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Ethiopian Civil Service University
Ethiopian Civil Service University

The document discusses capital budgeting techniques. It explains concepts like net initial investment, payback period, net present value (NPV), internal rate of return (IRR) and accounting rate of return (ARR). It provides examples of calculating net initial investment, payback period, NPV and IRR for investment projects. The techniques' merits and limitations are also outlined.

Economy & FinanceBusiness
1 of 63
CHAPTER FIVE CAPITAL BUDGETING ,[object Object],[object Object],[object Object],[object Object],[object Object]
INTRODUCTION ,[object Object],[object Object],[object Object]
5.1. Investment Outlay (The Net Initial Investment) ,[object Object],[object Object]
Cont… ,[object Object],[object Object]
Format for Determining Net Initial Investment Project cost or cost of new fixed assets XXX Add: Cost of installation, insurance, transport XX Add: Positive net working capital XX Deduct Cash inflows from the proceeds of old fixed asset disposal XX A(D) Taxes (tax savings) on old asset disposal XX Net Initial investment (or net initial cash outflows) XXX
Example: 1 ,[object Object]
Cont… ,[object Object]
Solution ,[object Object]
Cont… ,[object Object]
Cont… ,[object Object],[object Object]
Cont… ,[object Object],[object Object]
Cont… ,[object Object],[object Object]
Example: 2 ,[object Object]
Cont… ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Cont… ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Cont… ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Cont… ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Project Evaluation: Alternative Methods ,[object Object],[object Object],[object Object],[object Object]
Payback Period (PBP) ,[object Object],[object Object]
Cont… ,[object Object]
Example: 1 ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Cont… ,[object Object],[object Object],[object Object],[object Object]
Example: 2 ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
INDEPENDENT vs. MUTUALLY EXCLUSIVE PROJECTS: ,[object Object],[object Object],[object Object],[object Object]
Decision rule: ,[object Object],[object Object],[object Object],[object Object],[object Object]
Merits of the Payback Period Criterion ,[object Object],[object Object],[object Object],[object Object],[object Object]
Net Present Value (NPV) ,[object Object],CF 1 CF 2 CF n ,[object Object],+ . . . + + - ICO NPV =
Cont… ,[object Object],[object Object],[object Object],[object Object],[object Object]
Example: 1 ,[object Object]
Solution ,[object Object],[object Object],[object Object],[object Object]
Example 2 ,[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Interpretation of the NPV Criterion ,[object Object],[object Object],[object Object],[object Object]
Merits of the NPV Criterion ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Limitations of the NPV Criterion ,[object Object],[object Object],[object Object]
Internal Rate of Return (IRR) ,[object Object],CF 1 CF 2 CF n ,[object Object],+ . . . + + ICO =
Cont… ,[object Object],[object Object]
Decision rule ,[object Object],[object Object],[object Object]
Cont… ,[object Object],Cash Flows Are in Annuity Form Cash Flows are Not in Annuity Form IRR can be computed very easily computation IRR can become tedious
Example: 1 ,[object Object],[object Object]
Cont… ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Cont… ,[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object],[object Object]
Computation of IRR When CFs are Not in Annuity Form ,[object Object],[object Object],[object Object]
Dominance Technique ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Cont… ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Cont… ,[object Object],[object Object],[object Object]
Cont… ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Cont… ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Cont… ,[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Weighted AverageTechnique ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Cont… ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Cont… ,[object Object],[object Object],[object Object]
Cont… ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Cont… ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Cont… ,[object Object],[object Object],[object Object],[object Object]
Merits of the IRR Criterion ,[object Object],[object Object],[object Object]
Limitations of the IRR ,[object Object],[object Object]
Accounting Rate of Return ,[object Object],[object Object],[object Object],[object Object]
Cont… ,[object Object],[object Object],[object Object]
Merits of ARR Method ,[object Object],[object Object],[object Object],[object Object]
Demerits of ARR Method ,[object Object],[object Object],[object Object],[object Object]

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Fm chapter five

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  • 5. Format for Determining Net Initial Investment Project cost or cost of new fixed assets XXX Add: Cost of installation, insurance, transport XX Add: Positive net working capital XX Deduct Cash inflows from the proceeds of old fixed asset disposal XX A(D) Taxes (tax savings) on old asset disposal XX Net Initial investment (or net initial cash outflows) XXX
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