“capital budgeting” with reference to mumbai waste management limited,

8/10/2019 CAPITAL BUDGETING with reference to MUMBAI WASTE MANAGEMENT LIMITED,

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CAPITAL BUDGETING

INTRODUCTION:

Capital budgeting is the process of making investment decisions in capital

expenditures. A capital expenditure may be defined as an expenditure the benefits of

which are expected to be received over period of time exceeding one year. The main

characteristic of capital expenditure is that the expenditure is incurred at one point of

time whereas benefits of the expenditure are realized at different points of time in future.

In simple language we may say that a capital expenditure is an expenditure incurred for

acquiring or improving or improving the fixed assets the benefits of which are expectedto be received over a number of years in future.

This pro!ect presents two versions of heuristic algorithm to solve a model of

capital budgeting problem in a decentralized multidivisional firm involving no more than

two exchanges of information between headquarters and divisions. "ead quarters make

allocation of funds to each division based upon its cash demand and its potential growth

rate. #ach division determines which pro!ects to accept. Then an additional iteration is

performed to define the solution

To take up a new pro!ect involves a capital investment decision and it is the top

management$s duty to make a situation and feasibility analysis of that particular pro!ect

and means of financing and implementing it. %inancing is a rapidly expanding field

which focuses not on the credit status of a company but on cash flows that will be

generated by a specific pro!ect.

The capital budgeting decisions procedure basically involves the evaluation of

the desirability of an investment proposal. It is obvious that the firm must have a

systematic procedure for making capital budgeting decisions. The procedure for making

capital budgeting decisions must be consistent with ob!ective of wealth maximization. In

view of the significance of capital budgeting decisions the procedure must consist of

step by step analysis of the data to bridge the gap in the organization.

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expenditures. A capital expenditure may be defined as an expenditure the benefits of

which are expected to be received over period of time exceeding one year. The main

characteristic of capital expenditure is that the expenditure is incurred at one point of



acquiring or improving or improving the fixed assets the benefits of which are expected

to be received over a number of years in future.


capital budgeting problem in a decentralized multidivisional firm involving no more thantwo exchanges of information between headquarters and divisions. "ead quarters make

allocation of funds to each division based upon its cash demand and its potential growth

rate. #ach division determines which pro!ects to accept. Then an additional iteration is

performed to define the solution



and means of financing and implementing it. %inancing is a rapidly expanding field








step by step analysis of the data to bridge the gap in the organization.

The capital program is generally financed by borrowing money usually through

the sales of bonds. This differs from the company$s expenses budget which covers day'

to'day operating expenditures ( is financed by company$s taxes and other revenues

along with other companies in the industry.

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The capital budgeting strategy presents the goals policy constraints assumptions

the organization$s capital needs over the next &* years. The document also provides the

anticipated sources of financing and the implications of the strategy including any

possible economic social and environmental effects. After a public hearing and a report

by the organization planning commission or board of directors the final version of the

strategy is released with the executive budget in every year.

The strategy presents capital pro!ects in broad categories that reflect

organization$s agency goals. There are various ways the organization records the

progress of capital pro!ects. In general they measure financial transaction spending and

obligation rather than what most department come about the status of work on a

particular pro!ect. Although information is publicly available on annual capital spending

by budget line no information is currently made publicly available that provides detailed

pro!ect level information on the status of capital pro!ects.

FACTORS FOR CAPITAL BUDGETING:-

Cost of acquisition of permanent asset as land and building plant and machinery

goodwill etc.

Cost of addition expansion Improvement or alteration in the fixed assets.

Cost of replacement of permanent assets.

+esearch and development pro!ect cost etc.

DEFINITIONS OF CAPITAL BUDGETING:-,Capital budgeting is a long term planning for making and financing proposed capital

outlays-

: -T. Horngreen

A budget is an estimate of future needs arranged according at an orderly basis covering

some or all the activities of an enterprise for a definite period of time-

: - George R. Terry

udget as a financial and/ or quantitative statement prepared to a definite period of

time of the policy to be pursued during that period for the purpose of attaining a given

ob!ective- 0 ' Icma, Lonon

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SIGNIFICANCE OF CAPITAL BUDGETING:-

Capital budgeting decisions deserve to be treated in a different manner as there are

conceptual problems involved which necessarily makes the decision process more

complex while this makes things more difficult for the decision process maker it also

makes the problem more challenging. There are several practical reasons for placing

greater emphasis on capital expenditure decisions.

!. LONG TER" PERIOD:-

The consequences of capital expenditure decisions extend far into future. The scope

of current manufacturing activities of an organization is governed largely by capital

expenditures in the past. 2ikewise current capital expenditures decision provides the

frame work for future activities. Capital investment decisions have an enormous bearing

on the basic character of an organization.

#. IRRE$ESIBILIT%:-

The markets are used for capital equipment in general is ill'organized. %urther some

types of capital equipment custom made to meet specific requirements the market may

virtually be non'existent.

&. SUBSTANCIAL OUTLA%:-

Capital expenditure usually involves substantial outlays. An integrated steel plant

for example involves an outlay of several thousand millions. Capital costs tend to

increase with advanced technology.



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NEED OF CAPITAL BUDGETING:-

The importance of capital budgeting can be well understood from the fact that

unsound investment decision may prove to be fatal to the very existence of the concern.The need significance or importance of capital budgeting arises mainly due to the

following

2arge investments

2ong'term commitment of funds

Irreversible nature

2ong'term effect on profitability

4ifficulties of investment decisions

5ational importance.

