Computing Cash Flow From Investment And Net Present Value Accounting Essay

The expected period of timeA during which an plus is utile to the mean proprietor. The economic life of an plus could be different than the existent physical life of the plus. Estimating the economic life of an plus is of import for concerns so that they can find when it is worthwhile to put in new equipment. In add-on, concerns must be after so that they have sufficient financess to buy replacings for expensive equipment once it has exceeded its utile life.

SCAP VALUE: an incidental end product of a joint procedure ; it is saleable but the gross revenues value fromA scrapA is non plenty for direction to warrant set abouting the joint procedure ; it is viewed as holding a lower gross revenues value than a byproduct ; leftover stuff that has a minimum but distinguishable disposal value.

CASH FLOWS FROM INVESTMENT: Cash flow analysis is a critical procedure for both companies and investors. It ‘s besides a complex procedure that can go forth the mean investor with the feeling that deputing security analysis to a competent fiscal adviser merely might be a good thought. Cash Flow investings are investings that provide regular monthly, quarterly, or one-year payments.A In about all hard currency flow investings, the general rule is the same ; A an investor puts up a ball amount in order to have re-occurring payments and hence, receives a return on investing. When you start to integrate hard currency flow into your portfolio, a new universe of fiscal possibilities appears at your fingertips.A These investings are structured to give dependable and reliable returns, which give you the power to be after your fiscal hereafter. Examples of hard currency flow investings:

Residential Real Estate: A The most good known signifier of hard currency flow investment is buying residential existent estate to utilize as rental property.A A In this investing, you put up a ball amount of hard currency to buy the belongings in order to have the monthly income that the rent of the belongings produces.

Tax returns: A 8-17 %

Time Horizon: A Varies.

Depreciation: In a broader economic sense, the depreciated cost for industry is the aggregative sum of capital that is “ used up ” in a given period, such as a financial twelvemonth. This value can be examined for tendencies in capital disbursement and accounting aggressiveness.A

The value of an plus cyberspace of all accumulated depreciation that has been recorded against it.

Depreciated Cost = Purchase Price ( or cost footing ) – { Accumulative Depreciation }

Depreciated cost is besides known as the “ net book value ” or “ adjusted cost footing ” .

STRAIGHT LINE METHOD OF DEPRECIATION: Straight-line method of depreciation is the most popular and simple method of depreciation. In this method, the purchase monetary value or the acquisition value of the plus is divided by the utile life of the plus after subtracting the bit value from the value of an plus. Scrap value of the assets is the value of the plus at which it can be sold after its utile life is over. In order to understand the straight-line method of depreciation better.

Net PRESENT VALUE: The Net Present Value ( NPV ) of aA Capital BudgetingA undertaking indicates the expected impact of the undertaking on the value of the house. Undertakings with a positive NPV are expected to increase the value of the house. Therefore, the NPV determination regulation specifies that allA independentA undertakings with a positive NPV should be accepted. When taking amongA reciprocally exclusiveA undertakings, the undertaking with the largest ( positive ) NPV should be selected. The NPV is calculated as the present value of the undertaking ‘s hard currency influxs minus the present value of the undertaking ‘s hard currency escapes. This relationship is expressed by the undermentioned expression:

hypertext transfer protocol: //www.zenwealth.com/BusinessFinanceOnline/CB/images/NPV.gif

where,

CFtA = the hard currency flow at clip T and

R = the cost of capital.

CALUCATION OF CASH FLOWS

Particulars

Sum

Net income before revenue enhancement and depreciation ( PBT )

— – Depreciation ( w.note )

2,00,000

— -1,53,343

Net income before revenue enhancement

— – Tax @ 50 %

46,657

— – 23,329

Net income after revenue enhancement ( PAT )

23,328

Cash influx ( each twelvemonth ) = Net income after revenue enhancement ( PAT ) + depreciation

= 23,328 + 1,53,343

= Rs.1,76,671

Terminal influx in the 7th twelvemonth = Rs.30,000 ( trash value )

Working NOTES- :

Calculation of depreciation

= Cost of works + installing cost – bit value

Economic life

= 11,00,000 + 3,400 – 30,000

7yrs

= Rs.1,53,343

CALCULATION OF NET PRESENT VALUE

Year

hard currency influx

PVF ( 10 % , N )

Entire PVF ( Rs. )

1

1,76,671

0.909

1,60,594

2

1,76,671

0.826

1,45,931

3

1,76,671

0.751

1,32,680

4

1,76,671

0.683

1,20,667

5

1,76,671

0.621

1,09,713

6

1,76,671

0.564

99,643

7

1,76,671+30,000 =2,06,671

0.513

1,06,022

Sum of influxs 8,75,250

Less: hard currency escape ( at clip 0 ) -11,03,340

( Plant cost +installation charges )

NPV ( 2,27,975 )

NPV = PRESENT VALUE OF CASH INFLOW — PRESENT VALUE OF CASH OUTFLOW

Decision

Since the NPV of the proposal is negative, the proposal needs to be rejected.