computer network.doc
-
Upload
bhatiaharryjassi -
Category
Documents
-
view
213 -
download
0
Transcript of computer network.doc
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 1/76
ISO-OSI 7-Layer Network Architecture
This lecture introduces the ISO-OSI layered architecture of Networks. According to the ISOstandards, networks have been divided into 7 layers depending on the complexity of thefucntionality each of these layers provide. The detailed description of each of these layers isgiven in the notes below. We will first list the layers as defined by the standard in theincreasing order of function complexity:
1. Physical Layer2. Data Link Layer
3. Network Layer
4. Transport Layer
5. Session Layer
6. Presentation Layer
7. Application Layer
Physical Layer This layer is the lowest layer in the OSI model. It helps in the transmission of
data between two machines that are communicating through a physical medium,
which can be optical fibres,copper wire or wireless etc. The following are the
main functions of the physical layer:
1. Hardware Specification: The details of the physical cables, networkinterface cards, wireless radios, etc are a part of this layer.
Coaxial Cable Hybrid Cable Wireless Card Network Card
1
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 2/76
2. Encoding and Signalling: How are the bits encoded in the medium isalso decided by this layer. For example, on the coppar wire medium, wecan use differnet voltage levels for a certain time interval to represent '0'and '1'. We may use +5mV for 1nsec to represent '1' and -5mV for 1nsecto represent '0'. All the issues of modulation is dealt with in this layer. eg,
we may use Binary phase shift keying for the representation of '1' and '0'rather than using different volatage levels if we have to transfer in RFwaves.
Binary Phase Shift Keying
3. Data Transmission and Reception: The transfer of each bit of data isthe responsibility of this layer. This layer assures the transmissoin of eachbit with a high probability . The transmission of the bits is not completelyreliable as their is no error correction in this layer.
4. Topology and Network Design: The network design is the integral partof the physical layer. Which part of the network is the router going to beplaced, where the switches will be used, where we will put the hubs, howmany machines is each switch going to handle, what server is going to be
placed where, and many such concerns are to be taken care of by thephysical layer. The variosu kinds of netopologies that we decide to usemay be ring, bus, star or a hybrid of these topologies depending on ourrequirements.
2
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 3/76
Data Link Layer
This layer provides reliable transmission of a packet by using the services of the
physical layer which transmits bits over the medium in an unreliable fashion.
This layer is concerned with :
1. Framing : Breaking input data into frames (typically a few hundred bytes)and caring about the frame boundaries and the size of each frame.
2. Acknowledgment : Sent by the receiving end to inform the source that theframe was received without any error.
3. Sequence Numbering : To acknowledge which frame was received.
4. Error Detection : The frames may be damaged, lost or duplicated leadingto errors.The error control is on link to link basis.
5. Retransmission : The packet is retransmitted if the source fails to receiveacknowledgment.
3
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 4/76
6. Flow Control : Necessary for a fast transmitter to keep pace with a slowreceiver.
Data Link Layer
Network Layer
Its basic functions are routing and congestion control.
Routing: This deals with determining how packets will be routed (transferred)
from source to destination. It can be of three types :
• Static : Routes are based on static tables that are "wired into" the networkand are rarely changed.
• Dynamic : All packets of one application can follow different routesdepending upon the topology of the network, the shortest path and thecurrent network load.
• Semi-Dynamic : A route is chosen at the start of each conversation andthen all the packets of the application follow the same route.
4
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 5/76
Routing
The services provided by the network can be of two types :
• Connection less service: Each packet of an application is treated as anindependent entity. On each packet of the application the destinationaddress is provided and the packet is routed.
• Connection oriented service: Here, first a connection is established andthen all packets of the application follow the same route. To understandthe above concept, we can also draw an analogy from the real life.Connection oriented service is modeled after the telephone system. Allvoice packets go on the same path after the connection is established tillthe connection is hung up. It acts like a tube ; the sender pushes the
objects in at one end and the receiver takes them out in the same order atthe other end. Connection less service is modeled after the postal system.Each letter carries the destination address and is routed independent of allthe others. Here, it is possible that the letter sent first is delayed so thatthe second letter reaches the destination before the first letter.
Congestion Control: A router can be connected to 4-5 networks. If all the
networks send packet at the same time with maximum rate possible then the
router may not be able to handle all the packets and may drop some/all packets.
In this context the dropping of the packets should be minimized and the source
whose packet was dropped should be informed. The control of such congestion is
also a function of the network layer. Other issues related with this layer aretransmitting time, delays, jittering.
5
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 6/76
Internetworking: Internetworks are multiple networks that are connected in
such a way that they act as one large network, connecting multiple office or
department networks. Internetworks are connected by networking hardware
such as routers, switches, and bridges.Internetworking is a solution born of three
networking problems: isolated LANs, duplication of resources, and the lack of acentralized network management system. With connected LANs, companies no
longer have to duplicate programs or resources on each network. This in turn
gives way to managing the network from one central location instead of trying to
manage each separate LAN. We should be able to transmit any packet from one
network to any other network even if they follow different protocols or use
different addressing modes.
Inter-Networking
Network Layer does not guarantee that the packet will reach its intended
destination. There are no reliability guarantees.
Transport LayerIts functions are :
• Multiplexing / Demultiplexing : Normally the transport layer will createdistinct network connection for each transport connection required by thesession layer. The transport layer may either create multiple networkconnections (to improve throughput) or it may multiplex several transportconnections onto the same network connection (because creating andmaintaining networks may be expensive). In the latter case,demultiplexing will be required at the receiving end. A point to note hereis that communication is always carried out between two processes and
not between two machines. This is also known as process-to-processcommunication.
6
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 7/76
• Fragmentation and Re-assembly : The data accepted by the transportlayer from the session layer is split up into smaller units (fragmentation) if needed and then passed to the network layer. Correspondingly, the dataprovided by the network layer to the transport layer on the receiving sideis re-assembled.
Fragmentation Reassembly
• Types of service : The transport layer also decides the type of servicethat should be provided to the session layer. The service may be perfectlyreliable, or may be reliable within certain tolerances or may not be reliableat all. The message may or may not be received in the order in which itwas sent. The decision regarding the type of service to be provided istaken at the time when the connection is established.
• Error Control : If reliable service is provided then error detection anderror recovery operations are also performed. It provides error control
mechanism on end to end basis.
• Flow Control : A fast host cannot keep pace with a slow one. Hence, thisis a mechanism to regulate the flow of information.
• Connection Establishment / Release : The transport layer alsoestablishes and releases the connection across the network. This requiressome sort of naming mechanism so that a process on one machine canindicate with whom it wants to communicate.
