Capital Budgeting Examples
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mojo.com/)
Investment Banking
Tutorials
Investment Banking
Free Course
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(https://www.wallstreetmojo.com/capital-budgetingmethods/)
(https://www.wallstre
etmojo.com/freeinvestment-bankingcourses)
Investment
Banking Basics
What is Investment
Banking? (Overview
of what do they
actually do!)
(https://www.wallstre
etmojo.com/what-isinvestment-banking/)
Investment Banking
Functions
(https://www.wallstre
Examples of Capital Budgeting
Techniques
etmojo.com/investme
nt-bankingfunctions/)
Investment Banking
Below example of capital budgeting technique shows us how an
organization can arrive on the decision by comparing future cash
vs Commercial
in ows and out ows of the individual projects. Point to be
Banking
remembered on capital budgeting is that it considers only nancial
(https://www.wallstre
factors in investment as explained in the below examples and not a
etmojo.com/investme
nt-banking-vs-
qualitative factor. With the help of capital budgeting, we can
commercial-banking/) understand that some of the methods make decisions making easy
Equity Research in an
Investment Bank
however some methods do not arrive at a decision, it makes
organization dif cult to make decisions.
(https://www.wallstreet
(https://www.wallstre
mojo.com/)
etmojo.com/equityresearch-in-an-
Top 5 Examples of
investment-bank/)
Capital Budgeting
What is Asset
Management
Company AMC
(https://www.wallstre
etmojo.com/what-isasset-management-
Let’s see some simple to advanced examples of capital budgeting to
understand it better.
company-amc/)
Sales and Trading in
Investment Banking
(https://www.wallstre
etmojo.com/sales-
Example #1 (Pay Back Period)
What is Pay Back Period
and-trading-in-
(https://www.wallstreetmojo.com/payback-period-discounted-
investment-banking/)
payback-period/) and how to understand that let’s discuss this by
Private Placement,
IPO and FPO in
considering the below example?
Investment Banking
(https://www.wallstre
An XYZ limited company looking to invest in one of the new
etmojo.com/private-
project and cost of that project is $10,000 before investing
placement-ipo-fpoin-investment-
company want to analyze that how long it will take a company to
banking/)
recovered invested money in a project?
Investment Banking –
Underwriters and
Market Makers
Popular Course in this category
(https://www.wallstre
etmojo.com/investme
nt-bankingunderwriters-andmarket-makers/)
Investment Banking –
Investment Banking Training (117 Courses, 25+
Mergers and
Projects)
Acquisitions
117 Courses | 25+ Projects | 600+ Hours | Full Lifetime Access |
(https://www.wallstre
Certi cate of Completion
etmojo.com/investme
nt-banking-mergersd
i iti
/)
4.9 (831 ratings)
Course Price
and-acquisitions/)
$299 $449
Investment Banking –
(https://www.wallstreet
Restructuring and
mojo.com/)
Reorganisation
(https://www.wallstre
View Course
(https://www.wallstreetmojo.com/investment-bankingtraining/?btnz=wsm-blg-inline-banner1)
etmojo.com/investme
nt-bankingrestructuring-andreorganisation/)
Investment Banking
Roles and
Responsibilities
(https://www.wallstre
etmojo.com/investme
nt-banking-rolesand-responsibilities/)
Related Courses
Financial Modeling Course
(https://www.wallstreetmojo.com/ nancial-modelingcourse/?btnz=wsm-blg-inline-banner1)
M&A Course (https://www.wallstreetmojo.com/mergersand-acquisitions-course/?btnz=wsm-blg-inline-banner1)
LBO Modeling Course (https://www.wallstreetmojo.com/lbomodeling-course/?btnz=wsm-blg-inline-banner1)
Market Makers
(https://www.wallstre
etmojo.com/market-
Solution:
makers/)
Propreitary Trading
(https://www.wallstre
etmojo.com/proprieta
ry-trading/)
Deal Origination
(Sourcing)
Start Your Free Investment Banking Course
Download IB Excel Templates, Accounting, Valuation, Financial Modeling,
Video Tutorials
(https://www.wallstre
Let’s say in a year one and so on company recover a pro t as listed
etmojo.com/deal-
in the table below.
origination-sourcing/)
Initial Public Offering
(IPO)
(https://www.wallstre
etmojo.com/initialpublic-offering-ipo/)
Price-Weighted
Index
(https://www.wallstre
etmojo.com/priceweighted-index/)
Delisting
(https://www.wallstre
etmojo.com/delisting/
)
(https://www.wallstreet
Publicly Traded
mojo.com/)
Companies
(https://www.wallstre
etmojo.com/publiclytraded-companies/)
Top 4 Must Know
Investment Banking
Charts (Free
So how long it will take the company to recover invested money
Download Template
from the above table it shows 3 year and some months. But this is
included)
(https://www.wallstre
not the right way to nd out a payback period of initial investment
etmojo.com/investme
because base what company is considering here is pro t and it is
nt-banking-charts-
not a cash ow so pro t is not the right criteria so a company should
pe-charts-pe-bandchart-football- eld-
use here is cash ow. So pro t is arrived after deducting
scenario-graphs/)
depreciation value so to know the cash ows we have to add
Pitch Book | Guide to
depreciation in pro t let say depreciation value is $2,000 so net
Investment Banking
Pitch Book
cash ows will be as listed in below table.
