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Capital Budgeting in Corporate Sector - A Case Study: M. Kannadhasan - Dr. R. Nandagopal
Capital Budgeting in Corporate Sector - A Case Study: M. Kannadhasan - Dr. R. Nandagopal
Abstract
In todays ever changing world, the only thing that does not change is change itself.
Change can trigger any corporate growth which can be measured in terms of increase in
investments or sales. A progressive business firm continually needs to expand its fixed assets
and other resources to be competitive in the race. Investment in fixed assets is an important
indicator of corporate growth. The success of the corporate growth in the long run depends
upon the effectiveness with which the management makes capital expenditure decisions. In
the dynamic business environment, making capital budgeting decisions are among the most
important and multifaceted of all management decisions as it represents major commitments
of companys resources and have serious consequences on the profitability and financial
stability. How far the corporate attains financial stability and profitability over a period of
time, while making capital budgeting needs evaluation and is a million dollar issue. In view
of this, this study has made an attempt to analyse the efficiency of the corporate sectors
capital budgeting through their financial statements.
Introduction
In todays ever changing world, the
only thing that does not change is change
itself. Successful companies are always
looking at ways in which they can change
and develop. Change can trigger corporate
gro wth and Grow th i s essential for
sustaining the viability, dynamism and
value enhancing capability of a company,
which lead to higher profits and better the
shareholders value. To achieve the desired
growth, the firm has to be competitive in
all functional areas especially in financial
management which is the back bone of any
business. Primarily gro wth can be
measure d in terms
investments or sales.
o f ch ange
in
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Review of Literature
Over the years, Research on Capital
budgeting is well documented in many
countries. Some examples of these are in
USA (Kl amme r, 1972, Gitman and
Forrester, 1977, Cooper et. Al, 1990,
Graham and Harvey 2001& 02, Ryan &
Ryan, 2002 Stanley Block, 2005), the UK
(Jog & Srivastava, 1995), Asia-Pacific
Region (Wong, Farragher, and Leung, 1987,
Kester & Chong, 1998, Kester et.al, 1999,)
China & Dutch (Niels Hermes et. Al, 2005,),
South Africa (Hall, 2000,), Cyprus (Lazariids
, 2004), and India (Prasanna Chandra,
1975, Porwal, 1976, Pandey, 1989, Rao
Cherukuri, 1996, Manoj Anand, 2002,
Sarkar 2004, Lokanandha Reddy Irala,
2006, Tamilmani, 2004 & 2007).
The research studies so far are mostly
concerned with the capital budgeting
practices in corporate sector with specific
focus on appraisal methods, income
measurement, determination of discount
rate and risk analysis. Almost all the
studies used primary data as the basis and
the analysis was sketchy. Though there
have been many studies published in
journals relating to capital budgeting
decision in the corporate world, but no study
has been specifically done on capital
budgeting based on secondary data which
could be dealt in this study.
2.
3.
Research Methodology
The research design of this study is
descriptive in nature. This study is based
on secondary data which was obtained from
financial statements published by this
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Table 1
Fixed Investment Classification Statements
(Figures in Millions)
Financial Year
Net Fixed
Assets at
the beginning
of the year
Fixed Assets
increased
during the year
Percent of
Increase
Classification
1998-99
8935.22
1665.49
18.64
1999-00
9150.34
1076.98
11.77
2000-01
8915.41
1050.12
11.78
2001-02
9560.99
1613.16
16.87
2002-03
9025.19
1326.53
15.00
2003-04
8748.29
792.08
09.05
2004-05
8938.46
1796.95
20.10
2005-06
9432.71
2426.32
25.72
The
amo unt of i ncre mental
investments increased its height in 2005-
20
Incremental Fixed
Investments
1665.49
1076.98
1050.12
1613.16
1326.53
792.08
1796.95
2426.32
1468.45
519.76
282.52
Sales
Profit
20450.71
25987.18
26066.63
26304.48
30739.95
39272.73
48112.82
60531.08
34683.20
13668.07
253.75
-120.62
805.86
913.77
1172.31
1634.78
2773.59
3108.38
3976.11
1783.02
1377.19
129.47
(Figures in Millions)
Depreciation
690.40
641.42
784.41
765.02
1752.18
912.63
1075.91
868.24
936.28
356.61
262.55
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Table 3
Simple Correlation Analysis
Variables
Between
Correlation (r)
FI & Sales
0.60
4.5
1.895
Ho Rejected
FI & Profits
0.43
2.86
1.895
Ho Rejected
-0.01
-0.06
1.895
Ho Accepted
Sales &
Profits
0.97
23.94
1.895
Ho Rejected
Sales &
Depreciation
0.16
0.97
1.895
Ho Accepted
Profits &
Depreciation
0.26
1.62
1.895
Ho Accepted
FI &
Depreciation
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D.F
Results
Conclusions
References
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