Managerial decisions are often based on intuition and gut feelings rather than explicit analysis. Judgment is influenced by both quantifiable and intangible factors like information quality, reputation, politics, and even superstition. Strategic planning and capital budgeting processes can differ in their objectives, types of analysis used, and treatment of quantifiable vs intangible factors. Informational asymmetries between managers, shareholders, and bondholders can also lead to distortions in investment decisions. Efforts are needed to bridge the gaps between strategic planning and financial analysis.
The document discusses project management and outlines several key aspects:
1. It describes three forms of project organization: line and staff, divisional, and matrix.
2. It covers various aspects of project planning including work breakdown structure, project life cycle, planning tools like bar charts and network techniques, and hierarchy of plans.
3. It discusses project control through performance analysis using terms like budgeted cost for work scheduled and actual cost of work performed.
The document discusses various sources of financing for projects including internal accruals, equity capital, preference capital, debentures, term loans, working capital advances, and miscellaneous sources. It compares the differences between equity and debt financing and lists key factors for determining an appropriate debt-to-equity ratio. Specific financing methods like initial public offerings, rights issues, private placements, and bond offerings are outlined. International financing options through eurocurrency loans, eurobonds, and global depository receipts are also summarized.
Venture capital (VC) funds provide financing to young private companies that are not ready or willing to tap public financial markets. VC investments involve high-growth potential businesses with medium- to long-term horizons, high risks and returns, and active post-financing involvement. The VC appraisal process emphasizes management team assessment, strategic strengths, and liquidity potential. Valuation converts projected performance into equity stakes. Deal structuring chooses funding instruments and terms. Post-financing agreements define investor rights and controls. Current concerns in India include competition, valuations, economic uncertainty, contract enforcement, and manager shortages.
The presentation covers project constraints: project dependence, capital rationing, project invisibility. It covers comparing project under constraints: methods of ranking, ranking conflicts,
This document discusses capital budgeting and project planning. It outlines the key aspects of investment/project selection including make-or-buy decisions, outsourcing, expansion, product improvements, and regulatory compliance. It also discusses investment finance sources including internal and external financing. Finally, it describes the stages of project planning including searching for proposals, classification, cost-benefit analysis, feasibility studies, decision-making, implementation, and performance reviews.
This document discusses capital investment decisions and the capital budgeting process. It covers the importance and difficulties of capital investments, types of investments, phases of capital budgeting including planning, analysis, selection, financing and review. It also discusses levels of decision making, facets of project analysis including market, technical and financial analysis. It outlines objectives of capital budgeting to maximize firm value and risks. Finally, it identifies common weaknesses in capital budgeting practices.
- Because of constraints like project dependencies, capital rationing, and project indivisibility, investment projects cannot be viewed in isolation. Two common approaches used to evaluate multiple projects are the method of ranking and mathematical programming.
- The method of ranking ranks projects by their NPV, IRR or BCR but has problems like conflict in rankings between criteria and inability to handle project indivisibility.
- Mathematical programming models like linear programming, integer linear programming and goal programming formulate the problem as an objective function subject to constraints, allowing complex project interdependencies and capital rationing to be incorporated.
Capital budgeting is the process of evaluating and selecting long-term investment projects. It involves generating investment proposals, estimating the costs and benefits of projects, and selecting projects using techniques like payback period, accounting rate of return, and discounted cash flow analysis. Capital budgeting is important because it influences a company's future profitability, allows investment in projects that ensure adequate returns over the long run, and helps manage risks associated with long-term decisions under uncertainty. The goal is to rationally and efficiently allocate scarce capital resources among competing investment opportunities.
The document discusses project management and outlines several key aspects:
1. It describes three forms of project organization: line and staff, divisional, and matrix.
2. It covers various aspects of project planning including work breakdown structure, project life cycle, planning tools like bar charts and network techniques, and hierarchy of plans.
3. It discusses project control through performance analysis using terms like budgeted cost for work scheduled and actual cost of work performed.
The document discusses various sources of financing for projects including internal accruals, equity capital, preference capital, debentures, term loans, working capital advances, and miscellaneous sources. It compares the differences between equity and debt financing and lists key factors for determining an appropriate debt-to-equity ratio. Specific financing methods like initial public offerings, rights issues, private placements, and bond offerings are outlined. International financing options through eurocurrency loans, eurobonds, and global depository receipts are also summarized.
Venture capital (VC) funds provide financing to young private companies that are not ready or willing to tap public financial markets. VC investments involve high-growth potential businesses with medium- to long-term horizons, high risks and returns, and active post-financing involvement. The VC appraisal process emphasizes management team assessment, strategic strengths, and liquidity potential. Valuation converts projected performance into equity stakes. Deal structuring chooses funding instruments and terms. Post-financing agreements define investor rights and controls. Current concerns in India include competition, valuations, economic uncertainty, contract enforcement, and manager shortages.
The presentation covers project constraints: project dependence, capital rationing, project invisibility. It covers comparing project under constraints: methods of ranking, ranking conflicts,
This document discusses capital budgeting and project planning. It outlines the key aspects of investment/project selection including make-or-buy decisions, outsourcing, expansion, product improvements, and regulatory compliance. It also discusses investment finance sources including internal and external financing. Finally, it describes the stages of project planning including searching for proposals, classification, cost-benefit analysis, feasibility studies, decision-making, implementation, and performance reviews.
This document discusses capital investment decisions and the capital budgeting process. It covers the importance and difficulties of capital investments, types of investments, phases of capital budgeting including planning, analysis, selection, financing and review. It also discusses levels of decision making, facets of project analysis including market, technical and financial analysis. It outlines objectives of capital budgeting to maximize firm value and risks. Finally, it identifies common weaknesses in capital budgeting practices.
- Because of constraints like project dependencies, capital rationing, and project indivisibility, investment projects cannot be viewed in isolation. Two common approaches used to evaluate multiple projects are the method of ranking and mathematical programming.
- The method of ranking ranks projects by their NPV, IRR or BCR but has problems like conflict in rankings between criteria and inability to handle project indivisibility.
- Mathematical programming models like linear programming, integer linear programming and goal programming formulate the problem as an objective function subject to constraints, allowing complex project interdependencies and capital rationing to be incorporated.
Capital budgeting is the process of evaluating and selecting long-term investment projects. It involves generating investment proposals, estimating the costs and benefits of projects, and selecting projects using techniques like payback period, accounting rate of return, and discounted cash flow analysis. Capital budgeting is important because it influences a company's future profitability, allows investment in projects that ensure adequate returns over the long run, and helps manage risks associated with long-term decisions under uncertainty. The goal is to rationally and efficiently allocate scarce capital resources among competing investment opportunities.
