CAPITAL BUDGETING

INTRODUCTION

Capital Budgeting is the process of making investment decisions in Capital expenditures.

A Capital expenditure may be defined as an expenditure the benefits of which are expected to be
received over period of time exceeding one year.
The main characteristic of a Capital expenditure is that the expenditure is incurred at one
point of time whereas benefits of the expenditure are realized at different points of time in future.
In simple language we may say that a Capital expenditure is an expenditure incurred for
acquiring or improving or improving the fixed assets, the benefits of which are expected to be
received over a number of years in future.
This project presents two versions of heuristic algorithm to solve a model of Capital
Budgeting problems in a decentralized multidivisional firm involving no more than two
exchanges of information between headquarters and divisions.
Head quarters make an allocation of funds to each division based upon its cash demand
and its potential growth rate. Each division determines which projects to accept. Then, an
additional iteration is performed to define the solution.
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 focus not
on the credit status of a company, but on cash flows that will be generated by a specific project.
The Capital Budgeting decisions 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 for making Capital Budgeting decisions must be consistent with objective
of wealth maximization. In view of the significance of Capital Budgeting decisions, the
procedure must consist of step by step analysis of the data to bridging the gap in the
organization.

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 The Capital program is generally financed by borrowing money usually through the sales
of bonds. This differs from the companys expenses budget, which covers day-to-day operating
expenditures & is financed by companys taxes and other revenues along with other companies
in the industry.
The Capital Budgeting strategy presents the goals, policy constraints, assumptions the
organizations Capital needs over the next 10 years. The document also provides the anticipated
sources of financing, and the implications of the strategy, including any possible economic,
social and environmental effects.
After a public hearing and a report by the organization planning commission or board of
directors, the final version of the strategy is released with the executive budget in every year.
The strategy presents Capital projects in broad categories that reflect organizations
agency goals. There are various ways the organization records the progress of Capital projects. In
general, they measure financial transaction, spending and obligation, rather than what most
department come about the status of work on a particular project.
Although information is publicly available on annual Capital spending by budget line, no
information is currently made publicly available that provides detailed project level information
on the status of Capital projects.
DEFINITIONS OF CAPITAL BUDGETING

Capital Budgeting is a long term planning for making and financing proposed Capital
outlays
-T.Horngreen
A budget is an estimate of future needs arranged according to at an orderly basis covering some
or all the activities of an enterprise for a definite period of time

- George R. Terry

Budget as a financial and or quantitative statement prepared to a definite period of time, of the
policy to be pursued during that period for the purpose of attaining a given objective decisions. These are

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FACTORS FOR CAPITAL BUDGETING

Cost of acquisition of permanent asset as Land and Building, Plant and Machinery,
Goodwill, etc.
Cost of addition, expansion, Improvement or alteration in the fixed assets.
Cost of replacement of permanent assets.
Research and development project cost,
Time value of money can be considered at the project period,
It should be maintained the assets in the organizations value and value of the firm,
Cost decisions can be taken as finance manager as soon as early, etc.,

IMPORTANCE OF CAPITAL BUDGETING

The Capital Budgeting decisions are important, crucial and critical business decisions due to
following reasons:

LONG TERM PERIOD

The consequences of Capital expenditure decisions extended far into future. The scope of current
manufacturing activities of a organization is governed largely by Capital expenditures in the past.
Likewise, current Capital expenditures decision provides the frame work for future activities. Capital
investment decisions have an enormous bearing on the basic character of an organization.

IRREVESIBILITY

The markets are used for Capital equipment in general is ill-organized. Further, for some types of
Capital equipment, custom made to meet specific requirements, the market may virtually be non-existent.

SUBSTANCIAL OUTLAY

Capital expenditure usually involves substantial outlays. An integrated steel plant, for example,
involves an outlay of several thousand millions. Capital costs tend to increase with advanced technology.

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 NEED OF THE STUDY

The importance of Capital Budgeting can be well understood from the fact that 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

Large Investments

Long-term commitment of Funds

Irreversible Nature

Long-term effect on Profitability

Difficulties of Investment Decisions

National Importance

Expansion of business by Investing Plant and Machinery

Replacing and Modernizing

Mechanization of process

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 SCOPE OF THE STUDY

The Capital Budgeting decision of the firm would be influenced .Its wealth the more sound and
profitable an investment proposal is more the wealth of the firm .They also has a bearing and the
competitive position of the firm because they relate to fixed assets. They fixed assets are the true earnings
assets of generate limited goods are important to operations but without fixed assets to generate limited
goods that can be counted into current assets the firm would not be able to operate.

Capital Budgeting decisions are strategic decisions, they require large amount of fund. The
involve coasts and the majority of the firms have scare Capital resources. This solves the need for
thoughtful, wise and comment investment decisions, as an incorrect decisions would not only result in
loses but also prevent the from carrying profits from other investments that could not be undertaken for
want of funds.

Study of this type is useful to management, employs, suppliers and society.

Study of this is useful to the research scholars who conduct in-depth research

Study of useful to the similar organization is assessing there financial performance

Study of these types is useful to competitors to make necessary steps to improve the Capital
Budgeting.

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 OBJECTIVES OF THE STUDY

The purpose of the present study is to analyze the project expansion of PMPC Ltd.

To present theoretical framework relating to the Capital Budgeting in PMPC Ltd.

To understand various methods practiced in the company to provide finance to projects.

To evaluate the effectiveness of Capital expenditure decisions of company.

To put to the best use of available resources for the production process.

To offer Findings, Suggestions and Conclusions based up on the Study.

Creative search for Profitable Opportunities

Long-range Capital Planning

Short-range Capital Planning

Measurement of Project Work

Screening and Selection

Forms of Disposal

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 RESEARCH METHODOLOGY

Methodology is a systematic process of collecting information in order to analyze and verify a

phenomenon. The data was collected thought two principle sources.

(a) Primary data

(b) Secondary data

Primary data
The primary data needed for the study is directly gathered by the researcher through interview
with concerned officers &staff, either individually or collectively, some of information has been
supplemented by personal observation with concerned officers of department of PMPC Ltd.,

Secondary data
In the present study the researcher depends more on the secondary data. Which is available in the
form of financial statements like P&L account and balance sheets information is collected from internal
financial reports magazines, and text books. Some of information pertaining to industry profile is
collected from websites.

Further the data needed for the study was also needed;

(a) Collection of required data from annual records of the PMPC Ltd;

(b) Reference from text books and journals relating to financial management.

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 DIAGRAMMATIC REPRESENTATION OF METHODOLOGY

Data sources

Primary Sources Secondary

Sources

Management Respondents Inside the Outside the

Company Company

Personal Annual Reports Text books

Observance Journals

Figure: 1.1

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 LIMITATIONS OF THE STUDY

The limitations of the study are:

The study is conducted in a short period for a limited time. The study may not be detailed in
all aspect.

There was no scope of gathering current information, as the auditing has not been done by the
time of project work.

The study is carried based on the information and documents provided by the organization
and based on the interaction with the various employees of the respective departments.

It is the study of what has happened in the firm during the period.

Traditional methods are not followed Time Value of Money.

It is difficult to understand when compared with other techniques.

The finance manager exercises his functions through his two subordinates known as
Treasurer and Controller.

Its a long time process in that decision making process.

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 INDUSTRY PROFILE

India with 57m cows and 39m buffaloes has the largest population of cattle in the World. Milk
production gives employment to 70m dairy farmers. In terms of the Total production, India ranks 2 nd to
USA with a production of 71m tons in 1997-98Milk production is expected to cross 74m tons in 1998-99,
making India the no I milk producing nation in the world. Although milk production has grown at a fast
pace during the last three decades, milk yield per animals is very low in India at around 1.5lt per day. The
main reason for the low yield is lack of use of scientific practices in mulching. Inadequate availability of
fodder in all seasons unavailability of services.

