PROJECT REPORT

ON

“CAPITAL BUDGETING OF SERVICE INDUSTRY”

SUBMITTED BY:-

RAHUL CHANDRAMOHAN GIRI

T.Y.BMS: SEMESTER – V

T.BMS – 05

INTERNAL GUIDE

PROF. PAYAL VERMA

SUBMITTED TO

UNIVERSITY OF MUMBAI

MAHENDRA PRATAP SHARADA PRASAD SINGH

DEGREE COLLEGE OF ARTS, COMMERCE & SCIENCE, BANDRA (E),

MUMBAI – 400 051.

ACADEMIC YEAR 2017-2018

1
 DECLARATION

I, Rahul Chandramohan Giri student of the M.P.S.P SINGH College of Arts,

Commerce And Science from T.Y.BMS Semester – V (2017-2018) do hereby
declare that I have completed the project entitled “Capital Budgeting Of Service
Industry” as a part of my academic fulfillment.

I further declare that information submitted by me is true and original to the best of
my knowledge and belief.

DATE: _____________

PLACE: MUMBAI

_________________________

SIGNATURE OF STUDENT

(Rahul Chandramohan Giri)

2
 M.P.S.P SINGH DEGREE COLLEGE

OF
ARTS, COMMERCE AND SCIENCE

CERTIFICATE

This is to certify that Rahul Chandramohan Giri of MahendraPratapSharada Prasad

Singh Degree College of Arts, Commerce & Science, Class T.Y.BMS Roll No.
TBMS –05 has completed a project on CAPITAL BUDGETING OF SERVICE
INDUSTRY for the fulfillment of Semester – V. Bachelor of Management
Studies, University of Mumbai.

______________________ ____________________

(INTERNAL EXAMINER) (EXTERNAL EXAMINAR)

PROF. SWETA PATHAK DR. A.K.CHAUDHARY

(BMS CO-ORDINATOR) (PRINCIPAL)

3
 ACKNOWLEDGEMENT

I take this opportunity to express my gratitude to the people who have been
instrumental in the successful completion of this project.

I express special thanks:

I would like to show my greatest appreciation to PROF. PAYAL VERMA. I can’t

say thank you enough for this tremendous support and help. Without his/her
encouragement and guidance this project would have not materialized.

I also wish to express my gratitude to coordinator PROF. SWETA PATHAK for

providing me an opportunity to do my project work.

The special thanks to all the professors of ‘M.P.S.P Singh Degree College of
Arts, Commerce & Science,’for their kind co-operation to the completion of my
project work.

I am also thankful to the Principal DR. A.K. CHOUDHARY for providing

invaluable guidance during my research to the project work.

I am thankful to all my loving friends for their encouragement and support and for
the guidance which gave a proper shape to this project.

I wish to avail myself of this to thank my parents for their manual support,
strength and help for everything.

Last but not least; I am grateful to the University of Mumbai for including such
kind of project work in the curriculum i.e. to widen the horizon of the students and
also act as a source of learning for them.

All the above mentioned people have left a mark on this project and gave me right
path. I will always be indebted to them.

4
 TABLE OF CONTENTS

SR.NO PARTICULARS PAGE NO.

1. Introduction To Capital Budgeting. 4-10

1.1 Introduction 5

1.2 Meaning 6

1.3 Definition 7

1.4 Objective of capital budgeting 8

1.5 Important 9

1.6 conclusion 10

2 Technique Of Capital Budgeting 11-19

2.1 Introduction 12-13

2.2 Traditional Capital Budgeting Techniques 14-16

2.3 Modern Capital budgeting techniques 17-19

2.4 conclusion 19

3 Net Present Value (NPV) 20-29

3.1 Introduction 21

3.2 Steps involved in Calculation of Net Present 22-23

Value

3.3 Merits & Demerits of Net Present Value Metho 24-25

5
SR.NO PARTICULARS PAGE NO.

3.4 Strengths & Weaknesses Of Net 26

Present Value (NPV)

3.5 Assumptions & Example 27-28

3.6 conclusion 29

4 Capital budgeting under Risk & uncertainty 30-44

4.1 Introduction 31-32

4.2 Risk adjusted discount rate 33-34

4.3 Certainty Equivalent Apperoach 35-38

4.4 Scenario Analysis 39-41

4.5 Sensitivity analysis 42

4.6 Simulation 43

4.7 conclusion 44

5 Decision Tree Analysis 45-54

5.1 Introduction 46

5.2 Decision tree building blocks 47-52

5.3 Advantages and disadvantages 53

5.4 conclusion 54

6
SR.NO PARTICULARS PAGE NO.

6 Sensitivity Analysis 55-68

6.1 Meaning 56

6.2 Introduction 56

6.3 Settings and constraints 57

6.4 Core methodology 58-62

6.5 Applications of Sensitivity Analysis 63-66

6.6 Sensitivity auditing 67

6.7 conclusion 68

7 Case study 69-73

8 Conclusion 74-75

9 Bibliography 75-77

7
CHAPTER 1
INTRODUCTION TO
CAPITAL BUDGETING .

8
1.1 Introduction-
A capital investment involves large expenditure to purchase
fixed assets like machinery etc. Such investments is expected to give benefits for
many year in future. This is a crucial task for the management. This amount
involved are large and the effects of investment will last for long periods. Such
decision cannot be changed easily. Some examples of capital investment decision
are;

1) Purchase of equipment or land & buildings in order to expand or to diversify

into a new line of business.
2) Replacement of a manual process with a mechanized one.
3) Choosing between alternative machine.
4) Expenditure for a research and development programme.
5) Expenditure for an advertising campaign.

9
1.2 Meaning-
Capital budgeting refers to the process of evaluating the
investment opportunites. Capital budgeting involves planning of the capital
investment decisions. Capital budgeting considers both capital outlays as
well as their financing. Some definitions of capital budgeting given by
different authorities are reproduced below.
Capital budgeting is the process in which a business
determines and evaluates potential expenses or investments that are large in
nature. These expenditures and investment include projects such as building
a new plant or investing in a long-term venture. Often times, a prospective
project’s lifetime cash inflows and outflows are assessed in order to
determine whether the potential returns generated meet a sufficient target
benchmark, also known as “investment appraisal”.

