A STUDY OF CAPITAL BUDGETING IN VYANKATESH UDYOG PVT LTD

Abstract

In today’s highly competitive business, environment long-term capital investments have become a critical issue. Organizations are still making efforts to understand suitable capital budgeting techniques. Capital budgeting decisions, being strategic in nature, are likely to have a marked bearing on profitability of corporate business enterprises. The analysis in respect of the sample companies has been carried out on the basis of the two broad parameters: (a) the investment and financing activities of the sample companies and (b) the capital budgeting practices followed by such enterprises. Capital budgeting practices in India, at least amongst the sample companies, appear to have improved over the past two decades with an increasing number of companies using more sophisticated DCF techniques. A striking finding of the survey is that internal rate of return (IRR) is preferred over the net present value (NPV) method by most of the sample companies, in spite of the superiority of the NPV method. The theory–practice gap is a recurrent theme in the capital budgeting literature, in particular with regard to NPV. Despite the recommendations of the financial literature on using NPV as the primary technique, this research too found that respondent firms indicated a preference for IRR compared to NPV. As far as the capital expenditure activity is concerned, the sample companies have made substantial investments in acquisition of new fixed assets The importance has been given to capital investment for the creation of shareholder wealth for individual firms. It is vital to investigate the practices used to evaluate the projects. Capital budgeting techniques i.e., Pay Back Period (PBP); Accounting Rate of Return (ARR); Net Present Value (NPV); Internal Rate of Return (IRR) and Profitability Index (PI) methods have been used as the techniques of capital budgeting