Capital Budgeting

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Capital Budgeting

Sandeep Goel

Assistant Professor - Finance

Management Development Institute
Gurgaon, India

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Capital Budgeting
Copyright Business Expert Press, LLC, 2015
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted in any form or by any
meanselectronic, mechanical, photocopy, recording, or any other
except for brief quotations, not to exceed 400 words, without the prior
permission of the publisher.
First published in 2015 by
Business Expert Press, LLC
222 East 46th Street, New York, NY 10017
www.businessexpertpress.com
ISBN-13: 978-1-60649-986-3 (print)
ISBN-13: 978-1-60649-987-0 (e-book)
Business Expert Press Finance and Financial Management Collection
Collection ISSN: 2331-0049 (print)
Collection ISSN: 2331-0057 (electronic)
Cover and interior design by S4Carlisle Publishing Services Private Ltd.,
Chennai, India
First edition: 2015
10 9 8 7 6 5 4 3 2 1
Printed in the United States of America

Abstract
Capital budgeting is an important pat of the financial management of a
business organization. It is a process that business houses use to evaluate an investment project. The decision of whether to accept or deny
an investment project is capital budgeting decision. Capital budgeting is
important because it determines the long-term economic and financial
profitability of any investment project. It lays down the future success of
a business. The present book aims to develop not only an understanding
of the concepts of capital budgeting but also to provide its practical application to help the students to learn both theory and practice of capital
budgeting to be used in the financial management of a business organization. It analyzes the capital budgeting practices of corporate enterprises
in India in diverse sectors, on comparative basis in order to provide the
readers a better insight into the various issues and challenges regarding
capital budgeting management.

Keywords
capital budgeting, capital expenditure, financial management, business
organization, corporate enterprises

Contents
Preface...................................................................................................ix
Section 1 Introduction................................................................... 1
Chapter 1 Nature of Financial Management.......................................3
Section 2
Chapter 2
Chapter 3
Chapter 4
Chapter 5

Capital Budgeting Decision & Appraisal........................ 9

Capital Budgeting: Nature & Scope.................................11
Project Feasibility.............................................................19
Project Management Techniques......................................33
Social-Costs Benefit Analysis............................................39

Section 3
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10

Capital Budgeting Management.................................... 45

Time Value of Money.......................................................47
Determination of Cash Flows...........................................51
Capital Budgeting Appraisal Methods..............................63
Risk Analysis in Capital Budgeting...................................89
Capital Budgeting Under Capital Rationing..................107

Section 4 Financing Decision...................................................... 115

Chapter 11 Cost of Capital...............................................................117
Section 5 International Perspective............................................. 127
Chapter 12 Capital Budgeting for the Multinational Firms...............129
Chapter 13 Post Completion Auditing of Capital Budgeting
Decision.........................................................................139
Chapter 14 Capital Investment Issues and Challenges......................147
Section 6
Chapter 15
Chapter 16
Chapter 17

Case Studies................................................................ 153

Capital Budgeting Practice of Reliance Industries Ltd....155
Capital Budgeting of Indian PSUs.................................167
Capital Investment Practices of Oil Sector in India........177

Key Terms............................................................................................183
Review Questions.................................................................................187

viii CONTENTS

Test Yourself Problems & Solutions....................................................193

Bibliography........................................................................................209
Index..................................................................................................211

