2013
Capital Budgeting
Submitted to:
Mr. K.M Anwarul Islam
Senior Lecturer& Course Coordinator
Business Administration
The Millennium University
Submitted by:
Muhammad Ibrahim Sohel
ID: 112 BBA 0021
st
Batch: 21 (class with 15th +16th )
BBA Program
The Millennium University
03-Oct-13
Capital Budgeting
What is Capital Budgeting?
- Planning and managing expenditure for long lived assets.
What is Pay Back Period (PBP)?
- PBP shows how much time a project takes to cover its investment or outlay.
Pay Back Period formula:
PBP = NCO (Net Cash Outflow)/ Annual Cash Flow (If cash inflow equal)
PBP = A + (NCO – C) / D (If cash inflow are not equal)
What are the problems with Pay Back Period?
1.
2.
3.
4.
It doesn’t consider the time value of money.
It ignores all cash flows occurring after the PBP.
It doesn’t consider the salvage value.
It doesn’t match with the companies long term goals.
What are the advantages of Pay Back Period?
1. It is easy to make decision.
2. It encourage the firm to short term investment. Because, quick cash recovery may
enhance the reinvestment possibilities for such firms.
3. It takes less costs than others.
4. It helps company to evaluate managers decision making ability. Because, it takes less
time than NPV (Net present value).
What is AAR?
AAR (Average Accounting Return) is the average projects earning after tax and
depreciation divided by average book value of the investment during its life.
.THE END.