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LONG TERM DECISION MAKING

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ACCOUNTING RATE OF RETURN (ARR)
c
 c c ccccc ccc
c cc
c÷ c c
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cc
cc c  cc  
c c÷ c cc
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cc  c c !c cc›cc c c c c  c cc cc
!c" c
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Formula of ARR
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÷ cc÷  cc
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Steps to calculate ARR
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Decision criteria
G cc  c
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+ c


cc÷  c
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½AYBACK ½ERIOD
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½ayback periodcccc  cc c cc
c   c c c  c
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cc c c  
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cc #***c
  
c%  c  c **c c c%c  cc%c cc c c

c cc
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. ¬0÷c.c½÷G÷„ c½p ›mc
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÷c  c  cc c c c  
c c cc% c c   cc
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. c
cccproject costs RM100,000cc cexpected to return RM20,000
annuallyc cpayback period will be RM100,000 / RM20,000, or five years.

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c% c cc c
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DISCOUNTED ½AYBACK ½ERIOD
c
½c½ c cc  c
c cc
c% c  cc % c
%   c% cm c½c½ c%ccc c c c cc c% c
% c c c
  cc1 c
cc
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cc cm c c"ccc c c
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c cc c c  
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c

Discounted ½ayback ½eriod Example

0c c  ccm c½c½ c% cc


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c
  c0c c cc% c cc   cc c% cc ccc cc c
c c c c ****c (****c '****cc #****cc c›c„ c
c c  c  c c #*****cc

Discounted ½ayback ½eriod Calculation

cc
Yearc Cash Flowsc DCFc Cumulative DCFc
*c $ #*****c cc cc
#c ****c (#23c (#23c
&c (****c '33c &23c
'c '****c &#c #*3c
(c #****c 3&*c ##3c
cc

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c
Discounted ½ayback ½eriod Step by Step

~c "ccc c c c% cc c cc ccc


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cc
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cc c c c c c%  c c

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~c "c
c c c c cc cc 1 c c%cccc c
c cccc cc cc c c
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cc cc c c%c
pcc #*****c$c &23cc)c &#cc*2(cc
~c c%cc cm c½c½ cc cc%cc c c 
c
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c c c&c  c cm c½c
½ c c&c4c2(cc&2(c cc
~c › cc   c c c c
c c%cc   c cm c
½c½ cc cc
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ccc#&ccc c
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½c½ c c&c ccc
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NET ½RESENT VALUE (N½V)
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 c c%c c  c cc c% cc c  c cc c
% c ½c c ccccc/c c ccc  
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Formula:c

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ÿhat is N½V?c
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G c›c %cc %ccc cc  c c c ½cc
c cc
% cc c
cc1 cc%ccc%   c ccc  ccc !ccc
c c !c c% cc% c
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How N½V helps you decidec
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ccc %cc cccccc
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c›c c cc ½c c  c c*c c c !c cc5c›c  c%  c1 c
 cc%  c c  c
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c›c c cc ½c c c c*c c c !c 1c%  c c  cc cc$c›c
  c%  c1c ccc
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Examplec
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›c  c c ccc ½c1 c c c%c
c
c
 c%1ccc
c#* c ccc'c c !c c%cc c c
#****c
c
c›c c c c%ccc
c '***c
c›c c c c%ccc
c ('**c
c›c c  c c%ccc
c **c
c

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STE½ 1c
c
 c%c c !c ccc c c #****cc%c%1cc
cc
c
cc cc c 
c%c" c%cccc cc %c
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 c%cc%  c  c  cc
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c  c cc c c›c  c%  c c c
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c,%c
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c%c%  c6c
c,%c
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c%c%  c6c
c,%c
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c%c%  c6c
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%cc
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STE½ 2
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›c c
c›c c›1ccc
cc#* c c  c c
 c c1 c c
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c%1ccc
cc  cc c cc  c !c›c  cc
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cc c  c  c%c c  c  5c
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cc%cc%  c %c
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cp c#* c **c c c 
cc%cc%  c %c
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c
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STE½ 3
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01 c 
c1 c c  c c ccc c % c
c
c1cc  cc#* cc%cc#cc c
c c
ccc c  c
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c c c ccc  c cc  c cc &&&c
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cmc c 
c c c c ('**c%1cccc c c c  c
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ccc c  c c
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cmc c 
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ccc c  c c
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STE½ 4
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÷c &&&c4c ''&c4c ('2'c  c c #*2'2&c
c
c
FINAL STE½
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cc c !c 
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mc  c  c c #*2'2&c$c #****c cRM638.62c  c c cN½V5c
c
c c  c !cc6c"c 

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INTERNAL RATE OF RETURNc(IRR)c
c
 cinternal rate of returncIRRc cc cc  c ccccc
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 c c cc  
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cc  cm„.  c c 
c c cc  c  c›c ccc   c
c c c› c c cc c c  c c
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p
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÷c
c c  cc !c   ccccc c#&3&c%  c%c
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. c c c cc  cc  c !c
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›c  ccc c % c c%c  c cc%c
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(c „c c  c cc c c% cc
 cc% c cc
c cc c&c
c

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Solution
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 cc#& c
 c c c% c ½c8#& c ½resent Value
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&c ***c *3&c 2'2*c
'c #****c *##c ##**c
c  c cc c% c c c c c ccc#32*#*c
0 c›cc c c c c c c ccc#&3&**c
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c c ½c c  c c c  cc c !c c   c c#& c   c
%c  c c  cc   c c c
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c  c cc c% c c c c c ccc#222'#*c
0 c›cc c c c c c c ccc#&3&**c
c  c ccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccc2&3*c
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c ccccccccc#& c4c&*2 c
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½ROFITABILITY INDEX (½I)
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c

½I = ½V of future cash flows


Initial investment
÷  c½›c c c cc
½I = 1 + N½V
Initial Investment
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Uuestioncc÷c !c  c #***cc c  c cc c c


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Solutionccc
c ½›cccc #&*c c ccc#&c
c cccccccccc #***c
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c c c ccc#***c c
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c c #****c% c  c c
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c
  c ! c%c c c c !c% c c c   c ½c c
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EFFECT OF INFLATION AND TAX IN CA½ITAL BUDGETING

› .0÷› c÷ mc„÷½›÷0cG¬mp› c

m 1cinflationc  cc


ccccapital budgeting analysis6c c % c c
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cc c   cc c  cc c
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c%c%c c c
%cc

÷9pc÷ mc„÷½›÷0cG¬mp› c

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~c ›c  cccapital budgeting decisionscc  c  c%c cincome
taxesc c%c   c
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m cc c

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

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Itemc Treatmentc
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cc#c$cc ccc cc c
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c%c c  c c% c

à  


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c cc  c cc c  c !c c  c c 
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EUUIVALENT ANNUAL VALUE (EAV)
c
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c c
0
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p÷cc c   cc 

c cc c%  c  c c  c


p÷c

CA½ITAL RATIONONG

~c „c c  ccc c%  c c


c c  c c c c
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c ! c
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c  cc 
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cc c c ! c%  c c   cc  c c
% c c c c

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c  ccc c c c c   c
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c  c  c c%c cc
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p cc c

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c cccc c
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› cc c

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c  c cc
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BEHAVIOURAL AND IN CA½ITAL BUDGETING

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