Capital Expenditure Planning and Control: A Survey of Indian Practice

The purpose of the study was to find out the policy and practice of Indian companies regarding various phases of the capital expenditure planning and control, and to ascertain corporate executives’ opinion on the linkage between the capital budgeting and the corporate strategy. Detailed questionnaires were sent to fourteen companies which had agreed to participate in the study. The study reveals the following: (i) The definition and classification of capital expenditures is guided a lot by accounting convention and tax regulations. (ii) A very large number of project ideas are generated at the plant level. Thus the investment idea generation is a bottom-up process. (iii) The authority to progress and approve investment proposals and to spend money for approved expenditures is rigidly concentrated in the hands of a few top management officials. (iv) A large number of business executives lack conceptual clarity in estimating cash flows. (v) Almost all companies use payback as the evaluation criterion. About three-fourth companies use NPV or IRR; but none of the companies uses any of the sophisticated criteria without payback. (vi) Selling price, product demand, technological changes and government policies contribute investment risk. Sensitivity analysis is the most popular method of handling investment risk. (vii) Companies hardly face capital shortage. No company uses mathematical model to select project under capital rationing. (viii) It is a common practice in India to reappraise approved projects. The power to review reappraisals is concentrated at the top. (iv) In practice, strategic considerations (as well as a number of qualitative factors) are considered to be very important in the investment planning. On the basis of the findings of the study and experiences of other countries, a descriptive model for the capital expenditure planning and control is developed.