## Lease calculation excel sheet,pret de voiture garage renault,volkswagen canada lease rates - PDF Review

### Author: admin | Category: Car Loan Canada | Date: 11.03.2015

0% intro APR until November 2013 on balance transfers0% intro APR until November 2013 on purchasesNo annual fee$0 Fraud Liability if your card is lost or stolen24-hour travel assistance gives you a replacement card and cash advance24-hour roadside assistance Calculate Car PaymentFeb 12, 2004 . Excel Amortization : Excel Amortization ScheduleYou just enter the loan amount, the interest rate, and period.

Loan Calculator - Free Simple Loan Calculator for ExcelLoan Calculator for Excel - Download a simple loan calculator spreadsheet to calculate the payment, time to payoff, interest rate, or loan amount. An amortization schedule is a list of payments for a mortgage or loan, which shows how each payment is applied to both the principal amount and the interest. This spreadsheet-based calculator creates an amortization schedule for a fixed-rate loan, with optional extra payments. Start by entering the total loan amount, the annual interest rate, the number of years required to repay the loan, and how frequently the payments must be made.

The payment frequency can be annual, semi-annual, quarterly, bi-monthly, monthly, bi-weekly, or weekly. The Commercial Version allows you to use this spreadsheet in your loan or financial advisory business. The header includes a place for the borrower's name and your company info: View Screenshot. The Vertex42 logo and copyright are outside the print area so that they don't show up when you print the schedule. This spreadsheet provides a more advanced way to track actual payments than the Payment Schedule included in the standard Loan Amortization Schedule. Usually, the interest rate that you enter into an amortization calculator is the nominal annual rate. Basic amortization calculators usually assume that the payment frequency matches the compounding period. Some loans in the UK use an annual interest accrual period (annual compounding) where a monthly payment is calculated by dividing the annual payment by 12.

There are two scenarios in which you could end up with negative amortization in this spreadsheet (interest being added to the balance).

A loan payment schedule usually shows all payments and interest rounded to the nearest cent. When an amortization schedule includes rounding, the last payment usually has to be changed to make up the difference and bring the balance to zero.

With this template, it is really quite simple to handle arbitrary extra payments (prepayments or additional payments on the principal).

If you are on your last payment or the normal payment is greater than (1+rate)*balance, then pay (1+rate)*balance, otherwise make the normal payment. A balloon loan or balloon mortgage payment is a payment in which you plan to pay off your auto or mortgage loan in a big chunk after a number of small regular monthly payments.

Calculate the monthly payments, total interest, and the amount of the balloon payment for a simple loan using this Excel spreadsheet template. The spreadsheet includes an amortization and payment schedule suitable for car loans, business loans, and mortgage loans. I originally created this spreadsheet to figure out a payment schedule for a car loan or auto loan. The latest versions of the balloon loan calculator (v1.3+) take into account the fact that the regular payment and the interest are rounded to the nearest cent.

This spreadsheet can be useful as a mortgage calculator, particularly for calculating the balloon payment that is made when you sell your house after a number of years. Amortization Calculator, by Bret Whissel, An excellent web-based calculator with amortization schedule. Disclaimer: The spreadsheet and the info on this page is meant for educational purposes only. Chapter 24 examines analytical methods and reasoning that are applicable to management decision-making activities. Purchase the 2016-2017 Edition of the Managerial Accounting Textbook (Chapters 17 through 24 including problem sets) for $79.95 here. Purchase the Managerial Accounting Workbook 2016-2017 Edition (Chapters 17 through 24) for $39.95 here. Purchase the Managerial Accounting Solutions Manual 2016-2017 Edition (Chapters 17 through 24) for $44.95 here.

The overall theme of this chapter is to impart knowledge about sound principles and methods that can be employed to make sound business decisions.

One of the first things to understand about sound business judgment is that a distinction must be made between sunk costs and relevant costs.

A sunk cost relates to the historical amount that has already been expended on a project or object. During a recent ice storm, Dillaway Company’s delivery truck was involved in a traffic accident. The logic implied by the preceding discussion is to focus on incremental items that differ between the alternatives.

The preceding analysis also supports sale and replacement because the income and cash flow impacts are $2,000 better than with the repair option. Remember that the analytical techniques presented throughout this chapter are based on concrete illustrations and logic. It is virtually impossible to develop a listing of every type of business decision that will be confronted. The outsourcing decision process should include an analysis of all relevant costs and benefits.

Direct labor to staff the tech support department consists of 3 persons always available during each 8-hour shift, at an hourly rate of $12 per hour (3 persons per shift X 8 hours per shift X 3 shifts per day X 365 days per year X $12 per hour = $315,360). Pilot has been approached by Chandra Corporation, a leading provider of independent tech support services, to provide a turn-key tech support solution at the rate of $12 per support event. Mueller Building Systems manufactures customized steel components that are sold in kits for the do-it-yourself rancher. In an effort to free up capacity, Mueller contracted with Zhang Manufacturing of China to produce all roof truss components to be included in the final kits.

Notice that the analysis reveals that Mueller Building Systems will reduce costs by only $10,800,000 via outsourcing, but can easily spend more than this on purchasing the same units from Zhang. Companies must be very careful to consider qualitative issues in making decisions about outsourcing.

Hopefully rare, but not to be ignored, are risks associated with relying on suppliers in politically unstable environments; significant disruptions are not without precedent.

A business may receive a special order at a price that is significantly different from the normal pricing scheme. Lunker Lures has been approached by Walleye Pro Fishing World to produce a special run of 1,000,000 units. A potential error in special order pricing is acceptance of special orders offering the highest contribution margin per dollar of sales, while ignoring capacity constraints. At first glance, one would assume that the Fishing Town order would represent the better choice.

The better choice is to go with the Wiggler, as that option maximizes the total contribution margin. Management should not merely conclude that any unit generating a net loss is to be eliminated. Consider that some fixed costs identified with a discontinued unit may continue and must be absorbed by other units. Casa de Deportes is a mega sporting goods store occupying 80,000 square feet of space in a rented retail center. Some contend that this approach results in sacrificing long-term opportunities to enhance short-term profitability.

Much of the discussion has focused on decisions relating to near-term operations and activities.

Such capital expenditure decisions relate to construction of new facilities, large outlays for vehicles and machinery, embarking upon new product research and development, and similar items where the upfront cost is huge and the payback period will span years to come. Although the tendency is to focus on the financial dimensions, such decisions are made even more complex because they usually involve a number of nonfinancial components as well. These types of decisions involve considerable risk because they usually involve large amounts of money and extended durations of time. For instance, a student may currently invest time and money in an education; probably the student could make more money in the near term by working more hours in a paying job and devoting less time to study. Capital expenditure planning requires managers to effectively evaluate and rank alternatives. Managers naturally feel pressure to deliver in the near term, for fear of not keeping their jobs in the long term.

Fortunately, a number of analytical tools are available to bring logical and rationale decision-making processes to bear on capital expenditure decisions. The capital budgeting tools covered in the remainder of this chapter are net present value, accounting rate of return, internal rate of return, and payback method. There is an expression that “time is money.” In capital budgeting, this concept is actually measured and brought to bear on the decision process. In the context of capital budgeting, assume two alternative investments have the same upfront cost.

The starting point for understanding the time value of money is to develop an appreciation for compound interest. In this context, consider that when one spends a dollar on a soft drink, that person is actually foregoing $0.10 per year for the rest of their life (assuming a 10% interest rate). Compound interest calculations can be used to compute the amount to which an investment will grow in the future.

The annual interest each year is larger than the year before because of “compounding.” Compounding simply means that an investment is growing with accumulated interest and earning interest on previously accrued interest that becomes part of the total investment pool. An annuity due (also known as an annuity in advance) involves a level stream of payments, with the payments being made at the beginning of each time period.

Although the graphic provides a useful explanatory tool, it is a bit cumbersome to implement.

Notice the similarity to the preceding graphic, except that each year’s payment is shifted to the end of the year.

A present value of $1 table reveals predetermined values for calculating the present value of $1, based on alternative assumptions about interest rates and time periods. Be aware that most electronic spreadsheets also include functions for calculating present and future value amounts by simply completing a set of predetermined queries.

These spreadsheet functions can prove to be very efficient and effective in performing the calculations illustrated in this chapter.

The basic principles about how dollars are impacted by compound interest and present value calculations can be used to make better business decisions. The net present value (NPV) method offsets the present value of an investment’s cash inflows against the present value of the cash outflows. In the alternative, management may simply adopt a minimum required threshold rate of return that must be exceeded before an investment will be undertaken.

Even a casual observer of macroeconomic trends knows that government policies about interest rates influence investment activity and consumer behavior. To illustrate the impact of shifting interest rates, consider that Greenspan is considering a $500,000 investment that returns $128,000 at the end of each year for five years.

In computing NPV, notice that the focus is on cash flows, not “income.” Items like depreciation do not impact the cash flows and are not included in the present value calculations. As a simple illustration, assume that Mirage Company purchases a tract of land with a prolific spring-fed creek. The annual cash flow from water sales (not the net income) is incorporated into the following spreadsheet. The accounting rate of return is an alternative evaluative tool that focuses on accounting income rather than cash flows. The internal rate of return (also called the time-adjusted rate of return) is similar to NPV.

The payback method is a popular and easy method, and can be valuable when the key investment goal is to find projects where the initial investment is quickly recovered.

Capital budgeting decisions are not much different than the whole of managerial accounting.

This template will help you to get a feeling if you want to spend your money for car loan or mortgage. Fill in the loan amount, interest rate, term and start dates to calculate your loan information.

The schedule shows the remaining balance still owed after each payment is made, so you know how much you have left to pay. Then you can experiment with other payment scenarios such as making an extra payment or a balloon payment.

You can also make multiple copies of the Schedule worksheet within the same workbook, to compare different loans and scenarios. It can be used to estimate a payment schedule for a Simple Interest Loan or Simple Interest Mortgage, in which the interest accrues daily in a separate interest accrual account.

It allows you to create a payment schedule for a fixed-rate loan, with optional extra payments and an optional interest-only period.

However, when creating an amortization schedule, it is the interest rate per period that you use in the calculations, labeled rate per period in the above spreadsheet. In that case, the rate per period is simply the nominal annual interest rate divided by the number of periods per year. To determine what that balloon payment will be, you can download the free Excel template below which calculates the regular monthly payment and balloon payment for a loan period between 1 and 360 months (30 years). There is really no excuse for stepping into a business plan when it has little or no chance for success. These techniques won’t eliminate execution errors, but they will help avoid many of the judgment errors that are all too common among failing businesses. For example, one may have purchased an expensive shirt that was hopelessly shrunk in the dryer. Although the detailed analysis may be more descriptive of the entirety of the two alternatives, it can become unnecessarily burdensome.

Suppose the local truck dealer offered Dillaway a third option: a $27,000 trade-in allowance toward a new truck costing $80,000. However, success in business depends upon much more than just adapting these sound conceptual approaches to a business world that is filled with uncertain and abstract problems. Classic examples include whether or not to outsource, when to accept special orders, and whether to discontinue a product or project. Recognize that this process begins with judgment (what are the alternatives?) and ends with judgment (which alternative presents the best blend of quantitative and qualitative factors?).

Items that differ between the “make” alternative and the “buy” alternative should be studied. If outsourcing will free up capacity to be used on other services or products, then the contribution margin associated with the additional services or products also becomes a relevant item in the decision process.

The kits include all of the parts necessary to easily construct metal barns of various shapes and sizes. The capacity that was released by the outsourcing decision enabled a 10% increase in the total number of kits that were produced and sold. This results because the freed capacity will be used to produce additional contribution margin that would otherwise be foregone. Oftentimes, the costs of placing and tracking orders, freight, customs fees, commissions, or other costs can be overlooked in the analysis. Outsourcing places quality control, production scheduling, and similar issues in the hands of a third party.

The quantitative analysis will focus on the contribution margin associated with the special order.

These lures would be sold under the Walleye Wiggler brand name and would not otherwise compete with sales of Rippin’ Rogues.

But, what if one were also informed that remaining plant capacity would allow production of either 1,000,000 Walleye Wigglers or 600,000 Bass Buzzers? This important distinction gives consideration to the fact that producing a few units (with a high per-unit contribution margin) may be less profitable than producing many units (with a low per-unit contribution margin).

Such decisions can have far-reaching effects on the company, shareholders, employees, and suppliers. If Golf is discontinued, only 70% of the general and administrative costs would be eliminated, rent and depreciation would continue to be incurred, and utilities would be reduced by only half. The reallocation of unavoidable costs not only reduces overall profitability, but it also moves Camping in a precarious direction.

However, a significant portion of its success may be centered around a narrow set of products, customers, and services. For instance, a “small and inexperienced” customer that is abandoned today might eventually grow to be a major player. But, managers must also ponder occasional big-ticket expenditures that will impact many years to come. Thus, the final decision may involve consideration of architectural, engineering, marketing, regulatory, and numerous other variables. In addition, capital expenditure decisions (also called capital budgeting) are usually accompanied by a number of alternatives from which to choose.

