ºÝºÝߣ

ºÝºÝߣShare a Scribd company logo

Powerpoint Presentation on Financial Management-G.REGIO.pptx

•Download as PPTX, PDF•
•
G
GENELYNREGIO1

The document discusses capital budgeting techniques and their importance for business investment decisions. It defines capital budgeting and describes techniques like payback period, net present value (NPV), and internal rate of return (IRR). Payback period only considers cash flows until initial investment is recovered, while NPV and IRR account for time value of money. NPV indicates profitability based on whether the value is positive or negative, and IRR shows the discount rate where NPV equals zero. Sensitivity analysis and scenario planning can help address uncertainties in capital budgeting evaluations.

1 of 33
Download to read offline
Powerpoint Presentation on Financial Management-G.REGIO.pptx
Purpose and Scope to provide a comprehensive understanding of various capital budgeting techniques and their significance in aiding businesses to make informed investments decisions. seeks to offer practical insights into the application of key techniques to assess the feasibility, risks, and potential returns associated with long-term investment projects.
Definition of Capital Budgeting Capital budgeting is the process of evaluating and selecting long-term investments that are consistent with the firm’s goal of maximizing owner wealth and making prudent investment decisions regarding long-term assets and projects. Importance of Capital Budgeting Techniques for Businesses Capital budgeting techniques plays a crucial role in the strategic decision-making process of businesses, serving as a compass for prudent investment choices.
A. Overview of Long-Term Investment Decision Making Long term investment decision- making entails a strategic process in which businesses assess and select investment opportunities that are expected to yield returns over an extended period.
B. Role of Capital Budgeting in Financial Management The role of capital budgeting in financial management is crucial as it facilitates the effective allocation of financial resources to maximize long-term profitability and sustainability. It assists in the evaluation and selection of investment projects that align with the organization’s strategic goals and financial objectives.
Powerpoint Presentation on Financial Management-G.REGIO.pptx
Payback periods are commonly used to evaluate proposed investments. The payback period is the amount of time required for the firm to recover its initial investment in a project, as calculated from cash inflows. In the case of annuity, the payback period can be found by dividing the initial investments by the annual cash inflow.
The Decision Criteria: When the payback period is used to make accept-reject decisions, the decision criteria are as follows:  If the payback period is less than the maximum acceptable payback period, accept the project.  If the payback period is greater than the maximum acceptable payback period, reject the project.
Powerpoint Presentation on Financial Management-G.REGIO.pptx
Provides straightforward and easy to understand measure of investment risk Promotes a focus on short-term profitability Aids in setting investment time horizons Subjectively determined number fails to take fully into account the time factor in the value of money failure to recognize cash flows that occur after the payback period.
The payback period does not fully account the time value of money.
Payback period fails to recognize cash flows that occur after the payback period.
Net Present Value (NPV) is a financial metric used in capital budgeting to assess the profitability of an investment or project. Net Present Value (NPV) considers the time value of money. It is considered a sophisticated capital budgeting technique.
Powerpoint Presentation on Financial Management-G.REGIO.pptx
A positive NPV indicates that the investment is expected to generate returns higher than the discount rate and is, therefore, profitable. On the other hand, a negative NPV suggests that the investment may not meet the desired rate of return and may not be financially viable.
The Decision Criteria: If the NPV is greater than $0, accept the project. If the NPV is less than $0, reject the project.
Powerpoint Presentation on Financial Management-G.REGIO.pptx
Powerpoint Presentation on Financial Management-G.REGIO.pptx
