Hi there, this is Imran here in this

video you would learn about return on investment techniques such as net

present value internal rate of return profitability index and payback period

these are also called as Capital budgeting techniques the knowledge that

you would acquire by learning capital budgeting techniques would be helpful

for you in project management program management financial management and for

students who are attending and via tasks if you’re preparing for PMP or prince2

it is very important for you to learn the Capital budgeting techniques because

you may get a couple of questions in exams that you may need to answer with

respect to decisions you make to choose between different projects and if you

are a project manager and if you are not aware of capital budgeting techniques

then I would say you must learn the capital budgeting techniques and the

recently it could help you to make informed decisions when you’re faced

with challenges with respect to the financial viability and business

justification of projects capital budgeting techniques fall under the

branch of financial management let me give you a brief overview of where does

the capital budgeting technique fit into under financial management the financial

management is primarily divided into 201 corporate finance to account in your

control these are further divided into sub functions each function is a big

subject in itself and would take hours if not days to learn about each function

and our focus would be on capital budgeting, the reason why

I am showing you the financial management overview is that it would

help you to understand where exactly the capital budgeting technique fit into

under financial management and if an organization decides to undertake a

project it could usually do two studies one is technical feasibility and other

is finish survival if the project is not technically

feasible then there is no point in going ahead with the project and if the

project is technically feasible and then the organization’s would conduct

financial viability for the projects with the help of Capital budgeting okay

so the point is what exactly is capital budgeting technique

capital budgeting technique is a planning process it determines whether

it is worth to take our invest organisations capsule into projects and

it always works for the benefit of the firm by increasing its financial value

and before we get started to learn about capital budgeting techniques it is very

important for you to learn among the terms discounted cash flow and non

discounted cash flow so the question is what is discounted cash flow and to

explain this you must first understand the time has a money value discounted

cash flow takes the time value of money into consideration for example the money

in hand today it invested in the bank will earn let’s say 6% per annum

so this six percent can be considered as a discounted cash flow and you need to

remember one thing it’s not only about the interest rate it could also be the

rate of return that an organization gets back if it invests the money in a

business which could earn more than the interest rate and let’s say 8% rate of

return is what we are getting by investing the capital in a business then

this 8% rate of return should be considered as a discounted cash flow and

this discounted cash flow is also called as opportunity cost of capital or

sometimes it is referred as cost of capture and now let’s move on to non

discounted cash flow now this is simple it does not take time value of money

into consideration so therefore the interest or the rate of

Britain is not taken into consideration now let’s see what is opportunity cost

of cats what is opportunity cost of capital

opportunity cost of capital is something that you would give up in order to get

something else let me ask you this question

what do you think is the opportunity cost for me for making this video if I’m

not making this video for you then I would be spending this I’m going out

with my friends or I would be spending time with my one-and-a-half here please

so the opportunity cost of making this video is the time lost spending with my

kid or with my friends and it applies to everyone even you watching this video if

