INTRODUCTION TO FINANCE:

Finance is one of the requisites for all human activities like, personal, business or
government.
Finance refers to the money resources owned or borrowed available to
individuals, businesses or governments for their operations.
Basically, finance is monetized form of capital, and capital is the saving for
investment. Amount of savings depends on income and consumption. There are certain
macro economics equations.
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DEFINITION OF FINANCE:
'()*'( "+*&$T and ,(T(* *)-(. observes that, /finance may be
generally defined as the study of money, its nature, creation, behavior,
regulation and problems0
Finance may be defined as, /the provision of at the time when it is
required.0
FINANCIAL MANAGEMENT:
&n simple words, financial management is management principles and practices
applied to finance. Financial management refers to corporate finance or
managerial finance. &t is elaborately concerned with the acquisition and use of
funds by a business firm.
Financial management may be considered to be the management of the finance
function. Financial management applies to an organization, irrespective of its
size, nature of ownership and control and whether it is a manufacturing or service
organization.
FINANCIAL MANAGEMENT
,)1&" -("&$&).$2
3a4 1ine of business
3b4 5ode of entry
3c4 $ize of firm
3d4 Assets mi6
3e4 "apital mi6
3f4 1iquidity
3g4 -ividend and
policy
*isk
*eturn
7alue of
firm
DEFINITION OF FINANCIAL MANAGEMENT:
According to +oward, /financial management involves the application of general
management principles to a particular financial operation.0
Bonneville and -ewey defines, /financing consist in the raising, providing and
managing all money, capital or funds of any kinds to be used in connection with the
business0
FINANCE AND OTHER DISCIPLINES
FUNCTIONS OF FINANCIAL MANAGEMENT:
Financial management functions are classified into three categories. They are%
&nvestment decision
Financial decision
-ividend decision
)ther functions
,*&5A* -&$"&,1&.($2
8. Accounting
9. (conomics
:. Ta6ation
)T+(* -&$"&,1&.($2
3a4 operation *esearch
3b4 production
F&.A."( -("&$&).$2
3i4 &nvestment
3ii4 ;orking capital
3iii4 1everage
3iv4 -ividend policy
(i). Investment decisin:
&nvestment decision relates to the selection of assets in which funds will be
invested by a firm.
1ong<term assets
$hort<term assets
"apital budgeting
;orking capital management
(ii). Fin!ncin" decisin:
Finance decision relates to financing mi6 or capital structure or leverage. "apital
structure deals to the optimum combination of debt and equity.
"apital structure ! -ebt # (quity
Financing decision involves%
"apital structure theory
"apital structure decision
(iii) Dividend #$ic% decisin:
-ividend is the monetary benefit of the shareholders. -ividend is declared by the
part of profits. &t is very most important to decide%
;hether to pay dividend to shareholders
;hether to retain the dividend by the organization for further development and
e6pansion
(iv) Ot&e' ()nctins:
-etermining financial needs
Financial analysis
"ost volume profit analysis
Fi6ed assets management
"apital budgeting
-ividend policies
SIGNIFICANCE OF FINANCIAL MANAGEMENT:
Functions of financial
management
&nvestment -ecision Financing -ecision
-ividend policy
-ecision
Financial management covers a very large spectrum of activities of a business.
Finance knowledge is a must for all irrespective of position, place, and portfolio.
Financial management influences the profitability or return on investment of a
business.
Financial management affects the liquidity position of a business
Financial management is infle6ibility in capital structure.
Financial management influences the business credit rating, employee
commitment, suppliers confidence etc.,
Financial management increase the value of business through efficient and
effective decisions
Financial management is necessary for survival, growth, e6pansion and
diversification of a business.
O*+ECTI,ES OF FINANCIAL MANAGEMENT 2
Acc'din" t R-e't . +&nsn
,lanning and control
*aising of funds
&nvesting funds
5eeting special problems
Acc'din" t G')n/!$d Nemm!'s
&nvestment of funds
,roviding liquid assets
'enerating earnings
5a6imizing market value of the firm
Acc'din" t .estn 0 *'i"&!m
Financial planning and control
Fi6ed assets and working capital management
"apital structure decisions
&ndividual financing episodes
GOALS OF FINANCIAL MANAGEMENT
'oals provide the foundation for any managerial activity. They are the last
towards which all activities are directed. The purpose and direction of an
organization are seen in its goals.
