# Capital Investment Analysis and Project Assessment

Save this PDF as:

Size: px
Start display at page:

## Transcription

5 Then, Net Income x Marginal Tax Rate = Taxes Step 5. Compute the net present value. You simply compute net present value as the present value of the net cash flows obtained in Step 4 minus the present value of the cash outlay to purchase the investment of Step 2: The marginal tax rate reflects the additional taxes that will be paid on income generated by the particular investment. Note that depreciation enters in this computation of the tax liability. As shown above, the additional tax liability will reduce the net cash flow from a particular investment. You should include the terminal value, also known as salvage value, of a particular machine or a piece of equipment as a positive cash flow in the last year if it is to be sold or traded on a new item. The salvage value is part of the cash benefit stream that will be received if the capital item is sold. Or if it is traded for a new capital item, as is often the case with machinery, the salvage value reflects the reduced cash outlay that will be incurred to purchase the new machine. After you compute the annual net cash flow for each year of the project, you have produced a series of annual net cash flows. Step 4. Calculate the present value of the annual net cash flows. In Step 3, you calculated the annual net cash flow stream for the entire useful life of the asset. Now you want to convert this stream into a single figure that represents the current or present value of such a stream of income over time. As has been suggested earlier, you can determine the present value of income that will be received sometime in the future by multiplying the annual income times the discount factor for the appropriate discount rate and year. By multiplying the annual net cash flow for each year times the discount factor and then summing the discounted annual net cash flows, you can obtain a single present value figure. You obtain the discount factors to be used in this computation from the table in the appendix. Determine the factor for each year by entering the number from the table for the appropriate discount rate in Step 1 and the appropriate year. For example, if you calculated a discount rate of 12% in Step 1, the discount factor for year 1 to be used in the computation of the present value of the annual net cash flows would be Likewise, the discount factor for year 2 (12 %) would be Present value of net cash flows Present value of cash = Net present value Step 6. Accept or reject the investment. The criterion for accepting or rejecting an investment is simple if the alternatives are mutually exclusive: accept an investment if it has a positive net present value or reject that investment if it has a negative net present value. This simple criterion is possible because when the benefit stream or the annual net cash flows for a particular investment are discounted with the cost of capital, the resulting figure represents the maximum amount that you could afford to pay for the investment and expect to just break even, including opportunity costs on the money invested. Therefore, a net present value of zero indicates that the particular investment is generating a return exactly equivalent to the cost of capital or the cost of debt and equity funds that have been used to finance the investment. A positive net present value indicates that the particular investment is generating a benefit stream larger than the cost of the funds used to finance the investment; hence, the investment is a profitable one. In essence, the additional return adjusted by the time value of money is larger than the additional cost of the investment. In contrast, a negative net present value indicates that the increased income received from the investment will be less than the cost of funds required to support that investment. Thus, the investment is undesirable, and you should commit the funds to some alternative investment that will generate a return at least equivalent to their cost. In some cases, the decision may not be one of accepting or rejecting a particular investment but of choosing among a number of alternative investments. In this situation, you can rank the investment alternatives in order of preference based on their net present values, with the alternative having the highest net present value ranked first and the one with the 5 Purdue Extension Knowledge to Go

6 lowest net present value ranked last. You would then implement all those alternatives with a positive net present value if the funds were available to do so. If the funds to acquire the alternative investments were limited, you would choose that combination of projects that generates the largest total net present value with the limited funds. A Profitability Example To show you how to use the net present value procedure in capital budgeting, let s apply it to an example of deciding whether a mechanic should add a tow truck to his business. A good tow truck can be bought for \$76,800. The mechanic has researched the costs to operate the truck and the possible revenues that could be earned. Additionally, he has estimated that the truck would be worth about \$30,000 when the project would end in five years. The tax rate is expected to be 35%, and the business will finance the project with 60% equity and 40% debt in the long run. The cost of equity capital (return on equity funds currently being used in the business) is 13.4%, and debt funds can be borrowed at 10.6%. Step 1. Choose an appropriate discount rate to reflect the time value of money. The mechanic would compute the discount rate as: d = K ew e(1 t) + K dw d(1 t) = x 0.6 x x 0.4 x 0.65 = = 0.08 Where d = discount rate K e = cost of equity (rate of return on equity capital) W e = proportion of equity funds used in the business K d = cost of debt funds (interest) W d = proportion of debt funds in the business t = tax rate Step 2. Calculate the present value of the cash outlay required to purchase the asset. The purchase price of the truck is \$76,800. No additional working capital will be required, and the total outlay must be committed immediately. So the present value of the cash outlay is \$76,800. Step 3. Calculate the benefits or annual net cash flow for each year from the investment over its useful life. The revenue from operating the truck is calculated to be \$42,032 for the first year. Similarly, there are expenses associated with its operation. These are estimated to be \$20,301 for year one and increase each year because of inflation. To calculate taxes, the mechanic would subtract expenses and depreciation from the revenue to find the taxable income. These taxes will then be removed from the revenue along with the cash expenses to give annual net cash flow, which, in the first year, will be \$5,590. He would thus compute the annual net cash flows as follows for year one: \$42,032 (cash revenue) 20,301 (cash expenses) + 0 (salvage value) 5,590 (taxes) = \$16,141 (annual net cash flow) He computed income taxes for year one as: \$42,032 (cash revenue) 20,301 (cash expenses) 5,760 (taxes) = \$15,971 (net income) 6 Purdue Extension Knowledge to Go

