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  • Topic 9

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    Longer-Run Decisions: Capital Budgeting

    • Introduction

      This topic examines how businesses make decisions to invest in new assets or new projects.  Depending on the type and size of business, these investments may be small or large.  Nevertheless, the principles that underlie the decisions whether to make the investments are the same, regardless of the absolute size of the investment.  Four principal methods in analysing potential investments include the accounting rate of return (ARR), the payback period (PP), the net present value (NPV) and the internal rate of return (IRR).  Complicating issues surrounding the practicalities and complications in calculating and applying numerical decision-support tools are also discussed in this topic.

    • Topic 9: Longer-Run Decisions: Capital Budgeting

      After studying this topic students will be able to:

      Understand the nature of investment decisions;

      • Apply accounting rate of return;
      • Apply payback period method;
      • Calculate net present values and understand the factors that affect the discount rate;
      • Apply internal rate of return;
      • Understand some practical issues in making decisions.

       

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