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.
It is the process of considering alternative capital projects and selecting those alternatives that provide the most profitable return on available funds.
Examples of capital projects include land, buildings, equipment and other major fixed asset items.
It is the process of considering alternative capital projects and selecting those alternatives that provide the most profitable return on available funds.
Examples of capital projects include land, buildings, equipment and other major fixed asset items.
Understand the nature and importance of investment decisions.
Distinguish between discounted cash flow (DCF) and non-discounted cash flow (non-DCF) techniques of investment evaluation.
Explain the methods of calculating net present value (NPV) and internal rate of return (IRR).
Show the implications of net present value (NPV) and internal rate of return (IRR).
Describe the non-DCF evaluation criteria: payback and accounting rate of return and discuss the reasons for their popularity in practice and their pitfalls.
Illustrate the computation of the discounted payback.
Describe the merits and demerits of the DCF and Non-DCF investment criteria.
Compare and contract NPV and IRR and emphasise the superiority of NPV rule.
Understand the nature and importance of investment decisions.
Distinguish between discounted cash flow (DCF) and non-discounted cash flow (non-DCF) techniques of investment evaluation.
Explain the methods of calculating net present value (NPV) and internal rate of return (IRR).
Show the implications of net present value (NPV) and internal rate of return (IRR).
Describe the non-DCF evaluation criteria: payback and accounting rate of return and discuss the reasons for their popularity in practice and their pitfalls.
Illustrate the computation of the discounted payback.
Describe the merits and demerits of the DCF and Non-DCF investment criteria.
Compare and contract NPV and IRR and emphasise the superiority of NPV rule.
The 2017 21st Annual Third-Party Logistics Study shows that shippers and their third-party logistics providers continue to move away from primarily transactional relationships and toward meaningful partnerships. Since the study began 21 years ago, researchers have seen the continued improvement in the strategic nature of relationships between shippers and third-party logistics providers.
This year’s survey suggests 3PLs and their customers continue to improve the quality of their relationships. Both parties—91% of 3PL users and 97% of 3PL providers—reported that their relationships are successful and that their work is yielding positive results.
Responsibility accounting is a system of dividing an organization into similar units, each of which is to be assigned particular responsibilities. These units may be in the form of divisions, segments, departments, branches, product lines and so on. Each department is comprised of individuals who are responsible for particular tasks or managerial functions. The managers of various departments should ensure that the people in their department are doing well to achieve the goal. Responsibility accounting refers to the various concepts and tools used by managerial accountants to measure the performance of people and departments in order to ensure that the achievement of the goals set by the top management.
Responsibility accounting, therefore, represents a method of measuring the performances of various divisions of an organization. The test to identify the division is that the operating performance is separately identifiable and measurable in some way that is of practical significance to the management. Responsibility accounting collects and reports planned and actual accounting information about the inputs and outputs of responsibility centers.
CSCMP 2014: Dr. Robert C. Lieb 2014 3PL Provider CEO PerspectiveAlen Beljin
Dr. Bob Lieb, professor of supply chain management at Northeastern University, is author of the 21st Annual Survey of Third-Party Logistics Provider CEOs, sponsored by Penske Logistics The studies revealed that 3PL CEOs are confident about the current state and future revenue growth of their companies and the regional 3PL industries. The annual surveys, which this year included the CEOs of 27 of the world's largest 3PLs, found that approximately 75 percent of the companies involved in the surveys were profitable in 2013. North American and Asian-Pacific CEOs forecasted three-year company growth of 10.77 percent and 16.2 percent, respectively. European CEOs forecasted 8.33 percent growth over the same period.
Third party logistics providers typically specialize in integrated operation, warehousing and transportation services
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Fourth party logistics (4 PL) companies serve as consultants who manage the relationship between the principal company and one or more 3PLs to make sure all operations are running smoothly.
Capital Budgeting is about how one should evaluate the financing options based on the superior financial performance through mathematical techniques. These techniques have been discussed in the presentation in detail.
Projects may look attractive for two reasons:1) There are some errors in forecast 2)The company genuinely expects to earn excess profits.
So increase odds in your favor by moving in areas of competitive advantages.
Look at economic rents and where even advantage is absent or entry of competitors will push prices down or costs up, don’t enter .
When you have the market value of an asset use it..rather then over analysis…gold, real estate..airplanes etc…
PV calculations may vary and subject to error …that’s life!!!!!