OPERATION FLOOD

The transition of the Indian milk industry, from a situation of net import to that of surplus has been
led by the efforts of national dairy development board operation flood program under the aegis of the
former chairman of the board Dr.Kurien launched in 1970, operation flood has led to the modernization of
Indian Dairy sector and crated a strong network for procurement processing and Distribution of milk has
increased from 132gm per day in 1950 to over 220gm per day in 1998. The main thrust of operation
flood was to organize dairy co-operatives in the milk-shed areas of the village, and to link them to the
four metro cities, which are the main markets for milk.

The efforts undertaken by have not only led to enhanced production, improvement in methods of
processing and development of a strong marketing network, but have also led to the Emergence of
dairying as an important source of the employment and income Generation in the rural areas. It has also
led to am improvement in yields, longer Location periods, shorter calving intervals, etc., through the use
of modern Breeding techniques. Establishment of milk collection centers and chilling centers has
enhanced life or raw milk enabled minimization

of wastages due to spoilage of Milk. Operation flood has been one of the worlds largest dairy
development Programme and looking at the success achieved on India by adopting the co-operative route
a few other countries have also replicated the model of Indias white revolution.

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 Market size for milk sold in loose/package from is estimated to be 33m tons valued at Rs.429bn. The
market is currently growing at round 4.5% p.a in volume terms. It is one of the single largest segments
amongst food products.

Milk production is largely concentrated in few states namely Uttar Pradesh, Gujarat, Punjab,
Rajasthan and Haryana. Milk production grew by a mere pa between 1947 and 1970. Since the early
1970s under operation flood, production Growth increased significantly averaging over 5% pa. About
75% of milk is consumed at the household levels, which is not a part of commercial dairy industry. Milk
demand in four large metros is estimated to be 6m liters per day about 40% of which is supplied by 10
public sectors/co-operative dairy plants.

The bulk of the remainders are supplied by the traditional unorganized sector. Loose milk has
a larger market in India as it is perceived to be fresh by most consumers. In reality however, it opposes a
higher risk of adulteration and contamination.

MARKET SIZE AND GROWTH

Market size for milk (sold in loose/package form) is estimated to be 33m tons valued at
Rs.429dn. The market is currently growing around 4.5% pa in volume terms. It is one of the single
segments amongst food products.

Milk production is largely concentrated in few states namely Uttar Pradesh, Gujarat, Punjab,
Rajasthan and Haryana. Milk production grew by a mere 1% pa between 1947 and 1970. Since the early
70s under operation flood, production Growth increased significantly averaging over 5%pa.

About 75% of milk is consumed at the household level which is not a part of commercial dairy
industry. Milk demand in four large metros is estimated to be 6m its per day, about 40% of which is
supplied by the traditional unorganized sector. Loose milk has a larger market in India as it is perceived to
be fresh by most consumers. In reality however, it poses a higher risk of adulteration and contamination.

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MAJOR PLAYERS

The packed segment milk segment is dominated by the dairy co-operatives. Gujarat co-operative
milk marketing federation (GCMMF) IS THE LARGEST PLAYER. All other local dairy co-operatives
have their local brands (for Eg.Gokul,Warana in Maharashtra,a saras in Rajasthan, verka in Punjab,
Mother in Andhra Pradesh, Avian in Tamil Nadu etc.)Other private players include J.K Dairy, Heritage
Foods, Indiana Dairy, Dairy specialties etc. Amruth industries, once a leading player in the sector has
turned bankrupt and is facing liquidation.

The dairy industry was deli censed in 1991 with a view to encourage private Investment and flow
of capital and new technology in the segment. Although Deli censing attracted large number of players,
concerns on issues like excess Capacity, sale of contaminated/substandard quality of milk products etc.,
included

The Government to promulgate the MMPO (milk and milk products order) in 1992. MMPO
prescribes state registration to plants producing between 10000 to 75000 liters of milk per day or
manufacturing milk products containing between 500 to 3750 tones of milk solids per year. Plants
producing over 75000 liters per day or more that 3750 tones per year on milk solids have to be registered
with the central government. The stringent regulations, government controls and licensing requirements
for new capacities have restricted large Indian and MNC players from making significant investment in
his product category. Most of the private sector players have restricted themselves to manufacture of
value added milk products like baby food, dairy whiteners, condensed milk etc.

INDIA WORLDS LARGEST MILK PRODUCER

India has become the worlds No.1 milk producing country, with output in 1999-2000(marketing
year ending March 2000) forecasting at 78 million tones. United States, where the milk production is
anticipated to grow only marginally at 71million tones, occupied the top slot till 1997. In the year 1997,
Indias milk production was on par with the U>S> at 71 million tones. The world milk production in
1998 at 557 million tones would continue the steady progress in recent years (see Table 1). Further more
the annual rate of growth in milk production in India is between 5-6 percent, against the worlds at 1
percent. The steep rise in the growth pattern has been attributed to sustained expansion in domestic
demand, although per capita consumption is modest at 70 kg of milk equivalent.

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ANNUAL MILK PRODUCTION HAS TREBLED

Indias annual milk production has more then trebled in the last 30 years, Rising from 21
million tones in 1968 to an anticipated 80 million tones in 2001. This raped growth and modernization is
largely credited to the contribution of dairy Co-operatives, under the operation flood (of) project, assisted
by many Multilateral agencies, including the European Union, the World Bank, FAO and WEP (World
Food Program). In the Indian context of poverty and malnutrition. Milk has a special role to play for its
many nutritional advantages as well as providing supplementary income to some 70 million farmers in
over 500,000 Remote villages.

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WORLDS TOP MILK PRODUCERS:

Countries 2013 2014 2015

India 80 74 70

United States 78 78 74

Russian Fed 36 40 38

eration

Pakistan 26 25 23

Brazil 28 23 20

Ukraine 16 17 18

Poland 16 15 13

New Zealand 12 11 10

Australia 10 9 9

EC 130 128 125

World(includes 56 552 542

others)

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 TABLE NO: 1.1

INDIAN DAIRY: EXPANDING DAIRY

Indias modern dairy sector has expanded rapidly. From an insignificant 200,000 liters per day
(lpd) of milk being processed in 1951, the organized sector is presently handling some 20 million 1pd in
over 400 dairy plants. Already, one of the worlds largest liquid milk plants is located in Delhi, handling
over 800000 liters of milk per day (Mother dairy,Delhi). Indias first automated dairy (capacity:1millionlt
p.d) Mother dairy, Gandhinagar been established at Gandhinagar near Ahamedabad, Gujarat, in west
India ID is owned by indias digest dairy co-operative group, Gujarat Co-operative milk marketing
Federation (FCMMF) in Anand, with an annual turnover in excess of Rs.23 billion (US$500 million).
Amul-III with its satellite dairies, with total installed capacity of 1.5 million per day has also been
commissioned. Indias first vertical dairy (capacity: 400,000 l p.d) owned by the pradeshik cooperative
Dairy federation (PCDF) has been commissioned at Noida, out side Delhi.

Bangladesh, China, Hong Kong, Singapore, Thailand, Malaysia, Philippines, Japan, UAE,
Oman and other Gulf countries, all located close to India

CONCERNS IN EXPORT COMPETITIVENESS ARE

QUALITY

Significant investment has to be made in milk procurement, equipments, chilling and

refrigeration facilities. Also, training has to be imparted to improve the quality to bring it up to
international standards.

