CAPITAL BUDGETING

Group Members:Nuzzar Naseem

Atya Jan MuhammadMahek SamiAnum Anwar

Submitted to: Sir Tauseef Shah

CAPITAL BUDGETING Capital budgeting is the process in which a business

determines and evaluates potential expenses or investments that are large in nature.

Screening Decisions A screening capital budget decision is a decision taken to determine if a

proposed investment meets certain preset requirements, such as those in a cost

Preference Capital Budgeting: The company compares several alternative projects that have met their

screening criteria -- whether a minimum rate of return or some other measure of usefulness -- and ranks them in order of desirability.

The time value of money (TVM) is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.

TIME VALUE OF MONEY

What is Discounting ? Discounting is the process of determining the present value of a payment or a

stream of payments that is to be received in the future. Given the time value of money, a dollar is worth more today than it would be worth tomorrow. Discounting is the primary factor used in pricing a stream of tomorrow's cash flows.

HARPER COMPANYInitial cost . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . .50000Life of the project . . . . .. . . .. . . .. . . .. . .. . . .. .. . .. . .5years.Annual Cost Saving . . . . . . .. . . . . . . .. . . . . .. . . . . . . 18000Salvage Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .00Required Rate Of Return. . . . . . . . . . . . . . . . . . . . . . . .20%

HARPER COMPANYITEM YEARS AMOUNT OF

CASH FLOW20% Factor

Present Value OF Cash Flows

Annual Cost Savings 1-5 18000 2.991* 53838

Initial Investment now (50000) 1.000 (50000)

Net Present Value 3838

Purchase cost of equipment……………432000Annual saving . . .. . . . . . . . . .. . . . . . . . .90000Life of equipment. . .. . . . . .. . . . . . .12YEARS.

REQUIRED:1). Company required pay back period of 4 year or less.2). Company required rate of return is 14%.

PAY BACK PERIODFORMULA

Pay back period = Investment required annual net cash inflow

= 432000 = 4.8 YEAR90000

SIMPLE RATE OF RETURN:Annual cost saving 90,000Less annual depreciation 36,000Annual incremental net operating

Income 54,000

simple rate of return = Annual incremental net operating income Initial investment 54,000 = =12.5% 432,000