Capital Budgeting Techniques for business with example

1. Capital Budgeting Techniques
Net Present Value Method NPV Method
Dr. Mangesh Bhople
Asst. Professor, MAEER’s MIT Arts
Commerce and Science College Alandi
Pune

2. Time Value of Money
1
Time Value of Money =------------
(1+r^n)
Where r= Hurdle rate or Cost of
Capital
n = No. of Year of the
consideration
Eg. PV of 1 Re. @ 10 % Discounig
Factor will be
1
Time Value of 1 Re. @ 10% =------------
(1+0.1^1)
= 0.99

3. The Net Present Value Method
NPV is important for
selection or rejection
of any project
NPV = Present value
of Inflows – Present
Value of Outflow

4. Problem: A firm is considering an investment proposal worth Rs.80,000. The CFATs (cash inflows after tax)
are expected to be as follows. The rate of discount is 10%. Find out whether the project is worthwhile or not.
Year CFAT PV of 1 Re. at 10 %
Discount Factor
PV of CFAT
1 15000 1/1.1^1 = 0.909 13635
2 22000 1/1.1^2 = 0.826 18172
3 27000 1/ 1.1^3 = 0.751 20277
4 29000 1/1.1^4 = 0.683 19807
5 21000 1/ 1.1^5 = 0.621 13041
Total 114000 84932
Year CFAT
1 15000
2 22000
3 27000
4 29000
5 21000
Solution:
NPV = Present value of Inflows – Present Value of Outflow/s
= 84932 – 80000 = + 4932

5. Final Decision
Net Present
Value
Positive
Not Acceptable
Project
Acceptable Project
Negative

6. Thank You!