PRODUCTIVITY

To have an exportable surplus in the long-term and also to maintain cost com petitiveness, it is
imperative to improve productivity of Indian Cattle. There is a vest market for the export of traditional
milk products such has ghee, Shrikhand, rasgoals and other ethic sweets to the large number of Indian
Scattered all over the world.

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SWOT ANALYSIS

A. Strengths

High Level of productions and global standings in most of the agro products.
High level of employment generations both direct and indirect.
High level of skill development through various institutes for agriculture
Production and technology management
Lower level of production coasts even with poor productivity and yields due
To lower overheads.
Indian dairy farmers are very cost effective even after working in a very
Low subsidized environment irrespective of their European counter counterparts.
Cheap labor force
Higher customer base.

B. weaknesses

Poor productivity and yield

Poor quality management at the production levels.
Not much of technology penetration in the rural hinterland.
Existence of any processing facilities at the farm level like food parks etc.
Poor quality orientation and consciousness at farm level.
Higher costs for food processing and thus costlier processed food.
Quality standard management execution more obligatory than mandatory
And enforcement not too stringent for both domestic as well as exports markets.
Poor per capita income thus restricting most of the consumers to live life.
Happily with unprocessed food products only as processed food is very
Costly due to cost inefficiencies arising out of poor scales and lack of Horizontal integration.

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C. Opportunities

More orientation towards mechanized, organic and large scale farming due to intervention of
multinationals of better exposure of select Indian farmers. To the international environment. The
growth of so called rural Crorepathi is found to be more then their urban counterparts in most of
the regions in the Country.
Few large conglomerated (ITC, Reliance) shifting towards farming as Backward integration to
provide better forward linkages to their domestic FMCG and exports arms.
Better accountability consciousness in various research institutor related to Agriculture for
developing better varieties, breeds with higher productivity and yields and also major industrial
houses(Nicholas Primal) providing
Support to these institutes for a sustainable growth by investing heavily in new frontiers of
technology like biotechnology.
Increasing share of Indian food products in the international markets due to increasing Indians
population outside the country as well as large exports By Indian companies in last few years
with the benefits extended by the Indian Government to exports income.
D. Threats

Neighboring countries which are trying to become more competitive in Labor and more
productive with their land use.
More penetration and branding in the international markets by Comparatively very small nations
both in size and production but with very high levels of food processing more then 60-70%
against that of our Country at around 2% for fruits and vegetables and 18% for milk.
Lack of infrastructure at the rural level makes it a curse to be a part of rural India. Till now out of
around 6.5 lacks villages only 20% can be considered as the one with amenities to provide a
satisfactory lifestyle. In rest even the Basic amenities are still to be provided and forget about any
structured mannerism for reverse logistics.

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 MAJOR MILK DAIRY PRODUCTS AND THEIR BRANDS

Company BRANDS MAJOR PRODUCTS

Nestle Milk-Maid,Cerelac, Lactogen, Sweetened condensed Milk

Milk Everyday Powder, malted Food, Milk
powder & Dairy Whitener, Ghee
& ice Cream.

Mild Foods Limited Milk food Ghee & Ice cream

Smith Line Beaches Ltd., Malted food Malted Milk food, Ghee Butter &
Other Baby foods

Gujarat co-operative Market Milk product Butter, Ghee and other milk
federation products

Cadbury Bourn vita Infant Milk Food, Malted Milk

Food.

Britannia Milkman Flavor Milk, Ghee, Milk powder,

Biscuits& Ghee

TABLE NO:1.2

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19
 COMPANY PROFILE

The milk collection in Prakasam District started with the commissioning of the Milk chilling
center of Ongole in 1975, majority of milk producers in the district are from the categories of the land less
agricultural labors, marginal and small farmers most of whom are from socially economically backward
classes. While dairying is an essential side income to agriculture, majority of the milk producer farmers,
slowly it took an important turn as a prominent contribution to the rural economy.
To the economically backward community it is emerging as the dependable source of income and
in turn boosts up total economy the cotton to take up dairying as a dependable source of income. The
awareness to maintain better brief many cattle among the farmers has also increased.
The parkas District co-operative milk producer union established in the year 1986 with the
affiliation of the mild producer dairy co-operative formed. The investment from operation flood project
strengthened the processing capacity built up besides introduction of technical inputs for milk production
enhancement of milk producer co-operative doorsteps.
Due to constant affords of this dairy and involvement of milk producers the milk collection of
500LPD in 1975 increased to 95,000LPD by 1994 on an average, in he recent years, as a result of central
government, liberalization policy, more than 25 private dairies came into existence in Prakasam district,
and as such the average milk collection fell down to some extent.

Salient features of milk procedures factory: Ongole

Prakasam District is the native tract of the world famous Ongole breed of cattle. The district has
good potentialities for milk productions, due to the irrigation facilities available from Nagarjuna Sager
and water sources from tubular wells and tanks. The milk procurement in the district was started in 1975
with 12.00Lts. Capacity milk chilling center at Ongole. The capacity has been increased to 80,000Lts. Per
day by 1982 in as pan of 10 years.
The procurement has increased to 1.45 lakh liter, per day in the peak of 1986 observing the trend
increase of milk production it was proposed to establish a milk products factory of capacity of 3.5 lakh its.
Per day under operation Flood with financial assistance from NDDB on 30% grant and 70% loan basis.
The project was contemplated to handle the surplus milk from Nellore District also. The
execution of the project was entrusted NDDB on turnkey
Basis.

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 Products manufacture in the company
1. i) Milk
ii) Butter milk
iii) Ghee

iv) Khova
v) Flavored milk

2. Milk handling capacity : 3.50 Lakh its. Per day

3. Date of work capacity : 16.09.1987
4. Capital out lay : 19.25 Crores
5. Extent of land : 89.69 acres
6. Date of commitment of trail runs : 16.1.1995
7. Milk products capacity
a) Milk in sachets : 30,000lrs. Per day
b) Butter : 20 Mt/ Day
c) Ghee : 10 Mt/ Day
d) Milk powder : 30 Mt/ D

Milk chilling centers in Prakasam District

Milk chilling centers Capacity Average collection for day

Kondamanjulur 40,000lts 9,000lts

Kanigiri 20,000lts 7,000lts

Yerragondapalem 12,000lts 9,000lts

Cumbam 12,000lts 3,000lts

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 Dairy Co-operative societies in Prakasam District

Co-operative groups of milk producers 448

Working of Co-operative groups of milk producers 269
Association centers of milk producers 424
Milk producers 27,987
Milk retailing centers 150
Dairy parlors 10
Animal first AID centers 268
A.I centers 30

No. of Beneficiaries

(Directly and indirectly)

Framers of S.C community 11,698

Framers of S.T community 3,190

Framers of B.C community 22,335

Framers of Others community 69,128

Total Beneficiaries 1,06,351

OBJECTIVES OF P.M.P.C.LTD

Evolving long-term policies to encourage and develop and develop milk production and productivity
in the district.
Achieving co-ordination among various programmed in the district to optimize resource utilization.
Providing remunerative and assured market for the milk produced by the farmers round the year.
Improving efficiency in milk collection, transport, processing and marketing with the emphasis on
reducing the cost of operations at very stage from rural farmer to urban consumer.
Increasing in availability of milk and developing the market of milk and milk products.
Developing the manpower of the organization to reach excellence in their working life and create a
pro-active organizational culture for achieving competitive edge.