Be on guard, as this behavioral issue can potentially foster an environment where the best long-run decisions are not always selected.

These tools require foundational knowledge in compound interest and present value techniques, as provided in the next section. The fundamental idea is that a dollar received today is worth more than a dollar to be received in the future. And, as will be shown, that annual dime of savings builds to much more because of interest that is earned on the interest.

For instance, perhaps one plans on saving for retirement by investing $5,000 at the beginning of each year for the next five years.

This means that each payment will accumulate interest for one less year, and the final payment will accumulate no interest! But, many decisions and accounting measurements will be based on a reciprocal concept known as present value. If the interest rate is 10%, presumably he or she would accept the sum that would grow to $1 in one year if it were invested at 10%.

Perhaps one is considering buying an investment that returns $5,000 per year for five years, with the first payment to be received immediately. Of course, there is a present value of an annuity due table to ease the burden of this calculation ($5,000 X 4.16897 = $20,849). The present value of an ordinary annuity table provides the necessary factor to determine that $5,000 to be received at the end of each year for a 5-year period is worth only $18,954, assuming a 10% interest rate ($5,000 X 3.79079 = $18,954). There are a variety of approaches to calculating the future or present value for such scenarios.

That value is discounted back to the beginning of Year 1 value ($259,357) by treating it as a lump sum.

This result occurs because it assumes a 5-year annuity and backs out the amount relating to the first two years, leaving only the last three years in the resulting present value factor.

The following spreadsheet shows how the net present value shifts from a positive net present value of $39,183 (when interest rates are 6%), to positive $11,067 (when interest rates are 8%), to negative $14,779 (when interest rates rise to 10%).

That is why the illustration for Markum Real Estate did not include deductions for depreciation. The annual net cash flows are then multiplied by the appropriate present value factors corresponding to an 8% discount rate. This method divides the average annual increase in income by the amount of initial investment. But, rather than working with a predetermined cost of capital, this method calculates the actual discount rate that equates the present value of a project’s cash inflows with the present value of the cash outflows. The decision rule is to accept the projects with the highest internal rates of return, so long as those rates are at least equal to the firm’s cost of capital. One would repeatedly try rates until the rate that caused the present value of cash inflows to equal the present value of cash outflows is isolated. To create an amortization schedule using Excel, you can use our free amortization calculator which is able to handle the type of rounding required of an official payment schedule.

Make sure to read the related blog article to learn how to pay off your loan earlier and save on interest. When the compound period and payment period are different (as in Canadian mortgages), a more general formula is needed (see my amortization calculation article). The way to simulate this using our Amortization Schedule is by setting both the compound period and the payment frequency to annual. The second is if you choose a compound period that is shorter than the payment period (for example, choosing a weekly compound period but making payments monthly).

Changing the Payment Amount makes more sense to me, and is the approach I use in my spreadsheets.

For fixed-rate loans, this reduces the balance and the overall interest, and can help you pay off your loan early.

Mainly because I didn't have the cash in hand to pay for the car in one lump sum, but I knew that I would after 6 months (because after 10 years of being a student, I was finally going to have a job). Please consult your financial advisor or lending institution before making any final financial decisions. For a public company that is valued based on a multiple of reported income, a dollar wasted can translate into many times that in lost market value. There would be no reason to buy a matching pair of pants because so much was invested in the shirt. Relevant items are future costs and revenues expected to differ among the alternative decisions under consideration.

Do not assume that analytical methods can be used to solve all business problems, but do not abandon them in favor of wild guesswork! Although each of these examples will be considered in more detail, it is most important to develop a general frame of reference for business decision making. For instance, some companies outsource data processing, tech support, payroll services, and similar operational aspects of running a business. As a result, unavoidable fixed overhead does not vary between the alternatives and can be disregarded. Chandra’s proposal to Pilot notes that the total expected cost of $600,000 (50,000 events X $12 per event) is less than the $635,360 currently budgeted for tech support.

In other words, if a company continues to manufacture a product in lieu of outsourcing, it foregoes the chance to produce the alternative product. Likewise, if outsourcing results in employee layoffs, expect increases in unemployment taxes, potential acceleration of pension costs, and other costs that should not be ignored in the quantitative analysis. One must continually monitor the supplier’s financial health and ability to continue to deliver quality products on a timely basis. Although global trade is increasingly reliant on English, there are still many miscues brought about by a failure to have full and complete communication. Despite the potential problems, there are decided trends suggesting that the most successful businesses learn to utilize logical outsourcing opportunities in both local and global markets.

In other words, it must be determined whether the special order sales price exceeds the variable production and selling costs associated with the special order. However, so long as Walleye Wigglers do not compete with sales of Rippin’ Rogues, and Lunker Lures has enough capacity to produce lures without increasing fixed costs, profit will be enhanced by $200,000 ($0.20 X 1,000,000) by accepting the order.

Suppose Fishing Town also placed a special order for a Bass Buzzer lure, and that special order afforded a 30% margin on a $1.00 per unit selling price.

Now, the total contribution margin on the Wiggler is $200,000 (1,000,000 units X $0.20) while the total contribution on the Buzzer is $180,000 (600,000 X 30%). Contribution margin analysis should never be divorced from consideration of factors that limit its generation.

What analytical methods should be employed to support a final decision to discontinue a business unit?

Instead, the appropriate analysis is to compare company-wide net income “with” and “without” the unit targeted for elimination.

Sometimes, an option that is best in the long term may be the least desirable in the near term, and vice versa. In addition, managers must understand the goals of business owners: What is to be optimized, short-run or long-run performance goals? This result occurs because a dollar in hand today can be invested to generate additional immediate returns. If one invests $1 for one year, at 10% interest per year, how much will he or she have at the end of the year? Future value tables provide predetermined values for a variety of such computations (see the companion website for a complete set of tables).

If the annual interest rate is 10% per year, how much will accumulate by the end of the 5-year period? The next graphic portrays a 5-year, 10%, ordinary annuity involving level payments of $5,000 each. Be sure to note the striking difference between the accumulated total under an annuity due versus an ordinary annuity ($33,578 vs.

Present value (also known as discounting) determines the current worth of cash to be received in the future.

Perhaps the safest approach is to diagram the anticipated cash flows and apply logical manipulations. Then, it will produce annual rents of $100,000 at the beginning of each of the next three years.

These include net present value, accounting rate of return, internal rate of return, and payback.

Had the up-front investment been $675,000 (instead of $575,000), the project would have a negative net present value of $22,031 ($807,828 - $829,859). In considering the decision, the interest rates on the deal likely made a big difference in how the proposed transaction was viewed. This means that the investment would make sense if the cost of capital was 6%, but not 10%. However, when applying net present value considerations in practice, one must be well versed in tax effects. Net water sales amount to $40,000 per year (for simplicity, assume this amount is collected at the end of each year and is net of all cash expenses).

