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Inter_P6A_FM_Mod1_Chapter_5_Financing_Decisions_Capital_Structure.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 6.2 Under-Capitalisation
It is just reverse of over-capitalisation. It is a state, when its actual capitalisation is lower than its proper capitalisation as warranted by its earning capacity. This situation normally happens with companies which have insufficient capital but la... | [
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0.01597539894282818,
0.0... |
Inter_P6A_FM_Mod1_Chapter_5_Financing_Decisions_Capital_Structure.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 6.3 Over-Capitalisation vis-Γ -vis Under-Capitalisation
From the above discussion it can be said that both over-capitalisation and undercapitalisation are not good. However, over-capitalisation is more dangerous to the company, shareholders and the society than under-capitalisation. The ... | [
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-0.... |
Inter_P6A_FM_Mod1_Chapter_5_Financing_Decisions_Capital_Structure.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SUMMARY
- β¦ Capital Structure : Capital structure refers to the mix of a firm's capitalisation (mix of long term sources of funds such as debentures, preference share capital, equity share capital and retained earnings for meeting total capital requirement). While choosing ... | [
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Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## LEARNING OUTCOMES
After studying this chapter, you would be able to -
- ο¨ Understand the concept of business risk and financial risk.
- ο¨ Discuss and interpret the types of leverages.
- ο¨ Discuss the relationship between operating leverage, Break even analysis & Margin of Safety.
- ο¨ Discuss ... | [
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-0.... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 1. INTRODUCTION
Objective of financial management is to maximize wealth . Here, wealth means market value. Value is directly related to performance of company and inversely related to expectation of investors. In turn, expectation of investor is dependent on risk of the company. Ther... | [
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0.01... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 2.1 Meaning of Leverage
The term leverage represents influence or power . In financial analysis, leverage represents the influence of one financial variable over some other related financial variable. These financial variables may be costs, output, sales revenue, Earnings Be... | [
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-0.... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 2.2 Types of Leverage
There are three commonly used measures of leverage in financial analysis. These are:
- (i) Operating Leverage: It is the relationship between Sales and EBIT and indicates business risk.
- (ii) Financial Leverage: It is the relationship between EBIT and EPS ... | [
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0.03577695041894913,
0.02724435366690159,
0.005165185779333115,
0.01314959954470396,
-0.04... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 2.3 Chart Showing Degree of Operating Leverage, Financial Leverage and Combined leverage
<!-- image -->
| Profitability Statement ... | [
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0.011364464648067951,
-0.026... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 3. OPERATING LEVERAGE
Operating Leverage (OL) means tendency of operating income (EBIT) to change disproportionately with change in sale volume. This disproportionate change is caused by operating fixed cost, which does not change with change in sales volume.
In other word... | [
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0.028032086789608,
0.010255333967506886,
-0.... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 3.1 Degree of Operating Leverage (DOL)
When we measure magnitude of disproportionate change, it is termed as degree of leverage. Degree of Operating Leverage (DOL) may be defined as percentage change in EBIT with respect to percentage change in sales quantity.
<!-- formula-not-decoded -->
Mathem... | [
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0.009501845575869083,
-0.011... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 3.2 Break-Even Analysis and Operating Leverage
Break-even analysis is a generally used to study the Cost Volume Profit analysis. It is concerned with computing the break-even point. At break-even point (BEP) of production level and sales, there will be no profit and loss i.e. total cost is equal t... | [
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-... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 3.3 Margin of Safety (MOS) and Operating Leverage (OL)
In cost accounting, margin of safety (MOS) may be calculated as follows:
<!-- formula-not-decoded -->
Higher margin of safety indicates lower business risk and higher profit and vice versa. MOS is inversely related to OL.
If we both multipl... | [
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-0.0... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
<!-- formula-not-decoded -->
Situation 2 : Positive Leverage
| Particulars | 20,000 units | 30,000 units |
|--------------------|----------------|----------------|
| | ( ` ) | (`) |
| Sales@ ` 10 | 2,00,000 | 3,0... | [
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0.023152600973844528,
0.030590664595365524,
0.005221... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Analysis and Interpretation of operating leverage
| S. No. | Situation | Result |
|----------|------------------------------|-----------------------------|
| 1 | No Fixed Cost | No operating leverage |
| 2. | Higher Fixed ... | [
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0.08510477840900421,
0.023628348484635353,
0.05744519084692001,
0.004572440404444933,
-0.... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 1
A Company produces and sells 10,000 shirts. The selling price per shirt is ` 500. Variable cost is ` 200 per shirt and fixed operating cost is ` 25,00,000.
- (a) CALCULATE operating leverage.