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Preface
Financial management is one of the most essential areas of any organization. It begins with investment decision in long-term assets, that is,
capital budgeting decision. Capital budgeting decision lays down the
foundation stone of the financial management. Thats why the success of
financial management depends on right capital budgeting application.
It is against this backdrop that the present book has been attempted.
Its focus is to highlight the importance of an efficient capital budgeting
decision in managing finances of a business enterprise. The objective of
the book is, to develop not only an understanding of the concepts of capital budgeting but also to provide its practical dimension to help students
to learn both theory and practice of capital budgeting to be used in the
financial management of a business organization. Further, it will be useful
to the managers to use it as an effective tool for resource allocation and
evaluation of the business viability.
It also analyzes the capital budgeting practices of corporate enterprises
in India in diverse sectors, on comparative basis in order to have a better
insight into the various issues and challenges regarding capital budgeting
management.
The present book is divided into six parts. Part I gives an overview of
the conceptual framework of financial management. Part II discusses the
nature and scope of capital budgeting decision along with project feasibility process and techniques. Part III contains a detailed discussion on the
aspect of time value of money, capital budgeting appraisal techniques,
and risk mitigation methods. Part IV discusses the financing aspect of
capital investment decision by the business units. Part V comprises the international perspective of capital budgeting decision. Part VI is the casestudy discussion of the capital budgeting concept. It analyzes the capital
budgeting practices of companies, like Reliance Industries Ltd., ONGC
Ltd., Vizag Steel Ltd., and Cairns India on comparative basis. It examines
their fixed assets structure to see the level of investment made in fixed assets and their efficiency in utilization.

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x PREFACE

It is hoped that it would create a fresh knowledge base thereof to

the academia and provide direction to the business and policy makers
to effectively cope with emerging financial challenges related to capital
budgeting practices at the global level.
I wish to thank God Almighty for everything in life! The work would
be incomplete if I do not acknowledge my parents contribution. They
have been a constant source of inspiration for me and have always stood
by me through thick and thin.
My wife provided her unstinted support and encouragement in completing the book. My little daughter Maanya is my soul whose smile always keeps me going in life.
Last, but not the least, I am thankful to the entire team of Business
Expert Press for their tremendous support and whole hearted cooperation
at all stages of publication of this book.
I am confident that the readers will find this book truly valuable
in terms of its quality and presentation. Any constructive comments
and suggestions for improving the contents of the book will be highly
appreciated.

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SECTION 1

Introduction

CHAPTER 1

Nature of Financial
Management

The Present Chapter

It discusses the concept of financial management, its scope with
its importance and objectives. There is an overview of the various
financial problems faced by business enterprises as well.

Introduction
Almost everything in life eventually boils down to the rupee sign, so the
adage goes. Money, and therefore, finance, is an integral part of life.1
Business is no exception to it. It needs to have an efficient financial management not only in totality but also in segmental performance. Hence,
growth of every business enterprise is closely linked with efficient management of its finance.

Meaning of Financial Management

Financial management refers to the process of raising and allocation of
funds. It is the sum total of planning, organizing, directing, and controlling the financial activities of the enterprise.

Douglas R. Emery, et al., Principles of Financial Management. (New Jersey: Prentice

Hall, 1998), 2.

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CAPITAL BUDGETING

Elements
1. Investment decision: It refers to the allocation of funds in various assets.
The investment in fixed assets is called as capital budgeting decision.
The investment in current assets is called as working capital decision.
2. Financing decision: It involves funds raising from various sources
based on various factors, like the cost of funds, time- period, flexibility, and so on. It is about determining the financial structure of
an enterprise.
3. Dividend decision: It is the decision about distribution of net profit.
The finance manager decides how much quantum of profits to be
distributed as dividend to shareholders and how much to be retained
for future contingencies.

Objectives of Financial Management

The main objectives of financial management are:
1. Profit maximization: It is considered to be the primary objective of
financial management. Every business enterprise aims to earn maximum profit, both short-term and long- term.
2. Wealth maximization: Wealth maximization (shareholders value
maximization) is the key objective of financial management which
is preferred over profit maximization on account of shareholders value
creation, particularly in case of a listed company. Wealth maximization
implies both regular returns to shareholders in the form of dividend
and increase in the market value of the shares by high performance
of the company.
3. Liquidity: Cash is the king for any organization. Maintaining sound
liquidity is one of the most important objectives of financial management. The firm must have a sound cash position for day-to-day
expenses, like paying salaries, rent, electricity bills, etc. If the firm
does not have enough liquidity, the survival of the firm is always
under threat.
4. Solvency: Long-term soundness is the most important objective of
financial management. The company must be solvent to pay interest

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Nature of Financial Management

and repay loans at regular intervals; only then the company will survive in the competitive world.

