Capital Budgeting is about how one should evaluate the financing options based on the superior financial performance through mathematical techniques. These techniques have been discussed in the presentation in detail.
Investment Decision — Capital Budgeting Techniques — Pay Back Method — Accounting Rate Of Return — NPV — IRR — Discounted Pay Back Method — Capital Rationing — Risk Adjusted Techniques Of Capital Budgeting. — Capital Budgeting Practices
Discuss the concept of risk in investment decisions.
Understand some commonly used techniques, i.e., payback, certainty equivalent and risk-adjusted discount rate, of risk analysis in capital budgeting.
Focus on the need and mechanics of sensitivity analysis and scenario analysis.
Highlight the utility and methodology simulation analysis.
Explain the decision tree approach in sequential investment decisions.
Focus on the relationship between utility theory and capital budgeting decisions.
Investment Decision — Capital Budgeting Techniques — Pay Back Method — Accounting Rate Of Return — NPV — IRR — Discounted Pay Back Method — Capital Rationing — Risk Adjusted Techniques Of Capital Budgeting. — Capital Budgeting Practices
Discuss the concept of risk in investment decisions.
Understand some commonly used techniques, i.e., payback, certainty equivalent and risk-adjusted discount rate, of risk analysis in capital budgeting.
Focus on the need and mechanics of sensitivity analysis and scenario analysis.
Highlight the utility and methodology simulation analysis.
Explain the decision tree approach in sequential investment decisions.
Focus on the relationship between utility theory and capital budgeting decisions.
Describes in detail the steps involved in the calculation of Internal Rate of Return. Useful to students of Under graduate, post graduate and professional course students pursuing course in finance
This PPT contains the full detail of topic leverage in financial management
it covers following topics :-
Meaning of Leverage
Types of Leverage
Operating Leverage
Financial Leverage
Difference between Operating & Financial Leverage
Combined Leverage
Illustrations
Exercise
This presentation is made by Toran Lal Verma. Meaning, nature, and scope of Financial Management are discussed. scope and objectives of financial management have been discussed along with merits and demerits.
Describes in detail the steps involved in the calculation of Internal Rate of Return. Useful to students of Under graduate, post graduate and professional course students pursuing course in finance
This PPT contains the full detail of topic leverage in financial management
it covers following topics :-
Meaning of Leverage
Types of Leverage
Operating Leverage
Financial Leverage
Difference between Operating & Financial Leverage
Combined Leverage
Illustrations
Exercise
This presentation is made by Toran Lal Verma. Meaning, nature, and scope of Financial Management are discussed. scope and objectives of financial management have been discussed along with merits and demerits.
ICQs provide system for the assessment of risks embedded in the internal control system. Every internal auditor prepares ICQs according to his understanding of the internal control system. There are some certain common areas that are present in every organization. This ICQs deal with those common areas that are integral part of every organization's internal control system.
The most comprehensive definition of internal audit is given by the IIA, USA. It is,
"Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes."
The purpose of the presentation is to provide clarification for a better understanding of what internal audit definition, objectives, functions, stages and reporting are all about? What difference does it make in the presence of an external audit? How different is its scope from that of the external audit? How internal audit standards contribute to better performance of internal audit work and its reporting to the Board or Audit Committee?
A customer-centric costing system that bases all cost workings for a product from its market price. The purpose is to reduce cost of a product as low as possible to arrive at a price that would be either equal to or less than that of competitors’ product while delivering the same functionality.
depreciation, straight line, units of productions, double declining, income tax, depreciation methods, advance business consulting, www.mba4help.com Miami, Jose cintron
Accounting Standard-3 Cash Flow Statement by Nithin RajChinnu Raj
Are you Searching for the Complete Information on AS-3 (Cash Flow Statement)??You have come Correctly..Here is the Brief Description on Cash Flow Statement which enables the Students to gain the complete knowledge on AS-3.
Thanks for viewing my PPT......
Chapter- III Techniques of Capital Budgeting
Concept, Significance, Nature and classification of capital budgeting decisions, cash flow computation- Incremental approach; Evaluation criteria- Pay Back Period, ARR, NPV, IRR and PI methods; capital rationing, Capital budgeting under risk and uncertainty.
CAPITAL BUDGETING - Meaning, Definition, Needs, Significance, Process & Appra...Sundar B N
This ppt contains CAPITAL BUDGETING - Meaning, Definition, Needs, Significance, Process & Appraisal Methods - Problems.
Capital Budgeting – Introduction, Meaning, Definition, Need & Significance
Process of Capital Budgeting
Payback Period & Discounted PBP – Meaning, Formula & Problem
Net Present value - Meaning, Formula & Problem
Profitability Index - Meaning, Formula & Problem
Internal Rate of Return - Meaning, Formula & Problem
ABC is a costing system where indirect costs are assigned to products and services. The system establishes a relationship between overhead costs and production activities by allocating overhead costs to them with high precision. As a result, overhead costs are allocated more accurately based on their relevant activity levels. The system has eliminated the defects of the traditional/absorption costing system. ABC is used both as a planning tool and as a controlling instrument after the production is finished. ABC provides the basis for pricing decisions, inventory valuation, profitability analysis and overhead allocation. The system can effectively be used for both products and services.
Corporate Social Responsibility (CSR) is about how companies manage their business processes to produce an overall positive impact on society. It covers sustainability, social impact and ethics on business interests and objectives. This presentation also gives a balancing view of the commercial interests of businesses and social & environmental obligations of a business enterprise.
The ISO 26000 standard defines CSR as:
an organization's responsibility for the impacts of its decisions and activities on society and the environment, through transparent and ethical behavior that:
- contributes to Sustainable Development, including health and the welfare of society;
- takes into account the expectations of stakeholders;
- is in compliance with applicable law and consistent with international norms of behavior;
- and is integrated throughout the organization and implemented in its relations.
The 6 core subjects listed by ISO 26000 are:
1. Human rights
2. Labor practices
3. The environment
4. Fair operating practices
5. Consumer issues
6. Community involvement and development
The presentation covers all aspects of CSR and provide adequate guidance on the principles and practices of CSR.
Value Analysis (VA) is a tool (technique or method) that is used for improving the value of a product or a process of understanding its constituent components and their associated costs. It aims at finding improvements to the components by reducing their cost and increasing the value of the functions of a product or a service.
A critical advantage to using a VA is its potential for reducing costs, which is a benefit that permeates all advantages of the system.
A VA breaks-down a product or service into components, it enables you to analyze each component on its own, evaluating its features and functions in detail efficiency and effectiveness.
Microfinancing is a type of banking service provided to unemployed or low-income individuals or groups who otherwise would have no other access to financial services. The objective is uplifting the economic activity at the lowest strata of the population. The generation of economic activity would alleviate poverty through the creation of income and employment opportunities.
A VAT audit is the FTA’s assessment of a company about its responsibility as a taxable person. The audit ensures that a company has fully captured the input and output tax on its all vatable transactions. This audit is conducted to ensure that the tax liability is calculated correctly and paid in full within the stipulated timeframe. The FTA also assesses a company whether they are fulfilling all responsibilities that apply to its business as per the VAT law.
The FTA can conduct the audit within 5 years for any business, but in some circumstances, the FTA has the right to extend the time frame for the audit and record-keeping.
VAT Evasion or Fraud: Penalties & Precautions (The UAE Perspective)Ahmad Tariq Bhatti
Tax evasion or fraud refers to a case where a taxable person intentionally defrauds to pay less tax or no tax to the FTA that is lawfully due to him. With tax evasion, the taxpayer intentionally and deliberately misrepresents the tax liability to avoid paying higher taxes to the government. The government loses money as a result of this act. Therefore, the law imposes severe penalties to such taxable persons. The tax fraud necessarily includes an intention to not pay the tax. The FTA has to prove through fraud examination tests or techniques that the person held for tax evasion or fraud has been intentionally involved in this act.fraud
Life-cycle costing is a system that provides an estimate of all the costs and revenues attributable to a cost object (product, service, project or asset) from its development to its discarding or dis-lodging or discontinuing or removing or abandonment from the market.
Life-cycle costing can be applied to products, services, projects, or assets over the entire life-cycle in the market. The objective of life-cycle costing is to maximize returns over the entire life of a product, service, project or asset by minimizing costs and maximizing revenues through the application of planning, management, and controlling techniques.
Budgeting — A Framework for the Budgetary Controls SystemAhmad Tariq Bhatti
A budget is a formal statement of estimated income and expenses based on future plans and objectives. In other words, a budget is a document that management makes to estimate the revenues and expenses for an upcoming period based on their goals for the business.
A budget is basically a financial plan for a given period, normally a year. It greatly enhances the success of business undertaking.
Corporate budgets are essential for operating at cost efficiency. Aside from earmarking resources, a budget can also be helpful in setting goals, measuring outcomes and planning for contingencies.
This is a pictorial depiction of the life in Lahore during the British rule in the subcontinent. This was a time where the camera came into this region. The life and time were captured by many people during this era. We collected some of those pictures and presented them here for you. This presentation will go a long way in understanding the plight of common people especially the people who were living in the city of Lahore and its suburbs.
There is a saying, a picture is worth a thousand words. It is also believed, we are a reflection of the people who lived before us and the people coming after us will be a reflection of ours. It is also said, seeing is believing. These proverbs will come to your mind again and again while seeing this photo album.
The earliest picture starts in 1859 and the last one is around 1950, in this way more than 90 years have been covered. The photos are arranged in chronological order. We have rejected scores of photos only because the references were not available or were doubtful enough to be taken here.
We exercised due care and diligence in reporting the year of the photos, however, any mistake in writing the year of a photo is inadvertently mine, therefore, it should be excused. Any correction suggested by the viewers will be noted for the next editions.
Internal Control Questionnaires for Construction CompaniesAhmad Tariq Bhatti
Risk assessment and plugging them is key to the success of business processes. Construction companies are exposed to many kinds of risks. Correct identification of these risks is necessary for the management of such risks. We have prepared these risk assessment questionnaires from the perspective of construction companies. The coverage of issues is adequate. Hopefully, these questionnaires will be helpful in plugging key risks and drive successful business operations of construction companies. We welcome comments for improvements. Thank you.
Employee Assessment and Evaluation for Continuation of ServiceAhmad Tariq Bhatti
Trust Versus Performance Model explains the employee evaluation on the basis of two factors ie trust and performance. The model helps to retain employees on these two parameters of success.
Internal Controls are defined as a system of well designed procedures by a company’s management and top-level executives, to provide a substantial degree of assurance in achieving business objective, while complying with the policies and laws, safeguarding the assets, maintaining efficiency and effectiveness in regular operations and reliability of financial statements.
Internal Control Questionnaires are preliminary risk assessment procedures for the existence and working of the internal control system. These questionnaires are filled in the presence of the auditor. Ideally, an auditor reads these questions and a relevant area employee replies in yes or no based on his knowledge of the process.
The questionnaire is useful to determine which areas the audit should focus on more as compared to rest ones. When employees answer the questions, the auditor knows whether the company is keeping accurate records overall, and proper system of internal controls. The same area questions may be asked from different employees of the same area in order to keep the risk assessment fool proof.
Dengue or break-bone fever is a mosquito-borne disease that is caused by the biting of Dengue infected mosquito. Symptoms typically begin three to fourteen days after infection. This may include a high fever, headache, vomiting, muscle and joint pains, and a characteristic skin rash.
Salalah in Oman is exotic location for refreshing and enjoyment. Salalah green rugged hills, sea shores, historical & religious places, scenic beauty and a lot more...
2. Elemental Economics - Mineral demand.pdfNeal Brewster
After this second you should be able to: Explain the main determinants of demand for any mineral product, and their relative importance; recognise and explain how demand for any product is likely to change with economic activity; recognise and explain the roles of technology and relative prices in influencing demand; be able to explain the differences between the rates of growth of demand for different products.
Abhay Bhutada Leads Poonawalla Fincorp To Record Low NPA And Unprecedented Gr...Vighnesh Shashtri
Under the leadership of Abhay Bhutada, Poonawalla Fincorp has achieved record-low Non-Performing Assets (NPA) and witnessed unprecedented growth. Bhutada's strategic vision and effective management have significantly enhanced the company's financial health, showcasing a robust performance in the financial sector. This achievement underscores the company's resilience and ability to thrive in a competitive market, setting a new benchmark for operational excellence in the industry.
Turin Startup Ecosystem 2024 - Ricerca sulle Startup e il Sistema dell'Innov...Quotidiano Piemontese
Turin Startup Ecosystem 2024
Una ricerca de il Club degli Investitori, in collaborazione con ToTeM Torino Tech Map e con il supporto della ESCP Business School e di Growth Capital
US Economic Outlook - Being Decided - M Capital Group August 2021.pdfpchutichetpong
The U.S. economy is continuing its impressive recovery from the COVID-19 pandemic and not slowing down despite re-occurring bumps. The U.S. savings rate reached its highest ever recorded level at 34% in April 2020 and Americans seem ready to spend. The sectors that had been hurt the most by the pandemic specifically reduced consumer spending, like retail, leisure, hospitality, and travel, are now experiencing massive growth in revenue and job openings.
