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Risk-Return Analysis and Capital Budgeting Techniques

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Arindam Khan
Arindam Khan
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Concept of Risk ,[object Object],[object Object],[object Object],[object Object],[object Object]
Sample Payoff Matrix 70 35 - 20 New Marketing Programme 60 30 - 15 New Product Design 40 25 - 40 New Plant Boom Normal Recession Strategy Payoff Matrix : Profits ( Rs, Crores) for Each Strategy – State of Nature (Economic Condition) Combination
Risk and Decision Making ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Probability Distribution for Two Investment Alternatives 250 0.30 Rapid Inflation 200 0.50 Moderate Inflation 150 0.20 No Inflation Investment I 400 0.30 Rapid Inflation 200 0.50 Moderate Inflation 100 0.20 No Inflation Investment I Outcome (Xi) Probability (Pi) State of Nature Probability Distribution for Two Investment Alternatives
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Risk Preferences ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Risk Management ,[object Object],[object Object],[object Object],[object Object],[object Object]
Risk Management ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Evaluating Capital project ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Risk Management ,[object Object],[object Object],[object Object]
Capital Budgeting ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Capital Budgeting ,[object Object],[object Object],[object Object],[object Object],[object Object]
Capital Budgeting Process ,[object Object],30,00,000 Recapture of Working Capital 1,34,10,760 Net Cash Flow (Year 5) 40,00,000 Plus : Salvage value of machinery 64,10,760 59,31,600 54,96,000 51,00,000 47,40,000 Net Cash Flow 30,00,000 30,00,000 30,00,000 30,00,000 30,00,000 Plus : Depreciation 34,10,760 29,31,600 24,96,000 21,00,000 17,40,000 Profit After Tax 22,73,840 19,54,400 16,64,000 14,00,000 11,60,000 Less : Income Tax 56,84,600 48,86,000 41,60,,000 35,00,000 29,00,000 Profit Before Tax 30,00,000 30,00,000 30,00,000 30,00,000 30,00,000 Less : Depreciation 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000 Less : Fixed Cost 58,56,400 53,24,000 48,40,000 44,00,000 40,00,000 Less: Variable Cost 1,46,41,000 1,33,10,000 1,21,00,000 1,10,00,000 1,00,00,000 Sales Year 5 Year 4 Year 3 Year 2 Year 1
Capital Budgeting Process (contd.) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Evaluating Capital project ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Evaluating Capital project ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Evaluating Capital project ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Evaluating Capital project ,[object Object],24.2 34.9 IRR 675 622 NPV (12% DR) Evaluation Criteria 2000 450 5 600 450 4 600 450 3 0 450 2 -300 450 1 Net Cash Flows (Year) 1,000 1,000 Initial Cost Project B Project A Cost, Cash Flow, and Evaluation Criteria Data for Two Capital Investments
Capital Budgeting Process (contd.) ,[object Object],[object Object],[object Object],[object Object],[object Object]
The Cost of Capital ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
The Cost of Capital ,[object Object],[object Object]
Discounted Cash Flow ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Composite Cost of Capital ,[object Object],[object Object],[object Object]
Cost of Capital – Main Points ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

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Risk-Return Analysis and Capital Budgeting Techniques

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  • 2. Sample Payoff Matrix 70 35 - 20 New Marketing Programme 60 30 - 15 New Product Design 40 25 - 40 New Plant Boom Normal Recession Strategy Payoff Matrix : Profits ( Rs, Crores) for Each Strategy – State of Nature (Economic Condition) Combination
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  • 4. Probability Distribution for Two Investment Alternatives 250 0.30 Rapid Inflation 200 0.50 Moderate Inflation 150 0.20 No Inflation Investment I 400 0.30 Rapid Inflation 200 0.50 Moderate Inflation 100 0.20 No Inflation Investment I Outcome (Xi) Probability (Pi) State of Nature Probability Distribution for Two Investment Alternatives
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