my first ppt

1. CAPITAL BUDGETING
METHODS

2. WHAT IS CAPITAL BUDGETING ?
• The process through which different projects are evaluated is
known as capital budgeting.
• Capital budgeting is the process a business undertakes to
evaluate potential major projects or investments. Construction
of a new plant or a big investment in an outside venture are
examples of projects that would require capital budgeting
before they are approved or rejected.

3. METHODS OF CAPITAL BUDGETING :
• Traditional methods:
1. Payback period
2. Accounting rate of return method

4. • Discounted cash flow methods:
1. Net present value method
2. Profitability index method
3. Internal rate of return

5. PAYBACK PERIOD METHOD:
• It is the method of evaluating investment opportunities and product
development projects on the basis of the time taken to recoup the
investment.
• This period is compared to the required payback period to determine
the acceptability of the investment proposal.
PBP= Cash outflow / cash inflow

6. AVERAGE RATE OF RETURN METHOD:
• ARR means the average annual earning on the project. Under
this method, profit after tax and depreciation is considered.
The average rate of return can be calculated in the following
two ways.

7. ARR on Average investment = (Average Profit After Tax / Average
Investment) * 100
• ARR on Initial investment = (Average Profit After Tax / Initial
Investment) * 100

8. DISCOUNTED CASH FLOW METHOD:
• Discounted cash flow (DCF) is a model or method of valuation
in which future cash flows are discounted back to a present
value using the time-value of money.
• An investment’s worth is equal to the present value of all
projected future cash flows.

9. NET PRESENT VALUE METHOD
• It is the best method for evaluation of investment proposal.
This method takes into account time value of money. NPV= PV
of inflows- PV of outflows.
Evaluation of Net Present Value Method:-
Project with the higher NPV should be selected.
Accept if NPV>0
Reject NPV<0
May or may not accept NPV=0

10. PROFITABILITY INDEX METHOD:
• As the NPV method it is also shows that project is accepted or
not. If Profitability index is higher than 1, the proposal can be
accepted.
Accepted PI>1
Rejected PI<1
Profitability index =Total Cash Inflows / Total Cash Outflows

11. INTERNAL RATE OF RETURN METHOD:
• IRR is the rate of return that a project earns. The rate of
discount calculated by trial and error , where the present value
of future cash flows is equal to the present value of outflows, is
known as the Internal Rate of Return.
• IRR= LDR +((NRV –C) / (NPV@LDR –NPV@HDR)) * (HDR –LDR)

12. THANK YOU