ACCT 001 Lecture Notes - Lecture 26: Discounted Cash Flow, Cash Flow, Financial Statement

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bronzegrasshopper664

23 Sep 2020

School

College of The Sequoias

Department

Accounting (ACCT)

Course

ACCT 001

Professor

lindsay

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Document Summary

Quantitative analyses of the costs and benefits of capital investment decisions must consider the time value of money. This means cash flow is important, not accounting net income. Risk is the greatest factor associated with time value of money we do not know what the future will bring. How is time value of money considered in capital investments: net present value method (npv, internal rate of return method (irr) Capital investment tools that recognise the time value of money and use discounted cash flow techniques are preferred. Payback method is a non-discounted method that is useful as an approximation used in capital investment decisions. A system where the impact of transactions on the financial statements is recorded at the time the expenses and revenues occur, rather than when they occur. Cash accounting is a different system that records the impact of transactions on the financial statements at the time when the cash is received or paid.

Related Questions

1) Why is it beneficial to routinely compare the cost ofindividual investments to future earnings and cash flows?

To rank investments

To keep your boss happy

To practice my accounting skills

2) What is a synonym for capital investment analysis? Choosethe best answer:

Capital budgeting

Balance Sheet

Income Statement

3) What are two methods to evaluate capital investments thatdo not use present values?

Average rate of return method

Cash payback method

Double declining balance depreciation

4) What are two methods to evaluate investments that usepresent value?

Statement of cash flows

Net present value method

Internal rate of return method

5) The time value of money concept recognizes that:

A dollar today is worth more than a dollar tomorrow becausetoday's dollar can earn interest.

The Federal Reserve Board raised the interest rate.

Straight line depreciation is better than the double decliningbalance method.

6) The internal rate of return method of analysis is used toevaluate proposed capital investments. It uses present valueconcepts to compute the rate of return from the net cash flowsexpected from the investment. Are there any disadvantage of the IRRmethod?

7) Assume the average rate of return for investment A and Bamounts to 10% (A) verses 20% (B). Which investment is preferable,and why?

8) Explain how to compute the net present value of aninvestment, in your own words.

greenllama519

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

RozzisRozzis

Construction is analyzing its capital expenditure proposals forthe purchase of equipment in the coming year. The capital budget islimited to

$ 5 comma 000 comma 000$5,000,000

for the year.

LindaLinda

BensonBenson?,

staff analyst at

RozzisRozzis?,

is preparing an analysis of the three projects underconsideration by

ChesterChester

RozzisRozzis?,

the? company's owner.

Requirement 1. Because the? company's cash is?limited,

RozzisRozzis

thinks the payback method should be used to choose between thecapital budgeting projects.

a. What are the benefits and limitations ofusing the payback method to choose between? projects?

Benefits of the payback? method:

Easy to understand and captures uncertainty about expected cashflows in later years of a project

Your answer is correct.

Indicates whether or not the project will earn the? company'sminimum required rate of return

Utilizes the time value of money and computes each? project'sunique rate of return

All of the above

Limitations of the payback? method:

Cannot be used when? management's required rate of return variesfrom one period to the next.

Cannot be used for projects with unequal periodic cash flows

Fails to incorporate the time value of money and does notconsider a? project's cash flows after the payback period

All of the above

Data Table:

Project A

Project B

Project C

Projected cash outflow

Net initial investment

$3,000,000

$2,100,000

$3,000,000

Projected cash inflows

Year 1

$1,200,000

$1,700,000

Year 2

1,200,000

600,000

1,700,000

Year 3

1,200,000

500,000

200,000

Year 4

1,200,000

100,000

Required rate of return

Requirements:

1.	Because the? company's cash is? limited, RozzisRozzis thinks the payback method should be used to choose between thecapital budgeting projects.
	a.	What are the benefits and limitations of using the paybackmethod to choose between? projects?
	b.	Calculate the payback period for each of the three projects. Ignoreincome taxes. Using the payback? method, which projects should RozzisRozzis ?choose?
2.	BensonBenson thinks that projects should be selected based on their NPVs. Assumeall cash flows occur at the end of the year except for initialinvestment amounts. Calculate the NPV for each project. Ignoreincome taxes.
3.	Which? projects, if? any, would you recommend? funding? Brieflyexplain why.

amaranthtrout588

ACCT 001 Lecture Notes - Lecture 26: Discounted Cash Flow, Cash Flow, Financial Statement

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