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What does annuity cost mean

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Annuity cost refers to the equivalent annuity outflow calculated according to the net annuity flow principle by comparing the cash outflow of each scheme without considering the changes in the operating cash inflow of each scheme. Annuity cost=total present value of cash outflow ÷ annuity present value coefficient.

Annuity cost is mainly used to measure the replacement decision of fixed assets and equipment with different life periods. The most important thing is the amount of cash outflows. It is important to understand that the company needs to calculate how much the equipment costs the company. The realization value is the amount it costs. Because the company uses the equipment, the realization value of the equipment is useless. In addition, the company has to pay operating costs every year. The sum of the two is the total outflows. After using up, there is residual value, which is inflow, The net outflow is after subtracting.

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What is the cost of an annuity?

Annuity cost=(original investment amount - residual value income × compound interest present value coefficient+∑ present value of annual operating cost)/annuity present value coefficient

Annuity cost=(original investment amount - residual income+residual income - residual income × compound interest present value coefficient+∑ present value of annual operating cost)/annuity present value coefficient

Annuity cost=(original investment amount - residual value income)/annuity present value coefficient+residual value income × (1 - compound interest present value coefficient)/annuity present value coefficient+∑ annual operating cost present value/annuity present value coefficient

Annuity cost=(original investment amount - residual income)/annuity present value coefficient+residual income × [1-1/(1+i) n]/{[1 - (1+i) - n]/i}+∑ annual operating cost present value/annuity present value coefficient

Where, [1-1/(1+i) n]/{[1 - (1+i) - n]/i=i * [1-1/(1+i) n]/(1-1/(1+i) n)=i

So=(original investment amount - residual income)/annuity present value coefficient+residual income × i+∑ current value of annual operating cost/annuity present value coefficient

The third formula is derived. It is meaningless to understand each item separately. The final formula is the result of simplification.

Weighted average cost of capital ratio

Weighted average cost of capital is a method to calculate the company's cost of capital by weighted average of the weight of all kinds of capital in the total capital source. Capital sources include ordinary shares, preferred shares, bonds and all long-term debts. When calculating, the cost of each kind of capital (after tax) is multiplied by its proportion in the total capital, and then added up. It is mostly used for company capital budget.

It is used to measure the cost of capital of a company in financial activities. Because financing cost is regarded as a logical price tag, it was used by many companies as the discount rate of a financing project in the past.

There are two main sources for companies to obtain funds from outside: equity and debt. Therefore, a company's capital structure mainly consists of three components: preferred shares, common shares and debt (bonds and promissory notes are common). The weighted average cost of capital considers the relative weight of each component in the capital structure and reflects the expected cost of the company's new assets.

When calculating the proportion of individual funds in total funds, the book value, market value and target value weights can be used to calculate. Market value weights refer to the weights of bonds and stocks determined at market prices. The weighted average cost of capital calculated in this way can reflect the actual situation of the enterprise. At the same time, in order to make up for the inconvenience of frequent price changes in the securities market, the average price can also be used.

Target value weight refers to the weight of bonds and stocks determined by the expected target market value in the future. This kind of capital structure can reflect expectations, rather than the past and present capital cost structure just like the book value weight and market value weight, so the weighted average capital cost calculated by the target value weight is more suitable for enterprises to raise new funds. However, it is difficult for enterprises to objectively and reasonably determine the target value of securities, which makes this calculation method difficult to be popularized.

Source: Formula for Calculating Annuity Cost of Intermediate Financial Management

What is the difference between annuity cost and annuity net flow?

Annuity cost=total present value of cash outflow/annuity present value coefficient

Annuity net flow=net present value/annuity present value coefficient

Both of them calculate annuities based on present value. Due to different present values, annuities are called differently.

3. ? In annuity cost calculation, outflow is plus and inflow is minus;

In the calculation of net flow of annuity, inflow is plus and outflow is minus.

Extended data:

1. ? The total present value or total final value of the total amount of all net cash flows during the project period is converted into the average net cash flow of an equivalent annuity, which is called the annual net cash flow. In essence, after the net present value is calculated by a false design, the annuity is calculated.

2. ? Calculation principle of annuity net flow

NPV=ANCF×（P/A,i,n）

Annuity net flow (ANCF)=total present value of cash flow (NPV)/annuity present value coefficient (P/A, i, n)

=Total present value of cash flow/present value coefficient of annuity

The decision-making principle of annuity net flow method is the same as that of net present value index.

3. ? Evaluation of annuity net flow method

(1) The annuity net flow method is an auxiliary method of the net present value method. When the service life of each scheme is the same, it is essentially the net present value method.

(2) It is applicable to investment plan decisions with different periods.

(3) It has the same disadvantage as the net present value method and is not convenient to make decisions on independent investment plans with unequal original investment amount.

Youth is used to waste 2024-06-18 16:44:18

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