2 SOLUTIONS TO BRIEF EERCISES BRIEF EERCISE 12-1 $45, $5, 9 years BRIEF EERCISE 12-2 Net annual cash flows $4, 5.65 $226, 215, $ 11, The investment should be made because the net present value is positive. BRIEF EERCISE 12-3 value of net annual cash flows value of salvage value $25, 65, 1% Discount Factor $ 94,77 4,36 135,13 136, $ (87) Since the net present value is negative, the project is unacceptable. BRIEF EERCISE 12-4 value of net annual cash flows value of salvage value $34, 9% Discount Factor ($188,184) ( ) ( 188,184) ( 2,) ($ (11,816) The reduction in downtime would have to have a present value of at least $11,816 in order for the project to be acceptable.
3 BRIEF EERCISE 12-5 Project A 9% Discount Factor value of net annual cash flows value of salvage value $7, $449, ,236 4, $ 49,236 Profitability index $449,236/$4, 1.12 Project B 9% Discount Factor value of net annual cash flows value of salvage value $5, $32,883 32,883 28, $ 4,883 Profitability index $32,883/$28, 1.15 Project B has a lower net present value than Project A, but because of its lower capital investment, it has a higher profitability index. Based on its profitability index, Project B should be accepted. BRIEF EERCISE 12-6 Original estimate value of net annual cash flows value of salvage value $46, 1% Discount Factor $264, ,915 25, $ 14,915
4 BRIEF EERCISE 12-6 (Continued) Revised estimate value of net annual cash flows value of salvage value 1% Discount Factor $39, ($253,37) ( ) ( 253,37) ( 26,) ($ (6,693) The original net present value was projected to be a positive $14,915; however, the revised estimate is a negative $6,693. The project is not a success. BRIEF EERCISE 12-7 When net annual cash flows are expected to be equal, the internal rate of return can be approximated by dividing the capital investment by the net annual cash flows to determine the discount factor, and then locating this discount factor on the present value of an annuity table. $176,/$33, By tracing across on the 7-year row we see that the discount factor for 8% is Thus, the internal rate of return on this project is approximately 8%. BRIEF EERCISE 12-8 When net annual cash flows are expected to be equal, the internal rate of return can be approximated by dividing the capital investment by the net annual cash flows to determine the discount factor, and then locating this discount factor on the present value of an annuity table. Since this exercise has a salvage value, not all cash flows are equal. In this case, the internal rate of return can be approximated by identifying the discount rate that will result in a net present value of zero. By experimenting with various rates, we determined that the net present value is approximately zero when a discount rate of approximately 9% is used.
5 BRIEF EERCISE 12-8 (Continued) Net annual cash flows $4, $15, $25, value of net annual cash flows value of salvage value $25, 716, 9% Discount Factor $1,79, ,567 2,44,75 2,45, $ (25) The 9% internal rate of return exceeds the company s 7% required rate of return; thus, the project should be accepted. BRIEF EERCISE 12-9 The annual rate of return is calculated by dividing expected annual income by the average investment. The company s expected annual income is: $13, $7, $6, Its average investment is: $47, + $1, 2 $24, Therefore, its annual rate of return is: $6,/$24, 25%
6 SOLUTIONS FOR DO IT! REVIEW EERCISES DO IT! 12-1 Estimated annual cash inflows... $8, Estimated annual cash outflows... 4, Net annual cash flow... $4, payback period $12,/$4, 3 years. DO IT! 12-2 Estimated annual cash inflows... $8, Estimated annual cash outflows... 4, Net annual cash flow... $4, Flow 12% Discount Factor value of net annual cash flows $4, a $121,494 12, $ 1,494 a Table 4, Appendix A. Since the net present value is positive, the project should be accepted DO IT! 12-3 Estimated annual cash inflows... $8, Estimated annual cash outflows... 4, Net annual cash flow... $4, $12,/$4, 3.. Using Table 4 of Appendix A and the factors that correspond with the four-period row, 3. is between the factors for 12% and 15%. Since the project has an internal rate that is more than 12%, the company s required rate of return, the project should be accepted.
