CAPITAL INVESTMENT ANALYSIS WITH TAXATION OBJECTIVE At the end of this lecture‚ the students should be able to: 1. Explain the nature of inflation 2. Distinguish between money cash flow and real cash flow 3. Distinguish between money and real discount rates 4. Compute impact of inflation on discounted cash flow. 5. Explain investment incentives - capital allowance‚ annual allowance initial allowance 6. Compute impact of tax on capital investment Introduction Inflation refers to persistent
Premium Inflation Net present value Corporate finance
company can choose because it is more effective at dealing effectively with periodic free cash flows that develop from the time that an asset is purchased through its life to the point where it is sold‚ ranking projects and variable rates of return through the project life. The Internal Rate of Return is an inefficient model to make decisions with because it lack the ability to account for the periodic free cash flows‚ proper ranking and variable returns from certain projects. The use of Internal Rate
Premium Net present value Internal rate of return Rate of return
ACCT 712 Final Exam 1. Net cash will be different from a company’s net income because of the changes in working capital (inventories‚ receivables‚ etc.) which is derived in the operating flows on a cash flow statement. By taking net income and making adjustments to reflect the changes‚ net cash flow from operating section will show how cash was generated. Another main reason is the translation process from accrual accounting to cash accounting because for example revenue reported on a accrual
Premium Generally Accepted Accounting Principles Cash flow Income statement
should Caledonia focus on project free cash flows as opposed to the accounting profits earned by the project when analyzing whether to undertake the project? It is important that Caledonia Company should focus on the free cash flows instead of the accounting profits. With the free cash flows that the company receives they can reinvest. To accurately analyze the timing of the benefit or cost we can examine the cash flows. The only cash flows that the company should be interested in
Premium Net present value Rate of return Cash flow
Life of the project = 10 years Annual net cash inflow = $4‚000 Salvage Value = $0 Required rate of return = 16% Item Years Amount of cash flow 16% factor Present Value of Cash flow Annual net cash flow 1 to 10 $4‚000 4.833 $19‚332 Intial Investment Now $15‚000 1 $15‚000 Net Present Value (a-b) $4‚332 Project B Initial Cost = $15‚000 Life of the project = 10 years Cash inflow = $6000 (60‚000/10 years) Salvage Value
Premium Investment Net present value Cash flow
its operations and the stock price almost doubled. However‚ in year 14 the company started a rapid descent. The company did not have enough cash flow to service its debt. Furthermore‚ the company found material misstatements in their financial statements. After analyzing the financial statements of the company it has become clear the causes of the cash flow problems. a. An important factor that indicates a company’s liquidity position is to analyze the change in current ratio and quick ratio
Premium Cash flow Income statement
company. The aim of the memo is to analyze the financial data from Chemalite and make a recommendation on the prospects of holding investments in Chemalite. Key Points • Zero liabilities • Positive net income • Negative cash flow from operating activities • Cash invested in business • Falling bank account balance • Start up expenses already incurred • Net income understates potential of business • Lifetime of patent Zero liabilities. Chemalite financed all of its start up costs through
Premium Income statement Cash flow Generally Accepted Accounting Principles
“cost of capital” is defined as a the rate of return on investment projects nesscery to have unchanged market price of a firm’s share. It may be the rate at which funds can be borrowed on new equity capital or‚ it may be the rate at which futher cash flows are discounted to measure its present values. The cost of Capital of a firm is the weighted average of the cost of the various sources of finance that have been used by it. The cost of capital to a firm is the minimum rate of return that it must
Premium Finance Corporate finance Cash flow
D) current assets minus current liabilities. 5. The ________ is the time period that elapses from the point when the firm makes the outlay to purchase raw materials on account to the point when payment is made to the supplier of the goods. A) cash conversion cycle B) average payment cycle C) average production cycle D) average collection cycle 6. A
Premium Balance sheet Generally Accepted Accounting Principles Financial ratio
In the cash basis accounting revenues are reported in the same period that cash is received from customers. When the cash is paid out expenses are reported on the income statement. In the accrual basis of accounting revenues are reported when they are earned‚ which most of the time happens before customers pay out the cash. Unlike cash basis‚ in accrual basis‚ expenses are reported on the income statement in the same period they occur. Accrual basis accounting oftentimes provides a more accurate
Premium Income statement Generally Accepted Accounting Principles Cash flow