This contrasts with NPV, which has a general decision rule of accepting projects with a “positive NPV,” subject to availability of capital. If an investment involves uneven cash flows, the computation requires scheduling cash inflows and outflows. For example, some investments may pay back rapidly, but have little residual cash flow after the payback period. You can use the free loan amortization schedule for mortgages, auto loans, consumer loans, and business loans. Many loan and amortization calculators, especially those used for academic or illustrative purposes, do not do any rounding.

So, depending on how your lender decides to handle the rounding, you may see slight differences between this spreadsheet, your specific payment schedule, or an online loan amortization calculator. But, the normal payment remains the same (except for the last payment required to bring the balance to zero - see below).

You may need to change this option if you are trying to match the spreadsheet up with a schedule that you received from your lender.

So, to keep the monthly payments low at first, we set up a 3-year loan with the plan to pay the loan off completely after about 6 months.

While interest-only loans may look appealing due to the low monthly payment, you still have to pay off the loan eventually.

Perhaps inventory was shipped using costly overnight express when less-expensive ground shipping would have worked as well. The amount previously spent on the shirt is no longer relevant; it is a sunk cost and should not influence future actions. Dillaway took the truck to a local dealer who offered two options: (a) repair the truck for $24,000 or (b) buy the truck “as is, where is” for $10,000. To toss in the extraneous data may help describe the situation, but it is of no benefit in attempting to guide decisions. Manufacturing companies may also find it advantageous to outsource certain aspects of production (frequently termed the “make or buy” decision). On the other hand, if some fixed factory overhead can be avoided by outsourcing, it should be taken into consideration as a relevant item. Because these applications are often of critical importance, Pilot maintains a tech support department that is available around the clock to answer questions.

Phone and computer equipment are leased under a flat-rate contract, but the agreement is cancelable without penalty. Finally, a situation like that faced by Mueller may indicate the need for additional capital expenditures to increase overall capacity. If goods are being moved internationally, goods may be subject to high freight costs, customs fees, taxes, and other costs. Rippin’ Rogues are sold to retailers across the country through an established network of manufacturers’ representatives who are paid $0.10 for each lure sold in their respective territories.

Lunker Lures is obligated to pay its representatives half of the normal rep fee for such private label transactions.

The unavoidable costs are shifted equally to the other departments (although other allocation methods could be used, the overall conclusions would not change). To experiment with a future value table, determine how much $1 would grow to in 10 periods at 5% per period. For instance, a 12% annual interest rate, with monthly compounding for two years, would require reference to the 1% column (12% annual rate equates to a monthly rate of 1%) and 24-period row (2 years equates to 24 months). They can arise in loans, retirement plans, leases, insurance settlements, tax-related calculations, and so forth.

The present value of the rents and sales price are combined to produce the total present value for all cash inflows ($807,828). This simple approach allows rapid recalculation of net present value by simply changing the value in the interest rate cell. Some noncash expenses like depreciation can reduce taxable income, which in turn reduces the amount of cash that must be paid for taxes. Interestingly, had the annual net income of $19,500 been erroneously substituted for the $29,500 annual cash flow, this analysis would have produced a negative net present value. The payback period is the point at which the cumulative net cash inflows begin to exceed the cumulative net cash outflows.

Other investments may take years to pay back and then continue to generate future returns for many more years to come. If you are a small private lender, you can download the commercial version and use it to create a repayment schedule to give to the borrower.

This spreadsheet rounds the monthly payment and the interest payment to the nearest cent, but it also includes an option to turn off the rounding (so that you can quickly compare the calculations to other calculators).

Dillaway has found an undamaged, but otherwise identical, used truck for sale on the internet for $32,000.

All that matters is that the truck can be repaired for $24,000, or the truck can be sold for $10,000 and a similar one purchased for $32,000.

As a result, companies must constantly assess the opportunities for improved results via outsourcing.

The annual depreciation charge on furniture and fixtures reflects a cost allocation of expenditures made in prior years. Even if Chandra is engaged to provide the support services, building rent will continue to be incurred (it is not relevant to the decision). Accountants (and economists and others) may use the term opportunity cost to describe the cost of foregone opportunities. Delays are often associated with the uncertain logistics of moving goods through brokers, large sea ports, and homeland security inspections.

In the near term, the business might appear more profitable by not buying a new system, but the long run may be better served by making the investment.

In addition, managers can use these tools to clearly convey justification for making certain decisions, even if they appear to be illogical in the near-term.

Although the total cash returns are the same, the time value of money is better for Alpha than Beta. If the same investment involved annual compounding, then one would refer to the 12% column and 2-period row.

Sometimes, one may be curious to learn how much a recurring stream of payments will grow to after a number of periods. Markum desires to know the present value of the anticipated cash inflows, assuming a 5% annual interest rate.

This type of cash flow manipulation is quite common in calculating present values for many investment decisions. Therefore, cash inflows and outflows associated with a particular investment should be carefully analyzed on an after-tax basis. One cannot underestimate the importance of considering tax effects on the viability of investment alternatives. The decision rule is to accept investments that exceed a particular accounting rate of return.

Although the investment with the shorter payback may be viewed as favorable, it could easily turn out to be the worst choice. Hundreds of examples can be cited, and management must be diligent to control against these types of business execution errors. In the former case, Dillaway is back in operation for $24,000; in the later, Dillaway is back in operation for $22,000 ($32,000 - $10,000). As a result, proper incremental analysis often centers on choosing the option of least incremental harm or loss.

As a result, Dillaway must now begin to consider other qualitative factors beyond those evident in the incremental cost analysis. With Alpha, the money is returned sooner, allowing for enhanced reinvestment opportunities.

Maintenance, insurance, and taxes on the building will amount to $10,000 per year, payable at the end of each of the five years. This often entails the preparation of pro forma cash flow statements and consultation with professionals well versed in the details of specific tax rules. The total cost of relevant items is much less than the $600,000 indicated by Chandra’s proposal.

As a result, by itself, the accounting rate of return can easily misidentify the best investment alternatives. Rarely are two (or more) options under consideration driven only by quantifiable mathematics. Therefore, the quantitative analysis suggests that Pilot should continue to provide its own tech support in the near future. Therefore, accountants rely on precise mathematical techniques to quantify the time value of money. This rate was selected by a higher-lower guessing process (trying each interest rate guess in cell A2).

