1. Let's talk about Capital Budgeting. This is like when you have some money and you want to decide what big toy or game to buy that will make you happy for a long time. 2. Companies do the same thing but with big projects or machines. They want to pick the best one that will help them make more money later. 3. One way to decide is called Net Present Value (NPV). It means we look at how much money the project will make in the future, but we remember that money now is worth more than money later. 4. The formula for NPV is: $$\text{NPV} = \text{Present Value of Future Money} - \text{Money Spent Now}$$ 5. To find the Present Value of Future Money, we take each future payment and divide it by $(1 + r)^t$, where $r$ is the rate (like 10% or 0.1) and $t$ is the year number. 6. For example, if a project costs 125,000 now and gives 30,000 in year 1, 30,000 in year 2, and 25,000 in years 3, 4, and 5, and the rate is 10% (0.1), we calculate: $$\text{NPV} = \frac{30,000}{(1+0.1)^1} + \frac{30,000}{(1+0.1)^2} + \frac{25,000}{(1+0.1)^3} + \frac{25,000}{(1+0.1)^4} + \frac{25,000}{(1+0.1)^5} - 125,000$$ 7. Doing the math step by step: $$\frac{30,000}{1.1} = 27,272.73$$ $$\frac{30,000}{1.21} = 24,793.39$$ $$\frac{25,000}{1.331} = 18,783.53$$ $$\frac{25,000}{1.4641} = 17,078.66$$ $$\frac{25,000}{1.61051} = 15,519.99$$ 8. Adding these up: $$27,272.73 + 24,793.39 + 18,783.53 + 17,078.66 + 15,519.99 = 103,448.3$$ 9. Now subtract the initial cost: $$103,448.3 - 125,000 = -21,551.7$$ 10. Since the NPV is negative, it means the project will lose money, so we should not do it. 11. Another way to decide is the Payback Period. This tells us how many years it takes to get back the money we spent. 12. If the project gives the same money every year, we just divide the money spent by the money earned each year. 13. For example, if we spend 40,000 and get 10,000 every year, the payback period is: $$\frac{40,000}{10,000} = 4 \text{ years}$$ 14. If we want to get our money back in 3 years but it takes 4, then we should not do the project. 15. Lastly, Average Accounting Return (AAR) is like checking how much money we make on average compared to how much the project is worth. 16. We find the average net income (money made) and divide it by the average book value (how much the project is worth on paper). 17. For example, if average net income is 1,615,250 and average book value is 8,000,000, then: $$\text{AAR} = \frac{1,615,250}{8,000,000} = 0.2019 = 20.19\%$$ 18. This means the project makes about 20% return on the money invested. So, capital budgeting helps us pick the best project by checking if it makes money (NPV), how fast we get our money back (Payback Period), and how good the return is (AAR).