1. CAPITAL BUDGETING BY PROF. P. M. POPHALE

2. NATURE OF DECISION 1. LONG TERM INVESTMENT.Investments are for a very long period of time 2. LARGE OUTLAY. Involves large amount of funds 3. RETURNS OVER A PERIOD. Returns are received over a period of time

3. NATURE contd…. 4. IRREVERSIBLE DECISION. Decisions once taken are difficult to reverse 5. CURRENT OUTFLOW OR A SERIES OF OUTFLOW.Outflow at current period 6. ANTICIPATED FUTURE FLOWS. Future flows are anticipated

4. NATURE contd. … 7. TECHNICAL ANALYSIS. The technical viability of project is established 8. BENEFIT OF INCREASED REVENUES 9. ADDITION, DISPOSITION, MODIFICATION, REPLACEMENT OF FIXED ASSETS. Decisions increasing revenues or reducing costs

5. NATURE contd. … 10. HIGH DEGREE OF RISK e.g.pager.Dealing with uncertain future consisting of large no. of factors affecting 11.AFFECTING EVALUATION BY ANALYSTS. Analysts may affect the evaluation

6. NATURE contd. … 12. REVENUE FORECASTS. Revenue forecasts is a pre-requisite 13. DIFFICULT TO CALCULATE ALL BENEFITS IN MONETARY TERMS. Non monetary impact is not counted

7. DATA REQUIRED 1.CASH FLOWS – INCREMENTAL & EFFECT ON EXISTING INFLOWS 2.TAX STRUTURE 3.DEPRECIATION 4.INCREMENTAL OUTFLOWS – INITIAL & ADDITIONAL

8. CALCULATION OF CASH FLOWS 1.SALES 2.EXPENSES EXCLUDING INT & DEP 3.PBIDT 4.PBDT 5.PBT 6.PAT 7.CASHFLOWS

9. METHODS OF EVALUATION 1.PAY BACK PERIOD METHOD. Period of repayment of initial investment 2.AVERAGE RATE OF RETURN. Average profits/Investments 3. DISCOUNTED CASH FLOW METHODS

10. METHODS OF EVALUATION CONCEPT OF TIME VALUE OF MONEY. Computing and discounting THE IMPORTANCE OF CHOOSING DISCOUNTING FACTOR. The relevance and subjectivity of discounting factor

11. DISCOUNTED CASH FLOW METHODS 1.NET PRESENT VALUE METHOD 2.RELATIVE NPV/ PROFITABILITY INDEX METHOD 3.INTERNAL RATE OF RETURN 4.TERMINAL VALUE METHOD

12. NET PRESENT VALUE METHOD SALES FORECAST. Based on market research and analysis EXPENSES FORECAST. Based on past experience COMPUTATION OF ACCOUNTING PROFIT. Calculated as per accounting principles

13. NPV contd. … CALCULATION OF CASH FLOWS. Cash flows = PAT + Non cash charges APPLICATION OF DISCOUNTING FACTORS & PRESENT VALUES. Cash inflows x Discounting factor TOTAL PV OF FUTURE INFLOWS

14. NPV contd. … TOTAL CASH OUTFLOW.Initial investment in FA & WC NET PV.Total PV – Total cash outflow DECISION MAKING – ACCEPT / REJECT DECISION. Accept if NPV is positive

15. RELATIVE NPV NPV RELATIVE NPV = -------------------- X 100 INVESTMENT DECISION MAKING

16. INTERNAL RATE OF RETURN CALCULATE RATE OF RETURN WITH POSITIVE NPV CALCULATE RATE OF RETURN WITH NEGATIVE NPV RATE WITH +VE NPV DIFF. BET. IRR = +VE NPV + -------------------------------------- X TWO RATES +VE NPV – NEGATIVE NPV OF RETURN

17. LIMITATIONS OF DCF DIFFICULT TO UNDERSTAND.Requires understanding of accounting concepts SUBJECTIVE CHOICE OF DISCOUNTING FACTOR. Choice depends upon the person, discounting factor directly affects the decision

18. LIMITATIONS OF DCF PROPER CALCULATION OF CASH FLOWS. Sales forecast, profit anticipations may not be scientifically arrived at UNCERTAIN FUTURE. All forecasts are subject to uncertainty