10
1.3 Definitions-
a) “ The term capital budgeting generaly refers to acquiring inputs with
long-run returns.”
_ Richards & Greenland.

b) “ Capital budgeting is long-term planning for making and financing

proposed capital outlay.”
_Charles.T. Norngreen.

c) “ Capital budgeting consists of planning for making & development of

available capital for the purpose of maximizing the long term profitability of
the firm.”
_R .M. Lunch.

d) “ Capital budget is essentially a list of what management believes to be

worthwhile projects for the acquisition of new capital assets together with
the estimated cost of each product.”
_Robert N. Anthony

11
1.4 Objectives of Capital budgeting-

a) To know the expenditure involved is relatively large. Wrong decision may

have serious consequences.
b) To know the period over which the benefit will be received is quite long.
Hence, a business has to suffer for any mistake for a considerable period.
c) To know the benefit will arise in future the outcome of decisions is
uncertain the further into the future that planue are made the more uncertain
are the results.
d) To know the capital budgeting decision are very crucial to existence,
growth and stability of a concern, such decision are usually taken at the
highest level of the management.
e) To know the capital budgeting decisions are irreversible in nature. It is
often difficult,if not impossible, to reverse a capital budgeting decision
involving a huge investment, without considerable financial loss to the
concern.

12
 1.5 IMPORTANCE OF CAPITAL BUDGETING

1) Long term investments involve risks: Capital expenditures are long

term investments which involve more financial risks. That is why proper planning
through capital budgeting is needed.

2) Huge investments and irreversible ones: As the investments are huge

but the funds are limited, proper planning through capital expenditure is a pre-
requisite. Also, the capital investment decisions are irreversible in nature, i.e. once
a permanent asset is purchased its disposal shall incur losses.

3) Long run in the business: Capital budgeting reduces the costs as well as
brings changes in the profitability of the company. It helps avoid over or under
investments. Proper planning and analysis of the projects helps in the long run.

13
1.6 Conclusion-

Capital budgeting means a decision relating to planning for

capital assets (e.g. purchase of a new machine or setting up of a factory ) as to
whether or not money should be invested in the long-term projects. Capital
budgeting involves a financial analysis of the various alternative proposals
regarding a capital expenditure and to select / choose the best out of the several
alternatives.

14
CHAPTER 2
TECHNIQUE OF CAPITAL
BUDGETING

15
2.1 Introduction-
A number of capital budgeting techniques are used in practice. Such capital
budgeting techniques may be grouped in the following two categories:
1) Capital budgeting techniques under certainty; and
2) Capital budgeting techniques under uncertainty.
An investment proposal is evaluated by comparing cash
inflows with cash outflows. Different methods or techniques make such
comparison in different ways. It should be kept in mind that a method or
technique is only a tool for decision- making. There is no one best
technique for taking a capital investment decision. Hence, different firms
may use different techniques, depending upon the circumstances of each
case. A large concern may use more than one technique to evaluate each
of its investment projects, while a small concern may use only one
technique which involves minimum cost and time.

1) Traditional Capital budgeting techniques .

2) Modern Capital budgeting techniques.

16
17
2.2 Traditional Capital Budgeting Techniques :
There are
different methods adopted for capital budgeting. The traditional methods
or non discount methods include : Payback period and Accounting rate
of return method. The discounted cash flow method includes the NPV
method, profitability index method and IRR.

I. Pay Back Period=As the name suggest this method refers to the period
in which the proposal will generate cash to recover the initial investment
made. It purely emphasize on the cash inflow, economic life of the
project and the investment made in the project, with no consideration to
time value of money. Through this method selection of proposal is based
on the earning capacity of the project ,with no consideration to time
value of money. Through this selection of proposal is based on the
earning capacity of the project. With simple calculation, selection or
rejection of the project can be done, with result that will help auge the
risk the risk involved. However, as the method is based on thumb rule, it
does not consider the important of time value of money and so the
relevant dimensions of profitability.

Payback period = cash outlay (investment) /

Ann

18
Example:

Project A Project B

Cost 1,00,000 1,00,000

Expected future cash flow

Year 1 50,000 1,00,000

Year 2 50,000 5,000

Year 3 1,10,000 5,000

Year 4 None None

TOTAL 2,10,000 1,10,000

Payback 2 years 1 year

19
 II. Accounting rate of return method (ARR):

This method helps to overcome the disadvantages of the payback period method.
The rate of return is expressed as a percentage of the earnings of the investment in
a particular project. It works on the criteria that any project having ARR higher
than the minimum rate established by the management will be considered and
those below the predetermined rate are rejected.

This method takes into account the entire economic life of a project providing a
better means of comparison. It also ensures compensation of expected profitability
of projects through the concept of net earnings. However, this method also ignores
time value of money and doesn’t consider the length of life of the projects. Also it
is not consistent with the firm’s objective of maximizing the market value of
shares.

ARR= Average income/Average Investment

 Discounted cash flow method:

The discounted cash flow technique calculates the cash inflow and outflow through
the life of an asset. These are then discounted through a discounting factor. The
discounted cash inflows and outflows are then compared. This technique takes into
account the interest factor and the return after the payback period.

20
 2.3 Modern Capital budgeting techniques :
is the planning
process used to determine whether an organization's long term
investments such as new machinery, replacement of machinery, new
plants, new products, and research development projects are worth the
funding of cash through the firm's capitalization structure (debt, equity
or retained earnings).

2.3.1 Net present Value (NPV) Method:

This is one of the widely used methods for evaluating capital investment proposals.
In this technique the cash inflow that is expected at different periods of time is
discounted at a particular rate. The present values of the cash inflow are compared
to the original investment. If the difference between them is positive (+) then it is
accepted or otherwise rejected. This method considers the time value of money and
is consistent with the objective of maximizing profits for the owners. However,
understanding the concept of cost of capital is not an easy task.

The equation for the net present value, assuming that all cash outflows are made in
the initial year (tg), will be:

Where A1, A2…. represent cash inflows, K is the firm’s cost of capital, C is the
cost of the investment proposal and n is the expected life of the proposal. It should
be noted that the cost of capital, K, is assumed to be known, otherwise the net
present, value cannot be known.

NPV = PVB – PVC

21
where,

PVB = Present value of benefits

PVC = Present value of Costs

III. Internal Rate of Return (IRR):

This is defined as the rate at which the net present value of the investment is zero.
The discounted cash inflow is equal to the discounted cash outflow. This method
also considers time value of money. It tries to arrive to a rate of interest at which
funds invested in the project could be repaid out of the cash inflows. However,
computation of IRR is a tedious task.

It is called internal rate because it depends solely on the outlay and proceeds
associated with the project and not any rate determined outside the investment.

It can be determined by solving the following equation:

If IRR > WACC then the project is profitable.

If IRR > k = accept

If IR < k = reject

22
 IV. Profitability Index (PI):

It is the ratio of the present value of future cash benefits, at the required rate of
return to the initial cash outflow of the investment. It may be gross or net, net
being simply gross minus one. The formula to calculate profitability index (PI) or
benefit cost (BC) ratio is as follows.

