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Unformatted text preview: Capital Budgeting and Capital Budgeting and Managerial Decisions Managerial Decisions Chapter 25 Chapter 25 Capital budgeting: Analyzing alternative long term investments and deciding which assets to acquire or sell. Outcome is uncertain. Large amounts of money are usually involved. Investment involves a longterm commitment. Decision may be difficult or impossible to reverse. Capital Budgeting Capital Budgeting Capital Budgeting Payback period Net present value Accounting rate of return Internal rate of return FasTrac wants to install a machine that costs $16,000 and has an 8year useful life with zero salvage value. Annual net cash flows are: Year Annual Net Cash Flows Cumulative Net Cash Flows (16,000) $ (16,000) $ 1 3,000 (13,000) 2 4,000 (9,000) 3 4,000 (5,000) 4 4,000 (1,000) 5 5,000 4,000 6 3,000 7,000 7 2,000 9,000 8 2,000 11,000 Payback Period with Payback Period with Uneven Cash Flows Uneven Cash Flows Net Cash Flows Year A B C 1 5,000 $ 8,000 $ 1,000 $ 2 5,000 5,000 5,000 3 5,000 2,000 9,000 Total 15,000 $ 15,000 $ 15,000 $ Net Present Value Net Present Value with Uneven Cash Flows with Uneven Cash Flows Appendix B Appendix B Time Value of Money Time Value of Money Time Value of Money Time Value of Money If $1,000 were invested at an interest rate of If $1,000 were invested at an interest rate of 10% for 4 years 10% for 4 years Today 1 2 3 4 Time Value of Money Time Value of Money Amount x Factor = Answer Present Value of $1 Period 1% 2% 3% 4% 5% 6% 10% 12% 1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9091 0.8929 2 0.9803 0.9612 0.9426 0.9246 0.9070 0.8900 0.8264 0.7972 3 0.9706 0.9423 0.9151 0.8890 0.8638 0.8396 0.7513 0.7118 4 0.9610 0.9238 0.8885 0.8548 0.8227 0.7921 0.6830 0.6355 5 0.9515 0.9057 0.8626 0.8219 0.7835 0.7473 0.6209 0.5674 6 0.9420 0.8880 0.8375 0.7903 0.7462 0.7050 0.5645 0.5066 7 0.9327 0.8706 0.8131 0.7599 0.7107 0.6651 0.5132 0.4523 8 0.9235 0.8535 0.7894 0.7307 0.6768 0.6274 0.4665 0.4039 9 0.9143 0.8368 0.7664 0.7026 0.6446 0.5919 0.4241 0.3606 10 0.9053 0.8203 0.7441 0.6756 0.6139 0.5584 0.3855 0.3220 20 0.8195 0.6730 0.5537 0.4564 0.3769 0.3118 0.1486 0.1037 30 0.7419 0.5521 0.4120 0.3083 0.2314 0.1741 0.0573 0.0334 40 0.6717 0.4529 0.3066 0.2083 0.1420 0.0972 0.0221 0.0107 50 0.6080 0.3715 0.2281 0.1407 0.0872 0.0543 0.0085 0.0035 Interest Rate Time Value of Money Time Value of Money If $1,464 were needed in 4 years assuming an If $1,464 were needed in 4 years assuming an interest rate of 10%... interest rate of 10%... Today 1 2 3 4 Present Value of Net Cash Flows $1 Factor PV of Net Cash Flows Year A B C at 10% A B C 1 5,000 $ 8,000 $ 1,000 $ 0.9091 4,546 $ 7,273 $ 909 $ 2 5,000 5,000 5,000 0.8264 4,132 4,132 4,132 3 5,000 2,000 9,000 0.7513 3,757 1,503 6,762 Total 15,000 $ 15,000 $ 15,000 $ 12,435 $ 12,908 $ 11,803 $ Amount invested (12,000) (12,000)...
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This note was uploaded on 03/01/2008 for the course ACC 310F taught by Professor Verduzco during the Fall '07 term at University of Texas at Austin.
 Fall '07
 Verduzco

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