ch13-AFM102s2012

New truck 32883 net present value of costs a

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Unformatted text preview: ty index = PV of net cash inflows . net investment required the higher the profitability index, the better Which approach is better & why? the profitability index is superior because it will always give the correct signal as to the relative desirability of alternatives, even if the alternatives have different lives and different patterns of earnings (text 9ce pg625) Managerial Accounting 13-42 13-43 Postaudit of Investment Projects A postaudit is a follow-up after the project has been completed postaudit to see whether or not expected results were actually realized. realized. Many organizations fail to compare the estimates made in the capital budgeting process with the actual results This is a mistake for three reasons: By comparing estimates with results, the organizations planners can identify where their estimates are wrong and try to avoid making similar mistakes in the future By assessing the skill of planners, organizations can identify and reward those who are good at making capital budgeting decisions By auditing the results of acquiring long-term assets, companies create an environment in which planners are less tempted to inflate estimates of the cash benefits associated with their projects in order to get them approved Managerial Accounting 13-44 The Concept of Present Value Appendix 13A Managerial Accounting 13-45 The Theory of Interest A dollar received today is worth more than a dollar received a year from now because you can put it in the bank today and have more than a dollar a year from now. Managerial Accounting 13-46 The Theory of Interest – An Example Assume a bank pays 8% interest on a $100 deposit made today. How much will the $100 be worth in one year? Fn = P(1 + r) n Fn = $100(1 + .08)1 Fn = $108.00 Managerial Accounting 13-47 The Theory of Interest – An Example Assume a bank pays 8% interest on a $100 deposit made today. How much will the $100 be worth in one year? Periods 1 2 3 4 5 Future Value of $1 8% 10% 1.080 1.100 1.166 1.210 1.260 1.331 1.360 1.464 1.469 1.611 12% 1.120 1.254 1.405 1.574 1.762 The $108 can also be derived by using the Future Value of $1 table shown in Exhibit 13-20. Managerial Accounting 13-48 Compound Interest – An Example What if the $108 was left in the bank for a second year? How much would the original $100 be worth at the end of the second year? Fn = P(1 + r)n 2 Fn = $100(1 + .08) Fn = $116.64 The interest that is paid in the second year on the interest earned in the first year is known as compound interest. Managerial Accounting 13-49 Compound Interest – An Example What if the $108 was left in the bank for a second year? How much would the original $100 be worth at the end of the second year? Periods 1 2 3 4 5 Future Value of $1 8% 10% 1.080 1.100 1.166 1.210 1.260 1.331 1.360 1.464 1.469 1.611 12% 1.120 1.254 1.405 1.574 1.762 The $116.60 can also be derived by using the Future Value of $1 table shown in Exhibit 13-20. Managerial Accounting 13-50 Computation of Present Value An i...
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This note was uploaded on 09/30/2013 for the course AFM 102 taught by Professor R.ducharme during the Spring '09 term at Waterloo.

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