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2014 By Ankita Sharma

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CHAPTER 1: INTRODUCTION 1.1 About the topic: Financial Management is that managerial

activity which is related to the planning and controlling of the firms financial resources in

order to maximize profits and ensure liquidity in the organization. Without Financial

Management no company can work properly and there would be confusion and losses if

Financial Management is not taken into account seriously by the managers. It

encompasses the procurement of the funds in the most economic and prudent manner and

employment of these funds in the most optimum way to maximize the return to the owner.

It gives the direction in which the funds should be used and to what extend for the

betterment of the organization. According to Van Horne and Wachowicz, Financial

Management is concerned with the acquisition, financing and management of assets with

some overall goal in mind. There are three types of decisions that are taken in Financial

Management and these decisions exist at every level of management. The three important

Financial Management Decisions are:- 1. Investment Decisions 2. Financing Decisions 3.

Dividend Policy Decisions Financial Analysis is a part of decision making process. Financial

decision making involves analyzing the financialsetbacks that thefirm faces andselect ing

that sequence ofactions that are to be seized in order to resolve the problem. As a

decision maker,a manager must be able to use the analytical techniques of financial

analysis. The role of f inancial analyst may be assumed by any manager.To make financial

decisionsthe manager must be able to identify potential financial problems and analyze the

effects of alternative courses of action. Managers at every single level have to make

tough commercial decisions continuously. Analytical tools and techniques are important in
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decision making, analysis, planning and control. Aspec ts of financial management are

performed by most managers today, and it is vital that managers be able to apply

analytical techniques to their specific financial problems or decisions. 1.2 Investment

Decisions The investment decision relates to the selection of assets in which funds will be

invested by a firm. This way the decision maker ought to choose that whether to invest in

short word assets or in long word assets that should yield the benefits in future. Future

benefits of investments are tough to compute and cannot be predicted with certainty.

Because of the uncertain future, investment decisions involve risk. Investment proposals

should, therefore, be evaluated in terms of both expected return and risk. So these

decisions are very important for the organisation as huge amount of money is involved and

it is difficult to alter such decisions. The assets which can be acquired fall into two broad

groups: ? Short-term or current assets (Working Capital Management) ? Long-term assets

(Capital Budgeting) 1.2.1 Short term Investment Decisions:These decisions are concerned

with the dec isions about the level of cash, inventory, debtors etc. Efficient cash

management, Inventory management and receivable management are essential ingredients

of sound working capital management. The optimum amount of current assets and current

liabilities should be determined so that the profitability of the business remains intact and

there is no fall in the liquidity. These decisions are for short period of time as compared to

the long term decisions and are of generally for 1 year. 1.2.2 Long term Investment

Decisions: The term Capital Budgeting consists of two words, Capital and Budgeting.

Capital means funds currently available with the company and Budgeting means planning

and investment of these funds in a project. Thus, Capital Budgeting involves firms

decisions to invest its current funds in a project. It is a process of determining which

potential long term projects are worth undertaking. Thus, Capital Budgetingcan be defined

as the decision makingprocedure by which firmsevaluates the purchase of major fixed

assetslike building, machinery and equipment. It is a process of analysing alternative

investments and deciding which assets to acquire. 1.3 Financing Decisions This decision

focuses on planning of finance for the company. Financing decision is thesubsequent most

vital purpose to be performed by the financial manager.The manager must decide where

and how to acquire funds to meet the firms investment needs.In simple language it means

from where to get funds for the organization so that the company could invest those funds

and maximize the benefits. The manager has to take the decision that whether to obtain

funds through equity or through debts. The central issue before him is to determine the

proportion of equity and debt. The mix of debt and equity is known as the firms capital

structure. The financial manager must strive to obtain the best financing mix or the

optimum capital structure for his firm. It should be in such a way that the organization

must get the best out of it. The concern of the financing decision is with the financing-mix

or capital structure or leverage.There are two aspects of the financing decision.? Capital

Structure decisions ? Cost of capital This decision generally depends upon three factorsi.e. cost, risk and control. The composition/ mixture of various sources should be made in

such a way that all the financial requirements of the organization whether present or

future, long term or short term should be met in due time with minimum/ optimum cost,

least risk and better control. To achieve this target, firstly financial objectives should be

established and then financial policies must be formed to achieve these objectives and

then procedures and programs should be formulated which will help in taking important

decisions regarding procurement, administration and disbursement of business funds in the

best possible way. It is important to make a choice from different sources available for

raising finance. A company can raise funds from various sources. Long term finance can be

arranged by issue of shares, debentures or from financial institutions. Short term finance

can be procured from banks, trade credit or advances from customers. The choice from

different sources to raise funds mainly depends upon cost of raising funds, risk and control

involved. 1.4 Dividend Policy Decisions Dividend policy involves the decisions whether:- ?

To distribute earnings in the form of dividend among shareholders ? To retain earnings forreinvestment in the business ? To retain some earnings and to distribute the remaining

earnings The main objective of a company is to increase the wealth of shareholders. The

firm ought to, consequently, pursue such a dividend strategy that ensures the

maximization of its shareholders wealth. Thus, a good dividend policy refers to that

dividend policy which ensures the maximization of shareholders wealth. Dividend decision is

a decision concerning the allocation of a proportion of net profits of the firm in the form of

dividends to the stockholders of the company. Dividend decision is seized by the Board of

Managers and is next suggested to the shareholders for their final approval at the Annual

General Meeting ofcompany. Theshareholders cannot increase the amount of dividend as

recommended by the Board of Directors. However, they can reduce the amount of

dividend. Dividend pay-out ratio of a company, to a large extend, depends on its funds

requirements for the future. If a firm has substantial investment opportunities, it may

declare lower dividends to conserve resources for growth. On the other hand, if a firm has


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not profitable investment opportunities, it may distribute large amount of earnings.