References of Images
• http://www.putergeek.com/.../ pci_combo_card_sm.jpg• http://blue.utb.edu/libertad/clipart/pi_wireless_pc_card_b.jpg
7
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 8/76
• http://www.commscope.com/ images/hybrids.jpg hybrid cable
• http://www.cba.nau.edu/facstaff/maris-j/SavedStuff/Images/net_topo.gif
• http://www.ces.net/doc/2003/research/xl-unicast-routing.gif
• http://www.infinitygroup.com/images/internetworking.gif
• http://www.microway.com/.../ data_link_layer.gif
• http://searchnetworking.techtarget.com/WhatIs/images/coaxla.gif
• http://www.df.lth.se/~pkj/thesis_report/img13.gif
• http://www.df.lth.se/~pkj/ thesis_report/img12.gif
• http://www.ifla.org/VI/5/reports/rep3/rep3-2.gif
• http://msp.gsfc.nasa.gov/tdrss/bpsk.gif
CHAPTER 1
INTRODUCTION
8
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 9/76
Capital project planning is the process by which companies allocate funds to
various investment projects designed to ensure profitability and growth.
Evaluation of such projects involves estimating their future benefits to the
company and comparing these with their costs.
In a competitive economy, the economic viability and prosperity of a company
depends upon the effectiveness and adequacy of capital expenditure evaluation
and fixed assets management.
Capital budgeting refers to planning the deployment of available capital for the
purpose of maximizing the long-term profitability of the firm. It is the firm’s
decision to invest its current funds most efficiently in long-term activities in
anticipation of future benefits over a series of years.
In other words, capital budget may be defined as the firm’s decision to invest its
current funds most efficiently in the long term assets in anticipation of an
expected flow of benefits over a series of years. Therefore, it involves a current
outlay or series of outlay of cash resources in return for an anticipated flow of
future benefits. capital budgeting is the process to identify, analysis and select
investment projects, whose returns (cash flows) are expected to extend beyond
9
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 10/76
one year. Firm’s investment decisions would generally a include expansion,
acquisition, modernization, replacement of fixed assets or long-term assets.
From the above definition, we may identify the basic features of capital
budgeting viz., potentially large anticipated benefits, relatively a high degree
risk, and a relatively long-time period between the initial outlay and anticipated
return.
SOURCES OF DATA:
Methodology is a systematic process of collecting information in order to
analyze and verifies a phenomenon. The collection of data is through two
principle sources. They are discussed as
1) Primary data
2) Secondary data
PRIMARY DATA:
The primary data needed for the study is gathered through interview with
concerned officers and staff, either individually or collectively, sum of the
information has been verified or supplemented with personal observation
conducting personal interviews with concerned officers of finance department
of “Azingo pvt ltd”.
SECONDARY DATA:
10
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 11/76
The secondary data needed for the study was collected from published sources
such as, pamphlets of annual reports, returns and internal records, reference
from text books and journal management.
Further data needed for the study was collected from:-
Collection of required data from annual records of the company.
Reference from text books and journals relating to financial management
DIAGRAMITIC REPRESENTATION OF RESEARCH
METHODOLOGY:
TOOLS USED FOR ANALYZING:
Modern capital budgeting techniques are:
PI – Profitability Index
11
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 12/76
NPV – Net Present Value
IRR – Internal Rate of Return
IMPORTANCE OF THE STUDY:
Capital investments, representing the growing edge of a business, are deemed to
be very important “THREE” inter-related factors
1) The influence firm growth in the long term consequences capital investment
decisions have considerable impact on what the firm can do in future.
2) They affect the risk of the firm; it is difficult to reverse capital investment
decisions because the market for used capital investment in ill organized or
most of the capital equipments bought by a firm to meet its specific
requirements.
3) Capital investment decisions involve substantial outlays.
In Azingo, capital budgeting is more or less a continuous process and it is
carried out by different functional areas of management such as production,
marketing, chemical engineering, financial management etc., all the relevant
functional departments play a crucial role in the capital budgeting decision
process.
12
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 13/76
OBJECTIVES OF THE STUDY:
To present theoretical framework relating to capital budgeting.
To evaluate the effectiveness of capital expenditure decisions of
company.
To provide support in order to accomplished the overall goal of the
capital budgeting system of Azingo Pvt Ltd
To evaluate the elements consider by the Azingo Pvt Ltd during
expansion of project.
13
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 14/76
1.6 SCOPE OF THE STUDY:
The scope of study is limited to AZINGO Pvt Ltd. Hyderabad; it does
not relate to any other branches of the company.
Only certain numbers of projects are studied for the research.
14
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 15/76
LIMITATIONS OF THE STUDY:
The major limitation is the time; the study was conducted within in 45
days.
The study is carried based on the information and documents provided by
the organization.
There was no scope of gathering current information, as the auditing has
not been done by time of project work.
The rationale underlying of capital budgeting decisions efficiency. Thus, a firm
must replace worn and obsolete plant and machinery, acquire fixed assets for
current and new products and make strategic investment decisions. This will
enable the firm to achieve its objective of maximizing profits either by way of
increased revenues or cost reductions. The quality of these decisions is
improved by capital budgeting. Capital budgeting decision can be of two types:
1) To those which expand revenues, and
To those which reduce costs
15
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 16/76
CHAPTER-II
REVIEW OF LITERATURE:
16
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 17/76
REVIEW OF LITERATURE:
“A case study on Modern Capital Budgeting Techniques” by Anita Shukla
- www.eassytown.com
From the study it has been indentified that if two investments has having
positive NPV and IRR is more than cost of capital then project having more
NPV will be accepted, because the IRR is biased towards with higher initial
cash flows, hence the IRR would be higher for those projects whose initial cash
flows are higher, yet that does not necessarily mean that those projects would
have the higher NPV. Here, we must consider a very important point: the
bottom line for any capital budgeting decision is accepting the project that
would create the highest added value for shareholders, hence the higher the
NPV, the more attractive the investment
“Capital Budgeting–Financial appraisal of Investments Projects” by Don
Dayananda, Steve Harrison.
"The results of this study demonstrated the importance of considering external
factors in the capital budgeting process. The role of local and national
governments must also be considered. This study will help others realize how
17
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 18/76
important it is to include external factors in their capital budgeting analysis.
This can make the process difficult, especially if the superior does not
understand the importance of external variables that can affect the outcome of
the project."
“Research on Importance of Capital Budgeting Techniques in
International Scale” by Ervin L.Black published in Journal of Accounting
and Finance, 7th Edition
The purpose of this research is to examine the application of capital budgeting
on an international scale. Capital budgeting involves the making of investment
decisions related to assets. The "capital" in capital budgeting refers to the
investment of resources in assets, while the budgeting refers to the analysis and
assessment of revenue inflows and outflows related to the proposed capital
investment over a specified period of time. The purpose of capital budgeting is
two-fold. First, the process must determine whether or not a proposed capital
investment will be a profitable one over the specified time period; and, second,
the process must provide management with a means of selecting between
investment alternatives.
18
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 19/76
CHAPTR-III
COMPANY PROFILE
19
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 20/76
THEORETICAL BACKGROUND OF THE TOPIC:
FEATURES OF CAPITAL BUDGETING PROCESS:
Capital budgeting decisions have the following features:
• It involves exchange of current funds for future a benefits.
• They benefit future periods.
•
They have the effect of increasing the capacity, efficiency, span of life
regarding future benefits.
