comparative data worksheet wk 6 494551

123 The Time Value of Money 12 C H A P T E R PURPOSE The purpose of these computations is to evaluate the use of money. The manager has many options as to where resources of the organization should be spent.1 These calculations provide guides to assist in evaluating the alternatives. UNADJUSTED RATE OF RETURN The unadjusted rate of return is a relatively unsophisticated return-on-investment method, and the answer is only an estimate, containing no precision. The computation of the unadjusted rate of return is as follows: Average Annual Net IncomeRate of Return Original Investment Amount OR Average Annual Net IncomeRate of Return Average Investment Amount The original investment amount is a matter of record. The average investment amount is arrived at by taking the total unrecovered asset cost at the beginning of estimated useful life plus the unrecovered asset cost at the end of estimated useful life and dividing by two. This method has the advantage of accommodating whatever depreciation method has been chosen by the organization. This method is sometimes called the accountant’s method because information necessary for the computation is obtained from the financial statements. After completing this chapter, you should be able to 1. Compute an unadjusted rate of return. 2. Understand how to use a present-value table. 3. Compute an internal rate of return. 4. Understand the payback period theory. P r o g r e s s N o t e s 124 CHAPTER 12 The Time Value of Money PRESENT-VALUE ANALYSIS The concept of present-value analysis is based on the time value of money. Inherent in this concept is the fact that the value of a dollar today is more than the value of a dollar in the future: thus the “present value” terminology. Furthermore, the further in the future the receipt of your dollar occurs, the less it is worth. Think of a dollar bill dwindling in size more and more as its receipt stretches further and further into the future. This is the concept of present-value analysis….