FEATURES OF CAPITAL BUDGSTING PROCESS:-

6otentially large anticipated benefits.

A relative high degree of risk.

A relative long time period between the initial outlay and anticipated returns.

OB'ECTI$ES FOR CAPITAL BUDGETING:-

It determines the capital pro!ects on which work can be started during the budget

period after taking into account their urgency and the expected rate of return on

each pro!ect.

It estimates the expenditure that would have to be incurred on capital pro!ects

approved by the management together with the sources from which the required

funds would be obtained.

It restricts the capital expenditure on pro!ects within authorized limits.



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(INDS OF CAPITAL BUDGETING:-

Capital budgeting refers to the total process of generating evaluating selecting and

following up a capital expenditure alternatives. The firm allocates or budgets financial

recourses to new investment proposals. asically the firm may be confronted with three

types of capital budgeting decisions0'

To accept or re!ect decision

The mutually exclusive choice decisions and

The capital rationing decision

T%PES OF CAPITAL BUDETING DECISIONS:-

Capital budgeting decisions are of paramount importance in financial decision making.

In first place they affect the profitability of the firm. They also have a bearing on the

competitive position of the firm because they relate to fixed assets. The fixed assets are

true goods that can ultimately be sold for'profit. 8enerally the capital budgeting of

investment decision includes addition disposition modification and replacement of

fixed assets.

E)PANSION OF E)ISTING BUSINESS:-A company may add capacity to its existing product lines to expand existing

operations. %or example 9:9AI ;A


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REPLACE"ENT AND "ODERNI+ATION:-

The main ob!ective of modernization and replacement is to improve

operating efficiency to reduce costs. Cost savings will reflect in the increased profits but

the firm$s revenue may remain unchanged. Assets become outdated and absolute with

technological changes. The firm must decide to replace those with new assets that

operate more economically. +eplacement decisions help to introduce more efficient and

economical assets and therefore are also called cost'reduction investments.

"owever replacement decisions that involve substantial modernization and

technological improvements expand revenues as well as reduce costs. >et another useful

way to classify investments is as follows0

9utually exclusive investments

Independent investments

Contingent investments

CAPITAL BUDGETING PROCESS:-

The preparation of the capital budget is a process that lasts many months and is

intended to take into account neighborhood and bough needs as well as organization

wide. The process begin in the fall when each of the segment holds public hearings each

community board submits a statements of its capital priorities for the next fiscal year to

the managing director and appropriate board chairman. The capital budgeting process

involves ? steps explained in diagrammatic ( theoretic as follows0

! IDENTIFICATION OF IN$EST"ENT PROPOSALS:-

The capital budgeting process begins with the identification of investment proposals.

The investment proposals may originate from the top management or from any officer of

the organization. The department head analyses the various proposals in the light of the

corporte strategies and submit the suitable proposal to the capital budgeting committee in

case of large organizations concerned with process of long'term investment proposals.

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# SCREEN PROPOSALS:-

The expenditure planning committee screens the various proposals received from

different departments in different angles to ensure that these are in selection criteria of

the organization and also do not lead to department imbalances.

& E$ALUTION OF $ARIOUS PROPOSALS:-

The next steps in capital budgeting process is to evaluate the probability of

various independent proposals those which do not compete with one another and the

same way be either accepted or re!ected on the basis of a minimum return on investment

required.

FI)ING PRIORITIES:-

After evaluating various proposals the unprofitable or uneconomic proposals

may be re!ected straight away. ut it may not be possible for the organization to invest

immediately in all the acceptable proposals due to limitations of funds. "ence it is very

essential to rank the various proposals and to establish priorities after consideringurgency risk ( profitability involved is the criteria.

FINAL APPRO$AL:-

6roposals meeting the evaluation and other criteria are finally approved to be

included in the capital expenditure budget. "owever proposals involving smaller

investment may be decided at the lower levels for expeditious action. The capital

expenditure budget lay down the amount of estimated expenditure to be incurred on

fixed assets during the budget period.

/ I"PLE"ENTING PROPOSALS:-

6reparation of a capital expenditure budget ( incorporation of particular

proposals in the budget does not itself authorize to go ahead with implementation of the

pro!ect. A request for authority to spend the amount should be made to be the capital

expenditure committee which may like to review the profitability of the pro!ect in

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changed circumstances. In the implementation of the pro!ects networks techniques such

as 6#+T ( C69 are applied for pro!ect management.

0 PERFOR"ANCE RE$IE*:-In this stage the process of capital budgeting is the evaluation of he performance of the

pro!ect. The evaluation is made through post completion audit by way of comparison of

actual expenditure on the pro!ect with the budgeted one and also by comparing the

actual return from the investment with the anticipated return. The unfavorable variances

if any should be looked into and the causes the same be identified so that corrective

action may be taken in future.

1 FEEDBAC(:-

The last step in the capital budgeting process is feedback from employeesinvolved in the organization. If any consequences are there the process may come to & st

step of the process.