Functions of Financial Management

Following are the main functions of financial management:
1. Estimation of financial requirements: Proper estimation of financial requirements is a very important function of financial management. The finance manager must find out how much finance is
required for the operations of the company, according to the fixed
capital and working capital requirements.
2. Proper mobilization of funds: Mobilization (collection) of funds is
another important function of financial management. After estimating the financial requirements, the finance manager must decide on
the sources of finance. The finance can be raised from various sources
such as shares, debentures, bank loans, and so on. There must be a
proper balance between owned funds and borrowed funds.
3. Efficient utilization of finance: Once the funds are raised, the next
task of finance manager is to utilize them efficiently. Long-term
funds should be invested in fixed assets and short-term funds should
be used for current assets. The companys funds should not be invested in the unprofitable projects.
4. Distribution of profits: The distribution of net profit has to be
decided by the finance manager. He has to decide between dividend and reinvestment of earnings, keeping in view the requirements of shareholders and expansion and diversification plans of
the company.
5. Cash management: Finance manager also has to decide about the
cash required for various requirements of the firm. Cash is required
for many purposes like payment of wages and salaries, bills, meeting
current liabilities, and so on.
6. Financial control: Maintaining financial controls is a very important function of a finance manager. This is exercised with the help
of techniques like ratio analysis, budgetary control, cost analysis,
and so on.

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CAPITAL BUDGETING

Financial Management for Businesses in India

Gone are the days when there used to be a single manager who would
manage the entire operations of a business. With multinationals around,
the finance function has become much more specialized and complex.
There are specialists who look after specialized categories of operations.
Since liberalization in 1991, the face of Indian corporate has
changed tremendously. Finance is the essence of management of any
business. It is in this context financial management for businesses in
India is seen. Today every company has specialist set of people shouldering the responsibility of finance manager in their organization.
Different connotations are used for finance manager by different companies, viz. Director-Finance, President-Finance, Chief Finance Officer, Financial Controller, and so on.
Todays finance manager does not perform the routine function of
raising and disbursement of funds anymore. He has to do multitasking
for the overall growth of the business. He has to safeguard the financial
assets of the company, plan the business operations in a way so that there
is a positive cash flow. In his day-to-day responsibilities, he has to look
at the audit reports, and final accounts for analyzing the performance of
the company.
Financial management is a process that is associated with both planning and control. As planning, it involves procuring and allocation of
available funds in a most profitable manner. Control on the other hand
refers to keeping an eye on the cash flow. A finance manager is thus responsible for the total management of funds in an enterprise. In nutshell,
financial management for businesses has become very scientific in India
with the latest techniques of management around.
In any organization, finance manager has to use the available resources
in the most efficient manner so as to generate maximum profits for the
company and keep shareholders happy. This leads to realization of the
ultimate organizational objective of shareholders wealth maximization.
In conclusion, financial management has changed with the changing
times and become very scientific for efficient management of business organizations with the latest principles and practices of management being
followed.

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Nature of Financial Management

Financial Management Problems & Solutions

The problems relating to the financial management faced by corporate
enterprises and their possible solutions may be reiterated below:
1. The enterprises sometimes due to poor planning, fail to identify and
maintain the desirable combination of sources of funds. They face
the problem of shortage of equity and depend too much on the borrowed capital. Hence, there is a necessity of proper financial planning to make the financial structure optimal.
2. Likewise, the enterprises also maintain an inappropriate combination
of assets. This results in the problem of either underinvestment or
overinvestment in fixed assets on one hand and current assets, particularly in inventories and receivables, on the other hand. In such
condition, the inventories and receivables are to be checked by way
of adopting the appropriate inventory controlling techniques and altering credit and collection policies suitably. There should be a more
efficient utilization of assets.
3. The enterprises fail in making proper future projection of revenues and
costs which result in improper investment in inventories receivables,
and additional plant capacity, and so on. All these factors ultimately
account for poor earnings of the enterprises.
Hence, there is a need for a sound profit planning for ensuring better
utilization of resources and enhanced earnings.

