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PV from years 1-7)1Calculate payback period. The payback periodis the time it takes in years for a investment to return back to the original amount invested in capitalProjects with even cash flows payback period is calculated byProjects with uneven cash flows are calculated by adding up all the annual cash flows until the cumulative total cash flows equal net investment1Understand the differences between cash budgeting and capital budgeting. Capital Budgetingis the process of evaluating a organizations investment in the long run w/capital budgeting we look more into the future, usually 5-10 yearsCash Budgeting is the estimation of cash inflows and outflows for a business or individual for a specific time period and are used to see whether the entity has enoughcash to fulfill their operations and obligations2Identify cash inflows and outflows.
Statement of cash flowspresents the inflows and outflows of cash in the different activities of the business the net increases or net decrease in cash and the resulting cash balance at the end of the period Cash inflowsare referred to as receipts of cash while cash outflows to payments or disbursements3Calculate net present value. The net present value approach (NPV)requires that you calculate the present value of each cash flow then you add or 'net' those present values to arrive at projects next capital valueSteps: Identify and get the amount of each cash flowsDetermine the appropriate discount rate The appropriate discount rate will change from company to company The discount rate is the average of the company's interest rate on borrowed fundsTwo other factors that affect discount rate are (1) the finance theory states that risks and rate of return are positively related meaning that if risks # then the rate of return will # as well (2) a discount rate should increase if inflation is expected to happen over the life of the projectCalculate the present value of each cash flowYou need to multiply the present value and multiply the right valuefactorCalculate the net present value Once you've the calculated the present value then you add them together to get a net value of the project. 2Understand return on investment and return of investmentReturn Of Investment:means recouping the original investment -- getting your money backReturn on Investment:means that you'll get over and above what you put into the investment. (i.e You spend 60$ on a investment and you yet back 80$ you've earned a 20$ return on investment)Chapter 101Calculate division and company return on investment.Return on Investmentmeasures a rate of return generated by a investment on assets ROI = operating income ( or segment margin) / average operating assetsASC280 'segment margin' provides generally accepted accounting principle that require companies to escort selected information about operating segments Return on Investmentis still widely used today to evaluate a large range of