Shareholders preference also influences the dividend policy of the firm. While taking any

dividend decisions, the directors should also consider the desires of shareholders. If

shareholders have interest in current income, then the firm should follow the liberal

Dividend Payout Policy. On the other hand, if they have a preference for capital gains, the

firm should follow a conservative dividend policy. 1.5 Capital Expenditure The investments

that the firm makes on its physical assets such as land, building, property, equipment, etc

are termed as Capital Expenditure. Capital Expenditure decisions are concerned with

decisions regarding investment of funds in fixed and current assets for getting returns for a

number of years. 1.5.1 What is Capital Budgeting? Capital Budgeting means planning and

control of capital expenditure. It plays an important role in the success of an organization

and is extremely important for the organization as:- ? Huge amount of money is involved ?

It is tough to reverse the decision ? Such decisions have a considerable impact on the

future of the organization Capital expenditure decisions involve large investments of funds;

hence it is necessary for a firm to make such decisions very carefully. Wrong decisions may

result into huge financial losses to the company and may eventually lead to the

bankruptcy/ failure of the firm. Capital Budgeting is the art of finding assets/ projects that

are worth more than they cost to the company. Only that asset or project should be

accepted which gives some surplus i.e. which contributes to the wealth of shareholders. A

Capital Budgeting decision has its effect over a long period of time. Thus, Capital Budgeting

techniques help a company to achieve its goal of maximization of shareholders wealth.

Once a firm seizes the decision to invest in a particular asset or undertaking, it will have to

suffer a heavy financial loss, if later on; it decides to reverse its decision. The asset so

required will have to be disposed of at a thorough away price. Thus, it is necessary for a

company to properly evaluate the investment proposals before taking the final decision.

Capital budgeting is useful in selecting the best investment proposal. A proposal is

accepted if it yields a rate of return higher than the minimum required rate of return. If

projects are mutually exclusive, the company may select one best alternative out of the

various options by adopting some suitable method of capital budgeting. Thus, capital

budgeting involves firmsdecisions to invest its current funds in a project. It is a process

of determining which potential long term projects are worth undertaking. 1.6 Methods of

Capital Budgeting The various methods of capital budgeting that a decision maker can

follow described in this section: 1.6.1 Pay Back PeriodMethod Pay back period is the most

popular traditionalmethod of evaluating investment proposals.Under this method,

investment proposals are ranked according to the length of their pay back period. Pay back

period is the periodwithin which theproject will pay back its cost. Smaller the Pay Back

period, better the project is. The main advantage of this method is that it isvery simple to

calculate anddoes not involve complexity. Pay back period can be calculated on the

basis of simple cash flow or discounted cash flow. Payback Period = Investment requiredfor a project/ net annual cash inflow 1.6.2 Net Present Value(NPV) Method Net Present

Value Method isconsidered to be thebest methodfor evaluating the investment

proposals, as ittakes into consideration thetime value of money. NPV = Present Value of

cash inflow Present value of cash outflow Where, Present Value = Cash InflowX Present

value ofRe. 1 at discount rate In case the NPV is positive, the project should be

accepted. However if the NPV is negative, the project should be rejected. If projects are

mutually exclusive, accept the one with the highest NPV. Acc ept the proposal --- - If NPV

> Zero Reject the proposal ---- If NPV < Zero NPV takes into account cash flow of the

project over its entire life, so the true profitability of the project can be assessed.

Discounting process enables thecomparison ofvarious projects to be made at the same

point of time. 1.6.3 Profitability Index Method Gross Profitability Index(GPI) = present

value of inflow / present value of outflow If PI is more than 1 then the project should be

taken. Suppose the PI of a 5 years project is 1.50 it means that on an investment of Re. 1

, the present value of the return that we will get over 5 years is Rs. 0.5 If GPI > 1 Acceptthe project If GPI < 1 Reject the project Net Profitability Index(NPI) = Net present value /

initial cash outlayIf NPI > 0 Accept the project If NPI < 0 Reject the project 1.6.4 Internal

Rate of Return(IRR) Internal Rate of Return(IRR) can be definedas that rate of discount

at which the present value of cash inflows is equal to the present value of cash outflows.

In other words, itis the rate that gives a net present value (NPV) of zero. It is calculated

on the basis of discounted cash flow approach. It is inclusive of cost of capital. For

example, cost of capital is 10% and IRR is 15%, it means the total return on the funds

employed is 15% out of which 10% is to meet the cost of capital and the balance it is

extra profit over and above cost of capital. IRR is that discounting rate at which NPV of a

project is zero. This method takes into account the time value of money. If NPV = 0 or PI

= 1, than IRR is equal to discounting If NPV > Zero or if PI > 1, IRR is greater than

discounting rate If NPV < Zero or PI < 1, than IRR is less than discounting rate 1.7 NPV v/s

IRR In case of independent projects: Both NPV and IRR methods will give same accept


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expenditure announcements depends more on the market's assessment of the quality of its

investment opportunities than its industry affiliation. (Kee H. Chung, Peter Wright, Charlie