(Examples)
(https://www.wallstre
etmojo.com/investme
nt-banking-pitchbooks/)
What is LBO?
(https://www.wallstre
etmojo.com/what-islbo/)
Leverage buyout Lbo
Analysis
(https://www.wallstre
etmojo.com/leveragebuyout-lbo-analysis/)
LBO Financing
So from Cash ow analysis, (https://www.wallstreetmojo.com/cashow-analysis/) company will recover initial investment within 2
years. So the payback period is nothing but the time taken by cash
in ows to recover the investment amount.
(https://www.wallstre
etmojo.com/lbonancing/)
Capital Budgeting
(https://www.wallstre
Example #2
Calculate the Pay Back Period and Discounted Pay Back Period
(htt
//
ll t
t
j
/di
t d
b
k
i d
etmojo.com/capital-
(https://www.wallstreetmojo.com/discounted-payback-period-
budgeting/)
formula/) for the project which cost $270,000 and projects
(https://www.wallstreet
Capital Budgeting
mojo.com/)
Methods
expected to generate $75,000 per year for the next ve years?
(https://www.wallstre
Company required rate of return
etmojo.com/capital-
(https://www.wallstreetmojo.com/required-rate-of-return-
budgeting-methods/)
Capital Budgeting
formula/) is 11 percent. Should the company go ahead and invest
Examples
in a project? The rate of Return 11%.Do we have to nd here, PB?
Capital Budgeting
DPB?Should the project be purchased?
Process
(https://www.wallstre
etmojo.com/capitalbudgeting-process/)
Trading Floor
(https://www.wallstre
etmojo.com/tradingoor/)
Limit Order
(https://www.wallstre
etmojo.com/limitorder/)
Block Trade
Solution:
(https://www.wallstre
etmojo.com/blocktrade/)
Gray List
(https://www.wallstre
etmojo.com/gray-list/)
Market Order vs Limit
Order
(https://www.wallstre
etmojo.com/marketorder-vs-limit-order/)
Bid vs Ask
(https://www.wallstre
etmojo.com/bid-vsask/)
Bid vs Offer Price
(https://www.wallstre
After adding cash ows of each year Balance will come as shown in
below table.
etmojo.com/bid-vsoffer-price/)
(https://www.wallstreet
Industry vs Sector
mojo.com/)
(https://www.wallstre
etmojo.com/industryvs-sector/)
Merchant Bank
(https://www.wallstre
etmojo.com/merchant
From the above table positive balance is in between 3 and 4 years
-bank/)
so,
Money Market
Account
PB= (Year – Last negative Balance)/Cash Flows
(https://www.wallstre
etmojo.com/money-
PB=[3-(-45,000)]/75,000
market-account/)
PB= 3.6 Years
Best Investment
Banking Books
(https://www.wallstre
etmojo.com/top-
Or
investment-banking-
PB= Initial Investment/Annual Cash Flows
books/)
PB= 270,000/75,000
Nasdaq vs Dow
Jones
PB= 3.6 Years.
(https://www.wallstre
etmojo.com/nasdaqvs-dow-jones-2/)
Nasdaq vs Nyse
With the Discounted rate of return
(https://www.wallstreetmojo.com/discount-rate-vs-interest-rate/) of
(https://www.wallstre
11% Present Value of Cash Flows
etmojo.com/nasdaq-
(https://www.wallstreetmojo.com/present-value-factor-pv/) as
vs-nyse/)
Differences Between
NSE and BSE
(https://www.wallstre
etmojo.com/differenc
es-between-nseand-bse/)
SWOT Analysis
(https://www.wallstre
etmojo.com/swotanalysis/)
shown in below table.
SWOT Analysis
Examples
(https://www.wallstreet
(https://www.wallstre
mojo.com/)
etmojo.com/swot-
analysis-examples/)
PEST Analysis
Example
(https://www.wallstre
etmojo.com/pestanalysis-example/)
Investment Banking
Careers (25+)
DPB= (Year – Last negative Balance)/Cash Flows
DPB= [(4-(37,316.57)/44,508.85)
DPB= 4.84 Years
So from above both capital budgeting method
(https://www.wallstreet
mojo.com/category/inve
stmentbanking/investmentbanking-careers)
Investment Banking
Firms (27+)
(https://www.wallstreet
(https://www.wallstreetmojo.com/capital-budgeting-methods/), it is
clear that the company should go ahead and invest in the project as
though both methods the company will cover initial investment
before 5 years.