7 Then, \$15,971 (net income) x 35% (marginal tax rate) = \$5,590 (taxes) Annual computations, based on the mechanic s estimations of revenue and expenses, would be as shown in Table 3. Table 3. Annual Cash Flows for an Investment Project Year Cash Revenue Cash Expense Salvage Value Taxes Net Cash Flow 1 \$42,032 \$20,301 \$5,590 \$16, ,360 20,910 3,777 17, ,122 21,242 4,139 16, ,887 21,583 4,413 15, ,654 21,931 30,000 15,054 34,669 Step 4. Calculate the present value of the annual net cash flows. The mechanic would compute the present value of the net cash flows as the sum of the discounted annual net cash flows (net cash flow times the discount factor) (Table 4). Table 4. Computations to Reach Net Cash Flow for Each Year of an Investment Year Annual Net Cash Flow Discount Factor Present Value of Annual Net Cash Flow 1 \$16, \$14,945 2 \$17, \$15,151 3 \$16, \$13,289 4 \$15, \$11,680 5 \$34, \$23,596 Present value of the net cash flows \$78,661 Step 5. Compute the net present value. Net present value is computed as the present value of the net cash flows minus the present value of the cash outlay: \$78,661 \$76,800 = \$1,861 Step 6. Accept or reject the investment. Based on the positive net present value of Step 5, the mechanic s decision would be to buy the tow truck and add that service to his business. The tow truck will generate a return that exceeds the cost of funding the venture it generates a positive net present value. Financial Feasibility Once you have analyzed the profitability of various investments and chosen an alternative, you need to evaluate its financial feasibility. Financial feasibility analysis determines whether or not the investment will generate sufficient cash income to make the principal and interest payments on borrowed funds used to purchase the asset. If you will be making the purchase with equity funds and a loan is not required, then financial feasibility analysis is unnecessary. Feasibility Calculation The first step in financial feasibility analysis is to determine the annual net cash flows for your project. Fortunately, you have already calculated these annual flows as part of your economic profitability analysis. Next, you must determine the annual principal and interest payments based on the loan repayment schedule. Because the annual net cash flows are after-tax and the payment schedule is before-tax, you must adjust this payment schedule to an after-tax basis by calculating the tax savings from the deductibility of interest and subtracting this savings from the payment schedule. Then, you compare the annual net cash flow to the after-tax annual principal and interest payments to determine if a cash surplus or deficit will occur. If a cash surplus results, the investment project will generate sufficient cash flow to make the loan payments, and the project is financially feasible as well as economically profitable. If a cash deficit results, the project is not financially feasible it will not generate sufficient cash income to make the loan payments. Cash deficits do not mean that the investment is unprofitable or should not be made; they simply mean that you will likely encounter loan servicing problems. You can reduce or eliminate cash deficits in a number of ways. Extending the loan terms (i.e., more years to repay the principal) will result in lower annual debt servicing requirements, thus reducing the deficit. Increasing the amount of the 7 Purdue Extension Knowledge to Go

