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

Concept of Time Value of Money Let's start a discussion on Time Value of Money by taking a very simple scenario. If you are offered the choice between having 10,000 today and having 10,000 at a future date, you will usually prefer to have 10,000 now. Similarly, if the choice is between paying 10,000 now or paying the same 10,000 at a future date, you will usually prefer to pay 10,000 later. It is simple common sense. In the first case by accepting? 10,000 early, you can simply put the money in the bank and earn some interest. Similarly in the second case by deferring the payment, you can earn interest by keeping the money in the bank. Therefore the time gap allowed helps us to make some money. This incremental gain is time value of money Now let me ask a question, if the bank interest was zero (which is generally not the case), what would be the time value of money? As you rightly guessed it would also be zero. By Heena Malhotra

Compounding is the process of calculating future values of cash flows where discounting means finding present value of cash flows Compounding Present Value Future Value Discounting By Heena Malhotra

Therefore, we can say that the present value of a sum of money to be received at a future date is determined by discounting the future value at the interest rate that the money could earn over the period. This process is known as Discounting The present value interest rate or the future value interest rate is known as the discount rate. This discount rate is the rate with which the present value or the future value is traded off. A higher discount rate will result in a lower value for the amount in the future. This rate also By Heena Malhotra

Where, FV Future value n years hence iRate of interest per annum n Number of years for which discounting is done. As mentioned earlier, computation of P may be simple if we make use of either the calculator or the Present Value table showing values of (1+ for various time periods/per annum interest rates. For positive i, the factor (1i) is always less than 1, indicating thereby, future amount has smaller present value. By Heena Malhotra

Present value interest factor of 1 per period at i% for n periods, PVIF(i,n). 0.980 0.97 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.942 0.915 0.889 0.924 0.888 0.855 0.9060.8630.822 0.784 07470.7130.681 0.650 0.621 0.888 0.837 0.790 0.7 0.990 2 0.980 3 0.971 4 0.961 5 0.951 6 0.942 7 0.933 0.871 0.813 0.760 0.711 0.665 .623 0.583 0.547 0.513 8 0.923 9 0.864 0.823 0.840 0.816 0.794 0.772 0.751 0.792 0.763 0.735 0.708 0.683 46 0.705 0.666 0.630 0.596 0.564 0.853 0.789 0.731770.627 0.582 0540 0.502 0.467 0.837 0.766 0.703 0.914 0.592 0.5440.500 0.460 0.424 0.558 0.508 0.463 0422 820 0.744 0.676 0.614 0.804 0.722 0.650 0.5 0.788 0.701 0.625 0.5570.497 0.4440.397 0.356 0.319 0.773 0.681 0.601 0.758 0.661 0.577 0.50 0.743 0642 0.555 0481 0417 0.362 0.315 0.275 0.239 0.728 0.623 0.534 0.714 0.605 0.513 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180 0.896 120.887 13 0.879 14 0.870 85 0.527 0.475 0.429 0.388 0.350 0.530 0.469 0.415 0.368 0.326 0.290 0.442 0.388 0.340 0.299 0.263 16 0.853 17 0.844 18 0.836 0.458 0.436 0.394 0.339 0.292 0.252 0.218 0.371 0.317 0.270 0.231 0.198

-=0.909 (1+i) (1+10%) (1.1) (1+1)2_ (1+1096)2= (1.1)2=0.826 By Heena Malhotra

Period | 11% 12% 13% 14% 15%| 16% 17% 18% 19% 20% 10.901 0.893 0.885 0.877 0870 0862 0.855 0.847 0.840 0.833 20812 0.797 0.783 0.769 0.7560.743 0.731 0.718 0.706 0.694 3 0.731 0712 0693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 0693 0675 658 064 0593 0579 40.659 0.636 0613 0.592 05720.552 0.534 0516 0499 0482 5 0.593 0.567 0543 0519 0497 0476 0456 0437 0419 0402 By Heena Malhotra

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