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Finance Management Articles
Page 83 of 96
Using below data, calculate depreciation using sinking fund method.\\nInitial cost of an equipment is Rs. 5000000/- , life span of equipment is 15 years,\\nSalvage value = Rs. 250000/-, interest rate = 10%
SolutionThe solution is given below −Depreciable cost = 5000000 – 250000 => Rs.4750000/- Sinking fund value = [interest/ {(1+interst) ^period -1} => [0.1/{(1+0.1)^15-1} => 0.03147 Annual depreciation = depreciable cost * sinking fund factor => 4750000*0.03147 =>Rs. 149482.5/- Book value (year 1) => 5000000 – 149482.5 => Rs.4850517.45/- Interest earned (end of 2nd year) => 149482.5 * 0.1 => Rs.14948.25/- Increased fund (for 2nd year) => 149482.5+14948.25 => Rs.164430.75/- Accumulated Depreciation (end of 2nd year) => 149482.5+164430.75 => Rs.313913.25/- Book value (end of 2nd year) => (4850517.45 – 164430.75) => Rs.4686086.7/- Interest earned (at the end of 3rd year) => ...
Read MoreGive the journal entry for the sinking fund deprecation method.
Journal entryDateParticularsDrCrXX/XX/XXXXDepreciation A/cTo sinking fund A/c(Being depreciation is transferred to sinking fund account)XXXXXXXX/XX/XXXXProfit and Loss A/cTo Depreciation A/c(Being depreciation is charged to profit and loss account)XXXXXXXX/XX/XXXXSinking fund investment A/cTo Bank A/c(Being amount of depreciation invested)XXXXXXXX/XX/XXXXBank A/cTo interest on sinking fund investment A/c(Being interest earned on sinking fund investment)XXXXXXXX/XX/XXXXBank A/cTo sinking fund investment A/c(Being sinking fund investment sold at the end of asset life)XXXXXXXX/XX/XXXXSinking fund investment A/cTo sinking fund A/c(Being profit on sale of investment transferred to sinking fund)XXXXXXXX/XX/XXXXSinking fund A/cTo sinking fund investment A/c(Being loss on sale of investment transferred ...
Read MoreExplain sinking fund depreciation.
Sinking fund depreciation is also called as depreciation fund account. Amount generated through sinking fund depreciation is used to replace the asset when it needed. In this amount, charge is credited in sinking fund account, which is shown in liability side in balance sheet and asset value has its original value, and shown in asset side of balance sheet. The amount generated through sinking fund is invested in marketable security at the end of the year.FormulaSinking fund value = [interest/ {(1+interst) ^period -1} Sinking fund tableYear2%4%6%8%10%11.001.001.001.001.0050.1920.1850.1770.1700.164100.0910.0830.0760.0690.063150.0580.0450.0430.0370.031200.0410.0330.0270.0220.017250.0310.0240.0180.0140.01300.0250.0180.0130.0090.006350.020.0140.0090.0060.003400.020.010.0060.0040.002450.0140.0080.0050.0020.001500.0120.0060.0030.0020.001(rounded off to 3 decimals)Money accumulated$\frac{(1+\frac{interest ...
Read MoreDifference between internal rate of return and modified internal rate of return.
The major differences between internal rate of return (IRR) and modified internal rate of return are as follows −Internal rate of return (IRR)Calculates discount rate based on internal factors.NPV = 0.Cash flows are Reinvested at project’s IRR.Provides two solutions.Less accurate.Higher than MIRR.Low precision.Modified internal rate of returnCost of capital is used in calculations.NPV = investment (outflow).Cash flows are reinvested at firm rate of return.Provides one solution.More accurate.More realistic than IRR.High precision.
Read MoreWhat are the factors considered by venture capitalist before investing?
