Page 407 - Corporate Finance PDF Final new link

NPP

BRILLIANT’S Capital Budgeting 407

1. Replacement and Modernization Deci- 1. [aßbog_|Q> Ed§ _m°S>Zm©BOoeZ {S>{gOZ… [aßbog_|Q>
sions: The replacement and modernization de- Ed§ _m°S>Zm©BOoeZ {S>{gOZ H$m CÔoí` Am°naoqQ>J B{\${eE§gr
cisions aim at to improve operating efficiency H$mo ~‹T>mZm Ed§ H$m°ñQ> H$mo H$_ H$aZm hmoVm h¡Ÿ& bJmVma
and to reduce cost. Generally all types of plant Cn`moJ Ho$ H$maU AWdm VH$ZrH$s joÌ _| àJ{V Ho$ H$maU
and machinery require replacement either àË`oH$ ßbm§Q> EH$ {ZpíMV g_` Ho$ níMmV² MbZ go ~mha
because the economic life of the plant or ma-
hmo OmVm h¡ VWm Cgo [aßbog H$aZm Amdí`H$ hmo OmVm h¡Ÿ&
chinery is over or because it has become tech-
nologically outdated. The former decision is nhco dmco {ZU©` H$mo '[aßbog_|Q> {S>{gOZ'$H$hm OmVm h¡
known as 'replacement decisions' and later VWm ~mX dmco {ZU©` H$mo '_m°S>Zm©BOoeZ {S>{gOZ' H$hm
one is known as 'modernization decisions'. OmVm h¡Ÿ& [aßbog_|Q> {S>{gOZ Ed§ _m°S>Zm©BOoeZ {S>{gOZ,
Both replacement and modernization decisions XmoZm| hr àH$ma Ho$ {S>{gOZ H$m°ñQ> H$mo H$_ H$aZo Ho$ CÔoí`
are called cost reduction decisions. go {b`o OmVo h¢Ÿ&
2. Expansion Decisions: Existing success- 2. {dñVma g§~§Yr {ZU©`… O~ H$moB© \$_© _mH}$Q> _| g\$bVm
ful firms may experience growth in demand of àmßV H$aVr h¡ Vmo _mH}$Q> _| CgHo$ àmoS>ŠQ> H$s _m±J ~‹T>Vr h¡Ÿ&
their product line. If such firms experience
shortage or delay in the delivery of their prod- Eogr \$_© O~ AnZr ~‹T>r hþB© _m±J H$mo CnbãY gmYZm| H$s
ucts due to inadequate production facilities, ghm`Vm go nyam Zht H$a nmVr h¡ V~ H¡$no{gQ>r ~‹T>mZo Ho$ {b`o
they may consider proposal to add capacity to {dñVma g§~§Yr {ZU©` {b`o OmVo h¢Ÿ&
existing product line.
3. Diversification Decisions: These deci- 3. n[adV©Z g§~§Yr {ZU©`… Bg àH$ma Ho$ {ZU©` _|
sions require evaluation of proposals to diver- Z`o _mH}$Q> AWdm Z`o àmoS>ŠQ> go g§~§pYV àñVmdm| H$m
sify into new product lines, new markets, etc. AÜ``Z {H$`m OmVm h¡ Vm{H$ {d{^Þ àmoS>ŠQ²>g _| go {H$gr
for reducing the risk of failure by
dealing in different products or EH$ àmoS>ŠQ> Ho$ \o$b hmo OmZo na [añH$ H$mo
Types of Capital
by operating in several markets. H$_ {H$`m Om gHo$Ÿ&
Investment
Note: Both expansion and di- Decisions ZmoQ>… XmoZm| {dñVma Ed§ n[adV©Z g§~§Yr
versification decisions are called {ZU©`, amOñd (aodoÝ`y) d¥{Õ {ZU©` H$ho
A. On the basis of firm’s
revenue expansion decisions. OmVo h¢Ÿ&
existence
B. On the Basis of Decision 1. Replacement and B. {S>{gOZ g§~§Yr n[apñW{V`m| Ho$
Situation Modernization Deci- AmYma na
sions
The capital budgeting deci- 2. Expansion Decisions {S>{gOZ g§~§Yr n[apñW{V`m| Ho$ AmYma
sions on the basis of decision situ- 3. Diversification Deci- na H¡${nQ>b ~OqQ>J {S>{gOÝg H$mo {ZåZ
ation are classified as follows: sions àH$ma go dJuH¥$V {H$`m Om gH$Vm h¡…
1. Mutually Exclusive Deci- B. On the basis of deci- 1. nañna EŠñŠby{gd {ZU©`… Xmo `m
sions: The decisions are said to be sion situation Xmo go A{YH$ àñVmdm| H$mo nañna EŠñŠby{gd
mutually exclusive if two or more 1. Mutually Exclusive V~ _mZm OmVm h¡ O~ {H$gr EH$ àñVmd H$mo
alternative proposals are such that Decisions ñdrH¥$V H$aZo na AÝ` àñVmdm| H$mo ñdrH¥$V
the acceptance of one proposal will 2. Accept-reject Deci- H$aZm g§^d Zht hmoŸ& CXmhaU Ho$ {b`o, `{X
exclude the acceptance of the other sions
alternative proposals. For in- 3. Contingent Decisions H$moB© \$_© go_r-Am°Q>mo_o{Q>H$ Ed§ Am°Q>mo_o{Q>H$