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H.T.NO: 1302-18-672-074


Department of Business Administration

(Affiliated to Osmania University)
Capital Budgeting decisions pertaining to fixed /long term assets which by definition
refer to assets which are in operation, and yield a return, over a period of time, usually
exceeding one year. They, therefore involve a series of outlays of cash resources in return for
anticipated flow of future benefits.

Capital budgeting is the process that companies use for decision making on capital project.
The capital project lasts for longer time, usually more than one year. As the project is usually
large and has important impact on the long-term success of the

business, it is crucial for the business to make the right decision.

Capital Budgeting Process

The specific capital budgeting procedures that the manager uses depend on the manger's level
in the organization and the complexities of the organization and the size of the projects. The
typical steps in the capital budgeting process are as follows:

 Brainstorming. Investment ideas can come from anywhere, from the top or the bottom
of the organization, from any department or functional area, or from outside the
company. Generating good investment ideas to consider is the most important step in
the process.

 Project analysis. This step involves gathering the information to forecast cash flows
for each project and then evaluating the project's profitability.

 Capital budget planning. The company must organize the profitable proposals into a
coordinated whole that fits within the company's overall strategies, and it also must
consider the projects' timing. Some projects that look good when considered in
isolation may be undesirable strategically. Because of financial and real resource
issues, the scheduling and prioritizing of projects is important.

 Performance monitoring. In a post-audit, actual results are compared to planned or

predicted results, and any differences must be explained. For example, how do the
revenues, expenses, and cash flows realized from an investment compare to the
predictions? Post-auditing capital projects is important for several reasons. First, it
helps monitor the forecasts and analysis that underlie the capital budgeting process.
Systematic errors, such as overly optimistic forecasts, become apparent. Second, it
helps improve business operations. If sales or costs are out of line, it will focus
attention on bringing performance closer to expectations if at all possible. Finally,
monitoring and post-auditing recent capital investments will produce concrete ideas
for future investments. Managers can decide to invest more heavily in profitable areas
and scale down or cancel investments in areas that are disappointing.

Complexity of Capital Budgeting Process

The budgeting process needs the involvement of different departments in the business.
Planning for capital investments can be very complex, often involving many persons inside
and outside of the company. Information about marketing, science, engineering, regulation,
taxation, finance, production, and behavioral issues must be systematically gathered and

The authority to make capital decisions depends on the size and complexity of the project.
Lower-level managers may have discretion to make decisions that involve less than a given
amount of money, or that do not exceed a given capital budget. Larger and more complex
decisions are reserved for top management, and some are so significant that the company's
board of directors ultimately has the decision-making authority. Like everything else, capital
budgeting is a cost-benefit exercise. At the margin, the benefits from the improved decision
making should exceed the costs of the capital budgeting efforts.

Capital budgeting also has a bearing on the competitive position of the enterprise
mainly because of the fact that they relate to fixed asset. The fixed asset represents a true
earning asset of the firm. They enable the firm to generate finished goods that can be
ultimately being sold for profits. The Capital Expenditure decision has its effects over a
long-time span and inevitable affects the company’s future cost structure.

The Capital investment decision once made are not easily reversible without much
financial loss to the firm because their may be no market for second-of –hand plant and
equipment and their conversion to other uses may most financially viable.
Capital investment involves cost and the majority of the firms have search capital
resources. A common problem that corporations face on an annual basis is creating the
capital budget for the next fiscal year. The creation of the capital budget for a company is an
annual rite that often does not receive the scrutiny that it merits. Too often, the task of
evaluating competing budget items comes down to a simple comparison of the IRRs (internal
rates of return) for competing projects and a selection of those projects with the highest
When companies do not spend as much time trying to quantify projects, the decision often
comes down to “strategic” decision making on the part of the CEO or executive team. This
strategy is often a gut feel from the executive team.
By institutionalizing a hierarchical decision-making process, the company would be forced to
think about what are the priorities of the company and to evaluate each alternative vis-a-vis
all other projects.


Capital Budgeting means planning for capital assets. Capital Budgeting decisions are vital
to an organization as to include the decision as to:

 Whether or not funds should be invested in long term projects such as settings of
an industry, purchase of plant and machinery etc.,
 Analyze the proposals for expansion or creating additions capacities.
 To decide the replacement of permanent assets such as building and equipment’s.
 To make financial analysis of various proposals regarding capital investment so as
to choose the best out of many alternative proposals.


The efficient allocation of capital is the most important financial function in the
modern times. It involves decision to commit the firm’s, since they stand the long- term
assets such decision are of considerable importance to the firm since they send to
determine its value and size by influencing its growth, probability and growth.
The scope of the study is limited to collecting the financial data of Ultra Tech Cements
Limited for five years and budgeted figures of each year.


To evaluate the capital budgeting practices relating to various projects of Ultra Tech
Cements Limited Hyderabad
1. To Assess the long term requirements of funds and plan for application of internal
resources and debt servicing.
2. To Assess the effectiveness of long-term investment decisions of Ultra Tech
Cements Limited
3. To offer conclusion derived from the study and give suitable suggestions for the
efficient utilization of capital expenditure decisions.


At each point of time a business firm has a number of proposals regarding various projects
in which, it can invest funds. But the funds available with the firm are always limited and are
not possible to invest trend in the entire proposal at a time. Hence it is very essential to select
from amongst the various competing proposals, those that gives the highest benefits. The
crux of capital budgeting is the allocation of available resources to various proposals. There
are many considerations, economic as well as non-economic, which influence the capital
budgeting decision in the profitability of the prospective investment.

