Capital Budgeting Techniques in financial management.pptx

explains what is capital budgeting, the importance and the techniques

1. Capital Budgeting Techniques Add description Name

2. Contents Introduction to Capital Budgeting Capital Budgeting Techniques Risk Analysis in Capital Budgeting Evaluating Project Alternatives Discounted Cash Flow Analysis 01 02 04 05 03 06 Implementing and Monitoring Capital Projects

3. Introduction to Capital Budgeting Add description PART 01

4. Definition of Capital Budgeting Evaluating and selecting long-term investments that are aligned with the organization's goals. Process of Evaluating Analyzing the costs, benefits, and risks of potential projects. Determining Investment Viability Deciding how to best utilize the organization's limited financial resources. Optimizing Capital Allocation

5. Importance of Capital Budgeting Helps organizations allocate resources effectively to maximize returns. Guides investment decisions Assesses the potential risks and rewards of investment projects. Evaluates project feasibility Enables organizations to align investments with long-term business objectives. Supports strategic planning

6. Capital Budgeting Process Analyze potential projects to determine feasibility and alignment with company goals. Identify Investment Opportunities Forecast cash inflows and outflows for each project under consideration. Estimate Project Costs and Benefits Use capital budgeting techniques to assess and prioritize investment options. Evaluate and Select Projects

7. Capital Budgeting Techniques Add description PART 02

8. Net Present Value (NPV) Discounts future cash flows to present value to determine project's net worth. Evaluates project's profitability Accounts for the opportunity cost of capital. Considers time value of money Helps choose projects that maximize shareholder wealth. Provides objective investment decision

9. Internal Rate of Return (IRR) Calculates the discount rate that makes the net present value of all cash flows equal to zero. Measures project profitability Considers the time value of money. Compares favorably to other techniques Indicates the maximum interest rate a project can support. Provides decision-making insight

10. Payback Period Evaluates project Measures time to recoup initial investment. Considers time value of money Discounts cash flows to present value. Simple to calculate Provides quick assessment of project viability.

11. Discounted Cash Flow Analysis Add description PART 03

12. Calculating NPV Forecast the expected cash inflows and outflows over the project's lifetime. Estimate Future Cash Flows Choose an appropriate discount rate to account for the time value of money. Determine Discount Rate Discount the future cash flows to their present value and sum to find the NPV. Calculate Net Present Value

13. Calculating IRR 01 Identify all cash inflows and outflows over the project's lifespan. Determine cash flows 02 Determine the appropriate discount rate based on the company's cost of capital. Calculate the discount rate 03 Use financial formulas or software to find the internal rate of return. Solve for the IRR

14. Interpreting Results Determines the overall profitability of a project. Net Present Value Measures the project's rate of return. Internal Rate of Return 02 01 Estimates the time required to recoup the initial investment. Payback Period 03

15. Risk Analysis in Capital Budgeting Add description PART 04

16. Sensitivity Analysis Examines how changes in key input variables impact project outcomes. Identifies Critical Variables Determines the minimum level of sales required to cover costs. Break-Even Analysis Evaluates best-case, worst-case, and most-likely case scenarios. Scenario Analysis

17. Scenario Analysis Analyze best-case, worst-case, and most likely scenarios to assess project risk. Evaluate potential outcomes Determine the key factors that significantly impact project viability. Identify critical variables Assess how changes in variables affect the project's net present value. Perform sensitivity analysis

18. Monte Carlo Simulation Probabilistic Approach Simulates multiple scenarios to assess risk. Quantifies Uncertainty Provides range of potential outcomes. Sensitivity Analysis Identifies critical variables impacting project viability.

19. Evaluating Project Alternatives Add description PART 05

20. Comparing NPV and IRR Calculates the present value of a project's future cash flows. Net Present Value (NPV) Determines the discount rate that makes a project's NPV equal to zero. Internal Rate of Return (IRR)

21. Considering Non-Financial Factors Evaluate project's alignment with company's strategic goals and values. Qualitative Factors 01 Assess the project's environmental sustainability and carbon footprint. Environmental Impact 02 Consider the project's impact on local communities and stakeholders. Social Responsibility 03

22. Making the Final Decision Evaluate the cost-benefit ratio of each project alternative to determine the most viable option. Analyze Cost-Benefit Ratio Identify and mitigate potential risks associated with each project alternative. Assess Project Risks Ensure the selected project aligns with the organization's long-term strategic objectives. Consider Strategic Alignment

23. Implementing and Monitoring Capital Projects Add description PART 06

24. Project Management Techniques Define key project phases and timeline. Establish Project Milestones Optimize resource utilization for efficiency. Allocate Resources Effectively Identify and mitigate potential project risks. Implement Risk Management

25. Performance Tracking Monitor project progress against predetermined metrics. Establish KPIs Identify and analyze deviations from the plan. Variance Analysis 02 01 Implement changes to get the project back on track. Corrective Actions 03

26. Post-Implementation Review Assess Project Outcomes Evaluate project performance against initial objectives and goals. Identify Lessons Learned Document successes, challenges, and areas for improvement. Optimize Future Processes Incorporate learnings to enhance capital budgeting and project management.

27. Thank You Name