1. Financial Management ips An Insight to Capital Budgeting www.ipsacademy.org

5. Substantial expenditure

6. Irreversibility

7. Over and under capacityips www.ipsacademy.org

9. Difficult to measure the benefit in quantitative terms.

10. Time Element: the problem of phasing properly the availability of capital assets in order to have them come ‘on stream’ at the correct time.ips www.ipsacademy.org

11. Financial Management CAPITAL BUDGETING PROCESS ips PROPOSALS NEW INVESTMENT OPPORTUNITIES PLANNING PHASE REJECTED OPPORTUNITIES IMROVEMENT IN PLANNING AND EVALUATION PROCEEDURE PROPOSALS EVALUATION PHASE REJECTED PROPOSALS PROJECTS SELECTION PHASE REJECTED PROJECTS ACCEPTED PROJECTS IMPLEMENTATION PHASE ONLINE PROJECTS CONTROL PHASE PROJECT TERMINATION AUDITING PHASE www.ipsacademy.org

13. Cash flow approach takes in to account ‘time value of money’.

14. In the absence of real performance improvement accountants may accelerate revenues and defer costs.www.ipsacademy.org

15. Financial Management ips EVALUATION CRITERIA NON DISCOUNTING CRITERIA DISCOUNTING CRITERIA NET PRESENT VALUE INTERNAL RATE OF RETURN DISC. PAYBACK PERIOD PR’ABLTY INDEX (PI) ACC. RATE OF RETURN PAYBACK PERIOD www.ipsacademy.org

18. Emphasizes on earlier cash flows.

19. Rough and ready method or dealing with risk.

20. Ignores cash after the payback period.

21. Fails to consider ‘time value of the money’DISADVANTAGES ADVANTAGES www.ipsacademy.org

23. Evaluates return on accounting profits. i.e. on accrual basis

24. Annual returns are expressed in percentage of net investment.ips AVERAGE PROFIT AFTER TAX AVERAGE RATE OF RETURN 100 AVERAGE INVESTMENT www.ipsacademy.org

26. Fails to consider ‘time value of the money’.

27. Ignores the size of investment required.

28. Simple.

29. Considers value of project to its economic life.DISADVANTAGES ADVANTAGES www.ipsacademy.org

31. Based on accounting profits; no separate calculation required.DISADVANTAGES ADVANTAGES www.ipsacademy.org

33. Inflationary pressures.

34. Uncertainty of the future. i.e. preference of current consumption than future consumption.ips www.ipsacademy.org

38. It surmounts the objection that equal weight is given to all flows starting year one to the cut off date.

39. In other words, it discounts the cash inflow by applying the present value factors for different periods.ips www.ipsacademy.org

41. Calculated by counting the years the discounted cash flows add up to the initial investment.

42. Still takes no account of cash flow after the cut-off date.ips www.ipsacademy.org

44. Depends solely on the forecasted cash flows and the opportunity cost of capital.

45. Opportunity cost of capital is the expected rate of return on investment of equivalent risks.

46. Present value of cash flows is calculated using opportunity cost of capital at discount rate.ips www.ipsacademy.org

48. Projects are ranked in the order of highest ‘Net Present Values'ips www.ipsacademy.org

50. Biased towards longer term projects.

51. Considers‘time value of money’.

52. Relies on discount rate and estimated cash flows.DISADVANTAGES ADVANTAGES www.ipsacademy.org

54. It is the discount rate at which the present value of cash flows equals the present value of cash outflows. i.e. NPV = 0

55. In other words, IRR is the rate of return the project earns.

56. The rate of discount is determined by the ‘trial and error method’ .ips www.ipsacademy.org

59. Assumes that future cash flows are reinvested at a rate equal to IRR.

60. Considers Working Capital and Scrape Value

61. Considers cash flows during the whole economic life.DISADVANTAGES ADVANTAGES www.ipsacademy.org

63. Figures out discount rate that makes NPV zero.

64. Assumes that cost of capital is known.

65. Calculates NPV, given the discount rate.NET PRESENT VALUE INTERNAL RATE OF RETURN www.ipsacademy.org

67. The profitability index rule tells us to accept all projects with an index greater than 1. If the profitability index is greater than 1, the present value PV of Ci is greater than the initial investment - C0 and so the project must have a positive net present value.ips P/V OF CASH INFLOW PROFITABILITY INDEX INITIAL CASH OUTFLOW www.ipsacademy.org

68. Financial Management ips Thank You www.ipsacademy.org