Capital Budgeting Essay Example | Topics and Well Written Essays - 5000 words

Capital Budgeting - Essay Example And when we search for scientifically viable definitions of these basic concepts, we discover that a debtor who is illiquid is a debtor who is temporarily unable to pay his or her debts, whereas the insolvent debtor is permanently unable to pay his or her debts. Time is thus an element in the concepts. A problem of invisibility arises with regard to solvency/insolvency because the solvency or insolvency of business enterprises is not apparent in traditional financial statements, even though such state ments claim to give a "true and fair view." Consequently, traditional financial statements are worthless as a means of describing the financial position of business enterprises."(Kirdegaard, 1997, p.39) Using the time value of money approach, the total first class airline tickets bought at $.1,300 less the flier discount of $200 would translated to the following data below. The total tickets from year 1 to year 10 is $2,807,200 as indicated in the above computation. The present value of the $2,807,200 is $1,917,843. This is computed because the company has entered into a ten year contract with the airline company resulting to a flier discount. The difference between the cost and present value is $889,357.04 or thirty two percent (32) of the cost of ten year contract tickets. This is the amount that the company will save if this alternative is chosen(Ross, 1996;p179-206). Year 1 2 3 4 5 Flights per year 50 53 56 59 62 at 4 persons per flight 200 212 224 236 248 First Class $1,100 220,000 233,200 246,400 259,600 272,800 Year 6 7 8 9 10 Flights per year 65 68 71 75 79 at 4 persons per flight 260 272 284 300 316 First Class $1,100 286,000 299,200 312,400 330,000 347,600 Alternative 2 PV factor Cost2,500,000.00Present Value10 payments 14% 250,000 x 5.2161 = 1,304,025.00Present Value 325,000 x 0.2697 (87,652.50) Difference1,195,975.000.48Using the time value of money approach, the present value of the ten year installment payments amounting to $250,000 is $ 1,304,025. Also, the present value of the scrap value when the airplane will lose its flying use and will be sold is $ 87,652.50 which is deducted from the present value of the airplane purchase. The difference between the cost and the present value where the $2,500,000 is paid in ten equal annual installments is $1,195,975. This can