Capital budgeting

Capital Budgeting Estimating Cash Flows & Techniques

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

[object Object],[object Object],[object Object]

Capital Budgeting: The process of planning for purchases of long-term assets. ,[object Object],[object Object],[object Object],[object Object]

Decision-making Criteria in Capital Budgeting ,[object Object]

[object Object],[object Object],[object Object],[object Object],Decision-making Criteria in Capital Budgeting

Payback Period ,[object Object]

Payback Period ,[object Object],0 1 2 3 4 5 8 6 7 (500) 150 150 150 150 150 150 150 150

Payback Period ,[object Object],Payback period = 3.33 years . 0 1 2 3 4 5 8 6 7 (500) 150 150 150 150 150 150 150 150

[object Object],[object Object],[object Object],[object Object],[object Object],Payback Period (Acceptance Criterion)

Drawbacks of Payback Period ,[object Object],[object Object],[object Object],[object Object]

Drawbacks of Payback Period ,[object Object],[object Object],0 1 2 3 4 5 8 6 7 (500) 150 150 150 150 150 (300) 0 0

Other Methods ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Net Present Value ,[object Object],NPV = - ICO CF t (1 + k) t n t=1 

Net Present Value ,[object Object],[object Object],[object Object]

[object Object],NPV Example 0 1 2 3 4 5 (250,000) 100,000 100,000 100,000 100,000 100,000

Net Present Value (NPV) ,[object Object],[object Object],[object Object],[object Object]

Profitability Index NPV = - ICO CF t (1 + k) t n t=1 

Profitability Index PI = ICO CF t (1 + k) n t=1  t NPV = - ICO CF t (1 + k) t n t=1 

[object Object],[object Object],[object Object],Profitability Index

PI Example ,[object Object],[object Object],[object Object]

Internal Rate of Return (IRR) ,[object Object]

Internal Rate of Return (IRR) NPV = - ICO CF t (1 + k) t n t=1 

Internal Rate of Return (IRR) NPV = - ICO CF t (1 + k) t n t=1  n t=1  IRR: = ICO CF t (1 + IRR) t

Internal Rate of Return (IRR) ,[object Object],[object Object],n t=1  IRR: = ICO CF t (1 + IRR) t

Calculating IRR ,[object Object],[object Object],0 1 2 3 4 5 (250,000) 100,000 100,000 100,000 100,000 100,000

IRR Decision Rule ,[object Object],[object Object],[object Object]

[object Object],[object Object]

[object Object],[object Object],0 1 2 3 4 5 (500) 200 100 (200) 400 300

[object Object],[object Object],1 0 1 2 3 4 5 (500) 200 100 (200) 400 300

[object Object],[object Object],0 1 2 3 4 5 (500) 200 100 (200) 400 300 1 2

[object Object],[object Object],0 1 2 3 4 5 (500) 200 100 (200) 400 300 1 2 3

Summary Problem ,[object Object],[object Object],[object Object],[object Object],0 1 2 3 4 5 (900) 300 400 400 500 600

Capital Rationing ,[object Object],[object Object],[object Object]

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