CENTRE POINT COLLEGE

INTRODUCTION
The project titled ANALYTICAL STUDY OF CAPITAL INVESTMENT OF AMARDEEP COAL SUPPLIER NAGPUR,FOR THE PERIOD 2009-10 covers the topic related with the source of finance of the business firm, the time period of the investment, the pattern and method of the investment, the invested policy and where the capital is been invested.

A) WHAT IS FINANCE?
Finance studies and addresses the way in which individuals, businesses and organizations raise, allocate, and use monetary resources over a time, taking into account the risks entitled in their projects. The term Finance may thus incorporate any of the following. The study, management and control of money and other assets. As a verb, To finance is to provide funds for business or for an individuals large purchase (car, home, etc.) The activity of finance is the application of a set of techniques that individuals and organizations used to manage their money, particularly the differences between income and expenditure and the risks of their investments. An income that exceeds its expenditure can lend or invest the excess income. On the other hand, an entity whose income is less than its expenditure can raise capital by borrowing or selling equity claims, decreasing its expenses, or increasing its income. The lender can find a borrower financial intermediary, such as a bank or a buy notes or bonds in the bond market. The lender receives interest, the borrower pays a higher interest than a lender receives, and the financial intermediary pockets the difference.

CENTRE POINT COLLEGE Finance is used by individuals (personal finance), by government (public fianc), by businesses (corporate finance), as well as by wide variety of organizations including non profit organization. In general, the goals of the above activities are achieved through the use of appropriate financial instruments. Finance is one of the most important aspects of business management. Without proper financial planning a new enterprise is unlikely to be successful. Managing money (a liquid asset) is essential to ensure future, both for the individual and an organization.

B) WHAT IS FINANCIAL MANAGEMENT?

Financial Management in simple terms means the management of funds. Management of funds acts as the primary concern whether it may be in business undertaking or in an educational institution. Financial Management which simply means dealing with management of money matters. Financial Management is that managerial activity which is concerned with the planning and controlling of the firms financial resources. It is an integrated decision making process concerned with acquiring, financing and managing assets to accomplish the overall goal of a business organization. Financial Management means efficient use of economic resources namely the capital funds. It comprises of the forecasting, planning, organizing, directing, coordinating and controlling of all activity relating to acquiring and application of the financial resources. According to Phillippatus, Financial Management is concerned with the managerial decisions that results in acquisition and financing of short term and long term credits for the firm. Here it deals with the situations that require selection of specific assets (or combination of assets), the selection of specific problem of size and growth of an enterprise. Here the

CENTRE POINT COLLEGE analysis deals with the expected inflow and outflow of funds and their effect on managerial objectives. The analysis states two main aspects of Financial Management like procurement of funds and an effective use of fund to achieve business objectives. 1) Procurement of Funds Funds can be obtained from different sources so procurement of funds is considered as one of the important aspects of business concern. Funds procured from different sources have different characteristics in terms of risk, cost and control. Funds issued by the issue of equity shares are the best from the point of view for the company as there is no question of repayment of equity capital except when the company is under liquidation. From the cost point of view, equity capital is the most expensive source of funds as dividends expectation of share holders is normally higher than prevalent interest rates. Financial Management constitutes risks, cost and control. In globalize competitive scenario mobilization of funds plays a very significant role. Funds can be raised either through domestic market or from abroad. Foreign Direct Investment (FDI) as well as Foreign Institutional Investors (FII) are two major sources of raising funds. The mechanism of procurement of funds has to be modified in the light of requirement of foreign investors. 2) Effective Utilization of Funds Effective utilization of funds as an important aspect of Financial Management avoids the situations whether fund is kept idle or proper uses are not being made. Funds procure involved certain cost and risk. If the funds are not used properly then running business will be too difficult. In case of dividend decisions, we also consider this. So it is crucial to employ the fund properly and profitably.

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C) WHAT IS THE SCOPE OF FINANCIAL MANAGEMENT?

