Question

-Please provide an example from a real company that used capital budgeting for a particular product proposal.
-What were the results of that project?
-Can you think of any companies who didn't properly invest/innovate and are now defunct or on the way to closing?
-How can you use capital budgeting in your own lives?

Answer 1

Capital budgeting is the planning process used to determine whether an organizations long term investments such as new machinery, replacement of machinery, new plants, new products, and research development projects can be done using the firms capitalization structures (debt, equity or retained earnings) to bring profit as well as to increase the value of the firm to the shareholders.

CAPITAL BUDGETING TECHNIQUES:

Cash Inflow: Any source of income coming inside a company. Eg: receipt of loan from bank, interest from savings, investment made by shareholders

Cash outflow: Any source of income going out of a company. Eg: Dividend paid to shareholders, income tax, rent, buying of raw materials.

Out of these two factors income per share is given more importance.

How will you evaluate a target company?

Only after evaluating the target company’s profitability, the acquiring company finalizes the merger. In Evaluation of a Merger as a Capital Budgeting Decision, the acquiring company requires the following statements.

Financial statement:

This is considered to be the first step after deciding a merger. Both company’s financials are shared with each other.

• Income statement:

Before a merger, both companies can measure their revenue lines and compile their income statements to calculate their combined profitability. The acquiring company may check the expenses of the merger company in order to see whether they have used the resources in right way.

Balance sheet: Cash flow statement:

After go through all these statements and capital budgeting techniques the acquiring firm will decide whether to acquire the target firm or not.

REAL LIFE COMPANY EXAMPLE OF CAPITAL BUDEGITING DECISION

CAPITAL BUDGETING AT RELIRCL has a net worth of over Rs '3,300 crore and over 165,000' shareholders. On conversion of outstanding equity instruments, the net worth of the company will increase to about Rs 4,100 crore. It is headed by Anil Ambani and is a part of the Reliance ADA Group.RELIANCE CAPITAL

RIL uses two types of budeting methods

capex and opex

RIl get good returns on long term investment by using capital budegeting