Encom Corporation

Topics: Generally Accepted Accounting Principles, Depreciation, Income statement Pages: 2 (369 words) Published: June 11, 2012
EnCom Corporation
Stage 1
1. $1,720 (S1)
The beginning investment must cover the Capital Expenditure and the first Inventory purchase. Additional investment of $120 is required in the following period. 2. $2,059.87 (S1)
3. 14.76% (S1)
4. Statement 2

For investment and operations purchases cash flow cannot be ignore but for a corporation’s performance every period the earnings are the best measure. The earnings number is the best matching of revenues and expenses. In cash flow the connection between expense and revenues is distorted. 6.

The IRR is an overall assessment of the project while the ROE is a periodical assessment. ROE is based on accrual earnings while the IRR is based on cash dividends paid out. ROE treats beginning equity as a one year investment while IRR accounts for the fact that equity could be invested for a longer period of time.

Stage 2
1. The IRR of the corporation increased as did the NPV so EnCom should invest in the project. (S3) 2. 16.03% (S3)
3. Statement 4
I consider this assumption to be a bit too conservative. It follows the cash flow related to the project closer than actually matching expenses and revenues. 4. Statement 5
I consider this to be a neutral approach. It matches the GAAP matching principle by expensing the marketing cost to the period in which the benefits of the marketing are realized. 5. Statement 6

I consider this to be an aggressive approach. It completely mismatches revenues and expenses. The marketing expense is recognized in a period in which no marketing benefit is received. 6. I believe that the 2nd method is the best. It is the most accurate in terms of the matching principle. 7.

The first method lowers the 1st years ROE while inflating the ROE of the next 2 years. The second method provides a more balanced ROE throughout.
The third method inflates the ROE of the first three years and significantly lowers the 4th years ROE. 8. The aggressive...
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