135 the four methods are 1 net present value npv 2

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135) The four methods are: 1. Net Present Value (NPV); 2. Internal Rate of Return (IRR); 3. Payback; and 4. Accrual Accounting Rate of Return (AARR). NPV has advantages in that it uses discounted cash flows, and can deal with uneven cash flows, considers the inflows and outflows of the project. A disadvantage of NPV is that the results indicate if it achieves a particular cost of capital or not, but it does not indicate what the rate of return actually is. The IRR method generates an expected rate of return for the investment given the time of the project and the discounting of cash flows. A disadvantage of the IRR is that the results are expressed in the form of a percentage rather than in dollars and it is difficult to use when the project has uneven cash flows. The payback method is simple to use, and adapts to both even and uneven cash flows. It also highlights the liquidity of a project. A disadvantage to the payback method is that it does not consider either the time value of money, or the cash flows that occur after the payback time period. The AARR method uses the information that is most often found in financial statements N including net income and depreciation. A drawback is that the method does not take into account the time value of money or the cash flows of the project. 136) Depreciation tax deductions result in tax savings which offset the cost of acquiring the capital equipment. The more rapidly for tax purposes an assets costs can be written off, the earlier the reductions in taxes can be realised and the greater the savings in cash outflows. 137) The introduction of new technology into the product line offerings of a company will likely contain many elements of uncertainty. Will the customers value it? What will the price structure be? Also, when managers introduce automation into the workplace, it may be difficult to assess the impact it will have on the existing workforce. The managers must develop and insert a great deal of judgement and sometimes intuition when trying to incorporate and quantify their effects as part of the capital budgeting process. 138) A corporation's customer base is considered an intangible asset because if it is handled properly, a corporation's existing customers will be a source of revenues for an indefinite time period. One could make the case that the customer base is like an annuity N a steady source of revenues and earnings. Thus it is an asset, although an intangible one. An existing customer usually will stay with a corporation if he or she is handled properly. Usually there is minimal marginal cost in retaining a customer other than producing a satisfactory product. In contrast, attracting new customers takes time, effort, and most times substantial marketing dollars. Thus, it is much easier to retain a current customer than to obtain a new one. This is why the existing customer base is considered an asset.
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