Capital Budgeting Examples

(https://www.wallstreet
mojo.com/)

Investment Banking (https://www.wallstreetmojo.com/capital-budgeting-

process/)
Tutorials
Investment Banking (https://www.wallstreetmojo.com/capital-budgeting-
Free Course methods/)
(https://www.wallstre
etmojo.com/free-
investment-banking-
courses)

Investment
Banking Basics
What is Investment
Banking? (Overview
of what do they
actually do!)
(https://www.wallstre
etmojo.com/what-is-
investment-banking/)
Investment Banking Examples of Capital Budgeting
Techniques
Functions
(https://www.wallstre
etmojo.com/investme
nt-banking- Below example of capital budgeting technique shows us how an
functions/)
organization can arrive on the decision by comparing future cash
Investment Banking
vs Commercial in ows and out ows of the individual projects. Point to be
Banking
remembered on capital budgeting is that it considers only nancial

(https://www.wallstre factors in investment as explained in the below examples and not a

etmojo.com/investme
qualitative factor. With the help of capital budgeting, we can
nt-banking-vs-
commercial-banking/) understand that some of the methods make decisions making easy
 Equity Research in an however some methods do not arrive at a decision, it makes
Investment Bank
(https://www.wallstreet organization dif cult to make decisions.
(https://www.wallstre
mojo.com/)
etmojo.com/equity-
research-in-an-
investment-bank/)       Top 5 Examples of
What is Asset
Capital Budgeting
Management
Company AMC
(https://www.wallstre
Let’s see some simple to advanced examples of capital budgeting to
etmojo.com/what-is-
asset-management- understand it better.
company-amc/)
Sales and Trading in
Investment Banking Example #1 (Pay Back Period)
(https://www.wallstre
What is Pay Back Period
etmojo.com/sales-
and-trading-in- (https://www.wallstreetmojo.com/payback-period-discounted-
investment-banking/)
payback-period/) and how to understand that let’s discuss this by
Private Placement,
considering the below example?
IPO and FPO in
Investment Banking
(https://www.wallstre An XYZ limited company looking to invest in one of the new
etmojo.com/private-
project and cost of that project is $10,000 before investing
placement-ipo-fpo-
in-investment- company want to analyze that how long it will take a company to
banking/) recovered invested money in a project?
Investment Banking –
Underwriters and
Market Makers Popular Course in this category
(https://www.wallstre
etmojo.com/investme
nt-banking-
underwriters-and-
market-makers/)
Investment Banking – Investment Banking Training (117 Courses, 25+
Mergers and Projects)
Acquisitions 117 Courses | 25+ Projects | 600+ Hours | Full Lifetime Access |
(https://www.wallstre Certi cate of Completion
etmojo.com/investme 4.9 (831 ratings)
nt-banking-mergers-
Course Price
d i iti /)
 and-acquisitions/)
Investment Banking – $299 $449
(https://www.wallstreet
Restructuring and View Course
mojo.com/)
Reorganisation
(https://www.wallstre (https://www.wallstreetmojo.com/investment-banking-
etmojo.com/investme training/?btnz=wsm-blg-inline-banner1)
nt-banking-
Related Courses
restructuring-and-
reorganisation/) Financial Modeling Course
Investment Banking (https://www.wallstreetmojo.com/ nancial-modeling-
course/?btnz=wsm-blg-inline-banner1)
Roles and
Responsibilities M&A Course (https://www.wallstreetmojo.com/mergers-
(https://www.wallstre and-acquisitions-course/?btnz=wsm-blg-inline-banner1)
etmojo.com/investme
LBO Modeling Course (https://www.wallstreetmojo.com/lbo-
nt-banking-roles-
modeling-course/?btnz=wsm-blg-inline-banner1)
and-responsibilities/)
Market Makers
(https://www.wallstre
etmojo.com/market- Solution:
makers/)
Propreitary Trading
(https://www.wallstre Start Your Free Investment Banking Course
etmojo.com/proprieta
Download IB Excel Templates, Accounting, Valuation, Financial Modeling,
ry-trading/)
Video Tutorials
Deal Origination
(Sourcing)
(https://www.wallstre Let’s say in a year one and so on company recover a pro t as listed
etmojo.com/deal- in the table below.
origination-sourcing/)
Initial Public Offering
(IPO)
(https://www.wallstre
etmojo.com/initial-
public-offering-ipo/)
Price-Weighted
Index
(https://www.wallstre

