TITLE :- CAPITAL BUDGETING

AND ITS TECHNIQUES IN

PRATHI SOLUTIONS PRIVATE
LIMITED

CONTENTS

INTRODUCTION TO THE STUDY

CHAPTER-1 INDUSTRY PROFILE
CHAPTER-2 COMPANY PROFILE
CHAPTER-3 RESEARCH AND METHODOLOGY
CHAPTER-4 PROJECT PLANNING (CAPITAL
BUDGETING)

CHAPTER-5 FINANANCING OF THE PROJECT

CHAPTER-6 FINANCE AND ACCOUNT SECTION AT
PRATHI SOLUTION PRIVATE LIMITED
CHAPTER-7 DATA ANALYSS AND INTERPRETATION
CHAPTER-8 EVALUTION OF CAPITAL BUDGETING

CHAPTE
R-9

FINDINGS AND SUGGESTIONS

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.

CHAPTER-1

INDUSTRY PROFILE

Industry Profile

Software and services

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 ites-bpo
market may increase to us$ 1 trillion.

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

winning combination of cost-quality-scalability versus competing offshore
destinations such as the philippines and china . Some of the key drivers of
the indian ites-bpo industry include: improved efficiency and higher service
levels due to streamlined processes, quality improvements due to better
educated workforce, cost savings between 40-50%, increase in offshoring by
existing customers, superior project management skills and availability of a
highly skilled, educated and english speaking labour pool.

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

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

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

cent in 2002-03 to rs. 10,200 crore (us$ 2.1 billion) in 2002-03. However,
since north america accounts for around 50 per cent of global it services
spending, it is likely to continue to dominate indian software exports.

The domestic software and services segment is estimated to register a

growth of 14.8 per cent to reach rs. 15,400 crore (us$ 3.37 billion) in 2003-04
from rs. 134 billion (us$ 2.78 billion) in 2002-03. Increased spending by the
banking,

financial

services

and

insurance

(bfsi),

government

and

manufacturing sectors resulted in this growth.

Software services dominate the segment, accounting for an estimated 66.8

per cent of the total market in 2003-04. Contribution from packaged software
is estimated at 13.7 per cent, while the domestic ites and software services
markets are estimated to contribute the remaining 19.5 per cent.
During 2003-04, the packaged software segment is likely to grow by 5 per
cent to reach rs. 2,100 crore (us$ 460 million). Companies preferred to 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 .
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.

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

assessment. The quality maturity of indian software and ites-bpo industry can
be measured from the fact that already 275 indian software and ites-bpo
companies have acquired quality certification and about 80 more companies
are in pipeline.

India has become one of the most preferred destinations for sourcing
software and it enabled services, achieving an export value of nearly us$ 9.5
billion in 2002-03. India in comparison to other low cost locations ranks high
in several critical parameters including, level of government support, quality
of the labor pool, english language skills, cost advantages, project
management skills, entrepreneurial culture, indian diasporas and strong
customer relationships, expertise in new technologies and over-all quality
control. India 's strength has been enhanced by the industry's strong focus on
quality software and processes. Indian companies are known for their quality
services and have received sei-cmm level 5 and iso-level certifications.
Additionally, a favourable time zone difference with north america and europe
helps organizations achieve 24x7 internal operations and customer service.

India's weakness include - positioning and brand management, infrastructureurban 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 destinations
like philippines, malaysia, south africa, etc., and stringent visa/work permit

CHAPTER-2
COMPANY PROFILE

Mission Statement
To become the ultimate choice of the customer when it comes to
recruiting services and software services by providing him with our
delightful and qualitative services.

Company Profile
Prathi Solutions was established with a vision to become a trusted
partner when it comes to providing the right kind of resources in the
right time and at the right cost.

Our focus within the recruiting industry allows us to provide our clients
a highly specialized service across all vertical markets, skill-sets and

levels of seniority, through both permanent and contract recruitment.

