Capital Budgeting
Capital Budgeting
Capital Budgeting
Session II :
Project Appraisal
Market Appraisal
Technical Appraisal
Project Appraisal
Management Appraisal
Financial Appraisal
Project Appraisal
Market Appraisal
Technical Appraisal
Project Appraisal
Management Appraisal
Financial Appraisal
Financial Appraisal
Financial appraisal of a project is to work out the financial feasibility. In other words, financial appraisal of a project means assessing whether a project is profitable for the business concern or not.
Past working results. (B/S, Income statement, CFS, Ratio Analysis) Cost of Project (Initial Investment) Sources of funds (Financing and Costs) Future projections of cash flow to be generated.
B/S: The past financial statements are a useful source of assessment of financial performance of companies. The Balance sheet reveals the Assets, Liabilities of the firm. P/L: The Income statement reflects the revenue expenses and income of the company. The difference between the total expenses and total income gives the net profit/loss for the firm. CFS : Cash flow statement reveals the cash generation capacity of the firm. Ratio analysis : Different ratios like leverage ratios, liquidity, activity ratios and profitability ratios help in assessment of the performance, efficiency and productivity of the company.
Land and site development Buildings Plant and Machinery Imported Indigenous Technical know-how fees Expenses on foreign technicians and training of India technicians abroad. Miscellaneous fixed assets Preliminary and preoperative expenses Provision for contingencies Margin money for working capital
Example
The cash inflows of two projects having equal initial cash outflow of Rs. 1,00,000 are given as follows: Yr.
1.
2.
3. 4. 5.
Project X (Rs.) Project Y(Rs.) 20,000 25,000 20,000 25,000 30,000 50,000 30,000 20,000 50,000 10,000 Calculate Pay Back Period and evaluate the project which is better.
Answer
Project Y will be selected as it is having less payback period being 3 years as compared to Project X having 4 years payback.
Decision Criterion : Accept if ARR more than minimum rate otherwise reject
NPV Continued.
R1 R2 R3 Rn + + + NPV = (1+I)1 (1+I)2 (1+I)3 (1+I)n
MINUS
Where,
R = Cash Inflows at different preiods I = Cost of Capital or Cut Off Rate
Initial Investment
Profitability Index
PI = Present Value of Future Cash Inflows Present Value of Cash Outflows
This method makes two projects comparable in which there is difference in the amounts of initial investment.
Problem
From the following estimate which machine is better for the company:
Machine Cost Yr.1 Yr.2 Yr.3 Yr.4 Yr.5 A 25 L -5L 20L 14L 6L B 40 L 10L 14L 16L 17L 8L Cost of Capital = 16%. Life of both machines = 5 Years. Evaluate the proposal using (i) PBP (ii) NPV (iii) PI
Answers
S.No. Particulars
1. 2. 3.
PBP NPV PI
Thanks
Manvinder Singh Pahwa
Mobile: 093525 01090 (Rajasthan) Mobile: 099868 73977 (Karnataka) email: [email protected]