 Hello, and welcome to this session in which we will discuss capital budgeting. So first we need to know what is capital budgeting, and capital budgeting is a method, is a tool to evaluate and measure the financial viability of a long-term investment project. Those long-term investment projects are major. In other words, you are committing a large amount of money that cannot be easily reversed. In the real world, we call them the short escape acts, capital expenditure. Simply put, we need to find out whether those projects are good for us, it's a good idea or not a good idea. So capital budgeting is a tool, or actually we have more than one tool, to evaluate whether this project, whether this investment, this long-term investment is a good idea, a good project or not. So what are some examples? Well, we could be expanding our operation, plant expansion. We need to find out whether it's a good idea or not from a financial perspective. We could be undertaking a major advertising campaign. We're going to spend this much money. Is this going to generate revenue to justify the investment? Sometime we might have to buy equipment. Which equipment we should select based on our cash flow, based on future cash flows? Whether we should lease or buy something, an asset, a piece of land? What should we do? How should we treat this? For some time we might undertake cost reduction project. That's also considered part of capital budgeting. And obviously replace an equipment, because you need the equipment, you need the equipment to replace the old one. Maybe the new equipment can generate more revenue, but the new equipment costs more. Is it worth the investment? These are the examples of capital budgeting decisions. When you undertake a capital budgeting decision, you are going to be facing many risks. Let's talk about those risks. The first one is you are using the wrong data. Simply put, you're estimating your cash flow, you're estimating your future expenditure. And guess what? You did not select, you did not estimate, because remember, you are estimating the numbers. You did not estimate properly. You could have estimated properly and you arrived at the wrong conclusion or you used the wrong analysis. That's also a risk. Another risk will be competitive strategies. If you planned for A, then your competitors basically have another project that is similar to yours and basically took away the benefit of your project. Could be customer taste. Right now, maybe people like milk and six months from now, they may not like to consume milk, consumer taste. Change in laws and regulation and obviously those are not in your favor. You thought, for example, you want to buy several property and rent them as Airbnb. That's a capital project decision. Then suddenly, where you purchase those properties, laws and regulation don't allow Airbnb. Well, guess what? That's a risk. Old changes in macroeconomics factors such as interest rate, inflation, taxes, you did not plan for this, especially taxes and inflation because you have no control over this as well as interest rate. Maybe you can lock your interest rate, but you cannot control inflation. You cannot control taxes because inflation is based on macroeconomic factors. Taxes are set by the government so that you cannot control. You're always taking a risk. What are some of the tools or technique used in capital budgeting? Well, we're going to list them here and we're going to discuss each one of them later on in details. Net present value is one of them, NPV, IRR, the internal rate of return, payback period, discounted payback period, simple or accounting rate of return. Now when we utilize those strategies, we're trying to find out whether we need to accept or not accept a project. That's one reason to use it. In some time, what we have to do is we have to do what's called a preference decision. When we look at preference decision, we would look at another technique. How do we rank? Simply put, you have many projects. How do you rank the project? We'll talk about this in a separate recording. But simply put, the techniques will tell us whether we should accept or reject a project based on our criteria. What should you do now? Go to farhatlectures.com and work multiple choice through false questions that's going to help you understand this concept better. Invest in your education, invest in your career, invest in yourself. Good luck, study hard, and of course, stay safe.