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4
Capital Budgeting
Decisions
Topik Pembahasan
Plant expansion
We
Wecan
can determine
determinethethepresent
presentvalue
value
factor
factor using
usingthe
the formula
formulaoror using
using
present
presentvalue
valuetables.
tables.
1 2 3 4 5 6
Working Initial
capital investment
Incremental
operating
costs
Release of
Reduction
working
of costs
capital
Incremental
revenues
Because
Because thethe net
net present
present value
value is
is equal
equal to
to zero,
zero,
the
the attachment
attachment investment
investment provides
provides exactly
exactly
aa 10%
10% return.
return.
Present value of $1
factor for 3 years at 10%.
Present value of $1
factor for 5 years at 10%.
$104, 320
= 5.216
$20,000
Cost $300,000
Productive life 10 years
Salvage value 7,000
Replace brushes at
the end of 6 years 50,000
Salvage of old equip. 40,000
Home
Furniture
Investment
A B
Present value of cash inflows $81,000 $6,000
Investment required 80,000 5,000
Profitability index 1.01 1.20
The
The higher
higher the
the profitability
profitability index,
index, the
the
more
more desirable
desirable the
the project.
project.
$140,000
Payback period = $35,000
Ignores the
time value
of money.
Short-comings
of the Payback
Period. Ignores cash
flows after
the payback
period.
The
The simple
simple rate
rate of of return
return method
method
is
is not
not recommended
recommended for for aa variety
variety
of
of reasons,
reasons, the
the most most important
important of of
being
being that
that itit ignores
ignores thethe time
time
value
value of of money.
money.