Capital budgeting project of IFFCo

PREFACE

In today‘s era of globalization and competition, coping up with technological

advancement, which is undergoing evolution at a very fast rate, holds the key to the

survival and growth of any organization. Installing technology, well-equipped facilities

or going for modification in the existing ones are the means to attain better

performance efficiency and hence further the value addition. IFFCO, the largest

fertiliser industry of India (by sales turnover) is India‘s sole representative in Fortunes

prestigious listing of world‘s largest fertiliser Industry. To maintain strategic edge in

the market place, IFFCO has given importance to capital budgeting because capital

investment decisions often represent the most important decisions taken by an

organization, and they are extremely important, they sometimes also pose difficulties.

The evaluation of projects should be performed by a group of experts who have no

axe to grind. It is necessary to ensure that an impartial group scrutinizes projects and

that objectivity is maintained in the evaluation process. A company in practice should

take all care in selecting a method or methods of investment evaluation. The criterion

selected should be a true measure of the investment‘s profitability (in terms of cash

flows), and it should lead to the net increase in the company‘s wealth (that is, its

benefits should exceed its cost adjusted for time value and risk). It should also be seen

that the evaluation criteria do not discriminate between the investment proposals.

They should be capable of ranking projects correctly in terms of profitability. The NPV

method is theoretically the most desirable criterion as it is a true measure of

profitability; it generally ranks projects correctly.

of 76

Declaration

I Ms ANU BEHERA bearing Roll number: 205 do hereby declare

that this project report titled “Capital Budgeting has been prepared on the basis of

my learning through Summer Internship Programme at Indian Farmers Fertiliser

Cooperative Ltd. From 15th October 2012 to 28th November 2013 under the joint

supervision of Mr. K.K Nayak and Prof. S .K Panda. The findings of the study are

original and the study materials used have been duly recognized in the body of the

report. This report has not been submitted to any Institute/University for the award

of any degree or diploma in full or part.

( Ms. ANU BEHERA)

Date:

of 76

Acknowledgements

With all humility I would like to express that I am very lucky to undergo summer training at Indian Farmers Fertiliser Cooperative Ltd. Paradeep Unit. It was a golden opportunity for gaining practical experience and self development. Further, I am honoured to have so many wonderful people who helped me insistently in several ways for the completion of this project report.

I am extremely thankful to Mr. K.K Nayak who in spite of his busy schedule of work spared his valuable time to listen and guide all through the project period. Without his active support and supervision it was not possible to complete the project work.

I sincerely acknowledge my gratitude to Professor Mr. Sangram Kesari Panda who was not only involved in the entire process but also shared his knowledge, encouraged me and gone through the report before it was submitted for evaluation. Thank you, Dear Sir.

I would like to thank Dr. R.N Mohapatra Director, Dr. K.K Sahoo, Dean, and Prof. Sangram Keshari Panda for their active support and arrangements to make my learning and life easier at “ IFFCO”.

All my friends deserve thanks for their cooperation and sharing of valuable information that helped me in the preparation of this report.

Last but not least I owe my heartfelt gratitude to my parents for their constant help, encouragement and emotional support during the entire period of Summer Internship without which this report would not have been completed.

Ms. ANU BEHERA

Date:

of 76

CONTENTS

CHAPTER - 1

Introduction

1.1 Executive Summary

1.2 Objective

1.3 Scope

CHAPTER – 2

Theoretical Overview

CHAPTER – 3

Organization Overview

CHAPTER – 4

Data Analysis

CHAPTER – 5

Project Finding & Conclusion

Suggestions/Recommendation

Bibliography.

of 76

CHAPTER 1 INTRODUCTION

of 76

EXECUTIVE SUMMARY

IFFCO is currently India's largest Fertiliser industry by sales

with a turnover of Rs. 21673.36 crore and profits of Rs. 728.72 crore for fiscal

2012-13. IFFCO has given importance for capital budgeting because capital

investment decisions often represent the most important decisions taken by an

organization, and they are extremely important, they sometime also pose

difficulties. In the given sample project the process by which company studies the

different aspects of proposal, and decides about feasibility and viability of the

project. Moreover it reflects different phases, process of analysis of capital

budgeting.

An important step in raising capital is estimating the capital

requirements. Some of the capital raised will likely be used to increase working

capital. Capital budgeting is the process of identifying and ranking which of these

capital investments add the most value to the business. Capital budgeting decisions

are not unlike the personal budgeting decisions we make every day. It Consider

these common features;

PROJECT RANKING

How one chooses to allocate the investment capital raised

depends on the set of Investment opportunities. Project ranking is a means of

allocating the investment Capital to those projects that contribute the most value

to the business.

of 76

MEASUREMENT

There is a variety of methods available for measuring the firms

return on an investment project. Three major methods useful in measuring a

project value are the pay back, net present value, and IRR methods.

Objective of the Study:-

After studying this chapter the reader should be able:

Define the capital budgeting with in broader prospective management.

Classify investment project on the basis of how they influence the

investment decision process.

Broader overview of capital budgeting process.

Appreciate the importance of using computer spreadsheet packages such as

excel for capital budgeting computation.

Gain a broad overview of how the material in this book is organized.

METHODOLOGY OF RESEARCH:-

The Research method which I had adopted at IFFCO was conducting

exploratory research and personal interviews. Exploratory research design is

the unstructured and informal research undertaken to gain background

information about the organization. Under exploratory research, the method

adopted here was conducting experience survey. Experience survey had

of 76

been conducted in order to gather information from the knowledgeable

person on the issues relevant to the research project.

Required Information & Data:-

I have taken every data from the annual report, capital

budget book, cost benefits analysis report and other related sources.

Limitations of the study:-

This study has been carried out only based on information obtained by

interviewing personals in F & A Department IFFCO PARADEEP.

Information received was based on secondary data and on the primary

guidance given by the employees there at IFFCO PARADEEP. So any Error in

source data that may change the Actual Scenario.

This study has been carried out in a period of 45 days which is very less to

know and understand an organization like IFFCO PARADEEP.

Major sources of structured information and data or Records up to last 10

Years have been used.

Also to evaluate and ascertain financial position correctly of organization like

IFFCO, a student like me of 21 years age is too less.

It was advised to go through only in procedural information & not to use any

financial data pertaining to IFFCO as a whole or for IFFCO PARADEEP UNIT.

However at many places figures shown are as sample/Estimate figures &

not the actual figures.

of 76

CHAPTER 2

THEORETICAL OVERVIEW

of 76

Capital Budgeting (overview)

Introduction:-

An efficient allocation of capital is the most important finance

functioning modern times. It involves decisions to commit firm’s funds to long-

term assets. Such decisions are tend to determine the value of company/firm by

influencing its growth, profitability & risk.Investment decisions are generally

known as capital budgeting or capital expenditure decisions. It is clever decisions to

invest current in longterm assets expecting long-term benefits firm’s investment

decisions would generally include expansion, acquisition, modernization and

replacement of long-term assets.Such decisions can be investment decisions,

financing decisions or operating decisions. Investment decisions deal with

investment of organization’s resources in Long tern (fixed) Assets and / or Short

term(Current) Assets. Decisions pertaining to investment in Short term Assets fall

under “Working Capital Management”. Decisions pertaining to investment in Long

term Assets are classified as “Capital Budgeting” decisions.Capital budgeting

decisions are related to allocation of investible funds to different long-term assets.

They have

long-term implications and affect thefuture growth and profitability of the firm.In

evaluating such investment proposals, it is important to carefully considerthe

expected benefits of investment against the expenses associated with it.

Organizations are frequently faced with Capital Budgeting decisions. Any decision

that requires the use of resources is a capital budgeting decisions.Capital budgeting

is more or less a continuous process in any growing concern.

of 76

Capital budgeting is a required managerial tool. One duty of a financial

manager is to choose investments with satisfactory cash flows and rates of return.

Therefore, a financial manager must be able to decide whether an investment is

worth undertaking and be able to choose intelligently between two or more

alternatives. To do this, a sound procedure to evaluate, compare, and select

projects is needed. This procedure is called capital budgeting.

Figure of capital Budgeting:

CONCEPT:-

The term Capital Budgeting refers to the long-term planning for

proposed capital outlays or expenditure for the purpose of maximizing return on

investments.

of 76

Goal of the firm

Maximising share holders wealth of value of firm

Financing decision Dividend decision Investment decision

Short term Investment

Long term Investment

Capital Budgeting

The capital expenditure may be :

(1) Cost of mechanization, automation and replacement.

(2) Cost of acquisition of fixed assets. e.g., land, building and machinery etc.

(3) Investment on research and development.

(4) Cost of development and expansion of existing and new projects.

DEFINITION OF CAPITAL BUDGETING:-

Capital Budget is also known as "Investment Decision

Making or Capital Expenditure Decisions" or "Planning Capital Expenditure" etc.

