A202 CH13

(Formula) Simple Rate of Return =

Annual incremental net operating income / Initial investment

(Formula) Payback Period =

Investment Required / Annual Net Cash Inflow

Use discounted cash flows:

Net present value method & internal rate of return.

The net present value of a project is:

The difference between the present value of cash inflows and present value of cash outflows for a project. AND. Used in determining whether or not a project is an acceptable capital investment.

A postaudit...

involves checking whether or not expected results are actually realized.

The payback period is:

length of time it takes the project to recover its initial cost from the net cash flows generated.

A positive net present value indicates that the

project's return exceeds the discount rate.

A negative net present value indicates that the

project's return is less than the discount rate.

The internal rate of return is:

the discount rate that results in a net present value of ZERO for the investment. & rate of return of an investment project over its useful life.

The payback method focuses on the payback period, which is...

the length of time that it takes for a project to recoup its initial cost out of the cash receipts that it generates.

The discount rate is aka

the minimum required rate of return.

The net present value method compares the present value of a project's cash INFLOWS with the present value of its cash OUTFLOWS. The difference between these two streams of cash flows is called

the net present value.