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Chapter 13

Chapter 13 Managerial Accounting Notes

3 Pages
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Department
Accounting
Course Code
ACCT 2230
Professor
Elliot Currie

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Chapter 13 Accounting NotesCapital Budgeting DecisionsCapital Budgeting The process of planning significant outlays n projects that have longterm implications such as purchases of new equipment or the intro of new products Capital budgeting involves investment a company must commit funds now in order to receive a return laterCAPITAL BUDGETINGPLANNINGTYPICAL CAPITAL BUDGETING DECISIONSCapital budgeting decisions seem to fall into 2 broad categories1 Screening Decisions Decision as to whether a proposed investment meets some preset standard of acceptance2 Preference Decision Decision as to which of several competing acceptable investments proposals are bestAPPROACHES TO CAPITAL BUDGETING DECISIONSTHE PAYBACK METHODPayback Period The length of time that it takes for a project to recover its initial cost out of the cash receipts that it generates The quicker the cost of an investment can be recovered the more desirable is the investmentPayback periodInvestment RequiredNet annual cash inflow Formula can only be used when net annual cash inflow is the same every yearEVALUATION OF THE PAYBACK METHOD A shorter payback period doesnt always mean that one investment is more desirable than another One may have shorter lifespan that cant be seen Payback method doesnt adequately consider the time value of money Cash inflow might be received several years in the future Good because it can help identify which proposals are in
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