etmojo.com/price-
weighted-index/)
Delisting
(https://www.wallstre
 etmojo.com/delisting/
)
(https://www.wallstreet
Publicly Traded
mojo.com/)
Companies
(https://www.wallstre
etmojo.com/publicly-
traded-companies/)
Top 4 Must Know
Investment Banking
Charts (Free So how long it will take the company to recover invested money
Download Template from the above table it shows 3 year and some months. But this is
included)
not the right way to nd out a payback period of initial investment
(https://www.wallstre
etmojo.com/investme because base what company is considering here is pro t and it is
nt-banking-charts- not a cash ow so pro t is not the right criteria so a company should
pe-charts-pe-band-
use here is cash ow. So pro t is arrived after deducting
chart-football- eld-
scenario-graphs/) depreciation value so to know the cash ows we have to add
Pitch Book | Guide to depreciation in pro t let say depreciation value is $2,000 so net
Investment Banking
Pitch Book cash ows will be as listed in below table.
(Examples)
(https://www.wallstre
etmojo.com/investme
nt-banking-pitch-
books/)
What is LBO?
(https://www.wallstre
etmojo.com/what-is-
lbo/)
Leverage buyout Lbo
So from Cash ow analysis, (https://www.wallstreetmojo.com/cash-
Analysis
(https://www.wallstre ow-analysis/) company will recover initial investment within 2
etmojo.com/leverage- years. So the payback period is nothing but the time taken by cash
buyout-lbo-analysis/)
in ows to recover the investment amount.
LBO Financing
(https://www.wallstre

etmojo.com/lbo-
nancing/) Example #2
Capital Budgeting
Calculate the Pay Back Period and Discounted Pay Back Period
(https://www.wallstre
(htt // ll t t j /di t d b k i d
 etmojo.com/capital- (https://www.wallstreetmojo.com/discounted-payback-period-
budgeting/)
formula/) for the project which cost $270,000 and projects
(https://www.wallstreet
Capital Budgeting
mojo.com/) expected to generate $75,000 per year for the next ve years?
Methods
(https://www.wallstre Company required rate of return
etmojo.com/capital-
(https://www.wallstreetmojo.com/required-rate-of-return-
budgeting-methods/)
formula/) is 11 percent. Should the company go ahead and invest
Capital Budgeting
Examples in a project? The rate of Return 11%.Do we have to nd here, PB?

Capital Budgeting DPB?Should the project be purchased?

Process
(https://www.wallstre
etmojo.com/capital-
budgeting-process/)
Trading Floor
(https://www.wallstre
etmojo.com/trading-
oor/)
Limit Order
(https://www.wallstre
etmojo.com/limit-
order/)
Block Trade Solution:
(https://www.wallstre
etmojo.com/block- After adding cash ows of each year Balance will come as shown in
trade/)
below table.
Gray List
(https://www.wallstre
etmojo.com/gray-list/)
Market Order vs Limit
Order
(https://www.wallstre
etmojo.com/market-
order-vs-limit-order/)
Bid vs Ask
(https://www.wallstre

etmojo.com/bid-vs-
ask/)
Bid vs Offer Price
(https://www.wallstre
 etmojo.com/bid-vs-
offer-price/)
(https://www.wallstreet
Industry vs Sector
mojo.com/)
(https://www.wallstre
etmojo.com/industry-
vs-sector/)
Merchant Bank
(https://www.wallstre
etmojo.com/merchant From the above table positive balance is in between 3 and 4 years
-bank/) so,
Money Market
Account
PB= (Year – Last negative Balance)/Cash Flows
(https://www.wallstre
etmojo.com/money- PB=[3-(-45,000)]/75,000
market-account/) PB= 3.6 Years
Best Investment
Banking Books
Or
(https://www.wallstre
etmojo.com/top-
investment-banking- PB= Initial Investment/Annual Cash Flows
books/)
PB= 270,000/75,000
Nasdaq vs Dow
PB= 3.6 Years.
Jones
(https://www.wallstre
etmojo.com/nasdaq- With the Discounted rate of return
vs-dow-jones-2/)
(https://www.wallstreetmojo.com/discount-rate-vs-interest-rate/) of
Nasdaq vs Nyse
(https://www.wallstre 11% Present Value of Cash Flows
etmojo.com/nasdaq- (https://www.wallstreetmojo.com/present-value-factor-pv/) as
vs-nyse/)
shown in below table.
Differences Between
NSE and BSE
(https://www.wallstre
etmojo.com/differenc
es-between-nse-
and-bse/)

SWOT Analysis
(https://www.wallstre
etmojo.com/swot-
analysis/)
 SWOT Analysis
Examples
(https://www.wallstreet
(https://www.wallstre
mojo.com/)
etmojo.com/swot-
analysis-examples/)
PEST Analysis
Example
(https://www.wallstre DPB= (Year – Last negative Balance)/Cash Flows
etmojo.com/pest-
DPB= [(4-(37,316.57)/44,508.85)
analysis-example/)
DPB= 4.84 Years
Investment Banking

Careers (25+) So from above both capital budgeting method

(https://www.wallstreet
(https://www.wallstreetmojo.com/capital-budgeting-methods/), it is
mojo.com/category/inve
clear that the company should go ahead and invest in the project as
stment-
though both methods the company will cover initial investment
banking/investment-
before 5 years.
banking-careers)

