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## PowerPoint Slideshow about ' Financial Analysis' - marijke-nika

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### Financial Analysis

### Future Value of an Investment

### Present Value of a Future Amount

### Present Value Factors (pf)

### Annuities

### Present Value Factors (af)

### Present Value Factor (af) for Application J.3

### Straight-Line Depreciation

### Modified Accelerated Cost Recovery System (MACRS)

### Modified Accelerated Cost Recovery System (MACRS)

### Example J.1Calculating After-Tax Cash Flows

### Example J.2 Calculating NPV

### Example J.2Calculating IRR

### Example J.2Calculating Payback Period

Supplement J

F = future value of the investment at the end of n periods

P = amount invested at the beginning, called the principal

r = periodic interest rate

r = number of time periods for which the interest compounds

The value of an investment at the end of the period over which interest is compounded.

F = P(1 + r)n

(1 + r)n

P =

where

F = future value of the investment at the end of n periods

P = amount invested at the beginning, called the principal

r = periodic interest rate (discount rate)

r = number of time periods for which the interest compounds

The amount that must be invested now to accumulate to a certain amount in the future at a specific interest rate.

Present Value Factors for a Single Payment

Number of Interest Rate (r)

Periods

(n) 0.01 0.02 0.03 0.04 0.05 0.06 0.08 0.10 0.12 0.14

1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9259 0.9091 0.8929 0.8772

2 0.9803 0.9612 0.9426 0.9246 0.9070 0.8900 0.8573 0.8264 0.7972 0.7695

3 0.9706 0.9423 0.9151 0.8890 0.8638 0.8396 0.7938 0.7513 0.7118 0.6750

4 0.9610 0.9238 0.8885 0.8548 0.8227 0.7921 0.7350 0.6830 0.6355 0.5921

5 0.9515 0.9057 0.8626 0.8219 0.7835 0.7473 0.6806 0.6209 0.5674 0.4194

6 0.9420 0.8880 0.8375 0.7903 0.7462 0.7050 0.6302 0.5645 0.5066 0.4556

7 0.9327 0.8706 0.8131 0.7599 0.7107 0.6651 0.5835 0.5132 0.4523 0.3996

8 0.9235 0.8635 0.7894 0.7307 0.6768 0.6274 0.5403 0.4665 0.4039 0.3506

9 0.9143 0.8368 0.7664 0.7026 0.6446 0.5919 0.5002 0.4241 0.3606 0.3075

10 0.9053 0.8203 0.7441 0.6756 0.6139 0.5584 0.4632 0.3855 0.3220 0.2697

Present Value Factor (pf) for Application J.2

Application J.2 using the pfFactor

(1 + r)n

F

(1 + r)n+1

P = + + …

A series of payments on a fixed amount for a specified number of years.

or P = A (af)

where P = present value of an investment

A = amount of the annuity received each year af = present value factor for an annuity

Present Value Factors of an Annuity

Number of Interest Rate (r)

Periods

(n) 0.01 0.02 0.03 0.04 0.05 0.06 0.08 0.10 0.12 0.14

1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9259 0.9091 0.8929 0.8772

2 1.9704 1.9416 1.9135 1.8861 1.8594 1.8334 1.7833 1.7355 1.6901 1.6467

3 2.9410 2.8839 2.8286 2.7751 2.7732 2.6730 2.5771 2.4869 2.4018 2.3216

4 3.9020 3.8077 3.7171 3.6299 3.5460 3.4651 3.3121 3.1699 3.0373 2.9137

5 4.8534 4.7135 4.5797 4.4518 4.3295 4.2124 3.9927 3.7908 3.6048 3.4331

6 5.7955 5.6014 5.4172 5.2421 5.0757 4.9173 4.6229 4.3553 4.1114 3.8887

7 6.7282 6.4720 6.2303 6.0021 5.7864 5.5824 5.2064 4.8684 4.5638 4.2883

8 7.6517 7.3255 7.0197 6.7327 6.4632 6.2098 5.7466 5.3349 4.9676 4.6389

9 8.5660 8.1622 7.7861 7.4353 7.1078 6.8017 6.2469 5.7590 5.3282 4.9464

10 9.4713 8.9826 8.3302 8.1109 7.7217 7.3601 6.7201 6.1446 5.6502 5.2161

(n)0.06 0.08 0.10 0.12 0.14

1 0.9434 0.9259 0.9091 0.8929 0.8772

2 1.8334 1.7833 1.7355 1.6901 1.6467

3 2.6730 2.5771 2.4869 2.4018 2.3216

4 3.4651 3.3121 3.1699 3.0373 2.9137

5 4.2124 3.9927 3.7908 3.6048 3.4331

Application J.3

Present Value of a $500 Annuity for 5 Years

P = A (af)

A = $500 for 5 years at 6%

af = 4.2124 (from table)

