BANARAS HINDU UNIVERSITY

INSTITUTE OF AGRICULTURAL SCIENCES

Department of Agricultural Economics,
MABM
Presentation On Capital Budgeting and Measurement of Financial Performance in
Retail
Submitted By,
Submitted To, Akanksha, Amit Rathour

Professor P.S. Badal, MABM,2nd Year

22412ABM003,22412ABM004
Department of Agricultural Economics
Department of Agricultural Economics
Institute of Agricultural Sciences
Institute of Agricultural Sciences
Banaras Hindu University
 Capital Budgeting
• Capital budgeting is the process of evaluating and selecting long-term
investments.
• It involves estimating the costs and benefits of a project, and then deciding
whether or not to proceed with it.
• The term capital budgeting refers to expenditure on capital assets.
• It helps to determine the company’s investment in the long-term fixed assets
such as the addition or replacement of the plant and machinery, new
equipment, research, development, etc.
• This capital budgeting process is the decision regarding the sources of
finance and then calculating the return earned from the investment.
 Features of Capital Budgeting
• There is a long duration between the initial investments and the expected
returns.
• The organizations usually estimate large profits.
• The process involves high risks.
• It is a fixed investment over the long run.
• Investments made in a project determine the future financial condition of
an organization.
• All projects require significant amounts of funding.
• The amount of investment made in the project determines the
profitability of a company
 Factors Affecting Capital Budgeting
• Capital Return
• Accounting Methods
• Structure of Capital
• Availability of Funds
• Management decisions
• Government Policies
• Working Capital
• Need of the project
• Lending terms of financial institutions
• Earnings
• Taxation Policies
• The economic value of the project
 Importance of Capital Budgeting
• It increases accountability among employees and improves
measurability of success in projects
• It gives you a better understanding of risks and returns in investments
• Better chances of surviving in a competitive market space
• Better resource allocation–workforce, capital, and labor hours
• Creates a strong outline and roadmap for a project
Steps to Capital Budgeting Process
• Generation of Investment
Ideas and To Identify
Investment Opportunities
• Gathering of the Investment
Proposals
• Estimating Cash Flows
• Evaluating Cash Flows
• Selecting a Project
• Execution and Monitoring
 Methods of Capital Budgeting
1. Payback Period Method
It refers to the time taken by a proposed project to
generate enough income to cover the initial investment.
The project with the quickest payback is chosen by the
company.
Payback Period = Initial Cash Investment /Annual Cash
Flow
2. Net Present Value Method (NPV)
This method compares the present value of a project’s
cash inflows to the present value of its cash
outflows, taking into account the time value of
money.
 Methods of Capital Budgeting
NPV = Cash flow / (1+i)t - initial investment
where:
i = Required return or discount rate
t = Number of time periods

3. Internal Rate of Return (IRR)

IRR helps businesses understand just how profitable their investment could
be.
Here’s a general rule of thumb for IRR:
• IRR > Cost of Capital = Accept Project
• IRR < Cost of Capital = Reject Project
 Methods of Capital Budgeting
4.Profitability Index (PI)
A measure of how profitable an investment is when you compare the cash
inflows (the present value of future earnings) with the initial cash outflow
for the investment.
Profitability Index = Present Value of Cash Inflows / Initial Investment
5. Accounting Rate of Return (ARR)
The ARR analyses accounting data to evaluate the ROI. It takes into
account revenue and expenses as well as depreciation.
Accounting Rate of Return = Average Annual Accounting / Profit Initial
Investment
 6. Modified Internal Rate of Return (MIRR)
The Modified Internal Rate of Return (MIRR) method is a capital budgeting
technique used to determine the rate of return on investment by considering both the
cost of the investment and the reinvestment rate of future cash flows.
MIRR = [(FV of positive cash flows / PV of negative cash flows)^(1/n)] – 1
T h a n k
y ou !