1. Made by
Sumit anoop bihari
Pgd 11109
Sec a

2.  Meaning of Capital Budgeting
 Significance of Capital Budgeting Analysis
 Traditional Capital Budgeting Techniques
Payback Period Approach
Discounted Payback Period Approach
Discounted Cash Flow Techniques
Net Present Value
Internal Rate of Return
Profitability Index
Net Present Value versus Internal Rate of Return

3.  Capitalbudgeting addresses the issue of
strategic long-term investment decisions.
 Capitalbudgeting can be defined as the
process of analyzing, evaluating, and
deciding whether resources should be
allocated to a project or not.
 Processof capital budgeting ensure
optimal allocation of resources

4.  Considered to be the most important
decision that a corporate treasurer has to
make.

5. Involve massive investment of
resources
Are not easily reversible
Have long-term implications for
the firm
Involve uncertainty and risk for
the firm

6.  Payback Period Approach
 Discounted Payback Period Approach
 Net Present Value Approach
 Internal Rate of Return
 Profitability Index

7.  The amount of time needed to recover the
initial investment
 Thenumber of years it takes including a
fraction of the year to recover initial
investment is called payback period

8.  Based on the dollar amount of cash flows
 The dollar amount of value added by a
project
 NPV equals the present value of cash
inflows minus initial investment
 Technique is consistent with the principle
of wealth maximization—Why?
 Accept a project if NPV ≥ 0

9.  The rate at which the net present value of
cash flows of a project is zero, I.e., the rate
at which the present value of cash inflows
equals initial investment
 Project’s promised rate of return given initial
investment and cash flows
 Consistent with wealth maximization
 Accept a project if IRR ≥ Cost of Capital

10.  Usually,NPV and IRR are consistent with
each other. If IRR says accept the
project, NPV will also say accept the
project
 IRR can be in conflict with NPV if
Investing or Financing Decisions
Projects are mutually exclusive
Projects differ in scale of investment
Cash flow patterns of projects is different
If cash flows alternate in sign—problem of
multiple IRR
 If IRR and NPV conflict, use NPV approach

11. A part of discounted cash flow family
 PI = PV of Cash Inflows/initial investment
 Accept a project if PI ≥ 1.0, which means
positive NPV
 Usually, PI consistent with NPV
 When in conflict with NPV, use NPV

12.  Although our decision should be based on NPV,
but each technique contributes in its own way.
 Payback period is a rough measure of riskiness.
The longer the payback period, more risky a
project is
 IRR is a measure of safety margin in a project.
Higher IRR means more safety margin in the
project’s estimated cash flows
 PI is a measure of cost-benefit analysis. How
much NPV for every dollar of initial investment