Financial Model for Capital Expenditure Approval

A financial model for capital expenditure approval is the document that turns a spending request into a yes or no. It projects the cash a project consumes and returns, tests that return against the company’s cost of capital, and shows the board what happens if the assumptions break. In India, the answer also depends on when an asset is put to use, whether GST credit survives, and which body has to approve the spend under the Companies Act 2013 and the shareholders’ agreement. This article sets out how to structure the model, which metrics boards actually read, and the Indian tax and governance inputs that change the verdict.

What should a financial model for capital expenditure approval include?

It should include five blocks: an assumptions sheet, a capex and funding schedule, incremental operating cash flows, a tax layer (depreciation under section 33 of the Income-tax Act 2025 and GST input tax credit under the CGST Act 2017), and a decision sheet showing NPV, IRR, payback and sensitivities. Every figure should be incremental, meaning the change versus not doing the project.

How a capex approval model differs from other financial models

A capex approval model answers one question: does this specific spend earn more than it costs, after tax and risk? It is narrower than a company-wide three-statement model and more decision-focused than a budget. It evaluates one project on an incremental basis, while the company model evaluates the whole business.

Teams often try to answer the capex question inside their fundraise model or annual budget. That rarely works. A fundraise model blends dozens of decisions into one forecast, so the return on a single ₹8 crore plant line disappears into consolidated EBITDA. A budget records the spend but does not test whether it should happen. The capex approval model isolates the project and asks what changes because of it.

How capex approval models compare with adjacent models

Model	Question it answers	Unit of analysis	Typical reader
Capex approval model	Should we make this specific investment?	One project, incremental cash flows	Board, investment committee, lenders
Three-statement model	What does the whole company look like over 3 to 5 years?	Entire entity	Investors, management
Expansion budget	How do we release and control money for a new market?	Stage gates and spend lines	Management, board
Debt vs equity model	How should we fund the business?	Capital structure	Founders, CFO
Annual budget	What will we spend this year?	Cost centres	Department heads

The capex model usually feeds the others. Once approved, its outputs (spend timing, depreciation, incremental revenue) flow into the three-statement model and the budget. If you are still deciding whether a cost is capital or revenue in the first place, our guide on the difference between capital expenditure and revenue expenditure covers that classification; this article assumes the spend is capital.

Which capex decisions need a full model?

Not every purchase deserves one. Laptops and routine replacements go through a purchase approval with a budget check. A full model earns its cost where the spend is large relative to the balance sheet, the payback runs beyond a year, or the decision is hard to reverse. Common triggers in growth-stage Indian companies include:

1. A manufacturing line, cold chain facility or warehouse automation project
2. Owned GPU or server infrastructure versus continued cloud spend
3. A retail, dark store or clinic rollout where each unit carries fit-out capex
4. A building purchase versus a long lease
5. Any spend that crosses a reserved-matter threshold in the shareholders’ agreement

Why does the model need a do-nothing case?

Every capex decision is a comparison, so the model needs a base case showing what happens if the company does not spend. Incremental cash flow is the project case minus the do-nothing case, not the project case on its own. The do-nothing case is rarely zero: third-party storage rent keeps escalating, an ageing machine keeps breaking down, cloud bills keep growing with usage.

Approvers also want the alternatives that were considered and rejected. A useful pack shows three to four options side by side: do nothing, the proposed project, a smaller or phased version, and an outsourced or leased route. Where the spend is mandatory (a fire safety upgrade, a pollution control system required by a State Pollution Control Board consent condition, a data localisation requirement), the question changes from whether to spend to which option costs least. For mandatory spend with options of different lives, compare equivalent annual cost: the present value of each option’s cost converted into a level annual figure over its own life.

Capex categories and how the decision rule changes

Category	Example	Decision question	Typical rule
Growth	New plant line, new city rollout	Does it beat the hurdle rate?	NPV above zero at risk-adjusted rate
Efficiency	Warehouse automation, solar rooftop	Do savings repay the spend in time?	NPV and payback within a set limit
Replacement	End-of-life machinery, server refresh	Replace now or run on?	Equivalent annual cost against do-nothing
Mandatory or compliance	Pollution control, fire safety	Which option costs least?	Lowest equivalent annual cost

The definitions of each capex type are covered in our capital vs revenue expenditure guide; what matters for the model is that each category needs a different decision rule and often a different hurdle rate.

