Join CAIIB WITH ASHOK on YouTube & App

ABFM MODULE - B
Chapter 9: CAPITAL INVESTMENT DECISIONS (PART-I)
What we will study?
*How to make capital investment decision?
*What are the methods available to evaluate your
investment decision?
*How to calculate Payback period?
 Join CAIIB WITH ASHOK on YouTube & App
CAPITAL INVESTMENT DECISIONS:
The Investment decision is concerned with the selection of
assets in which funds will be invested by a firm.

Where to invest the Money?

The Investment of funds has to be made after
CAREFUL ASSESSMENT
Of various projects Through

CAPITAL BUDGETING

Capital Budgeting refers to the PROCESS of making

decision regarding capital investment in fixed assets such as
machinery, land, building etc.

PROJECT A PROJECT B PROJECT C

₹ 20,00,000 ₹ 40,00,000 ₹ 60,00,000
 Join CAIIB WITH ASHOK on YouTube & App
EVALUATION TECHNIQUES

NON – DISCOUNTING DISCOUNTED

PAY BACK PERIOD NET PRESENT VALUE (NPV)

ACCOUNTING RATE OF PROITABILITY INDEX (PI)

RETURN (ARR)

INTERNAL RATE RETURN

(IRR)

MODIFIED IRR

PAY BACK PERIOD:

How soon can we get our CASH BACK?
₹ 1000
1 2 3 4 5 6 7

200 200 200 200 200 200 200

 Join CAIIB WITH ASHOK on YouTube & App

𝐈𝐧𝐢𝐭𝐢𝐚𝐥 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭
No. of years to recover = 𝐀𝐧𝐧𝐮𝐚𝐥 𝐂𝐚𝐬𝐡 𝐈𝐧𝐟𝐥𝐨𝐰
𝟏𝟎𝟎
Initial Investment = = 5 years
𝟐𝟎

PAY BACK PERIOD: When cash inflow is same every year

Ques 1. Initial Investment = 30,00,000, Annual cash inflow =
5,00,000 for 10 years. Calculate the payback period?
Sol 1:
𝐈𝐧𝐢𝐭𝐢𝐚𝐥 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭
Pay back Period = 𝐀𝐧𝐧𝐮𝐚𝐥 𝐜𝐚𝐬𝐡 𝐈𝐧𝐟𝐥𝐨𝐰
𝟑𝟎,𝟎𝟎,𝟎𝟎𝟎
= = 6 years
𝟓,𝟎𝟎,𝟎𝟎𝟎

Ques 2. Suggest the management using Payback Period which

machine they should buy?
MACHINE A MACHINE B
Initial Investment = 15,00,000 20,00,000
Cash inflow (per year) =5,00,000 5,50,000
 Join CAIIB WITH ASHOK on YouTube & App
Sol 2:
Calculate the payback period of each machine:
MACHINE A MACHINE B
𝟏𝟓,𝟎𝟎,𝟎𝟎𝟎 𝟐𝟎,𝟎𝟎,𝟎𝟎𝟎
= =
𝟓,𝟎𝟎,𝟎𝟎𝟎 𝟓,𝟓𝟎,𝟎𝟎𝟎

= 3 years = 3.6 years

So, buy Machine A because you will get your money back
sooner than Machine B.

PAY BACK PERIOD: When cash inflow is NOT same every year
If cash inflow of every year is not the same, we have to add up
Net Cash Inflows from the first year till the total is equal to the
amount invested initially. (Cumulative cashflow is calculated)
Ques 3. An Industry is considering investment in a project
which cost ₹ 6,00,000 and Cash Inflows are ₹ 120,000,
₹ 140,000, ₹ 180,000, ₹ 2,00,000, ₹ 2,50,000.
Now calculate the Payback Period?
 Join CAIIB WITH ASHOK on YouTube & App
Sol:
Initial Investment: ₹ 6,00,000
Years Cash flows Cumulative Cash
1 1,20,000 1,20,000
2 1,40,000 2,60,000
3 1,80,000 4,40,000
4 2,00,000 6,40,000
5 2,50,000

In 4th year we need only 6,00,000 - 4,40,000 = 1,60,000 ₹

In 4th year the actual cash inflow is = 2,00,000
So, the question is in how much time you will earn ₹ 1,60,000
if you earn total ₹ 2,00,000 in a year.

𝟏𝟔𝟎,𝟎𝟎𝟎
Payback Period = 3 years + 𝟐𝟎𝟎,𝟎𝟎𝟎

= 3 years + 0.8 = 3.8 years