The factors considered by venture capitalist before investing are as follows −Management Team − Investors look for management team that have skills, knowledge, and their record of accomplishment. Commitment towards the goal is the key.Viability of the project − Capital firm will look at product market, end user, competitors and growth of industry/sector before investing in a project.Business planCost and returns − Project cost, financing scheme, source of finance are also studied in details. Investment for a project will be depends on cash outflows. Internal rate of return (IRR) tells about risk associated with the project and the time to ...
Read MoreDefine concept of Debt securitisation in financial management.
Securitization is the procedure of converting assets into securities. In other words, securitization means all assets of a company are consolidated into securities.An originator, special purpose vehicle (SPV), investment bank, credit rating agency, insurance company, obligator and investor are required in securitization.The process involved in debt securitisation is as follows −Identification.Transfer.Issue.Redemption.Credit rating.Amount is collected into pool.Divide amount into small parts and sell that small parts as securities.Buyers who buy these securities will get interest.Mortgage backed securities.Moreover, process continues as a cycleSecuritization is done onTerm loans.Receivables (government & companies).Purchases loans.Lease finance.Mortgage loans etc.Methods in debt securitisation are mentioned below −Pass through ...
Read MoreDefine cut off point cut-off rate in accounting.
Cut off point is base point at which investment proposal is accepted. It depends on risk of the investment proposal. If the proposal has high risk then, cut off point is high and if the proposal has low risk then, cut off point is low.Cut off rate is the lower or base rate at which, investors gets their returns for their investment. Investors will use different techniques to analyse their proposals before investing. Depends on risk of the project and cut off rates varies for different projects.Factors affecting cut off rateAmount − If the investing amount is high, then cut ...
Read MoreDifferentiate between cash flow and free cash flow.
The major differences between cash flow and free cash flow are as follows −Cash flowFinds operating cash inflow and activities of finance and investments of the business.Net cash inflows are calculated.Liquidity of company is determined.It has broad scope.Operating, investing and finance cash flows are used in calculating cash flows.It gets difficult to find out cash flow when, both more than one cash and non-cash transactions are taken place.Not much time is needed.Used in financial accounting.Income statement is required for calculation purpose.Free cash flowFinds Prevent value of business.Valuation of business (investors) is calculated.Financial health of the company is determined.Limited scope.EBIT, Capital ...
Read MoreHow terminal cash flows are calculated
SolutionThe solution is as follows −Initial investment = Rs. 25000000/- Disposed value by analyst = Rs.500000/- Book value = Rs.375000/- Tax rate = 25%Tax rate for disposal => (500000 – 375000) * 25% => 125000 * 25% => Rs.31250/-After deducting taxes => 500000 – 31250 => Rs.468750/-Terminal cash flows = after deducting taxes + working capital recovered => 468750 + 500000 => Rs.968750/-
Read MoreHow investments are determined good or bad?
SolutionThe solution is given below −Total sales (in billion tons) – current = 16 Total sales (in billion tons) – proposed = 16 + 7 => 23Incremental cash flowsSalesCurrentDomestic sales => 8 * 80 => 640 Export sales => 8 * 120 => 960 Total current sales = 640 + 960 => 1600ProposedDomestic sales => 12 * 80 => 960 Export sales => 11 * 120 => 1320 Total current sales = 640 + 960 => 2280Incremental = proposed – sales => 2280 – 1600 => 680Variable cost => (11*20) + (12*15) => 220 – 180 => 40Contribution margin => sales – variable costsCurrent => 1600 – 180 => 1420Proposed => 2280 – 220 => 2060Fixed costCurrent => 140Proposed => 260Net cash => contribution margin – fixed costCurrent => 1420 – 140 => 1280Proposed => 2060 – 260 => 1800Incremental => net cash (proposed) – net cash (current) => 1800 – 1280 => $520 billionPay back => initial investment/ net cash (incremental) => 1000/ 520 => 1.92 years (approximately)Calculated payback (1.92 years) is less than estimated payback (4 years)Hence, we can conclude that it is a good investment.
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