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Unit 10 PPT

Capital budgeting decisions involve long-term investments that require significant capital expenditure, aimed at generating future returns for a business. These decisions can be categorized based on purpose (e.g., expansion, replacement, diversification), effect on profitability (e.g., increasing revenue, reducing costs), and decision situation (e.g., mutually exclusive, independent, dependent projects). Effective capital budgeting is crucial for financial management to optimize resource allocation and enhance company performance.

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2 views

Unit 10 PPT

Capital budgeting decisions involve long-term investments that require significant capital expenditure, aimed at generating future returns for a business. These decisions can be categorized based on purpose (e.g., expansion, replacement, diversification), effect on profitability (e.g., increasing revenue, reducing costs), and decision situation (e.g., mutually exclusive, independent, dependent projects). Effective capital budgeting is crucial for financial management to optimize resource allocation and enhance company performance.

Uploaded by

Vikash Burnwal
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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OMBC 203
FINANCIAL MANAGEMENT (FM)

Unit 10:
Capital Budgeting

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CAPITAL BUDGETING DECISIONS

• Capital Budgeting Decisions refer to the decisions


regarding long term investment of huge amounts i.e.
Capital expenditure in the projects which will prove
fruitful for the business and provide the required
returns in the future years with least possible cost.
KINDS OF CAPITAL BUDGETING DECISIONS

•Kinds of Capital Budgeting Decisions


•On the basis of
•Purpose
•On the basis of Effect on profitability
•On the basis of decision situation

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I. ON THE BASIS OF PURPOSE

Expansion Projects

Replacement Projects
Diversification Projects
Modernization Projects
Research & Development Projects
Environmental Projects

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1. EXPANSION PROJECTS

• According to Ezra Solamn “Financial management is


concerned with the efficient use of an important economic
resources viz capital funds”.

• Financial Management means planning, organizing, directing


and controlling the financial activities such as procurement
and utilization of funds of the enterprise.
2. REPLACEMENT PROJECTS

• Replacement Projects are the projects where capital


expenditure is made for the replacement of the existing
facilities, assets etc. which have become useless or lesser
productive with the passage of time, continuous use,
obsolescence of technology or other such reasons.
3. DIVERSIFICATION PROJECTS

• Diversification Projects are the projects where capital


expenditure is made on installation of new plant and
machinery, establishment of new factory, starting a new
product line in the industry other than the existing one etc.
These projects add to the earning capacity of a company
and reduces the risk of losses too.
4. MODERNIZATION PROJECTS

• Modernization Projects are the projects where capital


expenditure is made on installation of new plant and
machinery, buying new modern equipment etc. to avoid the
losses due to obsolete technology or obsolete equipment
being used in the business. These projects add to the
efficiency of the company and thus gives the competitive
edge.
5. RESEARCH & DEVELOPMENT PROJECTS

• Research and Development Projects are the projects where


capital expenditure is made on development of new
technologies, products, equipment etc. due to the changing
technological trends. These projects gives the competitive
edge to the company.
6. ENVIRONMENTAL PROJECTS

• Environmental Projects are the projects where capital


expenditure is made on improvement of working
environment, pollution control, provisions of safety etc.
These projects enhances the goodwill of the company rather
than giving direct benefits in the form of profits.
II. ON THE BASIS OF EFFECT ON PROFITABILITY

Projects increasing revenue

Projects reducing costs

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1. PROJECTS INCREASING REVENUE

• These projects bring more and more revenue to the firm


through expansion, diversification etc.
2. PROJECTS REDUCING COSTS

• These projects are undertaken to reduce the costs through


replacement, modernisation etc.
III. ON THE BASIS OF DECISION SITUATION

Mutually Exclusive Projects

Independent Projects

Dependent Projects

Capital Rationing

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1. MUTUALLY EXCLUSIVE PROJECTS

• These projects are the projects meant for achieving the same
purpose thus competing for funds in such a way that
acceptance of one project means rejection of other project.
These are either-or projects.
2. INDEPENDENT PROJECTS

• These projects are the projects meant for achieving different


purposes. The acceptance of one project does not mean
rejection of other project.
3. DEPENDENT PROJECTS

• These projects are the projects meant for achieving same


purpose. The acceptance of one project will mean
acceptance of other project too. These are also known as
Complimentary Projects.
4. CAPITAL RATIONING

• Capital rationing is the situation where a firm has to choose


combination of profitable projects yielding the highest Net
Present Value with available funds.
THANK YOU
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