3

GROUP THREE
. . . a continuation
from Group 2
CAPITAL STRUCTURE AND
DIVIDEND POLICY
INVESTMENT &
CAPITAL ASSETS

Capital Budgeting & Risk Raising capital in the Capital Structure

Analysis Financial Markets Determination – Planning
the Firms Financing Mix
Menor Treesh Marie Nibreda, Mark Lee
Limbaro, Trisha Nicole Ramos, Ruby

Cost of Capital Analysis and Impact of Dividend Policy &

Makalbe, Sorayah
Operating & Financial Internal Financing
Leverage
Pido, Rosemarie Reyes, Phoebe Kate
CAPITAL
BUDGETING
Presented by:
Treesh Marie B. Menor
October 21, 2023
What is capital
budgeting?
Capital budgeting is the process of
evaluating long-term investments to
determine which ones are worth pursuing.
It is a critical process for businesses of all
sizes, as it can have a major impact on
their long-term success.
Capital Budgeting
a financial management process that
involves evaluating, selecting, and
managing long-term investment projects.

Significance
it helps businesses to make better
investment decisions. Thus businesses can
improve their overall performance and
achieve their long-term goals.

Importance of Risk Analysis

it helps businesses to identify and assess
the potential risks associated with different
investment projects.
 Common Capital
Budgeting Methods

Net present value (NPV)
discounts future cash flows to their present
value. This is done to account for the time
value of money, which is the idea that
money is worth more today than it will be
in the future.
Internal rate of return (IRR) Payback period
the IRR is the rate of return that an calculates the number of years it takes for
investment project is expected to generate. an investment project to generate enough
cash flows to cover its initial cost.
 Disadvantage
NET PRESENT VALUE

It takes into account the time value of money.

It is relatively simple to calculate and interpret.
It is a versatile method that can be used to
(NPV)

evaluate a variety of different investment projects.

It can be used to compare investment projects
with different sizes and lifespans.
It can be used to rank investment projects in order
of profitability.

Advantage
It takes into account the time value of money.
It is relatively simple to calculate and interpret.
It is a versatile method that can be used to
evaluate a variety of different investment
projects.
Net present value (NPV)

Here are some tips for using NPV in capital budgeting:

Use a realistic discount rate.

Estimate future cash flows carefully.
Consider the strategic value of investment projects.
Use NPV in conjunction with other capital budgeting methods.
 Disadvantage
INTERNAL RATE OF
RETURN (IRR)
It can be difficult to calculate, especially for
complex investment projects.
It can have multiple solutions, which can make it
difficult to interpret.
It does not take into account the time value of
money as well as NPV.
It can lead to suboptimal investment decisions if
used incorrectly.

Advantage
It is easy to understand and interpret.
It can be used to compare investment projects
of different sizes and lifespans.
It can be used to rank investment projects in
order of profitability.
Internal rate of return (IRR)

Here are some tips for using IRR in capital budgeting:

Use IRR in conjunction with other capital budgeting methods, such as NPV.
Be careful when interpreting IRR results, especially if there are multiple solutions.
Consider the time value of money when making investment decisions.
Use a realistic discount rate.

Additional note: IRR is not recommended for use in capital budgeting when there are
negative cash flows.
 Disadvantage
PAYBACK PERIOD

It does not take into account the time value of

money.
It ignores cash flows that occur after the payback
period.
It can lead to suboptimal investment decisions if
used incorrectly.

Advantage
It is very simple to calculate and understand.
It is a good measure of liquidity, as it shows how
quickly a business can expect to recover its
initial investment.
It is a good measure of risk, as projects with
shorter payback periods are generally
considered to be less risky.
 Payback Period

Here are some tips for using Payback Period in capital budgeting:

Use the payback period in conjunction with other capital budgeting methods, such as NPV
and IRR.
Consider the time value of money when making investment decisions.
Set a maximum acceptable payback period for investment projects.
Use the payback period to screen investment projects, but do not use it as the sole
criterion for making investment decisions.

The payback period is often used in conjunction with other capital budgeting methods to get
a more complete picture of an investment project.
 Let’s Evaluate
A company is considering
investing in a new marketing
campaign. The campaign has an
initial cost of $1 million and is
expected to generate additional
sales of $200,000 per year for five
years. The company's discount
rate is 10%.
Evaluate using the following tools
NPV
IRR
Payback Period
Results of the tools

Accept Reject

NPV
$268,703.50

IRR
23.8%

Payback Period
4.2 years
Results of the tools

Accept Reject

NPV
$268,703.50

IRR
23.8%

Payback Period
4.2 years
Results of the tools

Accept Reject

NPV
$268,703.50

IRR
23.8%

Payback Period
4.2 years
Results of the tools

Accept Reject

NPV
$268,703.50

IRR
23.8%

Payback Period
4.2 years
Over All
These results suggest that the marketing
campaign is a good investment, as it is
expected to generate a positive NPV, has
an IRR that is greater than the company's
discount rate, and has a relatively short
payback period.

BUT. . .
Decision should also
consider other
relevant factors
 Resources
Does the business have the resources (e.g., people, budget, time) to
implement the investment successfully

Competitive
landscape Synergies
How will the investment Will the investment generate synergies with
impact the business's other investments that the business has
competitive position? made?
INVESTMENT
Investment
Strategic
DESICION
Decision Intangible
alignment benefits
Is the investment aligned In addition to financial benefits, investments
with the business's overall may also generate intangible benefits, such
strategy and goals? as improved employee morale, increased
customer satisfaction, or enhanced brand
reputation.

Risk
What are the risks associated with the investment,
and how can they be mitigated?