8 down payment will reduce the size of the loan and the annual principal and interest payments. Possibly, you could increase the net cash flow from the project by controlling expenses more carefully or increasing utilization. If you cannot reduce or eliminate the deficit, then you must subsidize with cash from some other source to make the capital purchase financially feasible. By completing a financial feasibility analysis, you can estimate the size of the needed subsidy. A Feasibility Example To illustrate the use of financial feasibility analysis, let s apply it to the earlier example of the decision to invest in a tow truck. Assume that the lender has agreed to a five-year loan for the full purchase price with five equal annual principal payments and 8.3% interest on the outstanding balance. The data used in the financial feasibility analysis are summarized in Table 5. You calculated the annual net cash flow (not the discounted net cash flow) earlier in the economic profitability analysis (see Step 3). The loan payment schedule calls for an annual payment of \$19,387. You calculate the tax savings from interest deductibility as the interest payments times the marginal tax bracket (35% in this example), resulting in an after-tax payment schedule as noted. As indicated in the last column of the table, cash deficits occur in several years of the project. Thus, even though the project is profitable, it will not produce sufficient cash to make the loan payments. This does not necessarily mean that the mechanic should not make the investment. It does mean that it will not generate enough cash to make the loan payment. Consequently, the mechanic should consider changes such as a longer term loan or a down payment and smaller loan. Other possibilities to make the project financially feasible would be to subsidize it with cash from elsewhere or reduce expenses so as to increase the cash flow from the investment. Final Comment The net present value method (NPV) of evaluating an investment allows you to consider the time value of money. Essentially, it helps you find the present value in today s dollars of the future net cash flow of a project. Then, you can compare that amount with the amount of money needed to implement the project. If the present value is greater than the cost, the project will provide a return on investment in excess of capital costs. If you are considering more than one project, you can compute the NPV of both and choose the one with the greatest NPV. The six steps in this publication show you how to calculate the NPV. Calculating the net present value of a project will tell you whether you will make a profit on the project overall. But in some years you may not have positive cash flows. An NPV does not tell you how much money may need to be borrowed to make up for a loss in a particular year. To estimate the cash needs in each year, you should calculate the financial feasibility of the project. Table 5. Information Used in Feasibility Calculations Year Annual Net Cash Flow Principal Payment Schedule Interest Total Tax Savings from Investment Deductibility After-Tax Payment Schedule Surplus or Deficit 1 \$16,141 \$13,013 \$6,374 \$19,387 \$2,231 \$17,156 \$-1, ,673 14, ,387 1,853 17, ,741 15, ,387 1,444 17,944-1, ,891 16, ,387 1,000 18,387-2, ,669 17, , ,867 15,802 8 Purdue Extension Knowledge to Go

9 Appendix: Present Value of \$1. Formula: \$1 / (1 + i)n Period 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% Purdue Extension Knowledge to Go

10 Appendix: Present Value of \$1. Formula: \$1 / (1 + i)n continued Period 8.5% 9.0% 9.5% 10.0% 10.5% 11.0% 11.5% 12.0% 12.5% 13.0% 13.5% Purdue Extension Knowledge to Go

11 Appendix: Present Value of \$1. Formula: \$1 / (1 + i)n continued Period 14.0% 14.5% 15.0% 15.5% 16.0% 16.5% 17.0% 17.5% 18.0% 18.5% Purdue Extension Knowledge to Go

12 Notes Visit Us on the Web Agricultural Innovation and Commercialization Center New Ventures Team Purdue Partners for Innovation in Indiana Agriculture Agricultural Innovation & Commercialization Center New Ventures Team Center for Food & Agricultural Business New 6/05 It is the policy of the Purdue University Cooperative Extension Service, David C. Petritz, Director, that all persons shall have equal opportunity and access to the programs and facilities You can order or download materials on this and other without regard to race, color, sex, religion, national origin, age, marital status, parental status, sexual orientation, or topics at the Purdue Extension Education Store. disability. Purdue University is an Affirmative Action institution. 12 Purdue Extension Knowledge to Go This material may be available in alternative formats.

### Net Present Value and Capital Budgeting. What to Discount

Net Present Value and Capital Budgeting (Text reference: Chapter 7) Topics what to discount the CCA system total project cash flow vs. tax shield approach detailed CCA calculations and examples project

### Leasing vs. Buying Farm Machinery

Leasing vs. Buying Farm Machinery Department of Agricultural Economics MF-2953 www.agmanager.info Machinery and equipment expense typically represents a major cost in agricultural production. Purchasing

### CHAPTER 7 MAKING CAPITAL INVESTMENT DECISIONS

CHAPTER 7 MAKING CAPITAL INVESTMENT DECISIONS Answers to Concepts Review and Critical Thinking Questions 1. In this context, an opportunity cost refers to the value of an asset or other input that will

### Agriculture & Business Management Notes...

Agriculture & Business Management Notes... Farm Machinery & Equipment -- Buy, Lease or Custom Hire Quick Notes... Selecting the best method to acquire machinery services presents a complex economic problem.

### Record Keeping in Farm Management

ExEx 5054 May 2004 Economics COLLEGE OF AGRICULTURE & BIOLOGICAL SCIENCES / SOUTH DAKOTA STATE UNIVERSITY / USDA Record Keeping in Farm Management Agustin Arzeno Area Management Specialist Introduction

### Key Financial Performance Measures for Farm General Managers

ID-243 Farm Business Management for the 21st Century Key Financial Performance Measures for Farm General Managers Purdue Extension West Lafayette, IN 47907 Key Financial Performance Measures for Farm General

### Loan Comparison. With this program, the user can compare two loan alternatives or evaluate the potential refinancing of an existing loan.

