ACCT 210 1st Edition Lecture 19 Outline of Last Lecture I Capital budgeting II Screening vs preference decisions III Identifying project cash flows IV Exercise 9 1 Outline of Current Lecture I Time value of money II Exercise 9 4 III Exercise 9 5 IV Net present value Current Lecture I Time value of money a Concepts i Single amount future value ii Single amount present value iii Annuity future value iv Annuity present value 1 Annuity is a stream of payments b Future value 1000 present value invested at 8 compounded for 2 years Year Amount Interest End year balance 1 1000 80 1080 2 1080 86 1166 II Exercise 9 4 a Cash flow Purchase of new equipment Salvage of old equipment Sales revenue Variable costs Additional fixed costs Salvage of new equipment Present value 1 210 000 180 000 28 36000 5 3893 table value with n 7 and I 7 5 432 414 14 36000 5 3893 2 716 207 99 000 5 3893 533 540 200 000 5 3893 124 540 III Exercise 9 5 a b Option 1 133 000 c 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 2 158 762 IV Net present value Present value of net cash flows Less capital investment Equals net present value If zero or positive accept proposal If negative reject proposal
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