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Learning Objectives. Define capital budgeting decisions as long-run investment decisions. (LO 1 ) Explain that cash flows rather than accounting earnings are evaluated in the capital budgeting decision. (LO 2 )
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Learning Objectives • Define capital budgeting decisions as long-run investment decisions. (LO1) • Explain that cash flows rather than accounting earnings are evaluated in the capital budgeting decision. (LO2) • Evaluate investments by the average accounting return, the payback period, the internal rate of return, the net present value and the profitability index. (LO3)
LO2 Accounting Flows Versus Cash Flows Table 12-1 Cash flow for Alston Corporation Earnings before amortization and taxes (cash inflow) . . . . $20,000 Amortization (non-cash expense) . . . . . . . . . 5,000 Earnings before taxes . . . . . . . . . . . . 15,000 Taxes (cash outflow) 40% . . . . . . . . . . . 6,000 Earnings aftertaxes . . . . . . . . . . . . 9,000 Amortization . . . . . . . . . . . . . . + 5,000 Cash flow . . . . . . . . . . . . . . . $14,000 Alternative method of cash flow calculation Cash inflow (EBAT) . . . . . . . . . . . . . $20,000 Cash outflow (taxes) . . . . . . . . . . . . - 6,000 Cash flow . . . . . . . . . . . . . . . $14,000
LO2 Table 12-2Revised cash flow for Alston Corporation Earnings before amortization and taxes . . . . . . $20,000 Amortization . . . . . . . . . . . . . 20,000 Earnings before taxes . . . . . . . . . . . 0 Taxes . . . . . . . . . . . . . . . 0 Earnings aftertaxes . . . . . . . . . . . 0 Amortization . . . . . . . . . . . . . + 20,000 Cash flow . . . . . . . . . . . . . $20,000
