To discuss: Planning horizon.
Introduction:
The two dimension of financial planning are as follows:
- Planning horizon and
- Aggregation
Answer to Problem 4.1CTF
M’s incorporation is in the process of preparing a financial plan for the firm for the next five years. This five year plan is referred as planning horizon.
Explanation of Solution
The span of time required to complete the desired plan is known as planning horizon; it is the first dimension of financial planning. It is also a part of financial decisions. As mentioned above, the period of five year is known as planning horizon.
The planning horizon is the period of length taken by the company on a particular plan which can either be a short term period or long term period. It is ultimately based on uncertainty. The higher the uncertainty, shorter would be the planning horizon.
Want to see more full solutions like this?
Chapter 4 Solutions
Fundamentals of Corporate Finance with Connect Access Card
- ABC Corporation will commence operations on January 1, 2013. The company projects the following financial performance during its first year of operation: Sales revenues are estimated at $2,500,000. Labor, material, and overhead costs are projected at $800,000. The company will purchase a warehouse worth $500,000 in February.To finance this warehouse, on January 1 the company will issue $500,000 of long-term bonds, which carry an interest rate of 10%. The first interest payment will occur on December 31. For depreciation purposes, the purchase cost of the warehouse is divided into $100,000 for the land and $400,000 for the building. The building is classified into the 39-year MACRS real-property class and will be depreciated accordingly. On January 5, the company will purchase $200,000 of equipment that has a five-year MACRS class life.(a) Determine the total depreciation expenses allowed in 2013.(b) Determine ABC's tax liability in 2013.arrow_forwardSpencer Wilkes is the marketing manager at Darby Company. Last year, Spencer recommended the company approve a capital investment project for the addition of a new product line. Spencer’s recommendation included predicted cash inflows for five years from the sales of the new product line. Darby Company has been selling new products for almost one year. The company has a policy of conducting annual post audits on capital investments, and Spencer is concerned about the one-year post-audit because sales in the first year have been lower than he estimated. However, sales have been increasing for the last couple of months, and Spencer expects that by the end of the second year, actual sales will exceed his estimates for the first two years combined. Spencer wants to shift some sales from the second year of the project into the first year. Doing so will make it appear that his cash flow predictions were accurate. With accurate estimates, he will be able to avoid a poor performance…arrow_forwardTo provide for the automation of a production process in six years, Invista is starting a sinking fund to accumulate $800,000 by the end of the six years. Round the sinking fund payments and the periodic interest earnings to the nearest dollar. If the sinking fund earns 6.4% compounded monthly, what month end payments should be made to the fund? In what month will the fund pass the halfway point?arrow_forward
- Spencer Wilkes is the marketing manager at Darby Company. Last year, Spencer recommended the company approve a capital investment project for the addition of a new product line. Spencer’s recommendation included predicted cash inflows for five years from the sales of the new product line. Darby Company has been selling the new products for almost one year. The company has a policy of conducting annual postaudits on capital investments, and Spencer is concerned about the one-year post-audit because sales in the first year have been lower than he estimated. However, sales have been increasing for the last couple of months, and Spencer expects that by the end of the second year, actual sales will exceed his estimates for the first two years combined. Spencer wants to shift some sales from the second year of the project into the first year. Doing so will make it appear that his cash flow predictions were accurate. With accurate estimates, he will be able to avoid a poor performance…arrow_forwardSalem Co. has a year-end of December 31 and they are evaluating the cash flows of some potential investments/projects they are considering for their next fiscal year, starting January 1. Salem Co. rents some of their equipment out to other companies for extra cash flow. They are evaluating three different options to structure their rental agreement in order to earn the largest amount of payments as possible. If Salem receives the rental payments of $15,000 for the next five years on each January 1 instead, at 7% compounded annually, how much is that worth today? $61,502.96 is incorrectarrow_forwardCool Brews is looking to expand it's brewpub empire with a new location. The building that Cool Brews is considering purchasing requires mortgage financing with $52,500 payments due at the end of each month for the next 15 years. Additionally, the company will pay $7,500 at the beginning of each month for various costs of ownership such as property taxes and insurance. Determine the cost of the building for Cool Brews assuming an applicable interest rate of 7%. There may be up to $2,000 difference due to rounding. Group of answer choices $19,031,605 $6,681,884 $6,705,760 $834,638 $10,800,000arrow_forward
