s.goel chpt 1

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Capital Budgeting

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Capital Budgeting

Sandeep GoelAssistant Professor - FinanceManagement Development InstituteGurgaon, India

Capital Budgeting Copyright © Business Expert Press, LLC, 2015

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopy, recording, or any other except for brief quotations, not to exceed 400 words, without the prior permission of the publisher.

First published in 2015 by Business Expert Press, LLC 222 East 46th Street, New York, NY 10017 www.businessexpertpress.com

ISBN-13: 978-1-60649-986-3 (print)ISBN-13: 978-1-60649-987-0 (e-book)

Business Expert Press Finance and Financial Management Collection

Collection ISSN: 2331-0049 (print)Collection ISSN: 2331-0057 (electronic)

Cover and interior design by S4Carlisle Publishing Services Private Ltd., Chennai, India

First edition: 2015

10 9 8 7 6 5 4 3 2 1

Printed in the United States of America

Abstract

Capital budgeting is an important pat of the financial management of a business organization. It is a process that business houses use to evalu-ate an investment project. The decision of whether to accept or deny an investment project is capital budgeting decision. Capital budgeting is important because it determines the long-term economic and financial profitability of any investment project. It lays down the future success of a business. The present book aims to develop not only an understanding of the concepts of capital budgeting but also to provide its practical ap-plication to help the students to learn both theory and practice of capital budgeting to be used in the financial management of a business organiza-tion. It analyzes the capital budgeting practices of corporate enterprises in India in diverse sectors, on comparative basis in order to provide the readers a better insight into the various issues and challenges regarding capital budgeting management.

Keywords

capital budgeting, capital expenditure, financial management, business organization, corporate enterprises

Contents

Preface ..................................................................................................ix

Section 1 Introduction .................................................................. 1Chapter 1 Nature of Financial Management ......................................3

Section 2 Capital Budgeting Decision & Appraisal ....................... 9Chapter 2 Capital Budgeting: Nature & Scope ................................11Chapter 3 Project Feasibility ............................................................19Chapter 4 Project Management Techniques .....................................33Chapter 5 Social-Costs Benefit Analysis ...........................................39

Section 3 Capital Budgeting Management ................................... 45Chapter 6 Time Value of Money ......................................................47Chapter 7 Determination of Cash Flows ..........................................51Chapter 8 Capital Budgeting Appraisal Methods .............................63Chapter 9 Risk Analysis in Capital Budgeting ..................................89Chapter 10 Capital Budgeting Under Capital Rationing..................107

Section 4 Financing Decision ..................................................... 115Chapter 11 Cost of Capital ..............................................................117

Section 5 International Perspective ............................................ 127Chapter 12 Capital Budgeting for the Multinational Firms ..............129Chapter 13 Post Completion Auditing of Capital Budgeting

Decision ........................................................................139Chapter 14 Capital Investment Issues and Challenges .....................147

Section 6 Case Studies ............................................................... 153Chapter 15 Capital Budgeting Practice of Reliance Industries Ltd ...155Chapter 16 Capital Budgeting of Indian PSUs.................................167Chapter 17 Capital Investment Practices of Oil Sector in India .......177

Key Terms ...........................................................................................183Review Questions ................................................................................187

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viii CONTENTS

Test Yourself —Problems & Solutions ...................................................193Bibliography .......................................................................................209Index .................................................................................................211

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Preface

Financial management is one of the most essential areas of any organi-zation. It begins with investment decision in long-term assets, that is, capital budgeting decision. Capital budgeting decision lays down the foundation stone of the financial management. That’s why the success of financial management depends on right capital budgeting application.

It is against this backdrop that the present book has been attempted. Its focus is to highlight the importance of an efficient capital budgeting decision in managing finances of a business enterprise. The objective of the book is, to develop not only an understanding of the concepts of capi-tal budgeting but also to provide its practical dimension to help students to learn both theory and practice of capital budgeting to be used in the financial management of a business organization. Further, it will be useful to the managers to use it as an effective tool for resource allocation and evaluation of the business viability.