This document discusses opportunity studies conducted at the subsector level to identify potential investment projects. It outlines the objectives, scope, data sources, organization, and outputs of opportunity studies. Key points include: Opportunity studies provide relevant information and data on subsectors to enable investors to identify the best opportunities and lower costs of feasibility studies. They draw data from public and private sources and are often conducted by public development institutions. The studies result in an executive summary that concisely describes typical projects in a subsector, business conditions, and recommendations. The summary highlights feasibility for decision makers.
Corporate finance refers to the financial activities of a company, including raising capital and managing financial risks. The goals of corporate finance are to maximize a company's value and manage financial risks. Key financial statements analyzed in corporate finance are the income statement, balance sheet, statement of retained earnings, and cash flow statement. Important techniques used in corporate finance include net present value analysis, internal rate of return calculation, and ratios analysis to evaluate a company's performance and make capital budgeting decisions.
Project management involves planning, scheduling, and controlling projects effectively. It establishes a basis for planning, decision making, and replanning. The phases of capital budgeting include planning, analysis, selection, implementation, and review. Planning involves identifying potential projects. Analysis involves studying marketing, technical, financial, economic, and ecological aspects. Selection uses non-discounting criteria like payback period and accounting rate of return, as well as discounting criteria like net present value, internal rate of return, and benefit cost ratio to determine if a project is worthwhile. Implementation consists of setting up manufacturing facilities through project design, negotiations, construction, training, and commissioning. Review periodically compares actual and projected performance to provide documentation for future decisions and suggest
This document discusses capital budgeting, which refers to the process of evaluating potential long-term investment projects. It describes the key aspects of capital budgeting including its meaning, significance, and common methods used. The capital budgeting process involves generating project proposals, evaluating them by estimating costs and benefits, selecting projects, and reviewing performance. Traditional methods for evaluating projects include payback period and accounting rate of return. Discounted cash flow methods, like net present value and internal rate of return, are also covered. The document provides details on how to calculate and apply each of these evaluation methods.
Basically computation of Project Appraisal technique with a special reference to financial parameters - Payback, Discounted Cash flow, NPV, IRR etc are explained. The slides are used for educating those who have taken up Project Finance recently
Evaluating various methods of capital budgetingmmakani
The document provides a comprehensive report on evaluating various methods of capital budgeting. It discusses key methods like net present value (NPV), internal rate of return (IRR), payback period, accounting rate of return. It also reviews literature on capital budgeting techniques used in foreign and Indian companies. The report finds that Indian companies increasingly use discounted cash flow methods like NPV and IRR for capital budgeting decisions, though payback period remains popular. Sensitivity analysis is a commonly used technique for incorporating risk into capital budgeting.
Chapter- III Techniques of Capital Budgeting
Concept, Significance, Nature and classification of capital budgeting decisions, cash flow computation- Incremental approach; Evaluation criteria- Pay Back Period, ARR, NPV, IRR and PI methods; capital rationing, Capital budgeting under risk and uncertainty.
This document provides an introduction and overview of capital budgeting. It defines capital budgeting as a firm's formal process for acquiring and investing in capital assets through long-term planning. It deals with evaluating investment proposals for long-term projects and allocating scarce financial resources. The document discusses the nature, importance, and process of capital budgeting, including identifying and screening proposals, evaluating alternatives, setting priorities, approving budgets, implementing projects, and reviewing performance. It also covers different types of capital budgeting decisions and factors that influence capital expenditure choices.
Capital budgeting is the process of evaluating potential long-term investments and projects that span multiple years. It involves creating a capital budget, screening potential projects, analyzing projects using analytical tools, and monitoring approved projects. The capital budgeting process seeks to select projects that will provide the best returns and ensures only relevant cash flows are considered in the analysis. It is an ongoing process of identifying, analyzing, selecting, implementing, and reviewing long-term investment opportunities.
The document discusses capital budgeting tools used to evaluate investment projects. It describes payback period, accounting rate of return, net present value (NPV), and internal rate of return (IRR). For payback period, it provides the calculation method and notes that it ignores the time value of money. NPV calculates the difference between the present value of cash inflows and outflows. IRR is the discount rate that sets the NPV equal to zero. Examples are provided to demonstrate calculations for each method. Capital budgeting tools help managers select projects that maximize value.
Capital budgeting is the process of identifying, evaluating, planning, and financing capital investment projects of an organization. It involves projects that require large sums of money and long time periods. The key steps are identifying potential projects, estimating costs and benefits, evaluating proposed projects, and developing a capital expenditure budget. Projects can be for replacement, improvement, or expansion. Various discounted cash flow methods and payback methods are used to evaluate projects based on factors like net investment, net returns, and cost of capital.
Futurum training capital budgeting entry levelmputrawal
Futurum training capital budgeting (intermediate)
Date : see at the website “futurum corfinan” (2-day training)
Venue : Hotel at Jakarta Pusat
Notes :
Presentation slides will be distributed in softcopy
Minimum participants = 10 persons
After the training, participants are allowed to discuss about the training materials via email in the website
Contact email : futurumcorfinan@gmail.com
Visit Website and Training Testimonials : google “futurum corfinan”
Capital budgeting is the process of analyzing long-term investment projects involving major capital or fixed asset expenditures. It involves evaluating proposed investments and deciding which projects to include in the capital budget. There are traditional non-discounted methods like payback period and accounting rate of return, as well as more accurate discounted cash flow methods like net present value, internal rate of return, and profitability index. Accurately evaluating investment opportunities is important because capital budgeting decisions involve large expenditures that have long-term impacts and risks.
Capital budgeting refers to the process of evaluating investment projects and determining whether they should be accepted or rejected. There are traditional and discounted cash flow methods for evaluating projects. Traditional methods include payback period and accounting rate of return, which do not consider the time value of money. Discounted cash flow methods like net present value (NPV) and internal rate of return (IRR) discount future cash flows to determine if a project will provide sufficient returns. The capital budgeting process involves project generation, evaluation using techniques like NPV or IRR, and selection of projects that meet acceptance criteria.
Impact of Firm Size on Capital Budgeting Techniques: An Empirical Study of Te...Muhammad Arslan
This study examines the type of capital budgeting methods used by textile firms in Pakistan and impact of firm
size on these methods. This study also investigates the relationship between the total assets of the firm and
annual turnover of the firm according to primary capital budgeting technique used. Questionnaire method is used
as a source of gathering primary data. SPSS is used as tool for analysis of data. Cross tabulation is applied on
each variable. Chi square test is also applied to investigate the relationship between total assets of firm and total
turnover of the firm according to primary capital budgeting technique used. Findings of this study reveal that net
present value method and internal rate of return are two mostly used methods. Findings also show that there is no
relationship between the total assets of the firms and turnover of the firm according to capital budgeting
technique used by firms. These results are well supported by the literature.
Discuss the concept of risk in investment decisions.
Understand some commonly used techniques, i.e., payback, certainty equivalent and risk-adjusted discount rate, of risk analysis in capital budgeting.
Focus on the need and mechanics of sensitivity analysis and scenario analysis.
Highlight the utility and methodology simulation analysis.
Explain the decision tree approach in sequential investment decisions.
Focus on the relationship between utility theory and capital budgeting decisions.
This document discusses capital budgeting and capital expenditure. It defines capital budgeting as long-term planning for capital outlays whose returns will be realized in future periods. Capital expenditure involves acquiring or improving fixed assets that provide benefits over many years. The document outlines the objectives, importance, difficulties and process of capital budgeting. It also discusses factors influencing investment decisions and different types of capital budgeting decisions.
Methodology For Formulation And Appraisal of a Projectimrohan1
The document outlines the methodology for project formulation and appraisal. It discusses the 5 stages of project formulation: 1) feasibility studies, 2) detailed studies, 3) developing project options, 4) detailed site development plans, and 5) implementation. The stages involve identifying needs, assessing sites, developing alternatives, designing plans, and implementing in phases while monitoring and evaluating progress.
This document discusses various capital budgeting techniques used to evaluate investment projects. It begins by explaining the importance of capital budgeting in long-term investment decisions and financial goals of maximizing firm value. Next, it outlines both non-discounted cash flow methods like average rate of return (ARR) and payback period (PBP), as well as discounted cash flow methods including net present value (NPV), internal rate of return (IRR), modified IRR, and profitability index (PI). For each technique, it provides the calculation method, advantages, and disadvantages. It emphasizes that NPV is the preferred approach as it considers the time value of money and is consistent with wealth maximization.
Sourabh Jain earned an MBA from the National Institute of Technology Karnataka in 2010-2012. The document appears to be a PowerPoint presentation created by Sourabh Jain to help with his studies. The presentation contains slides on various topics related to project management, including project idea generation, feasibility analysis, capacity planning, and plant location determinants.
Measure What Matters - New Perspectives on Portfolio SelectionUMT
The document discusses new frameworks for IT portfolio selection that consider both financial and strategic metrics. It summarizes that traditional portfolio selection focused solely on financial metrics, but recent research shows this led to underinvestment in strategic areas. The new framework evaluates investments from four perspectives: demand, supply, governance, and alternatives. This allows executives to consider financial returns, strategic alignment, risk exposure, architectural fit, options, costs, deadlines, and skills. Successful companies now use multiple financial and strategic metrics to optimize resource allocation and maximize investment value and benefits.
This document provides an outline for a presentation on capital budgeting. It discusses capital budgeting theory, evaluation methods like net present value (NPV), internal rate of return (IRR), and profitability index (PI). It covers the importance of capital budgeting, types of capital budgeting projects, and the eight step capital budgeting process. Evaluation methods are examined in depth including their strengths and weaknesses. The presentation aims to help the audience understand capital budgeting and how to select projects that maximize shareholder wealth.
This document discusses opportunity studies conducted at the subsector level to identify potential investment projects. It outlines the objectives, scope, data sources, organization, and outputs of opportunity studies. Key points include: Opportunity studies provide relevant information and data on subsectors to enable investors to identify the best opportunities and lower costs of feasibility studies. They draw data from public and private sources and are often conducted by public development institutions. The studies result in an executive summary that concisely describes typical projects in a subsector, business conditions, and recommendations. The summary highlights feasibility for decision makers.
Corporate finance refers to the financial activities of a company, including raising capital and managing financial risks. The goals of corporate finance are to maximize a company's value and manage financial risks. Key financial statements analyzed in corporate finance are the income statement, balance sheet, statement of retained earnings, and cash flow statement. Important techniques used in corporate finance include net present value analysis, internal rate of return calculation, and ratios analysis to evaluate a company's performance and make capital budgeting decisions.
Project management involves planning, scheduling, and controlling projects effectively. It establishes a basis for planning, decision making, and replanning. The phases of capital budgeting include planning, analysis, selection, implementation, and review. Planning involves identifying potential projects. Analysis involves studying marketing, technical, financial, economic, and ecological aspects. Selection uses non-discounting criteria like payback period and accounting rate of return, as well as discounting criteria like net present value, internal rate of return, and benefit cost ratio to determine if a project is worthwhile. Implementation consists of setting up manufacturing facilities through project design, negotiations, construction, training, and commissioning. Review periodically compares actual and projected performance to provide documentation for future decisions and suggest
This document discusses capital budgeting, which refers to the process of evaluating potential long-term investment projects. It describes the key aspects of capital budgeting including its meaning, significance, and common methods used. The capital budgeting process involves generating project proposals, evaluating them by estimating costs and benefits, selecting projects, and reviewing performance. Traditional methods for evaluating projects include payback period and accounting rate of return. Discounted cash flow methods, like net present value and internal rate of return, are also covered. The document provides details on how to calculate and apply each of these evaluation methods.
Basically computation of Project Appraisal technique with a special reference to financial parameters - Payback, Discounted Cash flow, NPV, IRR etc are explained. The slides are used for educating those who have taken up Project Finance recently
Evaluating various methods of capital budgetingmmakani
The document provides a comprehensive report on evaluating various methods of capital budgeting. It discusses key methods like net present value (NPV), internal rate of return (IRR), payback period, accounting rate of return. It also reviews literature on capital budgeting techniques used in foreign and Indian companies. The report finds that Indian companies increasingly use discounted cash flow methods like NPV and IRR for capital budgeting decisions, though payback period remains popular. Sensitivity analysis is a commonly used technique for incorporating risk into capital budgeting.
Chapter- III Techniques of Capital Budgeting
Concept, Significance, Nature and classification of capital budgeting decisions, cash flow computation- Incremental approach; Evaluation criteria- Pay Back Period, ARR, NPV, IRR and PI methods; capital rationing, Capital budgeting under risk and uncertainty.
This document provides an introduction and overview of capital budgeting. It defines capital budgeting as a firm's formal process for acquiring and investing in capital assets through long-term planning. It deals with evaluating investment proposals for long-term projects and allocating scarce financial resources. The document discusses the nature, importance, and process of capital budgeting, including identifying and screening proposals, evaluating alternatives, setting priorities, approving budgets, implementing projects, and reviewing performance. It also covers different types of capital budgeting decisions and factors that influence capital expenditure choices.
Capital budgeting is the process of evaluating potential long-term investments and projects that span multiple years. It involves creating a capital budget, screening potential projects, analyzing projects using analytical tools, and monitoring approved projects. The capital budgeting process seeks to select projects that will provide the best returns and ensures only relevant cash flows are considered in the analysis. It is an ongoing process of identifying, analyzing, selecting, implementing, and reviewing long-term investment opportunities.
The document discusses capital budgeting tools used to evaluate investment projects. It describes payback period, accounting rate of return, net present value (NPV), and internal rate of return (IRR). For payback period, it provides the calculation method and notes that it ignores the time value of money. NPV calculates the difference between the present value of cash inflows and outflows. IRR is the discount rate that sets the NPV equal to zero. Examples are provided to demonstrate calculations for each method. Capital budgeting tools help managers select projects that maximize value.
