CAPITAL BUDGETING

CAPITAL BUDGETING- reffered as capital investments planning, capital expenditures budgeting,

srategic planning or business programming.

MODEL:

TRADITIONAL MODEL (do not consider the time value of money)

A. Payback period net cash inflows, liquidity, the shorter,the better

B. Payback reciprocal, net cash inflows, liquidity, the higher, the better
C. Payback bailout, net cash inflows, liquidity, the higher, the better
D. Accounting rate of return, profit, profitability, the higher, the better

DISCOUNTED MODEL ( those that consider the time value of money)

A. Net Present Value Index, net cash inflows, liquidity, positive=accept: negative= reject
B. Net present value, net cash inflows, liquidity, positive=accept:negative=reject
C. Profitability Index, net cash inflows. Liquidity, greater than 1.0=accept: less than 1.0= reject
D. Discounted Payback Method, net cash inflows, liquidity, the shorter, the better
E. Internal Rate of Return, liquidity, the higher the better

PAYBACK PERIOD- length of time before an investement is recovered. It is where the time period
wherein cash inflows is equal to cost of investement. Also known as the breakeven time

FORMULA:
EVEN CASH INFLOWS = COST OF INVESTMENT/ANNUITY CASH INFLOWS
UNEVEN CASH INFLOWS= COST OPF INVESTMENT/CASH TO DATE

PAYBACK RECIPROCAL- represent the rate of cash returns provided by an investment in a given year

FORMULA:
PAYBACK RECIPROCAL = 1/PAYBACK PERIOD

PAYBACK BAILOUT PERIOD- measure the number of years to recup the investment after considering
its residual value. Total cash is equal to total cost of investments.

FORMULA:
AT PAYBACK BAILOUT= TOTAL CASH= COST OF INVESTMENT
TOTAL CASH= CASH TO DATE + RESIDUAL VALUE

ACCOUNTING RATE OF RETURN- measures the probability of a proposed project. Sometimes referred
to as unadjusted rate of return, return on investment, return on assets, and simple accounting rate of
return.

FORMULA: