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Measurement problems
Uncertainty
Temporal spread
Investment decisions-Capital
Expenditure decisions
Importance
Measurement problems
Uncertainty
Temporal spread
Phases of capital budgeting
Planning
Analysis
Selection
Implementation
Review
SELECTION
Criterion Accept when
Market analysis
Technical analysis
Financial analysis
Economic analysis
Ecological analysis
Sources of finance
Permanent sources
Share capital
Retained profits
Long term sources
Redeemable preference shares
Debentures
Long term loans
Seed capital / venture capital
Sources of finance
Entity concept
Money measurement concept
Stable monetary unit concept
Going concern concept
Cost concept
Conservatism concept
Dual aspect concept
Finance topics- Balance Sheet
Share capital Capital Structure
Equity/preference Cost of capital
Reserves & Surplus
Secured Loans
Debentures
Loans & Advances Working capital financial
Unsecured loans policy
Current Lia/provisions
Trade creditors
Provisions
Finance topics- Balance Sheet
Fixed Assets (Net) Capital budgeting
decisions
Investments Security Analysis
* excl. inventories
LEVERAGE RATIO
DER = Debt /Equity
Int.coverage.ratio =
PBIT+Depreciation / Int. on debt.
DSCR = PAT+Dep+Int. on debt /Int.
on debt + installment of debt
TURNOVER RATIO
Inventory turnover ratio = cost
of goods sold / Av. Inventory
Fixed assets turnover ratio =
Net sales /Av. Net fixed
assets.
Total asset turnover ratio =
Net sales / Av. Total assets
PROFITABILITY RATIO
GP margin = Gross profit / Net
sales
Net profit margin = Net profit / sales
Return on total assets = PAT / Av.
Total assets
VALUATION RATIO
EPS = Equity earnings / Number of
shares
Price Earning Ratio = Market price
per share/ EPS
Yield = Dividend + price change
/Initial price.
A CASH FLOW EXAMPLE
The timing of the cash flows is critical for
determining the Project's value.
below the line for cash investments or
above the line for returns.
Year 0
Net Present Value
Year Cash Flow Dis. Factor Present
@10% Value
0 -102 1 -102
1 51 0.90909 46.36359
2 51 0.82645 42.14895
3 61 0.75131 45.82991
NPV 32.34245
The evaluation of any project
depends on the magnitude of the
cash flows, the timing and the
discount rate.
The discount rate is highly
subjective. The higher the rate , the
less a rupee in the future would be
worth today.
The risk of the project should
determine the discount rate.
Internal Rate of Return
(IRR)
IRR is the rate at which
the discounted cash flows
in the future equal the
value of the investment
today. To find the IRR one
must try different rates
until the NPV equals zero.
@27% Value
0 -102 1 -102
1 51 0.78740 40
2 51 0.62000 32
3 61 0.48818 30
NPV 0