CHAPTER-1

INTRODUCTION

1

INTRODUCTION

The term capital budgeting refers to long term planning for proposed capital outlay and

their financing. Thus it includes both rising of long term funds as well as their utilization.

It may thus be defined as the firm’s formal process for the acquisition and investment of

capital. It is the decision making process by which the firms evaluate the purchase of

major fixed assets.

It involves firm’s decision to invest its current funds for addition, disposition,

modification and replacement of long-term on fixed assets. However, it should be noted

that investment in current assets necessitated on account of investment in a fixed assets.

Is as to be taken as a capital budgeting decision.

Capital budgeting is a many-sided activity. It includes searching for new and

more profitable investment proposals, investigating, engineering and marketing

considerations to predict the consequences of accepting the investment and making

economic analysis to determine the profit potential of each investment proposal. its basic

feature can be summarized as follows.

1. It has the potentiality of making large anticipated profits.

2. It involves a high degree of risk.

3. it involves relatively long-term period between the initiate outlay and the anticipated return.

On the basis of the above discussion it can be concluded that capital

budgeting consists in planning the development of available capital for the

purpose of maximizing the long-term profitability.

Capital budgeting is investment decision-making as to whether a project is worth

undertaking. Capital budgeting is basically concerned with the justification of capital

2

expenditures. Current expenditures are short-term and are completely written off in the

same year that expenses occur.

Definitions of capital budgeting

James C. van Horne: “capital budgeting involves a current investment in

which the benefits are expected to be received beyond one year in the feature.” It

suggests that the investment in any asset with a life of less then a year falls into

realm of the working capital management, whereas any with a life of more than

one year involves capital budgeting.

Weston and Brigham: “capital budgeting involves the entire process of

planning expenditures whose returns are to extend beyond one year”.

Charles T horngren: “capital budgeting is the long-term planning for making

and financing proposed capital outlays”.

Robert N Anthony: “ the capital budgeting is essentially a list of what,

management believes to be worthwhile projects for the acquisition of new capital

assets together with the estimated cost of each projects”.

Thus, capital budgeting decision may be defined as he firms decision to invest its

current funds most efficiently in long-term projects, in anticipation of an expected

flow of feature funds over a series of years.

It involves the process of generation of investment proposals, estimation of cash

flows for the proposals, evaluation of cash flows, selection of projects based an

acceptance criterion and finally continuous revaluation of investment projects

after their acceptance.

3

NEED OF THE STUDY

To know the operation of the company.

Project study is undertaken to analyze and understand capital Budgeting process in the company, which gives me exposure to Practical implication of theory

Knowledge. To know about company operations of using various capital

budgeting techniques.

To know how company gets funds from various resources.

Objectives:

The objectives of this projects study is intended to provide:

1. An understanding of the importance of capital budgeting.

2. To understand the various kinds of capital budgeting and problems faced by

organization.

3. To understand the various methods of determining the size of capital budgeting.

4. To measure the profitability of the projects by considering all cash flows.

5. To make recommendations to future improve the process of capital budgeting.

6. to review growth and working of TPIPL (Tecumseh Products India Pvt Ltd.) during 5 years.

7. Internal external factors that influence TPIPL which lead downfall.

4

8. Management approach towards TPIPL

Research methodology:

The study is based on the primary and secondary data.

Primary data: primary data is collected with the kind help and co-operation of

mr.khadher accounts officer, finance department, TPIPL

Secondary data: the relevant secondary data is collected from the following sources.

A) Annual report of TPIPL .

B) Internet.

Limitations:

● Financial matter are sensitive in nature, the same could not acquire easily.

● The serious limitations of the study are time factor.

● As adequate data was not able to pool because of the study maintained by the

firm.

● another limitation of the study is collecting data from finance department as they

were too busy in their own work.

5

CHAPTER-2

REVIEW OF LITERATURE

6

The term capital budgeting refers to long term planning for proposed capital outlay and

their financing. It includes raising long-term funds and their utilization. It may defined as

a firm’s formal process of acquisitions and investment of capital.

Capital budgeting may also be defined as “The decision making process by which a

Firm evaluates the purchase of major fixed assets “. It involves firm’s decision to invest

its current funds for addition, disposition, modification and replacement of fixed assets. It

deals exclusively with investment proposals, which is essentially long term projects and

is concerned with the allocation of firm’s scarce financial resources among the Available

market opportunities.

Some of the examples of capital Expenditure are

Acquisition cost of permanent assets as land and buildings.

Cost of addition, expansion, improvement or alteration in the fixed assets.

R &D project cost, etc.

Capital budgeting is a many-sided activity. It includes searching for new and More

profitable investment proposals, investigating, engineering and marketing Considerations

to predict the consequences of accepting the investment and making Economic analysis

to determine the profit potential of each investment proposal. Its basic feature can be

summarized as follows.

1. It has the potentiality of making large anticipated profits.

2. It involves a high degree of risk.

7

3. it involves relatively long-term period between the initiate outlay and the

Anticipated return.

On the basis of the above discussion it can be concluded that capital budgeting Consisting

Planning the development of available capital for the purpose of maximizing the long-

term profitability.

Capital budgeting is investment decision-making as to whether a project is worth

undertaking. Capital budgeting is basically concerned with the justification of capital

expenditures. Current expenditures are short-term and are completely written off in the

same year that expenses occur.

Definitions of capital budgeting

James C. van Horne: “Capital budgeting involves a current investment in which the

benefits are expected to be received beyond one year in the feature.” It Suggests that the

investment in any asset with a life of less then a year falls into realm of the working

capital management, whereas any with a life of more than one year involves capital

budgeting.

Weston and Brigham: “Capital budgeting involves the entire process of planning

expenditures whose returns are to extend beyond one year”.

Charles T Horngren: “Capital budgeting is the long-term planning for making and

financing proposed capital outlays”.

Robert N Anthony: “ The capital budgeting is essentially a list of what, management

believes to be worthwhile projects for the acquisition of new capital assets together with

the estimated cost of each projects”. Thus, capital budgeting decision may be defined as

he firms decision to invest its current funds most efficiently in Long-term projects, in

anticipation of an expected flow of feature funds over a series of years. It involves the

8

process of generation of investment proposals, estimation of cash flows for the proposals,

evaluation of cash flows, selection of projects based an acceptance criterion and finally

continuous revaluation of investment projects after their acceptance.

FEATURES OF CAPITAL BUDGETING:

The important features, which distinguish capital budgeting decisions in other day-to day

decisions, are capital budgeting decisions involve the exchange of current fun the

benefits to be achieved in future.

. The future benefits are expected and are to be realized over a series Of years.

. The funds are invested in non-flexible long-term funds.

. They have a long term and significant effect on the profitability of the Concern.

. They involve huge funds.

. They are irreversible decisions associated with high degree of risk.

IMPORTANCE OF CAPITAL BUDGETING:

Capital budgeting decisions are among the most crucial and business decisions. A

number of factors are responsible for capital decisions. Care must be taken while making

capital budgeting decisions influence all the departments of a company such as

production, marketing, personnel ete. The importance of capital budgeting can be

understood from the fact that an unsound investment decision may prove to be very

existence of the organization. The other reasons for keeping more attention include

the following.

1. Investment of huge funds: capital budgeting decisions required larger capital outlay

hence, the company should carefully plan its investment programmed so that it may

9

get the funds at the right time and they must be put to most profitable use. An

opportune investment decision can give rise for spectacular result. On the other hand,

an ill-advised and incorrect decision can jeopardize the profitable position and can

also be the cause for closer of the company.

2. Growth: The effects of investment decisions extend into future and have to be

Endured for a longer period than the consequences of the current operating

expenditure. A firm’s decision to invest in long-term assets has a decisive influence

on the rate and direction of its growth. A wrong decision can prove disastrous for

the continued survival of the firm; unwanted or unprofitable expansion of assets will

result in heavy operating costs to the firm. On the other hand inadequate investment

in assets would make it difficult for the firm to compete successfully and maintain its

market share.

3. Risk: A long-term commitment of funds may also change the risk complexity of the

firm. If the adoption of an investment increase average gain but causes frequent

fluctuations in it earnings, the firm will become more risky. Thus, investment

decision shapes the basic character of a firm.

4. Funding: investment decisions generally involve large amount of funds, which make

it imperative for the to plan its investment programmers very carefully and make an

advance arrangement for procuring finances internally or externally.

5. Irreversibility: Most investment decisions are irreversible. It is difficult to find a

market for such capital items once they have been acquired. The firm will incur

heavy losses if such assets are scrapped.

