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DU-FBS-DBI-16011

N.B: these presentation slides are shared for learning not for engaging in RIBA/ Interest. If any one does so then it is his responsibility.

Presentation Topic:
Capital Budgeting Techniques

Capital Budgeting Techniques: Tools used to

evaluate investment opportunities by analyzing cash inflow and out flow and Total time required.

NPV: Difference between PV of total cash outflows and PV of total cash Inflows. NPV = PV of cash inflows Initial Investment.

Formula:

NET PRESENT VALUE (NPV)

Decision Criteria:
If

NPV > zero; Accept the Project. NPV < Zero; Reject the Project.

If

IRR: The annual rate of return that the firm will earn on an investment. IRR = The discounting rate that makes initial investment equal to PV total cash inflows. Formula:

INTERNAL RATE OF RETURN (IRR)

Decision Criteria:

If IRR > Cost of Capital (WACC) ; Accept the Investment Proposal. If IRR < Cost of Capital (WACC) ; Reject the Investment Proposal.

Payback Period: The time period required for a firm to recover its initial investment. Formula =

Decision Criteria:

If Payback Period < Maximum acceptable period; Accept

the Project

If Payback Period > Maximum acceptable period; Reject the Project

MIRR: While the internal rate of return (IRR) assumes the cash flows from a project are reinvested at the IRR, the modified IRR assumes that positive cash flows are reinvested at the firm's cost of capital, and the initial outlays are financed at the firm's financing cost.

Formula=

Decision Criteria:

If MIRR > Cost of Capital (WACC) ; Accept the Investment Proposal.

If MIRR > Cost of Capital (WACC) ; Reject the Investment

Proposal.

Question?

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