Business Valuation Principles for EntrepreneursBen Wann
This insightful presentation is designed to equip entrepreneurs with the essential knowledge and tools needed to accurately value their businesses. Understanding business valuation is crucial for making informed decisions, whether you're seeking investment, planning to sell, or simply want to gauge your company's worth.
Cracking the Workplace Discipline Code Main.pptxWorkforce Group
Cultivating and maintaining discipline within teams is a critical differentiator for successful organisations.
Forward-thinking leaders and business managers understand the impact that discipline has on organisational success. A disciplined workforce operates with clarity, focus, and a shared understanding of expectations, ultimately driving better results, optimising productivity, and facilitating seamless collaboration.
Although discipline is not a one-size-fits-all approach, it can help create a work environment that encourages personal growth and accountability rather than solely relying on punitive measures.
In this deck, you will learn the significance of workplace discipline for organisational success. You’ll also learn
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Grote partijen zijn al een tijdje onderweg met retail media. Ondertussen worden in dit domein ook de kansen zichtbaar voor andere spelers in de markt. Maar met die kansen ontstaan ook vragen: Zelf retail media worden of erop adverteren? In welke fase van de funnel past het en hoe integreer je het in een mediaplan? Wat is nu precies het verschil met marketplaces en Programmatic ads? In dit half uur beslechten we de dilemma's en krijg je antwoorden op wanneer het voor jou tijd is om de volgende stap te zetten.
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"𝑩𝑬𝑮𝑼𝑵 𝑾𝑰𝑻𝑯 𝑻𝑱 𝑰𝑺 𝑯𝑨𝑳𝑭 𝑫𝑶𝑵𝑬"
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2. `Nature of Investment Decisions
The investment decisions of a firm are generally known
as the capital budgeting, or capital expenditure
decisions.
The firm’s investment decisions would generally
include expansion, acquisition, modernisation and
replacement of the long-term assets. Sale of a division
or business (divestment) is also as an investment
decision.
Decisions like the change in the methods of sales
distribution, or an advertisement campaign or a
3. Features of Investment Decisions
• The exchange of current funds for future
benefits.
• The funds are invested in long-term assets.
• The future benefits will occur to the firm over a
series of years.
5. Types of Investment Decisions
• One classification is as follows:
– Expansion of existing business
– Expansion of new business
– Replacement and modernisation
• Yet another useful way to classify investments is as
follows:
– Mutually exclusive investments
– Independent investments
– Contingent investments
6. Investment Evaluation Criteria
• Three steps are involved in the evaluation of an
investment:
– Estimation of cash flows
– Estimation of the required rate of return (the
opportunity cost of capital)
– Application of a decision rule for making the
choice
7. Investment Decision Rule
It should maximise the shareholders’ wealth.
It should consider all cash flows to determine the true profitability
of the project.
It should provide for an objective and unambiguous way of
separating good projects from bad projects.
8. It should help ranking of projects according to their true
profitability.
It should recognise the fact that bigger cash flows are preferable
to smaller ones and early cash flows are preferable to later ones.
It should help to choose among mutually exclusive projects that
project which maximises the shareholders’ wealth.
It should be a criterion which is applicable to any conceivable
investment project independent of others.
9. Evaluation Criteria
• 1. Discounted Cash Flow (DCF) Criteria
– Net Present Value (NPV)
– Internal Rate of Return (IRR)
– Profitability Index (PI)
• 2. Non-discounted Cash Flow Criteria
– Payback Period (PB)
– Discounted Payback Period (DPB)
– Accounting Rate of Return (ARR)
10. Net Present Value Method
Cash flows of the investment project should be forecasted
based on realistic assumptions.
Appropriate discount rate should be identified to discount
the forecasted cash flows. The appropriate discount rate is
the project’s opportunity cost of capital.
Present value of cash flows should be calculated using the
opportunity cost of capital as the discount rate.
The project should be accepted if NPV is positive (i.e., NPV
> 0).
11. Net Present Value Method
• Net present value should be found out by
subtracting present value of cash outflows from
present value of cash inflows. The formula for the
net present value can be written as follows:
31 2
02 3
0
1
NPV
(1 ) (1 ) (1 ) (1 )
NPV
(1 )
n
n
n
t
t
t
C CC C
C
k k k k
C
C
k
12. Acceptance Rule
• Accept the project when NPV is positive
NPV > 0
• Reject the project when NPV is negative
NPV < 0
• May accept the project when NPV is zero
NPV = 0
• The NPV method can be used to select between
mutually exclusive projects; the one with the
higher NPV should be selected.
