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.
Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. It may be positive, zero or negative.
NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project.
Also known as sophisticated technique for capital budgeting exercise.
It accounts for time value of money by using discounted cash flows in the calculation.
Describes in detail the steps involved in the calculation of Internal Rate of Return. Useful to students of Under graduate, post graduate and professional course students pursuing course in finance
Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. It may be positive, zero or negative.
NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project.
Also known as sophisticated technique for capital budgeting exercise.
It accounts for time value of money by using discounted cash flows in the calculation.
Describes in detail the steps involved in the calculation of Internal Rate of Return. Useful to students of Under graduate, post graduate and professional course students pursuing course in finance
Retirement Planning is the process of determining and accumulating the retirement corpus one would require to live a comfortable life after the paid work life ends.
The ultimate goal of retirement planning is to achieve financial independence.
Objectives-
To cover medical expenses and be prepared for medical emergencies.
To create regular income sources after retirement.
To deal with any kind of uncertainities.
As the Indian economy will mature, the interest rate and stock market return will continue to moderate resulting in lower return from investment.
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Retirement Planning is the process of determining and accumulating the retirement corpus one would require to live a comfortable life after the paid work life ends.
The ultimate goal of retirement planning is to achieve financial independence.
Objectives-
To cover medical expenses and be prepared for medical emergencies.
To create regular income sources after retirement.
To deal with any kind of uncertainities.
As the Indian economy will mature, the interest rate and stock market return will continue to moderate resulting in lower return from investment.
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Subscribe to DevTech Finance
Chapter- III Techniques of Capital Budgeting
Concept, Significance, Nature and classification of capital budgeting decisions, cash flow computation- Incremental approach; Evaluation criteria- Pay Back Period, ARR, NPV, IRR and PI methods; capital rationing, Capital budgeting under risk and uncertainty.
Investment Decision β Capital Budgeting Techniques β Pay Back Method β Accounting Rate Of Return β NPV β IRR β Discounted Pay Back Method β Capital Rationing β Risk Adjusted Techniques Of Capital Budgeting. β Capital Budgeting Practices.
what is the future of Pi Network currency.DOT TECH
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The future of the Pi cryptocurrency is uncertain, and its success will depend on several factors. Pi is a relatively new cryptocurrency that aims to be user-friendly and accessible to a wide audience. Here are a few key considerations for its future:
Message: @Pi_vendor_247 on telegram if u want to sell PI COINS.
1. Mainnet Launch: As of my last knowledge update in January 2022, Pi was still in the testnet phase. Its success will depend on a successful transition to a mainnet, where actual transactions can take place.
2. User Adoption: Pi's success will be closely tied to user adoption. The more users who join the network and actively participate, the stronger the ecosystem can become.
3. Utility and Use Cases: For a cryptocurrency to thrive, it must offer utility and practical use cases. The Pi team has talked about various applications, including peer-to-peer transactions, smart contracts, and more. The development and implementation of these features will be essential.
4. Regulatory Environment: The regulatory environment for cryptocurrencies is evolving globally. How Pi navigates and complies with regulations in various jurisdictions will significantly impact its future.
5. Technology Development: The Pi network must continue to develop and improve its technology, security, and scalability to compete with established cryptocurrencies.
6. Community Engagement: The Pi community plays a critical role in its future. Engaged users can help build trust and grow the network.
7. Monetization and Sustainability: The Pi team's monetization strategy, such as fees, partnerships, or other revenue sources, will affect its long-term sustainability.
It's essential to approach Pi or any new cryptocurrency with caution and conduct due diligence. Cryptocurrency investments involve risks, and potential rewards can be uncertain. The success and future of Pi will depend on the collective efforts of its team, community, and the broader cryptocurrency market dynamics. It's advisable to stay updated on Pi's development and follow any updates from the official Pi Network website or announcements from the team.
Introduction to Indian Financial System ()Avanish Goel
Β
The financial system of a country is an important tool for economic development of the country, as it helps in creation of wealth by linking savings with investments.
It facilitates the flow of funds form the households (savers) to business firms (investors) to aid in wealth creation and development of both the parties
If you are looking for a pi coin investor. Then look no further because I have the right one he is a pi vendor (he buy and resell to whales in China). I met him on a crypto conference and ever since I and my friends have sold more than 10k pi coins to him And he bought all and still want more. I will drop his telegram handle below just send him a message.