Managers must be mindful of the impacts of decisions on production capacity, customers, employees, and other qualitative factors. This does not take as many guesses as one might think; with a little logic, the exact correct rate can be found rather quickly.

Once the building lease matures, when the furniture and fixtures are in need of replacement, or if tech support volume drops off, Chandra’s proposal might be worthy of reconsideration.

Loan Calculator - Free Simple Loan Calculator for ExcelLoan Calculator for Excel - Download a simple loan calculator spreadsheet to calculate the payment, time to payoff, interest rate, or loan amount. An amortization schedule is a list of payments for a mortgage or loan, which shows how each payment is applied to both the principal amount and the interest. This spreadsheet-based calculator creates an amortization schedule for a fixed-rate loan, with optional extra payments. Start by entering the total loan amount, the annual interest rate, the number of years required to repay the loan, and how frequently the payments must be made.

The payment frequency can be annual, semi-annual, quarterly, bi-monthly, monthly, bi-weekly, or weekly. The Commercial Version allows you to use this spreadsheet in your loan or financial advisory business. The header includes a place for the borrower's name and your company info: View Screenshot. The Vertex42 logo and copyright are outside the print area so that they don't show up when you print the schedule. This spreadsheet provides a more advanced way to track actual payments than the Payment Schedule included in the standard Loan Amortization Schedule. Usually, the interest rate that you enter into an amortization calculator is the nominal annual rate. Basic amortization calculators usually assume that the payment frequency matches the compounding period. Some loans in the UK use an annual interest accrual period (annual compounding) where a monthly payment is calculated by dividing the annual payment by 12.

There are two scenarios in which you could end up with negative amortization in this spreadsheet (interest being added to the balance).

A loan payment schedule usually shows all payments and interest rounded to the nearest cent. When an amortization schedule includes rounding, the last payment usually has to be changed to make up the difference and bring the balance to zero.

With this template, it is really quite simple to handle arbitrary extra payments (prepayments or additional payments on the principal).

If you are on your last payment or the normal payment is greater than (1+rate)*balance, then pay (1+rate)*balance, otherwise make the normal payment. A balloon loan or balloon mortgage payment is a payment in which you plan to pay off your auto or mortgage loan in a big chunk after a number of small regular monthly payments.

Calculate the monthly payments, total interest, and the amount of the balloon payment for a simple loan using this Excel spreadsheet template. The spreadsheet includes an amortization and payment schedule suitable for car loans, business loans, and mortgage loans. I originally created this spreadsheet to figure out a payment schedule for a car loan or auto loan. The latest versions of the balloon loan calculator (v1.3+) take into account the fact that the regular payment and the interest are rounded to the nearest cent.

This spreadsheet can be useful as a mortgage calculator, particularly for calculating the balloon payment that is made when you sell your house after a number of years. Amortization Calculator, by Bret Whissel, An excellent web-based calculator with amortization schedule. Disclaimer: The spreadsheet and the info on this page is meant for educational purposes only. Chapter 24 examines analytical methods and reasoning that are applicable to management decision-making activities. Purchase the 2016-2017 Edition of the Managerial Accounting Textbook (Chapters 17 through 24 including problem sets) for $79.95 here. Purchase the Managerial Accounting Workbook 2016-2017 Edition (Chapters 17 through 24) for $39.95 here. Purchase the Managerial Accounting Solutions Manual 2016-2017 Edition (Chapters 17 through 24) for $44.95 here.

The overall theme of this chapter is to impart knowledge about sound principles and methods that can be employed to make sound business decisions.

One of the first things to understand about sound business judgment is that a distinction must be made between sunk costs and relevant costs.

A sunk cost relates to the historical amount that has already been expended on a project or object. During a recent ice storm, Dillaway Company’s delivery truck was involved in a traffic accident. The logic implied by the preceding discussion is to focus on incremental items that differ between the alternatives.

The preceding analysis also supports sale and replacement because the income and cash flow impacts are $2,000 better than with the repair option. Remember that the analytical techniques presented throughout this chapter are based on concrete illustrations and logic. It is virtually impossible to develop a listing of every type of business decision that will be confronted. The outsourcing decision process should include an analysis of all relevant costs and benefits.

Direct labor to staff the tech support department consists of 3 persons always available during each 8-hour shift, at an hourly rate of $12 per hour (3 persons per shift X 8 hours per shift X 3 shifts per day X 365 days per year X $12 per hour = $315,360). Pilot has been approached by Chandra Corporation, a leading provider of independent tech support services, to provide a turn-key tech support solution at the rate of $12 per support event. Mueller Building Systems manufactures customized steel components that are sold in kits for the do-it-yourself rancher. In an effort to free up capacity, Mueller contracted with Zhang Manufacturing of China to produce all roof truss components to be included in the final kits.

Notice that the analysis reveals that Mueller Building Systems will reduce costs by only $10,800,000 via outsourcing, but can easily spend more than this on purchasing the same units from Zhang. Companies must be very careful to consider qualitative issues in making decisions about outsourcing.

Hopefully rare, but not to be ignored, are risks associated with relying on suppliers in politically unstable environments; significant disruptions are not without precedent.

A business may receive a special order at a price that is significantly different from the normal pricing scheme. Lunker Lures has been approached by Walleye Pro Fishing World to produce a special run of 1,000,000 units. A potential error in special order pricing is acceptance of special orders offering the highest contribution margin per dollar of sales, while ignoring capacity constraints. At first glance, one would assume that the Fishing Town order would represent the better choice.

The better choice is to go with the Wiggler, as that option maximizes the total contribution margin. Management should not merely conclude that any unit generating a net loss is to be eliminated. Consider that some fixed costs identified with a discontinued unit may continue and must be absorbed by other units. Casa de Deportes is a mega sporting goods store occupying 80,000 square feet of space in a rented retail center. Some contend that this approach results in sacrificing long-term opportunities to enhance short-term profitability.

Much of the discussion has focused on decisions relating to near-term operations and activities.

Such capital expenditure decisions relate to construction of new facilities, large outlays for vehicles and machinery, embarking upon new product research and development, and similar items where the upfront cost is huge and the payback period will span years to come. Although the tendency is to focus on the financial dimensions, such decisions are made even more complex because they usually involve a number of nonfinancial components as well. These types of decisions involve considerable risk because they usually involve large amounts of money and extended durations of time. For instance, a student may currently invest time and money in an education; probably the student could make more money in the near term by working more hours in a paying job and devoting less time to study. Capital expenditure planning requires managers to effectively evaluate and rank alternatives. Managers naturally feel pressure to deliver in the near term, for fear of not keeping their jobs in the long term.

