Accounting 102 CH12

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  1. Only method to not use cash flows
    Annual rate of return method
  2. Cash Payback Period (Smaller Ratio is better)
    Cost of Captial Invstmnt (Inital Invstmnt) ÷ Net Annual Cash Flow
  3. Profitability Index
    Present Value of cash flows ÷ Initial Investment
  4. Internal Rate of Return
    • Capital Investment ÷ Net Annual Cash Flows
    • tells you when NPV equal to zero (use table to find rate)
    • ex: 3 yrs 277K/100K=2.77 look at table row 3 find 2.77 - will give u % where = 0
    • Accept project when IRR = or > RRR (dscnt rate)
  5. Annual Rate of Return (based on Accrual Acct)
    • Expected Annual Net Income ÷ Average Investment
    • acceptable if its rate of return is > mangmnt's rqrd rate
    • of return
  6. Average Investment
    Original Investment + Value at End of Life ÷ 2
  7. Net annual cash flow
    add back depreciation expense to net income.
  8. Discounted cash flow technique
    • Take into account TimeVM & *Est net cash flow frm invstmnt *(annual net cash flows + salvage value
    • (most informative and best conceptual approache)
  9. Interest (Simple)
    Principal (p) x Rate (i) x Time (n)
  10. Present value (Disc rate = i rate)
    Future value / (1 + i) ^1
  11. Future Value of a Single Amount
    FV = p x (1 + i) ^n
  12. Tables
    • 1 = Compound interest table
    • 2 = Future Value of an annuity.
    • 3 = Present Value (cap bud, RORetrn, IntnlR, RComputions)
    • 4 = Present Value of an annunity
  13. Net Present Value (NPV)
    • PV of Net cash flows (tableX)- Captial Investment (Intl Inv)
    • proposal acceptable when NPV is zero or positive
  14. Discout Rate = required rate of return
    two elements 1)cost of capital element 2)risk element
  15. Cost of capital
    Weighted average of the rates paid on borrowed funds
  16. Diff between internal rate of return method NPV methods
    IRR finds the interest yield of the potential investment
Card Set:
Accounting 102 CH12
2012-05-01 21:20:20
Chapter 12

Acct 102
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