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Chapter 26: Q4RQ (page 1463)

What are post-audits? When are they conducted?

Short Answer

Expert verified

A post-audit compares the real capital investment comes out with the expected results which should be achieved on a standard basis.

Step by step solution

01

Meaning of Post-Audits

A post-audit is supposed to compare the results of actual capital speculation with those anticipated. Companies can use the comparisons to see if their speculation is performing as anticipated and should be supported, or if they should end the project and offer assets.

02

When post-audit conducted.

Post-audits should be attempted regularly all through the project's life cycle, not as it were at the conclusion. Managers can make changes to projects over their life expectancy much obliged to intermediate post-audits. Managers moreover use post-audit input to make strides and forecasts for future projects. Managers will be more slanted to supply practical gauges with their capital investment demands in case they anticipate scheduling post-audits.

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Most popular questions from this chapter

What are some criticisms of the payback method?

What is the decision rule for payback?

Congratulations! You have won a state lottery. The state lottery offers you the following (after-tax) payout options:

Option #1: \(12,000,000 after five years

Option #2: \)2,150,000 per year for five years

Option #3: $10,000,000 after three years

Assuming you can earn 6% on your funds, which option would you prefer?

Question: Using the payback and accounting rate of return methods to make capital investment decisions

Consider how Hunter Valley Snow Park Lodge could use capital budgeting to decide whether the \(11,000,000 Snow Park Lodge expansion would be a good investment. Assume Hunter Valley鈥檚 managers developed the following estimates concerning the expansion:

Number of additional skiers per day 121 skiers

Average number of days per year that weather conditions

allow skiing at Hunter Valley 142 days

Useful life of expansion (in years) 7 years

Average cash spent by each skier per day \) 241

Average variable cost of serving each skier per day 83

Cost of expansion 11,000,000

Discount rate 10%

Assume that Hunter Valley uses the straight-line depreciation method and expects the lodge expansion to have a residual value of $600,000 at the end of its seven-year life.

Requirements

  1. Compute the average annual net cash inflow from the expansion.
  2. Compute the average annual operating income from the expansion.

Question: Defining capital investment terms

Fill in each statement with the appropriate capital investment analysis method:

Payback, ARR, NPV, or IRR. Some statements may have more than one answer.

  1. _____ is (are) more appropriate for long-term investments.
  2. _____ highlights risky investments.
  3. _____ shows the effect of the investment on the company鈥檚 accrual-based income.
  4. _____ is the interest rate that makes the NPV of an investment equal to zero.
  5. _____ requires management to identify the discount rate when used.
  6. _____ provides management with information on how fast the cash invested will be recouped.
  7. _____ is the rate of return, using discounted cash flows, a company can expect to earn by investing in the asset.
  8. _____ does not consider the asset鈥檚 profitability.
  9. _____ uses accrual accounting rather than net cash inflows in its computation.
See all solutions

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