you’re not watching this video then you would be doing something else and the

opportunity costs for you would be that something else and then the big question

comes why do people let go the opportunity cost the reason is because

people think rational meaning you weigh the pros and cons of all mutually

exclusive alternatives available you would choose the best alternative

available at that point in time because people expect to achieve greater

benefits choosing one alternative over the other mutually exclusive opportunity

discounted cash flow is nothing but the opportunity cost of capital so when I

say this houndred cash flow it also means that I’m

referring to the opportunity cost of capital or just say cost attached now

let’s look at these capital budgeting methods a net present value internal

rate of return profitability index these capsule budgeting techniques would

always consider the discounted cash flow without taking into consideration the

opportunity cost of capsule or the discounted cash flow we cannot calculate

the net present value or internal rate of return or profitable limits however

payback period the opportunity cost of capsule is an optional mostly when

calculating payback period the discounted cash flow is not considered

now let’s look at the future value present value let’s understand the

relationship between future value of money in present value for example let’s

say you have 100 dollars in hand today then what would be the future value of

that hundred dollars after one year similarly if you’re going to get $100

after one year for sure then what is the present value of that hundred dollars

now you should be able to calculate the future value or the present value if one

of the two information is available to us we can calculate using the formula FV

is equal to P V multiplied by 1 plus K whole power M K in this formula is the

discount rate in other words it is also the opportunity cost and n is the number

of years now let’s look at calculating the future value and present value with

some examples let’s first look at calculating the future value if you have

$100 and if you invest that money in a bank today and Bank promised you who

give you 8 percent per annum interest what would be the future value of that

hundred dollars after first year fifth year and 15 Q now here $100 is the

present value of the capsule and 8% is the opportunity cost of capsule now

8% means 8 500 that is equal to 0.08 and 1 plus K here is 1 plus 0.08 that is 1

point zero eight now you can see this on the screen here 1 plus K value K value

and present run now let’s use the formula and calculate the future value

moons now that we know the present value 1 plus K value and the N value it’s easy

to calculate the future value future value after 1 year is $100 multiplied by

1 point 0 H to the power of 1 and that gives you 108 dollars in future value

after five years is $100 multiplied by 1 point zero eight to the power of five

and if you do the calculations it will give you one hundred and forty six

dollars and similarly we can calculate the future value 100 dollars for any

period of time using the formula it could be for 15 years or any number of

years and for 15 years we are getting the value is three hundred and seventeen

dollars now I would request you after you watch this video come back to the

video again pause the video on the screen take a pen and paper in hand and

do the calculations this would help you to get prepared for the examinations

and do this for all the examples in this video that I show for calculations now

let’s look at how to calculate the present value

let’s say you have three scenarios where you are going to get hundred dollars

after one year five years in fifteen years then what would be the value of

one hundred dollars today now we have the formula through which we can

calculate the future value we would use the same formula to calculate the

present value the formula is present value is equal to future value divided

by one plus K to the power of n here the future value is $100 and the opportunity

