This document provides an overview of capital budgeting and cash flows. It defines key capital budgeting terminology and outlines the major components of relevant cash flows. It also describes the capital budgeting process, including proposal generation, review and analysis, decision making, implementation, and follow up. Additionally, it explains how to calculate the initial investment, operating cash inflows, terminal cash flow, and discusses capital budgeting techniques like payback period, net present value, and internal rate of return.
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.
This document discusses capital budgeting and provides an outline for a presentation on the topic. It defines capital budgeting as the process of analyzing projects and deciding which ones to include in a capital budget. The presentation will cover duties of financial managers, definitions of budgets, types of capital budgeting projects, evaluation criteria like net present value, internal rate of return and profitability index, and will conclude with a summary. It is being presented to Mr. Kashif Abbas by three students for their management sciences program.
This document provides an outline for a presentation on capital budgeting. It discusses capital budgeting theory, evaluation methods like net present value (NPV), internal rate of return (IRR), and profitability index (PI). It covers the importance of capital budgeting, types of capital budgeting projects, and the eight step capital budgeting process. Evaluation methods are examined in depth including their strengths and weaknesses. The presentation aims to help the audience understand capital budgeting and how to select projects that maximize shareholder wealth.
The document discusses capital budgeting, which refers to a company's process of making investment decisions in long-term assets or projects. It covers the objectives, types, and process of capital budgeting decisions. Some key points:
- Capital budgeting decisions are among the most important financial decisions as they impact a company's future profitability and growth.
- The capital budgeting process involves generating investment proposals, estimating cash flows, evaluating proposals using methods like NPV or IRR, selecting projects, and reviewing projects after completion.
- Traditional methods like payback period and accounting rate of return do not consider the time value of money, while modern discounted cash flow methods like NPV and IRR do.
Capital budgeting is the process of evaluating long-term investment projects and determining whether they are worth funding through debt, equity, or retained earnings. It involves estimating future cash flows of potential projects, evaluating them using techniques like net present value, and choosing projects that increase shareholder value and have returns higher than the company's cost of capital. The objectives of capital budgeting include setting investment priorities, purchasing assets that generate positive returns, aligning investments with marketing plans, keeping pace with projected growth, and maintaining an optimal debt level.
Capital budgeting is the process of planning long-term investments and allocating funds. It involves analyzing potential capital projects to determine which will be most profitable. Some key aspects of capital budgeting include evaluating projects based on cash flows rather than accounting profits, considering opportunity costs and tax implications, and ensuring project rates of return exceed the required cost of capital. Common techniques for evaluating projects include net present value analysis, internal rate of return, payback period, and profitability index. Capital budgeting helps firms make optimal investment decisions to maximize long-term value.
Capital budgeting refers to the long-term planning process used to evaluate proposed major investments and capital expenditures. It involves evaluating potential capital projects and determining which projects to invest in. The key methods used to evaluate projects include payback period, net present value, internal rate of return, and profitability index. Payback period is a simple and widely used traditional method that measures the time required for the cash inflows from a project to repay the initial cash outlay. However, it ignores cash flows beyond the payback period. More sophisticated discounted cash flow methods like net present value and internal rate of return are better as they consider the timing of all cash flows and investment cost of capital.
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.
This document discusses capital budgeting and provides an outline for a presentation on the topic. It defines capital budgeting as the process of analyzing projects and deciding which ones to include in a capital budget. The presentation will cover duties of financial managers, definitions of budgets, types of capital budgeting projects, evaluation criteria like net present value, internal rate of return and profitability index, and will conclude with a summary. It is being presented to Mr. Kashif Abbas by three students for their management sciences program.
This document provides an outline for a presentation on capital budgeting. It discusses capital budgeting theory, evaluation methods like net present value (NPV), internal rate of return (IRR), and profitability index (PI). It covers the importance of capital budgeting, types of capital budgeting projects, and the eight step capital budgeting process. Evaluation methods are examined in depth including their strengths and weaknesses. The presentation aims to help the audience understand capital budgeting and how to select projects that maximize shareholder wealth.
The document discusses capital budgeting, which refers to a company's process of making investment decisions in long-term assets or projects. It covers the objectives, types, and process of capital budgeting decisions. Some key points:
- Capital budgeting decisions are among the most important financial decisions as they impact a company's future profitability and growth.
- The capital budgeting process involves generating investment proposals, estimating cash flows, evaluating proposals using methods like NPV or IRR, selecting projects, and reviewing projects after completion.
- Traditional methods like payback period and accounting rate of return do not consider the time value of money, while modern discounted cash flow methods like NPV and IRR do.
Capital budgeting is the process of evaluating long-term investment projects and determining whether they are worth funding through debt, equity, or retained earnings. It involves estimating future cash flows of potential projects, evaluating them using techniques like net present value, and choosing projects that increase shareholder value and have returns higher than the company's cost of capital. The objectives of capital budgeting include setting investment priorities, purchasing assets that generate positive returns, aligning investments with marketing plans, keeping pace with projected growth, and maintaining an optimal debt level.