- (b) If sales are up by 10%, then COMPUTE the impact on EBIT? | [
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0.04619363695383072,
0.017551258206367493,
-0.02... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
- (a) Statement of Profitability
| | ` |
|------------------------------------|-----------|
| Sales Revenue (10,000 Γ 500) | 50,00,000 |
| Less: Variable Cost (10,000 Γ 200) | 20,00,000 |
| Contribution | 30,00,000 |
... | [
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0.038016531616449356,
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0.04854332283139229,
0.01389966532588005,
-0.0... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 2
CALCULATE the operating leverage for each of the four firms A, B, C and D from the following price and cost data:
a
| | Firms | Firms | Firms | Firms |
|------------------------|---------|---------|----------|---------|
| | A ... | [
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0.014858678914606571,
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0.029553618282079697,
0.023581787943840027,
-0.018233971670269966,
0.027473583817481995,
0.02296355366706848,
0.05656663328409195,
-0.0048730745911598206,
... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
| | Firms | Firms | Firms | Firms |
|----------------------------------|----------|----------|------------|------------|
| | A ( ` ) | B ( ` ) | C ( ` ) | D ( ` ) |
| Sales (units) ... | [
0.015722835436463356,
0.035168178379535675,
0.006316151935607195,
0.026575999334454536,
-0.006220194045454264,
-0.04573654383420944,
0.0016499476041644812,
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-0.03995798900723457,
0.055834751576185226,
0.028000608086586,
0.0521005354821682,
0.01717536896467209,
-0.013... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 4. FINANCIAL LEVERAGE
Financial leverage (FL) maybe defined as 'the use of funds with a fixed cost in order to increase earnings per share ' . In other words, it is the use of company funds on which it pays a limited return. Financial leverage involves the use of funds obtained at a ... | [
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-0... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 4.1 Degree of Financial Leverage (DFL)
Degree of financial leverage is the ratio of the percentage increase in Earnings Per Share (EPS) to the percentage increase in Earnings Before Interest and Taxes (EBIT). Financial Leverage (FL) is also defined as 'the ability of a firm ... | [
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-0.01... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Analysis and Interpretation of Financial leverage
| Sl. No. | Situation | Result |
|-----------|-----------------------------------------------------|-----------------------------|
| 1 | No Fixed Financial Cost ... | [
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0.02557613141834736,
-0.0347979... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 4.2 Financial Leverage as 'Trading on Equity'
<!-- image -->
Financial leverage indicates the use of funds with fixed cost like long term debts and preference share capital along with equity share capital which is known as trading on equity. The basic aim of financial leverage is to i... | [
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0.02525176852941513,
0.03166554495692253,
-0.00843... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 4.3 Financial Leverage as a 'Double edged Sword'
<!-- image -->
When the cost of 'fixed cost fund' is less than the return on investment , financial leverage will help to increase return on equity and EPS. The firm will also benefit from the saving of tax on interest on debts etc. However, when ... | [
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0.04069483280181885,
-0.006479... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 5.1 Degree of Combined Leverage (DCL)
Degree of combined leverage (DCL) is the ratio of percentage change in earning per share to the percentage change in sales. It indicates the effect the changes in sales will have on EPS.
%Changein EBIT %Change in EPS
%Changein Sales %Change in EBIT
%Change... | [
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0.018193041905760765,
-... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 5.2 Analysis of Combined Leverage
Combine leverage measures total risk. It depends on combination of operating and financial risk.
| DOL | DFL | Comments |
|-----... | [
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0.02976124733686447,
0.030454592779278755,
-0.0199... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 3
A firm's details are as under:
Sales (@100 per unit)
` 24,00,000
Variable Cost
50%
Fixed Cost
` 10,00,000
It has borrowed ` 10,00,000 @ 10% p.a. and its equity share capital is ` 10,00,000 ( ` 100 each).