cost of capsule is given as eight dollars eight percent sorry now using

the formula we can calculate the present value the present value of $100 to be

received after one year would be 100 divided by one point zero eight and that

would give you 93 dollars and similarly we can calculate the

present value of $100 to be received after five years or 15 years and for

that matter any period of time as long as we know the future value in the

discount rates now on the screen I’ve just done the calculations for the

present value for present value for one year present value for five years

present value for 15 years now you can just pause the screen and you can do the

calculations or you can come back and do the calculations now that we have

learned how to calculate the present value and future value it is just a

cakewalk for you to calculate the net present value and before we learn how to

calculate the net present value let’s look at the few important points that we

need to keep in mind and remember in order to calculate the net present value

net present value is determined by subtracting present value of all cash

outflows from the present value of all cash inflows meaning you would need to

take into consideration all the cash inflows for a project and calculate

their present value and we need to sum up all the present values and from the

sum of all present values you will need to subtract the cash outflows and that

would give you the net present value I know you’re confused a little bit here

but do not worry this would become clear when you look at an example in the next

coming slide and this is very important to remember once we calculate the net

present value it should always be positive for the project

being accepted if the net present value is negative that means the project is

not enhancing a viable now let’s get into the nitty-gritty of calculating the

net present value here is an example a sum of $400,000 is invested in an IT

project and below we have the cash inflows to the project up to a period of

five years and the opportunity cost of capsule is given as eight-person all we

need to do is calculate the net present value and bases the net present value

decide if the project is worth undertaking or do we need to reject the

project see in this example the $400,000 is spent out right initially fit is

called a cash outflow and coming to the revenue from the project at the end of

first year the project generates $70,000 and at the end of second year the

project generous $120,000 and at the end of third year it generates one $40,000

and for fourth year it generates one $40,000 and at the end of fifth year it

generates $40,000 now that we know how to calculate the present value we need

to calculate the present value for year one that is for $70,000 in for year two

that is 120 thousand dollars in for a 3-1 $40,000 and year for again one

$40,000 in for efi same $40,000 now once we get the present value for the EO one

two three four five we need to sum them up and subscribe to $400,000 and that

gives us the net present value information and if the net present value

is positive you should accept the project and if it is negative you should

check the hose I have done the calculations here I got all the present

value details for all the ears and when I sum them up I got the total value of

all caps in close as four hundred eight thousand nine hundred and fifty nine

dollars and for us to calculate the net present value we have to subtract the

cash outflows from the cash inflation remember the cash outflows for this

example was four hundred thousand dollars that was spent initially so that

becomes cash outflow now that we have the cash inflow for all the cash inflow

of all present values which is four hundred eight thousand nine fifty nine

dollars we need to subtract four hundred thousand dollars from this announce and

that would give us eight thousand nine hundred and fifty nine dollars and since

this net present value is positive this project in the accepted now let’s look

at another example the same example I would say what we have done is we have

just changed the opportunity cost of the capsule from eight percent to fifteen

percent now this was eight percent in the previous example and this is fifteen

version in this example and let’s see if the project is still financially viable

and won’t remain the same the time period remains the same it’s only just

the opportunity cost that has changed from 8 percent per annum to 15 percent

per annum now let’s look if this project is still financially viable or not I’ve

done the calculations on the screen we know the formula for present value now

using the present value formula we would calculate the present value for year 1

year 2 year 3 year 4 and year 5 that uses these values here on the screen now

if I sum them up I get three hundred and forty three thousand five hundred and

ninety one dollars and the cash outflow which we’ve done initially is four

hundred thousand dollars now if I subtract four hundred thousand dollars

from three hundred and forty three five ninety one dollars I get the net present

value as – fifty-six thousand four hundred and

eight dollars and the net present value has become negative here so we should

not accept this project because this project is not financially viable now

look at the note on this page below though we have the same inflow and

outflow of cash when compared to the previous example the net present value

has changed from positive to negative when the opportunity costs of captain

has increased from eight percent fifteen version now what does they say they say

that net present value is very much dependent on the discount rate or the

opportunity cost of capsule now with this example we complete the net present

value and now let’s move on to the eternal rate of return calculations now

generally speaking the higher the project’s internal rate of return the

better and it’s more desirable to undertake the project’s internal rate of

return is the calculations by which we would be able to tell how much rate of

return are we getting from the project so higher the internal rate of return

the better for the project IRR which is also called as internal rate of return

can also be used through ranked projects now IRR is nothing but the discount rate

at which the net present value becomes sheer I’ll make it clear in a moment

let’s say you have to choose between two projects where the net present value of

the project is say and you are asked to choose one of the projects then you

would need to choose the project which has the higher internal rate of return

now you may get a couple of questions in exams asking you to choose between two

different projects they may give you the net present value details internal rate

of return it is and they would ask you to choose what project among the three

projects then you would need to choose the project which has highest internal

rate of return and remember this point the project’s internal rate of return

should be greater than because the project’s internal rate of

return is greater than opportunity cost you should always accept the cross and

if the project’s internal rate of return is less than the opportunity cost

you should reject the project because if the internal rate of return is less than

