11 ( Capital Budgeting )

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( Capital Budgeting Decision Rules )1. ( Payback Period : PB ) 2. ( Net Present Value : NPV ) 3. ( Profitability Index : PI ) 4. ( Average Rate of Return : ARR ) 5. ( Internal Rate of Return : IRR)

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1. ( Payback Period : PB ) 2 - PB = - PB = +

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10 4 12 % ( : ) 1 2 1 6.5 3.5 2 3.0 3.5 3 3.0 3.5 4 1.0 3.5

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10 4 12 % ( : ) 1 2 1 6.5 3.5 2 3.0 3.5 3 3.0 3.5 4 1.0 3.5

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PB 1 PB = 2 9.5 + ( 0.5 / 3.0 ) = 2 + 0.16 = 2.16 2 PB= 10 / 3.5 = 2.85

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PB 1 2.16 2 2.85 1 2

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PB- - -

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2. ( Net Present Value : NPV ) NPV= - NPV= CF1 + CF2 + ...+ CFn - I ( 1+k )1 ( 1+k )2 ( 1+k )n CF = I = k = , n =

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- NPV= CF ( PVIFA k , n ) - I- NPV = CF1(PVIF k,1) + CF2 (PVIF k,2) +...+ CFn (PVIF k,n) - I NPV NPV

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10 4 12 % ( : ) 1 2 1 6.5 3.5 2 3.0 3.5 3 3.0 3.5 4 1.0 3.5

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NPV 1 NPV = 6.5 (PVIF 12,1) + 3.0 (PVIF 12,2) + 3.0 (PVIF 12,3) + 1.0 (PVIF 12,4) - 10.0

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Table A - 1 Present Value of $1 Due At The End of N Periods Period 12% 10.8929 20.7972 30.7118 40.6355

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NPV 1 NPV = 6.5 (PVIF 12,1) + 3.0 (PVIF 12,2) + 3.0 (PVIF 12,3) + 1.0 (PVIF 12,4) - 10.0 = 6.5 (0.8929) + 3.0 (0.7927) + 3.0 (0.7118) + 1.0 (0.6355) - 10.0 = 5.80 + 2.38 + 2.13 + 0.63 - 10.0 = 10.94 - 10.0 = 0.94

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NPV 2 NPV= 3.5 ( PVIFA 12 , 4 ) - 10.0= 3.5 (3.0373 ) - 10.0 = 10.63 - 10.0 = 0.63

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NPV 1 NPV 0.94 2 NPV 0.63 1 2

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NPV- - - - PB

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3. ( Profitability Index : PI ) PI =

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- PI= CF ( PVIFA k , n ) I- PI = CF1( PVIF k,1 ) + CF2 ( PVIF k,2 ) +...+ CFn ( PVIF k,n ) I

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PI 1 PI PI 1

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10 4 12 % ( : ) 1 2 1 6.5 3.5 2 3.0 3.5 3 3.0 3.5 4 1.0 3.5

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PI 1 PI = 6.5 (PVIF 12,1) + 3.0 (PVIF 12,2) +3.0 (PVIF 12,3) + 1.0 (PVIF 12,4) 10.0

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NPV 1 NPV = 6.5 (PVIF 12,1) + 3.0 (PVIF 12,2) + 3.0 (PVIF 12,3) + 1.0 (PVIF 12,4) - 10.0 = 6.5 (0.8929) + 3.0 (0.7927) + 3.0 (0.7118) + 1.0 (0.6355) - 10.0 = 5.80 + 2.38 + 2.13 + 0.63 - 10.0 = 10.94 - 10.0

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PI 1 PI = 6.5 (PVIF 12,1) + 3.0 (PVIF 12,2) +3.0 (PVIF 12,3) + 1.0 (PVIF 12,4) 10.0 = 10.94 / 10.0 = 1.094 2 PI = 3.5 ( PVIFA 12 , 4 ) 10.0 = 10.63 / 10.0 = 1.063

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PI 1 PI 1.094 2 PI 1.063 1 2

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PI- - - -

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4. ( Average Rate of Return : ARR ) ARR = = - 2 ARR ARR

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ARR- - -

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5. ( Internal Rate of Return : IRR ) = CF1 + CF2 + + CFn = I ( 1+k)1 ( 1+k)2 ( 1+k)nCF1( PVIF k,1 ) + CF2 ( PVIF k,2 ) +...+ CFn ( PVIF k,n ) = I

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IRR IRR

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IRR- - - -

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