@Pi_vendor_247
when will pi network coin be available on crypto exchange.DOT TECH
Β
There is no set date for when Pi coins will enter the market.
However, the developers are working hard to get them released as soon as possible.
Once they are available, users will be able to exchange other cryptocurrencies for Pi coins on designated exchanges.
But for now the only way to sell your pi coins is through verified pi vendor.
Here is the telegram contact of my personal pi vendor
@Pi_vendor_247
where can I find a legit pi merchant onlineDOT TECH
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Yes. This is very easy what you need is a recommendation from someone who has successfully traded pi coins before with a merchant.
Who is a pi merchant?
A pi merchant is someone who buys pi network coins and resell them to Investors looking forward to hold thousands of pi coins before the open mainnet.
I will leave the telegram contact of my personal pi merchant to trade with
@Pi_vendor_247
how to sell pi coins in all Africa Countries.DOT TECH
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Yes. You can sell your pi network for other cryptocurrencies like Bitcoin, usdt , Ethereum and other currencies And this is done easily with the help from a pi merchant.
What is a pi merchant ?
Since pi is not launched yet in any exchange. The only way you can sell right now is through merchants.
A verified Pi merchant is someone who buys pi network coins from miners and resell them to investors looking forward to hold massive quantities of pi coins before mainnet launch in 2026.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
Exploring Abhay Bhutadaβs Views After Poonawalla Fincorpβs Collaboration With...beulahfernandes8
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The financial landscape in India has witnessed a significant development with the recent collaboration between Poonawalla Fincorp and IndusInd Bank.
The launch of the co-branded credit card, the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card, marks a major milestone for both entities.
This strategic move aims to redefine and elevate the banking experience for customers.
how can I sell pi coins after successfully completing KYCDOT TECH
Β
Pi coins is not launched yet in any exchange π± this means it's not swappable, the current pi displaying on coin market cap is the iou version of pi. And you can learn all about that on my previous post.
RIGHT NOW THE ONLY WAYΒ you can sell pi coins is through verified pi merchants. A pi merchant is someone who buys pi coins and resell them to exchanges and crypto whales. Looking forward to hold massive quantities of pi coins before the mainnet launch.
This is because pi network is not doing any pre-sale or ico offerings, the only way to get my coins is from buying from miners. So a merchant facilitates the transactions between the miners and these exchanges holding pi.
I and my friends has sold more than 6000 pi coins successfully with this method. I will be happy to share the contact of my personal pi merchant. The one i trade with, if you have your own merchant you can trade with them. For those who are new.
Message: @Pi_vendor_247 on telegram.
I wouldn't advise you selling all percentage of the pi coins. Leave at least a before so its a win win during open mainnet. Have a nice day pioneers β₯οΈ
#kyc #mainnet #picoins #pi #sellpi #piwallet
#pinetwork
USDA Loans in California: A Comprehensive Overview.pptxmarketing367770
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USDA Loans in California: A Comprehensive Overview
If you're dreaming of owning a home in California's rural or suburban areas, a USDA loan might be the perfect solution. The U.S. Department of Agriculture (USDA) offers these loans to help low-to-moderate-income individuals and families achieve homeownership.
Key Features of USDA Loans:
Zero Down Payment: USDA loans require no down payment, making homeownership more accessible.
Competitive Interest Rates: These loans often come with lower interest rates compared to conventional loans.
Flexible Credit Requirements: USDA loans have more lenient credit score requirements, helping those with less-than-perfect credit.
Guaranteed Loan Program: The USDA guarantees a portion of the loan, reducing risk for lenders and expanding borrowing options.
Eligibility Criteria:
Location: The property must be located in a USDA-designated rural or suburban area. Many areas in California qualify.
Income Limits: Applicants must meet income guidelines, which vary by region and household size.
Primary Residence: The home must be used as the borrower's primary residence.
Application Process:
Find a USDA-Approved Lender: Not all lenders offer USDA loans, so it's essential to choose one approved by the USDA.
Pre-Qualification: Determine your eligibility and the amount you can borrow.
Property Search: Look for properties in eligible rural or suburban areas.
Loan Application: Submit your application, including financial and personal information.
Processing and Approval: The lender and USDA will review your application. If approved, you can proceed to closing.