Capital budgeting is the process of planning long-term investments and allocating funds. It involves analyzing potential capital projects to determine which will be most profitable. Some key aspects of capital budgeting include evaluating projects based on cash flows rather than accounting profits, considering opportunity costs and tax implications, and ensuring project rates of return exceed the required cost of capital. Common techniques for evaluating projects include net present value analysis, internal rate of return, payback period, and profitability index. Capital budgeting helps firms make optimal investment decisions to maximize long-term value.
Capital budgeting refers to the long-term planning process used to evaluate proposed major investments and capital expenditures. It involves evaluating potential capital projects and determining which projects to invest in. The key methods used to evaluate projects include payback period, net present value, internal rate of return, and profitability index. Payback period is a simple and widely used traditional method that measures the time required for the cash inflows from a project to repay the initial cash outlay. However, it ignores cash flows beyond the payback period. More sophisticated discounted cash flow methods like net present value and internal rate of return are better as they consider the timing of all cash flows and investment cost of capital.
The Miller-Orr model of cash management allows businesses to set upper and lower cash balance limits and determine a target cash balance point. It accounts for stochastic cash inflows and outflows. The key assumptions are random daily cash balances, ability to invest idle cash, and transaction fees for buying/selling securities.
Money markets deal with short-term financial assets up to one year. Transactions typically occur through phone without brokers. Participants include central banks, commercial banks, and non-bank financial institutions.
International finance management helps determine exchange rates, assess foreign debt securities and inflation rates, compare countries' economic statuses, and identify foreign market opportunities. Exchange rates strongly influence international finance calculations.
There is a consistent relationship
The document discusses various capital budgeting techniques for evaluating investment projects. It begins by introducing capital budgeting and some key concepts. It then describes the payback period method and its limitations, such as ignoring cash flows after the payback point and not accounting for the time value of money. The document also discusses the discounted payback period method and the accounting rate of return (ARR) method. It provides examples and evaluates the strengths and weaknesses of each technique.
Capital budgeting decisions are much vital than the decisions on management of working capital as these decisions requires careful analysis of the expected costs and benefits to be derived from each capital expenditure on acquisition of land, building, equipments and for permanent additions to working capital associated with the plant expansion.
The level of investments that maximizes the present value of the firm is simultaneously determined by the interaction of supply and demand forces under conditions of uncertainty
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
The document discusses capital budgeting, which refers to the planning process used to determine whether long-term investments are worth funding with cash. It defines capital budgeting, outlines its key characteristics and process, and describes various techniques used, including payback period, accounting rate of return, net present value, internal rate of return, and profitability index. It also discusses determining relevant cash flows, the cost of capital, and calculating the weighted average cost of capital.
Capital budgeting refers to the process of evaluating investment projects and determining whether they should be accepted or rejected. There are traditional and discounted cash flow methods for evaluating projects. Traditional methods include payback period and accounting rate of return, which do not consider the time value of money. Discounted cash flow methods like net present value (NPV) and internal rate of return (IRR) discount future cash flows to determine if a project will provide sufficient returns. The capital budgeting process involves project generation, evaluation using techniques like NPV or IRR, and selection of projects that meet acceptance criteria.
Capital budgeting refers to the process of evaluating investment projects and determining whether they should be accepted or rejected. There are traditional and discounted cash flow methods for evaluating projects. Traditional methods include payback period and accounting rate of return, which do not consider the time value of money. Discounted cash flow methods, like net present value and internal rate of return, discount future cash flows to determine the value of projects today. These methods are preferred as they are consistent with maximizing shareholder value.
The functions of a financial manager include:
1. Estimating financial requirements, selecting sources of funds, allocating funds, analyzing financial performance, capital budgeting, working capital management, profit planning and control, providing fair returns to investors, and maintaining liquidity and maximizing wealth.
2. Selecting the right sources of funds at the right time and cost, such as equity, debt, or preferred shares.
3. Distributing funds between capital and operating expenditures and evaluating investment proposals.
The document provides an introduction to working capital, which is defined as a financial metric representing operating liquidity available to a business. It is calculated as current assets minus current liabilities. The objective of the study and importance of studying working capital management are discussed. Methodology including type of research, data collection techniques, and data analysis tools are explained. Key aspects of working capital including components, management, and kinds are outlined. Decision criteria for working capital management and how it is guided are also summarized.
The document discusses capital budgeting and investment project evaluation. It defines capital budgeting as evaluating long-term investment proposals to maximize investor wealth. The key steps in the capital budgeting process are planning potential investments, evaluating proposals using techniques like NPV and IRR, selecting projects, implementing, controlling, and reviewing projects. Cash flows, including initial investments, interim cash flows, and terminal cash flows, are crucial to accurately evaluate projects. The document provides examples of calculating relevant cash flows for capital budgeting analysis.
