Annuity Due and Ordinary Annuity – Capital Budgeting Techniques We often encounter situations where we have multiple cash flows of same amount. A very common example of such cash flows is loan repayment plan where borrower is asked to repay the loan by making equal installments over some period of time. Almost all home mortgages, car… Read More »
How to Calculate Net Present Value For example we are planning of starting a business of producing and selling pesticides. We can estimate the initial cost with reasonable accuracy because we know what we will need to buy to begin production. Would this be a good investment? It depends, whether its value exceeds its initial cost or… Read More »
How to Calculate Discounted Payback Period For calculating discounted payback period (DPP), we will calculate the present value (PV) of each cash flow (CF) starting from the first year as zero point. For said purpose, the management is required to set a suitable discount rate. The discounted cash flow (DCF) for each period is to… Read More »
How to Calculate Payback Period-Capital Budgeting Techniques Payback period is calculated by capital invested in the project by the net annual cash flow. Average of net annual cash flows may be used if net annual cash flows are not expected to be the same. Payback Period= Initial Investment/Average Annual Cash Flows
Independent and Mutually Exclusive Projects Understanding of classification of capital budgeting projects plays a crucial role while analyzing viability of projects. What is mutually Independent Projects? A Project whose cash flows have no impact on the acceptance or rejection of other projects is termed as Independent Project (not mutually exclusive). Thus, all such Projects which meet… Read More »
Internal Rate Of Return And Mutually Exclusive Projects……. What’s the Concern? While considering the mutually exclusive projects, IRR technique can be misleading. Investment projects are said to be mutually exclusive if only one project could be accepted and others would have to be rejected. NPV and IRR methods for project evaluation leads to conflicting results… Read More »
Capital Structure and Cash Flows On one hand, operations of the company may help in forecasting of future cash flows but in addition to this, future cash inflows and outflows can also be accessed through company capital structure. A corporation may use different combinations of equity, debt, or mixture of securities to finance its assets… Read More »
Cash Flow and Capital Budgeting Cash Flow Definition Fund Flow or Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business during a specific period of time. Why is cash flow important? The success of any business can be determined through its capacity to generate positive cash flows.… Read More »
Profitability Index Profitability index (PI) is the ratio of investment to pay off a suggested project. It is a useful capital budgeting technique for grading projects because it measures the value created per unit of investment made by the investor. This technique is also known as Profit Investment Ratio (PIR), Benefit-Cost Ratio and Value Investment… Read More »
Present Value of Multiple Cash Flows We come across many cases where we have to determine the present value of series of multiple cash flows. There are two ways we can calculate present value of multiple cash flows. Either we discount back individual cash flow at a time, or we can just calculate the present… Read More »