Week 9 ACCY 111 RJD Lecture 6

Barnes nobles nook electronic reader now accounts for

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Barnes & Noble's Nook electronic reader now accounts for 28 per cent of the market for those devices. And the Nook has the potential to go beyond books to deliver all types of digital products, including music, magazines, TV shows and movies. That makes it a competitor not just to Amazon.com's Kindle but also to Apple's iPad. This deal is all about the device. Apple proved, you need to have the content and the device. Malone has the content, and Barnes & Noble has the device. You're not buying the stores; you're buying the Nook.
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Investment appraisal methods There are four main methods used in practice to evaluate investment opportunities: - accounting rate of return (ARR) - payback period (PP) - net present value (NPV) - internal rate of return (IRR) Some smaller businesses may use informal methods such as manager’s ‘instincts’ – we will return to such qualitative analysis later.
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New Zealand Exotic Timbers Ltd The company has a rimu logging concession on the West Coast of the South Island. It has the opportunity to expand production over the next five years by the purchase of a new saw mill that will cost $1,000,000 but will be able to be sold at the end of the five years for $200,000. Increased production of rimu timber: next year 5,000 cubic metres year 2 10,000 cubic metres year 3 15,000 cubic metres year 4 15,000 cubic metres year 5 5,000 cubic metres
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The estimated selling price is $120 per cubic metre The estimated extraction costs are $80 per cubic metre As each cubic metre will give rise to $40 net cash flow over the proposed project cash flows will be: Immediate cost of saw mill $1,000,000 1 year’s time $200,000 2 year’s time $400,000 3 year’s time $600,000 4 year’s time $600,000 5 year’s time $200,000 plus disposal of saw mill $200,000 New Zealand Exotic Timbers Ltd
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Or alternatively we might show those cash flows as follows: $000 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Cost of sawmill (1,000 ) Net Profit 200 400 600 600 200 Disposal of sawmill 200 (1,000 ) 200 400 600 600 400 New Zealand Exotic Timbers Ltd
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Accounting Rate of Return (ARR) ARR takes the average accounting profit the investment will generate, and expresses it as a percentage of the average investment in the project as measured in accounting terms: The calculation requires two figures: - The annual average accounting profit - The average investment for the particular project ARR = Average annual profit Average investment to earn that profit x 100%
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Accounting Rate of Return (ARR) Average annual profit before depreciation : (200,000+400,000+600,000+600,000+200,000)/5 = $400,000 Assuming the saw mill is depreciated on a straight line basis the annual depreciation charge will be: (1,000,000 – 200,000)/5 = $160,000 Thus the annual profit after depreciation will be : ( 400,000 – 160,000) = $240,000
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Accounting Rate of Return (ARR) Thus the saw mill will appear in the balance sheet as follows: beginning of year 1 $1,000,000 end of year 1 840,000 year 2 680,000 year 3 520,000 year 4 360,000 year 5 200,000 and the average investment will be $600,000
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Accounting Rate of Return (ARR) The accounting rate of return on the investment in the new saw mill will be : (240,000 / 600,000) * 100% = 40%
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Accounting Rate of Return (ARR) ARR Decision Rules: For any project to be accepted, it must achieve a target ARR as a minimum; If there are competing projects that exceed the minimum rate, the one with the highest ARR would normally be chosen
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