A sound financial management is essential in all types of organizations whether it may be profit or non profit. Financial Management is essential in a planned economy as well as in a capitalist set up as it involves efficient use of resources. From time to time it is seen that many firms have been liquidated not because of the technology was obsolete or because their products were not in demand or their labour was not skilled and motivated but there was a complete mismanagement of financial affairs. Even in boom period, when a company makes high profits there is also a fear of liquidation of bad financial management. Financial Management optimizes the output from the given input of funds. In the country as India where resources are scarce and the demands for the funds are many, only the need of proper financial management is required. In case of newly started companies with a high growth rate, it is more important to have sound financial management since finance alone guarantees their survival. Financial Management is very important in case of non profit organizations, which do not pay adequate attention to financial management. However, a sound system of financial management has to be cultivated among the bureaucrats, administrators, engineers, educationalists and public at large. The use of this does not stick only with company but also it extends to the shareholders, employees, government, investors, creditors, management, financial institutions, banks etc. A proper financial management also helps the above in decision making in various aspects.

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D) WHAT IS THE OBJECTIVE OF FINANCIAL MANAGEMENT?

Efficient financial management requires the existence of some objectives or goals because judgment as to whether or not a financial decision is efficient must be made in the light of some of the objectives. Although various objectives are possible but two main objectives of financial management is elaborated for discussion. These are:1) Profit Maximization 2) Wealth/Value Maximization 1) Profit Maximization:Financial Management has the same objective as that of a company that is to earn profit. However, profit maximization cannot be the sole objectives of the company. It is a limited objective. If profits are given undue importance then problems may arise as discussed below: The term profit is vague. It does not clarify what it exactly means and conveys different meaning to different people. Profit maximization has to be attempted with a realization of risk involved. A positive relationship exists between risk and profit. So both should be balanced. Profit maximization does not take into account the time pattern of returns. Profit maximization as an objective is too narrow.

CENTRE POINT COLLEGE 2) Wealth /Value Maximization:It is commonly agreed that the objectives of a firm is to maximize value or wealth. Value of a firm is represented by the market price of the companys common stock. The market price of a firms stock represents the focal judgment of all market participants as to what the value of the particular firm is. It takes into account the present and prospective future earnings per share, the timings and risk of these earning, the dividend policy of the firm and many other factors that bear upon the market price of the stock. Market price acts as the performance index or report card of the firms progress. Prices in the share market are largely affected by many factors like general economic outlook, outlook of a particular company, technical factors and even mass psychology. Normally this is a function of two factors as given below: The anticipated rate of earnings per share of the company. The capitalization rate. The likely rate of Earnings per Share i.e. EPS depends upon the assessment as to how profitably a company is growing to operate in the future. The capitalization rate reflects the liking of the investors for the company.

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E) WHAT IS CAPITAL BUDGETING?

Capital budget is a part of the finances which deals in the decision of procuring the funds for the machinery and equipments. The topic analytical study of capital investment of Amardeep Coal Supplier Nagpur, for the period 2009-10 is basically to study the detailed examination of capital management of the firm. The term capital budgeting refers to a process by which a firm determines where it should apply its comparatively limited financial resources. The study is basically conducted to see that whether the capital is available to the firm or whether it has to procure it thought other sources or take decisions whether to lease or purchase the machinery. The study also shows the policy of the firm, involved during the capital budgeting decisions.

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COMPANY PROFILE
Amardeep Coal Suppliers is one of the leading companies in vidharbh region of Maharashtra which basically deals with steam Coal. Steam Coal: - Steam Coal is a coal which has a high heat & Carbon value which is basically used only in manufacturing Industry, Also referred to as steaming coal, thermal coal or energy coal. It is used as a fuel source in electrical power generation, cement manufacture and various industrial applications. Amardeep Coal Suppliers also deals with movement of goods from one place to another as per the requirement of the consumer. The firm have got its own fleet of 112 trucks comprising of Ten Wheelers, Six Wheelers & Eighteen Wheelers in sound running condition. HISTORY Amardeep coal supplier is owned by Mr. Deepak Jaiswal which is a sole-proprietor business organization. The firm was established since the year 1986.Deepak Jaiswal is self made business. Born in poor family, he started his business carrier at the age of 12 as flowers sellers near temples on footpath. By his sincere affords and hard work, he won the hearts of the people. He always had high dream. He believes in congress principles and is stubborn congress man and he participates actively in congress activities and awarded as general secretary of youth congress Daxin Mumbai. From a flower seller he develops his ambient as industrial material supplied. In order to make material available at cheapest prices to industries, he shifted himself from Mumbai to Nagpur with is a source of coal. Soon he established himself in coal business. In spite of getting success in coal business he has not forgotten his old days today also he help all the young and inspiring youths and motives them to think big. He feels that todays youth can take our country to new heights internationally, hence youths should be helped and encourage.

