Capital Budgeting Rules 04

Capital Budgeting Techniques (Investment Decision Rules) (Measuring Return on Investment)

Capital Budgeting ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Should we Build/buy this plant?

Important Points for Evaluation ,[object Object],[object Object],[object Object],[object Object]

Alternative Decision (RoI) Rules ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],0 1 2 3 4 5 2000 2500 3000 3500 4000 -10,000

NPV: Net Present Value ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],0 1 2 3 4 5 2000 2500 3000 3500 4000 -10,000 0 1 2 3 4 5 1785.71 1992.98 2135.34 2224.31 2269.71 -10,000

IRR: Internal Rate Of Return ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Deciding Multiple Projects: NPV/IRR ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],0 10 20 30 40 50 5 10 15 20 23.6 NPV Rs. Discount Rate (%) IRR L = 18.1% IRR S = 23.6% Crossover Point = 8.7% S L . . 18.1

IRR v/s NPV ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],4,495 4,495 4,495 -10,000 B – A 5,000 5,000 5,000 -11,000 Project B 505 505 505 -1,000 Project A 3 2 1 0 Period

IRR v/s NPV ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],5,000 5,000 5,000 -11,000 Project B 505 505 505 -1,000 Project A 3 2 1 0 Period

Problems with the IRR ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],-2500 3000 1000 E-F 2 1 0 Period 105 -145 50 E-F 2 1 0 Period

MIRR: Modified IRR ,[object Object],[object Object]

Calculating MIRR ,[object Object],[object Object],[object Object],[object Object],[object Object],0 1 2 3 4 5 2000 2500 3000 3500 4000 -10,000

Payback Period ,[object Object],[object Object],[object Object],[object Object],[object Object],0 1 2 3 4 5 2000 2500 3000 3500 4000 -10,000

Payback Period : problems ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

NPV(DCF), IRR, PP ,[object Object],[object Object],[object Object],[object Object]

Discounted Payback Period ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],0 1 2 3 4 5 1785.71 1992.98 2135.34 2224.31 2269.71 -10,000 0 1 2 3 4 5 2000 2500 3000 3500 4000 -10,000

Problems with the DPP ,[object Object],[object Object],[object Object]

Profitability Index ,[object Object],[object Object],[object Object],[object Object],0 1 2 3 4 5 2000 2500 3000 3500 4000 -10,000

PV, NPV, PI ,[object Object],[object Object],[object Object],All amunts In Rs. Lakhs 0.33 5 20 15 D 0.6 6 16 10 C 0.4 8 28 20 B 0.3 9 39 30 A PI NPV PV Investment Projects

Numericals ,[object Object],31,000 32,000 -50,000 Project C 50,600 67,400 -99,200 Project B 52,000 65,000 -100,000 Project A C 2 C 1 C 0

Numericals ,[object Object],0.5 2.5 7.5 5 E 0.33 5 20 15 D 0.6 6 16 10 C 0.4 8 28 20 B 0.3 9 39 30 A P.I. = NPV/Inv NPV PV Investment

Capital Budgeting Rules 04

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Capital Budgeting Rules 04