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Business LibreTexts

11.6: Chapter 11 Key Points

  • Page ID
    10678
  • 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.