session 3 capital investment - Capital Budgeting Decisions...

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Capital Budgeting Decisions
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I. M. Pandey, Financial Management, 9th ed., Vikas. 2 Chapter Objectives Understand the nature and importance of investment decisions. Distinguish between discounted cash flow (DCF) and non- discounted cash flow (non-DCF) techniques of investment evaluation. Explain the methods of calculating net present value (NPV) and internal rate of return (IRR). Show the implications of net present value (NPV) and internal rate of return (IRR). Describe the non-DCF evaluation criteria: payback and accounting rate of return and discuss the reasons for their popularity in practice and their pitfalls. Illustrate the computation of the discounted payback. Describe the merits and demerits of the DCF and Non-DCF investment criteria. Compare and contract NPV and IRR and emphasise the superiority of NPV rule.
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I. M. Pandey, Financial Management, 9th ed., Vikas. 3 Nature of Investment Decisions The investment decisions of a firm are generally known as the capital budgeting, or capital expenditure decisions. The firm’s investment decisions would generally include expansion , acquisition , modernisation and replacement of the long-term assets. Sale of a division or business ( divestment ) is also as an investment decision. Decisions like the change in the methods of sales distribution , or an advertisement campaign or a research and development programme have long-term implications for the firm’s expenditures and benefits, and therefore, they should also be evaluated as investment decisions.
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I. M. Pandey, Financial Management, 9th ed., Vikas. 4 Features of Investment Decisions The exchange of current funds for future benefits. The funds are invested in long-term assets. The future benefits will occur to the firm over a series of years.
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I. M. Pandey, Financial Management, 9th ed., Vikas. 5 Importance of Investment Decisions Growth Risk Funding Irreversibility Complexity
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I. M. Pandey, Financial Management, 9th ed., Vikas. 6 Types of Investment Decisions One classification is as follows: Expansion of existing business Expansion of new business Replacement and modernisation Yet another useful way to classify investments is as follows: Mutually exclusive investments Independent investments Contingent investments
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I. M. Pandey, Financial Management, 9th ed., Vikas. 7 Investment Evaluation Criteria Three steps are involved in the evaluation of an investment: Estimation of cash flows Estimation of the required rate of return (the opportunity cost of capital) Application of a decision rule for making the choice
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I. M. Pandey, Financial Management, 9th ed., Vikas. 8
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This note was uploaded on 03/03/2011 for the course MARKETING 101 taught by Professor Singh during the Spring '11 term at Management Development Institute.

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session 3 capital investment - Capital Budgeting Decisions...

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