6. Complexity: Investment decisions are among the firm’s most difficult decisions.

They are an assessment of future events, which are difficult to predict. It is really a

complex problem to correctly estimate the future cash flows of an investment

10

Economic, political social and technological forces the uncertainty in cash flow

Estimation.

7. Long-term implication: The effect of a capital budgeting decision will be felt by

the company over a long period and therefore they have decisive influence on the rate

and direction of the growth of the company, for example, if accompany purchases a new

machine by paying heavy amount and the project comes out to be unprofitable, the

company decides to write off the burden of fixed cost up to stage, where the Company

decides to write off the machine completely. Apart from this, if the results are extended

for a long period of time, it may result in loosing the flexibility of the decision maker,

because it involves lot of uncertainly about the future of the investment. Further, it may

be influenced by several future unforeseen events.

8) Irreversible decisions: capital budgeting decisions are irreversible in majority of the

cases. It is due to the fact that, it is very difficult to find a market for the capital assets.

The only alternative is to treat the entire value of the assets as a scrap. This will result in

heavy loss.

9) Capital budgeting decisions are most difficult to take: Capital budgeting decisions

involve assessment of future events, which are most uncertain. It will be Very difficult to

project sales revenues, costs and benefits accurately in quantitative terms because of

economic, political, social and technological factors. Future, the Erroneous forecast of

asset needs can result in serious consequence for a company.

10) Raising of funds: Another reason for the importance of capital budgeting is that

always assets acquisition involves substantial amount of funds an the part of the

Company. Before a firm spends large amount of funds, it must plan them to raise

systematically because funds are not always available with the company. Company

contemplating a major capital expenditure programmed may need to arrange its financing

11

requirements several years in advance, to be sure of having the availability of funds for

expansion.

11) Ability to compete: finally, it has been said that many firms fail, not because they

have too much capital equipment but because they have too little ability to complete. The

conservative approach of having a small amount of capital equipment may be approach

may also be fatal if the other competitors install modern and automated equipment that

permit them to produce a better product and sell it a lower price. Hence, the investment in

capital assets help must the company to face and meet competition from the other

companies in the same industry.

Large investment:

Capital expenditure decision, generally involves large investment of funds. But the funds

available with firm are scarce and the demand for funds exceeds resources. Hence, it is

very important for a firm to plan and control its capital expenditure.

Long term commitment of funds:

Capital expenditure involves not only large amount of funds but also funds for long-term

or an permanent basis. The long-term commitment of funds increases the financial risk

involved in the investment decision.

12

Capital budgeting process:

Capital budgeting is a complex process which may be divided into the following phases: ● Identification of project investment opportunities

● assembling of proposed investments

● Decision making

● Preparation of capital budget and appropriations

● Implementation

● Performance review

Identification of potential investment opportunities The capital budgeting process begins with the identification of potential

investment opportunities. Identification of investment ideas it is helpful to:-

1. Monitor external environment regularly to scout investment opportunities.

2. formulate a well defined corporate strategy based upon a through analysis of

strength, weakness, opportunities and threats

3. Share corporate strategy and perspectives with person who are involved in the

process of capital budgeting.

4. Motivation employees to make suggestions.

13

Assembling of proposed investments:

Investment proposal are usually classified into various categories for facilitating

decision making, budgeting and control.

● Replacement investments

● Expansion investments

● New product investments

● Obligatory and welfare investments

The purpose of routing a proposal through several persons is primarily to ensure that the

proposal is viewed from different angles. It is helps in creating a climate for bringing

about co-ordination of interrelated activities.

Decision making Choosing the best alternatives projects which support the firm is an important aspect of

investment decision. Proper decision by the investment by evaluating the returns on

investments.

Preparation of capital budget and appropriations Projects involving smaller outlays and which can be decided by executives at

lower levels. Projects involving larger outlays are included in the capital budget after

necessary approvals. Before undertaking such projects an appropriation order is usually

required. The purpose of this check is mainly to ensure that the funds position of the firm

is satisfactory at the time of implementation. Further, it provides an opportunity to review

the project at the time of implementation.

Implementation

14

Translating an investment proposal into a concrete project is a complex, time-

consuming. For expeditious implementation at a reasonable cost, the following are

needed:-

Adequate formulation of projects

Use of the principle of responsibility accounting:- assign specific responsibilities to

project managers within the defined time-frame and cost limits are helpful for expeditious

execution and cost control.

Use of network techniques:- for project planning and control, several network

techniques are required like PERT(program evaluation review technique) CPM (critical

path method).

Performance review

Performance review or post-completion audit is a feedback device. It is a means

for comparing actual performance with projected performance. It may be conducted,

most appropriately, when the operations of the project have stabilized. It is useful in

several ways:-

● It throws lights on how realistic were the assumptions underlying the projects.

● It provides a documented log of experience that is highly valuable for decision

making.

● It helps in uncovering judgmental biases

● It includes a desired caution among project sponsors.

PROJECT CLASSIFICATION:-

15

Firms normally classify projects into different categories. Each

category is then analyzed somewhat differently. While the system of classification may

vary from one firm to another, the following categories are found in most classification.

A) Mandatory investment:- these are expenditures required to comply with

statutory requirements. Examples of such investments are

● Pollution control equipment.

● Medical dispensary.

● Fire fighting equipment.

B) REPLACEMENT PROJECTS:- firm routinely invest in equipment meant to

replace obsolete and inefficient, even through they may in a serviceable condition.

The objective of such investments is to

● reduce costs

● Increase the return

● improve the quality.

C) EXPANSION PROJECTS:- these investments are meant to increase capacity or

widen the distribution network. Such investments call for an explicit forecast of growth.

Decisions relating to such projects are taken by the top management.

D) Diversification projects:- these investments are aimed at producing new products

or services or entering into entirely new geographical areas. Often diversification

projects entail substantial risks, involve large outlays, and require considerable

managerial effort and attention.

E) Research and development:- traditionally r&d projects absorbed very small

proportions of capital budget r&d projects are characterized by numerous uncertainties

and typically involved sequential decision making.

Importance of capital budgeting decisions

16

Capital budgeting decisions are among the most crucial and business decisions. A

number of factors are responsible for capital decisions. Care must be taken while

making capital budgeting decisions influence all the departments of a company such

as production, marketing, personnel ete. The other reasons for keeping more attention

include the following.

1) Investment of huge funds: capital budgeting decisions required larger capital

outlay hence, the company should carefully plan its investment programmed so

that it may get the funds at the right time and they must be put to most profitable

use. An opportune investment decision can give rise for spectacular result. On the

other hand, an ill-advised and incorrect decision can jeopardize the profitable

position and can also be the cause for closer of the company.

2) Growth: the effects of investment decisions extend into future and have to be

endured for a longer period than the consequences of the current operating

expenditure. A firm’s decision to invest in long-term assets has a decisive

influence on the rate and direction of its growth. A wrong decision can prove

disastrous for the continued survival of the firm; unwanted or unprofitable

expansion of assets will result in heavy operating costs to the firm. On the other

hand inadequate investment in assets would make it difficult for the firm to

compete successfully and maintain its market share.

3) Risk: A long-term commitment of funds may also change the risk complexity of he

firm. If the adoption of an investment increase average gain but causes frequent

fluctuations in it earnings, the firm will become more risky. Thus, investment decision

shapes the basic character of a firm.

4) Funding: investment decisions generally involve large amount of funds, which make

it imperative for the to plan its investment programmers very carefully and make an

advance arrangement for procuring finances internally or externally.

17

5) Irreversibility: most investment decisions are irreversible. It is difficult to find a

market for such capital items once they have been acquired. The firm will incur heavy

losses if such assets are scrapped.

6) Complexity: investment decisions are among the firm’s most difficult decisions. They

are an assessment of future events, which are difficult to predict. It is really a complex

problem to correctly estimate the future cash flows of an investment. Economic, political

social and technological forces the uncertainty in cash flow estimation.

7) Long-term implication: the effect of a capital budgeting decision will be felt by the

company over a long period and therefore they have decisive influence on the rate and

direction of the growth of the company, for example, if accompany purchases a new

machine by paying heavy amount and the project comes out to be unprofitable, the

company decides to write off the burden of fixed cost up to a stage, where the company

decides to write off the machine completely. Apart from this, if the results are extended

for a long period of time, it may result in loosing the flexibility of the decision maker,

because it involves lot of uncertainly about the future of the investment. Further, it may

be influenced by several future unforeseen events.

