ACCT 210 1st Edition Lecture 19Outline of Last Lecture I. Capital budgetingII. Screening vs. preference decisionsIII. Identifying project cash flowsIV. Exercise 9-1Outline of Current Lecture I. Time value of moneyII. Exercise 9-4III. Exercise 9-5IV. Net present valueCurrent LectureI. Time value of moneya. Concepts:i. Single amount future valueii. Single amount present valueiii. Annuity future valueiv. Annuity present value1. Annuity is a stream of paymentsb. Future value: $1000 (present value) invested at 8% compounded for 2 yearsYear Amount Interest End year balance1 $1000 $80 $10802 $1080 $86 $1166II. Exercise 9-4a.Cash flow Present valuePurchase of new equipment -1,210,000Salvage of old equipment 180,000Sales revenue (28 *36000) * 5.3893 (table value with n = 7 and I = 7%) = 5,432,414Variable costs -(14 * 36000) * 5.3893 = - 2,716,207Additional fixed costs -99,000 * 5.3893 = -533,540Salvage of new equipment 200,000 * 5.3893 = 124,540III. Exercise 9-5a.b. Option 1 = 133,000c. Option 2 = (20,644 * 0.3624) + (17,300 * 8.7455)i. 0.3624 found on PV table with n = 15, I = 7%ii. 8.7455 found on annuity PV table with n = 14, I = 7%d. Option 2 = 158,762IV. Net present valuePresent value of net cash flowsPresent value of net cash flowsLess capital investmentLess capital investmentEquals net present valueEquals net present valueIf zero or positive, accept proposalIf zero or positive, accept proposalIf negative, reject proposalIf negative, reject
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