'oals acts as motivators, serve as the standards for measuring performance, help
in co<ordination of multiplicity of tasks, help in identifying inter<departmental
relationships and so on.
'oals have to be specific and quantitative. 'oals are generally multiple.
T1PES OF GOALS:
O((ici!$ "!$s = official goals are the general aims of the organization. 5a6imum
return on investment and market value per share may be termed as official goals.
O#e'!tin!$ "!$s = )perational goals are more qualitative and verifiable. The
scale, mi6 and timing of specific form of finance are detailed.
O#e'!tive "!$s = )perative goals indicate what the organization is really
attempting to do. They are focused and help in choice making.
PROFIT MA2IMI3ATION:
o ,rofit ma6imization is a stated goal of financial management.
o ,rofit is the e6cess of revenue over e6penses.
o ,rofit ma6imization is ma6imizing revenue given the e6penses.
o *evenue ma6imization is possible through pricing and scale strategies
o By increasing the selling price one may achieve revenue ma6imization.
O*+ECTI,ES OF PROFIT MA2IMI3ATION:
o ,rofit is measure of success in business.
o ,rofit is a measure of performance.
o ,erformance efficiency is indicated by the quantum of profit.
o ,rofit making is essential for the growth and survival of any undertaking.
o ,rofit making is accepted by the society.
ROLE OF FINANCIAL MANAGEMENT:
Anticipating financial management
Acquiring financial resources
Allocation of fund in business
Forecasting e6pected funds.
Business needs
TIME ,ALUE OF MONE1:
Time value of the money is important concept of financial management. &t
involves that the value of money is different at different points of time. 5oreover, money
can be put to productive use.
&n simple words, the value of a certain amount of money today is more valuable
than its value tomorrow.
The value of money is di((e'ent !t di((e'ent #int ( time due to several
reasons.
,resence of inflation.
,resence of individuals for current consumption over future consumption
&nvestment opportunities
REASONS:
8. ,resence of inflation2
The first reason of decreasing value of money with the increase in time is due to
inflation. &nflation is all pervasive and is a universal phenomenon. For the purpose of
discussion, we will define inflation as the rise in the prices of goods, leading to a
reduction in the value of money.
9. ,resence of individuals for current consumption over future consumption2
The second reason for decreasing value of money is the preference of individuals
to consume now than latter. (ach one of us faces a situation of trade = off between
present and future consumption.
:. &nvestment opportunities2
Thirdly, money has time value because capital can be put to productive use, even
if it is not consume now. 1ike any other commodity, money too is scarce.
CONCEPT OF TIME ,ALUE OF MONE1:
7aluation of financial securities.
7aluation of firms
7aluation of capital budgeting, merger and acquisition
,ersonal finance
1easing and hire purchase transactions
REASONS FOR TIME ,ALUE OF MONE1:
&ndividual, in general, prefer current consumption to future consumption
"apital can be employed productively to generate positive returns.
An investment of one rupee today grows to 8 # r a year. * stands for rate of
return.
&n an inflationary period, a rupee today represents a greater real purchasing power
than a rupee a year hence.
RIS4 AND RETURN:
RETURNS:
(verything held constant, individuals generally prefer current consumption to
future consumption. &n order to motivate individuals to invest, a potential investment
must offer a positive rate of return. This will result in the investor having greater future
wealth and therefore greater future consumption opportunities than the current
consumption opportunities. &t is an incentive for the investor to postpone consumption.
Three ma>or factors which determine the return investors require in order
investing. They are2
The time preference for consumption as measured by the risk<free real rate of
return.
The e6pected rate of inflation.
The risk associated with the investment.
Re5)i'ed 'et)'n 6 (Ris78('ee 'e!$ '!te 9 E:#ected in($!tin 9 Ris7 #'emi)m)
The first two factors 3the risk<free real rate of return and *ate of inflation4 are
common to all investments. )nly the third factor, risk premium is unique to each
investment.
RIS42
The risk of an investment refers to the volatility of its rate of return. The volatility
in the return results in the possibility that the realized returns will be less than the returns
that were e6pected. The source of such risk is the failure of dividends or interest and or
the security?s price to materialize as e6pected.
&nvestment risk is associated with the variability of rates of return. The more
variable return, the more risky the investment. The standard deviation is commonly used
as the measure of risk.
