Synopsis

On
Capital Budgeting

Title of Project : Capital Budgeting

Submitted By:
Sonia Verma
MBA 4th Sem.
11815603913

Northern India Engineering College

Introduction
Capital budgeting (or investment appraisal) is the
process of determining the viability to long-term
investments on purchase or replacement of property
plant and equipment, new product line or other
projects. Capital budgeting is the planning of longterm corporate financial projects relating to
investments funded through and affecting the
firm's capital structure. Management must allocate
the firm's limited resources between competing
opportunities (projects), which is one of the main
focuses of capital budgeting. Capital budgeting is
also concerned with the setting of criteria about
which projects should receive investment funding to
increase the value of the firm, and whether to finance
that investment with equity or debt capital.
Investments should be made on the basis of valueadded to the future of the corporation. Capital
budgeting projects may include a wide variety of
different types of investments, including but not
limited to, expansion policies, or mergers and

acquisitions. When no such value can be added

through the capital budgeting process and excess cash
surplus exists and is not needed, then management is
expected to pay out some or all of those surplus
earnings in the form of cash dividends or to
repurchase the company's stock through a share
buyback program.

Objectives
1.

2.

3.

To understand the capital budgeting

requirements of the organisaton , to identify
high quality capital projects.
To analyse the expansion and modern
requirement of the business by increasing
production capital.
To evaluate the financial investment
associated with the replacement of existing
assets by the purchase of new assets.

Research Methodology
In an attempt to achieve the objective of this report an
evaluation and assessment of the capital budgeting
evaluation techniques used by firms in the will

undertaken. The following research methodology was

used: Firstly, an in-depth analysis of secondary data
from financial textbooks, dissertations and reports on
capital

budgeting

evaluation

techniques,

was

performed. The purpose of the in-depth analysis of

secondary data was to determine the guidelines that
exist pertaining to capital budgeting evaluation
techniques used by financial

managers in firms.

Secondly, in order to obtain empirical perspectives on

capital budgeting evaluation techniques used by the
firms and to give effect to the stated research
objectives, and empirical case studies for analysis of
data is to be used.

Literature of Review

Indian Studies
Prasanna Chandra (2005) conducted a survey of
twenty firms to examine the importance assigned to
economic analysis of capital expenditures, methods
used and its rationale for analyzing capital
expenditures and ways to improve economic analysis
ofcapital expenditures.
Porwal L S (2002) had done an empirical study of
the organizational, quantitative, qualitative, and
behavioural and control aspects of capital budgeting
in large manufacturing public limited companies in
the private sector in India. He had selected 118
companies out of which 52 companies (44%)
provided usable responses.
Pandey I M (2000): In a study of the capital
budgeting practices of fourteen medium to large size
companies in India, it was found that all companies,
except one, used payback.
With payback and/or other techniques about twothirds of companies used IRR and about two-fifths
NPV. IRR was found to be the second most popular
method.

Foreign Studies:
Hermes, N., Smid, P., Yao, L. (2006) compared the
use of capital budgeting techniquesof Dutch and
Chinese firms, using data obtained from a survey
among 250 Dutch and 300Chinese companies.

Abstract
This dissertation contributes to an understanding of
capital budgeting and accounting practice. The
factors affecting practice are of special research
interest. It is also investigated whether practice
diverges from what is prescribed by finance text
books and accounting standards/ frameworks. The
overarching

research

question

posed

in

this

dissertations is: What capital budgeting and

accounting choices are made by top management in
practice, and how can these choices be explained?. it
consists of four case studies that address this issue.
The first two papers focused on capital budgeting
choices. Findings emphasised that the use of
sophisticated capital budgeting and cost of capital
estimation methods such as NPV and CAPM was
widespread in Swedish listed companies. However,
also unsophisticated accounting based methods were
employed. Overall, findings suggested that Swedish
companies used capital budgeting and cost of capital
estimation

techniques

U.S./continental

less

European

often

than

companies.

did
Other

Vaihekoski Mika and Liljeblom Eva (2004)

conducted a survey of 144 companies listed on the
Helsinki Stock Exchange to examine the practice of
the use of investmentevaluation methods and
required rate of return in.

interesting findings were changes over time. Over

Ioannis T. Lazaridis (2004) had done a survey of

capital budgeting practices of the firms in Cyprus.

size was generally positively related to more

time, the use of sophisticated methods increased and

the use of unsophisticated methods decreased. This
indicated a closing of the theory-practice gap. Finally,
extensive use of methods.