Project Review and

Administrative Aspects
Amit Singla

 Capital Budgeting does not occur in vacuum.

Rather it takes place in a real organization with
its
attendant
complexities
such
as
compartmentalized thinking, multi layered
decision making, uneven knowledge of finance,
bureaucratic red tape, and agency problem.
To cope with these problems, firms develop
suitable administrative procedures and try to
mitigate agency problems through combination
of monitoring and incentives.

Various facets of project

review

Control of in-progress projects

Post-completion audits
Abandonment analysis
Administrative aspects of capital
budgeting
Agency problem
How sound is the capital budgeting
system

Control of in-progress projects

Establishment of internal control
procedures
Use of regular progress reports

Post-completion audits
Performance evaluation may be done in
terms of economic rate of return or book
return on investment
Regular post completion audits :
Provide a documented log of experience for
future decisions making
Enable the firm in identifying individuals with
superior abilities in planning and forecasting
Serve as a useful ground for promising
executives who need broader business
experience and exposure

Abandonment analysis
Capital expenditure management is a dynamic process
Capital investments must be reappraised periodically to
determine whether they should be continued or
terminated or divested
Estimate the incremental cash flow on an existing project
and establish an appropriate discount rate
You can now decide whether the project should be
continued, terminated, or divested.
The following info is required for that:
Present value of expected cash flows
Salvage value
Divestiture value

Continuation versus abandonment decision

Managing Divestments

Administrative aspects of capital

budgeting
Identification of promising investment
opportunities
Classification of investments
Replacement, modernization and rationalization,
expansion, new product, research and development,
obligatory and welfare investments

Submission of proposals
Decision making
Preparation of capital budget and appropriation
Implementation
Performance review

Agency problem