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 Consolidation and expansion of co-operative structure with special attention to small farmers and
weaker sections of milk producing community.
Traders from countries like Singapore and Brunei placing orders with the dairy for milk powder.
Introduction of quality systems under ISO: 9001-2000: 14001-2004 and HACCP certification.
Financial restructuring of the organization with the help of the Government of A.P and NDDB.
Plan to increase procurement to two lacks liters a day.
MILK PROCUREMENT

Milk produced twice a day from 600 villages in the district among these 600 centers about 195
registered societies under ANAND PATTERN. A good milk procurement infrastructure has been
developed for the last several years in the district. It is envisaged to open centers to boost up milk
production with more and more active participation of milk producers under operation flood II program,
and substantial improvement in milk production is envisaged in near future.

MILK SUPPLY

Milk products factory, Prakasam supplies milk in Ongole and to near towns in liter and 1liter
sachets. Bulk milk supplies to hospitals, hostels and other institutions besides regular market milk
supplies. Milk products factory, Ongole dispatches milk to madras, Hyderabad and Banglore.

ORGANIZATIONAL STRUCTURE
Organization structure is the basic frame work of which the managers decision marking behavior
takes important place. It basically deals with, Relationships. It is an established pattern of relationships
among the components are interrelated or interconnected, this prescribes the relationships among various
positions since the positions since the positions are held by various people with in the organization.

Organizational structure is the totally of both formal and informal relationships. The organization
structure involves the following steps:

Identification of activities
Group activities
Delegating of authority

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 In the PRAKASAM MILK PRODUCER COMPANY LIMITED., Organizational
structures, chairman is the head of board of directors. General Manager will be under the control of
board of directors. The general manager has various lands created under him like plant manager,
production manager, accounts officer, personal officer, sales manager, medical officer, quality control
officer etc.,

Every manager delegates authority to subordinates. It is visible that here is proper

understanding and coordination among all departments of the organization. This harmonious
relationship between the departments leads to facilitates efficient management and effective
communication. Optimum use of organizational resources and stimulating creativity in the
organizational mechanism.

P.M.P.C. LIMITED

1 Number of villages covered 815

2 Number of cooperative societies 534

3 Number of milk routes 35

4 Number of chilling centers 6

5 Number of feed mixing plants 2

6 Milk products factory area 27.3 acers

7 Value of factory buildings Rs.120 lakhs

8 UNICEF aided equipment value Rs.57 lakhs

9 Value of other buildings and investments Rs.270 lakhs

10 Date of commissioning of milk products factory 11-4-1969

11 Total staff 1854

12 Date of formation of union 6-7-1983

13 Date of transfer of management of union 8-2-1985

TABLE NO: 2.1

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MILK PRODUCTION PROCESS FLOW

PRODUCTION PROCESS OF MILK

MILK COLLECTION

MILK POWDER

WATERING THE POWDER

CHURNING

QUALITY CONTROL

PACKING

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 Milk is collected from collection point and is pasteurized and converted in to milk powder. As per
the demand of the requirement the Powder is mixed with water and converted back to milk, churned and
the quality controllers check the quality, and then approve the milk for packing.

MILK AND MILK PRODUCTS:

Today P.M.P.C LTD offers the widest spectrum of milk Products in India, under the
brand name Mother Dairy. These include ghee, Butter, processed cheddar cheese and cheese
spread, UHT Milk (STD milk, Toned milk, Low fat milk), flavored milk (merry milk), slim milk
in tetra packs, Sterilized ream, skim milk powder, dairy Whitener, cooking Butter and Ice cream.
Several among these carry the Agmark, an attestation of quality by government of India and the
ISI mark of Bureau of Indian standards.
The brand Mother Dairy connotes quality and quantity, which makes it a trusted Name in
millions of households across the country.

In addition, P.M.P.C LTD also manufactures products such as Sterilized Flavored milk,
panner (indigenous unripended cheese) doodh peda (desucated milk sweet) and buttermilk which
is marked through a Network of Mother Dairy parlors and a chain of retailers spread across
Andhra Pradesh.

The Dairy is equipped with the ISO 9001-2000 certification and Recently ISO 14001:2004
certification.

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 Theoretical Frame work

INTRODUCTION
Capital project planning is the process by which companies allocate funds to various investment
projects designed to ensure profitability and growth.

Evaluation of such projects involve estimating their future benefits to the company and
comparing these with their costs.

In a competitive economy, the economic viability and prosperity of a company depends upon the
effectiveness and adequacy of capital expenditure evaluation and fixed assets management.

MEANING AND DEFINITION

Capital budgeting refers to planning the deployment of available capital for the purpose
of maximizing the long - term profitability of the form. It is the firms decision to invest its
current funds most efficiently in long-term activities in anticipation of flow of future benefits
over a series of years.

In other words, Capital budget may be defined as the firms decision to invest its current
funds most efficiently in the long -term assets in anticipation of an expected flow of benefits over
a series of years. (10)Therefore, it involves a current outlay or series of outlay of cash resources
in return for an anticipated flow of future benefits. Capital budgeting is the process to identify,
analysis and select investment projects, whose returns (cash flows) are expected to extend
beyond one year.(11) Firms investment decisions would generally include expansion,
acquisition, modernization, replacement of fixed assets or long-term assets. From the above
definition, we may identify the basic features of capital budgeting viz., potentially large
anticipated benefits, relatively a high degree risk, and a relatively long-time period between the
initial outlay and anticipated return.

CAPITAL BUDGETING INVOLVES

* The search for new and more profitable investment proposals.

*The making of an economic analysis to determine the profit potential of each investment
proposal. In simple, capital budgeting refers to the total process of generating, evaluating,
selecting and following upon capital expenditure alternatives.

27
 Capital budgeting may be defined as the firms formal process fat the acquisition and
investment of capital. It involves the firms decision to invest its current funds for addition,
disposition, modification and replacement of fixed assets.

FEATURES OF CAPITAL BUDGTING DECISIONS

Capital budgeting decisions have the following features

a) It involves exchange of current funds for future benefits.

b) They benefit future periods.

c) They have the effect of increasing the capacity, efficiency, span of life regarding future

Benefits.

d) Funds are invested in long-term activities.

Some of the examples of capital budgeting decision are

a) Introduction of a new product.

b) Expansion of business by investing in plant and machinery.

c) Replacing and modernizing a process.

d) Mechanization of process.

e) Choice between alternative machines.

SIGNIFICANCE
Capital budgeting decisions are significant due to the following reasons:

28
Growth

The fixed assets are earning assets, since they have decisive influence on the rate of
return and direction of firms growth. A wrong decision can affect the other projects which are
already running under profits. In other words unwanted or unprofitable investments will result in
heavy operating costs.

More Risky

Investment in long-term assets increases average profit but in may lead to fluctuations in
its earnings, them firm will become more risky. Hence, investment decision decides the future of
the business concern.

Huge investments

Long-term assets involve more initial cash outflows, which makes it imperative for the
firm to plan its investment programmers very carefully and make an advance arrangement of
funds either from internal sources or external sources or from both the sources.

Irreversibility

Long-term asset investment decisions are not easily reversible and that too, with much
financial loss to the firm, due to difficulties in finding out market for such capital items once they
have been used. Hence, firm will incur more loss in that type of capital assets.

Effect on other Projects

Whenever long-term asset investment is a part of the expansion programmer, its cash
flow effects the projects under consideration, if it is not economically independent. The effect
may be increased in profits or decrease in profits. So, while taking investment in long-term
assets, the decision maker has to check the impact of this project on other projects, if the effect is
in terms of increase in profits then he/she has to accept the project and vice versa.

Difficult Decision

Capital budgeting decision is very difficult due to (a) decision involves future years cash
inflows, (b) uncertainty of future and more risk.

