Professional Documents
Culture Documents
Establishment of Internal Control Procedures: For every in-progress capital project, proper control accounts are set up. These are charged with all relevant expenditures, which are further classified into capital & revenue items .These accounts reflect out-of-pocket payments as well as allocated expenses. Use of Regular Progress Reports: Periodic progress reports compare actual expenditures against estimates. The offer several benefits a) They provide timely information so that corrective action can be initiated to tackle potential problems b) They generate inputs for cash budgeting and fund raising c) They serve as the basis for calculating variances and explaining variances .
ABANDONMENT ANALYSIS
The techniques used to analyze new project can also be used to analyze whether an existing project should be continued or terminated. Most of the investment in a new project is still to be made and hence relevant cash outflow. By contrast, much of the investment in an existing project represents a sunk cost ,which is not relevant for project analysis. In the case of a new project ,the estimates of cash flows are likely to be more uncertain. The discount rate to be used for reappraising an existing project is likely to be different from that used to analyse the same project when it was initiated
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Agency Problem
Mangers as agents of shareholders are supposed to take actions that maximize the welfare of the shareholders. Preside over a big empire that gives them power ,stature and higher compensation. Enjoy generous compensation and lavish perquisites. Avoid risks because acceptance of high firm specific ,although acceptable to diversified shareholders ,can threaten the security of their job and the growth prospects with the firm. Agency costs can be mitigated by monitoring the actions and behaviour of the managers and by offering them right incentives that motivate them to maximise value.