Question

how would you integrate the four cash flow reporting methods into a capital expenditure proposal?

Payback method, Accounting rate of return, net present value and internal rate of return.

Answer 1

Payback Period is the time period required to recoup the funds expended in an investment. It is the break even point where the amount recovered is equal to the original investment. For example, the company can set a 3 years time period to recover the capital expenditure , the payback method can assess whether the expenfiture can be recouped.

Accounting Rate of Return can be calculated by dividing net income by intial investment and this ratio is used in capital budgeting. The firm can set a desired level of accounting rate of return and can evaluate the capital expenditure proposal on the basis of the return achieved.

Net Present Value is the present value of all cash flows depends on the intervals of time between now and cash flow. It is the Present Value of Cash Inflows minus Present Value of Cash Outflows. If the net present value is positive, the capital expenditure proposal should be accepted.

Internal Rate of Return is the measure of the investment's rate of return. It is the point at which the present value of all cash outflows is equal to all cash inflows. The firm can set a desired level of internal rate of return and can evaluate the capital expenditure proposal on the basis of the return achieved.