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RESEARCH STUDY A) PROBLEM DEFINITION

In modern times, the efficient allocation of capital resources is a most crucial function of financial management. This function involves organizations decision to invest its resources in long- term assets like land, building facilities, equipment, vehicles, etc. all these assets are extremely important to the firm because, in general, all the organizational profits are derived from the use of its capital in investment in assets which represent a very large commitment of financial resources, and these funds usually remain invested over long period of time. The future development of a firm hinges on the capital investment projects, the replacement of existing capital assets, and /or the decision to abandon previously accepted undertakings which turns out to be less attractive to the organization than was originally thought, and divesting the resources to the contemplation of new ideas and planning. For new projects such as investment decisions of a firm within the definition of capital budgeting or capital expenditure decisions. Capital budgeting refers to long term planning for proposed capital outlays and their financing. Thus, it includes both raising of long- term funds as well as their utilization. It may, thus, be defines the firms formal process for acquisition and investment of capital. It contains 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 investment proposal. Hence the capital budgeting decision plays important role in achieving the objectives of the financial management that is profit maximization through cost control. But this importance is sometimes over looked by the company owners so the topic is taken under consideration for the research study.

CENTRE POINT COLLEGE The project would throw light on capital decision making process its related concepts and methods which would facilitates the company for their better functioning the basic features of capital budgeting decisions.

1. Current funds are exchanged for future benefits; 2. There is an investment in long-term activities; and 3. The future benefits will occur to the firm over series of years.

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B) OBJECTIVES OF THE STUDY

The main objectives of the study are as follows: To study the source of finance of the business firm. To study invested policy and where the capital is been invested. To study the time period of the investment. To study the pattern and method of the investment.

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C) HYPOTHESIS OF THE STUDY

The hypothesis taken under consideration for the study is: 1. That more than 60% of capital is invested for long period of time.

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D) SCOPE OF THE STUDY

Geographical ConstraintsThe firm undertakes its operations in vidarbha region only. Firms nameAmardeep coal supplier located near nag nadi reshimbagh, Nagpur. Topics DiscussedAnalytical study of capital investment of amardeep coal supplier Nagpur, for the period 2009-10. And its method likes:1. Accounting rate of return 2. Net present value 3. Profitability index 4. Internal rate of return 5. Modified internal rate of return 6. Equivalent annuity Time LimitFor the research period of 2009-2010.

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E) THEORETICAL PERSPECTIVE
Capital budgeting (or investment appraisal) is the planning process used to determine whether a firms long term investments such as new machinery, replacement machinery, new plants, new products, and research developments projects are worth pursuing. It is budget for major capital, or investment, expenditure. To be more precise, capital budgeting decision may be defined as the firms decision to invest its current find more efficiently in long term activities in anticipation of an expected flow of future benefits over a series of years. The long term activities are those activities which affects firms operation beyond the one year period. Capital budgeting is a many sided activity. Many formal methods are used in capital budgeting, including the techniques such as: Accounting Rate of Return Net Present Value Profitability Index Internal Rate of Return Payback Period

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Capital Budgeting Methods METHOD

Traditional

Modern

Pay Back Period

Accounting Rate of Return

New Present Value

Profitability Index

Internal Rate of Return

1. PAY BACK METHOD: The pay back method (B) is the simplest and perhaps the most widely employed quantitative method of appraising capital expenditure decisions. This method answers the question. How many years will it take for the cash benefit to pay the original cost of an investment ? (Normally disregarding salvage value). Cash benefits here represent CFAT ignoring interest payment. Thus, the pay back method measures the number of years required for the CFAT to pay back the original outlet required in an investment proposal. There are ways of calculating the BP period. The one of the method can be applied when the cash flow stream is in the nature of annuity for each year of the projects life, that is, CFAT are uniform. In such a situation, the initial cost of the investment is divided by the constant annual cash flow:

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CENTRE POINT COLLEGE 2. ACCOUNTING RATE OF RETURN: Accounting rate of return or ARR is a financial ratio used in budgeting. The ratio does not take into account the concept of time value of money. ARR calculates the return, generated from net income of the proposed capital investment. The ARR is a percentage return. Say, if ARR = 7% then it means that the project is expected to earn seven cents out each dollar invested. If the ARR is equal of or greater than the required rate of return, the project is acceptable. If it is less than the desired rate, it should be rejected. When comparing investment, the higher the ARR, the more attractive the investment. ________________________________________________________________________ Basic Formulae ________________________________________________________________________