7 DO IT! 12-4 Revenues... $8, Less: Expenses (excluding depreciation)... $4, Depreciation ($12,/4 years)... 3, 7, Annual net income... $ 1, Average investment ($12, + )/2 $6,. Annual rate of return $1,/$6, 16.7%. Since the annual rate of return, 16.7%, is greater than Wallowa s required rate of return, 12%, the proposed project is acceptable.
8 SOLUTIONS TO EERCISES EERCISE 12-1 (a) The cash payback period is: $56, $7,5 7.5 years The net present value is: value of net annual cash flows value of salvage value $ 7,5 27, 8% Discount Factor $43,1 14,587 57,687 56, $ 1,687 (b) In order to meet the cash payback criteria, the project would have to have a cash payback period of less than 4 years (8 2). It does not meet this criteria. The net present value is positive, however, suggesting the project should be accepted. The reason for the difference is that the project s high estimated salvage value increases the present value of the project. The net present value is a better indicator of the project s worth. EERCISE 12-2 (a) AA Year Net Annual Flow Cumulative Net Flow $ 7, 9, 12, $ 7, 16, 28, payback period 2.5 years $22, $16, $6, $6, $12,.5
9 EERCISE 12-2 (Continued) BB 22, 1, 2.2 years CC Year Net Annual Flow Cumulative Net Flow $13, 12, 11, $13, 25, 36, payback period 1.75 years $22, 13, $9, $9, $12,.75 The most desirable project is CC because it has the shortest payback period. The least desirable project is AA because it has the longest payback period. As indicated, only CC is acceptable because its cash payback is 1.75 years. (b) AA BB CC Discount Factor Flow Flow Flow Year Total present value Investment $ 7, 9, 12, $ 6,25 7,175 8,541 21,966 (22,) $ (34) $1, 1, 1, $ 8,929 7,972 7,118 24,19(1) (22,) $ 2,19 $13, 12, 11, $11,67 9,566 7,83 29,3 (22,) $ 7,3 (1) This total may also be obtained from Table 4: $1, $24,18. (The difference of $1 is due to rounding) Project CC is still the most desirable project. Also, on the basis of net present values, project BB is also acceptable. Project AA is not desirable.
10 EERCISE 12-3 Investment in new equipment... $2,45, Disposal of old equipment... (26,) Additional training required... 85, Net initial investment required... $2,275, Calculation of net present value: Year Discount Factor, 9% Amount flows $ 39, $ 357, , 336, , 317, , 31, , 282, , 259, , 238,55 Maintenance (1,) (64,993) Net cash flows from operations: 2,28,586 Terminal salvage , 191,461 value of cash inflows 2,22,47 Initial investment (2,275,) $ (54,953) Based on the net present calculation alone, the sewing machine should not be purchased. However, the internal rate of return would be only slightly lower than the 9% minimum required, so the company may want to look at some of the non-quantitative factors involved.
11 EERCISE 12-4 Machine A 9% Discount Factor value of net annual cash flows value of salvage value $15, $83,22 83,22 75,5 $ 7,522 Profitability index $83,22/$75,5 1.1 Machine B value of net annual cash flows value of salvage value $3, 9% Discount Factor ($166,45) ( ) ( 166,45) ( 18,) ($ (13,955) Profitability index $166,45/$18,.92 Machine B has a negative net present value, and also a lower profitability index. Machine B should be rejected and Machine A should be purchased. EERCISE 12-5 When net annual cash flows are expected to be equal, the internal rate of return can be approximated by dividing the capital investment by the net annual cash flows to determine the discount factor, and then locating this discount factor on the present value of an annuity table. $43,/$11, By tracing across on the 6-year row, we see that the discount factor for 11% is Thus, the internal rate of return on this project is approximately 11%. Since this is above the company s required rate of return, the project should be accepted.