Model architecture: the five sheets every capex model needs

A capex approval model works best as five linked sheets: inputs, capex and funding schedule, operating cash flows, tax, and decision outputs. Inputs sit in one place, calculations never contain hardcoded numbers, and the decision sheet reads only from calculation sheets. This structure lets a reviewer trace any output back to an assumption in two clicks.

Sheet 1: assumptions and inputs

Every number a reviewer might challenge belongs here, with a source column. For capex projects the critical inputs are:

• Asset cost broken into base price, freight, installation, import duty and pre-operative costs that qualify for capitalisation
• Commissioning date (the date the asset is put to use, which drives tax depreciation, covered below)
• Capacity, ramp-up curve and utilisation by month
• Price, volume and variable cost per unit of incremental output
• Incremental fixed costs: staff, power, maintenance contracts, insurance
• Useful life for books (Schedule II, Companies Act 2013) and tax block rate (section 33, Income-tax Act 2025)
• Discount rate and terminal or salvage value assumptions
• A contingency line on capital cost, sized to the project’s definition stage (estimate: higher at concept stage, lower once vendor quotes are firm)
• Inflation and price escalation for both costs and selling prices

Mark each input as confirmed (vendor quote, signed term sheet) or estimated. Boards trust a model more when they can see which numbers are firm.

Inflation, foreign exchange and imported equipment

Keep inflation consistent. Nominal cash flows (with price escalation built in) go with a nominal discount rate; real cash flows go with a real rate. Mixing the two is a common reason a project shows an IRR that no one can reproduce. Indian models usually run in nominal terms because loan rates, tax and GST are all nominal.

For imported machinery, the landed cost depends on the exchange rate on the payment dates, not the quote date. Where payments are staged (advance, shipment, commissioning), model each tranche at its own date and show the rupee cost at the quote rate and at a depreciated rupee scenario. If the company books a forward cover, the hedge cost belongs in the capital cost.

Sheet 2: capex and funding schedule

Lay out spend by month, not by year. Capex projects in India routinely slip by one or two quarters between purchase order and commissioning, and that slip has tax consequences. Show advances paid to vendors separately from capitalised cost, because advances sit as capital work in progress (CWIP) until the asset is ready for use under Ind AS 16 or AS 10.

The funding block shows where the money comes from: internal accruals, equity already raised, a term loan, or an external commercial borrowing. Interest during construction on a qualifying asset is capitalised under Ind AS 23 (Borrowing Costs), so the model should compute it rather than expense it.

Sheet 3: incremental operating cash flows

This sheet carries revenue, variable costs, fixed costs and working capital for the project only. The working capital line is the one teams most often forget. A new production line needs raw material inventory and extends receivables; a dark store needs stock on day one. That cash leaves the business at the start and returns at the end of the project life, and it can move NPV materially. Our working capital and cash flow model guide covers the mechanics of debtor and inventory days.

Sheet 4: tax

Tax depreciation, corporate tax on incremental profit and GST credit timing live here. This sheet is where Indian models differ most from generic templates, so it gets its own section below.

Sheet 5: decision outputs

One page, readable without opening any other sheet: NPV, IRR, payback, discounted payback, peak funding requirement, and a sensitivity table. If a board member reads only this page, they should be able to vote.

Model controls before the pack goes out

An approval model is a record of what the board agreed to, so it needs controls a working model does not. Freeze the approved base case as a separate version once the resolution passes. Log every later change with a date and a reason. Add a checks sheet that recomputes NPV, IRR and cash totals independently and flags any mismatch. The full review process is covered in our guide to financial model review services; for capex the frozen base case matters most, because the post-investment review compares against it.

Decision metrics: NPV, IRR and payback for capex approval

Net present value (NPV) is the primary decision metric in a financial model for capital expenditure approval: approve projects with positive NPV at the company’s hurdle rate. Internal rate of return (IRR) and payback support the decision but should not override NPV, because IRR can mislead on projects with uneven cash flows or different scales.