GUIDELINE FOR CAPITAL BUDGETING:-

There are many guidelines for capital budgeting process either it is long'term or

short' term plan. The ma!or points are0

5eed and ob!ectives of the owner


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CO""ITTEE IN CAPITAL BUDGETING:-

GUNTUR ENGINEER COLLEGE

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CAPITAL CO""IT"ENT PLAN:-

The progress of pro!ects included in the capital budget a capital commitment

plan is issued three times a year. The commitment plan lays out the anticipated

implementation schedule for the current fiscal and the next three years. The first

commitment plan is published within *days of the adoption of the capital budget.

:pdated commitment plans are issued in Danuary ( April along with the company$sbudget proposals.

The commitment plan translates the appropriations approved under the adopted

capital budget into schedule for implementing individual pro!ects. The fact that funds are

appropriated for a pro!ect in the capital budget does not necessarily mean that work will

start or be completed that fiscal year. The choice of priorities and timing of pro!ects is

decided by office management ( budget in consultation with the agencies along with

considerations of how much the managing director thinks the organization can afford to

append on capital pro!ects overall.

The capital commitment plan lays out the anticipated implemented schedule for

capital pro!ects and is one source of information on how far along pro!ects are although

not consistent or always useful one. The adopted commitment plan is usually published

in


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DIFFICULTIES OF CAPITAL BUDGETING:-

;hile capital expenditure decisions are extremely important they also pose

difficulties which stem from three principal sources0

Identifying ( measuring the costs ( benefits of a capital expenditure proposal

tends to be difficult

There is great deal of uncertainty for capital expenditure decision which involves

cost ( benefits that extend far into the future

It is impossible to pro!ect exactly what will happen in the future

The time period creates some problems in estimating discount rates (

establishing equivalences.

LI"ITATIONS OF CAPITAL BUDGETING:-

Capital budgeting techniques suffer from the following limitations0

&E All the techniques of capital budgeting presume that various investment

proposals under consideration are mutually exclusive which may not practically

be true in some particular circumstances.

)E The techniques of capital budgeting require estimation of future cash inflows and

outflows. The future is always uncertain and the data collected for future may not

be exact. Bbliviously the results based upon wrong data may not be good.

1E There are certain factors like morale of the employees goodwill of the firm etc.

which cannot be correctly quantified but which otherwise substantially influence

the capital decision.

3E :rgency is another limitation in the evaluation of capital investment decisions.

7E :ncertainty and risk pose the biggest limitation to the techniques of capital

budgeting.

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COST EFFECTI$E ANAL%SIS:-

In the cost effectiveness analysis the pro!ect selection or technological choice

only costs of two or more alternatives choices are considering treating the benefits as

identical. This approach is used when the acquisition of how to minimize the costs for

undertaking an activity at a given discount rates in case the benefits and operating costs

are given one can minimize the capital cost to obtain given discount.

PRO'ECT PLANNING:-

The planning of a pro!ect is a technically pre'determined set of inter related

activities involving the effective use of given material human technological and

financial resources over a given period of time. ;hich in association with other

development pro!ects result in the achievement of certain predetermined ob!ectives such

as the production of specified goods and servicesF

6ro!ect planning is spread over a period of time and is not a one shot activity. The

important stages in the life of a pro!ect are0

It$s identification

It$s initial formulation

It$s evaluation

It$s final formulation

It$s implementation

It$s completion and operation

The time taken for the entire process is the gestation period of the pro!ect.

The process of identification of a pro!ect begins when we are seriously trying to

overcome certain problems. They may be non'utilization to overcome available

funds 6lant capacity expansion etc.

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CONTENTS OF THE PRO'ECT REPORT:-

+aw material

9arket and marketing


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Non DCF cr34er3a

5a Pay6ac7 8er3o

The payback period one of the most popular and widely recognized traditional

methods of evaluating investment proposals. 6ayback period is the number of years

required to recover the original cash outlay invested in a pro!ect.

If the pro!ect generates constant annual cash flows the payback period can be

computed by dividing cash outlay by the annual cash inflows.

6ayback period

C

Co

inflowscashAnnual

investmentInitial

oC Initial investment

C Annual cash inflows

In the case of :5 equal cash inflows the payback period can be found out by

adding up the cash inflow until the total is equal to the initial cash outlay.

56 Acco9n43ng Ra4e o Re49rn 5ARR

The accounting rate of return HA++E also known as the return on investment

H+BIE uses accounting information as revealed by financial statements to measure the

profitability of an investment. The accounting rate of return is the ratio of the average

after tax profit divided by the average investment. The average investment would be

equal to half of the original investment if it were depreciated constantly.

A + + &**investmentAverage

IncomeAverage

DCF Cr34er3a

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5a Ne4 Pre;en4


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k the discount rate

n life of the pro!ect in year

*C Cash out lay

5PI

>et another time J ad!usted method of evaluating the investment proposals is the

benefit J cost H/C.E ratio or profitability index H6IE 6rofitability index is the ratio of the

present value of cash inflows at the required rate of return to the initial cash out of the

investment.

6I outlayCashIntial

inflowCashof6

;here 6 6resent alue

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CRITERIAN TABLE0'

In the evaluation process or capital budgeting techniques there will be a criteria to

accept or re!ect the pro!ect. The criteria will be expressed as0

Criteria/9ethod Accept +e!ect Indifferent

6ay ack 6eriod H66E LTarget 6eriod MTarget 6eriod Target period

Accounting +ate of+eturn HA++E

M Target +ate L Target +ate Target rate

5et 6resent alue H56E M * L * *

Internal +ate of +eturnHI++E

MCost Bf Capital LCost Bf Capital cost of capital

6rofitability index H6IE M & L & &

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OBJECTIVES OF THE STUDY

To present theoretical framework relating to capital budgeting.

