3. JAIIB-Accounting and Finance for Bankers-Capital Budgeting Techniques

Capital Budgeting Techniques

1. Used to choose between various projects
2. A capital project involves capital outflow( investment) and capital inflows(net profit) over the life of the project.
3. PV of all cash inflows will be +ve and PV of all cash outflows will be negative.PV will depend on the discount rate( cost of capital)
4. Summation of all the PVs of cash inflows and outflows is called Net Present Value(NPV)
5. IRR is that discount rate at which NPV of a project is zero.
6. Other method used for capital budgeting is pay back period  method.

Decision Making – to acquire or not to acquire the capital goods.

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