《Management Accounting 7th管理会计 Don R.Hansen》ch18.pptVIP

Chapter 1 - Payback Method Payback period Accounting Rate Of Return ARR ARR Average income ÷ Original investment or Average investment Accounting Rate Of Return ARR A screening measure to ensure that new investment will not adversely affect net income To ensure a favorable effect on net income so that bonuses can be earned increased Accounting Rate Of Return ARR The major deficiency of the accounting rate of return is that it ignores the time value of money. NPV P – I where: P the present value of the project’s future cash inflows I the present value of the project’s cost usually the initial outlay Net present value is the difference between the present value of the cash inflows and outflows associated with a project. Brannon Company has developed new earphones for portable CD and tape players that are expected to generate an annual revenue of $300,000. Necessary production equipment would cost $320,000 and can be sold in five years for $40,000. Decision Criteria for NPV If NPV 0, this indicates: 1. The initial investment has been recovered 2. The required rate of return has been recovered Thus, break even has been achieved and we are indifferent about the project. Decision Criteria for NPV If the NPV 0 this indicates: 1. The initial investment has been recovered 2. The required rate of return has been recovered 3. A return in excess of 1. and 2. has been received Thus, the earphones should be manufactured. Reinvestment Assumption The NVP model assumes that all cash flows generated by a project are immediately reinvested to earn the required rate of return throughout the life of the project. The internal rate of return IRR is the discount rate that sets the project’s NPV at zero. Thus, P I for the IRR. Example: A project requires a $10,000 investment and will return $12,000 after one year. What is the IRR $12,000/ 1 + i $10,000 1 + i 1.2 i 0.20 If the IRR Cost of Capital, the project should be accepted. If the IRR