Future Value =
(1 + periodic interest rate) to power of number of periods x initial investment
Present Value =
Future Value / (1+I) to power of n
where I = interest rate or discount factor
n = number periods in the future
Rule of 72
Take interest rate, it times time = 72
Capital Budgeting steps
Identifying Alternatives
Quantifying the alternatives
Tanking the alternatives
selecting Investments
Sunk cost
Cash flow that a company will have to bear even if the investment is not undertaken
Investment tax credit
Amounts of a credit equal to a certain percentage of the cost of an investment and for capital budgeting purposes would be considered a reduction in the initial outlay
Useful life of an asset
Estimated economic life of an asset which is the number of years an asset is expected to be productive
Depreciable life
number of years that the company will depreciate the asset and is a function of the depreciation method that I’d chosen
residual value
Present value of all future cash flows
Payback
Investment divided by the annual cash inflows
or when amount cash flow = investment
Net present value
Equates Cost of investment with present value of its future cash flows
cash inflows - initial value
Internal Rate of Return
Discount factor necessary to make investment’s net present value equal to zero
PVI =
Cash inflow / cash outflow
Calculate discount cash flows
Multiply amount by factor of discount
Npv =
Discounted cash flow - initial investment
Internal rate of return
Complex calculation to determine discount factor needed to make NPV = 0
Time value of money
Compounding
Discounting
Gross profit margin
(Gross profit/net sales)*100
37% = 37c
Net profit margin
(Net profit/ net sales) *100
Revenue
Increase in owners equity
Expenses
Decrease in owners equity
Operating activities
Cash flows relating to day-to-day activities
cf
Investing activities
Cash flows related to purchase or sale of non-current assets
cf
Financing activities
Cash flows related to firms financial structure
cf
Revenue
Direct result of selling inventory
Cost of goods sold
Costs related to getting inventory into condition and location ready for sale
gross profit
Profit earned directly from sale of inventory
Adjusted gross profit
transactions that aren’t the result of sale of inventory but are related to inventory and help in managing inventory
Other revenues
Revenues that aren’t earned at time of sale. Is not put with revenues to prevent wrong measure of Mark-up
Other expenses
Expenses not related to inventory
