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LONG TERM DECISION MAKING

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~c ¬ cc  
c  c  c
Jc ÷c cc  c÷ c
Jc ½c c
Jc m c½c½ c
Jc c½  cc ½c
Jc  c cc  c cc
Jc ½ cc
c
~c pcccccccc
~c p  cc p÷c
~c c c
~c G   cc c  cccc
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c
ACCOUNTING RATE OF RETURN (ARR)
c
 c c ccccc ccc
c cc
c÷ c c
 c  c c 
cc
cc c  cc  
c c÷ c cc
 c  ccc÷ cc c cc
 c c c !c ccc c
 c cc c c  cc c÷ c c cc c  c c c   c
cc  c c !c cccc c c c c  c cc cc
!c" c
 c  
 c c   c c÷ c c
 c  c c
  
c
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Formula of ARR
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÷ cc÷  cc
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c ÷  c  
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Steps to calculate ARR
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#\$cc cc%cc
&\$  cc  
c
'\$ c c ccc cc c  
c
(\$c% c c c  cc cc  
cc c  cc
 )c  
c#**c
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Decision criteria
G cc  c
 c%c%ccc !cc cc cc  c÷  c c
 c   c c cc c
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
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cc÷  c
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÷  cc÷  c
#c c÷  c  cc  cc   c  cc
 c
&c ÷c  c c c cc cc
 cc cc
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m   cc÷  c
#c c cc c% cc   cc cc c cc
cc c
 cc  c  cc c  c ! c
&c c c  c c
c cc
cc,cc  cc c% c
cc c  c c c% c c ! cc
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½AYBACK ½ERIOD
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½ayback periodcccc  cc c cc
c   c c c  c
cc  
cc- -c c 
cc c c  
c. c
cc #***c
  
c%  c  c **c c c%c  cc%c cc c c

c cc
c ccccc½c c c
   c %c
c 
 c cc-c c -c÷c cc c   cc  c c
  cc cc  c½c c c%c ccc c cc c
 c /c
 cc
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. ¬0÷c.c½÷G÷ c½p mc
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÷c  c  cc c c c  
c c cc% c c   cc
 c
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. c
cccproject costs RM100,000cc cexpected to return RM20,000
annuallyc cpayback period will be RM100,000 / RM20,000, or five years.

  c c%c
c 
c% c cc c
 c
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#cc  cc c c c c cc cc   c cc

  c c
&cc  c c
c cc
c
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G cc  c   c  c
  cccccc  c c
 c cc  c c c c%c c c  c
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DISCOUNTED ½AYBACK ½ERIOD
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½c½ c cc  c
c cc
c% c  cc % c
%   c% cm c½c½ c%ccc c c c cc c% c
% c c c
  cc1 c
cc
c c  c c ccc  c
cc cm c c"ccc c c
 cc c   cc c c
c cc c c  
c
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0c c  ccm c½c½ c% cc

c  
c
  c0c c cc% c cc   cc c% cc ccc cc c
c c c c ****c (****c '****cc #****cc cc c
c c  c  c c #*****cc

Discounted ½ayback ½eriod Calculation

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Yearc Cash Flowsc DCFc Cumulative DCFc
*c \$ #*****c cc cc
#c ****c (#23c (#23c
&c (****c '33c &23c
'c '****c &#c #*3c
(c #****c 3&*c ##3c
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Discounted ½ayback ½eriod Step by Step

~c "ccc c c c% cc c cc ccc

 c
 c c% c
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~c "ccccc  c c
cc c c c c c%  c c

 cc ccc cc ccc
~c "c
c c c c cc cc 1 c c%cccc c
c cccc cc cc c c
 ccc c
 c c c c  c
cc cc c c%c
pcc #*****c\$c &23cc)c &#cc*2(cc
~c c%cc cm c½c½ cc cc%cc c c 
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 c c ccccc c c 
c c c&c  c cm c½c
½ c c&c4c2(cc&2(c cc
~c  cc   c c c c
c c%cc   c cm c
½c½ cc cc
 c  c%c"cc c c*2(cc

ccc#&ccc c
 c%  c c&*c
 c  c cm c
½c½ c c&c ccc
 cc

c
NET ½RESENT VALUE (N½V)
c
 c c%c c  c cc c% cc c  c cc c
% c ½c c ccccc/c c ccc  
c
 c !cc
c
½c  c c   cc c cc c c% c cc  
c c
 !c%cccc
c
Formula:c

