Explanation Capital budgeting: Capital budgeting is a process by which the management can plan and evaluate the investment proposal of plant assets. The capital budgeting decision is crucial for the long-run financial health of a business enterprise, because the large amount of funds is committed for long period of time, at the same time the capital budgeting decisions are difficult to reverse once the funds have been committed. Time value of money: The time value is measured with the difference between an option’s current value and its intrinsic value. In other words, the value of money available at present is worth more in the future due to its potential earning capacity. Calculate the total present value of the given future cash flows as follows: In this case, the cash flows for three years is not equal, hence, the annuity method is not used to calculate the present value of cash flows. The total present value of cash flows is, Total present value of cash flows = ( Present value of cash flows for year 1 (1) + Present value of cash flows for year 2 (2) + Present value of cash flows for year 3 (3) ) = ( $ 1 , 870 + $ 2 , 619 + $ 3 , 264 ) = $ 7 , 753 . Working note (1): Calculate the present value for year 1. Present value of cash flow for year 1 } = ( Cash flow × Present value of factor at 7% for 1st year ) = ( $ 2 , 000 × 0

Horngren's Financial & Managerial Accounting, The Managerial Chapters (6th Edition)

6th Edition

ISBN: 9780134486857

Author: Tracie L. Miller-Nobles, Brenda L. Mattison, Ella Mae Matsumura

Publisher: PEARSON

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Chapter 26, Problem 13TI

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Calculate the total present value of the given future cash flows.

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Chapter 26, Problem 12TI

Chapter 26, Problem 14TI

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Chapter 26 Solutions

Horngren's Financial & Managerial Accounting, The Managerial Chapters (6th Edition)

Ch. 26 - Match the following business activities to the...Ch. 26 - Match the following business activities to the...Ch. 26 - Prob. 3TI Ch. 26 - Prob. 4TI Ch. 26 - Prob. 5TI Ch. 26 - Match the following business activities to the...Ch. 26 - Prob. 7TI Ch. 26 - Prob. 8TI Ch. 26 - Prob. 9TI Ch. 26 - Based on your answers to the above questions,...

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