This document provides an overview of capital budgeting techniques, including net present value (NPV) analysis. It discusses key concepts such as NPV, internal rate of return, payback period, and average accounting return. An example is provided to demonstrate calculating NPV for a potential capital investment project with cash flows over 5 years and an initial cost of $40,000. The NPV is calculated to be negative, so the project would be rejected as it does not increase shareholder wealth.
Capital budgeting is the process of evaluating potential capital expenditures. It involves analyzing proposed investments in fixed assets and choosing those that will provide the best return. The key steps in capital budgeting are: evaluating investment proposals, screening proposals, analyzing the proposals using techniques like net present value (NPV), internal rate of return (IRR), and payback period, setting priorities, approval of budget, implementation, and performance review. NPV and IRR are discounted cash flow methods that account for the time value of money, making them generally preferred over traditional methods like payback period and accounting rate of return.
- Capital budgeting is the process of evaluating projects requiring large capital outlays and deciding whether to undertake them.
- Common capital budgeting tools include payback period, net present value (NPV), and internal rate of return (IRR).
- Payback period is the time needed to recover the initial investment and ignores cash flows after payback. NPV and IRR consider the time value of money by discounting future cash flows.
- Projects are accepted if their payback period is lower than the company's cutoff period, NPV is positive, or IRR is higher than the minimum required rate of return.
The document discusses capital budgeting techniques used to evaluate potential large investments. It describes the payback period method and average rate of return method. The payback period method calculates the number of years for the initial investment to be paid back from cash inflows. The average rate of return method calculates the average annual accounting profit as a percentage of the average investment over the project's lifetime. The document provides examples of calculating payback periods and average rates of return for projects using both straight-line and written down depreciation methods. It outlines the rules for accepting or rejecting projects based on whether the payback period or rate of return meets requirements.
The document discusses capital structure and capital budgeting. It defines capital structure as the arrangement of capital from different sources to fund long-term business needs. It then discusses various factors that determine capital structure like risk, cost of capital, control, and business nature. The document also defines capital budgeting as evaluating potential projects and investments, and discusses techniques used like net present value, internal rate of return, and payback period. It emphasizes estimating incremental cash flows by considering project cash flows with and without the investment.
This document discusses various capital budgeting techniques used to evaluate long-term investment projects. It describes techniques such as net present value (NPV), internal rate of return (IRR), profitability index (PI), payback period, and accounting rate of return. For each technique, it provides the calculation method, acceptance criteria, and advantages and limitations of the approach. The key methods are NPV, IRR and PI, which incorporate the time value of money, while payback period and accounting rate of return do not fully consider cash flow patterns and the time value of money.
capital budgeting introduction,types of techniques and capital rationingDr Yogita Wagh
Capital budgeting is the process that companies use to evaluate potential long-term investments and major capital expenditures. There are four main questions addressed in capital budgeting: 1) How do firms decide whether to invest in long-lived assets? 2) How are choices made between mutually exclusive investments? 3) How are different capital budgeting techniques related? 4) Which techniques do firms actually use? Common capital budgeting techniques include net present value (NPV), internal rate of return (IRR), payback period, average rate of return, and profitability index. These techniques are used to evaluate projects, make acceptance/rejection decisions between mutually exclusive projects, and determine project selection under capital rationing constraints.
Capital budgeting (1)- Management accountingJithin Zcs
This document discusses investment decision rules and capital budgeting. It begins by outlining common investment decision rules like payback period, net present value (NPV), internal rate of return (IRR), and accounting rate of return. It notes that NPV and IRR are preferred as they consider the time value of money. The document then discusses capital budgeting, highlighting the importance of estimating incremental cash flows and ignoring sunk costs. It provides the format for determining initial cash outflows and interim incremental net cash flows for investment projects.
This document discusses capital budgeting and investment decision making. It begins by defining capital budgeting as the process of evaluating investment opportunities that require large capital outlays and have benefits received over many years in the future. The document then outlines the capital budgeting process, which includes identifying investment opportunities, evaluating proposals, selecting the most profitable project, allocating funding, and reviewing performance after completion. Finally, it discusses various methods that can be used to evaluate investment proposals, including payback period, accounting rate of return, net present value, and internal rate of return.
Capital budgeting is the process of evaluating potential capital expenditures. It involves analyzing proposed investments in fixed assets and choosing those that will provide the best return. The key steps in capital budgeting are: evaluating investment proposals, screening proposals, analyzing the proposals using techniques like net present value (NPV), internal rate of return (IRR), and payback period, setting priorities, approval of budget, implementation, and performance review. NPV and IRR are discounted cash flow methods that account for the time value of money, making them generally preferred over traditional methods like payback period and accounting rate of return.
- Capital budgeting is the process of evaluating projects requiring large capital outlays and deciding whether to undertake them.
- Common capital budgeting tools include payback period, net present value (NPV), and internal rate of return (IRR).
- Payback period is the time needed to recover the initial investment and ignores cash flows after payback. NPV and IRR consider the time value of money by discounting future cash flows.
- Projects are accepted if their payback period is lower than the company's cutoff period, NPV is positive, or IRR is higher than the minimum required rate of return.
