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An essential phase of a rational capital budgeting process concerns appraising the profitability potentials of recognized opportunities for capital investment. Typically, management must decide upon an effective rationing of capital among the numerous capital proposals recommended to it for adoption. Profitability considerations are manifestly important in such decisions. While the notion of rate of return on investment is commonplace, the term is widely employed to describe a variety of historical and projected mathematical relationships between earnings and investment. In this paper, rate of return refers to that rate of interest which equates through time a project's anticipated cash flows with the initial capital outlay required to adopt rate of return determination explicitly considers all three determinants of a proposal's financial worth and ignores external considerations such as the cost of the capital required to adopt the proposal. Via the discounting procedure, the time value of money is taken into account. A proposal's expected profitability is ex- pressed in a single figure representing the average annual rate of compound interest at which the project's initial investment is expected to be recovered through cash flow generation.

The article focuses on the significant advances in accounting for income models, book yield and the rate of return of companies. The author considers the characteristics of the compound-interest investment model. He also explains the apparent differences between book yield and the project rate of return. The underlying difference is that the project rate and the book yield are calculated under two different sets of conditions, and with two purposes in mind. In addition, the author observes that many of the problems that arise in the use of book yields stem from the attempt to oversimplify the given situation.

The discount system of capital expenditure evaluation, as the measure of a project's inherent desirability, provides rates of return which can be compared with those of other projects and with another measure, representative of the outside community's charge for the use of savings, called the cost of capital. The author classifies projects into two classes, independent and dependent, in order to discuss the effect of the two capital evaluation methods on each of the two classes of projects. By reviewing the capital expenditures evaluation problem in a number of areas, he finds that the method of direct discounting always provides superior results to those of the rate of return system. Direct discounting more quickly evaluates single-answer independent projects. It solves single-answer dependent projects without analysis of difference projects and without providing misleadingly higher answers on inferior projects. This research paper thus shows that it is simpler and more useful to discount all projects at the cost of capital than to solve for rates of return.

Much progress has been made in recent years in developing a complete working system for computing an accurate and dependable rate of return measure, which is useful in making investment decisions. The framework of this analysis is known as the discounted cash-flow method. It is undoubtedly true that the complete investment analysis method must be shown and explained clearly before it will be well accepted and utilized. One area of vagueness, which still, remains in the literature concerns tax loads and effective tax rates. It is clear, probably, that each project cannot be assumed isolated from the others in respect to tax loads, i.e., to call it independent from the other operations. If this assumption were made, however, the venture's tax load would be estimated by using the statutory tax rate against the expected yearly net income figures, not considering any deductions, which may be available from other parts of the company. The true worth of prospective projects can be badly underestimated when there are large amounts of re-allocable deductions, which are not allocated to the prospective ventures. It can be said that a rate of return estimate, which has been computed without considering the re-allocable deductions cannot be made to be accurate with some simple correction factors.

A graph similar in concept to the conventional profit-volume graph can be used in capital investment planning and can be especially useful in the analysis of relatively complex investment situations. The net discounted cash flow line for the most profitable investment candidate crosses the expected cost of capital line or zone at the highest point. In a large number of investment situations, this line will also cross the internal rate of return line at the highest discount rate and will be above all other discounted cash flow lines at all points. There are also investment situations in which the discounted cash flow lines for the various alternatives will cross. The line for the most profitable alternative does not necessarily lie to the right of the other lines when it crosses over the internal rate of return line. It will, however, be the highest line when it crosses the expected cost of capital line or zone. The line of limitation can be used to predict the cost within reasonable limits.

This article presents information on financial accounting. The net realizable value of an asset is defined as the maximum net amount, which can be realized from the disposal of that asset within a short period of time. Net amount is defined as the selling price less disposition costs including tax effects discounted to the point of measurement. Basically, the issue is whether or not society is better served by the valuation of assets for public reporting at the cash they command upon sale or at the cash required to have them available for use by the firm. It might appear that under pure and perfect competition, with equally well-informed actors, the gap between the net realizable value and the replacement cost would be minimal and could be ignored. This is not the case due to the existence of frictions in the market place, such as commissions, transportation costs and the like. A stronger argument favoring net realizable value is based upon the frequent reference by statement users to a rate of return computation. The measurement of assets influences both elements of this computation since this measurement affects the denominator directly and the numerator through the depreciation charge.

The article presents an approach to capital budgeting that involves formal recognition of the fact that future cash flows are not known with certainty. The uncertainty is incorporated in the analysis by the utilization of probability theory. The approach referred to as the probability approach to capital budgeting. For purposes of describing the probability approach to capital budgeting the net present value of an investment will be used as a measure of the worth of the investment. If an investor wishes to use the rate-of-return approach instead of the net present value approach, the essentials of the probability approach to capital budgeting would be the same. In order to understand the probability approach to capital budgeting, one must be familiar with certain concepts from probability theory. A probability beliefs approach has been suggested in connection with the portfolio selection problem and could be adapted to the capital budgeting problem. Another approach might be suitable in certain cases that would involve the use of historical data.

The article focuses on the research paper "A Problem in Discounted Cash Flow," by Billy E. Goetz, published in an earlier issue of the journal The Accounting Review. The paper described a procedure for constructing discounted cash flow examples with multiple yield rates of return. According to the author, the method is not a rare cubic equation with five real and unequal roots. Rather, applying three-place tables to that example produces essentially random numbers for the project's excess present value at discount rates between 7 and 33 percent approximately, the range in which both the actual yields and the 5 apparent yields lie. However, if the example is solved algebraically or by using four-place tables, the actual yields are discernible. The resolving capacity of iterative solution methods depends on the number of places or significant digits in the present value tables being used. Making the comparison at the local extremes establishes a minimum necessary condition for the example to be compatible with the tables being used.

