Module 4 - Decisions Under Uncertainty
Module 4 - Decisions Under Uncertainty
Module 4 - Decisions Under Uncertainty
I. Effects of Inflation
Inflation is the increase in the prices for goods and services from one year to
another, thus decreasing the purchasing power of money.
��′ = �� + �� + ��(��)
Where,
�� = ��(1 + ��′)��
Sample Problem:
A machine costs P20,000 today. If inflation is 6% per year and interest is 10% per year,
what will be the appropriate future value of the machine adjusted for inflation in 5 years?
Solution:
We must first solve the corrected rate of interest including the inflation
��′ = 0.166
Then solve for the future value of the machine,
�� = ��(1 + ��′)��
�� = 20,000(1 + 0.166)5
�� = ��43,104.51
II. Depreciation
Purposes of Depreciation
1 To provide for the recovery of capital which has been invested in physical property.
Depreciation Methods
����������
���� = ���� �� ��
Book value,
Sample Problem:
A machine cost P1,800,000. It has a salvage value of P300,000 at the end of 5 years. If
money is worth 6% annually; using the 5 types of depreciation, determine the
depreciation at 3rd year.
��3 = ��300,000
��3 = ��3 �� 3
���� = ��300,000�� 3
���� = ��900,000
����3 = 900,000
2. Sinking Fund Method 🡪 This method assumes that a sinking fund is established in
which funds will accumulate for replacement. The total depreciation that has taken place
up to any given time is assumed to be equal to the accumulated amount in the sinking
fund at that time.
��
�� =��[(1 + ��) − 1]
��
�� =(���� − ����)��
(1 + ��)�� − 1
Book value,
Annual depreciation,
Sample Problem:
A machine cost P1,800,000. It has a salvage value of P300,000 at the end of 5 years. If
money is worth 6% annually; using the 5 types of depreciation, determine the
depreciation at 3rd year.
�� =(���� − ����)��
(1 + ��)�� − 1
�� =(��1,800,000 − 300,000)(6%)
(1 + (6%))5 − 1
�� = ��266,094.60
���� =��[(1 + ��)�� − 1]
��
��2 = ��548,154.876
����2 = ��1,800,000 −
��548,154.876 ����2 =
��1,251,845.124
��2 = ��847,138.7686
����3 = ��1,800,000 −
��847,138.7686 ����3 =
��952,861.2314
��3 = ��1,251,845.124 −
��952,861.2314 ���� =
Formula or Constant Ratio Method. It is assumed that the annual cost of depreciation is
fixed percentage of the salvage value at the beginning of the year. The ratio of the
depreciation in any year to the book value at the beginning of that year is constant
throughout the life of the property and is designated by k, the rate of depreciation.
�� = 1 − √����
��
����
Annual Depreciation,
Sample Problem:
A machine cost P1,800,000. It has a salvage value of P300,000 at the end of 5 years. If
money is worth 6% annually; using the 5 types of depreciation, determine the
depreciation at 3rd year.
�� = 1 − √����
��
����
�� = 1 − √��300,000
5
��1,800,000
�� = 0.3012
������′ = ����(1 − ��)��−��
����3′ = ��878,978.592
����3 = ��614,230.24
��3 = 264,748.35
2
�� = ��
2
������−1 = ���� (1 − ��)��−1
2
������ = ���� (1 − ��)��
Annual Depreciation,
���� = ������−1 − ������
Sample Problem:
A machine cost P1,800,000. It has a salvage value of P300,000 at the end of 5 years. If
money is worth 6% annually; using the 5 types of depreciation, determine the
depreciation at 3rd year.
2
�� = ��
2
�� = 5
�� = 0.4
2
������−1 = ���� (1 − ��)��−1
����3−1 = ��648,000
����3 = ��388,800
Annual Depreciation,
���� = [(�� − �� + 1)
���� = [��(2�� − �� + 1)
2(������ ���� ��ℎ�� ����������)] (����
− ����)
Book Value,
Sample Problem:
A machine cost P1,800,000. It has a salvage value of P300,000 at the end of 5 years. If
money is worth 6% annually; using the 5 types of depreciation, determine the
depreciation at 3rd year.