4. The enterprises lack a definite and stable dividend policy. No adequate

balance is maintained between payment of dividends and retention
of earnings. There should be more regularity and consistency in payment of dividends in proportion to their equity capital.
5. The enterprises should be managed by only professionally competent,
qualified, and experienced personnel based on the practice of participative management and supported by an efficient information system.

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Index
Accounting rate of return (ARR), 17,
6769
Adjusted present value (APV), 7274
After-tax cash flows, 52
Aggressive beta, 122
Amount of capital, 148
Annuity cash flows, 7071
Appraising projects, key issues in,
3032
APV. See Adjusted present value
(APV)
ARR. See Accounting rate of return
(ARR)
Asian Development Bank, 39
Average/neutral beta, 122
Benefit-cost ratio (B/c ratio), 7476
Beta
calculation of, 122
categories of, 122
definition of, 121
Break-even point, 9596
Business
capital budgeting practices, 8788
drivers, 2021
plan versus feasibility study, 27
promoters, 2627
structure, 26
Cairn India, capital investment
practices of, 178179
long-term growth, strategy for,
180181
CAPEX. See Capital expenditure
(CAPEX)
Capital asset pricing method
(CAPM), 121123
Capital budgeting, 1118
business versus government, 8788
under capital rationing, 107113
decision. See Capital budgeting
decision
effective, 8587

features of, 1213

of Indian public sector undertaking,
167176
for multinational firms, 129138
process, 1415
projects. See Capital budgeting
projects
of Reliance Industries Ltd, 155166
risk analysis in, 89106
for subsidiary projects, 137
Capital budgeting appraisal
cost of capital, 117126
methods, 6388
business versus government
capital budgeting practices,
8788
effective capital budgeting, 8587
nonconventional cash flows,
8285
techniques under certainty,
6385
techniques under uncertainty, 63
Capital budgeting decision, 4, 117
cash flows for, 5162
importance of, 13
overview of, 1213
post completing auditing of,
139146
time value of money in, 4750
types of, 13
Capital budgeting projects
evaluation of, 1415
methods, 1617
risk, 18
types of, 1516
Capital expenditure (CAPEX), 8587
effective management, factors for,
8687
Capital investment decisions
future challenges to, 149151
key issues of, 148149
Capital investment practices, of oil
sector in India, 177181

212 INDEX

Capital rationing, capital budgeting

under, 107113
factors for, 110113
method of, 108109
problems in, 113
types of, 109110
Capital structure decision, 117
CAPM. See Capital asset pricing
method (CAPM)
Cash flows, 5152
annuity, 7071
and capital rationing, 113
components of, 5759
discounted, 6982
estimation of, 5259
financing versus operating,
130131
focus on, 86
foreign investment decision-making
process, 134135
incremental, 5456, 86
inflation and, 6062
inflows. See Cash inflows
mixed stream, 7172
nominal, 6162
nonconventional, 8285
nondiscounted, 6469
of ONGC, 172
outflows. See Cash outflows
parent versus project, 131, 134135
versus PAT, 52
real, 6162
reinvestment of, 18
relevant, 53, 131132
terminal, 56
Cash inflows, 51
calculation of, 56
even, 64
terminal, 56
uneven, 65
Cash management, 5
Cash outflows, 51
calculation of, 55
CDM. See Clean development
mechanism (CDM) project
Certainty-equivalent coefficient,
9394
CGD. See City Gas Distribution
(CGD)