It also analyzes the capital budgeting practices of corporate enterprises in India in diverse sectors, on comparative basis in order to have a better insight into the various issues and challenges regarding capital budgeting management.

The present book is divided into six parts. Part I gives an overview of the conceptual framework of financial management. Part II discusses the nature and scope of capital budgeting decision along with project feasibil-ity process and techniques. Part III contains a detailed discussion on the aspect of time value of money, capital budgeting appraisal techniques, and risk mitigation methods. Part IV discusses the financing aspect of capital investment decision by the business units. Part V comprises the in-ternational perspective of capital budgeting decision. Part VI is the case-study discussion of the capital budgeting concept. It analyzes the capital budgeting practices of companies, like Reliance Industries Ltd., ONGC Ltd., Vizag Steel Ltd., and Cairns India on comparative basis. It examines their fixed assets structure to see the level of investment made in fixed as-sets and their efficiency in utilization.

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x PREFACE

It is hoped that it would create a fresh knowledge base thereof to the academia and provide direction to the business and policy makers to effectively cope with emerging financial challenges related to capital budgeting practices at the global level.

I wish to thank God Almighty for everything in life! The work would be incomplete if I do not acknowledge my parents’ contribution. They have been a constant source of inspiration for me and have always stood by me through thick and thin.

My wife provided her unstinted support and encouragement in com-pleting the book. My little daughter Maanya is my soul whose smile al-ways keeps me going in life.

Last, but not the least, I am thankful to the entire team of Business Expert Press for their tremendous support and whole hearted cooperation at all stages of publication of this book.

I am confident that the readers will find this book truly valuable in terms of its quality and presentation. Any constructive comments and suggestions for improving the contents of the book will be highly appreciated.

SECTION 1

Introduction

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Introduction

Almost everything in life eventually boils down to the rupee sign, so the adage goes. Money, and therefore, finance, is an integral part of life.1 Business is no exception to it. It needs to have an efficient financial man-agement not only in totality but also in segmental performance. Hence, growth of every business enterprise is closely linked with efficient man-agement of its finance.

Meaning of Financial Management

Financial management refers to the process of raising and allocation of funds. It is the sum total of planning, organizing, directing, and control-ling the financial activities of the enterprise.

1Douglas R. Emery, et al., Principles of Financial Management. (New Jersey: Prentice Hall, 1998), 2.

CHAPTER 1

Nature of Financial Management

The Present ChapterIt discusses the concept of financial management, its scope with its importance and objectives. There is an overview of the various financial problems faced by business enterprises as well.

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Elements

1. Investment decision: It refers to the allocation of funds in various assets. The investment in fixed assets is called as “capital budgeting decision.” The investment in current assets is called as “working capital decision.”

2. Financing decision: It involves funds’ raising from various sources based on various factors, like the cost of funds, time- period, flex-ibility, and so on. It is about determining the “financial structure” of an enterprise.

3. Dividend decision: It is the decision about distribution of net profit. The finance manager decides how much quantum of profits to be distributed as dividend to shareholders and how much to be retained for future contingencies.

Objectives of Financial Management

The main objectives of financial management are:

1. Profit maximization: It is considered to be the primary objective of financial management. Every business enterprise aims to earn maxi-mum profit, both short-term and long- term.

2. Wealth maximization: Wealth maximization (shareholders’ value maximization) is the key objective of financial management which is preferred over profit maximization on account of shareholders’ value creation, particularly in case of a listed company. Wealth maximization implies both regular returns to shareholders in the form of dividend and increase in the market value of the shares by high performance of the company.

3. Liquidity: Cash is the king for any organization. Maintaining sound liquidity is one of the most important objectives of financial man-agement. The firm must have a sound cash position for day-to-day expenses, like paying salaries, rent, electricity bills, etc. If the firm does not have enough liquidity, the survival of the firm is always under threat.