The document discusses capital budgeting techniques used to evaluate potential large investments. It describes the payback period method and average rate of return method. The payback period method calculates the number of years for the initial investment to be paid back from cash inflows. The average rate of return method calculates the average annual accounting profit as a percentage of the average investment over the project's lifetime. The document provides examples of calculating payback periods and average rates of return for projects using both straight-line and written down depreciation methods. It outlines the rules for accepting or rejecting projects based on whether the payback period or rate of return meets requirements.
The document discusses capital structure and capital budgeting. It defines capital structure as the arrangement of capital from different sources to fund long-term business needs. It then discusses various factors that determine capital structure like risk, cost of capital, control, and business nature. The document also defines capital budgeting as evaluating potential projects and investments, and discusses techniques used like net present value, internal rate of return, and payback period. It emphasizes estimating incremental cash flows by considering project cash flows with and without the investment.
This document discusses various capital budgeting techniques used to evaluate long-term investment projects. It describes techniques such as net present value (NPV), internal rate of return (IRR), profitability index (PI), payback period, and accounting rate of return. For each technique, it provides the calculation method, acceptance criteria, and advantages and limitations of the approach. The key methods are NPV, IRR and PI, which incorporate the time value of money, while payback period and accounting rate of return do not fully consider cash flow patterns and the time value of money.
capital budgeting introduction,types of techniques and capital rationingDr Yogita Wagh
Capital budgeting is the process that companies use to evaluate potential long-term investments and major capital expenditures. There are four main questions addressed in capital budgeting: 1) How do firms decide whether to invest in long-lived assets? 2) How are choices made between mutually exclusive investments? 3) How are different capital budgeting techniques related? 4) Which techniques do firms actually use? Common capital budgeting techniques include net present value (NPV), internal rate of return (IRR), payback period, average rate of return, and profitability index. These techniques are used to evaluate projects, make acceptance/rejection decisions between mutually exclusive projects, and determine project selection under capital rationing constraints.
Capital budgeting (1)- Management accountingJithin Zcs
This document discusses investment decision rules and capital budgeting. It begins by outlining common investment decision rules like payback period, net present value (NPV), internal rate of return (IRR), and accounting rate of return. It notes that NPV and IRR are preferred as they consider the time value of money. The document then discusses capital budgeting, highlighting the importance of estimating incremental cash flows and ignoring sunk costs. It provides the format for determining initial cash outflows and interim incremental net cash flows for investment projects.
This document discusses capital budgeting and investment decision making. It begins by defining capital budgeting as the process of evaluating investment opportunities that require large capital outlays and have benefits received over many years in the future. The document then outlines the capital budgeting process, which includes identifying investment opportunities, evaluating proposals, selecting the most profitable project, allocating funding, and reviewing performance after completion. Finally, it discusses various methods that can be used to evaluate investment proposals, including payback period, accounting rate of return, net present value, and internal rate of return.
The document discusses various methods for analyzing the financial feasibility of a project, including net present value (NPV), payback period, discounted payback period, average accounting return, and internal rate of return (IRR). It then provides an example calculation of each method for a sample project with an initial investment of $165,000 and cash flows over 3 years. Based on the calculations, the project would be accepted based on the NPV and IRR methods but rejected according to the payback period, discounted payback period, and average accounting return methods.
The document discusses various capital budgeting techniques used to evaluate investment decisions. It describes methods such as payback period, accounting rate of return, net present value, internal rate of return, and profitability index. Each method is explained with examples and their advantages and limitations are discussed. The net present value method is considered the most appropriate technique as it incorporates the time value of money and maximizes shareholder wealth.
The slide is about evaluation of investment in projects before starting the project. Useful for Finance Manager, Finance Students, Entrepreneurs and Project Managers
This document discusses capital budgeting and cash flow analysis techniques. It defines capital budgeting as the planning and control of capital expenditures, particularly long-term investments in fixed assets. Several evaluation techniques are described, including non-discounting methods like average rate of return and payback period, as well as discounted cash flow methods like net present value, internal rate of return, and profitability index. Cash flows are categorized as initial, operating, and terminal cash flows. The steps for estimating cash flows and handling replacement project analysis are also outlined.
FM-Unit 2_Long Term Investment Decision.pptxradha91354
This document outlines a unit on long-term investment decisions for a financial management course. It covers key concepts in capital budgeting including nature and meaning, principles and techniques, estimation of relevant cash flows, and evaluation techniques such as accounting rate of return, net present value, internal rate of return, payback period and profitability index method. Examples are provided to demonstrate calculation of accounting rate of return and payback period. The document emphasizes that capital budgeting involves evaluating major projects requiring large investments and having long-term effects on company profitability.
Capital budgeting is the process of evaluating investment opportunities and selecting those that will create the most value for the firm. The document discusses various capital budgeting techniques including payback period, accounting rate of return, net present value, and internal rate of return. It provides an example calculation of payback period for a project with uneven cash flows. The advantages and limitations of the payback period method are also reviewed.
Capital budgeting decision criteria and risk analysisManuel Palcon II
This document discusses various concepts and methods used in capital budgeting and risk analysis. It defines key terms like cost of capital, net present value (NPV), internal rate of return (IRR), profitability index (PI), and payback period. It presents the formulas and calculations for these decision criteria and explains how to apply them to evaluate projects and make investment decisions. The document also discusses tools for assessing risk, such as sensitivity analysis and simulation analysis, and introduces the concept of real options in capital budgeting.
