2. POINTS TO DISCUSS
1. MEANING OF CAPITAL INVESTMENTS,
2. IMPORTANCE AND DIFFICULTIES ,
3. TYPES OF CAPITAL INVESTMENT,
4. PHASES OF CAPITAL BUDGETING
3. INTRODUCTION
• ENTREPRENEURIAL RESOURCES INCLUDE (1) PEOPLE, SUCH AS THE
MANAGEMENT TEAM, THE BOARD OF DIRECTORS, LAWYERS, ACCOUNTANTS,
AND CONSULTANTS; (2) FINANCIAL RESOURCES; (3) ASSETS, SUCH AS PLANT
AND EQUIPMENT; AND (4) THE BUSINESS PLAN.
• HOWARD H. STEVENSON (SAROFIM-ROCK BAKER FOUNDATION PROFESSOR
EMERITUS, FORMER SENIOR ASSOCIATE DEAN, DIRECTOR OF PUBLISHING IN
HARVARD) HAS POINTED OUT THAT ENTREPRENEURS SEEK TO USE THE
MINIMUM POSSIBLE AMOUNT OF ALL TYPES OF RESOURCES AT EACH STAGE IN
THEIR VENTURES’ GROWTH. RATHER THAN OWN THE RESOURCES THEY NEED,
ENTREPRENEURS SEEK TO CONTROL RESOURCES
EXAMPLE
• FORD STARTED HIS VENTURE WITH A $28,000 BUSINESS LOAN AND MADE THE
WORLD’S FIRST MASS-PRODUCED CARS
4. CAPITAL INVESTMENT
• CAPITAL INVESTMENT IS THE ACQUISITION OF PHYSICAL ASSETS BY A COMPANY
FOR USE IN FURTHERING ITS LONG-TERM BUSINESS GOALS AND OBJECTIVES.
REAL ESTATE, MANUFACTURING PLANTS, AND MACHINERY ARE AMONG THE
ASSETS THAT ARE PURCHASED AS CAPITAL INVESTMENTS.
THE CAPITAL USED MAY COME FROM A WIDE RANGE OF SOURCES FROM
TRADITIONAL BANK LOANS TO VENTURE CAPITAL DEALS.
8. TYPES OF CAPITAL INVESTMENT
THERE ARE DIFFERENT WAY CAPITAL CAN BE INVESTED –
• PHYSICAL , MONITORY, INTANGIBLE – MONEY CAN BE INVESTED INTO INFRA,
LIKE FACTORY PLANT, BUILDING ETC. OR CAN BE INVESTED INTO STOCK BONDS
ETC. AN INTANGIBLE COULD BE IN PATENTS, R& D, MARKET RESEARCH
FRANCHISE ETC.
• STRATEGIC AND TACTICAL-
• FOR EXAMPLE TATA MOTORS DECISION TO INVEST IN PASSENGER CAR IS
STRATEGIC INVESTMENT WHILE REPLACING OLD MACHINERY TO NEW IS
TACTICAL INVESTMENT DECISION
BESIDES THERE ARE FEW MORE TYPES OF INVESTMENTS –
• REPLACEMENT
• DIVERSIFICATION
• EXPANSION ETC.
11. FEW SITUATION -1
• A LTD IS INTO WOODEN PRODUCT. THOUGH THEY DECIDED TO MAINTAIN THE GOOD
QUALITY OF THE PRODUCT, AFTER AN INCREASE IN THE PRODUCTION LEVEL OF WOODEN
PRODUCTS, THE QUALITY DEPARTMENT HAS BEEN RECEIVING NUMEROUS COMPLAINTS ABOUT
THE QUALITY OF THE PRODUCT. MR ROHAN, WHO WAS BUSY SOLVING SOME IMPORTANT
PROBLEMS CONCERNING SHIPPING DEPARTMENT FELT UNCOMFORTABLE WITH ALL THESE
COMPLAINTS REGARDING QUALITY OF THE PRODUCT.
IF YOU WERE IN ROHAN’S POSITION, WHAT DECISION WOULD YOU TAKE?
A DECREASE THE PRODUCTION LEVEL OF WOODEN PRODUCTS.
B CHANGE ALL THE SUPPLIERS, SINCE THEY ARE SUPPLYING LOW QUALITY WOOD.
C SINCE QUALITY OF THE PRODUCT IS MORE IMPORTANT, PUT SHIPPING PROBLEMS ASIDE AND
THINK ABOUT HOW WHAT’S WRONG WITH THE PRODUCT QUALITY.
D CHECK WITH SUPPLIERS ABOUT THE QUALITY OF WOOD AND ASK GAUTHAM TO COME UP
WITH A PLAN TO SOLVE THE PROBLEMS REGARDING QUALITY.
