Module: Business Finance
Agenda
Proposal Generation
Review and Analysis
Decision Making
Implementation
Follow-up
Capital Budgeting Process
[Source: (Dayananda et al., 2002)]
Theoretical Perspective Cost of Capital Inflation Taxation Organizations Future Strategy Competitive Advantage Competitiveness of the Market
Theoretical Perspective Knowledge and Expertise Recognizing Real Options Business Risk Political Risk Exchange Risk Entry and Exit Barriers
Three Investments
Privately Owned Small Company
Medium Size Company
Large Company
Investment Decision 01 Organization Profile - 01 Name
ABC Company (Real Name removed Due to Request)
Organization Type
Private Owned Family Business
Industry
Coconut Industry
Interviewee’s Name
Mr. Sunil Perera
Designation
Owner
Investment Date
2003
Effects of Inflation and Tax Use of Cost of Capital Assessment of Risk
Initial Investment ( Tracker + Trailer + Brush Hog Mower)
Operational Cost- If invest (per annum) Licence + Service + Repair + Driver + Fuel
Cost of Capital @12(per annum) Based on Spot Bank Interest Rate
680,000 95,000 82,000
Total Expenditure- If invest (per annum)
177000
Operational Cost- If do not invested (per annum)
240,000
(Labour + Rented Tractors)
Saving (per annum) (~60,000)
Payback time 10.8 Years
63000
Evaluation Factors according to Theory
Capital Budgeting Techniques Risk Factor
Pay Back Up to Some Extend
Inflation
Not Considered
Taxation
Not Considered
Cost of Capital
Considered
Capital Budgeting Refinements
Considered
Other Factors
Considered
Reasons For Variation Investor’s Background and Education level Self Confidence Experience of the Investor Trends and Operation Efficiency Believe on Qualitative Facts Lot of Hidden Cost/Risks Quality and Speed Time and Effort on incorporating Factors Difficulty on Estimation
Post Implementation Analysis Yr
Estimated Saving
Actual Saving
1
Less than 63000
24000
2
63000
-5000
3
63000
85000 (appx)
4
63000
85000 (appx)
First Year
Real Options
Second Year
Risk Reduction
Rest of the Years
Cost Reduction
Investment Decision 02 Organization Profile - 02 Name
XYZ Knitting (Pvt) Ltd (Real Name removed Due to Request)
Organization Type
Private Owned Business Partnership
Industry
Apparel Industry
Interviewee’s Name
Mr. Janaka Bandara.
Interviewee’s Designation
CEO
Investment Date
2007
Nature of business
Investment Decision 02 Effects of Inflation and Tax Use of Cost of Capital Assessment of Risk
Evaluation Factors according to Theory
Capital Budgeting Techniques Risk Factor
NPV Up to Some Extend
Inflation
Not Considered
Taxation
Considered
Cost of Capital on Capital Budgeting
Considered
Other Factors on Investment Evaluation
Considered
Post Implementation Analysis
Investment Decision 03 Organization Profile - 03 Name
XYZ Company (Real Name removed Due to Request)
Organization Type
Private
Industry
Food Industry
Interviewee’s Name
xxxxxxxxxxxxxxx
Designation
Investment Analyst
Company Background Investment decision Establishing hubs in the North and East
Investment Decision 03 Risk factors: Environmental Risk Market Risk
Effects of Inflation and tax Purchase Committee Meeting Independent Vs Mutually Exclusive Payback Period
NPV
Nonconventional Cash Flows Post Implementation Audit
Evaluation Factors according to Theory
Capital Budgeting Techniques Risk Factor
Payback / NPV Environmental/Market
Inflation
Central Bank Rate
Taxation
Considered
Cost of Capital
Considered
Capital Budgeting Refinements
Considered
Other Factors
Considered
Results of Other Surveys Internal rate of return is widely accepted
[Source: (Graham & Harvey, 2002)]
Results of Other Surveys Simple payback model is a secondary consideration Small firms are more likely to use payback method of calculation coupled with gut instinct Risk adjustment varies from firm to firm
Research Yields The method of investment appraisal varies depends on Scale of the organization Availability of resources Expertise Preference for Pay Back Period method Vs. NPV
Conclusion Importance of other factors Gut Feeling Tacit knowledge Risk assessment Competitiveness of market Impact on current investment portfolio
Thank You Q&A