12.2: Chapter 11 Key Points

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Key Takeaways – Capital Budgeting

Capital Budgeting looks at the purchase of long term plant assets or investments.

Capital Budgeting can use simple techniques that do not take the present value of $1 into account (remember, a dollar is not worth the same as it was 20 years ago).

Payback period provides you with an idea of how long it will take to earn back the money you paid for the asset. It is calculated as Cost of Investment / Net Cash Flow

Net Cash Flow refers to the after-tax net income of a company with any non-cash expenses added back in (like Depreciation).

Accounting Rate of Return provides you with an idea of how many cents of after-tax net income you earn of every dollar of your investment. It is calculated as after-tax net income / average investment.

Average Investment for the rate of return is calculated as the Beginning Book Value (or Cost of investment) + Salvage value (or Ending book value) divided by 2

Click capital budget key points for a printable copy.