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Capital Budgeting

Capital Budgeting



capital budgeting

capital budgeting



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    Capital Budgeting Capital Budgeting Presentation Transcript

    • Capital Budgeting Course Teacher M. Zahangir Alam Lecturer in Finance IIUC - DC
    • Concept of Capital Budgeting
      • The process of identifying, analyzing, and selecting investment projects whose returns (cash flows) are expected to extend beyond one year.
      Should we build this plant?
    • Significance of Capital Budgeting
      • To influence the firm’s growth in the long run.
      • To affect the risk of the firm.
      • To involve huge amount of funds.
      • It can not easily be changed without considerable financial loss.
    • The Capital Budgeting Process
      • Select projects based on a value-maximizing acceptance criterion.
      • Re-evaluate implemented investment projects continuously and perform post audits for completed projects.
    • Classification of Investment Project Proposals
      • New Products or expansion of existing products.
      • Replacement of existing equipment or buildings.
      • Research and development.
      • Exploration.
      • Other (e.g., safety or pollution related)
    • Types of Project
      • Independent Project: The acceptance the one project’s does not eliminate the acceptance of others.
      • Mutually Exclusive Project : The acceptance the one project’s eliminates the acceptance of others.
    • Techniques of Capital Budgeting
      • Pay Back Period (PBP): It refers to the number of years required to recover the initial investment in the form of cumulative cash inflows.
      • Decision Criterion:
      • If actual PBP is less than standard PBP accept the project and vice versa.
      • Net Present Value (NPV): It is one of the capital budgeting techniques, recognizing the time value of money.
      • Decision Criterion:
      • If NPV is greater than zero accept the project and vice versa.
      • Internal Rate of Return (IRR): The discount rate of a project which makes it NPV equal to zero.
      • Decision Criterion:
      • Accept the project if IRR is greater than cost of capital and vice versa.