8) Irreversible decisions: capital budgeting decisions are irreversible in majority of the

cases. It is due to the fact that, it is very difficult to find a market for the capital assets.

The only alternative is to treat the entire value of the assets as a scrap. This will result in

heavy loss.

9) Capital budgeting decisions are most difficult to take: capital budgeting decisions

involve assessment of future events, which are most uncertain. It will be very difficult to

project sales revenues, costs and benefits accurately in quantitative terms because of

economic, political, social and technological factors. Future, the erroneous forecast of

asset needs can result in serious consequence for a company.

10) Raising of funds: another reason for the importance of capital budgeting is that

always assets acquisition involves substantial amount of funds an the part of the

company. Before a firm spends large amount of funds, it must plan them to raise

18

systematically because funds are not always available with the company. The company

contemplating a major capital expenditure programmed may need to arrange its financing

requirements several years in advance, to be sure of having the availability of funds for

expansion.

11) Ability to compete: finally, it has been said that many firms fail, not because they

have too much capital equipment but because they have too little ability to complete. The

conservative approach of having a small amount of capital equipment may be approach

may also be fatal if the other competitors install modern and automated equipment that

permit them to produce a better product and sell it a lower price. Hence, the investment in

capital assets help must the company to face and meet competition from the other

companies in the same industry.

19

CHAPTER-3

INDUSTRY PROFILE

20

INDUSTRY PROFILE:

The Sound Fridge: A Very Cool Idea.

For thousands of years, people have used forms of refrigeration to keep food and other

objects cold. Keeping food cold helps slow the spoiling process and helps it last longer.

Today more than 99% of American homes have a refrigerator. These are based on the

compression of a gas into a liquid to absorb heat. The substance that is used for

compression has most commonly been Freon, a substance which is harmful to the ozone

layer. The insulation used in those refrigerators also contains harmful substances.

Fortunately, there is a new cooling technology involving sound waves that is efficient and

is not harmful to the environment. This new type of refrigeration relies on the

compression and expansion properties of sound waves and gas in order to keep things

21

cool.  A typical modern refrigerator works by compressing a gas until it becomes a cooler

liquid. It is then run throughout the refrigerator to cool it, and through this process, the

liquid becomes a gas again. Sound waves are able to heat or cool objects in a similar

fashion because they travel by compressing and expanding gas. As the gas expands, it

cools down. In an acoustic refrigerator, the sound would hit a plate in a tube, and it would

change the temperature to either hot or cold. The cold plates would be used to cool the

refrigerator.

Researchers Matt Poese and Steve Garrett of Penn State's Applied Research Laboratory

(ARL) have described a small "thermo acoustic refrigerator" where a souped-up

loudspeaker is used to generate high amplitude sound energy in environmentally safe

inert gas that is converted directly into useful cooling. They have developed loudspeakers

that operate near their natural resonance frequencies and use metal bellows that replace

loudspeaker cones to compress the gases. Their loudspeakers have demonstrated

efficiencies as high as 89% at powers as large as 5 kilowatts - the equivalent of nearly

seven horsepower. All of this power is produced without lubricants or sliding seals so it

has the potential for very long life and low maintenance operation.

Today, refrigerators are taken for granted as one of the most common appliances in the

home, but it was not always so. Before refrigerators, people tried to preserve their food in

cool places like streams, caves, and snow banks. As more people moved into cities,

however, a better solution was needed

22

HISTORY

Around 500 B.C. the Egyptians and Indians made ice on cold nights by setting water out

in earthenware pots and keeping the pots wet. At some point, perhaps in fourteenth

century China or seventeenth century Italy, it was discovered that the evaporation of

brine (salt water) absorbed heat and therefore a container placed in brine would stay cold.

In 18th century England, servants collected ice in the winter and put it into icehouses,

where the sheets of ice were packed in salt, wrapped in strips of flannel, and stored

underground to keep them frozen until summer.

The first known artificial refrigeration was demonstrated by William Cullen at the

University of Glasgow in 1748. He did not however use his discovery for any practical

purpose.The first practical refrigerating machine was built by Jacob Perkins in 1834; it

used ether in a vapour compression cycle. German engineer Carl von Linden patented not

a refrigerator but the process of liquefying gas in 1876 that is part of basic refrigeration

technology.Refrigerators from the late 1800s until 1929 used the toxic gases ammonia

(NH3), methyl chloride (CH3Cl), and sulphur dioxide (SO2) as refrigerants. Several fatal

accidents occurred in the 1920s when methyl chloride leaked out of refrigerators.

Refrigeration engineers searched for acceptable substitutes until the 1920s, when a

number of synthetic refrigerants called halocarbons or CFCs (chlorofluorocarbons) were

developed by Frigidaire.  The best known of these substances was patented under the

brand name of Freon.  Chemically, Freon was created by the substitution of two chlorine

23

and two fluorine atoms for the four hydrogen atoms in methane (CH4); the result,

dichlorodifluoromethane (CCl2F2), is odourless and is toxic only in extremely large doses

In the 1920s and '30s, consumers were introduced to freezers when the first electric

refrigerators with ice cube compartments came on the market. Mass production of

modern refrigerators didn't get started until after World War II.

HOW REFRIGERATORS WORK

The basic idea behind a refrigerator was very simple: It used the evaporation of a liquid

to absorb heat. When you put water on your skin it makes you feel cool. As the water

evaporates, it absorbs heat, creating that cool feeling.

Every single refrigerator is made up of at least four key parts:

1. Compressor

2. Heat-exchanging pipes (also known as a condenser)

3. Expansion valve

4. Refrigerant

24

To begin the process, the compressor compresses the refrigerant gas. This compression

causes an increase in the pressure of the gas (the orange region), which in turn increases

the temperature of the gas. This heat caused by the increase in temperature is relieved

through the heat-exchanging pipes that are coiled outside of the refrigerator. It is essential

that this portion of the pipes is outside the refrigerator so that all the heat is dissipated to

the surroundings.

As the refrigerant cools, it condenses into a liquid form (the red to purple region). It then

flows through the expansion valve (point C), forcing the refrigerant into a low-pressure

zone. This pressure drop causes expansion, followed by evaporation. This evaporation

causes heat absorption, thus making the inside of the refrigerator cool (the light blue

region). The coiled surface area allows for an increased area to transfer energy. Once the

refrigerant reaches this point in the cycle, the process is repeated.

25

The above picture is of the back of the average home refrigerator. It shows the heat

exchanging pipes used for external cooling, as well as the compressor located at the

bottom.

PELTIER COOLERS

You may have seen the new coolers that don't use ice, plugging into your car's cigarette

lighter instead. These coolers rely on a process known as the Peltier effect, or

thermoelectric effect, to produce cold temperatures electronically.

You can create the Peltier effect with a battery, two pieces of copper wire and a piece of

bismuth or iron wire. Connect the copper wires to the two poles of the battery, and then

connect the bismuth or iron wire between the two pieces of copper wire. The

bismuth/iron and copper must touch -- it is this junction that causes the Peltier effect.

26

The junction where current flows from copper to bismuth will get hot and the junction

where current flows from bismuth to copper the junction will get cold. The maximum

temperature drop is about 40 F from the ambient temperature where the hot junction is

located.

Peltiers are also commonly used as cooling devices for computer processors, as they are

extremely effective at cooling these units. A common problem with this method of

cooling CPUs is the dissipation of the heat produced by the hot side of the peltier.

Sometimes even with a heat sink (radiator) and a fan, one still may not be able to

dissipate the heat quick enough to make the peltier cooler effective and beneficial.

Refrigeration compressors are a special type of compressor used for refrigeration, heat

pumping, and air conditioning. Those compressors are large mechanical units, designed

to be the core of industrial and air conditioning systems. Small, portable compressors do

not fit into this category.

Refrigeration compressors are designed to turn low-pressure gases into high-pressure and

high-temperature gases. Additionally, technically speaking, they are also used to maintain

a low boiling point. This is achieved by removing vapor from the evaporator. There are

three main types of refrigeration compressors.

The first type of refrigeration compressor is the screw compressor. Screw compressors

pass the refrigerant vapor through screw spindles. Each screw spindle compresses the

intake of gas. Although there are refrigeration compressors with multiple spindles, most

screw compressors have just two screw spindles.

27

The second type of refrigeration compressor is the scroll compressor. Scroll compressors

achieve a lower rate of leakage and therefore are more efficient. They are the most

common type of refrigeration compressors on the market.