• Funds are invested in long-term activities
Some of the examples of capital budgeting decision are:
• Introduction of a new product.
• Expansion of business by investing in plant and machinery.
• Replacing and modernizing a process.
• Mechanization of process.
• Choice between alternative machines.
TYPES OF CAPITAL BUDETING DECISIONS:
Capital budgeting decisions are of paramount importance in financial decision
making. In first place they affect the profitability of the firm. They also have a
20
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 21/76
bearing on the competitive position of the firm because they relate to fixed
assets. The fixed assets are true goods than can ultimately be sold for-profit.
Generally the capital budgeting of investment decision includes addition,
disposition, modification, and replacement of fixed assets.
Diagram 1.1.1:
21
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 22/76
EXPANSION OF EXISTING BUSINESS:
A company may add capacity to its existing product lines to expand existing
operations. For example Siva Shakthi Bio Planttec may increase its plant
capacity to manufacture more detergents soaps & powder. It is an example of
related expansion.
EXPANSION OF NEW BUSINESS:
A Firm may expand its activities in a new business expansion of a new business
requires investment and new kind of production activating with in the firm. If
packing manufacturing company invests in a new plant and machinery to
produce ball bearings, which the firm has not manufactured before, this
represents expansion of new business or unrelated diversification. Sometimes
accompany acquires existing firms to expand its business.
REPLACEMENT AND MODERANIZATION:
The main objective of modernization and replacement is to improve operating
efficiency reduce costs. Cost savings will reflect in the increased profits, but the
firm’s revenue may remain unchanged. Assets become outdated and absolute
with technological changes. The firm must decide to replace those with new
assets that operate more economically. Replacement decisions help to introduce
more efficient and economical assets and therefore, are also called cost-
reduction investments.
22
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 23/76
However replacement decisions that involve substantial modernization and
technological improvements expand revenues as well as reduce costs. Yet
another useful way to classify investments is as follows:
Mutually exclusive investments
Independent investments
Contingent investments
FACTORS FOR CAPITAL BUDGETING:
Cost of acquisition of permanent asset as land and building, plant and
machinery, goodwill, etc.
Cost of addition, expansion, Improvement or alteration in the fixed assets.
Cost of replacement of permanent assets.
Research and development project cost, etc.
CAPITAL BUDGETING PROCESS:
23
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 24/76
The preparation of the capital budget is a process that lasts many months and is
intended to take into account neighborhood and bough needs as well as
organization wide. The process begin in the fall, when each of the segment
holds public hearings, each community board submits a statements of its capital
priorities for the next fiscal year to the managing director and appropriate
borough chairmen. The capital budgeting process involves 8 steps explained in
theoretic as follows:
1. Identification of investment proposals
2. Screen proposals
3. Evaluation of various proposals
4. Fixing priorities
5. Final approval
6. Implementing proposals
7. Performance review
8. Feed back
IDENTIFICATION OF INVESTMENT PROPOSALS:
24
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 25/76
The capital budgeting process begins with the identification of investment
proposals. The investment proposals are initiated from the top management or
from any officer of the organization. The department head analyses the various
proposals in the light of the corporate strategies and submit the suitable proposal
to the capital budgeting committee in case of large organizations concerned
with process of long-term investment proposals.
Identification of investment ideas it is helpful to
Monitor external environment regularly to scout investment
opportunities.
Formulate a well defined corporate strategy based on through
analysis of strengths, weaknesses, opportunities, and threats.
Share corporate strategy and respective with persons.
Motivate employees to make suggestions.
SCREEN PROPOSALS:
The expenditure planning committee screens the various proposals received
from different departments in different angles to ensure that these are in
selection criteria of the organization and also do not lead to department
imbalances.
EVALUATION OF VARIOUS PROPOSALS:
25
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 26/76
The next steps in capital budgeting process in to evaluate the probability of
various probability the independent proposals are those which do not complete
with one another and the same way be either accepted or rejected on the basic of
a minimum return on investment required.
FIXING PRIORITIES:
After evaluating various proposals, the unprofitable or uneconomic proposals
may be rejected straight away. But it may not be possible for the organization to
invest immediately in all the acceptable proposals due to limitations of funds.
Hence, it is very essential to rank the various proposals and to establish
priorities after considering urgency, risk & profitability involved the criteria
FINAL APPROVAL
Proposals meeting the evaluation and other criteria are finally approved to be
included in the capital expenditure budget. However proposals involving
smaller investment may be decided at the lower levels for expeditious action.
The capital expenditure budget lay down the amount of estimated expenditure
to be incurred on fixed assets during the budget period.
IMPLEMENTING PROPOSALS:
26
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 27/76
Preparation of a capital expenditure budgeting & incorporation of a particular
proposals in the budget does not itself authorize to go ahead with
implementation of the project. A request for authority to spend the amount
should be made to be the capital expenditure committee which may like to
review the profitability of the project in changed circumstances. In the
implementation of the projects networks techniques such as PERT & CPM are
applied for project management.
PERFORMANCE REVIEW:
In this stage the process of capital budgeting is the evaluation of the
performance of the project. The evaluation is made through post completion
audit by way of comparison 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 unfavorable variances if any should be looked into
and the causes the same is identified so that identified so that corrective action
may be taken in future.
It throws light on how realistic were the assumptions underlying the
project.
It provided a documented log of experience that is highly valuable for
decision making.
FEEDBACK:
27
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 28/76
In this stage, if once the performance review was completed and evaluated the
results were communicated and feedback was given to the top management.
GUIDELINES FOR CAPITAL BUDGETING:
There are many guidelines for capital budgeting process either it is long-term or
short- term plan.
The major points are:
Need and objectives of owner
Size of market in terms of existing & proposed product lines and
anticipated growth of the market share
Size of existing plants & plans for new plant sites and plant
Economic conditions which may affect the firm’s operations and
Business and financial risk associated with the replacement & existing
assets of the purchases of new assets
CONTENTS OF THE PROJECT REPORT:
Raw material
Market and marketing
Site of project
28
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 29/76
Project engineering dealing with technical aspects of the project
Location and layout of the project building
Building
Production capacity
Work schedule
CRITERIA FOR CAPITAL BUDGETING:
Potentially, there is a wide array of criteria for selecting projects. Some
shareholders may want the firm to select projects that will show immediate
surges in cash flow, others may want to emphasize long-term growth with little
importance on short-term performance viewed in this way; it would be quite
difficult to satisfy the differing interests of all the shareholders. Fortunately,
there is a solution.
METHODS FOR EVALUTION:
In view of the significance of capital budgeting decisions, it is absolutely
necessary that the method adopted for appraisal of capital investment proposals
is a sound one. Any appraisal method should provide for the following.
a) A basis of distinguishing between acceptable and non acceptable projects.29
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 30/76
b) Ranking of projects in order of their desirability.
c) Choosing among several alternatives
d) A criterion which is applicable to any conceivable project.
e) Recognizing the fact that bigger benefits are preferable to smaller ones
and early benefits to later ones.