The document discusses capital budgeting and various capital budgeting techniques. It begins by defining capital budgeting as the process of making long-term investment decisions regarding projects with benefits expected over several years. It then discusses various capital budgeting methods including traditional non-discounting methods like payback period and accounting rate of return as well as modern discounting methods like net present value, internal rate of return, and profitability index. Specific examples are provided to demonstrate how to use the payback period and accounting rate of return methods to evaluate investment projects.
Financial management involves planning, organizing, and controlling financial resources. The document outlines key financial management concepts like the objectives of financial management to ensure adequate funding and returns. It also discusses functions such as estimating capital needs, determining sources of funds, and managing cash flows. Other concepts covered include financial statements like the balance sheet, which lists assets/liabilities, and profit and loss statement, which outlines revenues/expenses.
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!!!!!
This document discusses capital budgeting methods for evaluating projects that span multiple years. It covers key concepts like net present value, internal rate of return, payback period, and accrual rate of return. The document provides examples to illustrate how to calculate NPV, IRR, and payback period for hypothetical capital investment projects. It also discusses how depreciation affects after-tax cash flows and how performance evaluation using accrual rates can conflict with capital budgeting decisions made using discounted cash flow methods.
This document discusses capital budgeting and investment appraisal. It defines capital budgeting as analyzing long-term investment alternatives. Examples include new plants, machinery, and equipment. Capital budgeting decisions involve large, non-reversible, and strategic investments that are risky. The document outlines the steps to evaluate capital budgeting decisions and lists accounting rate of return, net present value, payback period, and internal rate of return as common evaluation methods.
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.
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.
Capital budgeting is a process of evaluating investments and huge expenses in order to obtain the best returns on investment.
An organization is often faced with the challenges of selecting between two projects/investments or the buy vs replace decision. Ideally, an organization would like to invest in all profitable projects but due to the limitation on the availability of capital an organization has to choose between different projects/investments.
What are the objectives of Capital budgeting?
Capital expenditures are huge and have a long-term effect. Therefore, while performing a capital budgeting analysis an organization must keep the following objectives in mind:
1. Selecting profitable projects
An organization comes across various profitable projects frequently. But due to capital restrictions, an organization needs to select the right mix of profitable projects that will increase its shareholders’ wealth.
2. Capital expenditure control
Selecting the most profitable investment is the main objective of capital budgeting. However, controlling capital costs is also an important objective. Forecasting capital expenditure requirements and budgeting for it, and ensuring no investment opportunities are lost is the crux of budgeting.
3. Finding the right sources for funds
Determining the quantum of funds and the sources for procuring them is another important objective of capital budgeting. Finding the balance between the cost of borrowing and returns on investment is an important goal of Capital Budgeting.
The following are the two methods:
A) Traditional Method
1. Pay back period method
2. Improvement of traditional approach
3. Rate of Return Method or Accounting Method
B) Time adjusted method or discount methods
4. Net Present Value method
5. Internal Rate of Return Method
6. Profitability Index Method
Corporations generally invest in debt or share securities for three main reasons: (1) to manage excess cash, (2) generate investment income, and (3) for strategic reasons. The accounting for investments depends on the type and ownership level. For debt investments and share investments where ownership is less than 20%, companies record investments at cost and recognize gains/losses upon sale. For share investments where ownership is 20-50%, companies use the equity method to adjust the investment balance for the investor's share of earnings and dividends. For share investments over 50% ownership, consolidated financial statements are prepared to combine the parent and subsidiary.
The Miller-Orr model of cash management allows businesses to set upper and lower cash balance limits and determine a target cash balance point. It accounts for stochastic cash inflows and outflows. The key assumptions are random daily cash balances, ability to invest idle cash, and transaction fees for buying/selling securities.
Money markets deal with short-term financial assets up to one year. Transactions typically occur through phone without brokers. Participants include central banks, commercial banks, and non-bank financial institutions.
International finance management helps determine exchange rates, assess foreign debt securities and inflation rates, compare countries' economic statuses, and identify foreign market opportunities. Exchange rates strongly influence international finance calculations.
There is a consistent relationship
The document discusses various capital budgeting techniques for evaluating investment projects. It begins by introducing capital budgeting and some key concepts. It then describes the payback period method and its limitations, such as ignoring cash flows after the payback point and not accounting for the time value of money. The document also discusses the discounted payback period method and the accounting rate of return (ARR) method. It provides examples and evaluates the strengths and weaknesses of each technique.
Capital budgeting decisions are much vital than the decisions on management of working capital as these decisions requires careful analysis of the expected costs and benefits to be derived from each capital expenditure on acquisition of land, building, equipments and for permanent additions to working capital associated with the plant expansion.
