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

Payback Reciprocal The payback reciprocal can be calculated as follows: PaybackReciprocale ntialimvestment Average anualcashnflow Initialinvestment Example Suppose a project requires an initial investment of 20,000 and it would give annual cash inflow of 4,000. The useful life of the project is estimated to be 5 years. In this example payback reciprocal will be: 24,000x100-20% 20,000 By Heena Malhotra

Payback Reciprocal o As the name indicates it is the reciprocal of payback period. A major drawback of the payback period method of capital budgeting is that it does not indicate any cut off period for the purpose of investment decision. o It is, however, argued that the reciprocal of the payback would be a close approximation of the Internal Rate of Return if the life of the project is at least twice the payback period and the project generates equal amount of the annual cash inflows. o In practice, the payback reciprocal is a helpful tool for quickly estimating the rate of return of a project provided its life is at least twice the payback period. By Heena Malhotra

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

Example suppose Times Ltd. is going to invest in a project a sum of 73,00,000 having a life span of 3 years. Salvage value of machine is 90,000. The profit before depreciation for each year is 1,50,000 The Profit after Tax and value of Investment in the Beginning and at the End of each year shall be as follows: Year Profit Before Depreciation Profit after Value of Investment in Depreciation R) Dep. (R) Beginning End 1,50,000 1,50,000 1,50,000 70,000 70,000 70,000 80,000 80,000 80,000 3,00,000 2,30,000 2,30,000 1,60,000 1,60,000 90,000 By Heena Malhotra

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

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

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Mushtaq Kumar

2 years ago

thanks ma'am ample information you provided about the INTERNET

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JRF Ritu Boora

9 months ago

mam cut off rate minimum rate of earning hoti hai kya

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Kanupriya Raghav

a year ago

ok still I'm not satisfied... I'm asking about the long question in which you've calculated from 3versions in which profit is 80000...in next video also the question gives different ARR percentage if we calculate it normally and averagely

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Heena

a year ago

quite obviously hum different amounts lenge to hmara answer different hi aayega, same kyu aana chahiye??
I'm understanding your point but different formulas , different amounts will always give you different answers.

Hadiya Khan

a year ago

maam when we cal it through different formulas answeres are different Whats the reason that we are not getting same answere as question is same

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Heena

a year ago

Because we are using different amounts, for example, agr hum 10000/100000 aur 20000/100000 to ans to different aayega , Issi tarah denominator change hoga to ans different aayega :)
Same ans tab aata h tab hum aa jakar same amounts use kr rhe hote h :)

Kanupriya Raghav

a year ago

Why is the ARR different from all the formulas?

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Heena

a year ago

because it considers accounting profits and other considers cash flows.

Kanupriya Raghav

a year ago

No I meant...the different ways are there in the video to calculate ARR but all should provide same answer but they're not ..So that I'm asking..Why is it yielding different returns when we are using different formulas?

Heena

a year ago

hum different amounts see calculation kr rhe h to ARR different hi aayegi. :) Check out the next video usme ek aur question h :)