29
Other reasons regarding the significance of capital budgeting are

The decision-maker loses some of his flexibility, for the results continue over an extended
period of time. He has to make a commitment for the future.

Asset expansion is related to future sales.

The availability of capital assets has to be phased properly.

Asset expansion typically involves the allocation of substantial amount of funds.

Many firms fail, because they involve the allocation of substantial amount of funds.

Decision relating to capital investment is among the most difficult and, at the same time,
most critical that a management has to make. These decisions require an assessment of the
future events which are uncertain.

The most important reason for capital budgeting decisions is that, they have long-term
implications for a firm. The effects of a capital budgeting decision extends into the future
and have to be put with, for a longer period than the consequences of current operating
expenditures.

Capital budgeting is an important function of the management because it is one of the

critical determinants of success or failure of the company, advised or excessive capital
spending may create excessive capacity and increase in operating costs limits the viability
of company funds and reduce its profit earning capacity.

OBSTACLES FOR CAPITAL BUDGETING

Capital budgeting decisions are very important, but they pose difficulties, which shoot from three
principle sources.

30
Measurement Problem

Evaluation of project requires identifying and measuring its costs and benefits, which is
difficult since they involve tedious calculations and lengthy process. Majority of replacement or
expansion programmers have impact on some other activities of the company (introduction of
new product may result in the decrease in sales of the other existing product) or have some
intangible consequences (improving morale of the workers).

Uncertainty

Selection or rejection of a capital expenditure project depends on expected costs and

benefits in the future. Future is uncertain, if anybody tries to predict the future , it will be childish
or foolish. Hence, it is impossible to predict the future cash inflows.

Temporal Spread

The costs and benefits, which are expected, are associated with a particular capital
expenditure project spread out over a long period of time, which is 10-20 years for industrial
projects and 20-50 years for infrastructure projects. The temporal spread create some problems
in estimating discount rates for conversation of future cash inflows in present values and
establishing equivalences.

CAPITAL BUDGETING PROCESS

Project Project Project Project

Execution
Generation Evaluation Selection
Execution
Selection

Exhibits Capital Budgeting process

While steps are essential to any capital budgeting process, but individual situations of capital
budgeting may demand other steps relevant to the situation to make the process an effective one.

31
 1. Project Generation

Investment proposals of various types may originate at different levels within a firm. The
investment proposals may fall into one of the following categories.

Proposals to add new product to the product line.

Proposal to expand capacity in existing product lines.

Proposals to reduce the costs of the output of the existing at any level; from top
management level to the level of the workers. The proposals may originate systematically
or haphazardly.

2. Project Evaluation

Project Evaluation involves two steps.:

Estimation of benefits and costs. The benefits and costs must be measures in terms of cash
flows.

Selection of an appropriate criterion to judge the desirability of the project.

3. Project Selection

Since capital budgeting decisions are of considerable significance, the final

approval of the project may generally rest on the top management. However, projects are
screened at multiple levels.

4. Project Execution

The funds are appropriated for capital expenditure after the final selection of
investment proposals. The formal planning for the appropriation of funds is called the
capital budget. The project execution committee or the management must ensure that the
funds are spent in accordance with appropriations made in the capital budget. According
to Fianc managers, the Capital Budgeting Process is classified as under:

32
 Planning/Idea Generation
Evaluation/Analysis
Selection
Financing
Execution/Implementation
Review

PROCESS/STEPS OF CAPITAL BUDGETING

The process of Capital budgeting may be divided into six broad phases / steps, viz., planning or
idea generation, evaluation/analysis, selection, fancing,cution/implementation and review. Figure
8.1 depicts the relationship among phases of capital budgeting.

1. Planning / Idea Generation

The search for promising project ideas is the first step in capital budgeting
process. In other words the planning phase of a firms capital budgeting process is
concerned with articulation of its broad investment strategy and the generation and
preliminary search of project proposals. Identifying a new worthwhile project is a
complex problem. It involves a careful study from many different angles. Ideas can be
generated from the sources like, performance analysis of existing industries,
examination of input and output of various industries, review of import and export data,
study plans outlays and government guidelines, looking at the suggestions of financial
institutions and developmental agencies, study of local materials and resources, analysis
of economic and social trends, study of new technological developments, draw clues
from the consumption abroad, explore the possibility of reviving sick units, identity
unfulfilled psychological needs, attending trade fairs, stimulate creativity for generating
new product ideas among the employees.

2. Evaluation/Analysis

In the preliminary, screening, when a project proposal suggests that the project is
prime facie worthwhile, then it is required to go for evolution/analysis. Analysis has to
consider aspects like, marketing, technical, financial, economic and ecological analysis.
This phase focuses on gathering data, preparing, summarizing relevant information about
various alternative projects available, which are being considered for inclusion in the
capital budgeting process. Costs and benefits are determined based on the information
gathered about other alternative projects.

33
 3. Selection

Selection or rejection follows the analysis phase. If the project is worthwhile,

after using a wide range of evolution techniques, which are divided into traditional/no
discounted and modern/ discounted. Selection and rejection of a project depends on the
technique used to evaluate and its rule of acceptance. The acceptance rules are deferent
for each and every method. Apart from the use of techniques. of evaluation, there are
few techniques available for measurement (range, standard deviation, coefficient of
variation) and incorporation of risk (risk adjusted discount rate, certainty equivalent,
probability distribution approach and decision tree approach) in capital budgeting.

4. Financing of the Project

After the selection of the project, the next step is financing. Generally the amount
required is known after the selection of the project. Under this phase financing
arrangements have to be made. There are two broad sources available such as equity
(shareholders funds-paid up share capital, share premium, and retained earnings) and
debt (loan funds-term funds debentures, and working capital advances). While deciding
the capital structure, the decision maker has to keep in mind some factors, which
influence capital structure, The factors are Flexibility, Risk Income, Control, and Tax
benefits (referred to by the acronym FRICT). Capital should consist of debt and equity.

5. Execution/Implementation

Planning of paper work and implementation is physically different in

implementation the selected project. Implementation of an industrial project involves the
stages, project and engineering designs, negotiations and contracting, construction,
training and plant commissioning. Translating an investment proposal from paper work
to concrete work is complex, time consuming and a risky task. Adequate formulation of
project, use of the principle of responsibility accounting and use of network techniques
(PERT and CPM), are very much helpful for the implementation of a project at
reasonable cost.

6. Review of the Project

Once the project is converted from paper work to concrete work, then there is need to
review the project. Performance review should be done periodically, under this performance
review, actual performance is compared with the predetermined or projected performance.
34
PRINCIPLES OF CAPITAL BUDGETING

Capital expenditure decisions should be taken on the basis of the following factors:

Creative search for profitable opportunities: profitable investment opportunities.

Should be sought to supplement existing proposals.

Long-range capital planning: It indicates sect oral demand for funds to stimulate
alternative proposals before the aggregate demand for funds is finalized.

Short-range capital planning: It indicates sect oral demand for funds to stimulate
alternative proposals before the aggregate demand for funds is finalized.

Measurement of project work: here the project is ranked with the other projects.
Screening and selection: The project is examined on the basis of selection criteria, such
as the supply cost of capital, expected returns alternative investment opportunities, etc,.

Retirement and disposal: The expiry of the life cycle of a project is marked at this
stage.

Forms and procedures: These involve the preparation of reports necessary for any
capital expenditure programmer.

35
TECHNIQUES OF PROJECT EVALUATION

Project Evaluation Techniques

Project Evaluation
Techniques

Traditional Or
Non-discounted Cash Modern Or
Flow Discounted Cash Flow

Pay Back Period NPV Method

Accounting Role of Return I.R.R.

