FNT1 Composition



SIMPLY BY: Jae Kierstin Carreira


PART B1 Identify the actual correct net cash flow pertaining to the second yr would be if all bills were as described although there was zero depreciation costs.

Here is what we realize already:

Season two Net Cash Flow with depreciation

Anticipated annual sales of new item

Expected annual costs of new product

cash expenses

depreciation expenses

Cash flow before taxation

Income tax in marginal charge

Net income

Net annual income for years displayed

3, 169, 000

2, 400, 500

380, 000

390, 1000

124, 800

265, 2 hundred

645, 2 hundred


Yr two Net Cash Flow with NO depreciation

Predicted annual revenue of new product

Expected twelve-monthly costs of recent product

cash expenses

depreciation expenses

Cash flow before income taxes

Income tax in marginal price

Net income

Net annual cashflow for years demonstrated

3, 169, 000

a couple of, 400, 1000

380, 000

770, 000

246, 400

523, six hundred

523, six hundred

You will notice our net annual cash flow to get year two is lower when we do not apply the devaluation back to the web income.

Season two twelve-monthly cash flow with depreciation

$645, 200

Yr two income with NO depreciation

$523, six-hundred

A difference of $121, six-hundred in gross annual cash flow.


PART B1a What is the impact of downgrading on net cash flow to get year two?

Applying depreciation reduces the amount you pay out in fees because it drops your taxable income.

For Example:

Y2 with downgrading Y2 without depreciation

Profits before fees

Income tax in marginal charge

Net income

390, 000

770, 000

124, 800

246, 400

265, 200

523, 600

Therefore , depreciation impacts cash flow by reducing the number of cash a small business must pay in taxes.

As you can see over, not choosing depreciation can lead to Company D paying $121, 600 extra in taxation.



Enough time value pounds

Before we can address a decision process pertaining to Net Present Value (NPV) and Internal Rate of Return (IRR) we must 1st understand the period value of money. In our circumstance we uses the time worth of $1.

A very simple explanation of this strategy is to declare a money today will be worth more than a buck in the future because you can invest your dollar today and earn money from it, this is certainly called curiosity. Invested funds that earns income with time is called " time benefit of $1”. (Horngren ou al, 2008 )

There are three elements you MUST know to find time value of $1. 1 . Primary amount (how much you are investing)

2 . Range of periods (how long with time is your investment)

three or more. Interest rate (how much is this investment gonna cost you)

There are two methods of capital investment analysis that utilize the time benefit of money; Net Present Value (NPV) and Internal Price of Go back (IRR). All of us will talk about those and how they connect with our situation next.

a few


Net present worth is the net difference between the present value of the investments net cash inflows plus the investments costs (cash outflows) (Horngren, Harrison Jr., and Oliver, 2008). We discount the net inflows using the necessary rate of return which this case 12%. This method is one of the two methods of analysis that uses the time value pounds.

For each 12 months you find the PV element for 12% return and multiply that by the cash flow. Example of a PV

graph and or chart

Next you ought to add up all the Present beliefs and then subtract total purchase and building restoration costs. Our characters are displayed on the following slide.


PART B2 (continued)

Net Present Value (NPV)= -$39, 944

Funds Flows:

12 months 1

Season 2

Season 3

12 months 4

Year 5

12% PV


Present Benefit

645, 200

0. 893

576, 164

645, two hundred

0. 797

512, 224

624, 800

0. 712

444, 858

624, 800

0. 636

397, 373

611, 2 hundred

0. 567

346, 550

611, two hundred

0. 507

309, 878

Year 7

Year almost eight

801, six-hundred

0. 452

362, 323

801, six hundred

0. 404

323, 846

Working Capital Go back

300, 000

0. 404

121, two hundred

Salvage Come back

Building restoration costs



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