Normally such decisions where investment of money and expected benefits arising

therefrom are spread over more than one year, it includes both raising of long-

term funds as well as their utilization.

Charles T. Horngnen has defined capital budgeting as "Capital

Budgeting is longterm planning for making and financing proposed capital outlays."

Importance of Capital Budgeting:-

Capital budgeting is important because of the following reasons:

(1) Capital budgeting decisions involve long-term implication for the firm, and

influence its risk complexion.

(2) Capital budgeting involves commitment of large amount of funds.

(3) Capital decisions are required to assessment of future events which are

uncertain.

(4) Wrong sale forecast ; may lead to over or under investment of resources.

(5) In most cases, capital budgeting decisions are irreversible. This is because it is

very difficult to find a market for the capital goods. The only alternative available is

to scrap the asset, and incur heavy loss.

of 76

(6) Capital budgeting ensures the selection of right source of finance at the right

time.

(7) Many firms fail, because they have too much or too little capital equipment.

(8) Investment decision taken by individual concern is of national importance

because it determines employment, economic activities and economic growth.

Objectives of Capital Budgeting:-

The following are the important objectives of capital budgeting:

(1) To ensure the selection of the possible profitable capital projects.

(2) To ensure the effective control of capital expenditure in order to achieve by

forecasting the long-term financial requirements.

(3) To make estimation of capital expenditure during the budget period and to see

that the benefits and costs may be measured in terms of cash flow.

(4) Determining the required quantum takes place as per authorization and

sanctions.

(5) To facilitate co-ordination of inter-departmental project funds among the

competing capital projects.

(6) To ensure maximization of profit by allocating the available investible.

Principles Or Factors Of Capital Budgeting Decisions:-

A decision regarding investment or a capital budgeting decision

involves the following principles or factors:

(1) A careful estimate of the amount to be invested.

(2) Creative search for profitable opportunities.

of 76

(3) A careful estimates of revenues to be earned and costs to be incurred in future

in respect of the project under consideration.

(4) A listing and consideration of non-monetary factors influencing the decisions.

(5) Evaluation of various proposals in order of priority having regard to the amount

available for investment.

(6) Proposals should be controlled in order to avoid costly delays and cost over-

runs.

(7) Evaluation of actual results achieved against those budget.

(8) Care should be taken to think all the implication of long range capital

investment and working capital requirements.

(9) It should recognize the fact that bigger benefits are preferable to smaller ones

and early benefits are preferable to latter benefits.

Types of Capital Expenditure:-

Capital Expenditure can be of two types :-

(1) Capital expenditure increases revenue.

(2) Capital expenditure reduces costs.

(1)Capital Expenditure Increases Revenue:

It is the expenditure which brings more revenue to the firm either by

expanding the existing production facilities or development of new production line.

(2) Capital Expenditure Reduces Costs:

of 76

Such a capital expenditure reduces the cost of present product and

thereby increases the profitability of existing operations. It can be done by

replacement of old machine by a new one.

Types of Capital Budgeting Proposals:-

A firm may have several investment proposals for its consideration. It may adopt

after considering the merits and demerits of each one of them. For this purpose

capital expenditure proposals may be

classified into :

(1) Independent Proposals

(2) Dependent Proposals or Contingent Proposals

(3) Mutually Excusive Proposals

(1) Independent Proposals :

These proposals are said be to economically independent which are

accepted or rejected on the basis of minimum return on investment required.

Independent proposals do not depend upon each other.

(2) Dependent Proposals or Contingent Proposals :

In this case, when the acceptance of one proposal

of 76

is contingent upon the acceptance of other proposals. it is called as "Dependent or

Contingent Proposals." For example, construction of new building on account of

installation of new plant and machinery.

(3)Mutually Exclusive Proposals:

Mutually Exclusive Proposals refer to the acceptance one proposal results in

the automatic rejection of the other proposal. Then the two investments are

mutually exclusive. In other words, one can be rejected and the other can be

accepted. It is easier for a firm to take capital budgeting decisions on such projects.

Capital Budgeting Process:-

The following procedure may be considered in the process of capital

budgeting decisions :

(1)Requirement of implementation of capital expenditure.

(2)Various capital expenditure proposal receive by the company.

(3) Identification of profitable investment proposals.

(4) Screening and selection of right proposals.

(5) Evaluation of measures of investment worth on the basis of profitability and

uncertainty or risk.

(6) Establishing priorities, i.e., uneconomical or unprofitable proposals may be

rejected.

(7) Final approval and preparation of capital expenditure budget.

of 76

(8) Implementing proposal, i.e., project execution.

(9) Review the performance of projects.

of 76

of 76

1.

REQUARMENT

PROPOSSALS

2.

DIFFERENT

PROPOSSALS3.

INVESTMENT

PROPOSSALS

4.

SCREEN PROPOSSALS

9.

REVIEW PRFORMANCE

8.

IMPLEMENT THE

PROPOSSAL

7.

FINAL

APPROVAL6.

FIX PRIORITIES

5.

EVALUATE VARIOUS PROPOSSALS

CAPITAL BUDGETING

PROCESS

1- Requirement of proposal

1. REQUIREMENT OF PROPOSSALS :-

In the first process company/ industry requires the investment propossal for

implementing the capital expenditure.

2. DIFFERENT/ CAPITAL EXPENDITURE PROPOSSALS:-

In this steps various propossals receive by the company.

3. IDENTIFICATION OF INVESTMENT PROPOSSAL:

The capital budgeting process begins with the identifications of

investment propossals. The process of idea about potential investment

oppertunities may originate from top management or may come from the rank &

file worker of any department or from any officer of the organisation. The

dipartmental head anaiyses various propossals in the light of corporate strategies

& submit the suitable propossal s to the capital expenditure plannig committee

incase of large organisations or to the officer concerned with the process of long

term investment.

4. SCREENING PROPOSSALS.:

The expenditure planning committee sreens the various propossals

received from different departments. The committee views these proposals from

various angels to ensure that these are in accordance with the corporate

strategies or selection criterion of the firm & also do not leads to departmental

imbalances.

of 76

5. EVALUATION OF VARIOUS PROPOSSAL :

The next step in capital budgetig proces is to evaluate the profitability

of various propossals. There are many method used for this purpose such as pay

back period method, rate of retun method , net present value method , internal

rate of return method etc. all these methods are used in evaluating the

profitability of investment propossals.

Various propossals to be evaluated may be classified as;

(1) Independent Proposals

(2) Dependent Proposals or Contingent Proposals

(3) Mutually Excusive Proposals

6. FIXING PRIORITIES :

After evaluating variouse propossal, the unprofitable

or un economic propossal may be rejected in straight away. But it may not be

possible for the firm to invest immediately in all the acceptable propossals due to

limitation of fund.Hence it is very essential to rank the various prop[ossal & to

establish Priorities after cosidering urgency, risk & profitabity involved there in.

7- FINAL APPROVAL & PREPARATION OF CAPITAL EXPENDITURE BUDGET:

Propossal meeting the evaluation & other criteria are

final approved to be include in capital expenditure budget. However, the

propossal involviong smaller investment may be decided at the lower level for

of 76

expenditure action. The capital; expenditure budget lays down the amount of

estimated expenditure to be incurred on fixed asset during budget period.

7. IMPLEMENTING PROPOSSAL :

Preparation of capital expenditure budgeting & incorporation of

a particular in the propossal budget does not itself authorise to go ahed with the

implementing of the project. A request for authority to spend the amount

should further be made to the capital expenditure committee which may like to

review the profitability of the project in the canged circumtances.

8. PERFORMANCE REVIEW:

The last stage in the process of capital budgeting is evaluation of the

performance of the project. The evaluation is made through post completion

audit by way of comparision of actual expenditure on the project with the

budgeted one , and also by comparing the actual return from the investment

with the anticipated return. The unfavourable variances, if any should be looked

into and the causes of the same be identified so that corrective action may be in

futurer.

of 76

DETERMINATION OF CASH FLOWS

Determination of year-wise cash flows is the most crucial step of the

financial analysis. The cash flows shall be determined for three components

namely:

a) Initial Investment

b) Operating Cash Flows

c) Terminal Cash Flow

a) Initial Investment

This component of cash flow mainly represents net cash outlay in the

period in which the asset is purchased or constructed. In other words, initial

investment shall comprise of the total project cost as indicated in the capital

investment proposal and shall also include incremental value of working capital,

wherever required.

a) Operating Cash Flows

This component of cash flow presents year-wise cash flow generated

from operations after the project has been commissioned. The determination of

operating cash flows shall, therefore, entail estimating year-wise operating income,

input/ raw material cost and operating expenses during the project life.

of 76

Operating Income :-

Operating income of a project represents total realization

or savings from the operations, after implementation of the project.

