Class Notes on Capital Investments and TVM (1) - The...

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The University of Texas at AustinMcCombs School of BusinessACC 310F: Foundations of Accounting (ACC 310F)Class Notes on Capital Investments and Time Value of MoneyChapter 15OverviewSomeday you may decide to buy a house. If so, it's a commitment that should be consideredcarefully because if you have to borrow money to purchase the house, typical loans have termsin the decades. In this section, you'll learn how companies evaluate the implication of similarlong-term time decisions.Demonstration Problem #1If you borrowed $800 at an annual rate of interest of 10% how much would you owe in twoyears assuming you made no payments on the loan until then?Capital Investment AnalysisAverage Rate of ReturnCash Payback MethodNet Present Value (NPV) MethodoPresent Value IndexNPV of Cash Flows / Amount InvestedInternal Rate of ReturnDemonstration Problem #2Your lemonade company is considering investing in the High Output Automatic Ice Maker; themachine costs $2,600 and you’ve estimated that it will increase net cash flows by $700 per yearfor 4 years at which time it will be worthless.What is the cash payback period for the investment?Using an interest rate of 8% what is the net present value of the investment?

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