The article discusses a study on the relation of a firm's performance to the sophistication of capital investment procedures and standards. The findings of the study did not indicate a consistent association between performance and capital budgeting techniques despite an increasing adoption of sophisticated capital budgeting methods. This states that the mere adoption of different analytical tools is not enough to being about superior performance. Moreover, factors such as marketing, product development, executive recruitment and training, and labor relations may have a greater impact on profitability.

This article presents information on an experiment designed to test the usefulness of an alternative accounting model to one group of users, investors in common stock. The particular model tested calls for general price-level adjustments as well as restatement of accounts to current replacement costs. Subjects were given financial statements of actual companies and were asked to specify a holding period of one, two, or three years and then select the firm which they felt would produce the highest rate of return to the investor during this period. The subjects could also indicate that the company selected would be the same regardless of whether the holding period was one, two, or three years. In addition, subjects were asked to express a measure of the confidence they had in their choices and to place a hypothetical value on the price of the companies stocks. The results were then analyzed considering both the company and the holding period selected to see if subjects using current-cost financial statements made different and better decisions than those using only historical cost financial statements.

The past several years have seen a substantial increase in the application of the concept of present value in making capital investment decisions. The concept itself is by no means new. Its use in the financial field dates back several centuries, and it is the basis for such common financial techniques as the determination of bond yields, mortgage amortization schedules, and so forth. Moreover, applications to capital replacement situations have been discussed in engineering literature. The past reluctance of businessmen to use the present value concept in allocating capital resources may have had a variety of causes. Many may have been discouraged by the apparent complexity of the mathematics involved. Others no doubt felt that the added refinement of technique was not justified in view of the rough estimates to which the techniques are applied. While it is true that the present value concept involves mathematics above the level of simple arithmetic and hence more involved than that used by the traditional techniques, it is not necessary to deal with these complexities.

When a proposed capital project is evaluated at the firm's cost of capital, the present value V may be compared to the project's initial cost C in two different ways, (V-C), or (V-C)/C. Alternatively, one may determine the rate of discount i, which equates the present value of a payoff stream to its initial cost and which is often referred to as the internal rate of return. Proposed projects may then be ranked on the basis of the order of magnitude of (V-C), (V-C)/C, or i, and choices made on the basis of the familiar decision rule corresponding to each ranking procedure. The method which ranks projects on the basis of (V-C)/C, however, can be shown to be equivalent to a ranking on the basis of V/C, a quantity sometimes called the profitability index. The purpose of this note is two-fold. First, to set forth conditions for which, the ranking of proposed projects on the basis of (V-C) will correspond to the ranking on the basis of(V-C)/C, the ranking on the basis of i will conform to the ranking on the basis of(V-C)/C, and the rankings in both the mentioned statements will not correspond. Second, to draw attention to the fact that the (V- C)/C ranking is not equivalent to the (V-C) ranking.

The purpose of this article is to re-emphasize the effectiveness of simple ranking techniques in the heuristic solution of capital budgeting problems. Certainly, the application of mathematical programming techniques to capital budgeting decisions provides a most challenging area for research. Such programming formulations have continued to increase their realism by accounting for capital constraints, institutional requirements, and the effect of uncertainty. To examine the relative efficiency of selecting capital projects by a ranking strategy, it was necessary to have several hypothetical capital budgeting problems. The efficiency of simple ranking techniques requires that projects have a reasonably proportionate utilization of resource constraints. However, even in the absence of this condition, it is possible to generate an "approximate" solution by extending the previous simple ranking techniques to a "multidimensional" ranking criterion. Basically, the multidimensional ranking algorithm is an extension of the simple ranking techniques, and this extension is required for capital budgeting problems with multiple resource constraints which have considerable variation in their utilization by the proposed investment projects.

The analysis in this article applies in general to the investment credit. This tax measure was introduced even more emphatically than the guidelines to stimulate investment. Accounting requirements, which would reduce the attractiveness or the apparent attractiveness of the credit, would run counter to public policy. Companies will get the investment credit if they qualify; it is not a matter of choice; in this respect the credit differs from the guidelines. From the point of view of the public interest, a part of the problem is whether one or another method of reporting would be more effective in demonstrating to management the benefits from the credit. If the tax savings had to be set off in tax deferral accounts the near-money gains of the investment credit might seem smaller and the stimulus to investment somewhat reduced. The tax advantage for a profitable railroad comes when the qualifying investment is made. Of course, complications will arise in some cases. There are contingencies, which can lead to the loss of some of the credit received on investments in prior years. And there will be carryovers of unused credits. The effect of a credit received in one year on the tax-worth of depreciation deductions in the future will present difficult, often insuperable, valuation problems.

The article presents comparative rather than absolute limitations, a problem that faces accounting, and deals with purchasing power measurements in accounting. In recent times, two basic economic fears, namely, inflation and deflation have been developed which involve concern about the purchasing power of the dollar, and its lack of monetary stability or shifting of the price level. The general price index, or any one of its broad subdivisions, is admittedly no more than a very general indication of what "package" of goods and services a given quantity of money will buy under certain conditions of time and place. The price index blends indiscriminately the effect of monetary factors with such factors as output, technology, wage bargaining, etc. The problem of inflation may be delimited and treated as involving determination of the cost of goods delivered to customers, determination of the cost of utilization of long-term assets, and measurement for administrative and other purposes of return on capital investment.