Yet the right involved in the proposals cannot be ignored, profitability and risk are directly
related, i.e. higher profitability the greater the risk and vice versa there are several methods
for evaluating and ranking the capital investment proposals.

Data collection:

Primary data: - The primary data is the data which is collected, by interviewing directly
with the organizations concerned executives. This is the direct information gathered from the
organization., But in this project No primary data is used.
Secondary data: - The secondary data is used for the completion of project which is
gathered from publications and websites.

P A Ryan, & G P Ryan, G. (2002). Capital Budgeting Practices of the Fortune 1000:
How Have Things Changed? Journal of Business and Management, in their studies shows
that the financial manager prefers IRR and non-discounted payback models over net present
value. In our study we would show what methods are tend to be used by our financial
managers in different industry. And try to find out whether they use multiple methods to get
the optimal methods.

Pike, R. (1996). A Longitudinal Survey on Capital Budgeting Practices. Journal of Business

Finance & Accounting, in his study he said capital budgeting does not have the intention to
present the current position rather than it tries to find relations between investment practices
and organizational variables for example firm size, capital intensity and environmental
uncertainty and performance. In our study, we also want to find out what is the importance of
capital budgeting in our arena for practicing or running business. And also want to find out
how capital budgeting effects the performance of the firm.

Andor, G., K. Mohanty, S., & Toth, T. (2011). Capital Budgeting Practices: A Survey of
Central and Eastern European Firms. In this paper, they reported that they get the survey
results from executives of companies I ten countries in Central and Eastern Europe (CEE) –
Bulgaria, Croatia, Csech Republic, Hungary, Lativa, Lithunia, Poland, Romania, Slovak
Republic, and Slovenia regarding their capital budgeting practices. The findings of their
survey indicate that capital budgeting practices in Central Eastern European (CEE) countries
tend to be influenced mostly by firm size and multinational culture. In our study we would
like to show the capital budgeting practices of different firms rather than different country.
And would also try to find out influential factor of capital budgeting practices.

Bennouna, K., G. Meredith, G., & Marchant, T. (2010). Improved capital budgeting
decision making: evidence from Canada. Management Decision, 48(2), 225-247. In this
article the authors tries to evaluate current techniques in capital budget decision making in
Canada. They also figured out the fact that sound financial management and capital
investment decision making are critical factors for survival and long-term success for firms.
Our study also show that sound financial management lead to long-term success of the firm.
Yasmin, S. (2015). Capital Budgeting in Practice: An Explorative Study on Bangladeshi
Companies. International Journal of Engineering, Business and Enterprise Applications,,
158-164. In her descriptive research she emphasizes on capital budgeting practices of the
companies in Bangladesh. From the research it is evident that NPV and IRR are the
dominating methods of capital budgeting. However Payback Period (PBP) is used by many of
the companies. In our study, we try to figure out the dominating methods of capital budgeting
and will focus on the other methods to show the actual practice of capital budgeting in
Bangladeshi companies.

Mao, J. C. T. (1970), Survey of Capital Budgeting: Theory and Practice. The Journal of
Finance, 25: 349–360. This study illustrates the differences in capital budgeting theory and
practice. There have been invented many applications to improvise the capital budgeting
techniques and procedures. In this paper we are very eager to show the disparity between
capital budgeting theory and capital budgeting in practice.

M.Jog, V., & K. Srivastava, A. (1996). Capital Budgeting Practices in Corporate Canada.
Financial Management Association, 37-43. In this article it is identified that capital budgeting
and the estimation of cost of capital are one of the most crucial financial decisions faced by
financial managers. In this study they show variation of uses capital budgeting techniques
used by Canadian corporations. Likely, in our study we show the variations of uses capital
budgeting techniques by different firms in accordance to their requirement.

Hall, J., & Millard, S. (2009). Capital budgeting practices used by selected listed South
African firms. South African Journal of Economics and Management Sciences, , 85-97. This
article studies the application of capital budgeting process among a sample of sample of
South African industrial firms listed on the JSE securities exchange for almost 10 years. NPV
is founded to be most recognized methods over IRR which is proved by the incorporation of
this method by many companies.

Hermes, N., Smid, P., & Yao, L. (2007). Capital Budgeting Practices: A Comparative Study
of the Netherlands and China. International Business review, 630-650. This paper shows the
comparison of the uses of capital budgeting techniques of Dutch and Chinese companies. For
the purpose of the paper the researcher obtain data from a survey among 250 Dutch and 300
Chinese companies. The aim was to analyze the use of techniques by companies in both
countries from a comparative perspective to see economic development differs in two
countries. In our study we focus only to companies of a single country (Bangladesh) to see
comparison of efficiency of techniques used by the firms.

Brijlal, P., & Quesada, L. (2011). The Use of Capital Budgeting Techniques in Businesses:
A Perspective From The Western Cape. The Journal of Applied Business Research –, 25``
(4), 37-46. In their study it is prominent that there are several techniques commonly used to
evaluate capital budgeting projects. For the evaluation Payback period (PBP), Accounting
Rate of Return (ARR), Present value, Internal Rate of Return (IRR), and Profitability Index
are commonly used. From their study they found that Discounted PBP and IRR proved as
superior over NPV. In our paper we also try to go through the basic capital budgeting
techniques and find out the superior techniques that used by most of the firms.

-Financial Management - Prasanna Chandra
-Management Accounting - R.K.Sharma & Shashi K.Gupta
-Management Accounting -S.N.Maheshwary
-Financial Management -Khan and Jain
-Research Methodology -K.R.Kothari

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