12 EERCISE 12-6 (a) Total net investment $29,3 + $1,5 $2, $28,8 Annual net cash flow $7, Payback period $28,8 $7, 4.1 years (b) approximates zero when discount rate is 12%. Item Amount Years PV Factor Net annual cash flows $7, $28,78 (28,8) $ (2) (c) Because the approximate internal rate of return of 12% exceeds the required rate of return of 1%, the investment should be accepted. EERCISE 12-7 (a) Project Capital Investment Net Annual * Internal Rate of Return Factor Closest Discount Factor Internal Rate of Return 22A 23A 24A $24, $27, $28, ($16,7 + $4,) ($2,6 + $3,) ($17,5 + $4,) % 12% 1% *(Annual income + Depreciation expense) (b) The acceptable projects are 22A and 23A because their rates of return are equal to or greater than the 11% required rate of return.
13 EERCISE 12-8 The annual rate of return is calculated by dividing expected annual income by the average investment. The company s expected annual income is: $7, $41,5 $28,5 Its average investment is: $3, + $8, 2 $19, Therefore, its annual rate of return is: $28,5 $19, 15% EERCISE 12-9 (a) Cost of hoist: $35, + $3,3 + $7 $39,. Net annual cash flows: Number of extra mufflers 5 52 weeks (a) 26 Contribution margin per muffler ($72 $36 $12) (b) $24 Total net annual cash flows (a) (b) $6,24 payback period $39, $6, years. (b) Average investment: ($39, + $3,) 2 $21,. Annual depreciation: ($39, $3,) 8 $4,5. Annual net income: $6,24 $4,5 $1,74. Annual rate of return $1,74 $21, 8.3% (rounded).
14 EERCISE 12-1 (a) 1. payback period: $19, $5, 3.8 years. 2. Annual rate of return: $12, [($19, + $) 2] 12.63%. (b) Item Amount Years PV Factor Net annual cash flows $ 5, $18,239)) (19,) $ (9,761))) EERCISE (a) Year Net Annual Flow Cumulative Net Flow $45, 4, 35, $ 45, 85, 12, payback period 2.57 years (2 + [($15, $85,) $35,]) (b) Average annual net income ($1, + $12, + $14, + $16, + $18,) 5 $14, Average investment ($15, + $) 2 $52,5 Annual rate of return $14, $52, % (c) Discount Year Factor, 12% Amount Net cash flows $45, $ 4, , 31, , 24, , 19, , 14,186 value of cash in flows 13,231 Initial investment (15,) $ 25,231
15 SOLUTIONS TO PROBLEMS PROBLEM 12-1A (a) Project Kilo $15, ($14, + $3,) 3.41 years Project Lima Year Flow Cumulative Flow $51, ($18, + $33,) $5, ($17, + $33,) $49, ($16, + $33,) $45, ($12, + $33,) $42, ($ 9, + $33,) $ 51, $11, $15, $195, $237, payback period 3.33 years $165, $15, $15, $15, $45,.33 Project Oscar Year Flow Cumulative Flow $67, ($27, + $4,) $63, ($23, + $4,) $61, ($21, + $4,) $53, ($13, + $4,) $52, ($12, + $4,) $ 67, $13, $191, $244, $296, payback period 3.17 years $2, $191, $9, $9, $53,.17
16 PROBLEM 12-1A (Continued) (b) Project Kilo Item Amount Years PV Factor Net annual cash flows Negative net present value $44, $147,495 (15,) $ (2,55) Discount Year Factor Total Positive (negative) net present value Project Lima Flow PV $ 51, $ 44,348 5, 37,87 49, 32,218 45, 25,729 42, 2,882 $237, 16,984 (165,) $ (4,16) Project Oscar Flow PV $ 67, $ 58,261 63, 47,637 61, 4,19 53, 3,33 52, 25,853 $296, 22,163 (2,) $ 2,163 (c) Project Kilo $14, [($15, + $) 2] 18.67%. Project Lima $14,4 [($165, + $) 2] 17.5%. Project Oscar $19,2 [($2, + $) 2] 19.2%. (d) Project Kilo Lima Oscar Payback Net Annual Rate of Return The best project is Oscar.
