Business Administration - Accounting & Financial Planning FIN401 Lecture Notes - Lecture 9: Capital Budgeting, Effective Interest Rate, Liquid Oxygen

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greenmuskrat329

20 Jan 2018

School

Seneca College

Department

Business Administration - Accounting & Financial Planning

Course

Business Administration - Accounting & Financial Planning FIN401

Professor

Larry Hurst

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Document Summary

Chapter 9 - outline: basic idea of time value of money, application to capital budgeting decision and cost of capital, nominal and effective annual interest rates, annuities, canadian mortgage, summary and conclusions. Explain the concept of the time value of money. (lo1) Calculate present values, future values, and annuities based on the number of time periods involved and the going interest rate. (lo2) Calculate yield based on the time relationships between cash flows. (lo3) Capital budgeting decision and cost of capital: capital budgeting decision is about comparing current outlays with future benefits, cost of capital is the discount rate used in this comparison process. Discussion: list five different financial applications of the time value of money. Future value and present value: future value (fv) is what money today will be worth at some, present value (pv) is what money at some point in the future is point in the future. worth today.

Related Questions

have everyone done somthing like this to give me a idea how OI shpuld start off, or do have any example so make my own, please.

Capital Budgeting Project Create your own capital budgeting project.

This can be a work related, personal or hypothetical. For example determining whether you should pursue an advanced degree, purchase a house, car, change jobs, save for retirement or open a business. Prepare a paragraph or two explaining what your project is and what data you are using.

Start by drawing a time line and list costs (cash outflows). Add estimated cash inflows based on when they will occur. Determine the interest rate that will be used for discounting.

This will be your required rate of return for similar investments with the same risk.

Calculate the Net Present Value and Internal Rate of Return. Interpret the NPV results.

Was the NPV positive or negative? What does this mean? Interpret the IRR results.

Does the IRR exceed your cost of capital? Your cost of capital would be your required rate of return.

Show all calculations either by hand, calculator inputs or spreadsheet.

Summarize your results. What is your decision?

lilacrabbit436

1) Why is it beneficial to routinely compare the cost ofindividual investments to future earnings and cash flows?

To rank investments

To keep your boss happy

To practice my accounting skills

2) What is a synonym for capital investment analysis? Choosethe best answer:

Capital budgeting

Balance Sheet

Income Statement

3) What are two methods to evaluate capital investments thatdo not use present values?

Average rate of return method

Cash payback method

Double declining balance depreciation

4) What are two methods to evaluate investments that usepresent value?

Statement of cash flows

Net present value method

Internal rate of return method

5) The time value of money concept recognizes that:

A dollar today is worth more than a dollar tomorrow becausetoday's dollar can earn interest.

The Federal Reserve Board raised the interest rate.

Straight line depreciation is better than the double decliningbalance method.

6) The internal rate of return method of analysis is used toevaluate proposed capital investments. It uses present valueconcepts to compute the rate of return from the net cash flowsexpected from the investment. Are there any disadvantage of the IRRmethod?

7) Assume the average rate of return for investment A and Bamounts to 10% (A) verses 20% (B). Which investment is preferable,and why?

8) Explain how to compute the net present value of aninvestment, in your own words.

greenllama519

QUESTION 1 The time value of money refers to the issue of: A. what the value of the stream of future cash flows is today. B. why a dollar received tomorrow is worth more than a dollar received today. C. what the time required to double an amount of money. D. why people prefer to consume things at some time in the future rather than today.

QUESTION 2 The process of converting an amount given at the present time into a future value is called: A. annualizing. B. discounting. C. compounding. D. capital budgeting. 2 points

QUESTION 3 Juan Vinson is planning to buy a house in five years. He is looking to invest $25,000 today in an index mutual fund that will provide him a return of 12 percent annually. How much will he have at the end of five years? (Round to the nearest dollar.) A. $45,000 B. $28,000 C. $44,059 D. $28,530 2 points

QUESTION 4 Which of the following statements is true with respect to the present value of a future amount? A. The higher the discount rate, the higher the present value of a single sum for a given time period. B. The relation between present value and time is exponential. C. The greater the time period, the higher the present value of a single sum for a given interest rate. D. The lower the discount rate, the lower the present value of a single sum for a given time period. 2 points

QUESTION 5 Which of the following statements is true of the rule of 72? A. It can be used to determine the amount of time it takes to double an investment. B. It is fairly accurate for interest rates between 25 and 50 percent. C. It states that the time to double your money (TDM) approximately equals 72/i, where i represents the years it takes to double your investment. D. It can be used to estimate approximate compound interest earned for a period of 72 days. 2 points

QUESTION 6 The present value of future cash flows are computed by multiplying future value with the: A. discounting factor. B. compound factor. C. interest rate. D. number of periods. 2 points

QUESTION 7 The present value of multiple cash flows is: A. greater than the sum of the cash flows. B. equal to the sum of all the cash flows. C. less than the sum of the cash flows. D. higher or lower than the cash flows depending on the interest rate. 2 points

QUESTION 8 Cash flows associated with annuities are considered to be: A. an uneven cash flow stream. B. a constant cash flow stream. C. a mix of constant and uneven cash flow streams. D. a cash flow stream with decreasing trend. 2 points

QUESTION 9 The annuity transformation method is used to transform: A. a present value annuity to a future value annuity. B. a present value annuity to an annuity due. C. an ordinary annuity to an annuity due. D. a perpetuity to an annuity. 2 points

QUESTION 10 The true cost of borrowing is the: A. annual percentage rate. B. effective annual rate. C. quoted interest rate. D. periodic rate.

Business Administration - Accounting & Financial Planning FIN401 Lecture Notes - Lecture 9: Capital Budgeting, Effective Interest Rate, Liquid Oxygen

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