We believe that successful recruitment services is partnership-based

which is why we work closely with our clients over a period of time to
provide flexible, tailor-made solutions; from contingency and campaign
through to a comprehensive managed service.

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

across various industries, domains and technologies. Most of our
employees have varied experience in these fields and with their hands
on expertise it helped us so many times in the past in delivering more
than expected.

We at Prathi solutions are committed towards helping our clients in

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

Quality Policy

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

requirements without regression and wastage of time

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
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
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.

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

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
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
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 3
RESEARCH AND METHODOLOGY
3.1 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.

3.2 OBJECTIVES OF THE STUDY: To describe the organizational profile of PRATHI SOLUTIONS PVT
LTD.
To discuss the importance of the management in capital
budgeting.
Determination of proposed investments, inflows and out flows.
To evaluate the investment proposal by using capital budgeting
techniques.
To summarize and to suggest for the better investment proposal.

3.3 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.

3.4 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 .

Thorough interactions with the various department Managers of

PRATHI SOLUTIONS PVT LTD.

Guidelines

given by the Project Guide, Mr.

TRIPATHY, Dy. Manager, Budget Section, F & A.

SRIRAM

Secondary Sources:

This data is from the number of books and records of the company, the
annual reports published by the company and other magazines.

The

secondary data is

obtained from the following.

Collection of required data from annual records, monthly

records,
internal Published book or profile of PRATHI
SOLUTIONS PVT LTD.

Other books and Journals and magazines

Annual Reports of the company

3.5 Limitations:-

Though the project was completed successfully with a few limitations

may .
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.
The period of study that is 6 weeks is not enough to
conduct detailed study of the project.

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

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.

How much importance is assigned to economic analysis of

capital expenditure in practice?

What methods are used for analyzing capital expenditure in

practice and what is the reason for underlying these methods?

The answers of the above questions are based on a survey of twenty firms
varying on several dimensions like industry category, size, financial
performance and capital intensity. From these firms, executives, responsible
for capital investment evaluation and capital budget preparation were
interviewed

CHAPTER-4
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;

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.

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;

 Whether or not funds should be invested in long term

projects such as setting of an industry, purchase of
plant and machinery etc.,
Analyze the proposal for expansion or creating additional
capacity.
To decide the replacement of permanent assets such as
building and equipments.
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.

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,

Decision extends to a series of years beyond the current

accounting period.

Uncertainties of future and

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

By taking a capital expenditure decision, a firm commits itself to a sizeable
amount of fixed cost in terms of interest, supervisors salary, insurance,

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

produces less than anticipated profits, the firm will have to bear the burden of
fixed cost.

8. Impact on firms competitive strength

The capital budgeting decisions affect the capacity and strength of a firm to
face competition. It is so because the capital investment decisions affect the
future profits and costs of the firm. This will ultimately affect the firms
competitive strength.

9. Cost control
In capital budgeting there is a regular comparison of budgeted and actual
expenditures. Therefore cost control is facilitated through capital budgeting.

10. Wealth Maximization

The basic objective of financial management is to maximize the wealth of the
shareholders. Capital budgeting helps to achieve this basic objective. Capital
budgeting avoids over investments and under investments in fixed assets. In
this way capital budgeting protects the interest of the shareholders and of
the enterprise.

4.3 STEPS IN CAPITAL BUDGETING

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

investment of current funds for the benefit to be achieved in future which is
always uncertain. Capital budgeting is a six step process. The following steps
are involved in capital budgeting;
1. Project generation

The capital budgeting process begins with generation or

identification of

investment proposals. This involves a continuous search for investment

opportunities which are compatible with firms objectives.

2. Project screening
Each proposal is then subject to a preliminary screening process in order to
assess whether it is technically feasible, resources required are available, and
expected returns are adequate to compensate for the risks involved.

3. Project evaluation

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

evaluate the profitability of each proposal. This involves two steps;
Estimation of cost and benefit in terms of cash flows
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

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.

