Chapter 11

The Basics of Capital Budgeting

AGUNG WICAKSONO 17061104059

DESY NATALIA LIANDO 17061104069
I KETUT ARYA ADITYA 17061104077
RIA AMADITA PALANDENG 17061104091
WINNNIE MALONTA 17061104096
BENEDICTUS HENDRA 17061104098
TANIA ROPAH 17061104109
 Project Classifications
Replacement:
Maintenance Of Business
Replacement projects are necessary if
the firm is to continue in business
Replacement:
Cost Reduction
This category includes expenditures to
replace serviceable but obsolete equipment
Expansion Of Existing
Products Or Markets
To increase output of existing products,
or to expand retail outlets or
distribution facilities in market now
Expansion Into New Products
Or Markets
These are investments to produce a new
product or to expand into a geographic
area not currently being served.
Safety Or Environmental
Projects
Expenditures necessary to comply with
government orders, labor agreement, or
insurance policy terms fall into this
category.
Other
Includes office buildings, parking
lots, executive aircraft, and so on.
 Net Present Value (NPV)
A method of ranking investment
proposals using to the present value
of future net cash flows, discounted at
Payback Period the marginal cost of capital
The length of time required for an investment’s
net revenues to cover its cost.

​W here:
CF​= net cash inflow-outflows during a single
period t
k = discount rate or return that could be
earned in alternative investments
t = number of time periods​
 Modified Internal Rate of Return (MIRR)

Internal Rate of Return (IRR) The discount rate at which the present
A method of ranking investment proposals value of a project’s cost is equal to the
using the rate of return on a investment, present value of its terminal value, where
calculated by finding the discount rate that the terminal value is found as the sum of
equates the present value of future cash the future values of the cash inflows,
inflows to the project’s cost compounded at the firm’s cost of capital.
. PV costs = PV terminal value
.

​W here:
CF​= net cash inflow-outflows during a ​W here:
single period t COF​= cash otuflows
IRR = Internal Rate of Return CIF = cash inflows
k = discount rate or return that could be
earned in alternative investments
TV = terminal value
MIRR = modified rate of return
 Problems Example
PT. Elvina will invest with the purchase of a machine for Rp.150.000,000 and has a
|residual value of Rp.83.500,000. The machine has a 5 years economic life. The company
also pays 14% interest with a net income level:
Year I = Rp.37.500,000
Year II = Rp.30.000,000
Year III = Rp.23.000,000
Year IV = Rp.45.000,000
Year V = Rp.50.000,000
Will this investment project be accepted if we want to analyze it using the PP, PI, IRR,
and NPV methods.
 Answer
Depreciation = 150.000,000 – 83.500,000/ 5
= 13.300,000
Table of profit calculation (EAT) and cash flow

Year EAT Depreciation Procced DF PV. Procced

1 37.500,000 13.300,000 50.800,000 0,877 44.551.600
2 30.000,000 13.300,000 43.300,000 0,769 33.297.700
3 23.000,000 13.300,000 36.300,000 0,675 24.502.500
4 45.000,000 13.300,000 48.300,000 0,592 28.593.600
5 50.000,000 13.300,000 53.300,000 0,519 27.662.700

83.500,000 0,519 43.336.500

185.500,000 201.944.600
Payback Period:
HP = 150.000,000
Residue = 83.500,000 : 66.500,000
Procced I = 50.800,000 : 15.700,000
15.700,000*12 = 4. 35
43.300,000
0.35* 30 days = 11 days

So, the length of return of capital received by inventors is 1 year 4 months 11 days. And because
the length of return is faster than the economic age, the investment the accepted.

PI = PV.Procced/ PV.Outlays
=201.944,600/ 150.000,000 = 1.35>1 (Accepted)
ARR = EAT*100%/PV.Outlays
= 185.500,000*100%/150.000,000 =123,67%>100% (Accepted)
NPV = PV.Procced-PV.Outlays
= 201.944,600-150.000,000 =51.944,600
So, the NPV is positive, then the investment is accepted by the company.
Any Comment?