Capital Budgeting BBS First Year

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Special notes:
Capital budgeting is the technique of analyzing whether or 1. BSV = Purchase price – Depreciation to date
not to make big investments. It involves three steps: 2. CSV= BSV if CSV is not given but never assume that
1. Calculation of initial investment (NCO) CSV = BSV because BSV is always the result of asset
2. Calculation of annual CFAT + final year CFAT which we get after deducting depreciation from the
3. Analyzing using PBP,NPV,IRR,PI and ARR (MOST purchase price.
IMPORTANT PART FOR THIS LEVEL) 3. Depreciation=Total cost or BSV of assets - BSV at end
Step 1. Calculation of NCO Remaining life
For new Project For replacement project Total Gain = Normal Gain + Capital Gain
Cost of new project/asset (-) Cost of N.project/assets (-) Total Gain = CSV today – BSV today
Working capital tied up (-) Working capital tied up (-)
Investment tax credit Capital Gain = CSV Today – Purchase price/original cost
ITC or allowance (+) (+)
CSV of old asset today
(+) Normal Gain = Total gain – Capital Gain
Net cash outlay (NCO) (xx)
Tax adjustment Tax payable= CG x CG Tax rate +NG x NG tax rate
Note: CSV value of old assets x
1) ITC = Investment tax BSV of old assets XX
credit = Purchase price X Profit or loss on sale +/- Reducing operating cost, Saving in operating cost,
ITC rate Tax Paid/Tax saving -/+ annual cash saving, saving annual expenses excluding
2) Cost of new assets = Net Cash outlay (NCO) xx
depreciation = EBDT
Purchase price + freight CSV-BSV (Profit) 100
Annual saving after charging depreciation and before
transportation + customs + CGT(CSV-PP) x %
installation+ Cleaning Normal Tax(100-CG)x% tax = EBT
charges + Erection + Octroi Net of tax CSV = Put direct csv no need to calculate tax.

Step 3. Analyzing
Step 2. Calculation of CFAT (Cash flow after tax) A. Calculation of Pay back period and discounted PBP
CFAT = Net profit + Depreciation PBP = NCO/ CFAT ( For even cash flow)
CFAT for NEW/ REPLACEMENT projects PBP = Minimum year + Amount to be recovered
Sales/increase in sales xxx CFAT of next year
Less: Cash expenses/ inc in cash expenses xxx B. NPV = TPV – NCO
Earnings before Depreciation and tax /Diff (EBDT) xxx C. IRR = LR + NPV Lr x (Hr- Lr)
Less: Depreciation/ Differential depreciation xxx NPVLr- NPVHr
Earnings (Differential) before tax (EBT) xxx D. Profitability Index = TPV/ NCO
Less: Tax ( Rate × EBT ) xxx E. Accounting Rate of Return = Average EAT/Avg.Investment
Earning after tax (EAT) xxx Average Eat = Total EAT/ Project's life
Add back depreciation/ Differential xxx Average investment ={ NCO + BSV end}/2
Annual/differential cash flow after tax xxxx
F. Calculation of MIRR = NCO = Terminal value
(1+MIRR)n
Calculation of final year CFAT (IF W/C or CSV end either Terminal value = Cash inflow x FVIF
one or both are given: Decision making
Final year CFAT for NEW/REPLACEMENT project S.N Tool New Replacement
Regular /Differential CFAT as above xxx
1. PBP As least as best Lowest is best
Working capital release xxx
2. NPV Positive Positive with
CSV/Differential CSV at the end xxx xxx
accepted highest
TAX. ADJUSTMENTS
3. IRR Higher than K is Higher than k and
CSV/Differential CSV at the end xxx
acceptable highest accepted
BSV/ Differential BSV at the end xxx
4. PI Accept if PI is Higher than 1 and
Profit / Loss +/-
higher than 1 greater accepted
Tax paid/ saved on profit/loss -/+
Final year CFAT xxxx "WE DON’T TEACH YOU DIFFERENT THINGS
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