INPUT/ RAW MATERIAL COST:-

Landed cost of inputs / raw material shall include all the

incidental costs involved including present rate of custom duties.

OPERATING EXPENSES :-

The operating expenditure of the project shall include the cost of

chemicals and consumables, utilities (like power, water, and fuel) repairs and

maintenance, wages and salaries, rent and insurance, depreciation, other

administrative expenses etc.

b) TERMINAL CASH FLOW:-

The cash flow in the terminal year of the project mainly represents

the salvage value of the project plus release of incremental working capital.

Salvage value shall be considered as under:

Land to be valued at original cost.

Tax on capital gain should be considered. Capital gains shall be taken as

terminal value minus written down value as per income tax act.

Methods of Evaluating Capital Investment Proposals:

of 76

There are number of appraisal methods which may be recommended

for evaluating the capital investment proposals. We shall discuss the most widely

accepted methods. These methods can be grouped into the following categories :

I. Traditional Methods:

Traditional methods are grouped in to the following :

(1) Pay-back period method or Payout method.

(2) Improvement of Traditional Approach to Pay-back Period Method.

(a) Post Pay-back profitability Method.

(b) Discounted Pay-back Period Method.

(c) Reciprocal Pay-back Period Method.

(3) Rate of Return Method or Accounting Rate of Return Method.

II. Time Adjusted Method or Discounted Cash Flow Method

Time Adjusted Method further classified into:

(1) Net Present Value Method.

(2) Internal Rate of Return Method.

(3) Profitability Index Method.

CAPITAL BUDGETING PROCESS IN IFFCO

The first question concerns the firm's long-term investments. The process of

planning and managing a firm's long-term investments is called capital budgeting.

In capital budgeting, the financial manager tries to identify investment

of 76

opportunities that are worth more to the firm than they cost to acquire. This

means that the value of the cash flow generated by an asset exceeds the cost of

that asset.

BUDGET:

A budget is a financial and / or quantitative statement,

prepared prior to a defined period of time, of the policy to be perused

during that period for purpose of attaining the given objective.

A budget is blue print of desired plan of actions or operations.

Plans covering the entire organization and all its functions like purchase,

production, sales, financial management, research & development are

expressed through budget. A budget can be expressed in terms of money or

quantity, or both.

BUDGETING :

Budgeting can be defined as “The statement of plan of

activities of an Organization expressed in financial and quantitative term for a

definite future period approved in advance by Top Management.”

Objectives of Budgeting :

1. To control economic expenditures

2. To ensure availability of adequate working capital for efficient operation of

plants.

3. To prevent wastes

4. To ensure adequate return on capital employed.

of 76

Capital Budget:

Capital Budget is prepared for Procurement of Capital nature items

or for Capital nature works to be done during Budgeted year. The items so

procured or work so to be done are not the part of Profit & Loss Account, but are

to be shown at Assets side of Balance Sheet. However, Depreciation calculated for

Assets already having with Organization and Assets procured during the year is

calculated and is to be shown in Profit & Loss Account for particular year. Capital

Budget is prepared for next Financial Year commencing from April to March.

Capital budget projections:-

They are projected for a time frame covering

Revised Estimate: Projections for current year

Budget Estimates: Projections for coming Year

Capital budget- coverage:-

Sanctions:-

In this head approvals for creation of facility will be projected on the

basis of facilities. It covers existing sanctions, addition/ deletions and fresh

sanctions.

Commitments:-

In this head commitments made against facilities head will be projected.

of 76

Expenditure:-

It is a head in which incurrence of actual expenditure incurred against

each facility head will be projected.

Process for preparation of Capital Budget in IFFCO:-

1. Intimation from Head Office to send proposals for next Financial year.

2. Collection of various estimates from Indentors/ H.O.

3. Compilation of various data in specially designed Proformas.

4. Put-up to Unit Head for consideration.

5. Meeting by Unit Head with various Head of Departments /

Sectional Heads.

6. Final proposals to be sent to Head Office.

of 76

CHAPTER 3

ORGANISATION OVERVIEW

of 76

INDIAN FERTILIZER INDUSTRY

India is the second biggest consumer of fertilizer in the

world next only to China. The Indian Fertilizer companies produced around 37.6

million tonnes of fertilizer in the year 2012-13 with a 9% rise in comparison to

34.6 million tonnes of last year ( 2011-12 ) production. However, the total

availability was short of demand and was met through imports. Of total fertiliser

production, urea output increased to 23.3 million tonnes in FY12-13 from 21.8

million tonnes in FY11-12 due to better capacity utilization. While production of

di-ammonium phosphate (DAP) 4 million tones this year, output of NPK

(nitrogen, phosphate and potassium) 10 million tonnes in the current period.

The entire requirement of around five million tonnes of

potassic fertilisers would be met through imports as India does not have

of 76

commercially viable sources of potash. With a view to make the nation self-

sufficient in urea fertiliser, the Fertiliser Ministry has moved a proposal to boost

investment in the sector. The fertilizer subsidy bill for FY 2012-13 is expected to

increase by Rs 10,000 crore in respect of the budgeted estimates.

In current financial year FY 2012-13 the subsidy bill

would reach to Rs 70,974 crore while it was

estimated as Rs 60,974 crore in the budget. The

government planned to contain subsidy within 2% of

the GDP in FY 2012-13 but due to international

conditions like depreciating Rupee and oil prices

subsidies rose to 2.6 % of GDP.

India is meeting 80 per cent of its urea requirement through

indigenous production but is largely import dependent for its requirements of

phosphatic and potassic (P & K) fertilizers either as finished fertilizers or raw

materials. Its entire potash requirement, about 90 per cent of phosphatic

requirement, and 20 per cent urea requirement is met through imports.

In addition to urea, 25 grades of P & K fertilizers namely di-

ammonium phosphate (DAP), muriate of potash (MOP), mono-ammonium

phosphate (MAP), triple super phosphate (TSP), ammonium sulphate (AS), single

super phosphate (SSP) and 18 grades of NPKS complex fertilizers are provided to

farmers at subsidized prices under the Nutrient Based Subsidy (NBS) Policy.

of 76

Farmers pay only 50 per cent of the delivered cost of P & K fertilizers, the rest is

borne by the Government of India in the form of subsidy. The Government has also

included seven new grades of NPKS complex fertilizers under the NBS Policy. At

present 25 grades of P & K fertilizers are under the NBS Policy.

INTRODUTION OF IFFCO:-

During mid- sixties the Co-operative sector in India was

responsible for distribution of 70 percent of fertilisers consumed in the country.

This Sector had adequate infrastructure to distribute fertilisers but had no

production facilities of its own and hence dependent on public/private Sectors for

supplies. To overcome this lacuna and to bridge the demand supply gap in the

country, a new cooperative society was conceived to specifically cater to the

requirements of farmers. It was an unique venture in which the farmers of the

country through their own Co-operative Societies created this new institution to

safeguard their interests. The number of Co-operative Societies associated with

IFFCO have risen from 57 in 1967 to 39,824 at present.

Indian Farmers Fertiliser Co-operative Limited (IFFCO) was registered on

November 3, 1967 as a Multi-unit Co-operative Society. On the enactment of the

Multistate Co-operative Societies act 1984 & 2002, the Society is deemed to be

registered as a Multistate Co-operative Society. The Society is primarily engaged in

production and distribution of fertilisers. The byelaws of the Society provide a

broad frame work for the activities of IFFCO as a Co-operative Society.

of 76

IFFCO commissioned an ammonia - urea complex at Kalol and the

NPK/DAP plant at Kandla both in the state of Gujarat in 1975. Another ammonia -

urea complex was set up at Phulpur in the state of Uttar Pradesh in 1981. The

ammonia - urea unit at Aonla was commissioned in 1988.

In 1993, IFFCO had drawn up a major expansion programme of all

the four plants under overall aegis of IFFCO VISION 2000.

The expansion projects at Aonla, Kalol, Phulpur and Kandla

were completed on schedule. All the projects conceived as part of VISION 2000 had

been realised without time or cost overruns. All the production units of IFFCO have

established a reputation for excellence and quality. Another growth path was

chalked out to realise newer dreams and greater heights through Vision 2010. As

part of this vision, IFFCO has acquired fertiliser unit at Paradeep in Orissa in

September 2005. As a result of these expansion projects and acuisition, IFFCO's

annual capacity has been increased to 3.69 million tonnes of Urea and NPK/DAP

equivalent to 1.71 million tonnes. In pursuit of its growth and development, IFFCO

had embarked upon and successfully implemented its Corporate Plans, ‘Mission

2005’ and ‘Vision 2010’. These plans have resulted in IFFCO becoming one of the

largest producer and marketeer of Chemical fertilisers by expansion of its existing

Units, setting up Joint Venture Companies Overseas and Diversification into new

Sectors.

