Capital Budgeting Techinisues.pptdsadasdasdasdasdasdasdasdasadasdsadasdsad

It's about finance technique

1. 08/25/24 1
Capital Budgeting Techniques
Dr. Md. Azizur Rahman
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2. "Capital Budgeting“ trends in
Scopus
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3. "Capital Budgeting“ trends in
Scopus
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4. Goal of the Chapter
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
To understanding capital budgeting (concept, significance)

To identifying investment opportunities

To learn the measuring financial viability (Techniques-NPV, IRR,
Paybacks)

T ranking investment alternatives for selecting best possible
project

To get the overview of capital budgeting in practice

To apply this in the decision making and implementation

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Concept of Capital Budgeting
The process of identifying,
analyzing, and selecting
investment projects whose
returns (cash flows) are
expected to extend beyond
one year.
For more details:
Gitman, Juchau, and Flanagan (2015)
Brigham and Ehrhardt (2016)
Should we
build this
plant?
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6. 08/25/24 6
Significance of Capital Budgeting
i.To influence the firm’s growth in the
long run.
ii.To affect the risk of the firm.
iii.To involve huge amount of funds.
iv.It can not easily be changed without
considerable financial loss.
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7. 08/25/24 7
The Capital Budgeting Process

Select projects based on a value-
maximizing acceptance criterion.

Re-evaluate implemented investment
projects continuously and perform post
audits for completed projects.

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8. 08/25/24 8
Classification of Investment Project
Proposals
i.New Products or expansion of existing
products.
ii.Replacement of existing equipment or
buildings.
iii.Research and development.
iv.Exploration.
v.Other (e.g., safety or pollution related)
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9. 08/25/24 9
Types of Project

Independent Project: The
acceptance the one
project does not
eliminate the acceptance
of others.

Mutually Exclusive
Project: The acceptance
the one project
eliminates the
acceptance of others.
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10. Techniques of Capital Budgeting
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Capital Budgeting
Technique
Discounting
Criteria
Non-discounting
Criteria
Net present
value (NPV)
Internal rate of
return (IRR)
Profitability
index (PI)
Payback period
(PB)
Accounting rate of
return
(ARR)
Discounted
payback period
Net Terminal
Value (NTL)
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11. 08/25/24 11
Techniques of Capital Budgeting
i.Pay Back Period (PBP): It refers to the
number of years required to recover the
initial investment in the form of
cumulative cash inflows.
Decision Criterion:
If actual PBP is less than standard PBP
accept the project and vice versa.
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12. 08/25/24 12
ii.Net Present Value (NPV): It is one of the
capital budgeting techniques, recognizing
the time value of money.
Decision Criterion:
If NPV is greater than zero accept the
project and vice versa.
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iii.Internal Rate of Return (IRR): The
discount rate of a project which makes
it NPV equal to zero.
Decision Criterion:
Accept the project if IRR is greater than
cost of capital and vice versa.
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14. Profitability Index Technique

Profitability index (PI) also known as
Benefit Costs Ratio measures the present
value of returns (cash inflows) peer taka
invested. It is a relative measure which is
obtained by dividing the present value of
future cash inflows by the present of cash
out flows. Symbolically –

PI = PV of cash inflows/PV of cash out flows
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15. 
Acceptance Rule:

A project will qualify for acceptance if
its PI exceeds 1, the rules are as
follows:

Accept if PI > 1,

Reject if PI < 1, and

May accept if PI = 1
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16. References:

Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management:
Theory & Practice: Cengage Learning.

Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of
Managerial Finance: Pearson Australia.
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17. Details of Chapter Goal
Understanding Capital Budgeting:

Define and explain the concept of capital budgeting.

Highlight its importance in financial decision-making.
Identifying Investment Opportunities:

Learn how to identify potential investment opportunities or projects within a company.
Measuring Financial Viability:

Explore techniques for assessing the financial viability of capital projects.

Understand how to calculate metrics like net present value (NPV), internal rate of return (IRR), and payback
period.
Ranking Investment Alternatives:

Learn about ranking methods such as NPV ranking, IRR ranking, and profitability index.

Understand their strengths and limitations.
Capital Budgeting in Practice:

Provide examples and case studies to illustrate how capital budgeting techniques are applied in real-world
business scenarios.
Decision Making and Implementation:

Emphasize the role of capital budgeting in the decision-making process.

Discuss the steps involved in implementing selected projects.
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