FINANCIAL MANAGEMENT ( PART-2 ) NET PRESENT VALUE
|
|
- Amelia Campbell
- 5 years ago
- Views:
Transcription
1 FINANCIAL MANAGEMENT ( PART-2 ) NET PRESENT VALUE 1. INTRODUCTION Dear students, welcome to the lecture series on financial management. Today in this lecture, we shall learn the techniques of evaluation of capital budgeting proposals. These techniques will be based on discounted cash flows or it is also known as time adjusted rate of return. We shall cover the topics net present value, profitability index, internal rate of return and their comparisons. The objective of this lecture is to understand various techniques employed to evaluate an investment proposal. We shall discuss each of this techniques based on time adjusted rate of return with its utility, advantages and disadvantages. 2. MEANING OF NET PRESENT VALUE Now students, we will learn what is net present value? Net present value method is the classic economic method of evaluating any investment proposal. It is a discounting cash flow technique which postulates or which recognizes the time value of money, it postulates different cash flows arising in different periods, differ in value and are comparable only when they are equivalent that is present value are found out, now what are the steps involved in analyzing net present technique.
2 First one is cash flow, cash flows are determine on the basis of certain realistic assumptions, Now these forecasted cash flows can be of three types, First initial incremental cash flows, Second interim incremental cash flows, Third, terminal cash flows.
3 What is initial incremental cash flow? It is the expenditure which we need to incur if we are going into a project, that means initial cost of investment, for example, we need to buy a machinery, so the cost of acquisition of machinery, any carriage inward related to it or any other installation expenses shall form the cost of that machine and it will be our initial cash outflow. If any additional working capital is required, that too will form part of initial cash out flow. In case of replacement of an asset, we need to sell it and need to buy a new one; in that case, any salvage value which we are receiving from selling that old asset shall be subtracted from the cost of investment or cost of new machine. So this comprises our initial incremental cash flow.
4 Second is interim incremental cash flow. What are these cash flows? They are accruing when a number of period have gone by, means after initial investment, in subsequent years, we are receiving these inflows. They are revenues which we can earn from installing a machine, they come year by year, so they are called in between or interim cash flows. Now comes terminal cash flows. Terminal cash flow means when a project comes to an end, what we are receiving or what we are giving back, so the examples of such terminal cash flows is in case of new machinery, if its life is 10 years, at the end of 10 th year, if I am going to sell these machinery, whatever selling amount as a salvage value of that old machine I am receiving is my terminal cash inflow. Similarly if I am recovering of working capital back which has not been used in the project or what has been left out, this will also form terminal cash inflows part so now first thing is clear, what are cash flows that are needed for a NPV technique. One thing should be kept in mind that these cash flows will be cash flows after tax but before depreciation and other amortization because we need to add back depreciations and amortization as they are not cash expenses. So now we will learn another factor which is involved in NPV technique and that is called discounting rate. Discounting rate is nothing but the opportunity cost of capital. What is opportunity cost of capital? It is the minimum expectation of share holder, which means whatever minimum rate of return, a investor expect from a firm to earn is called cost of capital and that will be used for discounting the cash flows arising from a project. Third is present value of cash inflows. Since our cash outflow is in zero period, we have to find out equivalents of inflows arising in subsequent year, for that we will use a technique called discounting of cash flows for which there is a formula.
5 What is the formula for discounting the cash flows? C/(1+R) and the exponent to the (1+ R) will be N, that is number of years, this way we shall compute the present value of cash flows and finally we will find out net present value, its formula is Present value of cash inflows - cost of investment or we can say Present value of cash inflow- present value of cash outflows. Both the terms should be in the present value, with this we have learned the factors which are involved into the NPV technique.
6 3. MERITS OF NPV TECHNIQUES Students, now we will evaluate this technique which we have learned for evaluating a capital budgeting proposal, that means all the merits and demerits of net present value method needs to be understood. So what are the merits of net present value method?
7 Firstly it takes into account time value of money, we all know that a rupee receive today is worth more than it is received tomorrow. So the most important part is that it takes into account present value that is equivalent of present rupee is ascertained in this method. Second is overall profitability of the project can be ascertained. How it takes into considerations overall profitability, it considers all the cash flows arising in a project to evaluate the profitability of the project, so the project holds the net present value is higher, we will accept that project, in that way it will enhance the share holders worth value of firm because more profitable projects will be accepted the better will be are avenues for generating profits. The third important merit of the system is it enhances share holders wealth; this is the virtue of this technique that it works on maximization of share holder s wealth.
8 How share holders wealth is maximized? If he takes as I have already explained that it works on profitability, so the value of firm increases by accepting profitable projects which in turn increases the market price of share and if market price of share is increased, it will automatically increase the wealth of share holders.
9 4. DEMERITS OF NPV TECHNIQUES Now what are the demerits of this system? Are there some limitations using NPV technique? Theoretically there cannot be but in practice, there are certain problems related to computation of NPV techniques like cash flows, they are based on estimations, if rationally they are not computed, they may give wrong results, so we have to be quite rational. First one is cash flows, cash flow estimation is based on probabilistic technique, it is easy to calculate NPV if cash flows forecasted are known to us, but what is the problem that these forecasted cash flows should be properly and rationally computed. If they are taken arbitrarily, it may give wrong results,
10 Second one is discount rate, it is difficult to precisely measure the discount rate, so there may be variation in the calculation or it may be subject to some error. Third one is mutually exclusive projects, further cautions needs to be applied in using NPV technique where projects are mutually exclusive because there may be certain projects which have different outflows and different time periods that is project life may be different, their initial investment will be different so the NPV criteria may give some ambiguous results, in that case, we have to take help of other techniques also, so these are the demerits of NPV method.
11 5. ILLUSTRATION TO UNDERSTAND COMPUTATION OF NET PRESENT VALUE Now we will learn how to calculate net present value with an example. For the sake of convenience, I am taking the same figures as we have learned in our previous lecture for calculating present value. So first is cost of investment, it will be 100. Then cash inflows which I am receiving from this project having a project life of five year will be, first year 40, second year 30, third year 30, fourth year 20 and fifth year 15.
12 Now we have to ascertain discounting factors which we all know that can be ascertained by using the formula 1/(1+R)ⁿ, so here the discounting rate will be 10 %, so discount factors will be 1/1.1 first will give me and ,0.753, and lastly for 5 th year, Alternatively you can see the PV tables which are given in all the text books. There you have to find out the rate and parallel to it, there will be years. So for first year, discounting factor would have been mentioned over there subsequently for all the years, they have already calculated these factors, so you just need to take up the factors and place it in front of cash flows. So I have done this work, you can see this example on the screen, its 40 X 0.909, in this way, the entire cash flows will be multiplied with their respective discounting factors, we are getting present value for first year 36, second year 24, third year its 23, fourth year 17 and fifth year 9.
13 Adding them all, I am getting present value of cash inflows which is amounting to Rs 109 and we know our cost of investment was 100 Rs. so net present value is I have used the formula, present value of cash inflows - present value of cash out flows. So my NPV is coming as 9 which is a positive NPV. Now what to do? Let s learn the decision criteria s, for accepting a proposal based on NPV, what we need to look at is NPV is positive or not, In case NPV is positive, that means cash inflows are exceeding cash out flows, we will accept the proposal.
14 In case it is negative, that means present value of all the cash inflows arising over the project life are less than initial cost of capital, we will reject the proposal because it s not going to be profitable for the firm. In this proposal, we are going to accept it as it s giving me a positive NPV. 6. DECISION BASED ON NPV TECHNIQUE Now let s take up question were we need to apply this technique for taking the decision. We can see the question on the screen, you have the opportunity to purchase an office building. You have a tenant lined up that will generate Rs. 60,000 per year in cash flow for three years. At the end of three years, you anticipate selling the building for Rs. 4,50,000. Assume cost of capital as 7 %, how much would you be willing to pay for the building. This question is saying that you have a building option to purchase, you are going to purchase a building is his giving a rent because you have a tenant tied up their so he will give you a rent of 16,000 for first year, 16,000 for second year and 16,000 for third year. So this 16,000 for first to three year are called interim incremental cash flows and at the end of third year, the selling price of the building, that means the service value which you will receive by selling this building
15 will be 4,50,000, so this is terminal cash flow. So in the third year, what you will be getting is 16,000 plus 4,50,000, that is 4,66,000. Now there is one more part in this question, it s says that if the building is being offered for sale, at a price of 3,50,000, would you buy the building or not? Let s see the solution, you can see this slide,
16 here for the first year a discount 16,000 using the formula, so my formula is what was the formula? It was C/(1 + R)ⁿ, so for the first year, n will be 1, 16000/(1.07), it will give me 14,953. So present values will be For second year, will be divided by 1.07 and again 1.07 because exponent is two years or you can use the discounting factors directly, so it will give me present value of 16,000 for second year as For third year, we have to discount 4,66,000 or you can say that 4,66,000/(1.07)³, 3 times you have to divide 4,66,000 by 1.07, so the value will be 3,80,395. Adding this all, we are getting Rs. 4,09,323, this is the amount we are ready to pay for this building. Now they are selling it to us for 3,50,000 Rs., so my initial incremental outflow or cost of this building will be 3,50,000, I need to subtract 4,09,323 from 3,50,000. It will give me a positive NPV which will amount to 59,323. It is a profitable investment, so we will go for it. Hopefully the way of calculating is clear with this example. Students now we shall summarize this lecture what we have learned today. Firstly we have learned the meaning of net present value that is it means PV of cash inflows minus PV of cash outflows. Then its merits, that it takes into consideration time value of money and profitability, it measures share holders wealth also and its demerits that cash flows are based on estimations, discounting rate is difficult to ascertain and in case of mutually exclusive project is difficult to find out the results. Then we have learned it s method of computation and an example. With this, we are concluding this lecture, thank you.
FINANCIAL MANAGEMENT (PART 4) INTRODUCTION OF CAPITAL BUDGETING PART- 1
FINANCIAL MANAGEMENT (PART 4) INTRODUCTION OF CAPITAL BUDGETING PART- 1 1. INTRODUCTION Dear students, welcome to the lecture series on capital budgeting. Today in this lecture, we shall learn about meaning,
More information(Refer Slide Time: 4:11)
Depreciation, Alternate Investment and Profitability Analysis. Professor Dr. Bikash Mohanty. Department of Chemical Engineering. Indian Institute of Technology, Roorkee. Lecture-19. Profitability Analysis
More informationCommercestudyguide.com Capital Budgeting. Definition of Capital Budgeting. Nature of Capital Budgeting. The process of Capital Budgeting
Commercestudyguide.com Capital Budgeting Capital Budgeting decision is considered the most important and most critical decision for a finance manager. It involves decisions related to long-term investments
More informationFINANCIAL MANAGEMENT (PART-21) TOOLS OF FINANCIAL PLANNING CASH-BUDGET (PART-2)
FINANCIAL MANAGEMENT (PART-21) TOOLS OF FINANCIAL PLANNING CASH-BUDGET (PART-2) 1. INTRODUCTION Dear Students, Welcome to the lecture series on Financial Management. Today we shall cover the topic tools
More informationNet Present Value Q: Suppose we can invest $50 today & receive $60 later today. What is our increase in value? Net Present Value Suppose we can invest
Ch. 11 The Basics of Capital Budgeting Topics Net Present Value Other Investment Criteria IRR Payback What is capital budgeting? Analysis of potential additions to fixed assets. Long-term decisions; involve
More informationEngineering Economics and Financial Accounting
Engineering Economics and Financial Accounting Unit 5: Accounting Major Topics are: Balance Sheet - Profit & Loss Statement - Evaluation of Investment decisions Average Rate of Return - Payback Period
More information(Refer Slide Time: 00:50)
Engineering Economic Analysis Professor Dr. Pradeep K Jha Department of Mechanical and Industrial Engineering Indian Institute of Technology Roorkee Lecture 22 Basic Depreciation Methods: S-L Method, Declining
More information(Refer Slide Time: 3:03)
Depreciation, Alternate Investment and Profitability Analysis. Professor Dr. Bikash Mohanty. Department of Chemical Engineering. Indian Institute of Technology, Roorkee. Lecture-7. Depreciation Sinking
More informationInvestment Appraisal
Investment Appraisal Introduction to Investment Appraisal Whatever level of management authorises a capital expenditure, the proposed investment should be properly evaluated, and found to be worthwhile
More informationCAPITAL BUDGETING Shenandoah Furniture, Inc.
CAPITAL BUDGETING Shenandoah Furniture, Inc. Shenandoah Furniture is considering replacing one of the machines in its manufacturing facility. The cost of the new machine will be $76,120. Transportation
More informationSession 1, Monday, April 8 th (9:45-10:45)
Session 1, Monday, April 8 th (9:45-10:45) Time Value of Money and Capital Budgeting v2.0 2014 Association for Financial Professionals. All rights reserved. Session 3-1 Chapters Covered Time Value of Money:
More informationLecture 3. Chapter 4: Allocating Resources Over Time
Lecture 3 Chapter 4: Allocating Resources Over Time 1 Introduction: Time Value of Money (TVM) $20 today is worth more than the expectation of $20 tomorrow because: a bank would pay interest on the $20
More informationAFP Financial Planning & Analysis Learning System Session 1, Monday, April 3 rd (9:45-10:45) Time Value of Money and Capital Budgeting
AFP Financial Planning & Analysis Learning System Session 1, Monday, April 3 rd (9:45-10:45) Time Value of Money and Capital Budgeting Chapters Covered Time Value of Money: Part I, Domain B Chapter 6 Net
More informationThe following points highlight the three time-adjusted or discounted methods of capital budgeting, i.e., 1. Net Present Value
Discounted Methods of Capital Budgeting Financial Analysis The following points highlight the three time-adjusted or discounted methods of capital budgeting, i.e., 1. Net Present Value Method 2. Internal
More information(Refer Slide Time: 00:55)
Engineering Economic Analysis Professor Dr. Pradeep K Jha Department of Mechanical and Industrial Engineering Indian Institute of Technology Roorkee Lecture 11 Economic Equivalence: Meaning and Principles
More informationInternational Project Management. prof.dr MILOŠ D. MILOVANČEVIĆ
International Project Management prof.dr MILOŠ D. MILOVANČEVIĆ Project Evaluation and Analysis Project Financial Analysis Project Evaluation and Analysis The important aspects of project analysis are:
More informationCS 413 Software Project Management LECTURE 8 COST MANAGEMENT FOR SOFTWARE PROJECT - II CASH FLOW ANALYSIS TECHNIQUES
LECTURE 8 COST MANAGEMENT FOR SOFTWARE PROJECT - II CASH FLOW ANALYSIS TECHNIQUES PAYBACK PERIOD: The payback period is the length of time it takes the company to recoup the initial costs of producing
More informationFinancial Statements Analysis and Reporting Dr. Anil Kumar Sharma Department of Management Studies Indian Institute of Technology, Roorkee
Financial Statements Analysis and Reporting Dr. Anil Kumar Sharma Department of Management Studies Indian Institute of Technology, Roorkee Lecture - 35 Ratio Analysis Part 1 Welcome students. So, as I
More informationUniversity 18 Lessons Financial Management. Unit 2: Capital Budgeting Decisions
University 18 Lessons Financial Management Unit 2: Capital Budgeting Decisions Nature of Investment Decisions The investment decisions of a firm are generally known as the capital budgeting, or capital
More informationTime value of money-concepts and Calculations Prof. Bikash Mohanty Department of Chemical Engineering Indian Institute of Technology, Roorkee
Time value of money-concepts and Calculations Prof. Bikash Mohanty Department of Chemical Engineering Indian Institute of Technology, Roorkee Lecture 04 Compounding Techniques- 1&2 Welcome to the lecture
More informationLecture - 25 Depreciation Accounting
Economics, Management and Entrepreneurship Prof. Pratap K. J. Mohapatra Department of Industrial Engineering & Management Indian Institute of Technology Kharagpur Lecture - 25 Depreciation Accounting Good
More informationMGT201 Lecture No. 11
MGT201 Lecture No. 11 Learning Objectives: In this lecture, we will discuss some special areas of capital budgeting in which the calculation of NPV & IRR is a bit more difficult. These concepts will be
More informationChapter 14 Solutions Solution 14.1
Chapter 14 Solutions Solution 14.1 a) Compare and contrast the various methods of investment appraisal. To what extent would it be true to say there is a place for each of them As capital investment decisions
More informationUnit-2. Capital Budgeting
Unit-2 Capital Budgeting Unit Structure 2.0. Objectives. 2.1. Introduction. 2.2. Presentation of subject matter. 2.2.1 Meaning of capital budgeting. 2.2.2 Capital expenditure. 2.2.3 Definitions. 2.2.4
More informationLecture Guide. Sample Pages Follow. for Timothy Gallagher s Financial Management 7e Principles and Practice
Lecture Guide for Timothy Gallagher s Financial Management 7e Principles and Practice 707 Slides Written by Tim Gallagher the textbook author Use as flash cards for terminology and concept review Also
More informationSolution to Problem Set 1
M.I.T. Spring 999 Sloan School of Management 5.45 Solution to Problem Set. Investment has an NPV of 0000 + 20000 + 20% = 6667. Similarly, investments 2, 3, and 4 have NPV s of 5000, -47, and 267, respectively.
More informationFinancial Management Masters of Business Administration Study Notes & Tutorial Questions Chapter 3: Investment Decisions
Financial Management Masters of Business Administration Study Notes & Tutorial Questions Chapter 3: Investment Decisions 1 INTRODUCTION The word Capital refers to be the total investment of a company of
More informationFinancial Management I
Financial Management I Workshop on Time Value of Money MBA 2016 2017 Slide 2 Finance & Valuation Capital Budgeting Decisions Long-term Investment decisions Investments in Net Working Capital Financing
More informationTHE FINANCIAL EVALUTATION OF INVESTMENTS: THE TIME VALUE OF MONEY, THE PRESENT VALUE, NPV, IRR
THE FINANCIAL EVALUTATION OF INVESTMENTS: THE TIME VALUE OF MONEY, THE PRESENT VALUE, NPV, IRR Lesson 9 Castellanza, 15 th November 2017 SUMMARY The investment definition and analysis Financial value of
More informationTime value of money-concepts and Calculations Prof. Bikash Mohanty Department of Chemical Engineering Indian Institute of Technology, Roorkee
Time value of money-concepts and Calculations Prof. Bikash Mohanty Department of Chemical Engineering Indian Institute of Technology, Roorkee Lecture 08 Present Value Welcome to the lecture series on Time
More informationACCTG101 Revision MODULES 10 & 11 LITTLE NOTABLES EXCLUSIVE - VICKY TANG
ACCTG101 Revision MODULES 10 & 11 TIME VALUE OF MONEY & CAPITAL INVESTMENT MODULE 10 TIME VALUE OF MONEY Time Value of Money is the concept that cash flows of dollar amounts have different values at different
More informationFINANCIAL MANAGEMENT (PART-19) DIVIDEND POLICY I. Dear students, Welcome to the lecture series on Financial Management.
