CAPITAL INVESTMENT DECISIONS

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1. 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
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2. Year 0 =

  • (Total investment); (Total investment)
  • (Total anual profit); (Total investment )

3. Accounting Rate of Return (ARR) =

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

4. Payback period (PP) graph - Headings along horizontal axis

  • Year; Cash flow; Cumulative cash flow
  • Years: 0, 1, 2, 3, 4,

5. Payback period (PP) graph - Headings down the vertical axis

  • Years: 0, 1, 2, 3, 4,
  • Year; Cash flow; Cumulative cash flow

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