PI = PV cash inflows/Initial cash outlay A,

PI = NPV (benefits) / NPV (Costs)

2.4 Conclusion:
According to the definition of Charles T. Hrongreen, “Capital Budgeting is a long-
term planning for making and financing proposed capital outlays.”

One can conclude that capital budgeting is the attempt to determine the future .

23
CHAPTER 3
NET PRESENT VALUE

(NPV)

24
3.1 Introduction

The time value of money is taken into consideration by NPV method and
attempts to calculate the return on investment by introducing the time element factor. It
recognizes the fact that a penny earned today is worth more than the same penny earned
tomorrow.

The present values of all cash inflows and cash outflows are calculated separately over
the entire life of the project by considering the firm’s cost of capital or a predetermined
rate. The difference of present value of cash inflow over the present value of cash
outflows is considered as net present value.

The following is the formula for calculating NPV:

where

Ct = net cash inflow during the period t

Co = total initial investment costs

r = discount rate, and

t = number of time periods

25
3.2 Steps involved in Calculation of Net Present Value

1. The first step is the determination of expected rate of return. The rate of return is
based on the investment policy of the company and the nature of investment
proposals.

Expected rate of return refers to an amount of profits to be earned or an amount of

savings to be made or an amount of income to be available out of the total capital
employed. It is otherwise called as cost of capital or cut off rate.

2. The second step is the assessment of the cost of the project. Generally, the cost
of the project is paid in the first year itself. If the cost of the project is paid in the
first year itself and there is no cash outflow in the subsequent years the cash
outflow is equal to the present value of cash outflow.

Sometimes there may be cash outflow during the life time of the project i.e. as
maintenance expenses. In this case, the following equation is used to find the
present value of cash outflows.

Where

PVCO = Present Value of Cash Outflow.

CO = Cash Outflow, n = Number of years, C = Cost of Capital, 0 = Initial Period,
1, 2. 3 = I Year, II year and III year respectively.

3. The next step is the assessment of the economic life of the project.

4. Then, the management accountant can find the present value of cash inflows
over the life of the project. If the cash inflows is uniform over the entire life of the
project, the cash inflow is multiplied with the help of the present value of $1
received annually for N years table value.
5. When the cash inflows are not uniform throughout the life of the project. the
following equation is used to find the present value.

26
Where,

PVCI = Present Value of Cash Inflow

CI = Cash Inflows, C = Cost of Capital, n = Number of years, 1, 2, 3 = I year, II
year and III year respectively.

6. Now, find the difference between the present value of cash inflow and the
present value of cash outflow.

7. If the present value of cash inflow is more than or equal to the present value of
cash outflow, the net present value is positive. Such type of project is acceptable.

8. If the present value of cash inflow is less than the present value of cash outflow,
the net present value is negative. Such type of project should be rejected.

9. If two or more mutually exclusive projects are evaluated, all the projects are
ranked according to the NPV since the amount of investment is equal. A project
which secures first rank should be accepted and all other projects are rejected
automatically.

27
3.3 Merits of Net Present Value Method

The following are the advantages of the Net Present Value Method.

1. It is based on the time value of money.

2. It considers the earnings or savings over the entire life of the project. These earnings or
savings are converted into the present value of money.

3. It helps to make a comparative assessment of different projects.

4. Under this method, the highest net present value project is recommended for
implementation. It leads to maximization of profits to the organization.

5. It can be applied to even and uneven cash inflows patterns.

6. The NPV method is generally preferred by economists. Hawkins and Pearce state that
this method is theoretically unassailable. If one wishes to maximize profits, the use of
NPV always finds the correct decision.

28
3.3 Demerits of the Net Present Value Method

The following are the disadvantages or limitations of the net present value method.

1. This method does not indicate the rate of return which is expected to be earned.

2. This method may fail to give satisfactory answer when the projects are requiring
different levels of amount of investment and with different economic life of the
projects.

3. The application or usage of this method requires the knowledge of rate of cost of
capital. If cost of capital is unknown, this method cannot be used.

4.The NPV method leads to confusing and contradictory answers in ranking of

complicated projects.

5.Determining an appropriate discount rate is difficult in this method.

6. This method cannot be used for finding the number of years required to recoup
the capital expenditure i.e. project amount.

29
3.4 Strengths Of Net Present Value (NPV)

1. NPV gives important to the time value of money.

2.In the calculation of NPV, both after cash flow and before cash flow over
the life span of the project are considered.

3. Profitability and risk of the projects are given high priority.

4. NPV helps in maximizing the firm's value.

3.4 Weaknesses Of Net Present Value (NPV)

1. NPV is difficult to use.

2. NPV can not give accurate decision if the amount of investment of

mutually exclusive projects are not equal.

3. It is difficult to calculate the appropriate discount rate.

4. NPV may not give correct decision when the projects are of unequal life.

30
3.5 Assumptions:
The net present value method is based on two assumptions. These are:

1. The cash generated by a project is immediately reinvested to

generate a return at a rate that is equal to the discount rate used in
present value analysis.
2. The inflow and outflow of cash other than initial investment occur at
the end of each period.

31
3.5 Example
A project requires an initial investment of $225,000 and is expected to generate the following net
cash inflows:

Year 1: $95,000

Year 2: $80,000

Year 3: $60,000

Year 4: $55,000

Required: Compute net present value of the project if the minimum desired rate of return is
12%.

Solution:

The cash inflow generated by the project is uneven. Therefore, the present value would be
computed for each year separately:

*Value from “present value of $1 table“.

The project seems attractive because its net present value is positive.

32
3.6 Conclusion
Net present value method calculates the present value of the cash flows based on the
opportunity cost of capital and derives the value which will be added to the wealth of the
shareholders if that project is undertaken.

Let us discuss each of these methods in comparison with net present value (NPV) to
reach the conclusion.

33
CHAPTER 4
Capital budgeting under Risk
& uncertainty

34
4.1 Introduction

It was assumed that those investment proposals did not

involve any kind of risk, i.e., whatever the proposal is undertaken, there
would not be any change in the business risk which are apprehended by the
suppliers of capital. Practically, in real world situation, this seldom
happens.

We know that decisions are taken on the basis of forecast which again
depends on future events whose happenings cannot be
anticipated/predicted with absolute certainly due to some factors, e.g.,
economic, social, political etc. That is why question of risk and uncertainty
appear before the business world although it varies from one investment
proposal to another.

35
 Risk in Capital
Budgeting

Certainty
Risk adjusted discount Equivalent
rate Apperoach

Scenario Sensitivity Simulation

Analysis Analysis Analysis

36
4.2 Risk adjusted discount rate

The risk-adjusted discount rate is the total of the risk-free

rate, i.e. the required return on risk-free investments, and the market premium, i.e.
the required return of the market. Financial analysts use the risk-adjusted discount
rate to discount a firm’s cash flows to their present value and determine the risk
that investor should accept for a particular investment.

