ACFI1001 Lecture Notes - Lecture 12: Net Present Value, Decision Rule, Cash Flow

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ceruleanbeaver564

23 Jul 2018

School

University of Newcastle

Department

Accounting

Course

ACFI1001

Professor

Marcus

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Document Summary

Making an outlay of cash which is expected to yield economic benefits to the investor at some other point in time. Four main methods used in practice to evaluate investment opportunities: accounting rate of return (arr, payback period (pp, net present value (npv) internal rate of return (irr) Some smaller businesses (cid:373)a(cid:455) use i(cid:374)for(cid:373)al (cid:373)ethods, su(cid:272)h as (cid:373)a(cid:374)agers(cid:859) i(cid:374)sti(cid:374)(cid:272)ts. Arr takes the average accounting profit the investment will generate, and expresses it as a percentage of the average investment in the project as measured in accounting terms: Arr= average annual profit/average investment to earn that profit x 100. The calculation requires :the annual average profit, the average investment for the particular project. Decision rules: for any project to be accepted, it must achieve a target arr as a minimum; if there are competing projects that exceed the minimum rate, the one with the highest arr would normally be chosen.

Related Questions

1 Accounting

The following are 10 technical accounting terms.

Net present value Capital budgeting Incremental analysis Discount rate Payback period Present value Sunk cost Salvage value Return on average investment Capital budget audit Each of the following statements may (or may not) describe one of these technical terms.

For each statement, indicate the accounting term described, or answer âNoneâ if the statement does not correctly describe any of the terms.

a the examination of difference among revenue, costs, and cash flows under alternative courses of actions

b a cost incurred in the past that cannot be changed as a result of future actions

c the process of planning and evaluating proposals for investments in plan assets

d the average annual net income from an investment expresses as a percentage of the average amount invested

e the length of time necessary to recover the entire cost of an investment from resulting annual net cash flows

f the present value of investment's expected future cash flows

g the amount of the money today that is considered equivalent to the cash flows expected to take place in the future

h the required rate of return used by an investor to discount future cash flows to their present value

i often an investment's final cash flows to be considered in discounted cash flow analysis

scarletworm172

home / study / business / accounting / questions and answers /1your family owns a velociraptor skeleton that ...

Question

1Your family owns a velociraptor skeleton that is currentlyvalued at $86.7 thousand. Your grandfather, being an avid fossilcollector, bought it 50 years ago for $24.8 thousand. If theskeleton keeps appreciating at the same average annual rate, whatwould be its value 25 years from now?

2You would like to establish a trust fund that would pay annualpayments to your heirs of $98 thousand a year forever. You expectthe trust fund to earn an average return of 8.84 percent. How muchdo you need to deposit into this trust fund today to achieve yourgoal?

3You are thinking of investing in a project that will pay you$100,000 7 years from now, and another $100,000 10 years from now.You think the right discount rate for the project is 6.9%. What isthe maximum you should be willing to pay for this investment?

4A firm recently purchased a new facility costing $962 thousand.The firm financed this purchase with an amortized loan at aninterest rate of 9.7 percent APR, with monthly payments of $16.1thousand. How long will it take to pay off this loan? (Enter answerin months, accurate to two decimal places.)

5An investment is expected to produce $2,370 at the end of eachyear for the next 10 years. Other investments of similar riskinessavailable to you are yielding 8.4 percent return. What is themaximum you should be willing to pay for this investment?

6You are not thrilled about spending your entire life working.So, you have decided that you will save $6 thousand a year,starting at the end of this year, and retire as soon as you canaccumulate $1 million. If you can earn an average of 8.47 percenton your savings, how many years will pass before you get toretire?

7How much money must you invest today, at 7.7 percent fixedannual interest rate, in order to have 10 thousand in 13 years?

8You have $1,895 today, and want to double your money in 19years. What interest rate must you earn to achieve your goal?

9The house you want to buy costs $260 thousand. You plan to makea cash down payment of 10 percent, and borrow the rest in a 30 yearmortgage at 4.8 percent APR. What will be the amount of yourmonthly mortgage payment?

10You estimate that you will need $771 thousand in 30 years tobuy some cybernetic body enhancements, including infrared vision,retractable claws, and expanded brain storage capacity. To achieveyour financial goal, you want to make three equal-sized depositsinto an account paying a fixed annual rate of 8.82%. The firstdeposit will be made right now, the second 10 years from now, andthe third 20 years from now. What is the size of each deposit youneed to make in order to partake of future cybernetic goodness?(Hint: draw this out on a timeline.)

harlequinmuskrat771

A decentralized organization is one in which:

a. each stockholder is given decision-making authority.

b. only top-level management is given decision-makingauthority.

c. each employee in the organization is given permission to makedecisions about their company.

d. managers at various levels throughout the organization aregiven decision-making authority.

A local chain department store grants each of its store managersthe authority to make buying decisions for their stores. Grantingmanagers this kind of authority is found in which type oforganization?

a. Desegmented

b. Centralized

c. Segmented

d. Decentralized

A local chain electronics store does not allow its store ordistrict managers to make important decisions about their stores.The main role of store managers is to supervise employees and makesure day-to-day transactions run smoothly while district managerssupervise store managers and report profitability data back totop-level management. Not allowing store or district managersdecision-making authority is most likely to be found in which typeof organization?

a. Centralized

b. Desegmented

c. Segmented

d. Decentralized

When a few individuals at the top of an organization retaindecision-making authority, the organization is referred to asa(n):

a. investment center.

b. centralized organization.

c. decentralized organization.

d. profit center.

