involves a current outlay (or current or Future Outlays) of funds in the expectation of a stream of benefits extending far into

the future . Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. This type of outlay is made by companies to maintain or increase the scope of their operations. These expenditures can include everything from repairing a roof to building a brand new factory.

Outlay on R&D , major advertising campaigns, reconditioning of plant and machinery. A hotel investing in developing a Spa in their complex. DND Flyway to Connect Noida Barapullah connecting Mayur Vihar A hotel investing in developing a Spa in their complex. Sports Infrastructure built for Games- Delhi 2010

 Long

Term Effects Irreversibility Substantial Outlays

Measurement

Problems Uncertainity Temporal Spread

1) Basic Classification Physical Assets- P&M, Vehicles, computers etc Monetary assets- Deposits, bonds & Equity share Intangible assets- R&D, Training , market Development , Franchises

2) On the basis of Investment Strategic Investment Tactical Investment 3) Classified by companies for planning & control Mandatory Investment Replacement Investment Expansion Investment Diversification Investment Misc Investment

Step 1- Planning Step 2- Analysis Step 3- Selection Step 4- Financing Step 5- Implementation Step 6- Review

Involves articulation of broad investment strategy and generation and preliminary screening of project proposals A preliminary study is done to assess 1) Whether project is worthwhile to justify a feasibility study 2) What aspects are critical to its viability

If its worthwhile then a detailed analysis is undertaken Marketing Technical Economic Ecological

Non Discounting Techniques: PBP- accept if PBP<Target period ARR- accept if ARR>target rate Non Discounting Techniques NPV- Accept if NPV>0 IRR- Accept if IRR>cost of capital Benefict Cost ratio BCR. 1

After selection, suitable financing arrangements may be chosen. Equity Financing Retained Earnings Debt consists of term loans, debentures, working capital advances etc. Debt equity ratio is critical issue.

Project & engineering Designs Negotiations and contracting Construction Training Plant Commissioning

Performance review to compare the Actual with the Projected. Helps in: 1. Analysing how realistic are the assumptions made for the project 2. Helps in future decisions 3. Remedial actions 4. Projects sponsers are made cautious.

The essence of the capital budgeting decision making is to determine, whether the initial expenditure of funds is duly compensated by the inflow of funds occurring in future. If greater values can be assigned to the inflow of funds than the present expenditure, then that the capital investment proposal must be accepted because that will add to the wealth of the company.

It

1. 2. 3. 4. 5. 6.

consists broadly decisions.

following

investment

New Projects Expansion Project Renewal Projects Exploration Projects (Oil Well) Research & Development (R & D) Projects. Projects For Compliance of Certain Statutory Requirement.

Poor alignment between strategies & capital budgeting Deficiencies in analytical techniques No linkege between compensation and financial measures Reverse financial engineering Weak integration between capital Budgeting and expense budgeting Inadequate post audits.