The level of investments that maximizes the present value of the firm is simultaneously determined by the interaction of supply and demand forces under conditions of uncertainty
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
The document discusses capital budgeting, which refers to the planning process used to determine whether long-term investments are worth funding with cash. It defines capital budgeting, outlines its key characteristics and process, and describes various techniques used, including payback period, accounting rate of return, net present value, internal rate of return, and profitability index. It also discusses determining relevant cash flows, the cost of capital, and calculating the weighted average cost of capital.
Capital budgeting refers to the process of evaluating investment projects and determining whether they should be accepted or rejected. There are traditional and discounted cash flow methods for evaluating projects. Traditional methods include payback period and accounting rate of return, which do not consider the time value of money. Discounted cash flow methods like net present value (NPV) and internal rate of return (IRR) discount future cash flows to determine if a project will provide sufficient returns. The capital budgeting process involves project generation, evaluation using techniques like NPV or IRR, and selection of projects that meet acceptance criteria.
Capital budgeting refers to the process of evaluating investment projects and determining whether they should be accepted or rejected. There are traditional and discounted cash flow methods for evaluating projects. Traditional methods include payback period and accounting rate of return, which do not consider the time value of money. Discounted cash flow methods, like net present value and internal rate of return, discount future cash flows to determine the value of projects today. These methods are preferred as they are consistent with maximizing shareholder value.
The functions of a financial manager include:
1. Estimating financial requirements, selecting sources of funds, allocating funds, analyzing financial performance, capital budgeting, working capital management, profit planning and control, providing fair returns to investors, and maintaining liquidity and maximizing wealth.
2. Selecting the right sources of funds at the right time and cost, such as equity, debt, or preferred shares.
3. Distributing funds between capital and operating expenditures and evaluating investment proposals.
The document provides an introduction to working capital, which is defined as a financial metric representing operating liquidity available to a business. It is calculated as current assets minus current liabilities. The objective of the study and importance of studying working capital management are discussed. Methodology including type of research, data collection techniques, and data analysis tools are explained. Key aspects of working capital including components, management, and kinds are outlined. Decision criteria for working capital management and how it is guided are also summarized.
The document discusses capital budgeting and investment project evaluation. It defines capital budgeting as evaluating long-term investment proposals to maximize investor wealth. The key steps in the capital budgeting process are planning potential investments, evaluating proposals using techniques like NPV and IRR, selecting projects, implementing, controlling, and reviewing projects. Cash flows, including initial investments, interim cash flows, and terminal cash flows, are crucial to accurately evaluate projects. The document provides examples of calculating relevant cash flows for capital budgeting analysis.
The document discusses capital budgeting and various capital budgeting techniques. It begins by defining capital budgeting as the process of making long-term investment decisions regarding projects with benefits expected over several years. It then discusses various capital budgeting methods including traditional non-discounting methods like payback period and accounting rate of return as well as modern discounting methods like net present value, internal rate of return, and profitability index. Specific examples are provided to demonstrate how to use the payback period and accounting rate of return methods to evaluate investment projects.
Financial management involves planning, organizing, and controlling financial resources. The document outlines key financial management concepts like the objectives of financial management to ensure adequate funding and returns. It also discusses functions such as estimating capital needs, determining sources of funds, and managing cash flows. Other concepts covered include financial statements like the balance sheet, which lists assets/liabilities, and profit and loss statement, which outlines revenues/expenses.
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!!!!!
This document discusses capital budgeting methods for evaluating projects that span multiple years. It covers key concepts like net present value, internal rate of return, payback period, and accrual rate of return. The document provides examples to illustrate how to calculate NPV, IRR, and payback period for hypothetical capital investment projects. It also discusses how depreciation affects after-tax cash flows and how performance evaluation using accrual rates can conflict with capital budgeting decisions made using discounted cash flow methods.
This document discusses capital budgeting and investment appraisal. It defines capital budgeting as analyzing long-term investment alternatives. Examples include new plants, machinery, and equipment. Capital budgeting decisions involve large, non-reversible, and strategic investments that are risky. The document outlines the steps to evaluate capital budgeting decisions and lists accounting rate of return, net present value, payback period, and internal rate of return as common evaluation methods.
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.
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.
Capital budgeting is a process of evaluating investments and huge expenses in order to obtain the best returns on investment.
An organization is often faced with the challenges of selecting between two projects/investments or the buy vs replace decision. Ideally, an organization would like to invest in all profitable projects but due to the limitation on the availability of capital an organization has to choose between different projects/investments.
What are the objectives of Capital budgeting?
Capital expenditures are huge and have a long-term effect. Therefore, while performing a capital budgeting analysis an organization must keep the following objectives in mind:
1. Selecting profitable projects
An organization comes across various profitable projects frequently. But due to capital restrictions, an organization needs to select the right mix of profitable projects that will increase its shareholders’ wealth.
