Control of In-Progress Projects

Establishment of Internal Control Procedures:

For every in-progress capital project, proper control accounts are set
up. These are charged with all relevant expenditures, which are
further classified into capital & revenue items .These accounts
reflect out-of-pocket payments as well as allocated expenses.

Use of Regular Progress Reports:

Reports : Periodic progress reports
compare actual expenditures against estimates. TheT he offer several
benefits a) They provide timely information so that corrective action
can be initiated to tackle potential problems b) They generate inputs
for cash budgeting and fund raising c) They serve as the basis for
calculating variances and explaining variances .
 Post Completion Audit

Regular post completion audits for capital projects : 1) provide

a documented log of experience that may be valuable in improving
future decision making ii) enable the firm in identifying individuals
with superior abilities in planning and forecasting iii) help in
discovering systematic biases in judgment iv) induce healthy
caution among project sponsors v) serve as a useful training
ground for promising executives who need broader business
experience and exposure.
ROI is defined as
Net Income

Book Value of assets

ABANDONMENT ANALYSIS
The techniques used to analyze new project can also be used to
analyze whether an existing project should be continued or
terminated.
Most of the investment in a new project is still to be made and
hence relevant cash outflow. By contrast, much of the investment in
an existing project represents a sunk cost ,which is not relevant for
project analysis.
In the case of a new project ,the estimates of cash flows are likely
to be more uncertain.
The discount rate to be used for reappraising an existing project is
likely to be different from that used to analyse the same project
when it was initiated
Administrative Aspects of Capital Budgeting

Identification of promising Investment Opportunities

Classification of Investments:
1. Replacement Investments
2. Modernization & Rationalization
3. Expansion Investments
4. New Product Investments
5. Research & Development Investments
6. Obligatory and Welfare Investments
Submission of Proposals
Decision Making
Preparation of capital budget
Administrative Aspects of Capital Budgeting

Implementation:
Adequate Formulation of Projects
Use of the principle of Responsibility accounting
Use of Network techniques
Exercise of Proper Control
Performance Review
 Agency Problem

Mangers as agents of shareholders are supposed to take

actions that maximize the welfare of the shareholders.
Preside over a big empire that gives them power ,stature and
higher compensation.
Enjoy generous compensation and lavish perquisites.
Avoid risks because acceptance of high firm  –specific
,although acceptable to diversified shareholders ,can
threaten the security of their job and the growth prospects
with the firm.
Agency costs can be mitigated by monitoring the actions and
behaviour of the managers and by offering them right
incentives that motivate them to maximise value.
Evaluating the capital Budgeting
System of an Organisation
Results
Techniques
Communication
Decentralisation
Intelligibility
Flexibility
Control
Review