The Finance Storyteller

@TheFinanceStoryteller

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Learn finance the EASY way! My channel is all about explaining you finance, accounting and investing in an understandable way: getting straight to the point, and having the numbers do the talking. Lots of case studies and real life examples, and clear descriptions of how things work in the real world (rather than the textbook).

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Capital budgeting techniques

5,545 views 3 months ago

Build up your knowledge of capital budgeting techniques by starting with the fairly simple ones, and then go to the more complex. Start with the payback method, net present value (NPV), and internal rate of return (IRR). Those are paramount in any capital budgeting cycle, and form the holy trinity of capital budgeting techniques. That’s the first layer. The second layer, consisting of the discounted payback method, the profitability index, and the crossover rate, adds some sophistication to the capital budgeting techniques of the holy trinity. Or they try to correct some shortcomings. Or they help you deal with very specific situations. They add some icing to the cake. ⏱️TIMESTAMPS⏱️ 00:00 Capital budgeting techniques roadmap 01:33 Characteristics of investment projects 04:23 Capital budgeting techniques big picture 04:42 Payback period method 08:37 Present value and future value 11:21 Net present value 14:54 NPV vs payback method outcomes 15:41 Internal rate of return 19:05 IRR vs NPV outcomes 20:30 Discounted payback method 23:23 Discounted payback vs regular payback method 24:52 Profitability index 26:45 Crossover rate Capital budgeting. The planning process for an organization's long term capital investments. It's important for any company to have a solid list in place of projects competing for funding. These projects will help drive growth, reduce costs, or reduce working capital. Throughout this video, we will evaluate projects A through E. Capital budgeting techniques are the methods of calculation that help rank investment project opportunities. But beware: different #capitalbudgeting techniques might yield different outcomes! Here is the big picture of the first layer of capital budgeting techniques: the payback method makes you think in years the net present value method makes you think in dollars of value created the internal rate of return method makes you think in % return Let’s start with the payback method. Absolutely beautiful in its simplicity. The central question: How many years does it take to recover the initial investment? The bridge between the payback method and #netpresentvalue consists of the terms future value and present value. You have to understand future value and present value before attempting any net present value calculations. Most of the Net Present Value calculation consists of translating all future cash flows into today’s money, basically doing multiple rounds of present value calculations. The central question that NPV helps to answer is: Does the project create value for the company? Internal Rate of Return or IRR is the third of the Big Three capital budgeting techniques. It’s a method that starts with the end in mind! The central question is: for each individual project, what is the discount rate that makes its NPV zero? So the OUTCOME is an NPV of zero, and we are now looking for the discount rates that get us there. Each of our well-known Big Three capital budgeting techniques, payback period, NPV and IRR, has a variation or improvement, that can add a lot of perspective. Discounted Payback is a variation on the payback method. The profitability index is an extension of Net Present Value. And the crossover rate is a special case of Internal Rate of Return calculations. The discounted payback method fixes one of the shortcomings of the payback method. The central question in discounted payback is: When do the cumulative cash flows reach zero, if time value of money is applied? The profitability index is an extension of Net Present Value, is very simple to calculate, and adds a lot of insight to the NPV calculation. Simply take the sum of the present values of the benefits, and divide it by the amount of the investment. The crossover rate is that discount rate beyond which the NPV ranking flips when comparing two projects in capital budgeting. You simply need to find the Internal Rate of Return (IRR) of the difference in cash flows between two projects. Philip de Vroe (The Finance Storyteller) aims to make accounting, finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, livestreams, classroom sessions, and webinars. Connect with me through Linked In! Want to get access to bonus content, and/or express your gratitude by buying me a cup of tea? Join my channel as a member through https://www.youtube.com/channel/UCQQJ...

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How to read an annual report? I hope these short tutorials help you get started on your journey! The videos in this playlist cover the annual report (narrative and numbers), some common financial acronyms, and examples of how to analyze an income statement, and how to analyze a cash flow statement.