Loan Comparison With this program, the user can compare two loan alternatives or evaluate the potential refinancing of an existing loan. Fast Tools & Resources Loans may differ in their interest rates,

### Measuring Financial Performance: A Critical Key to Managing Risk

Measuring Financial Performance: A Critical Key to Managing Risk Dr. Laurence M. Crane Director of Education and Training National Crop Insurance Services, Inc. The essence of managing risk is making good

### NORTH CENTRAL FARM MANAGEMENT EXTENSION COMMITTEE

NCFMEC-05 NORTH CENTRAL FARM MANAGEMENT EXTENSION COMMITTEE Purchasing and Leasing Farm Equipment Acknowledgements This publication is a product of the North Central Regional (NCR) Cooperative Extension

### AGRICULTURAL ECONOMICS. Preparing a Projected Cash Flow Statement. Introduction. What Information Is Provided? EC-616-W

AGRICULTURAL ECONOMICS EC-616-W Preparing a Projected Cash Flow Statement Freddie L. Barnard, Professor Elizabeth A. Yeager, Assistant Professor Department of Agricultural Economics Purdue University Introduction

### ( ) ( )( ) ( ) 2 ( ) 3. n n = 100 000 1+ 0.10 = 100 000 1.331 = 133100

Mariusz Próchniak Chair of Economics II Warsaw School of Economics CAPITAL BUDGETING Managerial Economics 1 2 1 Future value (FV) r annual interest rate B the amount of money held today Interest is compounded

### CHAPTER 7: NPV AND CAPITAL BUDGETING

CHAPTER 7: NPV AND CAPITAL BUDGETING I. Introduction Assigned problems are 3, 7, 34, 36, and 41. Read Appendix A. The key to analyzing a new project is to think incrementally. We calculate the incremental

### Part 7. Capital Budgeting

Part 7. Capital Budgeting What is Capital Budgeting? Nancy Garcia and Digital Solutions Digital Solutions, a software development house, is considering a number of new projects, including a joint venture

### Debt Service Analysis: Can I Repay?

Purdue Extension Knowledge to Go Debt Service Analysis: Can I Repay? Low prices and incomes have made many farmers and their lenders concerned about the farmers ability to fulfill debt obligations. Lenders

### Farmer-to-Consumer Marketing: The Series

Farmer-to-Consumer Marketing #6 Financial Management Scope of Financial Management Managing the financial affairs of a direct marketing operation includes: Raising capital Identifying financial objectives

### Capital Budgeting and Decision Making Capital budgeting can be used to analyze a

File C5-242 September 2013 www.extension.iastate.edu/agdm Capital Budgeting and Decision Making Capital budgeting can be used to analyze a wide variety of investments in capital assets (assets lasting

### CASH FLOW STATEMENT (AND FINANCIAL STATEMENT)

CASH FLOW STATEMENT (AND FINANCIAL STATEMENT) - At the most fundamental level, firms do two different things: (i) They generate cash (ii) They spend it. Cash is generated by selling a product, an asset

### Using the FRR to rate Project Business Success

Using the FRR to rate Project Business Success The purpose of this note is to explain the calculation of the financial rate of return (FRR), with a view, firstly to clarify the FRR concept and its determination,

### Should I Lease or Buy?

No. 1339 Information Sheet August 2001 Should I Lease or Buy? Steven W. Martin, Fred Cooke, Jr., David Parvin, and Scott Stiles INTRODUCTION For many farms, machinery expense is the largest single production

### Understanding A Firm s Financial Statements

CHAPTER OUTLINE Spotlight: J&S Construction Company (http://www.jsconstruction.com) 1 The Lemonade Kids Financial statement (accounting statements) reports of a firm s financial performance and resources,

Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods 1.0 FINANCIAL FORECASTING METHODS 1.01 Introduction

### Chapter 9. Year Revenue COGS Depreciation S&A Taxable Income After-tax Operating Income 1 \$20.60 \$12.36 \$1.00 \$2.06 \$5.18 \$3.11

Chapter 9 9-1 We assume that revenues and selling & administrative expenses will increase at the rate of inflation. Year Revenue COGS Depreciation S&A Taxable Income After-tax Operating Income 1 \$20.60

### BA 351 CORPORATE FINANCE. John R. Graham Adapted from S. Viswanathan LECTURE 5 LEASING FUQUA SCHOOL OF BUSINESS DUKE UNIVERSITY

