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Unformatted text preview: Capital Budgeting How managers plan significant outlays (such as the purchase of new equipment and introduction of new products) on projects that have longterm implications. Typical Capital Budgeting Decisions Plant expansion Equipment selection Equipment replacement Lease or buy Cost reduction (least cost) Typical Capital Budgeting Decisions Capital budgeting tends to fall into two broad categories . . . Screening decisions . Does a proposed project meet some present standard of acceptance? Typical Capital Budgeting Decisions Capital budgeting tends to fall into two broad categories . . . Screening decisions . Does a proposed project meet some present standard of acceptance? Preference decisions . Selecting from among (ranking) several alternative courses of action. Time Value of Money Business investments extend over long periods of time, so we must recognize the time value of money. Investments that promise returns earlier in time are preferable to those that promise returns later in time. For example Time Value of Money (Future Value) If $100,000 is invested today at 8% (simple) interest, how much will the investment be worth in two years? At the end of one year that $100,000 would earn $8 for a total of $108 1.08 X $100,000 = $108,000 Time Value of Money (Future Value) Tables are useful tools to calculate future (and present) values. Such tables calculate the future or present value for a single dollar. Time Value of Money (Future Value) 5% 6% 7% 8% 9% 10% 1 1.05000 1.06000 1.07000 1.08000 1.09000 1.10000 2 1.10250 1.12360 1.14490 1.16640 1.18810 1.21000 3 1.15763 1.19102 1.22504 1.25971 1.29503 1.33100 4 1.19102 1.26248 1.31080 1.36049 1.41158 1.46410 5 1.26248 1.33823 1.40255 1.46933 1.53862 1.61051 6 1.33823 1.41852 1.50073 1.58687 1.67710 1.77156 FV Table: Excerpt from Future Value of $1 Table (page 669) Appendix 14C1 (modified) F n = P (1 + r) n Year One Time Value of Money (Future Value) 5% 6% 7% 8% 9% 10% 1 1.05000 1.06000 1.07000 1.08000 1.09000 1.10000 2 1.10250 1.12360 1.14490 1.16640 1.18810 1.21000 3 1.15763 1.19102 1.22504 1.25971 1.29503 1.33100 4 1.19102 1.26248 1.31080 1.36049 1.41158 1.46410 5 1.26248 1.33823 1.40255 1.46933 1.53862 1.61051 6 1.33823 1.41852 1.50073 1.58687 1.67710 1.77156 FV Table: Excerpt from Future Value of $1 Table (page 669) Appendix 14C1 (modified) F n = P (1 + r) n Year One $100,000 X 1.08 = $108,000 Time Value of Money ( another view ) 100.00 108.00 96.00 98.00 100.00 102.00 104.00 106.00 108.00 110.00 1 Years into the Future Dollars One Dollar (or any number of dollars) will increase by a factor of 1.08 at the end of year one (at 8% simple interest). At the end of one year that $100,000 would earn $8 for a total of $108 1.08 X $100,000 = $108,000 At the end of year two that $108,000 will have earned another 8% 1.08 X $108,000 = $116,640 Time Value of Money (Future Value) $100,000 X 1.16640 = $116,640 (which is $108,000 plus .08X$108,000) Time Value of Money...
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This note was uploaded on 08/04/2008 for the course ACCT 210 taught by Professor Blanchard during the Summer '08 term at University of Arizona Tucson.
 Summer '08
 Blanchard

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