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c
ÿhat is N½V?c
c
G cc %cc %ccc cc  c c c ½cc
c cc
% cc c
cc1 cc%ccc%   c ccc  ccc !ccc
c c !c c% cc% c
c
How N½V helps you decidec
c
%c cc c% c ½c cc
ccc %cc cccccc
 !c ccc cc
c
c
cc c cc ½c c  c c*c c c !c cc5cc  c%  c1 c
 cc%  c c  c
c
cc c cc ½c c c c*c c c !c 1c%  c c  cc cc\$cc
  c%  c1c ccc
c
c
Examplec
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c  c c ccc ½c1 c c c%c
c
c
 c%1ccc
c#* c ccc'c c !c c%cc c c
#****c
c
cc c c c%ccc
c '***c
cc c c c%ccc
c ('**c
cc c  c c%ccc
c **c
c

c
c
STE½ 1c
c
 c%c c !c ccc c c #****cc%c%1cc
cc
c
cc cc c 
c%c" c%cccc cc %c
 c cc  c
 c c
 c%cc%  c  c  cc
c
  c
 c%cccc c  c cc cc  c'c c% c%1cc
c  c cc c cc  c%  c c c
c
c,%c
 c c c '***cc c 
c%c%  c6c
c,%c
 c c c ('**c%c c 
c%c%  c6c
c,%c
 c c c **c%  c c c 
c%c%  c6c
c
 c % cc cc  c c   c c c  c c c c  c c
%cc
c
STE½ 2
c
c c
cc c1ccc
cc#* c c  c c
 c c1 c c
 c


c%1ccc
cc  cc c cc  c !cc  cc
%cc  c c c   c cc  c  c
c
cc c  c  c%c c  c  5c
c
c  c%  c%c c   c
cp c#* c '***cc c 
cc%cc%  c %c
 c  c%6c
cp c#* c ('**c%c c 
cc%cc%  c %c
 c  c%6c
cp c#* c **c c c 
cc%cc%  c %c
 c  c%6c
c

c
c
STE½ 3
c
01 c 
c1 c c  c c ccc c % c
c
c1cc  cc#* cc%cc#cc c
c c
ccc c  c
 c1cc 
 cc*3*3#cc  c cc c '***c%1ccc
c c c ccc  c cc  c cc &&&c
c
cmc c 
c c c c ('**c%1cccc c c c  c
c1c
c  cc#* cc%cc&cc c
c c
ccc c  c c
 1cc*&2(cc  cc c7('**cccc  c cc ''&cc
c
cmc c 
c c c c **c%1cccc c  c c  c
c1c
c  cc#* cc%cc'cc c
c c
ccc c  c c
 1cc*#'cc  cc c **cccc  c cc ('2'c
c
STE½ 4
c
 cc c ccccc  c  c  c%c! ccc c2c
c
÷c &&&c4c ''&c4c ('2'c  c c #*2'2&c
c
c
FINAL STE½
c
 c c c%cccc c  c c c  
cc c !c 
c c
 cc cc
c
mc  c  c c #*2'2&c\$c #****c cRM638.62c  c c cN½V5c
c
c c  c !cc6c"c 