Capital budgeting is the process of identifying, evaluating, planning, and financing capital investment projects of an organization. It involves projects that require large sums of money and long time periods. The key steps are identifying potential projects, estimating costs and benefits, evaluating proposed projects, and developing a capital expenditure budget. Projects can be for replacement, improvement, or expansion. Various discounted cash flow methods and payback methods are used to evaluate projects based on factors like net investment, net returns, and cost of capital.
Futurum training capital budgeting entry levelmputrawal
Futurum training capital budgeting (intermediate)
Date : see at the website “futurum corfinan” (2-day training)
Venue : Hotel at Jakarta Pusat
Notes :
Presentation slides will be distributed in softcopy
Minimum participants = 10 persons
After the training, participants are allowed to discuss about the training materials via email in the website
Contact email : futurumcorfinan@gmail.com
Visit Website and Training Testimonials : google “futurum corfinan”
Capital budgeting is the process of analyzing long-term investment projects involving major capital or fixed asset expenditures. It involves evaluating proposed investments and deciding which projects to include in the capital budget. There are traditional non-discounted methods like payback period and accounting rate of return, as well as more accurate discounted cash flow methods like net present value, internal rate of return, and profitability index. Accurately evaluating investment opportunities is important because capital budgeting decisions involve large expenditures that have long-term impacts and risks.
Capital budgeting refers to the process of evaluating investment projects and determining whether they should be accepted or rejected. There are traditional and discounted cash flow methods for evaluating projects. Traditional methods include payback period and accounting rate of return, which do not consider the time value of money. Discounted cash flow methods like net present value (NPV) and internal rate of return (IRR) discount future cash flows to determine if a project will provide sufficient returns. The capital budgeting process involves project generation, evaluation using techniques like NPV or IRR, and selection of projects that meet acceptance criteria.
Impact of Firm Size on Capital Budgeting Techniques: An Empirical Study of Te...Muhammad Arslan
This study examines the type of capital budgeting methods used by textile firms in Pakistan and impact of firm
size on these methods. This study also investigates the relationship between the total assets of the firm and
annual turnover of the firm according to primary capital budgeting technique used. Questionnaire method is used
as a source of gathering primary data. SPSS is used as tool for analysis of data. Cross tabulation is applied on
each variable. Chi square test is also applied to investigate the relationship between total assets of firm and total
turnover of the firm according to primary capital budgeting technique used. Findings of this study reveal that net
present value method and internal rate of return are two mostly used methods. Findings also show that there is no
relationship between the total assets of the firms and turnover of the firm according to capital budgeting
technique used by firms. These results are well supported by the literature.
Discuss the concept of risk in investment decisions.
Understand some commonly used techniques, i.e., payback, certainty equivalent and risk-adjusted discount rate, of risk analysis in capital budgeting.
Focus on the need and mechanics of sensitivity analysis and scenario analysis.
Highlight the utility and methodology simulation analysis.
Explain the decision tree approach in sequential investment decisions.
Focus on the relationship between utility theory and capital budgeting decisions.
This document discusses capital budgeting and capital expenditure. It defines capital budgeting as long-term planning for capital outlays whose returns will be realized in future periods. Capital expenditure involves acquiring or improving fixed assets that provide benefits over many years. The document outlines the objectives, importance, difficulties and process of capital budgeting. It also discusses factors influencing investment decisions and different types of capital budgeting decisions.
Methodology For Formulation And Appraisal of a Projectimrohan1
The document outlines the methodology for project formulation and appraisal. It discusses the 5 stages of project formulation: 1) feasibility studies, 2) detailed studies, 3) developing project options, 4) detailed site development plans, and 5) implementation. The stages involve identifying needs, assessing sites, developing alternatives, designing plans, and implementing in phases while monitoring and evaluating progress.
This document discusses various capital budgeting techniques used to evaluate investment projects. It begins by explaining the importance of capital budgeting in long-term investment decisions and financial goals of maximizing firm value. Next, it outlines both non-discounted cash flow methods like average rate of return (ARR) and payback period (PBP), as well as discounted cash flow methods including net present value (NPV), internal rate of return (IRR), modified IRR, and profitability index (PI). For each technique, it provides the calculation method, advantages, and disadvantages. It emphasizes that NPV is the preferred approach as it considers the time value of money and is consistent with wealth maximization.
Sourabh Jain earned an MBA from the National Institute of Technology Karnataka in 2010-2012. The document appears to be a PowerPoint presentation created by Sourabh Jain to help with his studies. The presentation contains slides on various topics related to project management, including project idea generation, feasibility analysis, capacity planning, and plant location determinants.
Measure What Matters - New Perspectives on Portfolio SelectionUMT
The document discusses new frameworks for IT portfolio selection that consider both financial and strategic metrics. It summarizes that traditional portfolio selection focused solely on financial metrics, but recent research shows this led to underinvestment in strategic areas. The new framework evaluates investments from four perspectives: demand, supply, governance, and alternatives. This allows executives to consider financial returns, strategic alignment, risk exposure, architectural fit, options, costs, deadlines, and skills. Successful companies now use multiple financial and strategic metrics to optimize resource allocation and maximize investment value and benefits.
This document provides an outline for a presentation on capital budgeting. It discusses capital budgeting theory, evaluation methods like net present value (NPV), internal rate of return (IRR), and profitability index (PI). It covers the importance of capital budgeting, types of capital budgeting projects, and the eight step capital budgeting process. Evaluation methods are examined in depth including their strengths and weaknesses. The presentation aims to help the audience understand capital budgeting and how to select projects that maximize shareholder wealth.
Capital budgeting is the process of analyzing potential long-term investments and projects to determine which ones are worth undertaking. It involves analyzing projects with large capital expenditures that will impact the firm's future. Some key techniques for capital budgeting include net present value (NPV), internal rate of return (IRR), and profitability index. NPV and IRR are consistent with maximizing shareholder wealth if all cash flows are considered and the time value of money is incorporated. Capital rationing occurs when a firm has more projects with positive NPVs than available funds to invest, requiring some worthwhile projects to be declined due to artificial budget constraints.
This document provides an introduction to finance and working capital. It defines key terms like finance, working capital, gross working capital and net working capital. It discusses the importance of financial planning and maintaining adequate versus excessive working capital. It also outlines the operating cycle for manufacturing and trading businesses to demonstrate the time gaps that working capital is needed to address.
The document outlines 12 basic principles to consider when preparing cash flow forecasts and plans. Some key principles include: 1) Understanding cash flow contributions of different business units and product lines. 2) Involving managers who will be accountable for meeting cash flow targets. 3) Identifying and communicating key performance metrics to focus on. 4) Adapting cash flow planning processes to the organizational capabilities. 5) Encouraging open debate and fact-finding when preparing cash flow plans.