Spreadsheet Use
The Internal Rate of Return (IRR) is a financial metric used to evaluate the potential profitability of an investment or project which represents the discount rate at which the net present value (NPV) of future cash flows equals zero. The internal rate of return (IRR) is the most widely used sophisticated capital budgeting technique.
It is the compound annual rate of return that the firm will earn if it invests in the projects and receives the given cash inflows.
The Decision Criteria If the IRR is greater than the cost of capital, accept the project. If the IRR is less than the cost of capital, reject the project.
Calculating the IRR The actual calculation by hand of the IRR is no easy chore. It involves complex trial and error technique. The formula to solve for IRR is typically iterative, and it is commonly done using software, financial calculators, or spreadsheet programs like Microsoft Excel.
To calculate the IRR manually: 1. Write down all the cash flows from the investment or project. These cash flows could include initial investments and subsequent cash flows from the project over its life. 2. Set up the equation for the NPV of the project, with the discount rate (which is the IRR) as the variable. 3. Use techniques such as trial and error, interpolation, or financial calculators to find the discount rate that makes the NPV of the project equal to zero.
Powerpoint Presentation on Financial Management-G.REGIO.pptx
Calculator Use To find the IRR using preprogrammed function in a financial calculator, the key strokes for each project are the same as shown for the NPV calculation, except that the last two NVP keystrokes are replaced by a single IRR keystroke.
Spreadsheet Use
Comparing NPV and IRR Techniques Net Present Value (NPV) and Internal Rate Return (IRR) are both crucial capital budgeting techniques used to evaluate the viability of investment projects. NPV calculates the present value of expected cash flows by discounting them at a specified rate, whereas IRR determines the discount rate that equates present value of cash inflows with the initial investment.
Financial managers must apply appropriate decision techniques to assess whether the project creates value for stakeholders. Net present value (NPV) and internal rate return (IRR) are the generally preferred capital budgeting techniques. Both use the cost capital as the required return needed to compensate share-holders for undertaking projects with the same risk as that of the firm. The appeal of NPV and IRR stems from the fact that both indicate whether a proposed investment creates or destroys shareholder value.
Common Challenges and Criticisms of Capital Budgeting Techniques 1. Uncertainty and Risk Assessment: Difficulty in accurately forecasting future cash flows and risk factors, leading to potential inaccuracies in the evaluation process. 2. Exclusion of Intangible Factors: Inability to incorporate qualitative aspects such as social and environmental impacts. 3. Complexity in Evaluation: Challenges in analyzing complex projects with non-conventional cash flow patterns, leading to potential limitations in accurately assessing the project’s financial implications.
How to Address the Challenges and Criticisms of Capital Budgeting Techniques 1. Sensitivity Analysis: Conduct sensitivity analyses to assess the impact of changing variables on the investment outcome, providing insights into the potential risks and uncertainties associated with the project. 2. Incorporating Qualitative Factors: Integrate qualitative considerations such as environmental impact, social implications, and managerial flexibility into the evaluation process. 3. Scenario Planning: Utilize scenario planning to anticipate and prepare for various future possibilities, enabling a more robust evaluation of the project’s resilience under different economic, market and regulatory conditions.
Capital budgeting techniques serve as essential tools for business to make informed investment decisions, considering the long-term profitability and sustainability of projects. While these techniques provide valuable insights into the financial viability of investments, they are not without limitations. To address these challenges, it is imperative to adopt holistic approach to enhance the effectiveness of capital budgeting processes.
Powerpoint Presentation on Financial Management-G.REGIO.pptx