FINANCIAL MANAGEMENT (PART-19) DIVIDEND POLICY I 1. INTRODUCTION Dear students, Welcome to the lecture series on Financial Management. Learning Objectives Introduction Types of Dividend Policy Major issues
More informationINVESTMENT APPRAISAL TECHNIQUES FOR SMALL AND MEDIUM SCALE ENTERPRISES
SAMUEL ADEGBOYEGA UNIVERSITY COLLEGE OF MANAGEMENT AND SOCIAL SCIENCES DEPARTMENT OF BUSINESS ADMINISTRATION COURSE CODE: BUS 413 COURSE TITLE: SMALL AND MEDIUM SCALE ENTERPRISE MANAGEMENT SESSION: 2017/2018,
More informationCAPITAL BUDGETING AND THE INVESTMENT DECISION
C H A P T E R 1 2 CAPITAL BUDGETING AND THE INVESTMENT DECISION I N T R O D U C T I O N This chapter begins by discussing some of the problems associated with capital asset decisions, such as the long
More informationFinancial Statements Analysis and Reporting Dr. Anil Kumar Sharma Department of Management Studies Indian Institute of Technology, Roorkee
Financial Statements Analysis and Reporting Dr. Anil Kumar Sharma Department of Management Studies Indian Institute of Technology, Roorkee Lecture - 49 DuPont Ratios Part II Welcome students. So, in the
More informationGlobal Financial Management
Global Financial Management Valuation of Cash Flows Investment Decisions and Capital Budgeting Copyright 2004. All Worldwide Rights Reserved. See Credits for permissions. Latest Revision: August 23, 2004
More informationChapter 6 Capital Budgeting
Chapter 6 Capital Budgeting The objectives of this chapter are to enable you to: Understand different methods for analyzing budgeting of corporate cash flows Determine relevant cash flows for a project
More informationIntroduction to Capital
Introduction to Capital What is Capital? Money invested in business to generate income The money, property, and other valuables which collectively represent the wealth of an individual or business The
More information(Refer Slide Time: 4:32)
Depreciation, Alternate Investment and Profitability Analysis. Professor Dr. Bikash Mohanty. Department of Chemical Engineering. Indian Institute of Technology, Roorkee. Lecture-4. Double-Declining Balance
More information(Refer Slide Time: 2:56)
Depreciation, Alternate Investment and Profitability Analysis. Professor Dr. Bikash Mohanty. Department of Chemical Engineering. Indian Institute of Technology, Roorkee. Lecture-5. Depreciation Sum of
More informationSUGGESTED SOLUTIONS/ ANSWERS EXTRA ATTEMPT EXAMINATIONS, MAY of 7 STRATEGIC MANAGEMENT ACCOUNTING SEMESTER-6
Question No. 1 (a) SUGGESTED SOLUTIONS/ ANSWERS EXTRA ATTEMPT EXAMINATIONS, MAY 26 1 of 7 Years 26 27 28 29 2020 2021 Total Budgeted sales in units 42,000 43,000 51,000 58,000 61,000 Purchases minus variable
More informationGame Theory and Economics Prof. Dr. Debarshi Das Department of Humanities and Social Sciences Indian Institute of Technology, Guwahati.
Game Theory and Economics Prof. Dr. Debarshi Das Department of Humanities and Social Sciences Indian Institute of Technology, Guwahati. Module No. # 06 Illustrations of Extensive Games and Nash Equilibrium
More informationWEEK 7 Investment Appraisal -1
WEEK 7 Investment Appraisal -1 Learning Objectives Understand the nature and importance of investment decisions. Distinguish between discounted cash flow (DCF) and nondiscounted cash flow (non-dcf) techniques
More informationCHAPTER 4 SIMPLE AND COMPOUND INTEREST INCLUDING ANNUITY APPLICATIONS. Copyright -The Institute of Chartered Accountants of India
CHAPTER 4 SIMPLE AND COMPOUND INTEREST INCLUDING ANNUITY APPLICATIONS SIMPLE AND COMPOUND INTEREST INCLUDING ANNUITY- APPLICATIONS LEARNING OBJECTIVES After studying this chapter students will be able
More informationCA. Sonali Jagath Prasad ACA, ACMA, CGMA, B.Com.
MANAGEMENT OF FINANCIAL RESOURCES AND PERFORMANCE SESSIONS 3& 4 INVESTMENT APPRAISAL METHODS June 10 to 24, 2013 CA. Sonali Jagath Prasad ACA, ACMA, CGMA, B.Com. WESTFORD 2008 Thomson SCHOOL South-Western
More informationFinancial Statements Analysis & Reporting Dr. Anil Kumar Sharma Department of Management Studies Indian Institute of Technology, Roorkee
Financial Statements Analysis & Reporting Dr. Anil Kumar Sharma Department of Management Studies Indian Institute of Technology, Roorkee Lecture 52 Cash Flow Statement - Introduction Part I Welcome students.