This document discusses investment policies and strategies for non-profit organizations. It provides examples of investment policy statements and discusses key components like objectives, asset allocation, spending policies, and performance monitoring. It emphasizes the importance of having a documented investment roadmap to protect against emotional decisions and outlines factors like market conditions and inflation that non-profits should consider for short and long-term spending goals. The document also cautions against back-tested strategies and suggests non-profits evaluate investment manager performance against both static and dynamic benchmarks.
The document analyzes the potential for a company to expand into 16-ounce bottling by examining cash flows under three scenarios - a base case, pessimistic case, and optimistic case - finding that the pessimistic case yields a negative NPV while the base case and optimistic case produce positive NPVs, suggesting the expansion would be profitable under the base or optimistic forecasts but not under more pessimistic assumptions.
Strategic financial management refers to both the financial implications of business strategies and the strategic management of finances. It takes a long-term perspective to facilitate growth, sustainability, and competitive advantage. Strategic financial management deals with investment, financing, liquidity, and dividend decisions and applies financial techniques to strategic decision making to help achieve objectives. An effective strategic financial plan considers scenarios, start-up costs, ongoing costs, revenue, objectives, and what the planning process will accomplish for the organization.
Real Options, Investment Analysis and Process PANKAJ PANDEY
Understand the capital budgeting process:
Document the policies and practices of companies in India and compare them with that of the companies in developed countries.
Understand the linkage between corporate strategy and investment decisions.
Define strategic real options.
Show the valuation of real options.
The document discusses capital budgeting and investment analysis processes. It covers identifying investment opportunities, developing cash flow estimates, project evaluation techniques like net present value, and qualitative factors considered. Real options that provide flexibility are discussed, as well as valuing options using the Binomial and Black-Scholes methods. Capital budgeting is linked to corporate strategy, and decisions are made at operating, administrative and strategic levels.
Ratio analysis is used to evaluate a company's financial performance and health over time. It involves calculating and comparing various financial ratios to identify trends, strengths, weaknesses and how the company compares to its competitors. Some key points:
1. Ratios are calculated using figures from financial statements and compare metrics like profitability, liquidity, operating efficiency and financial strength.
2. Ratio analysis helps evaluate areas like a company's short-term solvency, profitability, operating efficiency, and long-term financial stability.
3. Comparing ratios over time and against industry benchmarks provides insight into a company's financial management and performance relative to its peers.
4. Various considerations must be made when interpreting
This document provides an overview of financial management. It defines key terms like finance, financial management, and discusses the nature and objectives of financial management. It also discusses the relationship between financial management and other business functions like economics, accounting, production etc. Additionally, it covers topics like agency theory, business policies and their impact on financial decisions, and contemporary issues in financial management.
A FINANCIAL STATEMENT ANALYSIS OF COMPANIES WITH DIFFERENT OWNERSHIP CONCENTR...Fiona Phillips
This document provides a literature review on research related to the relationship between ownership concentration and firm performance. It discusses several theories on how ownership structure can impact firm value and reviews studies that have examined the effects of incentives and managerial ownership levels. The literature review finds mixed results from prior research and conflicting theories on the relationship between ownership concentration and performance. It aims to contribute to the body of research on this topic.
Capital budgeting accounting is a crucial financial management process that involves evaluating potential long-term investment projects to determine their feasibility and profitability. By analyzing these investment opportunities, businesses can make informed decisions about allocating their financial resources wisely. In this comprehensive guide, we explore the significance of capital budgeting accounting in strategic decision-making. From understanding the core principles to exploring various capital budgeting methods, this article sheds light on how businesses can utilize this accounting technique to achieve sustainable growth and maximize returns on investments.
Capital budgeting is the process of evaluating investments in fixed assets with cash flows extending beyond one year. It allows companies to analyze major projects and determine if their expected returns meet benchmarks. The net present value (NPV) method discounts future cash flows to present value to see if a project's value exceeds its cost. It is considered the best technique as it incorporates the time value of money. Other methods like payback period and accounting rate of return are simpler but ignore important factors like risk and the length of a project's life. Capital budgeting is important for companies to evaluate projects carefully and make profitable long-term investment decisions that impact their future success.
Do you need to secure financing? Do you need to improve profitability? Do you need to protect wealth?
Financing decisions can become competitive advantages or disadvantages for a company and chances and risks for their owners. A suitable capital and wealth structure to reach your objectives requires business and financial planning, cash flow modeling, risk-management, legal structuring, and adequate finance sources.
Using Portfolio Management to Improve Business InvestmentCarolyn Reid
Structured Portfolio Management is very valuable to businesses in maximizing their Return on Investment. Portfolio Management ties investments to strategy to ensure the organization is realizing it's expected benefits and achieving it's strategy.
This document discusses developing an impact investment strategy. It outlines 6 key steps: 1) Developing an investment strategy by setting priorities and defining impact themes. 2) Sourcing investment opportunities through partners. 3) Conducting due diligence on essentials like impact thesis and risk. 4) Getting to deal terms by clarifying investment options. 5) Managing for mutual success through regular reporting and support. 6) Monitoring performance by setting targets and measuring impact and returns. It also discusses thematic investment approaches that classify companies into impact themes aligned with UN Sustainable Development Goals.
This document discusses capital budgeting and provides an outline for a presentation on the topic. It defines capital budgeting as the process of analyzing projects and deciding which ones to include in a capital budget. The presentation will cover duties of financial managers, definitions of budgets, types of capital budgeting projects, evaluation criteria like net present value, internal rate of return and profitability index, and will conclude with a summary. It is being presented to Mr. Kashif Abbas by three students for their management sciences program.
The document discusses capital budgeting, which refers to long-term planning for capital expenditures and their financing. It involves evaluating major fixed asset investments to allocate scarce financial resources. Capital budgeting decisions are complex, long-term, and irreversible. Managers may be overconfident in their capital budgeting judgments due to factors like attribution bias and selection bias. The capital budgeting process involves identifying, developing, selecting, and controlling projects. Selection techniques are most commonly studied but other stages also require attention. Capital budgeting decisions are influenced by many financial and non-financial factors like risk, uncertainty and availability of funds.
This document outlines a swot analysis for an individual. Their strengths include being positive, a quick learner, having creative thinking, being straightforward, good time management, and able to multi-task and manage multiple projects. Weaknesses are overthinking, anger, impatience, and being emotional. Opportunities exist to continue learning and expanding abilities, further improving business knowledge, and working abroad. Challenges include overcoming fears, getting a new job or promotion, and pursuing dream careers.
Performance appraisal involves evaluating an employee's overall contribution in the past, while performance management is an ongoing process of planning, monitoring, and evaluating employee objectives and contributions. Performance appraisal focuses on individual performance and mistakes, has an individualistic perspective, and is rigid, while performance management focuses on growth, has a holistic perspective, and is flexible.
