Managerial Accounting & Cost Concepts (Classification)

Accounting 202 Exam 4 Study Guide Chapter 12: Capital Budgeting Decisions (15 Questions, 160 Points) The term capital budgeting is used to describe how managers plan significant cash outlays on projects that have long-term implications such as the purchase of new equipment and the introduction of new products. This chapter describes three methods for making these types of investment decisionsthe payback method, the net present value method, and the simple rate of return method. Can (Do) I: Determine the payback period for an investment. The payback period is the number of periods that are required to recover the investment in a project from the project's net cash inflows. The payback period is most useful for projects whose useful lives are short and uncertain. Generally speaking, it is not a reliable method for evaluating investment opportunities because it ignores the time value of money and all cash flows that occur after the investment has been recovered. Evaluate the acceptability of an investment project using the net present value method. Investment decisions should take into account the time value of money because a dollar today is more valuable than a dollar received in the future. In the net present value method, future