《Survey of accounting 2th会计学 Carl S.Warren》ch15.pptVIP

1. Management plans, evaluates, and controls investments in fixed assets. 2. Capital investments involve a long-term commitment of funds. 3. Investments must earn a reasonable rate of return. 4. Should include a plan for encouraging and rewarding employees for submitting proposals. Average rate of return method Cash payback method Net present value method Internal rate of return method Easy to calculate Considers accounting income (often used to evaluate managers) Considers cash flows and the time value of money Machine cost $500,000 Expected useful life 4 years Residual value none Expected total income $200,000 Machine cost $500,000 Expected useful life 4 years Residual value none Expected total income $200,000 Average annual income $30,000 $36,000 Average investment $120,000 $180,000 Average rate of return Average annual income $30,000 $36,000 Average investment $120,000 $180,000 Average rate of return 25% 20% Investment cost $200,000 Expected useful life 8 years Expected annual net cash flows (equal) $40,000 Investment cost $200,000 Expected useful life 8 years Expected annual net cash flows (equal) $40,000 Year 1 $ 60,000 $ 60,000 Year 2 80,000 140,000 Year 3 105,000 245,000 Year 4 155,000 400,000 Year 5 100,000 500,000 Year 6 90,000 590,000 Year 1 $ 60,000 $ 60,000 Year 2 80,000 140,000 Year 3 105,000 245,000 Year 4 155,000 400,000 Year 5 100,000 500,000 Year 6 90,000 590,000 = $ 63,636.36 = 49,586.78 = 37,565.74 = 27,320.54 = 24,836.85 $202,946.27 200,000.00 $ 2,946.27 1.015 Total present value $107,000 $86,400 $93,600 Total investment 100,000 80,000 90,000 Net present value $ 7,000 $ 6,400 $ 3,600 Present value index 1.07 1.08 1.04 Assume a rate of return and calculate the present value. Modify the rate of return and calculate a new present value. Continue until the present value approximates the investment cost. Use a computer function to calculate exactly the expected rate of return