Capital budgeting
- 2. Overview Meaning of capital budgeting Definition of capital budgeting Importance of capital budgeting Types of capital budgeting.
- 3. Meaning of capital budgeting
- 4. Definition
- 5. Importance Value maximization: Maximizes the market value of the firm(share value of the firm). Cost minimization: it minimizes the cost of capital and cost of financing. Increase in share price: capital structure maximizes the companys market share by increasing the earnings per share of the ordinary shareholders. Investing opportunity: Capital structure increases the ability of the copany to fund new wealth increases the investing opportunities.
- 6. Complex capital structure pattern Equity shares and debentures (i.e. long term debt including bonds etc.) Equity shares and preference shares. Equity shares, preference shares and debentures (i.e. long term debt including bonds, etc).
- 7. Techniques used Many formal methods are used in capital budgeting , including the techniques such as: Net present value. Profitability index. Internal rate of return. Payback period. Accounting rate of return.
- 8. Net present value It is the difference between present value of cash inflows and the present value of cash outflows. NPV= =1 (1+) 0 駒 = net cash inflows during the periodt 0 = total initial investment costs. r = discount rate. t = number of time period
- 9. Profitability index It is an investment appraisal technique calculated by dividing the present value of future cash flows of a project by initial investment required for the project. Profitability index =
- 10. Internal rate of return It is the discount rate that causes the net present value of future cash flows from an equal investment equal to zero. 稲 = + 巨倹署 ( ) 巨倹署 巨倹署 = Low discount rate = higher discount rate. NPV1= Higher net present value NPV2 = Lower net present value
- 11. PAYBACK PERIOD It is the time in which the initial cash outflow of an investment is expected to be covered from the cash inflows generated bu the investment. Payback period = 稲 稲 稲 倹
- 12. Accounting rate of return It is ratio of estimated accounting profit of a project to the average investment made in the project. Accounting rate of return = 倹 稲