Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed

The ARR method differs from the payback method in that it considers profitability. Both methods ignore the time value of money. 13.6

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13.5
The ARR method differs from the payback method in that it considers profitability. Both methods ignore the time value of money.
13.6
A point of agreement is that an exclusive attachment to the mechanics of any single method examining only quantitative data is likely to result in overlooking important aspects of a decision. Two points of disagreement area) DCF can incorporate those strategic considerations that can be expressed in financial terms and (b) practical considerations of strategy not expressed in financial terms can be incorporated into decisions after DCF analysis.
13.7
A post-investment audit compares the predictions of investment costs and outcomes made at the time a project was selected to the actual results. It is important because it provides management feedback about performance. For example, if actual outcomes are much lower than predicted outcomes, management will investigate whether this occurred because the original estimates were overly optimistic or because of problems in implementing the project.
13.8
No. Income taxes also affect the cash-operating flows from an investment and the cash flows from current and terminal disposal of machines in the capital-budgeting decision. When a company has positive cash-operating flows and gains on disposal of machines, income taxes reduce the cash flows available to the company from these sources.

Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012
13.9
The real rate of return is the rate of return required to cover only investment risk. This rate is made up of two elements (a) a risk-free element and (b) a business-risk element. The nominal rate of return is the rate of return required to cover investment risk and the anticipated decline, due to inflation, in general purchasing power of the cash that the investment generates. This rate is made up of two elements (a) the real rate of return and (ban inflation element. The nominal rate of return and the real rate of return are related as follows Nominal rate = [(1 + Real rate) (1 + Inflation rate − 1

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