1. CAPITAL BUDGETINGCAPITAL BUDGETING
TITTO SUNNY
ARUN T.S
VIBIN UDAYAN
SOORAJ
SUBMITTED TO
Dr.MOHHAMED ASLAM ASWATHI UMESH
GEETHU
MBA TT 1st
SEM

2. Capital Expenditure refers to
investment in fixed assets and other
development projects, launching a new
product, improvisation, modernization,
expansion, replacement of fixed
assets etc.
Most firms carefully analyse the
potential projects in which they may
invest. The process of evaluating
opportunities is known as capital
investment decision. Capital
investment decision is also called
Capital expenditure decision or
Capital budgeting.

3. According to R.M.
Lynch,
“Capital budgeting
consists in employment
of available capital for
the purpose of
maximising the long
term profitability
(return on investment)
of the firm”.

4. FEATURES OF CAPITAL BUDGETINGFEATURES OF CAPITAL BUDGETING
The main features of Capital BudgetingThe main features of Capital Budgeting
 It involves the exchange of current funds for future benefit.It involves the exchange of current funds for future benefit.
 The future benefits are expected to be realised over a seriesThe future benefits are expected to be realised over a series
of years in future.of years in future.
 The funds are invested in long term assets.The funds are invested in long term assets.
 It is a long term irreversible decision.It is a long term irreversible decision.
 It involves huge initial funds.It involves huge initial funds.
 There is relatively a long gap of time between investment ofThere is relatively a long gap of time between investment of
funds and the expected returns.funds and the expected returns.
 It involves relatives a high degree of risk regarding the futureIt involves relatives a high degree of risk regarding the future
benefits.benefits.

5. STEPS IN CAPITALSTEPS IN CAPITAL
BUDGETINGBUDGETING
• Capital budgeting is a complex process. The following six-steps areCapital budgeting is a complex process. The following six-steps are
involved in capital budgeting.involved in capital budgeting.
• 1. Project generation1. Project generation
• 2. Project screening2. Project screening
• 3. Project evaluation3. Project evaluation
• 4. Project selection4. Project selection
• 5. Project execution and implementation.5. Project execution and implementation.
• 6. Performance review.6. Performance review.

6.  Availability of fund.
 Utilisation of funds
 Urgency of the project.
 Expectation of future earnings
 Intangible factors
 Risk and uncertainty

7. ROLE AND IMPORTANCE OF CAPITALROLE AND IMPORTANCE OF CAPITAL
BUDEGETINGBUDEGETING
Capital budgeting is concerned with heavyCapital budgeting is concerned with heavy
expenditure decisions. The benefits of returnsexpenditure decisions. The benefits of returns
from such expenditure is expected to be derivedfrom such expenditure is expected to be derived
over many years in future. This makes theover many years in future. This makes the
capital budgeting decisions more complex.capital budgeting decisions more complex.
These decisions affect the long term flexibilityThese decisions affect the long term flexibility
and profitability of the enterprise. Success orand profitability of the enterprise. Success or
failure of an enterprise is dependent up on thefailure of an enterprise is dependent up on the
quality of the capital budgeting alone in thequality of the capital budgeting alone in the
enterprise. Therefore proper planning and atenterprise. Therefore proper planning and at
most care is needed while making capitalmost care is needed while making capital
budgeting decision.budgeting decision.

8. REASONS FOR IMPORTANCE OFREASONS FOR IMPORTANCE OF
CAPITAL BUDGETINGCAPITAL BUDGETING
1.1. HUGE INVESTMENT:HUGE INVESTMENT: Capital budgeting decisions involvesCapital budgeting decisions involves
huge investment in permanent assets. Hence it requires carefulhuge investment in permanent assets. Hence it requires careful
planning and appraisal. A mistake in capital budgeting can proveplanning and appraisal. A mistake in capital budgeting can prove
fatal to the enterprise.fatal to the enterprise.
2.2. LONG TERM IMPLICATIONS:LONG TERM IMPLICATIONS: Capital budgeting decisionCapital budgeting decision
have long term effects on the future profitability and cost structurehave long term effects on the future profitability and cost structure
of the firm. A right decision may bring amazing returns, while aof the firm. A right decision may bring amazing returns, while a
wrong decision may endanger the survival of the firm.wrong decision may endanger the survival of the firm.
3.3. IRREVERSIBLE DECISION:IRREVERSIBLE DECISION: Capital investment decisionsCapital investment decisions
one made cannot be reversed back easily. This is because it isone made cannot be reversed back easily. This is because it is
difficult to dispose off fixed assets once they have been acquired.difficult to dispose off fixed assets once they have been acquired.
4.4. RISK:RISK: Long term commitment of funds involve greater risk andLong term commitment of funds involve greater risk and
uncertainty. The longer is the period of project ,the greater may beuncertainty. The longer is the period of project ,the greater may be
the risk and uncertainty.the risk and uncertainty.

9. 5.5. GROWTH:GROWTH: the capital budgeting decisions affect the rate andthe capital budgeting decisions affect the rate and
direction of growth of a firm.direction of growth of a firm.
6.6. IMPACT ON FIRM’S COMPETITIVE STRENGTH:IMPACT ON FIRM’S COMPETITIVE STRENGTH: TheThe
capital budgeting decision affect the capacity and strength of a firmcapital budgeting decision affect the capacity and strength of a firm
to face competition. It is so because the capital investment decisionsto face competition. It is so because the capital investment decisions
affect the future profits and cost of the firm.affect the future profits and cost of the firm.
7.7. MOST DIFFICULT DECISION:MOST DIFFICULT DECISION: Capital budgeting decisionsCapital budgeting decisions
are very difficult to make. These decision involve forecasting ofare very difficult to make. These decision involve forecasting of
future conditions for estimating the future cash flows ( benefits) andfuture conditions for estimating the future cash flows ( benefits) and
cost of different projects.cost of different projects.
8.8. COST CONTROL:COST CONTROL: In capital budgeting there is a regularIn capital budgeting there is a regular
comparison of budgeted and actual expenditures. Therefore costcomparison of budgeted and actual expenditures. Therefore cost
control is facilitated through capital budgeting.control is facilitated through capital budgeting.
9.9. WEALTH MAXIMISATION:WEALTH MAXIMISATION: The basic objective of financialThe basic objective of financial
management is to maximize the wealth of the shareholders. Capitalmanagement is to maximize the wealth of the shareholders. Capital
budgeting helps to achieve the this basic to objective.budgeting helps to achieve the this basic to objective.

10. LIMITATIONS OF CAPITALLIMITATIONS OF CAPITAL
BUDGETINGBUDGETING
1.1. The result of decision taken is uncertain. This is soThe result of decision taken is uncertain. This is so
because it is difficult to say that present circumstancesbecause it is difficult to say that present circumstances
will exist in future also .will exist in future also .
2.2. Some factors affecting investment proposals are notSome factors affecting investment proposals are not
measurable ( ie cannot be expressed in money value).measurable ( ie cannot be expressed in money value).
3.3. It is difficult to estimate the period for which investmentIt is difficult to estimate the period for which investment
is to be made and income will generate.is to be made and income will generate.
4.4. It is difficult to estimate the rate of return because futureIt is difficult to estimate the rate of return because future
is uncertain .is uncertain .
5.5. It is difficult to estimate the cost of capital.It is difficult to estimate the cost of capital.

11. TYPES OF INVESTMENTTYPES OF INVESTMENT
DECISIONS.DECISIONS.
1.1. TACTICAL INVESTMENT DECISIONTACTICAL INVESTMENT DECISION
These involve relatively small capitalThese involve relatively small capital
outlays.they do not result in a major change in the firm’soutlays.they do not result in a major change in the firm’s
products production method .sale of operationsproducts production method .sale of operations
etc.decision to invest is relatively minor tools, purchase ofetc.decision to invest is relatively minor tools, purchase of
water cooler ,typewriter calculating machines etc.arewater cooler ,typewriter calculating machines etc.are
examples of tactical decisions.examples of tactical decisions.
2.2. STRATEGIC INVESTMENT DECISIONS.STRATEGIC INVESTMENT DECISIONS.
These involve relatively large capitalThese involve relatively large capital
outlays. They have far reaching impact on the firm’soutlays. They have far reaching impact on the firm’s
future growth and profitability. These relate to importantfuture growth and profitability. These relate to important
areas such as new products, major productareas such as new products, major product
improvements, new research and developments etc.improvements, new research and developments etc.

