Lecture Survey of accounting - Chapter 16: Planning for capital investments

Planning for Capital Investments Chapter 16 McGraw­Hill/Irwin Copyright © 2012 by The McGraw­Hill Companies, Inc. All rights reserved. 16-2 Learning Objectives 1. Explain the time value of money concept and apply it to capital investment decisions. 2. Determine the present value of future cash flows. 3. Determine and interpret the net present value of an investment opportunity. 4. Determine and interpret the internal rate of return of an investment opportunity. 5. Identify cash flows associated with an investment opportunity. 6. Compare capital investment alternatives. 7. Determine the payback period for an investment opportunity. 8. Determine the unadjusted rate of return for an investment opportunity. 9. Conduct a postaudit of a completed investment. 16-3 Capital Investment Decisions Purchases of long­term operational assets are capital investments. Once a company purchases operational assets, it is committed to these investments for an extended period of time. Understanding the time value of money concept will help you make rational capital investment decisions. 16-4 Time Value of Money This concept recognizes that the present value of a dollar received in the future is less than today’s dollar. The further into the future the receipt is expected to occur, the smaller its present value. When a company invests in capital assets, it sacrifices present dollars in exchange for the opportunity to receive future dollars. 16-5 Minimum Rate of Return Most companies consider the cost of capital to be the minimum expected return on investment opportunities. Creditors expect interest payments; in most companies, owners expect dividends and increased stock value. The blend of creditors and owners costs is considered the cost of capital for an organization. ... - tailieumienphi.vn