2022_UBS_MBA_Finance_CAPITAL_BUDGETING.pptx

Finance_CAPITALBUDGETING

1. CAPITAL BUDGETING

2. The investment criteria is grouped in two categories Discounted cash flow (DCF) net present value (NPV) Internal rate of return (IRR) Profitability index (PI) Non discounted cash flow Payback period Discounted payback Accounting rate of return (ARR)

3. NET PRESENT VALUE It is classical economical method of evaluating investment proposals. It recognises the time value of money. If NPV > 0 accept the proposal If NPV < 0 reject the proposal If NPV = 0 may accept proposal

4. INTERNAL RATE OF RETURN (IRR) IRR is the rate that equates the investment outlay with the present value of cash inflow. If IRR > K accept the proposal If IRR < K reject the proposal If IRR = K may accept proposal

5. PROFITABILITY INDEX (PI) PI = Present value of cash inflows Initial cash outlay If PI > 1 accept the proposal If PI < 1 reject the proposal If PI = 1 may accept proposal

6. PAYBACK PERIOD It’s a traditional method, Payback is Number of years required to recover the original cash outlay. Payback = Initial investment Annual cash inflow Payback period < life of the project or standard set by mgt accept.

7. ACCOUNTING RATE OF RETURN (ARR) It is return of investment (ROI). ARR = average income average investment Average income =

8. The cost of the machine is 75 lakhs and life is 5 years with no salvage value. The expenses other than depreciation comes to 65% of sales. The sales for next five years are as under: 2023 40 lakhs 2024 60 lakhs 2025 90 lakhs 2026 110 lakhs 2027 125 lakhs The tax rate is 30%. Calculate Net present value, profitability index, internal rate of return, payback period, discounted pay back and accounting rate of return. The discount rate is 10%.

9. 3 The cost of the machine is 5 lakhs and life is 5 years. The expenses other than depreciation comes to 40% of sales. The sales for next five years are as under: 1 1,60,000 2 220,000 3 2,75,000 4 3,95,000 5 4,80,000 The tax rate is 25%. Calculate Net present value, profitability index, internal rate of return, payback period, discounted pay back and accounting rate of return. The discount rate is 12%.

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