- Replacement to reduce the cost
- Expansion to raise the protection level.
- New machinery installation for new product
- To meet the changing legal requirement standards. For example, safety and
environment protection. - Expansion or re-organization of R & D wing etc,
For screening purpose or from the point of prioritization and selection, a series of
questions must be developed. More specific questions from the angle of marketing and
profit should be encouraged. The strengths and weaknesses must be listed along with the
driving forces and the restraining forces of a capital investment proposal.
The capital budgeting evaluation involves the following steps.
- Determination of the cost of the project
- Estimated cash flows
- Salvage value of assets after its life span
- Estimation of riskiness on cash flow (measurement of uncertainty)
- Determination of discount factor to calculate the estimations in terms of present
value - Finding out PV of cost
- Calculation of NPV
- Calculation of IRR
Ranking will be done by using the following methods:-
- Pay back method
- Discounted pay back
- NPV
- IRR
- MIRR
- PI
- Payback Period
1.1 In how many years (period) can one recover the original investment? This
is the essence of payback period. How quickly will the original
investment be recovered?1.2 Calculate this for each capital project to rank it. The capital project with
shortest pay back period tops the list. To accept or reject proposed
projects must be mutually exclusive.- Discounted Pay back period
2.1 In L.U.2 the DCFT has been explained in detail. Use the DCFT technique
to convert the expected cash flows in terms of present value. The DCFT