MANAGERIAL ECONOMICS

Capital Budgeting & Investment Decision

Name Trupti C. Shinde Prasad Sule Mrunal Surve Praffula Waghamare Ayub Shaikh Santosh Hule Vijay Turkar Roll no. MHRDM 1112115 MHRDM 1112116 MHRDM 1112117 MHRDM 1112118 MHRDM 1112119 MHRDM 1112120 MHRDM 1112121

Capital Budgeting Process

What Is Capital Budgeting? CAPITAL BUDGETING is the process of planning the capital expenditure after a careful evaluation of the available capital Expenditure alternatives.

Project Classification Types Investment Selection Financing investment Allocation of Funds among projects
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Factors influencing investment decisions

Technological Change Competitors Strategy Demand Forecast Type of management Fiscal Policy Cash Flows Return expected from the investment Non economic Factors

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Determining the size of capital budget

The open-ended approach. The fixed or rationing type of budget Case by Case rationing Approach

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Steps in Capital Budgeting

List of Investment proposals Estimating cash Flows Cash outflow Cash inflow Methods of Project Valuation Compounding Discounting

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Modern Techniques of investment

Net present Value (NPV) Criterion

If NPV > 0, the project should be accepted. If NPV < 0, the project should be rejected.

Profitability Index (PI) Criterion

PI > 1 indicates a desirable investment. PI < 1 indicates an undesirable investment.

Internal rate of Return (IRR) Criterion

Accept when IRR > opportunity rate of interest Reject when IRR < opportunity rate of interest

Praful

Traditional methods of investment

The Payback period Method

I (initial investment)
C (Net Cash inflow)

P=

The Average return on investment method

Average annual profit (after tax)

ARR =

Average investment in project

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Cost of Capital
Cost of capital measures the real & opportunity cost to the firm of financing investment & is critical for sound management decisions

Cost of Debt After-tax cost of debt, Cd = Interest Rate (1 - Tax Rate). Cost of Equity Capital Cost of equity is a risk-free rate, RF, plus a risk premium, RP: Ce = RF + RP. Weighted Average Cost of Capital Marginal cost of a composite dollar of debt and equity financing.
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Capital Budgeting Decision Making Rules

Urgency Certainty of income Intangible factors Budgeting Constraints

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CAPITAL BUDGETING PRACTICES IN INDIA

Capital budgeting decisions are undertaken at the top management level and are planned in advance. The Corporate follow mostly top-down approach in this regard. Discounted cash flow techniques are more popular now. High growth firms use IRR more frequently whereas Payback period is more widely used by small firms.

Capital budgeting decisions are of paramount importance as they affect the profitability of a firm, and are the major determinants of its efficiency and competing power.

Vijay

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