Professional Documents
Culture Documents
Chapter 1 Overview
Chapter 1 Overview
Chapter 1 Overview
OVERVIEW
OUTLINE
Capital investments: Importance and difficulties
Types of capital investments
Phases of capital budgeting
Levels of decision making
Facets of project analysis
Feasibility study: A schematic diagram
Key issues in major investment decisions
Objectives of capital budgeting
Common weaknesses in capital budgeting
Capital Investment
Or
Capital Expenditure
Or
Project
Irreversibility
Substantial outlays
Difficulties
Measurement problems (identify & measure cost & benefits of project)
Uncertainty
Temporal spread
2. Discounting Criteria
NPV
IRR
Implementation
Translating an investment proposal into concrete project is a
complex, time consuming, and risky.
Improper implementation will lead to cost over run
To avoid cost overrun:
1. Be flexible and adapt to shock and surprises, as every thing
cannot be planned
Review
It should be done periodically to compare actual and projected
performance.
feedback
Administra
tive
decisions
Strategic
decisions
Lower level
management
Middle level
management
Top level
management
Routine
Semi-structured
Unstructured
Minor resource
commitment
Moderate
resource
commitment
Major
resource
commitment
Short-term
Medium-term
Long-term
Market Analysis
Market Share
Technical Viability
Technical Analysis
Sensible Choices
Risk
Financial Analysis
Economic Analysis
Return
Benefits and Costs in Shadow
Prices
Other Impacts
Environmental Damage
Ecological Analysis
Restoration Measures
P
r
e
Initial Screening
l
i
m
No
Yes
n
a
Terminate
o
r
k
E
A
o
n
No
Terminate
SUMMING UP
Capital budgeting is a complex process which may be divided into six broad
phases: planning, analysis, selection, financing, implementation and review.
Financial theory, in general, rests on the premise that the goal of financial
management should be to maximize the present wealth of the firms equity
shareholders. Business firms may pursue other goals. When these other goals
conflict with the goal of maximizing the wealth of equity shareholders, the
trade-off has to be understood.