CH12 Planning for Capital Investments

【Concept 01】 Annual rate of return method--The determination of the profitability of a capital expenditure, computed by dividing expected annual net income by the average investment. Capital budgeting--The process of making capital expenditure decisions in business. Cash payback technique--A capital budgeting technique that identifies the time period required to recover the cost of a capital investment from the net annual cash flow produced by the investment. Cost of capital--The weighted-average rate of return that the firm must pay to obtain funds from creditors and stockholders.

Discounted cash flow technique--A capital budgeting technique that considers both the estimated net cash flows from the investment and the time value of money. Discount rate--The interest rate used in discounting the future net cash flows to determine present value. Internal rate of return (IRR)--The interest rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected net annual cash flows. Internal rate of return (IRR) method--A method used in capital budgeting that results in finding the interest yield of the potential investment.

【Concept】 Capital budgeting techniques are used for evaluating capital investments. The net present value decision rule is accept the project if net present value is zero or positive；reject the project if net present value is negative.

Discounted cash flow techniques take into account the estimated net cash flow from investment and the time value of money.

如何用Excel计算Internal rate of return (IRR)

1)加入year0，填入"-initial investment" 2)依次填入每年的net cash flow 3)用irr()函数，框柱year0~yearN，计算IRR.

Which of the following will increase the net present value of a project?【A decrease in the discount rate】 The rate of return that management expects to pay on all borrowed and equity funds is the:【A.cost of capital】

A project with a zero net present value indicates that it is【acceptable】 The process of making capital expenditure decisions in business is known as【capital budgeting.】

Project 22A; Initial Investment--$244,500; Annual Income--$17,490 Life of Project--6 years

Each year net cash flow: Year0--(-244,500); Year1--17,490(Annual Income)+244,500/6(annual depreciation)=58240; ...; Year6=58240 应用irr()函数，框柱year0~yearN，计算IRR=11%

Hsung Company accumulates the following data concerning a proposed capital investment: cash cost $215,000, net annual cash flows $40,000, and present value factor of cash inflows for 10 years 5.65 (rounded).

Present Value: 40,000(net annual cash flows)*5.65(present value factor of cash inflows for 10 years )=226000

Net present value (NPV)--The difference that results when the original capital outlay is subtracted from the discounted net cash flows. Net present value (NPV) method--A method used in capital budgeting in which net cash flows are discounted to their present value and then compared to the capital outlay required by the investment. Post-audit--A thorough evaluation of how well a project's actual performance matches the original projections.

Profitability index--A method of comparing alternative projects that takes into account both the size of the investment and its discounted net cash flows. It is computed by dividing the present value of net cash flows by the initial investment. Required rate of return--Management's minimum acceptable rate of return on investments, sometimes called the discount rate or cost of capital. Sensitivity analysis--An approach that uses a number of outcome estimates to get a sense of the variability among potential returns.

Which of the following is not an example of a capital budgeting decision? Decision to build a new plant. Decision to renovate an existing facility. Decision to buy a piece of machinery. All of these are capital budgeting decisions.

【All of these are capital budgeting decisions.】

The internal rate of return (IRR) is the interest rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected net annual cash flows (that is, NPV equal to zero).

【The internal rate of return (IRR) 】

Estimated cash inflows and outflows are the preferred inputs for capital budgeting decisions.

【ture】

【查表格方法】 Table3 Present Value of 1(cash flow 每年不同) table4 Present Value of an Annuity of 1(cash flow 每年相同)

如果每年cash flow相同，就使用table4,定位payback年份数和rate，找出一个factor(present value factor of cash inflows for 10 years),用cash flow 和factor相乘，得到present value； 如果每年cash flow相同，就使用table3,定位payback年份和rate，用当年的factor乘以当年的cash flow，再相加起来求和，得出present value。

Hsung Company accumulates the following data concerning a proposed capital investment: cash cost $176,630, net annual cash flows $40,500, and present value factor of cash inflows for 10 years 4.66 (rounded). (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45).)Determine the net present value, and indicate whether the investment should be made.

已知，net annual cash flows $40,500 和present value factor of cash inflows for 10 years 4.66 可得 Present Value of future net cash flows $40,500*4.66=$188730 又由于capital cost $176,630 可得 Net Present Value $188730-$176,630=12100

【The discount rate】 is often referred to by alternative names, including the required rate of return, the hurdle rate, and the cutoff rate. Determination of the cost of capital varies somewhat depending on whether the entity is a for-profit or not-for-profit business. Calculation of the cost of capital is discussed more fully in advanced accounting and finance courses.

贴现率通常被称为其他名称，包括要求回报率、预期回报率和截止利率。资本成本的确定多少取决于实体是营利性还是非营利性企业。资本成本的计算在高级会计和金融课程中有更充分的讨论。