Chamber of Commerce, 156

City Gas Distribution (CGD), 180
Clean development mechanism
(CDM) project, 171
Coefficient of variation, 92
Companies Act, 1956, 163, 164
Companys overall strategy, evaluation
of, 133
Compounding, 48
future value (FV), 4849
Contingent projects, 16
Control, in financial management, 6
Corporate risk, 90
Cost(s)
of capital, 117126, 129
computation of, 118126
definition of, 117
foreign investment decisionmaking process, 135
of debt, 118120
of equity capital, 121123
explicit, 118
implicit, 118
of preference capital, 120121
of retained earnings, 123
specific. See Specific costs
CPA. See Critical path
analysis (CPA)
Credit needs, estimation of, 25
Critical path analysis (CPA), 3637
program evaluation and review
technique versus, 37
Cut-off rate. See Cost of capital
Debt cost, 118120
Decision-making
capital, 15
post completion review, 143
process, for foreign investment,
132137
Decision-tree analysis, 18, 106
Defensive beta, 122
Demand forecast, 134
Dependent projects, 16
Depreciation, 15
adequacy of, 162165
definition of, 162
policy, at Reliance Industries
Ltd.,164

 INDEX
213

Discounted cash flow techniques,

6982
adjusted present value, 7274
benefit-cost ratio, 7476
discounted payback period, 6970
internal rate of return, 7682
net present value, 7072
profitability index, 7476
Discounted payback period, 17,
6970
Discounting, 48
present value, 4950
Discount rate, and multinational
capital budgeting, 130
Diversification decision, 15
Dividend decision, 4
Double declining method, 163
Economic evaluation, for foreign
investment decision-making
process, 136
Economic feasibility, 2426
Enhanced Oil Recovery (EOR), 180
ENPV. See Expected net present value
(ENPV)
EOR. See Enhanced Oil Recovery
(EOR)
Equity
capital cost, 121123
estimation of, 25
Expansion decision, 15
Expected costs and returns, estimation
of, 2526
Expected net present value (ENPV),
9192
Explicit costs, 118
External capital rationing, 110
Feasibility study. See also Project
feasibility
versus business plan, 27
conducting, 21
definition of, 1920
good, essentials of, 2728
process of, 2022
project appraisal, 44
Finance/financing
decision, 4
efficient utilization of, 5

and multinational capital

budgeting, 130131
Financial control, 5
Financial feasibility, 2426
Financial management
for businesses in India, 6
functions of, 5
meaning of, 34
objectives of, 45
problems & solutions, 7
Financial requirement, estimation
of, 5
Financial techniques, for risk analysis,
92106
break-even point, 9596
certainty-equivalent coefficient/
conservative estimates, 9394
decision tree analysis, 106
key factor, 9899
payback, 95
risk-adjusted discount rate, 9798
risk of shut down, 99
scenario analysis, 102106
sensitivity analysis, 99102
simulation analysis, 106
Fixed assets, 1314
intangible, 14
to long-term funds ratio, 159161
management, of Reliance Industries
Ltd., 156165
depreciation, adequacy of,
162165
financing pattern of, 158161
level of investment, 156158
utilization, 161162
to net worth ratio, 158159
tangible, 14
to turnover ratio, 161, 162
Foreign capital investment
factors affecting, 130132
key issues in, 137138
Foreign currency fluctuations
effect on multinational capital
budgeting, 131
Foreign-exchange rates
effect on capital budgeting, 129
foreign investment decision-making
process, 134
Foreign investment search, 132133

214 INDEX

Foreign projects evaluation,

decision-making process
for,132137
cash flow analysis, 134135
companys overall strategy,
evaluation of, 133
cost of capital, determination
of,135
economic evaluation, 136
foreign investment search, 132133
implementation, 136
political climate, exploring, 133
post audit, 136137
project selection, 136
risk analysis, 136
Forward rate, for dollar cash
flows,137
Funds, mobilization of, 5
Future challenges to capital
investment decisions,
149151
Government
capital budgeting practices, 8788
Historical weights, 123
Hurdle rate. See Cost of capital
Implicit costs, 118
Improved Oil Recovery (IOR), 180
Income-Tax Act, 1961, 163
Income tax effects, 15
Incremental cash flows, 5456
focus on, 86
operating, 5556
types of, 5456
Independent projects, 16
India
financial management for businesses
in, 6
oil sector, capital investment
practices of, 177181
Inflation, 15
and cash flows, 53, 6062
long-term rates, effect on
multinational capital
budgeting, 131
Initial investment outlay, 5455
Installation costs, 53

