Capital budgeting is vital in marketing decisions.

Decisions on investment, which take time to mature, have to be based on the returns which that investment will make. Unless the project is for social reasons only, if the investment is unprofitable in the long run, it is unwise to invest in it now. Often, it would be good to know what the present value of the future investment is, or how long it will take to mature (give returns . !t could be much more profitable putting the planned investment money in the bank and earning interest, or investing in an alternative project. "ypical investment decisions include the decision to build another grain silo, cotton gin or cold store or invest in a new distribution depot. #t a lower level, marketers may wish to evaluate whether to spend more on advertising or increase the sales force, although it is difficult to measure the sales to advertising ratio. Chapter objectives "his chapter is intended to provide$ % #n understanding of the importance of capital budgeting in marketing decision making % #n e&planation of the different types of investment project % #n introduction to the economic evaluation of investment proposals % "he importance of the concept and calculation of net present value and internal rate of return in decision making % "he advantages and disadvantages of the payback method as a techni'ue for initial screening of two or more competing projects. (tructure of the chapter Capital budgeting is very obviously a vital activity in business. )ast sums of money can be easily wasted if the investment turns out to be wrong or uneconomic. "he subject matter is difficult to grasp by nature of the topic covered and also because of the mathematical content involved. *owever, it seeks to build on the concept of the future value of money which may be spent now. !t does this by e&amining the techni'ues of net present value, internal rate of return and annuities. "he timing of cash flows are important in new investment decisions and so the chapter looks at this +payback+ concept. One problem which plagues developing countries is +inflation rates+ which can, in some cases, e&ceed ,--. per annum. "he chapter ends by showing how marketers can take this in to account. Capital budgeting versus current e&penditures # capital investment project can be distinguished from current e&penditures by two features$ a such projects are relatively large b a significant period of time (more than one year elapses between the investment outlay and the receipt of the benefits.. #s a result, most medium/si0ed and large organisations have developed special procedures and methods for dealing with these decisions. # systematic approach to capital budgeting implies$ a the formulation of long/term goals b the creative search for and identification of new investment opportunities c classification of projects and recognition of economically and1or statistically dependent proposals d the estimation and forecasting of current and future cash flows e a suitable administrative framework capable of transferring the re'uired information to the decision level f the controlling of e&penditures and careful monitoring of crucial aspects of project e&ecution g a set of decision rules which can differentiate acceptable from unacceptable alternatives is re'uired. "he last point (g is crucial and this is the subject of later sections of the chapter.

"he classification of investment projects a 2y project si0e (mall projects may be approved by departmental managers. 3ore careful analysis and 2oard of Directors4 approval is needed for large projects of, say, half a million dollars or more. b 2y type of benefit to the firm % an increase in cash flow % a decrease in risk % an indirect benefit (showers for workers, etc . c 2y degree of dependence % mutually e&clusive projects (can e&ecute project # or 2, but not both % complementary projects$ taking project # increases the cash flow of project 2. % substitute projects$ taking project # decreases the cash flow of project 2. d 2y degree of statistical dependence % 5ositive dependence % 6egative dependence % (tatistical independence. e 2y type of cash flow % Conventional cash flow$ only one change in the cash flow sign e.g. /17777 or 71////, etc % 6on/conventional cash flows$ more than one change in the cash flow sign, e.g. 71/1777 or /171/17777, etc. "he economic evaluation of investment proposals "he analysis stipulates a decision rule for$ ! accepting or !! rejecting investment projects "he time value of money 8ecall that the interaction of lenders with borrowers sets an e'uilibrium rate of interest. 2orrowing is only worthwhile if the return on the loan e&ceeds the cost of the borrowed funds. 9ending is only worthwhile if the return is at least e'ual to that which can be obtained from alternative opportunities in the same risk class. "he interest rate received by the lender is made up of$ i "he time value of money$ the receipt of money is preferred sooner rather than later. 3oney can be used to earn more money. "he earlier the money is received, the greater the potential for increasing wealth. "hus, to forego the use of money, you must get some compensation. ii "he risk of the capital sum not being repaid. "his uncertainty re'uires a premium as a hedge against the risk, hence the return must be commensurate with the risk being undertaken. iii !nflation$ money may lose its purchasing power over time. "he lender must be compensated for the declining spending1purchasing power of money. !f the lender receives no compensation, he1she will be worse off when the loan is repaid than at the time of lending the money.