P.I.Method

1) TRADITIONAL TECHNIQUES OR NON-DISCOUNTED CASH FLOW

TECHNIQUES

The traditional techniques are further subdivided into two, such as.

(A) Payback period and

(B) Accounting Rate of Return or Average Rate of Return (ARR).

36
(A) Pay Back Period
Pay back period is one of the most popular and widely recognized technique of evaluating
investment proposals. Payback period may be defined as that period required, to recover the
original cash outflow invested in a project. In other words it is the minimum required number of
years to recover the original cash outlay invested in a project. The cash flow after taxes is used to
compute payback period.

Pay back period can be calculated in two ways,(i) Using formula (ii) Using Cumulative cash
flow method. The first method can be applied when the cash flows stream of each year is equal
/annuity in all the years or projects life, i.e., uniform cash flows for all the years. In this situation
the following formula is used to calculate payback period.

Pay Back period = Original Investment - Constant Annual Cash Flows after Taxes

Or

Initial investment (cash outlay)

Payback period = Initial investment (cash outlay)

Annual cash inflow

Accept-Reject Rule:

Acceptance or rejection of the project is based on the comparison of calculated PBP with the
maximum or standard payback period. Put it simple

Accept: Cal PBP < Standard PBP

Reject: Cal PBP > Standard PBP

Considered: Cal PBP = Standard PBP

37
Advantages Pay Back Period:

The Merits of payback period are,

* It is very simple and easy to understand.

* Cost involvement in calculating payback period is very less as compared to sophisticated

methods.

Limitations of Pay Back Period

Payback period method suffers from certain Limitations such as:

* It ignores cash flows after payback period.

* It is not an appropriate method of measuring the profitability of an investment, as it does not

consider all cash inflows yielded by the investment.

* It does not take into consideration time value of money.

* There is no rational basis for setting a minimum payback period.

* It is not consistent with the objective of maximizing shareholders wealth. Share value does not
depend on pay back periods of investment projects.

38
(B) ACCOUNTING RATE OF RETURN/AVERAGE RATE OF RETURN
(ARR)
Accounting rate of return method uses accounting information as revealed by financial
statements, to measure the profitability of the investment proposals. It is also known as the return
on investment (ROI) sometimes it is known as average rate of return (ARR) Average annual
earning after depreciation and taxes are used to calculate ARR. It is measured in terms of
percentage. ARR can be calculated in two ways.

(i) Whenever it is clearly mentioned as accounting rate of return

If accounting rate of return is give in the problem, return on original investment method should
be used to calculate accounting rate of return..

Accounting Rate of Return (ARR) = Average annual EATorPAT X100

Original investment (OI)*

* OI = Original investment Additional NWC + Installation Charges Transportation Charge

(ii) Whenever it is clearly mentioned as average rate of return.

If Average rate of return is given in the Illustration, return on average investment method should
be used to calculate average rate of return.

Average Rate Return = Average annual EAT X100

Average investment (AI)*

*AI= (Original investment-scrap)1/2+Additional NWC+Scrap value

(iii) If ARR is given in the problem, any one of the above method can be used to calculate ARR
(preferably return on average investment method).

39
Accept-Reject Rule

Acceptance or rejection of the project is based on the comparison of calculated ARR with the
predetermined rate or cut of rate.

Accept: Cal ARR > Predetermined ARR or Cut-off rate.

Reject: Cal ARR < Predetermined ARR or Cut-off rate.

Considered: Cal ARR = Predetermined ARR or Cut-off rate.

Advantages of ARR Method

The ARR method has some merits.

* The most significant merit of ARR is that, it is very simple to understand and easy to calculate.

* Information can easily be drawn from accounting records.

* It takes into account all profits of the projects life period.

* Cost involvement in calculating payback period is very less in comparison to the sophisticated
methods, since it saves analysts time.

Limitations of ARR Method

ARR method suffers from serious demerits.

* It uses accounting profits instead of actual cash flows after taxes, in evaluating the projects.
Accounting profits are inappropriate for evaluating and accepting projects, since they are
computed based on arbitrary assumptions and choices and also include non-cash items.

* It ignores the concept of time value of money.

* It does not allow profits to be reinvested.

* It does not differentiate between the sizes of the investment required for each project.

40
(2) MODERN TECHNIQUES OR DISCOUNTED CASH FLOW (DCF)
TECHNIQUES
Modern / discounted cash flow techniques take into consideration almost all the deficiencies
of the traditional methods and consider all benefits and cost occurring during the projects entire
life period. Modern techniques can be again subdivided into three, viz., (A) Net Present Value
(NPV) (B) Internal Rate of Return (IRR) or trial and error (C) Profitability Index (PI) or
Discounted Benefit Cost Ratio (DBCR).

(A) Net Present Value Method (NPV)

The net present value method is one of the discounted cash flow methods. It is also known as
discounted benefit cost ratio method. NPV can be defined as preset value of benefits minus
preset value of costs. It is the process of calculating present values of cash inflows using cost of
capital as an appropriate rate of discount and subtracts present value of cash outflows from the
present value of cash inflows and find the net present value, which may be positive or negative.
Positive net present value occurs when the present value of cash inflow is higher than the present
value of cash outflows and vice versa.

Steps involved in computation of NPV are

Forecasting of cash inflows of the investment project based on realistic assumptions.

Computation of cost of capital, which is used as discounting factor for conversion of future
cash inflows into present values.

Calculation of cash flows using cost of capital as discounting rate / factor.

Finding out NPV by subtracting present value of cash outflows from present value of cash
inflows.

Accept - Reject Rule:

Acceptance or reject rule of the project is decided based on the NPV.

Accept : NPV>Zero Reject: NPV<Zero Consider: NPV=Zero

Advantage of NPV Method

The Merits of NPV are

41
* It takes into account the time value of money.

* It uses all cash inflows occurring over the entire life period of the project including scrap value
of the old project

* It is particularly useful for the selection of mutually exclusive projects.

* It takes into consideration the changing discount rate.

* It is consistent with the objective of maximization of shareholders wealth.

Limitations of NPV Method

NPV is the most acceptable method on comparison with traditional methods. Nevertheless, it
has certain Limitations also.

* It is difficult to understand when compared with PBP and ARR.

* Calculation of required rate or discounting factor or cost of capital is difficult, which

involves a lengthy and time consuming process and presents illustrations. At the same time
calculation cost of capital is based on different methods.

* In case of projects involving different cash outlays. NPV method may not give dependable
results.

* It does not give satisfactory results when comparing two projects with different life periods.
Generally a project, having a shorter economic life would be preferable. other things being equal.

* Note: See TABLE A-3 the Present Value of One Rupee for PV one rupee at 10 per cent
discounting factor, because the cash inflow occurs unevenly for a period of 5 years.

(B) Internal Rate of Return (IRR)

This method advocated by Joel Dean, takes into account the magnitude and timing of cash
flossier is that rate at which the sum of Discounted Cash Inflow (DCF) equals the sum of
discounted cash outflow. It is the rate at which the net present value of the investment is zero. It

42
is called Internal Rate of Return because it depends mainly on the outlay and proceeds associated
with the project and not on any rate determined outside the investment. This method is also
known by following names.

* Marginal efficiency of capital.

* Rate of return over cost.

* Time adjusted rate of return.

* Yield on investment.

IRR= LDF%+ ^DF LDPV-OI

LDPV - HDPV

Where, LDF = Discount factor of low trial.

DF = Difference between low discounting factor and High discounting factor.

LDPV = PV of cash inflows at low discounting factor trial.

HDPV = PV of cash inflows at high discounting factor trial.

OI = Original investment.

