Capital Budget Recommendation

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Capital Budget Recommendation Managerial Accounting and Legal Aspect of Business/ACC 543 May 24, 2010 Capital Budget Recommendation Guillermo Navallez is the owner of Guillermo Furniture, a company that manufactures midgrade and high-end sofas. Recent changes in the business environment and economy have prompted Guillermo act fast before he is forced out of business. After doing some research, Guillermo identified some possible investment…show more content…
Internal Rate of Return. The Internal Rate of Return (IRR) is the cutoff rate that produce a zero net present value for a total of future cash flows. In other words, is the rate of return that makes the sum of present value of future cash flows and the end market value of an investment equal its current market value. The usefulness of IRR is that it provides a simple desired rate of return that any investment alternative should be avoided if the cost of capital exceeds this rate. Modified Internal Rate of Return. Modified Internal Rate of Return (MIRR) is the investor 's required rate of return that equates the Initial Cost Outlay with the present value of Terminal Value. In other words MIRR is the rate at which the difference between ICO and present value of future value of cash inflows in zero. In addition, because MIRR assumes that the cash flows are invested at the firm 's cost of capital, this method better take into account what is done with cash flows once they are received. Unadjusted Rate of Return. Unadjusted rate of return or simple rate of return is when the average incremental increase in annual net income is divided by total cost of the original investment. Similar to payback, this rate does not take into account the time value of money, which makes it less
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