Computing Capital Budgeting for Banking Sector

Perhaps the most difficult hurdle which companies come across is the selection of the project which is beneficial to the organization in the long-run and also increases the present value of the shareholders. This is where Capital Budgeting comes into play. Capital Budgeting is one of the most important areas of financial management. This paper gives an overview of what capital budgeting is, what different types of techniques comes under capital budgeting and how to represent capital budgeting technique algorithmically. In this paper we also throw some light on what the results of various capital budgeting techniques will be if any banking organization follows these techniques and compare those results. These techniques namely as Payback Period (PP), Average Rate of Return (ARR), Net Present Value (NPV), Profitability Index (PI) and Internal Rate of Return (IRR) are used to evaluate projects.


Introduction
An organizaton's success or failure depends on capital budgeting decisions. Capital budgeting decisions among several costly long-term investments play a profound impact on the organization and long-term performance. A capital budgeting decision can be stated as the process that companies use for making decisions on long-term projects. Such type of decisions are generally taken in line with the goal of maximizing shareholders value. A firm's investment decisions would generally include expansion, acquisition, modernisation and replacement of long-term assets. The decisions to invest in fixed assets are made by the managers as these are one of the major judgements. Capital budgeting involves various techniques which give a clear picture about which project is profitable. When a project is finalized, initial investment is made and then it is expected that future cash flows are calculated and discounted to the present value. If all the expected future discounted cash flows when combined together is greater than initial investment the project is said to be profitable.

Objective
To understand the practical use of capital budgeting methods in a banking organization for decision-making. To learn the significance of capital budgeting in valuing the project for financing.

Methodology
The information of this research paper has been compiled through Primary and Secondary Sources.

C. Discounted Payback Period
Step1: Start Step2: Import math Library Step3: Read initial_inv (initial investment) value from the user Step4: Read pbdt (profit before depreciation and tax), pbt (profit before tax), pvf (present value factor), pv (present value), np (net profit) and ci (cash inflow) as the empty list Step5: Set sum1, dpb and c variable as zero Step6: Read sal_value (salvage value), l (expected life), dr (discount rate) and tax from the

D. Net Present Value
Step1: Start Step2: Import math Library Step2: Read initial_inv (initial investment) value from the user Step3: Set pbdt (profit before depreciation and tax), pbt (profit before tax), np (net profit), pv (present value), pvf (present value factor), ci (cash inflow) as the empty list Step4: Set sum1 variable as zero Step5: Read sal_value (salvage value), l (expected life), dr (discount rate) and tax from the user Step7: Compute dr=dr/100 Step6: For i=0 to l Do Step7: Read Profit Before Depreciation and Tax

E. Profitability Index
Step1: Start Step2: Import math Library Step3: Read initial_inv (initial investment) value from the user Step4: Read pbdt (profit before depreciation and tax), pbt (profit before tax), pvf (present value factor), pv (present value), np (net profit) and ci (     The Profitability Index is fairly good. As PI (i.e 1.2588) is greater than 1, hence the project can be accepted. The above calculations can be performed for different techniques and get results for the same techniques for any project where the banking organization would like to invest in and foresee whether the project they are going to invest in reaps benefits to them in future. This helps in taking the call as to choose and go with the project that is most profitable. Generally, the calculations are done manually but the same steps can be done through automation or programmatically using python language. The above given algorithm steps when written and compiled using python language can ease the tedious task of manually updating cash flows for different successive years and computing the results for different techniques.
Most of the large organizations consider all the measures because each one provides somewhat different piece of relevant information to the decision makers and yet an impression has been created that the firms should use NPV method for decision making. The reason why NPV is considered as superior method because it helps the organization to decide as to which project is the most profitable by ranking projects of different sizes over varying period of time.

Conclusion
All the methodologies of capital budgeting postulate that several investment offers under concern are mutually exclusive which may not essentially be accurate in certain situations. Ambiguity and threat pose major restrictions to the methods of capital budgeting. Urgency is another check in the valuation of capital investment judgements. The method of capital budgeting involves valuation of future cash inflows and outflows. The future is always undefined and the data collected may not be precise. Clearly the outcomes based upon incorrect data may not be respectable.