Upload
anup-r-vijay
View
224
Download
0
Embed Size (px)
Citation preview
8/7/2019 Capita- Budgeting
1/16
Capital BudgetingCapital Budgeting
Decision CriteriaDecision CriteriaThe Investment DecisionThe Investment Decision
8/7/2019 Capita- Budgeting
2/16
8/7/2019 Capita- Budgeting
3/16
Investment DecisionsInvestment Decisions
Basic TerminologyBasic Terminology
Capital InvestmentCapital Investment
Capital ProjectCapital Project
Capital BudgetingCapital Budgeting
8/7/2019 Capita- Budgeting
4/16
Capital InvestmentCapital Investment
InvestmentInvestment inin RealReal AssetsAssets
suchsuch asas Land,Land, PlantPlant &&
Machinery,Machinery, BuildingBuilding andandFinancialFinancial AssetsAssets suchsuch asas
Shares,Shares, BondsBonds etcetc..
8/7/2019 Capita- Budgeting
5/16
Capital ProjectsCapital Projects
AA setset ofof assetasset investmentsinvestments
thatthat areare contingentcontingent onon oneone
anotheranother andand areare consideredconsideredtogethertogether..
8/7/2019 Capita- Budgeting
6/16
Capital BudgetingCapital Budgeting
TheThe processprocess ofof identifyingidentifying
andand selectingselecting investmentinvestment inin
assetsassets whosewhose expectedexpectedbenefitsbenefits exceedexceed theirtheir costscosts..
8/7/2019 Capita- Budgeting
7/16
Classifying ProjectsClassifying Projects
ShortShort--termterm VsVs.. LongLong termterm
projects(Time)projects(Time)
ReplacementReplacement VsVs.. ExpansionExpansion
projects(projects( NatureNature ofof project)project)
IndependentIndependent VsVs.. MutuallyMutually ExclusiveExclusive
projectsprojects (( DegreeDegree ofof dependence)dependence)ContingentContingent ProjectsProjects (Degree(Degree ofof
dependence)dependence)
8/7/2019 Capita- Budgeting
8/16
ShortShort--termterm:: IfIf benefitsbenefits areare receivedreceived
withinwithin currentcurrent periodperiod..
LongLong--termterm:: IfIf benefitsbenefits areare receivedreceived
beyondbeyond thethe assetasset period(period( capitalcapital
expenditure)expenditure)..
Short/Long-term Projects
8/7/2019 Capita- Budgeting
9/16
ReplacementReplacement::
MaintainMaintain currentcurrent levellevel ofof operatingoperating
activityactivity..
ExpansionExpansion::
BroadenBroaden existingexisting productproduct lineslines..
Replacement/Expansion
8/7/2019 Capita- Budgeting
10/16
IndependentIndependent::
AcceptanceAcceptance /Rejection/Rejection isis independentindependent
MutuallyMutually ExclusiveExclusive::AcceptanceAcceptance ofof oneone projectproject leadsleads toto
rejectionrejection ofof anotheranother
Independent/Mutually Exclusive
8/7/2019 Capita- Budgeting
11/16
ProjectsProjects thatthat areare dependentdependent onon anotheranother
projectsprojects acceptance/rejectionacceptance/rejection..
Contingent Projects
8/7/2019 Capita- Budgeting
12/16
YouYou areare thethe CFOCFO ofof 2020thth CenturyCentury OldOld
FoxFox.. YourYour companycompany isis planningplanning toto
makemake aa bigbig budgetbudget moviemovie calledcalled DesiDesi
JurassicJurassic ParkPark.. ListList thethe informationinformation youyou
needneed toto makemake aa decisiondecision..
Capital Budgeting
&
Shareholder Wealth Maximization
8/7/2019 Capita- Budgeting
13/16
Suppose you estimated that the movie makingSuppose you estimated that the movie making
would cost 500mn and you expect yearly cashwould cost 500mn and you expect yearly cash
flows(flows(mnmn) as below in how many years would) as below in how many years would
you recover your investment?you recover your investment?
00 11 22 33 44 55 8866 77
(500) 150 150 100 100 150 150 150 150(500) 150 150 100 100 150 150 150 150
CFO SpeakCFO Speak
8/7/2019 Capita- Budgeting
14/16
0 1 2 3 4 5
(2,50,000)70,000 70,000 70,000 70,000 70,000
CFO SpeakCFO Speak
Suppose a project costs Rs.2,50,000 and youSuppose a project costs Rs.2,50,000 and you
expect cash flows as below and the opportunityexpect cash flows as below and the opportunity
cost to your shareholders is 10% do you thinkcost to your shareholders is 10% do you think
accepting this project would increase theiraccepting this project would increase their
wealth? Use the template in the next slide towealth? Use the template in the next slide to
help you in your decision making:help you in your decision making:
8/7/2019 Capita- Budgeting
15/16
CFO Help DeskCFO Help Desk
Year Cash flows
( in Rs.000s)
PVIF@ ?% PV
( in Rs.000s)
0 (2,50,000) 1.00 (2,50,000)
1 70,0002 70,000
3 70,000
4 70,000
5 70,000
Total PV of Cash
inflows
Answer?????? ?
8/7/2019 Capita- Budgeting
16/16
0 1 2 3 4 5
(2,50,000)70,000 70,000 70,000 70,000 70,000
CFO SpeakCFO Speak
Suppose a project costs Rs.2,50,000 and youSuppose a project costs Rs.2,50,000 and you
expect cash flows as below and you have beenexpect cash flows as below and you have been
asked to find the discount rate at which theasked to find the discount rate at which the
sum total of the expected cash flows will equalsum total of the expected cash flows will equal
the initial outflow of Rs.2,50,000 what is yourthe initial outflow of Rs.2,50,000 what is your
answer?answer?