Project on Capital Budgeting

7/28/2019 Project on Capital Budgeting

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CONTENTS

CHAPTER-1 INTRODUCTION TO THE STUDY

CHAPTER-2 INDUSTRY PROFILE

CHAPTER-3 COMPANY PROFILE

CHAPTER-4 PROJECT PLANNING (CAPITAL BUDGETING)

CHAPTER-5 FINANCING OF THE PROJECT

CHAPTER-6 FINANCE AND ACCOUNTS SECTION AT

PRATHI SOLUTIONS PVT LTD

CHAPTER-7 DATA ANALYSIS AND INTERPRETATION

CHAPTER-8 EVALUATION OF CAPITAL BUDGETING

CHAPTER-9 FINDINGS AND SUGGESTIONS

BIBLIOGRAPHY


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CHAPTER 1

INTRODUCTION

1.1 INTRODUCTION OF THE STUDY

Every organization irrespective of its size and mission can be viewed as a

financial entity management of an organization. Financial management

focuses not only on the improvement of funds but also on their efficient

use with the objective of maximizing the owners wealth. The allocation of

funds is therefore an important function of financial management. The

allocation of funds involves the commitment of funds to assets and

activities.

There are two types of Investment decision:

1. Management of current assets or Working capital management.

2. Long term investment decision.

Long term investment decisions are widely known as capital budgeting or

capital expenditure budgeting. It means as to whether or not money should

be invested in long term project. This part is devoted to an in-depth and

comparative decision of capital budgeting/capital expenditure management.

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 entities which want to expand or improve theiroperation.

In general a project is an activity in which, we will spend money in

expectation of returns and which logically seems to lead itself to planning.


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Financing and implementation as a unit, is a specific activity with a specific

point and a specific ending point intended to accomplish a specific

objective.

To take up a new project, involves a capital investment decision and it is

the top managements duty to make a situation and feasibility analysis of

that particular project and means of financing and implementing it

financing is a rapidly expanding field, which focuses not on the credit

status of a company, but on cash flows that will be generated by a specific

project.

Capital budgeting has its origins in the natural resource and infrastructure

sectors. The current demand for infrastructure and capital investments is

being fueled by deregulation in the power, telecommunications, and

transportation sectors, by the globalization of product markets and the

need for manufacturing scale, and by the privatization of government

owned entities in developed and developing countries.

The capital budgeting decision procedure basically involves the evaluation

of the desirability of an investment proposal. It is obvious that the firm

must have a systematic procedure for making capital budgeting decisions.

The procedure must be consistent with the objective of wealth

maximization. In view of the significance of capital budgeting decisions, the

procedure must consist of step by step analysis.


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1.2 Importance of investment decisions:-

Capital investments, representing the growing edge of a business, are

deemed to be very important for three inter- related reasons.

1. They influence firm growth in the long term consequences capitalinvestment 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 investments is ill

organized and /or most of the capital equipments bought by a firm to meet

its specific requirements.

3. Capital investment decisions involve substantial out lays.

PRATHI SOLUTIONS PVT LTD is a growing concern, capital budgeting is

more or less a continuous process and it is carried out by different

functional areas of management such a production, marketing, engineering,

financial management etc. All the relevant functional departments play a

crucial role in the capital budgeting decision process.

1.3 Objectives of the study:-

1. To describe the organizational profile of PRATHI SOLUTIONS PVT LTD.

2. To discuss the importance of the management of capital budgeting.

3. Determination of proposal and investments, inflows and out flows.

4. To evaluate the investment proposal by using capital budgeting

techniques.

5. To summarize and to suggest for the better investment proposal.


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1.4 SCOPE OF THE STUDY:-

This study highlights the review of capital budgeting and capital

expenditure management of the company. Capital expenditure decisions

require careful planning and control. Such long term planning and control

of capital expenditure is called Capital Budgeting. The study also helps to

understand how the company estimates the future project cost. The study

also helps to understand the analysis of the alternative proposals and

deciding whether or not to commit funds to a particular investment

proposal whose benefits are to be realized over a period of time longer than

one year. The capital budgeting is based on some tools namely Paybackperiod, Average Rate of Return, Net Present Value, Profitability Index, and

Internal Rate of Return.

1.5METHODOLOGY:-

The information for the study is obtained from two sources namely.

1. Primary Sources

2. Secondary Sources

Primary Sources:

It is the information collected directly without any references. It is mainly

through interactions with concerned officers & staff, either individually or

collectively; some of the information has been verified or supplemented

with personal observation. These sources include.


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a. Thorough interactions with the various department Managers of

PRATHI SOLUTIONS PVT LTD.

b. Guidelines given by the Project Guide, Mr. SRIRAM TRIPATHY,

Dy. Manager, Budget Section, F & A.

Secondary Sources:

This data is from the number of books and records of the company, the

annual reports published by the company and other magazines. The

secondary data is obtained from the following.

a. Collection of required data from annual records, monthly

records, internal Published book or profile of PRATHI

SOLUTIONS PVT LTD.

b. Other books and Journals and magazines

c. Annual Reports of the company

1.6 Limitations:-

Though the project was completed successfully with a few limitations may .

a) Since the procedure and polices of the company will not allow to

disclose confidential financial information, the project has to be

completed with the available data given to us.

b) The period of study that is 6 weeks is not enough to conductdetailed study of the project.

c) The study is carried basing on the information and documents

provided by the organization and based on the interaction with

the various employees of the respective departments.


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1.7 REVIEW OF LITERATURE:-

The concept of Capital Budgeting being a very sensitive area of finance has

outreached the attention of many researchers .A number of studies has been

conducted on the subject. However briefing such studies will highlight the

importance of the present study. It should safeguard to avoid the wrong

choice of the project and investment to be made. It is necessary for the

management to give proper attention to capital budgeting.

The reason for the popularity of Payback period in the order of significance

were stated to be its, simplicity to use and understand, its emphasis on the

early recovery of investment and focus on risk. It was also found that one

third of companies always insisted on the computations of Payback periods

for all projects. For about two-third companies standard Payback period

ranged between three and five years.

The reason for the secondary role of Discounted Cash Flow techniques in

India included difficulty in understanding and using these techniques, due

to lack of qualified professional and unwillingness of top management to

use Discounted Cash Flow techniques.

One large manufacturing and marketing organization mentioned that

conditions of its business were such that Discounted Cash Flow techniques

were not needed. Yet another company stated that replacement projects

were very frequent in the company and it was not considered necessary to

use Discounted Cash Flow technique for evaluating such projects.

The present investment appraisal in practice is raising certain questions in

the context.


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1. How much importance is assigned to economic analysis of capital

expenditure in practice?

2. What methods are used for analyzing capital expenditure in practice

and what is the reason for underlying these methods?

The answers of the above questions are based on a survey of twenty firms

varying on several dimensions like industry category, size, financial

performance and capital intensity. From these firms, executives,

responsible for capital investment evaluation and capital budget

preparation were interviewed

CHAPTER-2INDUSTRY PROFILE

Industry Profile

Software and services


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The software and services industry continues to show a robust growth and

as per nasscom estimates, the total value of software and services export

was rs. 55,500 crore (us$ 12.5 billion) in 2003-04, an increase of 20.4 per

cent in rupee terms and 30 per cent in dollar terms.

The it enabled services - business process outsourcing (ites-bpo) sector hasemerged as a key driver of growth for the indian software and services

industry. The ites-bpo industry is likely to grow by about 54% in 2003-04 to

reach us$ 3.6 billion. In 2002-03, the indian ites-bpo industry grew by 59%

to us$ 2.3 billion. In 2002, the global business process outsourcing (ites-


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bpo) market was approximately us$ 773 billion. By 2006, the potential ites-

bpo market may increase to us$ 1 trillion.

India has maintained its global competitiveness in ites-bpo by providing a

winning combination of cost-quality-scalability versus competing offshore

destinations such as the philippines and china . Some of the key drivers of

the indian ites-bpo industry include: improved efficiency and higher service

levels due to streamlined processes, quality improvements due to better

educated workforce, cost savings between 40-50%, increase in offshoring by

existing customers, superior project management skills and availability of a

highly skilled, educated and english speaking labour pool.

Indian software companies are trying to increase their presence in europe .