USDA loans are an excellent option for those looking to buy a home in California's rural and suburban areas. With no down payment and flexible requirements, these loans make homeownership more attainable for many families. Explore your eligibility today and take the first step toward owning your dream home.
The secret way to sell pi coins effortlessly.DOT TECH
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Well as we all know pi isn't launched yet. But you can still sell your pi coins effortlessly because some whales in China are interested in holding massive pi coins. And they are willing to pay good money for it. If you are interested in selling I will leave a contact for you. Just telegram this number below. I sold about 3000 pi coins to him and he paid me immediately.
Telegram: @Pi_vendor_247
What price will pi network be listed on exchangesDOT TECH
Β
The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ β 50$.
So if you are interested in selling your pi network coins at a high rate tho. Or you can't wait till the mainnet launch in 2026. You can easily trade your pi coins with a merchant.
A merchant is someone who buys pi coins from miners and resell them to Investors looking forward to hold massive quantities till mainnet launch.
I will leave the telegram contact of my personal pi vendor to trade with.
@Pi_vendor_247
BYD SWOT Analysis and In-Depth Insights 2024.pptxmikemetalprod
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Indepth analysis of the BYD 2024
BYD (Build Your Dreams) is a Chinese automaker and battery manufacturer that has snowballed over the past two decades to become a significant player in electric vehicles and global clean energy technology.
This SWOT analysis examines BYD's strengths, weaknesses, opportunities, and threats as it competes in the fast-changing automotive and energy storage industries.
Founded in 1995 and headquartered in Shenzhen, BYD started as a battery company before expanding into automobiles in the early 2000s.
Initially manufacturing gasoline-powered vehicles, BYD focused on plug-in hybrid and fully electric vehicles, leveraging its expertise in battery technology.
Today, BYD is the worldβs largest electric vehicle manufacturer, delivering over 1.2 million electric cars globally. The company also produces electric buses, trucks, forklifts, and rail transit.
On the energy side, BYD is a major supplier of rechargeable batteries for cell phones, laptops, electric vehicles, and energy storage systems.
The Evolution of Non-Banking Financial Companies (NBFCs) in India: Challenges...beulahfernandes8
Β
Role in Financial System
NBFCs are critical in bridging the financial inclusion gap.
They provide specialized financial services that cater to segments often neglected by traditional banks.
Economic Impact
NBFCs contribute significantly to India's GDP.
They support sectors like micro, small, and medium enterprises (MSMEs), housing finance, and personal loans.
How to get verified on Coinbase Account?_.docxBuy bitget
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t's important to note that buying verified Coinbase accounts is not recommended and may violate Coinbase's terms of service. Instead of searching to "buy verified Coinbase accounts," follow the proper steps to verify your own account to ensure compliance and security.
2. CHAPTER OUTLINE
ο’ Nature & Meaning of Capital Budgeting
ο’ Principles & Techniques
ο’ Estimation of Relevant Cash Flows & Terminal
Value
ο’ Evaluation Techniques β
1. Accounting Rate of Return,
2. Net Present Value,
3. Internal Rate of Return,
4. Net Terminal Value,
5. Profitability Index Method
6. Pay Back Period 2
4. INTRODUCTION OF CAPITAL BUDGETING
ο’ Capital budgeting is made up of two words βcapitalβ and
βbudgeting.β
ο’ In this context, capital expenditure is the spending of
funds for large expenditures like purchasing fixed assets
and equipment, repairs to fixed assets or equipment,
research and development, expansion and the like.
ο’ Budgeting is setting targets for projects to ensure
maximum profitability.
ο’ Capital budgeting is the process a business undertakes
to evaluate potential major projects or investments.
ο’ Construction of a new plant or a big investment in an
outside venture are examples of projects that would
require capital budgeting before they are approved or
rejected. 4
5. ο’ Meaning of Capital Budgeting:
The process of taking decisions as to which assets should
be purchased and how to spend the funds for this purpose
is called Capital Budgeting.
ο’ Definition of Capital Budgeting:
οΌ According to I. M. Pandey, βCapital budgeting decision
may be defined as the firmβs decision to invest its
current funds most efficiently in long run activities in
anticipation of an expected flow of future benefits over
series of year.β
οΌ According to Shall and Haley, βThe process of
determining both how much to spend on capital assets
and which assets to acquire is called capital budgeting.
