Chapter 14 Flashcards
Typical Capital Budgeting Decisions
plant expansion, lease or buy, equipment selection, equipment replacement, cost reduction
Screening Decisions
does a proposed project meet some preset standard
Preference Decisions
selecting from among several competing courses of action
Simple Rate of Return
This Method focuses on incremental net operating income
Simple Rate of Return Formula
Annual Incremental Net Operating Income/ Initial Investment ( be reduced by salvage from sale of old equipment)
Annual Incremental Net Operating Income
Old Equipment Cost/Year (+)
Cost of New Equipment/Yr (-)
Annual Depreciation (-)
—-Calculated by new equipment cost/ years of useful life
Cash OutFlows
repair & maintenance, incremental operating costs, initial investment, working capital
Cash Inflows
Salvage value, incremental revenues, reduction of costs, the release of working capital
Time value of money
a dollar today is worth more than a dollar a year from now.
Payback Method
Analyze cash flow, does not consider the time value of money and uses payback periods
Payback period
is the length of time that it takes for a project to recoup its initial cost from the cash receipts that it generates
Payback period formula
Investment required/ annual net cash inflow
Net Present Value Method
Compares the present value of a project’s cash inflows with the present value of its cashout flows
Net Present Value Rules
+ Accept
0 Accept
- Not Accepted
Cost of Capital
the average return the company must pay to its long term creditors and stockholders
