### Create a StudySoup account

#### Be part of our community, it's free to join!

Already have a StudySoup account? Login here

# Chapter 9 "Budgeting Decisions" Notes ACCT 2102

GSU

GPA 3.0

### View Full Document

## About this Document

## 143

## 1

## Popular in PRIN OF ACCT II

## Popular in Accounting

This 5 page Class Notes was uploaded by Breana Carey on Thursday April 7, 2016. The Class Notes belongs to ACCT 2102 at Georgia State University taught by Kathleen S. Partridge (P) in Fall 2015. Since its upload, it has received 143 views. For similar materials see PRIN OF ACCT II in Accounting at Georgia State University.

## Popular in Accounting

## Reviews for Chapter 9 "Budgeting Decisions" Notes

### What is Karma?

#### Karma is the currency of StudySoup.

#### You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!

Date Created: 04/07/16

Accounting 2102: Chapter 9 "Capital Budgeting" Thursday, April 7, 2016 23:38 Capital Budgeting Decisions Capital Budgeting is the process of evaluating a organizations investment in the long run o w/capital budgeting we look more into the future, usually 5-10 years Investing capital assets: Capital assets are those assets that are expected to provide economic benefit for several years (usually listed under property, plant and equipment) 2 kinds of return are to be expected w/a long term asset Return Of Investment: means recouping the original investment -- getting your money back Return on Investment: means that you'll get over and above what you put into the investment. a. (i.e You spend 60$ on a investment and you yet back 80$ you've earned a 20$ return on investment) Making Capital Budgeting Choices: Many large companies have a large committee to review their choices because of the amount of money those projects require. 2 Kinds of capital budgeting choices: 1. Screening Decision: a proposed project is compared to its performance benchmarks to determine whether the project should be continued o The minimum required rate of return is called the Hurdle Rate 2. Preference Decision: managers determine which project will actually receive funds by rank ordering them based on selected criteria. Most capital budgeting decisions are based on cash flows, depreciation is not included because depreciation is not a cash flow. Time Value of Money: Present Value of 1$ A dollar received today is worth more than a dollar received anytime into the future because it can be invested today and earn additional money The process where you determine how much money to be received in the future is worth today is called discounting. The discounted amount is the present value of the future amount AKA Discount Rate Calculating present value: You need to know 3 things: (1) the future amount to be received (2) the interest rate an (3) when the future amount will be received Present value means you calculate by multiplying the number by the PVF PVF = Future Value x Present Value The discount rate will change with the period that you decide Interest can be discounted daily, annually, semi- annually and quarterly. The discount rate at present value The relationship between the discount rate is inversely related when the discount rate then the present value will Present Value of a Annuity While some investments need a lump sum of money others will create a general flow of payments Annuity: is a stream of equal cash flows received at equal time intervals. Net Present Value The net present value approach (NPV) requires that you calculate the present value of each cash flow then you add or 'net' those present values to arrive at projects next capital value Steps: 1. Identify an get the amount of each cash flows 2. Determine the appropriate discount rate The appropriate discount rate will change from company to company The discount rate is the average of the company's interest rate on borrowed funds Two other factors that affect discount rate are (1) the finance theory states that risks and rate of return are positively related meaning that if risks then the rate of return will as well (2) a discount rate should increase if inflation is expected to happen over the life of the project 3. Calculate the present value of each cash flow You need to multiply the present value and multiply the right value factor 4. Calculate the net present value Once you've the calculated the present value then you add them together to get a net value of the project. Internal Rate of return: Internal rate of return is the actual rate of return expected on a project. The internal rate of return (IRR) considers the amount to be earned on the project. Compared to the discount rate if it is equal or greater than we should accept the proposal. NOTE: When projects rate of return equals the discount rate than the NPV equals 0 Projects with even cash flows are a little easier to calculate, you need this formula The net initial investment is the net cash flow in year 0 1 Solve the present value of a annuity factor that equals 0 2 Look for the present value factor on the annuity table. The column where the present value factor is located is your internal rate of return. Projects with uneven cash flows are more difficult to solve because projects with uneven cash flows can't use the annuity table and essentially you have to use trial and error to understand what discount rate to use that will bring out NPV to 0 Screening and Preference Decisions: Profits with different sizes can be evaluated using the profitability index which compares the NPV project cash flows to the present value of the net initial investment. The project with the highest profitability index is the preferred project. o Other Capital Budgeting Techniques Payback period The payback period is the time it takes in years for a investment to return back to the original amount invested in capital Projects with even cash flows payback period is calculated by Projects with uneven cash flows are calculated by adding up all the annual cash flows until the cumulative total cash flows equal net investment Accounting Rate of return Accounting rate of return means that the return generated by an investment based on its net operating income. NOTE: this method doesn’t go by cash flows Accounting rate of return is calculated by calculating all of the additional revenues generated by the investment and then subtracting all additional operating expenses NOTE: If the project doesn’t have a stable operating income then you would do average annual net operating income/the total life of the project

### BOOM! Enjoy Your Free Notes!

We've added these Notes to your profile, click here to view them now.

### You're already Subscribed!

Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'

## Why people love StudySoup

#### "I was shooting for a perfect 4.0 GPA this semester. Having StudySoup as a study aid was critical to helping me achieve my goal...and I nailed it!"

#### "When you're taking detailed notes and trying to help everyone else out in the class, it really helps you learn and understand the material...plus I made $280 on my first study guide!"

#### "There's no way I would have passed my Organic Chemistry class this semester without the notes and study guides I got from StudySoup."

#### "It's a great way for students to improve their educational experience and it seemed like a product that everybody wants, so all the people participating are winning."

### Refund Policy

#### STUDYSOUP CANCELLATION POLICY

All subscriptions to StudySoup are paid in full at the time of subscribing. To change your credit card information or to cancel your subscription, go to "Edit Settings". All credit card information will be available there. If you should decide to cancel your subscription, it will continue to be valid until the next payment period, as all payments for the current period were made in advance. For special circumstances, please email support@studysoup.com

#### STUDYSOUP REFUND POLICY

StudySoup has more than 1 million course-specific study resources to help students study smarter. If you’re having trouble finding what you’re looking for, our customer support team can help you find what you need! Feel free to contact them here: support@studysoup.com

Recurring Subscriptions: If you have canceled your recurring subscription on the day of renewal and have not downloaded any documents, you may request a refund by submitting an email to support@studysoup.com

Satisfaction Guarantee: If you’re not satisfied with your subscription, you can contact us for further help. Contact must be made within 3 business days of your subscription purchase and your refund request will be subject for review.

Please Note: Refunds can never be provided more than 30 days after the initial purchase date regardless of your activity on the site.