IFFCO has now visualized a comprehensive plan titled ‘Vision-2015’

which is presently under implementation.

of 76

IFFCO, to day, is a leading player in India's fertiliser industry and is making

substantial contribution to the efforts of Indian Government to increase foodgrain

production in the country.

Indian Farmers Fertiliser Cooperative Limited, also known as IFFCO, is the world's

largest fertiliser cooperative federation based in India which is registered as a

Multistate Cooperative Society. IFFCO has 40,000 member cooperatives.

In1993, IFFCO had drawn up a major expansion programme of all the

four plants under overall aegis of IFFCO VISION 2000 . The expansion projects at

Aonla, Kalol, Phulpur and Kandla have been completed on schedule. Thus all the

projects conceived as part of Vision 2000 have been realized without time or cost

overruns. All the production units of IFFCO have established a reputation for

excellence and quality. A new growth path has been chalked out to realize newer

dreams and greater heights through Vision 2010 which is presently under

implementation. As part of the new vision, IFFCO has acquired fertiliser unit at

Paradeep in Orissa in September 2005 from M/s Oswal Chemical Fertilizer Limited

(OCFL).

As a result of these expansion projects and acquisition, IFFCO's annual capacity

has been increased to 3.69 million tonnes of Urea and NPK/DAP equivalent to 1.71

million tonnes of P2O5.

IFFCO has 5 production units which are as follows:-

1) Kandla unit

2) Kalol unit

of 76

http://kandlant1/applications/iffcowebr5.nsf/bcbea307bdd28640e52566a4003a8cc1/db9fe3391a17d9b76525709200419522?OpenDocument

http://kandlant1/applications/iffcowebr5.nsf/bcbea307bdd28640e52566a4003a8cc1/8ed84049fd49325865256e3f002040bd?OpenDocument

http://kandlant1/applications/iffcowebr5.nsf/45ac0a051a8cea458025646f0018ff45/a7152f40f3e483e7802564700039e604?OpenDocument

Head Office

Kandla Kalol Aonla

Aonla -1

Aonla-2

Phulpur

Phulpur-1

Phulpur-2

paradeep

3) Aonla

a) Aonla-1

b) Aonlal-2

4) Phulpur

a) Phulpur-1

b) Phulpur-2

5) Paradeep

IFFCO has made strategic investments in several joint ventures.

Godavari Fertilisers and Chemicals Ltd (GFCL) & Indian Potash Ltd (IPL) in India,

Industries Chimiques du Senegal (ICS) in Senegal and Oman India Fertiliser Company

(OMIFCO) in Oman are important fertiliser joint ventures. Indo Egyptian Fertiliser Co

of 76

(IEFC) in Egypt is under implementation. As part of strategic diversification, IFFCO

has entered into several key sectors. IFFCO-Tokio General Insurance Ltd (ITGI) is a

foray into general insurance sector. Through ITGI, IFFCO has formulated new

services of benefit to farmers. 'Sankat Haran BimaYojana' provides free insurance

cover to farmers along with each bag of IFFCO fertiliser purchased. To take the

benefits of emerging concepts like agricultural commodity trading, IFFCO has taken

equity in National Commodity and Derivative Exchange (NCDEX) and National

Collateral Management Services Ltd (NCMSL). IFFCO Chattisgarh Power Ltd (ICPL)

which is under implementation is yet another foray to move into core area of power.

IFFCO is also behind several other companies with the sole intention of benefiting

farmers.

The distribution of IFFCO's fertiliser is undertaken through over 39862 co-

operative societies. The entire activities of Distribution, Sales and Promotion are co-

coordinated by Marketing Central Office (MKCO) at New Delhi assisted by the

Marketing officesin the field. In addition, essential agro-inputs for crop production

are made available to the farmers through a chain of 158 Farmers Service Centre

(FSC). IFFCO has promoted several institutions and organizations to work for the

welfare of farmers, strengthening cooperative movement, improves Indian

agriculture. Indian Farm Forestry Development Cooperative Ltd (IFFDC), Cooperative

Rural Development Trust (CORDET), IFFCO Foundation, KisanSewa Trust belongs to

this category. An

ambitious project 'ICT Initiatives for Farmers and Cooperatives' is launched

to promote e-culture in rural India. IFFCO obsessively nurtures its relations with

farmers and undertakes a large number of agricultural extension activities for their

benefit every year. of 76

At IFFCO, the thirst for ever improving the services to farmers and

member co-operatives is insatiable, commitment to quality is insurmountable and

harnessing of mother earths' bounty to drive hunger away from India in an

ecologically sustainable manner is the prime mission. All that IFFCO cherishes in

exchange is an everlasting smile on the face of Indian Farmer who forms the

moving spirit behind this mission.

IFFCO, to day, is a leading player in India's fertiliser industry and is

making substantial contribution to the efforts of Indian Government to increase

food grain production in the country.

VISION:-

To augment the incremental incomes of farmers by helping them to increase

their crop productivity through balanced use of energy efficient fertilizers, maintain

the environmental health and to make cooperative societies economically &

democratically strong for professionalized services to the farming community to

ensure an empowered rural India.

MISSON:-

To make plants energy efficient and continually review various scheme to

converse an energy.

Commitment to health, safety, environment and forestry development to

enrich the quality of community life.

Commitment to social responsibility to strong social fabric. of 76

To provide to farmers high quality fertilizer in right time and in adequate

quantity with an objective to increase crop productivity

To ensure growth in core and non-core sector.

Foster a culture of trust, openess and mutual concern to make working a

stimulating and challenging experience for stakeholders.

To acquire, assimilate and adopt reliable, efficient and cost effective

technologies.

Sourcing raw materials fo production of phosphatic fertiliser at economical

cost entering in to joint ventures outsideIndia.

Type Cooperative

Founded 3 November 1967

HeadquartersIFFCO Sadan C-1, District Centre, Saket

Place, New Delhi-110017, India

Area served India

Key peopleNatwarlal Pitambardas Patel, Chairman

Dr. Udai Shanker Awasthi, CEO

Products Fertilizers

of 76

http://en.wikipedia.org/wiki/Fertilizer

http://en.wikipedia.org/wiki/India

http://en.wikipedia.org/wiki/India

http://en.wikipedia.org/wiki/Cooperative

http://en.wikipedia.org/wiki/Types_of_business_entity

Revenue 2384.97 crore (2012–13)

Net income 728.72 crore (2012–13)

Website www.iffco.in

Production and sales:-

During the year 2012–13 IFFCO produced 79,02,000

tonnes of fertiliser material; registering overall capacity utilisation of 99.2%

percent for nitrogenous(N) and 75% per cent for phosphate fertiliser. Plant

productivity during the year stood at 1671 tonnes/person. IFFCO achieved sales of

100.54 lakh tonne of fertiliser.

Financial performance :-

The Sale turn over of the society has was Rs 21673 crore during

2012-2013 as against Rs 25599 crore in the previous year. The reduction in sale

due to the lower production and imports was a strategic decision in view of

erratic mansoon and decline in fertiliser demand.The performance is even more

satisfying when viewed in the light of challenging business environment in the

fertiliser industry.

Diversification and joint ventures :-

Indian Potash Limited In India

of 76

http://en.wikipedia.org/w/index.php?title=Indian_Potash_Limited&action=edit&redlink=1

http://www.iffco.in/

http://en.wikipedia.org/wiki/Net_income

http://en.wikipedia.org/wiki/Indian_rupee

http://en.wikipedia.org/wiki/Indian_rupee

Industries Chimiques du Senegal (ICS) in Senegal

Oman India Fertiliser Company (OMIFCO) in Oman

Indo Egyptian Fertiliser Company (IEFCO) in Egypt,

Jordan India Fertiliser Company in Jordan

IFFCO-Tokio General Insurance (ITGI)

Equity in National Commodity and Derivatives Exchange (NCDEX) and

National Collateral Management Services Limited

IFFCO Chattisgarh Power Limited

IFFCO Kisan Sanchar Ltd (IKSL)

KISAN Special Economic Zone (IKSEZ) at Nellore in Andhra Pradesh.

In February 2010, it was announced that IFFCO had entered into a joint

venture partnership with GrowMax Agri Corp, a subsidiary of Americas

Petrogas Inc.