The third type of refrigeration compressor is the piston compressor. These compressors

achieve high pressure levels and are mostly used for commercial purposes. Piston

compressors are also known as reciprocating compressors.

Though other types of refrigeration compressors exist aside from the main three

described above, they fit only very specific situations and are usually not very effective.

These types are less common and their usage is very rare.

To sum it up, refrigeration compressors are large modules aimed at refrigeration, heat

pumping, and air conditioning of large facilities. They should not be confused with small,

stand-alone compressors. The three main types are of refrigeration compressors screw

compressors, scroll compressors, and piston or reciprocating compressors. Out of these

three, scroll compressors are the most efficient, while reciprocating compressors are used

for heavy industrial purposes.

Compressors provides detailed information on Air Compressors, Compressor Parts,

Compressors, Gas Compressors and more. Compressors are affiliated with Electric

Pressure Washers.

 1.1989 Apr 17, 1989 - The compressor lowers the temperature of refrigeration fluid in

the air conditioner, allowing the fan to blow cool air. "Our industry, as a whole,

will have no problem meeting that demand." Central air conditioning

28

compressors are made mostly in the U.S.A.

2.1992 Mar 4, 1992 including air-conditioners that use plain water as a refrigerant and

semiconductors that cool down when charged with electricity. An alternative

technology, backed by the natural gas industry, eliminates the compressor. After

the refrigerant has done its cooling

3. 1993 Feb 15, 1993 - In general, floor talk indicated that standardization is expected to

come to the letter and numbering system, and the industry would settle on

identical ... showed a refrigeration condensing unit that booth officials said

looked like a Japanese mini-split and used a scroll compressor.

 4.1999 Nov 1, 1999 - establishment of a hedge against the uncertainties of energy

industry restructuring. Today, high-efficiency natural gas cooling equipment is

readily . A mechanical compressor compresses cool, low-pressure refrigerant

vapor, discharging hot, high-temperature refrigerant vapor.

TPIL HYDERABAD HAS A TOTAL OF 766 PERMANENT EMPLOYEES AS ON

WHICH INCLUDES:

Officers

Staff

Workers

Special Baillie’s

29

Badili’s

Contract workers

CHAPTER-4

COMPANY PROFILE

30

TECUMSEH GLOBAL

Tecumseh Products Company (TPC) is a global Multi-National corporation

producing

Mechanical and electrical components essential to industries manufacturing and products

for health, comfort and convenience.

TPC is an independent global manufacturer of hermetic compressors for air

conditioning and refrigeration products, gas online engines and Power Tran composers

for lawn and garden applications and pumps.

TPC is a US$2 billion cooling giant having a global presence and a global vision

with 29 manufacturing locations in 4 continents across 100 countries employing over

19,000 people.

It is the world’s largest independent compressor company with 10% market share of the

global, 150 million units a year compressor market.

31

TPC products are grouped into three principal industry segments:

Compressor products

Engine and power Tran products

Pump products

In 1998 the world wide sales were $1.75 billion with compressors accounting for 60% of

total sales, engines 34% and pumps 6%.

IMAGE:

To build up a high degree of customer confidence by sustaining international

markets in regard to supply of spare parts and after sales service. The HRD policy of

TECUMSEH is manifested in the code of conduct of TPIPL listed below.

Respect and mutual trust.

Integrity and fairness in all matters.

Team work

Best customer service

Pursuit of personal excellence

32

ESTABLISHMENT:

Mr.Ray.Herick, a former employee of Ford Motors Company started in 1930. In

1937, the company went public with an offering of 25000 shares. Mr. Ray.W.Herick

passed away in 1973, but his vision lives through his son ken, the current chairman of the

board and his grandson Todd, who has been president and CEO since 1984. TPIPL is a

US$2 billion cooling giant leaving a global vision with 29 manufacturing locations in 4

continents across 100 countries employing over 19000 people. It is the world’s largest

independent compressor manufacturing company with a 10% market share of global 150

million units a year compressor market. In 1998, the worldwide sales were $1.75 million

with compressors accounting for 60% of total sales, engines 34% and pumps 6%.

TECUMSEH INDIA:

TECUMSEH Products India Private Ltd. is an ISO 14001 and 9001 certified,

American based Multi-National Company that has been expertise in manufacturing

hermetically sealed compressors. Tecumseh India is a100% subsidiary to Tecumseh

Products Company (TPC). In India the company has 20 sales offices and an extensive

network of over 200 dealers and more than 600 registered small scale manufacturers.

Tecumseh India is the preferred supplier to the who’s who of the AC&R Industry

in India and the Middle East, SAARC countries. The company was originally established

in 1963 under the name of USHA Refrigeration Industries Ltd., (URIL).

33

URIL started in 1963. URIL manufacture compressors for water cooler, air

conditioner, Air coolers. Lala Charath Ramanji who was from a renowned industrial

family of DCN and coromandal group of companies started URIL.

In 1970, the URIL was changed to C Shriram Refrigeration Ltd. And the business

was also diversified towards manufacturing of diesel engines and water coolers. Shriram

industries played a great role in the field and captured more than 50% of the market share

in India. Shriram industries also kept its hands in international trade and were successful

in exporting their products to the neighboring countries Nepal and Bangladesh.

In 1980 Lala Charatha Ramji son Mr. Siddharth C.Shriram became the chairman

cum managing director of the company. The period saw sea change in industrial policy,

which resulted in a great change in the industrial sector. In the process for survival,

Shriram went into tech collaboration with Westing House us and was named as SIEL

compressors.

Siel compressors were the first Indian company to manufacture compressors.

Later Westing House stopped manufacturing compressors and Siel went into technical

collaboration with Tecumseh Products Company USA in 1988.

Tecumseh means ‘CROUCHING PANTHER’.

Derived from the Shawnee tribe (1768-1813). It started its operations to offer new

state of art AW series to Indian customer, Subsequently, Tecumseh Products.

34

Company took over Siel group in 1997 and Siel group become 100% subsidiary

of Tecumseh Products Company. As soon as Tecumseh took over the company it stopped

manufacturing water coolers and restricted its production to CFC/hermetically sealed

compressors.

Tecumseh India is headed by Mr.S.Vipin Sondhi, managing director and employs

about 2500 people. Tecumseh India is largest merchant g manufacturer of compressors in

the country catering to all three segments air-conditioners, domestic and commercial

refrigeration and is a leading player with a growing Indian market for compressors in all

the three segments.

Tecumseh products Company invested $80 million in Indian operation known as

Tecumseh Products India Private Ltd., (TPIPL). TPIPL has two states of manufacturing

fac8ilities at Hyderabad. Andhra Pradesh and Ballabgarh. Haryana with CADEM at the

Hyderabad plant to meet global engineering needs.

About the Hyderabad plant:

35

The Hyderabad plant is located on sprawling 54 acre land at Balanagar. This

factory as started with the technical collaboration of Westing House, USA since Westing

House stopped making compressors, the company entered into technical collaboration

with Tecumseh in 1988-89 to offer Indian customers the state of the art AW series.

AT the Hyderabad plant, they manufacturer compressors for air-conditioning

form 1200BTU and also compressors for deep freezers, bottle coolers and water coolers.

Tecumseh is an ISO9001 certification too for the ECO friendly environment

maintenance. They have six regional sales offices, out of which four are located in

metropolitan cities like Delhi, Mumbai, Chennai and Calcutta. While the other two

offices are at Ahmedabad and Secunderabad. Besides these have branch office and

depots located in prime cities all over the country.

36

They have 177 dealers across the country and preferred suppliers to key OEMs

(original Equipment Manufacturers) like Voltas, AMTREX, LG. Blue-star, Godrej,

Videocon. FeddersLioyd, Hitachi etc…….

ORGANIZATION OVER VIEW:

Tecumseh products India company limited company is situated in Balanagar

industrial belt 15km from Hyderabad city. It’s located on the highway line going towards

HMT limited, Narsapur road regarding the previous history of the company it is started in

the year 1963 under the name and style as USHA Refrigeration industries family of DCM

and coromandal group of companies.

In 1970s they had diversified their business towards manufacturing of diesel

engines and air-coolers. They maintained a very good role in this field and captured

more than 50% share of India’s market. They had very good exports to neighboring

countries like Nepal, Bangladesh etc., later on in 1980s it was run by his son Mr.

Siddharth C Shriram who was chairman cum managing director of the company. In this

region lot of changes took place in industrial sector due to new industrial policy in the

country. For survival the company had approached Tecumseh Michiga America and it

was in technical collaboration for some years.