opportunity cost the project is not financially viable and it is better to

invest the money in a different project where we have a better instrument now

let’s look at the relationship between internal rate of return opportunity cost

and the net present value if IRR is greater than the opportunity cost then

the net present value will always be positive and if IRR is less than

opportunity cost then the net present value will always be negative as said

earlier as long as the net present value is positive the project is financially

viable in the moment the net present value goes to negative the project is

not energy divided right now let’s see an example and calculate the internal

rate of return for a project the project let’s say the project cost is thousand

dollars in the panel span is five years and it generates $200 at the end of year

one $300 at the end of year two $300 at the end of year three $400 in the year

four and $500 in the vo hi the opportunity cost is given here as twelve

receipts and now we are asked to calculate if the project is financially

viable or not faces the internal riddle now let’s look at the solution first we

need to calculate the net present value of the project then adjust the

opportunity cost until we get the net present value regime the opportunity

cost at which the net present value becomes 0 would be the internal rate of

return so we will tackle this solution with the following in mind if the NPV

positive that means at 12% opportunity cost the net present value is positive

so we need to increase the opportunity cost above to a person and see where

does the net present value become 0 once we find out the rate at which the

net present value becomes 0 we need to consider that rate has insulin later now

I will show you how the calculations are done let’s see the excel sheet which is

attached in this bitch and you get a period as to how the internal rate of

return is calculated so we know the formula to calculate the present value

and using the formula I have just automated this in the Excel report and

let me show you how it is done now we have all the future values here for year

1 year 3 a 3 year 4 5 we know what the discounted rate is its whole person

that’s given in the example here I have calculated the present value for year 1

year 2 year 3 year 4 and year 5 now I got cash inflow for all present values

as 1169 dollars I know the cash outflow is $1,000 so I calculated the net

present value which is 1 system in dollars now for us to calculate the

internal rate of return what we are doing is we need to adjust the discount

rate as I said the internal rate of return is nothing but the discount rate

at which the net present value becomes 0 now at 12% then at present values 1

system in dollars so let’s increase the 12% to 13% and let’s see what would be

the net present value so it dropped to 136 let’s look at code in version 321 or

$5 let’s see 15 versus $75 so net present

value is dropping as we increase the discount rate now let’s look at 17%

laters sorry 17% is harmful it’s $18 let’s see 18%

so it went to negative fruit should be in between 70 and 80 so let’s look at

some in point five right it’s five point five so let’s see seventeen point six

it’s two point eight 17.7 now it is close to zero zero point two four if I

make it seven point eight invention it so at 17 point seven percent discount

rate then it present value becomes zero now this would be the internal rate of

return because at seventeen percent discount rate the net present value have

become zero so this would be considered as the internal rate of now let’s go on

and let’s look at the profitability index before we move on to profitability

next let’s just look at this twelve percent discount rate the net present

value is one season in dollars in at 17.7% let us become zero point two four

close to zero so the IRR is seventeen / 17 point seven percent for this project

which is a pretty good internal rate of return let’s get on to profitability

next what is profitability index it is also again our decision-making criteria

to choose projects now it is a ratio by which we can tell how many dollars can

be earned in return for each dollar spends for you to be able to calculate

the profitability index you should know the present value of all cash inflows

and cash outflows and then divide the cash inflows with cash outflows and you

should be able to get the profitable day image I will show you how to calculate

the profitability index in an example now you need to remember this you should

accept the project if the profitability index is greater than one and you should

reject if it is less than one again the higher the profitability

for a project it is more desirable to undertake the project and let’s look at

the relationship between net present value and profitable index if net

present value is greater than 0 then the profitability index is greater than 1 if

the net present value is less than 0 then the profitability index is less

than 1 and remember this point this is very important

profitability index can never be negative it would always be greater than

0 the reason being is not subtracting the

cash outflows from hash enclosure we’re just dividing the cash inflows in the

cash outflows so therefore the profitability index can never be

negative it would always be greater than zero and the ideal profitability net

should always be greater than one and anything less than one for profitability

index the project is not financially viable now let’s look at the example for

profitability index in this example an investment of $25,000 is invested in a

project which is giving you a series of cash inflows that’s here it’s giving you

$5,000 at the end of year $100,000 enough a to $10,000 at end of year 3

again $10,000 at end of year four and $3,000 in the VF 5 and if the required

rate of return is 12 percent what is the profitability index the profitability

index is calculated by dividing the present value of all cash inflows by

present value of all cash outflows so first we need to calculate the present

value of all years all the years here and sum them up and divide it with the

cash outflow let’s see the excel sheet in which I have automated using the

formula to calculate a profitable English all right we know the formula

for present value now we know all the future values you

know the years of one two three four five I know the discount rate is 12%

I have automated the formula here so we calculate the present value for you one

calculate the present value for here to present value for year three per year

for input year five I got the individual present values for year one two three

four five now if I sum them up I get twenty six

thousand eight hundred fourteen dollars now in this example the cash inflow for

all the present values is twenty-six thousand eight hundred and fourteen

dollars but we have been given twenty five thousand dollars as cash outflows

all we need to do is divide twenty six thousand eight hundred fourteen dollars

with twenty five thousand dollars and that would give you the profitable

business here is the profitability on points is M so the profitability index

for this project is one point zero seven as I said earlier if the profitability

index is greater than one we can accept the project now if we change the

profitability index the discount rate the profit it would affect the

profitable index if I increase this it becomes third one four zero four see as

I increase the opportunity cost the profitability index went down so we have

a direct relationship between the discount rate and the property the

difference that’s about the profitability index now let’s move on to

the payback period now what is payback period it is the length of time required

for an investment to recover its initial cash or growth for example if you invest

thousand dollars in a project and it generates five hundred dollars every

year for a period of five years then what is the payback period I would say

the payback period would be three years because

it takes two years to recover the thousand dollars we invested in the

project initiative so the payback period is two years and generally speaking

organizations do not consider time value of money in a back idiot and again it

depends on the organization’s you’re working for however if you want to take

the time value of money into consideration for calculating payback

period you may do so and here is the important point good projects will not

only have a good internal rate of return or the net present length but they also

have early payback periods so if you’ve given a couple of projects with good

internal rate of return and in a present value choose the project which has early

payback period if the internal rate of return hundred present values are the

same for the projects you should go with the project that has the early day back

period now let’s look at the example that’s on the screen and I think with

that this video would come to an end in this example an investment of $25,000 in

IT projects you a series of cash inflows has described below it in the first year

