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Unformatted text preview: J B GUPTA CLASSES 98184931932, [email protected] , www.jbguptaclasses.com Copyright: Dr JB Gupta Chapter 7 Chapter 7 Chapter 7 Chapter 7 Capital Budgeting Capital Budgeting Capital Budgeting Capital Budgeting (Capital Expenditure decisions) Chapter Index x Method Based on Accounting Profit x Methods Based on Cash flows (A) Pay Back Period (PBP) Method (B) Discounted Cash Flow Analysis x Borrowed Funds And Capital Budgeting x Capital Rationing x Inflation x Capital Recovery Factor (CRF) x Foreign Exchange and Capital Budgeting: x Risk and Uncertainty x Sensitivity Analysis x Accounting Rate of Return x CPM, PERT and Simulation Model x Mutual Exclusive Projects x IRR Complications x Terminal Value Method x Adjusted Present Value (APV) x General Problems x Extra Practice (Must Do) x Extra Practice (Optional) x Appendix A (Some Assumptions in Capital Budgeting Problems) x Theoretical Aspects (i) Project (ii) Feasibility of the Project (iii) Promoters Contribution to the Project (iv) NPV (v) IRR (vi) PI (vii) NPV Model for the Evolution of Foreign Investment Proposals (viii) Capital Budgeting Under Inflationary Conditions (ix) Capital Rationing 2 (x) Certainty Equality Approach (xi) Social Cost Benefit (xii) Sensitivity Analysis CAPITAL expenditure decisions are concerned with decisions regarding investment of funds in fixed and current assets for getting returns for a number of years. Such decisions are extremely important because of following reasons: (i) Substantial sums of money are involved. (ii) It may be difficult to reverse the decision. (iii) Such decisions have considerable impact on the future of a firm. Sometimes, the success or failure of the firm may depend upon a single investment decision. Before discussing capital expenditure decision methods, we may understand following three points: (i) Cost of capital. (ii) Time Value of Money. (iii) Cash inflow from operation: There are two criteria for capital expenditure decisions: (a) Accounting profit, (b) Cash flow. Under Cash flow criterion, we require cash inflow, i.e., post-tax profit before non-cash items. Important non-cash items are depreciation and apportioned fixed costs. By apportioned fixed costs we mean, such fixed costs which are not being incurred because of the proposal but which are just being charged for determining accounting profit. CRITERIA FOR CAPITAL CRITERIA FOR CAPITAL CRITERIA FOR CAPITAL CRITERIA FOR CAPITAL EXPENDITURE DECISION EXPENDITURE DECISION EXPENDITURE DECISION EXPENDITURE DECISIONS As stated above, there are two criteria for capital expenditure decisions: (i) Accounting profit, (ii) Cash flow. Under Accounting profit criterion, only one method is there. It is known accounting rate of return or unadjusted rate of return. (It is known as unadjusted rate of return because for its calculations, we do not make any adjustment on account of time value of money). In case of cash flow criterion, cash inflows and cash outflows because of the proposal are considered for the...
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This note was uploaded on 01/28/2012 for the course MANAGEMENT 201 taught by Professor Refer during the Spring '11 term at UNO.
- Spring '11