Category Archives: CAPITAL BUDGETING I PRINCIPLES AND TECHNIQUES

Internal Rate of Return (IRR) Method

Internal Rate of Return (IRR) Method  Tile second discounted cash flow ([X:F) or time-adjusted method for appraising capital internecine decisions is the internal rate of return (IRR) method. This technique is also known :IS yield 01/ investment, marginal efficiency of capital, marginal productivity of capital, rate of ‘l’IIIn!. time-adjusted rate of return and MJ 011. Like the present value method,

Net” Present Value (NPV) Method

Net” Present Value (NPV) Method  11 K first DCF/I’V technique b the  NPV Allay be described as the summation of the present values of Gish proceeds (CfA i) in each year minus the summation of prudent values of the net cash outflows in each year. Symbolically, the NPV for projects having conventional l’a,h flows would be: If cash outflow is also expected to occur at some time other than at ini

Present Value (PV) /Discounted Cash Flow (OCF)

Present Value (PV) /Discounted Cash Flow (OCF) General Procedure ·The present value or the discounted cash flow procedure recognizes that cash now streams at different time periods differ in value and can be compared only when they are expressed in terms ofa common denominator ..that is, present values. It. thus, takes into account the time value of money. In this method, all cash flows arc expressed in terms o

Discounted Cash flow (DCF)/Time-Adjusted (TA) Techniques

Discounted Cash flow (DCF)/Time-Adjusted (TA) Techniques The distinguishing characteristics or the DCF capital budgeting techniques is that they take into consideration the time value or money while evaluating the Cost sand benefits of a project, I none fond or another, all these methods require cash-flows to be discounted at a certain rate, that is, the cost of capital. The cost or capital (K) is the minimum di

Evaluation

Evaluation The pay hack method has certain merits. It is’ easy to calculate and simple to understand. Moreover, the pay back method is an improvement over the ARR approach. Its superiority arises due to the fact that ir is based on cash now analysis. The ‘results of Example 10.6 illustrated in Table 10.10 can be cited in support of this. Thus, though the average cash flows for both the machines unde

Accept-Reject Criterion

Accept-Reject Criterion  In pay hack period can be used as a decision criterion to accept or reject investment proposals. One application of this technique is to compare the actual pay back with a predetermined pay back, rho is, the pay hack set up’by the management in terms of the maximum period during which the initial investment must be recovered. If the actual pay back period is less than the predete

Pay Back Method

Pay Back Method  Computation The pay back method (PB) is the second traditional method of capital budgeting. It is the simplest and, perhaps, the most widely employed, quantitative method for appraising capital expenditure eds ions. This method answers the question: How many years will it take for the cash benefits to pay the original cost of an investment, normally disregarding salvage “”ilue? R

Evaluation of ARR

Evaluation of ARR In evaluating the ARR, as a criterion to’ select/reject investment projects, its merits and drawbacks need to be considered, The most favorable attribute of the ARR method is its ea~y calculation. that is required is only the figure of accounting profits after taxes which would he easily obtainable. Moreover, it is simple to understand and use. In contrast to this, the discounted now tec

Accept-reject Rule

Accept-reject Rule  With the help of the ARR. the financial decision maker can decide whether to accept or reject the investment proposal. As an accept-reject criterion, the actual ARR would be compared with a predetermined or a minimum required rate of return or cut-off rate. A project would qualify .to be accepted if’ the actual ARR is higher than the minimum desired ARR. Otherwise, il is liable to be

Traditional Techniques

Average Rate of Return  Computation The average rate of return (AM) method of evaluating proposed capital expenditure is also known as the accounting rate of return method. It·is based upon accounting information rather than cash flows. There is no unanimity regarding the definition of the rate of return There are a number of alternative methods for calculating the ARR.The most common usage of the average Tate