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Pearson Education of Management Accounting_9

Tham khảo tài liệu 'pearson education of management accounting_9', kinh doanh - tiếp thị, quản trị kinh doanh phục vụ nhu cầu học tập, nghiên cứu và làm việc hiệu quả | NET PRESENT VALUE NPV 273 Time 000 Immediately Cost of machine 100 1 year s time Operating profit before depreciation 20 2 years time Operating profit before depreciation 40 3 years time Operating profit before depreciation 60 4 years time Operating profit before depreciation 60 5 years time Operating profit before depreciation 20 5 years time Disposal proceeds 20 We have already seen that it is not sufficient just to compare the basic cash inflows and outflows for the investment. It would be useful if we could express each of these cash flows in similar terms so that we could make a direct comparison between the sum of the inflows over time and the immediate 100 000 investment. Fortunately we can do this. Let us assume that instead of making this investment the business could make an alternative investment with similar risk and obtain a return of 20 per cent a year. Activity 8.9 We know that Billingsgate Battery Company could alternatively invest its money at a rate of 20 per cent a year. How much do you judge the present immediate value of the expected first year receipt of 20 000 to be In other words if instead of having to wait a year for the 20 000 and being deprived of the opportunity to invest it at 20 per cent you could have some money now what sum to be received now would you regard as exactly equivalent to getting 20 000 but having to wait a year for it We should obviously be happy to accept a lower amount if we could get it immediately than if we had to wait a year. This is because we could invest it at 20 per cent in the alternative project . Logically we should be prepared to accept the amount that with a year s income will grow to 20 000. If we call this amount PV for present value we can say PV PV X 20 20 000 - that is the amount plus income from investing the amount for the year equals the 20 000. 274 CHAPTER 8 MAKING CAPITAL INVESTMENT DECISIONS Activity 8.9 continued If we rearrange this equation we find PV X 1 0.2 20 000 Note that 0.2 is the same