17 PROBLEM 12-2A (a) (1) Annual Net Income Sales Expenses Drivers salaries Out-of-pocket expenses Depreciation Total expenses Net income inflow *$18,* * 48,* * 3,* * 25,* * 13,* *$ 5,* (2) Annual Inflow $18, 48, 3, 78, $ 3, *5 vans 1 trips 6 students 3 weeks $12. $18,. (b) 1. payback period $75, $3,* 2.5 years. *$5, + $25, 2. Annual rate of return $5, ($75, + ) %. (c) value of annual cash inflows ($3, *) $68,497 (75,) $ (6,53) *3 years at 15%, PV of annuity of 1. (d) The computations show that the commuter service is not a wise investment for these reasons: (1) annual net income will only be $5,, (2) the annual rate of return (13.33%) is less than the cost of capital (15%), (3) the cash payback period is 83% (2.5 3) of the useful life of the vans, and (4) net present value is negative.
18 PROBLEM 12-3A (a) (1) Option A 8% Discount Factor value of net annual cash flows value of cost to rebuild value of salvage value a $4, a ( (5,) ( ) ($28,255) ( (36,752) ( ) ($171,53) ( (16,) ($ 11,53) a Net annual cash flows $7, $3, $4, (2) Profitability index $171,53/$16, 1.7 (3) The internal rate of return can be approximated by finding the discount rate that results in a net present value of approximately zero. This is accomplished with a 1% discount rate. 1% Discount Factor value of net annual cash flows value of cost to rebuild value of salvage value a $4, a ( (5,) ( ) ($194,737) ( (34,151) ( ) ($16,586) (16,) ($ 586 a Net annual cash flows $7, $3, $4, (1) Option B 8% Discount Factor value of net annual cash flows value of cost to rebuild value of salvage value b $54, b 8, $281,144 4,668 $285,812 (227,) $ 58,812 b Net annual cash flows $8, $26, $54, (2) Profitability index $285,812/$227, 1.26
19 PROBLEM 12-3A (Continued) (3) Internal rate of return on Option B is 15%, as calculated below: 15% Discount Factor value of net annual cash flows value of cost to rebuild value of salvage value b $54, b 8, $224,663 3,8 $227,671 (227,) $ 671 b Net annual cash flows $8, $26, $54, (b) Option A has a lower net present value than Option B, and also a lower profitability index and internal rate of return. Therefore, Option B is the preferred project.
20 PROBLEM 12-4A (a) The net present value based on the original estimates is as follows: value of net annual cash flows value of cost of overhaul value of salvage value $ 8, ( (6,) ( 12,) 9% Discount Factor ($ 44,279 ( (4,251) ( 6,22 ($ 46,5 (6,) ($(13,95) Based on its negative net present value, the tow truck should not be purchased. (b) The net present value based on the revised estimates is as follows: value of net annual cash flows value of cost of overhaul value of salvage value $13,5* ( (6,)* ( 12, * 9% Discount Factor ($74,72) ( (4,251) ( 6,22) ($76,491) (6,) ($16,491) *$8, + ($3, + $75 + $1, + $75) Based on the revised figures, the tow truck has a positive net present value and therefore should be purchased. (c) The present value of the intangible benefits was $3,441 (the increase in the net present value from a negative $13,95 to a positive $16,491). Rick s estimates of the value of these intangible benefits may be overly optimistic. In order for the project to be acceptable, the present value of the intangible benefits would only have to be $13,95. That is the amount by which the original estimate fell short of having a positive net present value.
21 PROBLEM 12-5A (a) Using the original estimates, the net present value is calculated as follows: value of net annual cash flows value of salvage value ($3, + $6,) a $ 1, a 1,5, 8% Discount Factor $ 981, ,825 1,33,64 (9,) $ 43,64 a Net annual cash flows $94, $84, The positive net present value of the project suggests that it should be accepted. (b) Using the revised estimates, the net present value is calculated as follows: value of net annual cash flows value of salvage value b $ 5, b 1,5, 8% Discount Factor $(49,98) (321,825) $(812,733) (9,) $ (87,267) b Net annual cash flows $8, $75, Under these revised estimates, the project should be rejected. It appears that many of the camp s costs are fixed; thus, when the number of players declines, cash inflows decline, but cash outflows don t decline proportionately.