Institute of Chartered Accountants of

India, 162
Intangible fixed assets, 14
Internal capital rationing, 110
Internal rate of return (IRR), 17, 18,
7682, 100, 106
capital rationing, 108109
modified, 17
multiple, 18
net present value versus, 8082
of ONGC, 175
of Vizag steel, 170
Internal working conditions,
and capital investment
decisions,149
International Finance
Corporation, 39
Investment decision, 4
Investment plan, 106
Investment risks, types of, 121122
IOR. See Improved Oil
Recovery(IOR)
IRR. See Internal rate of return (IRR)
Key factor, 9899
LFA. See Logical framework analysis
(LFA)
Liquidity, 4
Little-Mirrlees approach, of project
appraisal, 4142
Logframe analysis. See Logical
framework analysis (LFA)
Logical framework analysis (LFA), 35
Long-term assets, investment pattern
of, 179
Long-term funds ratio, fixed assets to,
159161
Managerial feasibility, 2627
Marginal weights, 123
Margin of safety, 18, 95
Market assessment, 2223
Market risk, 90
Ministry of Petroleum and Natural
Gas, 177
MIRR. See Modified internal rate of
return (MIRR)
Mixed stream cash flows, 7172

 INDEX
215

Modified internal rate of return

(MIRR), 17, 8385
Monte Carlo simulation, 18
Multinational firms, capital budgeting
for, 129138
foreign capital investment, factors
affecting, 130132
foreign capital investment, key
issues in, 137138
foreign projects, process of
evaluating, 132137
Multiple IRR problem, 8285
Mutually exclusive projects, 16
Net income, from operations, 15
Net present value (NPV), 17, 18,
7072, 100, 106
capital rationing, 108109
expected, 9192
versus internal rate of return,
8082
of ONGC, 173174
of Vizag steel, 169
Net worth ratio, fixed assets to,
158159
Nominal cash flows versus real cash
flows, 6162
Nondiscounted cash flow techniques,
6469
accounting rate of return, 6769
payback period, 6467
Nondiversifiable risk, 121
NPCIL. See Nuclear Power
Corporation of India Limited
(NPCIL)
NPV. See Net present value (NPV)
Nuclear Power Corporation of India
Limited (NPCIL), 180
Oil and Natural Gas Corporation
Limited (ONGC)
capital budgeting practices of,
171178
CDM project, 171
long-term growth, strategy for,
179180
ONGC. See Oil and Natural Gas
Corporation Limited
(ONGC)

Operating cash flows

effect on multinational capital
budgeting, 130131
Opportunity cost, 54, 123
Organizational feasibility, 2627
Parent cash flows
effect on multinational capital
budgeting, 131
foreign investment decision-making
process, 134135
PAT versus cash flows, 52
Payback period (PBP), 1617,
6467,95
discounted, 17, 6970
of ONGC, 175
same, 6566
of Vizag steel, 168169
PBP. See Payback period (PBP)
PCA. See Post completing auditing
(PCA)
PERT. See Program evaluation and
review technique (PERT)
PI. See Profitability index (PI)
Planning, in financial management,
6, 7
Political climate, in foreign
investment decision-making
process, 133
Political risk, in multinational capital
budgeting, 132
Post completing auditing (PCA)
characteristics of, 139140
importance of, 140
Post completion review
case example, 145146
check list, 143145
process of, 141143
Prefeasibility study, 20
Preference capital cost, 120121
Probability measure, 9091
Problem tree analysis, 3435
Profitability index (PI), 17, 7476
capital rationing, 108109
Profit distribution, 5
Profit maximization, 4
Program evaluation and review
technique (PERT), 36
versus critical path analysis, 37