The plan for such expenditure is called a capital
budget.β
5
6. NATURE OF CAPITAL BUDGETING
ο’ It is a long-term investment decision.
ο’ It is irreversible in nature.
ο’ It requires a large amount of funds.
ο’ It is most critical and complicated decision for a
finance manager.
ο’ It involves an element of risk as the investment is
to be recovered in future.
6
7. IMPORTANCE OF CAPITAL BUDGETING
1. Large Expenditure
2. Long Term Effects
3. Estimates and Uncertainty
4. Effect on Profitability
5. Irreversible Decisions
7
8. PROCESS OF CAPITAL BUDGETING
1. Origin of Investment Proposal
2. Evaluation of the Projects
3. Selection of the Project
4. Implementation and Follow - up
8
10. ο’ Relevant Cash Flow
ο Relevant cash flow is the incremental after β tax
cash outflow (investment) and resulting subsequent
inflows associated with a proposed capital
expenditure.
ο’ Incremental Cash Flows
ο Incremental cash flows are the additional cash
flows (outflows as well as inflows) expected to
result from a proposed capital expenditure.
ο’ Sunk Costs
ο Sunk costs are cash outflows that have already
been made and therefore have no effect on the
cash flows relevant to a current decision.
10
11. ESTIMATION OF RELEVANT CASH FLOWS
1. Single Proposal
ο Cash Outflows of New Project
(1) Cost of new project
(2) + Installation cost of plant and equipments
(3) + Working capital requirements
ο Determination of Cash Inflows
Cash sales revenues
Less: Cash operating cost
Cash inflows before taxes (CFBT)
Less: Depreciation
Taxable income
Less: Tax
Earning after taxes
Plus: Depreciation
Cash inflows after tax (CFAT)
Plus: Salvage value
Plus: Recovery of working capital 11
12. 2. Replacement Situation
ο Cash Outflows in a Replacement Situation
(1) Cost of the new machine
(2) + Installation cost
(3) + Working Capital
(4) - Sale proceeds of existing machine
ο Depreciation Base of New Machine in a
Replacement Situation
(1) WDV of the existing machine
(2) + Cost of the acquisition of new machine (including
installation costs)
(3) - Sale proceeds of existing machine 12
13. 3. Mutually Exclusive Situations
ο In the case of mutually exclusive proposals, the
selection of one proposal exclude the choice of
other.
ο The calculation of the cash outflows and inflows are
same as the replacement situations.
13
15. ACCOUNTING RATE OF RETURN
ο’ The accounting rate of return (ARR) method of
evaluating proposed capital expenditure is also
known as the average rate of return method.
ο’ It is based on accounting information rather than
cash flows.
ARR =
π΄π£πππππ ππππ’ππ ππππππ‘π πππ‘ππ π‘ππ₯ππ
π΄π£πππππ πππ£ππ π‘ππππ‘ ππ£ππ π‘βπ ππππ ππ π‘βπ πππππππ‘
X 100
Average investment = Net working capital + Salvage
value + Β½ (Initial cost of machine β Salvage value)
15
16. ο’ Advantages:
1) It is easy to understand and convenient to use.
2) The figures of incomes are to be obtained from
profit and loss account; no other calculations are
required.
3) The entire income of the project is taken into
account.
4) It points to different alternative avenues of
investment.
5) It takes into consideration the savings over the
whole working life of the project.
6) With the help of this method, the most profitable
investment project can be selected from among the
various proposals. 16
17. ο’ Limitations:
1) It does not consider cash flow.
2) Project yields different amounts of income at
different points of time is ignored in this method. In
short, the time element is not given importance.
Only total income of the project is taken into
account.
3) The difference in investment outlays is not taken
into account under this method.
4) It ignores the fact that useful life of different projects
may be different.
5) It does not take note of all factors affecting rate of
profit.
6) It does not suggest whether a project should be
accepted or not, unless it is compared with a cut off
rate decided by management.
17
18. EXAMPLE
ο’ Determine the average rate of return from the following for
Machine A;
Cost Rs. 56,125
Annual estimated income after depreciation and income tax:
Year Amount
1 3375
2 5375
3 7375
4 9375
5 11,375
36,875
Estimated life 5 years
Estimated salvage value Rs. 3000
Depreciation has been charged on straight line basis.