22 PROBLEM 12-5A (Continued) (c) Using the original estimates, but an 11% discount rate, the net present value is calculated as follows: value of net annual cash flows value of salvage value c $ 1, c 1,5, 11% Discount Factor $ 796, ,45 $ 982,378 (9,) $ 82,378 c Net annual cash flows $94, $84, The positive net present value of the project suggests that it should be accepted; however, it is not nearly as profitable using an 11% discount rate. (d) The internal rate of return can be determined by calculating the discount rate that results in a net present value of approximately zero. In this case the internal rate of return was approximately 12%. 12% Discount Factor value of net annual cash flows value of salvage value $ 4, 1,332, $144, ,817 $9,8 (9,) $ 8 The project had a high internal rate of return, even though the business itself was not generating much cash flows, because the property increased significantly in value during the 5-year period.
21-18 Capital budgeting methods, no income taxes. The table for the present value of annuities (Appendix A, Table 4) shows: 10 periods at 14% 5.216 1a. Net present value $28,000 (5.216) $146,048 $36,048
CHAPTER 21 CAPITAL BUDGETING AND COST ANALYSIS 21-20 Capital budgeting with uneven cash flows, no income taxes. 1. Present value of savings in cash operating costs: $10,000 0.862 $ 8,620 8,000 0.743 5,944
12-1 Planning for Capital Investments Managerial Accounting Fifth Edition Weygandt Kimmel Kieso 12-2 study objectives 1. Discuss capital budgeting evaluation, and explain inputs used in capital budgeting.
Investment Criteria 208 Net Present Value (NPV) What: NPV is a measure of how much value is created or added today by undertaking an investment (the difference between the investment s market value and
Answers to Warm-Up Exercises E10-1. Answer: E10-2. Answer: Payback period The payback period for Project Hydrogen is 4.29 years. The payback period for Project Helium is 5.75 years. Both projects are acceptable
Capital Budgeting: Decision Criteria Example Consider a firm with two projects, A and B, each with the following cash flows and a 10 percent cost of capital: Project A Project B Year Cash Flows Cash Flows
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
Decision making made easy (Relevant to AAT Examination Paper 4: Business Economics and Financial Mathematics) YO Lam, SCOPE, City University of Hong Kong In the competitive world of business, we need to
Vol. 2, Chapter 4 Capital Budgeting Problem 1: Solution Answers found using Excel formulas: 1. Amount invested = $10,000 $21,589.25 Compounding period = annually Number of years = 10 Annual interest rate
Strategies and Mechanisms For Promoting Cleaner Production Investments In Developing Countries Profiting From Cleaner Production Performing Net Present Value (NPV) Calculations Cleaner Production Profiting
MBA Teaching Note 08-02 Net Present Value Analysis of the Purchase of a Hybrid Automobile 1 In this day and age of high energy prices and a desire to be more environmentally friendly, the automobile industry
Chapter 9 Cash Flow and Capital Budgeting MULTIPLE CHOICE 1. Gamma Electronics is considering the purchase of testing equipment that will cost $500,000. The equipment has a 5-year lifetime with no salvage
1. To calculate the payback period, we need to find the time that the project has recovered its initial investment. After three years, the project has created: $1,300 + 1,500 + 1,900 = $4,700 in cash flows.
Understanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions Chapter 8 Capital Budgeting Concept Check 8.1 1. What is the difference between independent and mutually
The Time Value of Money Future Value - Amount to which an investment will grow after earning interest. Compound Interest - Interest earned on interest. Simple Interest - Interest earned only on the original
apital Budgeting Formula Not in the book. Wei s summary If salvage value S is less than U n : If salvage value S is greater than U n : Note: IF t : incremental cash flows (could be negative) )(NW): change
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
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
Investment Appraisal Article relevant to F1 Business Mathematics and Quantitative Methods Author: Pat McGillion, current Examiner. Questions 1 and 6 often relate to Investment Appraisal, which is underpinned
EXERCISE 6-4 (15 20 minutes) (a) (b) (c) (d) Future value of an ordinary annuity of $4,000 a period for 20 periods at 8% $183,047.84 ($4,000 X 45.76196) Factor (1 +.08) X 1.08 Future value of an annuity
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
1 Why Use Net Present Value? The Payback Period Method The Discounted Payback Period Method The Average Accounting Return Method The Internal Rate of Return Problems with the IRR Approach The Profitability
Project Cost Management Guide to Mathematical Questions PMI, PMP, CAPM, PMBOK, PM Network and the PMI Registered Education Provider logo are registered marks of the Project Management Institute, Inc. Present
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
INDUSTRIAL UNIVERSITY OF HO CHI MINH CITY AUDITING ACCOUNTING FACULTY 10.SHORT-TERM DECISIONS & CAPITAL INVESTMENT APPRAISAL 4 Topic List INDUSTRIAL UNIVERSITY OF HO CHI MINH CITY AUDITING ACCOUNTING FACULTY
CAPITAL INVESTMENTS AND DISCOUNTED CASH FLOWS In January of each year, I travel to Spokane to meet with 0-150 managers and directors of agribusiness firms from throughout the Pacific Northwest. This midwinter
Chapter 10 The Basics of Capital Budgeting: Evaluating Cash Flows 1 Topics Overview and vocabulary Methods NPV IRR, MIRR Profitability Index Payback, discounted payback Unequal lives Economic life 2 What
Accounting Building Business Skills Paul D. Kimmel Appendix B: Time Value of Money PowerPoint presentation by Kate Wynn-Williams University of Otago, Dunedin 2003 John Wiley & Sons Australia, Ltd 1 Interest
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
Net Present Value and Other Investment Criteria Topics Covered Net Present Value Other Investment Criteria Mutually Exclusive Projects Capital Rationing Net Present Value Net Present Value - Present value
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
CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA 1. To calculate the payback period, we need to find the time that the project has recovered its initial investment. After three years, the project
Chapter 1: Introduction 1.1 Introduction Every long term decision the firm makes is a capital budgeting decision whenever it changes the company s cash flows. Consider launching a new product. This involves
Session #5 Capital Budgeting - II Damodaran - Chapter 9: 6,12,16,18 Chapter 10: 2,10,16(a&b) Chapter 11: 6,12,14 I. Additional Issues in Capital Budgeting. A. Capital rationing: Use profitability index
P13-119 (Ignore income taxes in this problem.) Tranter, Inc., is considering a project that would have a ten-year life and would require a $1,200,000 investment in equipment. At the end of ten years, the
corporate finance, final exam practice questions, NPV *Question 1.1: Net Present Value A firm invests $200,000 in machinery that yields net after-tax cash flows of $90,000 at the end of each of the next
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
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
Investment Planning Problems on Time value of money January 22, 2015 Vandana Srivastava SENSEX closing value on Tuesday: closing value on Wednesday: opening value on Thursday: Top news of any financial
Currently, 15-year mortgages are available at more attractive rates than 30-year terms, but they also entail higher monthly payments. Which is better? A look at the analysis. Selecting the Mortgage Term:
Excellence in Financial Management Course 3: Capital Budgeting Analysis Prepared by: Matt H. Evans, CPA, CMA, CFM This course provides a concise overview of capital budgeting analysis. This course is recommended
Answers to Warm-Up Exercises E11-1. Categorizing a firm s expenditures Answer: In this case, the tuition reimbursement should be categorized as a capital expenditure since the outlay of funds is expected
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
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
The Cost of Capital, and a Note on Capitalization Prepared by Kerry Krutilla 8all rights reserved Introduction Often in class we have presented a diagram like this: Table 1 B B1 B2 B3 C -Co This kind of
JF MSISS Excel 2010 Tutorial 4 In this session you will learn how to: Using functions The IF statement Calculating net present values. 1. Building a Spreadsheet Model The standard mortgage is the annuity