 c% cc cc c  ccc ½c c
 c c*c c1 ccc"c 2'2&c c c  c c*c%  c
 c c
 !c c%  ccc ccc

c
c
c
INTERNAL RATE OF RETURNc(IRR)c
c
 cinternal rate of returncIRRc cc cc  c ccccc
  c
c
 c c cc  
 cc c cc c c c%c
cc  cm.  c c 
c c cc  c  cc ccc   c
c c c c c cc c c  c c
c
p
c
c
÷c
c c  cc !c   ccccc c#&3&c%  c%c
 c c%c c c%c
c
 c#cc c***c
 c&cc c***c
 c'cc c#****c
. c c c cc  cc  c !c
c
c  ccc c % c c%c  c cc%c
#c ½cc c cc 
c¬ c  c c ccc c  c
cc c c c% c
&c 
 c c % c% c cccc c !cc c c c c
 c ½c c/ c c c c c c c cc c !c
'c ,%  cc c  c c c   c c cccc  cc  c
 c c cc \$  c
(c c c  c cc c c% cc
 cc% c cc
c cc c&c
c

c
c
Solution
c
 cc#& c
 c c c% c ½c8#& c ½resent Value
#c ***c *3&3c (((2(*c
&c ***c *3&c 2'2*c
'c #****c *##c ##**c
c  c cc c% c c c c c ccc#32*#*c
0 ccc c c c c c c ccc#&3&**c
c  c cccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccc22#*c
c
c c ½c c  c c c  cc c !c c   c c#& c   c
%c  c c  cc   c c c
c
 ccc#2 c
 c c c% c ½c8#2 c ½resent Valuec
#c ***c *2&#c ('#**c
&c ***c *('&c 3(2*c
'c #****c *2(*c 2(***c
c  c cc c% c c c c c ccc#222'#*c
0 ccc c c c c c c ccc#&3&**c
c  c ccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccc2&3*c
c
" ccc#2  c ½cc c !c c c %c%c%c c c cc c
 !c%cc%c#& cc#2 c
c
,%ccc c
c
c  cc#& c422#*)#&3c9c( c
c ccccccccc#& c4c&*2 c
c ccccccccc#(*2 c

c
c
½ROFITABILITY INDEX (½I)
c
~c ÷c cc½c  c  cc cc c  
c c cc
c  
c c cc
 c c  c c  c%c c
  cc cc  ccc c !c
~c cc c c )c cc c
  c½ccc !+ c c

 c  c c cc c !+ cc  
c
c
~c .
c

½I = ½V of future cash flows

Initial investment
÷  c½c c c cc
½I = 1 + N½V
Initial Investment
c
~c  c c  c
c c  c   ccc%   c ccc !c c
c  c cc c
~c p
cc c

Uuestioncc÷c !c  c #***cc c  c cc c c

 c% c  c #&*cc  c c c½cc c !c cc
Solutionccc
c ½cccc #&*c c ccc#&c
c cccccccccc #***c
÷  c½cc#c4cccc&*c cc#&c
c c c ccc#***c c
c
c    c%ccc c !c
c
c
c

c
c
  cc½c
c
~c c  c
c c½cc c !c c#&cc
 c c c  cc c
c c  
c%ccc& c  cc c c   c c½c c   c
 c c  cc c  
c
~c   c
 c c c c
 c% c  c    c  
c c
 c\$ c
c / cc% c cc
  c c 
cc
  c / cc c  c c
cc cc ! c% c
 c   c½ c
~c ,%  c! cc c  c cc 
cc c½cc c ! c c
c
  c÷c !c c #***c
c  c &***c  c cc
   c  c½cc&c÷  c !c
c c #****c% c  c c
c #2***cc   c  c½ccc#2cc  c c
c
  c ! c%c c c c !c% c c c   c ½c c
  c c½c c% c,c½c
ccc c c
c  c
 ! c   c
 c c cc ½c   c c½ccc
c  c
c
÷  cc½c
#c p cc cc

c
&c ¬  c c% c
'c ÷ c
c cc
ccc c c cc ½c
 c
(c c c
 c% c
c  
c    cc c

c
m  cc½c
cc
 c c
c  c ! c
c
c
c
c

c
c
EFFECT OF INFLATION AND TAX IN CA½ITAL BUDGETING

 .0÷ c÷ mc÷½÷0cG¬mp c

m 1cinflationc  cc

ccccapital budgeting analysis6c c % c c
c cc cc c  cc
cc c
 c c c ccc
c  cGcc cc  c
cc c   cc c  cc c
 c c  cc %c% c%c
cc  c 
c%c%c c c
%cc