Fortunately, a number of analytical tools are available to bring logical and rationale decision-making processes to bear on capital expenditure decisions. The capital budgeting tools covered in the remainder of this chapter are net present value, accounting rate of return, internal rate of return, and payback method. There is an expression that “time is money.” In capital budgeting, this concept is actually measured and brought to bear on the decision process. In the context of capital budgeting, assume two alternative investments have the same upfront cost.

The starting point for understanding the time value of money is to develop an appreciation for compound interest. In this context, consider that when one spends a dollar on a soft drink, that person is actually foregoing $0.10 per year for the rest of their life (assuming a 10% interest rate). Compound interest calculations can be used to compute the amount to which an investment will grow in the future.

The annual interest each year is larger than the year before because of “compounding.” Compounding simply means that an investment is growing with accumulated interest and earning interest on previously accrued interest that becomes part of the total investment pool. An annuity due (also known as an annuity in advance) involves a level stream of payments, with the payments being made at the beginning of each time period.

Although the graphic provides a useful explanatory tool, it is a bit cumbersome to implement.

Notice the similarity to the preceding graphic, except that each year’s payment is shifted to the end of the year.

A present value of $1 table reveals predetermined values for calculating the present value of $1, based on alternative assumptions about interest rates and time periods. Be aware that most electronic spreadsheets also include functions for calculating present and future value amounts by simply completing a set of predetermined queries.

These spreadsheet functions can prove to be very efficient and effective in performing the calculations illustrated in this chapter.

The basic principles about how dollars are impacted by compound interest and present value calculations can be used to make better business decisions. The net present value (NPV) method offsets the present value of an investment’s cash inflows against the present value of the cash outflows. In the alternative, management may simply adopt a minimum required threshold rate of return that must be exceeded before an investment will be undertaken.

Even a casual observer of macroeconomic trends knows that government policies about interest rates influence investment activity and consumer behavior. To illustrate the impact of shifting interest rates, consider that Greenspan is considering a $500,000 investment that returns $128,000 at the end of each year for five years.

In computing NPV, notice that the focus is on cash flows, not “income.” Items like depreciation do not impact the cash flows and are not included in the present value calculations. As a simple illustration, assume that Mirage Company purchases a tract of land with a prolific spring-fed creek. The annual cash flow from water sales (not the net income) is incorporated into the following spreadsheet. The accounting rate of return is an alternative evaluative tool that focuses on accounting income rather than cash flows. The internal rate of return (also called the time-adjusted rate of return) is similar to NPV.

The payback method is a popular and easy method, and can be valuable when the key investment goal is to find projects where the initial investment is quickly recovered.

Capital budgeting decisions are not much different than the whole of managerial accounting.

This template will help you to get a feeling if you want to spend your money for car loan or mortgage. Fill in the loan amount, interest rate, term and start dates to calculate your loan information.

The schedule shows the remaining balance still owed after each payment is made, so you know how much you have left to pay. Then you can experiment with other payment scenarios such as making an extra payment or a balloon payment.

You can also make multiple copies of the Schedule worksheet within the same workbook, to compare different loans and scenarios. It can be used to estimate a payment schedule for a Simple Interest Loan or Simple Interest Mortgage, in which the interest accrues daily in a separate interest accrual account.

It allows you to create a payment schedule for a fixed-rate loan, with optional extra payments and an optional interest-only period.

However, when creating an amortization schedule, it is the interest rate per period that you use in the calculations, labeled rate per period in the above spreadsheet. In that case, the rate per period is simply the nominal annual interest rate divided by the number of periods per year. To determine what that balloon payment will be, you can download the free Excel template below which calculates the regular monthly payment and balloon payment for a loan period between 1 and 360 months (30 years). There is really no excuse for stepping into a business plan when it has little or no chance for success. These techniques won’t eliminate execution errors, but they will help avoid many of the judgment errors that are all too common among failing businesses. For example, one may have purchased an expensive shirt that was hopelessly shrunk in the dryer. Although the detailed analysis may be more descriptive of the entirety of the two alternatives, it can become unnecessarily burdensome.

Suppose the local truck dealer offered Dillaway a third option: a $27,000 trade-in allowance toward a new truck costing $80,000. However, success in business depends upon much more than just adapting these sound conceptual approaches to a business world that is filled with uncertain and abstract problems. Classic examples include whether or not to outsource, when to accept special orders, and whether to discontinue a product or project. Recognize that this process begins with judgment (what are the alternatives?) and ends with judgment (which alternative presents the best blend of quantitative and qualitative factors?).

Items that differ between the “make” alternative and the “buy” alternative should be studied. If outsourcing will free up capacity to be used on other services or products, then the contribution margin associated with the additional services or products also becomes a relevant item in the decision process.

The kits include all of the parts necessary to easily construct metal barns of various shapes and sizes. The capacity that was released by the outsourcing decision enabled a 10% increase in the total number of kits that were produced and sold. This results because the freed capacity will be used to produce additional contribution margin that would otherwise be foregone. Oftentimes, the costs of placing and tracking orders, freight, customs fees, commissions, or other costs can be overlooked in the analysis. Outsourcing places quality control, production scheduling, and similar issues in the hands of a third party.

The quantitative analysis will focus on the contribution margin associated with the special order.

These lures would be sold under the Walleye Wiggler brand name and would not otherwise compete with sales of Rippin’ Rogues.

But, what if one were also informed that remaining plant capacity would allow production of either 1,000,000 Walleye Wigglers or 600,000 Bass Buzzers? This important distinction gives consideration to the fact that producing a few units (with a high per-unit contribution margin) may be less profitable than producing many units (with a low per-unit contribution margin).

Such decisions can have far-reaching effects on the company, shareholders, employees, and suppliers. If Golf is discontinued, only 70% of the general and administrative costs would be eliminated, rent and depreciation would continue to be incurred, and utilities would be reduced by only half. The reallocation of unavoidable costs not only reduces overall profitability, but it also moves Camping in a precarious direction.

However, a significant portion of its success may be centered around a narrow set of products, customers, and services. For instance, a “small and inexperienced” customer that is abandoned today might eventually grow to be a major player. But, managers must also ponder occasional big-ticket expenditures that will impact many years to come. Thus, the final decision may involve consideration of architectural, engineering, marketing, regulatory, and numerous other variables. In addition, capital expenditure decisions (also called capital budgeting) are usually accompanied by a number of alternatives from which to choose.

Be on guard, as this behavioral issue can potentially foster an environment where the best long-run decisions are not always selected.

These tools require foundational knowledge in compound interest and present value techniques, as provided in the next section. The fundamental idea is that a dollar received today is worth more than a dollar to be received in the future. And, as will be shown, that annual dime of savings builds to much more because of interest that is earned on the interest.