- YOUR FIRM IS CONSIDERING THE PURCHASE OF AN OLD OFFICE BUILDING WITH AN ESTIMATED REMAINING SERVICE LIFE OF 25 YEARS. THE TENANTS HAVE RECENTLY SIGNED LONG TERM LEASES, WHICH LEADS YOU TO BELIEVE THAT CURRENT RENTAL INCOME OF P150,000 PER YEAR WILL REMAIN CONSTANT FOR THE FIRST FIVE YEARS. THEN THE RENTAL INCOME WILL INCREASE BY 10% FOR EVERY FIVE YEARS INTERVAL OVER THE REMAINING ASSET LIFE. FOR EXAMPLE, THE ANNUAL RENTAL INCOME WOULD BE P165,000 FOR YEARS SIX THROUGH TEN, P181,500 FOR YEARS 11 THROUGH 15. P199,650 FOR YEARS 16 THROUGH 20, AND P 219, 615 FOR YEARS 21 THROUGH 25. YOU ESTIMATE THAT OPERATING EXPENSES, INCLUDING INCOME TAXES WILL BE P45,000 FOR THE FIRST YEAR AND THAT THEY WILL INCREASE BY P3,000 EACH YEAR THEREAFTER. YOU ESTIMATE THAT RAZING THE BUILDING AND SELLING THE LOT ON WHICH IT STANDS WILL REALIZE A NET AMOUNT OF P50,000 AT THE END OF THE 25 YEARS PERIOD. IF YOU HAD THE OPPORTUNITY TO INVEST YOUR MONEY ELSEWHERE AND THEREBY EARN INTEREST AT THE RATE OF 12 % PER…arrow_forwardYou have been asked to develop a pro forma statement of cash flow for the coming year for Autumn Seasons, a 200-unit suburban garden apartment community. This community has a mix of 40 studio, 80 one- and 80 two-bedroom apartments with current rents of $550, $600, and $800, respectively. Leases with tenants are usually made for 12-month periods. Current rents are expected to remain fixed for the next six months. After that time, rents for each apartment type should increase by $10 per unit and remain at those levels for the remainder of the year. Ten studios were leased 3 months ago for $500, 20 one-bedroom units were leased 2 months ago for $580, and 10 two-bedroom units were leased last month for $805. All other units have been leased recently at current rents. All of the previously leased units also are on 12-month leases. When those leases rollover, all are expected to be renewed at market rents upon rollover for an additional 12 months. Presently, 4 studios, 6 one- and 6…arrow_forwardOffice Furniture & Fixtures, which is estimated to cost $350,000, will be purchased in February. The manager has made arrangement with the suppliers to make a cash deposit of 40% upon signing of the agreement in February. The balance will be settled in five (5) equal monthly instalments beginning March of 2022.arrow_forward
- Wilson Bryant Air Conditioning, a Middle Georgia HVAC company, wanted to build a web-based project tracking for all small HVAC companies in Middle Georgia. Wilson Bryant Air Conditioning asked SunTrust Bank for a loan of $5 million presenting their idea. They had an agreement with the SunTrust that they will repay the loan by allocating 80% of the company's profits each year for the first 4 years to SunTrust. In the fifth year, the company will pay the remaining balance on the loan in cash. The company assumes that it will not earn any profit in the first year. Also, the company anticipates that the profits will be $1.5 million per year in years 2 through 4. If the SunTrust accepts the deal at an interest rate of 14% per year, and the company's plan will work to perfection, what is the projected amount of the last loan payment (in year 5)? Draw the cash flow diagram.arrow_forwardCollin Wilkes is the marketing manager at Darby Company. Last year, Collin recommended the company approve a capital investment project for the addition of a new product line. Collin’s recommendation included predicted cash inflows for five years from the sales of the new product line. Darby Company has been selling the new products for almost one year. The company has a policy of conducting annual post-audits on capital investments, and Collin is concerned about the one-year post-audit because sales in the first year have been lower than he estimated. However, sales have been increasing for the last couple of months, and Collin expects that by the end of the second year, actual sales will exceed his estimates for the first two years combined. Collin wants to shift some sales from the second year of the project into the first year. Doing so will make it appear that his cash flow predictions were accurate. With accurate estimates, he will be able to avoid a poor performance evaluation.…arrow_forwardIt's a week before Frogbox's October 31, 2023, year-end. You are the personnel director and are reviewing some financial information regarding the March 1, 2021, purchase of office furniture for the Western Region offices totalling $700,000 ($300,000 was paid in cash and the balance was financed over four years at 4% annual interest with annual principal payments of $100,000). The useful life of the furniture was estimated to be five years with a projected resale value at that time of $20,000. Insurance was purchased on the furniture at a cost of $8,000 annually, payable each March 1. You leave the office for the day wondering what needs to be considered regarding these items in preparation for year-end. Required 1. Identify the relevant facts. 2. Describe what principles need to be considered. 3. Outline the goal of financial reporting. 4. Recommend an appropriate accounting policy and describe the impact to the year-end financial statements. 4 MODE 6 PLAN Please donot provide…arrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education