ACCTG 101 Lecture Notes - Lecture 29: Cash Flow, Discounted Cash Flow, Investment

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ochrehornet578

14 Sep 2020

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Present value methods: an investment in fixed assets may be viewed as the acquisition of a series of net cash flows over a period of time. The period of time over which these net cash flows will be received may be an important factor in determining the value of an investment. Present value methods use both the amount and the timing of net cash flows in evaluating an investment. You would prefer to receive now because you could invest the today and earn interest for three years. As a result, the amount you would have after three years would be greater than : to illustrate, assume that on january 1, 20x1, you invest in an account that earns 12% interest compounded annually. After 1 year, the will grow to . 12 because interest of $. 12 is added to the investment. The . 12 earns 12% interest for the second year.

Related Questions

Capital Budgeting
Glacier Creek Textiles is planning to purchase new manufacturing equipment. The equipment has an acquisition cost of $100,000, an estimated useful life of five years and no residual value. The company uses a 12% rate of return to evaluate capital projects. The cash flows for the five years:

Year	Net Cash Outflows	Net Cash Inflows
Year	Amount invested	Net Cash Inflows
0	($100,000)
1		25,000
2		29,000
3		26,000
4		28,000
5		35,000


Requirements
1. Compute the accounting rate of return.
2. Compute the net present value of the investment using Excel's PV function.
3. Compute the net present value of the investment using Excel's NPV function.
4. Compute the profitability index, rounded to two decimal places.
5. Compute the internal rate of return of the investment using Excel's IRR function. Display to two decimal places, but do not round.

Excel Skills
1. Function PV
2. Function NPV
3. Function IRR

	Evaluate Glacier Creek Textiles' new manufacturing equipment.

	Data
	Annual discount Rate	0.12
	Cash Flow Year 0 (Cost)	(100,000)
	Cash Flow Year 1	25,000
	Cash Flow Year 2	29,000
	Cash Flow Year 3	26,000
	Cash Flow Year 4	28,000
	Cash Flow Year 5	35,000
	Useful Life in years	5
	Residual value	0



Requirement 1	Compute the Accounting Rate of Return

	Average annual operating income	Average amount invested	Accounting Rate of Return - ARR
	xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx	xxxxxxxxxxxxxx	xxxxxxxxxxxxxxxxx



Requirement 2	Compute the net present value of the investment using Excel's PV function.

	Period	Cash Flows
	1	(22,321)	Note: The first period is shown as an example.
	2	xxxxxxxx
	3	xxxxxxxx
	4	xxxxxxxx
	5	xxxxxxxx
	Present value of net cash flows	xxxxxxxx	Note: PV calculates the present value as a negative amount.
	Cost of Asset	xxxxxxxx
	Net Present Value	xxxxxxxx



Requirement 3	Compute the net present value of the investment using Excel's NPV function


	Present value of net cash flows	xxxxxxxxxx
	Cost of asset	xxxxxxxxxx
	Net Present Value	xxxxxxxxxx


Requirement 4	Compute the profitability index, rounded to two decimal places.

	Profitability index	xxxxxxxxxx


Requirement 5	Compute the internal rate of return of the investment using Excel's IRR function.
	Display to two decimal places, but do not round.

	IRR	xxxxxxxxx	Note: IRR requires a negative amount for the investment.

Places with xxxxx's are what needs to be filled in, and it's for excel so if I could see the references to which numbers and the formula used that would be helpful. Thank you!!

tanimpala296

1 Accounting

The following are 10 technical accounting terms.

Net present value Capital budgeting Incremental analysis Discount rate Payback period Present value Sunk cost Salvage value Return on average investment Capital budget audit Each of the following statements may (or may not) describe one of these technical terms.

For each statement, indicate the accounting term described, or answer âNoneâ if the statement does not correctly describe any of the terms.

a the examination of difference among revenue, costs, and cash flows under alternative courses of actions

b a cost incurred in the past that cannot be changed as a result of future actions

c the process of planning and evaluating proposals for investments in plan assets

d the average annual net income from an investment expresses as a percentage of the average amount invested

e the length of time necessary to recover the entire cost of an investment from resulting annual net cash flows

f the present value of investment's expected future cash flows

g the amount of the money today that is considered equivalent to the cash flows expected to take place in the future

h the required rate of return used by an investor to discount future cash flows to their present value

i often an investment's final cash flows to be considered in discounted cash flow analysis

scarletworm172

Alternative Capital Investments The investment committee ofShield Insurance Co. is evaluating two projects, office expansionand upgrade to computer servers. The projects have different usefullives, but each requires an investment of $1,239,000. The estimatednet cash flows from each project are as follows:

Alternative Capital Investments

The investment committee of Shield Insurance Co. is evaluatingtwo projects, office expansion and upgrade to computer servers. Theprojects have different useful lives, but each requires aninvestment of $1,239,000. The estimated net cash flows from eachproject are as follows:

The committee has selected a rate of 15% for purposes of netpresent value analysis. It also estimates that the residual valueat the end of each project's useful life is $0, but at the end ofthe fourth year, the office expansion's residual value would be$433,000.

Required:

If required, use the minus sign to indicate a negative netpresent value.

1. For each project, compute the net presentvalue. Use the present value of an annuity of $1 table above.Ignore the unequal lives of the projects. If required, round to thenearest dollar.

	Office Expansion	Server Upgrade
Present value of annual net cash flows	$ _________________	$ _________________
Less amount to be invested	$ _________________	$ _________________
Net present value	$ _________________	$ _________________

2. For each project, compute the net presentvalue, assuming that the office expansion is adjusted to afour-year life for purposes of analysis. Use the present value of$1 table above.

	Office Expansion	Server Upgrade
Present value of net cash flow total	$ _________________	$ _________________
Less amount to be invested	$ _________________	$ _________________
Net present value	$ _________________	$ _________________

3. The net present value of the two projectsover equal lives indicates that the _________________ has a highernet present value and would be a superior investment.

brownkoala554

ACCTG 101 Lecture Notes - Lecture 29: Cash Flow, Discounted Cash Flow, Investment

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