Average net income ARR = _____________________ Average investment

Book value at beginning of year 1 + Book value at end of useful life Average ______________________________________________________ 2 investment=

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CENTRE POINT COLLEGE 3. NET PRESENT VALUE: Net present value (NPA) or net present worth (NPW) is defined as the total present value (PV) of a time series of cash flows. It is a standard method for using the time value of money to appraise long- term projects. Used for capital budgeting, and widely throughout economics, it measures the excess or shortfall of cash flows, in present value terms, once financing charges are met. Formula ________________________________________________________________________ Each cash inflow/outflow is discounted back to its present value (PV) Then they are Rt _________ ( 1 + i)t Summed. Therefore NPV is sum of all items

Where t I Rt = The time of the cash flow. The discount rate (the rate of return that could be earned on an investment in the financial with similar risk). the net cash flow (the amount of cash, inflow minus outflow) at time t (for educational purposes, Ro is commonly placed to the left of the sum of emphasize its role as (minus the) investment.

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4. PROFITABILITY INDEX:
Profitability index indentifies the relationship of investment to payoff of a proposed project. The ratio is calculated as follows:

PV of future cash flows Profitability index = ____________________ PV of initial investment

Profitability Index is also know as Profit Investment Ratio, abbreviated to P.I. and Value Investment Ratio (V.I.R.). Profitability index is a good tool for ranking projects because it allows you to clearly identify the amount of value created per unit of investment, thus if you are capital constrained you wish to invest in those projects which create value most efficiently first. Where investment costs are included in the computed cash flow a PV > 0 simply indicates the project creates more value than the cost of capital which is determined by the Weighted Average Cost of Capital (WACC). A ratio of 1 is logically the lowest acceptable measure on the index. Any value lower than one would indicate that the projects PV is less than the initial investment. As values on the profitability index increase, so does the financial attractiveness of the proposed project.

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CENTRE POINT COLLEGE 5. INTERNAL RATE OF RETURN: DEFINITION

80.00 60.00 40.00 30.00 20.00 10.00 0.00 (10.00) (20.00) (30.00) 0%
5% 10% 15% 20% 25% 30% 35%

IRR=

17.09%

Showing the position of the IRR on the graph of NPV (r) (r is labeled I in the graph) The internal rate of return on an investment or potential investment is the annualized effective compound return rate that can be earned on the invested capital. In more familiar terms, the IRR of an investment is the interest is the interest rate at which costs of the investment lead to the benefits of the investment. This means that all gains from the investment are inherent to the time value of money and that the investment has a zero net present value at this interest rate. USES Because the internal rate of return is a rate quantity, it is an indicator of the efficiency, quality, or yield of a investment. This is in contract with the net present value, which is an indicator of the value or magnitude of an investment.

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CENTRE POINT COLLEGE An investment is considered acceptable if its internal rate of return is greater than an established minimum acceptable rate of return. In a scenario where an investment is considered by a firm that has equity holders, this minimum rate is the cost of capital of the investment (which may be determined by the risk adjusted cost of capital of alternative investments). This ensures that the investment is supported by equity holders since, in general, an investment whose IRR exceeds its cost of capital adds value for the company (i.e. it is profitable). CALCULATION Given a collection of pairs (time, cash flow) involved in a project, the internal rate of return follows from the net present value as a function of the rate of return. A rate of return for which this function is zero is an internal rate of return. Given the (period, cash flow) pairs (n, Cn) where n is a positive integer, the total number of periods N, and the net present value NPS, the internal rate of return is given by r in:

Cn =0 ( 1+ r)n

NPV =

n=0

Note that the period is usually given in years, but the calculation may be made simpler if r is calculated using the period in which the majority of the problem is defined (i.e. using months if most of cash flows occur at monthly intervals) and converted to a yearly period thereafter. Note- that any fixed time can be used in place of the present (e. g., the end of interval of an annuity); the value obtained is zero if and only if the NPV is zero.

