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AFM102 Lecture Notes - Income Tax, Historical Cost, Standard Deviation

Accounting & Financial Management
Course Code
Tony Atkinson

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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 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 year’s profit + ( amount left / next year’s profit present value )
Annual depreciation = (historical cost 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 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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