notes-c14 - C 14 - BUDGETING DECISIONS notes-c14.doc...

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1 C 14 - BUDGETING DECISIONS notes-c14.doc Written by Professor Gregory M. Burbage, MBA, CPA, CMA, CFM © CHAPTER LEARNING OBJECTIVES: MAJOR: - Make calculations using and understand fully the time value of money (TVM) concepts – Appendix 14A and 14C. - Calculate the net present value (NPV). - Calculate the internal rate of return (IRR) assuming a single annuity situation only, including interpolation of the TVM tables to the nearest tenth of a percent. - Rank investments using NPV or IRR. - Calculate the pay back. - Calculate the simple rate of return. MINOR: - Identify the limiting assumptions of NPV and IRR. NOT IMPORTANT: - Learning present and future value formulas. - Inflation and capital budgeting – Appendix B. - Income taxes in capital budgeting decisions will not be covered – Appendix 14D, solely because of time constraints. This topic should be studied on your own! The Time Value of Money (TVM) concept assumes that a nominal amount of money (a given amount such as $1,000) is worth more today than the same amount at a later date because of the ability to invest that money and make it grow to a larger sum later. Therefore, the reverse is also true. A given amount later is worth less that the same amount today. Therefore, calculating the Future value is accomplished by adding the earned interest to the starting amount (principal) to arrive at the answer. Or, calculating the Present Value is accomplished by subtracting the interest from the principal to arrive at the answer. The basic overall objective of investing in long-lived assets (capital budgeting decisions) is to earn a rate of return that is equal to, or greater than, the cost of capital. The cost of capital is the interest (discount) rate used in calculating net present values.
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This note was uploaded on 01/13/2012 for the course ACCT 222 taught by Professor Staff during the Spring '11 term at Los Rios Colleges.

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notes-c14 - C 14 - BUDGETING DECISIONS notes-c14.doc...

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