There are several methods for evaluating the investment proposals. In case of all
these methods the main emphasis is on the return which will be derived on the
capital invested in the project
30
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 31/76
CAPITAL BUDGETING TECHNIQUES:
The capital budgeting techniques are of two types:
1. Non DCF criteria
2. DCF criteria
NON DCF CRITERIA
(a) Payback period:
Payback period is one of the most popular and widely recognized traditional
methods of evaluation investment proposals. Pay back period is the number of
years required to recover the original cash outlay invested in a project.
If the project generates constant annual cash flows, the pay back period can be
computed by dividing cash outlay by the annual cash inflows.
Payback period =
C
C o
inflowscashAnnual
investmentInitial
oC = Initial investment
C = Annual cash inflows
In the case of unequal cash inflows, the pay back period can be found out by
adding up the cash inflow until the total is equal to the initial cash outlay.
Merits:
31
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 32/76
1) This method is simple to understand and easy to calculate.
2) Surplus arises only if the initial investment is fully recovered. Hence,
there is no profit on any project unless the payback period is over.
3) When funds are limited, projects having shorter payback period should be
selected, since they can be rotated more number of times.
4) This method is focuses on projects which generate cash inflows in earlier
years.
5) As time period of cash flows increases, risk and uncertainty also
increases.
LIMITATIONS
1) It stresses on capital recovery rather than profitability.
2) It does not consider the return from the project after its payback period.
3) Administrative difficulties may be faced in determining the maximum
acceptable pay back period.
(b) Accounting Rate of Return (ARR):
The accounting rate of return (ARR) also known as the return on
investment (ROI) uses accounting information, as revealed by financial
statements, to measure to profitability of an investment. The accounting rate of
return is the ratio of the average after fax profit divided by the average
32
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 33/76
investment. The average investment would be equal to half of the original
investment if it were depreciated constantly.
A R R = 100 investmentAverage
IncomeAverage×
Merits:
1) This method is simple to understand.
2) It is easy to operate and compute.
3) Income throughout the project life is considered.
4) It can be readily calculated using the accounting data.
Limitations:
1) It doesn’t consider cash inflows which are important in project evaluation
rather than PAT.
2) It takes the rough average of profits of future years. The pattern or
fluctuations in profits are ignored.
3) It ignores time value of money, which is important in capital budgeting
decisions.
DFC CRITERIA:
(a) Net Present value (NPV):
33
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 34/76
The NPV present value (NPV) method is the classic method of evaluating the
investment proposals. DCF technique that explicitly recognizes the time value
at different time periods differ in value and comparable only when their
equipment present values – are found out.
N.P.V = 0n
n
3
3
2
21
k)(1
C.........
k)(1
C
k)(1
C
k)(1
CC −
+
++
++
++
+
NPV = ∑= −+
n
ioC k
C
01
1
)1(
NPV = Net present value
fiC = Cash flows occurring at time
k = the discount rate
n = life of the project in years
0C = Cash outlay
Merits:
1) NPV method takes account the time value of money.
2) All cash inflows are considered.
3) All cash inflows are converted into present value.
34
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 35/76
4) It satisfies value additivity principle i.e., NPV of two or more projects can
be added.
Limitations:
1) It may not satisfactory answer when the projects being compared
involved different amounts of investment.
2) It is difficult to use.
3) It may mislead when dealing with alternative projects or limited funds.
4) It involves difficult calculations.
5) It involves forecasting cash flows and applications of discount rate
(b) Internal Rate of Return (IRR):
The internal rate of return (IRR) method is another discounted cash flow
technique which takes account of the magnitude and thing of cash flows, other
terms used to describe the IRR method are yield on an investment, marginal
efficiency of capital, rate of return over cost, time – adjusted rate of internal
return and soon.
NPV = ∑= +
++
+
n
0in1
fi
)k 1(
WCSV
)k 1(
C
Where
fiC
= Cash flows occurring at different point of time
35
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 36/76
k = the discount rate
n = life of the project in year
0C = Cash out lay
SV & WC = Salvage value and working capital at the end of the n years.
IRR = L + )LH() ba(
A−
−
Where
L = Lower discount rate at which NPV is positive
H = Higher discount rate at which NPV is negative
A = NPV at lower discount rate, L
B = NPV at higher discount rate, H
Merits:
1) This method considers the time value of money.
2) All cash flows are considered.
3) It has psychological appeal to the users.
36
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 37/76
4) The percentage figure calculated under this method is more meaningful
and acceptable, because it satisfies them in terms of rate of return on
capital.
Limitations:
1) It may not give unique answer in all situations.
2) It is difficult to understand and use in practices.
3) It implies that the intermediate cash inflows generated by the project.
(C) Profitability index (PI):
Yet another time – adjusted method of evaluating the investment proposals is
the benefit – cost (B/C.) ratio or profitability index (PI) Profitability index is the
ratio of the present valued of cash inflows, at the required rate of return, to the
initial cash out of the investment.
PI =outlayCashIntial
inflowCashof PV
Where PV = Present Value
Merits:
1) This method considers the time value of money.
2) All cash inflows are considered.
37
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 38/76
3) It is a better evaluation technique than NPV.
Limitations:
1) It fails as a guide in resolving capital rationing when projects are
indivisible.
COMMITTEE IN CAPITAL BUDGETING:
CAPITAL COMMITMENT PLAN:
The progress of projects included in the capital budget, a capital commitment
plan is issued three times a year. The commitment plan lays out the anticipated
implementation schedule for there current fiscal and the next three years. The
38
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 39/76
first commitment plan is published within 90days of the adoption of the capital
budget. Updated commitment plans are issued in January & April along with
the company’s budget proposals.
The commitment plan translates the appropriations approved under the adopted
capital budget into schedule for implementing individual projects. The fact that
funds are appropriated for a project in the capital budget does not necessarily
mean that work will start or be completed that fiscal year. He choice of
priorities and timing of projects is decided by office management & budget in
consultation with the agencies along with considerations of how much the
managing director thinks the organization can afford to append on capital
projects overall.
The capital commitment plan lays out the anticipated implemented schedule for
capital projects and is one source of information on how far along projects are
although not a consistent or always useful one. The adopted commitment plan is
usually published in September, & then updated in January & April.
In the capital budgeting for every two adjacent years there will be gap. The gap
between authorized commitments and the target is presented in capital
commitment plan as diminishing over the course of the year plan, in practice
many of the “unattained commitments” will be rolled over into the next year’s
plan, so that the current year gap will remain large. The gap has grown in recent
year exceeding in last two executive capital plans.
39
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 40/76
KINDS OF CAPITAL BUDGETING:
Capital budgeting refers to the total process of generating, evaluating,
selecting and following up a capital expenditure alternatives. The firm allocates
or budgets financial recourses to new investment proposals. Basically, the firm
may be confronted with three types of capital budgeting decisions:-
The accept or reject decision,
The mutually exclusive choice decisions, and
The capital rationing decision
The time period creates some problems in estimating discount rates &
establishing equivalences.
