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Presented By:-
Koustav Kundu
Mohit Garg
Swarna Mishra
• The Process which helps to evaluate different projects.
• Most Important and Complicated Problem of Managerial
Decisions.
• It is Long term planning for making and financing proposed
capital outlay.
• “Capital budgeting consists in planning development of
available capital for the purpose of maximizing the long term
profitability of the concern” - Lynch
• The main features of capital budgeting are
 Potentially large anticipated benefits
 A relatively high degree of risk
 Relatively long time period between the initial outlay and
the anticipated return.
• Pay Back Period Method
– Pay Back Period
– Discounting Pay Back Period
– Post Pay Back Period
– Post Pay Back Profit
– Post Pay Back Profitability
• Net Present Value Method
• Average Rate of Return (A.R.R.) Method
• Internal Rate of Return (I.R.R.) Method
Pay Back Period
• It refers to the period in which the project will generate the necessary cash
to recover the initial investment.
• The selection of the project is based on the earning capacity of a project.
Formula :- Net Investment
Cash Inflow
OR
Pay Back Period= Years in which max. amt. Rec. + Required remaining cost
Cash Inflow Of Next Year
Discounting Pay Back Period
• When Payback Period is calculated by taking into account
the discounting or present value factor.
Formula :-
Present Value Factor = 1
1 + Rate
Post Pay Back Period
Formula :- Estimated Life of Assets – Pay Back Period
Post Pay Back Profit
Formula :- Cash inflow X Post Pay Back Period
**(when Cash inflow of different years are same)
Cash inflow – Cost of Project
**(when cash inflow is different)
Post Pay Back Profitability
Formula :- Post Pay Back Profit X 100
Cost of Project
• Cash Inflow and outflow at different time periods differ in value.
• Inflow and Outflow are compared only when they are converted
to present values
• When we deduct the cost of project or outflow from present
value of Inflows we get Net present value
Formula :- Present values of Cash Inflow – Present Value of Cash
Outflow
• Also known as Accounting Rate of Return or Return on
Investment
• It focuses on average net income generated in a project.
Formula:- A.R.R.= Avg.Annual net profit after tax and dep. X 100
Average Investments
Here Avg. Investment = Original Investment – Scrap Value
2
• Also known as Time Adjusted Return on Investment or
Discounted Rate of Return.
• It is the rate at which the present value of annual savings just
equal to cost of investment
• In this Method we compare the project at different assumed
rate of returns
Formula:- IRR = LR+ LR Present Value X (HR-LR)
LR Present Value – (HR Present Value)
CONCLUSION
THANK
YOU!!

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Capital budgeting

  • 2. • The Process which helps to evaluate different projects. • Most Important and Complicated Problem of Managerial Decisions. • It is Long term planning for making and financing proposed capital outlay. • “Capital budgeting consists in planning development of available capital for the purpose of maximizing the long term profitability of the concern” - Lynch
  • 3. • The main features of capital budgeting are  Potentially large anticipated benefits  A relatively high degree of risk  Relatively long time period between the initial outlay and the anticipated return.
  • 4. • Pay Back Period Method – Pay Back Period – Discounting Pay Back Period – Post Pay Back Period – Post Pay Back Profit – Post Pay Back Profitability • Net Present Value Method • Average Rate of Return (A.R.R.) Method • Internal Rate of Return (I.R.R.) Method
  • 5. Pay Back Period • It refers to the period in which the project will generate the necessary cash to recover the initial investment. • The selection of the project is based on the earning capacity of a project. Formula :- Net Investment Cash Inflow OR Pay Back Period= Years in which max. amt. Rec. + Required remaining cost Cash Inflow Of Next Year
  • 6. Discounting Pay Back Period • When Payback Period is calculated by taking into account the discounting or present value factor. Formula :- Present Value Factor = 1 1 + Rate
  • 7. Post Pay Back Period Formula :- Estimated Life of Assets – Pay Back Period Post Pay Back Profit Formula :- Cash inflow X Post Pay Back Period **(when Cash inflow of different years are same) Cash inflow – Cost of Project **(when cash inflow is different) Post Pay Back Profitability Formula :- Post Pay Back Profit X 100 Cost of Project
  • 8. • Cash Inflow and outflow at different time periods differ in value. • Inflow and Outflow are compared only when they are converted to present values • When we deduct the cost of project or outflow from present value of Inflows we get Net present value Formula :- Present values of Cash Inflow – Present Value of Cash Outflow
  • 9. • Also known as Accounting Rate of Return or Return on Investment • It focuses on average net income generated in a project. Formula:- A.R.R.= Avg.Annual net profit after tax and dep. X 100 Average Investments Here Avg. Investment = Original Investment – Scrap Value 2
  • 10. • Also known as Time Adjusted Return on Investment or Discounted Rate of Return. • It is the rate at which the present value of annual savings just equal to cost of investment • In this Method we compare the project at different assumed rate of returns Formula:- IRR = LR+ LR Present Value X (HR-LR) LR Present Value – (HR Present Value)