Capital Investment

 Capital
 Revenue
 Deferred revenue
Capital investment
 Importance  Difficulties
 Long term effects  Measurement
 Irreversibility problems
 Substantial outlays  Uncertainty
 Temporal spread
Types of capital investment
 Physical
 Monetary
 Intangible
 Strategic
 Tactical
General types/reasons
 Replacement
 Mandatory
 Expansion
 Diversification
 R&D
 Miscellaneous
Phases
 Planning
Investment strategy
Preliminary screening
Feasibility study
 Analysis
PESTEL analysis
Gathering, preparing and summarising
Selection
Financing
 Equity
 Preference
 Debentures
 Term loan
 Other sources
 In the above cases one should take
FRICT(flexibility, risk, income,control
and taxes)
Implementation
Implementation at reasonable
cost involves
 Adequate formulation of projects
 Use of the principle of responsibility
accounting
 Use of network techniques(PERT and
CPM)
Levels of decision making
Facets of project analysis
 Market Analysis– potential market & market
share
 Technical Analysis– Technical viability &
sensible choices
 Financial Analysis – risk & return
 Economic Analysis – Benefits & costs in efficiency
prices & other impacts
 Ecological Analysis – environmental damage &
Restoration measures
Key issues in major investment decision

 Investment management
 Risks
 DCF Value
 Financing mix
 Impact on short term EPS
 Options (delay,expand)
Objectives of capital budgeting

 Contribution to the society

 Resources deployment
 Value for money to stakeholders
Weakness in capital budgeting

 Poor alignment between strategy and

capital budgeting
 Deficiencies in Analytical techniques
Base case identification
Risk is treated inadequately
Options are not properly evaluated
Lack of uniformity in assumptions
Side effects are ignored
 No linkage between compensation and
financial measures
 Reverse financial engineering
 Weak integration between CB and
Expense budgeting
 Inadequate post-audits
Strategy and resource
allocation
 Meaning
 A plan of action designed to achieve a
long-term or overall aim
Formulation of strategy

Balancing fit

Firms strategies
Conglomerate can add value in
emerging markets
 Product markets
 Capital markets
 Labour markets
 Regulations
 Contract enforcement
Diversification and value
creation
 Unrelated diversification
 Vertical integration
 Related diversification
 Strategic diversification
How to reduce risks in
diversifications
 What can our company do better than any of
our competitors
 What strategic asset is needed
 Can we catch up to or leapfrog competitors at
their own game
 Will diversification break up strategic assets
that need to be kept together
 Player or a winner
 What can our company learn by diversification
GE stoplight matrix
Mckinsey Matrix