In 1996 it was sold to Tecumseh products India Ltd Mr. Todd W Heroic who is

the chairman of the company. It had several manufacturing units in all over the world and

it was awarded 14001 certification in 1998.

37

The company had employed 436 permanent workers, 180 staff and around 120

officers. It had 4 regional offices and 12 branches through out the country. Apart from

this, company is providing indirect employment for more than 1000 families in a way of

providing ancillary job work.

About the ballabgarh/faridabad plant:

At Faridabad, in northern India, they have a capacity of about one million

compressors. This plant is eing relocated to an integrated unit at Ballabgarh with an

investment of Rs.200 crores (approx). This state of the art plant for manufacturer of non-

CFC compressors will be one of the best compressor facilities in Asia. It is located on21

acres of land on the Delhi-Mathura National highway

Departments of TPIPL:

HRdepartment

Accounts department

AW machine

Export Oriented Unit (EOU)

R&D

Maintenance and engineering department

Quality

Aw press shop

38

Service center

AW assembly

Rotary

During my project I observed activities in all the sections, in was they deal in

recruiting workers of technical nature and they call the candidates for various trades to

take them as apprentices trainees for a period of one year as per the norms laid down by

the government. In their tenure they will be given good training in their trader and they

will set to relate instruction classes which are conducted by department of employment

and training, they will be sent to appear the examination and necessary help is extended

till they complete their program. Regarding the functions of A&PO they look after the

attendance and leave records of all employees. They will advise the attendance

particulars to the information and Technology Department, where salary particulars are

processed. The salary particulars are given to accounts department in one day advance of

date of payment to workers under the supervision of time office personnel. Regarding

the payments, salaries will be credited to their savings bank accounts.

In ORTD section they will look after recruitment of personnel other than worker

cadre. Training will be given before they send to their work places. In the organization

all permanent

employees are drawing more than Rs.7,500/- and these people are not covered with a

medical policy with nation insurance company and the claims of employees are processed

through this department.

39

In organization good canteen is maintained all the employees are served breakfast, lunch

and dinner at subsidized rates. Apart from this tea will be served to all employees two

times on all working days. All the items are prepared as per the guidelines of the

management.

In Welfare department they look after so many facilities like issue of uniforms,

shoes an other facilities like conduction of sports, indoor and outdoor games to all

employees. On 30th of June every annual day is celebrated. On that day cultural

programs are arranged, outside cine artists are invited. On this occasion management

will distribute prizes to all winners of sports and cultural participants. Mementos are

distributed to employees who had completed 25 years of service. Best attendance,

rewards are distributed to workmen who are regular in attendance.

The company is built as per the regulations of the government. It has Eco-friendly

atmosphere throughout the factory. Company got certificate for ISO14001, 1988, this is

the first organization in the world to get the certification. All employees will take

participation in maintaining the factory clean and green.

TPIPL’S VISION:

To provide comprehensive solutions to customers in the field of cooling while

providing autonomous working environment for employees to top their potential bringing

out the best in them and optimize stake holders returns

TPIPL’S MISSION:

40

To be recognized as the world leader in the supply of refrigerators and air

conditioning compressors.

To provide our customers superior products and services.

To create environment in which our employees can grow to their full potential

and make difference.

To provide superior value to our stake-holders.

To be driven to reach the highest possible standards of excellence in our entire

endeavor.

Nothing will be done to compromise our integrity.

5-S PHILOSPHIES:

Tecumseh encourages its employees to follow these philosophies, which is the

Japanese way of working.

1. SERI (Sorting Out)

Look around your work area and ask 7yourself “is it really necessary for all items to be

there?”

Separate items “ok”, Re-workable and rejected items.

Rework the re-workable items and dispose off the rejected items.

2. SEITON (Systematic Arrangement)

41

Items must be placed in prefixed locations so that they are accessible and can be easily

used.

Items should be clearly identified by labeling them properly.

3. SEISO (SPIC AND SPAN)

Clean the work place yourself.

Clean all the equipment including tables etc., yourself.

4. SEIKETSU (SERENE Atmosphere)

A clean work place properly selected and with proper arrangement will soon become

dirty if SEIRI, SEITON and SEISO are not practiced regularly.

To achieve SERENE atmosphere the three steps of SEIRI, SEITON and SEISO should

be continuously repeated.

We should keep our area of work neat and clean.

5. SHITSHUKE (Stick to Self Discipline)

Follow rules and regulations strictly.

Adhere to timings and respect time.

Conform to standards while working.

Follow the prescribed operational standards.

ADVANTAGES OF 5-S

By thoroughly enforcing 5-s in each work area.

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Operations can be performed without error proceedings in well regulated fashion

in fewer defective items thereby increasing the overall quality of product.

Operations can be performed safely and comfortably reducing the chances of

accident.

Machinery and equipment can be carefully maintained the number of

breakdowns.

Operations can be performed efficiently and productively.

HOW TO ACHIEVE 5-S

Every employee can achieve 5-S very easily by having a close look at his work place. He

is to ensure that

No rejected/unwanted items are lying at his work place.

All items are kept in proper locations/order.

Everybody should co-operate in keeping his and other’s area and the machines

clean.

Follow the rules and regulations and maintain required standards.

STANDARDS AND POLICIES AT TPIPL

43

Workplace improvements (5-S Philosophies).

Creativity club.

KRA’s (improvements/suggestions).

Variable earnings-sharing of value addition.

Agreement process-organization needs.

Non-conformance reporting meetings.

Team assessment and feedback.

Changing life styles.

TPIPL’S QUALITY POLICY

Committed to total customer satisfaction by meeting their evolving needs,

exceptional and aspirations-stated, implied or latent.

Striving to provide products and services of global standard and to reach a

position of leadership in the field of operations, setting new values.

Continuous improvement across the organization and up gradation of product,

technology and process supportive environment at least cost to society shall

be the means to achieve the goals.

The approach will be through proper systems and procedures and total

involvement of employees endeavor and other business associates.

TPIPL’S ENVIRONMENTAL POLICY

44

The vision of Tecumseh India is to be a SERENE green and co-friendly co-operation

carrying out all its operations contributing to preservations of environment and natural

resources for the benefit at large.

Among others this can be achieved through

Allocation of country wide priority for sustainable development with total

involvement and commitment.

Evaluation and up gradation of current technologies products and raw materials

for minimization handling and disposal of solid, liquid and gaseous wastes.

Legal compliance and going beyond setting new standards.

Meeting international expectations such as Montreal Protocol 1987 in phrasing

out CFC’s as refrigerators in our compressors.

Training and propagation knowledge.

TPIPL’S KEY BUSINESS OBJECTIVES

Set the world industry standard of excellence for customer satisfaction.

Achieve total quality.

To attain and surpass for our products.

Maintain clear technology leadership.

Market share with focus on customer needs.

Meet business and financial commitments

45

TPIPL’S SEVEN DEADLY SINS

Inconsistent product quality.

Slow response to market place.

Lack of innovative and competitive product.

Uncompetitive cost structure.

Inadequate employee involvement.

Unresponsive customer service.

Ineffective resources allocation.

Reciprocating

The AW series of energy efficient compressors from Tecumseh, is undoubtedly most preferred

range of compressors for air-conditioners.

Super Tropical

Low Noise level

Wide Voltage Range

Highly Efficient

Proven Product

46

Rotary

Super Tropical

High EER

High motor Torque

Low Sound & Vibration

47

Low Sound & Vibration

CHAPTER-5

DATA ANALYSIS AND

48

INTERPRETATION

TECHNICQUES OF INVESTMENT EVLAUATION

The investment evaluation techniques play vital role in evaluating a project.

Profitability of a firm will increase if the proposal is profitable and vice versa.

Selection of profitable projects will help to maximize value of the through the

maximization of profits. Therefore, capital budgeting decisions from the framework

for a firm’s future development, as we have seen in capital budgeting decisions form

the framework for a firm’s future development. As we have seen in the analysis stage,

projects evaluation involves market analysis, financial analysis, technical analysis,

economic analysis, and ecological analysis. In financial analysis after estimation of

the cash flows and required rate of return on the project the next step is evaluation of

various investment alternatives and selection of the most profitable project.

