#1 Investment Decision – Capital Budgeting – Financial Management ~ B.COM / BBA / CMA #Finance

hi everyone in this CashNews.co we are going to start this new chapter of financial management that is investment decisions right now in this CashNews.co what are they going to do is in this CashNews.co we are going to just see the basic idea of this chapter okay we are not going to solve

any problems we are just going to have a brief little idea about this chapter and in the coming CashNews.cos we are going to see the problems fine so what do you mean by investment decision see here I have written the meaning over here the investment decision is concerned with the selection of

Assets in which the funds will be invested by a phone it is what it is related with investment how to invest the money and where to invest the money that is what this chapter focuses on right how to and where to invest the money okay so for example now let’s say you are a

financial analyst okay of a company and let’s say you have been given the responsibility of investing these 90 lakh rupees how will you invest it how will you do that there are lots of opportunities in front of you project a project B project C okay so how are you going to invest this money

are you going to invest in only one project or two projects together or a single any project how will you do it how will you select the project which you want to invest in right that is the main question over here where to invest where to invest the money in project a project B projects see how

will you decide it will you just take a lottery will you do that you just take a lottery when you put what chits what do you do you select it anyway any project no you can’t do that right you cannot select any project you like you cannot do that you can’t do that right because this is

very important it’s not just like 90 rupees it’s not like nine thousand rupees it’s 90 lakhs or maybe nine crores who knows there will lots and lots of funds will be at stake of the company right so you cannot just make decisions on your own right you have to base your decision on

some math right you’re a mathematical person you are a financial analyst right so you have to base your decisions on some math right so that is what you need to do so that is why you have to do some math and see which project is more suitable and most viable for your company right that is

what you have to do so that is what we are going to see in this chapter how to make investment decisions right where to invest the money see the investment of funds has to be made after careful assessment of various projects whatever opportunities are there right it may not be like Project ABC

there’ll be hundreds of opportunities right so you have to see all those opportunities and you have to analyze right you have to analyze through Capital Budgeting now what is Capital Budgeting see Capital

Budgeting is nothing but Capital Budgeting is nothing but just a process okay just a formal process Capital Budgeting refers to the process of making decisions regarding Capital investment in fixed

Assets such as machinery land building etc right now this is what is Capital Budgeting it is nothing but a formal process of investing the money right it is a Capital investment not a short-term investment okay yeah there is short

term investment but that comes under working Capital okay like receivables is there inventories there all that right here we are talking about Capital investment Capital expenditure the expenditure through which the benefits will accrue to the

business for a long period of time like say seven years ten years like that right for example investment in machinery land building etc these are the Capital expenditures okay not Revenue expenditure I mean your short term expenditures if you pay the rent the

benefits will accrue to the company only for a month right or how much the rent is paid fine so that is the Revenue expenditure this is Capital expenditure we are talking about so what is this process of Capital Budgeting CEO the

process of Capital Budgeting see the process of Capital Budgeting it starts with a planning okay first they have to plan how much money do we have right how much money do the company has and what all potential investment

opportunities are there they have to identify those opportunities fine and then the second stage of Capital Budgeting is the eValuation process what is this eValuation process see in eValuation process what we do

is we estimate the Cash Flows what all Cash Flows will be there how much do we in best right how much do we initially invest in the project what will be the termination value how much tax would be there right all these things they are going to they are going to

what they are going to estimate how much money will come in inflow and how much money will go out outflow right that is what they are going to estimate 100% true just they are going to have estimates right and then they are going to evaluate everything with the help of the

eValuation techniques this is the most crucial phase ok the eValuation phase and most of the problems of this chapter are based upon this phase only the eValuation phase we are we going to estimate the Cash Flows and we are going

to use the eValuation techniques to see whether the projects that are there are Profitable for the company or not okay so that is what we are going to do so there are various eValuation techniques that you need to understand right and we are not

going to see these techniques the concept and the problems in this CashNews.co no we are just going to see the names of this techniques and then in the coming CashNews.cos one by one we are going to cover these techniques and we are going to solve the problems of each and every technique fine so

see here eValuation techniques of Capital Budgeting there are two types non discounting and discounting now what do you mean by discounting see if you have learned the time value of money chapter then you already know what is this right see what is

the time value of money see I’ll just explain to you with the help of example if you have hundred rupees today in your pocket then that is worth more than the same hundred rupees if you have that in a year later right in a year later the purchasing power of that hundred rupees will fall down

right for example if you can purchase something today with that 100 rupees then you might not be able to purchase the same amount of commodity right with that money right that is what is time value of money it will fall the money the value of money will fall so what you have to do is the money

which we will receive in future right after a year after two year of a three-year the inflow due to that project what will happen for example let’s say this project will receive us this project will bring us let’s say 1 lakh rupees okay oh you are later 1 lakh rupees so what do we need

to do we have to dis ground that we have to bring that value down to the present value for example just for an example if you are receiving one lag in future then the worth of that money today terms it might be ninety five thousand right it may be ninety five thousand the dad is what will happen

okay we are going to see that in detail in the coming CashNews.cos right don’t worry in the net present value so these are techniques the non discounting techniques payback period Accounting rate of return and then there are discounting techniques net present value where we

discount the Cash Flows whatever money we are going to receive in future we are going to discount them okay we are going to bring them to the present value fine so that is what is meant by discounting techniques net present value Profit

Profitability index internal rate of return and then modified internal rate of return yeah so these are the eValuation techniques that we are going to use in this phase right and most of the problems in this chapter are based upon this okay

eValuation techniques fine and then you are going to select we are going to select the most Profitable and the most suitable project for the company among the projects evaluated okay and it’s not mandatory that you are going to sell only one project we might

also select two projects also fine yeah so that can also happen so the selection will happen in this stage and then there is implementation after selection what project we are going to invest in we are going to implement that project okay we are going to purchase the SSN all fine and then there is

control and then we are going to control the project we are going to monitor the project okay right by the feedback reports and everything we are going to see the performance of the project what is happening how is it happening everything we are going to monitor the project in this stage

controlling fine and then there is a review after the project’s termination after the project is completed right we are going to see whether the project was a success or a failure right and then this stage will help us in making another Capital appraisal okay another

Capital Budgeting this will help us the the review it will help us in the future fine so this was the process of Capital Budgeting okay the main thing is this stage only okay the eValuation stage the

eValuation techniques fine so in the coming CashNews.cos as I said we are going to solve the problem on payback period and Accounting rate of return and then one by one we are going to cover each and every methods find each and every techniques fine okaythen easy

right this was just the brief discussion about this chapter right okay