÷9pc÷ mc÷½÷0cG¬mp c

c
~c c  cccapital budgeting decisionscc  c  c%c cincome
taxesc c%c   c
Jc c. c
c / cccc
c c \$ \$ c
 / c  c c   cc  c cc
  
c c c
c 
c
c c
Jc cccc c
cc c c  cc
c  c
~c  c¬c
ccc c
 c
c"cc   c c  cc
  cccc c !c% c  c c%c  c
c
c

c 
 cc ccc  c  c c÷
c c

 c
 cc  c 
 c cc
Jc c
c  cc
c c
c cc   c
Jc  cc c cc ccc
c cccc c c

 c
c c  :cc  c%c ccc c
% c cc%ccc,%  c c 
 c c%c
c
  c  c c%c cc  c c
 c
 c
 c
c
c c ccc% ccc%cc
 c

c
c
 ccc÷ \$c c

~c G  cc  c

 cc
c cc c cc  c c

cc
cc c
 ccc c
cc c
1 cc
c
cc
~c cc  cc c  c c
1 ccc

cc c c c c c
c
 cc. c  c  c
  c cc ccc \$c  c
~c c. c
ccc
c c cc7#*c
cc cc  c c
  ccc cc
c cc7'c
c c \$c cc c c c
7c
c÷c ccc ccc c%c cafter-tax costc

~c m c ccc c%c

~c c. c  c  c c% c cccc  c  c
cc c c%c
 c,%  c c cc c
 c c
 cccc   c  cc ccc c
1 c c
% c
~c c  c ccc c ccc
 c  cc

c% cc c  cc7*****cc c c  cc
7'#****ccc c
c  cc c cc%  c c
 cc c73****c c c cc c c'* c÷ c %c%c
 c cc  c c
1 c cc7&***c

~c cc c ccc73****c  c73****cc   c 

c
cc  c  c c
cc c c c
c
 ccc
~c G c c c c   c 
cc c c
 cc ccdepreciation tax shieldc c cc cc
 c
c

c
c
 cc cc c c cc c
cc c c
c
cc cc c c% c

(3): Tax savings from the depreciation tax shield = Tax rate × Depreciation
deductionc

~c "cc  c  c

ccccc c73****c ccc
 c
c

*'*c×c73****cc7&***c ccc
 c

~c % c%c 
c \$c c% c ccc  c%c%c
c cc   c  cc c cc cc
~c cc
 c 
c%c%c 
c c c  c cc
   c c   cc c% ccc c/ c  cc
~c c  c%  c%c%c 
c c c c c cc c c c% c
 c  c c ccc ccc cc c cc ccc c
 cc%cc/ c c  c c
 c%c%c 
c cc
  c  cc  cc c cc ccc c cc%ccc
 c  c
c
~c cc c  c c
 c
c c  cc
 c
 cc
 cc c c
  c%cc ccc  c
 c
  c c  cc cc c ccc c
  cc c c  c cc c cc cc c 
c c c
 cc c c c  c 
cc  c ccc %c cc
 cc c%  c
 c cc cc cc

c
c
~c ÷c 

 cc c c%c  c c c c c c%c

Itemc Treatmentc
\$c c c cc#c\$cc ccc cc c
cc#c\$cc ccc cc c
c c c
%c
cc cc ccc cc  c
m cc
 
c c cc c
cc
 c  cccc 
c c c  cc c c
cc#c
\$cc cc c
cc ccc  cc

  


 cc  
cc7'*****cc c%c 
c cccc% cc
c c c  c    cc  
ccc c ccc! 
c
 c
cc  cc  c c! c c c cc c,%  c  c
  