CRITERIAN TABLE:
In the evaluation process or capital budgeting techniques there will be a criteria
to accept or reject the project. The criteria will be expressed as:
Table 1.1.1
Criterion/Method Accept Reject
Pay Back Period (PBP) < Target Period > Target Period
Accounting Rate of Return
(ARR)
> Target Rate < Target Rate
Net Present Value (NPV) > 0 < 0
Internal Rate of Return (IRR) > Cost Of
Capital
< Cost Of
Capital40
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 41/76
Profitability index (PI) > 1 < 1
COMPANY PROFILE:
Sri Mahesh Veerina (CEO)
41
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 42/76
Mahesh is the founder and CEO of Azingo, Inc. Mahesh is a seasoned Silicon
Valley entrepreneur and technology executive with over 18 years experience in
the technology industry.
Prior to Azingo, Mahesh was Vice President at Nokia Internet Communications
for the small office products division. Mahesh has founded two successful
technology companies over the last 10 years. Mahesh was the Founder,
President and CEO of Ramp Networks, Inc. (NASDAQ: RAMP) from 1996-
2001. Ramp Networks was a pioneer in the Internet access and security
appliances for the small office and enterprise remote office market segments.
Mahesh grew Ramp from a small technology startup to a publicly traded
company with market capitalization of over US$450M.
Nokia (NYSE: NOK) acquired Ramp Networks in 2001. Mahesh was founding
CEO and Chairman of FlowWise Networks, Inc., an IP routing acceleration
company from 1994-1997. Network Equipment Technologies (NASDAQ:
NET) acquired FlowWise Networks in 1998. Early in his career Mahesh held
several engineering and technology lead positions at Amdahl Corporation and
Synoptics. Mahesh has also co-founded, advised, and served on the boards of
several venture-backed technology startups in Silicon Valley. Mahesh has a MS
degree in Computer Engineering from Purdue University, West Lafayette. He
also holds a MS degree in Electronics from Andhra University, India.
42
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 43/76
1.3.1 INTRODUCTION:
Azingo is developing solutions for the fastest growing segments of the
mobile software market including cellular feature phones and lower-cost
Smartphone’s. Azingo enables its customers to demonstrate and launch new
mobile products in less time and at lower costs with the ability to tailor a
product’s features and user experience to the needs of specific market segments.
One Stop Solution:
Azingo uniquely offers a one-stop solution for designing and commercializing
new mobile phone products. Azingo Mobile, Azingo's next-generation Linux
platform, together with comprehensive engineering services significantly reduce
development costs and shorten delivery schedules for chipset and handset
manufacturers, integrators, and operators. Azingo helps its customers deliver
43
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 44/76
Internet-enabled, rich user experiences to entertain, inform, and enrich the lives
of mobile phone users worldwide.
World-Class Management Team:
Azingo was founded in 2005 and is managed by a team of seasoned high-tech
entrepreneurs and industry executives from world-class mobile, IP, and systems
companies such as Nokia, Motorola, and AT&T Bell Labs.
1.3.2 ABOUT AZINGO:
Azingo is a privately held company with the backing of Garnett and Helfrich
Capital, a leading private equity firm. The company is headquartered in
Sunnyvale, California and has development centers in Pune and Hyderabad,
India. Azingo was originally named Celunite, Inc. The company changed its
name on January 2nd, 2008.
PRODUCTS:
Azingo Mobile 2.0
44
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 45/76
Azingo Mobile 2.0 is the industry’s most portable, customizable, and
configurable open mobile platform. Azingo Mobile 2.0 was designed to reduce
the time and costs to create unique, cost-effective mobile phone products with
advanced, Internet-enabled multimedia capabilities.
Azingo Mobile 2.0 includes...
• a Linux kernel
• comprehensive mobile middleware
• an application framework
• a broad suite of mobile applications,
• SDKs for mobile software development
• application developer workbench tools
Azingo Mobile Products
• Platform
• Application Suite
• Browser
• Web Runtime
• Flash Runtime
• Operator Packs
KEY CAPABILITIES:
Mobile Internet – Azingo lowers the cost to use the Internet while on the go by
delivering advanced mobile browser services, Web widgets, and a rich set of
user interface features to make interacting with Internet content easy while
offering operators new service opportunities.
Multimedia Support – Azingo Mobile 2.0 supports the ability to play or
stream music and video in mid-tier phones, capabilities normally found only in
more expensive, high-end Smartphone’s.45
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 46/76
Broad Platform Support – Azingo Mobile 2.0 already runs on several of the
industry’s leading 2G and 3G chipsets. For other platforms, team can port
Azingo Mobile 2.0 to new handset and chipset designs and can deliver market-
specific solutions using the highly configurable features of the platform.
Mobile Optimization – Azingo Mobile 2.0 is optimized for memory footprint
and application launch performance, and includes fine-grain power management
tools.
Security – Azingo Mobile 2.0 includes a secure embedded architecture and full
support for wireless and IP security standards.
Seamless Integration – Azingo offers customers the choice of using its
Azingo Mobile 2.0 software with tightly integrated modules along with the
flexibility to leverage rich industry standard APIs to combine Azingo Mobile
2.0 with customer developed or third party modules to satisfy specialized
requirements.
Service Adaptation – Azingo Mobile 2.0 was designed to rapidly simplify and
shorten the creation of operator-branded service packs.
SERVICES:
Azingo’s team of Linux and mobile application experts provide custom
development solutions based on industry standard development platforms
46
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 47/76
allowing teams to quickly develop, test, debug, and deploy new devices,
applications, and services. Azingo’s engineering team is uniquely qualified
across all areas of Linux and modern mobile architectures.
Azingo's team has in-depth knowledge and expertise with...
• Multiple processor architectures (ARM,
ARC, StrongARM, xScale, MIPS, PowerPC,
x86) and related tools
• Linux kernels
• Open-source middleware technologies
• Advanced graphics and multimedia drivers
• Application models
• Java
• Web browsing
• Mobile applications
Engineering and consulting services can be tailored to meet a wide range of
mobile development needs, even under tight schedules. The result is that
Azingo customers gain significant time-to-market advantages.
Azingo's mobile Linux R&D services include...
• Complete mobile phone
integration and testing
• Board bring-up on mobile
platforms
• Compiler and tool-chain
optimizations for power,
footprint and performance
• Eclipse IDE development
47
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 48/76
• Developing comprehensive board
support packages for mobile
applications
• Custom driver development
• Porting Linux to target processors
• Custom kernel functionality
developmen
• Multimedia framework with
GStreamer and application
development
• Advanced browsing and Web
widget development: WebKit
• Tool-chain porting and
customization for GCC, GDB,
Binutils
• Development and customization
of development tools, including
compilers, debuggers,
configuration tools, and other
• Mobile platform software
engineering
• Application and middleware
development
• Comprehensive hardware and
software system integration
• Platform optimization and
tuning
• Integrating software to new
chipsets for evaluations and
demonstrations
• Project planning workshops
• Feasibility studies and
prototyping
• Architecture design
• Development of operator
branded service packs
• Turnkey solutions
48
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 49/76
utilities • Training
• Custom solution consulting
BOARD OF DIRECTORS:
DIRECTOR TERRY GARNET
DIRECTOR DEVID HELFRICH
CHIEF EXECUTIVE OFFICER MAHESH VEERINA
DIRECTOR T. MICHAEL NEVENS
Azingo Adds Former McKinsey Executive Mike Nevens to Board of
Directors
Sunnyvale, CA—May. 7, 2009 —Mobile Linux company Azingo today
announced the appointment of Mike Nevens to its board of directors. Nevens
brings to Azingo over 30 years of technology leadership and management
experience in building successful technology businesses. Nevens previously
served as a director (senior partner) of McKinsey & Co. He led McKinsey’s
global technology practice and served on the board of the McKinsey Global
Institute which conducts research on economic and policy issues.