FACTORS CONTRI*UTING TO RIS4:
Forces that contribute to variations in return are the elements of risk. $ome factors
are e6ternal to the firm, not controllable and affect a large number of securities. There
are some other factors which are internal to the firm and are controllable to a large
degree.
Those factors which are e6ternal, not controllable and affect many securities are
called sources of s%stem!tic 'is7. &nternal factors which are controllable and peculiar to
an industry and @ or a firm referred to as sources of )ns%stem!tic 'is7.
;. S1STEMATIC RIS42
$ystematic risk refers to that portion of risk affecting all the securities. &t may
arise due to economic, political and sociological factors. These factors cause the prices
of almost all the securities to rise or fall.
This will result in the security prices to move in the same direction as the stock
market inde6 3for instance the sense64. $ystematic risk is also referred to as market risk
or undiversifiable risk. (lements of systematic risk are2
5arket risk
&nterest rate risk
,urchasing power risk
M!'7et Ris7:
7ariability in return on most common stocks that is due to basic sweeping
changes in investor e6pectation is called as market risk. The basis for the changes in
investor?s e6pectations may be political, social or economic.
Inte'est R!te Ris7:
The variation in the returns caused by fluctuations in the general level of interest
rates is referred to as the interest rate risk. As the interest rate goes up, the market price
of e6isting fi6ed income securities falls, and vice versa.
P)'c&!sin" P/e' Ris7:
;hile market risk and interest rate risk are associated with the uncertainties in the
amount of money to be received by an investor, purchasing power risk is the uncertainty
of the purchasing power of the money to be received. &t refers to the impact of inflation
or deflation on an investment. *ising prices on goods and services are normally
associated with inflation or deflation on an investment.
<. UNS1STEMATIC RIS4:
Ansystematic risk is that portion of total risk that is unique to a firm or an
industry, above and beyond the systematic risk. Ansystematic risk may also be referred
to as diversifiable risk. The two ma>or elements of unsystematic risk are2
Business *isk
Financial *isk
*)siness Ris7:
Business risk arises due to the variations in the operating income and the
dividends. Factors such as management capability, consumer preferences, competition,
labour strikes and so on cause the business risk.
Business risk can be divided into two broad categories 2 internal an e6ternal.
&nternal business risk is associated with the efficiency with which a firm
conducts its business.
(6ternal business risk is associated with the e6ternal environment within
which a firm has to operate. The e6ternal factors may be the cost of capital, the business
cycle, demographic factors, government policies, economic factors, monetary and credit
policies, political = legal factors and so on.
Fin!nci!$ Ris7:
The way in which a company finances its activities influences the return to the
equity shareholders. This can be ascertained from the capital structure of the firm. The
use of debt finance creates payment of fi6ed interest and hence it affects the residual
profit available to the equity shareholders
CAPITAL *UDGETING:
INTRODUCTION:
The term capital budgeting refers to long<term planning for proposed capital
outlays and their financing. Thus, it includes both raising of long<term funds as well as
their utilization. &t may be defined as Bthe firm?s formal process for the acquisition and
investment of capital?. &t is the decision making process by which the firms evaluate the
ma>or fi6ed assets.
"apital budgeting is many sided activity, it includes searching for new and more
profitable investment proposals, investigating engineering and marketing consideration to
predict the consequences of accepting the investment and making economic analysis to
determine the profit potential of each investment proposal.
MEANING OF CAPITAL *UDGETING:
"apital budgeting is the process of making investment decision in capital
e6penditure. A capital e6penditure may be defined as an e6penditure the benefit of which
are e6pected to be received over a period of time e6ceeding one year.
&n simple words, capital e6penditure 3Budgeting4 incurred for acquiring or
improving the fi6ed assets, the benefits of which are e6pected to be received over a
number of years in future.
The following are some e6amples of capital e6penditure2
"ost of acquisition of permanent assets such as land and building, plant and
machinery, goodwill etc.
"ost of addition, e6pansion, improvement or alteration in the fi6ed assets.
"ost of replacement of fi6ed assets.
*esearch and development pro>ects costs etc.,
DEFINITION:
"+A*1($ T. +)5'*((. has defined, /capital budgeting is long term planning
for making and financing proposed outlays0.
*&"+A*- A.- '*((.1A; have referred to, /capital budgeting as acquiring
inputs with long<run return0.
A"")*-&.' T) 1."+, /capital budgeting consists in planning development
of available capital for the purpose of ma6imizing the long<term profitability of the
concern0.