Could this growth lead to a “Roaring Twenties”? As quickly as the U.S. economy contracted, experiencing a 9.1% drop in economic output relative to the business cycle in Q2 2020, the largest in recorded history, it has rebounded beyond expectations. This surprising growth seems to be fueled by the U.S. government’s aggressive fiscal and monetary policies, and an increase in consumer spending as mobility restrictions are lifted. Unemployment rates between June 2020 and June 2021 decreased by 5.2%, while the demand for labor is increasing, coupled with increasing wages to incentivize Americans to rejoin the labor force. Schools and businesses are expected to fully reopen soon. In parallel, vaccination rates across the country and the world continue to rise, with full vaccination rates of 50% and 14.8% respectively.
However, it is not completely smooth sailing from here. According to M Capital Group, the main risks that threaten the continued growth of the U.S. economy are inflation, unsettled trade relations, and another wave of Covid-19 mutations that could shut down the world again. Have we learned from the past year of COVID-19 and adapted our economy accordingly?
“In order for the U.S. economy to continue growing, whether there is another wave or not, the U.S. needs to focus on diversifying supply chains, supporting business investment, and maintaining consumer spending,” says Grace Feeley, a research analyst at M Capital Group.
While the economic indicators are positive, the risks are coming closer to manifesting and threatening such growth. The new variants spreading throughout the world, Delta, Lambda, and Gamma, are vaccine-resistant and muddy the predictions made about the economy and health of the country. These variants bring back the feeling of uncertainty that has wreaked havoc not only on the stock market but the mindset of people around the world. MCG provides unique insight on how to mitigate these risks to possibly ensure a bright economic future.
BYD SWOT Analysis and In-Depth Insights 2024.pptxmikemetalprod
Indepth analysis of the BYD 2024
BYD (Build Your Dreams) is a Chinese automaker and battery manufacturer that has snowballed over the past two decades to become a significant player in electric vehicles and global clean energy technology.
This SWOT analysis examines BYD's strengths, weaknesses, opportunities, and threats as it competes in the fast-changing automotive and energy storage industries.
Founded in 1995 and headquartered in Shenzhen, BYD started as a battery company before expanding into automobiles in the early 2000s.
Initially manufacturing gasoline-powered vehicles, BYD focused on plug-in hybrid and fully electric vehicles, leveraging its expertise in battery technology.
Today, BYD is the world’s largest electric vehicle manufacturer, delivering over 1.2 million electric cars globally. The company also produces electric buses, trucks, forklifts, and rail transit.
On the energy side, BYD is a major supplier of rechargeable batteries for cell phones, laptops, electric vehicles, and energy storage systems.
The European Unemployment Puzzle: implications from population agingGRAPE
We study the link between the evolving age structure of the working population and unemployment. We build a large new Keynesian OLG model with a realistic age structure, labor market frictions, sticky prices, and aggregate shocks. Once calibrated to the European economy, we quantify the extent to which demographic changes over the last three decades have contributed to the decline of the unemployment rate. Our findings yield important implications for the future evolution of unemployment given the anticipated further aging of the working population in Europe. We also quantify the implications for optimal monetary policy: lowering inflation volatility becomes less costly in terms of GDP and unemployment volatility, which hints that optimal monetary policy may be more hawkish in an aging society. Finally, our results also propose a partial reversal of the European-US unemployment puzzle due to the fact that the share of young workers is expected to remain robust in the US.
how to sell pi coins in South Korea profitably.DOT TECH
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Since there is no pre-sale, the only way exchanges can get pi is by buying from miners. So a pi merchant facilitates these transactions by acting as a bridge for both transactions.
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Seminar: Gender Board Diversity through Ownership NetworksGRAPE
Seminar on gender diversity spillovers through ownership networks at FAME|GRAPE. Presenting novel research. Studies in economics and management using econometrics methods.
1. Elemental Economics - Introduction to mining.pdfNeal Brewster
After this first you should: Understand the nature of mining; have an awareness of the industry’s boundaries, corporate structure and size; appreciation the complex motivations and objectives of the industries’ various participants; know how mineral reserves are defined and estimated, and how they evolve over time.
1. Second Edition
Planning, Incurring, Monitoring & Controlling Capital Expenditures
Ahmad Tariq Bhatti
FCMA, MA (Economics), BSc
Dubai, United Arab Emirates
4. 4
Capital Budgeting (CB) refers to the complete process of
generating/initiating investment proposals, evaluating,
ranking and selecting the best alternative(s), monitoring
and making follow up on investment(s) made.
Provides assessment for the financial feasibility of
investment options.
Evaluates, how an investment opportunity is worthwhile
and how it fits to the company’s strategy, goals and
objectives?
CB techniques are invariably used for all types of
investment opportunities from the purchase of a new piece
of machinery to a whole factory.
DEFINITION
5. 5
NATURE
CB Decisions have long-term impact on the business stability,
growth & success
CB Decisions involve huge investment of funds
CB Decisions are more complicated from concerns of future cash
flow estimates and their evaluation at the time of making
investment
CB Decisions are not easily reversible mainly because of loss of
investment
IMPORTANCE
Huge amount of resources are involved that has impact on
business strategy, growth, and survival.
Difficult to “bail out”, once an investment is made.
The capital investments are challenging and critical to the
success of the company. An incorrect decision may end with the
company’s closing-out from the market.
6. CONCEPT
6
Investment refers to an outlay of funds on which
management expects a return. An investment creates
value for shareowners when expected returns from
investment exceed its cost.
Capital Expenditure refers to long term
commitment of resources that provide future benefits
to business.
Why investment is made?
Expansion Plans, Growth Strategies, Capacity Increase
Increase of efficiency of the manufacturing facilities
Deploying or replacing latest technology
Acquisition of Fixed Assets, Copy Rights, Franchises, Licenses,
Patents
Establishing new brands, new lines of business, new products
Opening new offices, new factories, overseas branches
7. Independent Projects are projects where selection or
rejection of one project does not have any impact on the
selection or rejection of the other project. Management can
select any number of projects from the given options.
Mutually Exclusive Projects are projects that
compete each other, acceptance of one project becomes
automatic rejection of the other or vice versa. The projects
compete with each other based on the superior financial
performance. There can be any number of projects for a
subject and competing with each other. Management has to
decide about one project from all alternatives or options.