12. 33.CONVENTIONAL INVESTMENT DECISIONS.CONVENTIONAL INVESTMENT DECISIONS
These involve one or more installments of capitalThese involve one or more installments of capital
outlays followed by one or a series of cash inflows.outlays followed by one or a series of cash inflows.
4.4. NON-NON- CONVENTIONAL INVESTMENT DECISIONSCONVENTIONAL INVESTMENT DECISIONS
These involve cash outflow over a period of time followedThese involve cash outflow over a period of time followed
by a series of cash inflows.by a series of cash inflows.
5. ECONOMICAL INDEPENDENT INVESTMENT DECISIONS.5. ECONOMICAL INDEPENDENT INVESTMENT DECISIONS.
IIn these investment decisions management has non these investment decisions management has no
alternative investment opportunities .This means there is only onealternative investment opportunities .This means there is only one
project in which management has to decide whether to invest in or not.project in which management has to decide whether to invest in or not.
6. ECONOMICAL DEPENDENT INVESTMENT DECISIONS.6. ECONOMICAL DEPENDENT INVESTMENT DECISIONS.
TThese involve choice from among no a ofhese involve choice from among no a of
alternative investment decisions .These may be complementary. Joint oralternative investment decisions .These may be complementary. Joint or
mutually exclusive . mutually exclusive decisions compete with eachmutually exclusive . mutually exclusive decisions compete with each
other .if one is undertaken the others will have to be rejected.other .if one is undertaken the others will have to be rejected.

13. METHODS OF CAPITAL BUDGETTINGMETHODS OF CAPITAL BUDGETTING
PROBLEMS & SOLUTIONSPROBLEMS & SOLUTIONS
A .TRADTIONAL METHODSA .TRADTIONAL METHODS
 Urgency methodUrgency method
 Pay back methodPay back method
I. When annual cash inflows are equalI. When annual cash inflows are equal
II. When annual cash inflows are unequalII. When annual cash inflows are unequal
 Post Pay Back Profitability methodPost Pay Back Profitability method
 Average Rate of Return Method.Average Rate of Return Method.
B.DISCOUNTING CRITERIA ORB.DISCOUNTING CRITERIA OR
MODERN METHODS.MODERN METHODS.
 Discounted pay back methodDiscounted pay back method
 Net present value method.Net present value method.
 benefit cost ratio.benefit cost ratio.
 internal rate of return.internal rate of return.
 net terminal value method.net terminal value method.
C.Other methodsC.Other methods..
 The mapi formulaThe mapi formula
 Nomograph methodNomograph method

14. TRADTIONAL METHODS
 Traditional methods do not take into consideration the time
value of money
Important traditional methods may be discussed as
follows:
1. Urgency Method
Urgency is a criterion used to justify the acceptance of
capital projects on the basis of emergency requirements or
under crisis conditions. Under this method, the most urgent
project is taken up first.

15. MERITS
 It’s a very simple technique

It is useful in case of short term projects requiring
lesser investment.
DEMERITS
 It is not based on scientific analysis.
 Selection is not made on the basis of economical
consideration but just on the basis of situation.
 A project, even though it is profitable, will not be
accepted for the very simple reason that it can be
postponed.

16. PAY BACK METHODPAY BACK METHOD
 Used technique of evaluating capital expenditureUsed technique of evaluating capital expenditure
proposals. Pay back period is the length of time requiredproposals. Pay back period is the length of time required
to recover the initial cost of the project. In short , it is theto recover the initial cost of the project. In short , it is the
period required to recover the cost of investment. Pay backperiod required to recover the cost of investment. Pay back
method is also called ‘pay-out’ or ‘pay-off period’ ormethod is also called ‘pay-out’ or ‘pay-off period’ or
‘recoupment period’ or ‘replacement period’.‘recoupment period’ or ‘replacement period’.
 The payback period can be calculated in two differentThe payback period can be calculated in two different
situation as follows:situation as follows:
I. When annual cash inflows are equalI. When annual cash inflows are equal
II. When annual cash inflows are unequalII. When annual cash inflows are unequal

17. I.I. When annual cash inflows areWhen annual cash inflows are
equalequal
 When annual cash inflows or benefit generated by a project per yearWhen annual cash inflows or benefit generated by a project per year
are equal or constant(ie even cash inflows). The payback period isare equal or constant(ie even cash inflows). The payback period is
computed by dividing the initial investment or cash outlay by the netcomputed by dividing the initial investment or cash outlay by the net
annual cash inflows. It is expressed asannual cash inflows. It is expressed as
payback period =payback period = original cost of project(cash outlay)original cost of project(cash outlay)
annual net cash inflow(net earnings)annual net cash inflow(net earnings)
For eg; if a project involves a cash outlay of RS 5,00,000 andFor eg; if a project involves a cash outlay of RS 5,00,000 and
generates cash inflow of RS 1,00,000 annually for 7 years.generates cash inflow of RS 1,00,000 annually for 7 years.
payback =payback = 5,00,0005,00,000 = 5 years is required to recover= 5 years is required to recover
1,00,000 original investment.1,00,000 original investment.

18. II. When annual cash inflowsII. When annual cash inflows
are unequal.are unequal.
When cash inflows in different years areWhen cash inflows in different years are
unequal (uneven),the computation of payunequal (uneven),the computation of pay
back period is not so easy as in the case ofback period is not so easy as in the case of
even cash inflowseven cash inflows
In such case, payback period isIn such case, payback period is
calculated in the form of cumulative cashcalculated in the form of cumulative cash
inflows. It is ascertained by cumulatinginflows. It is ascertained by cumulating
cash inflow till the time when thecash inflow till the time when the
cumulative cash inflow become equal tocumulative cash inflow become equal to
initial investment.initial investment.

19.  For example, if the cost of project is Rs.1,00,000 and the cash inflow are;For example, if the cost of project is Rs.1,00,000 and the cash inflow are;
11stst
year Rs 10,000 and 2nd year Rs. 15,000,3year Rs 10,000 and 2nd year Rs. 15,000,3rdrd
year Rs.25,000 4year Rs.25,000 4thth
year Rs.year Rs.
30,000 and 530,000 and 5thth
year Rs .30,000.pay back period to recover originalyear Rs .30,000.pay back period to recover original
investment of Rs, 100000 comes to 4 years and 8 months (RS 80000 isinvestment of Rs, 100000 comes to 4 years and 8 months (RS 80000 is
recovered in 4 years and to recover the balance RS 20000, 8 monthsrecovered in 4 years and to recover the balance RS 20000, 8 months
required.required.
 4+4+ 20,00020,000 = 4 += 4 + 22 years or 4 years and 8 months.years or 4 years and 8 months.
30,000 330,000 3
pay back period can also be calculated by the following formula .pay back period can also be calculated by the following formula .
Pay back period = E +Pay back period = E + BB
CC
E = no years immediately proceeding the year of final recovery.E = no years immediately proceeding the year of final recovery.
B = Balance amount still to be recovered.B = Balance amount still to be recovered.
C = Cash flow during the year of final recovery.C = Cash flow during the year of final recovery.

20. POST PAY BACK METHODPOST PAY BACK METHOD
 As pointed out earlier, under payback method the profitability( ie cashAs pointed out earlier, under payback method the profitability( ie cash
inflows)after payback period is ignored. the post pay back methodinflows)after payback period is ignored. the post pay back method
has been evolved to overcome this limitation.has been evolved to overcome this limitation.
under post pay back method the entire cash inflows generated from aunder post pay back method the entire cash inflows generated from a
project during its working life are taken into account. The post payproject during its working life are taken into account. The post pay
back profitability calculated as underback profitability calculated as under
pay back profitability = total cash inflows in life-initial cost.pay back profitability = total cash inflows in life-initial cost.

21. For example, if the cost of project isFor example, if the cost of project is
Rs.100000 and the cash inflow are; 1Rs.100000 and the cash inflow are; 1stst
yearyear
Rs 10000 and year Rs. 15000,3Rs 10000 and year Rs. 15000,3rdrd
yearyear
Rs.2,5000 4Rs.2,5000 4thth
year Rs. 30,000 and 5year Rs. 30,000 and 5thth
year Rsyear Rs
.30,000..30,000.
Post pay back profitability =Post pay back profitability =
total cash inflows in life – initial cost.total cash inflows in life – initial cost.
1,10,000 -100000 = 10000.1,10,000 -100000 = 10000.
post pay back profitability = 10000post pay back profitability = 10000

22. Nomograph methodNomograph method
 Nomograph method facilitates the rate of returnNomograph method facilitates the rate of return
calculations nomograph method draws a certaincalculations nomograph method draws a certain
kind of graph which helps to understand the valuekind of graph which helps to understand the value
of other independent the variable when the valueof other independent the variable when the value
of other independent variables are given.of other independent variables are given.
this method is useful for quick calculation.this method is useful for quick calculation.
This is a time saving method. it is a simpleThis is a time saving method. it is a simple
method as well.hence,only minimum effort ismethod as well.hence,only minimum effort is
required for the preparation of this graph.required for the preparation of this graph.