The share of the european market in indian software exports is likely to

increase slowly during 2003-04. Software exports to europe grew by 18 per

cent in 2002-03 to rs. 10,200 crore (us$ 2.1 billion) in 2002-03. However,

since north america accounts for around 50 per cent of global it services

spending, it is likely to continue to dominate indian software exports.

The domestic software and services segment is estimated to register a

growth of 14.8 per cent to reach rs. 15,400 crore (us$ 3.37 billion) in 2003-

04 from rs. 134 billion (us$ 2.78 billion) in 2002-03. Increased spending by

the banking, financial services and insurance (bfsi), government and

manufacturing sectors resulted in this growth.

Software services dominate the segment, accounting for an estimated 66.8

per cent of the total market in 2003-04. Contribution from packaged

software is estimated at 13.7 per cent, while the domestic ites and software

services markets are estimated to contribute the remaining 19.5 per cent.

During 2003-04, the packaged software segment is likely to grow by 5 per

cent to reach rs. 2,100 crore (us$ 460 million). Companies preferred to


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deploy expensive, branded products rather than cheap off-the-shelf options

from local vendors, resulting in higher spending. The sme sector was

aggressive in implementing packaged software applications, but only as

long as it was necessary and resulted in a clear cost benefit in the short run.

The early adopters of business intelligence (bi) solution in the country are

banking and finance, telecom, retail, and fmcg companies. Presently, the

demand for bi solutions is largely being driven by mncs and large

enterprises. The bi solution seems to have gained more acceptances in

sectors where customers play a pivotal role in deciding the future of the

company.

Primarily services companies are driving the bi market in india , which is

signified by very high contributions from banking and finance, telecom, and

call centre companies. The indian industry is still in the data mining and

data warehousing phase, with limited cases of sophisticated applications

such as churn and business performance management implemented

recently. Most solution providers are currently not using standard platforms

for solution development, leading to non-structured solutions, which are

not compatible with each other and other business applications.

Given the high churn rate in the telecom sector, an increased demand for

customer relationship management (crm) solutions is witnessed in this

sector. Some of the prominent telecom players in the indian market that

have adopted these solutions include bharti, bpl, and orange . The retail

sector is also showing strong demand for crm solutions.

The supply chain management (scm) market in india is still in a nascent

stage. Some of the verticals that have gone in for scm solutions include e-

manufacturing, automotive, fmcg, retail, oil and gas. Manufacturing and

automotive sectors have been the leaders in adopting scm solutions in india


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. In the near future, fmcg and retail sectors are likely to increase scm

adoption.

Despite its smaller size relative to global standards, the services segment

has shown signs of maturity including: outsourcing of facility management

and it operations, consolidation of servers, storage and networks into data

centres, outsourcing of automated help desks and it services, and the

formulation of security policies and procedures.

E-governance can be defined as the use of information and communication

technologies to enhance access and delivery of government services for the

benefit of various stakeholders. Government agencies were among the first

to adopt it systems to manage payrolls, tax collection and records.

Developments in internet technologies have made it possible to assimilate

information from an unlimited number of sources as well as to make

government services more friendly and transparent to citizens.

Indian companies have raised their quality standards in recent years to

meet international demands. The it act of 2000 includes laws and policies

concerning data security and cyber crimes. Other than the it act, the indian

copyright act of 1972 deals with copyright issues in computer programs.

Indian companies as well as the government have been proactive in taking

appropriate steps to tackle security concerns.

Since the inception of the it industry in india , players within the country

have been focusing on quality initiatives, to align themselves with

international standards. The industry has set in place processes and

procedures for offering world class it software products and services. The

focus on maintaining high quality has lead to an increasing number of

companies getting assessed at key quality standards.


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As of december 2003, india has 65 companies at sei-cmm level 5

assessment. The quality maturity of indian software and ites-bpo industry

can be measured from the fact that already 275 indian software and ites-

bpo companies have acquired quality certification and about 80 more

companies are in pipeline.

India has become one of the most preferred destinations for sourcing

software and it enabled services, achieving an export value of nearly us$ 9.5

billion in 2002-03. India in comparison to other low cost locations ranks

high in several critical parameters including, level of government support,

quality of the labor pool, english language skills, cost advantages, project

management skills, entrepreneurial culture, indian diasporas and strong

customer relationships, expertise in new technologies and over-all quality

control. India 's strength has been enhanced by the industry's strong focus

on quality software and processes. Indian companies are known for their

quality services and have received sei-cmm level 5 and iso-level

certifications. Additionally, a favourable time zone difference with north

america and europe helps organizations achieve 24x7 internal operations

and customer service.

India's weakness include - positioning and brand management,

infrastructure-urban mass transportation and aviation, cultural differences,

physical distance from north america and need to back-end it and bpo skills

in college education curricula. India 's opportunities include - creation of

global household brands, low share in service lines such as systems

integration and it consulting, and deeper penetration in existing service

line, verticals and geographies (europe, china , japan ).

The threats to india include - internal competition for resources, slippage in

quality standards, rising labor costs, competition from upcoming


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destinations like philippines, malaysia, south africa, etc., and stringent

visa/work permit

CHAPTER-3

COMPANY PROFILE

Mission Statement

To become the ultimate choice of the customer when it comes to

recruiting services and software services by providing him with our

delightful and qualitative services.

Company Profile

Prathi Solutions was established with a vision to become a trusted

partner when it comes to providing the right kind of resources in the

right time and at the right cost.

Our focus within the recruiting industry allows us to provide our

clients a highly specialized service across all vertical markets, skill-sets and levels of seniority, through both permanent and contract

recruitment.

We believe that successful recruitment services is partnership-based

which is why we work closely with our clients over a period of time to

provide flexible, tailor-made solutions; from contingency and

campaign through to a comprehensive managed service.

We also have an enriching expertise in the field of software services

across various industries, domains and technologies. Most of our

employees have varied experience in these fields and with their hands


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on expertise it helped us so many times in the past in delivering more

than expected.

We at Prathi solutions are committed towards helping our clients in

realizing a qualitative, cost effective and a quicker to market solutions

Quality Policy

According to us quality lies in doing the appropriate work as per the

requirements without regression and wastage of time

We at Prathi believe that lack of quality results in long term losses for

a company. Though the objective is to keep the costs low in the

services we render but not at the cost of quality. Modern day

companies in search for sales and projects over commit to their

clients and finally end up delivering a low quality work. We are firmly

against it and believe in looking at a long term picture.

We are committed to make our customers happy and at the same time

ensure that we too are happy. In any deal lack of satisfaction from any

end leads to lack of quality. Hence the prime objective is to ensure

that we have a happier deal in order to delight our customers.

We are strictly adhering to CMMI level III at Prathi Solutions and are on

our way to realizing it very soon.

Approach

At Prathi we believe that the key to people and business performance

is the effective integration of your People Management roles and


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capability, your People Processes, and your People Development

activities.

We can support you in refining and improving each of these areas,

and can help you achieve step-change improvements in performance

through effective integration of the following three which are

People handling

People Development

People Method

Overview of our services

Welcome to the world of Prathi. We hare take pride in our expertise in

various domains, great experience, innovation, process methodology

and team work which has many a time helped us in delivering

exquisite solutions. We can provide you with any kind of service for

all your specific IT needs. For the


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best results that our experts are always in touch with your team and

keep updating regularly in order to produce the most accurate results

with astonishing quality. Our work path is very flexible in order to

suit the clients needs and we strive to suit to your requirements.

The benefits our clients experience by partnering with

us:-

1. High Quality in the work we do due to hiring and retaining of the

best individuals available in the market.

2. Reduced cost since we can do your job in the quickest possible time

with no regression.

3. Quicker reach to the market due to the talent tank we have,

4. Ready Availability always to accommodate every requirement of the

client.

5.A win - win partnership where both the parties end up with a happy

experience.

We are based here at India and are looking towards serving all our

Indian and Foreign clients with the best quality and the desired

delivery model.


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Technology and Industry

We are into various technologies and industry domains. Our capability

in each of these domains has been scaled up due to the quality

resources we hire and retain in the market. We also regularly train our

employees in order to keep them to the fore.

