This presentation highlights the different types of capital budgeting decisions.

1. Presented by: Ms. Komal Mahajan
Assistant Professor in Commerce
PRESENTATION ON KINDS OF CAPITAL
BUDGETING DECISIONS

2. CAPITAL BUDGETING DECISIONS
Capital Budgeting Decisions refer to the
decisions regarding long term investment of
huge amounts i.e. Capital expenditure in the
projects which will prove fruitful for the
business and provide the required returns in the
future years with least possible cost.

3. Kinds of Capital
Budgeting
Decisions
On the basis of
Purpose
On the basis of
Effect on
profitability
On the basis of
decision
situation
KINDS OF CAPITAL BUDGETING
DECISIONS

4. I. ON THE BASIS OF PURPOSE
Expansion Projects
Replacement Projects
Diversification Projects
Modernization Projects
Research & Development Projects
Environmental Projects

5. Expansion Projects are the projects where
capital expenditure is made on installation of
new plant and machinery, establishment of new
factory, starting a new product line in the
existing industry etc. These projects add to the
earning capacity of a company.
1. EXPANSION PROJECTS

6. Replacement Projects are the projects where
capital expenditure is made for the
replacement of the existing facilities, assets
etc. which have become useless or lesser
productive with the passage of time, continuous
use, obsolescence of technology or other such
reasons.
2. REPLACEMENT PROJECTS

7. Diversification Projects are the projects where
capital expenditure is made on installation of
new plant and machinery, establishment of new
factory, starting a new product line in the
industry other than the existing one etc. These
projects add to the earning capacity of a
company and reduces the risk of losses too.
3. DIVERSIFICATION PROJECTS

8. Modernization Projects are the projects where
capital expenditure is made on installation of
new plant and machinery, buying new modern
equipment etc. to avoid the losses due to
obsolete technology or obsolete equipment
being used in the business. These projects add
to the efficiency of the company and thus gives
the competitive edge.
4. MODERNIZATION PROJECTS

9. Research and Development Projects are the
projects where capital expenditure is made on
development of new technologies, products,
equipment etc. due to the changing
technological trends. These projects gives the
competitive edge to the company.
5. RESEARCH & DEVELOPMENT
PROJECTS

10. Environmental Projects are the projects where
capital expenditure is made on improvement of
working environment, pollution control,
provisions of safety etc. These projects
enhances the goodwill of the company rather
than giving direct benefits in the form of
profits.
6. ENVIRONMENTAL PROJECTS

11. II. ON THE BASIS OF EFFECT ON
PROFITABILITY
Projects increasing revenue
Projects reducing costs

12. These projects bring more and more
revenue to the firm through expansion,
diversification etc.
1. PROJECTS INCREASING REVENUE

13. These projects are undertaken to reduce
the costs through replacement,
modernisation etc.
2. PROJECTS REDUCING COSTS

14. III. ON THE BASIS OF DECISION
SITUATION
Mutually Exclusive Projects
Independent Projects
Dependent Projects
Capital Rationing

15. These projects are the projects meant for
achieving the same purpose thus competing for
funds in such a way that acceptance of one
project means rejection of other project. These
are either-or projects.
1. MUTUALLY EXCLUSIVE PROJECTS

16. These projects are the projects meant for
achieving different purposes. The acceptance of
one project does not mean rejection of other
project.
2. INDEPENDENT PROJECTS

17. These projects are the projects meant for
achieving same purpose. The acceptance of one
project will mean acceptance of other project
too. These are also known as Complimentary
Projects.
3. DEPENDENT PROJECTS

18. Capital rationing is the situation where a firm
has to choose combination of profitable
projects yielding the highest Net Present Value
with available funds.
4. CAPITAL RATIONING