CAPITAL BUDGETING OF COCA COLA

CHAPTER 1

Introduction

Objectives of the study

Need of the study

Scope of the study

Importance of the study

Limitations of the study

Methodology

CHAPTER 2

Review of Literature

CHAPTER 3

Industry profile & Company profile

CHAPTER 4

Data Analysis and Interpretation

CHAPTER 5

Findings

Suggestions

Conclusion

Bibliography
Fixed Assets Management

Fixed Asset are those assets which are of a somewhat fixed or permanent nature ( a life expectancy of more than one
year ) and are used by a business in its normal operations; they do not include items Offered for sale. Fixed assets
management is the most important task which a management has to facein its day-today situations, and is important
for the following reasons :i)There is risk involved in fixed assets because of their longer life.ii)Fixed Asset usually
have a relatively High cost.iii)Fixed Assets create problems of acquisition and replacement. Acquisitions are
additions to fixed assets. The main purpose of acquisitions is to increase existing capability. Replacements are the
assets which take the place of existing assets with comparable capacity. Betterments and improvements refer to
capital expenditure which results in the Physical change or alteration of an asset. The purchase of fixed assets is of
particular significance of business firms because the amount involved is relatively large and represent commitments
for a relatively long period of time. They are relatively long-lived assets which are acquired for use in a business and
not intended for sale.iv)There is a greater tendency to make use of machines and invest more and more in fixed

assets. The use of efficient machinery is necessary for economics of scale, particularly in conditions of increasing
competition. Because of technological changes, the investment infixed assets is likely to increase, for all assets
become outdated and may have to be replaced. Planning for long-term capital expenditure is the most important
function of every business because substantial amounts are involved and the investment of funds is spread over a
considerable period of time, and returns flow back at varying intervals in unknown amounts. Capital budgeting on a
long-term basis is an essential part of fixed assets management. While emphasising importance of fixed assets
management, Johnson points out that fixed financial obligations must be met when due, at an average and not in
most years but always. The policy in planning capital expenditure is not only important for a company and its
financial positions, but is also of strategic importance to the total economy.

SIGNIFICANCE OF CAPITAL BUDGETING

Capital budgeting is Significant for the following reasons:i)The decision maker loses some of his flexibility, for the
results continue over an extended

period of time. He has to make a commitment for the future.ii)Asset expansion is related to future sales.iii)The
availability of capital assets has to be phased properly.iv)Asset expansion typically involves the allocation of
substantial amounts of funds.v)Many firms fail because they have too much or too little capital
equipment.vi)Decisions relating to capital investment are among the difficult and at the same time, the most
critical because the effect of such decisions will have a far reaching influence on thefirms profitability for many
years to come.vii)The most important reason for capital budgeting decision is that they have long-term
implications for a firm. The effects of a capital budgeting decision extend into the future and have to be put up
with for a longer period than the consequences of current operating expenditures.viii)Capital budgeting is a vital
function of the management, for it is one of the critical determinants of the success or failure of a company.
Excessive capital spending may create excessive capacity and increase operati9ng costs, which limit the viability of
company funds and reduce its profits.

PRINCIPLES OF CAPITAL BUDGETING

Capital expenditure decisions should be taken on the basis of the following factors:Creative Search for Profitable
Opportunities: The first stage is the conception of the profits making idea. Profitable investment opportunities
should be sought to supplement existing proposals.Long-Range Capital Planning: A fexible programme of a
company’s expected future development over a long period of time should be prepared.Short-range Capital
Planning: This is for short period. It indicates its sectoral demand for funds to
stimulate alternative proposals before the aggregate demand for funds is finalised.