Corporate social responsibility:-

Indian Farm Forestry Development Cooperative Ltd (IFFDC),

Cooperative Rural Development Trust (CORDET),

IFFCO Foundation

Kisan Sewa Trust

INTRODUCTION OF IFFCO-PARADEEP

of 76

http://en.wikipedia.org/w/index.php?title=Kisan_Sewa_Trust&action=edit&redlink=1

http://en.wikipedia.org/w/index.php?title=IFFCO_Foundation&action=edit&redlink=1

http://en.wikipedia.org/w/index.php?title=Cooperative_Rural_Development_Trust&action=edit&redlink=1

http://en.wikipedia.org/w/index.php?title=Indian_Farm_Forestry_Development_Cooperative_Ltd&action=edit&redlink=1

http://en.wikipedia.org/wiki/GrowMax_Agri_Corp

http://en.wikipedia.org/w/index.php?title=IKSEZ&action=edit&redlink=1

http://en.wikipedia.org/w/index.php?title=KISAN_Special_Economic_Zone&action=edit&redlink=1

http://en.wikipedia.org/w/index.php?title=IFFCO_Chattisgarh_Power_Limited&action=edit&redlink=1

http://en.wikipedia.org/w/index.php?title=National_Collateral_Management_Services_Limited&action=edit&redlink=1

http://en.wikipedia.org/wiki/National_Commodity_and_Derivatives_Exchange

http://en.wikipedia.org/w/index.php?title=IFFCO-Tokio_General_Insurance&action=edit&redlink=1

http://en.wikipedia.org/w/index.php?title=Jordan_India_Fertiliser_Company&action=edit&redlink=1

http://en.wikipedia.org/wiki/Egypt

http://en.wikipedia.org/w/index.php?title=Indo_Egyptian_Fertiliser_Company&action=edit&redlink=1

http://en.wikipedia.org/wiki/Oman

http://en.wikipedia.org/w/index.php?title=Oman_India_Fertiliser_Company&action=edit&redlink=1

http://en.wikipedia.org/wiki/Senegal

http://en.wikipedia.org/w/index.php?title=Industries_Chimiques_du_Senegal&action=edit&redlink=1

PARADEEP Unit – Location

State Odisha, India

State Capital Bhubaneswar

District Jagatsinghpur

Nearest Airport Bhubaneswar Airport

Railway Station Paradeep station ( 12 Km from plant )

Road Adjacent to Paradeep Port Trust

on National

Highway NH-5 ,

Temperature ( o C ) 40 (Max.) in summer to 10 (Min.) in winter.

of 76

Rainfall (mm):- Average

Longitude :- 86°39'42"E

Latitude :- 20°18'36"N

Address :- IFFCO -ParadeepUnit,

Village- Musadia,

P.O- Paradeep, Dist – Jagatsinghpur,

Pin-754141 Odisha, INDIA

Phones :-

Voice:-

06722-228201 to 07

+919937294619

FAX :-

Website:-

E-Mail:-

06722-224112 (ED's Office),

224113 (ED's Residence)

06722-224131(F&A),228174 (Materials)

228160 (EPBX)

www.Iffco.In / www.iffco.org

[email protected]

IFFCO has acquired fertiliser unit at Paradeep in Orissa in September 2005 from

M/s Oswal Chemical Fertilizer Limited (OCFL). In paradeep have a 3 production

plant sulfuric acid plant (SAP), phosphoric acid plant (pap),NPK plant, T and G,

boiler, power plant. IFFCO PARADEEP has many explanation of plant after

acquiring.

of 76

http://kandlant1/applications/iffcowebr5.nsf/bcbea307bdd28640e52566a4003a8cc1/db9fe3391a17d9b76525709200419522?OpenDocument

mailto:[email protected]

http://www.iffco.org/

http://www.Iffco.In/

ACHIEVEMENTS of IFFCO Paradeep Unit: -

Confederation Of Indian Industries (CII) Awards -2012

Best Importer Award From Paradeep Port Trust (PPT) - 2012-13

National Energy Management Award – 2011

Awards From Indian National Suggestion Schemes Association (INSSAN)

FAI Awards - 2012

13th Annual Greentech Environment Award

Krushak Bandhu Award - 2012

IFFCO Paradeep Unit Has Won " Kalinga Csr Award 2011"

FAI Technical Innovation Award - 2011

National Award For Excellence In Water Management - 2011

Greentech Environment Award

IFFCO Paradeep Unit Bags Prestigious FAI Awards

of 76

http://www.iffco.nic.in/ifc/web.nsf/vwleftlinks/ProductionUnits?OpenDocument&ParadeepFAIAward

http://www.iffco.nic.in/ifc/web.nsf/vwleftlinks/ProductionUnits?OpenDocument&GreentechAward

http://www.iffco.nic.in/ifc/web.nsf/vwleftlinks/ProductionUnits?OpenDocument&ParadeepWaterAward

http://www.iffco.nic.in/ifc/web.nsf/vwleftlinks/ProductionUnits?OpenDocument&PaFAIAward

http://www.iffco.nic.in/ifc/web.nsf/vwleftlinks/ProductionUnits?OpenDocument&CSRAward

http://www.iffco.nic.in/ifc/web.nsf/vwleftlinks/ProductionUnits?OpenDocument&OKSAward

http://www.iffco.nic.in/ifc/web.nsf/vwleftlinks/ProductionUnits?OpenDocument&AGEAward

http://www.iffco.nic.in/ifc/web.nsf/vwleftlinks/ProductionUnits?OpenDocument&FAIAwardpara

http://www.iffco.nic.in/ifc/web.nsf/vwleftlinks/ProductionUnits?OpenDocument&ParaAwardINSSAN

http://www.iffco.nic.in/ifc/web.nsf/vwleftlinks/ProductionUnits?OpenDocument&ParaAwardsNEMA

http://www.iffco.nic.in/ifc/web.nsf/vwleftlinks/ProductionUnits?OpenDocument&ParadeepAwardPPT

http://www.iffco.nic.in/ifc/web.nsf/vwleftlinks/ProductionUnits?OpenDocument&ParaAwardCII

CHAPTER 4

DATA ANALYSIS

INDIAN FARMERS FERTILISER COOPERATIVE LIMITED

Proforma of Preparation of capital budgeting in IFFCO (Year wise):-

of 76

PARADEEP UNITCAPITAL BUDGET 2011-

2012BUDGET

CODE

ITE

MS

COST

ESTIMA

TE Rs'

COMMITMENT EXPENDITURE

During

2011-

During

2012-

During

2013-

During

2011-

During

2012-

During

2013-N.I Ener

gy

xx xx xx xx xx xx xxN.II Ope

rati

xx xx xx xx xx xx xxN.III Reli

abili

xx xx xx xx xx xx xxN.IV Safe

ty

xx xx xx xx xx xx xxN.V Repl

ace

xx xx xx xx xx xx xxN.VI stat

uota

xx xx xx xx xx xx xxN.VII Min

or

xx xx xx xx xx xx xxN.VIII Insp

ecti

xx xx xx xx xx xx xxN.IX Res

earc

xx xx xx xx xx xx xxN.X Ad

min

xx xx xx xx xx xx xxN.XI Asso

ciat

xx xx xx xx xx xx xxN.XII com

pute

xx xx xx xx xx xx xxN.XIII Secu

rity

xx xx xx xx xx xx xx Tota

l

xxx xxx xxx xxx xxx xxx xxx

CAPITAL BUDGET CONTROL

of 76

After receiving the copy of approved Capital Budget, Finance & Accounts

Department intimate all Departments/Sections about approval of items related to

their area. Budget for each & every item is entered in the Budget Module meant

for Budget Control in Financial Accounting Systems.

After receipt of intimation of sanctioned budget, indenter raise MPR/WOI

(Material Purchase Requisition / work of indent) and send it to F & A Department

through Materials Department for Budget Availability Certification.

F & A Department certify Budget Availability after scrutiny of MPR/WOI

comparing the same with Budget sanctioned & sent it to materials Department for

further action for procurement.

Once material Department completes all formalities for placing of order on

supplier/contractor, proposal sent to F&A for entering the landed cost in Budget

Module. F&A dept is responsible to assure that the material is not

procured/contract is not placed beyond the sanctioned budget.

To control Capital Budget commitment, monthly meetings

are held under the Chairmanship of Unit Head with all HODs / SHs and measures

are taken to utilize the budget timely. For this monthly commitment/expenditure

report is prepared by F & A Dept & is circulated to all HODs/SHS.

To appraise Head office about the progress of capital Budget, Quarterly report for

high value items are sent to Head Office in prescribed proformas.

of 76

Mainly in IFFCO, they are using in 3 types of budgeting

1) Capital budgeting

2) Revenue budgeting

3) Administrative HR Budget

I. Traditional Methods:

(1) Pay-back Period Method :

Pay-back period is also termed as "Pay-out period" or Pay-off

period. Payout Period Method is one of the most popular and widely recognized

traditional method of evaluating investment proposals. It is defined as the number

of years required to recover the initial investment in full with the help of the steam

of annual cash flows generated by the project.

Calculation of Pay-back Period:-

Pay-back period can be calculated into the following two different

situations :

(a) In the case of constant annual cash inflows.

(b) In the case of uneven or unequal cash inflows.

