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

Let us consider another example of two mutually exclusive projects A and B with the ollowing details, Cash flows Year 0 Year 1 IRR NPV(10%) Project A Project B ( 1,00,000)|1,50,0001. (75,00,000) 70,25,000 50%1736360 25% 708,180 By Heena Malhotra

Different conclusion in the following scenarios O There are circumstances/scenarios under which the net present value method and the internal rate of return methods will reach different conclusions. Let's discuss these scenarios:- o Scale or Size Disparity O Time Disparity in Cash Flows o Disparity in life of Proposals (Unequal Lives) By Heena Malhotra

Similarity Both the net present value and the internal rate of return method are discounted cash flo methods which mean that they considerthetime value of mone , Boththese techniques considera cashflows over the expecteduseful ifeofthe investment. By Heena Malhotra

For Mutually Exclusive Projects Techniques For Independent Project Pay Back) When Payback period s Project with least Maximum Acceptable Payback period should Payback period: Accepted be selected Non- Discounted (ii) When Payback period 2 Maximum Acceptable Payback period: Rejected Accounting ) When ARR 2 Minimum Project with the maximum Rate of Return (ARR) ARR should be selected. Acceptable Rate of Return: Accepted (i) When ARR s Minimum Acceptable Rate of Return: Rejected By Heena Malhotra

Discounted Net Present() When NPV >0: Accepted Project with the highest Value (NPV)( When NPV < 0: Rejected positive NPV should be selected Profitabilityl(0) When PI> 1: Accepted When Net Present Value Index(PI) When PI < 1: Rejected is same project with highest PI should be selected Internal() When IRR > K: Accepted Project with the maximum Rate of Retur Whn IRR < K Rejected IR should be selected Return (IRR) By Heena Malhotra

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