4. Solvency: Long-term soundness is the most important objective of financial management. The company must be solvent to pay interest

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and repay loans at regular intervals; only then the company will sur-vive in the competitive world.

Functions of Financial Management

Following are the main functions of financial management:

1. Estimation of financial requirements: Proper estimation of finan-cial requirements is a very important function of financial manage-ment. The finance manager must find out how much finance is required for the operations of the company, according to the fixed capital and working capital requirements.

2. Proper mobilization of funds: Mobilization (collection) of funds is another important function of financial management. After estimat-ing the financial requirements, the finance manager must decide on the sources of finance. The finance can be raised from various sources such as shares, debentures, bank loans, and so on. There must be a proper balance between owned funds and borrowed funds.

3. Efficient utilization of finance: Once the funds are raised, the next task of finance manager is to utilize them efficiently. Long-term funds should be invested in fixed assets and short-term funds should be used for current assets. The company’s funds should not be in-vested in the unprofitable projects.

4. Distribution of profits: The distribution of net profit has to be decided by the finance manager. He has to decide between divi-dend and reinvestment of earnings, keeping in view the require-ments of shareholders and expansion and diversification plans of the company.

5. Cash management: Finance manager also has to decide about the cash required for various requirements of the firm. Cash is required for many purposes like payment of wages and salaries, bills, meeting current liabilities, and so on.

6. Financial control: Maintaining financial controls is a very impor-tant function of a finance manager. This is exercised with the help of techniques like ratio analysis, budgetary control, cost analysis, and so on.

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Financial Management for Businesses in India

Gone are the days when there used to be a single manager who would manage the entire operations of a business. With multinationals around, the finance function has become much more specialized and complex. There are specialists who look after specialized categories of operations.

Since liberalization in 1991, the face of Indian corporate has changed tremendously. Finance is the essence of management of any business. It is in this context financial management for businesses in India is seen. Today every company has specialist set of people shoul-dering the responsibility of finance manager in their organization. Different connotations are used for finance manager by different com-panies, viz. Director-Finance, President-Finance, Chief Finance Of-ficer, Financial Controller, and so on.

Today’s finance manager does not perform the routine function of raising and disbursement of funds anymore. He has to do multitasking for the overall growth of the business. He has to safeguard the financial assets of the company, plan the business operations in a way so that there is a positive cash flow. In his day-to-day responsibilities, he has to look at the audit reports, and final accounts for analyzing the performance of the company.

Financial management is a process that is associated with both plan-ning and control. As planning, it involves procuring and allocation of available funds in a most profitable manner. Control on the other hand refers to keeping an eye on the cash flow. A finance manager is thus re-sponsible for the total management of funds in an enterprise. In nutshell, financial management for businesses has become very scientific in India with the latest techniques of management around.

In any organization, finance manager has to use the available resources in the most efficient manner so as to generate maximum profits for the company and keep shareholders happy. This leads to realization of the ultimate organizational objective of shareholders’ wealth maximization.

In conclusion, financial management has changed with the changing times and become very scientific for efficient management of business or-ganizations with the latest principles and practices of management being followed.

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Financial Management Problems & Solutions

The problems relating to the financial management faced by corporate enterprises and their possible solutions may be reiterated below:

1. The enterprises sometimes due to poor planning, fail to identify and maintain the desirable combination of sources of funds. They face the problem of shortage of equity and depend too much on the bor-rowed capital. Hence, there is a necessity of proper financial plan-ning to make the financial structure optimal.

2. Likewise, the enterprises also maintain an inappropriate combination of assets. This results in the problem of either underinvestment or overinvestment in fixed assets on one hand and current assets, par-ticularly in inventories and receivables, on the other hand. In such condition, the inventories and receivables are to be checked by way of adopting the appropriate inventory controlling techniques and al-tering credit and collection policies suitably. There should be a more efficient utilization of assets.

3. The enterprises fail in making proper future projection of revenues and costs which result in improper investment in inventories receivables, and additional plant capacity, and so on. All these factors ultimately account for poor earnings of the enterprises.

