Capital Project

8/7/2019 Capital Project

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DEFINITION

A Capital Project is a non-repetitive scheme/a time bound programme ofaction that consumes specified resources on the activities relating to

acquisition, creation/development and installation of capital assets to

achieve certain pre-defined objectives.

Tangible Resources: Money, Material, Machines & equipmentsIntangible Resources: Skill Time, efforts & vision

Capital Investment/ExpenditureThe sum total of all measurable costs is termed as Capital investment.

Examples:

Installation of a new project such as Thermal Power Station, Steel

Plant, Construction of road, building, hospital, school.Industrial project, the total capital expenditure may be classified into two

groups.

Factory Area (which includes production shops, labs and all otherfacilities and buildings which are related from and to the operation

of company).

Non-factory Area (which includes residential buildings for theemployees and other welfare facilities such as school, hospital,marketing complex, etc. for the residents who are family members

of the employees)


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Important characteristics of a capital project

While formulating a project and in respect of any decision making

relating thereto, it is always better to keep in mind the important

characteristics, which are inherent in a capital expenditurescheme/proposal.

There are briefly explained as follows:

One time investment (To be incurred in one year or over aspecified period in case of project with longer gestation period).

Heavy investment in general. Specific objectives, which are peculiar to the project itself. Irreversible nature of capital commitment once made. Benefits from a project to accrue in future over a longer period. Risk is involved in the changing socio-economic-political scenario.

Classification of Expenditure based on Objectives

EXPENDITURE

CAPITAL REVENUE

LONG-TERM FUTURE SHORT-TERMBENEFITS

PRESENT BENEFITS

(FIGURE III)

The main performance parameters in a project are:

To achieve time targets


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To achieve cost targets To achieve desired quality specifications

Any decision to reverse an already concluded project may be

effected only after incurring huge financial losses particularly in respect

of those projects wherein large fund has been invested in thespecific/special-purpose assets created/procured to meet specific

requirements. Besides, in general second-hand machines may not fetch

desirable price. A bad investment decision creates sunk cost and mighteat away even the resources generated through an existing good

investment.

Project Appraisal - 3

Capital Projects - Opportunities and classification

Synopsis1. Search for investment opportunities by a 6

Entrepreneur

2. Classification of projects in an existing concern 7

3. Expansion Project 8

4. Modernization Project 8

5. Balancing Facilities Project 8

6. Diversification Project 8

(1) Diversification may be undertaken through 9 VERTICAL

INTEGRATION

7. Cost Reduction Project 9

8. Research & Development Project 9

9. Quality Improvement Project 9

10. Employees' Welfare Project 9

11. Statutory Requirement Project 9

12. Pollution Control Project 9

13. Benefits of a capital Project 10

A capital project may be undertaken: By a new entrepreneur By an existing concern


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1. Search for investment opportunities by a new

entrepreneur

A new entrepreneur wants to achieve certain objectives e.g. to encash

opportunity to earn and to grow. He can make a search for investmentopportunities through an in-depth and systematic study in the following

areas:

1. Existing profitable product lines/industries in the market.2. In case of input requirement of various existing industries:-

The sources available Constraints being faced in procurement of resources The financial and qualitative factors involved The impact of following decisions on their performance:

Make or buyImport substitution

Product modification with the existing technology

Modification in layout of specific facilitiesTechnological improvement

The objective here is to find out any opportunity of undertaking a project

to meet out input requirements of one of more companies in the same

industry of the others.

3. Scope for reprocessing and recycling of existing products.4. Scope for enlargement of domestic market, and an entry into

the foreign market in respect of different products.5. The opportunities of take-over, merger, acquisition, jointventure, etc.

6. Government plans and policies, which may lead to industrial

development, change economic environment and change

consumption behavior.


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In this connection, the source of information may be:

1. The suggestions of project consultants, financial institutions and

companies engaged in the banking and financial service.

2. Trade exhibitions.

3. Project profiles prepared by consultancy firm.

4. Survey reports of government and private agencies,

annual research reports of research institutions/agencies and

newspapers.

5. Foreign training visits and survey on foreign nationals staying

in the country in order to understand their traditions,

consumption behavior, style of living.

6. Suggestions from employees, etc.

All these may also throw light on the new technological developments,

availability of resources, new tastes of consumers and also provide someguidance in respect of assistance available for manufacturing and

marketing. The various regulations and policies of government in

connection with economic, trade, commercial and other social mattersshould be gone through in order to ascertain their impact in the

evaluation of opportunities.


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2. Classification of projects in an existing concern.

An existing commercial concern is interest in the maximization of

wealth of its shareholders and in seeing that the market price of the

shares is constantly appreciated.

In an existing concern, the projects may be broadly classified as:

Capacity Expansion/Augmentation Modernization (Including replacement) Balancing Facilities Diversification Cost Reduction Research & Development Employees' Welfare Statutory Requirement

Each of the above categories is briefly described as follows:

3. Capacity Expansion/Augmentation Project

The objective here is to increase market share of the company either

through penetration into new market, or improving the share of existing

ones by supplying the product at reduced cost with latest technologicalfeatures.

The majorbenefits of expansion projects are:

Economies of large scale Optimum utilization of existing and new facilities


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4. Modernization Project (including Replacement Project)

The objective is to:

Bridge gap in the existing facilities with the installation of new andmost sophisticated machines.

Remove production bottlenecks (such as poor material handlingfacilities, inadequate storage facilities, etc.)

Add new features and systems to the existing facilities. Replace old/obsolete assets due to high operation cost and lower

productivity.

The majorbenefits are: Increase productivity Reduced manufacturing cost Elimination of dependence on the external suppliers of

inputs.

5. Balancing Facilities Project

Balance facilities are those which are required to remove

gaps/bottlenecks in the specific operation area to achieve certain targets

and standards in respect of production/capacity utilization, productivityand quality.

This may help to achieve the following objectives:

To remove production bottlenecks, thereby Increasing capacity utilization. To bridge the technology gap. To provide for higher flexibility in operation. To make a strong infrastructural base. To improve cost effectiveness. To intensify R&D activities.


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6. Diversification Project

The objective of diversification is to enter into new areas (whether

related or unrelated to existing operation) to achieve a higher rate of

growth.

(1) Diversification may be undertaken through VERTICAL

INTEGRATION

This maybe:

(a) Forward Integration

Forward Integration project involves addition of facilities to

commence either manufacture of a new product or a new service

with the use oi7through modification in the existing product.

(b) Backward Integration

Backward integration project involves addition of facilities tocommence self-manufacturing of raw material and components for

the existing product of the company.

The objective is to achieve cost reduction as well as to eliminate

dependence on external suppliers of raw material.

7. Cost Reduction Project

The objective here is to gain cost leadership in the competitive market.In general, the objective of cost reduction is achieved through

modernization, backward integration projects and so on.

Capital Project

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