Financial Forecasting and Project Analysis

14473 Words Apr 9th, 2011 58 Pages
FINANCIAL FORECASTING AND CAPITAL
BUDGETING ANALYSIS

Ronald W. Spahr
Professor and Chair, Department of Finance, Insurance and Real Estate
Fogelman College of Business and Economics
University of Memphis, Memphis, TN 38152-3120
Office phone: (901) 678-1747 or 5930, Fax: (901) 678-0839 spahr@memphis.edu January 10, 2011

FINANCIAL FORECASTING AND CAPITAL
BUDGETING ANALYSIS

Course Description

This course covers fundamental concepts and techniques of financial forecasting and financial analysis including time value of money, cost of capital, capital investment decisions, product costing and lease-buy analysis.

Course Outline

I. Time Value of Money
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We wish to compute the present value. The present value is the dollar amount which, if invested at r percent compounded annually, would grow to an amount C after n years.

PV formula: Let C denote a single lump sum cash flow to be received in n years; the present value is computed as follows: PV = C(1+r)-n

t=0 n =(years) _______________________ ( C PV = C(1+r)-n

Remark: The higher the interest rate, the lower the present value.
Example: Suppose the interest rate is 8% compounded annually. This implies that the multiplicative growth factor per year is 1.08.

a. A payment of $300 will occur today. Compute the future value of this cash flow ten years from now.

0 10 _______________________ $300 ( FV = ?

Solution: FV = $300(1.08)10 = $300(2.1589) = $647.68

Intuition: Someone who can borrow and lend at 8% would be indifferent between receiving $300 today or $647.68 ten years from now.

b. A payment of $1,000 will occur ten years from now. Compute the present value of this cash flow.

t=0 10 _______________________ ( $1,000 PV = ?

Solution: PV = $1,000(1.08)-10 = $1,000(.4632) = $463.19

Intuition: Someone who can borrow and lend at 8% would be indifferent between
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