This document discusses several financial management concepts including: 1) Net present value (NPV) which is the difference between the present value of future cash flows from an investment and the amount of the initial investment. 2) Cash flow estimation which businesses use to analyze potential market trends and risks by estimating a project's revenues and costs. 3) Payback period which is the length of time it takes for a project's cash receipts to recoup its initial cost. 4) Capital budgeting which is the planning process used to determine if long-term investments are worth pursuing using techniques like net present value, internal rate of return, and accounting rate of return.

1. Financial management
By
Sonam nigam
Sakshi dhaundiyal

2. NPV (net present value)
• A present value is the value now of a stream of
future cash flows, negative or positive. The value
of each cash flow needs to be adjusted for risk
and the time value of money.
• A net present value (NPV) includes all cash flows
including initial cash flows such as the cost of
purchasing an asset, whereas a present value
does not. The simple present value is useful
where the negative cash flow is an initial one-off,
as when buying a security

3. net present value (NPV)
• Definition
• The difference between the present value of
the future cash flows from an investment and
the amount of investment. Present value of
the expected cash flows is computed by
discounting them at the required rate of
return.

4. Cash Flow Estimation
• Cash flow estimation is a common practice in many businesses where analyzing
potential market trends is a required step in planning strategies. Businesses have a
number of different areas they can choose to focus on.
• There is an element of risk to all of these decisions based on what the business is
giving up. Cash flow estimation is a common tool used in risk analysis to help the
business judge possibilities from a monetary perspective.
• A project's cash flow is its revenue added to the company with its costs subtracted.
Before investing in a new project, a company should have a good estimate of its
expected revenues. Measuring total costs can be a bit more difficult. Total costs
first include all costs of running the project. They should also include the revenues
lost from other projects.
•
For example, if building a new plant means slowing production at another, that
cost should be considered. Sunk costs, investments that have already been spent,
are not counted in measuring a project's cash flow. Subtracting the total costs of a
project from its revenue gives the estimated cash flow.

5. Payback Period Method
• The payback is another method to evaluate an investment
project. The payback method focuses on the payback
period.
• The payback period is the length of time that it takes for a
project to recoup its initial cost out of the cash receipts that
it generates. This period is some times referred to as" the
time that it takes for an investment to pay for itself.“
• The basic premise of the payback method is that the more
quickly the cost of an investment can be recovered, the
more desirable is the investment.
• The payback period is expressed in years. When the net
annual cash inflow is the same every year, the following
formula can be used to calculate the payback period.

6. • Payback period = Investment required / Net
annual cash inflow

7. Capital budgeting
• Capital budgeting (or investment appraisal) is the
planning process used to determine whether an
organization's long term investments such as new
machinery, replacement machinery, new plants, new
products, and research development projects are
worth pursuing. It is budget for major capital, or
investment, expenditures.
• Many formal methods are used in capital budgeting,
including the techniques such as
• Accounting rate of return
• Net present value
• Profitability index

8. • Internal rate of return
• Modified internal rate of return
• Equivalent annuity
These methods use the incremental cash flows
from each potential investment, or project.
Techniques based on accounting earnings and
accounting rules are sometimes used - though
economists consider this to be improper - such as
the accounting rate of return, and "return on
investment." Simplified and hybrid methods are
used as well

9. Accounting rate of Return
• The Accounting rate of Return is found out by
dividing the average income after taxed by the
average investment, i.e., average net value
after depreciation. The accounting rate of
return, thus, is an average rate.

10. • There are two variants of the accounting rate of
return
• (a) Original Investment Method,
• (b) Average Investment Method.
Original Investment Method
Under this method average annual earnings or
profits over the life of the project are divided by
the total outlay of capital project, i.e., the original
investment. Thus ARR under this method is the
ratio between average annual profits and original
investment established.

11. • Average Investment Method:
Under average investment method, average
annual earnings are divided by the average
amount of investment. Average investment is
calculated, by dividing the original investment by
two or by a figure representing the mid-point
between the original outlay and the salvage of
the investment. Generally accounting rate of
return method is represented by the average
investment method.

12. • The following are the merits of the accounting
rate of Return method
• (1) It is very simple to understand and use.
(2) Rate of return may readily be calculated
with the help of accounting data.
(3) It takes investments and the total earnings
from the project during its life time.

13. ARR is most often used internally when selecting
projects. It can also be used to measure the
performance of projects within an organisation. It is
rarely used by investors, and should not be used at all,
because:
• Cash flows are more important to investors, and ARR is
based on numbers that include non-cash items.
• ARR does not take into account the time value of
money — the value of cashflows does not diminish
with time .
• It does not adjust for the greater risk to longer term
forecasts.
• There are better alternatives which are not significantly
more difficult to calculate.

14. Thank you