The difference between the market premium, which is often used as a discount
rate in valuation analysis is that the risk-adjusted discount rate takes into
consideration the future market conditions, the level of inflation and the value of
money at the end of the investment horizon.

Let’s look at an example.

37
4.2.1 Example
A leading technology company is considering undertaking a 4-year project
that requires an invested capital of $100,000 and is expected to return 18% or
$118,000 at maturity.

The present value of the project is:

Since the present value of the expected cash flows is lower than the invested
capital, the manager wants to calculate the present value of the expected
cash flows using the risk-adjusted discount rate 3% that will generate
$103,000 and reflects all the risks involved.

The present value of the project using the risk-adjusted discount rate is:

By using the risk-adjusted discount rate, the present value of the expected
cash flows is almost equal to the invested capital of $100,000. However, with
the adjustment of the discount rate to reflect all the risks of the project, the
present value of cash flows is still lower than the invested capital. Therefore,
the project should not be undertaken.

38
4.3 Introduction of 'Certainty Equivalent' Approach
The certainty
equivalent is a guaranteed return that someone would accept rather than taking a
chance on a higher, but uncertain, return. To put it another way, the certainty
equivalent is the guaranteed amount of cash that would yield the same exact
expected utility as a given risky asset with absolute certainty.

Certainty equivalent cash flow is the risk free cash flow which an
investor considers equivalent to a higher but risky expected cash flow

Certainty equivalent cash flow is calculated using the following formula:

Expected Cash Flow

Certainty Equivalent Cash Glow =
1 + Risk Premium

Where risk premium is the excess of risk-adjusted discount rate over the risk free
rate.

39
4.3.1 BREAKING DOWN 'Certainty Equivalent'
Investments must pay a
risk premium to compensate investors for the possibility that they may not get their
money back. If an investor has a choice between a U.S. government bond paying
3% interest and a corporate bond paying 8% interest, and he chooses the
government bond, the payoff is the certainty equivalent. The company would need
to offer this particular investor a potential return of more than 8% on its bonds to
convince him to buy. A company seeking investors can use the certainty equivalent
as a basis for determining how much more it needs to pay to convince investors to
consider the riskier option. The certainty equivalent varies because each investor
has a unique risk tolerance

40
4.3.2 Certainty Equivalent and Cash Flow
The idea of certainty equivalent can also
be applied to cash flow. The certainty equivalent cash flow is the risk-free cash
flow that an investor or manager considers equal to a different expected cash flow
which is higher, but also riskier. The formula for calculating the certainty
equivalent cash flow is as follows:

Certainty equivalent cash flow = expected cash flow / (1 + risk premium)

The risk premium is calculated as the risk-adjusted rate of return minus the risk-
free rate. The expected cash flow is calculated by taking the probability-weighted
dollar value of each expected cash flow and adding them up.

For example, imagine that an investor has the choice to accept a guaranteed $10
million cash inflow or an option with the following expectations:

1. A 30% chance of receiving $7.5 million

2. A 50% chance of receiving $15.5 million

3. A 20% chance of receiving $4 million

Based on these probabilities, the expected cash flow of this scenario is:

Expected cash flow = (30% x $7.5 million) + (50% x $15.5 million) + (20% x $4
million) = $10.8 million

Assume the risk-adjusted rate of return used to discount this option is 12% and the
risk-free rate is 3%. Thus, the risk premium is (12% - 3%), or 9%. Using the above
equation, the certainty equivalent cash flow is:

Certainty equivalent cash flow = $10.8 million / (1 + 9%) = $9.908 million.

Based on this, if the investor prefers to avoid risk, he should accept any guaranteed
option worth more than $9.908 million.

41
4.3.3 Example
A risk-adjusted rate of return of 13% was used to discount the
uniform expected annual net cash flows of $2.3 million. The project had a useful
life of 15 years and relevant risk free rate was 5%.

Solution

Risk Premium
= Risk Adjusted Rate of Return − Risk Free Rate
= 13% − 5%
= 8%

Certainty Equivalent Cash Flow

= $2.3 million ÷ (1 + 8%)
= $2.13 million

42
 4.4 Introduction of Scenario analysis
is a process of analyzing possible future events by considering
alternative possible outcomes (sometimes called "alternative worlds"). Thus,
scenario analysis, which is one of the main forms of projection, does not try to
show one exact picture of the future. Instead, it presents several alternative future
developments. Consequently, a scope of possible future outcomes is observable.
Not only are the outcomes observable, also the development paths leading to the
outcomes. In contrast to prognoses, the scenario analysis is not based on
extrapolation of the past or the extension of past trends. It does not rely on
historical data and does not expect past observations to remain valid in the future.
Instead, it tries to consider possible developments and turning points, which may
only be connected to the past. In short, several scenarios are fleshed out in a
scenario analysis to show possible future outcomes. Each scenario normally
combines optimistic, pessimistic, and more and less probable developments.
However, all aspects of scenarios should be plausible. Although highly discussed,
experience has shown that around three scenarios are most appropriate for further
discussion and selection. More scenarios risks making the analysis overly
complicated.[1][2]

43
4.4.1 Principle
Scenario-building is designed to allow improved decision-making by allowing
consideration of outcomes and their implications.

Scenario analysis can also be used to illuminate "wild cards." For example,
analysis of the possibility of the earth being struck by a meteor suggests that whilst
the probability is low, the damage inflicted is so high that the event is much more
important (threatening) than the low probability (in any one year) alone would
suggest. However, this possibility is usually disregarded by organizations using
scenario analysis to develop a strategic plan since it has such overarching
repercussion

44
4.4.2 Financial

In economics and finance, a financial institution might use scenario analysis to

forecast several possible scenarios for the economy (e.g. rapid growth, moderate
growth, slow growth) and for financial market returns (for bonds, stocks and cash)
in each of those scenarios. It might consider sub-sets of each of the possibilities. It
might further seek to determine correlations and assign probabilities to the
scenarios (and sub-sets if any). Then it will be in a position to consider how to
distribute assets between asset types (i.e. asset allocation); the institution can also
calculate the scenario-weighted expected return (which figure will indicate the
overall attractiveness of the financial environment). It may also perform stress
testing, using adverse scenarios.[3]

Depending on the complexity of the problem, scenario analysis can be a

demanding exercise. It can be difficult to foresee what the future holds (e.g. the
actual future outcome may be entirely unexpected), i.e. to foresee what the
scenarios are, and to assign probabilities to them; and this is true of the general
forecasts never mind the implied financial market returns. The outcomes can be
modeled mathematically/statistically e.g. taking account of possible variability
within single scenarios as well as possible relationships between scenarios. In
general, one should take care when assigning probabilities to different scenarios as
this could invite a tendency to consider only the scenario with the highest
probability.

