corporates finances, business studies, managerial accounting, High school final essays of Economics

Download corporates finances, business studies, managerial accounting and more High school final essays Economics in PDF only on Docsity! International Review of Business and Economics 53. EFFECTIVE CAPITAL BUDGETING DECISIONS BY FIRMS Mr. MANJUNATH M.S., Lecturer, Department of Commerce, Government First Grade College, NR Pura, Mail: manjunathms567@gmail. com Cell: 9972160567 Mr. PRAVEEN B, Assistant Professor, Department of Commerce & Management, PESInstitiute of Advanced Management Studies, Shivamogga. Mail: brppraveen1@gmail.com_ Cell: 9611650036 ABSTRACT inance is the life blood of business. Finance is said to be the circulatory system of the economy body, making possible the required cooperation between the innumerable units of activity. Finance guides and regulates investment decisions and expenditure of administers economic activities. Capital budgeting means planning for capital assets. Capital budgeting decisions are complex process of paramount importance in_ financial decisions, because efficient allocation of capital resources is one of the most crucial decisions of financial management. Capital budgeting is budgeting for capital projects.Because the long-term profitability of most enterprises depends on the nature and quality of their capital project investments, appropriate planning, evaluation, and implementation of high-return capital projects are imperative. Capital budgeting helps managers plan for the acquisition of capital projects that promise high returns. It is a managerial technique of meeting capital expenditure with the overall objectives of the firm. The research findings are expected to be useful to the financial institutions, managers as well as practitioners in the area of investment decision-making. As there are various methods and criteria available, the research studies undertaken so far suggest that by and large decision-makers tend to select methods ignoring time value of money. KEYWORDS Capital Budgeting, Expenditure. Capital budgeting.:It is decision- making process concerned’ with “whether or not (i) the firm should invest funds in an attempt to make profit?” and (ii) how to choose among competing projects. Risk: Refers to a situation in which there are several possible outcomes, each outcome occurring with a probability that is known to the decision-maker. Capital Expenditure: A capital expenditure is an expenditure incurred for acquiring or improving the fixed assets, the benefits of which are expected to be received over a number of years in future. Risk, Capital INTRODUCTION A number of researchers in finance and accounting have examined corporate capital budgeting practices. Many of these articles survey corporate managers and report the frequency with which various evaluation methods, Volume 4, Special Issue No.1, July 2020 338 ISSN: 24745146 (Online) 2474-5138 (Print) such as payback, internal rate of return (IRR), net present value (NPV), discounted payback, profitability index (PI), or average return on book value are used. The process of budgeting resources for the future of an organization's long termplans. Capital planning for a business would include budgeting for new and replacement machinery, research and development and the production of new products, new plants and other major capital expenditures. Capital budgeting is a managerial technique of meeting capital expenditure with the overall objectives of the firm. There are two fundamental types of financial decisions that the finance team needs to make in a business: investment and financing. The two decisions boil down to how to spend money and how to borrow money. A business needs to make investments in various projects. As a normal practice, a business entity invests the money in the acquisition of fixed assets, such as, machinery, land or building. OBJECTIVES OF THE STUDY The following objectives were set out for the study: 1. To determine the types of capital investments undertaken and _ the methods of appraisal used. 2. To analyze the problems faced to estimate the cash flows associated with each capital investment accurately. 3. To analyze how ‘Uncertainty’ in the future estimates in investment projects is being taken care of. 4. To study the preferences between Net Present Value (NPV) and Internal Rate of Return (IRR) methods. METHODOLOGY For the present study descriptive analysis method is applied and it is based on the secondary sources of data which have been collected from various articles, books, reports, documents journals, newspaper etc. Why do firms follow Capital budgeting decision? 1.Capital budgeting involves capital rationing 2.Capital budget becomes a control device when it is employed to control expenditure 3.A firm contemplating a major capital expenditure programme may need to arrange funds many years in advance to be sure of having the funds when required. It calls for the effective decision making process in terms of the acquisition of fixed assets, modification of fixed assets and replacement of fixed assets. Therefore, it is not only important to determine the capital expenditure of a business entity but also evaluate the results while considering various factors, such as, economic and social and technological etc. KINDS OF CAPITAL BUDGETING DECISION FOLLOWING BY FIRMS (i) Mutually Exclusive Projects: It means if a firm accepts one project, it may rule out the necessity for others i.e., the alternatives are mutually exclusive and only one is to be chosen. (ii)Accept-Reject Decisions’ or Acceptance Rule: The proposals which yield a higher rate of return in comparison with a certain rate of return or cost of capital are accepted and, naturally, the others are rejected. (iii) Capital Rationing Decision: Capital rationing is normally applied to situations where the supply of funds to the firm is limited in some way. As such, the term encompasses many different situations ranging from that where the borrowing and lending rates faced by the firm differ, to that where the funds available for investments are strictly limited. One Day Online International Conference Organised by IRBE Publications, Denver, USA 339 International Review of Business and Economics your building or converting existing space to be more functional. It includes those expenditures that make your business better without adding new structures, equipment or products. Unlike repairs, replacements and government requirements, expansions and improvements require extensive consideration before adding them to your capital budget. 4. Additions and Acquisitions Making additions to your buildings, adding new product lines and the equipment needed to produce it, and creating additional services are all part of the capital budget for growth. This category includes acquisition of new land and buildings. Additions to your business require resources and planning and should coincide with your strategic growth plans. The capital budget process allows you to consider all the ramifications of growth that includes the costs associated with the additional resources you'll need to achieve that growth. According to the website Reference for Business, the capital budgeting process does not just include making list of your additional needs, but considering how those additions fit in with your strategic goals. CONCLUSION A large number of empirical studies have been undertaken to examine the methods of capital budgeting used by industries in India and abroad. The main purpose was to study the practices of capital budgeting but it seems that there is no research conducted recently to study the methods used currently by industries. Trends towards sophisticated techniques and sound capital budgeting decisions have. The findings of this research, decades of teaching experience of the authors and the literature reviewed have been utilized to evaluate current practices and suggest possible improvements in decision making (through a normative framework). REFERENCES 1.Abdel-Kader M, Luther R_ (2006). Management accounting practices, April- 2015, Vol-7, Num-3. 2.V. Shanmugsundaram and Dr. V Balakrishnan, “ Investment Decisions”, Indian Journal of Finance. 3.Financial Management- I M Pandey, 10th Edition , Vikas Publishing House pvt., Ltd. [pp- 158-170]. 4.Financial Management- principles & Practice- G. Sudarshana Reddy, 3rd Revised Edition, Himalaya publishing House. [ unit-10, pp 257-262] 5.Financial Management- B S Raman - United Publishers- first Edition [unit 11, pp 503-523] 6.principles of financial management- Dr. G B Baligar- 6th Edition- Ashok Prakashan. [ unit 5, pp CB1- CB12] Volume 4, Special Issue No.1, July 2020 342 Reproduced with permission of copyright owner. Further reproduction prohibited without permission.