CAPITAL BUDGETING
Hendra
Gyda Chandra
Citra Yuliana Agustina
122121047
122121043
122121021
Introduction
Capital refers to longterm assets used in
production
Budget is a plan that outlines projected
expenditures during a future period
Capital budget is a summary of planned
investments of assets that will last for more
than a year
2
What is capital budgeting?
Capital budgeting is the whole process of
analyzing projects and deciding which ones to
accept and thus include in the capital budget
• Analysis of potential projects.
• Long-term decisions; involve large
expenditures.
• Very important to firm’s future.
3
CAPITAL BUDGETING
Why?
• Perhaps most impt. function
financial managers must
perform
– Results of Cap Budgeting
decisions continue for many
future years, so firm loses some
flexibility
– Cap Budgeting decisions define
firm’s strategic direction.
– Timing key since Cap Assets
must be put in place when
needed
Business Application
• Valuing projects that affect
firm’s strategic direction
• Methods of valuation used
in business
• Parallels to valuing financial
assets (securities)
4
Capital Budgeting Project Categories
1. Replacement to continue profitable
operations
2. Replacement to reduce costs
3. Expansion of existing products or markets
4. Expansion into new products/markets
5. Contraction decisions
6. Safety and/or environmental projects
7. Mergers
8. Other
5
Independent versus
Mutually Exclusive Projects
• Projects are:
– independent, if the cash flows of one are
unaffected by the acceptance of the other.
– mutually exclusive, if the cash flows of one can be
adversely impacted by the acceptance of the
other.
6
Normal vs. Nonnormal Cash Flows
• Normal Cash Flow Project:
– Cost (negative CF) followed by a series of positive cash
inflows.
– One change of signs.
• Nonnormal Cash Flow Project:
– Two or more changes of signs.
– Most common: Cost (negative CF), then string of positive
CFs, then cost to close project.
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Inflow (+) or Outflow (-) in Year
0
1
2
3
4
5
N
-
+
+
+
+
+
N
-
+
+
+
+
-
-
-
-
+
+
+
N
+
+
+
-
-
-
N
-
+
+
-
+
-
NN
NN
NN
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Net Present Value (NPV)
NPV defined as the present value of a project’s cash inflows
minus the present value of its costs, tells us how much the
project contributes to shareholder wealth—the larger the
NPV, the more value the project adds and thus the higher
the stock’s price.
The equation for the NPV :
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NPV Decision Rules
Independent projects: If NPV exceeds zero, accept the
project. Since S and L both have positive NPVs, accept them
both if they are independent.
Mutually exclusive projects: Accept the project with the
highest positive NPV. If no project has a positive NPV, then
reject them all. If S and L are mutually exclusive, the NPV
criterion would select L.
Projects must be either independent or mutually exclusive,
so one or the other of these rules applies to every project.
11
Internal Rate of Return: IRR
0
1
CF0
Cost
CF1
2
CF2
Inflows
3
CF3
IRR is the discount rate that
forces PV inflows = PV costs.
Same as that creates NPV= 0.
::i.e., project’s breakeven interest rate.
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NPV: Enter r, Solve for NPV
N
Σ
t=0
CFt
= NPV
(1 + r)t
IRR: Enter NPV = 0, Solve
for IRR
N
Σ
t=0
CFt
=0
(1 + IRR)t
IRR is an estimate of the project’s rate of return, so it is
comparable to the YTM on a bond.
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14
• The Multiple IRR Problem
A multiple IRR problem occurs when cash
flows during the project lifetime are negative
(i.e. the project operates at a loss or the
company needs to contribute more capital).
15
Example
A company invests $10,000 in a computer
and results in equivalent annual labor
savings of $4,021 over 3 years. The
company is said to earn a return of 10% on
its investment of $10,000.
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Project Balance Calculation:
0
1
2
3
Beginning
project balance
-$10,000
-$6,979
-$3,656
Return on
invested capital
-$1,000
-$697
-$365
-$10,000
+$4,021
+$4,021
+$4,021
Ending project
-$10,000
balance
-$6,979
-$3,656
0
Payment
received
The firm earns a 10% rate of return on funds that remain internally
invested in the project. Since the return is internal to the project, we
call it internal rate of return.
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n=10%
-800
5000
-5000
800=5000/(1+n)-5000/(1+n)2
Let (1+n) = x
800=5000/x-5000/x2
800x2 = 5000x-5000
800x2 - 5000x + 5000 =0
800x2 - 4000x - 1000x + 5000 =0
800x(x-5)-1000(x-5)=0
(800x-1000x)(x-5)=0
x = 1.25 and 5
1 + n = 1.25 -> n = 1.25-1=0.25 ~ 25%
1 + n = 5 -> n = 5-1=4 ~ 400%
Rate of return = 25 and 400 %
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Multiple Rate of Return
Why has this happened ?
Due to non – conventional cash flows
What to do?
