In Chapter 9 we develop the theory and application of capital budget analysis. T
ID: 2645708 • Letter: I
Question
In Chapter 9 we develop the theory and application of capital budget analysis. The theory was robust, the calculations mathematically and logically defined, and many of the real-world problems, likely to be encountered, were addressed. As capital budgeting essentially re-invents the company through major long-term expenditures it is arguably one of the most critical functions that financial management performs. However, based on my personal experiences, extensive empirical data, and antidotal data - many firms routinely experience significant failures in their selection of capital projects.
The assignment for this topic consists if two parts:
1) For your first topic in this conference I would like for you to briefly review either your personal experiences and/or the financial literature to identify and present a description of one actual capital project/product failure and the reasons attributed to the failure. For those of you who do not have personal experiences the following are some illustrated examples of failed projects/products over the last 50 years you may want to look up and consider: -New Coke,- The Iridium Satellite Communication,- the Edsel automobile, Beta (vs. VHS), the Concord SST, and various Dot Coms. Feel free to research others.
Remember this is a one to two paragraph exercise - do not go overboard - a few hours research and summation is all that
Explanation / Answer
Project - XYZ Company Dealing into Trading activities of Chemical and Fluid required at Varies Manufacturing plants around the city decided to Have a Laboratory and a Small Fluid Manufacturing Unit instead of directly Purchasing or Importing the required Chemicals. It was decided to set both the units under one roof and after setting clear goals and proper analysis the Project was viewed as a Profitable Venture considering almost all the budgeting techniques. The Gross Margin was suppose to improve a lot as well as the Net Profit was favourable over a period of time with 3 years as Pay back period as the sale was growing and estimates were favourable.
The Project implementation started however it was pulled back within 2-3 years and the company got back to trading activity after incurring enough losses in that period. Reason were many however there was nothing wrong in the Capital Budgeting Analysis on paper at the first place. Estmation seemed right and every factor like NPV. Cost of Capital ,Taxation, Saving, Margins were considered however the reason for failure was the execution, Inappropriate Testing and lack of risk planning. Below are the few Summarize reason for its failure
1) Delay in Implemention - After renting the facility due to lack of planning the Project slowly migrated in the 9 th month to produce actual product till then the facility & resources were idle creating additional unbudgeted cost
2) Our Chemist who were Quality Oriented used to Reject or Accept the order with 100% consideration were found struggling with 100 % quality Output so External Agency was hired to Train them and provide the consultancy services for some time. Again not budgeted
3) Operational Failure was the biggest reason where Projected Cost Control and efficiency utilization did not take place bacause of lack of Ownership which created Margin to reduce drastically caompared to the Budgeted. There was though some offset of losses because of Sales being more then the Budget as it was growing market and the trading activity was still in process
4) Short Term Appoach - Because of the above reason within two years there were two Opininons on the continuation of the Project as some Analyst within the Company presented a comparion of Actual results , Budget ,differential Analysis if the project would have been rejected , and scenarios of future Prospects. Though after analysis we learnt the reason of failures and if worked even from then it would have created a favourable results however after various discussions and Strategic settings it was offered to call off the project and to be back to Trading activity and untimately the firm started doing good business and better in years with increased sales and greater Contribution. The overall Losses because of the Project was roughly aroung 5 years of Net Profit.
3-5 specific factors most likely to contribute to capital project analysis failure
1) Lack of TimeLine / DeadLine of Performing activities
2) InAccurate Projection ( Income & expenses Both with Margin for Error )
3) Weak Execution and Operational Efficiency
4) Lack of Commitment , Skills & Expertise to drive the Project
5) Midway Closure of Project instead of Better Planning Forward