Measurement of project Work: The economic worth of a project to a company is evaluated at this stage. The
project is ranked with other projects.Screening and selection: The project is examined on the basis of selection
criteria, such as the supplyand cost of capital, expected returns, alternative investment opportunities etc.Post
Mortem: The ex-post routines of a completed investment project should be re-evaluated in orderto verify their
exact conformity with exact projections.Retirement and Disposal: The expiry of the cycle in the life of a project is
marked at this stage.Forms and Procedures: These involve the preparation of reports necessary for any capital
expenditure programme.Economics of Capital Budgeting: It includes estimating the rate of return on capital
expenditures.A knowledge theory underlying investment decisions is needed for this purpose. This broad field of
decision-making of capital investment is one of the most difficult, one of the most recurrent and one of the most
controversial of management areas; and it is also an area where there are tremendous opportunities for basic
improvements in operation and policies. It may be emphasised here that the Use of a model or of any of the
mathematical technique of the operations research does not imply Management by computers. The mathematical
model itself is a tool of management rather than a Replacement for management.Authorisation: Since capital
expenditure budget does not contain detailed expenditure, it is essential that before any individual projects
relating to capital items are started, the expenditure should be specially authorised.

Capital Expenditure for Long-Period: Capital budgeting entails heavy expenditure. Infact, this is a very important
characteristic which explains the importance of capital budgeting decisions to a firm. Capital is sunk for a long
period. This long-term commitment adds considerably to the risk of capital budgeting decisions. Capital
expenditure is the main link between the present and the future, for it is the principal means by which an industrial
company tries to attain its long-term goals and objectives. Because of its relationship with long-term profit
planning, its disproportionately heavy impact on short-term profit and its high volume, capital expenditure should
be planned and controlled. Decisions which involve the authorisation of capital expenditure projects are among
the most important for the Boards of Directors and their managerial advisers. Most capital expenditures schemes
call for apermanent commitment of relatively large sums of money over a number of years. Capital expenditure is
Strategic investment of some magnitude and is of a non-routine nature; it has economiclife and its benefits
continue over a series of years. From the standpoint of the stockholder and the consumer, capital expenditure are
the principal bulwark against the seemingly endless progression of wage increase. From the standpoint of labour,
capital expenditure are the basic economic source of future wage advances, for they embody the creative forward
strides of advancing technology. Finally, capital expenditure, both by their aggregate size and by their cyclical
timing, have a graet deal to do with the character of the economy as a whole , and therefore , with the
government’s role in maintaining stability.i)Creative Search for Profitable Opportunities: The concept of the profit-
making idea must be embodied in the capital facility. Profitable opportunity for the company’s invested capital
must be turned up. A corporation’s future profitability and growth are linked to the soundness of its capital
expenditure management programme. These steps then require to be integrated into a procedure to be used for
the conduct of an

organisation’s capital expenditure programme.ii)Long-range Capital Planning: To provide consistent benchmarks

for proposal Origination in all parts of the organisation, it is necessary to have some kind of a plan sketched for the
future even though it is a tentative plan. Consider the words of joel Dean:“Today’s Capital expenditures make the
bed that the company must lie in tomorrow. The Capital expenditures budget embraces a company’s plans for
replacing, improving and adding to its capital equipment”.iii)Short-range Capital Planning: The purpose of
preparing a short-range capital budget is to force the operating management to submit the bulk of its capital
proposals early enough to give the top management an indication of the company’s credit demands for
funds.iv)Measurement of Project Worth: In order to permit an objective ranging of projects, the productivity of the
proposed outlay will have to be measured properly.v)Screening and Selection: A screening standard should be set
in the light of the supply of cash available for capital expenditures, the cost of money to the company, and the
attractiveness of alternative investment opportunities.vi)Control of Authorised Outlay: Control has to be exercised
by the top management inorder to ensure that the facility conforms to specifications and that the outlay does not
exceed the amount authorised. Once the capital expenditure is incurred, it is most difficultto change the course of
expenditure. As capital assets are usually of limited specific use, the future needs of such should be carefully
assessed.vii)Post Mortem: In order to preserve the integration of the estimates of projected earning’s, a post-
completion audit of the company’s performance should be affected.viii)Retirement and Disposal: A management’s
responsibility for an investment approach ceases only when the facilities have been disposed of. The assets must
be retained throughout its economic life until it virtually becomes worthless at the time of disposal.ix)Forms and
Procedures: An effective system of capital expenditure control should be Implemented with the use of specialised
forms, written procedures etc. All tailored to the

Company’s need.x)Economics of Capital budgeting: Good estimates of a rate of return of capital expenditure
projects pre-suppose an understanding of the economic concept that Underline sound investment
decisions.xi)Increase the Breadth of Analysis Leading to Decision-Making: In evaluating capital expenditure
decision or a profit-plan , it has been fairly common to consider only an few alternative strategies or economic
assumptions before reaching a decision.xii)Tool for Special Problems: More and more attention is being devoted by
management to temporary and special problem situations.xiii)Understanding inherent Logic of the Financial
System: As a by-product of financial modelling, some executives have found that the act of defining the logic and
interaction Of the financial system in developing the model is, in itself , very important and revalling activity.