Consider tax @ 50 %. | [
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0.05583656206727028,
0.03290997073054314,
0.03046976961195469,
0.005... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
| | (`) |
|----------------------|-----------|
| Sales | 24,00,000 |
| Less: Variable cost | 12,00,000 |
| Contribution | 12,00,000 |
| Less: Fixed cost | 10,00,000 |
| EBIT | 2,00,000 |
| Less: Interest | 1,00,... | [
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0.03757087513804436,
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0.01068267971277237,
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0.05543533340096474,
0.024035342037677765,
0.03005000203847885,
0.036930620670318604,
-0.0018637... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 4
The following information is related to Yizi Company Ltd. for the current Financial Year:
| Equity share capital (of ` 10 each) | ` 50 lakhs |
|---------------------------------------|--------------|
| 12% Bonds of ` 1,000 each | ` 37 lakhs |
| Sales ... | [
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0.04942025989294052,
0.035764873027801514,
0.03123825415968895,
0.015307131223380566,
0.00106... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Computation of Profits after Tax (PAT)
| Particulars | ( ` ) |
|-------------------------------------------------|------------|
| Sales | 84,00,000 |
| Contribution (Sales Γ P/V ratio) | 23,14,200 |... | [
0.0003272716130595654,
0.024020526558160782,
-0.021224215626716614,
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0.046082526445388794,
-0.0003289471787866205,
0.03340135142207146,
0.01912005990743637,
... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 5
Following are the selected financial information of A Ltd. and B Ltd. for the current Financial Year:
| | A Ltd. | B Ltd. |
|---------------------|----------|------------|
| Variable Cost Ratio | 60% | 50% |
| Interest |... | [
0.01733141951262951,
0.0036239689216017723,
0.029018264263868332,
0.01281716302037239,
-0.025049148127436638,
-0.02039935626089573,
0.02321632206439972,
-0.005479047074913979,
-0.038359805941581726,
0.043114181607961655,
0.04028106480836868,
0.014354276470839977,
0.030944043770432472,
0.00... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Income Statements of Company A and Company B
| | Company A ( ` ) | Company B ( ` ) |
|-----------------------------------------|-------------------|-------------------|
| Sales | 3,75,000 | 8,00,000 |
|... | [
0.003811220172792673,
0.001966807059943676,
0.0067886849865317345,
-0.004898666869848967,
-0.02692323923110962,
-0.029136095196008682,
0.019668497145175934,
-0.012201053090393543,
-0.029452724382281303,
0.055198051035404205,
-0.008289799094200134,
0.05520393326878548,
0.02591913379728794,
... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Comment based on Leverage
Comment based on leverage -Company B is better than company A of the following reasons:
- Capacity of Company B to meet interest liability is better than that of companies A (from EBIT/Interest ratio)
`
`
<!-- formula-not-decoded -->
`
`
- Company B has the least f... | [
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0.027546728029847145,
0.030479295179247856,
0.017565006390213966,
-0... |
Inter_P6A_FM_Mod1_Chapter_6_Financing_Decisions_Leverages.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SUMMARY
| DOL | DFL ... | [
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0.025401735678315163,
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0.030344843864440918,
0.051600195467472076,
0.01... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## LEARNING OUTCOMES
- β¦ State the objectives of capital investment decisions.
- β¦ Discuss the importance and purpose of Capital budgeting for a business entity.
- β¦ Calculate cash flows in capital budgeting decisions and try to explain the basic principles for measuring the same.
- β¦ Discuss the v... | [
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0.03637811169028282,
0.012457046657800674,
-0.000... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## INVESTMENT DECISIONS
1.3
requires all the characteristics of budget. Due to this feature, investment decisions are very popularly known as Capital Budgeting, which means applying the principles of budgeting for capital investment.
In simple terms, Capital Budgeting involves:
- ο Ident... | [
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0.02562953159213066,
0.006265005562454462,
-0.001... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 2. PURPOSE OF CAPITAL BUDGETING
The capital budgeting decisions are important, crucial and critical business decisions due to the following reasons:
- (i) Substantial Investment : Investment decisions are related with fulfillment of long-term objectives and existence of an organization. ... | [
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0.06852157413959503,
0.024540850892663002,
-0.01039810385555029,
0.00882362388074398,
... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 3. CAPITAL BUDGETING PROCESS
The extent to which the capital budgeting process needs to be formalised and systematic procedures to be established depends on the size of the organisation; number of projects to be considered; direct financial benefit of each project considered... | [
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0.00529957190155983,
0.019909333437681198,
-0.00... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## INVESTMENT DECISIONS
1.5
- (v) Control: The progress of the project is monitored with the aid of feedback reports. These reports will include capital expenditure progress reports, performance reports comparing actual performance against plans set and post completion audits.
- (vi) Review: When a... | [
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0.005824487656354904,
-0... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 4. TYPES OF CAPITAL INVESTMENT DECISIONS
There are many ways to classify the capital budgeting decision. Generally capital investment decisions are classified in two ways. One way is to classify them on the basis of firm's existence. Another way is to classify them on the basis of decision situati... | [
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0.07836994528770447,
0.07184450328350067,
0.032354626804590225,
0.014028687961399555,
... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 4.1 On the basis of firm's existence
The capital budgeting decisions are taken by both newly incorporated firms as well as by existing firms. The new firms may require decision making in respect of selection of a plant to be installed. Whereas the existing firm may require taking deci... | [
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0.0018338278168812394,
0.046766042709350586,
0.05525796487927437,
-0.0028240352403372526,
-0.004349938128143549,... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 4.2 On the basis of situations
The capital budgeting decisions on the basis of situations are classified as follows:
- (i) Mutually exclusive decisions: The decisions are said to be mutually exclusive if two or more alternative proposals are such that the acceptance of one proposal will exclude t... | [
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0.06966297328472137,
0.046125780791044235,
0.004988688975572586,
0.025507910177111626,
0... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## INVESTMENT DECISIONS
1.7
- (iii) Contingent decisions: The contingent decisions are made when the proposals are dependable proposals. The investment in one proposal requires investment in one or more other proposals. For example, if a company accepts a proposal to set up a factory in remote area,... | [
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0.08069776743650436,
0.04108531028032303,
0.0296840388327837,
0.022794600576162338,
-0.0060107... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 4.3 Steps of Capital Budgeting Procedure
1. Estimation of Cash flows over the entire life for each of the projects under consideration.
2. Evaluate each of the alternative, using different decision criteria.
3. Determining the minimum required rate of return (i.e., WACC) to be used as ... | [
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0.050984110683202744,
0.00007716359687037766,
0.003033451037481427,
-... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 5. ESTIMATION OF PROJECT CASH FLOWS
Capital Budgeting analysis considers only incremental cash flows from an investment likely to result due to acceptance of any project. Therefore, one of the most important tasks in capital budgeting is estimating future cash flows for a projec... | [
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0.02967754378914833,
0.050528690218925476,
0.010733619332313538,
0.01372980885207653,
-0.02... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
An investment decision implies the choice of an objective, an appraisal technique and the project's life. The objective and technique must be related to definite period of time. The life of the project may be determined by taking into consideration t... | [
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0.049882881343364716,
0.042574845254421234,
0.01584498956799507,
0.029699120670557022,
0.00... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Example -1
X Ltd. manufactures electronic motors fitted in desert coolers. It has an annual turnover of ` 30 crore and cash expenses to generate this much of sale is ` 25 crore. Suppose applicable tax rate is 30% and depreciation is ` 1.50 crore p.a.
The table below is showing Tax shi... | [
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0.07669380307197571,
0.03641505539417267,
0.03670685365796089,
0.0272793211042881,
0.0... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## INVESTMENT DECISIONS
1.9
| Profit after Tax | 3.50 | 2.45 |
|--------------------|--------|--------|
| Add: Depreciation* | - | 1.50 |
| Cash Flow | 3.50 | 3.95 |
As we can see in the above table that due to depreciation under the second scenario, a tax sa... | [
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0.00... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
reduction in working capital shall be treated as cash inflow. It may be noted that, if nothing has been specifically mentioned for the release of working capital it is assumed that full amount has been realized at the end of the project. However, adjustment on ac... | [
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0.032728176563978195,
0.020010601729154587,
0.011886846274137497,
-... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## INVESTMENT DECISIONS
1.11
| Add: | Installation/Set-Up Costs | xxx | |
|----------------------|-----------------------------------------------------|-------|-----|
| Add/(less): | Increase (Decrease) in net Working Capital level | xxx ... | [
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0.010613661259412766,
-... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
| Add/(less): | Net decrease (increase) in taxes | xxx |
|---------------|-------------------------------------------------|-------|
| | Net change in income after taxes | xxx |
| Add/(less): | Net decrease (increase) in depr... | [
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0.05430011451244354,
0.021564563736319542,
0.019518576562404633,
0.02814517170190811,
-0.... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 6.1 Block of Assets and Depreciation
From above discussion, it is clear that tax shield/ benefit from depreciation is considered while calculating cash flows from the project. Taxable income is calculated as per the provisions of Income Tax or similar Act of a co... | [
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0.015713946893811226,
0.054132360965013504,
0.03727007284760475,
... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Example- 2
Suppose A Ltd. acquired new machinery for ` 1,00,000, depreciable at 20% as per written down value (WDV) method. The machine has an expected life of 5 years with salvage value of ` 10,000. The treatment of depreciation/ short term capital loss in the 5 th year in two cases shall be as f... | [
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0.019980937242507935,
0.006986600812524557,
0.03451819345355034,
0.017... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
- (ii) Case 2 - More than one asset exists in the Block : When more than one asset exists in the block, then deprecation shall be charged in the terminal year (5 th year) in which asset is sold. The WDV on which depreciation be charged shall be calculated by deducting sale val... | [
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0.015376873314380646,
0.030161995440721512,
0.016... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 6.2 Exclusion of Financing Costs Principle
When cash flows relating to long-term funds are being defined, financing costs of long-term funds (interest on long-term debt and equity dividend) should be excluded from the analysis. The interest and dividend payments are reflected in the wei... | [
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-0... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## INVESTMENT DECISIONS
1.15
While dividends pose no difficulty as they come only from profit after taxes, interest needs to be handled properly. Since interest is usually deducted in the process of arriving at profit after tax, an amount equal to 'Interest (1 -Tax rate)' should be added back to th... | [
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Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Year 1 Year 2 Year 3 Year 4
Profit before Interest and Tax ` 10,000 ` 20,000 ` 40,000 ` 50,000 If interest payable is ` 5,000 and tax rate is 30%, then the profit after tax excluding financing cost shall be as follows:
| | Year 1 ( ` ) | Year 2 ( ` ) | Year 3 ( ... | [
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0.016144564375281334,
0.02763879857957363,
-... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Alternatively
