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TECHNIQUES
The important evaluation technique for appraising an investment
proposal are those which are based on economic costs and
benefits.
1) Traditional methods
Pay-back method
It is calculated as:
capital investment
Pay – back period =
average annual cash inflows
CFAT
Rs. 80,000
Rs. 70,000
Rs. 40,000
Rs. 30,000
Where,
Average investment = Net working capital+ salvage value +
½ ( initial cost of the asset – salvage
value)
Accept – reject criteria:
AAPAT
ARR =
AI
PROFITABILITY INDEX
You require
1. Discounting rate
1. 10,000
2. 12,000
3. 12.000
4. 13,000
5. 14,000
Because,
If NPV is + Accept
If NPV is - Reject
A1 A2 A 3 Sn + Wn
PI is calculated as :
PVCI
PI = -------------
PVCO
INTERNAL RATE OF RETURN( IRR)
IRR is usually the rate of return that project
should earn.
Or
At IRR, NPV = 0
If the company wants to know as to what
rate of return should the company earn so
that its PVCI will be equal to its PVCO,
IRR technique is used.
Procedure for finding IRR:
PVCIL - PVCO
_______________ ( RH –RL)
IRR = RL +
PVCIL – PVCIH
cash INVENTORY
RECEIVABLES
CASH
RAW MATERIAL
DEBTORS / BR
WORK IN PROGRESS
SALES
FINISHED GOODS
Determinants of working capital
1) Transaction motive
2) Precautionary motive
3) Speculative motive
4) Compensating motive
Objectives of cash management
i) Raw material
a) Ordering costs
a) Carrying costs
RECEIVABLES MANAGEMENT
recovered.
Benefits: