FINANCIAL PATH

THE PACIFIC INSTITUTE OF FINANCIAL STUDIES & RESEARCH

Capital Expenditure Decision

Evaluation Criteria

Discounting Techniques: a) Net present value (NPV) b) Benefit cost ratio (BCR) OR Profitability index (PI) c) Net benefit cost ratio (NBCR) d) Internal rate of return (IRR) e) Annual capital charge (ACC) Formulaes: a) Net present value:Total PV of cash inflow Investment Decision criteria:- If NPV is +ve than accept it or vice versa. b) Benefit cost ratio:Total PV of cash inflow / Investment Decision criteria:- If BCR > 1, accept it or vice versa. c) Net benefit cash ratio:(Total PV of cash inflow Investment) / Investment. OR BCR 1 OR NPV / Investment Decision criteria:- If NBCR > 0, than accept it or vice versa. d) Internal rate of return:L1 + (L2 L1) (H B) (H S) If NPV = 0 than use this formulae. Where :-

Non Discounting Techniques:

Pay back period

Accounting rate of return.

L1=Lower Rate. L2=Higher Rate. H=highest Value. S=Smallest Value. B=Base Value. e) Annual capital charge: Investment + total PV of cost / PVIFA (kd,n) f) Pay back period: Total Investment / Cash Inflow per annum g) Accounting rate of return: Average annual income / Average Investment Where: Average Investment = (Opening investment + Closing investment) / 2 OR Investment /2

Please visit for more info: www.financialpath.in

The Pacific Institute of Financial Studies & Research

FINANCIAL PATH
THE PACIFIC INSTITUTE OF FINANCIAL STUDIES & RESEARCH
Cash Inflow: = (Increase in profit + Decrease in Cost Increase in depreciation) (1-t) + Increase in depreciation + Increase in scrap value. Scrap value: used in final year cash flow. Increase in depreciation: Depreciation on new machine Depreciation on old machine.

Please visit for more info: www.financialpath.in

The Pacific Institute of Financial Studies & Research