To study the financial aspects for future expansion of ,9:9AI ;A


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SECONDAR% DATA:-

The secondary data needed for the study was collected from published sources

such as pamphlets of annual reports returns and internal records reference from text

books and !ournal management.

%urther data needed for the study was collected from0'

Collection of required data from annual records of ,9:9AI ;A


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NEED FOR THE STUDY

The capital budgeting decisions may be defined as the firm$s decision to invest in

current funds most effectively ( efficiently in the long J term assets in anticipation of an

expected flow of benefits over a series of years. The long'term assets are those that affect

the firm$s operations beyond the one year period. The firm$s investment decisions would

generally includes expansion acquisition modernization and replacement of long term

assets.


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,9:9AI ;A


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INDUSTRY PROFILE

As indicated earlier the ;aste 9anagement 4ivision of +amky has various arms

and the plans of each of these business arms are presented hereunder0

HAZARDOUS WASTE MANAGEMENT

"azardous ;aste 9anagement is technically challenging and complex in

operation however +amky with its extensive involvement in the area since &3 and

focus has been able to attain significant knowledge and experience in the field. +amky

has had the advantage of technical know'how support from Australian Aided

International 4evelopment HAusAI4E and other international agencies. In addition to the

above +amky has some of the best professionals in the country in the field working in

the sub!ect for over &) years. As a result of the above extensive involvement and

manpower +amky has been able to create an entry barrier and is today the leader and

pioneer in the field of Industrial "azardous ;aste 9anagement. %urther +amky has

adopted best of the norms for


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wastes and intends to maintain the position in the country. +amky is contemplating to

bring in strategic partnership for the hazardous waste management division to boost the

growth prospects both for this sector and to augment its growth requirements in other

segments of environmental business.

BIO-MEDICAL (HOSPITAL) WASTE MANAGEMENT

9anagement of highly contaminated clinical and pathological wastes is one of

the ma!or problems encountered in the drive for environment protection. In the service

of a huge population the hospitals generate ,io'9edical ;astes- that are incompatible

with the environment. These wastes need professional attention for effective

management as the infectious nature of the waste can cause irreparable damage to the

human health and the environment. It has become imperative to monitor and control the

management and handling of these wastes. To redress this problem and provide the

health care establishments with a solution to their waste disposal dilemma a program of

investigation of appropriate methods for implementing a coordinated management

scheme has been performed by +amky leading to the establishment of common bio'

medical waste management facility at "yderabad which has the credit and distinction of

being India$s first. Today this has become a role model for the country and the country

today has over 3* similar facilities across the country. +amky owns and operates &1 of

these facilities and has its presence in all the 9etro Cities of India and controls over 17P

of India$s 9edical ;aste 9anagement by Durisdiction and by catering its services to over

*** "ealth Care #stablishments and over &7**** beds of inpatient medical services.

+amky has a


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implementation from )**1. 4espite having a legislation and effective date having been

lapsed 9 HbE availability of adequate funds

and most importantly HcE political willingness. "owever !udicial activism and

environmentalists pressure is mounting and more and more municipalities are turning

towards compliance. This can be evidenced from the fact that on an average there are

about &* J &7 tenders opening up every month for one or more of the 9


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OTHER ENVIRONMENTAL BUSINESS AREAS

As indicated earlier +amky would be exploring into various other areas of

environmental business which have a vast potential and have already seen great potential

in the developed markets including0

E-Was! Ma"a#!$!": Indian is emerging as a preferred destination for

manufacture and use of electronic materials and over time has come to a stage where

electronic waste management is required. 4ay by day quantities of these wastes

including defect manufacturing units used and reused items and other waste materials

of electronic items including mobile phones transistors radios computers and others

are becoming more and more common to waste management facilities. ;hile theseare wastes they also have high reuse/ recycle value within them. These wastes are

first shredded and then stages of recovery including in induction furnaces leads to

recovery of various expensive materials and thus making the pro!ect viable. In India

there is great potential for these materials in angalore Chennai "yderabad and

9umbai and +amky proposes to enter into this sector at these four cities parallely

and expand its collection network throughout the country from its existing network

of offices reducing the costs and increasing the profitability.

E$!%#&"# T!'"*#&!s: #nvironmental business is a very nascent sub!ect

with comprehensive environmental legislations getting formed up from early @*$s

and improving year after year. Bver time various technologies are emerging

providing alternate use for various waste materials these technologies are together

called as #merging Technologies.


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O"!-U+ S!%,&'!s: Is a very unique service which +amky has already started.

The service envisages an end to end solution to the environmental and waste

management requirements of the industry. The services include ;ater Treatment and


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environmental requirements. ;ith the above view +amky has opened its international

office at


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advantage. 6resently in India this sector is still in its nascent stage and has potential for

massive expansions and growth. As can be seen physically very insignificant portion of

the country is provided with efficient waste management services leave alone emerging

technologies and electronic waste facilities.