Decision Rules: The decision rules for independent and
mutually exclusive projects slightly differ. The way of
looking at investment opportunities under both types varies.
RELEVANT CONCEPTS
7
8. PROCESS
8
CB is a five steps process that is followed by the investment
managers in the order given as below:
Initiating, generating and gathering investments ideas.
Analyzing the costs and benefits for proposed investments by:
– Forecasting costs and benefits for each investment.
– Evaluating the costs and benefits based on CB techniques.
Ranking the relative superiority of each investment alternative
based on financial performance worked out and choosing the best
investment opportunity from the given set of opportunities.
Implementing the investment alternative chosen.
Monitoring & making follow-up on the investment made on
regular basis to see how far this investment opportunity has been
effective in the given framework of the company to achieve its
desired objectives.
10. EVALUATION TECHNIQUES
10
A: Traditional Techniques
1. Payback period (PB)
2. Discounted Payback Period (DPB)
3. Accounting Rate of Return (ARR)
B: Discounted Cash Flow (DCF)/
Time Adjusted (TA) Techniques
1. Net Present Value (NPV)
2. Internal Rate of Return (IRR)
3. Modified Internal Rate of Return (MIRR)
4. Terminal Value (TV)
5. Profitability Index (PI) or Benefit/Cost Ratio
Important Note
These techniques provide reliable evaluation under conditions of
perfect certainty. They are, nevertheless, widely used in practice in the
face of uncertainty.
12. DECISION RULES
FOR ALL CAPITAL BUDGETING TECHNIQUES
12
# Tech.
Accept or Reject Criteria for …
Single or Independent Project(s) Mutually Exclusive Projects
1. PB Less than the Target Period Shortest Payback Period
2. DPB Less than the Target Period Shortest Payback Period
3. ARR Above the Target Rate With the highest ARR
4. NPV A positive NPV With the highest positive NPV
5. IRR Higher than the Target Rate (Cost of
Capital)
With the highest IRR
6. MIRR
Higher than Target Cost of Capital
(i.e. WACC)
With higher MIRR
7. TV
If PVTS>PVO Accept,
And if PVTS<PVO Reject
With the highest PVTS>PVO
8. PI (B/C Ratio) PI exceeding 1 Higher PI
13. MERITS & DEMERITS
TRADITIONAL TECHNIQUES
13
# Tech. Merits Demerits
1. PB
Simple and easy to understand and use.
Objective – using cash flows.
Liquidity – commercially realistic.
Cautious & risk averse – ignores later cash
flows.
First level estimator – gives rough idea
about the recouping of the investment.
Ignores the time value of money.
Ignores cash flows after the
payback period.
Don’t recommend the acceptable
pay back period for the projects.
2. DPB
Provides more accurate estimate of cash
inflows.
Provides more accurate estimate of the time
frame for the recovery of initial investment.
Ignores cash flows after the
recovery of initial investment.
More difficult to calculate than
PB.
3. ARR
Simple and easy to calculate and use.
Aids internal and external comparisons.
Looks at the whole life of the project.
A useful tool to measure divisional
managerial performance.
Subjective – profit, not cash flows.
Ignores the time value of money.
Difficulty in use when with same
ARR and various project sizes.
14. MERITS & DEMERITS
DCF TECHNIQUES
14
# Tech. Merits Demerits
1. NPV
Takes account of the time value of
money.
Instrumental in understanding exact
addition to shareholder’s wealth.
Takes account of risk.
Looks at total benefits over the
entire life of the project.
Particularly useful for mutually
exclusive projects.
Adverse effects on accounting profits in
the short run.
How to choose discount rate? As NPV
is dependent on discount rate. Bank
rate, or WACC or another?
May not give satisfactory results where
projects have different lives.
In case the projects have different cash
outlays, it may not give dependable
results.
2. IRR
Takes account of the time value of
money.
Easy to be understood by managers.
Takes into account total cash
inflows and total outflows.
Involves tedious calculations.
Difficult to use in choosing projects of
varying sizes.
Difficult to choose when projects have
the same IRR.
Not dependent on the discount rate.
15. MERITS & DEMERITS
DCF TECHNIQUES
15
# Tech. Merits Demerits
3. MIRR
Quicker to calculate than IRR.
MIRR is invariably lower than IRR
that may be due to more realistic
assumption about re-investment rate.
There is much confusion about the re-
investment rate used in this formula.
One implication of MIRR is that the
project may not generate cash flows as
predicted and that NPV of the project is
overstated.
4. TV
Explicitly uses re-investment of cash
inflows.
Mathematically easier.
Easier to understand than NPV or
IRR.
It suits better to cash budgeting.
The major weakness of this
technique that it utilizes interest
rates that are uncertain for future
cash inflows.
5. PI
(B/C Ratio)
Better technique than NPV in
situations where capital rationing
issues are involved.
In mutually exclusive projects NPV
appears to be superior technique than PI.
Difficult to understand.
16. 16
ISSUES
When investment amount in given projects is different then the results from
NPV and IRR techniques shall lead to different conclusions.
When length of the given projects in terms of time is different then the
results obtained from NPV and IRR techniques shall lead to different
conclusions.
When the interest rates of given projects are different then the results
obtained from NPV and IRR shall lead to different conclusions.
When timing of cash flows is different i.e. timing of cash flows from the two
projects differs such that most of the cash flows from one project come in the
early years while most of the cash flows from other project come in the later
years, the results from NPV and IRR techniques shall lead to different
conclusions.
NPV compared w. IRR
RESOLUTION OF ISSUES
The value of early cash flows depends on the return that is earned on those cash
flows, i.e. the rate at which these funds are re-invested.
The NPV method implicitly assumes that the rate at which cash flows can be re-
invested is the cost of capital,
The IRR method assumes that the company re-invest the funds at the IRR.
The best assumption is that projects cash flows is re-invested at the cost of
capital, that goes for the recommendation of NPV method.
17. NPV, IRR & MIRR
17
NPV and IRR always lead to the same accept/reject decision for independent
projects.
NPV and IRR may lead to different accept/reject decisions for mutually
exclusive projects.
Where NPV and IRR give different accept/reject decision then NPV results
should be accepted.
NPV assumes re-investment of cash inflows at r (opportunity cost of capital).
IRR assumes reinvestment of cash inflows at IRR.
IRR indicates the minimum rate expected by the investors to get their
investment back from the project. They definitely get idea from IRR that how
much extra earnings are required to cover their cost of capital and net return on
their investment.
