- To promote a business.
- To pay taxes.
- To replace the assets.
- To support welfare programmers: Literary, health, camps, donates charitable trusts, Educational institutions: Public Sector.
- To wind up.
- Fixed Capital
- Working Capital
- It is used in acquiring Long-term assets such as
- Land & Buildings,
- Plant & Machinery,
- Furniture & Fixtures & so on.
- Fixed capital forms the skeleton of business.
- It provides the basic assets as per the business needs.
- These assets are not meant for resale.
- They are intended to generate revenues.
- Permanent in Nature.
- Profit Generation.
- Low liquidity – Fixed assets cannot be converted into cash quickly.
- Nature of Business.
- Methods of Production etc.
- Utilized for Promotion & Expansion-Business.
- Tangible Fixed Assets: These can be seen and touched
- Ex: Land, Buildings, Machinery, Motor Vehicles, Furniture etc.
- Intangible Fixed Assets: They don’t have physical form, Can’t be seen & touched.
- Ex: Goodwill, Brand names, Trademarks, Patents, Copyrights, so on.
- Financial Fixed Assets: These can be inverted in shares, foreign currency deposits, Government Bonds.
- Working capital is the flash & blood of the business.
- It makes a company to work.
- Short life span- Cash, Stock, Debtors.
- Smooth flow of operations.
- Liquidity- Cash.
- Amount of working capital: Depends size, nature of business.
- Utilized for payment of current expenses.
- Rent &
- Other Expenses.
- Current Assets: Cash, Stocks, Debtors, Prepaid expenses & Bills receivable.
- Current Liabilities: Creditors, Bills Payable.
- Long-term Finance (3 Years & above).
- Lands & Buildings.
- Plant & Machinery.
- Medium-term Finance (1 Year & below 3 Years).
- Bank & Hire Purchase Installment,
- TV, Motor Cycle etc.
- Short-term finance (Less than 1 year).
- Bank over credit,
- Trade credit,
- Advance from customers.
- Construction of new building or renovation of existing old building.
- Purchasing of technology from a foreign country.
- Building a production facility.
- To buy a new track.
- Sponsoring a local football or cricket team.
- Building a bridge.
- Buying an airline.
- Making a new product (Producing a new product).
- Starting a new business.http://www.btechbunks.com/
- Expansion of Plant & Machinery equipments.
- Advertising the company products.
- Labor agreements.
- Projects that reduce the costs.
- Projects that Increase the revenues (income).
- Cash inflows = Cash receipts.
- Cash outflows = Cash going out of business.
- It may be calculated for a particular project (or) for the whole business for one year (or) series of years.
Cash expenses 40% of receipts
Cash outflow before taxes
Cash flow after taxes
d = (b-c)
f = (d-e)
h = (f-g)
I = (h+e)
- Generating investment proposals.
- Estimating cash flows for the proposals.
- Evaluating cash flows.
- Selection of projects.
- Monitoring & re-evaluating, on a continuous basis the investment projects, once they are accepted.
- Replacement = to replace worn out or obsolete fixed assets.
- Expansion = to add capacity to existing product.
- Research & Development = where technology is rapidly changing, large sums need to be spent on research & development for investing on new products.
- Diversification = to reduce the risk of failure by operating in more than one market.
- Others = miscellaneous proposals.
- Traditional methods:
- Payback Period.
- Accounting rate of return method (A.R.R.).
- Discounted cash flow methods:
- Internal rate of return method (I.R.R.).
- Net present value method (N.V.P.).
- Under this method, the decision to accept or reject a proposal is based on its payback period. It means the original cost is recovered.
- It is calculated by:
- The shorter is the payback period. The better is the project in terms of paying back the original investment.
- The companies favor this method. The earlier the original investment is recovered.
Cash inflows (Rs)
Cumulative Cash inflows (Rs)
- Note: The original investment can be recovered by the end of second year is pay back period.
- Easy to calculate & understand.
- Liquidity is emphasized.
- Reliable technique in volatile business.
- Post-payback earnings ignored:http://www.btechbunks.com/
- Emphasized (by choosing only cash inflows) liquidity is over-emphasized.
- Timing of cash flows ignored. This method does not consider the timing of cash flows. All the cash flows are given equal weight age.
- Average capital.
- Original capital employed.
- ARR on Average Capital:
- On Original Investment: