ACG2071 Chapter 11 (Principles of Managerial Accounting)

The operational assets businesses use for long periods of time.

When a company purchases a capital asset.

The process of investing into capital assets

Capital rationing is the process of ranking and choosing among alternative capital investments based on the availability of funds.

So, maybe for a project you wait to the net 3 years to do it to get more funds, and there are mor eimportant projects to invest in.

The comparison of the actual results of the capital investment vs the projected results.

Generate more cash inflow than Cash outflow, over the useful life of an asset

"The desirability of a capital asset depends on its ability to generate net cash inflows—that is, cash inflows in excess of cash outflows—over the asset’s useful life."

Payback is a capital investment analysis method that measures the length of time it takes to recover, in net cash inflows, the cost of the initial investment.

1. It only focuses on the time it ill take to pay it back. Ot completely ignores profits afterward.

If after you break even, what if it just generates \$0 or \$1 million. This would not take that into consideration.

2.
"The key point is that the investment with the shortest payback is best only if all other factors are the same.

Therefore, managers usually use the payback method as a screening device to eliminate investments that will take too long to recoup the initial investment.

They rarely use payback as the sole method for deciding whether to invest in the asset."

"The accounting rate of return (ARR) is a capital investment analysis method that measures the profitability of an investment."


ARR measures the average annual rate of return over the asset’s entire life

PS: Residual value is the estimate value of an asset at the end of its useful life.

Recognition that money earns interest over time.

Lump Sum: Receive all the money at once (ex, you get get a singular lump-sum of \$1,200)n

Annuity: A stream of equal cash payment made at equal time intervals (ex, \$100 every month for 12 months)

1. The amount of the investment (stated in a lump-sum or an Annunity)

2. The number of periods is from the beginning to the end of the investment

3. The interest rate (i) is the annual percentage earned on investment

Simple Interest: Interest is only calculated on the principal amount

Compound Interest: Interest is calculated on the principal and on all previously earned interest

1. The Present Value is \$10,000

2. The Future Value is (10,000)+((10,000 x 0.06)5) = \$13,838

(ex, the present value would be \$10,000)

Step 1: Go to the Present Value Lump-sum table, and got to where the period is 5 and the percentage is 6. (Image)

Step 2: Its 0.747, so follow the formula

Present Value = Future Value x PV factor for i = 6%, n = 5

Present Value = \$13,383 x 0.747

Present Value = \$9,997

Step 1: Go to the Present Value Annuity table and find where it is period is 5 and percnetage of 6. (Image)

Step 2: It's 4.212, so follow the formula

Present Value = Future Value x PV factor for i = 6%, n = 5

Present Value = 2,000 x 4.212

Present Value = \$8,424

Step 1: Go to the Future Value Lump-Sum table, and find where the period is 5 and the percentage is 6. (Image)

Step 2: Its 1.338, so then follow the formula

Future Value = Present Value x FV factor for i = 6%, n = 5

Future Value = 10,000 x 1.338
Future Value = \$13,38

Step 1: Go to the Future Value Annunity table, and find where the period is 5 and the percentage is 6. (Image)

Step 2: Its 5.637, so then follow the formula

Future Value = Present Value x FV factor for i = 6%, n = 5

Future Value = \$2,000 x 5.637
Future Value = \$11,274

Net Present Value: The difference between the present value of the investments net cash inflows and the investments initial cost.

The present value is based on i (interest) and n (periods), specifically with interest based on the target interest

Managements minimum desired rate of return on a capital investment.

Step 1: The NPV is the difference between the present value and the initial investment. So, to the find the Present Value,

-Laptop Computers: Just do the steps for "Present Value Annuity" found in a previous slide. (SInce cash flow is equal each year)

-Desktop Computers: Since the cash flow is not equal each your, you have to calculate a lump-sum method for each year. (Shown in image)

Step 2: After you have the present value, just subtract it from the initial investment, which is \$1,000,000.

The residual value is treated as a lump-sum, so you need to use the Lump-sum PV factor.

-The profitability index computes the number of dollars returned for every dollar invested, with all calculations performed in present value dollars.

Formula: (Shown at the top of the image)

*Project C is the best since it returns \$1.21 (in present value dollars) for every \$1.00 invested.