CAPITAL BUD

AL BUDGETING
Years Cashflow Cumulative Cashflow
0 -325000
1 65000 -260000
2 75000 -185000
3 85000 -100000
4 100000 0 Pay Back happens at end of 4th year
5 70000 70000
6 55000 125000

Years Cashflow Cumulative Cashflow

0 -285000
1 65000 -220000
2 75000 -145000
3 85000 -60000
4 100000 40000 Completed Years + (Balance to be recovered / Cashflow of that period)
5 70000 110000 Payback happens
6 55000 165000 3+ 60000 3 years and 7 months
100000 0.6 7.2 months
12months
ow of that period)
 Discount Cumulative
Discounted
Years Cashflow Factor @ Discounted
Cashflow
10% Cashflow

0 -325000 1.0000 -325000 Calculation of Discount Factors

1 65000 0.9091 59091 -265909 1 / (1+r)^n
2 75000 0.8264 61983 -203926
3 85000 0.7513 63862 -140064
4 100000 0.6830 68301 -71763
5 70000 0.6209 43464 -28298 5 28298
6 55000 0.5645 31046 2748 5 Yrs 11 Mths 31046 0.911486
TOTAL 450000 327748 10.93783
NPV 2748
+ (Balance to be recovered / Cashflow of that period)
Payback happens
5 years and 11 months
 Discount
@ 10% Years Factors @
10%

n of Discount Factors 1 1 10% = 0.10 0 1.000000

1 / (1+r)^n (1+r)^n (1.1)^n n is the yea 1 0.909091
reasons affecting discount facto 2 0.826446
inflation 3 0.751315
cost of capital 4 0.683013
availability of other projects 5 0.620921
current market scenarios 6 0.564474
expected profit margins 7 0.513158
demand of the product / offerin 8 0.466507 1000000 466507.4
criticality of project 9 0.424098
seasonality of the project 10 0.385543
competitors 1 RUPEE EARNT IN THE 10TH YEAR FROM TODAY
will be worth 38 paise as of today's value
PROJECT A PROJECT B

Discount Discount
Discounted
Years Cashflows Factor @ Years Cashflows Factor @
Cashflows
24% 24%

0 -1000000 1 -1000000 0 -1000000 1

1 250000 0.80645161 201613 1 350000 0.80645161
2 230000 0.6503642 149584 2 365000 0.6503642
3 315000 0.52448726 165213 3 415000 0.52448726
4 365000 0.4229736 154385 4 325000 0.4229736
5 465000 0.34110774 158615 5 300000 0.34110774
6 280000 0.27508689 77024 6 180000 0.27508689
7 200000 0.22184426 44369 7 20000 0.22184426
8 133000 0.17890666 23795 DISCOUNTED PV 1955000
9 108000 0.14427957 15582 Net Present Value
10 65000 0.11635449 7563 25.41116%
TOTAL 2411000 997744 25.4261%
Net Present Value -2256
PV (Present ₹ 997,744 ₹ -2,256
 PROJECT C

Discount Discount Discounted Discounted Discounted

Factor @ Factor @ Cashflows @ Cashflows @ Cashflows @ Years Cashflows
26% 25.4261% 24% 26% 25.4261%

1 1 -1000000 -1000000 -1000000 0 -1000000

0.79365079 0.79728222 282258 277778 279048.7785 1 250000
0.62988158 0.63565895 237383 229907 232015.515 2 230000
0.49990602 0.50679958 217662 207461 210321.8248 3 315000
0.39675081 0.40406229 137466 128944 131320.2458 4 365000
0.31488159 0.32215169 102332 94464 96645.50553 5 565000
0.24990603 0.25684581 49516 44983 46232.24617 6 375000
0.19833812 0.2047786 4437 3967 4095.572007 7 200000
1031054 987504 0 8 133000
31054 -12496 -1000000 9 108000
10 65000
TOTAL 2606000
Net Present Value
 Discount
Discounted
Factor @
Cashflows
24%

1 -1000000 C - 16.06
0.80645161 201613 A - 14.11
0.6503642 149584 B - 9.55
0.52448726 165213
0.4229736 154385
0.34110774 192726
0.27508689 103158
0.22184426 44369
0.17890666 23795
0.14427957 15582
0.11635449 7563
1057988
Net Present Value 57988
IRR is that rate of return at which NPV is equal to zero.

Steps for calculating IRR:

1. Calculate NPV at a given rate
2. Choose a higher or lower Discount Rate as required and calculate NPV again.
3. Use the formula as given below.

