CONTENTS

CHAPTER-1 CHAPTER-2 CHAPTER-3 CHAPTER-4 CHAPTER-5 CHAPTER-6 INTRODUCTION TO THE STUDY INDUSTRY PROFILE COMPANY PROFILE PROJECT PLANNING (CAPITAL BUDGETING) FINANCING OF THE PROJECT FINANCE AND ACCOUNTS SECTION AT

PRATHI SOLUTIONS PVT LTD CHAPTER-7 CHAPTER-8 CHAPTER-9 DATA ANALYSIS AND INTERPRETATION EVALUATION OF CAPITAL BUDGETING FINDINGS AND SUGGESTIONS BIBLIOGRAPHY

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 their operation. 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.

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.

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 capital investment decisions have considerable impact on what the firm can do in future. 2. They affect the risk of the firm; it is difficult to reverse capital investment decisions because the market for used capital 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.

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 Payback period, Average Rate of Return, Net Present Value, Profitability Index, and Internal Rate of Return.

1.5 METHODOLOGY:-

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.

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. 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

The

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 conduct detailed 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. 6

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. 7

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 responsible and for capital capital intensity. investment From these firms, executives, budget evaluation and capital

preparation were interviewed

CHAPTER-2 INDUSTRY PROFILE Industry Profile

Software and services 8

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 has emerged 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-

bpo) market was approximately us$ 773 billion. By 2006, the potential itesbpo 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 200304 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 10

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 emanufacturing, automotive, fmcg, retail, oil and gas. Manufacturing and automotive sectors have been the leaders in adopting scm solutions in india 11

. 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 itesbpo 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, skillsets 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 a s 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 16

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 18

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 19

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 careers@prathisolutions.com

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: hr@prathisolutions.com 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 budgeting involves 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. 2. 3. It has the potentiality of making large anticipated profits. It involves a high degree of risk. 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 additional capacity. 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 24

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. 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. Therefore cost control is facilitated through capital

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 opportunities which are compatible with firms objectives. 2. Project screening

identification of

investment proposals. This involves a continuous search for investment

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 budget is 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. 27

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. 28

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 Cost

4.8 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. 30

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) 32

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 constant If 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 33

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 Reject May Accept Cut-off rate Cut-off rate is the rate below which a project would not be accepted. If ten percentage is the desired rate of return, the cut-off rate is 10%.The cut-off point may also be in terms of period. If the management desires that the investment in the project should be recouped in three years, the period of three years would be taken as the cut-off period. A project incapable of generating necessary cash to pay for the initial investment in the project with-in three years will not be accepted. II. AVERAGE RATE OF RETURN (ARR) METHOD P.B<cut-off rate P.B>cut-off rate P.B<cut-off rate

34

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 = Average Investment x 100

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 35

+ Scrap +Additional Working Capital 2 ADVANTAGES OF AVERAGE RATE OF RETURN (ARR) METHOD 1. 2. 3. 4. 5. It is easy to calculate and simple to understand. Emphasis is placed on the profitability of the project and not on liquidity. The earnings over the entire life of the project is considered for ascertaining the Average Rate of Return. 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.

36

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

37

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+ 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 38 xD

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.

39

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.

4.12 Project Planning:

The planning of a project is a technically pre- determined 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:

40

1. 2. 3. 4. 5. 6.

Its Identification Its initial formulation Its evaluation (Whether to select or to project) Its final formulation Its implementation 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. 2. 3. 4. 5. 6. 7. Market and marketing Site of the project Project engineering dealing with technical aspects of the project. Location and layout of the project building Building Production capacity. Work Schedule

Details of the cost of the Project:1. 2. 3. 4. 5. 6. 7. 8. Cost of land Cost of Building Cost of plant and machinery Engineering know how fee Expenses on training Erection supervision Miscellaneous fixed assets Preliminary expenses Pre-operative expenses 41

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:

42

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

43

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 followup. To compare periodically actual expenditure with the budgeted ones so as to avoid any excess expenditure. 44

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.

4.17 STEPS 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) 2) Operating leases 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.

45

1) 2) 3) 4) 5) 6)

Continuing schemes New schemes Modernization and rationalization Township Science and technology 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 is required 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.