+amky also takes its advantage and strength from its existing resource base of

man'power equipment location advantage and in'house expertise in various

infrastructure areas. %urther +amky with its full'fledged offices across India is able to

provide close contact to the client and provide quick response resulting in client

satisfaction. +amky$s thinking in terms of early bird concept and a sci'tech approach to

infrastructure development has in the past and in the future yield rich and paying

dividends +amky 1"s a 23** %a"#! 2 P*a" a". Ma'&"!%0 to support its

infrastructure development including various incinerators Hincluding its exclusive

arrangement with Alstom Air 6reheater CompanyE secured landfills direct relationship

and dealership with liner material suppliers heavy earth machinery among others. The

owning of these plant and machinery provides high quality out put and speed of

execution resulting in client satisfaction.

At +##2 #nvironment "ealth and


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FUTURE OUTLOO4

As on date +amky has &7 medical waste facilities &1 industrial hazardous waste

facilities &7 municipal waste facilities ) e';aste management facilities and numerous

recycling technology pro!ects and has opening areas in Bne':p


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COMPANY PROFILE

VISION:

To e a


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fields of solid waste management including medical waste management hazardous waste

management and municipal waste management with over 17 pro!ects. Today +amky is

handling more than 3* 6ublic 6rivate 6artnership 6ro!ects in the country ' the largest

being handled by any group and providing a stepping stone for infrastructure

development in the country.

RAM4Y founded in the year &3 by its founder and present Chairman and

9anaging 4irector 9r. Alla Ayodhya +ami +eddy a post graduate in civil engineering

with vast experience and exposure into civil and environmental infrastructure has grown

in a short span into a specialist multi'disciplinary organization focused in the areas of

Civil #nvironmental and ;aste 9anagement Infrastructure with specific emphasis on

the 6ublic 6rivate 6artnership 6ro!ects.

4uring the early years &3 J &7 the group focused in the areas of

environmental consultancy and construction of water and wastewater treatment plants/

effluent treatment plants for private industrial houses along with supply of this

equipment to various locations in the country.


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progress. ;hile environmental legislations in India are at par with the developed

countries their implementation is far from being acceptable. As of date a large portion of

environmental infrastructure is coming up owing to !udicial intervention and pressure

created from environmentalists. "owever today the growth rates of the sector are much

faster than a few years back.

4espite the slow growth rates in the sector +amky has been able to create a

leadership in the areas of ;aste 9anagement and is currently expanding into other areas

of environmental infrastructure as detailed in subsequent sections. As on date ;aste

9anagement forms a significant portion of the Company.

RAM4Y WASTE MANAGEMENT SERVICES :

+amky is a leader and pioneer in all the forms of waste management including

medical waste hazardous waste and municipal solid wastes. +amky has the credit and

distinction of having established the first'of'its'kind a bio'medical waste and hazardous

waste management facilities operating on a common platform in the country at

"yderabad. The group today is the leader in waste management in India with &7 bio'

medical waste management facilities &1 industrial hazardous waste management

facilities and &7 municipal solid waste management facilities located across the country.

The bio'medical waste management facilities operated are integrated facilities

catering to over *** health care establishments and over &7**** beds of inpatient

medical services. The facilities comprise of an incinerator autoclave shredder landfill

transport equipment and supporting infrastructure for effective management of bio'

medical wastes without any impact to the human health and environment. The company

offers high quality un'interrupted services at competitive prices. Bur medical waste

management facilities operate under the banner of


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The hazardous waste management facilities operated are also integrated facilities

being established to cater to over &7*** industrial establishments and over &.7 9illion

Tones of industrial hazardous wastes. The facilities comprise of a secured landfill

facility Hequivalent to :


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CAPITAL BUDGETING


expenditures. A capital expenditure may be defined as an expenditure the benefits ofwhich are expected to be received over period of time exceeding one year. The main

characteristic of a capital expenditure is that the expenditure is incurred at one point of



acquiring or improving or improving the fixed assets the benefits of which are expected

to be received over a number of years in future.


capital budgeting problems in a decentralized multidivisional firm involving no more

than two exchanges of information between headquarters and divisions. "ead quarters

make an allocation of funds to each division based upon its cash demand and its potential

growth rate. #ach division determines which pro!ects to accept. Then an additional

iteration is performed to define the solution



and means of financing and implementing it financing is a rapidly expanding field








step by step analysis of the data to bridging the gap in the organization.

The capital program is generally financed by borrowing money usually through

the sales of bonds. This differs from the company$s expenses budget which covers day'

GUNTUR ENGINEER COLLEGE 1@


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to'day operating expenditures ( is financed by company$s taxes and other revenues

along with other companies in the industry.

The capital budgeting strategy presents the goals policy constraints assumptions

the organization$s capital needs over the next &* years. The document also provides the

anticipated sources of financing and the implications of the strategy including any

possible economic social and environmental effects. After a public hearing and a report

by the organization planning commission or board of directors the final version of the

strategy is released with the executive budget in every year.

The strategy presents capital pro!ects in broad categories that reflect

organization$s agency goals. There are various ways the organization records the

progress of capital pro!ects. In general they measure financial transaction spending and

obligation rather than what most department come about the status of work on a

particular pro!ect. Although information is publicly available on annual capital spending

by budget line no information is currently made publicly available that provides detailed

pro!ect level information on the status of capital pro!ects.

FACTORS FOR CAPITAL BUDGETING:-

Cost of acquisition of permanent asset as land and building plant and machinery

goodwill etc.

Cost of addition expansion Improvement or alteration in the fixed assets.

Cost of replacement of permanent assets.

+esearch and development pro!ect cost etc.

DEFINITIONS OF CAPITAL BUDGETING:-

,Capital budgeting is a long term planning for making and financing proposed

capital outlays-

T6 H%"#%!!"

A budget is an estimate of future needs arranged according to at an orderly basis

covering some or all the activities of an enterprise for a definite period of time-

G!%#! R6 T!%%0

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udget as a financial and/ or quantitative statement prepared to a definite period

of time of the policy to be pursued during that period for the purpose of attaining a given

ob!ective-

I'$a7 L"."SIGNIFICANCE OF CAPITAL BUDGETING:-

Capital budgeting decisions deserve to be treated in a different manner as there

are conceptual problems involved which necessarily makes the decision process more

complex while this makes things more difficult for the decision process maker it also

makes the problem more challenging. There are several practical reasons for placing

greater emphasis on capital expenditure decisions. These are

86 LONG TERM PERIOD:-

The consequences of capital expenditure decisions extended far into future. The

scope of current manufacturing activities of a organization is governed largely by capital

expenditures in the past. 2ikewise current capital expenditures decision provides the

frame work for future activities. Capital investment decisions have an enormous bearing

on the basic character of a organization.

96 IRREVESIBILITY:-

The markets are used for capital equipment in general is ill'organized. %urther

for some types of capital equipment custom made to meet specific requirements the

market may virtually be non'existent.

6 SUBSTANCIAL OUTLAY:-

Capital expenditure usually involves substantial outlays. An integrated steel plantfor example involves an outlay of several thousand millions. Capital costs tend to

increase with advanced technology.



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NEED OF CAPITAL BUDGETING:-

The importance of capital budgeting can be well understood from the fact that

unsound investment decision may prove to be fatal to the very existence of the concern.

The need significance or importance of capital budgeting arises mainly due to the

following

2arge investments

2ong'term commitment of funds

Irreversible nature

2ong'term effect on profitability

4ifficulties of investment decisions

5ational importance.

FEATURES OF CAPITAL BUDGSTING PROCESS:-

6otentiality large anticipated benefits.

A relative high degree of risk.

A relative long time period between the initial outlay and anticipated returns.

OBJECTIVES FOR CAPITAL BUDGETING:-

It determines the capital pro!ects on which work can be started during the budget

period after taking into account their urgency and the expected rate of return on

each pro!ect.

It estimates the expenditure that would have to be incurred on capital pro!ects

approved by the management together with the sources from which the required

funds would be obtained.

It restricts the capital expenditure on pro!ects with in authorized limits.

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4INDS OF CAPITAL BUDGETING:-

Capital budgeting refers to the total process of generating evaluating selecting

and following up an capital expenditure alternatives. The firm allocates or budgets

financial recourses to new investment proposals. asically the firm may be confronted

with three types of capital budgeting decisions0'

The accept or re!ect decision

The mutually exclusive choice decisions and

The capital rationing decision

TYPES OF CAPITAL BUDETING DECISIONS:-

Capital budgeting decisions are of paramount importance in financial decision

making. In first place they affect the profitability of the firm. They also have a bearing on

the competitive position of the firm because they relate to fixed assets. The fixed assets

are true goods than can ultimately be sold for'profit. 8enerally the capital budgeting of

investment decision includes addition disposition modification and replacement of

fixed assets.

E;PANSION OF E;ISTING BUSINESS:-

A company may add capacity to its existing product lines to expand existing

operations. %or example harathi soap works H6#< B% CA6ITA2:48#TI58

#U6A5


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E;PANSION OF NEW BUSINESS:-

A %irm may expand its activities in a new business expansion of a new business

requires investment and new kind of production activating with in the firm. If packing

manufacturing company invests in a new plant and machinery to produce ball bearings

which the firm has not manufactured before this represents expansion of new business

or unrelated diversification.


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DIAGRAMATIC REPRESENTATION OF CAPITAL BUDGETING:-


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88)EVALUTION OF VARIOUS PROPOSALS:-

The next steps in capital budgeting process in to evaluate the probability of

various probability the independent proposals are those which do not complete with one

another and the same way be either accepted or re!ected on the basic of a minimum

return on investment required.

89) FI;ING PRIORITIES:-

After evaluating various proposals the unprofitable or uneconomic proposals

may be re!ected straight away. ut it may not be possible for the organization to invest

immediately in all the acceptable proposals due to limitations of funds. "ence it is very

essential to rank the various proposals and to establish priorities after considering

urgency risk ( profitability involved the criteria.

8) FINAL APPROVAL:-

6roposals meeting the evaluation and other criteria are finally approved to be

included in the capital expenditure budget. "owever proposals involving smaller

investment may be decided at the lower levels for expeditious action. The capital

expenditure budget lay down the amount of estimated expenditure to be incurred on

fixed assets during the budget period.

8>) IMPLEMENTING PROPOSALS:-

6reparation of a capital expenditure budgeting ( incorporation of a particular

proposals in the budget does not itself authorize to go ahead with implementation of the

pro!ect. A request for authority to spend the amount should be made to be the capital

expenditure committee which may like to review the profitability of the pro!ect in

changed circumstances. In the implementation of the pro!ects networks techniques such

as 6#+T ( C69 are applied for pro!ect management.



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8?) PERFORMANCE REVIEW:-

In this stage the process of capital budgeting is the evaluation of he performance of

the pro!ect. The evaluation is made through post completion audit by way of comparison

of actual expenditure on the pro!ect with the budgeted one and also by comparing the

actual return from the investment with the anticipated return. The unfavorable variances

if any should be looked into and the causes the same be identified so that identified so

that corrective action may be taken in future.

8@) FEEDBAC4:-

The last step in the capital budgeting process is feedback from employee

involved in the organization. If any consequences are there the process come to & ststep of

the process.

GUIDELINE FOR CAPITAL BUDGETING:-

There are many guidelines for capital budgeting process either it is long'term or

short' term plan. The ma!or points are0

5eed and ob!ectives of owner


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COMMITTEE IN CAPITAL BUDGETING:-

CAPITAL COMMITMENT PLAN:-

The progress of pro!ects included in the capital budget a capital commitment

plan is issued three times a year. The commitment plan lays out the anticipated

implementation schedule for there current fiscal and the next three years. The first

commitment plan is published within *days of the adoption of the capital budget.

:pdated commitment plans are issued in Danuary ( April along with the company$s

budget proposals.

The commitment plan translates the appropriations approved under the adopted

capital budget into schedule for implementing individual pro!ects. The fact that funds are

appropriated for a pro!ect in the capital budget does not necessarily mean that work will

start or be completed that fiscal year. "e choice of priorities and timing of pro!ects is

decided by office management ( budget in consultation with the agencies along with

considerations of how much the managing director thinks the organization can afford to

append on capital pro!ects overall.

The capital commitment plan lays out the anticipated implemented schedule for

capital pro!ects and is one source of information on how far along pro!ects are although

GUNTUR ENGINEER COLLEGE

C"I#%#U#C:TI

#

6+B4:CTIB59A5A8#+


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not a consistent or always useful one. The adopted commitment plan is usually published

in


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DIFFICULTIES OF CAPITAL BUDGETING:-

;hile capital expenditure decisions are extremely important they also pose

difficulties which stem from three principal sources0

Identifying ( measuring the costs ( benefits of a capital expenditure proposal

tends to be difficult

There is great deal of uncertainty for capital expenditure decision which involves

cost ( benefits that extend far into the future

It is impossible to product exactly what will happen in the future

The time period creates some problems in estimating discount rates (

establishing equivalences.

LIMITATIONS OF CAPITAL BUDGETING:-

Capital budgeting techniques suffer from the following limitations0

=E All the techniques of capital budgeting presume that various investment

proposals under consideration are mutually exclusive which may not practically

be true in some particular circumstances.

@E The techniques of capital budgeting require estimation of future cash inflows and

outflows. The future is always uncertain and the data collected for future may not

be exact. Bbliviously the results based upon wrong data may not be good.

?E There are certain factors like morale of the employees goodwill of the firm etc.

which cannot be correctly quantified but which other wise substantially influence

the capital decision.

E :rgency is another limitation in the evaluation of capital investment decisions.

&*E :ncertainty and risk pose the biggest limitation to the techniques of capital

budgeting.

COST EFFECTIVE ANALYSIS:-

In the cost effectiveness analysis the pro!ect selection or technological choice

only costs of two or more alternatives choices are considering treating the benefits as

identical. This approach is used when the acquisition of how to minimize the costs for



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undertaking an activity at a given discount rates in case the benefits and operating costs

are given one can minimize the capital cost to obtain given discount.

PROJECT PLANNING:-

The planning of a pro!ect is a technically pre'determined set of inter related

activities involving the effective use of given material human technological and

financial resources over a given period of time. ;hich in association with other

development pro!ects result in the achievement of certain predetermined ob!ectives such

as the production of specified goods and servicesF

6ro!ect planning is spread over a period of time and is not a one shot activity. The

important stages in the life of a pro!ect are0

It$s identification

It$s initial formulation

It$s evaluation

It$s final formulation

It$s implementation

It$s completion and operation

The time taken for the entire process is the gestation period of the pro!ect. The

process of identification of a pro!ect begins when we are seriously trying to overcome

certain problems. They may be non'utilization to overcome available funds plant

capacity expansion etc.

CONTENTS OF THE PROJECT REPORT:-

+aw material

9arket and marketing


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;ork schedule

CRITERIA FOR CAPITAL BUDGETING:-

6otentially there is a wide array of criteria for selecting pro!ects.


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6ay back period

C

Co

inflowscashAnnual

investmentInitial

oC Initial investment

C Annual cash inflows

In the case of unequal cash inflows the pay back period can be found out by

adding up the cash inflow until the total is equal to the initial cash outlay.

(/) A''3"&"# Ra! 2 R!3%" (ARR)

The accounting rate of return HA++E also known as the return on investment

H+BIE uses accounting information as revealed by financial statements to measure to

profitability of an investment. The accounting rate of return is the ratio of the average

after fax profit divided by the average investment. The average investment would be

equal to half of the original investment if it were depreciated constantly.

A + + &**investmentAverage

IncomeAverage

D&s'3"&"# Cas F*1 C%&!%&a

(a) N! P%!s!" ,a*3! (NPV)

The 56 present value H56E method is the classic method of evaluating the

investment proposals. If is a 4C% technique that explicitly recognizes the time value at

different time periods differ in value and comparable only when their equipment present

values J are found out.

