A PPT on Capital Budgeting describing Various Capital Budgeting Techniques like Net Present Value, Pay Back Period, Discounted Pay Back Period, Internal Rate of Return, Profitability Index.

1. Capital Budgeting
 Capital Budgeting decisions are decisions as
to whether or not money should be invested
in long term projects.
 It includes-
a. Analysis of proposal,
b. Evaluation of its impact on financial
position,
c. Selection of best alternative.

2. Need of Capital Budgeting
 Capital budgeting decisions are required to
take place for the following reasons-
a. Starting of new project,
b. Replacement of Fixed Asset,
c. Expansion of Capacity,
d. Diversification of Business.

3. Importance of Capital Budgeting
C.B. Decisions have long term implications on
the operations of the business,
C.B. Decisions involves large amount of
funds,
C.B. Decisions are irreversible in nature,
C.B. Decisions are difficult to make as it
involves future predictions

4. Factors to be considered in Capital
Budgeting Decisions
 Cash outflow,
 Cash inflow,
 Time –
a. Timing of cash flow.
b. Useful life of project (Project Life)

5. Capital Budgeting Techniques
 Capital Budgeting Techniques without
considering Time Value of Money
 Capital Budgeting Techniques considering
Time Value of Money

6. Capital Budgeting Techniques without
considering Time Value of Money
 Pay Back Period
 ROI
 ARR

7. Pay Back Period
 It is the time required for the project to recover its Investment
 Decision Rule:
a) For Single Project:
A project is to be selected if Pay Back Period is less than the life of a Project.
b) For 2 or More Projects:
A project with least Pay Back Period is to be selected.

8. Return on Investment
 ROI is the percentage profit earned on the Investment in the project.
 Decision Rule:
a) For Single Project:
A project with ROI equal to or more than targeted ROI is to be selected.
b) For 2 or More Projects:
A project with HIGHEST ROI is to be selected.

9. Average Rate of Return (ARR)
 ARR is the percentage average profit after tax earned on the
Investment in the project.
 Decision Rule:
a) For Single Project:
A project with ARR equal to or more than targeted ARR is to be
selected.
b) For 2 or More Projects:
A project with HIGHEST ARR is to be selected.

10. Capital Budgeting Techniques
considering Time Value of Money
 Discounted Pay Back Period
 Net Present Value
 Profitability Index
 Internal Rate of Return

11. Discounted Pay Back Period
 It is the time required for the project to recover its Investment
after considering discounted cashflows.
 Decision Rule:
a) For Single Project:
A project is to be selected if Discounted Pay Back Period is less than
the life of a Project.
b) For 2 or More Projects:
A project with least Discounted Pay Back Period is to be selected.

12. Net Present Value (NPV)
 NPV is calculated as-
NPV= ∑ PV of Cash Inflow - ∑ PV of Cash Outflow.
 Decision Rule:
a) For Single Project:
A project with positive NPV is to be selected.
b) For 2 or More Projects:
A project with highest positive NPV is to be selected.

13. Profitability Index (PI)
 PI is calculated as-
PI= ∑ PV of Cash Inflow ÷ ∑ PV of Cash Outflow.
 Decision Rule:
a) For Single Project:
A project with more than 1 PI is to be selected.
b) For 2 or More Projects:
A project with highest PI (provided that it is more than 1) is to be
selected.

14. Internal Rate of Return (IRR)
 IRR is calculated as-
IRR= S.R. + Surplus @ S.R./(Surplus+ Deficit) * Difference in Rates.
 Decision Rule:
a) For Single Project:
A project with least difference between IRR and Cost of Capital is to be
selected.
b) For 2 or More Projects:
A project with least difference between IRR and Cost of Capital is to be
selected.