Capex decision metrics and how boards use them

Metric	What it measures	Decision rule	Where it misleads
NPV	Value added in today’s rupees after recovering the cost of capital	Approve if NPV is above zero	Sensitive to discount rate choice
IRR	The discount rate at which NPV equals zero	Approve if IRR exceeds hurdle rate	Multiple IRRs with sign changes; favours small projects
Simple payback	Years to recover the initial outlay	Shorter is safer	Ignores time value and cash after payback
Discounted payback	Years to recover outlay in present value terms	Must fall within useful life	Still ignores cash after payback
Profitability index	PV of inflows divided by PV of outlay	Rank projects when capital is rationed	Not useful for a single yes or no

What hurdle rate should an Indian company use for capex approval?

The hurdle rate is the weighted average cost of capital (WACC) plus a premium for project risk. For a venture-funded company with little debt, WACC is close to the cost of equity, which investors price well above bank borrowing rates. A profitable, bank-funded business can use a lower rate because part of its funding is tax-deductible debt.

Two reference points anchor the debt side. The Reserve Bank of India (RBI) raised the policy repo rate by 25 basis points to 5.50% on 07/10/2026 and moved its stance to calibrated tightening (RBI Monetary Policy Committee resolution, October 2026), so floating-rate term loan costs are rising rather than falling. Bank term loans for capex price at a spread over the lender’s external benchmark, so the model should use the sanctioned rate from the term sheet, not a market average.

On the equity side, there is no regulator-published number. Startups that model a cost of equity in the high teens to mid-twenties percent are within the range commonly used in Indian venture practice (estimate; varies by stage and sector, confirm with your investors’ own return expectations). Add 2 to 5 percentage points for projects outside the core business, such as a first manufacturing line at a brand that has only outsourced before (estimate).

Why NPV beats IRR when projects compete

Consider two options competing for the same ₹5 crore. Option A is a ₹1 crore automation project with 40% IRR and ₹60 lakh NPV. Option B is a ₹5 crore plant expansion with 24% IRR and ₹2.1 crore NPV (illustrative figures). IRR ranks A first; NPV ranks B first. If the capital would otherwise sit idle, B adds more value. Present both metrics, but write the recommendation on NPV.

How should salvage value and replacement capex be modelled?

Model the project over the asset’s economic life, not an arbitrary five years. At the end, include the expected sale or scrap value net of tax, and release the working capital tied up in the project. Where the project runs longer than the first asset’s life (a fleet, a server cluster), include the replacement capex within the horizon instead of assuming the asset lasts forever.

The tax on sale is easy to get wrong. Because tax depreciation runs on a block, sale proceeds reduce the block’s written down value rather than producing a separate gain. A taxable gain arises only where proceeds exceed the block’s opening value plus additions, or where the block ceases to exist, and that gain is treated as short-term regardless of how long the asset was held (section 50 of the 1961 Act; confirm the corresponding provision under the Income-tax Act 2025). Most models should therefore show salvage value reducing future depreciation rather than triggering a lump-sum tax.

Ranking projects when capital is limited

When several approved-quality projects compete for one budget, rank them by profitability index (present value of inflows per rupee invested) rather than by NPV alone, and fill the budget from the top. Pure financial ranking misses projects with strategic or compliance value, so many boards add a weighted score covering strategic fit, risk, urgency and execution capacity. Keep the financial and qualitative scores separate in the pack, so a high strategic score cannot hide a negative NPV.

Indian tax inputs that change the capex decision

Tax changes capex returns through three channels: depreciation timing under section 33 of the Income-tax Act 2025, the corporate tax regime the company has opted for, and GST input tax credit on capital goods under the CGST Act 2017. A model that ignores any of these overstates or understates NPV, sometimes enough to flip the decision.

Depreciation under section 33 of the Income-tax Act 2025

The Income-tax Act 2025 replaced the Income-tax Act 1961 from 01/04/2026, and tax depreciation now sits in section 33 of the new Act (corresponding to section 32 of the 1961 Act). The block of assets method and written down value (WDV) computation carry over. Where an asset is acquired and put to use for less than 180 days in a tax year, depreciation for that year is restricted to half the normal rate.

That rule makes the commissioning date a model input with real money attached. Take a ₹2 crore machine in the 15% general plant and machinery block, for a company paying tax at an effective 25.168% (illustrative):

• Put to use on 15/09/2026 (more than 180 days before 31/03/2027): first-year depreciation of ₹30 lakh, tax shield of about ₹7.55 lakh
• Put to use on 15/11/2026 (fewer than 180 days): first-year depreciation of ₹15 lakh, tax shield of about ₹3.78 lakh

The difference is a timing shift of roughly ₹3.77 lakh of tax into the following year, not a permanent loss. It still affects NPV and, for a cash-constrained company, the funding gap. Build the commissioning date as a single input that drives both the operating ramp and the tax computation, so a delay flows through every sheet.