FEATURES OF CAPITAL *UDGETING:
&t has the potentiality of making large anticipated profits.
&t involves a high degree of risk
&t involves a relatively long time period between the initial outlay and
anticipated return.
The future benefits are e6pected to be realized over a series of years.
They involve generally huge funds.
They have a long term and significant effect on the profitability of the
concern.
"apital budgeting decision involves the e6change of current funds for the
benefits to be achieved in future.
CAPITAL E2PENDITURE *UDGET:
"apital e6penditure budget is a type of functional budget. &t is the firm?s formal
plan for the e6penditure of money for purchase of fi6ed assets. &t provides a guidance as
to the amount of capital that may be required for procurement of capital assets during the
budgeting period, the budget is prepared after taking into account the available
production capacities, probable reallocation of e6isting resources and possible
improvement in production techniques.
O*+ECTI,ES OF CAPITAL E2PENDITURE *UDGET:
o &t determines the capital pro>ects
o &t determines the e6pected rate of return on each pro>ect.
o &t estimates e6penditure.
o &t determines the source from which the required funds would be obtained.
o To coordinate inter departmental pro>ects.
o To measure the performance of on<going pro>ects.
o To prevent cost over<runs on the pro>ects.
IMPORTANCE OF CAPITAL *UDGETING:
o &nvolvement of heavy funds.
o 1ong<term implications
o &rreversible decision
o 5ost difficult to make
o "ost over runs
o 5ultiplicity of variables
o Top management activities.
NEED FOR CAPITAL *UDGETING:
Analyse the proposal for e6pansion or creating additional capacities.
To decide the replacement of permanent assets such as building and equipments
To make financial analysis of various proposals regarding capital investments so
as to choose the best out of many alternative proposals.
;hether or not funds should be invested in long<term pro>ects such as setting of
industry, purchase of plant and machinery, etc.,
SIGNIFICANCE OF CAPITAL *UDGETING:
1arge investments
1ong = term involvement of funds.
7ery difficult to dispose
1ong<term effect on profitability
-ifficulties of investment decision
.ational importance.
DIFFICULTIES IN CAPITAL *UDGETING:
The benefits from investments are received in future period.
The future is uncertain
5a6imum risk involved
Failure of forecasts
1eads to more errors
Future revenue based on size of the market.
$hifts in consumer preferences.
The action of competitors.
"hanges in economic and political environment.
RATIONALE OF CAPITAL *UDGETING:
(6penditure increasing revenue.
(6penditure reducing cost.
4INDS OF CAPITAL IN,ESTMENT PROPOSALS:
A firm may have several investment proposals for its consideration. &t may adopt
one of them, some of them or all of them depending upon investment proposals.
"ontingent or dependent proposals.
5utually e6clusive proposals.
FACTORS INFLUENCING CAPITAL IN,ESTMENT DECISIONS:
Availability of funds.
Future earnings.
1egal compulsion.
-egree of uncertainty
Argency.
*esearch and development.
"ompetitor?s activity.
&ntangible factors.
FACTORS AFFECTING CAPITAL IN,ESTMENT DECISION:
The amount of investment
"ost of new pro>ect
&nstallation cost
;orking capital
,rocessed from sale of assets.
Ta6 effects
&nvestment allowance
"ut off point
*eturn e6pected from the investment
Accounting profit
"ash flows
-etermining on economic value
Accounting ambiguities.
Time value of money.
*anking of the investment proposals
*isk and uncertainty
7arious non<monetary considerations.
IN,ESTMENT E,ALUATION CRITERIA:
The investment decision rules may be referred to as capital budgeting techniques,
or investment criteria. A sound appraisal technique should be used to measure the
economic worth of an investment pro>ect. The essential property of a sound technique is
that it should ma6imize the shareholder?s worth.
The following are sound investment evolution criterion.
&t should consider all cash flows to determine the true profitability of the pro>ect.
&t should provide for an ob>ective and unambiguous way of separating good
pro>ects from bad pro>ects.
&t should help ranking of pro>ects according to their true profitability.
&t should recognize the fact that bigger cash flows are preferable to smaller ones
and easily has flows are preferable to later ones.
&t should help to choose among mutually e6clusive pro>ects that pro>ect which
ma6imizes the shareholder?s wealth.
5(T+)-$ )F "A,&TA1 BA-'(T&.'2
The importance of the capital budgeting is the equalizing of matching the
available resources with the acceptable pro>ects.