| | Year 1 (`) | Year 2 (`) | Year 3 (`) | Year 4 (`) |
|--------------------------------|--------------|--------------|--------------|--------------|
| Profit before Interest and Tax | 10,000 | 20,000 | 40,000 | 50,000 |... | [
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0.001168717397376895,
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0.0454520657658577,
0.03233269602060318,
0.012228932231664658,
0.027634896337985992,
-0.... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 6.3 Post-tax Principle
Tax payments like other payments must be properly deducted in deriving the cash flows. That is, cash flows must be defined in post-tax terms. It is always better to avoid using pre-tax cash flows and using pre-tax discounting rate. The discounting rate and the cash flows, bo... | [
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0.012396669946610928,
0.030437221750617027,
0.024669889360666275,
0.01... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Statement showing the calculation of Cash Inflow After Tax (CFAT)
| Particulars | ( ` ) | ( ` ) |
|------------------------------------------|---------|---------|
| Sales value | | xxx |
| Less: Variable Cost ... | [
0.011210497468709946,
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0.04283877834677696,
0.034454595297575,
-0.0376... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 1
ABC Ltd is evaluating the purchase of a new machinery with a depreciable base of ` 1,00,000; expected economic life of 4 years and change in earnings before taxes and depreciation of ` 45,000 in year 1, ` 30,000 in year 2, ` 25,000 in year 3 and ` 35,000 in year 4. Assume straight-... | [
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0.06533674895763397,
0.058924466371536255,
-0.0010793075198307633,
0.0013941922225058079,
... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Amount in ( ` )
| | Years | Years | Years | Years |
|--------------------------------------|----------|----------|----------|----------|
| | 1 | 2 | 3 | 4 |
| Earnings before tax and d... | [
0.023343857377767563,
0.03144579380750656,
-0.007693788502365351,
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0.06405431777238846,
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0.025646071881055832,
0.03641882538795471,
-0.... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 7. CAPITAL BUDGETING TECHNIQUES
In order to maximise the return to the shareholders of a company, it is important that the best or most profitable investment projects are selected. Results of making a bad long-term investment decision can be devastating in both financial and strategic ... | [
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0.020807616412639618,
0.0... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
<!-- image -->
Organisations may use one or more of capital investment evaluation techniques from above. Some organisations use different methods for different types of projects while others may use multiple methods for evaluating each project. The techniques discu... | [
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0.009689610451459885,
-0.... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 8.1 Payback Period
Time required to recover the initial cash-outflow is called pay-back period. The payback period of an investment is the length of time required for the cumulative total net cash flows from the investment to equal the total initial cash outlays. At | [
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-0.006140134297311306,... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Steps in Payback period technique :
- (a) The first step in calculating the payback period is determining the total initial capital investment (cash outflow).
- (b) The second step is calculating/estimating the annual expected after-tax cash flows over the useful life of the project.
1. Unifo... | [
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0.0321490615606308,
0.009538164362311363,
-0.... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Example- 4
Suppose a project costs ` 20,00,000 and yields annually a profit of ` 3,00,000 after depreciation @ 12Β½% (straight line method) but before tax at 50%.
The first step would be to calculate the cash inflow from this project. The cash inflow is calculated as follows:
| Particulars ... | [
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0.00552630377933383,
0.021995877847075462,
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0.05690419673919678,
0.02466515637934208,
0.03253727778792381,
0.02821473404765129,
-0.019... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
Some Accountants calculate payback period after discounting the cash flows by a predetermined rate and the payback period so calculated is called as 'Discounted payback period' (discussed later on in the chapter).
2. Non-Uniform Cash Flows: When the annual cash inflows are no... | [
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0.08129078894853592,
0.007356392219662666,
0.03389102593064308,
0.01956956274807453,
-... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Example- 5
Suppose XYZ Ltd. is analyzing a project requiring an initial cash outlay of ` 2,00,000 and is expected to generate cash inflows as follows:
| Year | Annual Cash Inflows (`) |
|--------|---------------------------|
| 1 | 80,000 |
| 2 | 60,000 ... | [
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0.0848875343799591,
0.0310075506567955,
0.01431433204561472,
0.037861455231904984,
-0.00261... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## INVESTMENT DECISIONS
1.21
Payback period shall lie between 3 to 4 years. Since up to 3 years, a sum of ` 2,00,000 shall be recovered and balance of ` 5,000 shall be recovered in the part (fraction) of 4 th year, computation is as follows:
<!-- formula-not-decoded -->
Thus, total... | [
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0.06229110434651375,
0.019711080938577652,
0.030395332723855972,
-0.005954277236014605,
-0.... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Advantages of Payback period
- ο It is easy to compute.
- ο It is easy to understand as it provides a quick estimate of the time needed for the organization to recoup the cash invested.
- ο The length of the payback period can also serve as an estimate of a project's risk; the longer the paybac... | [
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0.07604411244392395,
0.03612399473786354,
0.01381918229162693,
0.002184906741604209,
-0.0... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Limitations of Payback period
- ο It ignores the time value of money . As long as the payback periods for two projects are the same, the payback period technique considers them equal as investments, even if one project generates most of its net cash inflows in the early years of the project while ... | [
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-0.02876357175409794,
0.03372746706008911,
0.02976711094379425,
-0.014... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 8.1.1 Payback Reciprocal
As the name indicates, it is the reciprocal of payback period. A major drawback of the payback period method of capital budgeting is that it does not indicate any cut off period for the purpose of investment decision. It is, however, argued that the | [
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0.02640344575047493,
0.011003389954566956,
-0.0006478693103417754,... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Example- 6
Suppose a project requires an initial investment of ` 20,000 and it would give annual cash inflow of ` 4,000. The useful life of the project is estimated to be 10 years.
<!-- formula-not-decoded -->
The above payback reciprocal provides a reasonable approximation... | [
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0.0632944107055664,
0.0496411994099617,
0.01658507063984871,
0.0016717955004423857,
0.00066... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 8.2 Accounting (Book) Rate of Return (ARR) or Average Rate of Return (ARR)
The accounting rate of return of an investment measures the average annual net income of the project (incremental income) as a percentage of the investment.
<!-- formula-not-decoded -->
The numerator is the averag... | [
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-0.025069598108530045,
-0.0... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
reciprocal of the payback would be a close approximation of the Internal Rate of Return (later discussed in detail) if the life of the project is at least twice the payback period and the project generates equal amount of the annual cash inflows. In practice, the ... | [
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-0.009716097265481949,
0.0... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Example- 7
Suppose Times Ltd. is going to invest in a project a sum of ` 3,00,000 having a life span of 3 years. Salvage value of machine is ` 90,000. The profit before depreciation for each year is ` 1,50,000.
The Profit after Tax and value of Investment in the Beginning and at the End of each y... | [
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0.062380097806453705,
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0.017414366826415062,
0.028055068105459213,
-... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## (c) Version 3: Average Investment Basis
<!-- formula-not-decoded -->
Average Investment = ( ` 3,00,000 + ` 90,000)/2 = ` 1,95,000 Or, Average Investment = Β½ (Initial Investment - Salvage Value) + Salvage Value = Β½ ( ` 3,00,000 -` 90,000) + ` 90,000 = ` 1,95,000 = 41.03%
<!-- formula-not-decoded ... | [
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-0.... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Advantages of ARR
- ο This technique uses readily available data that is routinely generated for financial reports and does not require any special procedures to generate data.
- ο This method may also mirror the method used to evaluate performance on the operating results of an investment... | [
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-0.0097581148147583,
... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Limitations of ARR
- ο The accounting rate of return technique, like the payback period technique, ignores the time value of money and considers the value of all cash flows to be equal.
- ο The technique uses accounting numbers that are dependent on the organization's choice of account... | [
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0.008772877976298332,
0.022453969344496727,
-0.0... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 2
A project requiring an investment of ` 10,00,000 and it yields profit after tax and depreciation which is as follows:
| Years | Profit after tax and depreciation (`) |
|---------|-----------------------------------------|
| 1 | 50,000 |
| ... | [
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0.04240934178233147,
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0.05272311717271805,
0.01807943359017372,
0.032109588384628296,
0.007339966017752886,
0.00... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
In this case the rate of return can be calculated as follows:
<!-- formula-not-decoded -->
- (a) If Initial Investment is considered then,
<!-- formula-not-decoded -->
This rate is compared with the rate expected on other projects, had the same funds been invested alternatively in tho... | [
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0.028829950839281082,
-0.02154579386115074,
0.... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 9. DISCOUNTING TECHNIQUES
Discounting techniques consider time value of money and discount the cash flows to their Present Value. These techniques are also known as Present Value techniques. These are namely Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index (... | [
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-0... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## INVESTMENT DECISIONS
funds in the best available alternative investment that has the same risk. Determining the best alternative opportunity available is difficult in practical terms so rather than using the true opportunity cost, organizations often use an alternative measure... | [
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-0.0... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 9.1 Net Present Value Technique (NPV)
The net present value technique is a discounted cash flow method that considers the time value of money in evaluating capital investments. An investment has cash flows throughout its life, and it is assumed that an amount of cash flow in the early years of an... | [
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0.055866871029138565,
0.0... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Net present value = Present value of net cash inflow - Total net initial investment
Since it might be possible that some additional investment may also be required during the life time of the project, then appropriate formula shall be:
Net present value = Present value of cash inflows - Present v... | [
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0.04103326052427292,
0.012213217094540596,
0.028826767578721046,
-... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Steps for calculating Net Present Value (NPV):
The steps for calculating net present value are:
1. Determine the net cash inflow in each year of the investment.
2. Select the desired rate of return or discounting rate or Weighted Average Cost of Capital.
3. Find the discount factor for each ... | [
-0.008134372532367706,
0.06176323443651199,
0.008651270531117916,
-0.023841315880417824,
0.003880116855725646,
-0.04562868922948837,
0.024488523602485657,
0.01198449544608593,
0.02089543268084526,
0.03854334354400635,
0.020431319251656532,
-0.003550643101334572,
0.037074554711580276,
-0.01... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Decision Rule:
| If NPV β₯ 0 | Accept the Proposal |
|--------------|-----------------------|
| If NPV < 0 | Reject the Proposal |
The NPV method can be used to select between mutually exclusive projects; the one with the higher NPV should be selected. | [
0.011780287139117718,
0.016577133908867836,
-0.00994598213583231,
0.0029933417681604624,
-0.03990962356328964,
-0.02897871844470501,
-0.011276344768702984,
0.048016469925642014,
-0.002788528800010681,
0.08213667571544647,
0.033176008611917496,
-0.010046282783150673,
0.03844842687249184,
0.... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 3
COMPUTE the net present value for a project with a net investment of ` 1,00,000 and net cash flows for year one is ` 55,000; for year two is ` 80,000 and for year three is ` 15,000. Further, the company's cost of capital is 10%.
[PVIF @ 10% for three years are 0.909, 0.826 and 0.75... | [
0.019663233309984207,
0.050259970128536224,
0.000461060757515952,
-0.03031042590737343,
-0.022806372493505478,
-0.048121143132448196,
0.0034593550954014063,
0.0040168664418160915,
0.009589120745658875,
0.030682628974318504,
0.036772098392248154,
0.00021581958571914583,
0.04855593293905258,
... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
| Year | Net Cash Flows (`) | PVIF @10% | Discounted Cash Flows (`) |
|-------------------|----------------------|-------------------|-----------------------------|
| 0 | (1,00,000) | 1.000 | (1,00,000) |
| 1 ... | [
0.03441419452428818,
0.04740917682647705,
0.003570799482986331,
-0.0016944499220699072,
-0.04253493249416351,
-0.040618181228637695,
0.014809805899858475,
0.023330628871917725,
0.0038171038031578064,
0.040100689977407455,
0.021750779822468758,
0.007944921962916851,
0.05312914773821831,
-0.... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 4
ABC Ltd. is a small company that is currently analyzing capital expenditure proposals for the purchase of equipment; the company uses the net present value technique to evaluate projects. The capital budget is limited to ` 500,000 which ABC Ltd. believes is the maximum capital it c... | [
0.05319730564951897,
0.037026483565568924,
0.008676180616021156,
-0.023181168362498283,
-0.011861994862556458,
-0.03424130380153656,
0.018272817134857178,
0.0049032485112547874,
-0.010687203146517277,
0.06597727537155151,
0.07644934952259064,
-0.0035532896872609854,
0.01968793198466301,
-0... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Calculation of net present value:
| Period | PV factor | Project A (`) | Project B (`) | Project C (`) | Project D (`) |
|-------------------|-------------------|-----------------|-----------------|-----------------|-----------------|
| 0 | 1.000 ... | [
0.029040182009339333,
0.04059762880206108,
-0.007766132242977619,
0.0005142807494848967,
-0.04486554488539696,
-0.062236055731773376,
0.015554786659777164,
-0.005669515114277601,
0.006939912214875221,
0.0445961058139801,
0.025111667811870575,
-0.005725535098463297,
0.058410849422216415,
-0... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Advantages of NPV
- ο NPV method takes into account the time value of money .
- ο The whole stream of cash flows is considered.
- ο The net present value can be seen as the addition to the wealth of shareholders. The criterion of NPV is thus in conformity with basic financial objectiv... | [
0.006563798990100622,
0.03821944445371628,
0.007041010074317455,
-0.024122511968016624,
-0.025690393522381783,
-0.021758228540420532,
-0.005933322943747044,
0.0050882259383797646,
-0.011039186269044876,
0.044885799288749695,
0.009478175081312656,
0.006904332898557186,
0.04966376721858978,
... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Limitations of NPV
- ο It involves difficult calculations .
- ο The application of this method necessitates forecasting cash flows and the discount rate. Thus, accuracy of NPV depends on accurate estimation of these two factors which may be quite difficult in practice.