Charoenwong (2005), Investment opportunities and market react ion to capital expenditure

decisions.) The managers at operating level of the company are more concerned with

short term goals and short term effects of various decision alternatives. For example,

operating management is concerned with cash managemnet decisions. Short term

objectives, such as cash liquidity and inventory control, are of primary concern in the

financial analysis of cash management decisions. A companys strategy creates and

sustains its competitive advantage. Most companies try to differntiate their product or

services from their competitors and to control the cost. (Investment opportunities and

market reaction to capital expenditure decisions, 2010.) In the wake of a globalised

markets, liberalized t rade regimes, economic recessions and challenges presented by

atrocious natural calamities, Indian corporate sector has been undergoing a dramatic

transformation. Investment opportunities have expanded beyond the geographical borders

and so has been the widening of financing options and above all the dependence on capital

markets has increased. In this scenario, the empirical finding of this study will be

interesting to financial institutions like IDBI, IFCI, ICICI, along with Commercial Banks. As

these institutions play a pivotal role in answering the financing needs of corporate sector.

The findings are relevant to the private corporate sector in general for their investment

portfolio decisions. (Modigliani, F and M Miller, The Cost of Capital, Corporation Finance

and the Theory of Investment", American Economic Review 48, 1999, 261-297.) The

earlier recommendations for achieving opt imal budgeting for capital expenditures integration

in LICs remain critical for success. However, obtaining the necessary results could take

LICs several years. In summary, an effective capital budgeting process should form an

integral component of a sound overall budgeting system. A well-designed public financial

management system supports each aspect of the system, including capital spending. Good

multi-year planning furthermore supports overall fiscal balance, with more stable spending

patterns for ministries and programs, and for their capital planning and execution. Good

budget execution and procurement will enable timely, within-budget completion of projects

(assuming good program and project management). Financial management information

systems will support the financial and program management needs of the execut ive,

ministries of finance and economy, spending ministries, and program managers. In

addressing these aspects, LICs should continuously aim to improve not only their capital

budgeting processes, but also their public financial management systems overall. (Davina

F. Jacobs, Public Financial Management Technical Guidance Note, Fiscal Affairs

Department, April 2009) This Report presents the findings of a Government-wide review

of infrastructure and capital investment policy led by the Department of Public Expenditure

and Reform. Within the context of tight fiscal constraints, the Government is committed to

ensuring that the countrys stock of infrastructure is capable of facilitating economicgrowth and that the enterprise development agencies have ample resources to foster

opportunities for enterprise development and job creation. Over the medium-term, there

will be a lower level of resources available for capital investment. The potential negative

consequences of reduced capital spending are tempered by recent improvements in the

economys infrastructure, but it is anticipated that there will be a return to a more

substantial Public Capital Programme beyond the period of this review. The countrys

infrastructural and capital investment needs are a function of broad societal and economic

developments. This review assesses the existing capacity of Irelands infrastructure and

identifies remaining gaps which must be addressed to aid economic recovery, social

cohesion and environmental sustainability. (Roinn Caiteachais Phoibli, Infrastructure and

Capital Investment 2012-16: Medium Term Exchequer Framework, November 2011)

Capital investment appraisal is affected by taxation in four main ways: First is that,

Annual profits are taxed, under current rules for large companies, half in the year when

they are made and half in the following year. You must read the question carefully to seewhat assumptions the examiner has made. You may, for example, be told that tax is to be

paid in the year following that in which the taxable income arises (which would mean that

a four-year project would need a five-year table). Secondly, Interest on debt is allowable

against corporation tax and this will affect the discount rate used. Third, Tax losses must

be included and will normally give rise to tax relief one year later. Fourth, the tax bill may

be reduced by grants and capital allowances, increasing the chance of a project being

acceptable. Read examination questions carefully for details of any such allowances. The

most common allowances in examinations (and in practice) are writing-down allowances

calculated on a reducing balance basis. (www.icsa.org.uk, Capital Budgeting) Investment

decisions are at the core of any development strategy. Economic growth and welfare

depends on productive capital, infrastructure, human capital, knowledge, total factor

productivity and the quality of institutions. All of these development ingredients imply - to

some extent - taking the hard decision to sink economic resources now, in the hope of


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future benefits, betting on the distant and uncertain future horizon. The economic returns

from investing in telecoms or in roads will be enjoyed by society after a relatively short

time span following project completion. Invest ing in primary education means bet ting on

the future generation and involves a period of over twenty years before getting a result in

terms of increased human capital. Preserving our environment may require decision-makers

to look into the very long term, as the current climate change debate shows. Every time

an investment decision has to be taken, one form or another of weighting costs against

benefits is involved, and some form of calculation over time is needed to compare the

former with the latter when they accrue in different years. Private companies and the

public sector at national, regional or local level make these calculations every day.

