I. Chapter 8 ContinuedII. Ranking MethodsIII. 4th Test InformationACCT 2020 1st Edition Lecture 20Outline of Last Lecture I. Capital BudgetingII. Time Value of MoneyIII. Net Present ValueIV. Internal Rate of ReturnV. Comparing ApproachesOutline of Current LectureI. Chapter 8 ContinuedII. Ranking MethodsIII. 4th Test InformationCurrent LectureI. Chapter 8 Continued- The present Value of a dollar today is one dollar, the present value of a dollar given in the future is less than one dollar. - Exampleo Consider a drafting a machine that would cost 100,000, last 4 years, provie annual cash savings (annuity) of 10,000 and considerable intangible benefits eachyear (quality of work, happier employees due to less work). How large in cash terms would those intangible benefits need to be if the discount rate is 14%? Years Cash Flows Factor PVThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best Used as a supplement to your own notes, not as a substitute.Invest. in this Machine Now (100,000) 1 (100,000)Ann. Net Cash Inflow 1-4 10,000 2.914 29,140 Negative Net Present value = not meeting Min. Requ. Rate of Return (70,860) 70,860 = $24,317 must be the cash value of intangibles2.914o Suppose all the cash flows related to an investment in a supertnker have been estimated except for its salvage value in 20 years. Using a discount rate of 12%, manangemtn has determined that the NPV of all the cash flows except the salvage value is a negative 1.04 million. How large would the salvage value need to be for the investment to be attractive?Net present Value to be offset = 1,040,000 = 10,000,000 Present value factor 0.104II. Ranking Methods- If we have 5 different options, we rank by most profitable- When sing the internal rate of return method to rank competing investment projects:o THE HIGHER THE INTERNAL RATE OF RETURN, THE MORE DESIRABLE THE PROJECT- Net present value methodo Cannot compare if the investments are different size. To do this, we convert both to a comparable value using the project profitability index. Net present Value = Project profitability indexInvestment Required- Payback Methodo Determines the pay back period of the investment. The period os the length of time that is takes for a project to recover its initial costs out of the cash receipts that it generates. How quickly will I get the money back?o Payback Period = Investment Required Annual Net Cash Inflowo $140,000 = 4 years to pay back $35,000o This method can be used as a screening tool - Simple Rate of Return Methodo Does not focus on cash Flows, rather it focuses on account net operating income.Initial investment should be reduced by any salvage value at the end. o Simple rate of Return = Annual Incremental Net Operating Income Initial investmento We now need to follow-up with a Postaudit by comparing with the results that were actually realized to make sure theIII. 4th Test Information- Standard Rateo know the standard price for direct materials/ direct labor(ALL THAT IT INCLUDES)o ideal and practical standards- How to compute spending variance (spending budget vs. actual results)o Who is responsible for variances?- Be able to compute margin and turnover, know that this is the formula for ROIo Calculate change to ROI with proposed change in operationso Know the criticisms- Residual incomeo Why instead of ROI?- Delivery cycle time, throughput time, manufacturing cycle efficiency- 4 different types of measures for performanceo learngng and growtho internal business processeso customerso product offerings- capital
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