Capital Budgeting

Owner's Claim Return

Value of the firm

Business Initial Invstment, Rate of return

event Managenent Return Internal rate of return

Criteria to assess
that
business/proposal
Export of Leather /option/choices
Logistics Criterion
Restaurant NPV
Real estate IRR
Consulting of study abroad Profitability Index
Pay back
Discounted Pay back
ARR
MIRR

Question There is a proposal to invest Rs.20,000 and the following inflows will be received over a number of years.
If the opportunity cost of fund is 10%. What is your suggestion?
Project A Project B
Two types of cash f Co 20,000 20,000 Rule of
Even cash flows C1 4,000 7,000 If NPV > 1 Accept
Uneven flows C2 5,000 8,000 If NPV = 1 Accept
C3 6,000 10,000 If NPV < 1 reject
C4 7,000 15,000
C5 2,000 6,000

Home Work
Do read out Capital Budgeting techniques_ frst three
 Capital Budgeting

Book value Market value

Net Present Value Co + C1 + C2 + Cn

There are two types of projects / options / choices

Mutually exclusive
Independent

ill be received over a number of years.

On the basis of an NPV

Solution
NPV = -20,000 4,000 / (1.10)1 5,000/(1.10)2

-20,000 18,297

Project A NPV = -1,703 Decision

Project B NPV = -20,000 6,363 6,612

-20,000 34,461
Rs.14,461 Decision
6,000/(1.10)3 7,000/(1.10)4 2,000/(1.10)5

It should be rejected

7,513 10,246 3,727

It could be accepted