23. The mapi techniqueThe mapi technique
 This technique has been offered by George terborgh in his book “ businessThis technique has been offered by George terborgh in his book “ business
investment policy". he is the chief economist of the machinery allied productinvestment policy". he is the chief economist of the machinery allied product
institute (mapi) of Washington D.C .institute (mapi) of Washington D.C .
A Firm has to consider the following 5 factors to make use of MAPIA Firm has to consider the following 5 factors to make use of MAPI
techniques;techniques;
a)a) Operating advantage from the new equipmentOperating advantage from the new equipment
b)b) Magnitude of the capital consumption avoided.Magnitude of the capital consumption avoided.
c)c) Subtraction of consuming capital.Subtraction of consuming capital.
d)d) Cost of consuming capital.Cost of consuming capital.
e)e) Net investment in the project.Net investment in the project.
According to MAPI method ,the rate of return from the nextAccording to MAPI method ,the rate of return from the next
year is calculated, while evaluating project profitability.year is calculated, while evaluating project profitability.

24. Discounted cash flow techniqueDiscounted cash flow technique
Payback method & average rate of return method do not consider the timePayback method & average rate of return method do not consider the time
value of money .the initial amount incurred for acquisition of assets tovalue of money .the initial amount incurred for acquisition of assets to
implement a project and income received from the project in future is givenimplement a project and income received from the project in future is given
equal importance under the other methods. But in fact the value of moneyequal importance under the other methods. But in fact the value of money
received in future is not equivalent to the value of money invested today .inreceived in future is not equivalent to the value of money invested today .in
other words a rupee in hand now is nor valuable than a rupee to be receivedother words a rupee in hand now is nor valuable than a rupee to be received
in future because cash in hand can be invested elsewhere and interest canin future because cash in hand can be invested elsewhere and interest can
be earned on it .for eg; if rupees 100 is invested at the annual interest of 10be earned on it .for eg; if rupees 100 is invested at the annual interest of 10
%,it will increased as under;%,it will increased as under;
RS 100 today is equal toRS 100 today is equal to
RS 110 after 1 year(100+10 of interest)RS 110 after 1 year(100+10 of interest)
RS 121 after 2 years (110+11 of interest).RS 121 after 2 years (110+11 of interest).
RE 1 After 1 year equal to RSRE 1 After 1 year equal to RS 100100= 0.909= 0.909
110110

25. Internal rate ofInternal rate of
return(IRR)return(IRR)
 Net present value method indicate the net present valueNet present value method indicate the net present value
of cash flows of a project at a pre-determined interestof cash flows of a project at a pre-determined interest
rate, but it doesn’t indicate the rate of return of therate, but it doesn’t indicate the rate of return of the
project . In order to find out the rate of return of theproject . In order to find out the rate of return of the
project, estimated cash inflows of each year areproject, estimated cash inflows of each year are
discounted at various rates till a rate is obtained at whichdiscounted at various rates till a rate is obtained at which
the present value of cash inflow is equal to the initialthe present value of cash inflow is equal to the initial
investment or the net present value comes to zero. Suchinvestment or the net present value comes to zero. Such
a rate is called internal rate of return or marginal rate ofa rate is called internal rate of return or marginal rate of
return .return .

26. The concept of rate of return is quite simpleThe concept of rate of return is quite simple
to understand in the case of a 1 periodto understand in the case of a 1 period
project.project.
assume that you deposit RS 10000 with aassume that you deposit RS 10000 with a
bank and would get back RS 10800 after 1bank and would get back RS 10800 after 1
year. The true rate of return on youryear. The true rate of return on your
investment would beinvestment would be
Rate of return =Rate of return =10800-1000010800-10000 = .08 = 8%= .08 = 8%
1000010000

27. Average rate of returnAverage rate of return
method(ARR)method(ARR)
 This method is also known as accounting rate ofThis method is also known as accounting rate of
return method or return on investment method orreturn method or return on investment method or
unadjusted rate of return method. under thisunadjusted rate of return method. under this
method average annual profit(after tax)ismethod average annual profit(after tax)is
expressed as percentage of investment.ARR isexpressed as percentage of investment.ARR is
found out by dividing average income by thefound out by dividing average income by the
average investment.ARR is calculated with theaverage investment.ARR is calculated with the
help of the following formula ;help of the following formula ;
 ARR =ARR = Average income or returnAverage income or return × 100× 100
average investmentaverage investment

