Professional Documents
Culture Documents
3 ●
Decision Making
5 ●
Implementation
6 ●
Performance Review
Project Classification
Mandatory investments
Replacement projects / Investment in new
technology
Diversification projects
R & D projects
Miscellaneous projects
Marketing and Advertising
Choices among different production processes
Expanding into new products, industries, or
markets
Acquisitions
Investment Criteria
Invetsment Criteria
projects.
It ensures the reduction of cost of capital
expenditure.
Acceptance Rule of PBP
If pay back period is less than the maximum
pay back period which is set up by the
management, the project would be accepted,
on the contrary, it would be rejected. Project
which has a shorter period will be selected
between the two.
Disadvantages of PBP
It does not measure the profitability of a
project.
It does not consider income beyond the pay
back period.
It does not give proper weightage to timing of
cash flows.
It does not consider cost of capital and
task sometimes.
It does not consider the length of lives of the
project.
Net Present Value (NPV)
Excess Present Value/ Net Gain Method
All cash inflows and outflows are converted
into PV by discounting
NPV = PV of cash inflows - PV of cash
outflows
Acceptance rule:
are uneven
Disadvantages of NPV
Not easy to determine the discounting rate
Comparatively difficult than non-discounted
techniques
Difficult to forecast economic life of any
investment exactly
When the projects in consideration involve
decisions
It considers all cash flows
It is consistent with the shareholder’s wealth
maximization objective.
Disadvantages of PI
It is similar to NPV approach
It measures the present value of return per
rupee invested
It measures the PV of return per rupee
decision)
Cost for day to day activities (Working Capital
decision)
Elements of Cash Flow Stream
Conventional project stream
◦ Initial Investment
Incremental Principle
Post-tax Principle
Consistency Principle
Separation Principle
Cash flows associated with investment side
and financing side should always be
separated.
Project
Financing Investment
Operationally it means that interest of debt is
ignored while computing profits and taxes
thereon.
If, interest is deducted for arriving at profit
◦ = (PBT + I) (1-Tax)
◦ =(PBT)(1-Tax) + Interest (1-Tax)
◦ = PAT + Interest (1-Tax)
Incremental Principle
Cash flows should always be measured in
incremental terms (dynamic approach)
Consider position of cash flows with and
Consistency Principle
◦ The cash flow of a project may be estimated from
the point of view of all investors or from the point
of view of equity shareholders.
◦ The discount rate must be consistent.
◦ Cash flow to all investors – WACC
◦ Cash flow to equity – Cost of Equity