Seminar on capital budgeting method

Seminar on capital budgeting method

• 1.
  CAPITAL BUDGETING METHODS
• 2.
  WHAT IS CAPITALBUDGETING ? • The process through which different projects are evaluated is known as capital budgeting. • Capital budgeting is the process a business undertakes to evaluate potential major projects or investments. 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.
• 3.
  METHODS OF CAPITALBUDGETING : • Traditional methods: 1. Payback period 2. Accounting rate of return method
• 4.
  • Discounted cashflow methods: 1. Net present value method 2. Profitability index method 3. Internal rate of return
• 5.
  PAYBACK PERIOD METHOD: •It is the method of evaluating investment opportunities and product development projects on the basis of the time taken to recoup the investment. • This period is compared to the required payback period to determine the acceptability of the investment proposal. PBP= Cash outflow / cash inflow
• 6.
  AVERAGE RATE OFRETURN METHOD: • ARR means the average annual earning on the project. Under this method, profit after tax and depreciation is considered. The average rate of return can be calculated in the following two ways.
• 7.
  ARR on Averageinvestment = (Average Profit After Tax / Average Investment) * 100 • ARR on Initial investment = (Average Profit After Tax / Initial Investment) * 100
• 8.
  DISCOUNTED CASH FLOWMETHOD: • Discounted cash flow (DCF) is a model or method of valuation in which future cash flows are discounted back to a present value using the time-value of money. • An investment’s worth is equal to the present value of all projected future cash flows.
• 9.
  NET PRESENT VALUEMETHOD • It is the best method for evaluation of investment proposal. This method takes into account time value of money. NPV= PV of inflows- PV of outflows. Evaluation of Net Present Value Method:- Project with the higher NPV should be selected. Accept if NPV>0 Reject NPV<0 May or may not accept NPV=0
• 10.
  PROFITABILITY INDEX METHOD: •As the NPV method it is also shows that project is accepted or not. If Profitability index is higher than 1, the proposal can be accepted. Accepted PI>1 Rejected PI<1 Profitability index =Total Cash Inflows / Total Cash Outflows
• 11.
  INTERNAL RATE OFRETURN METHOD: • IRR is the rate of return that a project earns. The rate of discount calculated by trial and error , where the present value of future cash flows is equal to the present value of outflows, is known as the Internal Rate of Return. • IRR= LDR +((NRV –C) / (NPV@LDR –NPV@HDR)) * (HDR –LDR)
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  THANK YOU