46

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. 47

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 VS BUYING 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). ShortTerm Loans & Credits

49

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) (b) (a) Ownership Securities or capital stock. Creditor ship Securities or debt Capital. Ownership Securities or capital Stock: Types of Ownership Securities or Capital Stock:

50

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 o o o o Initial public offering. Seasoned offering Rights issue. Private placement Preferential allotment.

ii)

Preference Capital:

These shares have certain preferences as compared to other type of shares. 1. 2. Payment of Divided 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 &

51

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.

6.1 Functions 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 &

52

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 coordination 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. 53

MISCELLANEOUS ACCOUNTS The miscellaneous jobs can be broadly divided into following categories: 1. 2. 3. Passing of bills of miscellaneous nature; Accounting of cash imprested and advances for expenses; 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 54

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 Sources of Funds: Auth share capital Paid up capital Reserve and surplus Secured loan Unsecured loan Total sources of funds 147639 Application of Funds: Gross Block(including CWIP) Net Block(including CWIP) Investments Deferred tax Assets Current Assets Inventories Sundry Debtors Others 28595 68236 6130 21496 56541 47507 55159 86632 103523 37363 60052 117391 50023 51764 107567 26887 ----25706 ----24149 82130 --23652 605 3369 25419 5 2037 73251 75734 77436 79349 83178 136118 185342 180972 200032 100000 57545 --13619 76475 100000 57545 --2785 75788 100000 57545 --85072 42725 100000 57545 10791 104307 8329 100000 57545 28500 113987 --07-08 08-09 09-10 10-11 11-12

Total
Current Liabilities and

102961

125544

245314

214806

209354

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Provisions Net Current Assets Deferred Revenue Exp Accumulated Loss TotalApplication(funds)

48770 54191 131 66430 147639

73207 52337 --58075 136118

170615 74699 --4364 185342

61460 153346 ----180972

36783 172571 ----200032

7.2 Profit and Loss Statement(2007-2012) (In Lacs)

Working results
Sales Subsidy Other Income Total
Cost Of Sales(including prior period adj but excluding Dep and Interest)

07-08 119793 86276 652 206721

08-09 120663 124527 3487 248677

09-10 94368 417077 49530 560975

10-11 119831 178583 18153 316927

11-12 128297 222170 12597 363064

187719 (19002) 3402 15600 4613 10987 59 ----10928

230047 (18630) 3817 14813 6387 8426 70 ----8356

484485 (76490) 3347 73143 5262 67881 14170 ----53711

288612 (28315) 3048 25267 7294 17973 6187 (3369) --15155

327032 (36032) 2470 33562 9644 23918 8278 1332 (3400) 17708

Gross Margin Depreciation

Profit/(loss) before Int and Taxes

Interest Profit/(loss) before taxes Taxes including FBT

Debit/(Credit) for deferred tax TaxationExpenses Credited NET PROFIT/(LOSS)

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CHAPTER-8 EVALUATION 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

8.2 STEPS 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. 2. 3. 4. Extension of Bagging Plant. Conveyor System for extended portion of Bagging plant. Shed for covering extended Bagging Plant. 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 2012-13 2013-14 2014-15 50.00 100.00 75.00 6.88 32.90 15.40 20.00 35.00 20.00 76.88 167.90 110.40 (Rs in crores) Total 225.00 55.17 75.00 355.17

Bank Loan Interest On LTL Internal Generation Total value Of the project

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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 LOAN 11% Interest '@11% p.a 2.06 4.81 8.25 8.25 8.25 8.15 7.91 7.49 7.08 6.67 6.26 5.84 5.43 5.02 4.61 4.19 3.78 3.37 2.96 2.54 2.13 1.72 1.31 0.89 0.48 0.17 119.63 2018-19 47.50 2.85 2017-18 60.00 9.35 2016-17 60.00 15.95 2015-16 60.00 22.55 2014-15 60.00 29.15 2013-14 12.5 32.90 2012-13 0 6.88 (Rs in Crores) Year wise Principal repayment Year wise Interest repayment

Opening Balance 1-Oct-12 1-Jan-13 1-Apr-13 1-Jul-13 1-Oct-13 1-Jan-14 1-Apr-14 1-Jul-14 1-Oct-14 1-Jan-15 1-Apr-15 1-Jul-15 1-Oct-15 1-Jan-16 1-Apr-16 1-Jul-16 1-Oct-16 1-Jan-17 1-Apr-17 1-Jul-17 1-Oct-17 1-Jan-18 1-Apr-18 1-Jul-18 1-Oct-18 1-Jan-19 1-Apr-19 75 175 300 300 300 296.25 287.5 272.5 257.5 242.5 227.5 212.5 197.5 182.5 167.5 152.5 137.5 122.5 107.5 92.5 77.5 62.5 47.5 32.5 17.5 6.25