18
19. ο’ ARR = Average Annual PAT/ Average Investment X
100
ο’ Average Annual PAT = Total PAT/No. of Years
ο’ = 36,875/5
ο’ = Rs. 7375
ο’ Average Investment = Net working capital +
Salvage value + Β½(Cost of machine β Salvage
value)
ο’ = 0 + 3000 + Β½ (56,125 β 3000)
ο’ = 3000 + 26, 562.5
ο’ = Rs. 29, 562.5
ο’ ARR = 7375/29,562.5 X 100
ο’ = 24.95% 19
20. PAYBACK PERIOD
ο’ Payback period is the exact amount of time required
for a firm to recover its initial investment in a project
as calculated from cash inflows.
ο’ Payback period is calculated as;
(1) In the case of annuity CFAT:
PB =
πΌππ£ππ π‘ππππ‘
π΄πππ’ππ πΆππ β πΉπππ€
(2) In the case of mixed CFAT:
It is obtained by cumulating CFAT till the cumulative
CFAT equal the initial investment.
20
21. ο’ Advantages:
1) It is simple to understand and easy to calculate.
2) It is highly useful for a firm facing liquidity problem.
3) It gives protection against risk of obsolescence in
the modern age where technology is changing very
fast.
4) The profitability of a project does not depend on
total return only, but on when it is available and how
speedily it is available.
5) The cost and sales price can be easily estimated if
the pay β back period is short.
6) It is an useful guide to investment policy.
7) It is most suitable when the future is very uncertain.
21
22. ο’ Limitations:
1) It fails to take into account time factor. It gives
equal weight to cash flows received at different
points of time. For example;
Project Investment CFAT CFAT Total
(Year 1) (Year 2)
X Rs. 11,000 Rs. 4,000 Rs. 7,000 = Rs. 11,000
Y Rs. 11,000 Rs. 6,000 Rs. 5,000 = Rs. 11,000
2) This method does not give a correct idea of the
profitability of a project as it does not take into
account cash proceeds received after the pay-back
period. 22
23. 3) This method prefers only those projects which
have short pay-back period, hence, it rejects
modern machines and equipments which may be
highly profitable but may give profits in the long
run.
4) It ignores the time value of money. It gives equal
weight to cash flow at different points of time. It
does not discount the cash inflows.
5) It does not take note of the cost of capital which is
the basis of investment decisions. 23
24. EXAMPLE
ο’ Determine the pay-back period from the following for
Machine A;
Cost Rs. 56,125
Annual estimated income after depreciation and income
tax:
Year Amount
1 3375
2 5375
3 7375
4 9375
5 11,375
36,875
Estimated life 5 years
Estimated salvage value Rs. 3000
Depreciation has been charged on straight line basis. 24
25. D = C βS
N
= 56,125 β 3000
5
= RS. 10,625
YEAR PAT DEPRECIATI
ON
CFAT CUMULATIVE
CFAT
1 3375 10,625 14,000 14,000
2 5375 10,625 16,000 30,000
3 7375 10,625 18,000 48,000
4 9375 10,625 20,000 68,000
5 11375 10,625 22,000+3000
=25,000
93,000
25
Initial Investment = Rs. 56,125
PB = 3 years + 8125/20,000
PB = 3 + 0.41 = 3.41 Years
26. NET PRESENT VALUE
ο’ Net present value is found by subtracting a projectβs
initial investment from the present value of its cash
inflows discounted at the firmβs cost of capital.
ο’ NPV = PV of Cash Inflows β PV of Cash Outflow
ο’ The accept β reject criteria:
οΌ If NPV is positive or NPV > 0, accept project.
οΌ If NPV is negative or NPV < 0, reject project.
οΌ If NPV = 0, the firm is indifferent between accepting
or rejecting the project.
26
27. ο’ Advantages:
1) Since this method recognizes the time value of money, it is
the best guide in long term decision β making.
2) The cash flow over the whole working life of the project is
taken into consideration in this method.
3) This method is consistent with the shareholdersβ objective
of maximizing the wealth as if a project which gives
maximum present value of cash flows is accepted, the
market price of the shares will be favorably affected.
4) Under this method, a comparison is possible among
different projects with different working lives as also
yielding different incomes in different years.
5) It takes into account the risk and uncertainties of business.
6) It takes into account cash flows and not profit, which is
more logical.
27
29. ο’ Limitations:
1) It necessitates calculations which are complicated
and difficult to understand.
2) It is difficult to determine the rate of discount to be
used in this method.
3) Under this method the present value of cash flows
of different projects are compared. Thus, no
absolute criteria is provided to judge the desirability
of investment projects.
4) The result may be misleading when the lengths of
working life of two investment projects are unequal.
29
30. EXAMPLE
ο’ Determine the Net present value from the following for
Machine A;
Cost Rs. 56,125; Discount rate is 10%
Annual estimated income after depreciation and income
tax:
Year Amount
1 3375
2 5375
3 7375
4 9375
5 11,375
36,875
Estimated life 5 years
Estimated salvage value Rs. 3000
Depreciation has been charged on straight line basis.
30
31. Year PAT Deprecia
tion
CFAT PVIF@
10%
PV of CFAT
1 3375 10625 14,000 0.909 12,726
2 5375 10625 16,000 0.826 13,216
3 7375 10625 18,000 0.751 13,518
4 9375 10625 20,000 0.683 13,660
5 11375 10625 22,000 +
3000 =
25,000
0.621 15,525
Total PV of CFAT 68,645
Less: PV of Cash Outflow 56,125
NPV 12,520 31
32. INTERNAL RATE OF RETURN
ο’ Internal rate of return (IRR) is the discount rate that
equates the present values of cash inflows with the
initial investment associated with a project, thereby
causing NPV = 0.
ο’ If the IRR ( r ) exceeds the cut-off rate (k), accept
the project.
ο’ Calculation of IRR:
1) Calculate the average annual cash inflow.
2) Determine pay back period dividing the initial
outlay by the average annual CFAT determined in
step 1.
3) Look for the factor in Table A-4, closest to the pay
back value. 32
33. 4) If the actual cash inflows are higher in the initial
years of the projectβs life than the average CFAT,
adjust IRR a few percentage points upward.
5) If in the early years the actual cash inflows are
below the average CFAT, adjust IRR a few
percentage points downward.
6) If the average CFAT seems fairly close to the
actual cash flows, no adjustment is to be made.
7) Find out the present value (using Table A-3),
taking discount rates as estimated earlier.
8) If the PV of CFAT equals the initial outlay, NPV is
zero, it is the IRR. Otherwise, repeat step 7 till two
consecutive discount rates that cause the NPV to be
positive and negative respectively.
33
34. 9) The actual value can be calculated by the method
of interpolation as;
IRR = A +
C
C βD
X (B β A)
Where A = Lower Rate of Discount at first trial
B = Higher Rate of Discount at second trial
C = Excess of PV of trial at lower rate
D = Shortfall in PV of trial at higher rate
34
35. ο’ Advantages:
1) It considers time value of money.
2) The cash flow available for the whole life of the
project is taken into account.
3) It is easier to understand by management and other
non-technical personnel as here the rate of interest
is computed which is better understood than
present value.
4) There is no need to fix the rate of return in advance
because the method itself is used to determine the
rate.
5) The objective of any business is to maximise the
ownersβ wealth and this method satisfies it.
35
36. ο’ Limitations:
1) The calculations are complicated because they are
based on trial and error method.
2) Uniform internal rate is not available under this
method. It may give multiple rates which become
confusing.
3) In certain situations, ranking of mutually exclusive
projects may be different by IRR method and NPV
methods.
36
37. EXAMPLE
ο’ By investing Rs. 60,000 in a project, the cash flow
available for 5 years is as follows:
1st year Rs. 22,000
2nd year Rs. 18,000
3rd year Rs. 14,000
4th year Rs. 16,000
5th year Rs. 10,000
Calculate Internal Rate of Return (IRR).
37
38. 1) Average CFAT =
22000+18000+14000+16000+10000
5
= Rs. 16000
2) PB = Investment/Average CFAT
= 60000/16000
= 3.75
3) At 10% = Factor 3.79, We will try at 11% & 12% as
initial years cash inflows are higher than average
CFAT Rs. 16,000
38
39. Year CFAT PVIF@11% PV of CFAT
1 22000 0.901 19,822
2 18000 0.812 14,616
3 14000 0.731 10,234
4 16000 0.659 10,544
5 10000 0.593 5930
Total PV of CFAT 61,146
Less: PV of Cash Outflow 60,000
NPV 1146
39
40. Year CFAT PVIF@12% PV of CFAT
1 22000 0.893 19,646
2 18000 0.797 14,346
3 14000 0.712 9968
4 16000 0.636 10,176
5 10000 0.567 5670
Total PV of CFAT 59,806
Less: PV of Cash Outflow 60,000
NPV (194)
40
41. ο’ By using interpolation
ο’ IRR = A +
C
C βD
X (B β A)
ο’ = 11 + 1146 X (12-11)
ο’ 1146 + 194
ο’ = 11 + 0.86 X 1
ο’ = 11.86%
41
42. NET TERMINAL VALUE
ο’ This method assumes that each cash inflow received
is reinvested in another asset at a certain rate of
interest.
