Capital Budgeting Process: A Case Study Analysis

This case study analyzes the capital budgeting process used by a company to determine which major projects are the most profitable. It discusses the factors considered in capital budgeting and provides a critical evaluation of the process.

Case Study

Contents
INTRODUCTION...........................................................................................................................................3
MAIN BODY.................................................................................................................................................3
Background of the case study..................................................................................................................3
Capital budgeting process used in case study..........................................................................................4
Factors consider of capital budgeting......................................................................................................5
Critical review and evaluation.................................................................................................................6
CONCLUSION...............................................................................................................................................7
REFERENCES................................................................................................................................................8

INTRODUCTION
Capital budgeting wants to enhance a company's future earnings by assisting it in
determining which major projects are the most profitable. This is due to the fact that most
businesses can only manage a certain amount of capital investments at any one moment.
Financing for new or replacement equipment, research & innovation, and the creation of new
goods, wind generators, and other large capital spending are all part of capital management for a
firm. Capital budgeting is a management strategy for aligning capital expenditures with the
company's overall goals (Idehen, 2021). Investment and borrowing are the two sorts of economic
matters that the financial manager must make in a firm. The two choices boil down to how much
income to expend and how much income to mortgage. A corporate entity's capital is typically
invested in the purchase of fixed assets, such as equipment, land, or a structure.
MAIN BODY
Background of the case study
Typically, companies calculate projected rates of return and payback periods when
evaluating investment possibilities (the time taken to recoup the capital outlay). According to
liaison and survey research, Australian companies demand projected capital expenditure returns
to surpass high "hurdle rates" of return that are frequently substantially over the cost of debt and
do not fluctuate frequently. Furthermore, many companies demand that the investment be repaid
within a few years, necessitating even higher indicated rates of return. As a result, many
Australian companies' capital expenditure decisions are not immediately affected by interest rate
fluctuations.
When a company is faced with a capital budgeting choice, one of the first jobs it must do is
determining if the initiative will be viable. The most popular techniques to investment evaluation
are payback period (PB), internal rate of return (IRR), and net present value (NPV). Capital
budgeting is the process of preparing for the purchase of capital assets (Hosseini, Geramirad and
Zare Zardeini, 2021). Since inspiring motivation of financial capital is one of the most essential
decisions in money planning, capital investment decisions are a complicated procedure of
fundamental part of the financial choices. Budgeting for infrastructure improvements is known
as capital budgeting. Since the quantity and scope of most businesses' capital currency risks

determine their lengthy success, proper planning, appraisal, and execution of rising infrastructure
improvements is critical. Capital budgeting manager and senior in planning for the procurement
of elevated infrastructure improvements.
Capital budgeting process used in case study
The Capital Budgeting process is a method of budgeting that is used to assess possible
purchases or expenses with a high dollar value. It aids in assessing the company's long-term
fixed asset investments, including plant and machinery additions or replacements, new systems,
research and development, and so on. This procedure involves deciding on a means of finance
but instead estimating the profit that may be made from the transaction (Aftab and Naveed,
2020). There are defined the process as per the case study such as:
 Identify and evaluate potential opportunities: The procedure starts with a search for
available options. A firm will most likely have several choices to examine for every
given Endeavour. If a firm needs to enhance its storage facilities, for instance, it may
either build on to its present structure or buy a bigger place in a new site. As a result,
each alternative must be assessed to see which is the most cost-effective and logistically
feasible. After identifying the most viable opportunity, a firm must choose the best timing
to pursue it, taking into account considerations such as business necessity and upfront
expenses.
 Estimate operating and implementation costs: The next stage is to calculate how much it
will cost to complete the job. It's possible that this procedure will need both internally
and externally investigation.
 Estimate cash flow or benefit: Now corporation need to figure out how much cash flow
the enterprise in question will create. Reviewing statistics on similar initiatives that have
been effective in the past is one approach to get at this amount. Unless the project will not
create cash flow immediately, such as updating personal computers for more complex
manufacturing, the firm must do its utmost to assign an expected cost reductions or
benefit to determine whether the effort is economically beneficial (Williams and
Waisanen, 2020).
 Assess risk: This phase entails calculating the proposal's risk, as well as the sum of
money the firm stands to lose if indeed the company fails or fails to complete the