E FIRE GAUTHAM, SINCE HE COULD NOT HANDLE THE WORK PROPERLY.
12. SITUATION- 2
READ THE INFORMATION GIVEN BELOW AND ANSWER THE QUESTIONS WHICH FOLLOW.
MALIBABA IS A JAPANESE E-COMMERCE COMPANY. IN THE ANNUAL MEETING OF THE BOARD OF
DIRECTORS, IT IS DECIDED THAT COMPANY WILL EXPAND ITS BUSINESS OVERSEAS. THEY WANT TO
INVEST IN AT LEAST 1 ASIAN COUNTRY. THE COMPANY FORMS A COMMITTEE TO ANALYZE THE
MARKET SITUATION IN VARIOUS ASIAN COUNTRIES. THE COMMITTEE STUDIES THE MARKET
CONDITIONS IN DEVELOPING ASIAN COUNTRIES AND BOILED DOWN ITS SEARCH TO 3 DIFFERENT
COUNTRIES.
THE PROS AND CONS FOR EACH OF THE COUNTRIES ARE LISTED IN A REPORT WHICH THE
COMMITTEE SUBMITS TO THE BOARD OF DIRECTORS. INDIA IS ONE OF THE PROSPECTIVE COUNTRIES
WHERE MALIBABA PLANS TO CREATE INVEST. HOWEVER, THE COUNTRY HAS RESTRICTIONS ON FDI
IN RETAIL MARKET. MOREOVER, THERE ARE ALREADY EXISTING PLAYERS LIKE KLIPKART AND
NAPDEAL IN THE INDIAN MARKET.
ANOTHER PROSPECTIVE COUNTRY IS SRI LANKA WHERE THERE IS NO EXISTING COMPETITOR BUT
THE MARKET REACH IS LOW. IN COMPARISON TO INDIA’S 1.2 BILLION, THE POPULATION OF SRI
LANKA IS MERELY 20 MILLION. THE THIRD PROSPECTIVE COUNTRY IS PAKISTAN. THIS COUNTRY HAS
A REASONABLY GOOD MARKET AND THERE’S NO COMPETITION . HOWEVER, THE COUNTRY IS NOT
WELL DEVELOPED AND THUS THE PURCHASING POWER OF THE PEOPLE IS LOW. MOREOVER, BECAUSE
OF BEING CALLED A TERRORIST HUB, THERE ARE ALSO SECURITY CONCERNS IN PAKISTAN.
13. QUESTION
• SRI LANKAN GOVERNMENT IS PROVIDING INCENTIVES FOR THE FOREIGN COMPANIES
INVESTING IN THE COUNTRY. MALIBABA WANTS TO INVEST IN ONLY ONE COUNTRY. MOST OF
THE BOARD MEMBERS ARE IN FAVOUR OF INVESTING IN INDIA WHILE SOME OF THEM WANT TO
INVEST IN SRI LANKA. WHICH OF THE FOLLOWING REASONS WILL CONVINCE THE OTHER
MEMBERS TO INVEST IN INDIA?
A THE MARKET IN INDIA IS FAR BIGGER THAN THE MARKET IN SRI LANKA
B THE COST OF SETTING UP THE BUSINESS PER POTENTIAL CUSTOMER IN INDIA WOULD BE
WAY LOWER THAN THAT IN SRI LANKA DESPITE THE GOVERNMENT’S INCENTIVES
C THE BENEFITS THAT SRI LANKA IS OFFERING ARE ONLY FOR THE SHORT TERM. AFTER
SOME TIME THE TAXES IN SRI LANKA WOULD BE SAME AS THOSE IN INDIA
D ONLY A AND B
E ALL OF THESE
14. QUESTION
• THE COMPANY HAS FINALLY DECIDED TO INVEST IN INDIA. HOWEVER, THE FDI
RESTRICTION LAWS PREVENT THE COMPANY FROM ENTERING THE INDIAN MARKET
IN ITS CURRENT
FORM. WHICH OF THE FOLLOWING WOULD BE THE BEST OPTION FOR THE COMPANY
IN SUCH A SCENARIO?
CREATE
• A GIVE UP ON THE PLAN TO INVEST IN INDIA AND INVEST IN PAKISTAN AND SRI
LANKA INSTEAD.
B REGISTER A COMPANY WITH A NEW NAME AND START OPERATIONS.
C TIE UP WITH AN ALREADY EXISTING E-COMMERCE COMPANY IN THE INDIAN
MARKET.
D REQUEST THE INDIAN GOVERNMENT TO RELAX THE FDI NORMS.
E ASKS ONE OF ITS BOARD MEMBERS, WHO HAS GOOD POLITICAL CONNECTIONS,
TO PUT PRESSURE ON THE INDIAN GOVERNMENT TO ALLOW FDI.
