The ppt describes an accounting technique about capital budgeting and its methods.

1. CAPITAL BUDGETING
TECHNIQUES
BY:
SHANTANU MISHRA

2. 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.

3. Capital budgeting consists of various
techniques used by managers such as:
 Net Present Value
 Payback Period
 Internal Rate of Return

4. Net Present Value
 Net present value (NPV) of a project is the potential change
in an investor's wealth caused by that project while time
value of money is being accounted for. It equals the present
value of net cash inflows generated by a project less the
initial investment on the project. It is one of the most
reliable measures used in capital budgeting because it
accounts for time value of money by using discounted cash
flows in the calculation.

5. NPV = R ×
1 − (1 + i)-n
− Initial Investment
i
NPV =
R1
+
R2
+
R3
+ ...
− Initial
Investme
nt
(1 + i)1 (1 + i)2 (1 + i)3
When cash inflows are uneven:
Where,
i is the target rate of return per period;
R1 is the net cash inflow during the first period;
R2 is the net cash inflow during the second period;
R3 is the net cash inflow during the third period,
and so on ...
When cash inflows are even:
In the above formula,
R is the net cash inflow expected to be received in each period;
i is the required rate of return per period;
n are the number of periods during which the project is expected
to operate and generate cash inflows.

6. Payback Period
Payback period is the time in which
the initial cash outflow of an
investment is expected to be
recovered from the cash inflows
generated by the investment. It is one
of the simplest investment appraisal
techniques.

7. Payback Period =
Initial Investment
Cash Inflow per
Period
The formula to calculate payback period of a project depends on whether the cash flow per period from the
project is even or uneven. In case they are even, the formula to calculate payback period is:
Payback Period = A +
B
C
When cash inflows are uneven, we need to calculate the cumulative net cash flow
for each period and then use the following formula for payback period:
In the above formula,
A is the last period with a negative cumulative
cash flow;
B is the absolute value of cumulative cash flow at
the end of the period A;
C is the total cash flow during the period after A

8. Internal Rate of Return
 Internal rate of return (IRR) is the discount
rate at which the net present value of an
investment becomes zero. In other words,
IRR is the discount rate which equates the
present value of the future cash flows of an
investment with the initial investment. It is
one of the several measures used for
investment appraisal.

9. CF1
+
CF2
+
CF3
+ ... - Initial
Investment
( 1 + r
)1
( 1 + r
)2
( 1 + r
)3
The calculation of IRR is a bit complex than other capital budgeting techniques. We know that at IRR, Net Present
Value (NPV) is zero, thus:
NPV = 0; or
PV of future cash flows − Initial Investment = 0; or
=0
Where,
r is the internal rate of return;
CF1 is the period one net cash inflow;
CF2 is the period two net cash inflow,
CF3 is the period three net cash inflow, and so
on ...

10. THANK YOU!