Professional Documents
Culture Documents
Capital Budgeting
Capital Budgeting
(INVESTMENT APPRAISAL
TECHNIQUES)
By
Name: Parmanand Sunda
CRO 0272758
Roll no. 19
Batch no. 343
Lab no. 4
Objectives
• Understand the key motives for capital
expenditure and the steps in the capital
Budgeting Process.
• Define Basic Capital Budgeting
terminology
• Explain the various forms of investment
appraisal techniques
Objectives (Contd)
• Calculate the initial investment associated
with a proposed capital expenditure
What is Capital Budgeting?
• Capital Budgeting is the process of
selecting, financing and controlling capital
expenditures in order to maximize the
value of the firm.
• Capital Budgeting is the process of
evaluating and selecting long-term
investments that are consistent with the
maximizing of owner’s wealth
Core Activity
• The core activity of the process of capital
budgeting is capital expenditure analysis
and the end-goal of this analysis is to
determine the course of action that will
minimize the inherent risk of the
investment project.
• The profitability, growth, competitiveness
and even the survival of a firm depend to a
large extent on how the capital budgeting
is carried out in the firm
THE NATURE OF CAPITAL
BUDGETING.
What are Capital Expenditures?
• Capital Expenditures are investments in
long – term assets that contribute to the
earning power of a firm over an extended
period of time.
• It involves spending an amount of cash in
the present with the expectation of future
cash return extending to more than one
year.
• The cash return could be revenues from
the sales of a new product and sales in a
new market, significant savings in labour
costs, and even bond interest received.
• It follows that the more effective a firm’s
capital budgeting is, the higher its growth
potential and consequently, the price of its
stock will perceivably be higher.
• EXAMPLES OF CAPITAL
EXPENDITURES
EXAMPLES OF CAPITAL
EXPENDITURES
• Acquisition of Land
• Building
• Equipment (required to expand the
business)
• Machines (to replace equipment that is
wearing out) or becoming technically
obsolete.
• Advertising Campaign
EXAMPLES OF CAPITAL
EXPENDITURES (Contd)
• Cost Forecasts.
• The cost of operation is determined.
• Cashflow Forecasts
• The demand and cost are integrated to estimate the
desirable optimum level of output. Then cashflow
analysis is done based on this level of output.
•Investment
Appraisal
Techniques
Investment Appraisal
FV = P x (1+ r)n
Types of investment appraisal:
• Payback Period
• Accounting Rate of Return (ARR)
• Internal Rate of Return (IRR)
• Profitability Index
• Net Present Value (discounted cash flow)
Payback Period (PBP)
– Payback period is the amount of time required for a
firm to recover its initial investment in a project, as
calculated from cash inflows.