Capital Budgeting Decision Criteria

The Investment Decision

 Investment decisions  Financing decisions  Liquidity decisions  Dividend decisions .Financial Decisions.

Investment Decisions Basic Terminology Capital Investment Capital Project Capital Budgeting .

Capital Investment Investment in Real Assets such as Land. etc. Building and Financial Assets such as Shares. . Bonds etc. Plant & Machinery.

together.Capital Projects A set of asset investments that are contingent on one another and are considered together. .

. costs.Capital Budgeting The process of identifying and selecting investment in assets whose expected benefits exceed their costs.

Long term projects(Time)  Replacement Vs. Mutually Exclusive Vs.Classifying Projects  Short-term Short- Vs. Vs. Expansion projects( Nature of project)  Independent Vs. projects ( Degree of dependence)  Contingent Projects (Degree of dependence) . Vs.

 Short-term: Short-term: .Short/Long-term Projects If benefits are received within current period. expenditure). period.  Long-term: If benefits are received Long-term: beyond the asset period( capital expenditure).

activity. lines.  Expansion: Expansion: Broaden existing product lines. .Replacement/Expansion  Replacement: Replacement: Maintain current level of operating activity.

Independent/Mutually Exclusive  Independent: Independent: Acceptance /Rejection is independent  Mutually Exclusive: Exclusive: Acceptance of one project leads to rejection of another .

acceptance/rejection. .Contingent Projects  Projects that are dependent on another project¶s acceptance/rejection.

Fox. List the information you Park. . decision. need to make a decision. Your company is planning to make a big budget movie called Desi Jurassic Park.Capital Budgeting & Shareholder Wealth Maximization  You are the CFO of 20th Century Old Fox.

CFO Speak  Suppose you estimated that the movie making would cost 500mn and you expect yearly cash flows(mn) flows(mn) as below in how many years would you recover your investment? (500) 150 150 100 100 150 150 150 150 0 1 2 3 4 5 6 7 8 .

50.000) 0 1 2 3 4 5 .000 and you expect cash flows as below and the opportunity cost to your shareholders is 10% do you think accepting this project would increase their wealth? Use the template in the next slide to help you in your decision making: 70.000 70.000 70.CFO Speak  Suppose a project costs Rs.50.000 (2.000 70.2.000 70.

000 70.00 PV ( in Rs.000 PVIF@ ?% 1.50.000) 70.000 70.50.000 70.000) .CFO Help Desk Year 0 1 2 3 4 5 Total PV of Cash inflows Answer?????? ? Cash flows ( in Rs.000 70.000¶s) (2.000¶s) (2.

000 and you expect cash flows as below and you have been asked to find the discount rate at which the sum total of the expected cash flows will equal the initial outflow of Rs.000 ( 70.000 70.000 70.000) 0 1 2 3 4 5 .2.CFO Speak  Suppose a project costs Rs.50.000 70.50.000 what is your answer? 70.