An unsuccessful performance management system lacks structure, communication, and recognition/rewards. Goals are not considered and recent performances are overemphasized. It relies solely on annual evaluations. A successful system is accurate, fair, efficient, elevates performance, uses multiple data sources, includes coaching skills development, and links compensation decisions to performance rather than using them as the main purpose
The document analyzes non-performing assets (NPAs) at State Bank of India over 5 years using ratio analysis of secondary data. Gross NPAs peaked at 11% in 2018 while net NPAs peaked at 6% that year. Suggestions include SBI taking more care in granting advances and addressing its high net NPA ratio. The conclusion is that NPAs are a major problem for Indian banks and banks should focus on good assets by considering internal and external factors.
The document discusses various aspects of project review and administration for capital budgeting such as controlling in-progress projects, conducting post-completion audits, evaluating economic versus book rates of return, guidelines for project abandonment analysis, addressing agency problems, and disciplining the capital budgeting process for small expenditures. It also provides details on evaluating capital budgeting systems, classification of investment proposals, and overcoming resistance to abandoning failing projects.
This document provides an overview of network techniques for project management, including PERT and CPM models. Key points covered include: developing a project network diagram; determining critical paths and calculating floats; time and cost estimation; scheduling activities based on available resources; and using the network to project costs and monitor project progress. PERT uses probabilistic analysis while CPM is deterministic, focusing on time-cost tradeoffs when crashing activities. The network allows visualization of activity relationships and quantitative analysis of schedule options and resource constraints.
This document provides an overview of private financing of infrastructure projects in India. It discusses how infrastructure projects are typically structured, with a special purpose vehicle (SPV) established to implement the project. Key project parties and contractual agreements governing the project are described. Power and telecommunication projects are used as examples to illustrate typical financial structures and risks. Private-public partnerships (PPPs) are also discussed as a model for infrastructure development in India given the large funding needs and involvement of the private sector. The document emphasizes the importance of PPPs for meeting India's infrastructure gaps and expanding economic growth.
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1) It discusses the pros and cons of using multiple discount rates versus a single discount rate for capital budgeting. While multiple rates are conceptually better, most firms use a single rate for simplicity and to reduce influence costs.
2) It provides steps for calculating a project's required rate of return, including determining comparable firm betas, adjusting for financial leverage, and calculating WACC.
3) It notes that firms often use a hurdle rate higher than WACC to provide incentives for better projects and account for overly optimistic forecasts. A survey found 51% use risk-adjusted rates and 59
This document discusses techniques for analyzing risk in project management, including sensitivity analysis, scenario analysis, break-even analysis, simulation analysis, decision tree analysis, and the Hillier model. It provides examples and explanations of how to perform each technique. Key steps include identifying uncertain variables, defining possible outcomes and assigning probabilities, calculating net present value under different scenarios, and evaluating decision alternatives based on expected monetary values. The goal of risk analysis is to assess how uncertainty may impact project objectives and determine the best course of action.
This document discusses methods for calculating the cost of capital, including the cost of debt, equity, and preference shares. It outlines the Capital Asset Pricing Model (CAPM) approach for estimating the cost of equity, as well as other methods like the dividend yield plus risk premium approach and the dividend discount model. It also discusses how to calculate the weighted average cost of capital (WACC) using target capital structure weights. Additionally, it notes some issues that companies face in estimating their cost of capital and common misconceptions about the concept.
The document discusses key concepts for estimating and analyzing project cash flows including: the elements of a cash flow stream; principles for cash flow estimation such as separation, incremental, post-tax, and consistency; perspectives to view cash flows from; and biases that can impact cash flow forecasting. Accurately estimating cash flows is important but difficult, and requires coordinating across departments while following principles and addressing inherent biases to produce reliable forecasts.
This document discusses various investment criteria used to evaluate capital budgeting projects. It covers net present value, benefit-cost ratio, internal rate of return, payback period, and accounting rate of return. Formulas are provided for calculating each method along with their pros and cons. The key steps in investment evaluation are estimating costs and benefits, assessing risk, calculating the cost of capital, and using these criteria to determine if a project is worthwhile.
The document discusses concepts related to the time value of money, including formulas for calculating future value and present value. Specifically, it provides formulas for calculating the future and present value of single amounts, annuities, perpetuities, and growing annuities. It also discusses concepts like effective interest rates, loan amortization schedules, and the relationship between nominal and effective rates for different compounding periods.
This document outlines the key financial information needed to evaluate a project, including: cost of project, means of financing, sales and production estimates, cost of production, working capital requirements and financing, profitability projections, cash flow statements, and balance sheets. It describes how to estimate each item, such as assuming gradual increases in capacity utilization for sales projections and including material, labor, utilities and overhead costs for cost of production. The working capital needs and sources of financing like bank loans are also addressed. Multi-year financial projections of profits, cash flows and balances sheets using this information are demonstrated through sample exhibits.
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1. Secondary information is collected to provide context, while primary data from market surveys supplements this.
2. Demand is characterized based on past and present effective demand, demand breakdowns, price trends, distribution methods, consumer profiles, and competition.
3. Common demand forecasting methods include qualitative approaches like expert panels, time series models like trend projection and exponential smoothing, and causal models like chain ratios and consumption levels based on income/price elasticities.
- The document discusses various tools and frameworks for identifying promising investment opportunities, including SWOT analysis, Porter's five forces model, and the product life cycle approach.
- It outlines the process of generating ideas, screening projects, and developing a project rating index to evaluate ideas. Factors like strategic fit, costs, risks and market potential are assessed.
- Successful entrepreneurs ask important questions about goals, strategy, and execution capability. Qualities like leadership, marketing skills, and the willingness to sacrifice are also discussed.
This chapter discusses corporate strategy and capital allocation. It covers key concepts like grand strategy, diversification strategy, portfolio strategy, and business level strategy. Grand strategies discussed include concentration, vertical integration, concentric diversification, and conglomerate diversification. The chapter also discusses the pros and cons of diversification and different frameworks for analyzing a company's portfolio of businesses, including the BCG matrix, GE's stoplight matrix, and McKinsey matrix. It emphasizes the importance of portfolio configuration and the role the corporate center can play in adding value through activities like industry shaping, deal making, and allocating scarce assets. Potential barriers to effective corporate portfolio management are also outlined.
Artificial Intelligence (AI) has revolutionized the creation of images and videos, enabling the generation of highly realistic and imaginative visual content. Utilizing advanced techniques like Generative Adversarial Networks (GANs) and neural style transfer, AI can transform simple sketches into detailed artwork or blend various styles into unique visual masterpieces. GANs, in particular, function by pitting two neural networks against each other, resulting in the production of remarkably lifelike images. AI's ability to analyze and learn from vast datasets allows it to create visuals that not only mimic human creativity but also push the boundaries of artistic expression, making it a powerful tool in digital media and entertainment industries.
