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CAPITAL BUDGETING
is a method of analyzing and comparing
substantial future investments and expenditures to
determine which ones are most worthwhile.
5
_
= +
9
=
10
Project
Project Performance
Screening Project Implementation
Identification & Review
& Selection
Generation
Evaluation
CATEGORIES OF PROJECT
CASH FLOW
Initial cash flow is the
amount of money paid out or
received at the start of a
project or investment.
TERMINAL CASH
FLOW
CAPITAL BUDGETING -
DECISION MAKING
PAY B A C K P E R I O D N ET PR ESEN T VAL U E
YR 0 YR 1 YR 2 YR 3 YR 4
Project A Project B
0 (10,000.00) (10,000.00) 0 (10,000.00) (10,000.00)
1 3,500.00 (6,500.00) 1 500.00 (9,500.00)
2 3,500.00 (3,000.00) 2 500.00 (9,000.00)
3 3,500.00 500.00 3 4,600.00 (4,400.00)
4 3,500.00 4 10,000.00 5,600.00
2.9 YEARS 3.4 YEARS
N E T P R E S E N T VA L U E
YR 0 YR 1 YR 2 YR 3 YR 4
𝐹𝑉
PV =
1+𝑅 𝑛
YR 0 YR 1 YR 2 YR 3 YR 4
Project B
0 (10,000.00) (10,000.00) NPV = PV of Inflows – Initial Investment
1 500/(1+10)1 455.00
= 11,154 – 10,000
2 500/(1+10)2 413.00
3 4600/(1+10)3 3,456.00 = 1,154
4 10000/(1+10)4 6,830.00
N E T P R E S E N T VA L U E
0 (10,000.00) (10,000.00)
1 3500/(1.10)1 3181.82 NPV a = 1,095
2 3500/(1.10)2 2892.56 NPV b = 1,154
3 3500/(1.10)3 2629.60
4 3500/(1.10)4 2390.55
I N T E R N A L R AT E O F
RETURN
YR 0 YR 1 YR 2 YR 3 YR 4
𝐹𝑉
PV =
1+𝑅 𝑛
𝐹𝑉
PV =
1+𝑅 𝑛
0 = PV of Inflows – Initial Investment
I N T E R N A L R AT E O F
RETURN
YR 0 YR 1 YR 2 YR 3 YR 4
Project A
0 -10,000.00 -10,000.00
IRR = 14.96%
1 3500/(1+R)1 3044.54
NPV = PV of Inflows – Initial Investment
2 3500/(1+R)2 2648.34
= 10,000 – 10,000
3 3500/(1+R)3 2303.71
=0
4 3500/(1+R)4 2003.92
N E T P R E S E N T VA L U E
YR 0 YR 1 YR 2 YR 3 YR 4
𝑇𝑉 𝑖𝑛𝑓𝑙𝑜𝑤
PV outflow =
1+𝑀𝐼𝑅𝑅 𝑛
YR 0 YR 1 YR 2 YR 3 YR 4
Project B 𝑇𝑉 𝑖𝑛𝑓𝑙𝑜𝑤
PV outflow =
0 -10,000.00 -10,000.00 1+𝑀𝐼𝑅𝑅 𝑛
1 500(1+R)3 440.53
2 500(1+R)2 388.13 16,330.50
10,000 =
3 4600(1+R)1 3146.08 1+𝑀𝐼𝑅𝑅 4
4 10000(1+R) 6025.83
16330.50 MIRR = 13.05%
ADVANCE ANALYSIS AND
APPRAISAL OF PERFORMANCE
FINANCIAL AND NON-FINANCIAL
PERFORMANCE MEASURE
FIVE MOST IMPORTANT
FINANCIAL METRICS
Net Income
Earnings Before Interest and Taxes
Gross Profit
Current Ratio
Return on Investment
Non-Financial Performance
Evaluation Parameters
BALANCE SCORE CARD
BALANCE SCORECARD
BALANCE SCORECARD
Then…
Step 1 Step 3
Step 2
Choose performance measures that Choose a target level of performance
Choose the details of each
align with top management’s financial and feedback mechanism for each
performance measure in Step 1
goals performance measure in Step 1
Performance measurement in
Multinational Companies
FINANCIAL NON FINANCIAL
• Customer perspective: Market
• Return on Investment share, customer satisfaction
• Residual Income • Internal-business-processes
perspective: Manufacturing lead
• Economic Value Added time, yield, on-time performance,
no. of new product launches and
• Return of Sales no. of new patents field
• Learning-and-growth perspective:
employee satisfaction, information
system availability
Distinguishing performance of managers from
performance of organization units
A. By Purpose -
To measure the performance of the manager or performance of the
organizational unit
B. By Scope –
To evaluate the whole organization’s economic performance for decision-
making purposes versus the items that the manager cannot influence
Intensity of Incentives
Types of Incentives
A. Financial incentives
B. Non-financial incentives
Financial Incentives
PAY AND
ALLOWANCES
Perquisites BONUS
Productivity
Monetary
Commission linked Wage
Incentives Incentives
Stock Options
or Co- Profit Sharing
partnership
RETIREMENT
BENEFITS
Non-Financial Incentives
STATUS
Employee Organizational
Empowerment Climate
Non- Career
Employee
Participation
Financial Advancement
Incentives Opportunity
Employee
Recognition Job Enrichment
Programmes
Job Security