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IFMP Capital Budgeting – Corporate Finance Certification (CBCFC), Pakistan study materials
IFMP Capital Budgeting – Corporate Finance Certification (CBCFC), Pakistan study resources

IFMP Capital Budgeting – Corporate Finance Certification (CBCFC), Pakistan: Capital Budgeting and Corporate Finance

IFMP Capital Budgeting – Corporate Finance Certification (CBCFC), Pakistan · Work through your exam, one topic at a time.

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Capital Budgeting and Corporate Finance

This domain tests end-to-end valuation of an investment decision: forecast incremental after-tax cash flows, discount them at the correct rate, rank projects when capital is rationed, and explain why positive NPV creates value. Items blend computation with concepts such as IRR's reinvestment assumption.

Core rules

  • Only incremental after-tax cash flows count. Exclude sunk costs such as a completed feasibility study; include opportunity costs such as rent forgone; exclude interest, because financing sits in the discount rate.
  • Operating cash flow = (revenue − cash costs − depreciation)(1 − t) + depreciation. The add-back is the tax shield t × depreciation, not the depreciation itself. Add net working capital at the start and recover it at the end; tax salvage as salvage − t(salvage − book value).
  • Rules: accept if NPV > 0, IRR > cost of capital, PI > 1, or discounted payback is inside the cutoff. For mutually exclusive projects with unequal lives, compare equivalent annual annuity.
  • IRR assumes reinvestment at IRR, ignores scale, and can give multiple answers when cash flows change sign more than once. MIRR sets explicit reinvestment and finance rates; NPV stays the primary rule.

Worked example

A plant costs PKR 5,000,000 and is depreciated straight-line to zero over five years. Incremental revenue is 3,000,000 a year, cash operating costs 1,200,000, tax 30%, WACC 12%.

Annual depreciation = 1,000,000. OCF = (3,000,000 − 1,200,000 − 1,000,000)(0.70) + 1,000,000 = 1,560,000.

The five-year annuity factor at 12% is 3.6048, so PV of inflows = 5,623,488 and NPV = +623,488: accept. Payback = 5,000,000 ÷ 1,560,000 = 3.21 years; PI = 1.12. For IRR, 1,560,000 × AF = 5,000,000 gives AF = 3.2051, so IRR ≈ 16.9%, above 12% and consistent with the positive NPV.

Traps that cost marks

  • Deducting interest and double-counting the cost of debt.
  • Discounting nominal cash flows at a real rate.
  • Omitting terminal working-capital recovery.
  • Retaining sunk costs to 'justify' a project already chosen.
  • Picking the higher-IRR project when scale or life differs.