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Discussing the Concepts of Present Value and Capital Finance

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Prepare a response to discuss the concepts of present value and capital finance. You will need to reflect on the concepts and assess your level of comfort with these concepts. Based on the concepts, you should assess which concepts you embrace and practice and which represent an opportunity for further personal and professional development which will enhance your effectiveness in your current place of employment and/or as your career progresses.

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The concept of present value is based on the premise that a $1 received today is greater than a $1 received in the future. It is related to the time value of money which indicates that the value of money is affected by an element of time because of possible inflationary pressures and other relevant factors.

The concept of present value has several uses:
1. It would determine how much must be saved or invested today, given certain interest (or discount) rates, in order to have the capacity for future purchases or larger investments.
2. It would allow one to decide whether present investment would be feasible, considering the estimated future earnings discounted to the present and compared to an amount spent today.
3. Securities (such as stocks and ...

Solution Summary

This solution discusses the concept of present value in 446 words with two references. Several uses of this concept are outlined in detail.

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Basic finance problems

1) Define the following terms:
a) Sunk Cost
b) Opportunity cost
c) Allocated cost

2) Is the following statement true or false. If the statement is true, where or how are these costs reflected?
"Financing costs should be ignored when estimating a project's relevant cash flows."

3) List and discuss items included in a project's initial cash outflow.

4) List and discuss items included in a project's terminal cash flow.

5) Williams Company is evaluating a project requiring a capital expenditure of $400,000. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows:

Year Net Income Net Cash Flow
1 $ 90,000 $ 250,000
2 80,000 200,000
3 40,000 100,000
4 30,000 100,000
$240,000 $650,000

The company's minimum desired rate of return for net present value analysis is 10%.

Calculate the Net Present Value of the project. Should the company go forward?

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