Assessment and analysis of capital expenditure (CAPEX) of Dabur in Indian factories and its benchmarking in FMCG sector

Student name: Ms Neha Tandon
Guide: Dr Manipadma Datta
Year of completion: 2012
Host Organisation: Dabur India Ltd.
Supervisor (Host Organisation): Mr Saibal Sengupta

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Abstract: • Capital expenditures are defined as investments to acquire fixed or long lived assets from which a stream of benefits is expected. Such expenditures represent company’s commitment to produce and sell future products and engage in other activities.
• Capital expenditure decisions, therefore, form a foundation for the future profitability of a company. Capital expenditure activities are made up of two distinct processes:
(a) Making the decision
(b) Implementing it, which may include performing a post-appraisal.

• The capital expenditure decision is derived from and is closely associated with strategic planning which is an effort by an organization to define its mission and goals and the policies and strategies it will follow to attain them.
• Capital expenditures budgets compare actual results with projections.
• The main factor to be considered at the time of making a choice for a suitable project is the rate of return expected from project.

Included in capital expenditures are amounts spent on:

• acquiring fixed, and in some cases, intangible assets
• repairing an existing asset so as to improve its useful life
• upgrading an existing asset if its results in a superior fixture
• preparing an asset to be used in business
• restoring property or adapting it to a new or different use
• starting or acquiring a new business

Other factors which are required to be considered before a final choice of the capital project

• The amount and timing of cash inflows and outflows: The shorter is the period within which the cost of the project is recovered the less risky is the project, and the greater is its liquidity.
• Cost of capital project: cost of acquiring fixed assets, cash position and availability of cash either from within or borrowing should be considered. There is no use of investing borrowed funds in a capital project if ROI paid on such funds is more than expected return.
• Product Demand: It should be seen whether there will be sufficient demand in future for the increased production because of additional fixed assets. It is not worthwhile to purchase a fixed asset having not sufficient demand for the increased production
• Opportunity Cost: Opportunity or alternative cost should be considered while making a choice of capital expenditure. The return obtainable from the funds, if utilised somewhere else, should be compared with the return expected from the proposed project.
• Cost of Production: The ultimate aim of cost accounting is to reduce cost of production by eliminating all types of wastages. The project which reduces cost of production should be favoured. Cost reduction should not be at the cost of quality.

Key motives for making capital expenditures

• Expansion: The most common motive of capital expenditure is to expand the level of operationsusually through acquisition of fixed assets. A growing firm often needs to acquire new fixed assets rapidly, as in purchase of property and plant facilities
• Replacement: As a firm’s growth slows and reaches maturity, most capital expenditures would be made to replace or renew obsolete or worn out assets. Each time a machine requires a major repair, the outlay for the repair should be compared to the outlay to replace the machine and the benefits of replacement
• Renewal : an alternative to replacement may involve rebuilding , overhauling or retrofitting an existing fixed asset. To improve efficiency replacement and renewal of existing machinery may be suitable solutions
• Others : some capital expenditures do not result in acquisition or transformation of tangible fixed assets. Instead they involve long term commitment of funds in expectation of a future return. These expenditures include outlays for advertising , R&D, management consulting and new products.