Decolonizing Universal Design for LearningFrederic Fovet
UDL has gained in popularity over the last decade both in the K-12 and the post-secondary sectors. The usefulness of UDL to create inclusive learning experiences for the full array of diverse learners has been well documented in the literature, and there is now increasing scholarship examining the process of integrating UDL strategically across organisations. One concern, however, remains under-reported and under-researched. Much of the scholarship on UDL ironically remains while and Eurocentric. Even if UDL, as a discourse, considers the decolonization of the curriculum, it is abundantly clear that the research and advocacy related to UDL originates almost exclusively from the Global North and from a Euro-Caucasian authorship. It is argued that it is high time for the way UDL has been monopolized by Global North scholars and practitioners to be challenged. Voices discussing and framing UDL, from the Global South and Indigenous communities, must be amplified and showcased in order to rectify this glaring imbalance and contradiction.
This session represents an opportunity for the author to reflect on a volume he has just finished editing entitled Decolonizing UDL and to highlight and share insights into the key innovations, promising practices, and calls for change, originating from the Global South and Indigenous Communities, that have woven the canvas of this book. The session seeks to create a space for critical dialogue, for the challenging of existing power dynamics within the UDL scholarship, and for the emergence of transformative voices from underrepresented communities. The workshop will use the UDL principles scrupulously to engage participants in diverse ways (challenging single story approaches to the narrative that surrounds UDL implementation) , as well as offer multiple means of action and expression for them to gain ownership over the key themes and concerns of the session (by encouraging a broad range of interventions, contributions, and stances).
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2. OUTLINE
• Managerial intuition and judgment
• Mission, strategy and capital budgeting
• Bridging the gulf between strategic planning and
financial analysis
• Informational asymmetry and capital budgeting
• Organisational considerations
• Reverse financial engineering
• Group process
• Impact on earnings
3. Managerial Intuition and Judgment
Many chief executives admit that ultimately their decisions are based
on gut-feeling. Robert Docktor conducted an experiment in which he
wired up a group of chief executive officers to an
electroencephalograph. He found that the brains of chief executive
officers were more active in right hemispheres, suggesting that they
frequently relied on intuitive hunches to define complex problems in
an open-ended state of ambiguity. Henry Mintzberg’s study likewise
showed that for making most of the strategic decisions managers
depend on the factor of judgment rather than explicit analysis. They
are often guided by their intuition and are not able to explain
adequately the how or why of their strategic decisions.
4. Factors Influencing Judgment
Judgment is influenced by a variety of factors such as :
Quality of information
Track record of the sponsor
Internal politics
Intangible benefits
Opportunity cost
Cost of reversing the decisions
Superstition
5. Superstition
Astrologers and psychologists have argued that magical rites and
superstitious behaviour make the world look more deterministic and
instil confidence in our ability to manage it. Superstitious beliefs seem
to help in:
Relieving anxiety
Imparting a sense of control
Encouraging necessary activity
Hence, such beliefs persist. And the more unpredictable or uncertain
the future appears to be, the greater may be the psychological urge to
rely on superstitions.
6. Mission
The mission of a firm provides the overarching perspective for its
activities which naturally cover strategy formulation and capital
budgeting. Most firms state their mission in formal terms. Here are
some examples of mission statements.
Merck : To preserve and improve life
IBM : To achieve value-added leadership position
Mckinsey : To help leading corporations and governments
to be more successful.
Ranbaxy : To be a research-oriented international
pharmaceutical company.
HDFC : To develop close relationships with individual
households; maintain position as the premier
housing finance institution in the country;
transform ideas into viable and creative
solutions.
7. Business planning Capital budgeting
April- Several scenarios are explored
August
September Initial premises are agreed to September Initial capital budgeting
guidelines are formulated
October - Work is continued toward October - Capital budget selection
December developing a final formal January is carried out in divisions
business plan and departments
January Final business plan is adopted February Capital budget is approved
by the executive committee
March Capital budget is approved
by the board
Linkages between Business Planning and Capital Budgeting
8. An Approach to Decision Making
Consistency
with Strategy?
Accept Positive NPV? Reject
Significant
Intangibles?
Yes
Yes
Yes
No
No
The key guidelines underlying the approach displayed above are :
In a decision involving measurement as well as judgment, as far as possible,
separate the quantifiable and intangible factors.
Don’t rely exclusively on measurable factors and spurious over- quantification.
Put differently, avoid the ‘what counts counts’bias.
9. Strategic Planning and Financial Analysis
Strategic planning Financial analysis
Objective Achieve a balanced goal structure Maximise shareholder value
Responsibility
- Internal Corporate planning department Finance department
- External Consultant Investment banker
Type of analysis Primary qualitative Primarily quantitative
Advantage Comprehensive qualitative Disciplined quantitative
assessment reasoning
Disadvantage Lacking in rigour Omission of hard-to-
quantify factors
10. Mistakes Committed in Financial Analysis
In applying DCF analysis, the following mistakes are commonly
committed:
• Mechanical projection of cash flows
• Optimistic bias in cash flows
• Emphasis on IRR
• Inconsistent treatment of inflation
• Unreasonably high discount rates
• Omission of embedded real options
11. Financial Naiveté' of Strategic Planning
Strategic planning is often naïve from the financial point of view. Wit the
following:
Strategic analysis focuses on variables like earnings per share and book rate
of return which are considered irrelevant by modern finance theory.
Strategic planning is sometimes based on the premise that a firm should, by
and large, depend on internally available funds. Put differently, the existence of
the capital market is ignored.
The hurdle rates applied in strategic planning are often not related to the
opportunity cost of capital.
Strategic planning typically emphasises a diversified business portfolio when
finance theory suggests that investors can resort to more efficient “home made”
diversification.
12. Reconciling the Differences
To bridge the gap between strategic planning and financial analysis, a conscious
effort is required on both the sides.
Financial analysts must avoid the mistakes commonly committed by them
and expand the scope of their work to reflect the values of options
embedded in investments of strategic significance.
Strategic planners must understand the logic of DCF analysis, acquire
familiarity with the meaning of capital market data, and calculate the
NPVs, at least as a rough check on the results of their analysis.
While a complete reconciliation is not practical, a sincere attempt to see
each other’s point of view and to unearth hidden premises will facilitate better
communication and understanding. This will ensure that strategic analysis is not
financially naïve and financial analysis is not insensitive to strategic issues.
13. Informational Asymmetry and Capital Budgeting
The conventional ‘text book’ approach to capital budgeting is starkly simple :
accept projects which have a positive NPV. It does not make any difference
whether the investment decision making is centralised or decentralised; it is
irrelevant whether the existing firm implements it or a newly set up firm executes
it; it does not matter what mix of financing is employed.
The behaviour of firms, however, is not always in conformity with what has
been said above. In the real world :
Firms often ration capital and do not invest in all projects that have positive
NPVs.
A lot of attention is paid to the extent to which capital budgeting decisions are
centralised.
Often, new projects are organised as separate corporate entities.
The mix of financing is considered to be very important.