“Mike Nevens is a strong technologist and business leader and we look forward
to benefiting from his insights and experience as a member of Azingo’s Board,”
said Terence Garnett, managing director and cofounder of Garnett & Helfrich
49
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 50/76
Capital. “His strategic counsel and direction has resulted in the success of many
Fortune 500 companies.”
"Azingo is an innovative and fast growing mobile software company,” said
Mike Nevens. “Azingo’s cross-platform strategy to create the foundation for a
Web 2.0 ecosystem is a powerful enabler of next generation mobile devices and
services.”
Nevens serves as a senior advisor to Permira on the Technology Sector. Permira
is an international private equity fund with 21 Billion Euros of funds under
management. He also serves on the board of directors of Borland Software
and Model N Software. He is a member of the executive committee of the board
of trustees of the San Jose Museum of Art and is president elect of that board.
He is a member of the board of ZER01: The Art and Technology Network, and
he is a member of the Advisory Council of the Mendoza College of Business at
the University of Notre Dame, where he has been an Adjunct Professor of
Corporate Governance and Strategy.
He holds a bachelor’s degree in physics from the University of Notre Dame and
a master of science in industrial administration from the Krannert School at
Purdue University where he was designated a Krannert Scholar.
Azingo develops and licenses leading edge software for mobile
devices. Azingo’s software suite includes a complete mobile operating
50
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 51/76
system, mobile browser and Web Runtime, as well as a mobile application
suite and developer tools. Azingo’s software products enable operators and
handset manufacturers to deliver customized mobile devices and services with a
rich Internet experience and a consistent user interface across their product
portfolios. The company is privately-held with headquarters in Sunnyvale,
California. Visit http://www.azingo.com
Azingo Joins OMTP to Advance Cross-Platform Mobile Web Services and
Application Development
Sunnyvale, CA—Mar. 30, 2009—Mobile Linux Company Azingo today
announced that it has joined OMTP to advance the BONDI initiative, which
ensures that developers can create secure mobile web applications and services
across different platforms and mobile devices.
Azingo has developed Azingo Mobile 2.0, an open mobile platform, to enable
handset makers to deliver next generation Web 2.0 experiences on mobile
phones. By joining OMTP, Azingo plans to contribute its expertise in open
mobile platform development to the BONDI specifications.
“We are pleased to join OMTP and plan to contribute our open mobile platform
and technology expertise to the BONDI initiative,” said Mahesh Veerina,
President and CEO of Azingo. “BONDI specifications will enable developers to
51
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 52/76
create secure web applications across a range of platforms and devices, which
will create a truly open eco system for developers.”
“Azingo is a great addition to the OMTP,” said Tim Raby, Managing Director
of the OMTP. “Azingo’s deep expertise in developing a mobile Linux platform
will significantly advance the BONDI initiative which will ensure that mobile
device users have access to innovative applications and services, regardless of
the platform or type of phone they use.”
Azingo Selected by Vodafone to Develop Mobile Applications for Linux
Platform
Sunnyvale, CA—Feb. 5, 2009 —Open Mobile OS Company Azingo today
announced that Vodafone, the world’s leading international mobile
communications group, has selected Azingo as a partner to develop applications
for mobile phones based on the LiMo platform.
“We are excited to partner with Azingo to develop cutting edge applications for
our mobile phones based on the LiMo platform,” said Guido Arnone, Director
of Terminals Technology at Vodafone. “We’re looking forward to working with
Azingo’s agile development teams to develop and deliver innovative
communications solutions for our customers.”
52
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 53/76
Both Azingo and Vodafone are core members of the LiMo Foundation, a
dedicated consortium of mobile industry leaders working together within an
open and transparent governance model—with shared leadership and shared
decision making—to deliver an open and globally consistent handset software
platform based upon Mobile Linux for use by the whole mobile industry.
“We are pleased that we were selected by Vodafone to develop innovative,
customized applications for LiMo platform based mobile phones,” said Mahesh
Veerina, President and CEO of Azingo. “Together with Vodafone, we’re
committed to delivering a range of exciting, appealing experiences for mobile
phone users.”
Azingo Launches Azingo Mobile 2.0, a Full Touch and Web Enabled
Mobile Operating System
Customizable User Experience and Touch Enabled Application Suite for
Mobile Phones
Sunnyvale, CA—Feb. 5, 2009 —Open Mobile OS company Azingo today
announced Azingo Mobile 2.0, a complete Linux based platform, which
includes the Azingo Browser, Azingo Web Runtime, Azingo Application Suite,
and Azingo Active Homescreen. Azingo Mobile 2.0 offers a comprehensive UI
toolkit enabling a full touch user experience and web widgets that can leverage
device specific services like telephony, messaging, multimedia and location
53
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 54/76
based services through the Azingo Web Runtime. Azingo’s products will be
demonstrated at the Mobile World Congress in Barcelona (booths 2.1D53 and
8B135), Feb. 16-19, 2009.
“We are excited to bring a full touch and web-enabled open mobile OS to
market,” said Mahesh Veerina, CEO of Azingo. “Azingo’s mobile platform and
software suite enable operators and handset manufacturers to deliver
customized mobile devices with a rich Internet experience and a consistent user
interface across their product portfolios.”
“Azingo has demonstrated leadership in the open mobile platform space by
bringing to market a full touch user experience for the LiMo platform,” said
Morgan Gillis, executive director of the LiMo Foundation. “The rich Web
Runtime environment and SDK of Azingo Mobile 2.0 will be instrumental in
enabling the LiMo developer ecosystem.”
Azingo Mobile 2.0 includes all of the software, development tools,
documentation and training required to design and commercialize new mobile
phone products. This new platform is based on the LiMo Foundation™ R1
Reference Implementation™ which is highly customizable to meet operator
requirements. Customers licensing Azingo Mobile 2.0 will receive the Azingo
Browser, Azingo Web Runtime, Azingo Active Homescreen and the Azingo
Application Suite.
54
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 55/76
The Azingo Browser is a complete Internet browser for all mobile platforms
both open and proprietary. Based on WebKit open source technology, the
Azingo Browser offers industry leading performance and desktop-class features
including, tabbed browsing, cookies, history, bookmarks, security, page
navigation, multimedia plug-ins and integration with Adobe Flash Lite.
