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

Advantages of IR This method makes use of the concept of time value of money All the cash tlows in the project are considered IRR is easier to use as instantaneous understanding of desirability can be deternined by comparing t with the costof a ria By Heena Malhotra

Limitations of IRR O The calculation process is tedious O The IRR approach creates a peculiar situation if we compare two projects with different inflow/outflow patterns. O It is assumed that under this method Intermediate cash inflows of a proposal are reinvested at a rate equal to the IRR. It is ridiculous to imagine that the same firm has a ability to reinvest the cash flows at a rate equal to IRR. By Heena Malhotra

MIRR O In MIRR technique, all the intermediate cash inflow are considered to be reinvested at cost of capital till the end of the project and a single terminal inflow is computed and there after MIRR is determined. By Heena Malhotra

Internal Rate of Return Method (IRR) IRR Definition: Internal rate of return for an investment proposal is the discount rate that equates the present value of the expected net cash flows with the initial cas outflow By Heena Malhotra

An investment of 1,36,000 yields the following cash inflows (profits before depreciation but after tax). Determine MIRR considering 8% as cost of capital. Year 30,000 40,000 60,000 30,000 20,000 1,80,000 2 SOLUTION Year- 0, Cash flow-1,36,000 The MIRR is calculated on the basis of investing the inflows at the cost of capital. The table below shows the valued of the inflows if they are immediately reinvested at 8%. By Heena Malhotra

Future value interest factor of 1 per period at i% for n periods, FVIF(i,n). (The Compound Sum of One Rupee) 1% 596 696 796 8% 1.100 2 1.020 1.040 1061 1.082 1.103 1.124 .145 1.166 1.188 1.210 3 1.030 1.061 1.093 1.125 1.158 1.191 1.225 1.260 1295 1.331 1.464 11.010 1.020 1.030 .040 1.050 .060 1.070 1.080 1.090 4 1.041 1.082 1.126 1.170 1.216 1.262 1.311 1.360 1.412 1.539 6 1.062 1.126 1.194 1.265 1.340 1419 .501 1.587 .677 7 1.072 1.149 1.230 1316 1.407 .504 1.606 1.714 1.828 1051 1104 1159 1217 1.2761 1.338 1403 1469 1.772 1.949 8 1.083 1.172 1.267 1369 1.477 1.594 1.718 1.851 993 2.144 2.358 2.594 11 1.116 1.243 1.384 1.539 .710 1.898 2105 2.332 2.5802.853 12 1.127 1.268 1.426 1.601 1.796 2.012 2.252 2.518 2.813 3.138 3.452 3.797 9 1.094 1.195 1.305 1423 1.551 1.689 1.838 1.999 2.172 2.367 101105 1.219 1.344 1480 1791 1967 2.159 13 1.138 1.294 1.469 1.665 1.886 2.133 2.410 2.720 3.066 14 1.149 1.319 1.513 1.732 1.980 2.26 2.579 2.937 3.342 151161 1346 1558 1801 2.079 2.397 2.759 3.642

YearCash flow 30,000 40,000 60,000 30,000 20,000 @ 8% reinvestment rate factor 1.3605 1.2597 1.1664 1.0800 1.0000 40,815 50,388 69,984 32,400 20,000 2,13,587 2 4 By Heena Malhotra

The total cash outfow in year 0 R 1,36,000) is compared with the possible inflow at year Sandth esulting iure of 600037 sthedicoun factorinyears,By 1,36,000 2,13,587 looking at the year 5 row in the present value tables,you will see that this gives a return of 9%. This means that the 72,13,587 received in year 5 is equivalent to 1,36,000 in year 0 if the discount rate is 9% By Heena Malhotra

MIRR O In MIRR technique, all the intermediate cash inflow are considered to be reinvested at cost of capital till the end of the project and a single terminal inflow is computed and there after MIRR is determined. The decision criterion of MIRR is same as IRR .e. you accept an investment if MIRR is larger than required rate of return and reject if it is lower than the required rate of return By Heena Malhotra

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Drashti Trivedi

2 years ago

sir plz complete all the chapters

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Anjali yadav

a year ago

Thank you Mam for this course on FM and the test series .. Aap bohat achche se explain krti h concepts ko.. it's bcoz of you ki mera basics clear hua FM ka .. thanks a lot .. ab Thora confidence aa gya h yeh subject pe .. and all credit goes to your dedication , your way of teaching and explaining even the minute things/ concept in details..
once again thank you !
An ideal teacher !!!
(1 request ..if you can strt a course even on Statistics subject ..it would be of great help)

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Heena Malhotra

a year ago

This course, it's success was only possible due to support of learner's like you. So, firstly I will thank you for your support , for watching these videos, for motivating me to work hard.
Secondly, Thank you so much for such kind words Anjali. These words meant a lot for me, especially when I wake up and first thing I see is comment like this one, it makes my whole day.
Lastly, I really love to teach, but due to time limitation I can't provide you detailed course on stats. I'm really very sorry for the inconvenience. But I will try to cover PY questions of stats. as soon as I get time. I hope that will help you. :) All the best, Stay Blessed :)

Anjali yadav

a year ago

Thank you Mam.. !!!
Prayers for your good health and prosperity .. 💓

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Albatin mendis

8 months ago

thanku mam ua fm course is tooo helpful....i understood all the concept thoroughly only because of u ..pls do make videos on other topics also...thanku so much mam...if possible i wud have give infinity likes for video's..mam want to enroll for ua paid courses pls do provide the details