Gradually, a consensus has emerged about the basic principles of how to compare costs

and benefits for investment appraisal. (Danuta Hubner, Guide to Cost Benefit Analysis of

Investment Projects, July 2008) Overconfidence has direct applications in investment,

which can be complex and involve forecasts of the future. Overconfident investors may

overestimate their ability to identify winning investments. Traditional financial theory

suggests holding diversified portfolios so that risk is not concentrated in any particular

area. Misguided conviction can weigh against this advice, with investors or their advisers

sure of the good prospects of a given investment, causing them to believe that

diversification is therefore unnecessary. Risk from this perspective means variability of

outcomes and riskier investments should, broadly speaking, offer higher rates of return as

compensation for higher risk. The theory assumes that investors seek the highest return

for the level of risk they are willing and able to bear. Financial advisers often ask clients to

complete a risk attitude questionnaire to establish their attitude to risk, and consider

issues such as investment time horizon and wealth levels to establish risk tolerance. Risk

tolerance drives the types of investments they recommend for the investor. (Alistair Byrne,

Senior Investment Consultant at Towers Watson With Stephen P Utkus, Principal,

Vanguard Center for Retirement Research, the Vanguard Group Inc, Understanding how the

mind can help or hinder investment success, 2012) The specification of the regression

function includes indicators for the business cycle as well as firm characteristics and

market structure. Capacity constraints, lack of qualified labor and expected business

development, all measured at the sector level, are inserted as direct indicators for the

business cycle. Economic activities are also represented by factor prices namely real tariff

salaries and real interest rate. The estimation results show that both pro- and counter-

cyclical patterns can be found in firms innovation activities. Looking at the results of the

probability to start to innovate, business cycle fluctuations only matter for SMEs which

react counter- c yclically to the lack of qualified labor on the sec tor level. This accounts

for the substantial importance of qualified labor for the innovation process. In turn, the

probability of ceasing to innovating is influenced by fluctuations in the economic activity

for all firms. Looking at the expected business development the firms react counter-cyclically to fluctuations, looking at the capacity utilization firms react pro- cyclically.

(Diana Heger, 2000, The Link Between Firms Innovation Decision and the Business Cycle:

An Empirical Analysis, Discussion Paper No. 04-85) CHAPTER 3: RESEARCH METHODOLOGY

AND PROCEDURES The aim of this section is to explain methods used in carrying out this

project. This section focuses on understanding the research methodology which is required

to develop a framework for collecting and analysing the data. It defines the techniques

and the concepts used to determine the secondary data and to analyse from the

secondary data. 3.1 Purpose of the Study: The study has been undertaken to understand

the importance of financial decision making in a company and how these decisions affect

the company. The three main decisions i.e., The Financing Decisions, Dividend Decisions

and Capital Expenditure Decisions are mentioned in this report. In this study, Capital

Expenditure Decisions are studied in detail. This is also known as Investment Decisions.

These decisions are important for a company as huge amount of money is involved and it is

very difficult to reverse such decisions. The purpose of the study is to identify theimportance of such decisions and how and in what ways a company can benefit from these

decisions. Hence, these decisions play a vital role in the life of a company. 3.2 Objectives

of the study: The objectives of the report are as follows: ? To study the investment

decisions that a company can make while starting a project in the changing business

cycles like recession, boom, recovery, etc. ? To study the managers behaviour regarding

investment in capital expenditure in the changing business cycles like recession, boom,

recovery, etc. ? To examine the various techniques that a company undertakes in order to

make investment decisions. 3.3 Source of Data: For the project work, I have used both

type of data, viz. Primary Data and Secondary Data: Primary Data: A questionnaire is

prepared for this project and responses are collected from the respondents. The responses

are collected by directly interacting with the managers of the companies. Questionnaire

includes all the relevant questions related to the investment decisions that the managers

have taken or are willing to take in future for their respective companies. The data


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collected in this project with the help of questionnaire is original. Secondary Data:

Secondary Data has been collected with the help of various articles, reports and blogs that

are there on the internet regarding the investment decisions for a company. Many

researchers projects are also been studied to have an idea of investment decisions.

Various published articles regarding the same have also been studied for this report. 3.4

Research Design In this report, Descriptive Research has been taken up as a thorough

study has been done regarding the investment decisions that the managers take for their

respective companies. This project includes a detail study of investment decisions.

Sampling Technique: In this report, the technique that was used for taking the samples

was The Judgemental Sampling technique as only specific mangers were interviewed. MS

Excel 2010 and SPSS are used to present the responses of the managers that are taken

with the help of questionnaires. 3.5 Data Collection Sample Size: A sample size of 15

respondents is taken into account. The responses are taken only from those managers

that contribute to the investment decisions in their companies. The data collection took

place by asking the questions to the managers directly in a personal interaction. I found it

essential to make sure that all the necessary information is collected regarding the

decisions that they have taken in their respective companies or will take in future as

authentication of information is very important. Various websites on the internet are also

been studied regarding the topic so as to get the clarity regarding the same.

Instrumentation: The instrument used in the research is a questionnaire to collect the

primary data and MS Excel 2010 and SPSS to analyse it. 3.6 Limitations of the study

Respondent Error: There could be respondent error in the report as 15 managers gave the

answers to the questionnaire and they all possessed different attitudes towards the

questionnaire. Sometimes, respondent was not willing to share the information as it was

sensitive to his company. Sampling Error: I have taken the sample size of 15, which cannot

determine the investing behaviour of the total population. The sample has been drawn from

only Delhi/NCR. CHAPTER 4: DATA ANALYSIS AND FINDINGS 4.1 Basic findings after

interviewing with mangers: The meaning of Investment Decision making differs from

manager to manager. One may focus on the financial results of the decision and the other

may focus on the impact of decisions on the companys future growth and expansion. After

interviewing the managers, the findings were that the investment decisions are influenced

by the size of the enterprise, the current business cycle, the nature of the project on

which the decision is to be taken and the risk bearing capability of a manager. In most

cases, these decisions are highly affected by the nature of the project undertaken by the

managers. Proper knowledge of the Financial Tools plays a major in dec iding about the

investment. However, there are still some managers who are not aware about the

advanced tools and techniques of Capital Budgeting and hence are facing hurdles in the

area of capital investment. A questionnaire was constructed which comprised of 11

questions. These 11 questions are only related to the investment decisions related tocapital expenditure in a company. The questionnaire was designed in such a way that it

was easy to understand and was presented to only managers of different companies/

businesses/ enterprises in Delhi NCR. 15 responses were recorded. The data was recorded

at the beginning of the year 2014. This primary data is useful as it gave the true picture of

the managers behaviour related to capital investment and the risks that they usually

suffer from such decisions. The questionnaire is further discussed in detail in this report.

