Chapter 11 Flashcards
The acquisition of a capital investment, either built or bought
Capital investment
The process of planning to invest in long-term assets in a way that returns the most profitability to the company.
capital budgeting
5 steps to long term capital planning
- Develop strategies
- Plan
- Direct
- Perform
- Capital rationing
4 methods to analyzing the planning stage
Stage 1
1. Payback
2. Accounting rate of return (ARR)
Stage 2
3. Net present value (NPV)
4. Internal rate of return (IRR)
The process of ranking and choosing among alternative capital investments based on the availability of funds.
Capital rationing
The comparison of the actual results of capital investments to the projected results
post-audits
Cash inflows in excess of cash outflows over an asset’s useful life.
Net Cash Inflows
3 Cash inflows
Revenue generated from investment
Savings in operation cost
Residual value
3 cash outflows
Initial investment
Additional operating cost
Refurbishment, repairs, maintenance
A capital investment analysis method that measures the length of time it takes to recover, in net cash inflow, the cost of the initial investment. Best used as a screening device
payback = amount invested/expected annual net cash inflow
A capital investment analysis method that measures the profitability of an investment. Average annual operating income/average amount invested
Accounting Rate of Return (ARR) = average annual operating income/average amount invested
Formula for average amount invested
(amount invested + residual value)/2
Recognition that money earns interest over time
time value of money
The value of an investment at the end of a specific time frame
future value = present value + interest earned
also = present value X FV factor
