Unformatted text preview: nvestment can be viewed in two
ways—its future value or its present
value.
Present
Value Future
Value Let’s look at a situation where the
future value is known and the present
value is the unknown.
Managerial Accounting 1351 Present Value – An Example
If a bond will pay $100 in two years, what is the present value of the
$100 if an investor can earn a return of 12% on investments? Fn
P=
(1 + r)n
$100
P=
(1 + .12)2
(1
P = $79.72 This process is called discounting. We have discounted the $100 to its
present value of $79.72. The interest rate used to find the present
value is called the discount rate.
Managerial Accounting 1352 Present Value – An Example $100 × 0.797 = $79.70 present value
$100
Periods
1
2
3
4
5 10%
0.909
0.826
0.751
0.683
0.621 Rate
12%
0.893
0.797
0.712
0.636
0.567 14%
0.877
0.769
0.675
0.592
0.519 Present value factor of $1 for 2 periods at 12%.
Managerial Accounting 1353 Present Value of a Series of Cash Flows
An investment that involves a series of
identical cash flows at the end of each
year is called an annuity.
annuity $100 1 Managerial Accounting $100 $100 2 $100 3 $100 4 $100 5 6 Present Value of a Series of Cash Flows –
An Example
Lacey Inc. purchased a tract of land on which a
$60,000 payment will be due each year for the
next five years. What is the present value of this
stream of cash payments when the discount rate
is 12%? Managerial Accounting 1354 Present Value of a Series of Cash Flows –
An Example
We could solve the problem like this . . .
Present
Periods
1
2
3
4
5 Value of an Annuity
10%
12%
0.909
0.893
1.736
1.690
2.487
2.402
3.170
3.037
3.791
3.605 of $1
14%
0.877
1.647
2.322
2.914
3.433 $60,000 × 3.605 = $216,300
Managerial Accounting 1355 1356 Income Taxes in Capital
Budgeting Decisions
Appendix 13B Managerial Accounting 1357 Concept of Aftertax Cost
An expenditure net of its tax effect is known as
aftertax cost.
Here is the equation for determining the aftertax cost of any taxdeductible cash expense:
Aftertax cost
=
(net cash outflow) (1 – Tax rate) × Taxdeductible cash expense Simplifying assumptions:
• Taxable income equals net income as computed for
financial reports
• The tax rate is a flat percentage of taxable income
Managerial Accounting 1358 Aftertax Cost – An Example
Assume a company with a 30% tax rate is
contemplating investing in a training program
that will cost $60,000 per year.
We can use this equation to determine that the
aftertax cost of the training program is $42,000. Aftertax cost
=
(net cash outflow) (1 – Tax rate) × Taxdeductible cash expense $42,000 = (1 – .30) × $60,000
Managerial Accounting 1359 Aftertax Cost – An Example
The answer can also be determined by
calculating the taxable income and income tax
for two alternatives—without the training
program and with the training program. The aftertax cost of
the training program is
the same—$42,000. Managerial Accounting 1360 Aftertax Cost – An Example
The amount of net cash inflow...
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 Spring '09
 R.DUCHARME

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