Hence, there is a need for a sound profit planning for ensuring better utilization of resources and enhanced earnings.

4. The enterprises lack a definite and stable dividend policy. No adequate balance is maintained between payment of dividends and retention of earnings. There should be more regularity and consistency in pay-ment of dividends in proportion to their equity capital.

5. The enterprises should be managed by only professionally competent, qualified, and experienced personnel based on the practice of participa-tive management and supported by an efficient information system.

IndexAccounting rate of return (ARR), 17,

67–69Adjusted present value (APV), 72–74After-tax cash flows, 52Aggressive beta, 122Amount of capital, 148Annuity cash flows, 70–71Appraising projects, key issues in,

30–32APV. See Adjusted present value

(APV)ARR. See Accounting rate of return

(ARR)Asian Development Bank, 39Average/neutral beta, 122

Benefit-cost ratio (B/c ratio), 74–76Beta

calculation of, 122categories of, 122definition of, 121

Break-even point, 95–96Business

capital budgeting practices, 87–88drivers, 20–21plan versus feasibility study, 27promoters, 26–27structure, 26

Cairn India, capital investment practices of, 178–179

long-term growth, strategy for, 180–181

CAPEX. See Capital expenditure (CAPEX)

Capital asset pricing method (CAPM), 121–123

Capital budgeting, 11–18business versus government, 87–88under capital rationing, 107–113decision. See Capital budgeting

decisioneffective, 85–87

features of, 12–13of Indian public sector undertaking,

167–176for multinational firms, 129–138process, 14–15projects. See Capital budgeting

projectsof Reliance Industries Ltd, 155–166risk analysis in, 89–106for subsidiary projects, 137

Capital budgeting appraisalcost of capital, 117–126methods, 63–88

business versus government capital budgeting practices, 87–88

effective capital budgeting, 85–87nonconventional cash flows,

82–85techniques under certainty,

63–85techniques under uncertainty, 63

Capital budgeting decision, 4, 117cash flows for, 51–62importance of, 13overview of, 12–13post completing auditing of,

139–146time value of money in, 47–50types of, 13

Capital budgeting projectsevaluation of, 14–15

methods, 16–17risk, 18

types of, 15–16Capital expenditure (CAPEX), 85–87

effective management, factors for, 86–87

Capital investment decisionsfuture challenges to, 149–151key issues of, 148–149

Capital investment practices, of oil sector in India, 177–181

212 INDEX

Capital rationing, capital budgeting under, 107–113

factors for, 110–113method of, 108–109problems in, 113types of, 109–110

Capital structure decision, 117CAPM. See Capital asset pricing

method (CAPM)Cash flows, 51–52

annuity, 70–71and capital rationing, 113components of, 57–59discounted, 69–82estimation of, 52–59financing versus operating,

130–131focus on, 86foreign investment decision-making

process, 134–135incremental, 54–56, 86inflation and, 60–62inflows. See Cash inflowsmixed stream, 71–72nominal, 61–62nonconventional, 82–85nondiscounted, 64–69of ONGC, 172outflows. See Cash outflowsparent versus project, 131, 134–135versus PAT, 52real, 61–62reinvestment of, 18relevant, 53, 131–132terminal, 56

Cash inflows, 51calculation of, 56even, 64terminal, 56uneven, 65

Cash management, 5Cash outflows, 51

calculation of, 55CDM. See Clean development

mechanism (CDM) projectCertainty-equivalent coefficient,

93–94CGD. See City Gas Distribution

(CGD)

Chamber of Commerce, 156City Gas Distribution (CGD), 180Clean development mechanism

(CDM) project, 171Coefficient of variation, 92Companies Act, 1956, 163, 164Company’s overall strategy, evaluation

of, 133Compounding, 48

future value (FV), 48–49Contingent projects, 16Control, in financial management, 6Corporate risk, 90Cost(s)

of capital, 117–126, 129computation of, 118–126definition of, 117foreign investment decision-

making process, 135of debt, 118–120of equity capital, 121–123explicit, 118implicit, 118of preference capital, 120–121of retained earnings, 123specific. See Specific costs

