Capital Budgeting and Decision Making

Read the Chapter 8 introduction, then click "Next Section" to read Section 8.1. You'll read about the example of Jackson's Quality Copies, a store that makes photocopies for its customers. The store wants to evaluate the purchase of an expensive new copier that costs $50,000, but with the potential to reduce expenses, increase productivity, and increase profits. The company president has to make the decision if the new copier is actually a good or bad addition. Managerial accounting methods can give her several tools to evaluate this investment. You use two methods to evaluate long-term investments, both of which consider the time value of money. The first is called the net present value (NPV) method, and the second is called the internal rate of return method. Before you start to consider the two methods, let's discuss the time value of money (present value) concept first.