Re-investment of cash inflows at opportunity cost, r, is more realistic, so NPV
method is best. NPV should be used to choose between mutually exclusive
projects.
MIRR assumes cash inflows are reinvested at WACC.
MIRR also avoids the problem of multiple IRRs. MIRR is better than IRR.
When there are non-normal cash flows and there are more than one IRRs, use
MIRR.
IRR is an estimate of a project’s rate of return, so it is comparable to the Yield
To Maturity (YTM) on a bond.
18. CRUX OF ALL CAPITAL
BUDGETING TECHNIQUES
18
The purpose of evaluation under all capital budgeting
techniques is to estimate the monetary benefit arising out
of investment made in a given project.
If a project is estimated to maximize
shareholder’s wealth at the end of a given period
of time by returning surplus monetary benefit
than the investment made, then decision is made
to take up the project for investment.
19. NON-FINANCIAL FACTORS
19
Company Goodwill, Image & Reputation
Management may reject an investment opportunity, as it will reflect badly on the
company goodwill, image and reputation.
Company Policies, Objectives & Culture
Management is bound to check, if the investment opportunity conforms to the
policies, objectives and culture of the company?
Environmental, Social, Legal & Ethical Issues
Management is required to make sure that the investment opportunity under
consideration is, legally, environmentally, socially and ethically acceptable and
viable.
Impact on Stakeholder Relationships
Management appraises the impact of the investment on competitors, shareholders,
employees, buyers, bankers, suppliers and government institutions, etc.
Management can reject a project based on non-financial factors though
the financial performance of a project is found satisfactory.
20. ACCOUNTING PROFIT
COMPARED TO CASH FLOWS
20
Most investment decision models use predicted cash flows instead of accounting profits.
Why investment managers pay more attention to cash flows rather than accounting
profit in their all calculations for investment decision-making?
In the simplest words, accounting profits reflect the profitability of a company over a
given period of time under the principles of accrual accounting, whereas, cash flows
tell about the cash position in a given period of time under cash basis of accounting.
Cash position is important for liquidity point of view whereas profitability indicates
viability of the company. A company with excellent profit figures may be very bad in
generating cash flows that are necessary to survive even in the short term.
Cash flows reflect on the management of cash cycle of the company so that
company would be able to pay-off its short term obligations whenever they fall due.
A company making huge loss may still be having very good cash flows that keep the
liquidity of the company excellent and thus vehicle of the company is moving forward.
Investors emphasize at the cash flows because the project performance is based on
reliable cash flow streams more than profitability viz exposed to number of
estimated amounts. Cash flows reflect the exact happening without using estimated
figures for number of allocations and provisions like depreciation, bad debts, and many
others.
21. 21
NORMAL VS NON NORMAL CASH FLOWS
Normal cash flow is the cash flow stream that comprises of initial investment
outlay and then positive net cash flow throughout the project life. It is also
called conventional cash flow stream.
Whereas non-normal cash flows have investment injections during the project
life as well, this is also known as un-conventional cash flow stream
The nature of the cash flow pattern is important in capital budgeting. Because
when the cash flows stream is non-normal, multiple-IRR problem arises.
Case # Yr. 0 Yr. 1 Yr. 2 Yr. 3 Yr. 4 Yr. 5 Pattern
1 - + + + + + N
2 - + + + + - NN
3 - - - + + + N
4 + + + - - - N
5 - + + - + - NN
• Cash out-flow (-)
• Cash In-flow (+)
• Normal Cash Flow Stream (N)
• Non Normal Cash Flow Stream (NN)
22. TIME VALUE OF MONEY
22
What is the difference between AED. 1 received now and
AED.1 received in a year’s time?
AED.1 received now has more value than that is received after a year.
The factors that change the value of money over a given
period of time are mentioned as below:
– Interest rate
– Inflation
– Currency devaluation
– Other risks to materialise the money
For example
The annual interest rate is 10%, I lend AED. 1 now and will get back after
1 year, how much worth of that AED.1 in a year’s time?
? x (1+10%) = AED. 1
? = AED. 0.909
10% is called “cost of capital”; “?” is called the “discount factor”
23. PRESENT VALUE
23
Finding present values is called discounting, and it is simply the reverse of
compounding. In general, the present value of a cash flow due n years in the
future is the amount which, if it were on hand today, would grow to equal the
future amount. By solving for PV in the future value equation, the present
value, or discounting, equation can be developed and written in several forms:
).PVIF(FV=
i+1
1
FV=
)i+(1
FV=PV ni,n
n
nn
n
Where:
PVIFi, n = Present Value Interest Factor at given rate and number of periods
PV = Present Value, or investment amount at the start of the project
i = interest rate per annum
n = number of periods
FVn = future value after n periods
24. CAPITAL RATIONING
24
The management has not only to determine the profitable investment
opportunities, but it has also to decide about that combination of
projects which delivers highest NPV within the available funds.
There are two types of capital rationing.
External Capital Rationing
-- Factors that are outside the company due to financial market
conditions.
Internal Capital Rationing
-- Factors that are within the company due to policy, procedure or
other constraints.
Capital Rationing is about selecting projects in a way that helps a
company completing them within the given financial resources.
Financial resources are limited, therefore, should be used in way that is
the best combination from company’s wealth maximization point of
view.
25. ILLUSTRATIVE MODEL
25
There are two mutually exclusive projects A and B for the
consideration of XYZ company. The data for the initial investments
and subsequent cash inflows is given on next slide.
Calculate:
– PB, DPB, ARR
– NPV, IRR, MIRR, TV & PI
Provide recommendations based on the results of budgeting
techniques to make the accept or reject decision in relation to
Project A or B?
Important note
Project A and Project B are competing each other and only one of them can be
selected (i.e. mutually exclusive projects). The project that has superior
financial performance shall be selected. The performance of these two mutually
exclusive projects shall be evaluated under 8 capital budgeting techniques.
26. CASH FLOWS FOR PROJECTS A & B
Year
Project A:
Net Cash flows in/(out)
Project B:
Net Cash flows in/(out)
For the year Accumulated For the year Accumulated
AED. AED. AED. AED.
0 (100,000) (100,000) (100,000) (100,000)
1 45,000 (55,000) 30,000 (70,000)
2 40,000 (15,000) 30,000 (40,000)
3 35,000 20,000 44,000 4,000
4 50,000 70,000 66,000 70,000
26
The depreciation charge is AED. 20,000 per annum.