45
4.5 Sensitivity analysis
is the study of how the uncertainty in the output of a
mathematical model or system (numerical or otherwise) can be apportioned to
different sources of uncertainty in its inputs. A related practice is uncertainty
analysis, which has a greater focus on uncertainty quantification and propagation
of uncertainty; ideally, uncertainty and sensitivity analysis should be run in
tandem.

The process of recalculating outcomes under alternative assumptions to determine

the impact of a variable under sensitivity analysis can be useful for a range of
purposes, including:

 Testing the robustness of the results of a model or system in the presence of

uncertainty.
 Increased understanding of the relationships between input and output
variables in a system or model.
 Uncertainty reduction, through the identification of model inputs that cause
significant uncertainty in the output and should therefore be the focus of
attention in order to increase robustness (perhaps by further research).
 Searching for errors in the model (by encountering unexpected relationships
between inputs and outputs).
 Model simplification – fixing model inputs that have no effect on the output,
or identifying and removing redundant parts of the model structure.
 Enhancing communication from modelers to decision makers (e.g. by
making recommendations more credible, understandable, compelling or
persuasive).

46
4.6 Simulation
is the imitation of the operation of a real-world process or system
over time. The act of simulating something first requires that a model be
developed; this model represents the key characteristics, behaviors and functions of
the selected physical or abstract system or process. The model represents the
system itself, whereas the simulation represents the operation of the system over
time.

Simulation is used in many contexts, such as simulation of technology for

performance optimization, safety engineering, testing, training, education, and
video games. Often, computer experiments are used to study simulation models.
Simulation is also used with scientific modelling of natural systems or human
systems to gain insight into their functioning, as in economics. Simulation can be
used to show the eventual real effects of alternative conditions and courses of
action. Simulation is also used when the real system cannot be engaged, because it
may not be accessible, or it may be dangerous or unacceptable to engage, or it is
being designed but not yet built, or it may simply not exist.

47
4.7 Conclusion

is the imitation of the operation of a real-world process or system

over time. The act of simulating something first requires that a model be
developed; this model represents the key characteristics, behaviors and functions of
the selected physical or abstract system or process. The model represents the
system itself, whereas the simulation represents the operation of the system over
time.

Simulation is used in many contexts, such as simulation of technology for

performance optimization, safety engineering, testing, training, education, and
video games. Often, computer experiments are used to study simulation models.
Simulation is also used with scientific modelling of natural systems or human
systems to gain insight into their functioning, as in economics. Simulation can be
used to show the eventual real effects of alternative conditions and courses of
action. Simulation is also used when the real system cannot be engaged, because it
may not be accessible, or it may be dangerous or unacceptable to engage, or it is
being designed but not yet built, or it may simply not exist.

48
CHAPTER 5
(Decision Tree Analysis)

49
5.1 Introduction

A decision tree is a decision support tool that uses a tree-like

graph or model of decisions and their possible consequences, including chance
event outcomes, resource costs, and utility. It is one way to display an algorithm
that only contains conditional control statements.

Decision trees are commonly used in operations research, specifically in decision

analysis, to help identify a strategy most likely to reach a goal, but are also a
popular tool in machine learning.

A decision tree is a flowchart-like structure in which each internal

node represents a "test" on an attribute (e.g. whether a coin flip comes up heads or
tails), each branch represents the outcome of the test, and each leaf node represents
a class label (decision taken after computing all attributes)

50
5.2 Decision tree building blocks
Decision trees, influence diagrams, utility
functions, and other decision analysis tools and methods are taught to
undergraduate students in schools of business, health economics, and public health,
and are examples of operations research or management science methods.

Decision tree building blocks consists of three types of blocks

I. Decision tree elements

II. Decision rules
III. Decision tree using flowchart symbols
IV. Analysis example
V. Influence diagram

51
 I. Decision tree elements

Drawn from left to right, a decision tree has only burst nodes (splitting paths) and
also sink nodes (converging paths). Therefore, used manually, they can grow very
big and are then often hard to draw fully by hand. Traditionally, decision trees
have been created manually — as the aside example shows — although
increasingly, specialized software is employed.

52
 II. Decision rules
The decision tree can be linearized into decision rules, where
the outcome is the contents of the leaf node, and the conditions along the path form
a conjunction in the if clause. In general, the rules have the form:

Decision rules can be generated by constructing association rules with the target
variable on the right. They can also denote temporal or causal relations.

III. Decision tree using flowchart symbols

Commonly a decision tree is drawn
using flowchart symbols as it is easier for many to read and understand.

53
54
IV. Analysis example
Analysis can take into account the decision maker's
(e.g., the company's) preference or utility function, for example:

The basic interpretation in this situation is that the company prefers B's risk and
payoffs under realistic risk preference coefficients (greater than $400K—in that
range of risk aversion, the company would need to model a third strategy, "Neither
A nor B").

55
V. Influence diagram
Much of the information in a decision tree can be
represented more compactly as an influence diagram, focusing attention on the
issues and relationships between events.

The rectangle on the left represents a decision, the ovals represent

actions, and the diamond represents results.

56
5.3 Advantages and disadvantages
I. Among decision support tools, decision trees (and influence diagrams) have
several advantages. Decision trees:
II. Are simple to understand and interpret. People are able to understand
decision tree models after a brief explanation.
III. Have value even with little hard data. Important insights can be generated
based on experts describing a situation (its alternatives, probabilities, and
costs) and their preferences for outcomes.
IV. Allow the addition of new possible scenarios.
V. Help determine worst, best and expected values for different scenarios.
VI. Use a white box model. If a given result is provided by a model.
VII. Can be combined with other decision techniques.

Disadvantages of decision trees:

I. For data including categorical variables with different number of levels,

information gain in decision trees is biased in favor of those attributes
with more levels.
II. Calculations can get very complex, particularly if many values are
uncertain and/or if many outcomes are linked.

57
 5.3 Association rule induction
Decision trees can also be seen as generative
models of induction rules from empirical data. An optimal decision tree is then
defined as a tree that accounts for most of the data, while minimizing the number
of levels (or "questions"). Several algorithms to generate such optimal trees have
been devised, such as ID3/4/5, CLS, ASSISTANT, and CART.

5.4 Conclusions
Decision tree learning is one of the most important
techniques in machine learning and data mining. It is a supervised technique that is
often used when a disjunction of hypothese is required or when dealing (not
exclusively) with categorical attributes.

We build decision trees in order to capture underlying relationships in a datset .