The document discusses various capital budgeting techniques used to evaluate long-term investment projects. It describes net present value (NPV) as a technique that measures the value created by discounting a project's cash flows to present value. It also covers internal rate of return (IRR), payback period, and profitability index. The techniques are applied to sample projects A and B to compare their results and demonstrate that different techniques can produce conflicting rankings of projects.
Capital budgeting is the process in which a business determines and evaluates potential expenses or investments that are large in nature.
These expenditures and investments include projects such as building a new plant or investing in a long-term venture. Often times, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the potential returns generated meet a sufficient target benchmark, also known as "investment appraisal."
- Project appraisal is the process of assessing proposals for resources before committing funds. It helps ensure projects benefit all community members and provide documentation for financial and audit requirements.
- Key issues in appraising projects include need, objectives, consultation, inputs/outputs, value for money, risks, sustainability, and more. Methods of appraisal include economic, technical, organizational, managerial, operational, and financial assessments.
- Capital budgeting determines the profitability of capital investments using methods like net present value (NPV), internal rate of return (IRR), profitability index (PI), and payback period to evaluate cash flows over time. Economic analysis assesses proposals based on their effects on the economy by adjusting
This document discusses techniques for evaluating investment projects, focusing on net present value (NPV) analysis. It provides the formula for calculating NPV and explains how to use NPV to evaluate projects. It also discusses other methods like internal rate of return (IRR) and profitability index (PI). The document notes some limitations of these techniques and provides guidance on how to address factors like mutually exclusive projects, capital rationing, and risk when evaluating capital budgeting decisions.
PGBM01 - MBA Financial Management And Control (2015-16 Trm1 A)Lecture 9 lon...Aquamarine Emerald
This document provides an overview of long-term decision making processes and techniques. It discusses the characteristics of long-term investments, the typical decision making process including initial investigation, evaluation, authorization, implementation and monitoring. It then covers techniques for evaluating investments, including payback period, accounting rate of return, net present value and internal rate of return. An example calculation compares two potential investment projects using these techniques, and recommends selecting the project with the highest net present value or internal rate of return.
The document discusses various capital budgeting techniques used to evaluate investment projects. It defines capital budgeting as involving the calculation of future cash flows, present value, internal rate of return, payback period and other factors to determine the profitability of projects. Several capital budgeting methods are described, including net present value (NPV), internal rate of return (IRR), profitability index (PI) and payback period. An example compares two investment projects using these techniques, and recommends project B based on it having a shorter payback period, higher accounting rate of return, and greater NPV and PI.
2.0 capital budgetingGOOD PRACTICAL.pptxPearlShell2
The document discusses various capital budgeting techniques used to evaluate long-term investment projects. It defines capital budgeting as the process of planning and approving large capital expenditures. Several traditional methods are described, including payback period and accounting rate of return. Payback period calculates the years to recover the initial investment, while accounting rate of return expresses profits as a percentage of average investment. Modern discounted cash flow methods take the time value of money into account, such as net present value (NPV) which discounts future cash flows to determine if a project's present value exceeds the initial investment. The document provides examples of calculating project metrics using these various capital budgeting techniques.
This document discusses capital budgeting, which relates to long-term investment decisions for firms. It defines capital budgeting as decisions regarding long-term assets that provide benefits over multiple years in the future. Some key points made include:
- Capital budgeting decisions involve large amounts of funds for long-term goals and are difficult and irreversible.
- The capital budgeting process considers total assets, business risk, and the cost of capital. It also distinguishes between unlimited funds and capital rationing situations.
- The capital budgeting process involves five steps: proposal generation, review and analysis, decision-making, implementation, and follow-up.
- Popular capital budgeting methods are discussed, including
NPV and IRR are commonly used methods for evaluating investment decisions, but each has limitations. NPV compares the present value of cash inflows to the investment cost, accepting projects where NPV is positive. IRR is the discount rate that sets NPV to zero, accepting projects where IRR exceeds the opportunity cost of capital. However, IRR can indicate acceptance of projects with negative NPV. Managers also consider payback period and accounting rate of return, but these methods ignore timing of cash flows. Cash flows rather than accounting profits drive NPV analysis. Overall, NPV is preferred but multiple methods are often examined when evaluating large capital investments.
This document discusses various methods for financial analysis and project selection. It describes numeric models such as net present value (NPV), internal rate of return (IRR), payback period, accounting rate of return (ARR), and return on investment (ROI). It also discusses non-numeric models like sacred cow, operating necessity, and competitive necessity. The key techniques in numeric models are then explained in more detail, including discounting cash flows, calculating NPV, determining payback periods, and how to use these models to evaluate investment projects. Examples are provided to illustrate how to apply these financial analysis methods.
The document discusses various investment decision concepts including investment, risk and return, capital budgeting techniques, and types of capital expenditures (capex). It provides examples of each type of capex - expansion, diversification, modernization, research & development, and miscellaneous. The capital budgeting techniques discussed include payback period, accounting rate of return, net present value, internal rate of return, and profitability index. Examples are provided to illustrate how to use the payback period technique to evaluate investment opportunities.
