CAPITAL BUDGETING Capital budgeting (or investment appraisal) is the planning process used to determine whether an organization's long

term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is budget for major capital, or investment, expenditures. Many formal methods are used in capital budgeting, including the techniques such as Accounting rate of return Payback period Net present value Profitability index Internal rate of return Modified internal rate of return Equivalent annuity Real Options Valuation

ACCOUNTING RATE OF RETURN Accounting rate of return, also known as the Average rate of return, or ARR is a financial ratio used in capital budgeting. The ratio does not take into account the concept of time value of money. ARR calculates the return, generated from net income of the proposed capital investment. The ARR is a percentage return. Say, if ARR = 7%, then it means that the project is expected to earn seven cents out of each dollar invested. If the ARR is equal to or greater than the required rate of return, the project is acceptable. If it is less than the desired rate, it should be rejected. When comparing investments, the higher the ARR, the more attractive the investment. Over one-half of large firms calculate ARR when appraising projects.

=Profit/investment equals to ARR. PAYBACK PERIOD Payback period in capital budgeting refers to the period of time required for the return on an investment to "repay" the sum of the original investment. For example, a $1000 investment which returned $500 per year would have a two year payback period. The time value of money is not taken into account. Payback period intuitively measures how long something takes to "pay for itself." All else being equal, shorter payback periods are preferable to longer payback periods. Payback period is widely used because of its ease of use despite the recognized limitations described below. The term is also widely used in other types of investment areas, often with respect to energy efficiency technologies, maintenance, upgrades, or other changes. For example, acompact

fluorescent light bulb may be described as having a payback period of a certain number of years or operating hours, assuming certain costs. Here, the return to the investment consists of reduced operating costs. Although primarily a financial term, the concept of a payback period is occasionally extended to other uses, such as energy payback period (the period of time over which the energy savings of a project equal the amount of energy expended since project inception); these other terms may not be standardized or widely used. Payback period as a tool of analysis is often used because it is easy to apply and easy to understand for most individuals, regardless of academic training or field of endeavour. When used carefully or to compare similar investments, it can be quite useful. As a stand-alone tool to compare an investment to "doing nothing," payback period has no explicit criteria for decision-making (except, perhaps, that the payback period should be less than infinity). The payback period is considered a method of analysis with serious limitations and qualifications for its use, because it does not account for the time value of money, risk, financingor other important considerations, such as the opportunity cost. Whilst the time value of money can be rectified by applying a weighted average cost of capital discount, it is generally agreed that this tool for investment decisions should not be used in isolation. Alternative measures of "return" preferred by economists are net present value and internal rate of return. An implicit assumption in the use of payback period is that returns to the investment continue after the payback period. Payback period does not specify any required comparison to other investments or even to not making an investment. Payback period is usually expressed in years. Start by calculating Net Cash Flow for each year: Net Cash Flow Year 1 = Cash Inflow Year 1 - Cash Outflow Year 1. Then Cumulative Cash Flow = (Net Cash Flow Year 1 + Net Cash Flow Year 2 + Net Cash Flow Year 3 ... etc.) Accumulate by year until Cumulative Cash Flow is a positive number: that year is the payback year. To calculate a more exact payback period: Payback Period = Amount to be Invested/Estimated Annual [1] Net Cash Flow 1{ } Additional complexity arises when the cash flow changes sign several times; i.e., it contains outflows in the midst or at the end of the project lifetime. The modified payback period algorithm may be applied then. First, the sum of all of the cash outflows is calculated. Then the cumulative positive cash flows are determined for each period. The modified payback period is calculated as the moment in which the cumulative positive cash flow exceeds the total cash outflow. NET PRESENT VALUE The net present value (NPV) or net present worth (NPW) of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values(PVs) of the individual cash flows of the same entity. In the case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting, and widely used throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in present value terms, once financing charges are met.NPV can be described as the Difference Amount between the sums of discounted; cash inflows and cash outflows. It compares
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the present value of money today to the present value of money in future, taking inflation and returns into account The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputs a price; the converse process in DCF analysis - taking a sequence of cash flows and a price as input and inferring as output a discount rate (the discount rate which would yield the given price as NPV) - is called the yield, and is more widely used in bond trading. FORMULA Each cash inflow/outflow is discounted back to its present value (PV). Then they are summed. Therefore NPV is the sum of all terms,

where t - the time of the cash flow i - the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk.); the opportunity cost of capital - the net cash flow (the amount of cash, inflow minus outflow) at time t. For educational purposes, investment. The result of this formula is multiplied with the Annual Net cash in-flows and reduced by Initial Cash outlay the present value but in cases where the cash flows are not equal in amount, then the previous formula will be used to determine the present value of each cash flow separately. Any cash flow within 12 months will not be discounted for NPV [2] purpose. is commonly placed to the left of the sum to emphasize its role as (minus) the

Given the (period, cash flow) pairs ( , net present value is given by:

) where

is the total number of periods, the

PROFITABILITY OF INDEX
Profitability index (PI), also known as profit investment ratio (PIR) and value investment ratio (VIR), is the ratio of payoff to investment of a proposed project. It is a useful tool for ranking projects because it allows you to quantify the amount of value created per unit of investment.

The ratio is calculated as f

Assuming that the cash flow calculated does not include the investment made in the project, a profitability index of 1 indicates breakeven. Any value lower than one would indicate that the project's PV is less than the initial investment. As the value of the profitability index increases, so does the financial attractiveness of the proposed project. Rules for selection or rejection of a project: If PI > 1 then accept the project If PI < 1 then reject the project

INTERNAL RATE OF RETURN

The internal rate of return (IRR) is a rate of return used in capital budgeting to measure and compare the profitability of investments. It is also called the discounted cash flow rate of return (DCFROR) or the [1] rate of return (ROR). In the context of savings and loans the IRR is also called the effective interest rate. The term internal refers to the fact that its calculation does not incorporate environmental factors (e.g., the interest rate or inflation). The internal rate of return on an investment or project is the "annualized effective compounded return rate" or "rate of return" that makes the net present value (NPV as NET*1/(1+IRR)^year) of all cash flows (both positive and negative) from a particular investment equal to zero. In more specific terms, the IRR of an investment is the discount rate at which the net present value of costs (negative cash flows) of the investment equals the net present value of the benefits (positive cash flows) of the investment. Discounted cash flow (DCF) calculations are commonly used to evaluate the desirability of investments or projects. The higher a project's DCF, the more desirable it is to undertake the project. Assuming all projects require the same amount of up-front investment, the project with the highest DCF would be considered the best and undertaken first. A firm (or individual) should, in theory, undertake all projects or investments available with IRRs that exceed the cost of capital. Investment may be limited by availability of funds to the firm and/or by the firm's capacity or ability to manage numerous projects. MODIFIED INTERNAL RATE OF RETURN The modified internal rate of return (MIRR) is a financial measure of an investment's [1][2] attractiveness. It is used in capital budgeting to rank alternative investments of equal size. As the name implies, MIRR is a modification of the internal rate of return (IRR) and as such aims to resolve some problems with the IRR. MIRR is calculated as follows:

, where n is the number of equal periods at the end of which the cash flows occur (not the number of cash flows), PV is present value (at the beginning of the first period), FV is future value (at the end of the last period).

The formula adds up the negative cash flows after discounting them to time zero using the external cost of capital, adds up the positive cash flows including the proceeds of reinvestment at the external reinvestment rate to the final period, and then works out what rate of return would cause the magnitude of the discounted negative cash flows at time zero to be equivalent to the future value of the positive cash flows at the final time period. EQUIVALENT ANNUITY The equivalent annual annuity formula is used in capital budgeting to show the net present value of an investment as a series of equal cash flows for the length of the investment. The net present value(NPV) formula shows the present value of an investment that has uneven cash flows. When comparing two different investments using the net present value method, the length of the investment (n) is not taken into consideration. An investment with a 15 year term may show a higher NPV than an investment with a 4 year term. By showing the NPV as a series of cash flows, the equivalent annual annuity formula provides a way To factor in the length of an investment.

REAL OPTION VALUATION Real options valuation, also often termed real options analysis, (ROV or ROA) [2] applies option valuation techniques to capital budgeting decisions. A real option itself, is the right but not the obligation to undertake certain business initiatives, such as deferring, abandoning, expanding, staging, or contracting a capital investment project. For example, the opportunity to invest in the expansion of a firm's factory, or alternatively to sell the factory, is a real call or put option, respectively. Real options are generally distinguished from conventional financial options in that they are not typically traded as securities, and do not usually involve decisions on an underlying asset that is traded as a [3] financial security. Real options analysis, as a discipline, extends from its application in corporate finance, to decision making under uncertainty in general, adapting the techniques developed forfinancial options to "real-life" decisions. For example, R&D managers can use Real Options Valuation to help them allocate their R&D budget among diverse projects; a non business example might be the decision to join the work force, or rather, to forgo several years of income to attend graduate school. It thus forces decision makers to be explicit about the assumptions underlying their projections, and for this reason ROV is increasingly employed as a tool in business strategy formulation.
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DIFFERENCE BETWEEN ORGANIC AND INORGANIC FERTILIZER Organic fertilizers are naturally occurring fertilizers (e.g. compost, manure).
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Naturally occurring organic fertilizers include manure, slurry, worm castings, peat, seaweed, humic acid, and guano. Sewage sludge use in organic agricultural operations in the U.S. has been extremely limited and rare due to USDA prohibition of the practice (due to toxic metal accumulation, among other [1][2][3] factors). Processed organic fertilizers include compost, bloodmeal, bone meal, humic acid, amino acids, and seaweed extracts. Other examples are natural enzyme-digested proteins, fish meal, and feather meal. Decomposing crop residue (green manure) from prior years is another source of fertility. INORGANIC FERTILIZER

A fertilizer containing a mixture of chemical compounds that are added to the soil in order to improve its fertility, but which can be harmful to the environment if used in large amount Organic vs Inorganic Compounds The most common differentiation to help distinguish between organic and inorganic compounds used to be the fact that organic compounds result from the activity of living beings, whereas inorganic compounds are either the result of natural processes unrelated to any life form or the result of human experimentation in the laboratory. But this definition is not strictly true because these days organic compounds can be artificially created by human beings, and moreover organic compounds have been found in outer space where there are no living beings. A more acceptable difference pertains to the salt making property of inorganic compounds which is absent in organic compound. But this definition too is not sacrosanct as both these compounds are sometimes known to buck the trend when it comes to the presence or absence of this property. Some might hold that organic compounds have carbon while inorganic do not. This too is not strictly one hundred per cent correct. A more tenable explanation is that organic compounds have carbon-hydrogen bonds, while inorganic do not. This is largely true and therefore is a real distinguishing characteristic. Yet another difference is the fact that inorganic compounds contain metal atoms, whereas organic compounds do not. This too is not one hundred percent true. Maybe one could just take the word of organic and inorganic chemist on what constitutes an organic or inorganic compound. Organic compounds are biological and inorganic are mineral in nature.