Which of the following statements regarding the structure oforganizations is false?

a. In a decentralized organization, decision-making authority isconfined to top-level management.

b. Decentralization may make it difficult for managers to shareunique and innovative ideas.

c. When decision-making authority is spread among too manymanagers, managers may become so concerned with their own area ofresponsibility that they lose sight of the company's overallfocus.

d. In a decentralized organization, there may be a lack ofcoordination and communication between segments.

Which of the following is an advantage of decentralization?

a. It allows top-level management who normally work at corporateheadquarters to get involved with the day-to-day decisions thatneed to be made at lower levels.

b. It allows managers to focus on their own area ofresponsibility rather than what is best for the company as awhole.

c. It requires very little as far as manager training costs.

d. It allows decisions to be made in a more timely manner.

Which of the following is not an advantage ofdecentralization?

a. It allows lower-level managers to focus on their ownparticular goals and objectives without having to consider theoverall company's goals and objectives.

b. It allows top-level managers more time to devote tolong-range strategic planning.

c. It permits lower-level managers to gain valuable on-the-jobtraining in order to become better managers.

d. It often creates higher job satisfaction for managers.

Which of the following is often not a disadvantage ofdecentralization?

a. Lack of coordination and communication between segments.

b. Higher training costs for lower-level managers.

c. Lack of company focus as lower-level managers may makedecisions that benefit their own particular segment.

d. Decreased job satisfaction for lower-level managers.

Which of the following is a disadvantage ofdecentralization?

a. Lower training costs for lower-level managers.

b. Less timely decisions are able to be made on a day-to-daybasis.

c. Decreased job satisfaction for lower-level managers.

d. Lack of coordination and communication between segments.

"Responsibility accounting" is the concept that says:

a. managers should be responsible for both revenues and costs oftheir particular segment.

b. managers should be held entirely responsible for allinvestment decisions that impact the particular segment in whichthey are in charge.

c. managers should be held responsible for only those thingsunder their control.

d. managers should never be held entirely responsible for thingsthat happen within the particular segment in which they are incharge.

A budget for a single unit of a product or service is called asa:

a. real cost.

b. fixed cost.

c. total cost.

d. standard cost.

Which of the following statements is true regarding the budgetedcost for direct materials?

a. It must be determined after materials are purchased for theyear.

b. It can not be determined if a company uses a just-in-timeinventory system.

c. It would consist of two components - a standard quantity anda standard price.

d. It would be used on a static budget but not a flexiblebudget.

Variance analysis compares:

a. standard costs and actual costs.

b. static budgets and flexible budgets.

c. product costs and period costs.

d. practical standards and ideal standards.

Which of the following statements is false regarding taskanalysis?

a. It uses actual historical data in the determination ofstandard costs.

b. It emphasizes what it should cost to produce a product ratherthan historical costs.

c. It examines the production process in detail.

d. It may involve the use of engineers.

Task analysis:

a. is used to set standard costs.

b. is used to determine the tasks that production employeesshould complete on a daily basis.

c. is used to evaluate employee performance.

d. emphasizes the historical costs of a product.

A(n) ____ is attainable only when near-perfect conditionsexist.

a. static budget

b. ideal standard

c. flexible budget

d. practical standard

In most companies, machines break down occasionally andemployees are often less than perfect. Which type of standardacknowledges these characteristics when determining the standardcost of a product?

a. Practical standard

b. Ideal standard

c. Efficiency standard

d. Budgeted standard

Hathaway Inc. produces and sells golf umbrellas to localresorts. Hathaway anticipates April to be a busy month with thesale of 2,000 umbrellas. The company has prepared the followingstatic budget for April:

Sales revenue (2,000 units)	$60,000
Variable costs:
Direct materials	6,000
Direct labor	8,000
Overhead	2,500
Fixed costs	6,000
Net operating income	$37,500

During April, Hathaway actually produced and sold 2,300 umbrellas.What should be Hathaway's net operating income in April based on aflexible budget?

a. $35,025

b. $43,125

c. $44,025

d. $37,500

Hoppe Inc. manufactures widgets. Management has determined thateach widget has a standard materials cost of $3.50 when 2.5 ouncesof raw material at a cost of $1.40 per ounce are used. The staticbudget for the month of December showed an estimated production of4,000 widgets in December. During December, 4,300 widgets wereactually produced. The actual cost for each widget was $3.60 when2.25 ounces of raw material at a cost of $1.60 per ounce werepurchased and used. What should be the total direct materials costaccording to Hoppe's flexible budget for December?

a. $14,000

b. $15,480

c. $14,400

d. $15,050

Violetta Inc. manufactures plastic storage boxes. Management hasdetermined that each medium-sized box has a standard materials costof $1.20 when 4 pounds of raw material at a cost of $.30 per poundare used. The static budget for the month of March showed anestimated production of 15,000 boxes in March. During March, 17,000boxes were actually produced. The actual cost for each box was$1.56 when 3.9 pounds of raw material at a cost of $.40 per poundwere purchased and used. What should be the total direct materialscost according to Violetta's flexible budget for March?

a. $26,520

b. $23,400

c. $18,000

d. $20,400

ACFI1001 Lecture Notes - Lecture 12: Net Present Value, Decision Rule, Cash Flow

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