(a) In the case of constant annual cash inflows :

If the project generates constant cash flow the

of 76

Pay-back period can be computed by dividing cash outlays (original investment) by

annual cash inflows.

The following formula can be used to ascertain pay-back period :

Pay back period = Cash outlays(Initial Investment)/Annual cash Inflow

Example :

A project requires initial investment of Rs. 40,000 and it will generate an annual

cash inflows of Rs. 10,000 for 6 years. You are required to find out pay-back period.

Solution:

Calculation of Pay-back period :-

= 4 Yrs

Pay-back period is 4 years, i.e., the investment is fully recovered in 4 years

(b) In the case of Uneven or Unequal Cash Inflows:

In the case of uneven or unequal cash inflows, the Pay-back

period is determined with the help of cumulative cash inflow. It can be calculated

by adding up the cash inflows until the total is equal to the initial investment.

of 76

Pay-back Period

=

Cash outlays (Initial

Investment)

Annual cash Inflow=

40000

10000

Calculation of Pay back Period method

IFFCO ltd producing article by manual labour & considering to replace it by a new

machine, prepare a statement of profitability showing the pay back period.

cost of capital 10%

Estimation for Replacement of Acid & Slurry Services pumps in PAP

RS 19500000

Cost of dismantling, erection & commissioning of Acid & Slurry Service pumps

in PAP Rs 500000

Annual saving Rs 4000000/-

Stdown time of equipment @ 10 days/Annum maintenance & repairing

job Rs 500000

Calculation of Annual Cash Inflow

Cost for Revamping of Replacement of Acid & slurry service

pumps in PAP

financial

implication

Amout in Lakh) Description

1 Internal estimation for replacement of Acid & slurry service

pumps in PAP

195

2 cost for dismantling, erection & commissioning of Acid &

slurry service pumps in PAP

5

3 Total cost in Rs 200

Annual saving aginst replacement of Acid & Slurry service

pumps in PAP

4 Annual saving aginst maintenance & Repairing job 5 of 76

5 Annual saving against down time eqipments @ 10

days/Annum

40

6 Net annual savings 45

7 Pay back period in years = Capital cost of the project / Net

annual savings

4.444

Accept or Reject Criterion:-

Investment decisions based on pay-back period used by many firms to accept or

reject an investment proposal. Among the mutually exclusive or alternative

projects whose pay-back periods are lower than the cut off period/ estimated life

of the project. The project would be accepted. if not it would be rejected.

Advantages of Pay-back Period Method:-

(1) It is an important guide to investment policy.

(2) It is simple to understand and easy to calculate.

(3) It facilitates to determine the liquidity and solvency of a firm.

(4) It helps to measure the profitable internal investment opportunities.

(5) It enables the firm to select an investment which yields a quick return on cash

funds.

(6) It used as a method of ranking competitive projects.

(7) It ensures reduction of cost of capital expenditure.

Disadvantages of Pay-back Period Method:

(1) It does not measure the profitability of a project.

of 76

(2) It does not value projects of different economic lives.

(3) This method does not consider income beyond the pay-back period.

(4) It does not give proper weight to timing of cash flows.

(5) It does not indicate how to maximize value and ignores the relative profitability

of the project.

(6) It does not consider cost of capital and interest factor which are very important

factors in taking sound investment decisions.

2. Improvement of Traditional Approach to Pay-back Period

The demerits of the pay-back period method may be eliminated in

the following ways:

(a) Post Pay-back Profitability Method:

One of the limitations of the pay-back period method is that it ignores

the post pay-back returns of project. To rectify the defect, post pay-back period

method considers the amount of profits earned after the pay-back period. This

method is also known as Surplus Life Over Payback Method.

According to this method, pay-back profitability is calculated by

annual cash inflows in each of the year, after the pay-back period. This can be

expressed in percentage of investment.

Post Pay-back Profitability = Annual Cash Inflow x (Estimated Life - Pay-back

Period)

The post pay-back profitability index can be determined by the

of 76

following equation :

Post pay-back profitability index =Post pay back profit

*100Initial Investments

(c) Discounted Pay-back Method:

This method is designed to overcome the limitation of the

payback period method. When savings are not levelled, it is better to calculate the

pay-back period by taking into consideration the present value of cash inflows.

Discounted pay-back method helps to measure the present value of all cash

inflows and outflows at an appropriate discount rate. The time period at which the

cumulated present value of cash inflows equals the present value of cash outflows

is known as discounted pay-back period.

Example:-

IFFCO ltd producing article by manual labour & considering to replace it by a new

machine, prepare a statement of profitability showing the pay back period.

cost of capital 10%

Estimation for Replacement of Acid & Slurry Services pumps in PAP

Rs 19500000

Cost of dismantling, erection & commissioning of Acid & Slurry Service pumps

in PAP Rs 500000

of 76

Annual saving Rs 3500000/-

Stdown time of equipment @ 10 days/Annum maintenance & repairing job

Rs 500000

year

Annual

Cash

inflow

Discounting

Fact. 10%

Present

vsalue of

cash inflow

Cummulative

Cashflow

Cash

outflow 0 -200 1 -200

cash

inflow 1 35

0.90909090

9

31.8181818

2 31.81818182

cash

inflow 2 35

0.82644628

1

28.9256198

3 60.74380165

cash

inflow 3 35

0.75131480

1

26.2960180

3 87.03981968

cash

inflow 4 35

0.68301345

5

23.9054709

4 110.9452906

cash

inflow 5 35

0.62092132

3

21.7322463

1 132.6775369

cash

inflow 6 35 0.56447393

19.7565875

5 152.4341245

cash

inflow 7 35

0.51315811

8

17.9605341

4 170.3946586

cash

inflow 8 35 0.46650738

16.3277583

1 186.7224169

cash 9 35 0.42409761 14.8434166 201.5658336 of 76

inflow 8 4

cash

inflow 10 35

0.38554328

9

13.4940151

3 215.0598487

cash

inflow 11 35

0.35049389

9

12.2672864

8 227.3271352

cash

inflow 12 35

0.31863081

8

11.1520786

2 238.4792138

238.479213

8

Pay back period =8yr+(200-186)

14.84

=

8.89450989

6

(c) Reciprocal Pay-back Period Method:

This methods helps to measure the expected rate of return of income

generated by a project. Reciprocal pay-back period method is a close

approximation of the Time Adjusted Rate of Return, if the earnings are levelled

and the estimated life of the project is somewhat more than twice the pay-back

period. This can be calculated by the following formula:

1

of 76

Reciprocal pay back period = *100pay back period

In previouse example,

Pay back period = 8.89451

Reciprocal pay back period =1

*100pay back period

=1

*1008.894509896

= 0.1124289 *100

= 11.24289041

3. Average Rate of Return Method (ARR) or Accounting Rate of Return Method:

Average Rate of Return Method is also termed as

Accounting Rate of Return Method. This method focuses on the average net

income generated in a project in relation to the project's average investment

outlay. The accounting rate of return is based on accounting profits.This method

involves accounting profits not cash flows and is similar to the performance

measure of return on capital employed. The average rate of return. can be

determined by the following equation;

of 76

Example:-

A project costing Rs10lacs. EBITD(Earning before Depriciation, Interest ,& Taxes)

during the last five years is expected to be Rs250000, Rs300000, Rs350000,

Rs400000, & Rs 500000.

Assume 33.99% tax & 30% depriciation on WDV method.

Computation of project ARR

Project cost

100000

0

Particulars Yrs1 Yrs2 Yrs3 Yrs4 Yrs5

Averag

e

EBITD 250000 300000

35000

0

40000

0

50000

0 360000

Less:Depriciation30

% 300000 210000

14700

0

10290

0 72030 166386

EBIT -50000 90000

20300

0

29710

0

42797

0 193614

of 76

ARR=

AverageEBIT(1-

t) *100

Average Investment

ARR= Average income X 100

Average investment

Less: Tax @33.99% 13596 69000

10098

4

14546

7 65809

127805

PAT-50000 76404

13400

0

19611

6

28250

3 127805

Boook value of

investment:

Begning

100000

0 700000

49000

0

34300

0

24010

0

End 700000 490000

34300

0

24010

0

16807

0

Total

170000

0

119000

0

83300

0

58310

0

40817

0

Average 850000 595000

41650

0

29155

0

20408

5 471427

ARR=

AverageEBIT(1-

t) *100

Average Investment

=127805

*100471427

= 27.11%

(NOTE: Unabsorbed depriciation of Yrs1 is carried forward & set-off against profit of Yrs2.

of 76

Tax is calculate on the balance of profit.)

Advantages :-

1. It considers all the years involved in the life of a project rather than only pay-

back years.

2. It applies accounting profit as a criterion of measurement and not cash flow.

3. It Is Easy To Calculate.

4. The Percentage Return Is More Familiar To The Executives.

Disadvantages:

(1) It applies profit as a measure of yardstick not cash flow.

