- the budget is prepared based on a forecast of what is expected to occur during the next period
- decision in this budgeting process is affected by historical information and anticipated changes such as inflation or the nature of the business
- ex, the number of medical technologists in a laboratory depends on the number of specimens being processed
- difficult to implement because of recruitment and retention problems
- Even the supplies must be ordered in advance to make sure that there is an adequate amount
- forecast method is applied but still closely monitored to ensure that projections are within the target.
- disregards the past allocation
- found to be successful in educational establishments as well as in large government institutions
- for successful budgeting using this method, it is still necessary to predict how much activity will cost and the historical data should still be considered
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On January 1, 2019, Hawthorne Corporation issued for $155,989, 5-year bonds with a face amount of$150,000 and a stated (or coupon) rate of 9%. The bonds pay interest annually and have an effective interest rate of 8%. Assume Hawthorne uses the effective interest rate method.
Prepare the journal entry for December 31, 2019, to record the payment of interest and the related interest expense.
Garage, Inc., has identified the following two mutually exclusive projects:
|Year||Cash Flow (A)||Cash Flow (B)|
a. What is the IRR for each of these projects? Applying the IRR decision rule, which project should the company accept? Is this decision necessarily correct?
b. If the required return is 11%, what is the NPV for each of these projects? Which project will the company choose if it applies the NPV decision rule?
c. Over what range of discount rates would the company choose project A? Project B? At what discount rate would the company be indifferent between these two projects? Explain.