Prepared by Deepa Antony Batch 1 S2 MGT1oo5211
Prepared by Deepa Antony Batch 1 S2 MGT1oo5211
Prepared by Deepa Antony Batch 1 S2 MGT1oo5211
investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing.
It is budget for major capital, or investment,
expenditures.
Also called investment appraisal.
Many formal methods are used in capital budgeting, including the techniques such as
Discounted pay back period Net present value Profitability index Internal rate of return Modified internal rate of return Equivalent annuity
Profitability Index
The profitability index is a technique of
capital budgeting. This holds the relationship between the investment and a proposed project's payoff. Mathematically the profitability index is given by the following formula: Profitability Index = (Present Value of future cash flows) / (Present Value of Initial investment)
various projects.
flow is in excess or deficit and also gives the amount of excess or shortfall in terms of the present value.
Mathematically,
NPV = ?(Ct / (1+r)t) - C0 , where the summation takes the value of t ranging from 1 to n n -- total project time t -- cash flow time r -- rate of discount Ct -- net cash flow at time t C0 --capital outlay when t = 0
in Capital Budgeting Analysis to access the viability of an investment proposal. Most important alternative to Net Present Value (NPV). IRR is The Discount rate at which the costs of investment equal to the benefits of the investment. Or in other words IRR is the Required Rate that equates the NPV of an investment zero.
positive , IRR must exceed Cost of Capital. However this is not true in case of mutually exclusive projects
the time value of money. Thus, future cash inflows are not discounted or adjusted for debt/equity used to undertake the project , inflation, etc.
But DPP considers the time value of
money, it shows the breakeven after covering such costs. This technique is somewhat similar to payback period except that the expected future cash flows
investments cash flows, discounted at projects cost of capital, will take to cover the initial cost of the project. In this approach, the PV of future cash inflows are cumulated up to time they cover the initial cost of the project. Discounted payback period is generally higher than payback period because it is money you will get in the future and will be less valuable than money today
IMPORTANCE
Capital Budgeting is an extremely important
aspect of a firm's financial management. Although capital assets usually comprise a smaller percentage of a firm's total assets than do current assets, capital assets are long-term. Therefore, a firm that makes a mistake in its capital budgeting process has to live with that mistake for a long period of time.
capital budgeting decisions. Involve top executives from production, engineering, marketing and so on not only financial managers.
OU KY AN TH
THANK YOU..