Scribd Logo
Upload

Welcome to Scribd!

  • E16.2 Valuation of Project Under Different Accounting Methods Given

    Uploaded by

    Swetty Retna
    20 views2 pages
    1) The document provides information about a project with a 2 year life, initial investments of $1,500 in equipment and $700 in advertising for total investment of $2,200. Expected revenues are $1,540 in each year. 2) It asks to value the project using discounted cash flow and residual earnings techniques under different accounting methods for depreciation and treatment of advertising costs. 3) It provides the calculations and answers for valuing the project under straight-line depreciation and expensing advertising, showing how the valuation and ratios change under the different treatments.

    Original Description:

    Original Title

    E16

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    1) The document provides information about a project with a 2 year life, initial investments of $1,500 in equipment and $700 in advertising for total investment of $2,200. Expected revenues are $1,540 in each year. 2) It asks to value the project using discounted cash flow and residual earnings techniques under different accounting methods for depreciation and treatment of advertising costs. 3) It provides the calculations and answers for valuing the project under straight-line depreciation and expensing advertising, showing how the valuation and ratios change under the different treatments.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    20 views2 pages

    E16.2 Valuation of Project Under Different Accounting Methods Given

    Uploaded by

    Swetty Retna
    1) The document provides information about a project with a 2 year life, initial investments of $1,500 in equipment and $700 in advertising for total investment of $2,200. Expected revenues are $1,540 in each year. 2) It asks to value the project using discounted cash flow and residual earnings techniques under different accounting methods for depreciation and treatment of advertising costs. 3) It provides the calculations and answers for valuing the project under straight-line depreciation and expensing advertising, showing how the valuation and ratios change under the different treatments.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 2

    Swety Retna/ S4310019 E16.

    2 Valuation of Project under Different Accounting Methods Given: Project with two year life. Required return of 9%/year All revenue received in cash Investment are depreciated using straight line method

    Initial investment in equipment Initial investment in advertising Total Investment Expected revenue, year 1 Expected revenue, year 2 Questions:

    $1,500 $ 700 $2,200 $1,540 $1,540

    a. Value of the project and its value added using discounted cash flow techniques b. Value of the project using residual earnings techniques with the total initial investment capitalized. c. Repeat part b of the questions, but with depreciation of $1,300 million in year 1. Explain why number differ. How does the value of investment change? d. Repeat the valuation using straight-line depreciation but with the initial investment in advertiseming expensed immediately, as required by GAAP. e. Compare the price to book ratio and the forward P/E ratio under the alternative accounting treatments for investment in advertising. Answers: a. Discounted Cash Flow Method FV1 = DPV (1 + i)n 1,540 = DPV (1 + 0,09)1 DPV = FV2 = 1,412.84

    = DPV (1+i)n

    1,540 = DPV (1+i)2 DPV = = 1,296.187

    Swety Retna/ S4310019 b. Residual Earnings Techniques Average Operating Asset Net Operating Income Minimum Required return (9%) ReOI RNOA = OI/ NOA = 1540/2200 = 0,7% c. Value of Investment Year Depreciation Book Value Residual Earnings (0,09) PV of RE (1,09)t Total PV Value of project 181.65 2,381.65 2,200 0 1 1,300 900 198 181.65 2,200 1,540 198 1,738

    d. Valuation using straight-line depreciation Assumes that depreciation is 10% each year Year Depreciation Book Value Residual Earnings (0,09) (1,09)t PV of RE (1,09)t Total PV Value of project 331.63 2,531.63 2,200 0 1 220 1,980 198 1.09 181.65 2 220 1760 178.2 1.1881 149.98

    e. Compare the price-to-book ratio dan forward P/E ratio Price-to-book ratio = value of net operating asset/net operating asset = 2,381.65/2200 =1,082 Forward Enterprise = value of operation/forward OI = 2200/1540 = 1,428

    You might also like