COMMERCE 2FA3 Chapter Notes - Chapter 9: Income Statement, Capital Cost, Sunk Costs

• School: McMaster University
• Department: Commerce
• Course: COMMERCE 2FA3
• Professor: Arshad Ahmad

Document Summary

Chapter 9 investment techniques: average accounting rate of return (aar, payback period & discounted payback (pb & dpb, internal rate of return (irr, net present value (npv, profitability index (pi) Average accounting rate of return a. is a modified roi return on investment. Pros: accounting info readily available, easy to calculate. Cons: difficult to compare and assess rate, based on book values, not cash flows, may give misleading results and misallocate capital. Payback period time to recover the initial investment. Pros: easy to calculate, adjusts for uncertainty, biased towards liquidity. Ignores the time value: uses an arbitrary cutoff period, uses book values, not cash flows, biased against long term projects. **discounted pay back period ** : time to recover the initial investment. Or, how long to get your money back. Net present value (npv): the value created or lost in todays dollars; accept the project if npv 0. Using the following cash flows and a 10% rate, compute the npv.