CPA. See Critical path analysis (CPA)

Credit needs, estimation of, 25Critical path analysis (CPA), 36–37

program evaluation and review technique versus, 37

Cut-off rate. See Cost of capital

Debt cost, 118–120Decision-making

capital, 15post completion review, 143process, for foreign investment,

132–137Decision-tree analysis, 18, 106Defensive beta, 122Demand forecast, 134Dependent projects, 16Depreciation, 15

adequacy of, 162–165definition of, 162policy, at Reliance Industries

Ltd., 164

INDEX 213

Discounted cash flow techniques, 69–82

adjusted present value, 72–74benefit-cost ratio, 74–76discounted payback period, 69–70internal rate of return, 76–82net present value, 70–72profitability index, 74–76

Discounted payback period, 17, 69–70

Discounting, 48present value, 49–50

Discount rate, and multinational capital budgeting, 130

Diversification decision, 15Dividend decision, 4Double declining method, 163

Economic evaluation, for foreign investment decision-making process, 136

Economic feasibility, 24–26Enhanced Oil Recovery (EOR), 180ENPV. See Expected net present value

(ENPV)EOR. See Enhanced Oil Recovery

(EOR)Equity

capital cost, 121–123estimation of, 25

Expansion decision, 15Expected costs and returns, estimation

of, 25–26Expected net present value (ENPV),

91–92Explicit costs, 118External capital rationing, 110

Feasibility study. See also Project feasibility

versus business plan, 27conducting, 21definition of, 19–20good, essentials of, 27–28process of, 20–22project appraisal, 44

Finance/financingdecision, 4efficient utilization of, 5

and multinational capital budgeting, 130–131

Financial control, 5Financial feasibility, 24–26Financial management

for businesses in India, 6functions of, 5meaning of, 3–4objectives of, 4–5problems & solutions, 7

Financial requirement, estimation of, 5

Financial techniques, for risk analysis, 92–106

break-even point, 95–96certainty-equivalent coefficient/

conservative estimates, 93–94decision tree analysis, 106key factor, 98–99payback, 95risk-adjusted discount rate, 97–98risk of shut down, 99scenario analysis, 102–106sensitivity analysis, 99–102simulation analysis, 106

Fixed assets, 13–14intangible, 14to long-term funds ratio, 159–161management, of Reliance Industries

Ltd., 156–165depreciation, adequacy of,

162–165financing pattern of, 158–161level of investment, 156–158utilization, 161–162

to net worth ratio, 158–159tangible, 14to turnover ratio, 161, 162

Foreign capital investmentfactors affecting, 130–132key issues in, 137–138

Foreign currency fluctuationseffect on multinational capital

budgeting, 131Foreign-exchange rates

effect on capital budgeting, 129foreign investment decision-making

process, 134Foreign investment search, 132–133

214 INDEX

Foreign projects evaluation, decision-making process for, 132–137

cash flow analysis, 134–135company’s overall strategy,

evaluation of, 133cost of capital, determination

of, 135economic evaluation, 136foreign investment search, 132–133implementation, 136political climate, exploring, 133post audit, 136–137project selection, 136risk analysis, 136

Forward rate, for dollar cash flows, 137

Funds, mobilization of, 5Future challenges to capital

investment decisions, 149–151

Governmentcapital budgeting practices, 87–88

Historical weights, 123Hurdle rate. See Cost of capital

Implicit costs, 118Improved Oil Recovery (IOR), 180Income-Tax Act, 1961, 163Income tax effects, 15Incremental cash flows, 54–56

focus on, 86operating, 55–56types of, 54–56

Independent projects, 16India

financial management for businesses in, 6

oil sector, capital investment practices of, 177–181

Inflation, 15and cash flows, 53, 60–62long-term rates, effect on

multinational capital budgeting, 131

Initial investment outlay, 54–55Installation costs, 53

Institute of Chartered Accountants of India, 162

Intangible fixed assets, 14Internal capital rationing, 110Internal rate of return (IRR), 17, 18,

