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Managerial accounting ,all explained above - Essay Example

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Managerial accounting ,all explained above

Investments have related interest expense amounts. The same return shows the interest rate that is used to generate a resultant zero net present value. The present value is arrived at by using an interest rate in the computation. The annual or periodic cash inflow is collected. Examples of inflows of cash are: ? 260 for year 1, ? 280 for year 2, ? 250 and for year 3. The interest rate is given. The periodic or annual inflows of cash are multiplied by the present value factor (interest rate). The result of the multiplication activity is the present value amount of the periodic inflows of cash (Hilton, 2011). To computation of the rate of internal return, the present values are determined. Next, the decision maker must equate the cost of the investment as the total inflows of cash. Subtracting the two accounts, the net present value is nil (Daft, 2011). Next, the internal rate of return can be easily computed (Sollenberger, 2008). The total present value of net inflows of cash is divided by the total inflows of cash. The computation outcome is traced is plotted on the net present value table. The decision maker searches for the column where the division result falls. The interest rate is traced by looking at the period row of the net present value table. ...
Further, the internal rate of return (IRR) tool is used to compare the financial performance of two or more entities. For example, the internal rate of return of Reagan Company is 6 percent. Further, Washington Company has an internal rate of return of 8 percent. Comparing the two companies’ internal rate of return, Washington Company has a better internal rate of return. The company with the higher internal rate of return output shows a financially better business image (Gitman, 2008). Compared with the net present value decision making tool, the internal rate of return is a better management tool. Most decision makers prefer the internal rate of return. The internal rate of return places importance on times’ effect on money, cash flows. Time value analysis includes placing higher value on the earlier collection or payment of cash amounts over the same amount of cash collected at later years. Second, average decision makers can use the simpler internal rate of return analysis for their decision making activities. The same return analysis eliminates subjective inputs injected into the analytical process (Besley, 2008). For those who are not well versed in financial analysis, the internal rate of return is one of the best decision references. The rate can be subjected to the decision makers’ subjective analysis. Many decision makers, including John right of Citigroup, insist they will only approve projects if the internal rate of return is higher than the cost of capital rate (Megginson, 2008). If the internal rate of return rate is higher than the cost of capital rate, the companies can recuperate their investment costs. Comparing Internal Rate of Return with other decision making tools Net Present Value. For decision makers who are not knowledgeable in ...Show more


Professor Internal Rate of Return December 8, 2013 Introduction The enhancement of the decision strategies includes the use of financial tools. There are several tools used in the management process (Warren, 2011). One of the tools relates to how many regular periods will the investment be recovered…
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