Chapter-1

LITERATURE REVIEW
budgeting is an important component of financial success. It is not difficult to implement, and it’s not
just for people with limited funds. Budgeting makes it easier for people with incomes and expenses of all
emergencies . and a new car or just about anything . for many people. having a solid budget in place,
knowing how much money they have and knowing exactly where the money is going makes it easier for
them to sleep at night . (for more on saving for retirement, see our retirement planning tutorial
;candidates ,see the registered retirement saving plan (RRSP) tutorial.

This budgeting tutorial will teach you everything from setting up a budget to updating it as your
circumstances change , as well as getting back on track if you go off your budget. Whether you’re a
college undergrad, retire or somewhere in between, if you’re looking for a way to manage your money
better and improve your money better and improve your financial situation than this tutorial for us.

Investment appairsal is the planning process used to determine whether an organization’s long term
investment such as new machinery replacement machinery . It is the process of allocating resources for
investments is to increase the value of the firm to the shareholders.

The process in which the business determines whether projects such as building, a new plant or
investing in long term venture are worth pursuing. Oftentimes, a perspective project’s lifetime cash
inflows and outflows are assessed in order to determine whether the returns generated meet a
sufficient target benchmark.

It can also help people people save for retirement, e capital budgeting is the planning of long-term
corporate financial project relating to investment 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 is also concerned with
setting of criteria about which projects should receive investment funding to the increase the value of
the firm and whether to finance that investment with the equity or debit capital.

Investment should be made on the basis of value added to the future of the corporation.

capital budgeting project may include a wide variety of different types of investment including but not
limited to expenses policies, or merger 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 firm of cash dividends or to repurchase
the company’s stock through a share payback program.

Choosing between capital budgeting projects may be based upon several inter – related criteria.

1. Corporate management seeks to maximize the value of the firm by investing in projects which yield a
positive net present value using an appropriate discount rate in consideration of risks.

2.These projects must be focused appropriately .

3.If no positive NPV projects exits and excess cash surplus is not needed to the firm, then financial
theory suggests that management should return some or all of the excess cash to shareholders (i.e.
distribution via dividends).

capital budgeting involves allocating the firm’s capital resources between competing projects and
investments. Each potential project’s value should be estimated using a discounted (DCF) valuation, to
find its net present value. this valuation requires estimating the size and timing of all the incremental
cash flows from the projects. (these future cash highest NPV(GE). The hurdle rate is critical to the
making the right decisions . The hurdle rate is the maximum acceptable rate of return on an
investments. This should reduce rate of riskiness of the investment. typically measured by volitality of
the cash flows and must take into account the financing mix. managers may use models such as CAPM
or the APT to estimate a discount rate appropriate than a projects risk of the firm as a whole .

Ideally , business should pursue all projects and opportunities that enhances the shareholders
value. however because the same amount of capital budgeting techniques to determines which
projects will yield the most return over an applicable period of time.

NEED FOR CAPITAL budgeting

1.As large sum is involved which influences the profitability of the firm making capital budgeting an
important task.

2.Long term investment once made cannot be reversed without significance loss of invested capital. The
investment becomes sunk and mistake , rather than being readily rectified must often be borne until the
firm can be withdrawn through depreciation charges or liquidation. It influences the whole conduct of
the business for the years to come.

3. investment decision are the base on which the profit will be earned and probably measured through
the return on the capital. A proper mix of capital investment is quite important to ensure a adequate
rate of return on investment , calling for the need of capital budgeting.

4.The implication of long term investment decision are more extensive than those of short run decision
because of time factor involved , capital budgeting decisions because of time factor involved, capital
budgeting decision because of time factor involved, capital budgeting decisions are subject to the higher
of risk and uncertain than short run decision.

Factors influencing capital budgeting are :

 Availability of funds
 Structure of capital
 Taxation policy
 Government policy
 Lending policies of financial institutions
 Immediate need of the project
 Earnings
 Capital returns
 Economic value of the projects
 Working capital
 Accounting practice
 Trend of earning
 Risk of business

HOW CAPITAL BUDGETING TECHNIQUES ARE USED IN SECL

INTRODUCTION
the amount of money allotted to the maintenance and growth of a business. A revenue budgeted a
essential to management and is the result of business forecasts of sales, revenue , expenses and
capital expenditure. revenue budgeted help business save time and effort by the proper use it
allows for alternative actions to be developed prior to the start of the new year.

THE BENefit of a revenue budget

The main benefit of a revenue budget is that it requires looking into the future. The revenue
budget should contain the assumption made about the future and the details about the number
units to be sold, the expected selling prices, and so on. The budgeted amount of revenue is then
compared to the budgeted amount of expenses in order to determine if the revenues are adequate.
Learning of a potential problem before the year begins is a huge benefit because it allows for
alternative actions to be developed prior to the start of the year. When an annual revenue budget is
detailed by mouth, each months actual revenues can be compared to the budgeted amount
.Similarly, the actual revenues can be compared to the budgeted revenues for the same period. in
other word, monthly revenues budgets allow you to monitor revenues as the year progresses
instead of being surprised at the end of the year.