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Basic Methods For Making Economy Studies
Basic Methods For Making Economy Studies
8/17/12
Rate of return is a measure of the effectiveness of an investment of capital. isPrepared by: Rolly C. Ramos a financial efficiency
8/17/12
It
Conditions:
a single investment of capital at the beginning of the first year of the project life and identical revenue and cost data for each year the capital invested is the total amount of capital investment required to finance the project
Prepared by: Rolly C. Ramos 8/17/12
Example: An investment of Php270,000 can be made in a project that will produce a uniform annual revenue of Php85,400 for 5 years and then have a salvage value of 10% of the investment. Costs for operation and maintenance will be Php81,000 per year. Taxes and insurance will be 4% of the first cost per year. The company expects capital to earn not less than 25% before income taxes. Is this a desirable investment?
a single investment of capital at the beginning of the first year of the project life identical revenue and cost data for each year
? ?
Php270,000
Uniform Annual Revenue = Php85,400 Costs of operation = Php81,000/yr
Solution
8/17/12
Example: An investment of Php270,000 can be made in a project that will produce a uniform annual revenue of Php85,400 for 5 years and then have a salvage value of 10% of the investment. Costs for operation and maintenance will be Php81,000 per year. Taxes and insurance will be 4% of the first cost per year. The company expects capital to earn not less than 25% before income taxes. Is this a desirable investment?
a single investment of capital at the beginning of the first year of the project life identical revenue and cost data for each year
? ?
Php270,000
Uniform Annual Revenue = Php85,400 Costs of operation = Php81,000/yr
Solution
8/17/12
Example: An investment of Php270,000 can be made in a project that will produce a uniform annual revenue of Php85,400 for 5 years and then have a salvage value of 10% of the investment. Costs for operation and maintenance will be Php81,000 per year. Taxes and insurance will be 4% of the first cost per year. The company expects capital to earn not less than 25% before income taxes. Is this a desirable investment?
No conditions to satisfy.
Solution
8/17/12
Example: An investment of Php270,000 can be made in a project that will produce a uniform annual revenue of Php85,400 for 5 years and then have a salvage value of 10% of the investment. Costs for operation and maintenance will be Php81,000 per year. Taxes and insurance will be 4% of the first cost per year. The company expects capital to earn not less than 25% before income taxes. Is this a desirable investment?
No conditions to satisfy.
Solution
8/17/12
8/17/12
Example: An investment of Php270,000 can be made in a project that will produce a uniform annual revenue of Php85,400 for 5 years and then have a salvage value of 10% of the investment. Costs for operation and maintenance will be Php81,000 per year. Taxes and insurance will be 4% of the first cost per year. The company expects capital to earn not less than 25% before income taxes. Is this a desirable investment?
No conditions to satisfy.
Solution
8/17/12
End of Lecture
Prepared by: Rolly C. Ramos 8/17/12
Payout Period
Payout Period
Payout Period
= 2.6 years
8/17/12
27,000
185,400
185,400
185,400
Cash flow diagram of cash inflows FW of cash inflows = 27,000 + 185,400 (F/A, 25%, 5) + = 27,000 + 185,400 (8.2070) = Php1,548,580
Annual costs (excluding depreciation) 0 1 = 81,000 + 270,000 2(0.04) 3 = 91,800 4 5
91,800 270,000
91,800
91,800
91,800
91,800
FW of cash outflows
Since the FW of the net cash flows is less than zero (1,548,580 1,577,390) = -Php28,810, the Prepared by: Rolly C. Ramos 8/17/12 investment is not justified.
27,000
185,400
185,400
185,400
Cash flow diagram of cash inflows PW of cash inflows = 185,400 (P/A, 25%, 5) + 27,000 (P/F, 25%, 5) = 185,400 (2.6893) + 27,000 (0.3277) = Php506,370
Annual costs (excluding depreciation) 0 1 = 81,000 + 270,000 2(0.04) 3 = 91,800 4 5
91,800 270,000
91,800
91,800
91,800
91,800
PW of cash outflows
= =
Since the PW of the net cash flows is less than zero (506,370 516,880) = -Php10,510, the investment is Prepared 8/17/12 not justified. by: Rolly C. Ramos
Php185,400
= 29,609
= 81,000 = 10,800 = 67,500 Php188,9 09 Php3,50 9 Since the excess of annual cash inflows over annual cash outflows is less than zero (-3,509), the investment is not justified.
Prepared by: Rolly C. Ramos 8/17/12
Operation and Maintenance Taxes and Insurance (270,000 * 4%) Interest on capital (270,000 * 25%) Total Annual Cost Excess
Php185,400
= 29,609
Operation and Maintenance Taxes and Insurance (270,000 * 4%) Total Annual CostAnnual Net Profit Php63,991
Rate of Return = Php270,00 0
x 100 = 23.70%
Since the rate of return is less than 25%, the investment is not justified.
Prepared by: Rolly C. Ramos 8/17/12