Prathi has an expertise in various technologies like

1. C , C++

2. Java /J2EE

3. Business Intelligence and Data Warehousing

4. SAP

5. Oracle and Oracle Apps.

6. Microsoft technologies

7. Enterprise Application Integration

We have our presence in various fields and domains. We have an

enriching experience in all these fields due to our previous projects.

1. Banking

2. Finance and Mortgage

3. Insurance


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4. Technology

5. Manufacturing

6. Retail

Training

We at Prathi have a vision of mastering every technology. We wish to

regularly update ourselves and also enable others in quickly

completing the learning process.

We have a vision to make our organization a hub in Software technical

training. We wish to open our technical training centers very soon and

hire the best faculties to explore every innovation in the field of

software programming.

We wish to give you the quickest solutions when it comes to training

your resources in software programming in any technology. We dream

to make it cheaper, quicker and qualitative in order to have your

resources quickly scaled to your immediate requirements.

Life at Prathi

At Prathi we have a vision of where we want to go and what we would

like to become, and it's really exciting, it is filled with challenges,

puzzling questions and what not. Would you like to be a part of this

organisation which dreams to make history by being the best when it

comes to staffing services, software services and training people. And

would you like to be with us in our dream towards making history? If


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yes, read on. With an unmatched expertise that we are hiring from the

market to ensure that they become great performers as well as

mentors, we hope to make our name heard soon. To achieve our

vision, we are always looking out for quality, ever learning and goal

oriented individuals who are ambitious, who love challenges and who

have a passion to excel!

In order to achieve this we conduct offcampus selections as well as

oncampus selections. Are you ready to dream with us.

Please send in your resume to [email protected]

OUR CLIENTS NETWORK

We believe that successful recruitment services is partnership-based

which is why we work closely with our clients over a period of time to

provide flexible, tailor-made solutions; from contingency and

campaign through to a comprehensive managed service.

We work with some of the most admired companies:

SNGC India Ltd, INDIA

Pafax Printwell, UK

Outsourcing Matters, UK

Trimco Direct, UK

VBuild Technologies, UK

Pens and Pads, UK


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Ennovative Technolgies, UK

CA Online Solutions, Taiwan

CONTACT US AT:

PRATHI SOFTWARE SOLUTIONS PVT. LTD.

Jubilee Hills Road 92,

Hyderabad - 500 033.

Ph: +91 40 31009632

Fax: +91 40 32442076

Email: [email protected]

www.prathisolutions.com

CHAPTER-4


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CAPITAL BUDGETING

4.1 MEANING

Capital Budgeting is the process of making investment decisions in capital

expenditure. A capital expenditure may be defined as an expenditure the

benefit of which are expected to be received over a period of time exceeding

one year.

The main characteristics of a capital expenditure are that the expenditure is

incurred at one point of time whereas benefits of the expenditure are

realized at different points of time in future. Capital expenditure involves

non-flexible long term commitment of funds. Thus capital expenditure

decisions are also called Long-Term Investment Decision. Capital budgetinginvolves the planning and control of capital expenditure.

DEFINITION:

R.M.LYNCH has defined capital Budgeting as Capital Budgeting

consists of employment of available capital for the purpose of

maximizing the long term profitability of the firm.

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 features 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 a relatively long-time period between the initial

outlay and the anticipated return.


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Capital Budgeting consists of planning and the development of available

capital for the purpose of maximizing the long-term profitability of the

firm.

4.2 NEED AND IMPORTANCE OF CAPITAL BUDGETING

Capital Budgeting means planning for capital assets. Capital Budgeting

decisions are vital to any organization as they include the decision to;

1. Whether or not funds should be invested in long term

projects such as setting of an industry, purchase of plant and

machinery etc.,

2. Analyze the proposal for expansion or creating additionalcapacity.

3. To decide the replacement of permanent assets such as

building and equipments.

4. To make financial analysis of various proposal regarding

capital investments so as to choose the best out of many

alternative proposals.

The importance of capital Budgeting can be well understood from the fact

that an unsound investment decision may prove to be fatal to the very

existence of the concern. The need, significance or importance of capital

budgeting arises mainly due to the following.

1. Large Investments

Capital budgeting decisions, generally involves large investment of funds.

But the funds available with the firm are always limited and the demand for

funds exceeds the resources. Hence it is very important for a firm to plan

and control its capital expenditure.


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2. Long-term commitment of Funds

Capital expenditure involves not only large amounts of funds but also funds

for long-term or more or less on permanent basis. The long-term

commitment of funds increases the financial risk involved in the investment

decision.

3. Irreversible Nature

The capital expenditure decisions are of irreversible nature. Once the

decisions for acquiring a permanent asset is taken, it became very difficult

to dispose of these assets without incurring heavy losses.

4. Long-term Effect of profitability

The investment decisions taken today not only affects present profit but

also the future profitability of the business. A profitable project selection is

fatal to the business.

5. Difficulties of investment decisions

The long term investment decisions are more difficult to take because,

1. Decision extends to a series of years beyond the current

accounting period.

2. Uncertainties of future and

3. Higher degree of risk.

6. National Importance

An investment decision through taken by individual concerns is of national

importance because it determines employment, economic activities and

economic growth.

7. Effect on cost structure


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By taking a capital expenditure decision, a firm commits itself to a sizeable

amount of fixed cost in terms of interest, supervisors salary, insurance,

building rent etc. If the investment turns out to be unsuccessful in future or

produces less than anticipated profits, the firm will have to bear the burden

of fixed cost.

8. Impact on firms competitive strength

The capital budgeting decisions affect the capacity and strength of a firm to

face competition. It is so because the capital investment decisions affect the

future profits and costs of the firm. This will ultimately affect the firms

competitive strength.

9. Cost control

In capital budgeting there is a regular comparison of budgeted and actual

expenditures. Therefore cost control is facilitated through capital

budgeting.

10. Wealth Maximization

The basic objective of financial management is to maximize the wealth of

the shareholders. Capital budgeting helps to achieve this basic objective.

Capital budgeting avoids over investments and under investments in fixed

assets. In this way capital budgeting protects the interest of the

shareholders and of the enterprise.

4.3 STEPS IN CAPITAL BUDGETING

Capital budgeting is a complex process. It involves decision relating to the

investment of current funds for the benefit to be achieved in future which is

always uncertain. Capital budgeting is a six step process. The following

steps are involved in capital budgeting;

1. Project generation


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The capital budgeting process begins with generation or identification of

investment proposals. This involves a continuous search for investment

opportunities which are compatible with firms objectives.

2. Project screening

Each proposal is then subject to a preliminary screening process in order to

assess whether it is technically feasible, resources required are available,

and expected returns are adequate to compensate for the risks involved.

3. Project evaluation

After screening of project ideas or investment proposals the next step is to

evaluate the profitability of each proposal. This involves two steps;

a. Estimation of cost and benefit in terms of cash flows

b. Selecting an appropriate criterion to judge the desirability of the

project.

4. Project selection

After evaluation the next step is the selection and the approval of the best

proposal. In actual practice all capital budgeting decision are made at

multiple levels and are finally approved by top management.

5. Project execution and implementation

After the selection of project funds are allocated for them and a capital

budget is prepared. It is the duties of the top management or capital

budgeting committee to ensure that funds are spend in accordance with

allocation made in the capital budget.

6. Performance review


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After the implementation of the project, its progress must be reviewed at

periodical intervals. The follow-up or review is made by comparing actual

performance with the budget estimates.

4.4 OPERATING BUDGET AND CAPITAL BUDGET

Most of the large firms prepare two different budgets each year.

1. OPERATING BUDGET

Operating budget shows planned operations for the forthcoming period and

includes sales, production, production cost, and selling and distribution

overhead budgets. Capital budgets deals exclusively with major investment

proposals.

2. CAPITAL EXPENDITURE BUDGET

Capital Expenditure is a type of functional budget. It is the firms formal

plan for the expenditure of money for purchase of fixed assets. The budgetis prepared after taking in to account the available production capacities,

probable reallocation of existing resources and possible improvements in

production techniques. If required, separate budgets can be prepared for

each item of capital assets such as a building budget, a plant and machinery

budget etc.

4.5 OBJECTIVES OF CAPITAL EXPENDITURE BUDGET

The objectives of Capital Expenditure Budget are as follows.


