INTRODUCTION

1.1 INTRODUCTION OF THE STUDY

Every organization irrespective of its size and mission can be viewed as a financial entity
management of an organization. Financial management focuses not only on the improvement
of funds but also on their efficient use with the objective of maximizing the owners’ wealth.
The allocation of funds is therefore an important function of financial management. The
allocation of funds involves the commitment of funds to assets and activities.

There are two types of Investment decision:

1. Management of current assets or Working capital management.

2. Long term investment decision.

Long term investment decisions are widely known as capital budgeting or capital expenditure
budgeting. It means as to whether or not money should be invested in long term project. This
part is devoted to an in-depth and comparative decision of capital budgeting/capital
expenditure management.

A project is an activity sufficiently self- contained to permit financial and commercial

analysis. In most cases projects represent expenditure of capital funds by pre- existing entities
which want to expand or improve their operation.

In general a project is an activity in which, we will spend money in expectation of returns and
which logically seems to lead itself to planning. Financing and implementation as a unit, is a
specific activity with a specific point and a specific ending point intended to accomplish a
specific objective.

To take up a new project, involves a capital investment decision and it is the top
management’s duty to make a situation and feasibility analysis of that particular project and
means of financing and implementing it financing is a rapidly expanding field, which focuses
not on the credit status of a company, but on cash flows that will be generated by a specific
project.

Capital budgeting has its origins in the natural resource and infrastructure sectors. The
current demand for infrastructure and capital investments is being fueled by deregulation in
the power, telecommunications, and transportation sectors, by the globalization of product
markets and the need for manufacturing scale, and by the privatization of government –
owned entities in developed and developing countries.

The capital budgeting decision procedure basically involves the evaluation of the desirability
of an investment proposal. It is obvious that the firm must have a systematic procedure for
making capital budgeting decisions.

The procedure must be consistent with the objective of wealth maximization. In view of the
significance of capital budgeting decisions, the procedure must consist of step by step
analysis.

1.2 Importance of investment decisions:-

Capital investments, representing the growing edge of a business, are deemed to be very
important for three inter- related reasons.

1. They influence firm growth in the long term consequences capital investment decisions
have considerable impact on what the firm can do in future.

2. They affect the risk of the firm; it is difficult to reverse capital investment decisions
because the market for used capital investments is ill organized and /or most of the capital
equipments bought by a firm to meet its specific requirements.

3. Capital investment decisions involve substantial out lays.

“THE COMPANY” is a growing concern, capital budgeting is more or less a continuous
process and it is carried out by different functional areas of management such a production,
marketing, engineering, financial management etc. All the relevant functional departments
play a crucial role in the capital budgeting decision process.

1.3 Objectives of the study:-

1. To describe the organizational profile of “THE COMPANY”.
2. To discuss the importance of the management of capital budgeting.
3. Determination of proposal and investments, inflows and out flows.
4. To evaluate the investment proposal by using capital budgeting techniques.
5. To summarize and to suggest for the better investment proposal.

1.4 SCOPE OF THE STUDY:-

This study highlights the review of capital budgeting and capital expenditure management of
the company. Capital expenditure decisions require careful planning and control. Such long
term planning and control of capital expenditure is called Capital Budgeting. The study also
helps to understand how the company estimates the future project cost. The study also helps
to understand the analysis of the alternative proposals and deciding whether or not to commit
funds to a particular investment proposal whose benefits are to be realized over a period of
time longer than one year. The capital budgeting is based on some tools namely Payback
period, Average Rate of Return, Net Present Value, Profitability Index, and Internal Rate of
Return.

1.5 METHODOLOGY:-

The information for the study is obtained from two sources namely.

1. Primary Sources
2. Secondary Sources
Primary Sources:

It is the information collected directly without any references. It is mainly through

interactions with concerned officers & staff, either individually or collectively; some of the
information has been verified or supplemented with personal observation. These sources
include.

a. Thorough interactions with the various department Managers of “THE COMAPNY”.

b. Guidelines given by the Project Guide.

Secondary Sources:

This data is from the number of books and records of the company, the annual reports
published by the company and other magazines. The secondary data is obtained from the
following.
a. Collection of required data from annual records, monthly records, internal
Published book or profile of ”THE COMPANY”.
b. Other books and Journals and magazines
c. Annual Reports of the company

1.6 Limitations:-

Though the project was completed successfully with a few limitations may .
a) Since the procedure and polices of the company will not allow to disclose
confidential financial information, the project has to be completed with the
available data given to us.

b) The period of study that is 6 weeks is not enough to conduct detailed study of
the project.
 c) The study is carried basing on the information and documents provided by the
organization and based on the interaction with the various employees of the
respective departments.

1.7 REVIEW OF LITERATURE:-

The concept of Capital Budgeting being a very sensitive area of finance has outreached the
attention of many researchers .A number of studies has been conducted on the subject.
However briefing such studies will highlight the importance of the present study. It should
safeguard to avoid the wrong choice of the project and investment to be made. It is necessary
for the management to give proper attention to capital budgeting.

The reason for the popularity of Payback period in the order of significance were stated to be
its, simplicity to use and understand, its emphasis on the early recovery of investment and
focus on risk. It was also found that one third of companies always insisted on the
computations of Payback periods for all projects. For about two-third companies standard
Payback period ranged between three and five years.

The reason for the secondary role of Discounted Cash Flow techniques in India included
difficulty in understanding and using these techniques, due to lack of qualified professional
and unwillingness of top management to use Discounted Cash Flow techniques.

One large manufacturing and marketing organization mentioned that conditions of its
business were such that Discounted Cash Flow techniques were not needed. Yet another
company stated that replacement projects were very frequent in the company and it was not
considered necessary to use Discounted Cash Flow technique for evaluating such projects.

The present investment appraisal in practice is raising certain questions in the context.

1. How much importance is assigned to economic analysis of capital expenditure

in practice?
 2. What methods are used for analyzing capital expenditure in practice and what
is the reason for underlying these methods?

The answers of the above questions are based on a survey of twenty firms varying on several
dimensions like industry category, size, financial performance and capital intensity. From
these firms, executives, responsible for capital investment evaluation and capital budget
preparation were interviewed.