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Payback period, accounting
All the above are the methods of capital budgeting which are having separate principles of deciding on which investment shall be taken up:
Payback period: This method is based on principle that the projects which recover which initial
Accounting rate of return: This method computes the simple rate of return on the average investment involved in the projects and the projects which provides the highest return shall be accepted.
Net Present value: This method is based on principle of time value of money and takes decision on the basis of net residual
Internal return of return: This method also suggests the rate of return which the investment will realize after considering the present value of cash inflows and outflows. The
Profitability Index: Profitability index is also a proportion of present value of cash inflows and initial investment. The project with higher ratio shall be accepted over the other projects.
Requirement1-a:
Thepayback period of the project shall be determined.
Requirement 1-b:
The Accounting rate of return of the project shall be computed.
Requirement1-c:
The net present value of project at 12% discount rate shall be computed.
Requirement1-d:
The Internal rate of return shall be determined
Requirement1-e:
The Profitability index of the project shall be determined.
Requirement2:
The decision on the project acceptance or rejection to be taken.
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Chapter 26 Solutions
ACCOUNTING PRINCIPLES 122 5/16 >C<
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