76–82, 100, 106capital rationing, 108–109modified, 17multiple, 18net present value versus, 80–82of ONGC, 175of Vizag steel, 170

Internal working conditions, and capital investment decisions, 149

International Finance Corporation, 39

Investment decision, 4Investment plan, 106Investment risks, types of, 121–122IOR. See Improved Oil

Recovery (IOR)IRR. See Internal rate of return (IRR)

Key factor, 98–99

LFA. See Logical framework analysis (LFA)

Liquidity, 4Little-Mirrlees approach, of project

appraisal, 41–42Logframe analysis. See Logical

framework analysis (LFA)Logical framework analysis (LFA), 35Long-term assets, investment pattern

of, 179Long-term funds ratio, fixed assets to,

159–161

Managerial feasibility, 26–27Marginal weights, 123Margin of safety, 18, 95Market assessment, 22–23Market risk, 90Ministry of Petroleum and Natural

Gas, 177MIRR. See Modified internal rate of

return (MIRR)Mixed stream cash flows, 71–72

INDEX 215

Modified internal rate of return (MIRR), 17, 83–85

Monte Carlo simulation, 18Multinational firms, capital budgeting

for, 129–138foreign capital investment, factors

affecting, 130–132foreign capital investment, key

issues in, 137–138foreign projects, process of

evaluating, 132–137Multiple IRR problem, 82–85Mutually exclusive projects, 16

Net income, from operations, 15Net present value (NPV), 17, 18,

70–72, 100, 106capital rationing, 108–109expected, 91–92versus internal rate of return,

80–82of ONGC, 173–174of Vizag steel, 169

Net worth ratio, fixed assets to, 158–159

Nominal cash flows versus real cash flows, 61–62

Nondiscounted cash flow techniques, 64–69

accounting rate of return, 67–69payback period, 64–67

Nondiversifiable risk, 121NPCIL. See Nuclear Power

Corporation of India Limited (NPCIL)

NPV. See Net present value (NPV)Nuclear Power Corporation of India

Limited (NPCIL), 180

Oil and Natural Gas Corporation Limited (ONGC)

capital budgeting practices of, 171–178

CDM project, 171long-term growth, strategy for,

179–180ONGC. See Oil and Natural Gas

Corporation Limited (ONGC)

Operating cash flowseffect on multinational capital

budgeting, 130–131Opportunity cost, 54, 123Organizational feasibility, 26–27

Parent cash flowseffect on multinational capital

budgeting, 131foreign investment decision-making

process, 134–135PAT versus cash flows, 52Payback period (PBP), 16–17,

64–67, 95discounted, 17, 69–70of ONGC, 175same, 65–66of Vizag steel, 168–169

PBP. See Payback period (PBP)PCA. See Post completing auditing

(PCA)PERT. See Program evaluation and

review technique (PERT)PI. See Profitability index (PI)Planning, in financial management,

6, 7Political climate, in foreign

investment decision-making process, 133

Political risk, in multinational capital budgeting, 132

Post completing auditing (PCA)characteristics of, 139–140importance of, 140

Post completion reviewcase example, 145–146check list, 143–145process of, 141–143

Prefeasibility study, 20Preference capital cost, 120–121Probability measure, 90–91Problem tree analysis, 34–35Profitability index (PI), 17, 74–76

capital rationing, 108–109Profit distribution, 5Profit maximization, 4Program evaluation and review

technique (PERT), 36versus critical path analysis, 37

216 INDEX

Project appraisalsocial-costs benefit analysis, 39–44

Project appraisal technique, 148Project assessment, 19Project cash flows

effect on multinational capital budgeting, 131

foreign investment decision-making process, 134–135

Project feasibility, 19–32appraising projects, key issues in,

30–32importance of, 28–29process of, 20–22types of, 22–27

Project management techniques, 33–37

critical path analysis, 36–37logical framework analysis, 35problem tree analysis, 34–35program evaluation and review

