Business Analysis

Chapter No. 11 - Capital Budgeting

Contents

* Capital budgets as opposed to revenue budgets

* Different kinds of capital budgets - non-productive assets, improving operating efficiency and capital projects

* Choosing capital projects - Conventional and Discounted Cash Flow techniques

* Payback period, Discounted payback period, Net Present Value, Internal Rate of Return, Profitability Index methods

* Assumptions underlying different methods

* Introduction to IRR vs. NPV

* Incremental cash flow principle for evaluation of replacement decisions

* Numerical exercises on incremental cash flows, NPV, IRR, Discounted payback period and Profitability Index

At the end of the chapter the student will be able to:

* Apply incremental cash flow principle to a replacement decision

* Apply conventional as well as DCF techniques to capital investment decisions

* Determine NPV for a given project and fix the range of rates between which IRR for a given set of projections would lie

* Understand how IRR readily offers itself for fixing Equated installments on a loan at a given rate of interest, duration and periodicity like monthly or quarterly

Capital budgets as opposed to revenue budgets

The assumption here is that the students understand the significance of the term "budgets". To recap, "budgets" are essentially meant for:

* Allocation