(2) The time value of money is ignored in this method.

(3) Yearly profit determination may be a difficult task.

II. Discounted Cash Flow Method (or) Time Adjusted Method:

Discount cash flow is a method of capital investment appraisal

which takes into account both the overall profitability of projects and also the

timing of return. Discounted cash flow method helps to measure the cash inflow

and outflow of a project as if they occurred at a single point in time so that they

can be compared in an appropriate way. This method recognizes that the use of

money has a cost, i.e., interest foregone.

In this method risk can be incorporated into Discounted Cash Flow

computations by adjusting the discount rate or cut off rate.

of 76

Disadvantages:

The following are some of the limitations of Discounted Pay-back Period Method:

(1)There may be difficulty in accurately establishing rates of interest over the cash

flow period.

(2) Lack of adequate expertise in order to properly apply the techniques and

interpret results.

(3) These techniques are based on cash flows, whereas reported earnings are

based on profits. The inclusion of Discounted Cash Flow Analysis may cause

projected earnings to fluctuate considerably and thus have an adverse on share

prices.

1. Net Present Value Method (NPV) :

This is one of the Discounted Cash Flow technique which explicitly

recognizes the time value of money. In this method all cash inflows and outflows

are converted into present value (i.e., value at the present time) applying an

appropriate rate of interest (usually cost of capital).

In other words, Net Present Value Method discount inflows

and outflows to their present value at the appropriate cost of capital and set the

present value of cash inflow against the present value of outflow to calculate Net

Present Value. Thus, the Net Present Value is obtained by subtracting the present

value of cash outflows from the present value of cash inflows.

Net Present Value =

Present value of cash inflow - Present value of cash out flow

of 76

Example:

Calculation of Net Present

Value

Acid & Slurry Service Pumps valueRs' 200 lacs

Annual Cash inflow 40 lacs

Estimated life 19 yrs

Cost of capital 10%

Tax 30%

Rs' Lacs

Year

Rs in

lakh Depreciation WDV PBT Tax PAT

Cash

Inflow

discounting

10%

Present

value

(A) (B) (C) (D)=(c)/19 (E)=(c)-(D)

(F)=(c)-

(D)

(G)=(F)*30

%

(H)=(F)-

(G) (I)=(H)+(D) (J) (K)=(I)*(J)

Initial out

flow 0 -200 10.5263 200 1.000 -200.000

Cash Inflow 1 40 10.5263 189.474 29.474 8.842 20.632 31.158 0.909 28.325

Cash Inflow 2 40 10.5263 178.947 29.474 8.842 20.632 31.158 0.826 25.750

Cash Inflow 3 40 10.5263 168.421 29.474 8.842 20.632 31.158 0.751 23.409

Cash Inflow 4 40 10.5263 157.895 29.474 8.842 20.632 31.158 0.683 21.281

Cash Inflow 5 40 10.5263 147.368 29.474 8.842 20.632 31.158 0.621 19.347

Cash Inflow 6 40 10.5263 136.842 29.474 8.842 20.632 31.158 0.564 17.588

Cash Inflow 7 40 10.5263 126.316 29.474 8.842 20.632 31.158 0.513 15.989

Cash Inflow 8 40 10.5263 115.789 29.474 8.842 20.632 31.158 0.467 14.535

Cash Inflow 9 40 10.5263 105.263 29.474 8.842 20.632 31.158 0.424 13.214

Cash Inflow 10 40 10.5263 94.737 29.474 8.842 20.632 31.158 0.386 12.013

Cash Inflow 11 40 10.5263 84.211 29.474 8.842 20.632 31.158 0.350 10.921

of 76

Cash Inflow 12 40 10.5263 73.684 29.474 8.842 20.632 31.158 0.319 9.928

Cash Inflow 13 40 10.5263 63.158 29.474 8.842 20.632 31.158 0.290 9.025

Cash Inflow 14 40 10.5263 52.632 29.474 8.842 20.632 31.158 0.263 8.205

Cash Inflow 15 40 10.5263 42.105 29.474 8.842 20.632 31.158 0.239 7.459

Cash Inflow 16 40 10.5263 31.579 29.474 8.842 20.632 31.158 0.218 6.781

Cash Inflow 17 40 10.5263 21.053 29.474 8.842 20.632 31.158 0.198 6.164

Cash Inflow 18 40 10.5263 10.526 29.474 8.842 20.632 31.158 0.180 5.604

Cash Inflow 19 40 10.5263 0.000 29.474 8.842 20.632 31.158 0.164 5.095

NPV 60.633

Rules of Acceptance:-

If the rate of return from a project is greater than the return

from an equivalent risk investment in securities traded in the financial market, the

Net Present Value will be positive. Alternatively, if the rate of return is lower, the

Net Present Value will be negative.

In other words, if a project has a positive Net Present Value it is

considered to be viable because the present value of the inflows exceeds the

present value of the outflows. If the projects are to be ranked or the decision is to

select one or another. the project with the greatest Net Present Value should be

chosen.

Symbolically the accept or reject criterion can be expressed as follows:

of 76

Where

NPV > Zero Accept the proposal

NPV < Zero Reject the Proposal

Advantages of Net Present Value Method:-

(1) It recognizes the time value of money and is thus scientific in its approach.

(2) All the cash flows spreadover the entire life of the project are used for

calculations.

(3) It is consistent with the objectives of maximizing the welfare of the owners as it

depicts the positive or otherwise present value of the proposals.

Disadvantages:

(1) This method is comparatively difficult to understand or use.

(2) When the projects in consideration involve different amounts of

investment, the Net Present Value Method may not give satisfactory results.

2. Internal Rate of Return Method (IRR) :-

Internal Rate of Return Method is also called as "Time Adjusted

Rate of Return Method." It is defined as the rate which equates the present value

of each cash inflows with the present value of cash outflows of an investment. In

other words, it is the rate at which the net present value of the investment is zero.

Horngren and Foster define “Internal Rate of Return as the

rate of interest at which the present value of expected cash inflows from a project

equals the present value of expected cash outflows of the project”.

of 76

The Internal Rate of Return can be found out by Trial and Error Method.

First, compute the present value of the cash flow from an investment, using an

arbitrarily selected interest rate, for example 10%. Then compare the present

value so obtained with the investment cost.

If the present value is higher than the cost of capital, try a higher interest

rate and go through the procedure again. On the other

hand if the calculated present value of the expected cash inflows is lower than the

present value of cash outflows, a lower rate should be tried. This process will be

repeated until and unless the Net Present Value becomes zero. The interest rate

that brings about this equality is defined as the Internal Rate of Return.

Alternatively, the internal rate can be obtained by Interpolation

Method when we come across 2 rates. One with positive Net Present Value and

other with negative Net Present Value. The IRR is considered as the highest rate of

interest which a business is able to pay on the funds borrowed to finance the

project out of cash inflows generated by the project.

The Interpolation formula can be used to measure the Internal Rate of Return

as follows :

NPV lower rate IRR=lower interest rate+ X Difference in rate

Total difference

Calculation of Internal rate of return (IRR).

Project cost RS 110000

of 76

Cash inflows :

Yrs 1 Rs60000

Yrs 2 Rs 20000

Yrs 3 Rs 10000

Yrs 4 Rs 50000

Solution:

Internal Rate of Return will be calculated by trail & error method. The cash flow is not uniform.

To have an approximate idea about such rate, we can calculate the "factor". It represent the

Same relationship of investment & cash inflows in case of pay back calculation.

F = I/c

F = Factor

I =origionl investment

C= Average cash inflow per annum

Factor for the project=110000

35000

= 3.14

The Factor will be located fropm the table "pv" of "Annuity of Rs. 1".

The approximate value of 3.14 is located against 10% in 4

years.

we will now apply 10% & 12% to get (+) NPV & (-) NPV

of 76

Year cash Inflows P.V @ 10% DCFAT

P>V@

12% DCFAT

P>V@

11.27% DCFAT

(Rs) (Rs) (Rs) (Rs)

1 60000 0.9091 54545.45 0.8929 53571.43 0.8989 53933.55

2 20000 0.8264 16528.93 0.7972 15943.88 0.8080 16160.16

3 10000 0.7513 7513.15 0.7118 7117.80 0.7263 7263.12

4 50000 0.6830 34150.67 0.6355 31775.90 0.6529 32643.83

P.V of

Inflow 112738.20 108409.01 110000.67

Less: Initial

investment 110000.00 110000.00 110000.00

NPV 2738.20 -1590.99 0.67

Calculations of Internal rate of return

Forward method: Taking10%

IRR=lower interest

rate+

NPV lower rate * Difference in rate

Total difference

= 10% +

2738.20094 (12%-

10%)

4329.18794

= 10% + 2738.201 * 2%

of 76

4329.188

= 10% + 1.27%

= 11.27%

Backward method: taking 12%

NPV higher rate *

Difference

in rateIRR=

Higher rate of interest

- Total difference

= 12% -1590.987

* 2%4329.188

= 12% - 0.73%

= 11.27%

Evaluation:-

A popular discounted cash flow method, the internal rate

of return criterion has several virtues :

(1) It takes into account the time value of money.