IRR =

Lower Rate + [Difference between lower interest rate and higher

interest rate] x Discounted PV of Inflows at Lower
Rate - Cash Outflow
Discounted PV of Inflows at Lower Rate - Discounted PV of Inflows at Higher Rate

Example 1: Example 2:
Invested Rs.11000 Invested Rs.1000000
Discounted PV @ 10% = 11272 Discounted PV @ 24% = 1031054
Discounted PV @ 12% = 10844 Discounted PV @ 26% = 987504

11272 - 11000 1031054 - 1000000

[
10% + 2% x
11272 - 10844
] [
24% + 2% x
1031054 - 987504

272
428 11.27103
 31054 0.713065442
] 43550 25.42613 1.426130884
25.42613088
PROJECT B PROJECT B
Years Cashflows Years Dates Cashflows
0 -1000000 0 01/Apr/2018 -800000 1 -800000
1 350000 1 01/May/2018 350000 0.80645 282257.5
2 365000 2 01/Jun/2018 365000 0.65036 237381.4
3 415000 3 01/Jul/2018 415000 0.52449 217663.4
4 325000 3 10/Jul/2018 -200000 1 -200000
5 300000 4 01/Aug/2018 325000 0.80645 0.42297 237170.1
6 180000 5 01/Sep/2018 300000 0.65036 0.34111 176553
7 20000 6 01/Oct/2018 180000 0.52249 0.27509 85141.8
7 01/Nov/2018 20000 0.42297 0.22184 7654.88
243822
IRR 25.4112% XIRR 25.9197%
Years Cashflow Discount DCF
0 -10 1 -10
1 2.5 0.806452 2.016129
2 2.3 0.650364 1.495838
3 3.15 0.524487 1.652135
4 3.65 0.422974 1.543854
5 4.65 0.341108 1.586151 IRR= 23.9924%
6 2.8 0.275087 0.770243 NPV= ₹ -0.00223
7 2 0.221844 0.443689
8 1.33 0.178907 0.237946
9 1.1 0.14428 0.158708
10 0.8 0.116354 0.093084
24.28 9.997775
-10 INITIAL I -10
PV 14.28 NPV -0.002225
 Discounted
Discount
Years Cashflow Cashflow @
Factors @ 24%
24%
0 -1000000 1 -1000000
1 250000 0.8064516129 201613
2 230000 0.65036420395 149584
3 315000 0.52448726125 165213
4 365000 0.42297359778 154385
5 465000 0.34110774015 158615 NPV
6 280000 0.27508688722 77024 ₹ -222.50
7 200000 0.22184426388 44369
8 133000 0.17890666442 23795 IRR
9 110000 0.14427956808 15871 23.992350%
10 80000 0.11635449039 9308
TOTAL 2428000 TOT PV 999777
NPV -223
inflation
cost of capital
volatility of project earnings
volatility of demand/sales
GTM time and strategy and cost
technology or disruptions
policy makers
regulated markets
profit expectations
seasonality of the product/demand
Profitability Index
PROJECT A PROJECT B
Discount Discount Discounte
Discounted
Years Cash Flow Factor @ Years Cash Flow Factor @ d
10% Cashflow 10% Cashflow
0 -300000 1 -300000 0 -225000 1 -225000
1 85000 0.9091 77273 1 85000 0.9091 77273
2 95000 0.8264 78512 2 95000 0.8264 78512
3 115000 0.7513 86401 3 65000 0.7513 48835
4 100000 0.6830 68301 4 60000 0.6830 40981
5 70000 0.6209 43464 5 45000 0.6209 27941
DISCOUNTED PV 353952 DISCOUNTED PV 273543
NPV 53952 NPV 48543

Profitability Index = PV of Cash Inflows / Total Investment

PI (Proj. A) 1.180 0.8743 -0.1257

PI (Proj. B) 1.216 0.9762 -0.0238
CE Approach

PROJECT A

Discount
Certainty Discounted
Years Cash Flow CE Cashflows Factor @ Years CF
Equivalence CE Cashflows
10%

0 -300000 1 -300000 1 -300000 0 -300000

1 85000 1 85000 0.9091 77273 1 85000
2 95000 0.9; 0.1 94500 0.8264 78099 2 95000
3 115000 0.8; 0.2 112000 0.7513 84147 3 115000
4 100000 0.65; 0.35 96500 0.6830 65911 4 100000
5 70000 0.6; 0.4 64000 0.6209 39739 5 70000
DISCOUNTED CE PV 345169
CE NPV 45169
Conditions:
90% certain to earn 95000, 10% certain to earn 90000
80% certain to earn 115000, 20% certain to earn 100000
65% certain to earn 100000, 35% certain to earn 90000
60% certain to earn 70000, 40% certain to earn 55000
 Discounte
CE Disc
Certainty CF Certainty d CE
Cashflow Factor
Cashflows

1 -300000 1 -300000
1 85000 0.909091 77272.73
0.9 90000 0.1 94500 0.826446 78099.17
0.8 100000 0.2 112000 0.751315 84147.26
0.65 90000 0.35 96500 0.683013 65910.8
0.6 55000 0.4 64000 0.620921 39738.96
TOTAL PV 345168.9
NPV 45168.92