Nama : Mohammad Ezykel Pasha

NIM : 205040107111009
Kelas :E
Pemateri : Asso. Prof. Dr. Juwaidah Sharifuddin

Resume 3 in 1:
Importance of Capital Budgeting in Agribusiness
Capital investments are long-term investments in which the assets used have a useful life
of many years. Capital investments include, for example, the construction of a new manufacturing
facility and the purchase of machinery and equipment. Capital planning Capital budgeting is a
way of calculating the financial feasibility of a capital project across its whole life cycle. Capital
budgeting is identifying cash inflows and cash outflows from an investment rather than tracking
revenues and costs. Non-expense items such as loan principal payments, for example, are
included in capital budgeting since they are cash flow transactions. There are various capital
budgeting analysis methodologies that may be used to analyze the economic feasibility of a
capital project, they are:
• Payback Period
Payback period represents the amount of time required for the cash flows generated by
the investment to repay the cost of the original investment. Assume that a $600 investment
generates $100 in yearly cash flows over a ten-year period. The time it takes to repay the
investment is six years. From the example, we know that the investment provides cash
flows for four years after the six-year payback period. The study excludes the value of
these four cash flows. Assume the investment pays out cash flow for 15 years rather than
10. Because there are five additional years of cash flows, the return on investment is
substantially higher. However, this is not taken into consideration in the research, and the
Payback Period remains at six years.
• Net Present Value
The Net Present Value (NPV) approach includes calculating the present value of a stream
of future cash flows. Cash flows can be positive (cash received) or negative (cash spent)
(cash paid). Because the initial investment is made at the start of the time period, its
present value is its fullface value. The Net Present Value is the difference between the
present value of cash inflows and the present value of cash outflows.
• Discounted Payment Period
This strategy reduces future cash flows to their present value so that the investment and
stream of cash flows may be compared at the same time. Each cash flow is discounted
over the number of years elapsed between the cash flow payment and the original
investment. To properly discount a series of cash flows, a discount rate must be
established. The discount rate for a company may represent its cost of capital or the
potential rate of return from an alternative investment.
• Profitability Index
The Profitability Index (PI) is another metric for determining the viability of a capital
investment. The Profitability Index is calculated by dividing the current value of capital
investment cash inflows by the present value of capital investment cash outflows. The
capital investment is allowed if the Profitability Index is greater than one. The capital
investment is rejected if it is less than one.
• Internal Rate of Return
The Internal Rate of Return (IRR) is another way for assessing capital investments. The
Internal Rate of Return (IRR) is the rate of return on capital invested. In other words, the
Internal Rate of Return is the discount rate that equals the Net Present Value. The Internal
Rate of Return, like the Net Present Value analysis, may be compared to a Threshold
Rate of Return to decide if the investment should proceed.
• Modified Internal Rate of Return
Another flaw in the Internal Rate of Return technique is that it assumes cash flows during
the study period will be reinvested at the Internal Rate of Return. The findings will be
distorted if the Internal Rate of Return differs significantly from the rate at which the cash
flows may be reinvested. However, in order to appropriately discount a future cash flow, it
must be examined over a five-year period.