 Besides basic capital budgeting model, there are certain other models that can also be used by any financial analyst in order to determine the financial worth of any investment proposal or a project or any intended proposed company. We know that the basic capital budgeting model uses future cash flows to determine financial worth of an investment proposal and along with this basic capital budgeting model, certain other models can also be used for the same purpose. These models include economic income and accounting income model, economic profit valuation model, residual income model and claim valuation model. A unique feature of these models is that these models are widely accepted and they are economically used across the globe by financial analysts while determining the financial worth of intended projects. How basic capital budgeting model works? It works in three phases. It identifies after-tax cash flows in terms of operating cash flows and non-operating cash flows. And by non-operating cash flows, we mean initial cash outflows and the terminal cash inflows. Then in this model, we discount these cash flows at the required rate of return in order to determine net present value of the project. An example to substantiate this basic capital budgeting model. In our example, we have an initial investment of 150,000. We have variable cash operating expenses as 50% of sales. We have fixed cash operating expenses of 20,000. Annual depreciation of 30,000 with zero book value. We have tax rate of 40%, solvage value of 10,000 and the required rate of return 10%. Dear students, on the screen, you can see the outlay of future cash flows from time zero to time five. When we discount these cash flows at the cost of capital or the required rate of return which is 10%, we can have the net present value of 69,492 which you can see and circled in green color. And the IRR on this project is 26.27% which is encircled in red color. Now come to the usage and application of other valuation models. We have accounting income and economic income. These two approaches differ in their application. How these two differ? While determining accounting income, we used depreciation on the basic cost of the asset or its original value. We allocate depreciation on the whole of the life of the asset through allocating its cost. Then we deduct interest expense as a business cost from our operating profit. In other words, the interest expense is an admissible item while determining profit before tax. But so far as the economic income is concerned in economic income, depreciation is based on the market value of the investment and economic income computations does not consider the deduction of interest expense rather the interest cost is embedded into the cost of capital that is used as a discounting factor for discounting the future cash flows of the project. If we develop an accounting equation to determine economic income, we can derive economic income as the sum of cash flows plus the change in market value. Now to determine a change in market value, we have to determine market value at two different point in times. Let's say we must have market value at the start of the period. This means we must have an opening market value and we must have then market value at the end of the period. And the difference of these two market values will be termed as a depreciation or an economic depreciation. So to determine economic income, we deduct economic depreciation from the cash flows. The resulting figure is the economic income. Now on the screen, you can see the difference between accounting income and economic income. How economic income is determined. As we know that we have earlier the market value of our project at time zero which was 219492 and that is basically the present value of all of the future cash flows which were discounted at 10% required rate of return in our earlier examples. Now as we have said that market value at any future date is basically the present value of the following cash flows discounted back to that original date. In the table, we have five years data. It starts from beginning market value, then we have ending market value. And from the beginning market value when we determine ending value, we have a change in market value. So to determine change in market value, we have to deduct the opening market value from the ending market value. Then we have after tax cash flows. And then we have economic income which is the difference between after tax cash flows and change in market value. Now to determine economic rate of return, we must divide economic income over the beginning market value of the investment. So at the last of the line, you can see that throughout the project period of five years, our economic rate of return remains the same and that is 10%. To further going into deeper the difference between economic income and accounting income, we have another example with certain assumption assumptions like the company can borrow up to 15% percent of its present value, which is at time zero. Then cost of debt is 0.33%. With 40% tax rate, the cost of debt is 5%. The company's life is five years. That means that the distribution of cash flows among the owners and creditors will occur throughout the period. Then the debt will be mortised as it should be there. Then full repayment of all of the operating expenses, interest expenses and taxes should be there. And after all these repayments, if there is any residual that that residual will be distributed among the shareholders or stockholders in the form of dividend or in the form of share repurchases. And on the screen, you can see that first three lines are highlighted in different colors are the assets liabilities and the net worth and middle of the line. We have net income that is determined through normal accounting procedure below this. We have net income plus the depreciation that we have operating cash flows. And in the last, we have distribution of these operating cash flows among the creditors as debt repayment and among the shareholders as dividend and or share repurchase. And at the end or bottom of the line, there is nothing. This means that all of the cash flows have to be distributed among the capital providers. Now how accounting performance mayors differ from economic performance mayors, there is a comparison. You can see that we have in the first column, economic income, accounting income, economic rate of return, return on equity and return of return on assets for the five years period of our project life, there is a substantial difference between these two mayors and difference is that over the period of five years, economic income is much lesser than the accounting income and the patron is also differing. Then we have seen that the accounting rate of return that is the return on equity and return on assets are also much higher than the economic rate of return.