We think you have liked this presentation. If you wish to download it, please recommend it to your friends in any social system. Share buttons are a little bit lower. Thank you!
Presentation is loading. Please wait.
Published byCurtis Durdin
Modified over 2 years ago
© Mcgraw-Hill Companies, 2008 Farm Management Chapter 17 Investment Analysis
© Mcgraw-Hill Companies, 2008 Chapter Outline Time Value of Money Investment Analysis Financial Feasibility Income Taxes, Inflation, and Risk
© Mcgraw-Hill Companies, 2008 Chapter Objectives 1.Explain the time value of money and its use 2.Illustrate the process of compounding 3.Demonstrate the process of discounting 4.Discuss the payback period, simple rate of return, net present value and internal rate of return 5.Show how to apply these concepts 6.Explain how income taxes, inflation, and risk affect investment analysis
© Mcgraw-Hill Companies, 2008 Time Value of Money 1.The dollar could be invested to earn interest 2.If dollar is spent on consumption, we’d prefer to get the enjoyment now 3.Risk is also a factor as unforeseen circumstances could prevent us from getting the dollar 4.Inflation may diminish the value of the dollar over time A dollar today is preferred to a dollar in the future:
© Mcgraw-Hill Companies, 2008 Present Value and Future Value Present Value (PV): the number of dollars available or invested at the current time or the current value of some amount to be received in the future Future Value (FV): the amount to be received at some future time or the amount a present value will be worth at some future date when invested at a given interest rate
© Mcgraw-Hill Companies, 2008 More Terms Payment (PMT): number of dollars to be paid or received in a time period Interest Rate ( i ): also called the discount rate the interest rate used to find present and future values, often equal to opportunity cost of capital Time Periods ( n ): the number of time periods used to compute present and future values Annuity: a term used to describe a series of periodic payments
© Mcgraw-Hill Companies, 2008 Table 17-1 Future Value of $1,000
© Mcgraw-Hill Companies, 2008 Figure 17-1 Illustration of the concept of future value for a present value and for an annuity
© Mcgraw-Hill Companies, 2008 Figure 17-2 Relation between compounding and discounting
© Mcgraw-Hill Companies, 2008 Computing Future Value FV = PV ( 1 + i ) n FV = $1,000 ( 1 + 0.08 ) 3 = $1,259.70
© Mcgraw-Hill Companies, 2008 Future Value of an Annuity FV = PMT ( 1 + i ) n 1 i
© Mcgraw-Hill Companies, 2008 Present Value PV = FV (1 + i ) n or FV 1 (1 + i ) n
© Mcgraw-Hill Companies, 2008 Present Value of an Annuity PV = PMT 1 ( 1 + i ) -n i
© Mcgraw-Hill Companies, 2008 Figure 17-3 Illustration of the concept of present value for a future value and for an annuity
© Mcgraw-Hill Companies, 2008 Table 17-2 Value of an Annuity
© Mcgraw-Hill Companies, 2008 Investment Analysis Investment analysis, also called capital budgeting, involves determining profitability of an investment Initial cost: actual total expenditure for the investment Net cash revenues: cash receipts minus cash expenses Terminal value: usually the same as salvage value Discount rate: opportunity cost of capital
© Mcgraw-Hill Companies, 2008 Payback Period The payback period is the number of years it would take an investment to return its original cost. If net cash revenues are constant each year, the payback period (P) is: P = C E where C is original cost and E is the expected annual net cash revenue
© Mcgraw-Hill Companies, 2008 Table 17-3 Net Cash Revenues for Two $10,000 Investments no terminal value
© Mcgraw-Hill Companies, 2008 Finding Payback Period The payback period for investment A is 3.33 years ($10,000 ÷ 3) The payback for investment B is 4 years, which is found by summing the revenues until they reach $10,000.
© Mcgraw-Hill Companies, 2008 Limitations of the Payback Period The payback period is easy to calculate and identifies the investments with the most immediate cash returns. But it ignores returns after the end of the payback period as well as the timing of cash flows.
© Mcgraw-Hill Companies, 2008 Simple Rate of Return Rate of return = Investment A = Investment B = average annual net revenue initial cost $1,000 $10,000 x 100% = 10% $1,200 $10,000 x 100% = 12%
© Mcgraw-Hill Companies, 2008 Net Present Value Net Present Value (NPV) is the sum of the present values of each year’s net cash flow minus the initial investment. NPV = + + + C P 1 P 2 P n (1 + i ) 1 (1 + i ) 2 (1 + i ) n.
© Mcgraw-Hill Companies, 2008 Table 17-4 Net Present Value and Internal Rate of Return for Two Investments of $10,000 10% discount rate and no terminal values
© Mcgraw-Hill Companies, 2008 Internal Rate of Return The internal rate of return (IRR) is the discount rate that would make the NPV of an investment equal to zero. The IRR is usually calculated by computer or with a financial calculator.
© Mcgraw-Hill Companies, 2008 Annual Equivalent and Capital Recovery The annual equivalent is an annuity that has the same present value as the investment being analyzed. Investment A: $1,370 0.2638 = $361.41 Investment B: $1,272 0.2638 = $335.55 The amortization factor for 10% and 5 years is 0.2638 (Appendix Table 1)
© Mcgraw-Hill Companies, 2008 Financial Feasibility The methods presented so far analyze economic profitability Investors also need to look at financial feasibility Will the investment generate sufficient cash flow at the right times to meet required cash outflows?
© Mcgraw-Hill Companies, 2008 Table 17-5 Cash Flow Analysis $10,000 loan at 8% interest with equal principal payments
© Mcgraw-Hill Companies, 2008 Income Taxes, Inflation, and Risk Different investments may have different effects on income taxes so they should be compared on an after-tax basis If net cash revenues and terminal values are adjusted for expected inflation, the discount rate should also be adjusted Investments with higher risk should be assigned a higher discount factor
© Mcgraw-Hill Companies, 2008 Sensitivity Analysis Sensitivity analysis is a process of asking several “what if” questions. What if net cash revenues are higher or lower? What if the timing is different? What if the discount rate were higher or lower? Change one or more values and recalculate NPV and IRR.
© Mcgraw-Hill Companies, 2008 Summary The future value of a sum of money is greater than its present value because of the interest that could be earned. Investments can be analyzed using payback period, simple rate of return, net present value, and internal rate of return.
Chapter 17 Investment Analysis
AGEC 407 Investment Analysis Time value of money –$1 received today is worth more than $1 received in the future Why? –Earning potential –Risk –Inflation.
Economic Concepts Related to Appraisals. Time Value of Money The basic idea is that a dollar today is worth more than a dollar tomorrow Why? – Consumption.
Capital Budgeting & Investment Analysis Decisions on acquisition of property, plant & equipment are called capital budgeting decisions. They differ from.
Chapter 8 Long-Term (Capital Investment) Decisions.
0 CHAPTER 10 Long-Term (Capital Investment) Decisions © 2009 Cengage Learning.
Chapter 20. Describe the importance of capital investments and the capital budgeting process.
Long-Term (Capital Investment) Decisions
8- 1 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young Capital Budgeting Chapter 8.
Topic 9 Time Value of Money.
PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright.
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 Chapter Three Opportunity Cost of Capital and of Capital and Capital Budgeting.
Chapter 26 Capital Investment Decisions
Copyright © Houghton Mifflin Company. All rights reserved.1 Financial & Managerial Accounting 2002e Belverd E. Needles, Jr. Marian Powers Susan Crosson.
Opportunity Cost of Capital and Capital Budgeting Chapter Three Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.
Opportunity Cost of Capital and Capital Budgeting
Acct Chapter 10 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of.
Chapter 4. Economic Factors in Design The basis of design decisions will be economics. Designing a technically safe and sound system will be only part.
Planning for Capital Investments Chapter 16 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
©The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin Chapter Ten Planning for Capital Investments.
Copyright © 2008 Prentice Hall All rights reserved 9-1 Capital Investment Decisions and the Time Value of Money Chapter 9.
ACCTG101 Revision MODULES 10 & 11 TIME VALUE OF MONEY & CAPITAL INVESTMENT.
Capital Budgeting Net Present Value (NPV)
Concepts of Value and Return CHAPTER 2. LEARNING OBJECTIVES Understand what gives money its time value. Explain the methods of calculating present.
Capital Investment Decisions and the Time Value of Money
INVESTMENT ANALYSIS OR CAPITAL BUDGETING. What is Capital Budgeting? THE PROCESS OF PLANNING EXPENDITURES ON ASSETS WHOSE RETURN WILL EXTEND BEYOND ONE.
Copyright © 2011 Nelson Education Limited Finance for Non-Financial Managers, 6 th edition PowerPoint Slides to accompany Prepared by Pierre Bergeron,
1 Capital Budgeting. 2 n Capital Budgeting is a process used to evaluate investments in long-term or Capital Assets. n Capital Assets n have useful lives.
APPLICATIONS OF MONEY-TIME RELATIONSHIPS
10-1 Fundamental Managerial Accounting Concepts Thomas P. Edmonds Bor-Yi Tsay Philip R. Olds Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights.
1 Chapter 7 The Time Value of Money. 2 Time Value A. Process of expressing 1. The present value of $1 invested now in future terms. (Compounding) Compounding.
©2009 McGraw-Hill Ryerson Limited 1 of 37 ©2009 McGraw-Hill Ryerson Limited 9 9 The Time Value of Money ©2009 McGraw-Hill Ryerson Limited Prepared by:
Copyright © 2009 Pearson Prentice Hall. All rights reserved. Chapter 4 Time Value of Money.
CHAPTER 4 BOND PRICES, BOND YIELDS, AND INTEREST RATE RISK.
Risk, Return, and the Time Value of Money Chapter 14.
Q1 The following expression matches the interest factor of continuous compounding and m compounding. Plug r=0.2, m=4 to get x=0.205.
Present Value and… Net Present Value. Basic Assumptions: All cash payments (receipts) Certainty regarding: Amount of cash flows Timing of cash flows All.
CHAPTER 10 PowerPoint Author: LuAnn Bean, Ph.D., CPA, CIA, CFE Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution.
Planning for Capital Investments Chapter 10. Copyright © 2003 McGraw-Hill Ryerson Limited, Canada 10-2 Capital Investment Decisions The purchase of long-term.
NPV and the Time Value of Money
Chapter 4,5 Time Value of Money.
ACOT Intro/Copyright Succeeding in Business with Microsoft Excel
T9.1 Chapter Outline Chapter 9 Net Present Value and Other Investment Criteria Chapter Organization 9.1Net Present Value 9.2The Payback Rule 9.3The Discounted.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
Capital Budgeting and Investment Analysis
Capital Expenditure Decisions Chapter 16 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior.
© 2003 McGraw-Hill Ryerson Limited 9 9 Chapter The Time Value of Money McGraw-Hill Ryerson©2003 McGraw-Hill Ryerson Limited Prepared by: Terry Fegarty.
Engineering Economic Analysis Canadian Edition
©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Capital Budgeting Chapter 11.
© 2017 SlidePlayer.com Inc. All rights reserved.