216 INDEX

Project appraisal
social-costs benefit analysis, 3944
Project appraisal technique, 148
Project assessment, 19
Project cash flows
effect on multinational capital
budgeting, 131
foreign investment decision-making
process, 134135
Project feasibility, 1932
appraising projects, key issues in,
3032
importance of, 2829
process of, 2022
types of, 2227
Project management techniques,
3337
critical path analysis, 3637
logical framework analysis, 35
problem tree analysis, 3435
program evaluation and review
technique, 36, 37
stakeholder analysis, 35
SWOT analysis, 34
Project ranking, 149
Project selection, and foreign
investment decision-making
process, 136
Real cash flows versus nominal cash
flows, 6162
Relevant cash flows, 53
effect on multinational capital
budgeting, 131132
Reliance Industries Ltd. (RIL)
capital budgeting practice of,
155166
fixed assets management, 156165
depreciation, adequacy of,
162165
financing pattern of, 158161
level of investment, 156158
utilization, 161162
suggestions, 165166
Replacement decision, 15
Retained earnings cost, 123
Return on investment (ROI), 149
RIL. See Reliance Industries
Ltd.(RIL)

Risk
-adjusted discount rate, 9798
analysis. See Risk analysis
corporate, 90
definition of, 8990
market, 90
stand-alone, 90
Risk analysis
in capital budgeting, 89106
financial techniques, 92106
statistical techniques for, 9092
for foreign investment decisionmaking process, 136
ROI. See Return on
investment (ROI)
Salvage value, 15
SCBA. See Social-costs benefit analysis
(SCBA)
Scenario analysis, 18, 102106
Sensitivity analysis, 18, 99102
Shareholding, of ONGC, 178
Shut-down risk, 99
Simulation analysis, 106
Social-costs benefit analysis (SCBA),
3944
case study, 4244
Little-Mirrlees approach, 4142
UNIDO approach, 4041
Solvency, 45
Specific costs
assigning weights to, 123
computation of, 118123
with weights, multiplying,
124126
Stakeholder analysis, 35
Stand-alone risk, 90
Standard deviation, 92
Statistical techniques, for risk analysis,
9092
Strategic problems, in
capitalinvestment
decisions,149
Subsidiary projects, capital budgeting
for, 137
Subsidized financing
effect on multinational capital
budgeting, 132
Sum of-the-years digit method, 163

 INDEX
217

Sunk costs, 53
SWOT (Strengths, Weaknesses,
Opportunities, and Threats)
analysis, 34
Systematic risk, 121
Tangible assets
fixed, 14
of Reliance Industries Ltd., 164
Target rate of return. See Cost of
capital
Technical feasibility, 2324
Terminal cash flows, 56
Terminal cash inflows, 56
Terminal values, and
multinationalcapital
budgeting, 130
Time value of money, 4750
capital expenditure
management, 87
definition of, 47
valuation methods, 4850

Total capital requirements, estimation

of, 25
Transportation costs, 53
UNIDO approach, of project
appraisal, 4041
Vizag steel, capital budgeting practices
of, 167170, 176
WACC. See Weighted Average Cost of
Capital (WACC)
WDV. See Written down value
(WDV) method
Wealth maximization, 4
Weighted Average Cost of Capital
(WACC), 117, 124126
What if analysis, 100
Working capital decision, 4
World Bank, 39
Written down value (WDV) method,
163, 164

OTHER TITLES IN OUR FINANCE AND FINANCIAL

MANAGEMENT COLLECTION
John A. Doukas, Old Dominion University, Editor
Applied International Finance: Managing Foreign Exchange Risk and International
Capital Budgeting by Thomas J. OBrien
Venture Capital in Asia: Investing in Emerging Countries by William Scheela
Global Mergers and Acquisitions: Combining Companies Across Borders
by Abdol S. Soofi and Yuqin Zhang
Essentials of Retirement Planning: A Holistic Review of Personal Retirement
Planning Issues and Employer-Sponsored Plans by Eric J. Robbins
The Fundamentals of Financial Statement Analysis as Applied to the Coca-Cola
Company by Carl B. McGowan, Jr., John C. Gardner, and Susan E. Moeller
Corporate Valuation Using the Free Cash Flow Method Applied to Coca-Cola by Carl B
McGowan, Jr.

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