The document discusses various methods for analyzing the financial feasibility of a project, including net present value (NPV), payback period, discounted payback period, average accounting return, and internal rate of return (IRR). It then provides an example calculation of each method for a sample project with an initial investment of $165,000 and cash flows over 3 years. Based on the calculations, the project would be accepted based on the NPV and IRR methods but rejected according to the payback period, discounted payback period, and average accounting return methods.
The document discusses various capital budgeting techniques used to evaluate investment decisions. It describes methods such as payback period, accounting rate of return, net present value, internal rate of return, and profitability index. Each method is explained with examples and their advantages and limitations are discussed. The net present value method is considered the most appropriate technique as it incorporates the time value of money and maximizes shareholder wealth.
The slide is about evaluation of investment in projects before starting the project. Useful for Finance Manager, Finance Students, Entrepreneurs and Project Managers
This document discusses capital budgeting and cash flow analysis techniques. It defines capital budgeting as the planning and control of capital expenditures, particularly long-term investments in fixed assets. Several evaluation techniques are described, including non-discounting methods like average rate of return and payback period, as well as discounted cash flow methods like net present value, internal rate of return, and profitability index. Cash flows are categorized as initial, operating, and terminal cash flows. The steps for estimating cash flows and handling replacement project analysis are also outlined.
FM-Unit 2_Long Term Investment Decision.pptxradha91354
This document outlines a unit on long-term investment decisions for a financial management course. It covers key concepts in capital budgeting including nature and meaning, principles and techniques, estimation of relevant cash flows, and evaluation techniques such as accounting rate of return, net present value, internal rate of return, payback period and profitability index method. Examples are provided to demonstrate calculation of accounting rate of return and payback period. The document emphasizes that capital budgeting involves evaluating major projects requiring large investments and having long-term effects on company profitability.
Capital budgeting is the process of evaluating investment opportunities and selecting those that will create the most value for the firm. The document discusses various capital budgeting techniques including payback period, accounting rate of return, net present value, and internal rate of return. It provides an example calculation of payback period for a project with uneven cash flows. The advantages and limitations of the payback period method are also reviewed.
Capital budgeting decision criteria and risk analysisManuel Palcon II
This document discusses various concepts and methods used in capital budgeting and risk analysis. It defines key terms like cost of capital, net present value (NPV), internal rate of return (IRR), profitability index (PI), and payback period. It presents the formulas and calculations for these decision criteria and explains how to apply them to evaluate projects and make investment decisions. The document also discusses tools for assessing risk, such as sensitivity analysis and simulation analysis, and introduces the concept of real options in capital budgeting.
The document discusses various capital budgeting techniques used to evaluate long-term investment projects. It describes net present value (NPV) as a technique that measures the value created by discounting a project's cash flows to present value. It also covers internal rate of return (IRR), payback period, and profitability index. The techniques are applied to sample projects A and B to compare their results and demonstrate that different techniques can produce conflicting rankings of projects.
Capital budgeting is the process in which a business determines and evaluates potential expenses or investments that are large in nature.
These expenditures and investments include projects such as building a new plant or investing in a long-term venture. Often times, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the potential returns generated meet a sufficient target benchmark, also known as "investment appraisal."
- Project appraisal is the process of assessing proposals for resources before committing funds. It helps ensure projects benefit all community members and provide documentation for financial and audit requirements.
- Key issues in appraising projects include need, objectives, consultation, inputs/outputs, value for money, risks, sustainability, and more. Methods of appraisal include economic, technical, organizational, managerial, operational, and financial assessments.
- Capital budgeting determines the profitability of capital investments using methods like net present value (NPV), internal rate of return (IRR), profitability index (PI), and payback period to evaluate cash flows over time. Economic analysis assesses proposals based on their effects on the economy by adjusting
This document discusses techniques for evaluating investment projects, focusing on net present value (NPV) analysis. It provides the formula for calculating NPV and explains how to use NPV to evaluate projects. It also discusses other methods like internal rate of return (IRR) and profitability index (PI). The document notes some limitations of these techniques and provides guidance on how to address factors like mutually exclusive projects, capital rationing, and risk when evaluating capital budgeting decisions.
PGBM01 - MBA Financial Management And Control (2015-16 Trm1 A)Lecture 9 lon...Aquamarine Emerald
This document provides an overview of long-term decision making processes and techniques. It discusses the characteristics of long-term investments, the typical decision making process including initial investigation, evaluation, authorization, implementation and monitoring. It then covers techniques for evaluating investments, including payback period, accounting rate of return, net present value and internal rate of return. An example calculation compares two potential investment projects using these techniques, and recommends selecting the project with the highest net present value or internal rate of return.
The document discusses various capital budgeting techniques used to evaluate investment projects. It defines capital budgeting as involving the calculation of future cash flows, present value, internal rate of return, payback period and other factors to determine the profitability of projects. Several capital budgeting methods are described, including net present value (NPV), internal rate of return (IRR), profitability index (PI) and payback period. An example compares two investment projects using these techniques, and recommends project B based on it having a shorter payback period, higher accounting rate of return, and greater NPV and PI.
