{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

AFM102March302011

# AFM102March302011 - Introduction to Management Accounting...

This preview shows pages 1–9. Sign up to view the full content.

Click to edit Master subtitle style 5/11/11 Introduction to Management Accounting March 30, 2011 Capital Budgeting – Net Present Value 11

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
5/11/11 Key Concepts in Today’s Class Capital budgeting The net present value concept 22
5/11/11 Net Present Value The net present value ( NPV ) is the sum of the present values of a project’s cash flows The steps used to compute an investment’s net present value are as follows: Step 1: Choose the appropriate period length to evaluate the investment proposal 33

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
5/11/11 Net Present Value Step 2: Identify the organization’s cost of capital, and convert it to an appropriate rate of return for the period length chosen in step 1 Step 3: Identify the incremental cash flow in each period of the project’s life Step 4: Compute the present value of each period’s cash flow using the organization’s cost of capital for the discount rate Step 5: Sum the present values of all the 44
5/11/11 Net Present Value To determine the NPV of Shirley’s investment: Step 1: The period length is one year Step 2: Shirley’s cost of capital is 10% per year Step 3: The incremental cash flows are: \$70,000 outflow immediately \$20,000 inflow at the end of each year for five years 55

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
5/11/11 Net Present Value Step 4: The present value of the cash flows when the organization’s cost of capital is 10% are: For a five-year annuity of \$20,000, PV = \$75,816 For the \$10,000 salvage in five years, PV = \$6,209 Step 5: To sum the present values of all the periodic cash flows and determine NPV The PV of the cash inflows is \$82,025 66
5/11/11 77

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
5/11/11 88 11-66 (a) Ronnie’s Welding Year Invest- ment Depre- ciation Increase Tax Income Tax Net PV Factor PV 0 \$50,000 (\$50,000) 1.0000 (\$50,000) 1 0 \$9,600\$14,000 \$4,400 \$1,760 12,240
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 14

AFM102March302011 - Introduction to Management Accounting...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online