The document discusses key concepts related to time value of money and capital budgeting techniques. It defines time value of money as the principle that money received in the present is worth more than the same amount in the future due to its potential to earn interest or appreciation. It then explains discounted cash flow analysis and other methods like payback period, return on investment, cost benefit analysis, and replacement analysis that are used to evaluate investments based on projected future cash flows discounted to present value. Finally, it defines inflation and its different types.

2. TIME VALUE OF MONEY
DEFINATION
• TIME VALUE OF MONEY (TVM) MEANS THAT MONEY RECEIVED IN PRESENT IS OF
HIGHER WORTH THAN MONEY TO BE RECEIVED IN THE FUTURE AS MONEY
RECEIVED NOW CAN BE INVESTED AND IT CAN GENERATE CASH FLOWS TO
ENTERPRISE IN FUTURE IN THE WAY OF INTEREST OR FROM INVESTMENT
APPRECIATION IN THE FUTURE AND FROM REINVESTMENT.

3. EXPLANATION
• TIME VALUE OF MONEY IS A CONCEPT THAT RECOGNIZES THE RELEVANT
WORTH OF FUTURE CASH FLOWS ARISING AS A RESULT OF FINANCIAL
DECISIONS BY CONSIDERING THE OPPORTUNITY COST.
• MOREOVER, RECEIVING MONEY IN THE FUTURE RATHER THAN NOW MAY
INVOLVE SOME RISK AND UNCERTAINTY REGARDING ITS RECOVERY. FOR
THESE REASONS, FUTURE CASH FLOWS ARE WORTH LESS THAN THE
PRESENT CASH FLOWS.

4. DISCOUNTED CASH FLOW (DCF)
• DISCOUNTED CASH FLOW (DCF) IS A VALUATIONMETHOD USED TO ESTIMATE THE
VALUE OF AN INVESTMENT BASED ON ITS FUTURE CASH FLOWS.
• DCF ANALYSIS ATTEMPTS TO FIGURE OUT THE VALUE OF AN INVESTMENT TODAY,
BASED ON PROJECTIONS OF HOW MUCH MONEY IT WILL GENERATE IN
THE FUTURE.
• THIS APPLIES TO BOTH FINANCIAL INVESTMENTS FOR INVESTORS AND FOR
BUSINESS OWNERS LOOKING TO MAKE CHANGES TO THEIR BUSINESSES, SUCH
AS PURCHASING NEW EQUIPMENT.

5. EXPLANATION
• DISCOUNTED CASH FLOW (DCF) HELPS DETERMINE THE VALUE OF AN
INVESTMENT BASED ON ITS FUTURE CASH FLOWS.
• THE PRESENT VALUE OF EXPECTED FUTURE CASH FLOWS IS ARRIVED AT BY
USING A DISCOUNT RATE TO CALCULATE THE DISCOUNTED CASH FLOW (DCF).
• IF THE DISCOUNTED CASH FLOW (DCF) IS ABOVE THE CURRENT COST OF THE
INVESTMENT, THE OPPORTUNITY COULD RESULT IN POSITIVE RETURNS.
• COMPANIES TYPICALLY USE THE WEIGHTED AVERAGE COST OF CAPITAL FOR THE
DISCOUNT RATE, AS IT TAKES INTO CONSIDERATION THE RATE OF RETURN
EXPECTED BY SHAREHOLDERS.
• THE DCF HAS LIMITATIONS, PRIMARILY THAT IT RELIES ON ESTIMATIONS ON
FUTURE CASH FLOWS, WHICH COULD PROVE TO BE INACCURATE.

6. PAYBACK PERIOD
WHAT IS THE PAYBACK PERIOD?
• THE PAYBACK PERIOD REFERS TO THE AMOUNT OF TIME IT TAKES TO RECOVER
THE COST OF AN INVESTMENT. SIMPLY PUT, THE PAYBACK PERIOD IS THE
LENGTH OF TIME AN INVESTMENT REACHESA BREAK-EVEN POINT.
• THE DESIRABILITY OF AN INVESTMENT IS DIRECTLY RELATED TO ITS PAYBACK
PERIOD. SHORTER PAYBACKS MEAN MORE ATTRACTIVE INVESTMENTS.

7. • ALTHOUGH CALCULATING THE PAYBACK PERIOD IS USEFUL IN FINANCIAL
AND CAPITAL BUDGETING, THIS METRIC HAS APPLICATIONS IN OTHER
INDUSTRIES.
• IT CAN BE USED BY HOMEOWNERS AND BUSINESSES TO CALCULATE THE
RETURN ON ENERGY-EFFICIENT TECHNOLOGIES SUCH AS SOLAR PANELS AND
INSULATION, INCLUDING MAINTENANCE AND UPGRADES.

8. RETURN ON INVESTMENT (ROI)

9. • RETURN ON INVESTMENT IS A RATIO BETWEEN NET PROFIT AND COST OF
INVESTMENT.
• A HIGH ROI MEANS THE INVESTMENT'S GAINS COMPARE FAVORABLY TO ITS
COST.
• AS A PERFORMANCE MEASURE, ROI IS USED TO EVALUATE THE EFFICIENCY OF
AN INVESTMENT OR TO COMPARE THE EFFICIENCIES OF SEVERAL DIFFERENT
INVESTMENTS.

10. COST BENEFIT ANALYSIS
WHAT IS A COST-BENEFITANALYSIS?
• A COST-BENEFIT ANALYSIS IS A PROCESS BUSINESSES USE TO
ANALYZE DECISIONS. THE BUSINESS OR ANALYST SUMS THE BENEFITS OF A
SITUATION OR ACTION AND THEN SUBTRACTS THE COSTS ASSOCIATED WITH
TAKING THAT ACTION.
• SOME CONSULTANTS OR ANALYSTS ALSO BUILD MODELS TO ASSIGN A DOLLAR
VALUE ON INTANGIBLE ITEMS, SUCH AS THE BENEFITS AND COSTS ASSOCIATED
WITH LIVING IN A CERTAIN TOWN.

11. REPLACEMENT ANALYSIS
• A TOOL WITH WHICH EQUIPMENT OWNERS TIME THE
EQUIPMENT REPLACEMENTDECISION.
• THE COST OF OWNING THE PRESENT EQUIPMENT IS COMPARED WITH THE COST
OF OWNING POTENTIAL ALTERNATIVES FOR REPLACING IT.
• THEORETICAL AND PRACTICAL METHODS ARE USED TO ACCOMPLISH THIS
IMPORTANT EQUIPMENT TASK.

12. TOP 6 METHODS USED FOR EQUIPMENT REPLACEMENTSTUDIES
• PAY-BACK PERIOD METHOD
• TOTAL LIFE AVERAGE METHOD
• ANNUAL COST METHOD
• PRESENT WORTH METHOD
• RATE OF RETURN METHOD
• MAPI METHOD

13. INFLATION
WHAT IS INFLATION?
• INFLATION IS A QUANTITATIVE MEASURE OF THE RATE AT WHICH THE
AVERAGE PRICE LEVEL OF A BASKET OF SELECTED GOODS AND SERVICES IN AN
ECONOMY INCREASES OVER SOME PERIOD OF TIME.
• IT IS THE RISE IN THE GENERAL LEVEL OF PRICES WHERE A UNIT OF CURRENCY
EFFECTIVELY BUYS LESS THAN IT DID IN PRIOR PERIODS. OFTEN EXPRESSED AS A
PERCENTAGE.

14. EXPLANATION
• INFLATION IS THE RATE AT WHICH THE GENERAL LEVEL OF PRICES FOR GOODS
AND SERVICES IS RISING AND, CONSEQUENTLY, THE PURCHASING POWER OF
CURRENCY IS FALLING.
• INFLATION IS CLASSIFIED INTO THREE TYPES:
• DEMAND-PULL INFLATION.
• COST-PUSH INFLATION.
• BUILT-IN INFLATION.

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