Asked by Brynn Lauman on May 26, 2024
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The payback method and accounting rate of return methods consider the effect of the time value of money.
Time Value
A financial principle acknowledging that receiving money now is more advantageous than receiving the same amount in the future due to its earning potential.
Payback Method
A capital budgeting technique that calculates the time required to recoup the initial investment through cash inflows.
Accounting Rate
Often refers to the accounting rate of return (ARR), a financial ratio used to measure the profitability of an investment, calculated by dividing the average annual profit by the initial investment cost.
- Recognize the importance of the time value of money in evaluating capital expenditure proposals.
- Understand the characteristics and applications of payback and accounting rate of return methods in capital budgeting.
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Learning Objectives
- Recognize the importance of the time value of money in evaluating capital expenditure proposals.
- Understand the characteristics and applications of payback and accounting rate of return methods in capital budgeting.
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