The solution is to calculated Modified
Internal Rate of Return (MIRR)
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n=10%
-800
5000
-5000
MIRR :
Step 1. Calculate PV of outflows at 10%
(-800X1)-5000/(1+0.1)2= - 4932.23
Step 2. Calculate of FV of Inflows at 10%
5000(1.10) = 5500
Step 3. Equate of PV of outflows with the PV of FV of Inflows and solve for ‘n’
4932.23=5500/(1+n)2
4932.22(1+n)2=5500
(1+n)2 = 5500/4932.23
1+n=[5500/4932.23]1/2
n = [5500 / 4932.23]1/2 – 1 = 0.0559 = 5.59 %
Rate of return = 5.59 %
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Net Present Value Profiles
• Ada 2 kondisi dasar yang menyebabkan NPV profiles menyebabkan konflik:
a. Perbedaan waktu
Terjadi saat sebagian besar arus kas satu proyek datang di awal, sementara
sebagian besar datang dari proyek lain kemudian.
b . Perbedaan ukuran proyek / skala
Terjadi jika jumlah yang diinvestasikan dalam satu proyek lebih besar
daripada proyek yang lain.
• Rumus = CF0 + CF1 + CF2 + … + CFN
(1+r)1 (1+r)2
(1+r)N
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• Contoh soal NPV
Diketahui
= CFo 1 = 5% CF1 = 10%
PV
= $ 100
Ditanya NPV tahun 1 cash flow:
NPV = 5% : $100
= $ 95,24
(1.05)1
10% : $100
= $ 90,91
(1.10)1
Presentase penurunan r = $95,24 - $90,91 = 4,5%
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PROFITABILITY INDEX
• Sering disebut juga dengan cost of benefit
ratio.
• Kriteria seleksi: Memilih beberapa usulan yang
menghasilkan nilai PI > 1 dan merupakan nilai
yang tertinggi
• Rumus = PV of future cash flows
Initial cost
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•
Contoh Soal PI:
Perusahaan X dihadapkan pada 2 pilihan untuk
mengimplementasikan sistem material handling
pada perusahaan mereka yaitu sbb:
1. Proyek A total biaya investasinya Rp 1.000.000.
Proceeds selama 10 thn Rp 200.000/thn.
2. Proyek B total biaya investasinya Rp 300.000.
Proceeds selama 10 thn Rp 51.560/thn.
Dengan Cost of capital sebesar 12 %,proyek mana yang
akan dipilih?
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Jawab:
• PI a = PVIFA(12%,10) x Rp 200.000
Rp 1.000.000
= 5,6502 x Rp 200.000
Rp 1.000.000
= 1,13
• PI b
= PVIFA(12%, 10) x Rp 51.560
Rp 300.000
= 0,9711
Kesimpulan: Proyek yang dipilih adalah proyek A karena
menghasilkan nilai PI > 1.
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PAYBACK PERIOD
• Payback period merupakan metode untuk menentukan
berapa lama suatu investasi akan kembali.
• Waktu yang diharapkan adalah waktu terendah dari
pengembalian nilai investasi kita.
• Rumus
=
Uncover cost at
Number of years + start of the year
prior to recovery
Cash flow during
full recovery year
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• Contoh soal 1 Payback Period:
Total investasi proyek A Rp 200 juta. Penerimaan
investasi per tahun Rp 40 juta. Payback period nya
adalah 5 tahun (Rp 40 jt x 5 tahun).
• Contoh soal 2 Payback Period:
Total investasi Rp 100 juta
Proceeds tahun 1 = Rp 30 juta
Proceeds tahun 2 = Rp 40 juta
Proceeds tahun 3 = Rp 30 juta
Proceeds tahun 4 = Rp 40 juta
Proceeds tahun 5 = Rp 30 juta
Hitung Payback period nya:
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Jawab:
Total investasi
Proceed thn 1
Dana yg blm kembali
Proceed thn 2
Dana yg blm kembali
Proceed thn 3
Dana yg blm kembali
Rp 100 jt
Rp 30 jt
Rp 70 jt
Rp 40 jt
Rp 30 jt
Rp 30 jt
Rp 0
Jadi payback period untuk proyek tersebut adalah 3
tahun.
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DISCOUNTED PAYBACK PERIOD
• Discounted payback period merupakan metode untuk
menentukan berapa lama suatu investasi akan kembali
dengan mendiskonkan cash inflow sebesar cost of capital
(COC).
• Waktu yang diharapkan adalah waktu terendah dari
pengembalian nilai investasi kita.
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• Contoh Discounted Payback Period:
Total investasi Rp 100 juta
Proceeds tahun 1 = Rp 30 juta
Proceeds tahun 2 = Rp 40 juta
Proceeds tahun 3 = Rp 30 juta
Proceeds tahun 4 = Rp 40 juta
Proceeds tahun 5 = Rp 30 juta
Diketahui COC = 10%
Hitung Discounted payback period nya:
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Jawab:
NET cash flow
Discounted NCF -100
Total investasi
Proceed thn 1
Dana yg blm kembali
Proceed thn 2
Dana yg blm kembali
Proceed thn 3
Dana yg blm kembali
0
-100
27,3
1
30
33,1
2
40
22,5
3
30
27,3
4
40
48,6
5
50
Rp 100 jt
Rp 27,3 jt
Rp 72,7 jt
Rp 33,1 jt
Rp 39,6 jt
Rp 22,5 jt
Rp 17,1 jt
Jadi discounted payback period untuk proyek tersebut adalah :
= 3 tahun + 17,1 jt
27,3 jt
= 3,6 tahun
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Conclusion
Capital Budgeting Evaluation Methods :
• Net Present Value (NPV)
• Internal Rate of Return (IRR)
• Modified Internal Rate of Return (MIRR)
• Profitability Index (PI)
• Payback Periode & Discounted Payback Periode
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Thank you