2.0 capital budgetingGOOD PRACTICAL.pptxPearlShell2
The document discusses various capital budgeting techniques used to evaluate long-term investment projects. It defines capital budgeting as the process of planning and approving large capital expenditures. Several traditional methods are described, including payback period and accounting rate of return. Payback period calculates the years to recover the initial investment, while accounting rate of return expresses profits as a percentage of average investment. Modern discounted cash flow methods take the time value of money into account, such as net present value (NPV) which discounts future cash flows to determine if a project's present value exceeds the initial investment. The document provides examples of calculating project metrics using these various capital budgeting techniques.
This document discusses capital budgeting, which relates to long-term investment decisions for firms. It defines capital budgeting as decisions regarding long-term assets that provide benefits over multiple years in the future. Some key points made include:
- Capital budgeting decisions involve large amounts of funds for long-term goals and are difficult and irreversible.
- The capital budgeting process considers total assets, business risk, and the cost of capital. It also distinguishes between unlimited funds and capital rationing situations.
- The capital budgeting process involves five steps: proposal generation, review and analysis, decision-making, implementation, and follow-up.
- Popular capital budgeting methods are discussed, including
NPV and IRR are commonly used methods for evaluating investment decisions, but each has limitations. NPV compares the present value of cash inflows to the investment cost, accepting projects where NPV is positive. IRR is the discount rate that sets NPV to zero, accepting projects where IRR exceeds the opportunity cost of capital. However, IRR can indicate acceptance of projects with negative NPV. Managers also consider payback period and accounting rate of return, but these methods ignore timing of cash flows. Cash flows rather than accounting profits drive NPV analysis. Overall, NPV is preferred but multiple methods are often examined when evaluating large capital investments.
This document discusses various methods for financial analysis and project selection. It describes numeric models such as net present value (NPV), internal rate of return (IRR), payback period, accounting rate of return (ARR), and return on investment (ROI). It also discusses non-numeric models like sacred cow, operating necessity, and competitive necessity. The key techniques in numeric models are then explained in more detail, including discounting cash flows, calculating NPV, determining payback periods, and how to use these models to evaluate investment projects. Examples are provided to illustrate how to apply these financial analysis methods.
The document discusses various investment decision concepts including investment, risk and return, capital budgeting techniques, and types of capital expenditures (capex). It provides examples of each type of capex - expansion, diversification, modernization, research & development, and miscellaneous. The capital budgeting techniques discussed include payback period, accounting rate of return, net present value, internal rate of return, and profitability index. Examples are provided to illustrate how to use the payback period technique to evaluate investment opportunities.
Abhay Bhutada, the Managing Director of Poonawalla Fincorp Limited, is an accomplished leader with over 15 years of experience in commercial and retail lending. A Qualified Chartered Accountant, he has been pivotal in leveraging technology to enhance financial services. Starting his career at Bank of India, he later founded TAB Capital Limited and co-founded Poonawalla Finance Private Limited, emphasizing digital lending. Under his leadership, Poonawalla Fincorp achieved a 'AAA' credit rating, integrating acquisitions and emphasizing corporate governance. Actively involved in industry forums and CSR initiatives, Abhay has been recognized with awards like "Young Entrepreneur of India 2017" and "40 under 40 Most Influential Leader for 2020-21." Personally, he values mindfulness, enjoys gardening, yoga, and sees every day as an opportunity for growth and improvement.
In a tight labour market, job-seekers gain bargaining power and leverage it into greater job quality—at least, that’s the conventional wisdom.
Michael, LMIC Economist, presented findings that reveal a weakened relationship between labour market tightness and job quality indicators following the pandemic. Labour market tightness coincided with growth in real wages for only a portion of workers: those in low-wage jobs requiring little education. Several factors—including labour market composition, worker and employer behaviour, and labour market practices—have contributed to the absence of worker benefits. These will be investigated further in future work.
Every business, big or small, deals with outgoing payments. Whether it’s to suppliers for inventory, to employees for salaries, or to vendors for services rendered, keeping track of these expenses is crucial. This is where payment vouchers come in – the unsung heroes of the accounting world.
Enhancing Asset Quality: Strategies for Financial Institutionsshruti1menon2
Ensuring robust asset quality is not just a mere aspect but a critical cornerstone for the stability and success of financial institutions worldwide. It serves as the bedrock upon which profitability is built and investor confidence is sustained. Therefore, in this presentation, we delve into a comprehensive exploration of strategies that can aid financial institutions in achieving and maintaining superior asset quality.
STREETONOMICS: Exploring the Uncharted Territories of Informal Markets throug...sameer shah
Delve into the world of STREETONOMICS, where a team of 7 enthusiasts embarks on a journey to understand unorganized markets. By engaging with a coffee street vendor and crafting questionnaires, this project uncovers valuable insights into consumer behavior and market dynamics in informal settings."
TEST BANK Principles of cost accounting 17th edition edward j vanderbeck mari...Donc Test
TEST BANK Principles of cost accounting 17th edition edward j vanderbeck maria r mitchell.docx
TEST BANK Principles of cost accounting 17th edition edward j vanderbeck maria r mitchell.docx
TEST BANK Principles of cost accounting 17th edition edward j vanderbeck maria r mitchell.docx
Economic Risk Factor Update: June 2024 [SlideShare]Commonwealth
May’s reports showed signs of continued economic growth, said Sam Millette, director, fixed income, in his latest Economic Risk Factor Update.
For more market updates, subscribe to The Independent Market Observer at https://blog.commonwealth.com/independent-market-observer.
OJP data from firms like Vicinity Jobs have emerged as a complement to traditional sources of labour demand data, such as the Job Vacancy and Wages Survey (JVWS). Ibrahim Abuallail, PhD Candidate, University of Ottawa, presented research relating to bias in OJPs and a proposed approach to effectively adjust OJP data to complement existing official data (such as from the JVWS) and improve the measurement of labour demand.
1. Finance and Investment
Capital Budgeting
Associate Professor: Dr.Mohamed Masry
PhD, MA, Sheffield Hallam University, UK.
MBA, BA, AAST, Egypt.
2. Key Concepts and Skills
• The payback rule and its shortcomings
• Accounting rates of return and their problems
• The net present value rule and why it is the
best decision criteria
• The Internal rate of return
• The profitability index and its relation to NPV
Dr. Mohamed Masry 2
Dr. Mohamed Masry 2
3. Outline
Dr. Mohamed Masry 3
Average Accounting Return
The Payback Rule
Net Present Value
Internal Rate of Return
The Profitability Index
The Practice of Capital Budgeting
4. Capital budgeting techniques
Capital budgeting is the process of identifying,
analyzing, and selecting investment projects
whose returns (cash flows) are expected to
extend beyond one year.
Dr. Mohamed Masry
4
Dr. Mohamed Masry 4
5. What Is Capital Budgeting?
• Capital budgeting is a process that businesses use to
evaluate potential major projects or investments. Building
a new plant or taking a large stake in an outside venture
are examples of initiatives that typically require capital
budgeting before they are approved or rejected by
management.
• As part of capital budgeting, a company might assess a
prospective project's lifetime cash inflows and outflows to
determine whether the potential returns it would
generate meet a sufficient target benchmark.
Dr. Mohamed Masry 5
6. Capital Budgeting
Dr. Mohamed Masry 6
Analysis of
potential
projects
Long-term
decisions
Large
expenditures
Difficult/impo
ssible to
reverse
Determines
firm’s
strategic
direction
7. Good Decision Criteria
Dr. Mohamed Masry 7
All cash flows
considered?
TVM considered?
Risk-adjusted?
Ability to rank
projects?
Indicates added
value to the
firm?
8. Independent versus Mutually Exclusive Projects
Dr. Mohamed Masry 8
Independent
The cash flows of one
project are unaffected
by the acceptance of
the other.
Mutually Exclusive
The acceptance of one
project precludes
accepting the other.
9. The capital budgeting process
9
Dr.
Mohamed
Masry
• Generate investment proposals consistent with the
firm’s strategic objectives.
• Estimate after-tax incremental operating cash flows
for the investment projects.
• Evaluate project incremental cash flows.
• Select projects based on a value-maximizing
acceptance criterion.
• Reevaluate implemented investment projects
continually and perform post-audits for completed
projects.
10. Classification of investment project proposals
10
Dr.
Mohamed
Masry
• New products or expansion of existing products
• Replacement of existing equipment or buildings
• Research and development
• Other (e.g., safety or pollution related)
11. Project evaluation: different methods
11
Dr.
Mohamed
Masry
• Payback Period (PBP)
• Average Accounting Return(AAR)
• Net Present Value (NPV)
• Internal Rate of Return (IRR)
• Profitability Index (PI)
12. What Is the Average Accounting Return (AAR)?
12
Dr.
Mohamed
Masry
• The average accounting return (AAR) is a formula that
reflects the percentage rate of return expected on an
investment or asset, compared to the initial
investment's cost. The AAR formula divides an asset's
average revenue by the company's initial investment
to derive the ratio or return that one may expect over
the lifetime of an asset or project. ARR does not
consider the time value of money or cash flows, which
can be an integral part of maintaining a business.
13. Average Accounting Return
• Many different definitions for average accounting return (AAR)
•In this course:
• Note: Average book value is taken by the start and end of the
period divided by 2 because it assumes the book value trends
from the start value to the end value in a straight line..
• Requires a target cutoff rate
• Decision Rule: Accept the project if the AAR is greater than
target rate.
• Net cash flow(NCF)=Net income-Annual deportation cost
• The formula to calculate annual depreciation using the straight-
line method is (cost – salvage value) / useful life
Value
Book
Average
Income
Net
Average
AAR
Dr. Mohamed Masry
13
14. Project evaluation example
14
Dr.
Mohamed
Masry
Investor is evaluating a new project for his business,
Jambura Farm (JF). He has determined that the after-tax
cash flows for the project will be 10,000; 12,000; 15,000;
10,000; and 7,000, respectively, for each of the Years 1
through 5. The initial cost (cash )outlay will be 40,000,
and salvage value=0; the company is using straight line
method of depreciation
15. Computing AAR for the Project
• Sample Project Data:
• Annual Depreciation installment= 40000-0/5=8000
• Year 1:NCF= 10000-8000=NI=2000
• Year 2:NCF=12000-8000=NI=4000
• Year 3:NCF=15000-8000=NI=7000
• Year 4:NCF=12000-8000=NI=4000
• Year 5:NCF=7000-8000=NI=-1000
• Average book value = 40000+0/2=$20000
• Required average accounting return = 20%
• Average Net Income:
($2000+4000+7000+4000+(1000) / 5 = $3200
• AAR = $3200/ 20000 = .16 = 16%
• Do we accept or reject the project?
