1. NPV IRR
PREMCHAND 12ME1E0020

2. “The term capital
budgeting
generally refers to
acquiring inputs
with long term
returns”
Richards &
Greenlaw

3.  The finance function has to deal with one
of the most important decisions
regarding:
 The amount to be invested in fixed
assets.
 The decision is technically in the
form of “Capital Budgeting”

4. Generation
Evaluation
Selection
Execution
 Identification of investment proposals
 Screening the proposals
Evaluation of various proposals
Fixing priorities
Final Approroval
Implementation of proposals
Performance review

5. Accounting rAte
of returns

6. Traditional Techniques

7.  Pay Back Period indicates the period within which the cost of
the project will be completely recovered.
 It indicates the period within which the total cash inflows
equal to the total cash outflows.
 Accept/Reject rules:
ACCEPT : calculated PBP < standard PBP
REJECT : calculated PBP > standard PBP
CONSIDER : calculated PBP = standard PBP
Year before fully recovered + unrecovered amt of investment
 Pay Back Period = -------------------------------------------------
cash flows during the period of final recovery

8.  ARR is used to measure the profitability of
investment proposals
 ARR is computed by dividing the average profits
after depreciation and taxes by net investments in the
project.

9. MODERN TECHNIQUES

10.  Net Present Value is a method of calculating
present value of each inflows and cash
outflows in an investment project, by using
cost of capital as the discounting rate.
 Accept/reject Rule :
◦ NPV > 0 will be accepted
◦ NPV < 0 will be accepted
◦ NPV = 0 will be consider
NPV = Discounted Cash Inflows – Discounted Cash Outflows

11.  Internal Rate of Return (IRR) is that rate at
which the discounted cash inflows match with
discounted cash outflows.
 Thus IRR may be called as the “break even
rate” of borrowing for the company.
 In simple words IRR indicates that
discounting rate at which NPV is zero.
 IRR > Cost of Capital ---- Accept
 IRR < Cost of Capital -----Reject
 IRR = Cost of Capital -----Consider

12.  It is the ratio between total discounted cash inflows
and total discounted cash outflows. Thus profitability
index can be computed as follows.
 Acceptance Rule
 PI > 1 will be accepted
 PI < 1 will be reject
 PI = 1 will be consider

13.  It is also called as PROFITABILITY INDEX
 The excess present value index is calculated by
dividing the net present value of cash inflow by initial
net investment cost
PV of cash inflow
Pay Back Period = -------------------------------------
Initial cash out lay

14. Thank You
K PREMCHAND
12ME1E0020