Capital Budgeting Decisions By Heena Malhotra

Payback Period Traditional or Non Discounting ccounting Rat of Return (ARR) Capital Budgeting Techniques Net Present Value (NPV) Profitability Index (PI) Time adjusted or Discounted Cash Flows Internal Rate of Return (IRR) Modified Internal Rate of Return (MIRR) Discounted Payback By Heena Malhotra

Accounting (Book) Rate of Return (ARR) Accounting rate of return Averageannualnetincome Investment By Heena Malhotra

Acceptance Rule o In case of multiple options = Higher ARR O In case of single optionARR Cut of Rate By Heena Malhotra

Advantages of ARR o This technique uses readily available data that is routinely generated for financial reports and does not require any special procedures to generate data. o This method may also mirror the method used to evaluate performance on the operating results of an investment.Using the same procedure in both decision-making and performance evaluation ensures consistency. o Lastly, the calculation of the accounting rate of return method considers all net incomes over the entire life of the project and provides a measure of the investment's profitability.

The ARR can be computed by following methods as follows: (a) Version 1: Annual Basis Profit after Depreciation Investment in the begining of the year Year 80,000-26.67% 3,00,000 2 230,000-34.78% 2, 30,000 80,000 -50% 1.60.000 200776+34 /8%+50 00% AverageARR: -37.15%

(b) Version 2: Total Investment Basis Average Annual Profit Investment in the begining (80,000 + 80,000 + 80,000)/3100 ARR x100 26.67% 3,00,000 (c) Vrsion 3: Average Investment Basis Average Annual Profit Average Investment x100 Average Investment 3,00,00090,000)/21,95,000 Or, 2Initial Investment Salvage Value) Salvage Value 12R3,00,000-90,000)90,000 1,95,000 80,000 x100-41.03% 1,95,000 - By Heena Malhotra

Limitations of ARR The accounting rate of return technique, like the payback period technique, ignores the time value of money and considers the value of all cash flows to be equal. The technique uses accounting numbers that are dependent on the organizations choice of accounting procedures, and different accounting procedures, e.g depreciation methods, can lead to substantially different amounts for an investment's net income and book values. The method uses net income rather than cash flows; while net income is a useful measure of profitability, the net cash flow is a better measure of an investment's performance Furthermore, inclusion of only the book value of the invested asset ignores the fact that a project can require commitments of working capital and other outlays that are not included in the book value of the project. By Heena Malhotra

Acceptance Rule o In case of multiple options = Higher ARR O In case of single optionARR Cut of Rate By Heena Malhotra

Payback Period Traditional or Non Discounting ccounting Rat of Return (ARR) Capital Budgeting Techniques Net Present Value (NPV) Profitability Index (PI) Time adjusted or Discounted Cash Flows Internal Rate of Return (IRR) Modified Internal Rate of Return (MIRR) Discounted Payback By Heena Malhotra

In this case the rate of return can be calculated as follows: TotalProfift+No.of yearsx100 Averageinvestment/Initialinvestment (a) If Initial Investment is considered then, 460,000:5years 100= 10,00,000 410:00,000 x100-9.2% By Heena Malhotra

Payback Period Traditional or Non Discounting ccounting Rat of Return (ARR) Capital Budgeting Techniques Net Present Value (NPV) Profitability Index (PI) Time adjusted or Discounted Cash Flows Internal Rate of Return (IRR) Modified Internal Rate of Return (MIRR) Discounted Payback By Heena Malhotra

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Baliram Kumar

3 years ago

thanks sir

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Dr Jagadesh Kumar

3 years ago

thank you ...sir ..hope you found it useful and do share it

Aarti Goswami

7 months ago

arr formulas kiskooi yaad rakgma haiii aapne 3_4 btaye kbhh profit kbbh net income kyaa krna haii plzz help me

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Aarti Goswami

7 months ago

maam confused

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