More informationFinancial Management Bachelors of Business Administration Study Notes & Tutorial Questions Chapter 1: Investment & Project Appraisal
Financial Management Bachelors of Business Administration Study Notes & Tutorial Questions Chapter 1: Investment & Project Appraisal Ibrahim Sameer AVID College Page 1 INTRODUCTION Capital budgeting is
More informationFINANCIAL ACCOUNTING (PART - 43) BRANCH ACCOUNTS - 1
FINANCIAL ACCOUNTING (PART - 43) BRANCH ACCOUNTS - 1 1. INTRODUCTION Dear students, I welcome you back on the lecture series of Financial accounting, today we are going to discuss Unit 8, and under Unit
More informationManagerial Accounting Prof. Dr. Varadraj Bapat School of Management Indian Institute of Technology, Bombay
Managerial Accounting Prof. Dr. Varadraj Bapat School of Management Indian Institute of Technology, Bombay Module - 6 Lecture - 11 Cash Flow Statement Cases - Part II Last two three sessions, we are discussing
More informationLecture 6 Capital Budgeting Decision
Lecture 6 Capital Budgeting Decision The term capital refers to long-term assets used in production, while a budget is a plan that details projected inflows and outflows during some future period. Thus,
More informationThe nature of investment decision
The nature of investment decision Investment decisions must be consistent with the objectives of the particular organization. In private-sector business, maximizing the wealth of the owners is normally
More informationChapter 02 Test Bank - Static KEY
Chapter 02 Test Bank - Static KEY 1. The present value of $100 expected two years from today at a discount rate of 6 percent is A. $112.36. B. $106.00. C. $100.00. D. $89.00. 2. Present value is defined
More informationBefore discussing capital expenditure decision methods, we may understand following three points:
J B GUPTA CLASSES 98184931932, drjaibhagwan@gmail.com, www.jbguptaclasses.com Copyright: Dr JB Gupta Chapter 7 Capital Budgeting (Capital Expenditure decisions) Chapter Index Method Based on Accounting
More informationPRACTICE TEST PAPER - 2 INTERMEDIATE (IPC): GROUP I PAPER 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT
PRACTICE TEST PAPER - 2 INTERMEDIATE (IPC): GROUP I PAPER 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT Question No. 1 is compulsory. Attempt any five questions from the remaining six questions. Working
More informationUNIT IV CAPITAL BUDGETING
UNIT IV CAPITAL BUDGETING Capital Budgeting: Capital budgeting is the process of making investment decision in long-term assets or courses of action. Capital expenditure incurred today is expected to bring
More information(Refer Slide Time: 0:50)
Depreciation, Alternate Investment and Profitability Analysis. Professor Dr. Bikash Mohanty. Department of Chemical Engineering. Indian Institute of Technology, Roorkee. Lecture-3. Declining Balance Method.
More informationMGT402 - COST & MANAGEMENT ACCOUNTING
MGT402 - COST & MANAGEMENT ACCOUNTING Lesson No. TOPICS Page No. 1 Cost Classification and Cost Behavior 1 2 Important Terminologies 11 3 Financial Statements 15 4 Financial Statements (Continued)....
More informationManagerial Accounting Prof. Dr. Varadraj Bapat Department School of Management Indian Institute of Technology, Bombay
Managerial Accounting Prof. Dr. Varadraj Bapat Department School of Management Indian Institute of Technology, Bombay Lecture - 30 Budgeting and Standard Costing In our last session, we had discussed about
More informationWHAT IS CAPITAL BUDGETING?
WHAT IS CAPITAL BUDGETING? Capital budgeting is a required managerial tool. One duty of a financial manager is to choose investments with satisfactory cash flows and rates of return. Therefore, a financial
More informationch11 Student: 3. An analysis of what happens to the estimate of net present value when only one variable is changed is called analysis.
ch11 Student: Multiple Choice Questions 1. Forecasting risk is defined as the: A. possibility that some proposed projects will be rejected. B. process of estimating future cash flows relative to a project.
More informationInternational Finance Prof. A. K. Misra Department of Management Indian Institute of Technology, Kharagpur
International Finance Prof. A. K. Misra Department of Management Indian Institute of Technology, Kharagpur Lecture - 25 Evaluation of Foreign Direct Investment Let us discuss section 25 that is on foreign
More informationMANAGEMENT ACCOUNTING (PART-6) UNIT- V BUDGETING FOR PROFIT PLANNING & CONTROL (PART-2)
MANAGEMENT ACCOUNTING (PART-6) UNIT- V BUDGETING FOR PROFIT PLANNING & CONTROL (PART-2) 1. INTRODUCTION Dear students, I welcome to you on lecture series of management accounting. Today we shall take up
More informationTopic 12 capital investment
Topic 12 capital investment Aldi press- release - There is a strong appetite among South Australians for an alternative place to shop and we are eager to show them the significant benefits that can come
More informationUNIT I INTRODUCTION TO ECONOMICS PART A (2 MARKS)
UNIT I INTRODUCTION TO ECONOMICS PART A (2 MARKS) 1. What is elasticity of Demand? Elasticity of demand may be defined as the degree of responsiveness of quantity demanded to a Change in price. 2. Define
More informationFinancial Statements and Closing Entries for a Merchandising Business
Ch.10 Financial Statements and Closing Entries for a Merchandising Business o Prepare financial statements for a merchandising business o Journalize adjusting and closing entries for a merchandising business
More informationLO 1: Cash Flow. Cash Payback Technique. Equal Annual Cash Flows: Cost of Capital Investment / Net Annual Cash Flow = Cash Payback Period
Cash payback technique LO 1: Cash Flow Capital budgeting: The process of planning significant investments in projects that have long lives and affect more than one future period, such as the purchase of
More informationManagerial Accounting Prof. Dr. Varadraj Bapat Department of School of Management Indian Institute of Technology, Bombay
Managerial Accounting Prof. Dr. Varadraj Bapat Department of School of Management Indian Institute of Technology, Bombay Lecture - 29 Budget and Budgetary Control Dear students, we have completed 13 modules.