a :uture values1compound interest :uture value (:) is the value in dollars at some point in the future of one or more investments. :) consists of$ i the original sum of money invested, and ii the return in the form of interest. "he general formula for computing :uture )alue is as follows$ :)n ; )o (l 7 r n where )o is the initial sum invested r is the interest rate n is the number of periods for which the investment is to receive interest. "hus we can compute the future value of what )o will accumulate to in n years when it is compounded annually at the same rate of r by using the above formula. 6ow attempt e&ercise <.,. =&ercise <., :uture values1compound interest i >hat is the future value of ?,- invested at ,-. at the end of , year@ ii >hat is the future value of ?,- invested at ,-. at the end of A years@ >e can derive the 5resent )alue (5) by using the formula$ :)n ; )o (! 7 r n 2y denoting )o by 5) we obtain$ :)n ; 5) (! 7 r n by dividing both sides of the formula by (! 7 r n we derive$

8ationale for the formula$ #s you will see from the following e&ercise, given the alternative of earning ,-. on his money, an individual (or firm should never offer (invest more than ?,-.-- to obtain ?,,.-- with certainty at the end of the year. 6ow attempt e&ercise <.B =&ercise <.B 5resent value i >hat is the present value of ?,,.-- at the end of one year@ ii >hat is the 5) of ?,<.,- at the end of A years@ b 6et present value (65) "he 65) method is used for evaluating the desirability of investments or projects.

where$ Ct ; the net cash receipt at the end of year t !o ; the initial investment outlay r ; the discount rate1the re'uired minimum rate of return on investment n ; the project1investment4s duration in years. "he discount factor r can be calculated using$

=&amples$

6.2. #t this point the tutor should introduce the net present value tables from any recognised published source. Do that now. Decision rule$ !f 65) is positive (7 $ accept the project !f 65) is negative(/ $ reject the project 6ow attempt e&ercise <.C. =&ercise <.C 6et present value # firm intends to invest ?,,--- in a project that generated net receipts of ?D--, ?E-- and ?<-- in the first, second and third years respectively. (hould the firm go ahead with the project@ #ttempt the calculation without reference to net present value tables first. c #nnuities 6.2. !ntroduce students to annuity tables from any recognised published source. # set of cash flows that are e'ual in each and every period is called an annuity. =&ample$ Fear Cash :low (? /D-, G-B G-C G--

5) ; ?G--(-.E-E, 7 ?G--(-.DB<G 7 ?G--(-.HA,C ; ?C<C.<G 7 ?CC-.A< 7 ?C--.AB ; ?EEG.HB 65) ; ?EEG.HB / ?D--.-; ?,EG.HB #lternatively, 5) of an annuity ; ?G-- (5):#t.i (C,-,,; ?G-- (-.E-E, 7 -.DB<G 7 -.HA,C ; ?G-- & B.GD<D ; ?EEG.HB 65) ; ?EEG.HB / ?D--.-; ?,EG.HB d 5erpetuities # perpetuity is an annuity with an infinite life. !t is an e'ual sum of money to be paid in each period forever.

where$ C is the sum to be received per period r is the discount rate or interest rate =&ample$ Fou are promised a perpetuity of ?H-- per year at a rate of interest of ,A. per annum. >hat price (5) should you be willing to pay for this income@

; ?G,<<<.<H # perpetuity with growth$ (uppose that the ?H-- annual income most recently received is e&pected to grow by a rate I of A. per year (compounded forever. *ow much would this income be worth when discounted at ,A.@ (olution$ (ubtract the growth rate from the discount rate and treat the first period4s cash flow as a perpetuity.

; ?HCA1-.,-

; ?H,CAe "he internal rate of return (!88 8efer students to the tables in any recognised published source. % "he !88 is the discount rate at which the 65) for a project e'uals 0ero. "his rate means that the present value of the cash inflows for the project would e'ual the present value of its outflows. % "he !88 is the break/even discount rate. % "he !88 is found by trial and error. where r ; !88 !88 of an annuity$

where$ J (n,r is the discount factor !o is the initial outlay C is the uniform annual receipt (C, ; CB ;....; Cn . =&ample$ >hat is the !88 of an e'ual annual income of ?B- per annum which accrues for H years and costs ?,B-@

;< :rom the tables ; G. =conomic rationale for !88$ !f !88 e&ceeds cost of capital, project is worthwhile, i.e. it is profitable to undertake. 6ow attempt e&ercise <.G =&ercise <.G !nternal rate of return :ind the !88 of this project for a firm with a B-. cost of capital$ F=#8 C#(* :9O>

? /,-,--, D,--B <,---

a "ry B-. b "ry BH. c "ry BE. 6et present value vs internal rate of return !ndependent vs dependent projects 65) and !88 methods are closely related because$ i both are time/adjusted measures of profitability, and ii their mathematical formulas are almost identical. (o, which method leads to an optimal decision$ !88 or 65)@ a 65) vs !88$ !ndependent projects !ndependent project$ (electing one project does not preclude the choosing of the other. >ith conventional cash flows (/K7K7 no conflict in decision arisesL in this case both 65) and !88 lead to the same accept1reject decisions. :igure <., 65) vs !88 !ndependent projects

!f cash flows are discounted at k,, 65) is positive and !88 M k,$ accept project. !f cash flows are discounted at kB, 65) is negative and !88 N kB$ reject the project. 3athematical proof$ for a project to be acceptable, the 65) must be positive, i.e.

(imilarly for the same project to be acceptable$

where 8 is the !88. (ince the numerators Ct are identical and positive in both instances$ % implicitly1intuitively 8 must be greater than k (8 M k L % !f 65) ; - then 8 ; k$ the company is indifferent to such a projectL % *ence, !88 and 65) lead to the same decision in this case. b 65) vs !88$ Dependent projects 65) clashes with !88 where mutually e&clusive projects e&ist. =&ample$ #grite& is considering building either a one/storey (5roject # or five/storey (5roject 2 block of offices on a prime site. "he following information is available$

!nitial !nvestment Outlay 6et !nflow at the Fear =nd 5roject # /E,A-,,,A--

5roject 2 /,A,--,D,---

#ssume k ; ,-., which project should #grite& undertake@

; ?EAG.AA

; ?,,C<C.<G 2oth projects are of one/year duration$ !88#$ ?,,,A-- ; ?E,A-- (, 78#

; ,.B,/, therefore !88# ; B,. !882$ ?,D,--- ; ?,A,---(, 7 82

; ,.B/, therefore !882 ; B-. Decision$ #ssuming that k ; ,-., both projects are acceptable because$ 65)# and 65)2 are both positive !88# M k #6D !882 M k >hich project is a +better option+ for #grite&@ !f we use the 65) method$ 65)2 (?,,C<C.<G M 65)# (?EAG.AA $ #grite& should choose 5roject 2. !f we use the !88 method$ !88# (B,. M !882 (B-. $ #grite& should choose 5roject #. (ee figure <.B. :igure <.B 65) vs !88$ Dependent projects

Up to a discount rate of ko$ project 2 is superior to project #, therefore project 2 is preferred to project #. 2eyond the point ko$ project # is superior to project 2, therefore project # is preferred to project 2 "he two methods do not rank the projects the same. Differences in the scale of investment 65) and !88 may give conflicting decisions where projects differ in their scale of investment. =&ample$ Fears , B C 5roject # /B,A-,,A-,,A-,,A-5roject 2 /,G,--H,--H,--H,---

#ssume k; ,-.. 65)# ; ?,,A-- & 5):# at ,-. for C years ; ?,,A-- & B.GDH ; ?C,HC-.A- / ?B,A--.-; ?,,BC-.A-. 65)2 ;; ?H,--- & 5):# at ,-. for C years ; ?H,--- & B.GDH ; ?,H,G-E / ?,G,--; ?C,G-E.--. !88# ;

; ,.<H. "herefore !88# ; C<. (from the tables !882 ;

; B."herefore !882 ; B,. Decision$ Conflicting, as$

% 65) prefers 2 to # % !88 prefers # to 2 65) !88 5roject # ? C,HC-.AC<. 5roject 2 ?,H,G--.-B,.

(ee figure <.C. :igure <.C (cale of investments

"o show why$ i the 65) prefers 2, the larger project, for a discount rate below B-. ii the 65) is superior to the !88 a Use the incremental cash flow approach, +2 minus #+ approach b Choosing project 2 is tantamount to choosing a hypothetical project +2 minus #+. , B C 5roject 2 / ,G,--H,--H,--H,--5roject # / B,A-,,A-,,A-,,A-+2 minus #+ / ,,,A-A,A-A,A-A,A--

!88+2 3inus #+

; B.-E ; B-. c Choosing 2 is e'uivalent to$ # 7 (2 / # ; 2 d Choosing the bigger project 2 means choosing the smaller project # plus an additional outlay of ?,,,A-of which ?A,A-- will be realised each year for the ne&t C years. e "he !88+2 minus #+ on the incremental cash flow is B-.. f Iiven k of ,-., this is a profitable opportunity, therefore must be accepted. g 2ut, if k were greater than the !88 (B-. on the incremental C:, then reject project. h #t the point of intersection, 65)# ; 65)2 or 65)# / 65)2 ; -, i.e. indifferent to projects # and 2. i !f k ; B-. (!88 of +2 / #+ the company should accept project #. % "his justifies the use of 65) criterion. #dvantage of 65)$ % !t ensures that the firm reaches an optimal scale of investment. Disadvantage of !88$ % !t e&presses the return in a percentage form rather than in terms of absolute dollar returns, e.g. the !88 will prefer A--. of ?, to B-. return on ?,--. *owever, most companies set their goals in absolute terms and not in . terms, e.g. target sales figure of ?B.A million. "he timing of the cash flow "he !88 may give conflicting decisions where the timing of cash flows varies between the B projects. 6ote that initial outlay !o is the same.

, B 5roject # / ,-B,BA.-5roject 2 / ,-,-C,.BA +# minus 2+ / DDD.,A

#ssume k ; ,-.

65) !88 5roject # ,H.C B-.-. 5roject 2 ,<.H BA.-. +# minus 2+ -.< ,-.E.

!88 prefers 2 to # even though both projects have identical initial outlays. (o, the decision is to accept #, that is 2 7 (# / 2 ; #. (ee figure <.G. :igure <.G "iming of the cash flow

"he hori0on problem 65) and !88 rankings are contradictory. 5roject # earns ?,B- at the end of the first year while project 2 earns ?,HG at the end of the fourth year.

, B C G 5roject # /,-,B/ / / 5roject 2 /,-/ / / ,HG

#ssume k ; ,-.

65)

!88 5roject # E B-. 5roject 2 ,E ,A.

Decision$ 65) prefers 2 to # !88 prefers # to 2. "he profitability inde& / 5! "his is a variant of the 65) method.

Decision rule$ 5! M ,L accept the project 5! N ,L reject the project !f 65) ; -, we have$ 65) ; 5) / !o ; 5) ; !o Dividing both sides by !o we get$

5! of ,.B means that the project4s profitability is B-.. =&ample$

5) of C: !o 5! 5roject # ,-AB.5roject 2 ,,A-,,--,.A

Decision$ Choose option 2 because it ma&imises the firm4s profitability by ?,,A--. Disadvantage of 5!$

9ike !88 it is a percentage and therefore ignores the scale of investment. "he payback period (55 "he C!3# defines payback as 4the time it takes the cash inflows from a capital investment project to e'ual the cash outflows, usually e&pressed in years4. >hen deciding between two or more competing projects, the usual decision is to accept the one with the shortest payback. 5ayback is often used as a +first screening method+. 2y this, we mean that when a capital investment project is being considered, the first 'uestion to ask is$ 4*ow long will it take to pay back its cost@4 "he company might have a target payback, and so it would reject a capital project unless its payback period were less than a certain number of years. =&ample ,$ Fears , B C G A 5roject # ,,---,--BA-,--BA-,--BA-,--BA-,--BA-,---

:or a project with e'ual annual receipts$

; G years =&ample B$ Fears , B C G 5roject 2 / ,-,--A,--B,A-G,--,,---

5ayback period lies between year B and year C. (um of money recovered by the end of the second year

; ?H,A--, i.e. (?A,--- 7 ?B,A-(um of money to be recovered by end of Crd year ; ?,-,--- / ?H,A-; ?B,A--

; B.<BA years Disadvantages of the payback method$ % !t ignores the timing of cash flows within the payback period, the cash flows after the end of payback period and therefore the total project return. % !t ignores the time value of money. "his means that it does not take into account the fact that ?, today is worth more than ?, in one year4s time. #n investor who has ?, today can either consume it immediately or alternatively can invest it at the prevailing interest rate, say C-., to get a return of ?,.C- in a year4s time. % !t is unable to distinguish between projects with the same payback period. % !t may lead to e&cessive investment in short/term projects. #dvantages of the payback method$ % 5ayback can be important$ long payback means capital tied up and high investment risk. "he method also has the advantage that it involves a 'uick, simple calculation and an easily understood concept. "he accounting rate of return / (#88 "he #88 method (also called the return on capital employed (8OC= or the return on investment (8O! method of appraising a capital project is to estimate the accounting rate of return that the project should yield. !f it e&ceeds a target rate of return, the project will be undertaken.

6ote that net annual profit e&cludes depreciation. =&ample$ # project has an initial outlay of ?, million and generates net receipts of ?BA-,--- for ,- years. #ssuming straight/line depreciation of ?,--,--- per year$

; ,A.

; C-. Disadvantages$ % !t does not take account of the timing of the profits from an investment.

% !t implicitly assumes stable cash receipts over time. % !t is based on accounting profits and not cash flows. #ccounting profits are subject to a number of different accounting treatments. % !t is a relative measure rather than an absolute measure and hence takes no account of the si0e of the investment. % !t takes no account of the length of the project. % it ignores the time value of money. "he payback and #88 methods in practice Despite the limitations of the payback method, it is the method most widely used in practice. "here are a number of reasons for this$ % !t is a particularly useful approach for ranking projects where a firm faces li'uidity constraints and re'uires fast repayment of investments. % !t is appropriate in situations where risky investments are made in uncertain markets that are subject to fast design and product changes or where future cash flows are particularly difficult to predict. % "he method is often used in conjunction with 65) or !88 method and acts as a first screening device to identify projects which are worthy of further investigation. % it is easily understood by all levels of management. % !t provides an important summary method$ how 'uickly will the initial investment be recouped@ 6ow attempt e&ercise <.A. =&ercise <.A 5ayback and #88 Delta Corporation is considering two capital e&penditure proposals. 2oth proposals are for similar products and both are e&pected to operate for four years. Only one proposal can be accepted. "he following information is available$ 5rofit1(loss 5roposal # 5roposal 2 ? ? !nitial investment G<,--G<,--Fear , <,A-G,A-Fear B C,A-B,A-Fear C ,C,A--

G,A-Fear G 9oss ,,A-5rofit ,G,A-=stimated scrap value at the end of Fear G G,--G,---

Depreciation is charged on the straight line basis. 5roblem$ a Calculate the following for both proposals$ i the payback period to one decimal place ii the average rate of return on initial investment, to one decimal place. #llowing for inflation (o far, the effect of inflation has not been considered on the appraisal of capital investment proposals. !nflation is particularly important in developing countries as the rate of inflation tends to be rather high. #s inflation rate increases, so will the minimum return re'uired by an investor. :or e&ample, one might be happy with a return of ,-. with 0ero inflation, but if inflation was B-., one would e&pect a much greater return. =&ample$ Oeymer :arm is considering investing in a project with the following cash flows$

"!3= #C"U#9 C#(* :9O>( P? (,--,--, E-,--B D-,--C H-,---

Oeymer :arm re'uires a minimum return of G-. under the present conditions. !nflation is currently running at C-. a year, and this is e&pected to continue indefinitely. (hould Oeymer :arm go ahead with the project@ 9et us take a look at Oeymer :arm4s re'uired rate of return. !f it invested ?,-,--- for one year on , Qanuary, then on C, December it would re'uire a minimum return of ?G,---. >ith the initial investment of ?,-,---, the total value of the investment by C, December must increase to ?,G,---. During the year, the purchasing value of the dollar would fall due to inflation. >e can restate the amount received on C, December in terms of the purchasing power of the dollar at , Qanuary as follows$

#mount received on C, December in terms of the value of the dollar at , Qanuary$

; ?,-,H<E !n terms of the value of the dollar at , Qanuary, Oeymer :arm would make a profit of ?H<E which represents a rate of return of H.<E. in +today4s money+ terms. "his is known as the real rate of return. "he re'uired rate of G-. is a money rate of return (sometimes known as a nominal rate of return . "he money rate measures the return in terms of the dollar, which is falling in value. "he real rate measures the return in constant price level terms. "he two rates of return and the inflation rate are linked by the e'uation$ (, 7 money rate ; (, 7 real rate & (, 7 inflation rate where all the rates are e&pressed as proportions. !n the e&ample, (, 7 -.G- ; (, 7 -.-H<E & (, 7 -.C ; ,.G(o, which rate is used in discounting@ #s a rule of thumb$ a !f the cash flows are e&pressed in terms of actual dollars that will be received or paid in the future, the money rate for discounting should be used. b !f the cash flows are e&pressed in terms of the value of the dollar at time - (i.e. in constant price level terms , the real rate of discounting should be used. !n Oeymer :arm4s case, the cash flows are e&pressed in terms of the actual dollars that will be received or paid at the relevant dates. "herefore, we should discount them using the money rate of return. "!3= C#(* :9O> D!(COU6" :#C"O8 5) ? G-. ? (,A-,--,.--(,--,--, E-,---.H,G <G,B<B D-,---.A,G-,D-C H-,---.C<G

BA,GD-

C-,AG-

"he project has a positive net present value of ?C-,AG-, so Oeymer :arm should go ahead with the project. "he future cash flows can be re/e&pressed in terms of the value of the dollar at time - as follows, given inflation at C-. a year$ "!3= #C"U#9 C#(* :9O> C#(* :9O> #" "!3= - 58!C= 9=)=9 ? ? (,--,--(,--,---

, E-,--<E,BC, B D-,--GH,CCH C H-,--C,,D<B

"he cash flows e&pressed in terms of the value of the dollar at time - can now be discounted using the real value of H.<E.. "!3= C#(* :9O> D!(COU6" :#C"O8 5) ? H.<E. ? (,--,--,.---

(,--,--, <E,BC, <G,BG< B GH,CCH G-,D-G C C,,D<B BA,GE-

C-,AG-

"he 65) is the same as before. =&pectations of inflation and the effects of inflation >hen a manager evaluates a project, or when a shareholder evaluates his1her investments, he1she can only guess what the rate of inflation will be. "hese guesses will probably be wrong, at least to some e&tent, as it is e&tremely difficult to forecast the rate of inflation accurately. "he only way in which uncertainty about inflation can be allowed for in project evaluation is by risk and uncertainty analysis. !nflation may be general, that is, affecting prices of all kinds, or specific to particular prices. Ieneralised inflation has the following effects$ a !nflation will mean higher costs and higher selling prices. !t is difficult to predict the effect of higher selling prices on demand. # company that raises its prices by C-., because the general rate of inflation is C-., might suffer a serious fall in demand. b !nflation, as it affects financing needs, is also going to affect gearing, and so the cost of capital. c (ince fi&ed assets and stocks will increase in money value, the same 'uantities of assets must be financed by increasing amounts of capital. !f the future rate of inflation can be predicted with some degree of accuracy, management can work out how much e&tra finance the company will need and take steps to obtain it, e.g. by increasing retention of earnings, or borrowing. *owever, if the future rate of inflation cannot be predicted with a certain amount of accuracy, then management should estimate what it will be and make plans to obtain the e&tra finance accordingly. 5rovisions should also be made to have access to 4contingency funds4 should the rate of inflation e&ceed e&pectations, e.g. a higher bank overdraft facility might be arranged should the need arise. 3any different proposals have been made for accounting for inflation. "wo systems known as +Current purchasing power+ (C55 and +Current cost accounting+ (CC# have been suggested. C55 is a system of accounting which makes adjustments to income and capital values to allow for the general rate of price inflation. CC# is a system which takes account of specific price inflation (i.e. changes in the prices of specific assets or

groups of assets , but not of general price inflation. !t involves adjusting accounts to reflect the current values of assets owned and used. #t present, there is very little measure of agreement as to the best approach to the problem of 4accounting for inflation4. 2oth these approaches are still being debated by the accountancy bodies. 6ow attempt e&ercise <.<. =&ercise <.< !nflation "# *oldings is considering whether to invest in a new product with a product life of four years. "he cost of the fi&ed asset investment would be ?C,---,--- in total, with ?,,A--,--- payable at once and the rest after one year. # further investment of ?<--,--- in working capital would be re'uired. "he management of "# *oldings e&pect all their investments to justify themselves financially within four years, after which the fi&ed asset is e&pected to be sold for ?<--,---. "he new venture will incur fi&ed costs of ?,,-G-,--- in the first year, including depreciation of ?G--,---. "hese costs, e&cluding depreciation, are e&pected to rise by ,-. each year because of inflation. "he unit selling price and unit variable cost are ?BG and ?,B respectively in the first year and e&pected yearly increases because of inflation are D. and ,G. respectively. #nnual sales are estimated to be ,HA,--units. "# *oldings money cost of capital is BD.. !s the product worth investing in@ Oey terms #ccounting rate of return #nnuities Capital budgeting Cash flow Classification of investment projects Compound interest Current cost accounting (CC# Current purchasing power (C55 Dependent projects !ndependent projects !nflation !nterest rate !nternal rate of return !nvestment decision 6et present value 5ayback period 5erpetuity 5resent value 8ates of return "he time value of money