28. Average investment =Average investment =
original investment +scrap valueoriginal investment +scrap value
22
OROR
== original investment – scrap valueoriginal investment – scrap value
22
For eg; XFor eg; X
YY
capital cost 40000capital cost 40000
6000060000
earnings after depreciationearnings after depreciation
1 st year 50001 st year 5000
80008000
2 nd year 70002 nd year 7000
1000010000
3 rd year 60003 rd year 6000
70007000
4 th year 60004 th year 6000

29. The average earningsThe average earnings
of project X =of project X = 2400024000 = RS 6000.= RS 6000.
44
The average investment =The average investment =
cost at the begining+cost at the end of the lifecost at the begining+cost at the end of the life..
22
40000+040000+0 = RS 20000.= RS 20000.
22
ARR =ARR =60006000 × 100 = 30 %× 100 = 30 %
2000020000
Average earnings of project y =Average earnings of project y = 3000030000
4 = RS 7500.4 = RS 7500.
Average investment =Average investment = 60000+060000+0 = 30000.= 30000.
22
ARR =ARR = 75007500 × 100 = 25 %× 100 = 25 %

30. Net Present ValueNet Present Value
DefinitionDefinition
NPV. TheNPV. The present valuepresent value of an investment's futureof an investment's future
net cash flowsnet cash flows minus the initialminus the initial investmentinvestment . If positive, the. If positive, the
investment should be made (unless an even better investmentinvestment should be made (unless an even better investment
exists), otherwise it should not.exists), otherwise it should not.
The total discounted value of all of the cash inflows and outflowsThe total discounted value of all of the cash inflows and outflows
from a project or investment.from a project or investment.
This method is used only when the rate of return on investment isThis method is used only when the rate of return on investment is
predetermined by management under the net persent valuepredetermined by management under the net persent value
method, the present value of all cash inflows (stream ofmethod, the present value of all cash inflows (stream of
benefits) is compared against the present value of all cashbenefits) is compared against the present value of all cash
outflows(cash outlays or cost of investment). The differenceoutflows(cash outlays or cost of investment). The difference
between the present value of cash inflows and cash outflows isbetween the present value of cash inflows and cash outflows is
called the net present value.the discount rate for obtaining thecalled the net present value.the discount rate for obtaining the
present value is some desired rate of return which may bepresent value is some desired rate of return which may be
equal to the cost of capitalequal to the cost of capital

31.  COMPUTATION OF CASH INFLOW & OUTFLOWS.COMPUTATION OF CASH INFLOW & OUTFLOWS.
Present value =Present value =
CC11 ++ CC22 ++ CC33 ++
……………………………… CCnn
( 1+r)( 1+r) (1+r)(1+r)22
( 1+r)( 1+r)22
( 1+r)( 1+r)22

32. Year Investmen
t & cash
flow
Discoun
t factor
at 15%
Presen
t value
Investment
and cash
Discount
factor
at15%
Present
value
0 100000 ……….. 100000 100000 ………….. 100000
1 30000 0.870 26100 20000 0.870 1740
2 40000 0.756 30240 30000 0.756 22680
3 40000 0.658 26320 50000 0.658 32900
4 30000 0.572 17160 40000 0.572 22880
5 30000 0.497 14910 30000 0.497 14910
170000 ……….. 114730 170000 110770
ProjectProject AA ProjectProject BB

33. PROJECT APROJECT A
Present value of cash outflow=100000Present value of cash outflow=100000
Present value of cash inflow =114730Present value of cash inflow =114730
Net present value=114730-100000=14730Net present value=114730-100000=14730
PROJECT BPROJECT B
Present value of cash outflow =100000Present value of cash outflow =100000
Present value of cash inflow =110770Present value of cash inflow =110770
Net present value =110770-100000=10770Net present value =110770-100000=10770

34. Difference between NPV & IRRDifference between NPV & IRR
Npv IRR
The minimum desired rate of
return(cost of capital)is assumed to be
known.
The minimum desired rate of return is
to be determined
It implies that the cash inflows are
invested at the rate of firm’s cost of
capital.
It implies that cash inflows are
reinvested at the IRR of the project.
It gives absolute return. It gives percentage return.
The NPV of different project can be
added.
The IRR of the different project can not
be added.

35. REFERENCE:REFERENCE:
1.1. WWW.WIKIPEDIA.ORGWWW.WIKIPEDIA.ORG
2.2. FINANCIAL MANAGEMENTFINANCIAL MANAGEMENT
AUTHOR: VINOD (BBA CALICUT UTY)AUTHOR: VINOD (BBA CALICUT UTY)