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Basics of Financial Management: Birla Institute of Technology
Basics of Financial Management: Birla Institute of Technology
Basics of Financial Management: Birla Institute of Technology
MANAGEMENT
ASSIGNMENT
SUBMITTED BY:
SUBMITTED TO: AYUSH RAJ
Dr. SUSHIL KUMAR BBA/15009/19
Where the annual cash inflows are equal, Divide the initial outlay (cost)
of the project by annual cash flows, where the project generates constant
annual cash inflows.
Where the annual cash inflows are unequal, the pat back period can be
found by adding up the cash inflows until the total is equal to the initial
cash outlay of project or original cost of the asset.
ii. Average rate of return method (ARR): Under this method average
profit after tax and deprecation is calculated and then it is divided by the
total capital outlay or total investment in the project.
ARR= Total Profits (after dep. & taxes) X 100
Net Investment in project x No. Of years of profits
Or
Average annual profit X 100
Net investment in the Project
When the annual net cash flows are equal over the life of the assets.
iv. Net Present Value Method: This method is the modern method of
evaluating the investment proposals. This method takes into consideration
the time value of money and attempts to calculate the return in investments
by introducing the factor of time element. It recognizes the fact that a rupee
earned today is more valuable earned tomorrow. The net present value of
all inflows and outflows of cash occurring during the entire life of the
project is determined separately for each year by discounting these flows
by the firm’s cost of capital.
v. Profitability Index or PI: This is also known as benefit cost ratio. This
is similar to the NPV method. The major drawback of NPV method that
does not give satisfactory results while evaluating the projects requiring
different initial investments. PI method provides solution to this.
PI is calculated as: