Professional Documents
Culture Documents
CHAPTER-1
• INTRODUCTION
• REVIEW OF LITERATURE
CHAPTER-2
• OBJECTIVES OF THE STUDY
• NEED OF STUDY
• SCOPE OF THE STUDY
CHAPTER- 3
• COMPANY PROFILE
CHAPTER- 4
• RESEARCH METHODOLOGY
• LIMITATION
• DATA ANALYSISANDINTERPRETATION
CHAPTER- 5
• FINDINGS
• SUGGESTIONS
• BALANCE SHEET
CHAPTER- 6
• CONCLUSION
• BIBILOGRAPHY
ABSTRACT
The project titled “CAPITAL BUDGETING IN DR. REDDY’S
INDEX (PI)
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INTRODUCTION
INTRODUCTION
An efficient allocation of capital is the most important finance function
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the long-term assets. The investment decisions of a firm are generally
evaluation.
• The project proposal will be initially evaluated by the HOD (Head Of the
Dept.).
• After initial approval from the HOD the project will be evaluated by the
no. (1) Taking out the Technicalities of the projects and viability in the
existing environment. This team will evaluate the project basically in these
areas –
2 Applicability of CGMP
3 Safety
4 Financial viability
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• Once the project team evaluates the project the investment proposal will
under which the total costs incurred will be traced and capitalized under
the project.
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REVIEWE
OF
LITERATURE
Investment Decisions
One of the basic questions faced by financial managers is: How should the
scarce resources of the firms be allocated to get the maximum value for the
firm? This refers to investment decisions, which deal with investment of firm’s
resources in Long term (fixed) Assets and Short term (current) Assets or
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Capital budgeting is a decision making process for investment in assets that
have long term implications, affect the future growth and profitability of the
firm and basic composition and assets mix of the firm. It involves
• Measuring the benefits and costs associated with each alternative option
investors of the firm and the return promised by the proposal, and
Typically, Capital Budgeting decisions involve rather large cash outlays and
commit the firm to a particular course of action over a relatively long period
and consequently, every care should be taken care of. The future risks and
future cash flows occur as they are intended to be. (R.P.Rustagi 2005, p367)
The term capital budgeting refers to long-term planning for proposed capital
outlays and their financing. Thus, it includes both rising of long-term funds as
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(I.M.Pandey 2005, p141). It is the decision making process where the firm
evaluate the purchase of major fixed assets. It involves the firm’s decision to
invest its current funds for addition, disposition, modification and replacement
• The future benefits will occur to the firm over a series of years
(I.M.Pandey2005,p141)
involve large investment of funds. But the funds available with the firm are
always limited and the demand for fund fax exceeds the resources. Hence it
is very important for a firm to plan and control its capital expenditure.
will be felt by the firm over a long period and therefore they have a
decisive influence on the rate and direction of the growth of the firm.
are irreversible. This is because it is very difficult to find a market for the
capital asset. The only alternative will be to scrap the capital assets so
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purchased or sell them at substantial loss in the event of the decision
compete with one another in a way that acceptance of one precludes the
return than a certain desired rate of return are accepted and the rest are
rejected.
compete with each other in a way that the acceptance of one precludes
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the acceptance of other or others. For example, if a company is
acceptance of one system will rule out the acceptance of another. Thus
technique has to be used for selecting the better or the best one. Once
( I.M.Pandey 2005,p142-143)
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Factors Affecting Capital Investment Decisions
The following are the four important factors, which are generally taken into
investment it can accept all capital investment proposals which give a rate
most firms have limited funds and therefore capital rationing has to be
imposed. In such an event a firm can take only such projects, which are
The term ‘capital investment required’ refers to the net cash outflow, which
is the sum of all outflows and inflows occurring at zero time period. The
Installation cost.
Working capital
away. The cash realized on account of such sale will reduce the cost of
new investment.
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Tax effects: The amount of profit or loss on the sale of assets may
ascertained by taking into account the cost of the asset, its book value
and the amount realized on its sale. The tax liability will be different in
When the asset is sold at a price higher than its book value but
return is usually decided on the basis of the cost of capital. For example, if the
A proposal, which yields a rate of return less than 10%. The project s giving a
CUT-OFF POINT: The cut-off point refers to the point below which a
project would not be accepted. For example, if 10% is the desired rate of
return, the cut-off rate is 10%. The cut-off point may also be in terms of
period. For example, if the management desires that the investment in the
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project should be recouped in three years, the period of three years would
from the investment proposals. There are two proposals available for
charges on the fixed assets are not subtracted from gross revenue
investment of current funds for the benefit to the achieved in future and the
• Implementation
• Performance review
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Identification of Potential Investment Opportunities
serve as the basis for setting production targets. This information, in turn, is
• Share corporate strategy and perspectives with persons who are involved
proposal form. Generally, most of the proposals, before they reach the capital
budgeting team, which assembles them, are routed through several persons.
ensure that the proposal is viewed from different angles. It also helps in
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facilitating decision-making, budgeting and control. An illustrative
• Replacement investment.
• Expansion investment.
Decision Making
decision-making. Under this system, executives are vested with the power to
Projects involving smaller outlays and which executives at lower levels can
is usually required. The purpose of this check is mainly to ensure that the
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Implementation
formulation of the project is not done, many surprises and project cannot
be over-emphasized.
defined time frame and cost limits is helpful for expeditious execution and
cost control.
Technique) and CAPM (Critical Path Method) are available. With the help
Performance Review
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• It throws light on how realistic were the assumptions underlying the
project.
decision making.
2006, p290-292)
1. TRADITIONAL TECHNIQUES:
• Pay-back period
Traditional Techniques
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regarding the definition of the rate of return. There are a number of alternative
methods for calculating the ARR. The most common usage of the average
ACCEPT-REJECT RULE:
With the help of the ARR, the financial decision maker can decide whether to
The pay back method (PB) is the second traditional method of capital
The first DCF/PV technique is the NPV. NPV may be described as the
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minus the summation of present value of the net cash outflows in each year.
Symbolically, the NPV for projects having conventional cash flows would be:
n ct
NPV = ∑ (1 + r )
t =1
t - Initial investment
r = discount rate
• Secondly, the present value of cash inflows and cash outflows should be
ACCEPT-REJECT CRITERION:
• NPV>ZERO (accept)
• NPV<ZERO (reject)
• NPV=ZERO (indifferent)
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Internal Rate of Return (IRR)
The second discounted cash flow (DCF) or time adjusted method for
adjusted rate of return and so on. Like the present value method, the IRR
method also considered the time value of money by discounting the cash
streams.
The internal rate of return is usually the rate of return the project earns. It is
defined as the discount rate(r) which equates the aggregate present value of
the net cash inflows (CFAT) with the aggregate present value of cash
outflows of a project. In other words, it is that rate which gives the project
NPV as zero.
COMPUTATION OF IRR
In computing IRR, future cash inflows are discounted in such a way that their
total PV is just equal to the PV of total cash outflows. The time schedule of
occurrence of the future cash flows is known but rate of discount is not. This
discount rate is ascertained by trial and error method. This rate of discount so
known as IRR.
n ct
Investment = ∑ (1 + r )
t =1
t
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Where ct = cash flow at the end of year t
ACCEPT-REJECT CRITERION
involves a comparison of the actual IRR with the required rate of return also
known as the cut-off rate or hurdle rate. The project would qualify to be
accepted if the IRR(r) exceeds the cut-off rate (k).If the IRR and the required
rate of return are equal, the firm is indifferent as to whether to accept or reject
the project.
(PI) or benefit cost ratio (B/C RATIO) .It is similar to NPV approach. The
profitability index approach measures the present value of returns per rupee
invested, while the NPV is based on the difference between the present value
of future cash inflows and the present value of cash outlays. A major short
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relative measure. It may be defined as the ratio which is obtained by dividing
the present value of future cash inflows by the present value of the cash
outlays.
Symbolically,
This method is also called as benefit cost ratio because the numerator
ACCEPT-REJECT CRITERION
Using the B/C ratio or the PI, a project will qualify for acceptance if its PI
When PI is greater than, equal to or less than 1, the net present value is
greater than, equal to or less then zero respectively. I n other words, the NPV
will be positive when the PI is greater than 1; will be negative when the PI is
less then one. Thus, the NPV and PI approaches give the same result
• PI>1 (ACCEPT)
• PI<1 (REJECT)
• PI=1 (INDIFFERENT)
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OBJECTIVES OF THE STUDY
The main objectives of the study are:
Ltd.
To analyze and assess the financial viability of the investment proposal using
Management Plan what it proposes to do in the next Financial Period usually a Year. It is
a Quantified Plan for future activities. Quantitative Blue Prints of Action. A Budget is
effectively used for Control purposes. Control involves the Evaluation of Performance
through comparison of Actual results with the plan and using the feedback either, to take
corrective action or to modify the plan. A Budget sets the targets for each Functional
Area and thus, provides a unique tool to Managers for effectively carrying out their
control function
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SCOPE OF THE STUDY
The scope of the present study includes the following:
Laboratories Ltd
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THE COMPANY
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. The company:-
DR. REDDY’S LABORATORIES LTD WAS FOUNDED BY DR ANJI REDDY, AN
ENTREPRENEUR-SCIENTIST, IN 1984. THE DNA OF THE COMPANY IS DRAWN
FROM ITS FOUNDER AND HIS VISION TO ESTABLISH INDIA’S FIRST
DISCOVERY LED GLOBAL PHARMACEUTICAL COMPANY. IN FACT, IT IS THIS
SPIRIT OF ENTREPRENEURSHIP THAT HAS SHAPED THE COMPANY TO
BECOME WHAT IT IS TODAY.DR ANJI REDDY, HAVING MOVED OUT OF
STANDARD ORGANICS LIMITED, A COMPANY HE HAD SUCCESSFULLY CO-
FOUNDED, STARTED DR. REDDY’S LABORATORIES LTD WITH $ 40,000 IN CASH
AND $120,000 IN BANK LOAN! TODAY, THE COMPANY WITH REVENUES OF
RS.2, 427 CRORE (US $546 MILLION), AS OF FISCAL YEAR 2006, IS INDIA’S
SECOND LARGEST PHARMACEUTICAL COMPANY AND THE YOUNGEST
AMONG ITS PEER GROUP.
THE COMPANY HAS SEVERAL DISTINCTIONS TO ITS CREDIT. BEING THE FIRST
PHARMACEUTICAL COMPANY FROM ASIA PACIFIC (OUTSIDE JAPAN) TO BE
LISTED ON THE NEW YORK STOCK EXCHANGE (ON APRIL 11, 2001) IS ONLY
ONE AMONG THEM. AND AS ALWAYS, DR. REDDY’S CHOSE TO DO IT IN THE
MOST DIFFICULT OF CIRCUMSTANCES AGAINST WIDESPREAD SKEPTICISM.
DR. REDDY’S CAME UP TRUMPS NOT ONLY HAVING ITS STOCK
OVERSUBSCRIBED BUT ALSO BECOMING THE BEST PERFORMING IPO THAT
YEAR.
Dr. Anji Reddy is well known for his passion for research and drug discovery.
Dr. Reddy’s started its drug discovery programme in 1993 and within three
molecule to Novo Nordisk in March 1997. With this very small but significant
step, the Indian industry went through a paradigm shift in its image from being
pioneered drug discovery in India. There are several such inflection points in
the company’s evolution from a bulk drug (API) manufacturer into a vertically
Today, the company manufactures and markets API (Bulk Actives), Finished
a very promising Drug Discovery Pipeline. When Dr. Reddy’s started its first
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big move in 1986 from manufacturing and marketing bulk actives to the
markets, it had to not only overcome regulatory and legal hurdles but also
Indian pharma industry, in stark contrast, is known globally for its proven high
This transition, a tough and often-perilous one, was made possible thanks to
Today, Dr. Reddy’s continues its journey. Leveraging on its ‘Low Cost, High
Intellect’ advantage. Foraying into new markets and new businesses. Taking
on new challenges and growing stronger and more capable. Each failure and
each success renewing the sense of purpose and helping the company
evolve. With over 950 scientists working across the globe, around the clock,
the company continues its relentless march forward to discover and deliver a
difference to peoples lives worldwide. And when it does that, it would only be
the beginning and yet it would be the most important step. As Lao Tzu wrote
a long time ago, ‘Even a 1000 mile journey starts with a single step.’
Business
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chain. We manufacture Active Pharmaceutical Ingredients and Finished
Dosage forms and market them globally, with a focus on United States,
Europe, India and Russia. In addition, the drug discovery arm of the company
Board of Directors
Dr. Reddy's has a board comprising of eminent individuals from diverse fields.
disclosure.
Our Directors are experts in the diversified fields of medicine, chemistry and
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Corporate Governance
plane of leadership.
achieving the desired results. This approach has transformed the company's
practices.
The company has identified and established its core purpose, mission and
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company and its management is constantly aligned with the business
The Appreciation Certificate of the District Collector for being the “Best Clean
Production Industry” for the year 2006 awarded to API Unit-V.
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4. Research Methodology
The primary data needed for the project analysis has been collected through
department.
The secondary sources of data are annual reports, brochures and web
resources. A case study approach has been used for the study of capital
4.1Limitations
• The study was conducted with the data available and analysis was made
accordingly.
• Due to the confidential financial records, the data is not exposed so the
• Since the study is based on the financial data that are obtained from the
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DATA ANALYSIS
&
INTERPRETATION
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Presentation & Analysis
Advantages:
Disadvantages:
block.
• Non – flameproof equipments – area classifications may not be met with 100%.
manufacturer
• Process development to offer low cost New Drug 30 formula with Fluid
- - 33
• Process will be developed with suitable alternative aqueous coating
materials.
• Use of low automation and low cost capital equipments, which competitors
• The job involves key operations like manual drug coating and operation of
by the markets.
resources.
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• Quality Assurance and Regulatory affairs has given clearance for such a
• Need for any specific licenses to sell New Drug 30 need to be verified
from Unit-III , however we are doing this activity from Unit-II currently.
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4.2.4 Net Income Per Annum
COMPUTATION OF NET INCOME PER ANNUM
(Rs in Mns)
(1) Operation Level 30Tn per month
(4) Sales Income [(1) * (2)] 27.00 25.50 24.00 22.50 21.00
(8) Net Income [(6) - (7)] 11.38 9.88 8.38 6.88 5.38
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(2) Avg. Investment 10.8 10.8 10.8 10.8 10.8
30 Tns
1400
1200
1000
800
ARR
600
Series1
400
200
0
700 750 800 850 900
Sales
Interpretations
The ARR more than the pre-specified rate of return is accepted. The company
requires a rate of return of 20%. Therefore, ARR of the project, which is greater than
20% as specified by management, is accepted but most viable is at a price of
Rs.900 with respect to quantity of 30 Tns per month or 360 Tns per annum.
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(1) Investment 21.6 21.6 21.6 21.6 21.6
30 Tns
0.35
0.3
0.25
0.2
PBP
0.15
Series1
0.1
0.05
0
700 750 800 850 900
Sales
Interpretations
The Payback Period calculated for a project is to be compared with some
predetermined target period and Payback Period less than the target period is
accepted. Therefore, target period is 3 years and project less than that is
accepted but the viable is at Rs.900 with respect to the quantity of 30 Tns per
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4.2.11 NPV: Operation Level – 30 TNS PER MONTH, Project Life – 5
Years
Net Present Value of the Project Investment @ discounting rate of 9%
(Rs in Mns)
Operation Level 30 Tns per month
Sale price Rs per kg 900 850 800 750 700
3.
(2) Present Value factor @ 9% 3.8 3.8 3.8 3.8 8
82.5
(3) Net Income 136.56 118.56 100.56 6 64.56
21.6 21.6
(5) Present Value of Investment 21.60 21.60 0 21.60 0
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30 Tns for 5yrs
500
400
300
NPV
200 Series1
100
0
700 750 800 850 900
Sales
Graph 3: Net Present Value for 30 Tons per Month, Project Life-5 Years
Interpretations
NPV shows present value of the project. The project is accepted if its NPV is
positive and rejected if NPV is negative. Therefore, NPV of 30 Tns per month
or 360 per annum for project life of 5years is showing positive and viable is at
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IRR: Operation Level – 30 TNS PER MONTH, Project Life – 5 Years
INTERNAL RATE OF RETURN FOR 5 YEARS (Rs in Mns)
Operation Level 30 Tns per month
Sale price Rs per kg 900 850 800 750 700
Investment -21.60 -21.6 -21.6 -21.6 -21.6
Net Income per annum for
5years
1 136.56 118.56 100.56 82.56 64.56
2 136.56 118.56 100.56 82.56 64.56
3 136.56 118.56 100.56 82.56 64.56
4 136.56 118.56 100.56 82.56 64.56
5 136.56 118.56 100.56 82.56 64.56
IRR 632% 549% 465% 382% 299%
Table 4: Internal Rate of Return for 30 Tons per Month, Project Life-5 years
700%
600%
500%
400%
IRR
300% Series1
200%
100%
0%
700 750 800 850 900
Sales
Graph 4: Internal Rate of Return for 30 Tons per Month, Project Life-5 years
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4.2.17.1 Interpretations
The project is accepted if IRR is more than the minimum rate, which is 9% for
this project. Thus, the project at a sale price of Rs.900 is getting greater than
Tns per month or 360 Tns per annum for project life of 5years.
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Operation Level – 30 TNS PER MONTH, Project Life – 5 Years
PROFITABILITY INDEX FOR 5 YEARS
(Rs in Mns)
Operation Level 30 Tns per month
Sale price Rs per kg 900 850 800 750 700
Present Value Net Income for 518.9 450.5 382.1 313.7 245.
(4) Project Life [(2) * (3)] 3 3 3 3 33
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30 Tns for 5yrs
25
20
15
PI
10 Series1
0
700 750 800 850 900
Sales
Graph 5: Profitability Index for 30 Tons per Month, Project Life-5 Years
4.2.17.2 Interpretations
PI is 24.02, which is more than 1 and also NPV is positive hence the project is
more viable at a sale price of Rs.900 with respect to the quantity of 30 Tns
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5.FINDINGS
The following are the findings during the study of the project:
• Average Rate of Return: As per the management, the minimum rate of return expected is
20%. The project showing ARR greater than 20% is accepted with respect to operation
• Pay Back Period: The project is accepted when Pay Back is less than 3 years which is
standard payback period set by the management. The project, which gives lesser payback
period among difference in sales price and quantity to be produced, is accepted and it is at
• Net Present Value: The net income of the project is discounted at the minimum required
rate of return – 9% and NPV is positive for different sales price and at different operational
levels.
• Internal Rate of Return: The capital invested is getting return of more than 40%, which is
• Profitability Index: The project showing PI more than 1 and also where NPV is positive is
taken up.
• As sales price rises, demand factor also needs to be taken into consideration.
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5.1SUGGESTIONS
Budgeting in DR. REDDY’S LABORATORITES LTD is mainly a performance based i.e., based on the
performance, where as zero-based budgeting is ideal for the company like DR. LABORATORIES LTD.
Production sales, Purchase, Finance, Marketing etc., this will enhance the efficiency of
the organization.
Job sequencing should be pre-determined & should follow up the sequential process,
until the end of the job. Thus the lead-time can be reduced.
centers.
production.
Education about the importance of budgeting should be communicated to all concerned authorities,
involved directly or indirectly to work according, for the growth of the company.
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Balance sheet (Rs corers)
Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 04
Sources of fund Loan funds
Owner's fund Sources of fund
Equity share capital 84.09 83.96 38.35 38.26 38.26
Share application money - - - - -
Preference share capital - - - - -
Reserves & surplus 4,727.72 4,289.40 2,223.79 2,035.82 2,008.76
Loan funds
Secured loans 3.40 1.92 145.13 3.27 35.64
Unsecured loans 458.91 327.98 778.74 269.96 22.58
Total 5,274.11 4,703.26 3,186.01 2,347.32 2,105.24
Uses of funds
Fixed assets
Gross block 1,750.21 1,291.19 1,052.90 1,004.22 810.95
Less : revaluation reserve - - - - -
Less : accumulated depreciation 762.80 609.15 491.08 441.68 352.85
Net block 987.42 682.04 561.82 562.54 458.10
Capital work-in-progress 245.71 280.61 112.92 60.13 105.25
Investments 2,080.71 966.99 911.36 358.46 612.05
Net current assets
Current assets, loans & advances 3,348.01 4,028.55 2,398.87 2,000.88 1,343.70
Less : current liabilities & provisions 1,387.74 1,254.93 798.95 634.68 413.86
Total net current assets 1,960.27 2,773.62 1,599.92 1,366.20 929.84
Miscellaneous expenses not written - - - - -
Total 5,274.11 4,703.26 3,186.01 2,347.32 2,105.24
Notes:
Book value of unquoted investments 2,080.41 966.68 911.05 413.63 419.48
Market value of quoted investments 1.92 1.20 1.16 31.88 254.94
Contingent liabilities 1,892.55 1,896.92 2,409.27 189.19 208.33
Number of equity shares outstanding (Lacks) 1681.73 1679.12 766.95 765.19 765.19
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SUMMARY
&
CONCLUSIONS
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Summary
The Project Report is based on the Capital Budgeting DR. REDDY’S LABORATORIES LTD.
The profile of the Company given briefly is collected from the official website of the DR.
REDDY’S LABORATORIES LTD & brochures and the introduction, literature review on topic
Capital Budgeting is text based. The Capital Budgeting procedure at DR.REDDY’S is studied
and the same is applied with respect to the Pay back period, average rate of return, net
present value, profitability index and internal rate of return, calculated and analyzed. Various
tables and charts have been shown in order to compare the increase or decrease of profitability
management. Although capital assets usually comprise a smaller percentage of a firm's total
assets than do current assets, capital assets are long-term. Therefore, a firm that makes a
mistake in its capital budgeting process has to live with that mistake for a long period of time.
- - 49
Conclusions
• It is concluded that the project is viable and profitable as the ARR is getting more than
20%.
• The PBP indicates that investment is fully recovered in short period depending upon sales
• NPV of the project is considered as better because of its higher Net Present Value.
• The IRR of the project is giving more than 40% Rate of Return whatever be the sales price
• The PI more than 1 and where project shows NPV as positive is given first preference.
• The company has to sell at lesser price for more quantity produced and sell at higher price
- - 50
BIBLIOGRAPHY
- - 51
7.1Books
Prasanna Chandra, (2006), Financial Management Theory and Practice (Sixth Edition), Tata
McGraw-Hill, New Delhi
I. M. Pandey, (2005), Financial Management (Ninth Edition), Vikas Publishing House Private
Ltd, New Delhi
V.K. Saxena & C.D Vashist, (2002), Cost and Management Accounting, Sultan Chand &
Sons, New Delhi
www.drreddys.com
www.wikipedia.org/wiki/capital_budgeting
www.studyfinance.com
www.netmba.com/finance/capital/budgeting
www.eximfm.com/training/capitalbudgeting.doc
www.investorwords.com
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