NATURE OF CAPITAL BUDGETING

& TYPES OF CAPITAL PROJECTS

Submitted by: Mitesh Kumar

Akash
Sharma
 CAPITAL BUDGETING
Capital Budgeting is long-
term planning for making
and financing proposed
capital outlays.
 NATURE OF CAPITAL BUDGETING
DECISIONS
Capital investments are those
investments where large amount
of the firms funds are invested in
long-term assets.
Capital Budgeting Decisions have
major impact on the health of the
firm. Some of the Areas are as
Follows:-
 GROWTH
The Decision to invest in long-term assets
influences the firms operations for many
years .
Sound Decisions can lead to good profits
which can be used for diversification and
expansion.
A very important feature of capital
budgeting decision is that generally these
cannot be reversed without incurring
heavy loss.
 Risk
The types of long-term projects
the firms takes up determines
the risk involved in the firms
operations.
This affects the basic business
Approach of the firm and
accordingly the character and the
reputation of the firm.
 UNCERTAINTY AND
COMPLEXITY
Future is always uncertain and it
is definitely more complex to be
able to estimate future cash
flows many years down the line.
So many things can change,
competition can increase ,
products with better technology
may be launched.
 REPLACEMENT OF AN OLD
MACHINE WITH A NEW ONE OF
THE SOME TYPE:-In such cases
technology wise the machine is
still relevant, but it has worn out
and requires frequent repairs.
 TYPES OF CAPITAL
PROJECTS
INDEPENDENT PROJECTS:-Independent
Projects are those which can be accepted or
rejected irrespective of the decision
regarding other projects.
MUTUALLY EXCLUSIVE PROJECTS:-Mutually
exclusive projects are those where only one
of the available options can be accepted.
CONTINGENT INVESTMENTS:-Contingent
Investments are those which are associated
with other major investments.
 REPLACEMENT OF A MACHINE WITH
ANOTHER MACHINE OF BETTER
TECHNOLOGY:-In this case the
existing machine is still operational,
but machines that are more efficient
and with better technology have hit
the market.
 MODERNISATION:- A Company may consider
in modernization and replacement of obsolete
assets with a view to keep pace with the
advent of new technology for improving
operational efficiency and minimization of
costs, which results in a higher level of profits.
ADVERTISING CAMPAIGNS:-A firm may launch
massive marketing efforts like advertising
campaigns and expect it to yield improved
sales for many years.