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CENTRE POINT COLLEGE In the case that the cash flows are random variables, such as in the case of a life annity, the expected values are put into the above formula. Often, the value of r cannot be found analytically. In this case, numerical methods or graphical methods must be used. NUMERICAL SOLUTION Since the above is a manifestation of the general problem of finding the roots of the equation NPV (r), there are many numerical methods that can be used to estimate r. For example, using the secant method, r is given by

(rn - T n-1) rn+1 = rn NPVn -----------------NPVn NPVn-1

Where rn is considered the nth approximation of the IRR. This formula initially requires two unique pairs of estimations of the IRR and NPV (ro, NPVo) and (r1, NPV1), and produces a sequence of

(ro,NPVo), (rn+1,NPVn+1)

(r1,NPV1),,(rn-1,NPVn-1),(rn,NPVn),

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CENTRE POINT COLLEGE That may converge to (r, O) as n 00. If the sequence coverage, then iterations of the formula can continue indefinitely so that r can be found to an arbitrary degree of accuracy. The convergence behavior of the sequence is governed by the following: If the function NPV (i) has a single real root r, then the sequence will converge reproducible towards r. If the function NPV (i) has n real roots r1, r2, ---, rn, then the sequence will converge to one of the roots and changing the values of the initial pairs may change the root to which is converges. If function NPV (i) has no real roots, then the sequence will tend towards infinity. Having r1 > ro when NPV or r1 < ro when NPVo < 0 may speed up convergence of rn to r.

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CENTRE POINT COLLEGE PROBLEMS WITH USING INTERNAL RATE OF RETURN As an investment decision tool, the calculated IRR should not be used to rate mutually exclusive projects, but only to decide whether a single project is worth investing in. NPV vs. discount rate comparison for two mutually exclusive projects. Project A has a higher NPV (for certain discount rates), even though its IRR= (x axix intercept) is lower than the project B (click to enlarge) In cases where one project has a higher initial investment than a second mutually exclusive project, the first project may have a lower IRR (expected return), but a higher NPV (increase in shareholders wealth) and should thus be accepted over the second project (assuming no capital constraints). IRR assumes consumption of positive cash flows during the project. If positive cash flows can be reinvested back into the project, then a suitable reinvestment rate is required in order to calculate the reinvestment cash flow and hence the IRR with cash flow reinvested.

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CENTRE POINT COLLEGE When the calculated IRR is different from the true reinvestment rate for interim cash flows, the measure will accurately reflect the annual equivalent return from the project. The company may have additional projects, with equally attractive prospects, in which to invest the interim cash flows. This makes IRR a suitable (and popular) choice for analyzing venture capital and other private equity investments, as these strategies usually require several cash investments throughout the project, but only see one cash outflow at the end of the project (e.g. via IPO or M & A). Since IRR does not consider cost of capital, it should not be used to compare projects of different duration. Modified Internal Rate of Return (MIRR) does consider cost of capital and provides a better indication of a projects efficiency in contributing to the firms discounted cash flow. In the case of positive cash flows followed by negative ones (++ ---) the IRR may have multiple values. In this case a discount rate may be used for the borrowing cash flow and the IRR calculated for the investment cash flow. This applies for example when a customer makes a deposit before a specific machine is built. In a series of cash flows like (-10, 21, -11), one initially invests money, so a high rate of return is best, but then receives more than one possesses, so then one owes money, so now a low rate of return is best. In this case it is not even clear whether a high or a low IRR is better. There may even be multiple IRRs for a single project, like in the example 0% as well as 10%. Example of this type of project are strip mines and nuclear power plants, where there is usually a large cash outflow at the end of the project. In general, the IRR can be calculated by solving a polynomial equation. Sturms theorem can be used to determine if that equation has a unique real solution. In general the IRR equation cannot be solved analytically but only interactively.

