Ch 3 - Before we start Before we start Switch off your cell...

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Unformatted text preview: Before we start Before we start Switch off your cell phone Switch off your cell phone Sign the attendance sheet Sign the attendance sheet Get ready for a quiz Get ready for a quiz Principles of Taxation Principles of Taxation Based on Based on Principles of Taxation for Business and Investment Planning Principles of Taxation for Business and Investment Planning by Sally M. Jones by Sally M. Jones Instructor: Instructor: Oksana Alexandrovna Korneo, MBA Oksana Alexandrovna Korneo, MBA [email protected] [email protected] Office #307, Dostyk Building Office #307, Dostyk Building Taxes as Transaction Cost Taxes as Transaction Cost Quantifying Cash Flows Quantifying Cash Flows Managers want to make decisions that maximize the Managers want to make decisions that maximize the value of the firm by maximizing positive cash flow or value of the firm by maximizing positive cash flow or minimizing negative cash flow. minimizing negative cash flow. The Concept of Present Value The Concept of Present Value Time value of money – a dollar available today is worth more than a dollar available tomorrow because the current dollar can be invested to start earning interest immediately. A dollar available today has a present value of a dollar . Discount rate- the rate of interest on invested funds for the deferral period. A transaction's net present value (NPV) is the sum of the present values of cash inflows and outflows relating to the transaction. Present Value Present Value 1 PV($1) = 1 + r 1 $0.9091 = 1,10 At an annual 10 percent discount rate, the present value of $1 to be received at the end of one year is $.9091 1 PV($1) = (1 + r) 1 $0.7513 = (1,10) n 3 At an annual 10 percent discount rate, the present value of $1 to be received at the end of three years is $.7513 Present Value of Annuity Present Value of Annuity 1 1 PV($1) for n periods = r r (1 + r) At a 10 percent annual discount rate, the present value of $1 to be received at the end of years 1 through 4 is $3.1699 n 1 1 3,1699 = 0,10 0,10 (1,10) 4 The Issue of Risk The Issue of Risk The quantification of cash flows and calculation of their net present value are necessarily based on assumptions concerning future events . A safe dollar is worth more than a risky dollar or The present value of a highly speculative future dollar should be based on a higher discount rate than the present value of a guaranteed future dollar Net Present Value Net Present Value Example 1 Example 1 Suppose a consulting firm must decide between two lucrative engagements, either of which would require the firm's complete attention for two years. either of which would require the firm's complete attention for two years....
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Ch 3 - Before we start Before we start Switch off your cell...

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