Capital Budgeting Techniques

1
CAPITAL BUDGETING

• TECHNIQUES

JAVED IQBAL J3F13MCOM0035 expertsign6_at_gmail.com
www.facebook.com/javediqbal70
2
Capital Expenditure?

• Capital Expenditure is an amount or Funds used
  by a company to acquire or upgrade physical
  assets such as
• Property
• Industrial buildings or
• Equipment.
• This type of outlay is made by companies to
  maintain or
• increase the scope of their operations.

3
What is Capital Budgeting?

• Capital budgeting refers to the process of
  deciding how to allocate the firms scarce
  capital resources (land, labor, and capital) to
  its various investment alternatives.
• The process of planning for purchases of
  long-term assets.

4
Investment Criteria
Investment Criteria
Discounting Methods
Non-Discounting Method
5
The Payback Period An Example
Formula
The shorter the payback period, the better.
6
Discounted Payback Period
Formula
The shorter the payback period, the better.
7
The Net Present Value
If acceptance is made on the basis of NPV, we
accept those project whose net present value is
higher than others.
8
Profitability Index
Profitability index (PI), also known as profit
investment ratio (PIR) and value investment ratio
(VIR), is the ratio of payoff to investment of a
proposed project. It is a useful tool for ranking
projects because it allows you to quantify the
amount of value created per unit of investment.
Profitability Index Present value of Future
Cash Flows
Initial Investment (Outlay)
9
The Profitability Index
If acceptance is made on the basis of PI, we
accept those project whose PI value is higher
than others.
10
The Internal Rate of Return

• The internal rate of return (IRR) is the discount
  rate that equates the present value of the cash
  flows and the cost of the investment
• Usually, we cannot calculate the IRR directly,
  instead we must use a trial and error process

11
Trial and Error Process
12

• Thank you!