Or

C-O
IRR= A+
C-D

Where,

A= Discounted factor of low trial.

B= Discounted factor of high trial.

c= Present value of cash inflow in the low trial.

43
 D= Present value of cash inflow in the high trial.

O= Original or initial outlay.

Accept-Reject Rule

Acceptance or reject rule of the project decides based upon the calculated IRR and Cost of
capital (Co)

Accepted: IRR>Cost of capital (Co)

Reject: IRR< Cost of capital (Co)

Consider IRR = Cost of capital (Co)

MERITS OF IRR
With the IRR attempts to find the maximum rate of interest at which funds invested in the
project could be repaid out of the cash inflows arising from that project.

It considers the time value of money.

It considers cash flows thought out the life of the project.

It is not in conflict with the concept of maximizing the welfare of the equity shareholders.

It is calculated by the method of trial and error, usually it gives more psycho local
satisfaction to the user.

It is consistent objective of shareholders; wealth maximization.

DEMERITS OF IRR
Calculation of IRR is quite tedious and it is difficult to understand.

Both NPV and IRR assume that the cash inflows can be reinvested at the discounting rate in the
new project. However, reinvestment of funds at the of funds at the cut-off rate is more

44
 appropriate than at the IRR Hence, NPV method is more reliable than IRR to ranking two or
more projects.

It implies that profits can be reinvested at internal rate of return. Which is not logical in manner.

It produces multiple rate of returns which can be confusing.

It does not help in the evaluation of mutually exclusive projects, since projects with highest IRR
would be selected. However, in practice, it may not turn out to be the one, that is the most
profitable and consistent with the objective of shareholders i.e. wealth maximization.

It may not give fruitful results in case of unequal projects life, unequal cash outflows, and
difference in the fining of cash flows.

It may give results inconsistent with NPV method. This is especially true in case of mutually
exclusive projects, i.e., projects, where acceptance of one would result in the rejection of the
other. Such conflict of results arises due to the following.

i. Differences in cash outlays.

ii. Unequal lives of projects.

iii. Different pattern of cash flows.

(C) Profitability Index (PI) / Discounted Benefit Cost Ratio (DBCR)

This is another discounted cash flow method of evaluating investment proposals. It is also known
as discounted benefit cost ratio method. It is similar to NPV method. It is the ratio of the present
value of cash inflows, at the required rate of return. To the initial cash outflow of the investment
proposals. PI method measures the present value of future cash per rupee, where as NPV is based

45
on the difference between present value of cash inflows and present value of cash outflows. NPV
method is not reliable to evaluate projects requiring unequal initial investments. PI method
provides solution to this problem. PI is the ratio, which is derived by dividing present value of
cash inflows by present value of cash outflows.

P1 is the ratio of present value of future cash benefits at the required at the required rate of
return at the initial cash outflow of the investment.

PI = PV of cash inflows

Initial cash outlay

Like IRR and NPV methods, profitability index is a conceptually sound method of
appraising investment projects. It provides ready comparisons between investment proposals of
different magnitudes.

Accept-Reject Rule

Accept: PI >1 Reject: PI <1 Considered: PI=1

Characteristics of Sound Investment Criterion

The characteristics should be possessed by a sound investment criterion.

It should consider all cash flows to determine the true profitability.

46
 It should provide for an objective and unambiguous way of separating good projects

From bad projects.

It should help ranking of projects according to their true profitability.

It should recognize the fact that bigger cash flows are preferable to smaller ones and

early cash flows are preferable to later ones.

It should help to choose among mutually exclusive projects that particular project which
maximizes the shareholders wealth,

It should be criteria which is applicable to any conceivable investment project independent of

others.

Merits of PI

The PI Method satisfies almost all the requirements of a sound investment criterion. The
characteristic as we recollect are.

* It gives due consideration to time value of money.

* It considers all cash flows to determine PI.

* It helps to rank projects according to their PI.

* It recognizes the fact that bigger cash flows are better than smaller ones and early cash flows
are preferable to later ones.

* It is consistent with the objectives maximization of shareholders wealth.

47
DATA ANALYSIS & INTERPRETATION

TRADITIONAL TECHNIQUES

Calculation of PBP and ARR with Graphs

PROBLEM: 1

Year CFAT (in Rs.)

2007 1,63,66,750

2008 2,17,33,100

2009 1,82,24,200

2010 1,76,35,600

2011 2,20,52,250

2012 1,41,90,665

2013 1,64,90,915

2014 1,54,92,349

2015 1,71,55,603

2016 1,73,58,650

Table: 5.1

48
SOLUTION

Year CCFAT (in

CFAT (in Rs.)
Rs.)

2007 1,63,66,750 1,63,66,750

2008 2,17,33,100 3,80,99,850

2009 1,82,24,200 5,63,24,050

2010 1,76,35,600 7,39,59,650

2011 2,20,52,250 9,60,11,900

2012 1,41,90,665 11,02,02,565

2013 1,64,90,915 12,66,93,480

2014 1,54,92,349 14,21,85,829

2015 1,71,55,603 15,93,41,432

2016 1,73,58,650 17,67,00,082

Table: 5.2

49
 Initial investment Co
Pay Back Period =
Annual cash inflows C
Initial Out lay = 9, 30, 00,817

9,30,00,8177,39,59,650
= 4 +
9,60,11,9007,39,59,650

1,90,41,167
=4+
2,20,52,250

= 4 + 0.86

=4+0.9
Pay Back Period = 4.9 Years

Criteria for evaluation

The pay back period computed for a project is less than the pay back period set by
management of the company, would be accepted.

A project actual pay back period is more than the determined period by the management,
it will be rejected.

50
 CFAT(in Rs.)
25000000

20000000

15000000

CFAT(in Rs.)
10000000

5000000

0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Graph: 5.1

Interpretation:
The standard payback period is set by P.M.P.C LTD for considering the expansion
project is greater than actual payback period is 4.9 years
It means 4 years and 9 months at the end of the year 2016.
In the year 2009 and 2012 the payback period values are very high
In the year 2013 the value is very low when compared to remaining years
The Pay Back Period is positive for evaluating results
Finally the P.M.P.C Limited got the standard Pay Back Period as for the given
consideration.

51
AVERAGE RATE OF RETURN (ARR)

Year CCFAT (in

CFAT (in Rs.)
Rs.)

2007 1,63,66,750 1,63,66,750

2008 2,17,33,100 3,80,99,850

2009 1,82,24,200 5,63,24,050

2010 1,76,35,600 7,39,59,650

2011 2,20,52,250 9,60,11,900

2012 1,41,90,665 11,02,02,565

2013 1,64,90,915 12,66,93,480

2014 1,54,92,349 14,21,85,829

2015 1,71,55,603 15,93,41,432

2016 1,73,58,650 17,67,00,082

Table 5.3

52
 ,,,
=

= 1, 76,70,008.8

=1,76,70,009

,,,
=

= 4, 65, 00,408.5

,,,
=
,,,

= 0.379 X 100

= 37.99

= 38%

Criteria for evaluation:

According to this ARR is higher than minimum rate of return established by the
management are accepted. It reject the project have less ARR than the rate set by the
management.

53
 CFAT(in Rs.)
25000000

20000000

15000000

CFAT(in Rs.)
10000000

5000000

0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Graph: 5.2

Interpretation:
The standard ARR set by p.m.p.c management is 30%.
The actual ARR is 38% is higher than standard ARR set by the management.
In the year 2011 the ARR value is more
In the year 2012 the ARR value is less
The p.m.p.c Limited is accepted the project
The p.m.p.c Limited standard ARR is increased by 8%.

