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CAPITAL BUDGETING/PROJECT APPRAISAL/CAPITAL EXPENDITURE DECISIONS
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Generally in livestock projects, the investments are made during different time periods and the associated benefits are spread overtime.
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These investments and returns are not comparable as such without adjusting for their time value.
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Thus the time value of money has to be necessarily taken into reckoning in the investment analysis of agricultural projects.
Capital expenditures are defined as investments to acquire fixed or long lived assets from which a stream of benefits is expected. Such expenditures represent an organization's commitment to produce and sell future products and engage in other activities. The estimate of the costs and benefits of a capital project should show the difference that results from making the investment. The important information is the change in cash flows as a result of undertaking the project, i.e. the differential principle.
Approaches to Preparation of Entrepreneurial Project on Livestock
While formulating a livestock project several factors, such as, kind of enterprise, amount of investment, availability of inputs and skilled labour,market potential, veterinarian's availability and nearness, sale price, scope for further expansion have to foreseen and worked out. Apart from this, availability of bank loans, their requirements, technical and financial detail would have to be sketched out. It starts from project planning, cost estimation, modalities of formulating the project and also availing the bank loans.
Fixed Investment Estimates
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Fixed investments consist of all the costs necessary to bring the project to full operation. These include the construction of animal sheds, purchase of animals, purchase of equipment costs, installation, training, commissioning, initial spoilage, spare parts inventory, etc.
Working Capital Estimates
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The analysis includes estimates of all investments required for a project. The project may require increases (or decreases) in cash, accounts receivable, accounts payable, or inventory. These changes in working capital should be included in the calculation as should the changes to these at the end of the economic life of the project.
Economic Life
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It is often difficult to estimate the life of a project (i.e., its planning horizon). The criterion is the continued ability to generate satisfactory cash flows or other intangible benefits. The economic life of a project is the lesser of its physical life, technological life or product-market life.
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Physical Life - Physical life represents the time taken for an asset to become physically worn out so that it can no longer be efficiently maintained and must be replaced.
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Technological Life -Technological life is the period of time that elapses before an even newer machine or process becomes available which would make the proposed machine or process obsolete.
Market Estimates
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Market Study - A market study forecasts sales revenue through the life of a project. It should describe fully all aspects of the company's position in the market and estimate the degree of marketing risk associated with the venture. It provides information on demand, supply and price trends in the overall market, and specific forecasts of market share, sales volume, net returns and selling costs, as well as what competitors are or may be doing in the market place.
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Competitive Factors - The demand forecast should indicate the competitors and their market share. The productive capacity in existence and potentially available would then be assessed in relation to the forecasted demand to show the volume and timing of expansion needs. Competitors' expansion possibilities and economics should also be considered along with their product and technology life cycles.
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Price Estimation - The estimation of price trends is frequently the most difficult area of market forecasting. However, analysis of the supply/demand balance and estimation of competitors' economics can provide a guide. The elasticity of demand in relation to the price may also be considered. A careful study of the product life cycle is often needed since, in the early development stages of a new product, the price is often high; it falls as demand levels off at maturity, and then declines further as new substitutes appear on the market.
Operating Cost Estimates
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Cost of feed and fodder, labour(Casual), health care charges, electricity and other miscellaneous costs are usually included.
Risk Analysis
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Risk exists in capital budgeting when more than one outcome may occur. A quantitative evaluation of a capital expenditure proposal requires that several predictions be made, often far into the future. As a general rule, the risk associated with achieving an expected cash inflow or outflow in a given year increases as one moves further into the future as there are more factors in the long term which cannot be foreseen but which will affect cash flows.
Evaluation Techniques
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Participants