The residual value for both projects is the same, AED. 20,000
Interest rate is 10% per annum
There is no tax imposed on the incomes of these projects.
27. ASSUMPTIONS & FEATURES
OF THE MODEL
27
The amounts of initial cash outlays (investments) are same,
The project lives are equal i.e. 4 years
Total amount of cash inflows over the entire lives of projects are equal,
Residual values at the end of the projects are same,
Interest rates are same,
The total amount of depreciation expense on these projects over the lives of
is same,
There is no tax imposed on the incomes earned on both projects,
There is no further investment after the initial one for the two projects,
The Projects A and B have continuous stream of cash inflows during the
entire period related to them i.e. normal cash flows,
The cash inflows though normal but are unequal for both Projects A & B.
It is assumed that non-financial factors relating to these two projects are
satisfactory. And there is as such no qualification re the non-financial factors.
Projects A and B are mutually exclusive projects.
Note
Interest rate is used alternatively as discount rate, hurdle rate, cut-off rate,
required rate, etc., etc.
28. 1. PAY BACK PERIOD
28
Calculation for Project A
= (change in cash flow required to reach zero/total cash flow in the year) + complete years
= (15,000/35,000) + 2
= 0.43 + 2 years = 2.43 years
Calculation for Project B
= (40,000/44,000) + 2
= 0.91 + 2 years = 2.91 years
Decision Rules
Project A has recovered the initial investment in 2.43 year whereas Project B has
recovered initial investment in 2.91 years. Project A has recovered initial
investment faster than Project B, therefore Project A is SELECTED.
Important note
A variation of this technique that involves Present Values of cash inflows is
known as Discounted Payback Period. It gives exact idea about re-couping of
original investment to the business.
29. 2. DISCOUNTED PAY BACK PERIOD
29
CALCULATION FOR PROJECT A
Year
Net Cash flows
in AED.
Discount Factor
for AED.1 @ 10%
p.a.
Present Value in
AED.
1 2 3=1x2
0 (100,000) 1.000 (100,000)
1 45,000 0.909 40,905
2 40,000 0.826 33,040
3 35,000 0.751 26,285
4 50,000 0.683 34,150
Discounted Payback Period for Project A
= 3 yrs. + (230/34,150)yr. = 3.007 yrs.
N.B.: The period indicates the recovery of initial investment plus cost of
capital in 3.007 years.
30. 30
CALCULATION FOR PROJECT B
Year
Cash flow in
AED.
Discount Factor for
AED. 1 @ 10% p.a.
Present Value in
AED.
1 2 3=1x2
0 (100,000) 1.000 (100,000)
1 30,000 0.909 27,270
2 30,000 0.826 24,780
3 44,000 0.751 33,044
4 66,000 0.683 45,078
Discounted Payback period for Project B
= 3 yrs. + (14,906/45,078)yr. = 3.331 yrs.
Decision Rule
The project that has longer discounted payback period shall be rejected. The Project B has longer
period to recoup the investment than Project A, therefore, Project B is rejected and Project A is
selected. This technique is the refinement of the Pay Back Method. It is also interesting to note that
results for acceptance or rejection are same under these two techniques. However, we have got the
exact idea about the recovery of the initial investment to the business.
31. 3. ACCOUNTING RATE OF RETURN
31
: Calculate annual profit
Annual Profit = Income - Depreciation
: Calculate average profit
Average Accounting Profit = Total Profits / # of Yrs.
: Calculate average capital invested
Average Capital = (Initial Investment + Residual Value)/2
: Calculate Accounting Rate of Return
ARR = (Average Profit/Average Capital) x 100
Annual Profit in the context of this model refers to the earnings from the project less all
other expenses including depreciation. The model used here gave us only depreciation
expense, therefore, it is deducted from the income given in each year. This is for the
reason of simplicity of the model. Further, cash inflows are the income in the absence of
any other expense for example, only depreciation is the expense to be charged against
these earnings In practice, we take net profit after tax for this working.
32. ARR CALCULATION
32
Project A
Average Accounting Profit = (Income – Depreciation)/4
Average Accounting Profit = (170,000 - 80,000)/4
= 22,500
Average investment = (Initial Investment + Residual Value)/2
= (100,000 + 20,000)/2 = 60,000
ARR = 22,500/60,000 x 100 = 37.50%
Project B
Average Accounting Profit = (170,000-80,000)/4 = 22,500
Average Investment = (100,000 + 20,000)/2 = 60,000
ARR = (22,500/60,000) x 100 = 37.50%
33. ACCOUNTING RATE OF RETURN
33
Decision Rules
For Independent Projects
Ranking shall be made of all independent projects based on their estimated ARR. The
projects that have higher estimated ARR than the minimum required ARR shall be
selected and all other projects shall be rejected.
For Mutually Exclusive Projects
The project with higher ARR is to be selected for mutually exclusive projects.
There are two check points for mutually exclusive projects.
All the competing projects should have higher ARR than the minimum required.
The project with higher ARR shall be selected and the other shall be rejected.
In this model, both projects have same ARR i.e 37.50%, So first, management shall
see if the estimated ARR for both Projects A and B is higher than the minimum
required ARR. For example, minimum ARR is 25%. Then management shall be
indifferent, as to select which of these two projects. Management shall extend their
studies further into the results of other capital budgeting techniques.
It is hereby advised to prepare a schedule that summarizes results from all CB
techniques to give a complete picture to the evaluator on one page. Please refer to
slide # 55 for the summarized results noted from each CB technique.
34. 4. NET PRESENT VALUE
34
The XYZ company’s interest rate is 10% p.a.
Discount Factors @ 10% p.a. for AED. 1 are as given below:
Year 1 = 0.909
Year 2 = 0.826
Year 3 = 0.751
Year 4 = 0.683
Formula to calculate Discount Factor @ 10% p.a. for AED. 1 is given as follows:
Discount Factor = 1/(1+10%)^n
.
1
0
1
CF
r
CF
NPV t
t
n
t
NPV = Net Present Value
CFt = Cash in-flows for given periods
CFo = Initial Investment
r = Discount Rate
35. NPV CALCULATION FOR PROJECT A
35
Year
Net Cash
flows in AED.
Discount
Factor for
AED.1 @ 10%
p.a.
Present Value
in AED.
1 2 3 = 1 x 2
0 (100,000) 1.000 (100,000)
1 45,000 0.909 40,905
2 40,000 0.826 33,040
3 35,000 0.751 26,285
4 50,000 0.683 34,150
NPV 34,380
36. NPV CALCULATION FOR PROJECT B
36
Year
Cash flow in
AED.