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CENTRE POINT COLLEGE When a project has multiple IRRs it may be more convenient to compute the IRR of the project with the benefits reinvestment. Accordingly, MIRR is used, which has an assumed reinvestment rate, usually equal to the projects cost of capital. Despite a strong academic preference for NPV, surveys indicate that executive prefer IRR over NPV. Apparently, managers find it easier to compare investments of different sizes in terms of percentage rages of return than by dollars of NPV. However, NPV remains the more accurate reflection of value to the business. IRR, as a measure of investment efficiency may give better insights in capital constrained situation. comparing mutually exclusive projects, NPV is the appropriate measure. MATHEMATICS Mathematically the value of the investment is assumed to undergo or decay according to some rate or return (any value greater than 100%), with discontinuities for cash flows, and the IRR of a series of cash flows in defined as may rate of return the results in a net present value of zero (or equivalently, a rate of return that results in the correct value of zero after the last cash flow). Thus internal rate(s) of return follow from the net present value as a function of the rate of return. This function is continuous. Towards a rate of return of 100% the net present value approaches infinity with the sign of the last cash flow, and towards a rate of return of positive infinity the net present value approaches the first cash flow (the one at the present). Therefore, if the first and last cash flow have a different sign there exists an internal rate of return. Examples of time series without an IRR. Only negative cash flows the NPV is negative for every rate of return. (-1, 1, -1) rather small positive cash flow between two negative cash flows; the NPV is a quadratic function of 1/1 (1+r), where r is the rate of return, or put differently, a quadratic function of the discount rate r/ (1+r); the highest NPV is -0.75, for r= 100%. However, when

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CENTRE POINT COLLEGE In the case of a series of exclusively negative cash flows followed by a series of exclusively positive ones, consider the total value of the cash flows converted to a time between the negative and the positive ones. The resulting function of the rate of return is continuous and monotonically decreasing from positive infinity to negative infinity, so there is a unique rate of return for which it is zero. Hence the IRR is also unique (and equal). Although the NPV function itself is not necessarily monotimically decreasing on its whole domain, it is at the IRR. Similarly, in the case of a series of exclusively positive cash flows followed by a series of exclusively negative ones the IRR is also unique. EXTENDED INTERNAL RATE OF RETURN: The Internal rate of return calculates the rate at which the investment made will generate cash flows. This method is convenient if the project has a short duration, but for projects which have an outlay of many years this method is not practical as IRR ignores the Time Value of Money. To take into consideration the Time Value of Money Extended Internal Rate of Return was introduced where all the future cash flows are first discounted at a discount rate and then the IRR is calculated. This method of calculation of IRR is called Extended Internal Rate of Return or XIRR.

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RESEARCH METHODOLOGY
Research is the process of systematic & in depth study or search of any particular topic, subject by the collection, presentation & interpretation of relevant details or data. It is a careful search or injury into any subject or subject matter, which is an endeavour to discover or to find out valuable facts which would be useful for further application or utilization. It in common parlance refers to a search for knowledge. Research can also be defined as a scientific and system search for pertinent information on specific topic. We can also say research as an art of scientific investigation. According to Clifford Woody research companies redefining problem, formulating hypothesis or suggested solutions; collecting; organizing and evaluation data; making deductions and reaching conclusions; and at last carefully testing the conclusions to determine whether they fit the formulating hypothesis. In the study of the topic ANALYTICAL STUDY OF CAPITAL

INVESTMENT OF AMARDEEP COAL SUPPLIER, NAGPUR, FOR THE PERIOD 2009-2010 the methodology adopted is Analytical and the method of
sampling is probability sampling.

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DATA COLLECTION

PRIMARY DATA COLLECTION METHOD:

Interview of once of the firm Mr. Deepak Jaiswal. Questionnaire.

SECONDARY DATA COLLECTION METHOD:

Internet Annual report Financial Management books

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DATA ANALYSIS AND INTERPRETATION

PARTICULARS FIXED ASSETS 60% LONG TERM INVESTMENT (TRUCKS) 40% SHORT TERM INVESTMENT (OTHERS) AMOUNT 26663866.25 16315694.25 10348172

INTERPRETATION: As shown in the graph, more than 60% of investment is done for long term i.e trucks and less than 40% is done for short term i.e others.

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PAY BACK PERIODTruck 1 No. of years Profit Before Deperation 1 yr 1395000 2 yr 1395000 3 yr 1395000 Deperation 30% (-) 418500 418500 418500 Net Profit 976500 976500 976500 30% Tax (-) 292950 292950 292950 Cash Amount Deperation (+) 683550 418500 683550 418500 683550 418500 TOTAL flow 1102050 1102050 1102050 3306150 in

Cash Inflow 1 yr 2 yr 3 yr

1102050 1102050 1102050 3306150

Cost of machine = 2296000 So as per calculation above Rs3306150 have been recovered in 3 year, while Rs.2296000 is required Therefore : 1 year 3306150 2296000 X= 365 :365 :x 365*2296000 3306150 760 DAYS (Approx) 760 days i.e.2 year 1month (LET X BE THE NUMBER OF DAYS)

X=

Therefore Pay =

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Truck 2 No. of Deperation years Profit Before 30% Deperation (-) 1 yr 2 yr 3 yr 1206000 1206000 1206000 361800 361800 361800 Net Profit 30% Tax (-) Amount Deperation (+) 361800 361800 361800 TOTAL Cash Inflow 1 yr 2 yr 3 yr 952740 952740 952740 2858220 Cost of machine =2296000 So as per calculation above Rs 2858220 have been recovered in 3 year, while Rs.2296000 is required Therefore : 1 year 2858220 2296000 X= 365 :365 :x 365*2296000 2858220 879 days (Approx) (LET X BE THE NUMBER OF DAYS) Cash flow in

844200 844200 844200

253260 590940 253260 590940 253260 590940

952740 952740 952740 2858220

X=

Therefore period =

879 days i.e. 2 year 5 month.

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INTERPRETATION: [TRUCK TO BE SELECTED=PAY BACK PERIOD OF TRUCK 1 (-) PAY BACK PERIOD OF TRUCK 2] As shown in the graph, according to the calculation above the pay back period of truck 1 is shorter than pay back period of truck 2 by 119 days (879-760 days). Hence truck 1 has been selected. Note: The price of the truck is taken approximately due to the fluctuations in the cost price of the trucks.

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Annual Rate of returnTruck 1 Annual Rate of return = Average Annual Profit Average or Initial Investment * 100

Annual Rate of return = Cash in Flow/No of years Cost of Machine /2 *100

Annual Rate of return = 3306150/3 2296000/2 *100

Annual Rate of return = 1102050 1148000 *100

Annual Rate of return Annual Rate of return = 96% (Approx) = 0.959974 *100 95.99739

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Truck 2 Annual Rate of return = Average Annual Profit Average or Initial Investment Cash in Flow/No of years Cost of Machine /2 2858220/3 *100 2296000/2 752740 1148000 0.655697 66% *100 * 100

Annual Rate of return

*100

Annual Rate of return

Annual Rate of return

Annual Rate of return Annual Rate of return

= =

*100 (Approx)

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INTERPRETATION: [TRUCK TO BE SELECTED=ANNUAL RATE OF RETURN OF TRUCK 1 (-) ANNUAL RATE OF RETURN OF TRUCK 2] As shown in the graph, according to the calculation above the annual rate of return of truck 1 is lesser than the annual rate of truck 2 by 40% (96-66 %). Hence truck 1 has been selected. Note: The price of the truck is taken approximately due to the fluctuations in the cost price of the trucks.

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NET PRESENT VALUETruck1 Cash Years flow In Discounted Cash Present Value Flow As per 10 % 1 2 3 1102050 1102050 1102050 0.909 0.826 0.751 total Therefore Net Present Value Net Present Value Net Present Value As per 10 % 1001763.45 910293.3 827639.55 2739696.3

= = =

total of discounted cash flow (-) cost of machine 2739696.3 443696.3 (-) 2296000

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Truck2 Cash In Present Years flow Discounted Cash

Value Flow As per 10 % As per 10 % 866040.66 786963.24 715507.74 2368511.64

1 2 3

952740 952740 952740

0.909 0.826 0.751 Total

Therefore Net Present Value Net Present Value Net Present Value

= = =

total of discounted cash flow (-) cost of machine 2368511.64 72511.64 (-) 2296000

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INTERPRETATION: [TRUCK TO BE SELECTED=NET PRESENT VALUE OF TRUCK 1 (-) NET PRESENT VALUE OF TRUCK 2] As shown in the graph, according to the calculation above the net present value of truck 1 is higher than the net present value of truck 2 by Rs.371184.66 (443696.3 371184.66 Rs). Hence truck 1 has been selected. Note: The price of the truck is taken approximately due to the fluctuations in the cost price of the trucks.

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PROFITABILITY INDEXTruck 1

Profitability Index

Total of Discounted Cash Flow Cost Of Machine 2739696 2296000 1.193248

Profitability Index

Profitability Index

________________________________________________________________________

Truck2

Profitability Index =

Total of Discounted Cash Flow Cost Of Machine

Profitability Index = 2368512 2296000

Profitability Index = 1.031582

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INTERPRETATION: [TRUCK TO BE SELECTED=PROFITABILITY INDEX OF TRUCK 1 (-) PROFITABILITY INDEX OF TRUCK 2] As shown in the graph, according to the calculation above the profitability index of truck 1 is higher than the profitability index of truck 2 by 0.16 Times (1.19 1.03 Times). Hence truck 1 has been selected. Note: The price of the truck is taken approximately due to the fluctuations in the cost price of the trucks.

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INTERNAL RATE OF RETURN

Truck1 Year Cash Inflow Present Value as per 43 % 0.699 0.699 0.699 TOTAL DCF (-) COST (=) NPV Discounted Flow as per 43 % 770332.95 770332.95 770332.95 2310998.85 2296000 14998.85 Cash Present Value as per 44 % 0.694 0.694 0.694 Discounted Flow as per 44 % 764822.7 764822.7 764822.7 2294468.1 2296000 -1531.9 Cash

1 2 3

1102050 1102050 1102050

FormulaIIR = LR + (NPV LR) {NVP LR (-) NPV HR} IIR = 43 + 14998.85 14998.85 14998.85 16530.75 0.907330278 43.90% (HR % - LR %)

-1531.9

IIR = 43

IIR = 43 IIR =

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Truck2 Cash Year Inflow Present Value as per 24 % 0.806 0.806 0.806 TOTAL DCF (-) COST (=) NPV Discounted Flow as per 24 % 767908.44 767908.44 767908.44 2303725.32 2296000 7725.32 Cash Present Value as per 25 % 0.8 0.8 0.8 Discounted Flow as per 25 % 762192 762192 762192 2286576 2296000 -9424 Cash

1 2 3

952740 952740 952740

FormulaIIR = LR + (NPV LR) {NVP LR (-) NPV HR} + 7725.32 7725.32 7725.32 17149.32 0.450473838 24.45% (HR % - LR %)

IIR = 24

-9424

IIR = 24

IIR = 24 IIR =

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INTERPRETATION: [TRUCK TO BE SELECTED=INTERNAL RATE OF RETURN OF TRUCK 1 (-) INTERNAL RATE OF RETURN OF TRUCK 2] As shown in the graph, according to the calculation above the internal rate of return of truck 1 is higher than the internal rate of return of truck 2 by 25.45% (49.9 24.45%). Hence truck 1 has been selected. Note: The price of the truck is taken approximately due to the fluctuations in the cost price of the trucks.

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CONCLUSION
After the study, based on the finding the projectee thus concludes that the capital budget process of Amardeep coal supplier is quiet simple and effective The project concludes that there are basically two methods of capital budgeting process i.e. traditional method and modern method. Traditional method comprises of pay back method, accounting rate of return & modern method includes net present value, profitability index, and internal rate of return.

The truck purchased by the Amardeep coal supplier is tractor trailer truck which was purchased in the period of 2008-2009 which is taken into consideration.

Amardeep coal supplier purchases the truck i.e the front part which is called as Tata horse 4018 from the supplier which is JAIKA MOTORS, and the trailer from the supplier which is SETRAC ENGINEERING PVT.LTD, BANGLORE. since the prices have been lower and after sales service is up to mark JAIKA MOTORS is considered to be the main supplier.

The decision for purchasing the truck by Amardeep coal supplier has been proven to be correct which is well supported by the calculation done by the both traditional and modern method.

The hypothesis taken under consideration That more than 60% of capital is invested for long period of time for the study has proven to be correct on the basis of data analysis.

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CENTRE POINT COLLEGE Limitation of the study due to inadequate of data two methods i.e modified internal rate of return & equivalent annual cost have been not used

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RECOMMENDATIONS AND SUGGESTIONS

All though Amardeep coal supplier is working efficiently there is always scope for improvement therefore, the projectee suggest some of the recommendations which can be considered for improvement in the efficiency in the working of Amardeep coal supplier The projectee recommends the following suggestion for Amardeep coal supplier: The firm can also consider following the modern methods of capital budgeting techniques as they are better than traditional methods since they can give the actual profit value, rate of return & how many times it can profit us in comparison over the option of alternate machines.

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BIBLIOGRAPHY
Books Referred: M.Y Khan & P.K Jain, Financial Management, Tata Mc Graw-Hill Publishing Company Limited, New Delhi, 2007

A.N.Chakrabarti, Financial Management, Mac Millan India Ltd, New Delhi, 2005

Website: Wikipedia Google Forex-management-online.blogspot.com

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