CHAPTER 1

OVER VIEW

OUTLINE
Capital investments: Importance and difficulties
Types of capital investments
Phases of capital budgeting
Levels of decision making
Facets of project analysis
Feasibility study: A schematic diagram
Key issues in major investment decisions
Objectives of capital budgeting
Common weaknesses in capital budgeting

Capital Investments : Importance and Difficulties

Importance
Long term effects
Irreversibility
Substantial outlays

Difficulties
Measurement problems
Uncertainty
Temporal spread

Types of Investments
Mandatory Investments
Replacement investments
Expansion investments
Diversification investments
R & D investments
Miscellaneous investments

Mahindra & Mahindra to InvestRs.4,000 Crore on Chakan

Plant Expansion- 28th august 2014
UltraTech Cement Capex ofRs.7,000 Crore For expansion
towards expansions, brownfield projects and grinding units
at various plants, going forward. -6 august 2014
Gitanjali Gems Plans to RaiseRs.175 Crore for Expansion of
diamond and jewellery business globally -August 1 ,2014
Vedanta May InvestRs.10,000 Crore on Lanjigarh Refinery
Expansion- august, 2014
Sesa Sterlite shares gained over 2 per cent toRs.298.35 on
Thursday as the company got nod from the local public to expand
capacity of its Lanjigarh refinery from one million tonne per
annum (mtpa) to six mtpa.-July 2014
Alstom T&D India today said it has bagged aRs.200 crore
order from Power Grid Corporation of India Ltd (PGCIL) for
upgrading grid substations in eastern parts of the country.
"Alstom T&D India has secured an order from Power Grid
Corporation of India Ltd...to supply transformers for the
upgrade and expansion of 400/220 kv grid substations across
eastern India," July , 2014

Sept 2013, Kerala-based Malabar Group, promoters of jewellery

retailer MalabarGoldand Diamonds, has planned to diversify into
development of townships, commercial hubs, e-commerce and organic
farming among others.
Sept, 2013, aluminum giant NALCO to invest Rs 33,000 crore for
diversification and expansion in a host of sectors including energy to
boost its productivity and profitability.
On January 3, 2012, ending months of speculation, one of Indias leading
private sector companies, Reliance Industries, announced a major foray
into the media and entertainment sector. The company, renamed Reliance
Infotel, has 4G licenses for all 22 telecom circles (contiguous regions) in
the country and is expected to start rolling out its service by the end of
this year.
In Dec, 2006, Surat-based textile firm Gupta Synthetics Ltd will invest Rs
223 crore in a diversification project at its Silvassa unit.
The project will be for manufacture of nylon tyre cord fabric (NTCF) and
nylon filament yarn (NFY), which are key inputs for the tyre, textile and
furnishing industries.
Khaitan Electricals Limited, the leading fan manufacturer, is on a
diversification spree - foraying into domestic appliances, lamps,
switchgear, wire and cables and pumps, aiming at over 100 per cent
growth in the topline in 2005-6.

Capital Budgeting Process

Planning
Analysis
Selection
Financing
Implementation
Review

Key Issues in Project Analysis

Potential Market

Market Analysis
Market Share
Technical Viability

Technical Analysis
Sensible Choices
Risk

Financial Analysis
Economic Analysis

Return
Benefits and Costs in efficiency
Prices
Other Impacts
Environmental Damage

Ecological Analysis
Restoration Measures

Levels of Decision Making

Operating
decisions

Where is the decision taken

How structured is the decision

What is the level of resource

commitment

What is the time horizon

Administra
tive
decisions

Strategic
decisions

Lower level
management

Middle level
management

Top level
management

Routine

Semi-structured

Unstructured

Minor resource
commitment

Moderate
resource
commitment

Major
resource
commitment

Short-term

Medium-term

Long-term

Feasibility Study : A Schematic Diagram

Generation of Ideas

P
r
e

Initial Screening

l
i
m

Is the Idea Prima Facie Promising

No

Yes

n
a

Plan Feasibility Analysis

Terminate

Conduct Market Analysis

Conduct Technical Analysis

o
r

Conduct Financial Analysis

k
E
A

o
n

Conduct Economic and Ecological Analysis

Is the Project Worthwhile ?
Yes
Prepare Funding Proposal

No
Terminate

Basic Considerations : Risk and Return

Investment
decisions

Return
Market value
of the firm

Financing
decisions

Risk