This is brief presentation on different strategies about financial management

2. Purpose and Scope
to provide a comprehensive understanding of various
capital budgeting techniques and their significance in
aiding businesses to make informed investments decisions.
seeks to offer practical insights into the application of key
techniques to assess the feasibility, risks, and potential
returns associated with long-term investment projects.

3. Definition of Capital Budgeting
Capital budgeting is the process of evaluating
and selecting long-term investments that are
consistent with the firm’s goal of maximizing owner
wealth and making prudent investment decisions
regarding long-term assets and projects.
Importance of Capital Budgeting Techniques for
Businesses
Capital budgeting techniques plays a crucial
role in the strategic decision-making process of
businesses, serving as a compass for prudent
investment choices.

4. A. Overview of Long-Term
Investment Decision Making
Long term investment decision-
making entails a strategic process in
which businesses assess and select
investment opportunities that are
expected to yield returns over an
extended period.

5. B. Role of Capital Budgeting in Financial
Management
The role of capital budgeting in
financial management is crucial as it
facilitates the effective allocation of financial
resources to maximize long-term profitability
and sustainability. It assists in the
evaluation and selection of investment
projects that align with the organization’s
strategic goals and financial objectives.

7. 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 annuity, the payback period can
be found by dividing the initial investments by the
annual cash inflow.

8. The Decision Criteria:
When the payback period is used to make
accept-reject decisions, the decision
criteria are as follows:
 If the payback period is less than the
maximum acceptable payback period,
accept the project.
 If the payback period is greater than
the maximum acceptable payback
period, reject the project.

10. Provides straightforward
and easy to understand
measure of investment
risk
Promotes a focus on
short-term profitability
Aids in setting investment
time horizons
Subjectively determined number
fails to take fully into account
the time factor in the value of
money
failure to recognize cash flows
that occur after the payback
period.

11. The payback period does not fully
account the time value of money.

12. Payback period fails to recognize cash
flows that occur after the payback period.

13. Net Present Value (NPV) is a financial metric used
in capital budgeting to assess the profitability of an
investment or project.
Net Present Value (NPV) considers the time value of
money. It is considered a sophisticated capital
budgeting technique.

15. A positive NPV indicates that the
investment is expected to
generate returns higher than the
discount rate and is, therefore,
profitable. On the other hand, a
negative NPV suggests that the
investment may not meet the
desired rate of return and may
not be financially viable.

16. The Decision Criteria:
If the NPV is greater than $0,
accept the project.
If the NPV is less than $0, reject
the project.

19. Spreadsheet Use

20. The Internal Rate of Return (IRR) is a financial metric
used to evaluate the potential profitability of an investment
or project which represents the discount rate at which the
net present value (NPV) of future cash flows equals zero.
The internal rate of return (IRR) is the most widely
used sophisticated capital budgeting technique.

21. It is the compound annual rate of return
that the firm will earn if it invests in the
projects and receives the given cash inflows.

22. The Decision Criteria
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.

23. Calculating the IRR
The actual calculation by hand of
the IRR is no easy chore. It
involves complex trial and error
technique.
The formula to solve for IRR is
typically iterative, and it is
commonly done using software,
financial calculators, or
spreadsheet programs like
Microsoft Excel.

24. To calculate the IRR manually:
1. Write down all the cash flows from the
investment or project. These cash flows
could include initial investments and
subsequent cash flows from the project
over its life.
2. Set up the equation for the NPV of the
project, with the discount rate (which is
the IRR) as the variable.
3. Use techniques such as trial and error,
interpolation, or financial calculators to
find the discount rate that makes the NPV
of the project equal to zero.

26. Calculator Use
To find the IRR using preprogrammed
function in a financial calculator, the
key strokes for each project are the
same as shown for the NPV
calculation, except that the last two
NVP keystrokes are replaced by a
single IRR keystroke.

27. Spreadsheet Use

28. Comparing NPV and IRR Techniques
Net Present Value (NPV) and Internal
Rate Return (IRR) are both crucial
capital budgeting techniques used to
evaluate the viability of investment
projects. NPV calculates the present
value of expected cash flows by
discounting them at a specified rate,
whereas IRR determines the discount
rate that equates present value of cash
inflows with the initial investment.

29. Financial managers must apply appropriate decision techniques to
assess whether the project creates value for stakeholders. Net present
value (NPV) and internal rate return (IRR) are the generally preferred
capital budgeting techniques. Both use the cost capital as the required
return needed to compensate share-holders for undertaking projects
with the same risk as that of the firm. The appeal of NPV and IRR
stems from the fact that both indicate whether a proposed investment
creates or destroys shareholder value.

30. Common Challenges and Criticisms of Capital Budgeting
Techniques
1. Uncertainty and Risk Assessment: Difficulty in accurately
forecasting future cash flows and risk factors, leading to
potential inaccuracies in the evaluation process.
2. Exclusion of Intangible Factors: Inability to incorporate
qualitative aspects such as social and environmental impacts.
3. Complexity in Evaluation: Challenges in analyzing complex
projects with non-conventional cash flow patterns, leading to
potential limitations in accurately assessing the project’s
financial implications.

31. How to Address the Challenges and Criticisms of Capital Budgeting Techniques
1. Sensitivity Analysis: Conduct sensitivity analyses to assess the impact of
changing variables on the investment outcome, providing insights into the
potential risks and uncertainties associated with the project.
2. Incorporating Qualitative Factors: Integrate qualitative considerations
such as environmental impact, social implications, and managerial flexibility
into the evaluation process.
3. Scenario Planning: Utilize scenario planning to anticipate and prepare for
various future possibilities, enabling a more robust evaluation of the
project’s resilience under different economic, market and regulatory
conditions.

32. Capital budgeting techniques serve as essential tools for business to
make informed investment decisions, considering the long-term
profitability and sustainability of projects. While these techniques
provide valuable insights into the financial viability of investments,
they are not without limitations.
To address these challenges, it is imperative to adopt holistic
approach to enhance the effectiveness of capital budgeting processes.