2. Capital expenditure control
Selecting the most profitable investment is the main objective of capital budgeting. However, controlling capital costs is also an important objective. Forecasting capital expenditure requirements and budgeting for it, and ensuring no investment opportunities are lost is the crux of budgeting.
3. Finding the right sources for funds
Determining the quantum of funds and the sources for procuring them is another important objective of capital budgeting. Finding the balance between the cost of borrowing and returns on investment is an important goal of Capital Budgeting.
The following are the two methods:
A) Traditional Method
1. Pay back period method
2. Improvement of traditional approach
3. Rate of Return Method or Accounting Method
B) Time adjusted method or discount methods
4. Net Present Value method
5. Internal Rate of Return Method
6. Profitability Index Method
Corporations generally invest in debt or share securities for three main reasons: (1) to manage excess cash, (2) generate investment income, and (3) for strategic reasons. The accounting for investments depends on the type and ownership level. For debt investments and share investments where ownership is less than 20%, companies record investments at cost and recognize gains/losses upon sale. For share investments where ownership is 20-50%, companies use the equity method to adjust the investment balance for the investor's share of earnings and dividends. For share investments over 50% ownership, consolidated financial statements are prepared to combine the parent and subsidiary.
This document is an introduction to human resource management (HRM) that covers key topics in several chapters. It defines HRM as the process of acquiring, training, appraising, and compensating employees while also attending to labor relations, health and safety, and fairness concerns. The role of HRM and skills needed for HRM professionals are discussed. Common challenges in HRM like containing costs and adapting to technological innovation are also reviewed. The document uses presentations and activities to engage the reader on these HRM concepts.
- Data flow diagrams (DFDs) graphically describe the flow of data within an organization using four basic elements: data sources and destinations, data flows, transformation processes, and data stores. DFDs are subdivided into lower levels to provide more detail. The highest-level DFD is called the context diagram.
- Flowcharts are used to describe business processes and document flows using standard symbols divided into four categories: input/output, processing, storage, and miscellaneous. Types of flowcharts include program, system, document, and internal control flowcharts.
- Business process diagrams visually describe the steps in a business process.
This document summarizes chapters from an accounting textbook. Chapter 1 discusses accounting for merchandising operations, including the recording of purchases and sales under a perpetual inventory system and the steps in the accounting cycle. Chapter 2 covers determining inventory quantities, cost flow assumptions, the lower-of-cost-or-market valuation method, and the inventory turnover ratio. Chapter 3 addresses cash controls, including controls over cash receipts, disbursements, bank reconciliations, and the presentation of cash on the balance sheet.
This document discusses the accounting treatment for savings accounts. It begins by defining savings accounts as accounts meant for non-trading customers to save money with limited transactions. The key steps in accounting for savings accounts are: 1) Open a savings account by depositing funds from cash or a checking account, 2) Withdraw funds from the savings account to cash or a checking account, and 3) Compute and record monthly interest earned on the minimum balance in the account. Interest is calculated using the minimum monthly balance and is recorded initially as an accrued interest account before being added to the savings account periodically. An example is provided to demonstrate computing minimum balances and recording deposits, withdrawals, and monthly interest for three months.
This chapter discusses the conceptual framework that underlies financial accounting. The conceptual framework is a coherent system of objectives and concepts that prescribe the nature, function and limits of financial reporting. It aims to increase users' understanding and confidence in financial reporting and enhance comparability. The FASB has issued several statements that relate to the conceptual framework and cover objectives of financial reporting, qualitative characteristics of accounting information, elements of financial statements, and recognition and measurement concepts. The conceptual framework also describes basic assumptions like economic entity, going concern, monetary unit and periodicity. It explains principles like historical cost, revenue recognition, matching and full disclosure. Constraints like cost-benefit relationship and materiality must also be considered in financial reporting.
The document describes three types of business activities:
1) Service businesses that provide services to customers and have no goods inventory, with a shorter operating cycle.
2) Merchandising businesses that buy and sell goods, having only finished goods inventory and a longer operating cycle.
3) Industrial businesses that transform raw materials into finished goods, having raw materials, work-in-process, and finished goods inventory, with restaurants and bakeries as examples. The type of activity relies primarily on the business's main source of revenue.
This chapter discusses the fundamentals of accounting including its nature, functions, users, principles, and key concepts. Accounting identifies, records, and communicates the financial events of a business. It provides information to internal users like managers and external users like investors and creditors. Companies follow generally accepted accounting principles to prepare four main financial statements - the income statement, balance sheet, statement of owner's equity, and statement of cash flows. The accounting equation forms the basis of recording transactions and showing a company's assets, liabilities, and owner's equity.
