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Role of Capital Budgeting in Strategic Planning

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Wasantha Subasinghe

on 25 July 2013

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Transcript of Role of Capital Budgeting in Strategic Planning

Determines where the firm is heading in the future

How is it going to get there?

How it will know whether it achieved the targets?

Focuses on the whole organization
What is strategic planning?
Tools used in capital budgeting
Group B - 1

MBA 12/3059 Alroy Mascrenghe
MBA 12/3097 Sanath Pilapitiya
MBA 12/3103 Pratap Rajan
MBA 12/3133 Sivaraj Murugiah
MBA 12/3135 Wasantha Subasinghe  
MBA 12/3149 Pradeep Wanninayake
MBA 12/3167 Anusha Wijesooriya   
Role of Capital Budgeting in Strategic Planning
Thank you
The strategy of the company will determine how capital budgeting techniques will be used.

The capital structure and the availability of funding will also affect the strategies of the company.

More sophisticated techniques like NPV and IRR are being used extensively in developed countries.

In Sri Lanka not much research has been done in this area.

From the one research that was done, capital budgeting techniques was not used even in large companies
“There was a clear indication in NZMPL the decisions were influenced by qualitative rather than quantitative information. The feeling among the management that numbers could be manipulated to make a proposal look good strongly suggests the case for emphasis of qualitative information by the management.”
Quote from the research
Quantitative analysis focused mainly on revenue forecasts

In the case of Kotmale Holdings, which was family controlled, the decision was taken by the Board to invest, after which the managers did a fact finding
Findings from the research
No capital budgeting techniques used when deciding on projects

Nestle Lanka and Fonterra - the value of the projects were more than Rs. 300 million

There was a very heavy reliance on qualitative analysis
Findings from the research
Not much research done in this area

One research is “A study of selected capital investment decisions in the dairy industry in Sri Lanka.” by P.P. Rajaratne 1997. MBA Research, PIM Colombo
Capital budgeting in Sri Lanka
Capital budgeting in Sri Lanka
Challenges in implementing capital budgeting decisions

Takeovers of rival companies could be initiated even though it may not be financially viable

Entrepreneurs may use gut feeling rather than detailed analysis to decide on project investments

Less sophisticated methods of capital budgeting maybe used and might not be adequate for appraisal purposes
Practical implications
Capital budgeting follows strategic planning. The investment decisions will be influenced by the strategy of the company

Capital investments are long term in nature

Capital investments affect future cash flows and risks of the firm
Role of capital budgeting in strategic planning
Role of capital budgeting in strategic planning
Capital is a scarce resource

Need to choose between alternative projects

To evaluate, compare and select projects

To maximize the wealth of shareholders
Why capital budgeting ?
What we will talk about…..
Source: Brounen et al, Corporate finance in Europe, confronting theory with practice, (2004)
Use of Capital budgeting techniques in companies

Project proposals cannot be generated in isolation and they have to fit in with the firm’s corporate goals, vision, mission and long term strategic plan
Role of capital budgeting in strategic planning
Investing in projects require financing which will affect the capital structure of the company

The strategy of the company will affect its capital structure

The availability of funding will affect the strategic plans of the company
Role of capital budgeting in strategic planning
Source : Capital budgeting, financial appraisal of investment projects. Retrieved from www.cambridge.com
Positioning of capital budgeting
Source : Capital budgeting, financial appraisal of investment projects. Retrieved from www.cambridge.com
The capital budgeting process
Four companies analysed
Types of capital budgeting processes
The process by which a business determines whether projects such as building a new plant or investing in a long term venture are worth pursuing

Implementation and monitoring of the chosen projects
What is capital budgeting?
Project successful
Project partially successful
Project Successful
Project not successful
Success of the projects
What is capital budgeting
What is strategic planning
Role of capital budgeting in strategic planning
Practical implications
Sri Lankan context
Full transcript