A SMORGASBORD OF CAPITAL BUDGETING PERFORMANCE MEASURES

1. A SMORGASBORD OF CAPITAL BUDGETING PERFORMANCE MEASURES Susanka Company’s president invited proposals from her management team for capital expenditures, and approved four proposals submitted by four different managers. She told the four managers that a bonus would be paid to the manager with the most successful capital project. The success of each project can be evaluated based on Net Present Value, Pre-Tax Accounting Rate of Return, Payback Method, or Internal Rate of Return. The following data are available.

3. A SMORGASBORD OF CAPITAL BUDGETING PERFORMANCE MEASURES All four of the capital expenditures have zero terminal value. Straight-line depreciation is used. The discount rate is 10%. You are a financial analyst working for (look at your handout). Which performance measure (or measures) will you recommend that your manager adopt in order to claim the bonus?

5. Payback Method = initial cost ÷ average net annual cash flow.

6. Payback Method

7. Net Present Value

8. Net Present Value

9. Net Present Value

10. Internal Rate of Return

11. Internal Rate of Return

12. Internal Rate of Return

13. Accounting Rate of Return

14. Accounting Rate of Return

15. Accounting Rate of Return

16. Accounting Rate of Return

17. Accounting Rate of Return

18. Summary