More Related Content

Powerpoint Presentation on Financial Management-G.REGIO.pptx

  • 2. Purpose and Scope to provide a comprehensive understanding of various capital budgeting techniques and their significance in aiding businesses to make informed investments decisions. seeks to offer practical insights into the application of key techniques to assess the feasibility, risks, and potential returns associated with long-term investment projects.
  • 3. Definition of Capital Budgeting Capital budgeting is the process of evaluating and selecting long-term investments that are consistent with the firm’s goal of maximizing owner wealth and making prudent investment decisions regarding long-term assets and projects. Importance of Capital Budgeting Techniques for Businesses Capital budgeting techniques plays a crucial role in the strategic decision-making process of businesses, serving as a compass for prudent investment choices.
  • 4. A. Overview of Long-Term Investment Decision Making Long term investment decision- making entails a strategic process in which businesses assess and select investment opportunities that are expected to yield returns over an extended period.
  • 5. B. Role of Capital Budgeting in Financial Management The role of capital budgeting in financial management is crucial as it facilitates the effective allocation of financial resources to maximize long-term profitability and sustainability. It assists in the evaluation and selection of investment projects that align with the organization’s strategic goals and financial objectives.
  • 7. Payback periods are commonly used to evaluate proposed investments. The payback period is the amount of time required for the firm to recover its initial investment in a project, as calculated from cash inflows. In the case of annuity, the payback period can be found by dividing the initial investments by the annual cash inflow.
  • 8. The Decision Criteria: When the payback period is used to make accept-reject decisions, the decision criteria are as follows:  If the payback period is less than the maximum acceptable payback period, accept the project.  If the payback period is greater than the maximum acceptable payback period, reject the project.
  • 10. Provides straightforward and easy to understand measure of investment risk Promotes a focus on short-term profitability Aids in setting investment time horizons Subjectively determined number fails to take fully into account the time factor in the value of money failure to recognize cash flows that occur after the payback period.
  • 11. The payback period does not fully account the time value of money.
  • 12. Payback period fails to recognize cash flows that occur after the payback period.
  • 13. Net Present Value (NPV) is a financial metric used in capital budgeting to assess the profitability of an investment or project. Net Present Value (NPV) considers the time value of money. It is considered a sophisticated capital budgeting technique.
  • 15. A positive NPV indicates that the investment is expected to generate returns higher than the discount rate and is, therefore, profitable. On the other hand, a negative NPV suggests that the investment may not meet the desired rate of return and may not be financially viable.
  • 16. The Decision Criteria: If the NPV is greater than $0, accept the project. If the NPV is less than $0, reject the project.
  • 20. The Internal Rate of Return (IRR) is a financial metric used to evaluate the potential profitability of an investment or project which represents the discount rate at which the net present value (NPV) of future cash flows equals zero. The internal rate of return (IRR) is the most widely used sophisticated capital budgeting technique.
  • 21. It is the compound annual rate of return that the firm will earn if it invests in the projects and receives the given cash inflows.
  • 22. The Decision Criteria If the IRR is greater than the cost of capital, accept the project. If the IRR is less than the cost of capital, reject the project.
  • 23. Calculating the IRR The actual calculation by hand of the IRR is no easy chore. It involves complex trial and error technique. The formula to solve for IRR is typically iterative, and it is commonly done using software, financial calculators, or spreadsheet programs like Microsoft Excel.
  • 24. To calculate the IRR manually: 1. Write down all the cash flows from the investment or project. These cash flows could include initial investments and subsequent cash flows from the project over its life. 2. Set up the equation for the NPV of the project, with the discount rate (which is the IRR) as the variable. 3. Use techniques such as trial and error, interpolation, or financial calculators to find the discount rate that makes the NPV of the project equal to zero.
  • 26. Calculator Use To find the IRR using preprogrammed function in a financial calculator, the key strokes for each project are the same as shown for the NPV calculation, except that the last two NVP keystrokes are replaced by a single IRR keystroke.
  • 28. Comparing NPV and IRR Techniques Net Present Value (NPV) and Internal Rate Return (IRR) are both crucial capital budgeting techniques used to evaluate the viability of investment projects. NPV calculates the present value of expected cash flows by discounting them at a specified rate, whereas IRR determines the discount rate that equates present value of cash inflows with the initial investment.
  • 29. Financial managers must apply appropriate decision techniques to assess whether the project creates value for stakeholders. Net present value (NPV) and internal rate return (IRR) are the generally preferred capital budgeting techniques. Both use the cost capital as the required return needed to compensate share-holders for undertaking projects with the same risk as that of the firm. The appeal of NPV and IRR stems from the fact that both indicate whether a proposed investment creates or destroys shareholder value.
  • 30. Common Challenges and Criticisms of Capital Budgeting Techniques 1. Uncertainty and Risk Assessment: Difficulty in accurately forecasting future cash flows and risk factors, leading to potential inaccuracies in the evaluation process. 2. Exclusion of Intangible Factors: Inability to incorporate qualitative aspects such as social and environmental impacts. 3. Complexity in Evaluation: Challenges in analyzing complex projects with non-conventional cash flow patterns, leading to potential limitations in accurately assessing the project’s financial implications.
  • 31. How to Address the Challenges and Criticisms of Capital Budgeting Techniques 1. Sensitivity Analysis: Conduct sensitivity analyses to assess the impact of changing variables on the investment outcome, providing insights into the potential risks and uncertainties associated with the project. 2. Incorporating Qualitative Factors: Integrate qualitative considerations such as environmental impact, social implications, and managerial flexibility into the evaluation process. 3. Scenario Planning: Utilize scenario planning to anticipate and prepare for various future possibilities, enabling a more robust evaluation of the project’s resilience under different economic, market and regulatory conditions.
  • 32. Capital budgeting techniques serve as essential tools for business to make informed investment decisions, considering the long-term profitability and sustainability of projects. While these techniques provide valuable insights into the financial viability of investments, they are not without limitations. To address these challenges, it is imperative to adopt holistic approach to enhance the effectiveness of capital budgeting processes.