PM-Corporate Planning and Capital Budgeting .pdf

This presentation highlights the critical aspects of corporate planning and capital budgeting, two essential processes for business success. Corporate planning encompasses the long-term objectives and strategies that guide an organization towards growth and profitability. It helps teams work cohesively towards common goals through tactical, contingency, and operational planning. Each type of planning plays a crucial role in ensuring that businesses can tackle immediate challenges, prepare for unforeseen events, and optimize daily operations for sustainable success.

The presentation also explores capital budgeting decisions, where companies evaluate potential major projects or investments. Techniques such as Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period are used to assess the financial viability of these projects. The capital budgeting process involves identifying potential projects, evaluating them, and implementing the ones that offer the best returns. Monitoring and reviewing these investments ensures they meet the company's strategic and financial goals.

A case study of ABC Electronics highlights how a company can use these tools to make informed decisions between two investment options. This practical example illustrates the importance of factors such as total cash flow, payback period, and long-term strategic alignment in the decision-making process.

By understanding these concepts, businesses can better manage resources, maximize shareholder wealth, and ensure long-term financial stability. This presentation provides a comprehensive overview for anyone seeking to understand corporate planning and investment strategies in today’s competitive business landscape.

1. Corporate
Planning

2. Corporate planning is setting long-term objectives
and goals within the organization’s scope to enable
an environment conducive to growth in terms of
revenue and profit margins.
It includes defining strategies, decision-making,
and allocating resources.
The corporate planning strategy aids the whole
team to work in one direction- the organization’s
goals.

3. Corporate planning is the process through which companies
draw a map of their plan of action that enables their growth
in quantifiable terms.
It is typically carried out through the top-level management of
the company. It is a medium-term goal that acts as the basis for
macro-level planning, called strategic planning.
To create a foolproof corporate plan, the organization must collect
sufficient data about their company and gain insights into their
competitor’s business model.
It is a continuous process that helps the organization grow
continuously through constant technological developments.

4. Process

5. Types
Tactical
Planning
Contingency
Planning
Operational
Planning

6. 1 – Tactical Planning
A tactical plan is a short-term goal to address
immediate goals, which over time, contribute to the
bigger plan.
Typically, a short-term goal helps tackle hindrances that
prevent the company from achieving its medium or
long-term goals.

7. 2 – Contingency Planning
A contingency plan is when a company develops
strategies that help them tackle an event from
stopping its operations.
This strategy is carried out in an adverse scenario, such
as a natural calamity or pandemic.
However, a contingency plan can also be initiated for
positive events, such as a high inflow of unexpected
client funds.

8. 3– Operational Planning
Operational planning is a form of action where the daily
tasks of each employee and manager are specified
and monitored.
It is usually planned for a period beyond one year.
However, to reach short-term objectives that aid the
enormous growth of the business, operation planning
is a wise choice as it optimally allocates financial,
physical, and human resources.

9. Capital
Budgeting
Decisions
Capital budgeting is a process that businesses use to
evaluate potential major projects or investments.
Building a new plant or purchasing equipment new or
taking a large stake in an outside venture are
examples of initiatives that typically require capital
budgeting before they are approved or rejected by
management.
As part of capital budgeting, a company might assess
a prospective project's lifetime cash inflows and
outflows to determine whether the potential returns it
would generate meet a sufficient target benchmark.
The capital budgeting process is also known as
investment appraisal.

10. Capital Budgeting Process
1. Identify
Potential
Projects
2. Evaluate
Projects
This involves scouting for investment opportunities that align with the
company's strategic goals. This could involve anything from building a
new factory to developing a new product line.
Some common methods include:
Net Present Value (NPV): This method considers the time value of
money by discounting future cash inflows back to their present
value. Projects with a positive NPV are generally considered
favorable.
Internal Rate of Return (IRR): Expected return on a project—if the
rate is higher than the cost of capital, it’s a good project.
Payback Period: Determines how long it would take a company to
see enough in cash flows to recover the original investment.

11. 3. Select
Projects
4. Implement
Projects
5. Monitor
and Review
Based on the evaluation using NPV, IRR, payback period
(and other relevant factors), companies shortlist projects
that demonstrate the most promising returns and strategic
fit.
Once the green light is given, the project is implemented.
This involves securing funding, allocating resources, and
ensuring the project is executed according to plan.
Companies track the performance of their capital projects
to see if they are meeting expectations. This helps them
refine their capital budgeting process for future decisions.