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.
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.
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.

 A project sheet is maintained for each project.

In order to ensure that the expenditure on different project is
properly analyzed.
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.,
The management is periodically informed about expenditure
incurred in respect of each project under appropriate heads.
In case project cost is expected to increase; a supplementary
sanction for the same is obtained.
In financial books the total expenditure incurred on all projects
is separately recorded.

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

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.

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
DECISIONS

AFFECTING

CAPITAL

INVESTMENT

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.

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
EVALUATION
OF INVESTMENT PROPOSALS

OR

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)

Payback Period Method

Average rate of Return Method

2. MODERN METHODS (DISCOUNTED CASH FLOW)

Net Present Value Method

Internal rate of Return Method
Profitability Index Method
TRADITIONAL METHODS (NON DISCOUNTED CASH FLOW)

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

Simple to understand and easy to calculate.

It
reduces
the
obsolescence.

chances

of

loss

through

A firm which has shortage of funds find this method

very useful.
This method costs less as it requires only very little
effort for its Computation.
DISADVANTAGES

This method does not take in to consideration the

cash inflows beyond the payback period.
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.

 It gives over emphasis for liquidity.

ACCEPTANCE RULE
The following are the Payback [P.B.Rules]
Accept

P.B<cut-off rate

Reject

P.B>cut-off rate

May Accept

P.B<cut-off rate

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

This method otherwise called the Rate of Return Method, takes in to account
the earnings expected from the investment over the entire life time of the
asset. The various projects are ranked in order of the rate of returns. The
project with the higher rate of return is accepted. Average Rate of Return is
found out by dividing the average income after depreciation and taxes, i.e.
the accounting profit, by the Average Investment.

Average Annual Earnings

ARR =

-------------------------------------------------- x 100
Average Investment

Where;
Average Annual Earnings is the total of anticipated annual earnings after
depreciation and tax (accounting profit) divided by the number of years.

Average Investment means

i. If there is no salvage (Scrap value)

Total Investment

ii. If there is scrap value

Total Investment-Scrap Value
+ Scrap Value
2

iii. If there is additional working capital

Total Investment-Scrap Value

+ Scrap +Additional Working Capital
2

ADVANTAGES OF AVERAGE RATE OF RETURN (ARR) METHOD

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

 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.
This averaging technique ignores the fluctuations in profits of
various years.
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.

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

Determine an appropriate rate of interest to discount cash

flows.
Compute the present value of total investment outlay (i.e.,
cash outflow) at the determined discounting rate.
Compute the present value of total cash inflows (profit before
depreciation and after tax) at the above determined discount
rate.
Subtract the present value of cash outflow (cost of
investment) from the present value of cash inflows to arrive at
the net present value.
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.
If the projects are ranked the project with the maximum
positive net present value should be chosen.

ADVANTAGES OF NET PRESENT VALUE METHOD

It considers the time value of money.

It considers the earnings over the entire life of the project.
Helpful in comparing two projects requiring same amount of
cash outflows.

DISADVANTAGES OF NET PRESENT VALUE METHOD

 Not helpful in comparing two projects with different cash

outflows.
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

IRR = L+ P1-Q x D
P1-P2
Where,
L = Lower rate of discount
P1 = Present value of cash inflows at lower rate of discount
P2 = Present value at higher discount rate
Q = Initial Investment
D = Difference in rate

ADVANTAGES OF INTERNAL RATE OF RETURN

It considers the time value of money.

The earnings over the entire life of project is considered.

Effective for comparing projects of different life periods and

different timings in timings of cash inflows.

DISADVANTAGES

Difficult to calculate.
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.

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:

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:

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:-

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

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:

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

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
sanctioned.

all

capital

expenditure

is

properly

To properly coordinate the projects of various departments

To fix priorities among various projects and ensure their
follow-up.
To compare periodically actual expenditure with the
budgeted ones so as to avoid any excess expenditure.
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

EXPENDITURE

IN

CONTROL

Preparation of capital expenditure budget.