For instance, perhaps one plans on saving for retirement by investing $5,000 at the beginning of each year for the next five years.

This means that each payment will accumulate interest for one less year, and the final payment will accumulate no interest! But, many decisions and accounting measurements will be based on a reciprocal concept known as present value. If the interest rate is 10%, presumably he or she would accept the sum that would grow to $1 in one year if it were invested at 10%.

Perhaps one is considering buying an investment that returns $5,000 per year for five years, with the first payment to be received immediately. Of course, there is a present value of an annuity due table to ease the burden of this calculation ($5,000 X 4.16897 = $20,849). The present value of an ordinary annuity table provides the necessary factor to determine that $5,000 to be received at the end of each year for a 5-year period is worth only $18,954, assuming a 10% interest rate ($5,000 X 3.79079 = $18,954). There are a variety of approaches to calculating the future or present value for such scenarios.

That value is discounted back to the beginning of Year 1 value ($259,357) by treating it as a lump sum.

This result occurs because it assumes a 5-year annuity and backs out the amount relating to the first two years, leaving only the last three years in the resulting present value factor.

The following spreadsheet shows how the net present value shifts from a positive net present value of $39,183 (when interest rates are 6%), to positive $11,067 (when interest rates are 8%), to negative $14,779 (when interest rates rise to 10%).

That is why the illustration for Markum Real Estate did not include deductions for depreciation. The annual net cash flows are then multiplied by the appropriate present value factors corresponding to an 8% discount rate. This method divides the average annual increase in income by the amount of initial investment. But, rather than working with a predetermined cost of capital, this method calculates the actual discount rate that equates the present value of a project’s cash inflows with the present value of the cash outflows. The decision rule is to accept the projects with the highest internal rates of return, so long as those rates are at least equal to the firm’s cost of capital. One would repeatedly try rates until the rate that caused the present value of cash inflows to equal the present value of cash outflows is isolated. To create an amortization schedule using Excel, you can use our free amortization calculator which is able to handle the type of rounding required of an official payment schedule.

Make sure to read the related blog article to learn how to pay off your loan earlier and save on interest. When the compound period and payment period are different (as in Canadian mortgages), a more general formula is needed (see my amortization calculation article). The way to simulate this using our Amortization Schedule is by setting both the compound period and the payment frequency to annual. The second is if you choose a compound period that is shorter than the payment period (for example, choosing a weekly compound period but making payments monthly).

Changing the Payment Amount makes more sense to me, and is the approach I use in my spreadsheets.

For fixed-rate loans, this reduces the balance and the overall interest, and can help you pay off your loan early.

Mainly because I didn't have the cash in hand to pay for the car in one lump sum, but I knew that I would after 6 months (because after 10 years of being a student, I was finally going to have a job). Please consult your financial advisor or lending institution before making any final financial decisions. For a public company that is valued based on a multiple of reported income, a dollar wasted can translate into many times that in lost market value. There would be no reason to buy a matching pair of pants because so much was invested in the shirt. Relevant items are future costs and revenues expected to differ among the alternative decisions under consideration.

Do not assume that analytical methods can be used to solve all business problems, but do not abandon them in favor of wild guesswork! Although each of these examples will be considered in more detail, it is most important to develop a general frame of reference for business decision making. For instance, some companies outsource data processing, tech support, payroll services, and similar operational aspects of running a business. As a result, unavoidable fixed overhead does not vary between the alternatives and can be disregarded. Chandra’s proposal to Pilot notes that the total expected cost of $600,000 (50,000 events X $12 per event) is less than the $635,360 currently budgeted for tech support.

In other words, if a company continues to manufacture a product in lieu of outsourcing, it foregoes the chance to produce the alternative product. Likewise, if outsourcing results in employee layoffs, expect increases in unemployment taxes, potential acceleration of pension costs, and other costs that should not be ignored in the quantitative analysis. One must continually monitor the supplier’s financial health and ability to continue to deliver quality products on a timely basis. Although global trade is increasingly reliant on English, there are still many miscues brought about by a failure to have full and complete communication. Despite the potential problems, there are decided trends suggesting that the most successful businesses learn to utilize logical outsourcing opportunities in both local and global markets.

In other words, it must be determined whether the special order sales price exceeds the variable production and selling costs associated with the special order. However, so long as Walleye Wigglers do not compete with sales of Rippin’ Rogues, and Lunker Lures has enough capacity to produce lures without increasing fixed costs, profit will be enhanced by $200,000 ($0.20 X 1,000,000) by accepting the order.

Suppose Fishing Town also placed a special order for a Bass Buzzer lure, and that special order afforded a 30% margin on a $1.00 per unit selling price.

Now, the total contribution margin on the Wiggler is $200,000 (1,000,000 units X $0.20) while the total contribution on the Buzzer is $180,000 (600,000 X 30%). Contribution margin analysis should never be divorced from consideration of factors that limit its generation.

What analytical methods should be employed to support a final decision to discontinue a business unit?

Instead, the appropriate analysis is to compare company-wide net income “with” and “without” the unit targeted for elimination.

Sometimes, an option that is best in the long term may be the least desirable in the near term, and vice versa. In addition, managers must understand the goals of business owners: What is to be optimized, short-run or long-run performance goals? This result occurs because a dollar in hand today can be invested to generate additional immediate returns. If one invests $1 for one year, at 10% interest per year, how much will he or she have at the end of the year? Future value tables provide predetermined values for a variety of such computations (see the companion website for a complete set of tables).

If the annual interest rate is 10% per year, how much will accumulate by the end of the 5-year period? The next graphic portrays a 5-year, 10%, ordinary annuity involving level payments of $5,000 each. Be sure to note the striking difference between the accumulated total under an annuity due versus an ordinary annuity ($33,578 vs.

Present value (also known as discounting) determines the current worth of cash to be received in the future.

Perhaps the safest approach is to diagram the anticipated cash flows and apply logical manipulations. Then, it will produce annual rents of $100,000 at the beginning of each of the next three years.

These include net present value, accounting rate of return, internal rate of return, and payback.

Had the up-front investment been $675,000 (instead of $575,000), the project would have a negative net present value of $22,031 ($807,828 - $829,859). In considering the decision, the interest rates on the deal likely made a big difference in how the proposed transaction was viewed. This means that the investment would make sense if the cost of capital was 6%, but not 10%. However, when applying net present value considerations in practice, one must be well versed in tax effects. Net water sales amount to $40,000 per year (for simplicity, assume this amount is collected at the end of each year and is net of all cash expenses).

