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Financial Management-Capital Budgeting

The document discusses various techniques used in capital budgeting decisions including net present value, internal rate of return, modified internal rate of return, profitability index, payback period, and discounted payback period. It provides details on each technique across multiple slides and covers key aspects of capital budgeting like cash flows, terminal values, and evaluation. The document is a presentation on capital budgeting decisions, their importance and limitations, and the various quantitative techniques used to evaluate long-term investment projects.

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akash yadav
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1K views24 pages

Financial Management-Capital Budgeting

The document discusses various techniques used in capital budgeting decisions including net present value, internal rate of return, modified internal rate of return, profitability index, payback period, and discounted payback period. It provides details on each technique across multiple slides and covers key aspects of capital budgeting like cash flows, terminal values, and evaluation. The document is a presentation on capital budgeting decisions, their importance and limitations, and the various quantitative techniques used to evaluate long-term investment projects.

Uploaded by

akash yadav
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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CAPITAL BUDGETING

DECISION
FINANCIAL MANAGEMENT
CONTENTS OF THE PRESENTATION :-

■ NATURE AND MEANING SLIDES 3-5

■ LIMITATIONS AND DIFFICULTIES SLIDE 6

■ PRINCIPLES AND TECHNIQUES SLIDE 7

■ CASH FLOWS AND TERMINAL VALUES SLIDE 8

■ EVALUATION TECHNIQUES SLIDES 9-21

■ CAPITAL RATIONING SLIDE 22

■ INFLATIONARY IMPACT SLIDE 23


CAPITAL BUDGETING
DECISIONS

Capital budgeting is the process that a business uses


to determine which proposed fixed asset purchases it
should accept, and which should be declined. This
process is used to create a quantitative view of each
proposed fixed asset investment, thereby giving a
rational basis for making a judgment.
HUGE FUNDS ARE REQUIRED

HIGH DEGREE OF RISK EXISTS


IMPORTANCE AFFECTS FUTURE COMPETITIVE STRENGHTS
AND
FEATURES OF LONG TERM AFFECT
CAPITAL
BUDGETING ESTIMATION OF LARGE PROFITS/LOSSES

IRREVERSIBLE DECISION

AFFECTS COST STRUCTURE


Capital budgeting, and investment
appraisal, is the planning process used
to determine whether an organization's
long term investments such as new
machinery, replacement of machinery,
new plants, new products, and research
MEANING development projects are worth the
funding of cash through the firm's
AND capitalization structure (debt, equity or
retained earnings). It is the process of
SCOPE allocating resources for major capital, or
investment, expenditures.One of the
primary goals of capital budgeting
investments is to increase the value of
the firm to the shareholders.
MUTUALLY
EXCLUSIVE &
CAN’T BE
IMPRACTICAL IN
ACCURATELY CERTAIN
CIRCUMSTANCES NEED FOR
CALCULATED IN
CASE OF FUTURE CASH
CONTINGENCIES INFLOWS AND
OUTFLOWS
LIMITATIONS OF
CAPITAL
BUDGETING
COMPLETELY
UNCERTAINIT IGNORES
Y AND RISK QUALITATIVE
URGENCY OF CAPITAL FACTORS
POSE BIG INVESTMENT
LIMITATIONS DECISION
CLICK ME !
During the Cash flows & terminal value
evaluation of
the company
using
discounted cash
flow, not all the
cash flows till
infinity are
taken and hence
after a certain
number of
years, the
possible value
of the
company’s
assets or
approximate
T
E
C
H
N
I
Q
U
E
S
NET PRESENT VALUE
(N.P.V.)
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. NPV is used in capital
budgeting and investment planning to analyze
the profitability of a projected investment or
project.
INTERNAL RATE OF RETURN
(I.R.R.)
Internal rate of return (IRR) is the interest rate at which the
net present value of all the cash flows (both positive and
negative) from a project or investment equal zero. Internal
rate of return is used to evaluate the attractiveness of a
project or investment.
MODIFIED INTERNAL RATE OF RETURN
(M.I.R.R.)
MIRR is similar to IRR in that it also causes NPV to be zero. However, unlike IRR, it doesn't assume
that net cash flows grow at the IRR. This is how MIRR addresses the most significant flaw with the
IRR approach i.e. that it overstates the return on a project because the IRR calculation inherently
assumes that the project net cash flows are reinvested at the IRR which is rarely the case because
alternate reinvestment opportunities are not readily available.
PROFITABILITY INDEX
The profitability index (PI), alternatively referred to
as value investment ratio (VIR), or profit
investment ratio (PIR), describes an index that
represents the relationship between the costs and
benefits of a proposed project, using the following
ratio:
PAYBACK PERIOD
DISCOUNTED PAYBACK
PERIOD
The discounted payback period is a capital budgeting
procedure used to determine the profitability of a project.
A discounted payback period gives the number of years it
takes to break even from undertaking the initial
expenditure, by discounting future cash flows and
recognizing the time value of money. The metric is used to
evaluate the feasibility and profitability of a given project.
BY:-
ASHWIN KALRA - 6586
RAAGHAV GUPTA - 6553
RISHABH KHULLAR - 6560
YASH GUPTA - 6544
MASAYA SAHOO – 6536
CHIRAG JAIN - 6539

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