This document discusses capital investment theory (CIT), which is a method for evaluating investment proposals based on their costs and benefits. It describes three stages of CIT: determining net investment outlay, determining net cash flows, and evaluating cash flows based on time value. Major CIT techniques include net present value (NPV), internal rate of return (IRR), and payback period. NPV compares discounted cash flows to investment outlay, with projects having the highest positive NPV prioritized. IRR determines the discount rate that makes the net present value equal to zero. Payback period is the time needed to recover the initial cash outlay. The document also notes some limitations of CIT.

1. CAPITAL INVESTMENT
THEORY
SUBMITTED TO:
Dr. SUJIT Kr. DUBEY
PROFESSOR
FMS, BHU
PREPARED BY:
STUTI KOTHARI
MBA III SEMESTER
ROLL NO.: 46

2. CIT
• It is a foolproof approach of evaluating product-
market proposals in terms of the incremental benefits
and costs associated with them.
• It involves three stages:
a) determination of net investment outlay
b) determination of net cash flows
c) evaluation of cash flows in terms of their time
value.

3. WHY CIT?
1. Growth
2. Risk
3. Funding
4. Irreversibility
5. Complexity

4. MAJOR TECHNIQUES
1. Net Present Value
2. Internal Rate Of Return
3. Payback

5. NET PRESENT VALUE
• This method seeks to evaluate by comparing discounted
net cash flows with net investment outlay to determine net
present value of projects.
• NPV=Net cash inflow-net investment outlay
• Acceptance rule:
i) NPV>0, Accept the project
ii) NPV<0, Reject the project
iii) NPV=0, May accept the project
• Project with highest positive net present value is accorded
the highest priority.

6. INTERNAL RATE OF RETURN
• In this approach that rate of return is determined which
discounts the future net cash flow to the level of
investment outlay.
• Acceptance rule:
i) IRR>k, Accept the project
ii) IRR<k, Reject the project
iii) IRR=k, May accept the project
Where k is the Cost of Capital.

7. PAYBACK
• Payback is the period of time required to recover the
original cash outlay invested in a project.
• If the project generates constant annual cash inflows, the
payback period is computed by dividing the initial cash
outlay by the annual cash inflow.
• In case of uneven cash inflows, the payback period can be
found out by adding up the cash inflows until the total is
equal to the initial cash outlay.
• Acceptance rule:
Payback Period<Standard Payback Period, Accept
the project and vice-versa
NPV.xlsx

8. SHORTCOMINGS OF CIT
CIT fails to take cognizance of the phases(first three) of
strategic decision making i.e.
1. Identification of the problem.
2. Formulation of alternate courses of action.
3. Evaluation of the alternatives.
4. Choice of one or more alternatives for implementation.
Requires accurate measurement of cash flows at different
interval of time.

9. THANK YOU!!
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