BA 351 CORPORATE FINANCE John R. Graham Adapted from S. Viswanathan LECTURE 5 LEASING FUQUA SCHOOL OF BUSINESS DUKE UNIVERSITY 1 Leasing has long been an important alternative to buying an asset. In this

### Percent, Sales Tax, & Discounts

Percent, Sales Tax, & Discounts Many applications involving percent are based on the following formula: Note that of implies multiplication. Suppose that the local sales tax rate is 7.5% and you purchase

Twelve Steps to Ag Decision Maker Cash Flow Budgeting File C3-15 How much financing will your farm business require this year? When will money be needed and from where will it come? A little advance planning

### Chapter 002 Financial Statements, Taxes and Cash Flow

Multiple Choice Questions 1. The financial statement summarizing the value of a firm's equity on a particular date is the: a. income statement. B. balance sheet. c. statement of cash flows. d. cash flow

### Learning Objectives: Quick answer key: Question # Multiple Choice True/False. 14.1 Describe the important of accounting and financial information.

0 Learning Objectives: 14.1 Describe the important of accounting and financial information. 14.2 Differentiate between managerial and financial accounting. 14.3 Identify the six steps of the accounting

Understanding Financial Statements For Your Business Disclaimer The information provided is for informational purposes only, does not constitute legal advice or create an attorney-client relationship,

### Preparing a Successful Financial Plan

Topic 9 Preparing a Successful Financial Plan LEARNING OUTCOMES By the end of this topic, you should be able to: 1. Describe the overview of accounting methods; 2. Prepare the three major financial statements

### This article illustrated deferred tax liabilities for a cash crop farm in west central Indiana. The

September 2014 Computation of Deferred Liabilities Michael Langemeier, Associate Director, Center for Commercial Agriculture This article is one of a series of financial management articles that will examine

### 11 PERFORMING FINANCIAL ANALYSIS

11 PERFORMING FINANCIAL ANALYSIS 11.1 Introduction When planning an energy efficiency or energy management project, the costs involved should always be considered. Therefore, as with any other type of

### Farm Financial Management

Farm Financial Management Your Farm Income Statement How much did your farm business earn last year? There are many ways to answer this question. A farm income statement (sometimes called a profit and

### Gary A. Hachfeld, David B. Bau, & C. Robert Holcomb, Extension Educators

Balance Sheet Agricultural Business Management Gary A. Hachfeld, David B. Bau, & C. Robert Holcomb, Extension Educators Financial Management Series #1 7/2013 A complete set of financial statements for

### Paper F9. Financial Management. Fundamentals Pilot Paper Skills module. The Association of Chartered Certified Accountants

Fundamentals Pilot Paper Skills module Financial Management Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FOUR questions are compulsory and MUST be attempted. Do NOT open this paper

### Finance 445 Practice Exam Chapters 1, 2, 5, and part of Chapter 6. Part One. Multiple Choice Questions.

Finance 445 Practice Exam Chapters 1, 2, 5, and part of Chapter 6 Part One. Multiple Choice Questions. 1. Similar to the example given in class, assume that a corporation has \$500 of cash revenue and \$300

### 1 (a) Calculation of net present value (NPV) Year 1 2 3 4 5 6 \$000 \$000 \$000 \$000 \$000 \$000 Sales revenue 1,600 1,600 1,600 1,600 1,600

Answers Fundamentals Level Skills Module, Paper F9 Financial Management December 2011 Answers 1 (a) Calculation of net present value (NPV) Year 1 2 3 4 5 6 \$000 \$000 \$000 \$000 \$000 \$000 Sales revenue 1,600

### Module 5: Interest concepts of future and present value

Page 1 of 23 Module 5: Interest concepts of future and present value Overview In this module, you learn about the fundamental concepts of interest and present and future values, as well as ordinary annuities

### University of Rio Grande Fall 2010

University of Rio Grande Fall 2010 Financial Management (Fin 20403) Practice Questions for Midterm 1 Answers the questions. (Or Identify the letter of the choice that best completes the statement if there

### UNDERSTANDING FINANCIAL STATEMENTS

UNDERSTANDING FINANCIAL STATEMENTS ITEM 8 It is important that the directors of any business, cooperative or otherwise, understand the financial statements of the business. Without a basic understanding

### CASH FLOWS, PROFITS AND

1 CASH FLOWS, PROFITS AND FINANCIAL STATEMENTS 1.1 INTRODUCTION Strategic cost management requires an understanding of not only profits and financial statements, but also of engineering economics and the

### CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA

CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA Basic 1. To calculate the payback period, we need to find the time that the project has recovered its initial investment. After two years, the