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1. It determines the capital projects on which work can be started

during the budget period after taking in to account their

urgency and the expected rate of return on each project.

2. It estimates the expenditure that would have to be incurred on

capital projects approved by the management together with the

source or sources from which the required funds would be

obtained.

3. It restricts the capital expenditure on projects within authorized

limits.

CONTROL OVER EXPENDITURE THROUGH CAPITAL EXPENDITURE BUDGET

The capital expenditure budget primarily ensures that only such projects

are taken in hand which are either expected to increase or maintain the rate

of return on capital employed. Each proposed project is appraised and only

essential project or projects likely to increase the profitability of the

organization are included in the budget. In order to control expenditure on

each project, the following procedure is adopted.

1. A project sheet is maintained for each project.

2. In order to ensure that the expenditure on different project is

properly analyzed.

3. The expenditure incurred on the project is regularly entered on the

project sheets from various sources such as invoices of assets

purchased, bill for delivery charges etc.,

4. The management is periodically informed about expenditure

incurred in respect of each project under appropriate heads.

5. In case project cost is expected to increase; a supplementary

sanction for the same is obtained.

6. In financial books the total expenditure incurred on all projects is

separately recorded.


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4.6 TACTICAL AND STRATEGIC INVESTMENT DECISION

Investment decision can be classified as,

1. Tactical Decision

A Tactical Decision generally involves a relatively small amount of funds

and does not constitute a major departure from the past practices of the

company.

2. Strategic Decision

A Strategic Investment Decision involves a large sum of money and may

also result in a major departure from the past practices of the company.

Acceptance of a Strategic Investment Decision involves a significant change

in the companys expected profits associated with a high degree of risk.

4.7 RATIONALE OF CAPITAL EXPENDITURE

Efficiency is the rationale underlying all capital decisions. A firm has to

continuously invest in new plant or machinery for expansion of its

operations or replace worn-out machinery for maintaining and improving its

efficiency. The overall objective is to maximize the firms profits and thus

optimizing the return on investment. This objective can be achieved either

by increased revenues or by cost reduction. Thus capital expenditure can be

of two types;

1. Expenditure Increasing Revenue

2. Expenditure Reducing Cost4.8 KINDS OF CAPITAL INVESTMENT PROPOSALS


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

adopt one of them, some of them or all of them depending upon whether

they are independent, contingent or dependent or mutually exclusive.

1. INDEPENDENT PROPOSALS

These are proposals which do not compete with one another in a way that

acceptance of one precludes the possibility of acceptance of another. In

case of such proposals the firm may straight away accept or reject a

proposals on the basis of minimum return on investment required. All these

proposals which give a higher return than a certain desired rate of return

are accepted and the rest are rejected.

2. CONTINGENT OR DEPENDENT PROPOSALS

These are proposals whose acceptance depends on the acceptance of one or

more other proposals. When a contingent investment proposal is made, it

should also contain the proposal on which it is dependent in order to have a

better perspective of the situation.

3. MUTUALLY EXCLUSIVE PROPOSALS

These proposals which compete with each other in a way that the

acceptance of one precludes the acceptance of other or others. Two or more

mutually exclusive proposals cannot both or all be accepted. Some

techniques have to be used for selecting the better or the best one. Once

this is done, other alternative automatically gets eliminated.

4. REPLACEMENT PROPOSALS

These aim at improving operating efficiency and reducing costs. These are

called cost reduction decisions.


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5. EXPANSION PROPOSALS

This refers to adding capacity to existing product line.

6. DIVERSIFICATION PROPOSALS

Diversification means operating in several markets rather than a single

market. It may also involve adding new products to the existing products.

Diversification decisions require evaluation of proposals to diversify in to

new product lines, new markets etc., for reducing the risk of failure.

7. CAPITAL RATIONING PROPOSALS

Capital rationing means distribution of capital in favor of some acceptable

proposals. A firm cannot afford to undertake all profitable proposals

because it has limited funds to invest. In such a case, these various

investment proposals compete for limited funds and the firm has to ration

them. Thus the situation where the firm is not able to finance all the

profitable investment opportunities due to limited resources is known as

capital rationing.

4.9 FACTORS AFFECTING CAPITAL INVESTMENT DECISIONS

The following are the four important factors which are generally taken in to

account while making a capital investment decision.

1. The Amount of Investment

In case a firm has unlimited funds for investment it can accept all capital

investment proposals which give a rate of return higher than the minimum

acceptable or cut-off rate.


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2. Minimum Rate of Return on Investment

The management expects a minimum rate of return on the capital

investment. The minimum rate of return is usually decided on the basis of

the cost of capital.

3. Return Expected from the Investment

Capital investment decisions are made in anticipation of increased return in

the future. It is therefore necessary to estimate the future return or benefits

accruing from the investment proposals while evaluating the capital

investment proposals.

4. Ranking of the Investment Proposals

When a number of projects appear to be acceptable on the basis of their

profitability the project will be ranked in the order of their profitability in

order to determine the most profitable project.

4.10 METHODS OF CAPITAL BUDGETING OR EVALUATION

OF INVESTMENT PROPOSALS

A business firm has a number of proposals regarding various projects in

which it can invest funds. But the funds available with the firm are always

limited and it is not possible to invest funds in all the proposals at a time.

The most widely accepted techniques used in estimating the cost returns of

investment projects can be grouped under two categories;

1. TRADITIONAL METHODS (NON DISCOUNTED CASH FLOW)

a. Payback Period Method

b. Average rate of Return Method

2. MODERN METHODS (DISCOUNTED CASH FLOW)


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a. Net Present Value Method

b. Internal rate of Return Method

c. Profitability Index Method

TRADITIONAL METHODS (NON DISCOUNTED CASH FLOW)

A. PAY BACK PERIOD METHOD

The payback period method is the simplest method of evaluating

investment proposals. Payback period represents the number of years

required to recover the original investment. The payback period is also

called Pay Out or Pay off Period. This period is calculated by dividing the

cost of the project by the annual earnings after tax but before depreciation.

Under this method the project is ranked on the basis of the length of the

payback period. A project with the shortest payback period will be given the

highest rank.

METHODS OF COMPUTATION OF PAYBACK PERIOD

There are two ways of calculating the payback period.

a. When annual cash inflow is constant

The formula is find out the payback period if the project generates constant

annual cash inflow is;

Original cost of the project

Payback period = Annual cash inflow

Annual cash inflow is the annual earning (profit depreciation and after

taxes) before

b. When annual cash inflow is not constantIf the annual cash inflows are unequal the payback period can be found out

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

outlay of the project.

ADVANTAGES OF PAYBACK PERIOD


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1. Simple to understand and easy to calculate.

2. It reduces the chances of loss through obsolescence.

3. A firm which has shortage of funds find this method

very useful.

4.This method costs less as it requires only very little

effort for its Computation.

DISADVANTAGES

1. This method does not take in to consideration the cash

inflows beyond the payback period.

2. It does not take in to consideration the time value of

money. It considers the same amount received in the

second year and third year as equal.

3. It gives over emphasis for liquidity.

ACCEPTANCE RULE

The following are the Payback [P.B.Rules]

Accept P.Bcut-off rate

May Accept P.B


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This method otherwise called the Rate of Return Method, takes in to account

the earnings expected from the investment over the entire life time of the

asset. The various projects are ranked in order of the rate of returns. The

project with the higher rate of return is accepted. Average Rate of Return is

found out by dividing the average income after depreciation and taxes, i.e.

the accounting profit, by the Average Investment.

Average Annual Earnings

ARR = x 100

Average Investment

Where;

Average Annual Earnings is the total of anticipated annual earnings after

depreciation and tax (accounting profit) divided by the number of years.

Average Investment means

i. If there is no salvage (Scrap value)

Total Investment

2

ii. If there is scrap value

Total Investment-Scrap Value

+ Scrap Value

2

iii. If there is additional working capital

Total Investment-Scrap Value


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+ Scrap +Additional Working Capital

2

ADVANTAGES OF AVERAGE RATE OF RETURN (ARR) METHOD

1. It is easy to calculate and simple to understand.

2. Emphasis is placed on the profitability of the project and not on

liquidity.

