CAPITAL INVESTMENT DECISIONS 0.0 / 5 ? AccountingCAPITAL INVESTMENT DECISIONS UniversityAll boards Created by: josief95Created on: 13-12-15 15:00 Total annual profit = Net profit per unit x replacement number 1 of 14 Total investment cost = Total cost of unit x replacement number 2 of 14 Total disposal value = Sale value per unit x replacement number 3 of 14 Average annual profit = Total anual profit x life time until replacement (yrs) / life time until replacement (yrs) 4 of 14 Average annual investment = Investment cost + total disposal value / 2 5 of 14 Accounting Rate of Return (ARR) = Total annual profit / Average annual investment x 100 6 of 14 Payback period (PP) graph - Headings along horizontal axis Year; Cash flow; Cumulative cash flow 7 of 14 Payback period (PP) graph - Headings down the vertical axis Years: 0, 1, 2, 3, 4, 8 of 14 Year 0 = (Total investment); (Total investment) 9 of 14 Cash flow (numbers vertically down) Year 0 = total investment; then every year following = Total annual profit 10 of 14 Cumulative Cash Flow (numbers vertically down) Year 0 = Year 0 = total investment; then every year following = investment - annual profit 11 of 14 Present Value (PV) = Discount Factor (DF) x Cash Flow 12 of 14 Internal rate of return (IRR) The discount rate, which, when applied to the future project cash flows, produces a zero NPV 13 of 14 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 14 of 14
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