49

A wide range of criteria has been suggested to judge the worthwhile ness of

investment of investment alternatives. Evaluation techniques are divided into two

broad categories, viz.,

(1) Traditional techniques or non-discounted techniques

(2) Modern techniques or discounted techniques

The traditional techniques further subdivided into two, as such as

(a) pay back period (PBP)

(b) accounting rate of return or average rate of return (ARR)

The modern techniques are again subdivided in to three such as

(a) net present value(NPV) technique

(b) internal rate of return(IRR) technique

(c) profitability index(PI)/discount benefit cost ratio(DBCR)

TRADITIONAL TECHNIQUES

The traditional techniques (non-discounted cash flow) are further sub-dividend into two,

such as

(a) pay back period, and

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(b) accounting rate of return (ARR).

(A) PAY BACK PERIOD

Pay back period is one of the most popular and widely recognized technique of

evaluating investment proposals. Pay back period may be defined as the period required

to recover the original cash outflow invested in a project. In other words it is the

minimum required number of years to recover the original cash invested in a project. The

cash flow after taxes are used to compute pay back period.

Project Evaluation Technique

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Modern

Or

Discounted cash flow

Traditional or

Non –

discounted cash

flow

Net present

value

Internal rate

of return

Profitability

indexPay back

period Accounting rate

of return

Pay back period can be calculated in two ways, (1) using formula and (2) using

cumulative cash flow method.

The first method can be applied when the annual cash flow stream of each year is equal

i.e., uniform cash flows for all the years. In situation the following formula is used to

calculate pay back period.

Pay Back Period = Original investment ÷ constant annual cash flows after taxes

The second method is applied when the annual cash flow after taxes are unequal or not

uniform over the project life period. In this situation, pay back period is calculated

through the process of cumulative cash flows, cumulative process goes up to the period

where cumulative cash flows equal to the actual cash flows. Put it simple:

PBP = year before full recovery + ( unrecovered amount of investment + cash flows

during the year)

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Decision Rule

Acceptance or reject of the project decides based the comparison of calculated

PBP the (maximum) standard pay back period, symbolically:

Accept: cal PBP < standard PBP

Reject: cal PBP > standard PBP

Advantages of pay back period

The merits of pay back period are,

- it is very simple and easy to understand.

- cost involvement in calculating PBP is very less with the comparison of modern

methods.

Limitations of pay back period

Pay back period method suffers from following limitations

- It ignores cash flows after pay back period.

- It is not appropriate method of measuring the profitability of a project, as it does not

consider all cash inflows yielded the investment.

- It does not take into consideration time value of money.

- There is no rationale basis for setting a minimum pay bask period.

53

- It is not consistent with the objective of maximizing shareholder’s wealth since share

value does not depend on pay back periods of investment projects.

(b) ACCOUNTING RATE OF RETURN

Accounting rate of return method is uses accounting information as revealed by financial

statements, to measure the profitability of the investment proposals. It is also known as

the return on investment (ROI). Some times it is called as average rate of return of

return(ARR). Average annual earnings after depreciation and taxes are used calculate

ARR. It is measured in terms of percentage. ARR is may be calculated in two ways.

(1) whenever it is clearly mentioned as accounting rate of return.

If accounting rate of return is given in the problem, return on original investment method

should be used to calculate accounting rate of return.

Average annual EAT or PAT

Accounting rate of return (ARR) = -------------------------------------- × 100

Original investment (OI)*

*OI = original investment + additional NWC + installation charges + transportation

charges

(2) whenever it is clearly mentioned as average rate of return.

54

If average rate of return is given in the problem, return on average investment method

should be used to calculate average rate of return.

Average annual EAT

Average rate of return = -------------------------------- × 100

Average investment(AI)*

*AI = (original investment – scrap value) ½ + additional NWC + scrap value

(3) if ARR is given in the problem, any one of the above method can be used

calculate ARR (preferably return on average investment method).

Decision Rule

Acceptance or reject of the project decides based the comparison of calculated

ARR with the predetermined rate or cut of rate.

Accept: cal ARR > predermined ARR or cut- off rate

Reject: cal ARR < predermined ARR or cut- off rate

Advantages of ARR method

The ARR method has some merits.

- It is very simple to understand and easy to calculate.

- Information can easily be drawn from accounting records.

55

- It takes into account all profits of the projects life period.

- Cost involvement in calculating ARR id very less with the comparison of modern

methods , since saves analysts’ time.

Limitations of ARR method

ARR method suffers form serious deficiencies.

- it uses accounting profits instead of actual cash flows after taxes in evaluating the

projects. Accounting profits are inappropriate for evaluating and accepting projects.

Since they are computed based on arbitrary assumptions and choices and also

include non- cash items.

- It ignores the concept of time value of money

- It does not allow the fact that the profits can be reinvested.

- It does not differentiate between the sizes of the investment required for each

project.

- It does not take into consideration any benefits, which can accrue to the firm from

the sale of abundant of equipment, which is replaced by the new investment.

- It feels that 10 per cent rate of return for 10 years is more beneficial than 8 per cent

rate of return for 25 years.

- It id incompatible with the objective of wealth maximization to the equity

shareholders.

- It uses arbitrary cut-off as yardstick or standard for acceptance or rejects rule.

(3) MODERN TECHNIQUES OR DISCOUNTED CASH FLOW (DCF)

TECHNIQUES.

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Modern techniques take into consideration almost all the deficiencies of the traditional

methods and they consider all benefits and cost occurring during the projects’ entire life

period. Modern techniques again subdivided into three, viz., (a) net present value (b)

internal rate of return or trail and error, and (c) profitability index or discounted benefit

cost ratio.

(a) NET PRESENT VALUE (NPV)

NPV can be defined as present value of benefits minus present value of costs. It is the

process of calculating present values of cash inflows using cost of capital as an

appropriate rate of discount and subtract present value of cash out flows the present value

of cash inflow and find the net present value, which may be positive or negative. It is also

known as discounted benefit cost ratio method. Positive net present value occurs when

the present value of cash inflows is higher then the present value of cash outflows and

vice versa.

Steps involved in computation of NPV

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(1) Forecasting of cash inflows of the investment project based on realistic

assumptions.

(2) Computation of cost of capital, which is used as discounting factor for conversion

of future cash inflows into present values.

(3) Calculation of PV cash flows using cost of capital as discounting rate.

(4) Finding out NPV by subtracting PV of cash outflows from PV of cash inflows.

Decision Rule

Acceptance or reject rule of the project decides based the NPV.

Accept: NPV>ZERO

Reject: NPV<ZERO

Advantages of NPV method:

The merits of NPV are,

- it takes into account the time value of money.

- It uses al cash inflows occurring over the entire life period of the project including

scrap value of the old project.

- It is particularly useful for the selection of mutually exclusive projects.

- It takes into consideration the changing discount rate.

- It is consistence with the objective of maximization of shareholders’ wealth.

Limitations of NPV method:

58

NPV is the most acceptable method with comparison of traditional methods. However, it

has certain limitations.

- it is difficult to understand when compared with PBP and ARR.

- Calculation of required rate or discounting factor or cost of capital (based on

different methods) is difficult, which involves a lengthy and time consuming

process and presents illustrations.

- In case of projects involving difficult cash outlays NPV method may not give

dependable results.

- It does not give satisfactory result when the comparison of two projects with

different life periods. Generally a project which having a shorter economic life

would preferable, other things being equal.

(b) INTERNAL RATE OF RETURN (IRR)

This is the second discounted cash flow method. It is also known as trail and error

method, yield on investment, rate of return, time adjusted rate of return and so on.

Internal rate of return may be defined as that discounting factor at which the present

value of cash inflows. It takes into account the magnitude and timing of cash flows. in

case of NPV method the discount rate is the required rate of return and that is

predetermined usually cost of capital, which determines based on external point of view,

where as IRR is based on facts, which is internal to the proposal. IRR depends entirely on

the initial cash outlay and cash proceeds of the proposal project. It is the best available

59

concept. We shall see that although frequently used concept in finance, yet at times it can

misleading measure of investment worth.

Computation of IRR is based on the cash flows after taxes. IRR is

mathematically represented as ‘r’. it can be found out by trail and error method. In this

method the evaluator selects any discount rate (by calculating fake PBP) to compute

present value of cash inflows. Otherwise cost of capital taken as first trail. If calculated

present value of the cash inflows is higher than the present value cash outflows then

evaluator has higher discount rate. On the other hand if the present value of cash inflows

is lower than the present value of cash outflows than evaluator has to try lower

discounting factor. This process will be repeated till the present value of cash inflows

equals to the present value of cash outflows. Generally, IRR may lies between two

discounting factors; in that case analyst has to use interpolation formula for calculation of

IRR. The formulae are as follows:

PVLDF-COF

IRR = LDF % + [▲DF ------------------------]

PVLDF-PVHDF

Where LDF = lower discount factor

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▲DF = different between low discounting factor and high discounting factor

PVLDF = PV of cash inflows at low discounting factor

PVHDF = PV of cash inflows at high discounting factor

COF = cash outflow.