This contrasts with NPV, which has a general decision rule of accepting projects with a “positive NPV,” subject to availability of capital. If an investment involves uneven cash flows, the computation requires scheduling cash inflows and outflows. For example, some investments may pay back rapidly, but have little residual cash flow after the payback period. You can use the free loan amortization schedule for mortgages, auto loans, consumer loans, and business loans. Many loan and amortization calculators, especially those used for academic or illustrative purposes, do not do any rounding.

So, depending on how your lender decides to handle the rounding, you may see slight differences between this spreadsheet, your specific payment schedule, or an online loan amortization calculator. But, the normal payment remains the same (except for the last payment required to bring the balance to zero - see below).

You may need to change this option if you are trying to match the spreadsheet up with a schedule that you received from your lender.

So, to keep the monthly payments low at first, we set up a 3-year loan with the plan to pay the loan off completely after about 6 months.

While interest-only loans may look appealing due to the low monthly payment, you still have to pay off the loan eventually.

Perhaps inventory was shipped using costly overnight express when less-expensive ground shipping would have worked as well. The amount previously spent on the shirt is no longer relevant; it is a sunk cost and should not influence future actions. Dillaway took the truck to a local dealer who offered two options: (a) repair the truck for $24,000 or (b) buy the truck “as is, where is” for $10,000. To toss in the extraneous data may help describe the situation, but it is of no benefit in attempting to guide decisions. Manufacturing companies may also find it advantageous to outsource certain aspects of production (frequently termed the “make or buy” decision). On the other hand, if some fixed factory overhead can be avoided by outsourcing, it should be taken into consideration as a relevant item. Because these applications are often of critical importance, Pilot maintains a tech support department that is available around the clock to answer questions.

Phone and computer equipment are leased under a flat-rate contract, but the agreement is cancelable without penalty. Finally, a situation like that faced by Mueller may indicate the need for additional capital expenditures to increase overall capacity. If goods are being moved internationally, goods may be subject to high freight costs, customs fees, taxes, and other costs. Rippin’ Rogues are sold to retailers across the country through an established network of manufacturers’ representatives who are paid $0.10 for each lure sold in their respective territories.

Lunker Lures is obligated to pay its representatives half of the normal rep fee for such private label transactions.

The unavoidable costs are shifted equally to the other departments (although other allocation methods could be used, the overall conclusions would not change). To experiment with a future value table, determine how much $1 would grow to in 10 periods at 5% per period. For instance, a 12% annual interest rate, with monthly compounding for two years, would require reference to the 1% column (12% annual rate equates to a monthly rate of 1%) and 24-period row (2 years equates to 24 months). They can arise in loans, retirement plans, leases, insurance settlements, tax-related calculations, and so forth.

The present value of the rents and sales price are combined to produce the total present value for all cash inflows ($807,828). This simple approach allows rapid recalculation of net present value by simply changing the value in the interest rate cell. Some noncash expenses like depreciation can reduce taxable income, which in turn reduces the amount of cash that must be paid for taxes. Interestingly, had the annual net income of $19,500 been erroneously substituted for the $29,500 annual cash flow, this analysis would have produced a negative net present value. The payback period is the point at which the cumulative net cash inflows begin to exceed the cumulative net cash outflows.

Other investments may take years to pay back and then continue to generate future returns for many more years to come. If you are a small private lender, you can download the commercial version and use it to create a repayment schedule to give to the borrower.

This spreadsheet rounds the monthly payment and the interest payment to the nearest cent, but it also includes an option to turn off the rounding (so that you can quickly compare the calculations to other calculators).

Dillaway has found an undamaged, but otherwise identical, used truck for sale on the internet for $32,000.

All that matters is that the truck can be repaired for $24,000, or the truck can be sold for $10,000 and a similar one purchased for $32,000.

As a result, companies must constantly assess the opportunities for improved results via outsourcing.

The annual depreciation charge on furniture and fixtures reflects a cost allocation of expenditures made in prior years. Even if Chandra is engaged to provide the support services, building rent will continue to be incurred (it is not relevant to the decision). Accountants (and economists and others) may use the term opportunity cost to describe the cost of foregone opportunities. Delays are often associated with the uncertain logistics of moving goods through brokers, large sea ports, and homeland security inspections.

In the near term, the business might appear more profitable by not buying a new system, but the long run may be better served by making the investment.

In addition, managers can use these tools to clearly convey justification for making certain decisions, even if they appear to be illogical in the near-term.

Although the total cash returns are the same, the time value of money is better for Alpha than Beta. If the same investment involved annual compounding, then one would refer to the 12% column and 2-period row.

Sometimes, one may be curious to learn how much a recurring stream of payments will grow to after a number of periods. Markum desires to know the present value of the anticipated cash inflows, assuming a 5% annual interest rate.

This type of cash flow manipulation is quite common in calculating present values for many investment decisions. Therefore, cash inflows and outflows associated with a particular investment should be carefully analyzed on an after-tax basis. One cannot underestimate the importance of considering tax effects on the viability of investment alternatives. The decision rule is to accept investments that exceed a particular accounting rate of return.

Although the investment with the shorter payback may be viewed as favorable, it could easily turn out to be the worst choice. Hundreds of examples can be cited, and management must be diligent to control against these types of business execution errors. In the former case, Dillaway is back in operation for $24,000; in the later, Dillaway is back in operation for $22,000 ($32,000 - $10,000). As a result, proper incremental analysis often centers on choosing the option of least incremental harm or loss.

As a result, Dillaway must now begin to consider other qualitative factors beyond those evident in the incremental cost analysis. With Alpha, the money is returned sooner, allowing for enhanced reinvestment opportunities.

Maintenance, insurance, and taxes on the building will amount to $10,000 per year, payable at the end of each of the five years. This often entails the preparation of pro forma cash flow statements and consultation with professionals well versed in the details of specific tax rules. The total cost of relevant items is much less than the $600,000 indicated by Chandra’s proposal.

As a result, by itself, the accounting rate of return can easily misidentify the best investment alternatives. Rarely are two (or more) options under consideration driven only by quantifiable mathematics. Therefore, the quantitative analysis suggests that Pilot should continue to provide its own tech support in the near future. Therefore, accountants rely on precise mathematical techniques to quantify the time value of money. This rate was selected by a higher-lower guessing process (trying each interest rate guess in cell A2).

Managers must be mindful of the impacts of decisions on production capacity, customers, employees, and other qualitative factors. This does not take as many guesses as one might think; with a little logic, the exact correct rate can be found rather quickly.

Once the building lease matures, when the furniture and fixtures are in need of replacement, or if tech support volume drops off, Chandra’s proposal might be worthy of reconsideration.

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