long-term decisions

Question 1

payback period

defiition

Answer 1

measures time it takes for cash inflows to equal initial cash outflows

cash based

Question 2

payback period

calculation

Answer 2

• add each year of cash inflows new thing will bring until you make up what machine cost

Question 3

payback period if not even year

calculation

Answer 3

(amount still needed at start of payback year / amount made that year) x 12

Question 4

Accounting rate of return (ARR)

definition

Answer 4

measures the return based on what you’ve invested

Question 5

ARR

equation

Answer 5

(average operating profit/ average capital employed) x 100

Question 6

average operating profit

equation

Answer 6

total profit/ no. of year project

Question 7

average capital employed

equation

Answer 7

cost + scrap value/ 2

2 is a fixed figure

Question 8

average operating profit using cash

equation

Answer 8

total cash (cost -scrap)/ no. of years project

cost - scrap = depreciation

Question 9

net present value (NPV)

definition

Answer 9

measures the sum of years; discounted cash flows less inital cash out flows

Question 10

NPV

equation

Answer 10

all years discounted cash flows - inital cash outflow

Question 11

internal rate of return (IRR)

definition

Answer 11

excat percenatge return of projcet, taking into acuont time value of money

Question 12

internal rate of return (IRR)

equation

Answer 12

discount rate of low trial + (NPV of low trial / NPV of low trial + NPV of hihg trial x (disocunt rate of high trial-discount rate of low trial))