Management uses several different methods in evaluating potential capital investments. Identify and briefly discuss the four methods outlined in the text.
What will be an ideal response?
The four methods are payback, accounting rate of return, net present value and internal rate of return. Payback and accounting rate of return, are fairly quick and easy, and they work well for capital investments that have a relatively short life span. Payback and accounting rate of return are also used to screen potential investments from those that are less desirable. Payback provides management with valuable information on how fast the cash invested will be recouped. The accounting rate of return shows the effect of the investment on the company's accrual-based income. Net present value and internal rate of return consider the time value of money and the cash flows associated with each investment.
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