Capital Budgeting: Even Cash Flow Uneven Cash Flow
Capital Budgeting: Even Cash Flow Uneven Cash Flow
Capital Budgeting: Even Cash Flow Uneven Cash Flow
METHODS
Those that do not consider time value of money
1. Payback Period 2. Accounting Rate of Return
Payback Period
Even Cash Flow Uneven Cash Flow
Aquino plans to purchase a piece of Aquino plans to purchase a piece of
equipment which amounts to P210,000 in equipment which amounts to P210,000 in
accordance with an investment proposal from a accordance with an investment proposal from a
member of his staff. If the equipment is bought, it member of his staff. If the equipment is bought, it
is expected to generate an annual cash inflow of is expected to generate cash inflow as shown
P40,000. A five year payback period is acceptable below. A five year payback period is acceptable to
to Aquino. Aquino.
Year Cash Inflow Year Cash Inflow
1 40,000 1 P20,000
2 40,000 2 30,000
3 40,000 3 40,000
4 40,000 4 50,000
5 40,000 5 50,000
6 40,000 6 40,000
Kim Corp invested P25,000 in a 4-year project. Kim’s cost of capital is 8%. Additional bits of
information on the project are as follows:
A 5-year project with an initial outlay of P18,000 an d a cost of capital of 14% will produce an annual
cash return of P5,600. The IRR of the project is 16.80%.
Profitability Index
Compute for the projects’ NPV and IRR (between 14% and 16%)
/RCR