4.2 The Questionnaire 1. How do you rate your willingness to take financial riskswith

respect to capital expenditure? 20% 27% 53% Low risk taker Average risk taker High risk

takerTable: 4.2.1 Willingness to take f inancial risk 8 out of 15 managers come under the

category of Average Risk Takers, i.e., 53% of the managers. So with this, we can say that

more than 50% of the managers are playing safe as they dont want to invest either too

less or too more while making the capital expenditure. While only 3 out of 15 managers are

high risk takers and only 4 are low risk takers. The risk taking capacity depends from one

manager to other. One cant say that Rs. 50 Crores loss to a manager is a huge loss as itall depends upon his capability of handling losses. So, this data is representing the risks

according to the managers capabilities. The answers given by them were according to

their risk handling management. Thus, we cant compare the risk of one manager with the

risk of other as the size of the business and the nature of the project also plays an

important role in deciding the risk factor of the business. 2. What kind of constrains do you

encounter in implementing capital expenditure decisions in the company? 40% 27%

Procurement of funds Management of funds 33% Inadequate knowledge about how to take

decisions Table 4.2.2 Kinds of constraints 6 out of 15 or 40% managers have inadequate

knowledge about how to take decisions i.e., they are not aware about the proper tools and

techniques of the Financial Management and thus are facing problems related to the same.

Whereas, 4 out of 15 managers find it difficult to procure funds before making a capital

investing decisions in their companies. When asked further, they elaborated that

sometimes, whatever money that they take from banks in the form of loans is not enough


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for their investments and 5 out of 15 managers find it difficult to make the proper

management of the funds available to them in making the capital investment. The majority

of the managers especially managers of small enterprises are not aware about the

advanced tools and techniques of the financial management and thus, restrict themselves

from investing big in the c apital expenditure. 3. When faced with a major financial decision,

you are more concerned about?12 10 8 6 4 2 0 Possible Losses Posssible Gains Series1 4

11 Table 4.2.3 Possible losses or possible gains The options given to the managers to this

question were either possible losses or possible gains. 11 out of 15 managers look for

possible gains while making major financial decisions in their companies while only 4 look for

the possible losses that they might face due to the decisions. This makes the fact clear

that the majority of the managers are having positive approach towards their decisions and

they think that their profitability will increase after taking such decisions in their

companies. However, there are still managers who think about the losses first before

making any financial decision in their companies. With the optimist approach, the manager

can invest huge amounts in his business and also by using proper tools and techniques of

financial management, can earn good profits however; the pessimist approach doesnt

allow the manager to invest more in his company. 4. What degree of risk have you taken

with yourcapital expenditure decisions in the past? Verylarge Very small7% 0% Large

Small13% 20% Medium60% Table 4.2.4 Degree of risk in past 9 out of 15 managers or

60% of them agree that they have taken medium risk with c apital expenditure dec isions in

the past 5 years. 3 have taken small amount of risk, 2 of them have taken large amount of

risk and 1 out of 15 managers, has taken very large risk. Risk is something which is

different to different managers. So in this question, there is no exact amount in monetary

terms that depicted risks rather a range of very small, small, medium, large and very large

was set up because a risk of Rs. 2 crores might be small to one manager but to some other

it could be very large. With this result, it was clear that 60% of the managers take medium

risks and are not open to larger amount of risks in their businesses in case of capital

expenditure decisions. 5. In the last five years, how have your investments in capital

expenditure changed? 8 7 6 5 4 3 2 1 0 Mostly Somewhat No or Somewhat Mostly towards

towards minimal risk towrads towards lower risk lower risk higher risk higher risk Series1 3 2

0 8 2 Table 4.2.5 Changes in investments 8 out of 15 managers have changed their

investments in capital expenditure somewhat towards higher risk. This depicts that, the

behaviour pattern of the managers has changed and they are willing to take more risk as

compare to what they were taking earlier. The majority of the managers lie in this

category. 2 out of 15 managers have changed their investments in capital expenditure

mostly towards higher risk. So overall, 10 managers are moving towards having higher risks

as compared to their earlier capabilities of handling risks respectively. This is a good sign

as this depicts that the managers are now willing to take more risks compared to their

previous capabilities. 3 out of 15 managers have changed their investments in capitalexpenditure mostly towards lower risk and 2 of them changed to somewhat towards lower

risk. This depicts that 5 out of 15 managers believe to invest in capital expenditure with a

lower risk as compared to their previous capabilities. This depicts their behaviour that they

are more concerned about the risks than returns in terms of capital expenditure. 6. What

degree of risk are you prepared to take with your capital expenditure decisions now and

going forward? Very large, 0 Very small, 1 Large, 3 Small, 4 Medium, 7 Table 4.2.6 Degree

