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MANAGERIAL ECONOMICS

Capital Budgeting & Investment Decision

Name Roll no.

Trupti C. Shinde MHRDM 1112115

Prasad Sule MHRDM 1112116

Mrunal Surve MHRDM 1112117

Praffula Waghamare MHRDM 1112118

Ayub Shaikh MHRDM 1112119

Santosh Hule MHRDM 1112120

Vijay Turkar MHRDM 1112121

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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

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Traditional methods of investment

The Payback period MethodI (initial investment)

P =

C (Net Cash inflow)

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 Debt

After-tax cost of debt, Cd = Interest Rate (1 - TaxRate).

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 equityfinancing.

Cost of capital measures the real & opportunity cost to the firm

of financing investment & is critical for sound managementdecisions

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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 topmanagement 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 Paybackperiod is more widely used by small firms.

Capital budgeting decisions are of paramountimportance as they affect the profitability of a firm, andare the major determinants of its efficiency andcompeting power.

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