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In a make-or-buy decison, the relevent costs are?
1. Manufacturing Costs that will be saved
2. Purchase Price
3. Opertunity Costs
Manufacturing Costs include?
1. Direct Materials
2. Direct Labor
3. Variable Manufacturing Overhead
4. Fixed Manufacturing Overhead
Annual Rate of Return
Expected Annual Net Income / Average Investment
Average Investment (Formula)
The annual rate of return decision rule is?
A project is acceptable if its rate of return is greater than managments rate of return
Cash Back Period (Formula)
Cash Flow (Formula)
Net Present Value (Formula)
Present Value of Net Cash Flows (Formula)
The NPV decision rule is?
Accept the project if NPV is zero or positive
The IRR decision rule is?
Acceot the project when IRR is equal to or greater than required rate of return
Steps in determining IRR
1. Compute IRR factor:
Capital Investment/Cash Flow=IRR Factor
2. Use the factor and the present value of an annuity of 1 table to find IRR
Incremental analyis & Capital budgeting