Accounting All-in-One For Dummies (+ Videos and Quizzes Online), 3rd Edition

Chapter 3

Buying Wisely

IN THIS CHAPTER

Distinguishing between opportunity and incremental costs

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

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. Then the chapter describes an easy technique called payback period for determining how long a project will take to become profitable. You gain an understanding of the time value of money to explain how to estimate the net present value ...