14. Why does a discrepancy exist between what the conventional model says
and how the real world firms behave ? Informational asymmetries of various
sorts seem to create such a hiatus. Informational asymmetry exists if the
transacting parties have unequal information, ex ante or ex post.
We may classify informational asymmetry into three broad types :
· Informational asymmetry between shareholders and bondholders
· Informational asymmetry between current shareholders and prospective
shareholders
· Informational asymmetry between managers and shareholders
15. Informational Asymmetry between Shareholders
and Bondholders
Informational asymmetry between shareholders and
bondholders has two possible distorting consequences
Asset substitution moral : Shareholders may prod
hazard management to substitute riskier
assets for safer assets, at the
expense of bondholders
Underinvestment moral : In firms with risky debt,
hazard shareholders have an incentive
to avoid investing in new projects
that have a positive NPV, because
they would not like the cash flows
of new projects to be diverted for
servicing existing risky debt.
16. Informational Asymmetry between Current Shareholders
and Prospective Shareholders
When there is informational asymmetry between current shareholders
and prospective shareholders, the latter will not fully appreciate the
future payoffs of various resources commitments. The common
distortions resulting from such informational asymmetry are :
Preference for projects with shorter payback period.
· A greater degree of capital rationing.
· Centralisation of capital budgeting.
. Accumulation of liquidity despite the existence of positive NPV
projects.
17. Informational Asymmetry between Managers
and Shareholders
Thanks to their informational advantage, managers enjoy latitude to
choose investments aimed at building their reputation, rather than
enhancing shareholders wealth. The concern for managerial reputation
may lead to three kinds of distortions in investment decisions:
Visibility Bias Managers seek to improve short term indicators of
performance.
Resolution Preference Managers attempt to advance the arrival of
good news and delay the announcement of bad news.
Mimicry and Avoidance Managers try to imitate the actions of
superior managers and avoid the actions of inferior managers.
18. Squeezing of an investment to improve short term cash flows
Premature liquidation of assets to show that they are worth a lot.
Adoption of projects with earlier payoffs.
Avoidance of worthwhile projects that carry risk of early
failure to protect short-term reputation.
Escalation of inferior projects to avoid admission of failure
Undertaking projects which are supposed to have benefits in
distant future to protect short-term reputation.
Conformity with other managers to avoid the ‘odd manager’ label.
Deviation from other managers to avoid seeming mediocre.
These incentives may lead to the following investment biases:
19. Reverse Financial Engineering
Many organisations have reasonably well-defined quantitative
indicators (such as IRR > 20 percent) for approving projects.
Since a project sponsor is keen to get his project included in the
capital budget, he is likely to massage the numbers and dress up his
project proposal.
20. Mitigating Financial Manipulation
McGrath and MacMillan have suggested a process they call discovery-
driven planning that has the potential of improving the quality of analysis.
It reverses the sequence of the steps in the stage-gate process.
In traditional method:
Assumptions Financial Projections
Discovery-driven planning starts with the minimal acceptable revenue,
income, and cash flow statement and then asks: “What assumptions must
be fulfilled to get these numbers?”
McGrath and MacMillan refer to this as “reverse income statement.”
The traditional method focuses the spotlight on financial projections, while
obfuscating the assumptions.
By contrast, discovery-driven planning focuses the spotlight on the
assumptions that reflect the key uncertainties.
21. Group Process
In theory, a group decision is supposed to exploit the synergies arising
from bringing together people with diverse skills, perspectives, and
values.
Many groups are unable to achieve process gains due to the following:
In intellectual tasks groups tend to outperform individuals whereas
in judgmental tasks groups tend to under perform individuals.
Groups tend to become polarised in respect of risk tolerance.
As a result of group discussion, group members tend to readily
accept a decision.
22. Reasons for Group Errors
Groupthink Like individuals, group are characterised by a
collective form of confirmation bias called groupthink.
Poor Information Sharing.
Inadequate Motivation.
23. Countering Groupthink
According to Hersh Shefrin groupthink can be checked by:
Asking group members to refrain from stating their positions at
the beginning of the discussion.
Explicitly encouraging debate, disagreement, and information
sharing.
Designating one member of the group to be a devil’s advocate
for each major proposal.
Regularly inviting outside experts to attend meetings, with the
charge that they challenge the group to refrain from meek
conformism.
24. Impact on Earnings
In theory, managers are supposed to maximise firm value
by choosing projects on the basis of their NPVs.
In practice, managers look at NPVs as well as the
accounting implications of their decisions.
In particular, they are concerned with the impact of
investments on reported earnings in the short run.
25. Reasons and Consequences of Emphasis on Short-term
Earnings
Reasons for Emphasis on Short-term Earnings.
Short-term incentive compensation of top management is often
linked to earnings.
Value of stock options and stock grants depends on corporate
earnings, at least in the short run.
When reported earnings are good, top managers enjoy greater
freedom.
Favourable earnings inspire greater confidence in all stakeholders.
The emphasis on short-term earnings may lead to acceptance of
projects that are earnings-accretive but NPV-negative.
26. SUMMARY
A mosaic of influences that can be described qualitatively have an
important bearing on capital expenditure decisions.
Capital budgeting is the principal instrument for implementing a firm’s
strategy. Hence the two should be properly linked.
In a decision involving measurement as well as judgment, as far as
possible, separate the quantifiable factors and the intangible factors.
Strategic planning, among other things, is concerned with the issue of
allocating a firm’s resources across different lines of business. In this
sense, strategic planning may be viewed as capital budgeting on a grand
scale.
Strategic planning is often naïve from the financial point of view and /
or the results of strategic planning and financial analysis are not
properly reconciled.
27. In applying DCF analysis, the following mistakes are commonly
committed: mechanical projection of cash flows, optimistic bias in cash
flows, emphasis on IRR, inconsistent treatment of inflation, and
unreasonably high discount rates.
To bridge the gap between strategic planning and financial analysis, a
conscious effort is required on both the sides. Financial analysts must
avoid the mistakes commonly committed by them and strategic planners
must understand the logic of the DCF analysis.
The behaviour of firms in the real world is often at variance with the
textbook model. The discrepancy arises mainly because of
informational asymmetries.
In theory, managers are supposed to maximize firm value by choosing
projects on the basis of their NPVs. In practice, managers look at NPVs
as well as the accounting implications of their investment decisions. In
particular, they are concerned with the impact of investments on
reported earnings in the short run.
28. Since a project sponsor is keen to get his proposal included in the capital
budget, he is likely to massage the numbers to dress up his project
proposal. Is there some way by which such financial manipulation can
be checked? McGrath and MacMillan have suggested a process they
call discovery-driven planning that has the potential of improving the
quality of analysis.
In order to be meaningful and viable, the capital budget of a firm must
satisfy some conditions: (i) It must be compatible with the resources of
the firm. (ii) It must be controllable. (iii) It must be endorsed by the
executive management.