of risk in future 7 out of 15 managers are willing to take medium degree risk in future. The

risk factor depends on business to business. So in this question, the medium degree of risk

is defined as per the business of the manager accordingly that is why any exact figure is

not considered. 3 out of 15 managers are willing to take large degree of risk in capital

expenditure as compared to their earlier capabilities. This depicts the behaviour of the

managers that they are also aware of the fact that without taking the risks, they cannot

get better returns. However, 4 out of 15 managers have said that they are willing to take

small risks in future as far as the capital investments decisions are concerned. This depictsthat they have a conservative attitude towards the risk factor and only 1 out of 15

managers is willing to take very small degree of risk in future. 7. How much of the funds

you have available to invest would you be willing to place in capital expenditure where

both returns and risks are expected to be above average?8 7 6 5 4 2 0 2 0 1 0% - 20%

20% - 40% 40% - 60% 60% - 80% 80% - 100% Table 4.2.7 Funds available 7 out of 15

managers said that they are willing to invest approx. 40%-60% of the funds available to

them in the capital expenditure. This shows us that most of the managers have 40%-60%

of the funds with them that can be used for the capital expenditure decisions which is a

good amount as approximately 50% of the funds are directly going towards the capital

expenditure. This shows us the behaviour of the managers that they are more likely to

invest the funds in the capital expenditure decisions than in any other investments. 5 out

of 15 managers are willing to invest 20%-40% of the funds available to them in the capital

expenditure decisions. 2 managers are willing to invest 60%-80% whereas only 1 manager


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is willing to invest 80%-100% of the funds available to him in capital expenditure. The

reason behind is that the manager has started a new business and requires to invest more

in capital expenditure. 8. What is the averageannual rate of return you would expect to

earnfrom your capital expenditure over the next ten years? 0% 20% 7% 40% 33% 8% -

10% 10% - 12% 12% - 14% 14% - 16% 16% + Table 4.2.8 Expected average annual rate

of return 6 out of 15 managers i.e., 40% of the managers are expecting 12%-14% return

from their capital expenditure in the next 10 years. When asked they said, the market

conditions are such that one can get 12%-14% of the returns from their capital

expenditure if invested wisely. 5 out of 15 managers i.e., 33% of the managers are

expect ing 14%-16% returns from their capital expenditure in the next 10 years. This

depicts us that these managers have invested a good amount of funds in the capital

expenditure and this is why they are expecting this much returns. 3 out of 15 managers

are expecting more than 16% returns from their capital expenditure. This shows a very

optimist attitude of the managers towards the returns that they expect and only 1 out of

15 managers is expect ing a return of 10%-12%. This shows a pessimist approach of a

manager. 9. Are you using any Capital Budgeting Techniques before making capital

decisions in your company? Yes No 40% 60% Table 4.2.9 Capital Budgeting Techniques 9

out of 15 managers i.e., 60% of the managers said that they are using the Capital

Budgeting Techniques in their companies. This depicts us that approximately 60% of the

managers are aware of the Capital Budgeting Techniques such as NPV (Net Present Value),

IRR (Internal Rate of Return), Pay Back Method, etc. this shows that whatever decisions

they take are according to the techniques and hence the error making chances get

reduced which is ultimately beneficial for the company. 6 out of 15 managers i.e., 40% of

the managers said that they dont use any Capital Budgeting Techniques in their

companies. This depicts us that approximately 40% of the managers are not at all aware of

these techniques and hence dont implement them in their businesses. This shows that

there is a need to generate knowledge to them regarding these techniques so that they

could also reduce the chances of errors in their companies. 10. Do you change your capital

investment decisions or project management decisions according to the changes in

business cycles? No, 0 Rarely, 6 Always, 5 Frequently, 4 Table 4.2.10 Changes in business

cycles 6 out of 15 managers agreed that they rarely change their capital investment

decisions according to the changing business cyc les. This shows that they are reluctant to

change their decisions are dont know how and when to change the decisions so that it

could make a good fit for the company. This shows that, the managers must be made

aware of the techniques and how they can implement them for the benefit of their

businesses. 4 out of 15 managers said that they frequently change their capital

investments decisions with changing business cycles and 5 out of 15 managers said that

they always change their decisions according to the changing business cycles. This shows

us that they are very well aware about the market situations are know how to implementthe changed decisions on time. 11. In which business cycle you would prefer to make a

capital investment in your company? Recession Period, 0 Recovery Period, 2 Boom Period,

13 Table 4.2.11 Which business cycle 13 out of 15 managers have said that they prefer

boom period to make a capital investment in their companies. This shows us a very positive

attitude of the managers and when asked, they said that the boom period is the best

period for making the decisions as the results that you will get are good and also, the

managers who plan to expand their businesses choose this particular period to do so. 2 out

of 15 managers have said they prefer to invest in Recovery period. When asked, they

answered that in the recovery period, the market starts increasing and when the market

increases, the growth opportunities for a manager increases. Hence, they prefer recovery

stage while nobody is willing to make a capital investment decisions in a recession period.