Forecasting: As funds are committed over extended periods of time, there is a need for proper forecasting. A bird
in hand is worth two in the bush.There is an element of uncertainty and risk Which may lie in store for the future.
All these factors have to be properly evaluated in the process of forecasting. A proper cost-benefit relationship
should also be established.Planning Asset Capacities:A firm has to assess the capacities of the assets properly
before arriving at its long-term decisions. Both under-capacities and over-capacities should be avoided. Moreover,
the management should determine the timing and the quality of asset acquisitions. Asset capacities have to be
related to market factors, which may change over a period of time because of various cyclical fluctuations. A firm
should, therefore plan and fix the capacities of its asset in which long-term investment is going to be sunk. Far-
sighted judgement is an essential pre-requisite of wise decisions bearing on capital expenditures. But such a
judgement, to be sound, should ne based on an needs an objective means of measuring the economic worth of

individual investment proposals so that it may choose and select those which will have the most profound impact
on a company’s long-run prosperity. The real worth of an investment proposal may ne traced to the credibility of
the forecasts of the sales demand and production capacity which underpin the validity of the assessments and any
miscalculation of these is likely to be of far greater consequences than the relatively marginal effects of errors
caused by the use of a wrong rate of interest in discounting calculations.
 CAPITAL BUDGETING PREPARATION AT COCA COLA

In 1892, Coca-Cola Company was developed and its headquarter was held in Atlanta. Its
franchise is considered as world’s greatest beverage industry. It captures 48% of market share.
In 200 countries almost more than 160 franchises are working properly. Coca-cola mission
statements are: to make value and create s difference, to refresh the world and to inspire
moments of optimism and happiness.

The vision and objectives of this company are “be a super area the work so people perform
their best to maintain their position”. Provide all people of the world a high-quality beverage
with a surety of safety which is mainly required and first priority of people. With a mutual
relationship with customers and suppliers, we create a strong network. They want to be a highly
effective, lean and fast-moving organization. They think that as a responsible citizen they help in
build and support sustainable communities by creating a difference. Fulfill their all
responsibilities and provide a maximum return in long terms to shareholders.

Coca-Cola Capital Business Process:

We can study many discussions on budgeting process of the company. Weighted debt and equity
make the structure of capital in the company. Dividends also distributed to equity holders.
Proper budgeting set up is prepared in all areas of a company like the decision of investment,
investment on asset and return level against such investments. They follow capital budgeting
decision process. Researchers work on the need and requirements of customers and introduce
such products which are the demand of customers. Almost more than 3500 products they
provide in the market of above 200 countries. Company commitment clearly shows that
they produce customized products for their customers.

Budgeting Process and Procedures for coca cola:

 Preparation techniques: in accordance with the 10k annual reports of coca
cola present that both financial and nonfinancial budgeting is basic purpose of the
company. In such a way that company set the budget according to their requirement and
desire and then selects objectives, so the main purpose of making budgets to achieve
these objectives in last.
 Uses of evaluation:  for both evaluations, internal and external, company
prepares a budget. A detailed analysis of brands performance shown in annual reports
because they want to present what is their actual production as compared to budgeted
they set at the start of the year.
 Difference between business units: as we know, coca cola is a multinational
brand, which has a large number of departments and units who perform different
actions to achieve their objectives. So verifying these departments’ performance and
making a comparison with each other is very important. The company performs this
action because they make targets for each department and then compare these targets
with actual outcomes of all departments. So evaluation is compulsory to compare the
performance of departments with each other to check the set objective delivery.
Coca-cola management accounting information system:
Management accounting is based on all accounting data collected from companies for
making an internal decision and manage all expenses and sales. Coca-cola uses
cashbook ledger having two sections; one section is used to save all records of
 disbursements and payments and the second section is utilized to record all cash
information and receipts. All record must be kept on a daily basis.

