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ACCT 2230 (113)

Managerial Accounting Chapter Thirteen Notes

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University of Guelph
ACCT 2230
Elliot Currie

Chapter Thirteen Capital Budgeting Decisions y Capital Budgeting Planning Investments o Typical Capital Budgeting DecisionsAny decision that involves an outlay now in order to obtain some return increase in revenue or reduction in costs in the future is a capital budgeting decision Typically capital budgeting decisions include y Cost reduction decisions Should new equipment be purchased to reduce costs y Expansion decisionsy Equipment selection decisionsy Lease or buy decisions y Equipment replacement decisionsCapital budgeting decisions tend to gall into two broad categories Screening decisions are those relating to whether a proposed project is accepted Preference decisions by contrast relate to selecting from among seeral acceptable alternatesy Approaches to Capital Budgeting Decisions o The Payback MethodThe payback method focuses on the payback period The payback period is the length of time that it takes for a project to recoup its initial cost out of the cash receipts that it generates Payback period investment requirednet annual cash inflowThe payback method is not a true measure of the profitability of an investment Rather it simply tells the manager how many years will be required to recover the original investmenty The Simple Rate of Return Method o Th
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