# Computing Cash Flow From Investment And Net Present Value Accounting Essay

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The expected period of timeÂ during which an asset is useful to the average owner. The economic life of an asset could be different than the actual physical life of the asset. Estimating the economic life of an asset is important for businesses so that they can determine when it is worthwhile to invest in new equipment. In addition, businesses must plan so that they have sufficient funds to purchase replacements for expensive equipment once it has exceeded its useful life.

## Residential Real Estate:Â The most well known form of cash flow investing is purchasing residential real estate to use as rental property.Â Â  In this investment, you put up a lump sum of cash to purchase the property in order to receive the monthly income that the rent of the property produces.

Returns:Â 8-17%

Time Horizon:Â Varies.

DEPRECIATION : In a broader economic sense, the depreciated cost for industry is the aggregate amount of capital that is "used up" in a given period, such as a fiscal year. This value can be examined for trends in capital spending and accounting aggressiveness.Â

The value of an asset net of all accumulated depreciation that has been recorded against it.

Depreciated Cost = Purchase Price (or cost basis) - {Cumulative Depreciation}

Depreciated cost is also known as the "net book value" or "adjusted cost basis".

STRAIGHT LINE METHOD OF DEPRECIATION: Straight-line method of depreciation is the most popular and simple method of depreciation. In this method, the purchase price or the acquisition value of the asset is divided by the useful life of the asset after deducting the scrap value from the value of an asset. Scrap value of the assets is the value of the asset at which it can be sold after its useful life is over. In order to understand the straight-line method of depreciation better.

NET PRESENT VALUE: The Net Present Value (NPV) of aÂ Capital BudgetingÂ project indicates the expected impact of the project on the value of the firm. Projects with a positive NPV are expected to increase the value of the firm. Thus, the NPV decision rule specifies that allÂ independentÂ projects with a positive NPV should be accepted. When choosing amongÂ mutually exclusiveÂ projects, the project with the largest (positive) NPV should be selected. The NPV is calculated as the present value of the project's cash inflows minus the present value of the project's cash outflows. This relationship is expressed by the following formula:

## where,

CFtÂ = the cash flow at time t and

r = the cost of capital.

## CALUCATION OF CASH FLOWS

Particulars

Amount

Profit before tax and depreciation(PBT)

--- Depreciation(w.note)

2,00,000

---1,53,343

Profit before tax

--- [email protected]%

46,657

--- 23,329

Profit after tax (PAT)

23,328

## Cash inflow (each year) = Profit after tax (PAT) + depreciation

= 23,328 + 1,53,343

## = Rs.1,76,671

Terminal inflow in the 7th year = Rs.30,000 (scrap value)

WORKING NOTES-:

## Economic life

= 11,00,000 + 3,400 - 30,000

7yrs

## Total PVF (Rs.)

1

1,76,671

0.909

1,60,594

2

1,76,671

0.826

1,45,931

3

1,76,671

0.751

1,32,680

4

1,76,671

0.683

1,20,667

5

1,76,671

0.621

1,09,713

6

1,76,671

0.564

99,643

7

1,76,671+30,000 =2,06,671

0.513

1,06,022

## Less: cash outflow (at time 0)-11,03,340

(Plant cost +installation charges)