CAPITAL INVESTMENT DECISIONS

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1. Total disposal value =

  • Investment cost + total disposal value / 2
  • Total annual profit / Average annual investment x 100
  • Sale value per unit x replacement number
  • Net profit per unit x replacement number
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2. Internal rate of return (IRR)

  • If competing projects have positive NPVs, the one with the highest NPV is selected
  • The discount rate, which, when applied to the future project cash flows, produces a zero NPV
  • If project NPV is positive, it should be accepted; if it is negative it should be rejected

3. Accounting Rate of Return (ARR) =

  • Total anual profit x life time until replacement (yrs) / life time until replacement (yrs)
  • Net profit per unit x replacement number
  • Total annual profit / Average annual investment x 100
  • Total cost of unit x replacement number

4. Cumulative Cash Flow (numbers vertically down)

  • Year 0 = Year 0 = total investment; then every year following = investment - annual profit
  • Year 0 = total investment; then every year following = Total annual profit
  • Every year = total investment;

5. Total investment cost =

  • Total cost of unit x replacement number
  • Total annual profit / Average annual investment x 100
  • Net profit per unit x replacement number
  • Investment cost + total disposal value / 2

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