ACCT20001 Final end of year cheat sheet

1 Found helpful • 2 Pages • Topic Notes • Year: Pre-2021 • Previously uploaded under: ACCT2011 - Financial Accounting A

Lecture 6: Capital Budgeting 1 1. Accounting Rate of Return Average Net Profit/[Initial cost+salvage value)/2] Advantages  simple to calc, profit figures usually available, considers income for each yr of projects life Disadvantages  TVM ignored, related to net profit not actual cash flow, profit is dependent on depreciation method, cut off is subject to management 2. Payback Period (compare to benchmark): (cost/cash flows): Advantages  simple, demonstrates risk i.e. short payback less risky, useful as supplementary info, measure of liquidity Disadvantages  fails to consider cashflow after payback, no TVM, payback subjective 3. NPVis the present value of all future cash flows discounted at required rate of return – Init CF NPV= - initial cost + (CF/1+r) +(CF/(1+r)^n) +…. Reject projects NPV<0. Zero NPV earns a fair return, NPV>0 earns more than required 4. Internal Rate of Return is the req rate of return that gives a NPV of zero 0= - initial cost + (CF/1+r) + (CF/(1+r)^2) Should be accepted when IRR>discount rate Investment relationships Mutually exclusive projects: More than one project is available but can only accept one e.g. use land as gold mine or house Independent projects: Accept one will will not eliminate

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