CAPITAL INVESTMENT DECISIONS

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1. Internal rate of return (IRR)

  • 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
  • If competing projects have positive NPVs, the one with the highest NPV is selected
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2. 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;

3. Average annual profit =

  • Total anual profit x life time until replacement (yrs) / life time until replacement (yrs)
  • Investment cost + total disposal value / 2
  • Total annual profit / Average annual investment x 100
  • Net profit per unit x replacement number
  • Total cost of unit x replacement number

4. Investment in new machinery - cash flow graph (Should investment be taken)

  • Years (Horizontal); Vertical - Capital expenditure; Savings; Disposal; Net cash flow; Discount factor; Present value = Net presnt value
  • Years (Vertical); Horizontal - Capital expenditure; Savings; Disposal; Net cash flow; Discount factor; Present value = Net presnt value

5. Total annual profit =

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

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