Proper authorization of capital expenditure.

Recording and control of expenditure.

Evaluation of performance.

OF

CAPITAL

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

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.

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.

Replacement / modernization.
Balancing facilities (essentially to increase production).
Operational requirements including material handling
Quality/testing facilities.
Welfare
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.

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.

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.

5.1Sources of Finance:

Loan Financing

Security Financing

Internal Financing

Loan Financing:
(a). Short-

Term Loans & Credits

2
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:

Trade Credit.

Installment Credit.

Advances.

Commercial papers

Commercial banks

Cash Credits

Over Drafts

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.

Ownership Securities or capital stock.

Creditor ship Securities or debt Capital.

Ownership Securities or capital Stock:

Types

of

Ownership

Securities

or

Capital Stock:

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.

ii)

Initial public offering.

Seasoned offering

Rights issue.

Private placement

Preferential allotment.

Preference Capital:

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

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 &
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 &
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.

MISCELLANEOUS ACCOUNTS

The miscellaneous jobs can be broadly divided into following categories:

1.

Passing of bills of miscellaneous nature;

2.

Accounting of cash imprested and advances for expenses;

3.

Miscellaneous recoveries from outside agencies.

Miscellaneous bills includes rates contracts for service contract for air
conditioner, water coolers, weighing machines, franking machines, knitting of
chairs, etc. Others miscellaneous bills includes telephone rentals, STD calls,
local calls, teleprinters , fax, service bills, advertisement bills, electricity bills,
printing and block making bills, bills of travel agents, bills of canteen
purchases, etc. Annual Contracts and Hiring of taxi, motors, etc. is also
included in this.

WORKS BILLS

Work bills section is entrusted with the task of checking and authentication of
APF received from various departments such as Civil, Plant, and Township etc.
They have to keep record and maintain account. They have to verify with
respect to measurements, Tax provisions like TDS and other deductions like
EMD, Security and penalty etc.

PURCHASE BILLS

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

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

CHAPTER-7
DATA ANALYSIS AND INTERPRETATION
7.1 Balance Sheet (2007-2008 to 2011-2012)
(In
lacs)
Particulars

07-08

08-09

09-10

10-11

11-12

100000

100000

100000

100000

100000

57545

57545

57545

57545

57545

---

---

---

10791

28500

Secured loan

13619

2785

85072

104307

113987

Unsecured loan

76475

75788

42725

8329

---

147639

136118

185342

180972

200032

73251

75734

77436

79349

83178

26887

25706

24149

23652

25419

Investments

---

---

82130

605

Deferred tax Assets

---

---

---

3369

2037

Inventories

28595

21496

55159

37363

50023

Sundry Debtors

68236

56541

86632

60052

51764

Others

6130

47507

103523

117391

107567

Total

102961

125544

245314

214806

209354

48770

73207

170615

61460

36783

Net Current Assets

54191

52337

74699

153346

172571

Deferred Revenue Exp

131

---

---

---

---

Sources of Funds:
Auth share capital
Paid up capital
Reserve and surplus

Total sources of funds

Application of Funds:
Gross Block(including
CWIP)
Net Block(including
CWIP)

Current Assets

Current Liabilities and

Provisions

Accumulated Loss
TotalApplication(fund

66430

58075

4364

---

---

147639

136118

185342

180972

200032

s)

7.2 Profit and Loss Statement(2007-2012)

(In

Lacs)
Working results
Sales
Subsidy
Other Income
Total

07-08

08-09

09-10

10-11

11-12

119793

120663

94368

119831

128297

86276

124527

417077

178583

222170

652

3487

49530

18153

12597

206721

248677

560975

316927

363064

187719

230047

484485

288612

327032

(19002)

(18630)

(76490)

(28315)

(36032

Cost Of Sales(including prior

period adj but excluding Dep
and Interest)