��3 = [(5 − 3 + 1)
15 ] (��1,800,000 − ��300,000)
��3 = 300,000
���� = [��(2�� − �� + 1)
2(������ ���� ��ℎ�� ����������)] (����
− ����)
��3 = [3(2(5) − 3 + 1)
2(15)] (��1,800,000 − ��300,000)
��3 = ��1,200,000
����3 = ��600,000
=���� − ����
���������� ���������� ���� ������������
������������ �������� ����
����������������
Sample Problem:
Solution:
=���� − ����
���������� ���������� ���� ������������
������������ �������� ����
����������������
������������������������ ������
Sample Problem:
������������������������ ������
Advantages of Corporation
• It enjoys perpetual life without regard to any change in the person of its owners,
the stockholders.
• The stockholders of the corporation are not liable for the debt of the corporation. • It
is relatively easier to obtain large amounts of money for expansion, due to its
perpetual life.
Disadvantages of Corporation
business organization.
Capitalization of a Corporation
• The capital of a corporation is acquired through the sale of stock. There are two
Common Stock
Common stakeholders have certain legal rights, among which are the following: o
Vote at stockholders’ meeting.
o Elect directors and delegates to them power to conduct the affairs the
business.
o Sell or dissolve the corporation.
o Make and amend by the laws of the corporation.
o Subject to government approval, amend, or change the charter or capital
structure.
o Participate in the profits.
o Inspect the books of the corporation.
Preferred Stock
the corporation is dissolved, the assets must be used to satisfy the claims of the
preferred stockholders before those of the holders of the common stock.
Preferred stockholders usually have the right to vote in meetings, but not always.
than ten years and guaranteed by a mortgage on certain assets of the corporation
or its subsidiaries. Bonds are issued when there is need for more capital such as
for expansion of the plant or the services rendered by the corporation.
• The face or par value of a bond is the amount stated on the bond. • When the face
value has been repaid, the bond is said to have been retired or redeemed. The bond
rate is the interest rate quoted on the bond.
Classification of Bonds
• Registered bonds. The name of the owner of this bond is recorded on the record
books of the corporation and interest payments are sent to the owner periodically
without any action on his part.
• Coupon bonds. Coupon bond have coupon attached to the bond for each interest
payment that will come due during the life of the bond. The owner of the bond can
collect the interest due by surrendering the coupon to the offices of the
corporation or at specified banks.
Methods of Bond Retirement
• The corporation may issue another set of bonds equal to the amount of bonds due
for redemption.
• The corporation may set up a sinking fund which periodic deposits of equal amount
are made. The accumulated amount in the sinking fund is equal to the amount
needed to retire the bonds at the time they are due.
Bonds
��
�� =��[(1 + ��) − 1]
��
��(1 + ��) +��
(1 + ��)��
Elements:
�� = �������� ����������
�� = ������������������, �� = ����
�� = ���������������� ��������
�� = ���������������� ������������
�� = �������������������� ����������
Sample Problem:
A 9% coupon bond has a P200,000 face value and matures in 6 years. What is the price
of this bond if yield to maturity is 8.2%?
Solution:
�� = 9%
�� = ��200,000
�� = 6 ����������
�� = 8.2 %
�� = �� = 200,000
Note: If Redemption Value is not given, redemption value and face value are equal.
First to solve is the dividends or coupon,
�� = ����
�� = (9%)(��200,000)
��
�� =��[(1 + ��) − 1]
��
��(1 + ��) +��
(1 + ��)��
Activity:
A bond issue of P200,000 in 10-year bonds, in P1,000 units, paying 16% nominal
interest in semi-annual payments, must be retired by the use of a sinking fund that
earns 12% compounded semi-annually. What is the total semi-annual expense?
IV. Break-even Analysis
Break-even Analysis
total income of the company would just be equal to the total expenses, thus
resulting in no loss nor profit.
on a chart called the break-even chart which shows the fixed costs, variable
costs, the expected profit or loss at any production levels.
• The intersection of the income and the variable costs indicates the break-even
− ������������ = ��������
0 ������������ = ������������������
����������
�������� = ���������������� �������� + ����������
��������
Where,
Fixed Cost 🡪 the costs that must be paid regardless of the quantity
produced.
Sample Problem:
Solution:
��������:
��������������:
�������������� = 1��
Then, use the breakeven formula (Profit = 0)
�� = 27,777.77
References
https://www.youtube.com/watch?
https://www.youtube.com/watch?v=sKDjMFKrKRc