Decision Rule:

Acceptance or reject rule of the project decides based on the calculated IRR and cost of

capital(Ko).

Accepted: IRR > cost of capital(Ko)

Reject: IRR < cost of capital(Ko).

Advantages of IRR

This method is a theoretically sound for evaluating capital expenditure projects. It has the

advantages offered by the NPV method such as:

- It takes into account the time value of money.

- It considers cash flows throughout the project’s life.

- It does not use the concept of required rate of return or the cost of capital; itself

provides a rate of return which is indicative of profitability.

- It gives more psychological satisfaction to the user, since it is calculated by the

method of trail and error.

- It is consistent which the objective of shareholder’s wealth maximization.

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Limitations of IRR:

Its theoretical soundness is not withstanding due to some serious limitations.

- It is difficult to understand and to calculate since it involves tedious calculations,

- It implies that profits can be reinvested at inter rate of return, which is not logical,

- It produce multiple rate of returns which can be confusing,

- It does not helpful for evaluation of mutually exclusive projects, since a project

with highest IRR would be selected. However, in practice, may not turn out to be

one which is the most profitable and consistent with the objective of shareholder’s

wealth maximization.

- It may not give fruitful result in case of unequal projects life, unequal cash

outflows, and difference in the timing of cash flows.

COPARE AND CONTRAST ‘NPV’ WITH ‘IRR’

NPV and IRR are the discounted cash flow methods available for evaluation of capital

budgeting projects. These are similar in certain respects. In certain situations, they would

give same accept or reject decision. But they differ in the sense that results regarding the

choice of assets under certain circumstances mutually contradictory. The comparison of

these methods is therefore, involves discussion of (a). Similarities between methods, and

(b). Differences.

NPV with IRR: similarities

- the two methods use cash inflows after tax (CFAT).

- Both the methods take in to consideration the time value of money.

62

- They consider CFAT through out projects life period

- Both methods give consistent result in terms of acceptance or rejection of

investment proposals in certain situations that are if a project is viable it will be

indicated by both the methods. If a project is not qualified, both methods will

indicate that it should be rejected.

- The situations in which the two methods will give a concurrent accept or reject

decision will be in respect of conventional and independent projects.

- According to NPV the decision rule is that a project will be accepted if NPV is

grater than zero, the IRR would support projects where IRR grater than cost of

capital (Ko)

NPV with IRR: Differences:

- In case of mutually exclusive projects if NPV method accepts the project while IRR

rejects.

- If there is a size disparity the NPV and IRR will give different rankings.

- When there is an incremental approach, the NPV method is superior to the IRR,

because the former supports projects, which are compatible with the goal of

shareholder’s wealth while the latter does not.

- When there is time disparity the NPV would give results superior to the IRR

method.

- Projects with unequal lives NPV and IRR would give conflicting ranking to

mutually exclusive projects.

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(C) PROFITABILITY INDEX (PI)

This is another discounted cash flow method of evaluating investment proposals. It is

similar to NPV method. It is the ratio the present value of cash inflows, at the required

rate of return, to the initial cash outflow of the investment proposal. PI measures the

present value of future cash per rupee of investment, where as NPV is based on the

difference present value of cash inflows and present value of cash outflows. NPV is not

reliable to evaluate projects requiring unequal initial investments. PI method provides

solution to this problem. PI is the ratio, which is derived by discounted benefit cost

ratio(DBCR).

PI = present value of cash inflows ÷ present value of cash outflows

Decision Rule

Accept: PI > 1 Reject: PI < 1

Characteristics of Sound Investment Technique

Any investment technique should be called as sound, when it is possessed the following

characteristics:

(1) it should consider all cash flows to determine the true profitability,

64

(2) it should provide for an objective and unambiguous way of separating good

projects from bad projects,

(3) it should help in ranking of projects according to their true profitability,

(4) it should recognize the fact that bigger cash flows are preferable to smaller ones

and early cash flows are preferable to later ones,

(5) it should be a criteria, which is applicable to any conceivable investment project

independent of others

advantages of PI

PI method satisfies almost all the requirements of a sound investment criterion. Now it

is better to call it as sound investment technique.

- It gives due consideration to time value of money.

- It considers all cash flows to determine PI,

- It will help to rank projects according to their PI,

- It recognized that the fact that bigger cash flows are better to smaller ones and early

cash flows are preferable to later ones.

- It can be used to choose mutually exclusive projects by calculating the incremental

benefit cost of ratio,

- It is consistent with the objectives maximization of shareholder’s wealth.

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ANNUAL PLAN: (DETAILED) SUMMARY OF CAPITAL BUDGETING FUNDS

(BUDGETING YEAR:2004-12)

INTRODUCTION TO UNAPPROVED SCHEMES:

In TPIPL limited a number of new projects are going on out of which 3

Projects are selected for the study. Some of the essential aspects of the projects are

depreciation Rate, company’s tax rate and the discounting factor.

The company is depreciation as follow given percentage are 12, 16, and 12 the company

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Followed the corporate tax is 35% and the discounting factor is 10% which is normally

fallowed by the corporate house’s the following table gives the abstract of the projects of

the company.

ABSTRACT OF THE PROJECT:

Serial. no

Project name.

Budget estimates. Depreciation.

Tax percentage.

Present value factor.

1Gear cutting machine. 1200000 12% 35% 10%

2

Thread cutting machine. 3185000 12% 35% 10%

1. gear cutting machine:

(estimated budget Rs.1200000 lakhs)

Calculation of cash flows after tax (craft)

Year CASH FLOWS

LESS: DEP 12% PBT LESS:TAX@35% PAT ADD:DEP CFAT

1 22800 144000 84000 29400 54600 144000 198600

2 264000 144000 120000 42000 78000 144000 222000

3 312000 144000 168000 588000 109200 144000 253200

4 384000 144000 240000 84000 156000 144000 300000

5 432000 144000 288000 1008000 187200 144000 331200

TOTAL         585200   1620000

1. CALCULATION OF NPV METHOD:

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NET PRESENT VALUE = PV OF CFAT - OUT FLOW

Where;

Pv of CFAT: 964296.6 Out flow: 1200000

Net present value: 964296.6 – 1200000

NPV= - 235703.4

INTERPRETATION:

* The NPV of the project is negative, so the project should be rejected.

2. CALCUALATION OF IRR METHOD:

WHEN IRR IS : 964296.6 IS NOT EQUAL 1200000

NOTE:

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YEARS CFAT PV@10% PV OF CFAT0 1200000 1 12000001 19600 0.909 180527.42 222000 0.826 1833723 253200 0.751 190153.24 300000 0.683 2049005 331200 0.62 205344TOTAL 964296.6

IRR: PV OF CFAT = NPV

● The IRR of the project is equal level it the level

● But the amount should be higher than the out flow.

●T he amount should increase after the substitute of IRR formula.

● The present problem is required rate 10% to change the value is 8%

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NET PRESENT VALUE: PV OF CFAT-OUT FLOW

Where:

PV of CFAT: 1021245.6

Out flow: 1200000

(178754.4) - 12000000 IRR = 8 + ------------------------------------------- *2 (178754.4) – 964296.6

IRR = 5.6

INTERPRETATION:

● IRR of the project is 5.6% which is below 10% so the project is rejected.

3. CALCULATION OF ARR METHOD:

AVARAGE ANNUAL PROFITS AFTER TAXESARR = ------------------------------------------------------------------------------------- *100 AVERAGE INVESTMENT OVER THE LIFE OF THE PROJECT

Where: Average annual profits after taxes: profits after tax

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YEARS CFAT PV@8% PV OF CFAT

0 1200000 1 1200000

1 198600 0.926 183903.6

2 222000 0.857 190254

3 253200 0.794 20104.8

4 300000 0.735 220500

5 331200 0.681 225547.2

TOTAL 1021245.6

LOW RATE OF CFAT – OUT FLOWIRR = r + ------------------------------------------------------------------- LOW RATE OF CFAT – HIGH RATE OF CFAT

No. of years

Average annual PAT: 585200 5

Average investment: total investment 2

: 1200000 2 : 600000

ARR = 117000 *100 600000

= 0.195 * 100

ARR = 19.5

INTERPRETATION:

● The ARR is 19.5% more then the required rate of return.● The ARR of this accepted.