4.3 Results from Cross Tabulations Table 4.3.1 How the managers rate their financial risks

in different business cycles: Case Processing Summary Cases Valid Mis sing To tal N

Percent N Percent N Percent Willenges to take financial risk * Buss_Cyl 15 100.0% 0 .0%15 100.0% Willingness to take financial risk * Buss_Cyl Crosstabulation Count boom Buss

_Cyl recovery Total Willenges to take financial risk Total Low risk taker Average risk taker

high risk taker 4 6 3 13 0 2 0 2 4 8 3 15 Interpretation: So, with the Cross Tabulation, it is

clear that in boom period, the number of average risk takers is high and then there are low

risk takers in the same business cycle followed by the high risk takers. There are no

managers who are willing to take any type of risks in the recession period. Total of 6

managers out of 15 come under the category of average risk takers in the boom period.

This shows that the boom period is viable for the managers as compared to the recovery

period. Table 4.3.2 funds available with managers in different business cycles: Case

Processing Summary Cases Valid Missing To tal N Percent N Percent N Percent funds

available to invest * business cycle 15 100.0% 0 .0% 15 100.0% funds available to invest

* business cycle Crosstabulation Count boom business cycle recovery Total Total funds

available to invest 20-40 40-60 60-80 80-100 4 6 2 1 13 1 1 0 0 2 5 7 2 1 15


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Interpretation: From the above table, 6 out of 15 managers in vest 40-60% of their funds

in the boom period. This forms the majority of the managers. Most of the managers are

comfortable in investing in the boom period. Whereas in the recovery period, there are very

less number of managers who want to invest in this period and also those managers invest

only 20-40% of their funds. Table 4.3.3 Expected Returns in different business cycles:

Case Processing Summary Cases Valid Missing To tal N Percent N Percent N Percent avg

annual return * business cycle 15 100.0% 0 .0% 15 100.0% avg annual return * business

cycle Crosstabulation Count boom business cycle recovery Total avg annual return Total

10-12 12-14 14-16 Above 16 1 5 4 3 13 0 1 0 1 2 1 6 4 4 15 Interpretation: Managers

expect to earn good returns in the boom period. 5 out of 15 managers expect to earn

around 12-14% returns in the boom period. This forms the majority. This table clearly

shows that the most beneficial period for the managers is the boom period. In this period,

they not only can take risks but also can earn good profits from their investments. Table

4.3.4 constraints in different business cycles: Case Processing Summary Cases Valid

Missing To tal N Percent N Percent N Percent Constnt * Buss_Cyl 15 100.0% 0 .0% 15

100.0% Constnt * Buss_Cyl Crosstabulation Count Buss _Cyl boom recovery Total Constnt

Total procurement of funds management of funds inadequate knowledge about how to take

decisions 4 4 5 13 0 1 1 2 4 5 6 15 Interpretation: Knowledge about how to take decisions

is the most important factor in the decision making process of a company. A manager has

to study many aspec ts from the external environment and the internal environment before

taking any decision. In the boom period where the managers have a good chance to get

better returns, many of them face problems of improper knowledge of making investment

decisions. In the recovery period also, managers face problems of management of funds

and improper knowledge. CHAPTER 5: CONCLUSION, FINDINGS AND RECOMANDATIONS 5.1

Conclusion Based on the study and data analysis, following conclusions can be drawn

about the research project: ? Risk forms a major portion in deciding about the capital

expenditure in a c ompany. This factor is something which no manager can ignore. From the

analysis, this can be made clear that nowadays managers are equally concerned about the

risk factor as they are about the returns from the capital investing decisions. ? The

behaviour pattern of the investors also reveals that they prefer to take medium risk in their

companies as far as the capital decisions are concerned. Risk depends on business to

business. For some managers a risk of Rs. 2 crores is of a small amount whereas for some

managers it is a huge risk. So, the risk in this project is defined in terms of the businesses

of the managers respect ively. ? The next important thing that a manager keeps in mind

while making a c apital expenditure is the current market situations. When asked about it,

most of the managers preferred the boom period to make a capital expenditure. It is the

period when the managers can maximise their returns or could minimize their losses. ?

Managers prefer to make a capital investment with their own funds available with them. In

this report, only small and medium scale managers were interviewed so they said thatwhatever funds they accumulate, they prefer those funds only over others for making a

capital expenditure in their companies. So, these are some of the conclusions that can be

drawn from the project report about the behaviour pattern of the managers. 5.2 Findings

Following are the findings of the research work: ? The survey shows that approximately

47% of the managers are medium risk takers. This means that they consider the risk factor

also while making the capital expenditure decisions and not just the returns that they

could acquire from them. This could be because of the market conditions that are

prevailing currently. So the managers are worried about the investments and hence not

comfortable for taking huge risks. ? Approximately 33% of the managers are expecting

returns of around 14%- 16% in the next 10 years. This range of returns is good but not

extraordinary and nearly one third of the managers fall under this category. ? 9 out of 15

managers i.e., 60% of the managers use Capital Budgeting Techniques in their companies

while making a c apital expenditure dec isions. This shows us that approximately 60% of the

managers are very well aware about the techniques of Capital Budgeting and hence, areusing them in their businesses. While 40% of the managers i.e., 6 out of 15 managers dont

use these techniques. The reason could be that they are not aware of such techniques in

the business. ? The managers are also aware of the changes in the business cycles and

keep themselves updated about the situations changing in the market and hence change

their capital investing dec isions accordingly. Approximately 60% of the managers change

their capital investing decisions according to the changes in the business cycles. So,

above mentioned are the findings of the report which shows that the capital investing

decisions play an important role in the business and the managers consider each and every

factor from risk to market conditions to evaluate the capital investing decisions in their

companies. 5.3 Recommendations Based on my understanding of the concept, I propose

the following recommendations: ? The Capital Budgeting Techniques are very important for

a business making a capital expenditure and there are still some managers who are not

using the techniques in their businesses. The reason behind is that they are not aware


