TAILIEUCHUNG - Lecture Accounting for business: A guide for non-accountants (2/e) – Chapter 9: Capital investment analysis: Basic budgetary controls

The learning objectives for this chapter include: Describe the two types of capital investment decisions with which managers may be faced: accept or reject decisions, capital-rationing decisions; describe the method of calculation of non-discounting models: payback period, accounting rate of return; explain the advantages and limitations of non-discounting models;. | Chapter 9 Capital investment analysis 9- Objectives Describe the two types of capital investment decisions with which managers may be faced: Accept or reject decisions Capital-rationing decisions Describe the method of calculation of non-discounting models: Payback period Accounting rate of return 9- Objectives (continued) Explain the advantages and limitations of non-discounting models. Explain the importance of the time value of money in capital budgeting decisions. Describe the method of calculation of discounting models: Internal rate of return Net present value Explain the advantages and disadvantages of discounting models. 9- Objectives (continued) Apply appropriate long-term decision-making techniques to practical situations involving: the acquisition of non-current assets the replacement of existing equipment leasing or buying. 9- Capital investment decisions Accept or reject decisions: Decision determined on a individual basis Accept if it meets the predetermined criteria. Capital-rationing decisions requiring ranking of multiple decisions: simultaneous ranked in order or preference predetermined criteria usually rate of return. 9- Non-discounting models Accounting rate of return (ARR) involves net profit after tax in relation to the investment tied up in the asset. Investment may be initial or average depending on the asset. 9- Non-discounting models (continued) Payback period involves determining how long it will take future cash flow from the asset to generate the cash to pay for the cost. 9- Non-discounting models (continued) Advantages of accounting rate of return: The data is easily obtainable from relevant financial statements. Calculations are relatively easy. Results are easily understood by the average person. 9- Non-discounting models (continued) Limitations of accounting rate of return: It accounts for only profits and not cash flows. It does not account for the timing of profits. It may not be consistent .

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