$5,000 in the second year $9,000 in the third and fourth years $10,000 and in

the fifth year it gives you $3,000 so what would be the payback period for

this project the solution is simple we need to calculate the time it takes to

earn $25,000 since we are not given the discount rate we need to just calculate

this payback period without considering the opportunity cost so in the end of

first year we got $5,000 and at the end of second year we got $9,000 so the

total amount we got at the end of second year is $14,000 it’s just the cumulative

of all the revenue that we get at the end of the ears okay so at the end of

third year it becomes one four thousand dollars since we need to

get back with twenty five thousand dollars let’s see if I calculate this

the cumulative of four years it would become thirty four thousand dollars

since we are concentrating only on 25 thousand dollars let’s break the fourth

year the venue in two month wise revenue and that would be ten thousand divided

by Club and that is eight hundred and thirty three dollars per month so for

three years one month we would earn about 24,000 plus eight hundred and

thirty three dollars and that would be twenty-four thousand eight hundred and

thirty dollars close to 25 thousand dollars and in three years two months

fine we would earn about twenty five thousand 666 dollars so we can say that

the payback period is in between three years one month and three years two

months for this project okay so that’s about the payback period payback period

is easy to calculate all we just need to do is just calculate the amount at what

period of time we would be able to recover the initial investments right so

let’s have a quick recap in this video we learned about the capital budgeting

techniques learn what is discounted cash flow and non discounted cash flow we

learned how to calculate the future value present value we learn how to

calculate the net present value internal rate of return payback period and

profitable index and with this we end this video tutorial if you find this

tutorial informative please subscribe and thumbs

MY SINCERE THANKS to this wonderful video and big thanks to the LECTURER (Mr Imran) presenting the chapters covered. i now have a much better understanding to the topics which i have been trying to seek help for the longest time. i am very grateful to Mr Imran (If i address correctly from start of video)

Thanks….

I Really appreciate the way of making understand the concepts by the example…thanks a lot

Mr you deserve more than like ,comments /subscribe .I preciate that

Thx 1000%

I learned a lot from this vedio. Thank you so much

Thnq for the video, this was the thing I was seeking for.

Thanks a lot bro ,may Allah bless u..

thank you…

this video is helpful..

thank you…

this video is helpful..

Thanks a lot ๐

hi imran your videos are really helpful, plz make more videos on project and their valuation.

Great lesson. Thanks

you made it sound so easy that now I have interest in learning more from you. thanks for such an informative video.

Thank you loads!!!!!!!

YOUR MIC SUCK THOUGH

Thanks for the amazing explanation. Learnt a lot.

VERY MUCH UNDERSTANDING SIR

Very Informative pmtycoon, thanks very much

supperr explanation thq sir…๐๐

This video is awesome, one of my seniors forwarded me this video as I was facing difficulty to understand these topics. I used to intermingle these concepts and Mr.Imran illustrated in very easy way (for all non-business backgrounds). If any high school student watches this video he will understand these topics easily.

Once again thanks for your remarkable effort for learners.

Thank you dear Imran Sir really me was seeking helps from someone to cover these topics , but today you teaches so well and you explain the topics in detail .

Again thanks for this video

Now i m capable and fully understand the topics thanks

Thank you so much this video has really helped me!

thanxx

Excellent video,great effort and thank you very much

THANK YOU…THIS VIDEO IS VERY VERY HELPFUL AND IT SIMPLIFY THE TECHNIQUES VERY WELL.THANKS.

Thanks a lot, sir

thank you so much sir…it helped me a lot.

Thankyou soo much very much helpful ๐

So clear and crystal explanation….

Your video = 15 marks in my final examination…kudos

Long life my lecturer.

Very nice and easy to understand

Fix the audio dude, seems like a good presentation but your mic is rubbish

Awesome video .. thanks for it

thank you so much for your effort .it is very useful material

This video is very essential to me. The explanation is nice and easily understand. Thank you for your smart explanation. God bless you and your beloved family thank you again.