In Excel language, if the initial cash flow is an inflow (positive), then the future value must be an outflow (negative). Therefore you must add a negative sign before the FV (and PV) function. The inputs
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 =
Project Management Seminars Financial Management of Projects.inproject managementandsystems engineering, is a deliverable-oriented decomposition of a project into smaller components. (source: Wikipedia)
CHAPTER 10: UNCERTAINTY AND RISK IN CAPITAL BUDGETING: PART I 10-1 Year ATCF 0-2,500,000 Initial Investment = $2,500,000 1 $1,280,000 Annual Operating Cash Flows 2 $1,280,000 Revenues $5,000,000 3 $1,280,000
FNE 215 Financial Planning Chris Leung, Ph.D., CFA, FRM Email: firstname.lastname@example.org Chapter 2 Planning with Personal Financial Statements Chapter Objectives Explain how to create your personal cash flow
Cash Flow, Taxes, and Project Evaluation Of the four steps in calculating NPV, the most difficult is the first: Forecasting cash flows. We now focus on this problem, with special attention to What is cash
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
EVALUATING CAPITAL INVESTMENTS IN AGRIBUSINESS Technological advancements impact the agribusiness industry in a very irregular fashion. Given the difficulties associated with predicting the arrival and/or
Chapter 20 Lease Financing ANSWERS TO END-OF-CHAPTER QUESTIONS 20-1 a. The lessee is the party leasing the property. The party receiving the payments from the lease (that is, the owner of the property)
appendix B Time value of money LEARNING OBJECTIVES After studying this appendix, you should be able to: Distinguish between simple and compound interest. Solve for future value of a single amount. Solve
Capital Investment Appraisal Techniques To download this article in printable format click here A practising Bookkeeper asked me recently how and by what methods one would appraise a proposed investment
HO-23: METHODS OF INVESTMENT APPRAISAL After completing this exercise you will be able to: Calculate and compare the different returns on an investment using the ROI, NPV, IRR functions. Investments: Discounting,
Kuwait University College of Business Administration Department of Finance and Financial Institutions Using )Casio FC-200V( for Fundamentals of Financial Management (220) Prepared by: Dalia A. Marafi Version
Which projects should the corporation undertake Investment criteria 1. Investment into a new project generates a flow of cash and, therefore, a standard DPV rule should be the first choice under consideration.
Economic and financial evaluation of measures and projects Exercice 1: Calculate the simple pay-back period for the installation of a new industrial equipment..the capital cost of installing the new machine
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
In following we will introduce one of the most important and powerful concepts you will learn in your study of finance; the time value of money. It is generally acknowledged that money has a time value.
Multiple Choice Questions (45%) Choose the Correct Answer 1. The following information was taken from XYZ Company s accounting records for the year ended December 31, 2014: Increase in raw materials inventory
CHAPTER 4 DISCOUNTED CASH FLOW VALUATION Solutions to Questions and Problems NOTE: All-end-of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability
385 356 PART FOUR Capital Budgeting a large number of NPV estimates that we summarize by calculating the average value and some measure of how spread out the different possibilities are. For example, it
Chapter 8 Capital Budgeting Process and Techniques MULTIPLE CHOICE 1. The capital budgeting process involves a. identifying potential investments b. analyzing the set of investment opportunities, and identifying
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
Texas Instruments (TI) BA II PLUS Professional The TI BA II PLUS Professional functions similarly to the TI BA II PLUS model. Any exceptions are noted here. The TI BA II PLUS Professional can perform two
CHAPTER 6 Accounting and the Time Value of Money ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems 1. Present value concepts. 1, 2, 3, 4, 5, 9, 17, 19 2. Use
D. Dimov Most financial decisions involve costs and benefits that are spread out over time Time value of money allows comparison of cash flows from different periods Question: You have to choose one of
: Financial Calculations The Time Value of Money Growth of Money I Growth of Money II The FV Function Amortisation of a Loan Annuity Calculation Comparing Investments Worked examples Other Financial Functions
WHAT IS CAPITAL BUDGETING? Capital budgeting is a required managerial tool. One duty of a financial manager is to choose investments with satisfactory cash flows and rates of return. Therefore, a financial
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
CARNEGIE MELLON UNIVERSITY CIO INSTITUTE CAPITAL BUDGETING BASICS Contact Information: Lynne Pastor Email: email@example.com RELATED LEARNGING OBJECTIVES 7.2 LO 3: Compare and contrast the implications
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