There are many ways in practice all over the sphere of capital e6penditure
decisions. ;hichever method is selected, it should%
8. ,rovide a basis for difference between acceptable and non<acceptable pro>ects.
9. *ank different proposals in order of priority.
:. +ave a suitable approach.
C. Adopt criterion.
D. *ecognizing the time value of money.
CHART
Abbreviation2
.,7 ! .(T ,*($(.T 7A1A(
AA* ! A"")A.T&.' *AT( )F *(TA*. )* A7(*A'( *AT( )F *(TA*.
,B, ! ,A<BA"E ,(*&)-
&** ! &.T(*.A1 *AT( )F *(TA*.
,& ! ,*)F&TAB&1&T &.-(F
5(T+)-$ )F A,,*A&$A1
.on<discounted cash flow
Techniques
-iscounted "ash flow Techniques
,ay<back
period method
,ay<back
profitability
method.
Average rate
of return
method
.et present value method
&nternal rate of return method
,rofitability inde6 method
TRADITIONAL METHODS:
,ay = back period method
,ay = back profitability method
Accounting rate of return or Average rate of return method
MODERN METHOD:
.et present value method
,rofitability &nde6
&nternal rate of return
PA1 = *AC4 PERIOD METHOD:
,ay = back period is also called Bpay = out? or Bpay = off period?. ,ay = back
period is the time required in which a pro>ect Bpays for itselfBthrough surplus cash flows.
&t is the period within which investment in fi6ed assets or pro>ects can be recovered.
&n simple words, pay = back period is the period of time for the cost of pro>ects to
be recovered from the additional cash flows of the pro>ect itself.
COMPUTATION OF P*P:
8. ;hen cash inflows are equal
,ay = back period ! &nitial cost of assets or initial investment in pro>ects
Annual cash inflows
9. ;hen cash inflows are not equal
,ay = back period ! &nvestment
"ash inflows
AD,ANTAGES OF P*P METHOD:
&t is simple to understand
&t is simple to calculate
&t concentrates on recovery of investment
&t takes cares uncertainty and risk
Built = in features
,rofit is determined.
&mportance to liquidity
&t acts guidelines for dividend policy
5anage with lower funds.
DISAD,ANTAGES OF PA18*AC4 PERIOD METHOD:
&t neglects post<pay<back period returns
&t is not concerned with the length of a pro>ect.
&t completely neglects the time value of money
"ash inflows are not recognized.
&t does not make to use of cost of capital.
&t is difficult to understand.
&t is a sub>ective decision.
&nvestment in different assets is interrelated.
&t does not calculate the profitability of the pro>ects.
&t is concerned with a short period of a pro>ect?s life time.
IN,ESTMENT DECISION> *ASED ON PA1 = *AC4 PERIOD METHOD:
Accept decision or *e>ect criterion
*anking of pro>ects
8. Accept -ecision or *e>ect "riterion2
5anagement of a firm may establish a B.orm? or B$tandard? for acceptable pay =
back period, usually based on cost of capital. &t is called Bcut = off? point.
All pro>ect whose pay = back period is higher than the norms or standard may be
re>ected outright. The pro>ect within the norms or standard pay = back period may be
short list for further consideration. They are acceptable pro>ects.
9. *anking of ,roposals2
,ay = back period can be used as the criterion to rank different investment
proposals. This method is very important in the case of mutually e6clusive pro>ects.
ACCOUNTING RATE OF RETURN (ARR):
Accounting rate of return takes into account the total earnings e6pected from an
investment proposals over its full life time. The method is called Accounting rate of
return or Average rate of return method because the concept based on profit.
STEPS IN ARR METHOD:
A** is determined separately for each of the pro>ects.
-ifferent pro>ects are ranked in order of rate of earnings.
&f there is no cut off rate.
,ro>ect with higher A** is acceptable
The cut off rate normally based on cost of capital of the firm.
,ro>ect with higher rate of return than the cut off rate are acceptable pro>ects.
AD,ANTAGES OF ARR:
&t is easy to understand.
(6act profitability of a pro>ect.
The basis for the method is according concept of profit.
This method is based on net earnings.
&t provides a more comprehensive comparative assessment of pro>ects.
DISAD,ANTAGES OF ARR:
This method ignores the time value of money.
*eliability of A** method is affected due to the various concept of investment.