Discount Factor for
AED. 1 @ 10% p.a.
Present Value in
AED.
1 2 3=1x2
0 (100,000) 1.000 (100,000)
1 30,000 0.909 27,270
2 30,000 0.826 24,780
3 44,000 0.751 33,044
4 66,000 0.683 45,078
NPV 30,172
37. 37
NPV = NPV(RATE%, VALUES)
Project A = NPV(10%, values) = AED. 31,285
Project B = NPV(10%, values) = AED. 27,457
Important Note
In our manual workings, all individual discounting factors have been rounded off to
four digits. In Excel workings, the system has taken full discounting factors without
rounding them off. There is definitely a difference in both workings. But results are
consistent and do not allow the decision be changed. For all practical purposes
except under exam conditions, we should use Excel formula to reach the exact
decision.
Difference
Difference in Project A NPV = 34,380 – 31,285 = 3,095
Difference in Project B NPV = 30,172 – 27,457 = 2,715
Calculation of NPVs by using EXCEL
Formula
38. 38
Discount Rate NPV Project A NPV Project B
AED. AED.
10% 31,285 31,285
13% 23,072 18,599
16% 15,998 11,032
19% 9,886 4,552
22% 4,594 (1,009)
25% - (5,791)
28% (3,995) (9,910)
IMPORTANT NOTE
The point where the NPV profile crosses the horizontal axis indicates a
project's IRR. This is the point where IRR is equal to the discount rate and
therefore makes NPV of projects equal to zero.
Profiling of the Project A & B on
the basis of their NPVs
39. 39
(15,000)
(10,000)
(5,000)
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
10 13 16 19 22 25 28
NPVofProjectsA&BinAED.
Discount Rate (%)
Profiling of Projects A & B on NPV Basis
NPV Project A
NPV Project B
Discount Rate
We can clearly see in the graph the results from using of different discount
rates for projects A and B. The NPV of both projects come to zero at 22%
and 25% discount rates. This is the graphical determination of IRR as well.
40. NPV DECISION RULES
40
NOTE
In the case of both Projects A and B, NPV is reducing when discount rates are increasing.
To generalize, when discount rate increases, NPV decreases and vice versa.
41. 5. INTERNAL RATE OF RETURN
41
IRR is the discount rate which delivers a zero NPV for a given project. That means a rate
at which PV of all cash inflows equals to total investment at a given point in time.
IRR Calculation for Project A
NPV = AED. 34,380 when the discount rate is 10%
NPV = ??? When the discount rate is 25%
Year
Cash flow in
AED.
Discount Factor for AED.
1 @ 25% p.a.
Present Value in
AED.
1 2 3=1x2
0 (100,000) 1.000 (100,000)
1 45,000 0.800 36,000
2 40,000 0.640 25,600
3 35,000 0.512 17,920
4 50,000 0.410 20,500
NPV (20)
N.B. : If we reduce the IRR to get the NPV exactly equal to zero. Then after
rounding off it shall be again equal to 25%. Therefore, IRR for Project A is 25%.
42. 42
IRR Calculation for Project B
NPV = AED. 30,172 when the discount rate is 10%
NPV = ??? When the discount rate is 25%
Year
Cash flow
in AED.
Discount Factor for
AED. 1 @ 25% p.a.
Present Value in
AED.
1 2 3 = 1x2
0 (100,000) 1.000 (100,000)
1 30,000 0.800 24,000
2 30,000 0.640 19,200
3 44,000 0.512 22,528
4 66,000 0.410 27,060
NPV (7,212)
NOTE
NPV of Project B is negative @ 25% discount rate. The higher the discount rate, the lesser is the
NPV . In order to have zero NPV, we have to reduce the discount rate from 25% to 22%. Please refer
to working on slide # 42.
43. CALCULATING IRR WITH EXCEL
FOR PROJECT A
43
Year Cash flow in AED.
0 (100,000)
1 45,000
2 40,000
3 35,000
4 50,000
IRR for Project A = IRR(values, [guess])
This formula produces an IRR for Project A of 25%.
Tip
Select any cell where you want to see the result. Write =IRR(values, [guess]).
In the place of values give range of cells as given in the above table including
investment at Y0.
44. 44
CALCULATING IRR WITH EXCEL
FOR PROJECT B
Year Cash flow AED.
0 (100,000)
1 30,000
2 30,000
3 44,000
4 66,000
IRR for Project A =IRR(values, [guess])
This formula produces an IRR for Project A of 21.42%.
TIP
Calculating IRR with EXCEL is easier than from the interpolation formula,
as given here-in-above. So it is advised to calculate IRR with EXCEL.
45. 45
Project B: IRR Calculation by using Interpolation Formula
Total change in NPV = 30,172 – (– 7,212) = 37,384
Total change in discount rate = 25% – 10% = 15%
IRR = 10% + 30,172/37,384 x 15% = 22%
The discount rate is chosen by hit and trial method. In this example, we have
reduced discount rate from 25% to 10% to find out the exact rate that shall make
the project NPV equal to Zero. And we found the exact rate of 22% that gives
NPV equal to zero by using Interpolation Formula.
Decision Rules
If Project A’s IRR>Project B’s IRR then select Project A , &
If Project B’s IRR>Project A’s IRR then select Project B
In this case Project A’s IRR>Project B’s IRR, therefore, Project A is selected.
Because its IRR 25% which is higher than that of Project B’s 22%.
It is also worth noting here that IRR>Discount Rate of 10%. If these two projects
were not competing each other (i.e. independent projects), then both would have
been selected. If IRR<Discount rate of 10%, then both project would have been
rejected.
Calculating IRR by using Interpolation Formula
46. 6. MODIFIED INTERNAL RATE OF RETURN
46
MIRR is used to gauge an investment’s attractiveness. It is
employed to rank alternative investments of equal size. There are
mainly two problems of IRR that are resolved by MIRR.
I. IRR assumes that interim positive cash flows are re-invested at the same rate
of return as that of the project that generated them. This is usually an un-
realistic scenario and more likely situation is that the funds will be re-
invested at a rate closer to the company’s cost of capital. IRR, therefore,
often gives an unduly optimistic picture of the projects being examined.
Generally, for comparing projects more fairly, Weighted Average Cost of
Capital (WACC) should be used for re-investing the interim cash flows.
MIRR correctly assumes reinvestment at opportunity cost = WACC.
II. More than one IRR can be found for projects with alternative positive and
negative cash flows, which leads to confusion and ambiguity. MIRR finds
only one value.