### THE LOAN RENEWAL SEASON: YOUR LENDER S CONCERNS. Michael Boehlje Department of Agricultural Economics Purdue University

THE LOAN RENEWAL SEASON: YOUR LENDER S CONCERNS Michael Boehlje Department of Agricultural Economics Purdue University Now that harvest is over, farmers are planning for next year s planting season. Lining

### Fundamentals Level Skills Module, Paper F9. Section A. Monetary value of return = \$3 10 x 1 197 = \$3 71 Current share price = \$3 71 \$0 21 = \$3 50

Answers Fundamentals Level Skills Module, Paper F9 Financial Management December 2014 Answers Section A 1 A Monetary value of return = \$3 10 x 1 197 = \$3 71 Current share price = \$3 71 \$0 21 = \$3 50 2

### Farm families have traditionally used the single entry (often referred to as cash) method of accounting

File C6-33 July 2009 www.extension.iastate.edu/agdm Understanding Double Entry Accounting Farm families have traditionally used the single entry (often referred to as cash) method of accounting for their

### Capital Budgeting Further Considerations

Capital Budgeting Further Considerations For 9.220, Term 1, 2002/03 02_Lecture10.ppt Lecture Outline Introduction The input for evaluating projects relevant cash flows Inflation: real vs. nominal analysis

### CALCULATOR TUTORIAL. Because most students that use Understanding Healthcare Financial Management will be conducting time

CALCULATOR TUTORIAL INTRODUCTION Because most students that use Understanding Healthcare Financial Management will be conducting time value analyses on spreadsheets, most of the text discussion focuses

### Winkler, D. T. "The Cost of Trade Credit: A Net Present Value Perspective." Journal of Business and Economic Studies, vol. 3, no. 1, 1996, pp. 53-63.

The Cost of Trade Credit: A Net Present Value Perspective By: Daniel T Winkler Winkler, D. T. "The Cost of Trade Credit: A Net Present Value Perspective." Journal of Business and Economic Studies, vol.

### Fast Tools & Resources. Capital Budgeting

Capital Budgeting With this program, the user can evaluate capital budgeting problems and perform comprehensive investment analysis comparisons on up to 4 separate projects or investments. Fast Tools &

### how to prepare a cash flow statement

business builder 4 how to prepare a cash flow statement zions business resource center zions business resource center 2 how to prepare a cash flow statement A cash flow statement is important to your business

### Real Estate. Refinancing

Introduction This Solutions Handbook has been designed to supplement the HP-2C Owner's Handbook by providing a variety of applications in the financial area. Programs and/or step-by-step keystroke procedures

### Capital Budgeting OVERVIEW

WSG12 7/7/03 4:25 PM Page 191 12 Capital Budgeting OVERVIEW This chapter concentrates on the long-term, strategic considerations and focuses primarily on the firm s investment opportunities. The discussions

### Financial Statements and Ratios: Notes

Financial Statements and Ratios: Notes 1. Uses of the income statement for evaluation Investors use the income statement to help judge their return on investment and creditors (lenders) use it to help

### The Nature, Elements and Importance of Working Capital

C. WORKING CAPITAL MANAGEMENT 1. The nature, elements and importance of working capital 2. Management of inventories, accounts receivable, accounts payable and cash 3. Determining working capital needs

### Chapter 09 - Using Discounted Cash-Flow Analysis to Make Investment Decisions

Solutions to Chapter 9 Using Discounted Cash-Flow Analysis to Make Investment Decisions 1. Net income = (\$74 \$42 \$10) [0.35 (\$74 \$42 \$10)] = \$22 \$7.7 = \$14.3 million Revenues cash expenses taxes paid =

### DUKE UNIVERSITY Fuqua School of Business. FINANCE 351 - CORPORATE FINANCE Problem Set #1 Prof. Simon Gervais Fall 2011 Term 2.

DUKE UNIVERSITY Fuqua School of Business FINANCE 351 - CORPORATE FINANCE Problem Set #1 Prof. Simon Gervais Fall 2011 Term 2 Questions 1. Two years ago, you put \$20,000 dollars in a savings account earning

### Preparing Agricultural Financial Statements

Preparing Agricultural Financial Statements Thoroughly understanding your business financial performance is critical for success in today s increasingly competitive agricultural environment. Accurate records

### MODULE 2. Capital Budgeting

MODULE 2 Capital Budgeting Capital Budgeting is a project selection exercise performed by the business enterprise. Capital budgeting uses the concept of present value to select the projects. Capital budgeting

### Accounts payable Money which you owe to an individual or business for goods or services that have been received but not yet paid for.

