Time Value of Money & Capital Budgeting

All strategic managers are faced with critical financial decisions such as investing huge amounts of capital, disposing of assets or business segments, and pricing decisions. Successful managers base their decisions on sophisticated capital budgeting methods employing time value of money techniques. Capital budgeting is the process employed by companies to evaluate the profitability or viability of their investment decisions.

The key to success for a manager making financial decisions is capital budgeting and time value of money. It is the single most important tool which helps in all key areas of decision making. Whether it is a decision to replace an asset, change selling prices, increase capacity, evaluate investment projects or even to disinvest; capital budgeting and time value of money will help in making the right decisions.

Capital budgeting decisions are crucial to a firm's success for several reasons. First, capital expenditures typically require large outlays of funds.

Second, firms must ascertain the best way to raise and repay these funds. Third, most capital budgeting decisions require a long-term commitment.

Finally, the timing of capital budgeting decisions is important. When large amounts of funds are raised, firms must pay close attention to the financial markets since the cost of capital is directly related to the current interest rate.

Expected Accomplishments

• Understand the basic tools to make decisions and assess performance
• Learn interest rate concepts and the firm's cost of capital
• Learn how to use NPV analysis for decision-making purposes
• Understand the principles of project evaluation using project cash flows
• Learn capital budgeting practices

Course Outline

Value of money

Effective interest rate

Future value and compounding

Present value Et discounting

Future Et Present value of annuity

Effective annual rates and compounding

Evaluating capital budgeting projects:

• Net present value
• In ternal rate of return
• Payback period
• Discounted payback periods

Profitability index

Principle of project evaluation

Incremental cash flows

Project cash flows

Pro forma financial statements

Total cash flows

Application of evaluation methods