Example #3 (Accounting Rate of Return)
Accounting Rate of Return technique of capital budgeting
mojo.com/category/inve measures the average annual rate of return
stment-
(https://www.wallstreetmojo.com/average-rate-of-return-
banking/investment-
formula/) over the assets life. Let see through this below example.
banking- rms)
Top Banks (42+)
(https://www.wallstreet
XYZ limited company planning to buy some new production
equipment which costs $240,000, but the company has unequal
mojo.com/category/inve net cash in ows during its life as shown in the table and $30,000
stment-banking/top-
residual value (https://www.wallstreetmojo.com/residual-value/)
banks)
at the end of its life. Calculate the accounting rate of return?
Mergers and
Acquisitions (45+)
(https://www.wallstreet
j
/
/i
mojo.com/category/inve
stment-
(https://www.wallstreet
banking/mergers-andmojo.com/)
acquisitions)
Cryptocurrency
Solution:
Basics (10+)
(https://www.wallstreet
First, calculate Average Annual Cash Flows
mojo.com/category/inve
stmentbanking/cryptocurrency
-basics)
Related Courses
Investment Banking
Course
(https://www.wallstre
etmojo.com/investme
nt-banking-training/?
btnz=wsm-blg-relcrs)
Financial Modeling
Course
=Total cash Flows/Total Number of Year
(https://www.wallstre
=360,000/6
etmojo.com/ nancialmodeling-course/?
btnz=wsm-blg-rel-
Average Annual Cash Flows =$60,000
crs)
Calculate Annual Depreciation Expenses
M&A Course
(https://www.wallstre
etmojo.com/mergersand-acquisitionscourse/?btnz=wsmblg-rel-crs)
LBO Modeling Course
(https://www.wallstre
etmojo.com/lbomodeling-course/?
bt
bl
l
(https://www.wallstreetmojo.com/income-tax-expense/)
btnz=wsm-blg-relcrs)
(https://www.wallstreet
mojo.com/)
=$240,000-$30,000/6
=210,000/6
Annual Depreciation Expenses =$35,000
Calculate ARR
(https://www.wallstreet
mojo.com/)
ARR=Average Annual net cash ows – Annual Depreciation
Expenses/ Initial Investment
ARR=$60,000- $35,000/$240,000
ARR=$25,000/$240,000 × 100
ARR=10.42%
Conclusion – So if ARR is higher than the hurdle rate
(https://www.wallstreetmojo.com/hurdle-rate/) established by
company management than it will be considered and in vice versa it
will be rejected.
Example #4 (Net Present Value)
MetLife Hospital is planning to buy an attachment for its X-ray
machine, cost of attachment is $3,170 and life of 4 years, Salvage
value is zero and increase in cash in ows every year is $1,000. No
investment is to be made unless having annual of 10%. Will the
MetLife Hospital invest in the attachment?
Solution:
(https://www.wallstreet
mojo.com/)
Total Investment Recovered (NPV
(https://www.wallstreetmojo.com/npv-in-excel/))= 3170
From the above table, it is clear that cash in ows of $1,000 during 4
years is suf cient to recover the initial investment of $3,170 and to
provide exactly 10% return on investment So MetLife Hospital can
invest in X-ray attachment.
Example #5
ABC limited company looking to invest in one of the Project cost
that project is $50,000 and cash in ows and out ows of a project
during 5 years as shown in below table. Calculate Net Present
Value and Internal Rate of Return of the Project. An interest rate
is of 5%.
(https://www.wallstreet
mojo.com/)
Solution:
First to calculate net cash ows
(https://www.wallstreetmojo.com/net-cash- ow-formula/) during
that time period by Cash in ows – Cash out ows as shown in below
table.
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NPV=
-50,000+15,000/(1+0.05)+12,000/(1+0.05)²+10,000/(1+0.05)³+
10,000/(1+0.05)⁴+
14,000/1+0.05)5
NPV=
50 000+14 285 71+10 884 35+8 638 56+8 227 07+10 969 21
-50,000+14,285.71+10,884.35+8,638.56+8,227.07+10,969.21
(https://www.wallstreet
mojo.com/)
NPV= $3,004.84 (Fractional Rounding of)
Calculate IRR (https://www.wallstreetmojo.com/calculate-irr-inexcel/)
Internal Rate of Return = 7.21%
If you take IRR 7.21% the net present value will be zero.
Points to Remember
If IRR is > than Discount (interest) rate, than NPV is
>0
If IRR is < than Discount (interest) rate, than NPV is
<0
If IRR is = to Discount (interest) rate, than NPV is = 0
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