Book depreciation is separate. The Companies Act 2013 prescribes useful lives in Schedule II (for example, general plant and machinery at 15 years and computers at 3 years for end-user devices). Book depreciation drives reported profit and covenants; tax depreciation drives cash tax. The model needs both.

The corporate tax regime affects capex incentives

Companies that opted for the concessional regime under section 115BAA of the 1961 Act (base rate 22%, carried forward into the Income-tax Act 2025) give up certain deductions, including additional depreciation on new plant and machinery for manufacturers. A manufacturing company on the normal regime may be able to claim additional depreciation on eligible new plant. Confirm the regime from the company’s latest return before building the tax sheet, and verify the corresponding section numbers under the 2025 Act against the official text.

GST input tax credit on capital goods

GST paid on capital goods used for taxable supplies is generally available as input tax credit under section 16 of the CGST Act 2017. Three rules change how the model treats it:

1. Section 16(3): if the company claims depreciation on the GST component of the asset cost under the Income-tax Act, it cannot also claim input tax credit on that GST. Model the GST as a recoverable, not as part of asset cost.
2. Section 17(5): credit is blocked on specified items, including most motor vehicles and works contract services for construction of immovable property (other than plant and machinery). A warehouse building does not generate ITC; racking classified as plant and machinery may.
3. Rule 43 of the CGST Rules 2017: where a capital good is used for both taxable and exempt supplies, credit is spread over five years and the exempt share reversed. Healthcare, education and some financial services businesses hit this.

On an asset costing ₹2 crore plus 18% GST, the ₹36 lakh of credit is cash the company recovers against output GST. If output GST is low in the early months (common in a new business line), the credit accumulates and the cash returns later. Model the credit utilisation month by month instead of assuming it nets off immediately.

Imported capital goods

For imported machinery, basic customs duty is a cost and gets capitalised; IGST on import is generally creditable. Exporters can consider the Export Promotion Capital Goods (EPCG) scheme under the Foreign Trade Policy 2023, which allows duty-free import of capital goods against an export obligation of six times the duty saved, to be met within six years. Failing the obligation brings back the duty with interest, so a model that uses EPCG should carry the export obligation as a tracked output.

Capital subsidies and government grants

State industrial policies commonly offer capital investment subsidies, interest subvention or stamp duty and electricity duty reimbursement for new manufacturing units, and central schemes add sector-specific support. Model these as separate cash inflows on the date they are realistically received, which is often 12 to 24 months after commissioning once the claim is verified (estimate; varies by state scheme), not on approval.

Two treatment points change the numbers. For tax, a subsidy directly or indirectly linked to the asset reduces its actual cost for depreciation (Explanation 10 to section 43(1) of the 1961 Act; confirm the corresponding provision under the Income-tax Act 2025), so the tax shield shrinks. For books, Ind AS 20 (Government Grants) requires the grant to be recognised either as deferred income or as a deduction from the asset’s carrying amount. Production Linked Incentive (PLI) payouts are tied to incremental sales, not to capex, so they belong in operating cash flows with the scheme’s eligibility conditions modelled as a risk.

How the main tax inputs move a capex model

Tax input	Governing provision	Model effect	What to confirm
Tax depreciation	Section 33, Income-tax Act 2025	Tax shield timing; half rate if used under 180 days	Commissioning date and block rate
Corporate tax regime	Section 115BAA, 1961 Act, as carried into the 2025 Act	Tax rate and access to additional depreciation	Option exercised in the latest return
GST credit on capital goods	Sections 16 and 17(5), CGST Act 2017	Recoverable cash or added cost	Asset classification and output GST capacity
Common credit reversal	Rule 43, CGST Rules 2017	Partial credit loss over 5 years	Share of exempt supplies
Import duty relief	EPCG scheme, Foreign Trade Policy 2023	Lower upfront cost against export obligation	Realistic export volumes

Board and investor approval: who actually signs off on capex?

