ACCTCY 2037: chapter 24
22 Cards in this Set
| Front | Back |
|---|---|
|
capital investment analysis (capital budgeting)
|
the process by which management plans, evaluates, and controls investments in fixed assets
|
|
time value of money concept
|
recognizes that an amount of cash invested today will earn income and therefore has value over time
|
|
average rate of return (accounting rate of return)
|
a measure of the average income asa percent of the average investment in fixed assets
|
|
cash payback period
|
the expected period of time that will pass the date of an investment and the complete recovery in cash (or equivalent) of the amount invested in
|
|
net cash flow
|
the excess of the cash flowing in from revenue over the csh flowing out for expenses
|
|
present value concepts
|
can be divided into the present value of an amount and the present value of an annuity. annuity
|
|
annuity
|
a series of equal net cash flows at fixed time intervals
|
|
present value of an annuity
|
the sum of the present values of each cash flow
|
|
net present value method (discounted cash flow method)
|
analyzes capital investment proposals by comparing the initial cash investment with the present value of the net cash flows
|
|
present value index
|
calculated by dividing the total present value of the net cash flow by the amount to be invested
|
|
initial rate of return method (time-adjusted rate of return method)
|
uses present value concepts to compute the rate of return form the net cash flows expected from capital investment proposals
|
|
inflation
|
occurs when general price levels are rising
|
|
currency exchange rates
|
the rates at which currency in another country can be exchanged for U.S. dollars
|
|
capital rationing
|
the process by which management allocates these funds among competing capital investment proposals
|
|
methods evaluating capital investment proposals that ignore present value include...
|
average rate of return
cash payback
|
|
management is considering a $100,000 investment in a project with a 5-year life and no residual value. if the total income from the project is expected to be $60,000 and recognition is given to the effect of straight-line depreciation on the investment, the average rate of return is...
|
(60,000/5)/(100,000-0)/2 = 24%
|
|
the expected period of time that will elapse between the date of a capital investment an the complete recovery of the amount of cash invested is called...
|
the cash payback period
|
|
average rate of return
|
a measure of the anticipated profitability of a proposal
|
|
net present value method
|
reduces the expected future net cash flows originating from ta proposal to their present values
|
|
internal rate of return method
|
uses present value concepts to compute the rate of return from the net cash flows expected from the investment
|
|
a project that will cost $120,000 is estimated to generate cash flows of $25,000 per year for eight years. what is the net present value for the project, assuming an 11% required rate of return?
|
page 1016 for answer
|
|
a project is estimated to generate cash flows of $40,000 per year for 10 years. the cost of the project is $226,009. What is the internal rate of return for this project?
|
226,009/40,000 = 5.65022
|
ACCTCY 2037: Appendix A Notecards