Coca-cola Cost Accounting Approach:

Costing system of products presents that all costs are related to departments or
processes and costs assign to products according to the utilization of process. In short,
the company considers each product cost depend on activities which include in the
production process. Main three activities are shown the production process features like
concentrate and syrup blending, packaging and manufacturing. So it is clearly showed
that company uses activity-based costing. The company also makes a budget of its costs
according to activities related to process. In simple, higher activities will be the result of
the higher budget of coca cola production.

Coca-cola Capital Decision-making Process:

The capital decision is very compulsory because as we consider all brands, a large
number of investment involve which make this decision riskier. Payback period is very
important to calculate because of investment returns. With this, internal rate of return
and net present value also determine in case of investment decision process to clearly
show the actual return on investments and also verify how much investment needs to
get expected results. After budgeting and costing method, coca cola use WACC weighted
average cost of capital to run the process of capital decision. In such type of capital
decisions, according to the cost of capital of every related activity and related capital are
weighted as per requirement for the intention of investment. In this regard, company
checks all outcomes and sources of capital that may cause to increase investment if for
equity, beta and return rate both increased.

Coca-cola Capital Acquisition and Structure:

For capital acquisition and structure, coca cola uses equity-based capital. This type of
capital acquires through available in the market for investing a point of view and then
investment interest in the form of dividend payments to investors. In other words, it’s a
shareholder bases structure where that shareholder becomes chairman who has the
highest investment in the company.

Decision-making criteria for acquiring a new investment in coca

cola:
Two main points we have to consider or analyze whether or not we have to take the
decision on investment in the company:

1. Expected returns: because of higher return on any investment, the chances of

adopting that investment becomes higher. As we know the criteria that only those
investments selected which provide positive results of returning in future.
2. Impact on brand image: coca cola is very much concerned about its brand
image and always make decisions for selecting any investment who reflect no nay
negative impact on its brand image. That’s why the company didn’t rely on government
systems because of corrupt reputation.
Zero-base Budgeting:
In last few years, the demand for the company going to decrease because customers are
going to be more concern about their health issues. So in this regard, the company cut
down their expenses and cut down jobs to maintain their position in the markets. In this
regard, the company uses zeros base budgeting. Zero based budgeting shows that review
of expenses, again and again, happens because no any extra expense takes spending
further. At the end of each financial quarter, expenses should be equals to income that
means utilize where actually we need, like rent, supplies, and funds for emergency or
retirement savings. It is also very popular cost-cutting measure from last many years.
Because many companies going to use this method and save their extra expenses.

Coca-cola uses this technique to save its money through cutting thousand of extra jobs,
selling corporate jets, removing inefficient factories and even appoint worker and before
making copies that have to take permission.  Zero-base budgeting really focuses on
reviewing your expenses so you can check where your money is gone or spend, and
budget items can be managed properly. Always focus the spending of every amount and
its basic utilization for the benefit of the company.

Coca-cola Sale Growth:
The sale growth is going to increase. It is only because of reducing any type of extra costs
from budgeting. In this case, the company can produce more units for sale, which
automatically increase the profit of the company. Its current growth rate in the economy
in more than 35% which shows that coca cola is competitive with the demand of
markets.

Coca-cola Competitors:
Coca-cola is not a single company who takes the market and also full fill customers
need. Also, many companies are here which is doing the same job like PepsiCo and
Cadbury Schweppes. But coca cola is considered a leader in the market of USA. Because
it captures 42.9% of market share while PepsiCo take 31.2% and Cadbury covers 17.6%
in the market. All debts or liabilities are paid against the interest of 4%.

Participants in Budgeting:
Normally, management and workers of the company together decide the budget as
comparing the actual results with standard budget and with the previous budget, but in
coca cola, with all this, customer’s demand play a very important role in making a
budget. Customer demand and requirement making the high budget as well as low. So
likeness and dislikes of users of coca cola is a main point while making a budget for
future.

Conclusion:
Coca-cola is well reputed and largest company in the world. People like all brands of this
company. They use different costing and capital method by; managing their investments
and spending also consider the market demand and trends. It’s a very important part of
industry sector.