Risk Free Rate: In corporate finance and valuation, we start off with the presumption that the riskfree

rate is given and easy to obtain and focus the bulk of our attention on estimating the risk parameters of individuals firms and risk premiums. But is the riskfree rate that simple to obtain? Both academics and practitioners have long used government security rates as riskfree rates, though there have been differences on whether to use short term or longterm rates. In this paper, we not only provide a framework for deciding whether to use short or long term rates in analysis but also a roadmap for what to do when there is no government bond rate available or when there is default risk in the government bond. We look at common errors that creep into valuations as a consequence of getting the riskfree rate wrong and suggest a way in which we can preserve consistency in both valuation and capital budgeting. Investors who buy assets have returns that they expect to make over the time horizon that they will hold the asset. The actual returns that they make over this holding period may by very different from the expected returns, and this is where the risk comes in. Risk in finance is viewed in terms of the variance in actual returns around the expected return. For an investment to be risk free in this environment, then, the actual returns should always be equal to the expected return Riskfree rate in Indian rupees = Market interest rate on rupee bond Default SpreadIndia Capital rationing has to do with the acquisition of new investments. More to the point, capital rationing is all about the acquisition of new investments based on such factors as the recent performance of other capital investments, the amount of disposable resources that are free to acquire a new asset, and the anticipated performance of the asset. In short, capital rationing is a strategy employed by companies to make investments based on the current relevant circumstances of the company. Generally, capital rationing is utilized as a means of putting a limit or cap on the portion of the existing budget that may be used in acquiring a new asset. As part of this process, the investor will also want to consider the use of a high cost of capital when thinking in terms of the outcome of the act of acquiring a particular asset. Obviously, any responsible company will choose to employ strategies

short term goals of the business, and proper attention to daily operations. One of the benefits of capital rationing is that the approach helps to ensure that funds for basic operations are not diverted in order to take advantage of a so-called cant fail opportunity, which helps to maintain the stability of the business. Explanation of Capital Rationing With Simple Example : -----------------------------------------------------------------------------For example, Company fixes his priority to invest his money in more profitable projects. Suppose a company has $ 1 million dollar and after using the Profitability index technique of capital budgeting company found that three projects of $ 600000, $ 300000 and $ 400000 are profitable out of seven projects but if company has limited cash of $ 1 million only. With this money, company can use capital rationing technique. Under this technique, if company sees that First and third proposals profitability index is high than second, then they will select only two projects combination out of three projects Difference between IRR and NPV: -------------------------------------NPV is the Net Present Value . It is the summation of present values of future cash flows less the present value of cash outflow. This method takes into accoutn the time value of money. Generally present value of cash outflow is determined by multiplying with the discounting factor which is the cost of capital of the company. NPV = - initial cost + process profit * process volume / discount rate * (1 - (1 + discount rate) to the power of (-1 * number of periods)) IRR is the Internal rate of return . It is the rate at which the PV of Inflow is equal to the PV of outflow. If IRR is positive then we can go with the project else ditch it. The formula is CF0 + CF1 + --(1+r) CF2 + ... + CFt = NPV ----(1+r)2 (1+r)t

CF: Cash Flow r = Internal rate of return NPV: Net present value For capital budgeting decisions a mix of techniques is used. No single method is accurate enough.Key differences between the most popular methods, the NPV(Net Present Value) Method and IRR (Internal Rate of Return) Method, include: NPV is calculated in terms of currency while IRR is expressed in terms of the percentage return a firm expects the capital project to return; Academic evidence suggests that the NPV Method is preferred over other methods since it calculates additional

that support the productive use of disposable funds built within a capital budget. At the same time, it is important to understand what benefits can reasonably be expected from owing the asset in question. Since capital rationing is all about setting criteria that any investment opportunity must meet before the company will seriously entertain the purchase, many businesses choose this strategy as their guiding process for any acquisitions. Using the basic principles of the technique, a company can develop a list of standards that must be addressed before any capital purchase. If the standards are drafted in a manner that accurately reflects the current condition of the company, then there is a good chance the right types of investments will be considered. Some of the more important factors to consider as part of a productive capital rationing approach are the financial condition of the company, the long and While both the NPV Method and the IRR Method are both DCFmodels and can even reach similar conclusions about a single project, the use of the IRR Method can lead to the belief that a smaller project with a shorter life and earlier cash inflows, is preferable to a larger project that will generate more cash Project Evaluation : It is a step-by-step process of collecting, recording and organizing information about project results, including short-term outputs (immediate results of activities, or project deliverables), and immediate and longer-term project outcomes (changes in behaviour, practice or policy resulting from the project). Common rationales for conducting an evaluation are: response to demands for accountability;demonstration of effective, efficient and equitable use of financial and other resources; recognition of actual changes and progress made;identification of success factors, need for improvement or where expected outcomes are unrealistic;validation for project staff and partners that desired outcomes are being achieved. The project planning stage is the best time to identify desired outcomes and how they will be measured. This will guide future planning, as well as ensure that the data required to measure success is available when the time comes to evaluate the project. Why is Project Evaluation important? Evaluating project results is helpful in providing answers to key questions like: What progress has been made? Were the desired outcomes achieved? Why? Are there ways that project activities can be refined to achieve better outcomes? Do the project results justify the project inputs? What are the Challenges in Monitoring and Evaluation? getting the commitment to do it; establishing base lines at the beginning of the project; identifying realistic quantitative and qualitative

wealth and the IRR Method does not; The IRR Method cannot be used to evaluate projects where there are changing cash flows (e.g., an initial outflow followed by in-flows and a later out-flow, such as may be required in the case of land reclamation by a mining firm); . However, the IRR Method does have one significant advantage -- managers tend to better understand the concept of returns stated in percentages and find it easy to compare to the required cost of capital; and, finally,

indicators; finding the time to do it and sticking to it; getting feedback from your stakeholders; reporting back to your stakeholders.