47. MIRR FORMULA
47
MIRR =
𝑛 𝑭𝑽 𝑃𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝐶𝑎𝑠ℎ𝑓𝑙𝑜𝑤𝑠, 𝑟𝑒𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑟𝑎𝑡𝑒
−−−−−−−−−−−−−−−−−−−−−−−−− −
𝑷𝑽(𝐶𝑎𝑠ℎ 𝑜𝑢𝑡𝑙𝑎𝑦, 𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑛𝑔 𝑐𝑜𝑠𝑡)
-1
Where n is the number of equal periods at the end of cash flows occur.
MIRR can be calculated by using Excel Formula that is given as below:
MIRR = MIRR(range, finance_rate, reivestment_rate)
Where:
Range: is the range of cells that represent a project’s cash flows
Finance_rate: is the interest rate that company pay’s to its banks
Reinvestment_rate: is the rate that company expects to receive on reinvestment of cash
inflows
48. MIRR DECISION RULES
48
Calculation
According to the data given at slide 26, Cost of Capital for the Project A and B is same at 10%
p.a. According to the assumption used in the formula for MIRR, the minimum return on re-
invested cash inflows is equal to Cost of Capital or Weighted Average Cost of Capital
(WACC) instead of IRR of the given projects.
MIRR for Project A = MIRR(range, 10%, 10%) = 18.44%
MIRR for Project B = MIRR(range, 10%, 10%) = 17.50%
Decision Rules
In case of independent projects, the project having MIRR greater than Cost of Capital is
acceptable. For mutually exclusive projects, the project having higher MIRR shall be selected.
Conclusion
Project A has higher MIRR than that of Project B. Therefore, A should be selected according
to the criteria established for acceptance and rejection of projects under MIRR.
49. 7. TERMINAL VALUE
49
This technique assumes that each cash inflow is re-invested in an other
opportunity at a certain rate of return from the moment it is received till the
moment the project is finished.
So each cash inflow shall be compounded separately based on its expected rate
of return. The total compounded cash balance shall be discounted at the rate of
interest XYZ agreed with its banks. This technique shall give us better
estimation of cash inflows at the end of the project. In addition to data given at
slide 26, following data shall be used in the calculation for Terminal Value of
Projects A & B:
At the end of year Expected rate of return (%)
1 7
2 9
3 6
4 8
50. TV CALCULATION
50
Yr. RoI YuI CF
Net cash
inflows
Project A
Total
compounde
d sum for
Project A
Net cash
inflows for
Project B
Total
compounded
sum for
Project B
1 2 3 4 5 6 = 4 x 5 7 8 = 4 x 7
% AED. AED. AED. AED.
1 7 3 1.225 45,000 55,125 30,000 36,750
2 9 2 1.188 40,000 47,520 30,000 35,640
3 6 1 1.060 35,000 37,100 44,000 46,640
4 8 0 - 50,000 50,000 66,000 66,000
Total 170,000 189,745 170,000 185,030
Abbreviations used in the table:
RoI: Rate of Interest expected from the market (minimum expected rate can be used)
YuI: Years under investment
CF: Compounding factor based on given rates
Yr.: Year
51. TV RESULT
51
Now, we can calculate the Present Value of the compounded sums for
Project A and Project B in the following manner:
Project A compounded sum x PV factor @ 10% = AED. 189,745 x 0.683
Present Value for Project A compounded sum = AED. 129, 596
Project B compounded sum x PV factor @ 10% = AED. 185,030 x 0.683
Present Value for Project B compounded sum = AED. 126,375
Important Note
A variation of Terminal Value (TV) is based on the pattern of NPV
technique and is known as Net Terminal Value (NTV) technique.
Symbolically, NTV = PVTS – PVO.
It has the same Decision Rules that are used for NPV technique. If NTV is
positive accept the project and if it is negative then reject it.
52. DECISION RULES FOR TV
52
For single project, If the Present Value of the Total of compounded re-invested cash
inflows (PVTS) is greater than the Present Value of the Outflows (PVO),
the proposed project is accepted, otherwise not.
For multiple projects (mutually exclusive projects), the project having PVTS
greater than all competing projects when compared with PVOs relating to them,
shall be selected. Symbolically,
PVTS>PVO Accept
PVTS<PVO Reject
Conclusion
In both projects PVTS is greater than PVO. Since we have to select any one of
them, that is Project A because its PVTS is greater than Project B when both
compared with their PVO which is same in this case.
53. 8. PROFITABILITY INDEX (PI)
53
Profitability Index (PI) or Benefit/Cost Ratio (B/C Ratio)
measures Present Value per Dirham invested.
It is a ratio of PV of future cash inflows by PV of cash outlays (ie net
investment).
PI = PV of expected cash inflows /PV of cash outflows
We calculate here PI for Projects A & B.
PI for Project A = 134,380/100,000 = 1.344
PI for Project B = 130,172/100,000 = 1.302
54. DECISION RULES FOR PI
54
If PI for any single project exceeds 1, the project can be accepted. For
the mutually exclusive projects, the project that has higher PI should
be considered for investment.
Conclusion
In the given illustration of two Projects A and B, Project A has higher
PI than that of Project B. Management should select Project A out of
the proposed investment opportunities.
55. SUMMARY OF RESULTS
55
# Technique
Results for Mutually Exclusive Projects…
Accept
Project
A B A or B?
1. PB 2.43 years 2.91 years A
2. DPB 3.007 years 3.331 years A
3. ARR 37.50% 37.50% N/A
4. NPV AED. 34,380 AED. 30,172 A
5. IRR 25% 22% A
6. MIRR 18.44% 17.50% A
7. TV AED. 129,596 AED. 126, 375 A
8. PI (B/C Ratio) 1.344 1.302 A
Final Conclusion
Based on the results of all CB techniques used in this illustration, we recommend the
management of XYZ company to go for Project A.
56. ABBREVIATIONS
56
# Abbreviation Description
1 AED. UAE Dirham
2 ARR Accounting Rate of Return
3 CB Capital Budgeting
4 DPB Discounted Payback Period
5 DCF Discounted Cash Flow
6 IRR Internal Rate of Return
7 MIRR Modified Internal Rate of Return
8 NPV Net Present Value
9 NTV Net Terminal Value
10 PB Payback Period
11 PI Profitability Index (also known as B/C Ratio)
12 PVO Present Value of Cash Outflows
13 PVTS PV of Total Compounded Reinvested Cash inflows
14 WACC Weighted Average Cost of Capital