploaded on 02/10/2014 for the course ACCT 331 taught by Professor Kline during the Fall '10 term at Drexel.

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