Accounting All-in-One For Dummies

Chapter 3

Answering the Question: Should I Buy That?

In This Chapter

Distinguishing between opportunity and incremental costs

Using the cash payback method to figure when an investment will pay for itself

Understanding time value of money and the net present value method

Estimating internal rate of return

Keeping qualitative factors in your sights

Before investing big bucks in a long-term project, managers must carefully plan all the project's details and determine how likely it is to deliver reasonable returns for the company. This planning means estimating the future cash flows that the project will bring in and coming to a determination that the project's cash inflows will exceed its cash outflows (total cost).

This chapter shows you several techniques for making decisions about whether to pursue long-term capital projects. First, it reviews the idea of incremental and opportunity costs — how a project may change some costs but not others. The chapter then describes an easy technique ...