5.6. *nn

1

1

)

)&

kEH&

C.........

kEH&

C

kEH&

C

kEH&

CC

+

++

++

++

+

56 =

+

n

i

oC

k

C

*&

&

E&H

;here

56 5et present value

fiC Cash flows occurring at time

k the discount rate

GUNTUR ENGINEER COLLEGE 7)


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n life of the pro!ect in years

*C Cash outlay

(/) I"!%"a* Ra! 2 R!3%" (IRR)

The internal rate of return HI++E method is another discounted cash flow

technique which takes account of the magnitude and thing of cash flows other terms

used to describe the I++ method are yield on an investment marginal efficiency of

capital rate of return over cost time J ad!usted rate of internal return and soon.

56 = +

++

+

n

*in&

fi

Ek&H

;C


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In the evaluation process or capital budgeting techniques there will be a criteria to

accept or re!ect the pro!ect. The criteria will be expressed as0

Criterian/9ethod Accept +e!ect Indifferent

6ay ack 6eriod H66E LTarget 6eriod MTarget 6eriod Target period

Accounting +ate of+eturn HA++E

M Target +ate L Target +ate Target rate

5et 6resent alue H56E M * L * *

Internal +ate of +eturn

HI++E

MCost Bf Capital LCost Bf Capital cost of capital

6rofitability index H6IE M & L & &



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DATA ANALYSIS INTERPRETATION

A pro!ect is an activity sufficiently self'contained to permit financial and

commercial analysis. In most cases pro!ects represent expenditure of capital funds by

pre'existing which they want to expand or improve their operation.

In general a pro!ect is an activity in which we will spend money in expansion of

returns which logically seems to lead self planning. %inancing and implementations as a

unit is a specific activity with a specific point and a specific ending point intended to

accomplish a specific ob!ective of the study

Capital budgeting has its going in the natural recourse and infrastructures sectors.

The current demand for infrastructures and capital investments is being fueled by

deregulation in the ,FMCG- H%ast 9oving Consumer 8oodsE telecommunication (

transportation sectors by the globalization of product markets and the needs from

manufacturing scale and by the privatization of government owned entities in developed

( developing countries

NON DCF CRITERIA:

5a PA% BAC( PERIOD5PBP:-

>#A+4#6+#CIATIB5

H+


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56 A$ERAGE RATE OF RETURN 5ARR:-

>#A+ I5CB9# 4#6+#CIATIB5 CA


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Average profit ?

17@7&?7.

@ 3=??.)3

Average investment )

3=*???= )1 *3331

A++ &**)1*3331

3@3=??.)

*.1)3& V &** 1).3&

+BI &**investmentInitial

profitAverage

3=*???=

3@3=?A?.)V &**

*.&=)*7 V &** &=.)&

Cr34er3a or e


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56 INTERNAL RATE OF RETURN:-

>#A+ CA


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>#A+ CA


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Cr34er3a or e


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Dec3;3on:-

6rofitability index of proposed expansion pro!ect is found out to be =.7@G this is

more than the 6I.

GUNTUR ENGINEER COLLEGE =1


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FINDINGS

The calculated payback period is 3years and @months. ut standard payback

period was six years by 9:9AI ;A


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SUGGESTIONS

It has been suggested that the 9:9AI ;A


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CONCLUSION

ased on the study in 9:9AI ;A


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Capital Budget Applicants Questionnaire

&. Is your pro!ect in a county or city that is required to fully plan Haccording to +C;1=.@*A.*3*E under the 8rowth 9anagement ActF If the answer to this question isno you do not have complete any more questions.

YES NO

). Is your pro!ect identified in the host county$s or city$s comprehensive planF YES NO

1. Is your pro!ect identified in the host county$s or city$s capital facilities planF YES NO

3. Is your pro!ect located in an identified urban growth areaF H6lease attach mapshowing pro!ect location and location of urban growth areaE

YES NO

7. If your pro!ect is located in an adopted urban growth area does the pro!ectfacilitate accommodate or attract planned for growthF

YES NO

a. What entity has analyzed the impacts on planned for growth in the host citys or

countys urban growth area for e!ample" your agency" the host jurisdiction" etc.#$

b. Is there a document that contains this informationF If so indicate document andattach the appropriate pages from that documentF If not attach an explanation.

=. If this pro!ect is located outside an urban growth area will this pro!ect create

pressures for additional developmentF

YES NO

a. ;hat entity has analyzed the impacts on planned for growth outside the urbangrowth area Hfor example your agency the host !urisdiction etc.EF

b. Is there a document that contains this informationF If so indicate documentand attach appropriate pages that contains this analysis. If not attach anexplanation.

@. "as there been coordination among the governments in the region during thedevelopment of this pro!ectF

YES NO

Is there a document that contains this informationF If so indicate document andattach appropriate pages that contains this analysis. If not attach an explanation.

?. ;hat local and additional funds were leveraged if anyF

. ;ere the environmental outcomes and the reduction of adverse impactsexaminedF

YES NO

BIBILOGRAPHY

GUNTUR ENGINEER COLLEGE =@


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%undamentals of %inancial

9anagement ' #ugene.%.righam

Doel.%."ouston

%inancial 9anagement ' I.9 6andey

%inancial 9anagement ' 6rasanna Chanrdra

%inancial 9anagement ' 9.>.Nhan ( Dain

“capital budgeting” with reference to mumbai waste management limited,

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