4. CALCULATION OF PROFITABILITY INDEXES:

Present value of cash inflowsProfitability index : ------------------------------------------- Present value of cash outflows

Where:

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Present value of cash inflows: 964296.6

Present value of cash outflows: 1200000

Profitability index = 964296.6

1200000

Profitability index = 0.803

INTERPRETATION:

● PI of the project is less than 1, it should be rejected.

5. CALCULATION OF PAY BACK PERIOD:

YEARS CASH INFLOWSCUMULATIVE CFAT

1 198600 198600

2 222000 420600

3 253200 673800

4 300000 973800

5 331200 1305000

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Required CFATPAY BACK PERIOD: base year + -------------------------- Next year CFAT

Where:

Base year = 4 Required CFAT = 226200 Next year CFAT = 331200

226200PBP = 4 + --------------------- 331200

= 4 +0.683 = 4.683 Years.

INTERPRETATION:

● the discounted pay back period is 4.683 years. The investment will be recovered in

4 years and 6 months.

2. THREAD CUTTING MACHINE:(Est. Budget RS. 31, 85,000 lakhs)

CALCULATION OF CASH FLOW AFTER TAX (CFAT)

YEARS CASH LESS:DEP@12% PBT LESS TAX@35% PAT ADD:DEP CFAT

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FLOWS1 605150 382200 222950 78032.5 144917.5 382200 52711762 700700 382200 318500 111475 207025 382200 5892253 828100 38200 445900 156065 289835 382200 6720354 1019200 382200 637000 222950 414050 382200 7962505 1146600 382200 764400 267540 496860 382200 879060TOTAL 1552688

1. CALCULATION OF NPV METHOD:

YEARS CFAT PV@10% PV OF CFAT0 3185000 1 31850001 527117.5 0.909 479149.82 589225 0.826 486699.83 672035 0.751 504698.34 796250 0.683 501637.55 879060 0.620 545896.3TOTAL 2518081.7

NET PRESENT VALUE: PV OF CFAT – OUTFLOW

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Where:

PV of CFAT: 2518081.7 Out flow: 3185000

NET PRESENT VALUE: 2518081.7 – 3185000 NPV = (- 666918.3)

INTERPRETATION:

● The NPV of the project is negative, so the project should be rejected.

2. CALCULATION OF IRR METHOD:

When IRR is: 2518081.7 not equal to 3185000

NOTE:

●The IRR of the project is equal leave it the level.

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IRR: PV OF CFAT = NPV

●But the amount should be higher then the out flow.

●The amount should increase the percentage will decrease at the time the value is increase after the substute of IRR formula.

●The present problem in required rate 10% to change the value is 8%.

Where:

PV of CFAT: 2710556 Out flow: 3185000

Net present value: 2710556 – 3185000

NPV = (- 474443.9)

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YEARS CFAT PV@8% PV OF CFAT

0 3185000 1 3185000

1 527117.5 0.926 488110.8

2 589225 0.857 504965.8

3 672035 0.794 533595.7

4 796250 0.735 585243.7

5 879060 0.681 598639.8

TOTAL 2710556

NET PRESENT VALUE: PV OF CFAT-OUT FLOW

LOW RATE OF CFAT – OUT FLOWIRR = r + ------------------------------------------------------------------- LOW RATE OF CFAT – HIGH RATE OF CFAT

(474443.9) - 3185000IRR = 8 + -------------------------------------- *2 (474443.9) – 2518081.7

= 8 + (- 3659443.9) *2 - 2992525.6

= 8 + (2.44) IRR=10.44 INTERPRETATION:

●IRR of the project is 10.44% which is approximately 10% so the second project is accepted.

●But according to NPV it should be rejected, IRR accepted means there is risk ness in the project.

3. CALCULATION OF ARR METHOD:

AVARAGE ANNUAL PROFITS AFTER TAXESARR = ------------------------------------------------------------------------------------- *100 AVERAGE INVESTMENT OVER THE LIFE OF THE PROJECT

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Where: Profit after tax Average annual profits after taxes: ----------------------- No. of years

1552687.5 Average annual PAT: --------------------------- 5 = 310537.5

Total investment Average investment: -------------------------- 2

: 3185000 2 = 1592500

310537.5ARR = --------------*100 1592500

=0.195*100 ARR= 19.5%

INTERPRETATION:● The ARR is 19.5% more then the required rate of return.● The ARR of this is accepted.

4. CALCULATION OF PROFITABILITY INDEXES:

Present value of cash inflowsProfitability index: -------------------------------------------

Present value of cash outflows

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Where:

Present value of cash inflows: 2710556 Present value of cash outflows: 3185000

2710556Profitability index = -------------------- 3185000

PI = 0.851 times.

INTERPRETATION:

● PI of the project is less then 1, it should be rejected.

5. CALCULATION OF PAY BACK PERIOD:

YEARS CASH INFLOWSCUMULATIVE CFAT

1 527117.5 527117.5

2 589225 1116342.5

3 672035 1788377.5

4 796250 2584627.5

5 879060 3463687.5

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Where: Base year = 4 Required CFAT = 600372.5 Next year CFAT = 879060

600372.5PBP = 4 + --------------- 879060

= 4.683 years

INTERPRETATION:

●The discounting pay back period is 4.683 years. Investment will recovered in 4 years and 6 months.● the study concerned with the capital budgeting with reference to TPIPL. The data is collected organized, analyzed and interpreted.The following findings are obtained from the analysis of data.

FROM THE ABOVE THE ANALYSIS ACCORDING TO THE TADITIONAL

TECHNIQUES:

Pay back period: in pay back period of the gear cutting machine the investment may

recover with in 4.27 years. But it does not tell when their proposal is profitable as not.

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Required CFATPAY BACK PERIOD: base year + -------------------------- Next year CFAT

ARR: in ARR of the gear cutting machine is accepted which is greater then the pre-

specified rate.

MODERN TECHNIQUES:

NPV: Net present value of the project is negative so, management rejects the proposal

this project benefits may not excess over the costs in real time it should be rejected.

IRR: The IRR of the projects is less than required rate of the company so, the proposal is

rejects.

PI: The profitability index of the project is below the ‘1” standard because project are

rejected.

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CHAPTER-6

Findings, suggestions and conclusion

FINDINGS:

THE GEAR CUTTING MACHINE:

● the gear cutting machine, first project is generating unequal cash flows for 5 years, the

initial investment is 12,00,000 lakhs.

● the ARR is 19.5% more then the required rate of return.

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● the discounted pay back period is 4.27 years. The investment will be recovered in 4

years and 2 months.

● from the above over all analysis of the gear cutting machine would not be accepted by

the company compared to discounting as modern methods

● Company may take the investment decision upon the gear cutting machine according to

the traditional methods.

● the over all project is not satisfactory.

THREAD CUTTING MACHINE:

● Thread cutting machine is the third project generate unequal cash flows for 5 years, the

initial investment of the project is 31,85,000

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● The ARR of the project is 19.5% which is more than the company rate of return.

● The discounted pay back period is 4.27 years. The investment of thread cutting

machine would be recovered in 4 years 2 months.

● The NPV of the project is negative, so the project should be rejected.

● IRR of the project is 10.44 which are approximately 10% so the third project is

accepted.

● But according to the NPV it should be rejected IRR accepted means, there is risk ness

is the project.

● And also PI of the project is less than 1, it should be rejected.

SUGGESTIONS:

● The following suggestions are obtained from the analysis of the data.

● Company may take investing decision base on the traditional techniques. Which are not

tells us profitability of the projects.

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● According to the discounting techniques like NPV, IRR and PI first two projects should

be rejected but management have not been taken decisions to stop the project till now.

● NPV of the third project is negative but IRR of this project is indicates positive, and PI

of the project is indicates positive, and PI of the project is less than one standard. It mean

it the company wants to continue the project in future, it may face risky ness from the

negative cash inflows of the company.

● It should be rejected but management not taken any handsome activity on this project.

● The Company should maintained proper records of the projects. And also should

shoeing full particulars including quantitative details and situation of the projects.

● The management should verify the position of the project and its cash flows, rate of

depreciation, and taxes in every year.

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BIBLIOGRAPHY

Bibliography:

Books:

Financial management study material

Financial management khan & Jain

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Financial management g.sudarsana reddy

Accounting volume1 study material

For the web site of www.tecumseh.com

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