Capital Budgeting of a Restaur bjbant.pptx

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1. Capital Budgeting of a Restaurant Presented by: Nikita Tamang Mila Shakya Aashish Bashyal Pranish Shakya

2. Objectives of Capital Budgeting Selecting the most profitable investment is the main objective of capital budgeting. Controlling capital costs. Forecasting capital expenditure requirements and budgeting for it, and ensuring no investment opportunities are lost.

3. Capital Budgeting for a New Restaurant in N e w Baneshwor Furniture NPR 300,000.00 Coffee Machine NPR 200,000.00 Utensils and Miscellaneous NPR 1,000,000.00 Oven, Gas Stove and Other kitchen Items NPR 1,500,000.00 Furnishing and interior NPR 2,000,000.00 Initial Investment NPR 5,000,000.00 Rate of return (k) 10% Tax Rate 25% Period (t) 5 years

4. Years CFAT (5000000) 1 700000 2 1200000 3 2000000 4 3500000 5 5000000

5. Methods of Capital Budgeting Net Present Value (NPV) Payback Period (PBP) Profitability Index (PI) Internal Rate of Return (IRR)

6. N e t Present Value (NPV) a financial metric used to evaluate the profitability of an investment. calculates the difference between the present value of cash inflows and outflows of an investment. time value of money by discounting future cash flows back to their present value using a specified rate of return

7. Calculating NPV NPV= – Initial Investment NPV= +…….+ - W here, CF = Cash flow k = Discount rate or rate of return t = Period n = Number of periods CF = Initial investment  

8. Calculating NPV NPV= + + - NPV= + + -5,000,000 NPV = 636,363.64 + 991,735.54 + 1,652,892.56 + 2,520,661.16 + 3,504,132.23 − 5,000,000 NPV = 3,305,785.13 Net Present Value (NPV) of the investment in the restaurant is Rs. 3,305,785.13. This indicates that the investment is expected to generate a positive return after considering the time value of money.  

9. Payback Period Period for any investor to have his/her initial investment in his/her business generate the actual initial investment. Time period where the business will generate its initial investment.

10. Payback Period When cash flow are even When cash flow are uneven  

11. Years CFAT Cumulative CF (5000000) (5000000) 1 700000 (4300000) 2 1200000 (3100000) 3 2000000 (1100000) 4 3500000 2400000 5 5000000 7400000

12. Calculation of Payback Period Cashflows are uneven = 3.31 YEARS  

13. Discounted Payback Period Payback period generally ignores the “Time Value of Money”, where Discounted Payback Period considers the actual future cash inflows considering the discounting factor.

14. Discounted Payback Period When cash flow are even When cash flow are uneven  

15. Years CFAT PV @10% Cumulative PV (5000000) (5000000) (5000000) 1 700000 666666.67 (4333333.33) 2 1200000 1088435.37 (3244897.96) 3 2000000 1727675.20 (1517222.76) 4 3500000 2879458.66 1362235.90 5 5000000 3917630.83 5279866.73

16. Calculation of Discounted Payback Period = 3.53 YEARS  

17. Profitability Index Technique to measure the relative profitability of the project Shows the present value per rupee of the initial investment

18. Profitability Index  

19. Calculation of Profitability Index 2.055973 The future cash flow indicates that the profitability index is greater than 1 which is good decision for the investment  

20. Internal Rate of Return Percentage that measures the return of an investment, or the annual rate of growth it's expected to generate calculated by applying a discount rate to the investment's expected cash flows until the net present value (NPV) is zero.

21. Steps to calculate IRR Step 1: Approx. PVIFA factor Approx. PVIFA = Step 2: Rationalize the cash flow Step 3: Trial and Hit (find out positive and negative cash flow) Step 4: Interpolation  

22. Calculating Approx PVIFA factor Approx. PVIFA = = = 2.0161  

23. Rationalize the Cashflow Referring to PVIFA table at 5 years, the factor 2.0161 lies between 15% and 16%

24. Years CFAT Factor at 27% PV Factor at 28% PV -5000000 1 -5000000 1 -5000000 1 700000 0.787 550900 0.781 546700 2 1200000 0.62 744000 0.61 732000 3 2000000 0.488 976000 0.477 954000 4 3500000 0.384 1344000 0.373 1305500 5 5000000 0.303 1515000 0.291 1455000 NPV 129900 -6800

25. Interpolation At 27.95% rate, the total present value of future cash flows equals initial investment i.t. Net Present value becomes 0.  

26. Thank you