bab 5

PowerPoint Presentation

Capital Budgeting and Cash Flow ProjectionTOPIC 5

1BDPW3103 INTRODUCTORY FINANCE1

Capital Budgeting?2A process of planning the asset spending that is the cash flow expected to be received after a year.

Evaluation will be undertaken on proposals of projects to determine the suitability of those projects to achieve the firms objective.3

Capital Budgeting: WHY IMPORTANT?Every decision made regarding capital budgeting has significant implications to both the cash flow expected to be received by the firm and to the cash flow risk.This is because the decision on capital budgeting involves investment of assets that is more than one year.Therefore, it is important that a firm makes an accurate projection of the expected return.Capital budgeting is part of the process of strategic management. Decision regarding capital budgeting of the firm shall point to the strategic direction of the firm.The timing of an investment project is important. 4Evaluation of Capital Budgeting Project5Steps:

Methods in Evaluating Project6Accounting Rate of Return

Methods in Evaluating Project7Accounting Rate of ReturnAn advantage of using Accounting Rate of Return (ARR):

It is easy to understand and to be used. The concept of income, book value and rate of return is a simple concept to understand by managers.The following are the disadvantages of using accounting rate of return(ARR):

(i) It does not take into account the present value of money ;(ii) It uses accounting measurement and not cash flow; and(iii) Different methods of calculation may cause different decisions made. By using equation 1, the project may be accepted but by using equation 2 it may be rejected.

Methods in Evaluating Project8 Payback Period



Methods in Evaluating Project11 Net Present Value

Methods in Evaluating Project12 Net Present Value

Methods in Evaluating Project13 Internal Rate of Return

Methods in Evaluating Project14 Internal Rate of Return

15

Exercise1:16Exercise2:

17Exercise3:

bab 5

Documents