School

University of WaterlooDepartment

Accounting & Financial ManagementCourse Code

AFM102Professor

Tony AtkinsonThis

**preview**shows half of the first page. to view the full**2 pages of the document.**Chapter 11 Review

FV = investment(PV) x (1+r)^n

PV = FV x (1+r)^-n

PV = annuity x annuity present value factor (from table)

Present value of bond= PV(annuity) + PV(limp-sum)

Payments paid annuity a = PV x capital recovery factor(table)

The more the periods or the bigger the rate the less valuable the a fixed amount

of cashed received in the future will be

Income tax = profit - depreciation

Net = depreciation + income tax â€“ tax

Payback method = investment / return ( increase in profits )

Discounted payback method =

- Create a table showing each year

- Year 0 is the investment

- Each other year show the present value of the return and subtract it from

amount left to recover from investment

- Number of periods it takes to recover = the year that has amount left less

than next yearâ€™s profit + ( amount left / next yearâ€™s profit present value )

Annual depreciation = (historical cost â€“ salvage value) / asset life

Accounting rate of return = Average income / average investment

Net Present value

- Identify the period length

- Convert the cost of capital to match period

- Identify cash flows ( inflow from annuity, outflow from investment, inflow

from salvage value )

- Calculate present value of annuity , present value of salvage

- Add inflows , subtract inflows â€“ outflows

Internal rate of return

- Increase the rate of return until profit is 0

- If in between two rates

o Add lower and higher results of rates

o Result of lower rate / result of addition

o Add lower rate + result of previous calculation

Profitability Index = Present value cash inflow / present value cash outflow

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