Accounting 102 CH12
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Only method to not use cash flows
Annual rate of return method

Cash Payback Period (Smaller Ratio is better)
Cost of Captial Invstmnt (Inital Invstmnt) ÷ Net Annual Cash Flow

Profitability Index
Present Value of cash flows ÷ Initial Investment

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)

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

Average Investment
Original Investment + Value at End of Life ÷ 2

Net annual cash flow
add back depreciation expense to net income.

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)

Interest (Simple)
Principal (p) x Rate (i) x Time (n)

Present value (Disc rate = i rate)
Future value / (1 + i) ^1

Future Value of a Single Amount
FV = p x (1 + i) ^n

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

Net Present Value (NPV)
 PV of Net cash flows (tableX) Captial Investment (Intl Inv)
 proposal acceptable when NPV is zero or positive

Discout Rate = required rate of return
two elements 1)cost of capital element 2)risk element

Cost of capital
Weighted average of the rates paid on borrowed funds

Diff between internal rate of return method NPV methods
IRR finds the interest yield of the potential investment