NATURE OF CAPITAL BUDGETING

& TYPES OF CAPITAL PROJECTS

 CAPITAL BUDGETING

Capital Budgeting is long-term

planning for making financing
proposed capital outlays.
 NATURE OF CAPITAL BUDGETING
DECISIONS
Capital investments re those
investments large amount of firms
funds are invested in a long-term
assets.
Capital Budgting Decisions have a
major impct on health of the firm.
Some of the Areas are as Follows:-
 GROWTH
The Decision to invest in long-term assets
influences the firms operations for many
years .
Sound Decisions lead to good profits which be
used for diversification expansion.
A very important feature of capital budgeting
decision is that generally these cannot be
reversed without incurring heavy loss.
 Risk
The types of long-term projects the
firms takes up determines the risk
involved in the firms operations.
This affects the basic business
Approach of the firm and accordingly
the character and the reputation of
the firm.
 UNCERTAINTY AND COMPLEXITY
Future is always uncertain and it is
definitely more complex to be able to
estimate future cash flows many years
down the line. So many things can
change, competition can increase ,
products with better technology may be
launched.
 REPLACEMENT OF AN OLD MACHINE
WITH A NEW ONE OF THE SOME TYPE:-In
such cases technology wise the machine
is still relevant, but it has worn out and
requires frequent repairs.
 TYPES OF CAPITAL PROJECTS
INDEPENDENT PROJECTS:-Independent Projects
are those which can be accepted or rejected
irrespective of of the decision regarding other
projects.
MUTUALLY EXCLUSIVE PROJECTS:-Mutually
exclusive projects are those where only one of the
available options can be accepted.
CONTINGENT INVESTMENTS:-Contingent
Investments are those which are associated with
other major investments.
 REPLACEMENT OF A MACHINE WITH
ANOTHER MACHINE OF BETTER
TECHNOLOGY:-In this case the existing
machine is still operational, but machines that
are more efficient and with better technology
have hit the market.
 MODERNISATION:- A Company may consider in
modernization and replacement of obsolete
assets with a view to keep pace with the advent
of new technology for improving operational
efficiency and minimization of costs, which
results in a higher level of profits.
ADVERTISING CAMPAIGNS:-A firm may launch
massive marketing efforts like advertising
campaigns and expect it to yield improved sales
for many years.