technique, 36, 37stakeholder analysis, 35SWOT analysis, 34

Project ranking, 149Project selection, and foreign

investment decision-making process, 136

Real cash flows versus nominal cash flows, 61–62

Relevant cash flows, 53effect on multinational capital

budgeting, 131–132Reliance Industries Ltd. (RIL)

capital budgeting practice of, 155–166

fixed assets management, 156–165depreciation, adequacy of,

162–165financing pattern of, 158–161level of investment, 156–158utilization, 161–162

suggestions, 165–166Replacement decision, 15Retained earnings cost, 123Return on investment (ROI), 149RIL. See Reliance Industries

Ltd. (RIL)

Risk-adjusted discount rate, 97–98analysis. See Risk analysiscorporate, 90definition of, 89–90market, 90stand-alone, 90

Risk analysisin capital budgeting, 89–106

financial techniques, 92–106statistical techniques for, 90–92

for foreign investment decision-making process, 136

ROI. See Return on investment (ROI)

Salvage value, 15SCBA. See Social-costs benefit analysis

(SCBA)Scenario analysis, 18, 102–106Sensitivity analysis, 18, 99–102Shareholding, of ONGC, 178Shut-down risk, 99Simulation analysis, 106Social-costs benefit analysis (SCBA),

39–44case study, 42–44Little-Mirrlees approach, 41–42UNIDO approach, 40–41

Solvency, 4–5Specific costs

assigning weights to, 123computation of, 118–123with weights, multiplying,

124–126Stakeholder analysis, 35Stand-alone risk, 90Standard deviation, 92Statistical techniques, for risk analysis,

90–92Strategic problems, in

capital investment decisions, 149

Subsidiary projects, capital budgeting for, 137

Subsidized financingeffect on multinational capital

budgeting, 132Sum of-the-years digit method, 163

INDEX 217

Sunk costs, 53SWOT (Strengths, Weaknesses,

Opportunities, and Threats) analysis, 34

Systematic risk, 121

Tangible assetsfixed, 14of Reliance Industries Ltd., 164

Target rate of return. See Cost of capital

Technical feasibility, 23–24Terminal cash flows, 56Terminal cash inflows, 56Terminal values, and

multinational capital budgeting, 130

Time value of money, 47–50capital expenditure

management, 87definition of, 47valuation methods, 48–50

Total capital requirements, estimation of, 25

Transportation costs, 53

UNIDO approach, of project appraisal, 40–41

Vizag steel, capital budgeting practices of, 167–170, 176

WACC. See Weighted Average Cost of Capital (WACC)

WDV. See Written down value (WDV) method

Wealth maximization, 4Weighted Average Cost of Capital

(WACC), 117, 124–126What if analysis, 100Working capital decision, 4World Bank, 39Written down value (WDV) method,

163, 164

OTHER TITLES IN OUR FINANCE AND FINANCIAL MANAGEMENT COLLECTION

John A. Doukas, Old Dominion University, Editor

• Applied International Finance: Managing Foreign Exchange Risk and International Capital Budgeting by Thomas J. O’Brien

• Venture Capital in Asia: Investing in Emerging Countries by William Scheela• Global Mergers and Acquisitions: Combining Companies Across Borders

by Abdol S. Soofi and Yuqin Zhang• Essentials of Retirement Planning: A Holistic Review of Personal Retirement

Planning Issues and Employer-Sponsored Plans by Eric J. Robbins• The Fundamentals of Financial Statement Analysis as Applied to the Coca-Cola

Company by Carl B. McGowan, Jr., John C. Gardner, and Susan E. Moeller• Corporate Valuation Using the Free Cash Flow Method Applied to Coca-Cola by Carl B

McGowan, Jr.

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s.goel chpt 1

Documents

capital budgeting management

practice of capital

concepts of capital

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