arise with the asking of this question will be detailed in this paper. Capital Budgeting techniques include the Payback Rule, IRR, NPV, and the Profitability Index. PAYBACK RULE The payback method indicates that an investment is acceptable if its calculated payback is less than some prescribed number of years. The payback method does not consider the present value of cash flows. Under this method, an investment project is accepted or rejected on the basis of payback period. Payback period means
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The financial reporting process is governed by accounting rules and standards, managerial incentives, and enforcement and monitoring mechanisms. It is important for a user of financial information to understand the financial reporting environment along with the accounting information presented in financial statements. In this chapter, the concepts underlying financial reporting are discussed with special emphasis on accounting rules. Next the purpose of financial reporting is discussed – its
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values of the following cash flow streams. The appropriate interest rate is 8% Year Cash Stream A Cash Stream B 1 $100 & nbsp; $300 2 400 400 3 400 400 4 400 400 5 300 100 PV for cash stream A = $1,251.29;
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Assets/Current Liabilities o Because current assets and liabilities are, in principle, converted to cash within twelve months, the current ratio is a measure of short-term liquidity; the unit measure is either in dollars or times. For a creditor, the higher the current ratio, the better. For firms, the higher the current ratio indicates liquidity and also an inefficient use of cash and other short-term assets. He ratio should generally be at least one. 2. The Quick of Acid-Test Ration=
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* Elected by shareholders * Ultimate decision-making authority * CEO: Typically delegated day-to-day decision making by Board * CFO (financial manager) * Reports to CEO * Investment decisions, financing decisions, cash management * Goal of firm to maximize shareholder value Ethics and Incentives * Agency problems: Managers may act in their own interest rather than best interest of shareholders * Use options or
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you the estimated cash flows for two proposed projects. Project L involves adding a new item to the firm’s ignition system line; it would take some time to build up the market for this product, so the cash inflows would increase over time. Project S involves an add-on to an existing line, and its cash flows would decrease over time. Both projects have 3-year lives, because Allied is planning to introduce entirely new models after 3 years. Here are the projects’ net cash flows (in thousands of dollars):
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Science-II Prof. R.Madumathi Computation Of Payback Period When the cash inflows are uniform the formula for payback period is cash outflow divided by annual cash inflow Computation Of Payback Period • When the cash inflows are uneven, the cumulative cash inflows are to be arrived at and then the payback period has to be calculated through interpolation. • Here payback period is the time when cumulative cash inflows are equal to the outflows. i.e., Payback Reciprocal Rate •
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Period- The Concept What is it? The payback period for a project is the expected time it will take to recover the original investment. The decision rule: Accept project if its payback period is less than the maximum allowed. Payback Period- An Example A project requires a $100,000,000 investment and is expected to generate the following cash flows in the years after the investment is made Year 1 2 3 4 5 Cashflow ($) 20,000,000 40,000,000 60,000,000 30,000,000 10,000,000 What is the payback
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benchmark when using NPV? Net Present Value (NPV) method for determining a capital budgeting project’s desirability is by computing the difference between the present values of a project’s cash inflows and outflows. Since this calculation includes the necessary capital expenditures and other startup costs of the project as cash outflows, a positive value indicates that the project is desirable that it more than covers all of the necessary resource cost to do the project itself. The acceptance benchmark when
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and managing capital investments (Baker, 2011). Although there are several techniques available for evaluating capital budgeting for projects acceptance, the best techniques identify the amount, the time value, and the risk factor of a project’s cash flows (Baker, 2011). Four of the more popular and most useful techniques that this paper will focus on are payback period, net present value (NPV), internal rate of return (IRR), and profitability index (IP). The first of the four techniques to review
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