# accounting

Topics: Net present value, Finance, Payback period Pages: 17 (4699 words) Published: October 12, 2013

A) PAYBACK PERIOD
We calculate the payback period for a proposed project by adding a project’s positive cash flows, one period at a time, until the sum equals the initial investment. The number of time periods it takes to cover this investment is the payback period. The main criticisms of the payback method are that cash flows after the payback period are ignored and the time value of money is not considered a payback period is calculated as :

initial investment
payback period= cash flow per period

actual cash flow- project low machine
1100 000
payback period = 500 000 = 2.2
= it will take two years and two months for the payback period. actual cash flow- project high machine
600 000 + 300 000 + 400 000 = 1 300 000
it would take three years for the payback period.

low project machine project is most liquid using payback as the liquidity measure.

B) Present value is calculated as:
PV=FV/(1+r)n
FV=future value
r=interest rate(cost of K)
n=number of periods/years

Actual cash flow -project LOW machine

a.500 000/ (1.12)1 = 446 428.57

b.500 000 / (1.12)2 = 398 596.93

c.500 000 / (1.12)3 = 355 890.12

d.500 000/ (1.12)4 = 317 759.03

Actual cash flow -project HIGH machine

a.600 000/ (1.12)1 = 535 714.28

b.300 000/ (1.12)2 = 239 158.16

c. 400 000/ (1.12)3 = 284 712.09

d.220 000/ (1.12)4 = 139 813.97

List and explain the three fundamental principles of financial management

The Importance of Cash Flow: In business, cash is what pays the bills. It is also what the firm receives in exchange for its products and services. Cash is therefore of ultimate importance, and the expectation that the firm will generate cash in the future is one of the factors that gives the firm its value.

The Effect of Timing on Cash Flows: Owners and potential investors look at when firms can expect to receive cash and when they can expect to pay out cash. All other factors being equal, the sooner companies expect to receive cash and the later they expect to pay out cash, the more valuable the firm and the higher its stock price will be.

The Influence of Risk: Risk affects value because the less certain owners and investors are about a firm's expected future cash flows, the lower they will value the company. The more certain owners and investors are about a firm's expected future cash flows, the higher they will value the company. In short, companies whose expected future cash flows are doubtful will have lower values than companies whose expected future cash flows are virtually certain.

what will Rolando's salary be in the final year of his contract 1)11 110 000 *25% = 138 875 00

2)138 87500 *25% = 173 593 75

3)173 59375 * 25% = 216 99 218.75

4)216 99 218.75 *25% = 271 240 23.44

5)271 240.23.44 *25% = 339 050 29.3

PV=FV/(1+r)n

FV=future value = 93 000 000
r=interest rate(cost of K)=0.4
n=number of periods/years =6years

93 000 000 / (1.4)6 = 12351358.7

INTRODUCTIONPAGE: 1

QUESTION 1PAGE: 2

QUESTION 2 PAGE: 3/4

QUESTION 3PAGE: 5/6

CONCLUSIONPAGE: 7

REFERENCESPAGE: 8

The objective of the assignment is to equip us the students with the knowledge of fundamental theory and practice the skills to apply in further studies. An effort has been made to maintain an understanding of the work and balance between an understanding between accounting and the ability to interpret and use the accounting terms effectively.

The aspect we are to cover in this assignment is capital budgeting, the fundamental principles of financial management as well as the time value of money.

Correia.C, Flynn.D, Uliana.E, Wormald.M....

References: • Correia.C, Flynn.D, Uliana.E, Wormald.M. Financial Management. Fifth edition. 2005. Cape Town. Juta and Co Ltd. ISBN: 0 7021 6033 4. Page no. 5-10/5-18.
• FAUL.MA, PISTORIUS.CWI, VAN VUUREN.LM, VORSTER.Q, SWANEVELDER.JJ, ACCOUNTING – AN INTRODUCTION, SIXTH EDITION. 1999.SOUTH AFRICA., BUTTERWORTH PUBLISHER
• HAIDEN.M, ACCOUNTING MAKES CENTS A CONCEPTUAL APPROCH

Please join StudyMode to read the full document