Accounting is the system that records and reports financial information about a business. It identifies, records, and communicates economic events to users. The chapter outlines key accounting concepts like the accounting equation, direct and indirect costs, fixed and variable costs, and the difference between inventoriable and period costs. It explains the four main financial statements - income statement, balance sheet, statement of owner's equity, and statement of cash flows - and how they are used to report on a business's financial performance and position.
This document provides information about accounting principles related to inventory, receivables, and property, plant, and equipment for Almarai, a Saudi dairy company. It discusses the perpetual and periodic inventory systems, methods for calculating cost of goods sold and inventory turnover. It also addresses calculating account receivable turnover and defines property, plant and equipment. Almarai uses an average cost method for inventory and the declining balance method for depreciating fixed assets.
This document provides an overview and analysis of balance sheet and cash flow statements for Suez Cement Company. It defines a balance sheet as a financial statement showing a company's assets, liabilities, and equity at a given date. Balance sheets are useful for computing return rates, evaluating capital structure, and assessing risk and future cash flows, though they have limitations like reporting historical costs and using estimates. The document also defines a cash flow statement as recording cash inflows and outflows during a period, including operating, investing, and financing activities. Operating activities reflect cash from providing products/services, while investing activities reflect long-term asset acquisitions and disposals. Financing activities reflect cash from investors, issuing/buying back shares
This document provides information about accounting principles related to inventory, receivables, and property, plant, and equipment for Almarai, a Saudi dairy company. It discusses the perpetual and periodic inventory systems, methods for calculating cost of inventory including average cost, inventory turnover metrics for 2023, types and calculation of accounts receivable turnover, and defines property, plant and equipment along with depreciation methods used by Almarai.
This document summarizes key concepts from Principles of Accounting 2. It discusses Walmart's operations, perpetual inventory systems, cost of goods sold calculations using FIFO and LIFO. It also summarizes chapters on inventories, receivables, property and equipment. Specifics include Walmart's multiple income statements, inventory turnover ratios, accounts receivable aging and allowance for doubtful accounts. Finally, it provides the team members who prepared the document.
This document provides an overview of chapter 6 on inventories from the textbook "Financial Accounting, IFRS Edition". It outlines 6 study objectives related to determining inventory quantities, accounting for inventories using different cost flow methods, the financial effects of cost flow assumptions, the lower-of-cost-or-net realizable value basis, effects of inventory errors, and analyzing inventories using turnover ratios. The document contains slides with explanations, examples, and review questions to explain key inventory accounting concepts.
This document provides an overview of a project on accounting principles for Deraya University. It discusses chapters on accounting information and the recording process, adjusting accounts, and completing the accounting cycle. It also describes the accounting system of Ottimo Restaurant, including key financial statements, reports, users, and accounts in its general ledger.
This document provides an overview and analysis of key financial statements for Suez Cement Company, including the income statement, balance sheet, and cash flow statement. The income statement measures a company's performance over a period of time and can be used to evaluate past performance and predict future performance. The balance sheet shows a company's assets, liabilities, and equity at a point in time and can be used to compute rates of return, evaluate capital structure, and assess risk. The cash flow statement records cash inflows and outflows during a period across operating, investing, and financing activities.
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1. Financial management chapter 6
CHAPTER 6 : CAPITAL BUDGETING CASH FLOW
• Learning Objectives:
• 1. Understand the key motives for capital expenditure and the steps in the capital budgeting process.
• 2. Define basic capital budgeting terminology.
• 3. Discuss the major components of relevant cash flows, expansion versus replacement cash flows, sunk
costs and opportunity costs, and international capital budgeting and long-term investments.
• 4. Calculate the initial investment associated with a proposed capital expenditure.
• 5. Determine relevant operating cash inflows using the income statement format.
• 6. Find the terminal cash flow.
• 7. Understand the role of capital budgeting techniques in the capital budgeting process.
• 8. Calculate, interpret, and evaluate the payback period.
• 9. Calculate, interpret, and evaluate the net present value (NPV).
• 10. Calculate, interpret, and evaluate the internal rate of return (IRR).
1
2. Financial management chapter 6
DEPARTMENTS NEEDS
Accounting:
You need to
understand
capital
budgeting cash
flows in order
to provide
revenue, cost,
depreciation,
and tax data
for use both in
monitoring
existing
projects and in
developing
cash flows for
proposed
projects.
Information
systems:
You need to
understand
capital
budgeting cash
flows in order
to maintain and
and facilitate
the retrieval of
cash flow data
for both
completed and
existing
projects.
Management:
You need to
understand
capital
budgeting cash
flows so that
you will
understand
what cash flows
are relevant in
making
decisions about
proposals for
acquiring
additional
production
facilities, for
new products,
and for the
expansion of
existing
product lines.
Marketing:
You need to
understand
capital
budgeting cash
flows so that
you can make
revenue
estimates for
proposals for
new marketing
programs, for
new products,
and for the
expansion of
existing
product lines.
