Financial Management Concepts

Accounting Rate of Return (ARR) Method of Capital Budgeting

Accounting Rate of Return (ARR) Method

Various proposals are ranked in order to rate of earnings on the investment in the projects concerned. The project which shows highest rate of return is selected and others are ruled out.

The Accounting Rate of Return is found out by dividing the average income after taxed by the average investment, i.e., average net value after depreciation. The accounting rate of return, thus, is an average rate and can be determined by the following equation.

Accounting Rate of Return (ARR) = Average income / Average investment

There are two variants of the accounting rate of return; Original Investment Method, and Average Investment Method.… Read the rest

Abey Francis

Payback Period Method of Capital Budgeting

Payback Period Method

The Payback period method of  capital budgeting  is popularly known as pay-off, pay out or replacement period methods also. It is the most popular and widely recognized traditional method of evaluating capital projects.

Payback period method represents the number of years required to recover the original cash outlay invested in a project. It is based on the principle that every capital expenditure pays itself back over a number of years. It attempts to measure the period of time, it takes for the original cost of a project to be recovered from the additional earnings of the project. It means where the total earnings (or net cash inflow) from investment equals the total outlay, that period is the pay-back period.… Read the rest

Abey Francis

Significance of Capital Budgeting

The key function of the financial management is the selection of the most profitable assortment of capital investment and it is the most important area of decision-making of the financial manager because any action taken by the manger in this area affects the working and the profitability of the firm for many years to come.

Significance of Capital Budgeting Decisions

The significance of capital budgeting can be emphasized taking into consideration the very nature of the capital expenditure such as heavy investment in capital projects, long-term implications for the firm, irreversible decisions and complicates of the decision making. Its importance can be illustrated well on the following other grounds:

1.… Read the rest

Abey Francis

Capital Budgeting- Definition, Nature and Procedure

Meaning of Capital Budgeting

Capital expenditure budget or capital budgeting is a process of making decisions regarding investments in fixed assets which are not meant for sale such as land, building, machinery or furniture.

The word investment refers to the expenditure which is required to be made in connection with the acquisition and the development of long-term facilities including fixed assets. It refers to process by which management selects those investment proposals which are worthwhile for investing available funds. For this purpose, management is to decide whether or not to acquire, or add to or replace fixed assets in the light of overall objectives of the firm.… Read the rest

Abey Francis

Merchant Banking Services: Management of Capital Issues

The capital issue are managed are category-1 merchant banker and constitutes the most important aspects of their services. The public issue of corporate securities involves marketing of capital issues of new and existing companies, additional issues of existing companies including rights issue and dilution of shares by letter of offer. The public issues are managed by the involvement of various agencies i.e. underwriters, brokers, bankers, advertising agency, printers, auditors, legal advisers, registrar to the issue and merchant bankers providing specialized services to make the issue of the success. However merchant banker is the agency at the apex level than that plan, coordinate and control the entire issue activity and direct different agencies to contribute to the successful marketing of securities.… Read the rest

Abey Francis

Merchant Banking Services: Credit Syndication

Credit syndication also known as credit procurement and project finance services. The main task involved in credit syndication is to raise to rupee and foreign currency loans with the banks and financial institutions both in India and abroad. It also arranges the bridge finance and the resources for cost escalations or cost Overruns.

Broadly, the credit syndications include the following acts;

  1. Estimating the total costs.
  2. Drawing a financing plan for the total project cost-conforming to the requirements of the promoters and their collaborators. Financial institutions and banks, government agencies and underwriters.
  3. Preparing loan application for financial assistance from term lenders/financial institutions/banks and monitoring their progress including the pre-sanction negotiations.
… Read the rest
Abey Francis