CAPITAL INVESTMENT DECISIONS

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  • Created by: josief95
  • Created on: 13-12-15 15:00

1. Total disposal value =

  • Sale value per 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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2. Cash flow (numbers vertically down)

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

3. Average annual profit =

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

4. 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

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

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

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