IGNOU : M.COM : MCO 7 : UNIT 6 : Q - 2. What are the different types of projects ? And what is the distinguishing feature of each type of project? Which project do you think involves highest risk and why?

 Ans. Types Of Capital Budgeting Decision

1. New Projects - The new projects mean expenditure on creation of new assets. For example, setting up an entirely new factory, a new building, a new plant, a new bridge etc. these projects are generally of a big size and take a relatively longer time for its completion and for the returns to flow in.

2. Expansion Projects - Wherever an existing capital asset needs expansion of capacities like setting up more machines in an existing factory or expanding the building of a factory or constructing a new facility etc., this will be called an ‘expansion project’. This type of project is relatively of a smaller size and gives the returns faster.

3. Renewal / Renovation Projects - Whenever a new factory has been set up, after some years some machines or part of it become technically obsolete and need replacement in order to remain competitive. In such a situation the old machinery is disposed off and new machinery is installed in its place. Fundamentally it is also a project like the above ones, with the only difference that the disposal of old machines will fetch some price which must be accounted for, when we take the cost of the new machine.

 4. Exploration Projects - Exploration projects are those projects when some new resources are to be discovered. The expenditure incurred on e.g. oil exploration may be called a project of this kind. This expenditure is also a capital budgeting expenditure, where we spend money now to reap benefits in future, with the only difference that there is far greater uncertainty about finding the resource for which the expenditure is to be incurred.

5. Research and Development (R & D) Projects - R & D projects are those projects in which present expenditure is being incurred in the hope of getting a new product, a new raw material, a new design or an improvement in the exiting ones. These projects are typically of a higher uncertainty than the above ones, because when we are undertaking a research project, we are neither sure of the time duration, nor of the expenditure, nor of the end result. Many R & D projects take a pretty long time in its completion with a high degree of uncertainty of end result.

6. Projects for the Compliance of Certain Statutory Requirements - There are some projects which are not undertaken explicitly for business prospects, but are nevertheless undertaken in compliance of legal requirements. These projects may be for ensuring certain safety requirements, e.g. installing fire fighting equipment or modification in existing structures for the safety of workers, or may be for controlling pollution from the factory e.g. an effluent treatment plant. Although no direct business profit seems to be coming but still no responsible company can ignore these projects. Sometimes or the other the law will take its course with immense cost to the company in terms of penalties and even closures. The case of Supreme Court ordering the closure the closure of all polluting factories around Taj Mahal is not a very old one.

 

Research and Development (R & D) involves highest risk

R & D projects are those projects in which present expenditure is being incurred in the hope of getting a new product, a new raw material, a new design or an improvement in the exiting ones. These projects are typically of a higher uncertainty than the above ones, because when we are undertaking a research project, we are neither sure of the time duration, nor of the expenditure, nor of the end result. Many R & D projects take a pretty long time in its completion with a high degree of uncertainty of end result.