CAPITAL INVESTMENT THEORY

SUBMITTED TO:Dr. SUJIT Kr. DUBEY PROFESSORFMS, BHU

PREPARED BY:STUTI KOTHARI

MBA III SEMESTERROLL NO.: 46

CIT• It is a foolproof approach of evaluating product-

market proposals in terms of the incremental benefits and costs associated with them.

• It involves three stages: a) determination of net investment outlay b) determination of net cash flows c) evaluation of cash flows in terms of their time

value.

WHY CIT?

1. Growth2. Risk3. Funding4. Irreversibility5. Complexity

MAJOR TECHNIQUES

1. Net Present Value2. Internal Rate Of Return3. Payback

NET PRESENT VALUE•This method seeks to evaluate by comparing discounted

net cash flows with net investment outlay to determine net present value of projects.

•NPV=Net cash inflow-net investment outlay

•Acceptance rule: i) NPV>0, Accept the project ii) NPV<0, Reject the project iii) NPV=0, May accept the project• Project with highest positive net present value is accorded

the highest priority.

INTERNAL RATE OF RETURN• In this approach that rate of return is determined which

discounts the future net cash flow to the level of investment outlay.

•Acceptance rule: i) IRR>k, Accept the project ii) IRR<k, Reject the project iii) IRR=k, May accept the projectWhere k is the Cost of Capital.

PAYBACK•Payback is the period of time required to recover the

original cash outlay invested in a project.• If the project generates constant annual cash inflows, the

payback period is computed by dividing the initial cash outlay by the annual cash inflow.

• In case of uneven cash inflows, the payback period can be found out by adding up the cash inflows until the total is equal to the initial cash outlay.

•Acceptance rule: Payback Period<Standard Payback Period, Accept

the project and vice-versaNPV.xlsx

SHORTCOMINGS OF CITCIT fails to take cognizance of the phases(first three) of

strategic decision making i.e.

1. Identification of the problem.2. Formulation of alternate courses of action.3. Evaluation of the alternatives.4. Choice of one or more alternatives for implementation.

Requires accurate measurement of cash flows at different interval of time.

THANK YOU!!