Operations:
You need to
understand
capital
budgeting cash
flows so that
you can make
cost estimates
for proposals
for the
acquisition of
new equipment
and production
facilities
2
3. Financial management chapter 6
THE CAPITAL BUDGETING PROCESS:
Capital budgeting :
is the process of evaluating and
selecting long-term investments
that are consistent with the
firm’s goal of maximizing owner
wealth.
Firms typically make a variety of long-term
investments, but the most common for the
manufacturing firm is in fixed assets, which
include property (land), plant, and equipment.
These assets, often referred to as
earning assets, generally provide
the basis for the firm’s earning
power and value. We begin by
discussing the motives for capital
expenditure.
3
4. Financial management chapter 6
Steps in the Process
The capital budgeting process consists of five
distinct but interrelated steps.
1. Proposal generation. Proposals are made at all levels within
a business organization and are reviewed by finance personnel.
personnel. Proposals that require large outlays are more
carefully scrutinized than less costly ones.
2. Review and analysis. Formal review and analysis is performed to assess the
appropriateness of proposals and evaluate their economic viability. Once the
analysis is complete, a summary report is submitted to decision makers.
3. Decision making. Firms typically delegate capital expenditure decision making on the basis of dollar limits.
Generally, the board of directors must authorize expenditures beyond a certain amount. Often plant managers are
given authority to make decisions necessary to keep the production line moving. 4
5. Financial management chapter 6
4. Implementation. Following approval, expenditures are made, and projects implemented. Expenditures for a
large project often occur in phases.
5. Follow-up. Results are monitored, and actual costs and benefits are com- pared with those that were
expected. Action may be required if actual out- comes differ from projected ones.
Each step in the process is important.
Basic Terminology
Before we develop the concepts, techniques, and practices related to the capital budgeting process, we need to
explain some basic terminology. In addition, we will
present some key assumptions that are used to simplify the discussion in the remainder of this chapter.
5
6. Financial management chapter 6
• Major Cash Flow Components
• The cash flows of any project having the conventional pattern can include three basic
components:
(1) an initial investment,
(2) operating cash inflows, and
(3) terminal cash flow. All projects—whether for expansion, replacement, renewal, or
some other purpose—have the first two components. Some, however, lack the final
component, terminal cash flow.
• Expansion versus Replacement Cash Flows
• Developing relevant cash flow estimates is most straightforward in the case of
expansion decisions. In this case, the initial investment, operating cash inflows, and
terminal cash flow are merely the after-tax cash outflow and inflows associated with
the proposed capital expenditure.
• Identifying relevant cash flows for replacement decisions is more complicated because
the firm must identify the incremental cash outflow and inflows that would result from
the proposed replacement. The initial investment in the case of replacement is the
difference between the initial investment needed to acquire the new asset and any
after-tax cash inflows expected from liquidation of the old asset 6
7. Financial management chapter 6
International
Capital
Budgeting and
Long-Term
Investments
Although the same basic capital budgeting principles are
used for domestic and international projects, several
additional factors must be addressed in evaluating foreign
investment opportunities. International capital budgeting
differs from the domestic version
because
(1) cash outflows and inflows occur in a foreign currency,
and (2) foreign investments
entail potentially significant political risk. Both of these risks
can be minimized through careful planning.
Finding the
Initial
Investment
The term initial investment as used here refers to the relevant cash outflows
to be considered when evaluating a prospective capital expenditure.
Because our discussion of capital budgeting is concerned only with
investments that exhibit conventional cash flows, the initial investment
occurs at time zero—the time at which the expenditure is made. The initial
investment is calculated by subtracting all cash inflows occurring at time
zero from all cash outflows occurring at time zero.
7
8. Financial management chapter 6
• Book Value
• The book value of an asset is its strict accounting value. It can be calculated by using
the following equation:
• Book value = Installed cost of asset - Accumulated depreciation
• Change in Net Working Capital
• Net working capital is the amount by which a firm’s current assets exceed its current
liabilities. It is important to note that changes in net working capital often accompany
capital expenditure decisions. If a firm acquires new machinery to expand its level of
operations, it will experience an increase in levels of cash, accounts receivable,
inventories, accounts payable, and accruals
• Finding the Operating Cash Inflows
• The benefits expected from a capital expenditure or “project” are embodied in its
operating cash inflows, which are incremental after-tax cash inflows. In this section we
use the income statement format to develop clear definitions of the terms after-tax,
cash inflows, and incremental.
8
9. Financial management chapter 6
• Finding the Terminal Cash Flow
Terminal cash flow is the cash flow resulting from termination and liquidation of a project
at the end of its economic life. It represents the after-tax cash flow, exclusive of operating
cash inflows, that occurs in
• Proceeds from Sale of Assets
• The proceeds from sale of the new and the old asset, often called “salvage value,”
represent the amount net of any removal or cleanup costs expected upon termination
of the project. For replacement projects, proceeds from both the new asset and the old
asset must be considered. For expansion and renewal types of capital expenditures, the
proceeds from the old asset are zero the final year of the project.
