Capital Budgeting

Question 1

Payback time (method)

Answer 1

Invest/ amount per year to pay off

Question 2

Discount payback period

Answer 2

Amount/ pv of amounts
E.g

FV=4000; N=1, pxr=1
i=15; PV=3478

Question 3

Accounting rate of return

Answer 3

Accounting rate of return (ARR) Ratio ARR = Average incremental net income(average profit) / Average Investment
Average incremental net income= Net incomes(after tax)/ useful life
Average investment=investment /2
Investment =(Initial cost+Residual)/2
=(Initial cost-Residual)/2

Question 4

Profit index

Answer 4

PI = Present value of future cashflow / Present value of cost of Investment
Pv of future cash flow= npv of cashflow
Present value of cost of investment= investment value