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Capital budgeting tools and analysis of capital expenditures

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  1. Introduction
    1. Objectives of the projec
    2. Key requirements for the project evaluation
    3. Research methodology
    4. Data analysis
  2. Research design
    1. Research methodology
    2. Data source
    3. Data analysis
  3. Financial review and analysis
  4. Application of cash
  5. Introduction to project
    1. Introduction
    2. Capital budgeting procedure
    3. Methods of financial evaluation
    4. Financial evaluation criteria
  6. The capital budgeting framework
    1. Identify alternatives
    2. Forecasting cashflows
    3. Determine cost of capital
    4. Estimate terminal value
    5. Risk analysis
    6. Capital rationing and planning
    7. Capital budgeting at aditya birla group
  7. Estimating capital
  8. Analysis
    1. Calculation of the Cost of Capital:
    2. Estimation of cost of equity
    3. Estimation of growth rate
  9. The company's cost of debt
  10. WACC of the company 2006
  11. WACC of the company 2007
  12. Project analysis
  13. Execution of the project sanctioned
  14. Findings
  15. Suggestions
  16. Conclusion
  17. Bibliography

Capital budgeting is a financial procedure to ensure that capital is allocated to value adding opportunities. A capital budgeting / investment proposal should be accepted /rejected depending on whether it generates, over the life of investment, returns more than its cost of capital.
?Capital budgeting is concerned with the allocation of the firm's scarce financial resources among the available market opportunities. The consideration of investment opportunities involves the comparison of the expected future streams of earnings from a project, with the immediate and subsequent expenditures for it."

An analysis of the above definition shows that capital budgeting correlates the planning of available financial resources and their long term investment with a view to maximize the profitability of the firm. The financial manager has to focus on maximizing the wealth of shareholders through investment decisions. Investment decisions are long-term strategic decisions. Thus, he should be in apposition to evaluate whether a particular investment will facilitate achievement of this goal or not. It is also known as investment decision, capital expenditure, capital expenditure planning, project planning etc. it is a process of making decision regarding investments in fixed assets which are not meant for sale such as land, building, machinery or furniture capital budgeting is the planning of the expenditure for a future return. It returns stretch themselves beyond a one-year time interval. Capital expenditure planning and control is a process of facilitating decisions covering expenditures on long-term assets. Since a company survival and profitability hinges on capital expenditure, specially the major ones, the importance of the capital budgeting process cannot be over emphasized.

[...] The theory of measuring cost of capital is not simple. The company has a total sale of Rs Million, and total gross assets of Rs Mn. and net profit of Rs Mn. in 2007. The capital structure of the company is given by: The average market price of one share in 2007 was $ The market value of the company's equity is obtained by multiplying the number of the outstanding shares ( 92.7 crore) by the average share price. The market value of debt is assumed to be equal to the book value. [...]

[...] INTRODUCTION TO PROJECT INTRODUCTION The investment decisions of a firm are generally known as capital budgeting or capital expenditure decisions. Thus, a capital budgeting decision may be defined as: firm's decision to invest its current funds most efficiently in long term assets in anticipation of an expected flow of benefits over a series of years.? The firm's investment decision would generally include expansion, acquisition, modernization and replacement of long term assets. Sale of a division of business (divestment) is also an investment decision. [...]

[...] NPV method permits this flexibility and hence allows objective analysis As discussed above, NPV represents the net contribution of a proposal towards the wealth of the shareholder and is, therefore, in full conformity with the objective of wealth maximization. Demerits of NPV 1. It involves tedious calculations. Moreover, it may not be able to overcome the uncertainty involved with cash flows occurring a distant point of time in future. The method does not have an inbuilt mechanism to take care of the errors of estimation The NPV technique requires the predetermination of the required rate of return or the cost of capital, which in itself is an arduous task. [...]

[...] The section also presents the standard outputs from the capital budgeting analysis that should be involved in a capex proposal. Categories of Investments Capex projects will be classified into the following categories: Category I : Non- return based / inevitable Capex Category II : Return based schemes Category III : Discretionary Capex Category IV : Category II projects each above Rs X Brownfield/ Greenfield expansions, M&A Different levels of analysis required for categories to above are as shown in the table below. [...]

[...] Analysis is very much dependent on the companies' internal bulletin. BIBLIOGRAPHY Capital budgeting By Pamela Parrish Peterson, Pamela Peterson Drake, Frank J. Fabozzi The finance and analysis of capital projects By A. J. Merrett, Allen Sykes Venture capital investment By Gavin C. Reid, MyiLibrary, ebrary, Inc Capital Budgeting Methods DCF Method 1. Net Present Value (NPV) Internal Rate of Return (IRR) Discounted Payback Profitability Index Terminal Value Non- DCF Methods 1. Pay Back Period 2. [...]

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