3. The earnings over the entire life of the project is considered for

4. ascertaining the Average Rate of Return.

5. This method makes use of the accounting profit.

DISADVANTAGES

1. Like the payback period method this method also ignores the time

value of money. The averaging technique gives equal weight to

profits occurring at different periods.

2. This averaging technique ignores the fluctuations in profits of

various years.

3. It makes use of the accounting profits, not cash flows, in

evaluating the project.

1. DISCOUNTED CASH FLOW METHODS

The payback period method and the Average rate of Return Method do not

take in to consideration the time value of money. They give equal weight to

the present and the future flow of incomes. The discounted cash flow

methods are based on the concept that a rupee earned today is more worth

than a rupee earned tomorrow. These methods take in to consideration the

profitability and also the time value of money.


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I. NET PRESENT VALUE (NPV) METHOD

The Net Present Value Method (NPV) gives consideration to the time value of

money. It views that the cash flows of different years differ in value and

they become comparable only when the present equivalent values of these

cash flows of different periods are ascertained. For this the net cash inflows

of various periods are discounted using the required rate of return, which is

a predetermined rate .If the present value of expected cash inflows exceeds

the initial cost of the project, the project is accepted.

NPV = Present value of cash inflows-Present value of initial

investment

STEPS IN NET PRESENT VALUE (NPV) METHOD

1. Determine an appropriate rate of interest to discount cash flows.

2. Compute the present value of total investment outlay (i.e., cash

outflow) at the determined discounting rate.

3. Compute the present value of total cash inflows (profit before

depreciation and after tax) at the above determined discount rate.

4. Subtract the present value of cash outflow (cost of investment)

from the present value of cash inflows to arrive at the net present

value.

5. If the net present value is negative i.e., the present value cash

outflow is more than the present value of cash inflow the project

proposals will be rejected .If net present value is zero or positive

the proposal can be accepted.

6. If the projects are ranked the project with the maximum positive

net present value should be chosen.

ADVANTAGES OF NET PRESENT VALUE METHOD


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1. It considers the time value of money.

2. It considers the earnings over the entire life of the project.

3. Helpful in comparing two projects requiring same amount of cash

outflows.

DISADVANTAGES OF NET PRESENT VALUE METHOD

1. Not helpful in comparing two projects with different cash outflows.

2. This method may be misleading is in comparing the projects of

unequal lives.

II. INTERNAL RATE OF RETURN (IRR) METHOD

The Internal Rate of Return for an investment proposal is that discount rate

which equates the present value of cash inflows with the present value of

cash outflows of the investment. The Internal Rate of Return is compared

with a required rate of return. If the Internal Rate of Return of the

investment proposal is more than the required rate of return the project is

rejected. If more than one project is proposed, the one which gives the

highest internal rate must be accepted.

It can be calculated by the following formula

P1-Q

IRR = L+ x D

P1-P2

Where,

L = Lower rate of discount

P1 = Present value of cash inflows at lower rate of discount

P2 = Present value at higher discount rate

Q = Initial Investment

D = Difference in rate

ADVANTAGES OF INTERNAL RATE OF RETURN


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1. It considers the time value of money.

2. The earnings over the entire life of project is considered.

3. Effective for comparing projects of different life periods and

different timings in timings of cash inflows.

DISADVANTAGES

1. Difficult to calculate.

2. This method presumes that the earnings are reinvested at the rate

earned by the investment which is not always true.

Accept or Reject Rule

Internal Rate of Return is the maximum rate of interest which an

organization can afford to pay on the capital invested in a project. A project

would qualify to be accepted if Internal Rate of Return exceeds the cut-off

rate. While evaluating two or more projects, a project giving a higher

Internal Rate of Return would be preferred. This is because higher the rate

of return, the more profitable is the investment.

III. PROFITABILITY INDEX METHOD

Present Value of Cash Inflows

Profitability Index =

Present Value of Cash Outflows

This is also called Benefit-Cost ratio. This is slight modification of the Net

Present Value Method. The present value of cash inflows and cash outflows

are calculated as under the NPV method. The Profitability Index is the ratio

of the present value of future cash inflow to the present value of the cash

outflow, i.e., initial cost of the project.


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If the Profitability index is equal to or more than one proposal the proposal

will be accepted. If there are more than one investment proposals, the one

with the highest profitability index will be preferred.

This method is also known as Benefit-Cost ratio because the numerator

measures benefits and the denominator measures costs. It is the ratio of

the present value of cash inflow at the required rate of return to the initial

cash outflow of the investment.

4.11 Cost Effective Analysis

In the cost effectiveness analysis the project selection or technological

choice, only the costs of two or more alternative choices are considered

treating the benefits as identical. This approach is used when the

acquisition of how to minimize the costs for undertaking an activity at a

given discount rates in case the benefits and operating costs are given, one

can minimize the capital cost to obtain given discount.

4.12Project Planning:

The planning of a project is a technically predetermined set of inter

related activities involving the effective use of given material, human,

technological and financial resources over a given period of time. Which in

association with other development projects result in the achievement of

certain predetermined objectives such as the production of specified goods

& services?

Project planning is spread over a period of time and is not a one shot

activity. The important stages in the life of a project are:


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1. Its Identification

2. Its initial formulation

3. Its evaluation (Whether to select or to project)

4. Its final formulation

5.

Its implementation

6. Its completion and operation

The time taken for the entire process is the gestation period of the project.

The process of identification of a project begins when we are seriously

trying to overcome certain problems. They may be non- utilization to

overcome available funds. Plant capacity, expansion etc

Contents of the project report:

1. Market and marketing

2. Site of the project

3. Project engineering dealing with technical aspects of the

project.

4. Location and layout of the project building

5. Building

6. Production capacity.

7. Work Schedule

Details of the cost of the Project:-

1. Cost of land

2. Cost of Building

3. Cost of plant and machinery

4. Engineering know how fee

5. Expenses on training Erection supervision

6. Miscellaneous fixed assets

7. Preliminary expenses

8. Pre-operative expenses


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9. Provision for contingencies

4.13 RISK AND UNCERTAINITY IN CAPITAL BUDGETING

All the techniques of capital budgeting requires the estimation of future

cash inflow and cash outflows. The cash flows are estimated abased on the

following factors.

Expected economic life of the project.

Salvage value of the asset at the end of the economic life.

Capacity of the product.

Selling price of the product.

Production cost.

Depreciation.

Rate of Taxation

Future demand of the product, etc.

But due to uncertainties about the future the estimates of demand,

production, sales costs, selling price, etc cannot be exact, for example a

product may become obsolete much earlier than anticipated due to un

expected technological developments all these elements of uncertainties

have to be take into account in the form of forcible risk while making an

investment decision. But some allowances for the element of risk have to be

proved.

4.14 FACTORS INFLUENCING CAPITAL EXPENDITURE

DESCISIONS:


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There are many factors financial as well as non financial which influence

the capital expenditure decisions and the profitability of the proposal yet,

there are many other factors which have to be taken into consideration

while taking a capital expenditure decisions. They are

1. URGENCY

Sometime an investment is to be made due to urgency for the survival of

the firm or to avoid heavy losses. In such circumstances, proper evaluation

cannot be made though profitability tests. Examples of each urgency are

breakdown of some plant and machinery fire accidents etc.

2. DEGREE OF UNCERTAINTY

Profitability is directly related to risk, higher the profits, greater is the risk

or uncertainty.

INTANGIBLE FACTORS

Sometimes, a capital expenditure has to be made due to certain emotional

and intangible factors such as safety and welfare of the workers, prestigious

projects, social welfare, goodwill of the firm etc.

1. AVAILABILITY OF FUNDS

As the capital expenditure generally requires the previsions of laws solely

influence by this factor and although the project may not be profitable. Yet

the investment has to be made.

2. FUTURE EARNINGS


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A project may not be profitable as competed to another today, but it may be

profited to increase future earnings.

Sometimes project with some lower profitability may be selected due to

constant flow of income as compared to another project with an irregular

and uncertain inflow of income.

4.15 CAPITAL EXPENDITURE CONTROL

Capital expenditure involves no-flexible long-term commitments of funds.