This can help us in classification and prediction as well as in data visualization . It
is preferable largely because of the intuitive tree representations of data that it
produces.
Many possible trees can be built that perfectly classify a given dataset. It is often
preferable to have small trees as they are easier to understand.
Various algorithms exist to construct Decision Trees. All of them need some sort
of criteria for selecting attributes to split data on. We looked at Information Gain,
Gain Ratio and the use of the chi-squared distribution.

58
CHAPTER 6
(Sensitivity Analysis)

59
6.1 Meaning
Sensitivity analysis is the study of how the uncertainty in the output
of a mathematical model or system (numerical or otherwise) can be apportioned to
different sources of uncertainty in its inputs. A related practice is uncertainty
analysis, which has a greater focus on uncertainty quantification and propagation
of uncertainty; ideally, uncertainty and sensitivity analysis should be run in
tandem.

6.2 Introduction

The process of recalculating outcomes under alternative

assumptions to determine the impact of a variable under sensitivity analysis can be
useful for a range of purposes, including:

I. Testing the robustness of the results of a model or system in the presence of

uncertainty.
II. Increased understanding of the relationships between input and output
variables in a system or model.
III. Uncertainty reduction, through the identification of model inputs that cause
significant uncertainty in the output and should therefore be the focus of
attention in order to increase robustness (perhaps by further research).
IV. Searching for errors in the model (by encountering unexpected relationships
between inputs and outputs).
V. Model simplification – fixing model inputs that have no effect on the output,
or identifying and removing redundant parts of the model structure.
VI. Enhancing communication from modelers to decision makers (e.g. by
making recommendations more credible, understandable, compelling or
persuasive).
VII. Finding regions in the space of input factors for which the model output is
either maximum or minimum or meets some optimum criterion (see
optimization and Monte Carlo filtering).
VIII. In case of calibrating models with large number of parameters, a primary
sensitivity test can ease the calibration stage by focusing on the sensitive
parameters. Not knowing the sensitivity of parameters can result in time
being uselessly spent on non-sensitive ones.

60
6.3 Settings and constraints
The choice of method of sensitivity analysis is
typically dictated by a number of problem constraints or settings. Some of the most
common are

I. Computational expense: Sensitivity analysis is almost always

performed by running the model a (possibly large) number of times, i.e. a
sampling-based approach.[10] This can be a significant problem when, A
single run of the model takes a significant amount of time (minutes,
hours or longer). This is not unusual with very complex models.
I. Correlated inputs: Most common sensitivity analysis methods assume
independence between model inputs, but sometimes inputs can be strongly
correlated. This is still an immature field of research and definitive methods
have yet to be established.
II. Nonlinearity: Some sensitivity analysis approaches, such as those based on
linear regression, can inaccurately measure sensitivity when the model
response is nonlinear with respect to its inputs. In such cases, variance-based
measures are more appropriate.
III. Model interactions: Interactions occur when the perturbation of two or
more inputs simultaneously causes variation in the output greater than that of
varying each of the inputs alone. Such interactions are present in any model
that is non-additive, but will be neglected by methods such as scatterplots
and one-at-a-time perturbations.[13] The effect of interactions can be
measured by the total-order sensitivity index.
IV. Multiple outputs: Virtually all sensitivity analysis methods consider a
single univariate model output, yet many models output a large number of
possibly spatially or time-dependent data. Note that this does not preclude
the possibility of performing different sensitivity analyses for each output of
interest. However, for models in which the outputs are correlated, the
sensitivity measures can be hard to interpret.
V. Given data: While in many cases the practitioner has access to the model, in
some instances a sensitivity analysis must be performed with "given data",
i.e. where the sample points (the values of the model inputs for each run)
cannot be chosen by the analyst.

61
 6.4 Core methodology
There are a large number of approaches to performing a
sensitivity analysis, many of which have been developed to address one or more of
the constraints discussed above. They are also distinguished by the type of
sensitivity measure, be it based on (for example) variance decompositions, partial
derivatives or elementary effects. In general, however, most procedures adhere to
the following outline:

I. Quantify the uncertainty in each input (e.g. ranges, probability

distributions). Note that this can be difficult and many methods exist to
elicit uncertainty distributions from subjective data.[15]
II. Identify the model output to be analysed (the target of interest should
ideally have a direct relation to the problem tackled by the model).
III. Run the model a number of times using some design of experiments,[16]
dictated by the method of choice and the input uncertainty.
IV. Using the resulting model outputs, calculate the sensitivity measures of
interest.

62
63
6.4.1 One-at-a-time (OAT/OFAT)

One of the simplest and most common approaches is

that of changing one-factor-at-a-time (OFAT or OAT), to see what effect this
produces on the output. OAT customarily involves

Sensitivity may then be measured by monitoring changes in the output, e.g. by

partial derivatives or linear regression. This appears a logical approach as any
change observed in the output will unambiguously be due to the single variable
changed. Furthermore, by changing one variable at a time, one can keep all other
variables fixed to their central or baseline values. This increases the comparability
of the results (all 'effects' are computed with reference to the same central point in
space) and minimizes the chances of computer programe crashes, more likely
when several input factors are changed simultaneously. OAT is frequently
preferred by modellers because of practical reasons. In case of model failure under
OAT analysis the modeller immediately knows which is the input factor
responsible for the failure.

6.4.2 Local methods

Local methods involve taking the partial derivative of the output Y

with respect to an input factor

where the subscript X0 indicates that the derivative is taken at some fixed
point in the space of the input (hence the 'local' in the name of the class).
Add joint modeling and Automated Differentiation are methods in this class.
Similar to OAT/OFAT, local methods do not attempt to fully explore the
input space, since they examine small perturbations, typically one variable at
a time.

64
 6.4.3 Scatter plots

A simple but useful tool is to plot scatter plots of the

output variable against individual input variables, after (randomly) sampling the
model over its input distributions. The advantage of this approach is that it can also
deal with "given data", i.e. a set of arbitrarily-placed data points, and gives a direct
visual indication of sensitivity. Quantitative measures can also be drawn, for
example by measuring the correlation between Y and Xi, or even by estimating
variance-based measures by nonlinear regression.

6.4.4 Regression analysis

Regression analysis, in the context of

sensitivity analysis, involves fitting a linear regression to the model response and
using standardized regression coefficients as direct measures of sensitivity. The
regression is required to be linear with respect to the data (i.e. a hyperplane, hence
with no quadratic terms, etc., as regressors) because otherwise it is difficult to
interpret the standardised coefficients. This method is therefore most suitable when
the model response is in fact linear; linearity can be confirmed, for instance, if the
coefficient of determination is large. The advantages of regression analysis are that
it is simple and has a low computational cost.