A Account A record of a business transaction. A contract arrangement, written or unwritten, to purchase and take delivery with payment to be made later as arranged. Accounts payable Money which you owe

### Would you like to know more about the

Your Net Worth Ag Decision Maker Statement File C3-20 Would you like to know more about the current financial situation of your farming operation? A simple listing of the property you own and the debts

### 6. FINANCIAL MANAGEMENT

6. FINANCIAL MANAGEMENT Syllabus Financial Management: Investment-need, Appraisal and criteria, Financial analysis techniques-simple pay back period, Return on investment, Net present value, Internal rate

### Chapter 7: Net Present Value and Capital Budgeting

Chapter 7: Net Present Value and Capital Budgeting 7.1 a. Yes, the reduction in the sales of the company s other products, referred to as erosion, should be treated as an incremental cash flow. These lost

### Will the future benefits of this project be large enough to justify the investment given the risk involved?

Chapter 1 The Overall Process Capital Expenditures Whenever we make an expenditure that generates a cash flow benefit for more than one year, this is a capital expenditure. Examples include the purchase

### Having cash on hand is costly since you either have to raise money initially (for example, by borrowing from a bank) or, if you retain cash out of

1 Working capital refers to liquid funds used to purchase materials and pay workers. This is in contrast to long term capital such as buildings and machinery. Part of working capital management is cash

### Financial Statements

Financial Statements The financial information forms the basis of financial planning, analysis & decision making for an organization or an individual. Financial information is needed to predict, compare

### 6.3 PROFIT AND LOSS AND BALANCE SHEETS. Simple Financial Calculations. Analysing Performance - The Balance Sheet. Analysing Performance

63 COSTS AND COSTING 6 PROFIT AND LOSS AND BALANCE SHEETS Simple Financial Calculations Analysing Performance - The Balance Sheet Analysing Performance Analysing Financial Performance Profit And Loss Forecast

### Financial Terms & Calculations

Financial Terms & Calculations So much about business and its management requires knowledge and information as to financial measurements. Unfortunately these key terms and ratios are often misunderstood

### MCQ on Financial Management

MCQ on Financial Management 1. "Shareholder wealth" in a firm is represented by: a) the number of people employed in the firm. b) the book value of the firm's assets less the book value of its liabilities

### Contribution 787 1,368 1,813 983. Taxable cash flow 682 1,253 1,688 858 Tax liabilities (205) (376) (506) (257)

Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2012 Answers 1 (a) Calculation of net present value (NPV) As nominal after-tax cash flows are to be discounted, the nominal

### CHAPTER 29. Capital Budgeting

CHAPTER 9 Capital Budgeting Meaning The term Capital Budgeting refers to the long-term planning for proposed capital outlays or expenditure for the purpose of maximizing return on investments. The capital

### Chapter 14 Notes Page 1

Chapter 14 Notes Page 1 Capital Budgeting This chapter examines various tools used to evaluate potential projects or investments. Accountants advocate the use of the Simple Rate of Return, which is based

### THE STOCK MARKET GAME GLOSSARY

THE STOCK MARKET GAME GLOSSARY Accounting: A method of recording a company s financial activity and arranging the information in reports that make the information understandable. Accounts payable: The

### SMALL BUSINESS OWNER S HANDBOOK

SMALL BUSINESS OWNER S HANDBOOK PART II: FINANCIAL PLANNING FOR SMALL BUSINESSES Introduction Financial Planning Methods of Financing Your Business Other Types of Funds & Financing How to Approach Lenders

### What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated?

What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? HOCK international - 2004 1 HOCK international - 2004 2 How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? HOCK

### APPENDIX 1 The Statement of Financial Position

APPENDIX 1 The Statement of Financial Position 1. Assets: the resources of the organization which are used to provide service and generate value 2. Current assets: assets which can be converted to cash

### In this chapter, we build on the basic knowledge of how businesses

03-Seidman.qxd 5/15/04 11:52 AM Page 41 3 An Introduction to Business Financial Statements In this chapter, we build on the basic knowledge of how businesses are financed by looking at how firms organize

### Examiner s report F9 Financial Management June 2013

Examiner s report F9 Financial Management June 2013 General Comments The examination consisted of four compulsory questions, each worth 25 marks. Most candidates attempted all four questions and there

### Estimation of Deferred Taxes

Estimation of Deferred Taxes With this program, the user can estimate current and noncurrent deferred taxes. Deferred Taxes Deferred taxes represent the federal income, state income, and Social Security

### Cash Flow Forecasting & Break-Even Analysis

Cash Flow Forecasting & Break-Even Analysis 1. Cash Flow Cash Flow Projections What is cash flow? Cash flow is an estimate of the timing of when the cash associated with sales will be received and when