P = 500(4.2124) = $2,106.20

I – S

n

D =

where

D = annual depreciation

I = amount of investment

S = salvage value

n = number of years of project’s life

3-year class: tools and equipment used in research

5-year class: autos, copiers, and computers

7-year class: industrial equipment and office furniture

10-year class: longer-life equipment

Modified ACRS Depreciation Allowances

Class of Investment

Year 3-Year 5-Year 7-Year 10-Year

1 33.33 20.00 14.29 10.00

2 44.45 32.00 24.49 18.00

3 14.81 19.20 17.49 14.40

4 7.41 11.52 12.49 11.52

5 11.52 8.93 9.22

6 5.76 8.93 7.37

7 8.93 6.55

8 4.45 6.55

9 6.55

10 6.55

11 3.29

100.0% 100.0% 100.0% 100.0%

3-year class: tools and equipment used in research

5-year class: autos, copiers, and computers

7-year class: industrial equipment and office furniture

10-year class: longer-life equipment

ITEM 2008 2009 2010 2011 2012 2013 2014

Initial Information

Annual demand (salads) 11,000 11,000 11,000 11,000 11,000

Investment $16,000

Interest (discount) rate 0.14

Cash Flows

Revenue $38,500 $38,500 $38,500 $38,500 $38,500

Expenses: Variable costs 22,000 22,000 22,000 22,000 22,000

Expenses: Fixed costs 8,000 8,000 8,000 8,000 8,000

Depreciation (D) 3,200 5,120 3,072 1,843 1,843 922

Pretax income $5,300 $3,380 $5,428 $6,657 $6,657 – $922

Taxes (40%) 2,120 1,352 2,171 2,663 2,663 – 369

Net operating income (NOI) $3,180 $2,208 $3,257 $3,994 $3,994 – $533

Total cash flow (NOI + D) $6,380 $7,148 $6,329 $5,837 $5,837 $369

Local restaurant considering the addition of a salad bar:

2009: $ 6,380(0.8772) = $ 5,597

2010: $ 7,148(0.7695) = $ 5,500

2011: $ 6,329(0.6750) = $ 4,272

2012: $ 5,837(0.5921) = $ 3,456

2013: $ 5,837(0.5194) = $ 3,032

2014: $ 369(0.4556) = $ 168

NPV = ($5,597 + $5,500 + $4,272 + $3,456 + $3,032 + $168) – $16,000

NPV = $6,024

Discount Rate NPV

14% $ 6,025

18% $ 4,092

22% $ 2,425

26% $ 977

30% – $ 199

28% $ 322

2009: $ 6,380(0.8772) = $ 5,597

2010: $ 7,148(0.7695) = $ 5,500

2011: $ 6,329(0.6750) = $ 4,272

2012: $ 5,837(0.5921) = $ 3,456

2013: $ 5,837(0.5194) = $ 3,032

2014: $ 369(0.4556) = $ 168

NPV = ($5,597 + $5,500 + $4,272 + $3,456 + $3,032 + $168) – $16,000

NPV = $6,024

YEAR

ITEM 2001 2002 2003 2004 2005 2006 2007

Add after-tax cash flows to get as close as possible to without exceeding the initial investment ($16,000)

Initial Information

Annual demand (salads) 11,000 11,000 11,000 11,000 11,000

Investment $16,000

Interest (discount) rate 0.14

Cash Flows

Revenue $38,500 $38,500 $38,500 $38,500 $38,500

Expenses: Variable costs 22,000 22,000 22,000 22,000 22,000

Expenses: Fixed costs 8,000 8,000 8,000 8,000 8,000

Depreciation (D) 3,200 5,120 3,072 1,843 1,843 922

Pretax income $5,300 $3,380 $5,428 $6,657 $6,657 – $922

Taxes (40%) 2,120 1,352 2,171 2,663 2,663 – 369

Net operating income (NOI) $3,180 $2,208 $3,257 $3,994 $3,994 – $533

Total cash flow (NOI + D) $6,380 $7,148 $6,329 $5,837 $5,837 $369

$6,380 + $7,148 = $13,528 (2009 and 2010)

$16,000 – $13,528 = $2,472 (remainder for 2010)

$2,472/$6,329 = 0.39 (portion of 2010 required)

Payback Period = 2.39 years

OM ExplorerFinancial Analysis Solver

Salad Bar example:

NPV for ProjectApplication J.4

Year 1: $500

Year 2: $650

Year 3: $900

The discount rate is 12%, and the initial investment is $1,550, so the project’s NPV is:

Present value of investment (Year 0): ($1,550.00)

Present value of Year 1 cash flow: 446.40

Present value of Year 2 cash flow: 518.18

Present value of Year 3 cash flow: 640.62

Project NPV: $ 55.20

IRR for ProjectApplication J.5

Payback Period for ProjectApplication J.6

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