All of the criteria have their own advantages and shortages. Therefore, single criterion is not suitable to be used to evaluate the project. 2.1 Impact on earnings per share The average annual earnings per share is calculated by the formula of [total cash flow of the project / (the number of outstanding shares * number of years)]. It is a good measure to represent the value
The total cost approach is a method of coordinating materials management and physical distribution. The cornerstone of the total cost approach is that all relevant logistical cost items are considered simultaneously when making a decision or a change in the logistics system, not just the item that is being changed. The total cost approach requires an understanding of cost tradeoffs. Making one part of the logistics process cheaper may end up creating more cost in other parts, resulting in a more expensive overall system. The total cost approach would recognize this to be the case, and would hopefully result in not implementing such a change.
And details of the expenses and services should be included. According to the Agent “Mansour Group” 1- Mansour group should act loyally and in good faith with the Mansour group and follow the commands instructed by Chevrolet to the best interest of selling the product and should not mix up its own interest with its duties to fulfil the obligations required. 2- Promoting the automobiles should be done with the full potential of the company to fulfil Chevrolet’s visions of its product. 3- Mansour group should refer to Chevrolet if it decides to do business using its name 4- In the legal documents, deals and promotions, Mansour group must refer to themselves as an agent 5- The premises, stores and offices and their maintenance that are used to fulfil the obligations of the agreement are done on Mansour group’s own expenses. 6- Adequate number of employees that are picked according to Chevrolet’s qualifications are required to be employed to carry out the duties of the agency.
REAL OPTIONS AND THEIR INCORPORATION WITHIN CAPITAL BUDGETING A real option is a form of derivative, similar to a forward contract, but with a couple of important differences. A real option infers the right, but not an obligation, to buy an underlying real asset. The holder of a real option will compare the market value of the asset in question, along with the agreed exchange value on the option and can then decide whether to exercise that option or tear it up. This flexibility can come at considerable cost, which we will examine in the next section. The process of capital budgeting focuses on the incremental increase in cash flows associated with an investment decision or investment project.
IAS 11 instructs that revenue from a Construction Contract will be recognized if can be estimated reliably. Revenue and costs would be recognized concurrently with the completion of the activity mentioned in the contract, which is known as the “Percentage of Completion Method” of Accounting. In order to make an estimate of the total financial outcome from a contract, the firm would have to be able to calculate approximates of the Total Contract Revenue, Stage of Completion and the completion costs of the contract. In contrasts, if no approximates could be determined, the revenue would not be recognized. Instead, the firm would only be able recognize whether the incurred Contract costs are recoverable and if they should be expensed or incurred.
MULTIPLE CHOICE QUESTIONS 1. The statement of cash flows should help investors and creditors assess each of the following except the a. entity's ability to generate future income. b. entity's ability to pay dividends. c. reasons for the difference between net income and net cash provided by operating activities. d. cash investing and financing transactions during the period.
In other words, the cost of raising fund is the firm’s cost of capital. Estimate a firm’s cost of capital is important because can help conclude required return for capital budgeting projects. Usually, the investor only picks up the project which provides higher return and lower risk on investments. Since the cost of capital is the minimum return required by investors, manager should invest only in projects that generate returns in excess of the cost of capital. Cost of capital can help define the acceptability of investment opportunities.
The straight-line method spreads the expense evenly by periods and the accelerated methods yield higher depreciation expense in the early years of an asset’s useful life and lower depreciation expense in the later years while the units-of-production method, bases depreciation expense for a given period on actual use. Companies use different depreciation methods for tax reporting and financial reporting because every company has a different asset quality and the depreciation on those assets for each company depreciates differently so it is up to the management to be discrete to which choice of depreciation to use in their reporting in respect to their fixed assets. Straight Line method: Advantage: 1) Straight-line method allows for more “income smoothing". 2) It allows company to show more book value of the asset which increases the value of the company. Disadvantages: 1) benefit of Tax deduction is availed late.
Accelerated depreciation does increase the value of an investment, however before it is explained how, it is important to define and point out the relevance of depreciation, book value, market value, inter-period tax allocation and deferred tax liability. Depreciation is a non-cash expense that lowers the value of assets over a period of time. Assets are depreciated for two reasons – wear and tear and old models becoming obsolete. Depreciation’s relevance to accelerated depreciation is that accelerated depreciation is taking base depreciation and accelerating it to report more depreciation earlier in the depreciation cycle. Book value is the value that an asset is on the balance sheet.
THE IRR RULE IS REDUNDANT AS AN INVESTMENT CRITERION BECAUSE THE NPV RULE ALWAYS DOMINATES IT IRR & NPV Net Present Value (NPV) is a measure used to determine whether a project is worth investing in. The NPV method calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present value, using the required rate of return (RRR). NPV compares the amount that has been invested today with the present value of the expected future returns. In other words, NPV compares the amount invested today with the future returns after it has been discounted by required rate of return (RRR). The RRR can also be called as the discount rate, hurdle rate or the opportunity cost of capital.