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Reinvestment Assumption (in Hindi)
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Heena Malhotra
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  1. Capital Budgeting Decisions By Heena Malhotra


  2. 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


  3. The Reinvestment Assumption The Net Present Value technique assumes that all cash flows can be reinvested at the discount rate used for calculating the NPV. This is a logical assumption since the use of the NPV technique implies that all projects which provide a higher return than the discounting factor are accepted. In contrast, IRR technique assumes that all cash flows are reinvested at the projects IRR. This assumption means that projects with heavy cash flows in the early years will be favoured by the IRR method vis- -vis projects which have got heavy cash flows in the later years. This implicit reinvestment assumption means that Projects like A, with cash flows concentrated in the earlier years of life will be preferred by the method relative to Projects such as B. By Heena Malhotra


  4. Investment Decisions Types of Investment Decisions Capital Budgeting --Techniques . Pay-back period Basic Principles for measuring Project Cash flows Accounting Rate of Return (ARR) Net Present Value (NPV) Profitability Index (PI) .Internal Rate of Return (IRR) . Modified Internal Rate Capital budgeting in special cases of Return (MIRR) Discounted Pay-back period


  5. Capital Budgeting under Capital Rationing o There may be a situation due to resource (capital) constraints (rationing) a firm may have to select some projects among various projects. By Heena Malhotra


  6. Shiva Limited is planning its capital investment programme for next year. It has five projects all of which give a positive NPV at the company cut-off rate of 15 percent, the investment outflows and present values being as follows: Investment! NPV @ 15% Project (50) (40) (25) (30) (35) 15.4 18.7 10.1 11.2 19.3 The company is limited to a capital spending of R1,20,000 You are required to optimise the returns from a package of projects within the capital spending limit. The projects are independent of each other and are divisible (ie, part- project is possible) By Heena Malhotra


  7. Computation of NPVs per 1 of Investment and Ranking of the Projects Project Investment NPV@ 15% NPV peri Rank.ng (50) (40) (25) (30) E35) 000 invested 15.4 18.7 10.1 11.2 19.3 0.31 0.47 0.40 0.37 0.55 By Heena Malhotra


  8. Building up of a Programme of Projects based on their Rankings Investment NPV @ 15% Project! 000 (35) (40) (25) (20) 000 19.3 18.7 10.1 7.5 (2/3 of project total) 120 55.6 By Heena Malhotra