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).Year12345Flights per year 5053565962at 4 persons per flight200212224236248First Class $1,100220,000233,200246,400259,600272,800Year678910Flights per year 6568717579at 4 persons per flight260272284300316First Class $1,100286,000299,200312,400330,000347,600Alternative 2PV factor Cost 2,500,000.

00 Present Value 10 payments 14% 250,000x5.2161= 1,304,025.00 Present Value 325,000x0.2697 (87,652.50) Difference 1,195,975.00 0.48 Using 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