2. Capital budgeting refers to the process
which the organizations use to make
decisions concerning investments in the
long-term assets of the firm.
The general idea is that the capital, or
long-term funds, raised by the firms are
used to invest in assets that will enable the
firm to generate revenues for several years
into the future.
3. GOALS OF THE FIRM
(Maximize shareholders wealth or value of the firm)
INVESTMENT
DECISION
Short – term
Investments
Long – term
Investment
CAPITAL BUDGETING
DIVIDEND
DECISION
FINANCING
DECISION
4. Corporate Goal: Maximize value of hospital without compromise on service quality
Strategic Planning: Cardiac SuperSpeciality Hospital targeting urban population
(Pune)
Preliminary Screening: Feasibility, Market Research
Financial Appraisal, Quantitative Analysis, Project Evaluation
Accept Reject
Implementation
Monitoring, Control, Review
Expand/Abandon?
Post-implementation Audit
5. Is the Project Feasible?
NEW HOSPITAL PLAN
Which CT Scan to Buy?
To Purchase New Machinery or Buy Pre-used
Machinery?
Which Capital Intensive Department to Outsource?
Expansion?
6. Net Present value
Payback Period
Internal Rate of Return
Profitability Index
Accounting Rate of Return
7. NPV of an investment / project is the difference
between present value of cash outflow and the cash
inflows discounted at the firms cost of capital.
∑ (ct – bt) / (1 + k)t
Where,
b= cash outflow
c = cash inflow
k = capital cost
t = time period
8. It is a time duration required to recoup the investment
committed to a project.
When the cash inflows are uniform
Cash outflow
Annual cash inflow
When the cash inflows are uneven
∑ cash inflow = cash outflow
9. Affect the profitability of the firm.
It has a bearing on the competitive position of the
enterprise as they relate to fixed assets.
Capital expenditure decision has an effect over a long
time span and affects the company’s future cost
structure.
Capital investment decision are not easily reversible
without much financial loss to the firm.
10. Finally Capital Investment involves cost and majority
of the firms have scarce capital resources.
This underlines the need for thoughtful, wise and
correct investment decisions as an incorrect decision
will not only result in losses but also prevent the firm
from earning profits.
