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    Capital Budgeting: by Vikas Shukla Jimmy Mody

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    Jimmy Mody
    The document discusses capital budgeting, which is the process of analyzing potential long-term investment projects. It defines capital budgeting and outlines the typical steps, which include estimating cash flows, assessing risk, determining the weighted average cost of capital, and evaluating cash flows. The document also discusses key capital budgeting techniques like payback period, net present value, internal rate of return, and profitability index.

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    Capital Budgeting: by Vikas Shukla Jimmy Mody

    Uploaded by

    Jimmy Mody
    15 views14 pages
    The document discusses capital budgeting, which is the process of analyzing potential long-term investment projects. It defines capital budgeting and outlines the typical steps, which include estimating cash flows, assessing risk, determining the weighted average cost of capital, and evaluating cash flows. The document also discusses key capital budgeting techniques like payback period, net present value, internal rate of return, and profitability index.

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    Capital Budgeting

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    The document discusses capital budgeting, which is the process of analyzing potential long-term investment projects. It defines capital budgeting and outlines the typical steps, which include estimating cash flows, assessing risk, determining the weighted average cost of capital, and evaluating cash flows. The document also discusses key capital budgeting techniques like payback period, net present value, internal rate of return, and profitability index.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    15 views14 pages

    Capital Budgeting: by Vikas Shukla Jimmy Mody

    Uploaded by

    Jimmy Mody
    The document discusses capital budgeting, which is the process of analyzing potential long-term investment projects. It defines capital budgeting and outlines the typical steps, which include estimating cash flows, assessing risk, determining the weighted average cost of capital, and evaluating cash flows. The document also discusses key capital budgeting techniques like payback period, net present value, internal rate of return, and profitability index.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 14

    Capital Budgeting

    By
    Vikas Shukla
    Jimmy mody
    What is Capital Budgeting?

    Analysis of potential projects.

    Long-term decisions; involve large


    expenditures.

    Very important to firm’s future


    Definition of Capital Budgeting

    “ Capital budgeting is the planning


    process used to determine whether a
    firm's long term investments such as
    new machinery, replacement
    machinery, new plants, new products,
    and research development projects
    are worth pursuing.
    Steps in Capital Budgeting

    Estimate
     cash flows (inflows & outflows).

    Assess risk
     of cash flows.

    Determine
     r = WACC for project.

    Evaluate
     cash flows.
    What is the difference between independent
    and mutually exclusive projects?
    Projects are:
    independent, if the cash flows of one are unaffected by the acceptance
    of the other.
    mutually exclusive, if the cash flows of one can be adversely impacted
    by the acceptance of the other.
    What is the Payback period?

    Payback period is the time duration


    required to recoup the investment
    committed to a project.

    Business enterprises following payback


    period use "stipulated payback period",
    which acts as a standard for screening the
    project.
    Strengths of Payback

    1. Provides an indication of a project’s


    risk and liquidity.

    2. Easy to calculate and understand.


    Weaknesses of Payback

    1. Ignores the TVM.

    2. Ignores CFs occurring after the


    payback period.
    Computation Of Payback Period

    When the cash inflows are uniform the formula for


    payback period is cash outflow divided by annual cash
    inflow

    When the cash inflows are uneven, the cumulative


    cash inflows are to be arrived at and then the payback
    period has to be calculated through interpolation.
    Average rate of return

    ARR is also known as the accounting rate of


    return method.

    Based upon accounting information rather


    than cash flows.
    Net Present Value (NPV)

    Net present value of an investment/project is the


    difference between present value of cash inflows and
    cash outflows.

    The present values of cash flows are obtained at a


    discount rate equivalent to the cost of capital.
    Internal Rate Of return

    “The internal rate of return (IRR) is


    defined as the discount rate that gives
    a net present value (NPV) of zero. It
    is a commonly used measure of
    investment efficiency.”
    Profitability Index

    Profitability ratio is otherwise referred to as Benefit/Cost


    ratio. This is an extention of the Net Present Value Method.
    This is relative valuation index and hence is comparable
    across different types of projects requiring different quantum
    of initial investments.

    Profitability index (PI) is the ratio of sent value of cash


    inflows to the present value of cash outflows. The present
    values of cash flows are obtained at a discount rate equivalent

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