CAPITAL BUDGETING · FORMULA AND EXCEL
1. Start here: the basic learning sequence
Build the cash flows first. Then calculate value, returns and recovery. These three lessons form the foundation for the advanced track.
Fundamentals & Core Concepts
Estimate the right cash flows before choosing a technique.
Depreciation & Cash-Flow Estimation
Build new-project and replacement-project cash flows, with tax shields and Excel reconciliations.
Capital Budgeting Evaluation Techniques
Apply payback, ARR, NPV, IRR, MIRR, PI and discounted payback.
CAPITAL BUDGETING · FORMULA AND EXCEL
2. What you should be able to do
| Lesson | Learning outcome |
|---|---|
| Fundamentals & Core Concepts | Explain CapEx, incremental flows, sunk and opportunity costs, CF0, OCF and terminal flows |
| Depreciation & Cash-Flow Estimation | Calculate tax shields and build new-project and replacement-project cash-flow streams |
| Evaluation Techniques | Calculate and interpret payback, ARR, NPV, IRR, MIRR, PI and discounted payback with formulas and Excel |
CAPITAL BUDGETING · FORMULA AND EXCEL
3. Practice the core case
Work through the ₹ lakh manufacturing case: initial outlay 120; annual OCF 35 for five years; terminal addition 26. The complete stream is −120,35,35,35,35,61. At 12%, NPV is 20.92 and IRR is 18.28%.
Before progressing, explain each cash-flow item, reproduce the Excel model and reconcile the manual calculation.
CAPITAL BUDGETING · FORMULA AND EXCEL
4. Move to Advanced Capital Budgeting
Once the core model is clear, examine alternative project choices, uncertainty, flexibility and financing.
Sources and further reading
Selected relevant sections of the supplied materials informed this series. Prasanna Chandra’s planning framework also informs the emphasis on estimation and strategic fit. These are original explanations and teaching cases, not reproduced textbook examples.
- Prasanna Chandra (2019), Projects: Planning, Analysis, Selection, Financing, Implementation, and Review, 9th edition, McGraw Hill. The uploaded 150-page scan was visually checked in selected opening sections: importance and difficulties of capital investment, project categories, planning–analysis–selection–financing–implementation–review, strategy and demand forecasting. It ends during Chapter 4; later detailed appraisal chapters appear in its contents but are not present in this extract.
- Dayananda, Irons, Harrison, Herbohn and Rowland (2002), Capital Budgeting: Financial Appraisal of Investment Projects, Cambridge University Press. Reviewed selected passages on relevant cash flows, appraisal methods, sensitivity, simulation and capital constraints. The chapter structure also guides further reading.
- Dr. Vijay Shankar Pandey, Capital Budgeting Techniques, uploaded as “Basics of Capital Budgetings”: process, payback, ARR, NPV, IRR and comparison. Rounded examples and conventions are checked independently rather than copied.
- Professor James P. Dow Jr., FIN 303, Part 8: Topics in Capital Budgeting: uncertainty, flexibility and unequal project lives.
- Capital Budgeting – Risk Analysis, uploaded five-page extract: probability, certainty equivalents and risk-adjusted approaches.
For continued study: Dayananda Chapters 1–2 for foundations; 5–6 for appraisal; 7–9 for risk; 11–12 for constrained selection; 16 for international appraisal. Review here is targeted, not a claim that the entire 343-page book was read.
Prasanna Chandra: further-reading map
The 9th-edition contents identifies Chapter 8 (Investment Criteria), Chapter 9 (Project Cash Flows), Chapter 10 (Cost of Capital), Chapter 11 (Project Risk Analysis), Chapter 12 (Project Rate of Return) and Chapter 13 (Special Decision Situations). These are reading directions, not claims that their absent pages were consulted.
Public reference links
- OpenStax: NPV
- OpenStax: IRR
- OpenStax: PI, MIRR and discounted payback
- OpenStax: choosing projects
- ACCA: incremental investment appraisal
- ACCA: inflation
- Microsoft: NPV timing convention
- Microsoft: MIRR
- Damodaran: Applied Corporate Finance resources
All rates, taxes, exchange rates and business figures in the examples are teaching assumptions. Results use unrounded calculations and are rounded for display. Excel formulas use English function names and commas.