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16. Example
•You are looking at a new project and have estimated
the following cash flows, net income and book value
data:
• Year 0:CF = -165,000
• Year 1:CF = 63,120
• Year 2:CF = 70,800
• Year 3:CF = 91,080
• Average book value = $82500 S.V=0
• Calculate the Average Accounting return
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17. Computing AAR for the Project
• Sample Project Data:
• Annual Depreciation installment= 165,000-0/3=55000
• Year 1: CF = 63,120-55000= NI = 8120
• Year 2: CF = 70,800-55000= NI = 15800
• Year 3: CF = 91,080-55000= NI = 36,080
• Average book value = 165000+0/2=$82500
• Required average accounting return = 25%
• Average Net Income:
($8120 + 15800 + 36,080) / 3 = $20000
• AAR = $20,000/ 82,500 = .2424 = 24.2%
• Do we accept or reject the project?
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Dr. Mohamed Masry
17
18. Decision Criteria Test - AAR
• Does the AAR rule account for the time value of
money?
• Does the AAR rule account for the risk of the
cash flows?
• Does the AAR rule provide an indication about
the increase in value?
• Should we consider the AAR rule for our
primary decision criteria?
Dr. Mohamed Masry 18
19. The Initial cost for both projects =21000 and salvage value=0;
the company is using straight line method of depreciation,
calculate AAR for both projects
19
Dr.
Mohamed
Masry
YEARS PROJECT 1 PROJECT 2
NI CF NI CF
1 4000 11000 3000 10000
2 4000 11000 3000 10000
3 1000 8000 3000 10000
Average 3000 10000 3000 10000
20. Advantages and
Disadvantages of AAR
20
Advantages
• Easy to calculate
• Needed information
usually available
Disadvantages
• Not a true rate of return
• Time value of money
ignored
• Uses an arbitrary
benchmark cutoff rate
• Based on accounting net
income and book values,
not cash flows and
market values
21. Payback Period
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How long does it take to recover the initial cost of a project?
Computation
Estimate the cash flows
Subtract the future cash flows from the
initial cost until initial investment is
recovered
A “break-even” type measure
Decision Rule – Accept if the payback period is less than some
preset limit
22. Payback period solution
PBP is the period of time required for the
cumulative expected cash flows from an
investment project to equal the initial cash
outflow.
0 1 2 3 4 5
-40 K 10 K 12 K 15 K 10 K 7 K
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22
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23. Payback period solution
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Yr Project JF
CF Cum CF
• 1 10,000 -30,000
• 2 12,000 -18,000
• 3 15,000 -3,000
• 4 10,000 7,000
• 5 7,000
0 -40,000 -40,000
• (*3rd yr Cum CF/4th yr CF)
Payback Periods: 3 + (3,000/10,000)*= 3.33 years
24. Example
Do we accept or reject the project?
Capital Budgeting Project
Year CF Cum. CFs
0 (165,000)
$ (165,000)
$
1 63,120
$ (101,880)
$
2 70,800
$ (31,080)
$
3 91,080
$ 60,000
$
Payback = year 2 +
+ (31080/91080)
Payback = 2.34 years
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25. Decision Criteria Test Payback
• Does the payback rule:
• Account for the time value of
money?
• Account for the risk of the cash
flows?
• Provide an indication about the
increase in value?
• Permit project ranking?
• Should we consider the payback rule
for our primary decision rule?
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26. The Initial cost for both projects =18000 and salvage
value=0; the company is using straight line method of
depreciation, calculate payback period for both projects
Dr. Mohamed Masry 26
Years Project 1CF Project 2CF
1 7000 5000
2 6000 6000
3 5000 7000
4 3000 3000
27. Advantages and Disadvantages of Payback
• Advantages
• Easy to understand
• Adjusts for uncertainty of
later cash flows
• Biased towards liquidity
• Disadvantages
• Ignores the time value of
money
• Requires an arbitrary cutoff
point
• Ignores cash flows beyond the
cutoff date
• Biased against long-term
projects, such as research and
development, and new projects
Dr. Mohamed Masry 27
28. Payback Summary
Payback period =
• Length of time until initial
investment is recovered
• Accept if payback < some specified
target
• Doesn’t account for time value of
money
• Ignores cash flows after payback
• Arbitrary cutoff period
• Asks the wrong question
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28
29. AAR Summary
Average Accounting Return=
• Average net income/Average book
value
• Accept if AAR > Some specified target
• Needed data usually readily available
• Not a true rate of return
• Time value of money ignored
• Arbitrary benchmark
• Based on accounting data not cash
flows
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29
30. What Is an Annuity?
An annuity is a financial investment that generates
regular payments for a set time. In modern times,
an annuity is most often purchased through an
insurance company or a financial services
company.
• Present value and future value are terms that are
frequently used in annuity contracts. The present
value of an annuity is the sum that must be
invested now to guarantee a desired payment in
the future,
• The future value is the total that will be achieved
over time.
Present Value Vs. Future Value in Annuities
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31. Present Value Vs. Future Value in Annuities
• Present value is the sum
of money that must be
invested to achieve a
specific future goal.
• Future value is the dollar
amount that will accrue
over time when that sum
is invested.