### Introduction to Discounted Cash Flow and Project Appraisal. Charles Ward

Introduction to Discounted Cash Flow and Project Appraisal Charles Ward Company investment decisions How firms makes investment decisions about real projects (not necessarily property) How to decide which

### Capital Budgeting Cash Flows

Learning Objectives 1-1 Capital Budgeting Cash Flows 1 Corporate Financial Management 3e Emery Finnerty Stowe 1-2 Calculate incremental after-tax cash flows for a capital budgeting project. Explain the

### Accounts Payable are the total amounts your business owes its suppliers for goods and services purchased.

Accounts Payable are the total amounts your business owes its suppliers for goods and services purchased. Accounts Receivable are the total amounts customers owe your business for goods or services sold

### If I offered to give you \$100, you would probably

File C5-96 June 2013 www.extension.iastate.edu/agdm Understanding the Time Value of Money If I offered to give you \$100, you would probably say yes. Then, if I asked you if you wanted the \$100 today or

### Chapter 18. Web Extension: Percentage Cost Analysis, Leasing Feedback, and Leveraged Leases

Chapter 18 Web Extension: Percentage Cost Analysis, Leasing Feedback, and Leveraged Leases Percentage Cost Analysis Anderson s lease-versus-purchase decision from Chapter 18 could also be analyzed using

### Understanding Vehicle Financing

Understanding Vehicle Financing Understanding Vehicle Financing With prices averaging more than \$31,000 for a new vehicle and \$17,000 for a used model from a dealership, you might consider financing or

### Lease-Versus-Buy. By Steven R. Price, CCIM

Lease-Versus-Buy Cost Analysis By Steven R. Price, CCIM Steven R. Price, CCIM, Benson Price Commercial, Colorado Springs, Colorado, has a national tenant representation and consulting practice. He was

### (Relevant to AAT Examination Paper 4 Business Economics and Financial Mathematics)

Capital Budgeting: Net Present Value vs Internal Rate of Return (Relevant to AAT Examination Paper 4 Business Economics and Financial Mathematics) Y O Lam Capital budgeting assists decision makers in a

### Cash Flow. Summary. Cash Flow. Louise Söderberg, 2010-10-15

Cash Flow Louise Söderberg, 2010-10-15 Summary The statement of cash flow reports the cash generated and used during the time interval specified in its headings. A cash flow analysis is a method of checking

### CHAPTER 2 ACCOUNTING STATEMENTS, TAXES, AND CASH FLOW

CHAPTER 2 ACCOUNTING STATEMENTS, TAXES, AND CASH FLOW Answers to Concepts Review and Critical Thinking Questions 1. True. Every asset can be converted to cash at some price. However, when we are referring

### STATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS

C H A P T E R 1 0 STATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS I N T R O D U C T I O N Historically, profit-oriented businesses have used the accrual basis of accounting in which the income statement,

### CHAPTER 5. Interest Rates. Chapter Synopsis

CHAPTER 5 Interest Rates Chapter Synopsis 5.1 Interest Rate Quotes and Adjustments Interest rates can compound more than once per year, such as monthly or semiannually. An annual percentage rate (APR)

### 1 (a) Net present value of investment in new machinery Year 1 2 3 4 5 \$000 \$000 \$000 \$000 \$000 Sales income 6,084 6,327 6,580 6,844

Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2013 Answers 1 (a) Net present value of investment in new machinery Year 1 2 3 4 5 \$000 \$000 \$000 \$000 \$000 Sales income 6,084

### Analyzing Quicken Farm Records with FINPACK

Analyzing Quicken Farm Records with FINPACK FINPACK is a computerized farm financial planning and analysis system. It will help you evaluate your financial situation, explore alternatives, and make informed

### UNDERSTANDING WHERE YOU STAND. A Simple Guide to Your Company s Financial Statements

UNDERSTANDING WHERE YOU STAND A Simple Guide to Your Company s Financial Statements Contents INTRODUCTION One statement cannot diagnose your company s financial health. Put several statements together

### Guide to Financial Ratios Analysis A Step by Step Guide to Balance Sheet and Profit and Loss Statement Analysis

Guide to Financial Ratios Analysis A Step by Step Guide to Balance Sheet and Profit and Loss Statement Analysis By BizMove Management Training Institute Other free books by BizMove that may interest you:

### Workbook 1 Buying and Selling

Contents Highlights... 2 Quick Practice Session on Buying and Selling... 2 Financial Quiz 1 - Buying & Selling... 3 Learning Zone Buying and Selling... 3 Talk the talk... 4 Understand the link between