(2) It considers the cash flows over the entire life of the project.

(3) It makes more meaningful and acceptable to users because it satisfies

them in terms of the rate of return on capital.

Limitations:-

(1) The internal rate of return may not be uniquely defined.

(2) The IRR is difficult to understand and involves complicated

computational problems.

of 76

(3) The internal rate of return figure cannot distinguish between

lending and borrowings and hence high internal rate of return need

not necessarily be a desirable feature.

3.Profitability Index Method:-

Profitability Index is also known as Benefit Cost Ratio.

It gives the present value of future benefits, computed at the required rate of

return on the initial investment. Profitability Index may either be Gross

Profitability Index or Net Profitability Index. Net Profitability Index is the

Gross Profitability Index minus one. The Profitability Index can be calculated

by the following equation:

profitability index =

Present value of cash inflow

Initial cash outlay / P.V of cash

outflow

If, P.I>1 Project is accepted

P.I <1 Project is rejected

(The P.I signifies present value of inflow per rupee of outflow. It helps to coparat

the projects involving different amount of initial investment).

In this method, a project with a PI greater than 1 is accepted, but a

of 76

project is rejected when its PI is less than 1. Note that the PI method is closely

related to the NPV approach. In fact, if the net present value of a project is positive,

the PI will be greater than 1. On the other hand, if the net present value is negative,

the project will have a PI of less than 1. The same conclusion is reached, therefore,

whether the net present value or the PI is used. In other words, if the present value

of cash flows exceeds the initial investment, there is a positive net present value

and PI greater than 1, indicating that the project is acceptable.

Example:-

A project is in the consideration of a firm.

The initial outlay of the project is Rs. 1000lac’ and it is expected

to generate cash inflows of Rs. 4,00lac’s, Rs. 3,00lac’s, Rs. 5,00 lac’s, and

Rs. 2,00lac’s, in four years to follow.

Assuming 10% rate of discount, calculate the Net Present Value and Benefit

Cost Ratio of the project.

Calculation of Profitability Index

Initial outlay of the project 1000lacs

Rs lacs

Y

ear Cash inflow

Discouted

factor 10%

present cash

flow

1 400 0.9091 363.6364

2 300 0.8264 247.9339

3 500 0.7513 375.6574

4 200 0.6830 136.6027

of 76

Net Present value of

cash inflow 1123.8303

Net present value= Present value of cash inflows- values of cash out flow

Net present

value=

Present value of cash inflows- values of cash

out flow

1123.830339-1000= 123.830339

Gross profitability index =

Present value of

cash inflow

Initial cash outlay

=1123.830339

1000

=1.12383

Net profitability Index = Gross profitability index - 1.0

= 1.12383 - 1.0

of 76

= 0.12383

Rule of Acceptance:

As per the Benefit Cost Ratio or Profitability Index a project with

Profitability Index greater than one should be accepted as it will have Positive

Net Present Value. Likewise if Profitability Index is less than one the project

is not beneficial and should not be accepted.

Advantages of Profitability Index:

(1) It duly recognizes the time value of money.

(2) For calculations when compared with internal rate of return method it

Requires less time.

(3) It helps in ranking the project for investment decisions.

(4) As this method is capable of calculating incremental benefit cost ratio,

it can be used to choose between mutually exclusive projects.

Among all the method IFFCO are mainly using the Pay back period method.

of 76

CHAPTER 5

ANALYSIS &

CONCLUSION

MAJOR FINDINGS of 76

FINDINGS:

A good atmosphere to work at & with employees of IFFCO.

Safety level is at high point.

A well Future Set Plan MISSION 2015.

A Strong Team of Directors from all over India.

Great Support of Government of India & Fertilizer Ministry.

A Strong Financial States.

A good training to employees.

Sales are main source of Income.

Raw Materials Cost consists of 90% of Total Cost. So Change in Raw Materials Price will

strongly affect the Total Cost.

As all most all the Raw Materials are imported, Change in Foreign currency, USD may impact

a lot to the Cost of Production.

For Continuity in Production there should be continuous Raw Material supply. So any

deficiency in supply of Raw Materials will affect the Production.

Whatever Project is undertaken at IFFCO paradeep up to date all Projects duration and

Cost were achieved within the specified limit or budget figure.

Continuously from last 15 Years IFFCO is providing the Dividend at the rate of 20% per Year.

Punctuality in Timings and Management work is excellent at IFFCO.

A well equipped System facility providing the LAN and VAN access for speedy communication.

Environment control policy adopted by ISO - 14001 Certified.

Best Employees welfare facility (Residence for all the employees at IFFCO Township).

Every Employees Work is interlinked.

Year at IFFCO Paradeep. No Interest is paid to vendor and same amount is being lying in the

of 76

society current Account..

Great Support of Government of India & Fertilizer Ministry.

A team work from Top Management to Lower Grade Staff to achieve the targets.

A Chain (H.O.) between Management Plants (Kalol, Kandla, Aonla & Phulpur, Paradeep &

Marketing office) all over India.

IFFCO seems a good pay master for employees as well as suppliers.

Work Load on employees are equally divided. No body is loaded with too much

Work or too less work.

of 76

SUGGESTION & CONCLUSIONSUGGESTIONS:-.

Media Support should be taken to change the minds of farmers to use fertilizer in their farms.

Employees should motivated to invest in IFFCO itself during their service & even after

Retirement in FDR scheme of IFFCO at H.O.

If employees agree at the time of retirement to convert his PF, Gratuity etc. in to FDR & as a

special care Ex-Employees should be paid higher rate of interest on his investment interest to

be paid to Ex-Employees on monthly basis so the fund remain safe in the hand of IFFCO &

Ex-Employees gets its return on monthly basis to pull out his remaining life happily & safely.

IFFCO one of the country’s largest producer of fertilizer in industry fertilizer is situated at

PARADEEP but then also there are many villages in Kachchh only where still Concept of

Scientific fertilizer in farms is not Clear & popular. Still there are many farmers using the

old concept of Cow Dung as the only way of fertilizer in there farms. So proper suggestion

and guidance should be given to change there mind set up.

of 76

CONCLUSIONI have carried out our training period of 45 days in Finance and Account Department

(F&A), IFFCO PARADEEP). During this period we have studied in brief and have taken

overview of the activities of each section of F&A Department at IFFCO PARADEEP. And

after the study I conclude that practices and procedures followed here at par with the

industry standard and comply with legal and regulatory requirements.

During out training we have studied and analyzed IFFCO’s annual report for the financial

year 2006-07 and found that IFFCO is financially very strong due to its large reserves and

has good credit in market, due to its high share of equity.

It has paid 20% dividend which is ever highest by any P.S.U. or co-operative society in India.

Successful realization of VISION 2010 and MISSION 2005 will definitely made the society

to emerge at top position in India. Also this would solve to its objective of being a socially

responsible organization and work for welfare of farmers not only in India but also in

abroad.

IFFCO is also Socially Responsible Organization who dose not only look after the wellbeing

of their employees and share holder only but they also look after the welfare of farmers by many

promotional programmers carried out under the schemes of IFFCO Kisan Sewa Trust and by the

Indian Farm Forestry Development Cooperative(IFFDC).

of 76

RECOMMENDATION

I undersigned, have no experience and my age is too less to valuate any industry giant like

IFFCO. Also the training period of 45 days is too less to understand and analyze the vast functions

procedure and regulatory requirements that needs to be carried out in cash section of finance and

account department of IFFCO paradeep. Yet I have tried my best and declare that the below

mentioned few suggestions that can be better coated than recommendations are no way on attempt

or intention to criticize organization like IFFCO & its management or employees, but only they are

to serve as indicators of level of our understanding of the activities carried out in various sections of

Finance and Account Department of IFFCO paradeep.

The whole process of implementing Capital budgeting is not only a tedious job, but also a

costly affair.

Trend of re-appropriation of budgets is not a healthy task.

of 76

BIBLIOGRAPHY

Books:

Name Author

Financial management I. M. Pandey ,

R.k sharma & Sashi Gupta

Cost Accounting S.P Jain & K.L Narang

Financial management &

international finance

Prasanna Chandra

Research methodology C. R. Kothari

Magazines : Paradeep Baivaba , IFFCO paradeep

Web side : www.iffco.nic.co

Other Company report: capital budget report, Cost benefit analysis report

of 76

http://www.iffco.nic.co/

Capital budgeting project of IFFCo

Documents

Transcript of Capital budgeting project of IFFCo