University:
Sloan School of Management
Course:
15.511 | Financial Accounting
Academic year:

2023
Views:

92

Pages:

8
Author:

Sonny Collins

Corporate Accounting Recitation 5 Accounting for Long Lived Assets The matching principle in action What dollar amount to capitalize? Over what time period should the asset be depreciated? At what rate should the asset be depreciated? Formulas PPEEB = PPEBB + Acquisitions – Disposals AccDepEB = AccDepBB + Depreciation – Acc DepDisposal Proceeds from sale (cash) = Net Book Value + gain/loss Time value of money Cash flows arrive at different time periods. We cannot add cash flows today to cash flows tomorrow. Key tool to add cash flows: The interest rate, also called discount rate, cost of capital or opportunity cost. Interest rate is a convenient (standardized) way of expressing the cost of borrowing or profit of lending on a per-dollar and per unit of time basis. Future value Intuition: A dollar today is worth more than a dollar tomorrow. Why? Suppose you can invest at 10%: In one year $1 will become $1.10. Future value in one year of P invested today at rate of return r: P + rP = P(1 + r) Future value = initial payment + accumulated interest In general the future value in n years of P invested today is: FV = P(1 + r)...(1 + r) = P(1 + r)n (1 + r)n is called the future value factor. Future value Example 1: Bank pays 8% interest on 5-year CD and you deposit $10,000. What will it be worth in 5 years? $10,000 * (1 + 8%) 5 = $14,693 Example 2: Which would you rather be given? (r = 8%) (a) $100 today; (b) $125 one year from today. Calculate the future value of (a): $100*(1+8%) = 108 Present value What is the value today of $100 received a year from now? How much would I need to save today in order to get $100 in one year? Consider saving P today. One year from now you receive: P*(1+r)=100 The present value of $100 received one year from now is: 100/(1+r) Present value With an interest rate of 6%, what is the PV of $100 received one year from now? PV=100/1.06=94.34 What is the PV if r=10%? PV=100/1.1=90.91 Present value With an interest rate of 10%, what is the PV of $100 received two years from now? PV = 100/(1 + 10%) 2 In general the present value of F received n years from now is: PV = F/(1 + r) n The term 1/(1 + r) n is called present value factor. The higher the r, the longer the time horizon, the lower the present value.