12. Objectives of Capital budgeting
Maximizing Shareholder Wealth
Optimal Allocation of Resources
Long-Term Planning
Risk Management
Enhancing Competitive Advantage
Ensuring Financial Stability
Facilitating Growth

13. Importance and Significance
Helps in maximizing returns
Ensures effective utilization of resources
Provides a long-term perspective
Reduces risk
Facilitates decision-making

14. Limitations
Inaccurate
estimates
Ignores qualitative
factors
High degree of
complexity
Limited scope
It relies heavily on estimates of future cash flows and discount
rates, which may be inaccurate, leading to incorrect
investment decisions.
Capital budgeting does not consider qualitative factors such as
social responsibility or environmental impact, which may be
important in certain cases.
Budgeting techniques can be complex and time-consuming to
implement, especially for large and complex investment
projects.
Some techniques are limited in scope as they only consider
financial factors and do not take into account non-financial
factors such as reputation or brand value.

15. CASE STUDY-
ABC Electronics is a mid-sized company specializing in consumer electronics. The company has been
experiencing steady growth and now has the opportunity to invest in new equipment to expand its
production capacity. The management is considering two different options for this investment.
Option 1: Invest in Machine X, which costs ₹40 lakh. Machine X is expected to generate additional
cash flows of ₹10 lakh per year for the next 5 years. The machine has no resale value at the end of its
life.
Option 2: Invest in Machine Y, which is more advanced and costs ₹60 lakh. Machine Y is expected to
generate additional cash flows of ₹12 lakh per year for the next 7 years. Like Machine X, it has no
resale value at the end of its useful life.
The company’s management wants to make a wise investment decision that will maximize
returns over time. They need to consider the cost of the machines, the potential cash flows, and the
time it will take to recover the initial investment. The company’s cost of capital is 8%, which is the
minimum return they expect from any investment.

16. Questions for Discussion:
Which machine has the higher total cash flow over its lifetime?
How long will it take for the company to recover its initial investment in
each machine?
If you were the financial manager at ABC Electronics, which machine would
you recommend based on the information provided?
Why do you think the time it takes to recover the investment (payback
period) is important for the company?
What other factors might the company consider before making a final
decision?

17. Solutions
1. Which machine has the higher total cash flow over its lifetime?
Machine X:
Cash flow per year: ₹10 lakh
Lifetime: 5 years
Total Cash Flow: ₹10 lakh * 5 = ₹50 lakh
Machine Y:
Cash flow per year: ₹12 lakh
Lifetime: 7 years
Total Cash Flow: ₹12 lakh * 7 = ₹84 lakh
Conclusion: Machine Y has the higher total cash flow over its lifetime.

18. Solutions
2. How long will it take for the company to recover its initial investment in each machine?
Machine X:
Initial investment: ₹40 lakh
Annual cash flow: ₹10 lakh
Payback Period: ₹40 lakh / ₹10 lakh per year = 4 years
Machine Y:
Initial investment: ₹60 lakh
Annual cash flow: ₹12 lakh
Payback Period: ₹60 lakh / ₹12 lakh per year = 5 years
Conclusion: Machine X has a shorter payback period of 4 years compared to Machine Y's 5
years.

19. Solutions
3. If you were the financial manager at ABC Electronics, which machine would you
recommend based on the information provided?
Machine X:
Lower initial investment
Shorter payback period
Suitable for quicker recovery of funds
Machine Y:
Higher total cash flow
Longer operational life
Higher overall return despite the longer payback period
Recommendation: Based on long-term benefits and higher total returns, Machine Y would be
the preferred choice, especially considering the company’s steady growth and long-term
investment outlook.

20. Solutions
4. Why do you think the time it takes to recover the investment (payback period) is
important for the company?
Risk Management: A shorter payback period reduces the risk of the investment, as the
company recovers its initial outlay faster.
Liquidity: The company can free up cash more quickly with a shorter payback period,
which can be reinvested or used for other operational needs.
Flexibility: A shorter payback period provides financial flexibility, allowing the company
to respond to market changes or new opportunities sooner.

21. Solutions
5. What other factors might the company consider before making a final decision?
Cost of Capital: Ensure that the chosen investment meets or exceeds the company’s cost
of capital (8%) to generate sufficient returns.
Risk and Uncertainty: Consider the risks associated with future cash flows, including
potential market changes, technological obsolescence, or economic downturns.
Strategic Fit: Assess how the investment aligns with the company’s long-term strategy
and growth objectives.
Operational Efficiency: Evaluate whether Machine Y’s advanced technology might offer
additional benefits, such as lower operating costs or higher productivity.
Maintenance and Downtime: Consider the maintenance costs and potential downtime of
each machine, as these could impact overall profitability.