Gross Margin

)
Depreciation

3402

3817

3347

3048

2470

15600

14813

73143

25267

33562

4613

6387

5262

7294

9644

10987

8426

67881

17973

23918

Taxes including FBT

59

70

14170

6187

8278

Debit/(Credit) for deferred

---

---

---

(3369)

1332

---

---

---

---

(3400)

10928

8356

53711

15155

17708

Profit/(loss) before Int and

Taxes

Interest
Profit/(loss) before taxes

tax
TaxationExpenses Credited
NET PROFIT/(LOSS)

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

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

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

Cost of the Project- 355.18 Cr

Year

2015-16

2016-17

2017-18

2018-19

2019-20

Amount

140.93

134.55

139.33

144.11

148.82

Calculation Of Pay Back Period:

(a)

S.no

Year

Cash Inflows

Cumulative Inflows

2015-16

140.93

140.93

2016-17

134.55

275.48

2017-18

139.33

414.81

2018-19

144.11

558.92

2019-20

148.82

707.74

Cash Outlay : 355.18 Cr

(b)

Payback Period :

INITIAL INVESTMENT
ANNUAL CASH FLOW

79.70
2 +

414.81

2.2 years

Pay Back Period:

It is assumed that the profit earning of the project will start from 2015-2016.

We should increase this period with same exception as there may be any
additional factor and other cause so rounding of 2.2 to 3 years will be right,
so that it will give more assistance to the calculation.

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

considered as a good project

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

2. Evaluation of the Project Using Internal Rate of Return

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

Year

2015-16

2016-17

2017-18

2018-19

2019-20

Amount

140.93

134.55

139.33

144.11

148.82

Internal Rate of Return:

Discount rate taken as 24%
(in crores)

Sl. No

Years

Cash Inflows

DCF (24%)

Present Values
of Inflows

1 2015-16

140.93

.806

113.58

2 2016-17

134.55

.660

88.80

.524

73.00

2017-18

139.33

4 2018-19

144.11

.422

60.81

5 2019-20

148.82

.341

50.74

6
7
8
9
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

Cash Inflows
140.93

DCF (26%)

Present Values
of Inflows

.787

110.91

2 2016-17

134.55

.620

83.421

3 2017-18

139.33

.488

68.00

4 2018-19

144.11

.384

55.34

5 2019-20

148.82

.302

50.74

6
7
8
9
10
11
12
13
14
15
Total Present Values of Inflows

366.412

Discount rate taken as 28%

(in crores)

Sl. No

Years

Cash Inflows

DCF (28%)

Present Values
of Inflows

1 2015-16

140.93

.781

110.06

2 2016-17

134.55

.600

80.73

3 2017-18

139.33

.465

64.78

4 2018-19

144.11

.361

52.02

5 2019-20

148.82

.279

41.52

6
7
8
9
10
11
12
13
14
15
Total Present Values of Inflows

349.11

Calculation of Internal Rate of Return

IRR

L+

A - Cash out lay

(H L)

A-B

26+

355.18 - 349.123

(355.18-349.123) +

X (28-26)

(366.412-355.18)
=

26 +

6.07

6.07+11.232
=

26 +

26.7
0

0.350

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.

CHAPTER-9
FINDINGS AND SUGGESTIONS

9.1 FINDINGS:

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.

4.

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

9.2 SUGGESTIONS:

.
1.

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

2.

The company may effectively use the available resources for attaining
maximum profit.

3.

The company has to analyze the proposal for expansion or creating

additional capacity.

4.

The company may plan and control its capital expenditure.

5.

The company has to ensure that the funds must be invested in long term
project or not.

6.

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

BIBLIOGRAPHY:

Financial Management
I. M. Pandey

Financial Management
Prasanna Chandra

Financial Management
M. Y. Khan & Jain

Financial Management -

Shashi.K.Gupta,

R.K.Sharma and
Neeti gupta

PRATHI SOLUTIONS profile & Annual Reports

Web Sites:

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URL: http://www.Wikipedia.com