,rofit as the criterion.
A** method is not properly assessed.
&nvestment is made in two or more installments.
CALCULATION OF ARR:
Total income method
Annual return on original investment method.
Annual return on average investment method
8. Total income method2
Total (arnings
A** ! F 8GG
)riginal "ost of investment < $crap
9. Annual return on original investment method2
Annual average earnings
A** ! F 8GG
)riginal investment
:. Annual return on average investment method2
Annual Average earnings
A** ! F 8GG
Average investment
.)T(2
3a4 Average &nvestment ! )riginal &nvestment

9
3b4 Average &nvestment ! )riginal &nvestment = $crap

9
DISCOUNTED CASH FLO. METHOD:
The discounted cash flow technique is an improvement on the pay = back period
method. &t takes into account both the interest factor as well as the return after the pay =
back period. The method involves three stages.
"alculation of cash flows
-iscounting the cash flows
Aggregating of discounted cash inflows
&n general -"F techniques provide quantitative, systematic and reliable shape to the
concept of time value of money.
There are two reasons for assigning higher value to earlier incomes. These reasons
are like foundations for the concept of time value of money.
&nterest aspects
Ancertainty aspects
NET PRESENT ,ALUE:
This generally considered to be the best method for evaluating the capital
investment proposals. &t recognizes the time value of money and that cash flows arising
at different period of time differ in value and are not comparable unless their equivalent
present values are found. The present value of these cash inflows and outflows are then
calculated at the rate of return acceptable to the management.
AD,ANTAGES OF NP,:
&t recognizes time value of money.
Better than the traditional method.
True assessment
&t considers the earnings over the entire life of the pro>ect.
&t tries to ma6imize the profit
&t favoring more profitable pro>ects.
DISAD,ANTAGES OF NP,:
"ompared to traditional methods.
&t is complicated to understand.
"omparison of pro>ects with unequal life time.
5isleading
&t is suitable for particular pro>ect
&t is not easy to determine as appropriate discount rate.
&t may not give good result.
$horter span of life of the assets.
CALCULATION OF NP, IN CASE OF REPLACEMENT OF MACHINE:
Additional investment
.et operating savings or profit
Additional ta6
PROFITA*ILIT1 INDE2:
The profitability inde6 is also known as benefit cost *atio 3B@"4. it shows the
relationship between ,.7 of cash inflows and ,.7 of cash outflows.
,resent value of future cash inflows
,.& !
,resent value of future cash outflows
Accept criterion ! ,.& H8
*e>ect "riterion ! ,.& I 8
AD,ANTAGES OF P.I:
&t recognizes time value of money.
Better than the traditional method.
True assessment
&t considers the earnings over the entire life of the pro>ect.
&t tries to ma6imize the profit.
&t favouring more profitable pro>ects.
&t is most suitable.
DISAD,ANTAGES OF PI:
"ompared to traditional methods.
&t is complicated to understand.
"omparison of pro>ects with unequal life time.
5isleading.
&t is suitable for particular pro>ect.
&t is not easy to determine as appropriate discount rate.
$horter span of life of the assets.
INTERNAL RATE OF RETURN:
The second discounted cash flow or time ad>usted method for appearing capital
investment decisions is the &** method. &** is that rate of return at which the present
value of cash inflows and cash outflows are equal.
Thus, at &** the total of discounted cash inflows equal the total of discounted
cash outflows. &** discounted the total cash flows to the level of zero.
"ash inflows
&** !
"ash outflows
&** is also known as trial and error yield method.
*
& !
8 # r
;here & ! cash outflows
* ! "ash inflows
* ! *ate of return on the investment.
Accept "riterion ! &** H "ut off rate
*e>ect "riterion ! &** I "ut off rate
AD,ANTAGES OF IRR:
&t takes into time value of money.
True profitability of a pro>ect can be assessed.
&t considers the profitability of a pro>ect over its entire economic life.
"ost of capital or pre<determined cut<off rate is not required.
&t is better than .,7 and &, method.
*anking of various proposals
&t provides for ma6imizing profitability.
&t is considered to be a more fle6ible technique of capital budgeting.
DISAD,ANTAGES OR DEMERITS OF IRR:
&n &**, the discounting rate is the unknown factor.
&** determine the ma6imum interest.
&** assumes re<investment.
&t is more practical
&t may differ from pro>ect evaluation.
&t is difficult to understand.