Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R

Capital Budgeting Step-by-Step
Introduction to Capital Budgeting

*Net Present Value - NPV
*Profitability Index
*Internal Rate of Return - IRR (Time-Adjusted Rate of Return)
*Payback Period,
*Simple Rate of Return, Also called the Accounting Rate of Return or Accrual Accounting Rate of Return

Time Value of Money – Present Value, Future Value
*Use of Present Value (PV) and Future Value (FV) Tables,
*Use of Financial Calculators – Recommendations, demonstration

Capital budgeting is an area that focuses on investing in long-lived, expensive assets. Examples of capital expenditures (capital investments, capital projects) include, the acquisition of land, buildings, equipment, aircraft, vehicles, boats, construction equipment, manufacturing equipment, store equipment, manufacturing plants, retail store outlets, patents, copyrights, and others.

Capital budgeting decision models are helpful for evaluating any and all costly projects that provide benefits for years to come.

Introduction/Conceptual Coverage - This video introduces capital budgeting and various important concepts and considerations.

Step-by-Step Calculations - The video also discusses the time value of money and provides various examples calculating both present value (PV) and future value (FV) of single cash flows as well as annuities (streams of equal cash flows with an equal time interval between each payment).

Present value and future value calculations are demonstrated using both PV and FV tables as well as various financial calculators.

The Texas Instruments BA II Plus, the Hewlett Packard HP 10b and HP 10c are discussed and used in the video.

The video demonstrates and discusses the benefits and drawbacks of the most popular capital budgeting decision models including:
*Net Present Value (NPV) for even and uneven cash flow streams
*Net Present Value Profitability Index
*Internal Rate of Return (IRR) for even and uneven cash flow streams
*Payback Period for even and uneven cash flow streams
*Simple Rate of Return
The benefits and drawbacks of each capital budgeting model are discussed.

For students, the video provides basic, step-by-step coverage that’s somewhat comparable to in-class introductory capital budgeting lectures in managerial or cost accounting. The video can provide the introduction, the extra review or tutoring students need to help them understand capital budgeting and how to do the calculations using tables and/or a financial calculator.

Amazon Calculator Links:

Texas Instruments Business Analysts II – BA II Plus (Popular among students, demonstrated in the video.):

Hewlett Packard 10b (Popular among students, shown in the video.):

Hewlett Packard 12c (Popular among financial professionals, demonstrated in the video.):

Thank you for watching and best regards,
Mike

[nigel]

One of THE best if not THE best explanation of capital budgeting I have seen, not to mention the step by step process. Not only that I now understand the the calculation, but I now also understand the concepts and why we do the calculations the way they are done.

[brendapaez]

THIS WAS INCREDIBLY EASY TO FOLLOW!

THANKS

[peggiehaas]

Professor Werner, Thank you so much for this video. It’s the way you explained complicated things in simple terms that make it so interesting. Also, the use of the calculator clarify common errors that discourage any student when we try it . Many thanks

[rosariopereira]

That's explained in a lucid way and honestly very well done - please request to incorporate some more concepts on statistical tools like Probability, Regression, Standard deviation, derivatives etc

[crisisbliss]

I need to incorporate these formulas into a spreadsheet, but the calculators you used were wonderful. I like you the way you clearly express things.

[thobilemaphanga]

Very informative. I was really lost and didn’t understand anything but now I’m good to start with my assignment

[evdoxiapikouni]

EXCELLENT. REALLY THE BEST WE HAVE FOUND

[NayrMcDubs]

You saved me from dropping out of a finance class thank you so much

[franklinokafor]

Well explained and easy to understand. Kudos.

[fayezfamfa]

This is great content ...why do not you put it on linkedin learning or coursera ?

[ntcuongct]

Dear friends, <br>
I have a question:<br>
1/ in the capital budgeting for 4 years, I can add multiple discount rates of any project to calculate NPV?. For example:
Discount rate of year 1 is 8%.
Discount rate of year 2 is 10%
Discount rate of year 3 is 8%.
Discount rate of year 4 is 9%

[irenedenisov]

Very good explanation of the methods and how respected they are. I would suggest to use an excell for calculation sine calculators are no longer in use. Formulas solve those calculations in a second.

[alemayehuchalchisa]

Thank you very much i am very happy in this presentation

[chrismachabee]

I came by to see your video and I had no sound. I checked my computer and all is well. I see as far as yesterdayit appears othave had audio.

[ЯсинМехмед]

Do they call it the ''internal''' rate of return because its specific to the firm/project receiving the investment from the creditors/investors?

[ntcuongct]

Hello friends,
I have 1 of the following situations:
1 / Company X has a large project with an investment of 1 billion USD, and its capital structure is expected to have 10% capital from the company and 90% capital from the bank, the bank will finance the capital as follows:
The project is divided into 3 phases:
Phase 1 is 200 million USD, when phase 1 comes into operation and has a turnover of 50 million USD, then proceed to phase 2.
Phase 2 is 500 million USD, when phase 2 comes into operation and has a turnover of 300 million USD, then proceed to phase 3.
Phase 2 is 300 million USD, when phase 2 comes into operation and has a turnover of 200 million USD, the bank starts collecting interest.
Question: I want to calculate the NPV, IRR of the whole project, will I split the project by phase or by the total of a large project? Thank you.

[ntcuongct]

Hello friends,
I have a question about capital budgeting:
1 / Assuming company X has a project that needs to invest in 3 years with a capital of 1 billion USD and starts in 2015. But the company is short of money, so it is expected to invest in 2015, 2017, 2019. Question: So we will calculate the cost of capital for the initial investment including 2016 and 2018 ?. Interest is 12% per year Thanks.

[TopStories-xt]

Hello everyone
I want to know how do we calculate the PV when given different payments?
Thanks 😀

[amnak.alsh.]

it's multiply from present to future, and division from future to present, why you didn't divide the 11K instead you multiplied it