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capital budget

Forums › ACCA Forums › ACCA MA Management Accounting Forums › capital budget

  • This topic has 10 replies, 5 voices, and was last updated 10 years ago by Farzana sultana.
Viewing 11 posts - 1 through 11 (of 11 total)
  • Author
    Posts
  • February 20, 2015 at 7:52 pm #229359
    daniel
    Member
    • Topics: 2
    • Replies: 5
    • ☆

    Z Co is evaluating a project which will generate cash flows of $2,600 each year in years four to
    eight. (The first amount will be received in four years from now.)
    What is the present value of the project cash flows using a discount rate of 14%?

    February 22, 2015 at 12:44 am #229562
    mrjonbain
    Moderator
    • Topics: 6
    • Replies: 2478
    • ☆☆☆☆☆

    There is more than one way of calculating the answer to this question.
    Here is one method:
    $2600×4.639=12061.4
    4.639 is annuity for 8 years at 14%.

    $2600×2.914=$7576.4
    2.914 is annuity for 4 years at 14%.
    $12061.4-$7576.4=$4485

    $4485 is present value of cash flows at this discount rate.

    February 22, 2015 at 7:06 am #229569
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Almost, but not quite.

    You should take the 8 year annuity factor and subtract the 3 years annuity factor (not 4 year) – this will leave you with 4 to 8 inclusive.

    (Daniel: I suggest you watch the free lecture on discounting where I go through examples like this.)

    February 22, 2015 at 9:13 am #229587
    daniel
    Member
    • Topics: 2
    • Replies: 5
    • ☆

    Thank you sir,
    am so grateful!!!

    February 22, 2015 at 10:38 am #229601
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    You are welcome 🙂

    February 22, 2015 at 12:24 pm #229612
    mrjonbain
    Moderator
    • Topics: 6
    • Replies: 2478
    • ☆☆☆☆☆

    Sorry for messing up the calculation.Thank you for the correction.

    February 22, 2015 at 12:34 pm #229613
    daniel
    Member
    • Topics: 2
    • Replies: 5
    • ☆

    Sir pls if i may ask, in one of your lectures, u made mention of sometin like this!! That since it started from 4 yrs to 8, u count frm the 4th yr to get your 4yrs and in counting it will be on the 7th year.pls can u verify it for me? Maybe i made a mistake in understanding it.
    thanks!!!

    February 24, 2015 at 9:51 am #229911
    Wemimo
    Member
    • Topics: 6
    • Replies: 21
    • ☆

    We should take note that first amount is from year 4, so we can not use year 8 directly in our calculation as it does not start from year 1. Here we will subtract annuity of year 8 from year 3.i.e
    Annuity for Year 8 @14%=4.639
    Annuity for Year 3 @14%=2.322
    Difference=2.317
    Present value =2600*2.317=6024.2

    February 24, 2015 at 11:20 am #229960
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Daniel:

    If you want me to answer then please ask in the Ask the Tutor Forum in future.

    What Wemimo has written is correct, although I am not sure that is what you are referring to.
    What I think you misunderstood was a question where an amount was received in each of 4 years, with the first receipt being in 4 years time.
    In that case, the receipts will be in 4 year, 5 years, 6 years, 7 years. So the last receipt will be in 7 years time. (i.e. years 4 to 7)

    February 24, 2015 at 11:27 am #229966
    Farzana sultana
    Member
    • Topics: 19
    • Replies: 43
    • ☆☆

    Hi wemimo,I could not understand. Could u plz explain y hv u taken 3 years instead of taking 4 years?

    February 24, 2015 at 11:42 am #229967
    Farzana sultana
    Member
    • Topics: 19
    • Replies: 43
    • ☆☆

    Thank you sir, now I understood.

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