Cost capital budgeting
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Transcript of Cost capital budgeting
CAPITAL BUDGETING
Group Members:Nuzzar Naseem
Atya Jan MuhammadMahek SamiAnum Anwar
Submitted to: Sir Tauseef Shah
CAPITAL BUDGETING Capital budgeting is the process in which a business
determines and evaluates potential expenses or investments that are large in nature.
Screening Decisions A screening capital budget decision is a decision taken to determine if a
proposed investment meets certain preset requirements, such as those in a cost
Preference Capital Budgeting: The company compares several alternative projects that have met their
screening criteria -- whether a minimum rate of return or some other measure of usefulness -- and ranks them in order of desirability.
The time value of money (TVM) is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.
TIME VALUE OF MONEY
What is Discounting ? Discounting is the process of determining the present value of a payment or a
stream of payments that is to be received in the future. Given the time value of money, a dollar is worth more today than it would be worth tomorrow. Discounting is the primary factor used in pricing a stream of tomorrow's cash flows.
HARPER COMPANYInitial cost . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . .50000Life of the project . . . . .. . . .. . . .. . . .. . .. . . .. .. . .. . .5years.Annual Cost Saving . . . . . . .. . . . . . . .. . . . . .. . . . . . . 18000Salvage Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .00Required Rate Of Return. . . . . . . . . . . . . . . . . . . . . . . .20%
HARPER COMPANYITEM YEARS AMOUNT OF
CASH FLOW20% Factor
Present Value OF Cash Flows
Annual Cost Savings 1-5 18000 2.991* 53838
Initial Investment now (50000) 1.000 (50000)
Net Present Value 3838
Purchase cost of equipment……………432000Annual saving . . .. . . . . . . . . .. . . . . . . . .90000Life of equipment. . .. . . . . .. . . . . . .12YEARS.
REQUIRED:1). Company required pay back period of 4 year or less.2). Company required rate of return is 14%.
PAY BACK PERIODFORMULA
Pay back period = Investment required annual net cash inflow
= 432000 = 4.8 YEAR90000
SIMPLE RATE OF RETURN:Annual cost saving 90,000Less annual depreciation 36,000Annual incremental net operating
Income 54,000
simple rate of return = Annual incremental net operating income Initial investment 54,000 = =12.5% 432,000