• Summarizing the Relevant Cash Flows
• The initial investment, operating cash inflows, and terminal cash flow together
represent a project’s relevant cash flows. These cash flows can be viewed as the
incremental after-tax cash flows attributable to the
proposed project. They represent, in a cash flow sense, how much better or worse off
the firm 9
10. Financial management chapter 6
Capital Budget
Techniques:
When firms have
developed relevant
cash flows, they
analyze them to
assess whether a
project is
acceptable or to
rank projects.
Several techniques
are available for
performing such
analyses. The
preferred
approaches
integrate time value
procedures, risk and
return
considerations, and
valuation concepts
to select capital
expenditures that
are consistent with
the firm’s goal of
maximizing owners’
wealth. This chapter
focuses on the use
of these techniques
in an environment o
Payback Period:
Payback periods
are commonly
used to evaluate
proposed
investments. The
payback period is
the amount of
time required for
the firm to recover
its initial
investment in a
project, as
calculated from
cash inflows. In the
case of an annuity,
the payback period
can be found by
dividing the initial
investment by the
annual cash inflow
f certainty. This
section covers risk
and other
refinements in
capital budgeting.
10
11. Financial management chapter 6
Net Present
Value
Because net present value (NPV) gives explicit consideration to the time
value of money, it is considered a sophisticated capital budgeting
technique. All such tech- niques in one way or another discount the
firm’s cash flows at a specified rate. This rate—often called the discount
rate, required return, cost of capital, or opportunity cost—is the
minimum return that must be earned on a project to leave the firm’s
market value unchanged. In this chapter, we take this rate as a “given.”
Internal Rate of
Return (IRR)
The internal rate of return (IRR) is probably the most widely
used sophisticated capital budgeting technique. However, it is
considerably more difficult than NPV to calculate by hand. The
internal rate of return (IRR) is the discount rate that equates
the NPV of an investment opportunity with $0 (because the
present value of cash inflows equals the initial investment).
11
12. Financial management chapter 6
• Example: We can calculate the payback period for Bennett Company’s
projects A and B using the data in Table 6. For project A, which is an
annuity, the payback period is 3.0 years ($42,000 initial investment --o
$14,000 annual cash inflow). Because project B generates a mixed stream
of cash inflows, the calculation of its payback period is not as clear-cut. In
year 1, the firm will recover $28,000 of its $45,000 initial investment. By the
end of year 2, $40,000 ($28,000 from year 1 +$12,000 from year 2) will
have been recovered. At the end of year 3, $50,000 will have been
recovered. Only 50% of the year 3 cash inflow of $10,000 is needed to
complete the payback of the initial $45,000. The payback period for project
B is therefore 2.5 years (2 years + 50% of year 3). If Bennett’s maximum
acceptable payback period were 2.75 years, project A would be rejected
and project B would be accepted. If the maximum payback were
• 2.25 years, both projects would be rejected. If the projects were being
ranked, B would be preferred over A, because it has a shorter payback
12
13. Financial management chapter 6
• NPV = Present value of cash inflows - Initial investment
• • If the NPV is greater than $0, accept the project.
• • If the NPV is less than $0, reject the project.
• • If the IRR is greater than the cost of capital, accept the project.
• • If the IRR is less than the cost of capital, reject the project.
• Internal Rate of Return (IRR)
• The internal rate of return (IRR) is probably the most widely used sophisticated capital
budgeting technique. However, it is considerably more difficult than NPV to calculate
by hand. The internal rate of return (IRR) is the discount rate that equates the NPV of
an investment opportunity with $0 (because the present value of cash inflows equals
the initial investment). It is the compound annual rate of return that the firm will earn if
it invests in the project and receives the given cash inflows.
• The Decision Criteria
• When IRR is used to make accept–reject decisions, the decision criteria are as follows:
• These criteria guarantee that the firm earns at least its required return. Such an
13
14. Financial management chapter 6
• Internal Rate of Return (IRR)
• The internal rate of return (IRR) is probably the most widely used sophisticated capital
budgeting technique. However, it is considerably more difficult than NPV to calculate
by hand. The internal rate of return (IRR) is the discount rate that equates the NPV of an
investment opportunity with $0 (because the present value of cash inflows equals the
initial investment). It is the compound annual rate of return that the firm will earn if it
invests in the project and receives the given cash inflows.
• The Decision Criteria
• When IRR is used to make accept–reject decisions, the decision criteria are as follows:
• These criteria guarantee that the firm earns at least its required return. Such an
outcome should enhance the market value of the firm and therefore the wealth of its
owners.
14