(BUSS 23001)
Principles of Financial Investment
Unit 2
Capital Appraisal Techniques
Concept - Part A (i)
- Time value of Money
DISCLAIMER
The PowerPoint presentations of the Module (BUSS 23001) (Principles of Financial
Investment) are created merely to guide me during the delivery of this module in my
class. The content included in the slides are only indicative to remind me the sequence
which I will be following during the delivery. The content presented in the slides is free
from any plagiarism and copyright violations and wherever needed appropriate
referencing/citations have been provided.
In addition to the content in this PowerPoint presentations, I will also be verbally
delivering other important content in the class as well as also writing on the board,
some information related to the topic being covered wherever necessary.
The student is therefore advised to refer to the text books, reference books and any
supplementary materials recommended in the Module Information Guide (MIG) or in
the PowerPoint presentations for complete understanding of the topic.
Recommended Books:
Arnold, Glen, (2013) Corporate financial management
GITMAN, L., J., (2009), Principles of Managerial Finance, Pearson Prentice Hall
Paramasivan, C 2009, Financial Management, New Age International Ltd, Daryaganj.
https://ebookcentral.proquest.com/lib/mecomanebooks/detail.action?docID=437705
Ramagopal, C 2008, Financial Management, New Age International Ltd, Daryaganj.
https://ebookcentral.proquest.com/lib/mecomanebooks/detail.action?docID=442140
Learning outcomes
• Investment Appraisal
• Capital appraisal techniques
• Time value of Money
• PV & FV
• Discounted cash flow techniques
Introduction: Investment Appraisal
• The future of a company lies in the investments it makes
today.
• Investment project proposals are the responsibility of all
managers in the organization.
• Capital budgeting is the financial evaluation of project
proposals.
• Weigh outlay today vs. expected future benefits.
Investment Appraisal
• Any investment decision involves risk, because it
deals with the future
• Firms are likely to have a number of alternatives to
choose from
• Investment appraisal techniques can help them to
do choose the best option.
Examples
1. New products or expansion of existing products
2. Replacement of existing equipment or buildings
3. Research and development
Capital Budgeting
Investment decisions of a company are generally known as
capital budgeting decisions.
1. Traditional techniques
Payback period method
Discounted Payback period Method
Accounting rate of return
2. Discounted Cash flow techniques
Net Present Value (NPV)
Internal Rate of Return (IRR)
Profitability Index (PI)
Modified Internal Rate of Return (MIRR)
Time value of Money
TVM defines that a dollar today is worth more than a
dollar in future.
In other words, a dollar today and a dollar in future
both are two different commodities.
To understand this, assume that a dollar today is like
an ORANGE and a dollar in future an Apple. Are orange
and apple the same commodities? Answer is NO.
So as the case with a dollar today and a dollar in
future.
Time Value of Money
• Reasons why a rial today can be worth more
than a rial in the future.
– Inflation
– Uncertainty
– Opportunity cost
• Time Value of Money: A rial today is worth more
than a rial tomorrow.
– A dollar today can be invested to earn a rate of
return or interest.
• What is today’s rial worth tomorrow (future value)?
FV = PV (1 + i) N
• What is tomorrow’s rial worth today (present value)?
=FV
PV 1+i)
/( N
Time value of Money
TYPES OF CASH FLOWS
- Cash Inflows and Cash outflows
- Single Cash Flows & Multiple Cash Flows
- Multiple Cash Flows are further divided into:
- Mixed Cash Flows (CFs)
- Same Cash Flows (CFs)
- Same Cash Flows are further divided into:
- Annuity (same CFs for certain time)
- Perpetuity (same CFs for infinite time)
Discounted Cash Flow Techniques
• Discounted cash flow analysis is the backbone of
modern academic finance.
• DCF is used to evaluate cash flow streams whose
costs and/or benefits extend beyond the current
year.
• Discounted Cash Flow (DCF) Methods measure all
expected future cash inflows and outflows of a
project as if they occurred at a single point in time.
Discounted Cash Flows
• The key feature of DCF methods is the time value of money
(interest), meaning that a rial received today is worth more
than a rial received in the future.
• DCF methods use the Required Rate of Return (RRR), which is
the minimum acceptable annual rate of return on an
investment.
• RRR is the return that an organization could expect to receive
elsewhere for an investment of comparable risk.
• RRR is also called the discount rate, hurdle rate, cost of capital
or opportunity cost of capital.
Thank You!
