ch13-AFM102s2012

Is known as compound interest managerial accounting

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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 13-51 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 13-52 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 13-53 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 13-54 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 13-55 13-56 Income Taxes in Capital Budgeting Decisions Appendix 13B Managerial Accounting 13-57 Concept of After-tax Cost An expenditure net of its tax effect is known as after-tax cost. Here is the equation for determining the aftertax cost of any tax-deductible cash expense: After-tax cost = (net cash outflow) (1 – Tax rate) × Tax-deductible 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 13-58 After-tax 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 after-tax cost of the training program is $42,000. After-tax cost = (net cash outflow) (1 – Tax rate) × Tax-deductible cash expense $42,000 = (1 – .30) × $60,000 Managerial Accounting 13-59 After-tax 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 after-tax cost of the training program is the same—$42,000. Managerial Accounting 13-60 After-tax Cost – An Example The amount of net cash inflow...
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