Capital budgeting is the process of identifying, evaluating, and implementing investment opportunities that can increase a firm's competitive advantages and market value per share. It involves estimating cash flows, assessing risk, determining the appropriate cost of capital, and using techniques like net present value (NPV), internal rate of return (IRR), and profitability index (PI) to calculate whether investments should be accepted or rejected based on whether their NPV is positive. Traditional techniques like payback period and accounting rate of return (ARR) are also used but modern discounted cash flow methods like NPV, IRR, and PI are preferred.
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.
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.
WORKING CAPITAL PRACTICESWORKING CAPITAL PRACTICES.docxericbrooks84875
WORKING CAPITAL PRACTICES
WORKING CAPITAL PRACTICES
Tanelle Peppers
Business 650
Ashford University
WORKING CAPITAL PRACTICESCapital budgeting are the planning methods used by organza tons to decide which of its long Term investments are worth pursuing. Since most organizations are at the moment restructuring Their working capital practices, in order to discover untapped cash sources .The main methods Used for capital budgeting are Internal rate of return, Net present value, Real options analysis, Payback period, Profitability index, and Equivalent annuity.
Net Present Value
It’s used in estimating each potential project's worth using a discounted cash flow valuation. The valuation requires estimating the size and timing of all the incremental cash flows from the project. The NPV is greatly affected by the discount rate, so selecting the proper rate–sometimes called the hurdle rate–is critical to making the right decision.
This should reflect the riskiness of the investment, typically measured by the volatility of cash flows, and must take into account the financing mix. Managers may use models, such as the CAPM or the APT, to estimate a discount rate appropriate for each particular project, and use the weighted average cost of capital (WACC) to reflect the financing mix selected. A common practice in choosing a discount rate for a project is to apply a WACC that applies to the entire firm, but a higher discount rate may be more appropriate when a project's risk is higher than the risk of the firm as a whole.
Internal Rate of Return
The internal rate of return (IRR) is defined as the discount rate that gives a net present value (NPV) of zero. It is a commonly used measure of investment efficiency.
The IRR method will result in the same decision as the NPV method for non-mutually exclusive projects in an unconstrained environment, in the usual cases where a negative cash flow occurs at the start of the project, followed by all positive cash flows. Nevertheless, for mutually exclusive projects, the decision rule of taking the project with the highest IRR, which is often used, may select a project with a lower NPV.
One shortcoming of the IRR method is that it is commonly misunderstood to convey the actual annual profitability of an investment. Accordingly, a measure called "Modified Internal Rate of Return (MIRR)" is often used.
Payback Period
Payback period in capital budgeting refers to the period of time required for the return on an investment to "repay" the sum of the original investment. Payback period intuitively measures how long something takes to "pay for itself.” All else being equal, shorter payback periods are preferable to longer payback periods.
The payback period is considered a method of analysis with serious limitations and qualifications for its use, because it does not account for the time value of money, risk, financing, or other important considerations, such as the opportunity cost.
Profitability Index
Prof.
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
WORKING CAPITAL PRACTICESWORKING CAPITAL PRACTICES.docxericbrooks84875
WORKING CAPITAL PRACTICES
WORKING CAPITAL PRACTICES
Tanelle Peppers
Business 650
Ashford University
WORKING CAPITAL PRACTICESCapital budgeting are the planning methods used by organza tons to decide which of its long Term investments are worth pursuing. Since most organizations are at the moment restructuring Their working capital practices, in order to discover untapped cash sources .The main methods Used for capital budgeting are Internal rate of return, Net present value, Real options analysis, Payback period, Profitability index, and Equivalent annuity.
Net Present Value
It’s used in estimating each potential project's worth using a discounted cash flow valuation. The valuation requires estimating the size and timing of all the incremental cash flows from the project. The NPV is greatly affected by the discount rate, so selecting the proper rate–sometimes called the hurdle rate–is critical to making the right decision.
This should reflect the riskiness of the investment, typically measured by the volatility of cash flows, and must take into account the financing mix. Managers may use models, such as the CAPM or the APT, to estimate a discount rate appropriate for each particular project, and use the weighted average cost of capital (WACC) to reflect the financing mix selected. A common practice in choosing a discount rate for a project is to apply a WACC that applies to the entire firm, but a higher discount rate may be more appropriate when a project's risk is higher than the risk of the firm as a whole.
Internal Rate of Return
The internal rate of return (IRR) is defined as the discount rate that gives a net present value (NPV) of zero. It is a commonly used measure of investment efficiency.
The IRR method will result in the same decision as the NPV method for non-mutually exclusive projects in an unconstrained environment, in the usual cases where a negative cash flow occurs at the start of the project, followed by all positive cash flows. Nevertheless, for mutually exclusive projects, the decision rule of taking the project with the highest IRR, which is often used, may select a project with a lower NPV.
One shortcoming of the IRR method is that it is commonly misunderstood to convey the actual annual profitability of an investment. Accordingly, a measure called "Modified Internal Rate of Return (MIRR)" is often used.
Payback Period
Payback period in capital budgeting refers to the period of time required for the return on an investment to "repay" the sum of the original investment. Payback period intuitively measures how long something takes to "pay for itself.” All else being equal, shorter payback periods are preferable to longer payback periods.
The payback period is considered a method of analysis with serious limitations and qualifications for its use, because it does not account for the time value of money, risk, financing, or other important considerations, such as the opportunity cost.
Profitability Index
Prof.
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
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Sustainability has become an increasingly critical topic as the world recognizes the need to protect our planet and its resources for future generations. Sustainability means meeting our current needs without compromising the ability of future generations to meet theirs. It involves long-term planning and consideration of the consequences of our actions. The goal is to create strategies that ensure the long-term viability of People, Planet, and Profit.
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Memorandum Of Association Constitution of Company.pptseri bangash
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A Memorandum of Association (MOA) is a legal document that outlines the fundamental principles and objectives upon which a company operates. It serves as the company's charter or constitution and defines the scope of its activities. Here's a detailed note on the MOA:
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Registered Office Clause: It specifies the location where the company's registered office is situated. This office is where all official communications and notices are sent.
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Capital Clause: This clause specifies the authorized capital of the company, i.e., the maximum amount of share capital the company is authorized to issue. It also mentions the division of this capital into shares and their respective nominal value.
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2. Meaning
Capital Budgeting is the process of
identifying, evaluating and
implementation of firm’s investment
opportunities.
When the organisation has find the
potential investment will enhance the
competitive advantages and increase the
market value per share.
3. Market value per share 100 OMR
Book value per share 30 OMR
The company create wealth 70 OMR
It involve huge funds
Decision is required before making an
investment
4. Capital Budgeting Process
1. Estimate the cash flows
2. Assess the riskiness of cash flows
3. Determine the appropriate cost of
capital
4. Find the NPV and IRR
5. Accept/ reject – decision
6. Traditional Method
Payback period
The payback period is the length of time it
takes to recover the cost of an investment
or the length of time an investor needs to
reach a breakeven point.
ARR (Accounting Rate of Return)
◦ It reflects the percentage rate of return
expected on an investment or asset,
compared to the initial investment's cost.
7. Modern Method (Discounted
cash flow method)
NPV
It is the difference between the present value
of cash inflows and the present value of cash
outflows over a period of time.
IRR
IRR is a discount rate that makes the net
present value (NPV) of all cash flows equal to
zero in a discounted cash flow analysis.
PI
The profitability index is calculated as the ratio
between the present value of future expected
cash flows and the initial amount invested in
the project.