Addition 75 100 125

Total 75 175 300 300 300 300 296.25 287.5 272.5 257.5 242.5 227.5 212.5 197.5 182.5 167.5 152.5 137.5 122.5 107.5 92.5 77.5 62.5 47.5 32.5 17.5 6.25

Repayment

Closing Balance 75 175 300 300 300

Year

3.75 8.75 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 11.25 6.25

296.25 287.5 272.5 257.5 242.5 227.5 212.5 197.5 182.5 167.5 152.5 137.5 122.5 107.5 92.5 77.5 62.5 47.5 32.5 17.5 6.25 0

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Interest Repaid Principal Repaid Total

REPAYMENT OF LONG TERM LOAN(LTL) 2012-13 2013-14 2014-15 2015-16 6.88 32.90 29.15 22.55 0 12.5 60.00 60.00 6.88 45.40 89.15 82.55

2016-17 15.95 60.00 75.95

2017-18 9.35 60.00 69.35

(Rs in crores) 2018-19 2.85 47.50 50.35

STEP5: PREPARING THE PROFITABILITY STATEMENT OF THE PROJECT:

The fifth step in the evaluation of the project is preparing the profitability statement of the project and the profitability statement of the project here is.
In terms of cost of Asset p.a 11% 2% 3% 2% 3% 5% 0.50% 5% 5.25%

Cost Elements Interest on Loan Insurance Salary and Wages Contract Employess Repairs and Maintenance Hard ware and soft ware material Packing cost Power, Fuel and Water Depreciation

Tax Depreciation as Per IT Act

32.445% 15%

Incremental Sales

PROFITABILITY STATEMENT OF THE PROJECT 2015-16 2016-17 2017-18 2018-19 1534.50 1534.50 1534.50 1534.50

(Rs in Crores) 2019-20 1534.50

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TOTAL REVENUE("A") EXPENDITURE Raw Materials Interest On Loan Insurance Salary and Wages Contract Employees Repairs and maintenance Hard ware and soft ware material Packaging Cost Power TOTAL EXPENDITURE ("B") PROFITS BEFORE DEPRECIATION AND TAX "C"(C=A-B) Less: DEPRECIATION "D" PROFIT BEFORE TAX "E"(E=C-D) Less: TAX(AS PER IT ACT) PROFIT AFTER TAX

1534.50

1534.50

1534.50

1534.50

1534.50

1227.60 13.75 7.10 10.66 7.10 10.66 17.76 1.78 17.76 1314.16

1227.60 22.55 7.10 10.66 7.10 10.66 17.76 1.78 17.76 1322.96

1227.60 15.95 7.10 10.66 7.10 10.66 17.76 1.78 17.76 1316.36

1227.60 9.35 7.10 10.66 7.10 10.66 17.76 1.78 17.76 1309.76

1227.60 2.85 7.10 10.66 7.10 10.66 17.76 1.78 17.76 1303.26

220.34 18.65 201.69 60.77 140.93

211.54 18.65 192.89 58.34 134.55

218.14 18.65 199.49 60.16 139.33

224.74 18.65 206.09 61.98 144.11

231.24 18.65 212.59 63.77 148.82

Computation of tax:
Profit Before Tax(PBT) Add:Depreciation(As Companies Act) TOTAL Per 18.65 220.34 33.05 187.29 60.77 18.65 211.54 31.73 179.81 58.34 18.65 218.14 32.72 185.42 60.16 18.65 224.74 33.71 191.03 61.98 18.65 231.24 34.69 196.55 63.77 2015-16 201.69 COMPUTATION OF TAX 2016-17 2017-18 192.89 199.49 2018-19 206.09 2019-20 212.59

Less:Depreciation (as Per IT Act) Profit After Depreciation TAX

STEP6: Valuation of the Asset:

The sixth step in the evaluation of the project is the valuation of the project at different times or at different periods at different years to come in the future. 62

Opening Balance Addition Total Less:Deletion Total Less:Depreciation ClOSING BALANCE