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about the techniques and dont know how to use these techniques. So, whenever a

project comes in front of them, they just consider the risk factor and decide upon it

whereas proper techniques such as NPV, IRR, and Pay Back Period must be considered

before making any capital expenditure decisions. This will not only improve the efficiency of

the managers but they will also gain benefits from the project. ? The managers sometimes

find it difficult to judge the current market situations and fail to make a good capital

investing decisions at times. When asked, they said that they dont have proper knowledge

about the dynamic market and they dont know when to change their decisions

accordingly. So, proper training must be given to them so that they could benefit from it

and can make logical and wise capital decisions in future. ? The other important thing that

was revealed during the survey was that the managers face some problems before making

a capital expenditure decisions. They are procurement of funds, management of funds and

lack of knowledge. Approximately 40% of the managers face the problem of inadequate

knowledge about how to take the decisions. So, this factor must be considered and proper

training and knowledge should be provided to them so that they could avoid making bad

decisions. So, these are some of the recommendations from my side and these factors

should be taken into consideration by every manager before making a capital expenditure

decision in his/ her company. REFERENCES: BOOKS & ARTICLES: ? R. K. Behl (2012): Final

Touch to Management Accounting, Fourth revised Edition 2011-2012, Aastha Publications.

? T. S. Grewal (2008): Analysis of Financial Statements, 2008 Edition, Sultan Chand

Educational Publishers. ? Kee H. Chung, Peter Wright, Charlie Charoenwong (2005),

Investment opportunities and market reac tion to capital expenditure dec isions. ? Modigliani,

F. and M. Miller, "The Cost of Capital, Corporation Finance and the Theory of Investment",

American Economic Review 48, 1999, 261-29. ? Davina F. Jacobs (2009): Public Financial

Management Tec hnical Guidance Note, Fiscal Affairs Department, April 2009. ? Roinn

Caiteachais Phoibli, Infrastructure and Capital Investment 2012-16: Medium Term

Exchequer Framework, November 2011. ? Danuta Hubner, Guide to Cost Benefit Analysis of

Investment Projects, July 2008. ? Alistair Byrne, Senior Investment Consultant at Towers

Watson With Stephen P Utkus, Principal, Vanguard Center for Retirement Research, the

Vanguard Group Inc, Understanding how the mind can help or hinder investment success,

2012. ? Diana Heger, 2000, The Link Between Firms Innovation Decision and the Business

Cycle: An Empirical Analysis, Discussion Paper No. 04-85. ? Hana Scholleova, Jiri Fotr,

Lenka Svecova (2010): Investment Decision Making Criterions In Pract ice, Issn 1822-6515

Ekonomika Ir Vadyba: 2010. 15 Economics And Management: 2010. 15. ? Carlos A. Valero

January, 1997: Applications Of Qualitative And Quantitative Techniques Of Management In

Administrative/Academic Decision-Making In Institutions Of Higher Education In Virginia. ?

John Graham and Campbell Harvey, Duke University: (2009) How Do CFOs Make Capital

Budgeting And Capital Structure Decisions? Stern Stewart Journal of Applied Corporate

Finance, 2009. ? Ari Riabacke 2006: Managerial Decision Making Under Risk andUncertainty, IAENG International Journal of Computer Science, 32:4, IJCS_32_4_12.

ANNEXURE: Questionnaire 1. How do you rate your willingness to take financial risks with

respect to capital expenditure? a) Low risk taker b) Average risk taker c) High risk taker 2.

What kind of constrains do you encounter in implementing capital expenditure decisions in

the company? a) Procurement of funds b) Management of funds c) Inadequate knowledge

about how to take decisions 3. When faced with a major financial decision, you are more

concerned about? a) Possible losses b) Possible gains 4. What degree of risk have you

taken with your capital expenditure decisions in the past? a) Very small b) Small c) Medium

d) Large e) Very Large 5. In the last five years, how have your investments in capital

expenditure changed? a) Mostly towards lower risk b) Somewhat towards lower risk c) No

or minimal changes d) Somewhat towards higher risk e) Mostly towards higher risk 6. What

degree of risk are you prepared to take with your capital expenditure decisions now and

going forward? a) Very small b) Small c) Medium d) Large e) Very Large 7. How much of

the funds you have available to invest would you be willing to place in capital expenditurewhere both returns and risks are expected to be above average? a) 0%-20% b) 20%-40%

c) 40%-60% d) 60%-80% e) 80%-100% 8. What is the average annual rate of return you

would expect to earn from your capital expenditure over the next ten years? a) 8%-10%

b) 10%-12% c) 12%-14% d) 14%-16% e) Above 16% 9. Are you using any Capital

Budgeting Techniques before making capital decisions in your company? a) Yes b) No 10.

Do you change your capital investment decisions or project management decisions

according to the changes in business cycles? a) Always b) Frequently c) Rarely d) No 11.

In which business cycle you would prefer to make a capital investment in your company?

a) Boom Period b) Recession Period c) Recovery Period

Name:_______________________________________________________________

Occupation:___________________________________________________________

Company Name:_______________________________________________________

Age:_________________________________________________________________ Phone


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No.____________________________________________________________ 1 2 3 4 5 6 7 8

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

38 39 40 41 42

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