The success of an enterprise in the long run depends up on the

effectiveness with which the management makes capital expenditure

decision. Capital expenditure decisions are very important as their impact is

more or less permanent on the well being and economic health of the

enterprise. Because of this large scale mechanization and automation and

importance of capital expenditure for increase in the profitability of a

concern. It has become essential to maintain an effective system of capital

expenditure control.

4.16 OBJECTIVES CONTROL OF CAPITAL EXPENDITURE

To make an estimate of capital expenditure and to see that the

total cash outlay is within the financial resources of the

enterprise

To ensure timely cash inflows for the projects so that no

availability of cash may not be problem in the implementation

of the problem.

To ensure that all capital expenditure is properly sanctioned.

To properly coordinate the projects of various departments

To fix priorities among various projects and ensure their follow-

up.

To compare periodically actual expenditure with the budgeted

ones so as to avoid any excess expenditure.


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To measure the performance of the project.

To ensure that sufficient amount of capital expenditure is

incurred to keep pace with rapid technological development.

To prevent over expansion.

4.17STEPS INVOLVED IN CONTROL OF CAPITAL EXPENDITURE

Preparation of capital expenditure budget.

Proper authorization of capital expenditure.

Recording and control of expenditure.

Evaluation of performance.

LEASE FINANCING

Lease finance is an agreement for the use of an asset for a specified rental.

The owner of the asset is called the lesser and the user the lesser

1) Operating leases

2) Financial leases

Operating leases are short-term no-cancel able leases where the risk of

obsolescence in borne by the lesser

Financial leases are long-term non-cancelable leases where any risk in the

use of asset is borne by the lessee and he enjoys the return too. Preliminary budget estimates for the year following the budget year.

GENERAL GUIDELINES:-

The capital funds budget is to be prepared under six major heads.


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1) Continuing schemes

2) New schemes

3) Modernization and rationalization

4) Township

5) Science and technology

6) EDP schemes

CONTINUING SCHEMES

These schemes include all such schemes which are under implementation of

which funds prevision has been made in the current year /prevision isrequired in the budget year.

NEW SCHEMES

This scheme includes all such schemes, which are proposed to be initiated

in the budget year and for which under provisions is required in the budget

year. Normally, such schemes are included in the five-year plan of the

company approved by the planning commission.

MODERNIZATION AND RATIONALIZATION (M&R)

This includes item of plant and machinery etc for which funds required in

the budget year and the following year. All item included in M&R should

result in cost reduction/quality improvement/rebottle

necking/replacement/productivity, improvement and welfare. The M&R

items are to be submitted in the following main characteristics accompanied

with full justification on the agenda of facilities increased output and

production, quality requirements bottlenecks.


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1. Replacement / modernization.

2. Balancing facilities (essentially to increase production).

3. Operational requirements including material handling

4. Quality/testing facilities.

5.Welfare

6. Minor works.

These requirements should be protested term wise. A separate proposal is

required for M&R items costing more than Rs. 10, 00,000.

TOWNSHIP

Township budget is divided into two parts.

Continuing township schemes

New townships schemes.

Funds required under each schemes should be backed up with full data on

number on quarter/scope of work to be completed against the funds

requirements phasing of budgeted funds for current year, budget year and

following year etc, should be given similar information on number of

quarter/scope of work already completed, expenditure incurred till last

year, satisfaction level it is to be added in the above back up information

for each scheme.

SCIENCE AND TECHNOLOGY

This budget can be divided into two categories

Continuing schemes.

New schemes to be taken up in the budget year.

The schemes should fall in any of the above cartages giving details on

physical and financial progress etc.


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EDP SCHEMES

All funds requirements for computer are information system should be

grouped under EDP schemes and projects accordingly.

BUYING OR PROCURING

Buying or procurement involves purchasing an asset permanently in the

form of cash or credit.

LEASING VSBUYING

Leasing equipment has the tax advantage of depreciation, which can

mutually benefit the lesser and lessee, other advantage of leasing, include

convenience and flexibility as well as specialized services to the lessee.

Lease privies handy to those linens, which cannot obtain loan capital form

normal sources.

The pros and cons of leasing and buying are to be examined thoroughly

before deciding the method of procurement i.e. leasing or buying.


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CHAPTER-5

FINANCING OF PROJECT

Project financing is considered right from the time of the conception of the

project. The proposal of the project progress working capital, so, in general

a project is considered as a mini firm is a part and parcel of the

organization.

5.1 Sources of Finance:

Loan Financing

Security Financing

Internal Financing

Loan Financing:

(a). Short- Term Loans & Credits


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Short Term Loans & Credits are raised by a firm for meeting its working

capital requirements. These are generally for a short period not exceeding

the accounting period i.e., one year.

Types of Short Term Loans & Credits:

1.Trade Credit.

2.Installment Credit.

3.Advances.

4.Commercial papers

5.Commercial banks

6.Cash Credits

7.Over Drafts

8.Public Deposits.

(b). Term Loans:

Term loans are given by the financial institutions and banks, which form the

primary source of long term debt for both private as well as the Government

organizations. Term loans are generally employed to finance the acquisition

of fixed assets that are generally repayable in less than 10 years. In addition

to short- term loans, company will raise medium term and long term loans.

5.2 Security Financing:

Corporate Securities can be classified into two categories.

(a) Ownership Securities or capital stock.

(b) Creditor ship Securities or debt Capital.

(a) Ownership Securities or capital Stock:

Types of Ownership Securities or Capital Stock:


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i) Equity Capital:

Equity Capital is also known as owners capital in a firm. The holders of

these shares are the real owners of the company. They have a control over

the working of the company. Different ways to raise the equity capital.

o Initial public offering.

o Seasoned offering

o Rights issue.

o Private placement

o Preferential allotment.

ii) Preference Capital:

These shares have certain preferences as compared to other type of shares.

1. Payment of Divided

2. Repayment of the capital at the time of liquidation of the

company.

b) Types of Creditor ship Securities:

Debentures:

Debentures are an alternative to the term loans and are instruments for

raising the debt finance. Debenture holders are the creditors of a company

and the company and the company have the obligations to pay the interest

and principal at specified times. Debentures provide more flexibility, with

respect to maturity, interest rate, security and repayment Debentures may

be fixed rate of interest or floating rate or may be zero rates. Debentures &


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Ownership Securities help the management of the company to reduce the

cost of capital.

5.3 Internal Financing:

A new company can raise finance only through external sources such as

shares, debentures, loans and public deposits. For existing company they

need to raise funds through internal source. Such as retained earnings

depreciation as a source of funds. Some other innovative source of finance

Venture Capital

Seed Capital

Bridge Finance

Lease Financing

Euro- Issues

CHAPTER-6

INTRODUCTION TO FINANCE AND ACCOUNTS DEPARTMENT

Finance is the lifeblood of the business .According to Howard and Upton

Finance is that administrative area or set of administrative function in

organizations which relate with the arrangements of cash and credit so that

the organization may have the means to carry out of its objective as

possible.

6.1Functions Of Finance and Accounting Department

Finance & Accounts Department of BHUBANESHWAR Unit is controlled by

Head Of the Department i.e. C.F.O. His main function is to co-ordinate all

activities related to Finance & Accounts and report to Head Offices Finance

& Accounts Department / Finance Director as well Unit Head. Finance &


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Accounts Department function various type of activities as per the

Guidelines issued by Head Office, Purchase Procedure, Service Rules, Powers

of officer etc. At present to carry out all the related activities, following four

sectional heads are reporting to him for work connected to their Sections.

All the four sectional heads independently report to Departmental Head.

However, in case, Departmental Head happens on tour or on leave, the next

senior sectional head takes the charge of the department and remaining

here sectional head will report to him for all the work connected to their

Sections.

6.2 FINANCE DEPARTMENT COMPRISES OF

1. Pay roll section

2. Raw materials

3. Fixed assets & insurance

4. Works bill section

5. Purchase bill section

6. Books & budgets

7. Financial concurrence

PAY ROLL SECTION

Pay roll section takes care of all the financial issues of employees in co-

ordination with Administrative & Personnel Department. Its functions

includes management of salaries, TA/DA, loans & advances, misc payment

related to employees, Perk/There allowance payments etc. Here records of

each employee are maintained regarding basic pay, leave encashment,

medical, salary, increments, promotion based perks, etc.


