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A PROJECT ON CAPITAL BUDGETING

OUTLINE OF THE PROJECT:


The study will be presented in 7 chapters
1.Introduction
2.Objective
3.Need
4.Scope
5.Research methodology
6.Limitations
7.Data analysis and interpretation
8.Conclusions and suggestions

INTRODUCTION:
Capital Budgeting, broadly defined as a decision-making process that enables
managers to evaluate and recognize projects that are valuable to the company,
is usually the dominant mission facing any financial manager and his/her team. It
is the most important task for managers for the following reasons.
First, the strategic decisions and directions of a company, new products, new
services, and expansion into new markets, are determined by the companys
capital budgeting. Second, capital budgeting decisions usually result in relatively
long-lasting effects to the company, and therefore a decrease in flexibility. Third,
serious consequences may arise from poor capital budgeting decisions. For
example, if a company devoted too much capital to one project, the companys
capital would be unnecessarily spent on excess production capacity. On the other
hand, if less-than-required capital was invested by the company, its productivity
would suffer by the simple fact that its equipment, computer hardware and
software might not be cutting-edge to improve production. These poor capital
budgeting decisions may allow rival companies the opportunity to steal market
share by taking advantage of a lower cost structure or production capabilities
matching demand.
Most textbooks classify capital budgeting projects roughly into the following five
categories.
(1) Replacement projects: If a piece of equipment is out-dated or hinders
efficient production, companys usually tends to avoid overanalyzing whether to
replace the older equipment. This type of project is usually carried out without
detailed analysis.
(2) Expansion projects: These projects expand the volume of the business
product lines, and more uncertainties of sales forecasts should be considered.
Very detailed analyses are usually involved in this instance.
(3) New products and services: New products and services require more
complex decision-making processes, and careful capital budgeting decisions are
necessary.
(4) Mandatory projects: These types of projects are required by the
government, an insurance company, or some other agency. These projects are
usually related to safety or the environment and are typically not revenuegenerating. Capital budgeting decisions are typically made to reach the objective
at the lowest cost to the company.

(5) Other projects: Other capital budgeting projects not directly categorized
under the previous four fall under other projects. This may be a pet project of
the CEO, or Apple Computer allowing Steve Jobs to run the Macintosh team at a
remote office. These types of projects are not subject to capital budgeting
analysis.

OBJECTIVE
The objectives of capital budgeting are to address the challenge of long term
planning by evaluating which investments to make now and in the future. A
schools equipment and facilities do not last forever. Theyll need
replacements and/or enhancements after a certain period of time. The
challenge is how to keep track of all those repairs, warranties, and facility
assessment data, while keeping the plan within its allocated budget . Financial
theory, in general, rests on the principle that the aim financial management
should be to make the most of the present wealth of the firms equity
shareholders. For a firm whose equity shares are dynamically traded on the
stock market, the assets of the equity shareholders is replicated in the market
price of the equity shares. Therefore the aim of financial management for
such firms should be to maximize the market price of equity shares.
The search of the welfare of equity shareholders is reasonable on the grounds
that it donates to a competent allocation of capital in the economy. The bases
for allotment of savings in the economy are anticipated return and risk. As
equity share prices are based on expected return and risk, hard work to
maximize equity share prices would end in an efficient allotment of resources.
A different justification may be given for the aim of shareholder wealth
maximization. Equity shareholders give the project (risk) capital required to
begin a business firm and employ the management of the firm not directly
through the board of directors. Therefore it behaves on corporate
management to encourage the interests of equity shareholders.
In a case where a public sector firm the equity stock of which, being fully
owned by the government, is not traded on the stock market, the goal of
financial management should be to maximized and the present value of the
stream of equity returns an appropriate discount rate has to be applied. A like
observation may be made with respect to other companies whose equity
shares are not traded or very poorly traded.

NEED
1. Huge Investments: Capital budgeting requires huge investments of
funds, but the available funds ate limited, therefore in the investment
decision are more. If higher risk are involved, it needs careful
planning of capital budgeting.
2. Long-term: Capital expenditure is long term in nature or
permanent in nature. Therefore financial risk involved in the

investment decision is more. If higher risks are involved, it needs


careful planning of capital budgeting.
3. Irreversible: The capital investment decisions are irreversible are
not changed back. Once the decision is taken for purchasing a
permanent asset, it is very difficult to dispose off those assets
without involving huge losses.
4. Long-term effect: Capital budgeting not only reduces the but also
increases the revenue in long term and will bring significant changes
in the profit of the company by avoiding over or more investment or
under investment. Over investments leads to be unable to utilize
assets or over utilization of fixed assets.
5. Future of the firm: In which course of action will be followed by
the firm is defined by capital structure.
6. Competitiveness: Sound capital budgeting help the firm to make
it competitive with other firm and in some extent grab the finance
opportunity from the market.
7. Global financing: If the firm existing in the market in a good
period of time it can plan its finance from the global market.
8. Cost effective: Capital budgeting helps to reduce cost and make
the whole financing decision cost effective. In the conclusion remark
we find capital budgeting a tool of competent management which
helps to manage finance for a period of time.

SCOPE OF CAPITAL BUDGETING DECISION


Mechanisation of a process:
In order to reduce costs, a firm may intend to
mechanise its existing production process by
installing machine. The future cash inflows on this
investment are the saving results from the lower
operating costs. The firm would be interested in
analysing whether it is worth to install the machine.
Expansion decision :
Every company want to expand its existing
business. In order to increase the scale of production
and sale, the company may think of acquiring new
machinery, addition of building, merger of takeover of
another business etc. This all would require additional
investment which should be evaluated in terms of
future expected earnings.
Replacement decision:
A company may contemplate to replace an
existing machine with a latest model. The use
of new and latest model of machinery may
possibly bring down operating costs and
increase the production. Such replacement
decision will take with the help of capital
budgeting.
Choice of equipment:
A company needs an equipment to perform a
certain process. Now a choice can be made
between semi- automatic or fully-automatic
machine. Capital budgeting process helps a
lot in such selection.

Product or process innovation:


The introduction of new product or a new
process will be involve heavy expenditure
and will earn profits also in the future. So . A
study of capital budgeting will be very useful
and the ultimate decision will depend upon
the profitability of the product or the process.
RESEARCH METHODOLOGY
RESEARCH
Research is a process in which the
researchers wish to find out the end results
for a given problem and thus the solution
helps in future course of actions. The
research has been defined as A careful
investigation or enquiry especially through
search for new facts in branch of knowledge.
RESEARCH DESIGN
The research design used in this project is
Analytical in nature the procedure using,
which researcher has to use facts or
information already available, and analyse
these to make a critical evaluation of the
performance.

TOOLS AND TECHNIQUES OF ANALYSIS:


Payback period
IRR
ROI

PAYBACK PERIOD:
Payback is the number of years
required to recover the original cash
outlay invested in a project.
if the project generates constant
annual cash inflows, the payback
period can be computed by dividing
cash outlay by the annual cash inflow.
That is
Payback=initial investment/annual
cash inflow
Unequal cash flows in case of unequal cash
inflows, the payback period can be found out by
adding up the cash inflows until the total is equal
to initial cash outlay
2. INTERNAL RATE OF RETURN:
The internal rate of return is the rate that
equates the investment outlay with the present
value of cash inflow received after one period.

This also implies that the rate of return is the


discount rate which makes NPV=0

DENA BANK
INTRODUCTION
Dena Bank was founded on 26th May, 1938 by the family of Devkaran
Nanjee under the name Devkaran Nanjee Banking Company Ltd
It became a Public Ltd. Company in December 1939 and later the name was changed
to Dena Bank Ltd.
In July 1969 Dena Bank Ltd. along with 13 other major banks was nationalized and is
now a Public Sector Bank constituted under the Banking Companies (Acquisition &
Transfer of Undertakings) Act, 1970. Under the provisions of the Banking Regulations Act
1949, in addition to the business of banking, the Bank can undertake other business as
specified in Section 6 of the Banking Regulations Act, 1949.
Milestones

One among six Public Sector Banks selected by the World Bank for sanctioning a
loan of Rs.72.3 crores for augmentation of Tier-II Capital under Financial Sector
Developmental project in the year 1995.

One among the few Banks to receive the World Bank loan for technological
upgradation and training.

Launched a Bond Issue of Rs.92.13 crores in November 1996.

Maiden Public Issue of Rs.180 Crores in November 1996.

Introduced Tele banking facility of selected metropolitan centers.

Dena Bank has been the first Bank to introduce:

Minor Savings Scheme.

Credit card in rural India known as "DENA KRISHI SAKH PATRA" (DKSP).

Drive-in ATM counter of Juhu, Mumbai.

Smart card at selected branches in Mumbai.

Customer rating system for rating the Bank Services.