2. What is Financial Management??
• Financial Management means
planning,
organizing,
directing and
controlling the financial activities such as
procurement and utilization of funds of the enterprise.
3. Capital Investment
• Capital investment may also refer to a firm's acquisition of
capital assets or fixed assets such as manufacturing plants
and machinery that is expected to be productive over many
years.
Capital
assets
Fixed
assets
Equity
Venture
capital
Angel
investor
4. Steps involved in capital
investment
Identify and
evaluate potential
opportunities
Estimate operation
and implementation
cost
Estimate flow or
benefits
Assess riskImplement
5. What is Capital Budgeting ?
Capital budgeting (or investment appraisal) is the process of
determining the viability to long-term investments on purchase
or replacement of property plant and equipment, new product
line or other projects.
7. Capital budgeting techniques
Payback period
Discounted payback period
Net present value
Accounting rate of return
Internal rate of return
Profiitability index
8. Time value of money (TVM)
• It is the idea that money available at the present time is worth
more than the same amount in the future due to its potential
earning capacity.
• TVM is also referred to as present discounted value.
• Time Value of Money Formula:
FV = PV x (1 + (i / n)) ^ (n x t)
‘FV’ = Future value of money
‘PV’ = Present value of money
‘i’ = interest rate
‘n’ = number of compounding periods per
year
‘t’ = number of years
9. Complex Investment Decision
• company is having money .. company decide where to invest this
money.. Eg new machinery, new project , in market etc.
11. Practical study of Techniques
Payback Period
• The payback period is the length of time required to
recover the cost of an investment.
• payback method, which is calculated by counting the
number of years it takes to recover the cash invested.
Formula:
12. Net Present Value
• Net Present Value (NPV) is the difference between the present
value of cash inflows and the present value of cash outflows.
NPV is used in capital budgeting to analyze the profitability of
a projected investment or project.
Formula:
Net Present Value= Total Present value of cash inflow Total Initial
Investment
13. Accounting rate of return
• It is a percentage measuring the average annual operating
profit against the average investment.
Formula:
Average Annual Profit
Average Investment
ARR = X100
14. ProfitabilityIndex
• Profitability index is an investment appraisal technique
calculated by dividing the present value of future cash flows of
a project by the initial investment required for the project.
• Formula:
Present value of future cash flows
Initial investment required
PI =
15. Internal Rate of Return
• Internal rate of return (IRR) is the interest rate at which the net
present value of all the cash flows (both positive and negative)
from a project or investment equal zero.
IRR of New
Project
Required
rate of
return
Project is
desirable
IRR of New
Project
Required rate
of return
Project is
rejected
17. Risk analysis in capital budgeting
• Techniques for analyzing risk:
Techniques
Stand alone
risk
Sensitivity
analysis
Scenario
analysis
Break even
analysis
Decision
tree analysis
Editor's Notes
Accounting rate of return : https://www.youtube.com/watch?v=fFI-3A-Vecc