In an Indian private company, capex approval usually passes through three gates: the internal delegation of authority, the board of directors under the Companies Act 2013, and investor consent under the shareholders’ agreement. The financial model has to be built for the strictest of the three, which in funded companies is usually the investor reserved matter.

Board powers under the Companies Act 2013

Section 179(3) of the Companies Act 2013 requires certain powers to be exercised only by resolution at a board meeting, including borrowing money, investing the company’s funds and granting loans. A capex project funded by a term loan therefore needs a board resolution for the borrowing even if management has authority over the spend itself.

Section 180(1)(c) requires a special resolution of shareholders where borrowing exceeds the aggregate of paid-up share capital, free reserves and securities premium. Private companies are exempt from section 180 under the Ministry of Corporate Affairs (MCA) exemption notification dated 05/06/2015, subject to the articles of association, which many investor-backed companies amend to reinstate similar controls. Public companies and subsidiaries of public companies remain covered.

Where the asset is bought from or leased from a related party (a promoter-owned building is the common case), section 188 applies (see our guide to related party transactions under section 188), and the model should show that the price is at arm’s length. Listed companies and specified unlisted companies also route the decision through the audit committee under section 177.

Shareholders’ agreement reserved matters

Most Series A and later shareholders’ agreements list capital expenditure above a threshold, or outside the approved annual budget, as a reserved matter requiring investor consent. Thresholds vary widely by deal. Pull the exact clause before building the model, because it decides who reads the output and how much sensitivity work they expect.

Typical capex approval matrix in a funded Indian private company

Spend level	Approver	Legal basis	What the model must show
Within approved budget, below delegated limit	CEO or CFO	Board-approved delegation of authority	Budget line and vendor quote
Above delegated limit, equity-funded	Board of directors	Delegation of authority; section 179(3) if investment of funds	NPV, IRR, payback, funding source
Debt-funded	Board of directors	Section 179(3)(d), Companies Act 2013	Debt service coverage, covenant headroom
Above SHA threshold or outside budget	Investor consent	Shareholders’ agreement reserved matters	Full model with scenarios
Related-party asset or lease	Board, and shareholders where thresholds are crossed	Section 188, Companies Act 2013	Arm’s length price support

Building the approval pack alongside your annual plan? Our budget forecasting services for startups page explains how capex lines and approval thresholds sit inside a board-approved budget.

What goes into the approval pack, and when should it be submitted?

A board or investor approval pack typically carries five items: a one-page summary with the ask, the recommendation and the key metrics; the model’s decision sheet; the options considered; a risk register listing the top five risks with owners and mitigations; and the proposed resolution with any conditions, such as a cost overrun tolerance after which management must return to the board.

Plan the submission around the board calendar. Vendor lead times for imported equipment often run several months, and the approval has to land before the purchase order, so working back from the commissioning date usually puts the pack 60 to 90 days ahead of the order (estimate). Where the decision cannot wait for a meeting, the Companies Act 2013 allows a circular resolution under section 175, though the section 179(3) powers listed above must be exercised at a meeting. See our notes on board resolution formats for drafting.

Debt-funded projects add a lender layer. Banks test debt service coverage ratio (DSCR) and security cover in the downside case, and for project loans the Reserve Bank of India (Project Finance) Directions 2025 set how lenders treat a delay in the date of commencement of commercial operations (DCCO). A model that shows commissioning slipping should show the DSCR in that case too.

Cross-border funding of capex

Where a foreign parent or investor funds the project, the funding route carries its own compliance. Fresh equity is reported to RBI in Form FC-GPR within 30 days of allotment under the Foreign Exchange Management (Non-debt Instruments) Rules 2019 and the FEMA reporting framework. A loan from a foreign lender or parent falls under the external commercial borrowing (ECB) framework in the Foreign Exchange Management (Borrowing and Lending) Regulations 2018 and RBI’s Master Direction on ECB, which restricts end-uses and sets cost ceilings. The ECB framework has been under revision, so confirm the current Master Direction before modelling interest cost. The funding sheet should carry the route and its timing, because a delayed FC-GPR or ECB registration can hold up disbursement and shift commissioning past the 180-day line.

Sensitivity, scenarios and buy vs lease analysis

Sensitivity analysis shows which assumptions decide the outcome, and in capex approval the answer is almost always the same three: commissioning delay, utilisation ramp and selling price. A good approval model shows NPV across a range of each, plus a downside case that combines them, so the board sees the break-even point rather than one point estimate.

