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Formulas Capital Budgeting

This document discusses methods for capital budgeting analysis: 1) Payback period is the number of years required to recover the initial cash outflow of a project from annual cash inflows. 2) Net present value (NPV) calculates the present value of future cash flows less the initial cash outflow. 3) Internal rate of return (IRR) is the discount rate that makes the NPV equal to zero. It is found using an iterative process.

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8K views1 page

Formulas Capital Budgeting

This document discusses methods for capital budgeting analysis: 1) Payback period is the number of years required to recover the initial cash outflow of a project from annual cash inflows. 2) Net present value (NPV) calculates the present value of future cash flows less the initial cash outflow. 3) Internal rate of return (IRR) is the discount rate that makes the NPV equal to zero. It is found using an iterative process.

Uploaded by

api-3727562
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Capital Budgeting

Net cash outflow


Pay back peroid =
Annual cash inflow
Or,

NCO - C
Pay Back Peroid = A +
D
Here,
A = The year in which the cumulative net cash flow is
nearer to NCO.
NCO = Net Cash Outlay.
C = Cumulative Net Cash Flow of Year A.
D = Net Cash Flow of the Year following the Year A.

 A1 A2 A3 An 
NPV =  + + + .............. + -C
 (1 + R)
1
(1 + R) (1 + R)
2 3
( 1 + R ) n 
C
IRR = A + ( B − A)
D
Here,
IRR = Internal Rate of Return
A = Lower Discounting Rate
B = Higher Discounting Rate
C = Net Present Value at Lower Discount Rate
D = Difference Between the NPV Value at Higher
Discounting Rate & at Lower Discount Rate.

Average Annual Net Income


Average Rate of Return (ARR) = × 100
Average Investment

Present Value of All Net Cash Benefits


Profitability Index (PI) =
Pr esent Value of Initial Investment

Cost - Salvage Value


Depreciation Per Year =
Expected Life

Created By,
Mahmudul Hoque Chowdhury
ID # 503, Daffodil Institute of IT (DIIT)

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