c cc c  c c cc c c  c
%c

ÿ 



  c c c% ccc c c !c cccc% cc

c c c0c c cc%c 
c% cc cc  
cc
c c ccc! 
c c
c÷ c  c ccc! 
c c
c
% c c% cc c  cc ccc c !1 cc c  cc
% cc cccc c%c cc
 c    cc  cc
  
c ccc c
c


c
c
 


 ccc c  c 
c  cc c c! c c c cc
c
 c c c  c c 
c c c
c cc c  c c
c 
c cc c  ccc cc c  c  c! c 
 c

 c

  


c c c  c ccc c  c c c c c  c 
c
  c  c c  c%ccccc c cc   c c
 c! c c c cc
c c c  c  c

m 

m 


 c 
c c c÷ c  \$ c  c c cc   c  cc
 c c c ccc c ccc c  c c

 cc c 
c%c c  c c% c

à  


c c
c cc  c  c c% c
c c
 cc c%cc/ cc ccc cccc c  cc  c
c  c cc c
cc c
c c \$cc c
c
c
c c  c cc#c\$cc c

c cc  c cc c  c !c c  c c 
c cc
   cc c
cc

cc

c
c
EUUIVALENT ANNUAL VALUE (EAV)
c
~c p  cc cp÷c c c c cc
 c   c
c c
0
 c
~c ÷c  c
c% c  c c c% ccc  ccc
c c c
c%  c c c c  c c
cc c  
c
~c cc c c% cc   cc  c c  c c c
~c . c
cc c
ccc  c c  c cc cc c
 c  
cc%  cc c
 c c c c c c cc
c%c c   c%cccccccc2c cc
c  c
½ c
 c c  c%cc  
c
~c  c c c%c
 c ccc
 cccc c
p÷cc c   cc 

c cc c%  c  c c  c

p÷c

CA½ITAL RATIONONG

~c c c  ccc c%  c c

c c  c c c c
c
 c   ccc  c cc  ccc  
c ! c
% c  cc  c cc
~c ¬ cc c c

c  cc 
cc
c c
 c  
c  ccc  c ccccc c

cc c c ! c%  c c   cc  c c
% c c c c

c
c
" cc 6c

c c
c  ccc c c c c   c
 cc c


c  c  c c%c cc
;cp c cc
;c c c

p cc c

  c
c cccc c
  ccc
  c
  c
c
c cc cc
 c
c cc  ccc c 
 c
 c c%ccc cc  c c c%cc% cc    ccc
 c cc cc
  c
  ccc
  cccc
 c cc cc  c c cc c%c%c  c  c%c  c
%  cc
  ccc c c    c

  c c cc c

 c    cc c

c  c cc
   c
cc
 c. c
cc
ccccccc c
c cc  c
ccc cc c
c   ccc

c
ccc   c
cc c
cc ccc  cc c
  c
 c

 c

c
c   ccc cc   c
c


c cc  c   c c c ccc"   c
cc ccc
   c c
c c c 
cc c c ! c%c  ccc c
 cc ccc c,%  c cc  c c c%c% c c
   cc %c ccc cc
  c

c c cc 

 c! c c c cGc cc c c cc

 ccc  ccc  c cc c  c

 c
c  c
  c  
c   
 cc%cc c 
cc c  c  c
  
c  cc c   c ccc c
 cc  cc

c
c
  c
 cc
c
cc  
c
 ccc c cc
cc% c c   cc /c 
ccc c % c

BEHAVIOURAL AND IN CA½ITAL BUDGETING

G   c cccGc<
 c

~c ÷c 
c  c% c cc  cc  c  cc c
   c cc
 cc cccc!
 c
~c G   c c% c  ccc!
c   c

   c cc c,
c
c½  c  c
~c c÷c c
c  c c    c  c c c c c c
 \$ c
 c% cc  cc%c cc c% c  c
c
c% c c ! c
~c m  cc c!
c   c% ccc cc /c c
cc cc c
 cc
~c  c   c% c \$ cc c   c
c
 c% cc
cc   cc% c  cc c /c
~c c c  c
 cc  
c !c  c c%c c!
c
  c
   c c c  c

c
c