More informationFINANCIAL MANAGEMENT (PART 16) DIVIDEND POLICY-II
FINANCIAL MANAGEMENT (PART 16) DIVIDEND POLICY-II 1. INTRODUCTION Dear Students, Welcome to the lecture series on Financial Management. Today in this lecture we shall cover the topic Dividend Policy. Under
More informationCost Analysis for Pollution Prevention
WMRC Fact Sheet TN03-080 March 2003 Cost Analysis for Pollution Prevention Pollution prevention can save money on the costs involved in an industrial production process, as well as provide new sources
More information(Refer Slide Time: 1:22)
Depreciation, Alternate Investment and Profitability Analysis. Professor Dr. Bikash Mohanty. Department of Chemical Engineering. Indian Institute of Technology, Roorkee. Lecture-8. Depreciation-Comparative
More informationIbrahim Sameer (MBA - Specialized in Finance, B.Com Specialized in Accounting & Marketing)
Ibrahim Sameer (MBA - Specialized in Finance, B.Com Specialized in Accounting & Marketing) Introduction A long term view of benefits and costs must be taken when reviewing a capital expenditure project.
More informationChapter 8. Capital Budgeting Cash Flow
Chapter 8 Capital Budgeting Cash Flow Learning Goals 1. Understand the motives for key capital budgeting expenditures and the steps in the capital budgeting process. 2. Define basic capital budgeting terminology.
More informationChapter 8 Net Present Value and Other Investment Criteria Good Decision Criteria
Chapter 8 Net Present Value and Other Investment Criteria Good Decision Criteria We need to ask ourselves the following questions when evaluating decision criteria Does the decision rule adjust for the
More informationINTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH AND REVIEW
INTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH AND REVIEW A FUNDAMENTAL STUDY ON LONG- TERM INVESTMENT DECISION P. Selvam* 1, N. Punitavati 2 1 Assistant Professor, Department of Management studies, Alpha
More informationChapter 7. Net Present Value and Other Investment Rules
Chapter 7 Net Present Value and Other Investment Rules Be able to compute payback and discounted payback and understand their shortcomings Understand accounting rates of return and their shortcomings Be
More informationInvestment Analysis and Project Assessment
Strategic Business Planning for Commercial Producers Investment Analysis and Project Assessment Michael Boehlje and Cole Ehmke Center for Food and Agricultural Business Purdue University Capital investment
More informationHPM Module_6_Capital_Budgeting_Exercise
HPM Module_6_Capital_Budgeting_Exercise OK, class, welcome back. We are going to do our tutorial on the capital budgeting module. And we've got two worksheets that we're going to look at today. We have
More informationChapter 9 Net Present Value and Other Investment Criteria. Net Present Value (NPV) Net Present Value (NPV) Konan Chan. Financial Management, Fall 2018
Chapter 9 Net Present Value and Other Investment Criteria Konan Chan Financial Management, Fall 2018 Topics Covered Investment Criteria Net Present Value (NPV) Payback Period Discounted Payback Average
More informationLecture 5 Present-Worth Analysis
Seg2510 Management Principles for Engineering Managers Lecture 5 Present-Worth Analysis Department of Systems Engineering and Engineering Management The Chinese University of Hong Kong 1 Part I Review
More informationUS03FBCA01- Financial Accounting and Management. Liquidity ratios Leverage ratios Activity ratios Profitability ratios
Unit 4 Ratio Analysis and Cost-Volume- Profit (CVP) Analysis Types of Ratio Several ratios, calculated from the accounting data, can be grouped into various classes according to financial activity or function
More informationCorporate Financial Management
Corporate Financial Management Professor James J. Barkocy There are three kinds of people: the ones that can count and the ones that can t. McGraw-Hill/Irwin Copyright 2012 by The McGraw-Hill Companies,
More informationCA - IPCC. Quality Education beyond your imagination...! Solutions to Assignment Problems in Financial Management_31e
CA - IPCC COURSE MATERIAL Quality Education beyond your imagination...! Solutions to Assignment Problems in Financial Management_31e Visit us @ www.gntmasterminds.com, Mail : mastermindsinfo@ymail.com
More informationGame Theory and Economics Prof. Dr. Debarshi Das Department of Humanities and Social Sciences Indian Institute of Technology, Guwahati
Game Theory and Economics Prof. Dr. Debarshi Das Department of Humanities and Social Sciences Indian Institute of Technology, Guwahati Module No. # 03 Illustrations of Nash Equilibrium Lecture No. # 03
More informationCAPITAL BUDGETING. Key Terms and Concepts to Know
CAPITAL BUDGETING Key Terms and Concepts to Know Capital budgeting: The process of planning significant investments in projects that have long lives and affect more than one future period, such as the
