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Capital budgeting (project appraisal)

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this one is the next steps of MA.

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Capital budgeting (project appraisal)

  1. 1.  Investment in long term projects/ Fixed assets (Capital Budgeting)  Investment in short term assets (Working Capital Management) 2
  2. 2. A task/ an undertaking, especially one involving considerable amount of input and output. Inputs-money, labour and equipments. Output – its production  Every project has different components/ activities  Completion period is relatively long  Relatively it is a large or major task 3
  3. 3.  Assign value to different components/ steps of project  Assessing cost and benefits of the project  All possible cost/ benefits items need to be identified 4
  4. 4. Cost  Initial investment  Working capital investment  Additional investment Benefits  Annual revenue/ profit  Salvage / scrap value  Realization of working capital 5
  5. 5.  Comparatively high investment  Long run nature  High risk  Irreversible nature 6
  6. 6.  New projects  Replacement projects 7
  7. 7.  Traditional methods Pay Back Period (PBP) Average Rate of Return (ARR)  Discounting methods Net Present Value (NPV) Internal Rate of Return (IRR) Profitability Index (PI) 8
  8. 8.  Present value of future cash flows  Discount by taking cost of capital  Average cost of capital can be applied 9
  9. 9.  Incremental cash flow concept can be applied Followings to be calculated - incremental investment - cash savings due to operating efficiency - Tax savings due to changes of depreciation 10

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