2015-16 0.00 355.17 355.17 0.00 355.17 53.28 301.90

VALUATION OF THE ASSET 2016-17 2017-18 2018-19 301.90 256.61 218.12 0.00 0.00 0.00 301.90 256.61 218.12 0.00 301.90 45.28 256.61 0.00 256.61 38.49 218.12 0.00 218.12 32.72 185.40

2019-20 185.40 0.00 185.40 0.00 185.40 27.81 157.59

(Rs In Crores) 2021-22 2022-23 157.59 133.95 0.00 0.00 157.59 133.95 0.00 157.59 23.64 133.95 0.00 133.95 43.46 90.49

STEP7: Preparation of Cash Flow Statement:

The seventh step in the evaluation of the project is the preparation of the Cash 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 201320142015201614 15 16 17 (Rs in Crores) 2018201919 20

201213 Cash Out Flow Capital Expenditure Project on the 76.88

201718

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 63

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 Amount 2015-16 140.93 2016-17 134.55 2017-18 139.33 2018-19 144.11 2019-20 148.82

Calculation Of Pay Back Period:

S.no 1 2 3 4 5 Year 2015-16 2016-17 2017-18 2018-19 2019-20 Cash Inflows 140.93 134.55 139.33 144.11 148.82 Cumulative Inflows 140.93 275.48 414.81 558.92 707.74

(a) (b)

Cash Outlay : 355.18 Cr Payback Period : INITIAL INVESTMENT ANNUAL 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 20152016. 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 2015-2016 Cost of the Project- 355.18 Cr Year Amount 2015-16 140.93 2016-17 134.55 2017-18 139.33 2018-19 144.11 2019-20 148.82 65

Internal Rate of Return:

Discount rate taken as 24%
(in crores)

Sl. No

Years 1 2015-16 2 2016-17 3 2017-18 4 2018-19 5 2019-20 6 7 8 9

Cash Inflows 140.93 134.55 139.33 144.11 148.82

DCF (24%) .806 .660 .524 .422 .341

Present Values of Inflows 113.58 88.80 73.00 60.81 50.74

10 11 12 13 14 15 Total Present Values of Inflows 386.93

Discount rate taken as 26%

(in crores)

Sl. No

Years 1 2015-16 2 2016-17

Cash Inflows 140.93 134.55

DCF (26%) .787 .620

Present Values of Inflows 110.91 83.421 66

3 2017-18 4 2018-19 5 2019-20 6 7 8 9 10 11 12 13 14 15

139.33 144.11 148.82

.488 .384 .302

68.00 55.34 50.74

Total Present Values of Inflows

366.412

Discount rate taken as 28%

(in crores)

Sl. No

Years 1 2015-16 2 2016-17 3 2017-18 4 2018-19 5

Cash Inflows 140.93 134.55 139.33 144.11

DCF (28%) .781 .600 .465 .361 .279

Present Values of Inflows 110.06 80.73 64.78 52.02 41.52 67

2019-20 6 7 8 9 10 11 12 13 14 15

148.82

Total Present Values of Inflows

349.11

Calculation of Internal Rate of Return

IRR

L+

A - Cash out lay A-B

X (H L)

26+

355.18 - 349.123

X (28-26)

(355.18-349.123) + (366.412355.18)
= 26 +

X 2

X 2

68

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, the project can be considered.

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CHAPTER-9 FINDINGS AND SUGGESTIONS 9.1 FINDINGS:

1 2 3 4. It was found that the payback Period of the project is 2 year and 2 months. The Payback Period shows that the initial investment can be recovered within a short period of time. The investment is ideal because normally an investment should be recoverable within 5 years. The Internal Rate of Return shows 26.70 % This also ensures a profitable investment.

9.2 SUGGESTIONS:

1. 2. 3. 4. 5. 6.

The company may fix the time period for the capital asset for replacement. The company may effectively use the available resources for attaining maximum profit. The company has to analyze the proposal for expansion or creating additional capacity. The company may plan and control its capital expenditure. The company has to ensure that the funds must be invested in long term project or not. The company may evaluate the estimation of cost and benefit in terms of cash flows.

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BIBLIOGRAPHY: Financial Management Financial Management Financial Management Financial Management I. M. Pandey Prasanna Chandra M. Y. Khan & Jain Shashi.K.Gupta, R.K.Sharma and Neeti gupta PRATHI SOLUTIONS profile & Annual Reports Web Sites: URL: http://www.google.com URL: http://www.Wikipedia.com

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