Beruflich Dokumente
Kultur Dokumente
&
Cash flow Analysis
www.a2zmba.com
Meaning
Capital budgeting
making investment
expenditure. It is
benefits of which
received over period
year.
www.a2zmba.com
is the process of
decisions in capital
an expenditure the
are expected to be
of time exceeding one
Example:
Cost of acquisition of permanent assets as land
www.a2zmba.com
www.a2zmba.com
www.a2zmba.com
Initial Investment
b)
c)
www.a2zmba.com
www.a2zmba.com
Techniques of capital
budgeting
(A) Discounted Cash Flow criteria
1.
2.
3.
4.
www.a2zmba.com
1. Net
Present
Value
(NPV):
It is one of the discounted cash flow
techniques explicitly recognising the time
value of money.
Acceptable Criteria:
If NPV > 0
- Accept
Not accept )
www.a2zmba.com
n
NPV =
C1
--------- - C0
t =1 (1+k)t
Where,
C1,C2 represent net cash inflows in
year 1, 2
K is the opportunity cost of capital.
C0
is the initial cost of the
investment and n is the expected
life of the investment.
www.a2zmba.com
Ct
INVT. = ------- - C0 = 0
t=1 (1+r)t
Ct = Cash flow at the end of the
r = Internal Rate of Return
n = life of the project
www.a2zmba.com
project
Example:
Year
0
1
2
3
4
Steps:
NCF
-1,00,000 (Investment)
30,000
30,000
40,000
45,000
802
r = 15 + (16-15) -------2,161
= 15 + (1) 0.37
r = 15.37%
Acceptance Rule:
If
r>k
Accept
r<k
Reject
r = k May accept
or reject
www.a2zmba.com
www.a2zmba.com
Example :
Rs.1,12,350
--------------- = 1.1235
Rs.1,00,000
Project is Accepted
Acceptance
If PI > 1
If PI < 1
If PI = 1
Rule ;
Accept
Reject
May accept or reject
www.a2zmba.com
(Non-
www.a2zmba.com
Example:
Assume that a project requires an outlay of
Rs.50000 and yields an annual cash inflow of
Rs.12,500 for 7 years. The PBP for the project is;
Rs.50,000
PBP = ------------- = 4 years
Rs. 12,500
www.a2zmba.com
4
3000
Solution :
Year
CF
Cumulative CF
1
8000
8000
2
7000
15000
3
4000
19000
4
3000
22000
When we add up the cash flows, we find that in the
first three years Rs.19,000 of the original outlays is
recovered. In the fourth year cash inflow generated
is Rs.3000 and only Rs.1000 (20,000 19000) of the
original outlay remains to be recovered.
www.a2zmba.com
www.a2zmba.com
Example:
Year
1
2
3
4
5
Cash inflow 8000 10000 11000 10000 12000
Initial Investment ; Rs.40000
Solution:
8000+10000+11000+10000+12000
Avg. Income = -----------------------------------------5 years
= Rs. 10,200
www.a2zmba.com
Rs. 40000
Avg. Investment = ----------- = Rs.20,000
2
10,200
ARR = ----------- x 100
20,000
ARR = 51%
Acceptance rule: If ARR is higher the the
minimum
rate
established
by
the
management and reject those projects
which has ARR less than the minimum rate.
www.a2zmba.com
Reinvestment Assumption
The IRR method is assumed to imply that
www.a2zmba.com
www.a2zmba.com
MIRR: Procedure
MIRR involves finding the Terminal Value (TV) of
www.a2zmba.com
Cash Outflowt
PVC = n ------------------t=0
(1+r)t
TV =
Cash Inflowt (1+r)n-t
Step 2: Calculate the terminal value (TV) of
the inflows expected from the project:
Step3: Obtain MIRR BY
PVC = TV / (1+MIRR)n
MIRR = (TV/PVC)1/n 1
www.a2zmba.com
Example:
Pentagon ltd. is evaluating a project that has the
following cash flows:
Year
0
CF -120
1
-80
2
20
3
60
4
80
5
100
6
120
(Rs. in million)
189.6=467/(1+MIRR)6
(1+MIRR)6 = 2.463
1 + MIRR = (2.463)1/6 = 1.162
MIRR = .162 OR 16.2
www.a2zmba.com
C0
-100
100
www.a2zmba.com
C1
120
-120
IRR
20%
20%
NPV at 10%
9
-9
www.a2zmba.com
C1
C2
C3
NPV
IRR
at 9%
(N-M)
-1260
140
www.a2zmba.com
1370
20
10%
Scale of Investment
Cash Flow (Rs)
Project
A
B
C0
-1,000
-100,000
C1
1,500
120,000
NPV
at 10%
364
9,080
IRR
50%
20%
When the cash outlays are different sizes, the NPV methods
gives unambiguous results.
Project
(A-B)
C0
-99000
C1
118,500
NPV at 10%
IRR
8,727
19.7%
C0
10,000
10,000
Both the
Rs.10,000
to choose
consistent
C1
C2
C3
C4
C5
NPV at 10%
IRR
12,000
0
20,120
908
2,495
20%
15%
Project Y is accepted.
www.a2zmba.com