Investment Banking
Example #3 (Accounting Rate of Return)
Firms (27+)

(https://www.wallstreet Accounting Rate of Return technique of capital budgeting

mojo.com/category/inve measures the average annual rate of return

stment- (https://www.wallstreetmojo.com/average-rate-of-return-
banking/investment- formula/) over the assets life. Let see through this below example.
banking- rms)
XYZ limited company planning to buy some new production
Top Banks (42+)
(https://www.wallstreet
equipment which costs $240,000, but the company has unequal

mojo.com/category/inve net cash in ows during its life as shown in the table and $30,000
stment-banking/top- residual value (https://www.wallstreetmojo.com/residual-value/)

banks) at the end of its life. Calculate the accounting rate of return?

Mergers and

Acquisitions (45+)
(https://www.wallstreet
j / /i
mojo.com/category/inve

stment-
(https://www.wallstreet
banking/mergers-and-
mojo.com/)
acquisitions)

Cryptocurrency
Solution:
Basics (10+)
(https://www.wallstreet First, calculate Average Annual Cash Flows
mojo.com/category/inve

stment-
banking/cryptocurrency
-basics)

Related Courses
Investment Banking
Course
(https://www.wallstre
etmojo.com/investme
nt-banking-training/?
btnz=wsm-blg-rel-
crs)
Financial Modeling
Course =Total cash Flows/Total Number of Year
(https://www.wallstre
=360,000/6
etmojo.com/ nancial-
modeling-course/?
btnz=wsm-blg-rel- Average Annual Cash Flows =$60,000
crs)
M&A Course Calculate Annual Depreciation Expenses
(https://www.wallstre
(https://www.wallstreetmojo.com/income-tax-expense/)
etmojo.com/mergers-
and-acquisitions-
course/?btnz=wsm-
blg-rel-crs)

LBO Modeling Course

(https://www.wallstre
etmojo.com/lbo-
modeling-course/?
bt bl l
 btnz=wsm-blg-rel-
crs)
(https://www.wallstreet
mojo.com/)

=$240,000-$30,000/6

=210,000/6

Annual Depreciation Expenses =$35,000

Calculate ARR
(https://www.wallstreet
mojo.com/)

ARR=Average Annual net cash ows – Annual Depreciation

Expenses/ Initial Investment

ARR=$60,000- $35,000/$240,000

ARR=$25,000/$240,000 × 100

ARR=10.42%

Conclusion – So if ARR is higher than the hurdle rate

(https://www.wallstreetmojo.com/hurdle-rate/) established by

company management than it will be considered and in vice versa it

will be rejected.

Example #4 (Net Present Value)

MetLife Hospital is planning to buy an attachment for its X-ray

machine, cost of attachment is $3,170 and life of 4 years, Salvage

value is zero and increase in cash in ows every year is $1,000. No

investment is to be made unless having annual of 10%. Will the

MetLife Hospital invest in the attachment?

Solution:
(https://www.wallstreet
mojo.com/)

Total Investment Recovered (NPV

(https://www.wallstreetmojo.com/npv-in-excel/))= 3170

From the above table, it is clear that cash in ows of $1,000 during 4

years is suf cient to recover the initial investment of $3,170 and to

provide exactly 10% return on investment So MetLife Hospital can

invest in X-ray attachment.

Example #5
ABC limited company looking to invest in one of the Project cost

that project is $50,000 and cash in ows and out ows of a project

during 5 years as shown in below table. Calculate Net Present

Value and Internal Rate of Return of the Project. An interest rate

is of 5%.
(https://www.wallstreet
mojo.com/)

Solution:

First to calculate net cash ows

(https://www.wallstreetmojo.com/net-cash- ow-formula/) during

that time period by Cash in ows – Cash out ows as shown in below

table.

Compare Our Intranet Software

Share Data & Collaborate With Our Digital Workplace Solutions Claromentis

NPV=

-50,000+15,000/(1+0.05)+12,000/(1+0.05)²+10,000/(1+0.05)³+

10,000/(1+0.05)⁴+

14,000/1+0.05)5

NPV=

50 000+14 285 71+10 884 35+8 638 56+8 227 07+10 969 21
 -50,000+14,285.71+10,884.35+8,638.56+8,227.07+10,969.21

(https://www.wallstreet
NPV= $3,004.84 (Fractional Rounding of)
mojo.com/)

Calculate IRR (https://www.wallstreetmojo.com/calculate-irr-in-

excel/)

Internal Rate of Return = 7.21%

If you take IRR 7.21% the net present value will be zero.

Points to Remember

If IRR is > than Discount (interest) rate, than NPV is

>0

If IRR is < than Discount (interest) rate, than NPV is

<0

If IRR is = to Discount (interest) rate, than NPV is = 0

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