A PRESENTATION ON

CAPITAL BUDGETING

Discussion and Evaluation Right Investment Success

GROUP G
 Contents:
Group members
•Mukesh Neupane
a.Introduction to capital budgeting.
•Manish Raj Pandey
b.Types of projects.
•Atul Bastakoti
c. Importance of Dhakal
•Vicky capital budgeting.
•Pratik Regmi
d.Procedures.
•Yadhav Ghale
e.Evaluation methods.
•Mohit Raj Aryal
f. Decision making.
g.Conclusion.
 Capital budgeting

WHATShould
IS we
CAPITAL
build this
BUDGETING????
plant?
In simple sense, is to a company what
buying stocks or bonds is to individuals:
An investment decision where each
want a return > cost

Gitman, LJ – “Capital Budgeting refer to the total

process of generating, evaluating, selecting and
following up on capital expenditure alternatives”
 Features:
• An exchange of current funds for future
benefits
• Requires huge amount of funds
• Long term commitment
• Decisions are not reversible
• Benefits can be expected for a long perio
 Project:

According According
to According to According
economic to risk dependenc to cash
life e flows

•Short-term •Replacement projects •Independent projects •Normal cash

•Expansion projects
flow projects
•Mutually exclusive
projects
•Nonnormal
•Long-term •New products and
•Contingent projects cash flow
markets
projects
•Mandated projects •Complementary
projects
 Importance:

Involvement of heavy funds

Decisions are not reversible

Long term effect on profitability

Why expenditure
cash flows
Accrual and why not
concept
concept
Net Profit???

Simple Revenue+
Time value of
Revenue
Accumulation Capital
money
Expenditure
Expenditure
 Cost of Asset (-)XXX
Shipping Costs (-)XXX
Installation Costs (-)XXX
Increase/decrease in Working Capital (-/+)XXX
Cash salvage value of Existing Assets (+)XXX
Tax Adjustment:
BSV of Existing Asset XXX
CSV of Existing Asset XXX
Gain(If CSV>BSV) or loss XXX * Tax rate= XXX

Tax Outstanding(If CSV>BSV) or Saving (-/+)

Investment Tax Credit (+) XXX
Net Cash Outlay(NCO) (-) XXX
• Method :
DCF = (DR -DE - DD)(1 - T) + DD
D- Change
R- Revenue
E- Expenditure
D- Depreciation
T- Tax Rate

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• Funds Realized from Sale of New Asset
+ Tax Consequences from the Sale of
the Asset

PLUS
• Recovery of Net Working Capital

12
 Evaluation methods:

Evaluation
Methods

Non- Discounted or
Discounted time adjusted

Accounting Net Present Profitability Internal Rate

Payback Period
Rate of Return Value Index of Return
 Non-Discounted Methods:
: Number of years required to
recover initial investment
 Even cash flow:

Uneven Cash Flow:

 2. ACCOUNTING RATE OF RETURN:

•Is return on investment or capital employed

ARR = Total CFAT*2 *100

Number of years*Total investment
 Discounted Methods:

Discounted
Methods

Net Present Profitability Internal Rate

Value Index of Return
 The Net Present Value of a Project

Project’s Cash Flows

(CFt)

CF1 CF2 CFN

NPV = + + ··· + − Initial cost
(1 + r )1 (1 + r)2 (1 + r)N

Market Project’s
interest rates debt/equity capacity
Project’s risk-adjusted
cost of capital
(r)
Market Project’s
risk aversion business risk

FAVOURABLE : NPV>0
• The discount rate that forces PV inflows = cost. This
is the same as forcing NPV = 0.
– NPV: Enter k, solve for NPV.
n
CFt

t  0 1  k 
t
 NPV .

– IRR: Enter NPV = 0, solve for IRR.

n CFt
 t  0.
t  0 1  IRR

FAVOURABLE : IRR>Overall cost of capital (Ko)

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• Ratio of the present value of the change in
operating cash flows to the present value of
the investment cash outflow.
n
CFt

t 1 1  k 
t
PI 
CF0
OR Simply,
PI= Total Present Value
Net Cash Outlay

FAVOURABLE : PI>1
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 Actual Decision Making:
The evaluation methods do not include the part
• Not as easy as expected…
THINK OUT OF THE BOX!!!
of Capital Raising which neglect the Floatation
• Theories
costs. say Favorable when NPV>0
•Example:
But not always true
•Q.HOW????
Capital Raised 6,00,000 FC=1,00,000
Nco=5,00,000 TPV= 5,50,000
Ans-Here TPV-Nco>0 so favorable but actually
Expense=6,00,000 and Income = 5,50,000
1 Real Life Decision

NO
YES IS Result>
Sacrifice???

Accept Reject
2
+ = 2000
•Non Discounted Methods are normally not used in practical life
•The financial
1000 results 1000
cannot be accumulated like the results and
consequences of real life.
• TIME0VALUE1 OF2 MONEY 3 4 5 6 7 8
 0 1 2 3 4 5 6 7 8

Sacrifice & Result Comparison Time Value of Money

Capital Budgeting
 BIBLIOGRAPHY:
• Wikipedia
• Investopedia
• Accountancy Book
 Presenters:

Manish
Mukesh
Pratik

Presentation
Vicky Yadhav

Atul Mohit