Azingo Web Runtime is a WebKit based technology that installs and executes
web applications (widgets) on a variety of mobile platforms. With Azingo Web
Runtime, developers can create web applications using web technologies such
as AJAX, HTML, JavaScript, and CSS. Web Runtime applications behave like
native applications and deliver Web 2.0 experiences that can utilize Azingo’s
comprehensive set of APIs to access handset resources.
Azingo’s Active Homescreen radically extends the capabilities of a
conventional phone homescreen by allowing users to add and organize
pertinent, real-time information from the Internet and their phone for fast,
simple access. The Azingo Active Homescreen was designed to mimic the
familiar computer desktop experience through features such as a wider,
scrolling homescreen area, drag and drop, shortcuts, folders, and widgets. Users
also have one-touch access to content on their handset, including native, Web,
or Flash Lite applications, contacts, photos, music, videos, and messages.
55
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 56/76
The Azingo Applications Suite is available for all Linux based mobile
platforms. The Suite includes the following applications: Azingo Mobile
Entertainment, Azingo Mobile Productivity, Azingo Mobile Communications,
and Azingo Mobile System Applications.
• Azingo Mobile Entertainment provides music and video players,
camera, and photo gallery.
• Azingo Mobile Productivity delivers complete Personal Information
Management applications, including contacts, calendar, tasks, notes,
calculator, and alarm.
• Azingo Mobile Communications offers telephony, call log, SMS, MMS,
and email.
• Azingo Mobile System Applications include idle screen, main menu,
panel, phone settings, application and connectivity managers, and a file
browser.
1.4 NEED FOR THE STUDY:
A project is an activity sufficiently self-contained to permit financial and
commercial analysis. In most cases projects represent expenditure of capital
funds by pre-existing which want to expand or improve their operation.
In general a project is an activity in which, we will spend money in expansion
of returns in which logically seems to lead it self planning. Financing and56
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 57/76
implementations as a unit, is a specific activity with a specific point and a
specific ending point intended to accomplish a specific objective of the study.
An efficient allocation of capital is the most important finance function in the
modern times. It involves decisions to commit the firm’s funds to the long-term
assets. Capital budgeting for investment decisions are of considerable
importance to the firm since hey tend to determine its value by influencing its
growth, evaluation of capital budgeting decisions.
A capital budgeting decisions may be defined as the firm’s decision to invest is
current funds most effectively & efficiently in the long – term assets in
anticipation of an expected flow of benefits over a series of years. The long-
term assets are those that affect the firm’s operations beyond the one year
period. The firm’s investment decisions would generally includes expansion,
acquisition modernization and replacement of long term assets. Sale of a
division or business is also an investment decision. Decision like the change in
the methods of sales distribution, or an advertisement campaign or research and
development program have long –term implications for the firm’s expenditure
and benefits, and therefore they should also be evaluated as investment
decisions.
57
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 58/76
CHAPTER -IV
DATA ANALYSIS58
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 59/76
PROBLEM 1:
Company is considering whether to buy the plant and machinery or to expand
the present plant and machinery.
The company decides to raise the 65% of investment with the help of
bank loan at an interest of 14% and remaining 35% by 16% debentures.
If the company decided to buy the plant the company has to incur an
initial outlay of Rs.45Crs having life of 4 years and it has to sell the old plant,
by this the company gets Rs.5Crs. The company expecting salvage value of
Rs.10Crs. at the end of fourth year.
59
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 60/76
If the company has decided to expand the present one it has to incur
initial outlay of Rs.35Crs the company expecting salvage value of Rs.3Crs at
the end of fourth year.
Evaluate whether the company has either to expand or to buy the plant &
machinery, if company expects that in both the cases a sale of 20000 units made
in first year and this will increase at a percentage of 20% up to 4 years. Each
unit can be sold at Rs 10000/-.
The company is considering corporate tax of 33.99% (including
surcharge) and following Straight Line Method for depreciation.
Case I: If the company buys a plant.
Calculation of Cash out Flow:
Investment to purchase new plant– Rs 45 Crs. Cash flow by sale of old
plant – Rs.5crs
Cash outflow (initial investment) – Rs.40 Crs
Calculation of depreciation:
60
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 61/76
yearsin Life
value salvageinvestment Intial −
= )(5.74
1040Crs=
−
Calculation of weighted average cost of capital:
(Kd*Wd) + (Kbl*Wbl)
Bank Loan = Rs. 26 Crs (40*65%) Debentures = Rs. 14 Crs (40*35%)
Amount(Rs inCrs)
Pre TaxCost Tax Post tax Cost Weights Cost
Bank Loan 26 14 0.34 9.24 0.65 6.006
Debenture 14 16 0.34 10.56 0.35 3.696
Weighted average Cost of Capital 9.702=10%
Interest payable = (26*14%) + (14*16%) = Rs 5.88Crs
Calculation of NPV and PI:
UNITS PRICE EBDIT DEP EBIT INT EBT
20000 10000 200000000 75000000 125000000 58800000 66200000
24000 10000 240000000 75000000 165000000 58800000 106200000
28800 10000 288000000 75000000 213000000 58800000 154200000
34560 10000 345600000 75000000 270600000 58800000 211800000
61
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 62/76
EBT TAX PAT DEPFREECASH FLOW
PVFACTOR
PV OFCASH FLOW
66200000 0.34 4369200075000000 118692000 0.909 107891028
106200000 0.34 70092000
75000000 145092000 0.823 119410716
154200000 0.34
101772000
75000000 176772000 0.756 133639632
211800000 0.34
139788000
75000000 214788000 0.683 146700204
Salvage Value at 4th year end 100000000 0.683 68300000
Cash inflow 575941580
Cash
outflow 400000000NPV 175941580
PI 1.43985395
Calculation of IRR:
As the cash inflows for a project are uneven we have to calculate Fake Par Back
Period.
Initial investment = Rs.40 Crs
Average Cash Inflows = Average CFAT
= (107891028+1194110716+133639632+146700204+68300000)/5
= 57.59/5 = 11.5188
Fake PBP = 40/11.518 = 3.472
We have to see the value 3.472 in the A4 table for 4 Years
This value will reflect in the A4 table at 6% for 4 Years.
Therefore the IRR for this alternative is 6%.
62
CFAT Average
C
InflowsCashAverage
InvestmentInitialPBPFake 0==
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 63/76
Case II: If the company decides to expand the plant
Calculation of Cash out Flow:
Expansion to the old plant – Rs.35Crs
Calculation of depreciation:
yearsin Life
value salvageinvestment Intial −
= )(84
335Crs=
−
Calculation of weighted average cost of capital:
Amount(Rs inCrs)
Pre TaxCost Tax
Post taxCost Weights Cost
Bank Loan 22.75 14 0.66 9.24 0.65 6.006
Debenture 12.25 16 0.66 10.56 0.35 3.696
35 Cost of Capital 9.702
Interest payable: (22.75*14%) + (12.25*16%) = 3.185+1.96 = Rs. 5.145 Crs
Calculation of NPV and PI:
UNITS PRICE EBDIT DEP EBIT INT EBT63
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 64/76
20000 10000200000000
80000000
120000000
51450000 68550000
24000 10000240000000
80000000
160000000
51450000 108550000
28800 10000288000000
80000000
208000000
51450000 156550000
34560 10000345600000
80000000
265600000
51450000 214150000
EBT TAX PAT DEPFREECASH FLOW
PVFACTOR
PV OF CASHFLOW
68550000 0.34 4524300080000000 125243000 0.909 113845887
108550000 0.34 71643000
80000000 151643000 0.823 124802189
156550000 0.34
103323000
80000000 183323000 0.756 138592188
214150000 0.34
141339000
80000000 221339000 0.683 151174537
Salvage Value at 4th year end 30000000 0.683 20490000
Cash inflow 548904801
Cash outflow 350000000
NPV 198904801
PI 1.5682
Calculation of IRR:
As for this also the cash inflows are uneven we have to calculate FPBP.
Average Cash inflows = Average CFAT
= (2113845887+124802189+138592188+151174537+20490000)/5
= 548904801/5= 137226200
64
CFAT Average
C
InflowsCashAverage
InvestmentInitialPBPFake 0==
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 65/76
FBP = 350000000/ 137226200 = 2.55
This value will reflect in the A4 table nearly 9% for 4 years.
Therefore the IRR for this alternative is 9%.
Case I Case II
PI 1.439 1.568
NPV(Rs in Crs) Rs.175941580/- Rs.198904801/-
IRR 6% 9%
Form the above interpretation for the alternative Case II (to expand the present
plant) the PI, NPV are better than the Case I (to buy the plant), though in Case-
II IRR (9%) is less than cost of capital (10%) NPV is positive and PI greater
than 1st alternative, it is better for the company expand the old plant rather than
to buy the new plant.
65
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 66/76
PROBLEM 2:
DIVERSIFICATION:
The company decided to diversify its business activities by providing operating
soft ware to computers. For R&D of this service the company has to incur some
expenses which are as follows
• Purchase of systems costing to amount of Rs. 25Crs
• Recruitment of Soft ware developers amounting to Rs. 10Crs (for a
period of 5years)
• Infrastructure amounting to Rs. 15Crs
There will be no salvage value for the purchase of systems by the company and
following SLM method for depreciation. The company expects a sale of
software up to 10000 users for first year and this will increase at a percentage of
15% up to 5 years. In this case the OS can be sold at Rs 20000/-. The tax rate
for the company is corporate tax of 33.99%.
The company decides to raise the 65% of investment with the help of bank loan
at an interest of 14% and remaining 35% by 16% debentures.
Find out the feasibility of the project, if the company considering the project
for a 5 years.
66
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 67/76
SOLUTION:
Calculation of Cash out flow:
Purchase of systems costing to amount of 25Crs
Recruitment of Soft ware developers amounting to 10Crs
Infrastructure amounting to 15Crs
Total cash out flow = 25+10+15 = Rs 50Crs.
Calculation of weighted average cost of capital:
(Kd*Wd) + (Kbl*Wbl)
Bank Loan = Rs. 26 Crs (40*65%) Debentures = Rs. 14 Crs (40*35%)
Amount(Rs in
Crs)
Pre Tax
Cost Tax Post tax Cost Weights Cost
Bank
Loan 26 14 0.34 9.24 0.65 6.006
Debenture 14 16 0.34 10.56 0.35 3.696
Weighted average Cost of Capital 9.702=10%
Interest payable = (26*14%) + (14*16%) = Rs 5.88Crs
67
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 68/76
Calculation of Depreciation:
yearsin Life
value salvageinvestment Initial −
Initial investment = 25+15 = Rs. 40 Crs Salvage value - Nil
).(8.5
040 A P Crs Rs=
−
Calculation of NPV and PI:
UnitsSold
Price EBIT DEP EBT INT PBT
10000 20000 200000000 8Cr 120000000 5880000 114120000
11500 20000 230000000 8Cr 150000000
5880000 144120000
13225 20000 264500000 8Cr 184500000
5880000 178620000
15208 20000 304160000 8Cr 224160000
5880000 218280000
17490 20000 349800000 8Cr 26980000
0
5880000 263920000
PBT TAX PAT DEP Cash Flow PV Factor CFAT
114120000 0.34 75319200 8Crs 155319200 0.909 141185152.8
144120000 0.34 95119200 8Crs 175119200 0.823 144123101.6
178620000 0.34117889200 8Crs 197889200 0.756 149604235.2
218280000 0.34 14406480 8Crs 224064800 0.683 153036258.4
68
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 69/76
0
263920000 0.34174187200 8Crs 254187200 0.621 157850251.2
Cash Inflow 745798999.2
Cashoutflow 500000000
NPV 245798999.2
PI 1.491597998
Calculation of IRR:
The cash inflows for the alternative that chosen are uneven, therefore we have
to calculate fake payback period.
Initial Investment = Rs. 50Crs
Average Cash Inflows = Average CFAT
(141185152.8+144123101.6+149604235.2+153036258.4+157850251.
2)/5
= 745798999.2/5 = 149159799.8/-
Fake payback period = 500000000/ 149159799.8 = 3.152
This value will reflect in the A4 table nearly 10% for 5 years.
IRR will be 10%.
INTERPRETATION:
69
CFAT Average
C
InflowsCashAverage
InvestmentInitialPBPFake 0==
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 70/76
NPV Rs.245798999/-
PI 1.491
IRR 10%
From the above calculation it can be inferred that the NPV is Rs.245798999/-,
PI is 1.491 and IRR is 10%. The calculation resulted is positive. So there is
feasibility of the project and the operations can be diversified in the company.
70
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 71/76
CHAPTER -V
FINDINGS AND CONCLUSIONS:
71
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 72/76
FINDINGS:
1) The company is using modern capital budgeting techniques like PI, NPV,
and IRR for evaluating the project.
2) With the help of bank loan and debentures the company is raising the
required capital.
3) Company is considering cost of capital as present value factor.
4) The company expands the present plant rather than to purchase the new
plant.
5) The company diversified the operations as it was found that the project is
feasible.
6) The company is considering corporate tax for calculating the cash flows.
7) Straight line method is being used by the company for charging the
depreciation.
72
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 73/76
CONCLUSION:
From the analysis it was concluded that in modern capital budgeting techniques
time value of money will be consider which tells the correct present value of
future money. When compared to debenture interest the bank loan is low, that’s
why the company is raising more of the investment through bank loan. As the
interest will be tax saving purpose, the company is raising the required
investment for purchasing the plant and machinery with the help of bank loan
and debentures.
RECOMMENDATIONS:
• Company has to raise the capital not only with the help of bank loan and
debentures and also by issuing shares, which means it has to go for IPO.
73
7/28/2019 computer network.doc
http://slidepdf.com/reader/full/computer-networkdoc 75/76
BIBILOGRAPHY:
BIBILOGRAPHY:
1. “Financial management” by I.M.Pandey, 2nd Edition of Vikas publishers.
2. “Accountancy” by P.C.Tulsian 4th edition TATA McGraw Hill
publishers.
75