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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 1342 1343 Postaudit of Investment Projects
A postaudit is a followup 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 longterm 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 1344 The Concept of Present Value
Appendix 13A Managerial Accounting 1345 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 1346 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 1347 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 1320.
Managerial Accounting 1348 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 1349 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 1320.
Managerial Accounting 1350 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.
 Spring '09
 R.DUCHARME

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