ο’ It is reinvested from the time it is received until the
completion of the project.
ο’ NTV = PVTS β PVO
Where, PVTS = Present value of the sum total of
the compounded reinvested cash inflows
PVO = Present value of the outflows
ο’ If the NTV is positive, accept the project
ο’ If the NTV is negative, reject the project 42
43. ο’ Advantages:
1) It has the advantage of cash inflow being
reinvested, once they are received.
2) It is mathematically easier to compute than the IRR
method.
3) The business executives who are not trained in
Accountancy and Statistics can understand this
compounding technique better than discounting
technique.
4) It is more suitable for cash budgeting requirements
as it also considers interest earnings.
43
44. ο’ Limitation:
ο¬ The major practical problem of this method lies in
determining the future rates of interest at which the
intermediate cash inflows received will be reinvested.
ο’ Example:
Original outlay Rs. 10,000; Life of the project 5 years;
Cash inflows Rs. 4000 each for 5 years and cost of
capital (k) 10 per cent. Calculate NTV.
Expected interest rates at which cash inflows will be
reinvested;
Year-end Per cent
1 6
2 6
3 8
4 8
5 8 44
45. Year Cash
Inflows
Rate of
Interest
for
Investmen
t (%)
Years for
Investme
nt
Compou
nding
Factor
(CVIF)
Compound
ing Value
1 4000 6 4 1.262 5048
2 4000 6 3 1.191 4764
3 4000 8 2 1.166 4664
4 4000 8 1 1.080 4320
5 4000 8 0 1.000 4000
20,000 Sum Total of Compounding Value 22,796
45
PV of Sum Total of Compound Value of Cash Inflow
= (22,796 X PVIFi,n)
= 22,796 X PVIF10%,5)
= 22,796 X 0.621
= 14,156.32
NTV = 14,156.32 β 10,000
= Rs. 4156.32
46. PROFITABILITY INDEX OR BENEFIT COST RATIO
ο’ It gives a proportion of present value of cash inflow
and present value of cash outflow or investment.
ο’ It is also known as Benefit β Cost Ratio as it is the
ratio of future cash benefit to initial cash outflow.
ο’ PI =
ππππ πππ‘ ππππ’π ππ πΆππ β πΌπππππ€
ππππ πππ‘ ππππ’π ππ πΆππ β ππ’π‘ππππ€
ο’ If the index is greater than 1, the project becomes
acceptable as it indicates that the present value of
cash inflow is more.
ο’ If PI or BC > 1, accept project
ο’ If PI or BC < 1, reject project
46
47. ο’ Advantages:
1) It gives due importance to time factor.
2) It considers the cash inflow during the whole life of
the project.
3) PI method gives a better indication of the project
to be selected in case there is scarcity of funds
available for investment.
47
48. EXAMPLE
ο’ Determine the Benefit β Cost Ratio from the following for
Machine A;
Cost Rs. 56,125; Discount rate is 10%
Annual estimated income after depreciation and income tax:
Year Amount
1 3375
2 5375
3 7375
4 9375
5 11,375
36,875
Estimated life 5 years
Estimated salvage value Rs. 3000
Depreciation has been charged on straight line basis. 48
49. Year PAT Depreciat
ion
CFAT PVIF
@10%
PV of
CFAT
1 3375 10,625 14,000 0.909 12,726
2 5375 10,625 16,000 0.826 13,216
3 7375 10,625 18,000 0.751 13,518
4 9375 10,625 20,000 0.683 13,660
5 11,375 10,625 25,000 0.621 15,525
Total PV of CFAT 68,645
49
BC = PV of Cash Inflow
PV of Cash Outflow
= 68,645
56,125
= 1.22