BCF303 ADVANCED FINANCIAL MANAGEMENT
Capital budgeting
Capital budgeting is concerned about making decisions about taking actions based on
current conditions and the expectations of future events. This is known as investment
appraisal and involves calculations that are useful when deciding if an investment
project should be undertaken or if there is a choice of investment projects which if any
of them should be undertaken.
Simple interest
Simple interest means that the interest in each time period is calculated as a
percentage of the original capital sum. The capital sum grows by the same amount in
each period. This given by the formula
I=PRT/100
Where I = simple interest
P= principal amount
R= rate of interest
T= time in years
Example
Suppose shs100 was invested at a simple interest rate of 5% per annum for 5 years
.What is the total amount that the sum would grow to.
Solution
I=PRT/100 = 100*5*5/100 = 25
Thus principal +interest= 100+25=125
Compound interest
, Compound interest means that the interest is added to the capital sum so that the next
amount of interest is calculated on the original capital sum plus the first amount of
interest. This is given by
A=P*(1+R/100)^T
Where A = the amount the sum will grow to
P= principal amount
R=rate of interest per annum
T= number of years the investment is made
Example
If we invested shs 100 at a rate of 5% per annum compound interest for 5 years how
much will the sum grow to?
Solution
A=P*(1+R/100)^T
A= 100*(1+5/100)^5
A=127.63
Investment appraisal
This is the method of making a choice of which investment or project should be
undertaken. When appraising investment projects, the principal factors to be taken into
consideration are
a) Initial cost of investment
b) The amount of income resulting from the investment, or the amount of cost the
investment will save
c) The estimated life of investment
Capital budgeting
Capital budgeting is concerned about making decisions about taking actions based on
current conditions and the expectations of future events. This is known as investment
appraisal and involves calculations that are useful when deciding if an investment
project should be undertaken or if there is a choice of investment projects which if any
of them should be undertaken.
Simple interest
Simple interest means that the interest in each time period is calculated as a
percentage of the original capital sum. The capital sum grows by the same amount in
each period. This given by the formula
I=PRT/100
Where I = simple interest
P= principal amount
R= rate of interest
T= time in years
Example
Suppose shs100 was invested at a simple interest rate of 5% per annum for 5 years
.What is the total amount that the sum would grow to.
Solution
I=PRT/100 = 100*5*5/100 = 25
Thus principal +interest= 100+25=125
Compound interest
, Compound interest means that the interest is added to the capital sum so that the next
amount of interest is calculated on the original capital sum plus the first amount of
interest. This is given by
A=P*(1+R/100)^T
Where A = the amount the sum will grow to
P= principal amount
R=rate of interest per annum
T= number of years the investment is made
Example
If we invested shs 100 at a rate of 5% per annum compound interest for 5 years how
much will the sum grow to?
Solution
A=P*(1+R/100)^T
A= 100*(1+5/100)^5
A=127.63
Investment appraisal
This is the method of making a choice of which investment or project should be
undertaken. When appraising investment projects, the principal factors to be taken into
consideration are
a) Initial cost of investment
b) The amount of income resulting from the investment, or the amount of cost the
investment will save
c) The estimated life of investment