65
6.4.5 Variance-based method

Variance-based methods are a class of

probabilistic approaches which quantify the input and output uncertainties as
probability distributions, and decompose the output variance into parts attributable
to input variables and combinations of variables. The sensitivity of the output to an
input variable is therefore measured by the amount of variance in the output caused
by that input. These can be expressed as conditional expectations,

6.4.6 Screening
Screening is a particular instance of a sampling-based
method. The objective here is rather to identify which input variables are
contributing significantly to the output uncertainty in high-dimensionality models,
rather than exactly quantifying sensitivity (i.e. in terms of variance). Screening
tends to have a relatively low computational cost when compared to other
approaches, and can be used in a preliminary analysis to weed out uninfluential
variables before applying a more informative analysis to the remaining set. One of
the most commonly used screening method is the elementary effect method.

66
6.5 Applications of Sensitivity Analysis
Some examples of sensitivity analyses performed in various disciplines follow
here.

6.5.1 Environmental

Environmental computer models are increasingly used in a

wide variety of studies and applications. For example, global climate models are
used for both short-term weather forecasts and long-term climate change.
Moreover, computer models are increasingly used for environmental decision-
making at a local scale, for example for assessing the impact of a waste water
treatment plant on a river flow, or for assessing the behavior and life-length of bio-
filters for contaminated waste water.

In both cases sensitivity analysis may help to understand the contribution of the
various sources of uncertainty to the model output uncertainty and the system
performance in general. In these cases, depending on model complexity, different
sampling strategies may be advisable and traditional sensitivity indices have to be
generalized to cover multiple model outputs, hetroskedastic effects and correlated
inputs.

6.5.2 Business

In a decision problem, the analyst may want to identify cost

drivers as well as other quantities for which we need to acquire better knowledge
in order to make an informed decision. On the other hand, some quantities have no
influence on the predictions, so that we can save resources at no loss in accuracy
by relaxing some of the conditions. See Corporate finance: Quantifying
uncertainty. Additionally to the general motivations listed above, sensitivity
analysis can help in a variety of other circumstances specific to business:

67
6.5.3 Social sciences

Sensitivity analysis is common practice in social sciences. A

famous early example is Mroz (1987), who analysed econometric models of
female labor market participation.

In modern econometrics the use of sensitivity analysis to anticipate criticism is the

subject of one of Peter Kennedy's "ten commandments of applied econometrics":

Thou shall confess in the presence of sensitivity. Corollary: Thou shall anticipate
criticism [•••] When reporting a sensitivity analysis, researchers should explain
fully their specification search so that the readers can judge for themselves how the
results may have been affected. This is basically an 'honesty is the best policy'
approach, advocated by Leamer, (1978]).

6.5.4 Chemistry

Sensitivity analysis is common in many areas of physics and

chemistry.

With the accumulation of knowledge about kinetic mechanisms under investigation

and with the advance of power of modern computing technologies, detailed
complex kinetic models are increasingly used as predictive tools and as aids for
understanding the underlying phenomena. A kinetic model is usually described by
a set of differential equations representing the concentration-time relationship.
Sensitivity analysis has been proven to be a powerful tool to investigate a complex
kinetic model.

Kinetic parameters are frequently determined from experimental data via nonlinear
estimation. Sensitivity analysis can be used for optimal experimental design, e.g.
determining initial conditions, measurement positions, and sampling time, to
generate informative data which are critical to estimation accuracy. A great
number of parameters in a complex model can be candidates for estimation but not
all are estimable. Sensitivity analysis can be used to identify the influential
parameters which can be determined from available data while screening out the
unimportant ones. Sensitivity analysis can also be used to identify the redundant
species and reactions allowing model reduction.

68
6.5.5 Engineering

Modern engineering design makes extensive use of computer

models to test designs before they are manufactured. Sensitivity analysis allows
designers to assess the effects and sources of uncertainties, in the interest of
building robust models. Sensitivity analyses have for example been performed in
biomechanical models, tunneling risk models, amongst others.

6.5.6 Multi-criteria decision making

Sometimes a sensitivity analysis may

reveal surprising insights about the subject of interest. For instance, the field of
multi-criteria decision making (MCDM) studies (among other topics) the problem
of how to select the best alternative among a number of competing alternatives.
This is an important task in decision making. In such a setting each alternative is
described in terms of a set of evaluative criteria. These criteria are associated with
weights of importance. Intuitively, one may think that the larger the weight for a
criterion is, the more critical that criterion should be. However, this may not be the
case. It is important to distinguish here the notion of criticality with that of
importance. By critical, we mean that a criterion with small change (as a
percentage) in its weight, may cause a significant change of the final solution. It is
possible criteria with rather small weights of importance (i.e., ones that are not so
important in that respect) to be much more critical in a given situation than ones
with larger weights. That is, a sensitivity analysis may shed light into issues not
anticipated at the beginning of a study. This, in turn, may dramatically improve the
effectiveness of the initial study and assist in the successful implementation of the
final solution.

69
6.5.6 Time-critical decision making
Producing time-critical accurate knowledge
about the state of a system (effect) under computational and data acquisition
(cause) constraints is a major challenge, especially if the knowledge required is
critical to the system operation where the safety of operators or integrity of costly
equipment is at stake, e.g., during manufacturing or during environment substrate
drilling. Understanding and interpreting, a chain of interrelated events, predicted or
unpredicted, that may or may not result in a specific state of the system, is the core
challenge of this research. Sensitivity analysis may be used to identify which set of
input data signals has a significant impact on the set of system state information
(i.e. output). Through a cause-effect analysis technique, sensitivity can be used to
support the filtering of unsolicited data to reduce the communication and
computational capabilities of a standard supervisory control and data acquisition
system

70
6.6 Sensitivity auditing
It may happen that a sensitivity analysis of a model-based
study is meant to underpin an inference, and to certify its robustness, in a context
where the inference feeds into a policy or decision making process. In these cases
the framing of the analysis itself, its institutional context, and the motivations of its
author may become a matter of great importance, and a pure sensitivity analysis –
with its emphasis on parametric uncertainty – may be seen as insufficient. The
emphasis on the framing may derive inter-alia from the relevance of the policy
study to different constituencies that are characterized by different norms and
values, and hence by a different story about 'what the problem is' and foremost
about 'who is telling the story'. Most often the framing includes more or less
implicit assumptions, which could be political (e.g. which group needs to be
protected) all the way to technical (e.g. which variable can be treated as a
constant).

In order to take these concerns into due consideration the instruments of SA have
been extended to provide an assessment of the entire knowledge and model
generating process. This approach has been called 'sensitivity auditing'. It takes
inspiration from NUSAP, a method used to qualify the worth of quantitative
information with the generation of `Pedigrees' of numbers. Likewise, sensitivity
auditing has been developed to provide pedigrees of models and model-based
inferences. Sensitivity auditing has been especially designed for an adversarial
context, where not only the nature of the evidence, but also the degree of certainty
and uncertainty associated to the evidence, will be the subject of partisan interests.

