Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Capital budgeting is a very complex process which can be divided into five
phases:
Planning
Analysis
Selection
Implementation
Review
Strategic decisions are long-term in their impact. They affect and shape the
direction of the whole business. They are generally made by senior
managers. The managers of the bakery need to take a strategic decision
about whether to remain in the cafe business. Long-term forecasts of
business turnover set against likely market conditions will help to determine if
it should close the cafe business.
Tactical decisions help to implement the strategy. They are usually made by
middle management. For the cafe, a tactical decision would be whether to
open earlier in the morning or on Saturday to attract new customers.
Managers would want research data on likely customer numbers to help them
decide if opening hours should be extended.
Market analysis
Market analysis is associated primarily with two questions:
What would be the collective demand of the planned product / service in
future?
What would be the market share of the project under evaluation?
To answer the above questions, the market analyst needs a broad variety of
information and suitable forecasting methods. The kinds of data required are:
Consumption trends in the past and the present expenditure level
Past and present supply situation
Production potential and constraints
Imports and exports
Formation of competition
Cost structure
Flexibility of demand
Consumer manners and conduct, intentions, motivations, attitudes,
preference, and needs.
Allocation channels and marketing guidelines in use
Administrative, technical, and legal constrictions.
Technical analysis
Examination of the technical and engineering characteristics of a project
needs to be done repeatedly when a project is made. Technical analysis seek
out to decide whether the fundamentals for the successful commissioning of
the project has been considered and reasonably good options have been
made with respect to location, size, process etc. The important questions
raised in technical analysis are the following
Whether preliminary tests and studies have been done?
Whether the availability of raw materials, power, and other inputs has been
recognized?
Whether the production method opted is suitable?
Whether the equipment and machines chosen are suitable?
Whether the supplementary equipments and auxiliary engineering works
have been given for?
Whether provision has been made for handling of effluents?
Whether the planned layout of the site, building, and plant is sound?
Whether work schedules have been reasonably drawn up?
Whether the technology planned to be employed is suitable from the social
plant of view?
Financial analysis
Financial analysis tries to ascertain whether the planned project will be
financially feasible in the sense of being able to meet the saddle of servicing
debt and whether the planned project will convince the return expectations of
those who provide the capital. The feature that have to be looked into while
conditioning financial appraisal are the following:
Investment pay out and cost of project
Means of financing
Cost of capital
Projected profitability
Break-even point
Cash flow of the project
Investment worth while ness judged in terms of a variety of standards of
merit
Projected financial position
Level of risk
Economic analysis
Economic analysis is also referred to as social cost benefit analysis and is
concerned with evaluating a project from the larger social point of view. In
such a judgement the focus is on the social costs and benefits of a project
which may usually be different from its economic costs and benefits. The
questions sought to be answered in social benefit analysis are the following
What are the direct economic benefits and costs of the project measured in
terms of efficiency prices and not in terms of market prices?
What would be the impact of the project on the allocation of income in the
society?
What would be the outcome of the project on the level of savings and
investment in the society?
What would be the involvement of the project towards the achievement of
certain merit wants like self-sufficiency, employment, and social order?
Ecological analysis
In recent years, environmental concerns have assumed a great deal of
importance and rightly so. Ecological analysis should be done particularly
for major projects which have significant ecological inference like plants and
irrigation schemes, and environmental polluting industries like bulk drugs,
chemicals and leather processing. The key questions raised in ecological
analysis are the following
What is the likely harm caused by the project to the environment?
What is the cost of reinstatement measures needed to make sure that the
damage to the environment is contained with in acceptable limits?
feasibility study
PMP Certification
2. To know whether the replacement of any existing fixed assets gives more
return than earlier.
4. To find out the quantum of finance required for the capital expenditure.
1. The economic life of the project and annual cash inflows are only an
estimation. The actual economic life of the project is either increased or
decreased. Likewise, the actual annual cash inflows may be either more or
less than the estimation. Hence, control over capital expenditure can not be
exercised.
2. Capital budgeting process does not take into consideration of various non-
financial aspects of the projects while they play an important role in
successful and profitable implementation of them. Hence, true profitability of
the project cannot be highlighted.
Capital Budgeting
Payback Period
Discounted Payback Period
Net Present Value
Accounting Rate of Return
Internal Rate of Return
Profitability Index
All of the above techniques are based on the comparison of cash inflows and
outflow of a project however they are substantially different in their approach.