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MISCELLANEOUS ACCOUNTS

The miscellaneous jobs can be broadly divided into following categories:

1. Passing of bills of miscellaneous nature;

2. Accounting of cash imprested and advances for expenses;

3. Miscellaneous recoveries from outside agencies.

Miscellaneous bills includes rates contracts for service contract for air

conditioner, water coolers, weighing machines, franking machines, knitting

of chairs, etc. Others miscellaneous bills includes telephone rentals, STD

calls, local calls, teleprinters , fax, service bills, advertisement bills,

electricity bills, printing and block making bills, bills of travel agents, bills

of canteen purchases, etc. Annual Contracts and Hiring of taxi, motors, etc.

is also included in this.

WORKS BILLS

Work bills section is entrusted with the task of checking and authentication

of APF received from various departments such as Civil, Plant, and

Township etc. They have to keep record and maintain account. They have to

verify with respect to measurements, Tax provisions like TDS and other

deductions like EMD, Security and penalty etc.

PURCHASE BILLS

In purchase bill, treatment is given to the bills on purchase of machinery

and tools and spares etc. for accounting requirements and book keeping as


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well as record maintenance and tax deductions and authentication of AFP on

purchase of Goods and Services.

FINANCIAL CONCURRENCE

Financial concurrence deals with crosschecking and green signaling the

requisition for purchases made by various indent departments of the unit.

They check for the availability of budget and ascertain its necessity and

critically for regular and smooth operations of the plants and activities of

various departments.

BOOKS & BUDGETS

Books and budget deal with revenue budget compilation, monitoring and

control, reconciliation of inter unit accounts, maintenance of books of

accounts and submission of monthly / quarterly / annual reports, COP

processing and attending internal / statutory / tax auditors.


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CHAPTER-7

DATA ANALYSIS AND INTERPRETATION

7.1 Balance Sheet (2007-2008 to 2011-2012)

(In lacs)

Particulars 07-08 08-09 09-10 10-11 11-12

Sources of Funds:

Auth share capital 100000 100000 100000 100000 100000

Paid up capital 57545 57545 57545 57545 57545

Reserve and surplus --- --- --- 10791 28500

Secured loan 13619 2785 85072 104307 113987

Unsecured loan 76475 75788 42725 8329 ---

Total sources of funds

147639 136118 185342 180972 200032

Application of Funds:

Gross Block(including

CWIP) 73251 75734 77436 79349 83178

Net Block(including

CWIP) 26887 25706 24149 23652 25419

Investments --- --- 82130 605 5

Deferred tax Assets --- --- --- 3369 2037

Current Assets

Inventories 28595 21496 55159 37363 50023

Sundry Debtors 68236 56541 86632 60052 51764Others 6130 47507 103523 117391 107567

Total 102961 125544 245314 214806 209354

Current Liabilities and


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Provisions 48770 73207 170615 61460 36783

Net Current Assets 54191 52337 74699 153346 172571

Deferred Revenue Exp 131 --- --- --- ---

Accumulated Loss 66430 58075 4364 --- ---

TotalApplication(funds) 147639 136118 185342 180972 200032

7.2 Profit and Loss Statement(2007-2012)

(In Lacs)Working results 07-08 08-09 09-10 10-11 11-12

Sales 119793 120663 94368 119831 128297

Subsidy 86276 124527 417077 178583 222170

Other Income 652 3487 49530 18153 12597Total 206721 248677 560975 316927 363064

Cost Of Sales(including prior

period adj but excluding Dep

and Interest)187719 230047 484485 288612 327032

Gross Margin (19002) (18630) (76490) (28315) (36032)

Depreciation 3402 3817 3347 3048 2470

Profit/(loss) before Int and

Taxes

15600 14813 73143 25267 33562

Interest 4613 6387 5262 7294 9644

Profit/(loss) before taxes 10987 8426 67881 17973 23918

Taxes including FBT 59 70 14170 6187 8278

Debit/(Credit) for deferred

tax

--- --- --- (3369) 1332

TaxationExpenses Credited --- --- --- --- (3400)

NET PROFIT/(LOSS) 10928 8356 53711 15155 17708


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CHAPTER-8EVALUATION OF PROJECT USING CAPITAL BUDGETING

TECHNIQUES

8.1 PROJECT EVALUATION

Name of the Project: Baggaging plant with handling system .

Project Estimate: Ventured into the market and got a quote for 300 Cr.

Project Cost: 300 Cr

Assumption: The Company has currently a dispatch mechanism which is

mechanized for dispatching or bagging 3,300 MT/day. The company plans

to increase its production level to 16, 00,000 MT/annum. So, the dispatch

system should be increased to an additional 1,550 Mt/day so that the total

dispatching to be done per day goes up to 4,850Mt/day. So, as to ensure

the smooth functioning of the dispatching system and this can be done by

setting up a new baggaging plant

Present Capacity-3,330MT/day

New Capacity - 4,850MT/day

Difference or excess production - (4850-3300)MT/day=1,550MT/day

8.2STEPS IN THE EVALUATION OF THE PROJECT

STEP1: Capital Budget Estimates:

The first and the foremost step in the evaluation of a project is the budget

estimate of the project. And here the estimate of the project is 300 crores.

This includes:-

1. Extension of Bagging Plant.

2. Conveyor System for extended portion of Bagging plant.

3. Shed for covering extended Bagging Plant.

4. Railway siding modification.


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5. Shed for covering extended portion of Bagging plant.

STEP2: Project Finance and Source of Funds:

The second step in the evaluation of the project is to find the funds to

install or to establish a project.

1. Debt/Loan Funds/Long term Loans

2. Internal Generation of funds

In this project we have funding of 75% from a bank at 11% rate of interest

P.a. providing with long term loans and the rest 25% from Internal

generation. With a moratorium of one year and repayment schedule of 5

years.

STEP3: Phasing of Capital Expenditure:

The third step in the evaluation of the project is the phasing of the

expenses or expenditure on the project. And here the phasing of the project

expenditure is as below:

PHASING OF CAPITAL EXPENDITURE (Rs in crores)

2012-13 2013-14 2014-15 Total

Bank Loan 50.00 100.00 75.00 225.00

Interest On LTL 6.88 32.90 15.40 55.17

Internal Generation 20.00 35.00 20.00 75.00

Total value Of the project 76.88 167.90 110.40 355.17


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Step4: Repayment Schedule of the Long Term Loan (LTL):

The fourth step in the evaluation of the project is preparing the repayment

schedule of the Long Term Loan (LTL). And here the project repayment

schedule is.

REPAYMENT SCHEDULE OF LONG-TERM LOAN11% (Rs in Crores)

OpeningBalance Addition Total Repayment

ClosingBalance

Interest'@11%p.a Year

Year wisePrincipalrepayment

Year wiseInterestrepayment

1-Oct-12 75 75 75

1-Jan-13 75 100 175 175 2.06

1-Apr-13 175 125 300 300 4.81 2012-13 0 6.88

1-Jul-13 300 300 300 8.251-Oct-13 300 300 300 8.25

1-Jan-14 300 300 3.75 296.25 8.25

1-Apr-14 296.25 296.25 8.75 287.5 8.15 2013-14 12.5 32.90

1-Jul-14 287.5 287.5 15.00 272.5 7.91

1-Oct-14 272.5 272.5 15.00 257.5 7.49

1-Jan-15 257.5 257.5 15.00 242.5 7.08

1-Apr-15 242.5 242.5 15.00 227.5 6.67 2014-15 60.00 29.15

1-Jul-15 227.5 227.5 15.00 212.5 6.26

1-Oct-15 212.5 212.5 15.00 197.5 5.84

1-Jan-16 197.5 197.5 15.00 182.5 5.43

1-Apr-16 182.5 182.5 15.00 167.5 5.02 2015-16 60.00 22.55

1-Jul-16 167.5 167.5 15.00 152.5 4.611-Oct-16 152.5 152.5 15.00 137.5 4.19

1-Jan-17 137.5 137.5 15.00 122.5 3.78

1-Apr-17 122.5 122.5 15.00 107.5 3.37 2016-17 60.00 15.95

1-Jul-17 107.5 107.5 15.00 92.5 2.96

1-Oct-17 92.5 92.5 15.00 77.5 2.54

1-Jan-18 77.5 77.5 15.00 62.5 2.13

1-Apr-18 62.5 62.5 15.00 47.5 1.72 2017-18 60.00 9.35

1-Jul-18 47.5 47.5 15.00 32.5 1.31

1-Oct-18 32.5 32.5 15.00 17.5 0.89

1-Jan-19 17.5 17.5 11.25 6.25 0.48

1-Apr-19 6.25 6.25 6.25 0 0.17 2018-19 47.50 2.85

119.63


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TOTAL REVENUE("A") 1534.50 1534.50 1534.50 1534.50 1534.50