71
6.7 Conclusions

There is clearly much more to the use of a decision

support model than finding a single optimal solution. That
solution should be viewed as the starting point for a wide
ranging set of sensitivity analyses to improve the
decision maker's knowledge and understanding of the
system's behaviour.

Even without undertaking the relatively complex

procedures which explicitly involve probabilities in the
sampling of scenarios or interpretation of results,
sensitivity analysis is a powerful and illuminating
methodology. The simple approach to sensitivity analysis
is easy to do, easy to understand, easy to communicate,
and applicable with any model. As a decision aid it is
often adequate despite its imperfections. Given its ease
and transparency, the simple approach to SA may even
be the absolute best method for the purpose of practical
decision making.

72
CHAPTER 7
(Casa study)

73
8.1 What happens in capital budgeting in service industry?
In today’s ever changing world, the only thing that does not
change is ‘change’ itself. Successful companies are always looking
at ways in which they can change and develop. Change can trigger
corporate growth and Growth is essential for sustaining the
viability, dynamism and value enhancing capability of a company,
which lead to higher profits and better the shareholders’ value. A
progressive business firm continually needs to expand its fixed
assets and other resources to be competitive in the race. Investment
in fixed assets is an important indicator of corporate growth. The
success of the corporate in the long run depends upon the
effectiveness with which the management makes capital
expenditure decisions.

8.2 Investigation

Maruti Suzuki India limited, a subsidiary of SMC, Japan, is the leader in

passenger cars and multipurpose vehicle (MPVs) in India, accounting for almost
55% of the total industry sales. The company formerly known as

Maruti Udyog limited

was incorporated as a joint venture (JV) between government of India and SMC,
Japan on 24 February,1981.The first car was rolled out from its Gurgaon facility on
14 Dec 1983.Sincethen; it has sustained its leadership position in the Indian car
market.We, at Maruti Suzuki, celebrated 26 years of car manufacturing in India
2009-10.Having achieved manufacturing excellence in India, we are now in the
process of enhancing our R&D capabilities to design and develop cars.In 2009-10,
the company sold 722,144 cars in the domestic market and exported70,023 cars
.Cumulatively, it has produced and sold over seven million cars .Thetotal income
of the company for 2009-10 stood at Rs. 214,538 million
(USD4.46 billion@ 1USD=Rs.48). We now aim at selling 750,000 units in the do
mesticmarket and exporting 130,000 units in 2009-10.Maruti Suzuki has a strong
balance sheet with Reserves and Surplus of Rs.92, 004million & debt equity ratio
of 0.07 as on 31March, 2010.

74
75
DOMESTIC SALES AND SERVICE NETWORK

TOTAL SERVICE NETWORK --------------2767

TOTAL SALES NETWORK-------------681

REGIONAL OFFICES--------------------16

AREA OFFICES----------------------09

ZONAL OFFICES------------------04

DELHI CORPORATE OFFICE

The company has the largest sales and service network amongst car manufacture in
India .It had 681 sales outlets in 454 cities as on 31stMarch, 2009. The car park of
the company is in excess of seven million vehicles and to service this car park ,the
company has 2,767 service workshops in1,314 cities .The service network of
Maruti Suzuki includes Dealer workshop , Maruti Authorized services stations
(MASs), Maruti service masters (MSM) and Maruti service Zones (MSZ).

Besides selling and servicing vehicles, the company provides its customers with
―one stop
-
shop‖ experience such as automobile Finance, Automobile insurance,
Maruti Genuine Parts and Accessories, Extended warranty and Maruti
Certified pre-owned car outlets in 181 cities as on 31stMarch, 2009.

76
COMPANY PRODUCT

The company offers a portfolio of 13 brands, ranging from the people‘s car Maruti

800 to the stylish hatch – back, Swift, SX4 sedan and luxury sport utility
vehicle(SUV), Grand Vitara. More than half the cars sold in India wear a Maruti
Suzuki badge. As per the classification by the society of Indian Automobile
manufacturers(SIAM), Maruti Suzuki models are categorized under the following
heads:A1 Segment (up to 3400 mm) : Maruti 800A2 Segment (3400 mm to
4000 mm): Alto, Estilo, Wagon R, A-star, Ritz, SwiftA3 Segment (4000mm to
4500 mm): Dzire & SX4Multy utility Vehicle (MUA) Segment: Gypsy &
Grand Vitara Multi Purpose vehicle (MPV) Segment: Omni & Versa

77
 CHAPTER
8&9
(Conclusion & Bibliography)

78
Conclusion
An empirical study of the practices of the Capital Budgeting for
evaluation of investment proposals in the corporate sector in India has been
made in the preceding chapters. Comparison, wherever possible, has been made
with the practices and procedures in the foreign countries. It has to be noted that
conclusions based upon a study of this type have to be taken as indicative of
broad trends only. However, the results of this study do indicate that majority of
large scale companies in India are aware of the need for a well formulated
capital budgeting decisions. It is proposed to review the important findings of
this study and venture to outline some suggestions and recommendations for the
benefit of academicians, industry as well as for post doctoral research. An in-
depth analysis has been carried out to observe the trend and insight into factors
that influence capital budgeting decisions. The results of the survey and its
analysis have been provided in chapter 5. The companies in India do have
specific amount of average size of annual capital budget and all project size
requires formal quantitative analysis. However, such analysis and use of capital
budgeting method differ on the basis of nature and size of a particular project
under consideration. Surprisingly, the companies under study in India seem to
be planning one year in advance only but here also the period of planning is
different for different projects. This may be due to volatile business
environment. The authority to take final capital budgeting decision rests with
the chief finance officer and top management officials of all the organizations
under study.

79
 Bibliography

Books:

Arvind A. Dhond: “Strategic financial management”, 2nd

Revised Edition, Vipul Prakashan Girgaum Mumbai-400004.

Arvind A. Dhond: “Corporate Finance”, 1nd Edition, Vipul

Prakashan Girgaum Mumbai-400004.

CA Dinesh Saini: “Strategic financial management”2nd Edition

Rishabh Publication House, Grant Road (East),Mumbai-400007.

80
Financial website:

 https://en.wikipedia.org/wiki/Capital_budgeting
 http://www.edupristine.com/blog/capital-budgeting-
techniques
 https://www.investopedia.com/university/capital-
budgeting/decision-tools.asp
 https://www.scribd.com/document/177494231/Maruti-
Suzuki-Capital-Budgeting

81