We cover scenario switch mechanics and output table design in our guide to scenario and sensitivity model development. For capex specifically, three tests matter most:

• A two-way table of NPV against utilisation and selling price
• A delay test: NPV if commissioning slips by 3 and 6 months, with the depreciation and GST credit effects flowing through
• A break-even utilisation: the capacity use at which NPV equals zero

When are Monte Carlo simulation and real options worth the effort?

For most growth-stage projects, a two-way sensitivity table and three scenarios are enough. Monte Carlo simulation, which runs thousands of combinations of input ranges to produce a probability distribution of NPV, earns its place when the project is large relative to the balance sheet and two or more inputs are both uncertain and correlated (commodity price and volume in a processing plant, for example).

Real options thinking is more useful day to day than the formal maths. A phased build carries an option to expand if phase one works and to stop if it does not. A leased building carries an option to exit. Valuing those choices, even roughly, often turns a marginal single-shot project into an approvable phased one, which is the route the case study below took.

Should you buy or lease the asset?

Leasing preserves cash and moves risk to the lessor; buying usually costs less over the asset’s life and gives the company the tax depreciation. The right answer depends on the company’s cost of capital, its tax position and how long it needs the asset. Compare the two on an after-tax present value basis, not on headline monthly cost.

Buy vs lease in a capex approval model

Factor	Buy	Lease
Upfront cash	Full cost plus GST (GST credit recovered later)	Security deposit and first rentals
Tax deduction	Depreciation under section 33, Income-tax Act 2025	Lease rentals as business expenditure (operating lease)
GST	Credit on purchase, subject to sections 16(3) and 17(5)	Credit on rentals, subject to the same blocks
Accounting	PPE under Ind AS 16 or AS 10	Right-of-use asset and lease liability under Ind AS 116; AS 19 for non-Ind AS companies
Residual value	Belongs to company	Belongs to lessor
Best fit	Long-life core assets, profitable taxpayer	Fast-obsolescence assets, loss-making or cash-tight company

A loss-making startup gains little from depreciation in the early years because it has no taxable profit to shield. Unabsorbed depreciation can be carried forward, but the present value of a deduction used in year five is low. That tilts many early-stage capex decisions toward leasing, even where the nominal lease cost is higher.

Post-investment review: closing the loop on approved capex

A post-investment review compares what the approved model promised with what the project delivered, usually 12 to 18 months after commissioning. It is the only control that keeps capex forecasts honest: if sponsors know the numbers will be checked, the next proposal is more realistic.

The review should cover five things against the frozen base case:

1. Final capitalised cost against approved cost, with contingency use explained
2. Actual commissioning date against plan, and its effect on tax depreciation and revenue start
3. Utilisation, price and operating cost against the ramp assumed
4. Working capital actually tied up
5. NPV re-run on actuals to date plus a refreshed forecast for the remaining life

This is project-level accountability, different from the monthly budget vs actual variance reporting a finance team runs on the whole P&L. For launches that carry little capex, the tracking approach in our new product launch model guide is the closer fit.

Indian financial statements add a disclosure hook. Schedule III to the Companies Act 2013 requires an ageing schedule for capital work in progress and, for projects that are overdue or over budget, a completion schedule. A project that stalls in CWIP shows up in the audited accounts, so the review should check that capitalisation happened when the asset was ready for use and not later.

Common mistakes that cost founders time and money

The most expensive capex model errors are not formula mistakes. They are framing mistakes that make a weak project look strong or hide the cash a strong project needs.

1. Modelling totals instead of increments. Teams project the whole business with and without the project and compare EBITDA, which pulls in allocated overheads that do not change. Use only cash that changes because of the decision. Sunk costs, such as a feasibility study already paid for, stay out.
2. Ignoring the commissioning date. A project approved in June and commissioned in November loses half its first-year tax depreciation under section 33 of the Income-tax Act 2025 and delays revenue. Treat commissioning as a scenario variable, not a fixed date.
3. Adding GST to asset cost. Capitalising recoverable GST overstates the outlay and tax depreciation, and claiming both depreciation and credit on the same tax breaches section 16(3) of the CGST Act 2017. Keep GST as a recoverable with its own utilisation schedule.
4. Leaving out working capital. A production line that needs ₹1.5 crore of inventory and receivables to run has a real outlay well above the machine price. Missing it inflates IRR and understates the funding request.
5. Skipping the do-nothing case. A project compared against zero rather than against the status quo misses the costs the company avoids (or keeps paying) without it. Model the base case explicitly.
6. Using the wrong discount rate. Applying a bank loan rate to an equity-funded project understates the cost of capital and approves projects that destroy value for shareholders. Match the hurdle rate to the actual funding mix and risk.