EXPENDITURE

Raw Materials 1227.60 1227.60 1227.60 1227.60 1227.60

Interest On Loan 13.75 22.55 15.95 9.35 2.85

Insurance 7.10 7.10 7.10 7.10 7.10

Salary and Wages 10.66 10.66 10.66 10.66 10.66Contract Employees 7.10 7.10 7.10 7.10 7.10

Repairs and maintenance 10.66 10.66 10.66 10.66 10.66

Hard ware and soft ware material 17.76 17.76 17.76 17.76 17.76

Packaging Cost 1.78 1.78 1.78 1.78 1.78

Power 17.76 17.76 17.76 17.76 17.76

TOTAL EXPENDITURE ("B") 1314.16 1322.96 1316.36 1309.76 1303.26

PROFITS BEFORE DEPRECIATIONAND TAX "C"(C=A-B) 220.34 211.54 218.14 224.74 231.24

Less: DEPRECIATION "D" 18.65 18.65 18.65 18.65 18.65

PROFIT BEFORE TAX "E"(E=C-D) 201.69 192.89 199.49 206.09 212.59

Less: TAX(AS PER IT ACT) 60.77 58.34 60.16 61.98 63.77

PROFIT AFTER TAX 140.93 134.55 139.33 144.11 148.82

Computation of tax:COMPUTATION OF TAX

2015-16 2016-17 2017-18 2018-19 2019-20

Profit Before Tax(PBT) 201.69 192.89 199.49 206.09 212.59

Add:Depreciation(As PerCompanies Act) 18.65 18.65 18.65 18.65 18.65

TOTAL 220.34 211.54 218.14 224.74 231.24

Less:Depreciation (as Per IT Act) 33.05 31.73 32.72 33.71 34.69

Profit After Depreciation 187.29 179.81 185.42 191.03 196.55

TAX 60.77 58.34 60.16 61.98 63.77

STEP6: Valuation of the Asset:

The sixth step in the evaluation of the project is the valuation of the projectat different times or at different periods at different years to come in thefuture.


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VALUATION OF THE ASSET (Rs In Crores)

2015-16 2016-17 2017-18 2018-19 2019-20 2021-22 2022-23

Opening Balance 0.00 301.90 256.61 218.12 185.40 157.59 133.95

Addition 355.17 0.00 0.00 0.00 0.00 0.00 0.00

Total 355.17 301.90 256.61 218.12 185.40 157.59 133.95

Less:Deletion 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total 355.17 301.90 256.61 218.12 185.40 157.59 133.95

Less:Depreciation 53.28 45.28 38.49 32.72 27.81 23.64 43.46

ClOSING BALANCE 301.90 256.61 218.12 185.40 157.59 133.95 90.49

STEP7: Preparation of Cash Flow Statement:

The seventh step in the evaluation of the project is the preparation of theCash Flow Statement. And we need the cash flows to find out the Payback

Period and the Internal Rate of Return of the project

CASH FLOW STATEMENT (Rs in Crores)

2012-13

2013-14

2014-15

2015-16

2016-17

2017-18

2018-19

2019-20

Cash Out Flow

Capital Expenditure on theProject 76.88 167.90 110.40

Cash In Flow

Incremental Profit After Tax 140.93 134.55 139.33 144.11 148.82

Step8: To Find the Viability of the Project by Using Different

Techniques Of Capital Budgeting:Here in Prathi the Techniques of capital budgeting used are :

1. Pay-Back Period Method

2. Internal Rate Of Return


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1. Evaluation of the Project Using Pay Back Period Method:

It was estimated that the cash in-flows will start from 2015-2016

Cost of the Project- 355.18 Cr

Year 2015-16 2016-17 2017-18 2018-19 2019-20

Amount 140.93 134.55 139.33 144.11 148.82

Calculation Of Pay Back Period:

S.no Year Cash Inflows CumulativeInflows

1 2015-16 140.93 140.93

2 2016-17 134.55 275.48

3 2017-18 139.33 414.81

4 2018-19 144.11 558.92

5 2019-20 148.82 707.74

(a) Cash Outlay : 355.18 Cr

(b) Payback Period : INITIAL INVESTMENTANNUAL CASH FLOW

= 2 +79.70

414.81

= 2.2 years


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Pay Back Period:

It is assumed that the profit earning of the project will start from 2015-

2016.

We should increase this period with same exception as there may be any

additional factor and other cause so rounding of 2.2 to 3 years will be right,

so that it will give more assistance to the calculation.

Suggestion: Any project which has a pay-back period of 3 to 5 years is

considered as a good project

And here we have got a pay-back period of 2.2 years. So, the project can be

considered

2. Evaluation of the Project Using Internal Rate of Return Method:

It was estimated that the cash in-flows will start from 2015-2016Cost of the Project- 355.18 Cr

Year 2015-16 2016-17 2017-18 2018-19 2019-20

Amount 140.93 134.55 139.33 144.11 148.82


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Internal Rate of Return:

Discount rate taken as 24% (in crores)

Sl. No Years Cash Inflows DCF (24%)

Present

Values ofInflows

1 2015-16 140.93 .806 113.58

2 2016-17 134.55 .660 88.80

3 2017-18 139.33 .524 73.00

4 2018-19 144.11 .422 60.81

5 2019-20 148.82 .341 50.746

7

8

9

10

11

12

1314

15

Total Present Values of Inflows 386.93



PresentValues ofInflows

1 2015-16 140.93 .787 110.91

2 2016-17 134.55 .620 83.421


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3 2017-18 139.33 .488 68.00

4 2018-19 144.11 .384 55.34

5 2019-20 148.82 .302 50.74

67

8

9

10

11

12

13

1415




PresentValues ofInflows

1 2015-16 140.93 .781 110.06

2 2016-17 134.55 .600 80.73

3 2017-18 139.33 .465 64.78

4 2018-19 144.11 .361 52.02

5 .279 41.52


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2019-20 148.82

6

7

8

9

10

11

12

13

14

15


Calculation of Internal Rate of Return

I R R = L + A - Cash out lay X (HL)

A-B

= 26+355.18 - 349.123 X (28-26)

(355.18-349.123) + (366.412-

355.18)

X 2

= 26 + X 2


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6.07

6.07+11.232

= 26 + 0.350 X 2

= 26.70

Internal Rate of Return (IRR):

In this calculation, is done on the basis of trail and errors. By taking various

percentage of (DCF).So that an appropriate percentage of Internal Rate of

Return can be judge out.

Calculated figure is 26.70%, so we can take it as 30% because at market

Uncertainity.

Suggestion:

Any project which has an Internal Rate of Return Between 16% to 20% is

considered as a good project

And here for this project the Internal Rate of Return is 26.70%. So, theproject can be considered.


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CHAPTER-9

FINDINGS AND SUGGESTIONS

9.1 FINDINGS:

1 It was found that the payback Period of the project is 2 year and 2

months.

2 The Payback Period shows that the initial investment can be recovered

within a short period of time.

3 The investment is ideal because normally an investment should be

recoverable within 5 years.

4. The Internal Rate of Return shows 26.70 % This also ensures a

profitable investment.

9.2SUGGESTIONS:

1. The company may fix the time period for the capital asset for

replacement.

2. The company may effectively use the available resources for attaining

maximum profit.

3. The company has to analyze the proposal for expansion or creating

additional capacity.

4. The company may plan and control its capital expenditure.

5. The company has to ensure that the funds must be invested in long

term project or not.

6. The company may evaluate the estimation of cost and benefit in terms

of cash flows.


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BIBLIOGRAPHY:

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Project on Capital Budgeting

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