13. Evaluation of the NPV Method
• NPV is most acceptable investment rule for the
following reasons:
– Time value
– Measure of true profitability
– Value-additivity
– Shareholder value
• Limitations:
– Involved cash flow estimation
14. Internal Rate of Return Method
• The internal rate of return (IRR) is the rate that
equates the investment outlay with the present
value of cash inflow received after one period. This
also implies that the rate of return is the discount
rate which makes NPV = 0.31 2
0 2 3
0
1
0
1
(1 ) (1 ) (1 ) (1 )
(1 )
0
(1 )
n
n
n
t
t
t
n
t
t
t
C CC C
C
r r r r
C
C
r
C
C
r
15. Acceptance Rule
• Accept the project when r > k.
• Reject the project when r < k.
• May accept the project when r = k.
• In case of independent projects, IRR and NPV
rules will give the same results if the firm has no
shortage of funds.
16. Evaluation of IRR Method
• IRR method has following merits:
– Time value
– Profitability measure
– Acceptance rule
– Shareholder value
• IRR method may suffer from:
– Multiple rates
– Mutually exclusive projects
17. Profitability Index
• Profitability index is the ratio of the present value
of cash inflows, at the required rate of return, to
the initial cash outflow of the investment.
18. Profitability Index
• The initial cash outlay of a project is Rs 100,000 and
it can generate cash inflow of Rs 40,000, Rs 30,000,
Rs 50,000 and Rs 20,000 in year 1 through 4.
Assume a 10 per cent rate of discount. The PV of
cash inflows at 10 per cent discount rate is:
.1235.1
1,00,000Rs
1,12,350Rs
PI
12,350Rs=100,000Rs112,350RsNPV
0.6820,000Rs+0.75150,000Rs+0.82630,000Rs+0.90940,000Rs=
)20,000(PVFRs+)50,000(PVFRs+)30,000(PVFRs+)40,000(PVFRsPV 0.104,0.103,0.102,0.101,
ARUN, MBA, TNAU.
19. Acceptance Rule
• The following are the PI acceptance rules:
– Accept the project when PI is greater than one.
PI > 1
– Reject the project when PI is less than one.
PI < 1
– May accept the project when PI is equal to one.
PI = 1
• The project with positive NPV will have PI greater
than one. PI less than means that the project’s NPV
is negative.
20. Evaluation of PI Method
• It recognises the time value of money.
• It is consistent with the shareholder value maximisation
principle. A project with PI greater than one will have
positive NPV and if accepted, it will increase
shareholders’ wealth.
• In the PI method, since the present value of cash
inflows is divided by the initial cash outflow, it is a
relative measure of a project’s profitability.
• Like NPV method, PI criterion also requires calculation
21. Payback
• Payback is the number of years required to recover the
original cash outlay invested in a project.
• If the project generates constant annual cash inflows,
the payback period can be computed by dividing cash
outlay by the annual cash inflow. That is:
0Initial Investment
Payback = =
Annual Cash Inflow
C
C
22. Acceptance Rule
• The project would be accepted if its payback period is
less than the maximum or standard payback period set
by management.
• As a ranking method, it gives highest ranking to the
project, which has the shortest payback period and
lowest ranking to the project with highest payback
period.
23. • Certain virtues:
Simplicity
Cost effective
Short-term effects
Risk shield
Liquidity
Serious limitations:
Cash flows after
payback
Cash flows ignored
Cash flow patterns
Administrative
difficulties
Inconsistent with
shareholder value
24. Accounting Rate of Return Method
• The accounting rate of return is the ratio of the
average after-tax profit divided by the average
investment. The average investment would be equal
to half of the original investment if it were
depreciated constantly.
Average income
ARR =
Average investment
25. Acceptance Rule
This method will accept all those projects whose ARR is
higher than the minimum rate established by the
management and reject those projects which have ARR
less than the minimum rate.
This method would rank a project as number one if it has
highest ARR and lowest rank would be assigned to the
project with lowest ARR.
26. Evaluation of ARR Method
• The ARR method may claim some merits
– Simplicity
– Accounting data
– Accounting profitability
• Serious shortcoming
– Cash flows ignored
– Time value ignored
– Arbitrary cut-off
Editor's Notes
Ct =net cash in the yearsv
K= opportunity cost of capital
Co= initial cost of capital
n = expected life
T=tax rate
I book value of investment
EBIT =YEANINGS BFORE INTEREST AND TAXES