Frequently asked questions on capex approval models

Q: Is tax depreciation still under section 32 for FY 2026-27?

A: No. From 01/04/2026, depreciation is under section 33 of the Income-tax Act 2025. The block of assets method, WDV computation and half-rate rule for assets used under 180 days carry over from section 32 of the 1961 Act.

Q: Can a company claim both GST credit and depreciation on the GST portion of a capital asset?

A: No. Section 16(3) of the CGST Act 2017 bars input tax credit on tax that has been capitalised and depreciated under the Income-tax Act. Choose one; for most businesses with taxable output, the credit is worth more.

Q: How long does it take to build a capex approval model?

A: Two to four weeks for a typical growth-stage project. The first week goes into collecting vendor quotes, the SHA reserved matters and tax regime details; the model build and review take the rest.

Q: What documents are needed to build the model?

A: Vendor quotations, the project timeline, the latest audited financials and tax return, the shareholders’ agreement, any loan term sheet, and operating assumptions from the business owner. The SHA and the latest return are the two most often missing.

Q: Does a private company need shareholder approval for a large capex loan?

A: Not under section 180(1)(c) of the Companies Act 2013, because the MCA notification of 05/06/2015 exempts private companies. The articles of association or the SHA may still require shareholder or investor consent, and the borrowing needs a board resolution under section 179(3)(d).

Q: Can a foreign parent lend money to an Indian subsidiary for capex?

A: Yes, through the external commercial borrowing route under the FEMA (Borrowing and Lending) Regulations 2018 and RBI’s Master Direction on ECB. End-use restrictions, cost ceilings and reporting apply; confirm the current Master Direction because the framework has been under revision.

Q: How should co-founders handle a promoter-owned building being leased to the company?

A: As a related party transaction under section 188 of the Companies Act 2013. The model should show the rent is at arm’s length, supported by comparable rentals or a valuation, and the interested directors should not vote.

Q: Do DPIIT-recognised startups get special tax treatment on capex?

A: Not on depreciation itself. Eligible startups may claim the profit-linked deduction available to DPIIT-recognised startups for three of their first ten years, which reduces the value of the depreciation tax shield in those years. Model the deduction years separately.

Q: What happens if the project is approved and then delayed?

A: Depreciation shifts if commissioning crosses the 180-day line, revenue starts later, and interest during construction rises. Present a revised model to the board showing the new NPV; most approvals carry a condition to return if cost or timing moves beyond a set tolerance.

Q: What if the project is cancelled after advances are paid?

A: Advances sit in capital work in progress and must be tested for impairment under Ind AS 36 or AS 28. Recoverable advances become a receivable; non-recoverable amounts are written off.

Q: What do lenders look for in a capex model?

A: Debt service coverage ratio (DSCR), security cover and covenant headroom under the downside case. Lenders read cash flow available for debt service before NPV.

Q: Should an equity-funded startup use its investors’ target return as the hurdle rate?

A: It is a reasonable starting point for the cost of equity, adjusted for project risk. Using the bank loan rate instead will approve projects that do not earn what shareholders expect.

Q: How is a GPU or server purchase treated differently from plant and machinery?

A: Computers and related hardware fall in a higher tax depreciation block than general plant under the Appendix to the Income-tax Rules, and Schedule II prescribes shorter useful lives for books. The faster obsolescence usually makes the buy vs cloud or lease comparison closer than the headline cost suggests.

Q: When should a post-investment review happen?

A: Usually 12 to 18 months after commissioning. Schedule it in the approval resolution itself, with a named owner, so it is not dropped once the project is running.

Q: Does a state capital subsidy reduce tax depreciation?

A: Yes, where it is linked to the asset. The subsidy reduces actual cost for depreciation (Explanation 10 to section 43(1) of the 1961 Act; confirm the 2025 Act equivalent), so model the lower depreciable base and the subsidy cash on its realistic receipt date.