More informationFINA 1082 Financial Management
FINA 1082 Financial Management Dr Cesario MATEUS Senior Lecturer in Finance and Banking Room QA257 Department of Accounting and Finance c.mateus@greenwich.ac.uk www.cesariomateus.com Lecture 1 Introduction
More informationWEB APPENDIX 12C. Refunding Operations
Refunding Operations WEB APPENDIX 12C Refunding decisions actually involve two separate questions: (1) Is it profitable to call an outstanding issue in the current period and replace it with a new issue;
More informationBFC2140: Corporate Finance 1
BFC2140: Corporate Finance 1 Table of Contents Topic 1: Introduction to Financial Mathematics... 2 Topic 2: Financial Mathematics II... 5 Topic 3: Valuation of Bonds & Equities... 9 Topic 4: Project Evaluation
More informationUNIT 5 COST OF CAPITAL
UNIT 5 COST OF CAPITAL UNIT 5 COST OF CAPITAL Cost of Capital Structure 5.0 Introduction 5.1 Unit Objectives 5.2 Concept of Cost of Capital 5.3 Importance of Cost of Capital 5.4 Classification of Cost
More informationChapter 6 Making Capital Investment Decisions
Making Capital Investment Decisions Solutions to Even-Numbered Problems and Cases 6.2 Manitoba Railroad Limited (MRL) (a) Discount Rate 7% Cash Cash Net Cash Cumulative Year Outflows Inflows Flows Cash
More informationSOLUTIONS TO ASSIGNMENT PROBLEMS. Problem No.1
W.N.-1: Calculation of depreciation per annum Depreciation p.a. = SOLUTIONS TO ASSIGNMENT PROBLEMS Cost -Scrap Value Life W.N.-2: Calculation of PAT p.a. Problem No.1 80,000 5 10,000 = Rs.14,000 p.a. 2.
More informationPRINCIPLES OF FINANCIAL APPRAISAL
LOWER MEKONG PUBLIC POLICY INITIATIVE Technical Training in Project Appraisal for the Lower Mekong Basin PRINCIPLES OF FINANCIAL APPRAISAL Ho Chi Minh City Nov 28 - Dec 09, 2016 Financial Analysis: Basic
More informationTypes of investment decisions: 1) Independent projects Projects that, if accepted or rejects, will not affect the cash flows of another project
Week 4: Capital Budgeting Capital budgeting is an analysis of potential additions to fixed assets, long-term decisions involving large expenditures and is very important to a firm s future Therefore capital
More informationGame Theory and Economics Prof. Dr. Debarshi Das Department of Humanities and Social Sciences Indian Institute of Technology, Guwahati
Game Theory and Economics Prof. Dr. Debarshi Das Department of Humanities and Social Sciences Indian Institute of Technology, Guwahati Module No. # 03 Illustrations of Nash Equilibrium Lecture No. # 02
More informationIntroduction to the Hewlett-Packard (HP) 10B Calculator and Review of Mortgage Finance Calculations
Introduction to the Hewlett-Packard (HP) 0B Calculator and Review of Mortgage Finance Calculations Real Estate Division Faculty of Commerce and Business Administration University of British Columbia Introduction
More informationMGT201 Current Online Solved 100 Quizzes By
MGT201 Current Online Solved 100 Quizzes By http://vustudents.ning.com Question # 1 Which if the following refers to capital budgeting? Investment in long-term liabilities Investment in fixed assets Investment
More informationWhat s next? Chapter 7. Topic Overview. Net Present Value & Other Investment Criteria
What s next? Capital Budgeting: involves making decisions about real asset investments. Chapter 7: Net Present Value and Other Investment Criteria Chapter 8: Estimating cash flows for a potential investment.
More informationTime value of money-concepts and Calculations Prof. Bikash Mohanty Department of Chemical Engineering Indian Institute of Technology, Roorkee
Time value of money-concepts and Calculations Prof. Bikash Mohanty Department of Chemical Engineering Indian Institute of Technology, Roorkee Lecture - 01 Introduction Welcome to the course Time value
More informationPRIME ACADEMY CAPITAL BUDGETING - 1 TIME VALUE OF MONEY THE EIGHT PRINCIPLES OF TIME VALUE
Capital Budgeting 11 CAPITAL BUDGETING - 1 Where should you put your money? In business you should put it in those assets that maximize wealth. How do you know that a project would maximize wealth? Enter
More informationChapter 10 The Basics of Capital Budgeting: Evaluating Cash Flows ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS
Chapter 10 The Basics of Capital Budgeting: Evaluating Cash Flows ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS 10-1 a. Capital budgeting is the whole process of analyzing projects and deciding whether
More informationInvestment Decision Criteria. Principles Applied in This Chapter. Disney s Capital Budgeting Decision
Investment Decision Criteria Chapter 11 1 Principles Applied in This Chapter Principle 1: Money Has a Time Value. Principle 2: There is a Risk-Return Tradeoff. Principle 3: Cash Flows Are the Source of
More information