?could you give me the this equation for NPV please

really thanks sir,i really understand and learned with full concept clear.thankyou

which one is traditional , IRR or profitibilty index?

, and

you can change your language

Excellent video, but poor audio !!!

The echo on the voice kind of scares me but thanks

Outstanding video !! Easy to understand

very helpful video to understand the concept…… thank you

Really Thank you so much, I understand very easily

wh?at happens to a 15yr investment with no inflows? i.e II =x amount and every year there is just x amount of additional outflow. you only get lump sum after 15yrs. e.g investing in a new premium whiskey that will take 15yrs to mature and during the period you need to pay for storage (while distilling)

Bro i dont knw what to say but u really saved my ass out here โค

Got accounting test tommorow about this topic and didint knw anything an hour ago

Im now 100% sure imma ace the test

Once again thanks man ur tge best ๐

very good presentation…..Thanks.

thank you so much for such wonderful explanations.. it was beyond helpful.

Great Effort, Very well explained, Much better than Live lectures

on the calculator 100 x 1.08^ 5=146.93

Wonderful explaination

Thanks to the lecturer..i have better understanding to all this topics

Such a master skill you used to put things in order that makes very easy to understand.

This is how big professors use to teach.

very helpful sir thank u so much

Brother i just love you… Your are an excellent teacher..

informative. Thanks mate.

Thanks

In the given sum of IRR, you are using excel, is there no manual way? And is trial and error the only way to solve it (if there are multiple cash flows)?

thank god i found this!

thanks very much

Excellent Lecture, thanks Mr. Imran. Your presentation and grasp on Topic is perfect. After watching this video, my all doubts got cleared. Thank You So much, will wait for more such videos.

in NPV first year is usually not discounted. in 14.56 of video the amount of first year (70000) should not be discounted. because discount rate should be started from second year of operation. correct me please if I'm wrong.

How would you determine the series of cash inflows for the future that was given, before we calculated the NPV?

Great video. I wonder i you get back to about min. 3:10 – 3:20 where you said "time has a money value". I presume you meant "money has a time value".

This is such a great lecture, the breakdown, really helps reading the book alone was not helping but I enjoy watching this video.

Thank you so much! That was pretty helpful ๐

good explanation

Superb crisp and clear explanation.. I am not from accounts background but with your explanation I am able to understand.

Thank you so much sir

Thank u very much sir…..this is really helpfull๐๐

I find a video very special, i tried to cover the knowledge when i was in college but i ended up confused. Thank u very much.

Thanks man!

I found this and it has helped tremendously, thank you so much !!

excellent video sir, keep doing the work!!

Amazing and useful lecture

Thankyou sir ๐

My sincere thanks to you Imran Sir.

Hi …video is very helpful…but one technique is Missing of Non discounted method that is ARR…plz explain that also

please add other topics of financial management sir.video was excellent .subscribed please do add more so that it would help many more

Thanks for this video its help me alot from where i can get the relevant video continuously regarding leverage, and cash management?

Absolutely wonderful lecture brother…. You just made me feel confident for my exams….. Bravo ๐๐๐๐พ

The explanation and examples were good to understand… !!! And gives better understanding… I will share this video to my friends… !๐ Thankyou sir!!!

Thanks a lot sir itโs really helpful! Tomorrow having exam its makes easy to learn capital budgeting now!

I want you one video on WACC please !

Good luck !

sir you used excel for irr how can i find IRR on paper

Such a beautiful explanation….. Thank you so much Sir…..Hope you do a lot more videoes…

thank you so much

Thank you so much.. It is very clear and understandable..very helpful to me

Nice tutorial imran sir…thanks a lot..

Thanks man)

wow!…never had all these better explained. thanks for simplifying…

Thank you๐

The best academic explanation I have ever seen on Youtube. If you can upload a video on Life Cycle Costing using NPV calculations, It would be a huge social service. Best of Luck

What an awesome explanation……i understood very easily….. Keep posting this type of vedioes…..these are very useful……

Thank you…ready for my CAT TOMORROW

It is very helpful video

thank you so much Sir

It is very helpful video

thank you so much Sir

Thanks alot

You are great

Ver good explination…