A final year project for students of a Business Studies teaching programme in the Caribbean island of Jamaica.

1. COST & MANAGEMENT
ACCOUNTING
CAPITAL BUGETING

2. CAPITAL BUGETING- TIME
VALUE OF MONEY CON’T
Comment on the two (2) calls
made.
Comment on the relevance
of time as it relates to money.

3. TIME VALUE OF MONEY
DEFINITION

4. Time Value of Money
Definition Con’t
• Time value of money is the concept that the value
of a dollar to be received in future is less than the
value of a dollar on hand today (Jan, 2016).

5. Time Value of Money
Future Value
• Future Value (FV)- This is the amount of compounded interest earned at
the end of the time period plus the initial capital (Moak & Mullin, 2014).
This can be computed by using the following formula:
(1+i)n X Original Investment

6. Time Value of Money
Future Value Con’t
Example
• What is the balance in an account at the end of 10 years
if $15,000.00 is deposited today and the account earns a
5% interest rate, compounded annually?

7. Time Value of Money
Future Value Con’t
Solution
FV = (1+i)n X Original Investment
FV = (1+0.05)10 X $15,000.00
FV = ( 1.6288) X $15,000.00
FV = $24,433.41

8. Time Value of Money
Present Value
• Present Value (PV)- This is the current value of a future sum. The value is
discounted back to a given interest rate for a specified period of time. This can be
computed by using the following formula:
FV / (1+i)n

9. Time Value of Money
Present Value Con’t
Example
• In the next 10 years, the future value in Mr. John’s account will
be $15,000.00. You were then informed that the interest rate is
5% annually. What is the present value in his account?

10. Time Value of Money
Present Value Con’t
Solution
PV = FV / (1+i)n
PV = 15000.00/(1+0.05)10
PV = $15,000.00/1.6288
PV = $9208.69

11. CLASS ACTIVITY

12. Time Value of Money
Activity
CASE FUTURE
VALUE
INTEREST
RATE
NUMBER
OF
PERIODS
PRESENT
VALUE
A $10,000.00 5% 5 $?
B $? 4% 20 $256,945.85
C $5,000.00 5.5% 3 $?

13. Time Value of Money
FUTURE VALUE
• FV = (1+i)n X Original Investment
PRESENT VALUE
• PV = FV / (1+i)n

14. Time Value of Money
Activity
CASE FUTURE
VALUE
INTEREST
RATE
NUMBER
OF
PERIODS
PRESENT
VALUE
A $10,000.00 5% 5 $?
B $? 4% 20 $256,945.85
C $5,000.00 5.5% 3 $?

15. Time Value of Money
FUTURE VALUE
• FV = (1+i)n X Original Investment
PRESENT VALUE
• PV = FV / (1+i)n

16. Time Value of Money
Activity
CASE FUTURE
VALUE
INTEREST
RATE
NUMBER
OF
PERIODS
PRESENT
VALUE
A $10,000.00 5% 5 $?
B $? 4% 20 $256,945.85
C $5,000.00 5.5% 3 $?

17. Time Value of Money
Answers
CASE FUTURE
VALUE
INTEREST
RATE
NUMBER
OF
PERIODS
PRESENT
VALUE
A $10,000.00 5% 5 $7,835.26
B $563,000.00 4% 20 $256,945.85
C $5,000.00 5.5% 3 $4,258.07

18. CAPITAL BUDGETING
NET PRESENT VALUE

19. Net Present Value
Definition
Net Present Value is based on the proposition that the value created
by making an investment can be calculated by setting benefits equal
to the positive cash flows generated by the investment (Cubberly,
1989).

20. Net Present Value
Indicators
• If:
NPV>0 - Accept the investment
NPV<0 - Reject the investment
NPV = 0 - The investment is marginal

21. Net Present Value
Advantages
• Recognizes the value of money (present value of future cash flows).
• Considers the entire life and results of the project.
• Easier to compute than the Internal Rate of Return method.

22. Net Present Value
Disadvantages
• Requires estimation of cash flows over the entire life of the
project, which could be very long.
• Assumes cash flows resulting from new revenues or cost
savings are immediately reinvested at the hurdle rate of return.

23. ASSESSMENT

24. Assessment
Q- Why would one chose to receive
funds now than in the future?

25. Assessment
A- One might choose to receive the money now because
that money will be worth more now than it will in a
year’s time.

26. Assessment
•Q- Which method is better when computing
capital budgeting; Net Present Value or
Internal Rate of Return ?

27. Assessment
• Net Present Value. This is so primarily because
Internal Rate of Return uses only one discount
rate.

28. Assessment
• State whether the following calculations are true or false:
Mary deposited $10.00 in an account that pays 5% interest. How much will she
have after 10 years? 50 years? 100 years?
10 Years FV= $10.00 (1+0.05)10 = $10.00 (1.6289) = $16.29
50 Years FV= $10.00 (1+0.05)50 = $10.00 (9.4674) = $114.67
100 Years FV= $10.00 (1+0.05)100 = $10.00 (131.50) = $1,000.00

29. Answer
• 10 Years- True 50 Years- False 100 Years- False

30. THE END