- ο The decision under NPV m... | [
0.02629680745303631,
0.02586374618113041,
-0.014920208603143692,
0.003212983487173915,
-0.05061186105012894,
-0.02105548232793808,
-0.008824121206998825,
0.013591173104941845,
0.007367599755525589,
0.0659516304731369,
0.016465647146105766,
-0.027174953371286392,
0.0268582534044981,
0.02383... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 9.2 Profitability Index/Desirability Factor/Present Value Index Method (PI)
The students may have seen how with the help of discounted cash flow technique, the two alternative proposals for capital expenditure can be compared. In certain cases, we have to compare a number of proposals, each in... | [
0.020109590142965317,
0.03962680324912071,
0.031111985445022583,
-0.03938128426671028,
-0.03568096458911896,
-0.0359007902443409,
-0.02451929822564125,
-0.016627877950668335,
-0.00387599621899426,
0.05179961025714874,
0.04053296893835068,
0.006129054352641106,
0.03797335550189018,
-0.03315... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 5
Suppose we have three projects involving discounted cash outflow of ` 5,50,000, ` 75,000 and ` 1,00,20,000 respectively. Suppose further that the sum of discounted cash inflows for these projects are ` 6,50,000, ` 95,000 and ` 1,00,30,000 respectively. CALCULATE the desirab... | [
0.03746873512864113,
0.029045887291431427,
0.012969362549483776,
-0.0376313291490078,
-0.048897068947553635,
-0.02337808348238468,
0.018215708434581757,
0.034801024943590164,
-0.035329338163137436,
0.05853664502501488,
0.04141031950712204,
0.013191581703722477,
0.046063728630542755,
-0.039... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
It can be seen that in absolute terms, project 3 gives the highest cash inflows yet its desirability factor is low. This is because the outflow is also very high. The Desirability/ Profitability Index factor helps us in ranking various projects .
Since PI is an ... | [
0.044938839972019196,
0.024943653494119644,
0.004909737966954708,
-0.02668541856110096,
-0.061983805149793625,
-0.027440212666988373,
-0.0141513142734766,
0.019321560859680176,
0.0011008329456672072,
0.034692250192165375,
0.03587884455919266,
0.0037173181772232056,
0.03695240989327431,
-0.... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Advantages of PI
- ο The method also uses the concept of time value of money .
- ο In the PI method, since the present value of cash inflows is divided by the present value of cash outflow, it is a relative measure of a project's profitability. | [
0.017849288880825043,
0.04133810102939606,
-0.018610892817378044,
-0.05253075063228607,
-0.053538963198661804,
0.0032305375207215548,
-0.010747905820608139,
0.011429468169808388,
0.022209178656339645,
0.040365248918533325,
0.02062198519706726,
0.02108086086809635,
0.005261060316115618,
-0.... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Limitations of PI
- ο Profitability index fails as a guide in resolving capital rationing where projects are indivisible.
- ο Once a single large project with high NPV is selected, possibility of accepting several small projects which together may have higher NPV than the single project is exclude... | [
0.03480316698551178,
0.03724290430545807,
-0.005578730721026659,
0.004736659117043018,
-0.04094463586807251,
-0.04451495409011841,
-0.025978753343224525,
0.008415530435740948,
0.0016342223389074206,
0.07215164601802826,
0.019521323963999748,
0.02400527335703373,
0.028150837868452072,
-0.02... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 9.3 Internal Rate of Return Method (IRR)
The internal rate of return method considers the time value of money, the initial cash investment, and all cash flows from the investment. But unlike the net present value method, the internal rate of return method does not use the desired rate of return b... | [
-0.012462281621992588,
0.017552684992551804,
-0.021940093487501144,
-0.06796105951070786,
-0.028211381286382675,
-0.027478327974677086,
0.006741417571902275,
-0.009332263842225075,
-0.012725576758384705,
0.05271469056606293,
0.022773565724492073,
0.039965227246284485,
-0.021861586719751358,
... |
Inter_P6A_FM_Mod2_Chapter_7_Investment_Decisions.pdf | FM | Study_Material | N/A | [Concept: Theory]
## INVESTMENT DECISIONS
This IRR is then compared to a criterion rate of return that can be the organization's desired rate of return for evaluating capital investments .
Calculation of IRR: The procedures for computing the internal rate of return vary with the pattern of net cash flows over the use... | [
0.005449268966913223,
0.03919396921992302,
-0.006516183726489544,
-0.030108032748103142,
-0.017113711684942245,
-0.02317877672612667,
-0.011653603985905647,
-0.02201385796070099,
0.013199497945606709,
0.04680314660072327,
0.04572112113237381,
0.006238655187189579,
0.008750680834054947,
-0.... |
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