• The present value is the
amount you must invest
to realize the future
value.
The present value of an annuity
is the current value of all the
income that will be generated
by that investment in the
future. In more practical terms,
it is the amount of money that
would need to be invested
today to generate a specific
income down the road.
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31
32. Investor is evaluating a new project for his business,
Jambura Farm (JF). He has determined that the after-tax
cash flows for the project will be 10,000; 12,000; 15,000;
10,000; and 7,000, respectively, for each of the Years 1
through 5. The initial cash outlay will be $40,000.
Jambura Farm has determined that the appropriate
discount rate (k) for this project is 13%.
Project evaluation example
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33. Net Present Value
NPV is the present value of an investment project’s
net cash flows minus the project’s initial cash
outflow.
CF1 CF2 CFn
(1+k)1 (1+k)2 (1+k)n
+ . . . +
+ - ICO
NPV =
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n
0
t
t
t
)
R
1
(
CF
NPV
37. Example
• You are looking at a new project and have
estimated the following cash flows, net income
and book value data:
• Year 0: CF = -165,000
• Year 1: CF = 63,120 NI = 13,620
• Year 2: CF = 70,800 NI = 3,300
• Year 3: CF = 91,080 NI = 29,100
• Average book value = $72,000
• Your required return for assets of this risk is 12%.
Dr. Mohamed Masry 37
38. Computing NPV for the Project
• Using the formula:
NPV = -165,000+ 63,120/(1.12)1 + 70,800/(1.12)2 +
91,080/(1.12)3 = 12,627.41
Capital Budgeting Project NPV
Required Return = 12%
Year CF Formula Disc CFs
0 (165,000.00) =(-165000)/(1.12)^0 = (165,000.00)
1 63,120.00 =(63120)/(1.12)^1 = 56,357.14
2 70,800.00 =(70800)/(1.12)^2 = 56,441.33
3 91,080.00 =(91080)/(1.12)^3 = 64,828.94
12,627.41
Dr. Mohamed Masry
39. No! The NPV is negative. This means that the
project is reducing shareholder wealth. [Reject as
NPV < 0 ]
The management of Jambura Farm has determined
that the required rate is 13% for projects of this
type.
Should this project be accepted?
NPV Acceptance Criterion
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40. NPV
Strengths &
Weaknesses
Strengths:
– Cash flows
assumed to be
reinvested at
the hurdle rate.
– Accounts for
TVM.
– Considers all
cash flows.
Weaknesses:
– A bit complicated
than PBP
–May not include
managerial
options embedded
in the project.
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41. Discount Rate (%)
0 3 6 9 12 15
IRR
NPV@13%
Sum of CF’s Plot NPV for each
discount rate.
Net
Present
Value
$000s
15
10
5
0
-4
NPV Profile
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42. IRR is the discount rate that equates the present value of
the future net cash flows from an investment project with
the project’s initial cash outflow.
CF1 CF2 CFn
(1+IRR)1 (1+IRR)2 (1+IRR)n
+ . . . +
+
ICO =
Internal rate of return
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43. 15,000 10,000 7,000
10,000 12,000
(1+IRR)1 (1+IRR)2
Find the interest rate (IRR) that causes the
discounted cash flows to equal 40,000.
+ +
+
+
$40,000 =
(1+IRR)3 (1+IRR)4 (1+IRR)5
IRR Solution
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46. .10 41,444
.05 IRR 40,000 4,603
.15 36,841
X 1,444
.05 4,603
1,444
X
=
Interpolate
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47. .10 41,444
.05 IRR 40,000 4,603
.15 36,841
(1,444)(0.05)
4,603
1,444
X = X = .0157
IRR = .10 + .0157 = .1157 or 11.57%
X
Interpolate
Dr. Mohamed Masry 47
48. No! JF will receive 11.57% for each dollar invested in
this project at a cost of 13%. [ IRR < Hurdle Rate ]
The management of Jambura Farm has determined that
the hurdle rate is 13% for projects of this type.
Should this project be accepted?
IRR Acceptance Criterion
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49. Strengths:
– Accounts for TVM
– Considers all cash flows
– Less subjectivity
Weaknesses:
– Assumes all cash flows
reinvested at the IRR
– Difficulties with project
rankings and multiple IRRs
IRR Strengths & Weaknesses
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50. PI is the ratio of the present value of a project’s future net
cash flows to the project’s initial cash outflow.
CF1 CF2 CFn
(1+k)1 (1+k)2 (1+k)n
+ . . . +
+ ICO
PI =
PI = 1 + [ NPV / ICO ]
<< OR >>
Profitability Index (PI)
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51. No! The PI is less than 1.00. This means that the
project is not profitable. [Reject as PI < 1.00 ]
PI =1+(-1428 / 40,000)
= .9643
Should this project be accepted?
PI Acceptance Criterion
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52. Strengths:
– Same as NPV
– Allows comparison of
different scale projects
Weaknesses:
– Same as NPV
– Provides only relative
profitability
– Potential ranking problems
PI Strengths & Weaknesses
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54. Assignment
• Consider an investment that costs $100,000
and has a cash inflow of $25,000 every year
for 5 years. The required return is 9% and
required payback is 4 years.
• What is the payback period?
• What is the NPV?
• Should we accept the project?
• What decision rule should be the primary
decision method?
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