Академический Документы
Профессиональный Документы
Культура Документы
K
Short / Normal
DESIGN SERVICES OF
S4CARLISLE
Publishing Services
Capital Budgeting
Sandeep Goel
K
Short / Normal
DESIGN SERVICES OF
S4CARLISLE
Publishing Services
Capital Budgeting
Copyright Business Expert Press, LLC, 2015
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted in any form or by any
meanselectronic, mechanical, photocopy, recording, or any other
except for brief quotations, not to exceed 400 words, without the prior
permission of the publisher.
First published in 2015 by
Business Expert Press, LLC
222 East 46th Street, New York, NY 10017
www.businessexpertpress.com
ISBN-13: 978-1-60649-986-3 (print)
ISBN-13: 978-1-60649-987-0 (e-book)
Business Expert Press Finance and Financial Management Collection
Collection ISSN: 2331-0049 (print)
Collection ISSN: 2331-0057 (electronic)
Cover and interior design by S4Carlisle Publishing Services Private Ltd.,
Chennai, India
First edition: 2015
10 9 8 7 6 5 4 3 2 1
Printed in the United States of America
Abstract
Capital budgeting is an important pat of the financial management of a
business organization. It is a process that business houses use to evaluate an investment project. The decision of whether to accept or deny
an investment project is capital budgeting decision. Capital budgeting is
important because it determines the long-term economic and financial
profitability of any investment project. It lays down the future success of
a business. The present book aims to develop not only an understanding
of the concepts of capital budgeting but also to provide its practical application to help the students to learn both theory and practice of capital
budgeting to be used in the financial management of a business organization. It analyzes the capital budgeting practices of corporate enterprises
in India in diverse sectors, on comparative basis in order to provide the
readers a better insight into the various issues and challenges regarding
capital budgeting management.
Keywords
capital budgeting, capital expenditure, financial management, business
organization, corporate enterprises
Contents
Preface...................................................................................................ix
Section 1 Introduction................................................................... 1
Chapter 1 Nature of Financial Management.......................................3
Section 2
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Section 3
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Key Terms............................................................................................183
Review Questions.................................................................................187
viii CONTENTS
K
Short / Normal
DESIGN SERVICES OF
S4CARLISLE
Publishing Services
Preface
Financial management is one of the most essential areas of any organization. It begins with investment decision in long-term assets, that is,
capital budgeting decision. Capital budgeting decision lays down the
foundation stone of the financial management. Thats why the success of
financial management depends on right capital budgeting application.
It is against this backdrop that the present book has been attempted.
Its focus is to highlight the importance of an efficient capital budgeting
decision in managing finances of a business enterprise. The objective of
the book is, to develop not only an understanding of the concepts of capital budgeting but also to provide its practical dimension to help students
to learn both theory and practice of capital budgeting to be used in the
financial management of a business organization. Further, it will be useful
to the managers to use it as an effective tool for resource allocation and
evaluation of the business viability.
It also analyzes the capital budgeting practices of corporate enterprises
in India in diverse sectors, on comparative basis in order to have a better
insight into the various issues and challenges regarding capital budgeting
management.
The present book is divided into six parts. Part I gives an overview of
the conceptual framework of financial management. Part II discusses the
nature and scope of capital budgeting decision along with project feasibility process and techniques. Part III contains a detailed discussion on the
aspect of time value of money, capital budgeting appraisal techniques,
and risk mitigation methods. Part IV discusses the financing aspect of
capital investment decision by the business units. Part V comprises the international perspective of capital budgeting decision. Part VI is the casestudy discussion of the capital budgeting concept. It analyzes the capital
budgeting practices of companies, like Reliance Industries Ltd., ONGC
Ltd., Vizag Steel Ltd., and Cairns India on comparative basis. It examines
their fixed assets structure to see the level of investment made in fixed assets and their efficiency in utilization.
K
Short / Normal
DESIGN SERVICES OF
S4CARLISLE
Publishing Services
x PREFACE
K
Short / Normal
DESIGN SERVICES OF
S4CARLISLE
Publishing Services
SECTION 1
Introduction
CHAPTER 1
Nature of Financial
Management
Introduction
Almost everything in life eventually boils down to the rupee sign, so the
adage goes. Money, and therefore, finance, is an integral part of life.1
Business is no exception to it. It needs to have an efficient financial management not only in totality but also in segmental performance. Hence,
growth of every business enterprise is closely linked with efficient management of its finance.
K
Short / Normal
DESIGN SERVICES OF
S4CARLISLE
Publishing Services
CAPITAL BUDGETING
Elements
1. Investment decision: It refers to the allocation of funds in various assets.
The investment in fixed assets is called as capital budgeting decision.
The investment in current assets is called as working capital decision.
2. Financing decision: It involves funds raising from various sources
based on various factors, like the cost of funds, time- period, flexibility, and so on. It is about determining the financial structure of
an enterprise.
3. Dividend decision: It is the decision about distribution of net profit.
The finance manager decides how much quantum of profits to be
distributed as dividend to shareholders and how much to be retained
for future contingencies.
K
Short / Normal
DESIGN SERVICES OF
S4CARLISLE
Publishing Services
and repay loans at regular intervals; only then the company will survive in the competitive world.
K
Short / Normal
DESIGN SERVICES OF
S4CARLISLE
Publishing Services
CAPITAL BUDGETING
K
Short / Normal
DESIGN SERVICES OF
S4CARLISLE
Publishing Services
K
Short / Normal
DESIGN SERVICES OF
S4CARLISLE
Publishing Services
Index
Accounting rate of return (ARR), 17,
6769
Adjusted present value (APV), 7274
After-tax cash flows, 52
Aggressive beta, 122
Amount of capital, 148
Annuity cash flows, 7071
Appraising projects, key issues in,
3032
APV. See Adjusted present value
(APV)
ARR. See Accounting rate of return
(ARR)
Asian Development Bank, 39
Average/neutral beta, 122
Benefit-cost ratio (B/c ratio), 7476
Beta
calculation of, 122
categories of, 122
definition of, 121
Break-even point, 9596
Business
capital budgeting practices, 8788
drivers, 2021
plan versus feasibility study, 27
promoters, 2627
structure, 26
Cairn India, capital investment
practices of, 178179
long-term growth, strategy for,
180181
CAPEX. See Capital expenditure
(CAPEX)
Capital asset pricing method
(CAPM), 121123
Capital budgeting, 1118
business versus government, 8788
under capital rationing, 107113
decision. See Capital budgeting
decision
effective, 8587
212 INDEX
INDEX
213
214 INDEX
INDEX
215
216 INDEX
Project appraisal
social-costs benefit analysis, 3944
Project appraisal technique, 148
Project assessment, 19
Project cash flows
effect on multinational capital
budgeting, 131
foreign investment decision-making
process, 134135
Project feasibility, 1932
appraising projects, key issues in,
3032
importance of, 2829
process of, 2022
types of, 2227
Project management techniques,
3337
critical path analysis, 3637
logical framework analysis, 35
problem tree analysis, 3435
program evaluation and review
technique, 36, 37
stakeholder analysis, 35
SWOT analysis, 34
Project ranking, 149
Project selection, and foreign
investment decision-making
process, 136
Real cash flows versus nominal cash
flows, 6162
Relevant cash flows, 53
effect on multinational capital
budgeting, 131132
Reliance Industries Ltd. (RIL)
capital budgeting practice of,
155166
fixed assets management, 156165
depreciation, adequacy of,
162165
financing pattern of, 158161
level of investment, 156158
utilization, 161162
suggestions, 165166
Replacement decision, 15
Retained earnings cost, 123
Return on investment (ROI), 149
RIL. See Reliance Industries
Ltd.(RIL)
Risk
-adjusted discount rate, 9798
analysis. See Risk analysis
corporate, 90
definition of, 8990
market, 90
stand-alone, 90
Risk analysis
in capital budgeting, 89106
financial techniques, 92106
statistical techniques for, 9092
for foreign investment decisionmaking process, 136
ROI. See Return on
investment (ROI)
Salvage value, 15
SCBA. See Social-costs benefit analysis
(SCBA)
Scenario analysis, 18, 102106
Sensitivity analysis, 18, 99102
Shareholding, of ONGC, 178
Shut-down risk, 99
Simulation analysis, 106
Social-costs benefit analysis (SCBA),
3944
case study, 4244
Little-Mirrlees approach, 4142
UNIDO approach, 4041
Solvency, 45
Specific costs
assigning weights to, 123
computation of, 118123
with weights, multiplying,
124126
Stakeholder analysis, 35
Stand-alone risk, 90
Standard deviation, 92
Statistical techniques, for risk analysis,
9092
Strategic problems, in
capitalinvestment
decisions,149
Subsidiary projects, capital budgeting
for, 137
Subsidized financing
effect on multinational capital
budgeting, 132
Sum of-the-years digit method, 163
INDEX
217
Sunk costs, 53
SWOT (Strengths, Weaknesses,
Opportunities, and Threats)
analysis, 34
Systematic risk, 121
Tangible assets
fixed, 14
of Reliance Industries Ltd., 164
Target rate of return. See Cost of
capital
Technical feasibility, 2324
Terminal cash flows, 56
Terminal cash inflows, 56
Terminal values, and
multinationalcapital
budgeting, 130
Time value of money, 4750
capital expenditure
management, 87
definition of, 47
valuation methods, 4850
a one-time purchase,
that is owned forever,
allows for simultaneous readers,
has no restrictions on printing, and
can be downloaded as PDFs from within the library community.
Our digital library collections are a great solution to beat the rising cost of textbooks. E-books
can be loaded into their course management systems or onto students e-book readers.
The Business Expert Press digital libraries are very affordable, with no obligation to buy in future
years. For more information, please visit www.businessexpertpress.com/librarians. To set up a trial
in the United States, please contact sales@businessexpertpress.com.