assignment on time. Once a level of risk has been established, the firm may compare
itself against the expected cash flow or profit to see whether it is worthwhile to proceed
with execution (Topyan, 2021).
 Implement: If a firm decides to proceed with a project, it will require an operational
framework. A mechanism for financing for the job at hand, a system for controlling costs,
and a method for documenting working capital or advantages generated by the project
should all be included in the strategy. Timetable containing major project requirements,
along with a dead line if relevant, should be included in the implementation strategy.
Factors consider of capital budgeting
1. Technology factor: Before implementing CBD, administration must do a thorough analysis of
the cost of new products/equipment, as well as the allocate efficiency of both new and old
technology.
2. Demand forecasting: Before CBD, a long-term demand analysis is required.
3. Competitive strategy: If a rival is investing in new elevated and expense industrial equipment,
we may be compelled to obey suit (Mota and Coutinho dos Santos, 2020).
4. Management style: Firms with creative management are more likely to invest in new
equipment/investment than those with surgical treatments.
5. Cash flow: A cash flow statement or cash budget may assist a company in determining when it
is appropriate to engage in CBD. Profit after taxes but before depreciation is referred to as cash
inflows. The reason for this is that devaluation is recorded as a book item with no actual money
withdrawal. As a result, the amount of depreciation will be included in the cash inflow.
6. Funding Accessibility: Not every project needs the same degree of expenditure. Certain
initiatives need a large sum of money as well as a significant profit margin. Such initiatives may
be abandoned if the firm does not have sufficient finances.

7. Investment Minimum Rate of Return: On investment capital, each analyst expects a minimal
rate of interest or cut-off rate. It represents the level threshold beyond which a proposal will be
rejected.
8. Earnings Potential: Potential income might be consistent or fluctuate. Despite this, the
intended output assured future revenues in totality, which influences project selection.
9. Overall Revenue Quantity: It is important to determine the amount of profit that may be
anticipated from the execution of the chosen project. The term profit corresponds to the sum
quantity of projects that have been completed according to financial statements (Matějka,
Merchant and O'Grady, 2021).
10. Legal Obligations: When choosing a project, managers should keep the legal restrictions in
mind. There are a variety of legislative regulations in place to safeguard the environment in the
textile and petrochemical sectors. Instead of profitability, the administration now prioritises laws
specifically.
Critical review and evaluation
The whole investment choice process is frequently very subjective, creating a role for
"animal spirits" or "gut feeling" to have a significant impact on capital expenditure decisions, as
discussed with management. This is hardly unexpected, think how hard it is to estimate
investment returns for the quantitative criteria stated, thus construction companies must depend
on personal feedback (Beaulieu, 2020). Many connections, however, have confirmed that
projects that met quantitative criteria were still turned down due to other factors such as
strategies adopted, increased risk objection, a constrained capital budget implemented by top
management levels or the international main competitor, fewer funding to implement initiatives,
or investor conceptions. Discussions with liaison contacts reveal that the entire decision-making
process is extremely subjective, allowing "animal spirits" to play a part. As previously stated,
organizations constantly refuse investment plans that meet identity quantitative requirements for
a variety of reasons, including worries about the economy, resource endowments inside the
business, or investor desires. Since the economic meltdown, several executives have stated that
they have taken a more conservative attitude to capital investment, perhaps because the future is

more unclear or because they are less willing to take risks (Chortareas, Noikokyris and Rakeeb,
2021).
CONCLUSION
As per the above report it has been recommended that A significant number of empirical
studies have been conducted to investigate the capital budgeting strategies utilized by Indian and
international companies. The major goal was to examine capital budgeting techniques; however
it appears that no new research has been done to look into the current methodologies utilized by
businesses. Trends toward advanced methodologies and sound capital budgeting judgments have
influenced capital budgeting decisions. The outcomes of this study, as well as the authors'
centuries of professional experience and the literature examined, were used to assess existing
practices and recommend possible changes in making decisions (using a regulatory regime).

REFERENCES
Books and Journal
Idehen, A. V., 2021. Capital investment decisions of small and medium enterprises in Benin-
City, Nigeria. International Journal of Research in Business and Social Science (2147-
4478). 10(3). pp.101-108.
Hosseini, S. A., Geramirad, F. and Zare Zardeini, T., 2021. Analysis of the scientific stream of
management accounting research in the Web of Science database. Management
Accounting. 13(47). pp.125-142.
Aftab, R. and Naveed, M., 2020. Investment review in sports leagues: financial evidence from
Pakistan Super League. Managerial Finance.
Topyan, K., 2021. Levered-Beta and Cost of Capital Sensitivities: An Experimental Investigation
in Capital Structure. Journal of Risk and Financial Management. 14(4). p.152.
Mota, J. H. and Coutinho dos Santos, M., 2020. Does internal capital market affiliation matter
for capital allocation? An empirical analysis. An Empirical Analysis (January 22, 2020).
Matějka, M., Merchant, K. A. and O'Grady, W., 2021. An empirical investigation of beyond
budgeting practices. Journal of Management Accounting Research. 33(2). pp.167-189.
Beaulieu, P. R., 2020. Contract-Based Cost Analytics. Journal of Emerging Technologies in
Accounting. 17(1). pp.11-19.
Chortareas, G., Noikokyris, E. and Rakeeb, F. R., 2021. Investment, firm-specific uncertainty,
and market power in South Africa. Economic Modelling. 96. pp.389-395.
Williams, D. and Waisanen, D., 2020. Participatory Budgeting from the Past to the Present. Real
Money, Real Power?, pp.9-17.