54
Time Adjusted Techniques
Calculate NPV, IRR and PI with Graph
PROBLEM: 2

Year CFAT(inRs.)

2007 1,63,66,750

2008 2,17,33,100

2009 1,82,24,200

2010 1,76,35,600

2011 2,20,52,250

2012 1,41,90,665

2013 16490915

2014 15492349

2015 17155603

2016 17358650

Table: 5.4

55
SOLUTION:

PV = CFAT x
Year CFAT (in Rs.) DCF @ 10%
DF

2007 1,63,66,750 0.909 1,48,77,376

2008 2,17,33,100 0.826 1,79,51,541

2009 1,82,24,200 0.751 1,36,86,374

2010 1,76,35,600 0.683 1,20,45,115

2011 2,20,52,250 0.621 1,36,94,447

2012 1,41,90,665 0.564 80,03,535

2013 1,64,90,915 0.513 84,59,839

2014 1,54,92,349 0.467 72,34,927

2015 1,71,55,603 0.424 72,73,976

2016 1,73,58,640 0.386 67,00,439

TOTAL 10,99,27,569

Table 5.5

56
 Initial investment out lay (Co) = 9, 30, 00,817

NPV = Cash in flow Cash out flow

NPV = 10, 99, 27, 569 9, 30, 00, 817

= 1, 69, 26, 752

Criteria for evaluation:

o In case of calculated NPV is positive or zero, the project should be accepted.

o If the calculated NPV is negative, the project is rejected.

57
 PV=CFAT DF
20000000
18000000
16000000
14000000
12000000
10000000
PV=CFAT X DF
8000000
6000000
4000000
2000000
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Graph: 5.3

Interpretation
The NPV of the project is accepted i.e., positive
So that in the year 2008 the cash inflow value is very high
The 10 years data should be very clearly in that table
The initial inflow should be very high when compared to initial outflow

58
INTERNAL RATE RETURN (IRR)

PV = CFAT x
Year CFAT(in Rs.) DCF @ 10%
DF

2007 1,63,66,750 0.909 1,48,77,376

2008 2,17,33,100 0.826 1,79,51,541

2009 1,82,24,200 0.751 1,36,86,374

2010 1,76,35,600 0.683 1,20,45,115

2011 2,20,52,250 0.621 1,36,94,447

2012 1,41,90,665 0.564 80,03,535

2013 1,64,90,915 0.513 84,59,839

2014 1,54,92,349 0.467 72,34,927

2015 1,71,55,603 0.424 72,73,976

2016 1,73,58,640 0.386 67,00,439

TOTAL 10,99,27,569

TABLE 5.6

59
 PV = CFAT x
Year CFAT (in Rs.) DCF @ 13%
DF

2007 1,63,66,750 0.884 1,44,68,207

2008 2,17,33,100 0.783 1,70,17,017

2009 1,82,24,200 0.653 1,19,00,403

2010 1,76,35,600 0.613 1,08,10,623

2011 2,20,52,250 0.543 1,19,74,372

2012 1,41,90,665 0.480 68,11,519

2013 1,64,90,915 0.425 70,08,639

2014 1,54,92,349 0.376 58,25,123

2015 1,71,55,603 0.333 57,12,816

2016 1,73,58,650 0.295 51,20,802

Total 9,66,49,521

Table 5.7

60
 ,,,,,,
IRR =10 + ( )
,,,,,,
,,,
= 10 + (3)
,,,

= 10 + (1.27 * 3)
= 13.81%

Criteria for evaluation:

In this method the project can accept when IRR is higher than its cost of Capital
or cut rate. Unless we can, Reject.

61
 CFAT(in Rs.)
25000000

20000000

15000000

CFAT(in Rs.)
10000000

5000000

0
2006 2007 2009 2010 2011 2012 2013 2014 2015 2016

Graph : 5.4

Interpretation

The project is can accept because of the calculation IRR is higher than its cost of Capital.
The Cost of Capital fixed by management, but the actual is more its standard
Hence, we can accept the project.
The P.M.P.C Limited can accept these standards
Finally these 10 years data related to 13% discount factor
The calculations are related to 10% and 13% values

62
Profitability Index

PV = CFAT x
Year CFAT (in Rs.) DCF @ 10%
DF

2007 1,63,66,750 0.909 1,48,77,376

2008 2,17,33,100 0.826 1,79,51,541

2009 1,82,24,200 0.751 1,36,86,374

2010 1,76,35,600 0.683 1,20,45,115

2011 2,20,52,250 0.621 1,36,94,447

2012 1,41,90,665 0.564 80,03,535

2013 1,64,90,915 0.513 84,59,839

2014 1,54,92,349 0.467 72,34,927

2015 1,71,55,603 0.424 72,73,976

2016 1,73,58,640 0.386 67,00,439

TOTAL 10,99,27,569

Table 5.8

,,,
=
,,,

= 1.18

63
Criteria for evaluation
A project can be accepted if its PI index is greater than one. If the PI is less
than one we should reject the project

PV=CFAT DF

20000000

18000000

16000000

14000000

12000000

10000000
PV=CFAT X DF
8000000

6000000

4000000

2000000

0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Graph : 5.5

Interpretation:

Profitability index of proposed expansion project is found 1.18; this is more than the one.
So it can accepted the project
Here it is very similar to the NPV
The value of these analysis divided with the outflow and inflow values
It must be differences between two aspects i.e., inflow and outlay

64
Discounted Pay Back Period

PV = CFAT x
Year CFAT (in Rs.) DCF @ 10% CCFAT
DF

2007 1,63,66,750 0.909 1,48,77,376 1,48,77,376

2008 2,17,33,100 0.826 1,79,51,541 3,28,28,917

2009 1,82,24,200 0.751 1,36,86,374 4,65,15,291

2010 1,76,35,600 0.683 1,20,45,115 5,85,60,406

2011 2,20,52,250 0.621 1,36,94,447 7,22,54,853

2012 1,41,90,665 0.564 80,03,535 8,02,58,388

2013 1,64,90,915 0.513 84,59,839 8,87,18,227

2014 1,54,92,349 0.467 72,34,927 9,59,53,154

2015 1,71,55,603 0.424 72,73,976 10,32,27,130

2016 1,73,58,640 0.386 67,00,439 10,99,27,569

Table 5.9

65
 ,,,,,,
DPBP = 7 +
,,,,,,

,,
=7+
,,

= 7+0.59
= 7+0.6

= 7.6 Years

CCFT
120000000

100000000

80000000

60000000
CCFT

40000000

20000000

0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Graph: 5.6

Interpretation
The discounting pay Back period is less than the life time of the project.
So we can accept the project.
The P.M.P.C Limited can accept all these projects
It analyses all discounted factors related to pay back period
It must be more assured to this analysis.

66
 FINDINGS

The Net Working Capital is good. But the companys Capital Budget turnover ratio shows the

utilization of Capital Budges not satisfactory.

Companys average collection period of debtors is satisfactory in 2011-12 compared to

the other years.

The liquidity position of the company is satisfactory. Even though the companys current ratio

does not equal to the standard norms.

It is recognized that, the inventory ratio varied between 10.02times in 2006-2007 and 12.62 times

in 2011-12.

As a whole the inventory turnover ratio is maintained satisfactorily.

The quick ratio is very low at the beginning of the years.

But later it is registered at higher rate in this organization.

The composition of current assets is dominated by inventory and receivable in 2013-14

the composition of current assets are dominated by inventory and other current assets.

The inventory index and growth rate of P.M.P.C is so even for instance the annual growth

of P.M.P.C is negative.

The receivable index in P.M.P.C is highly uneven. In some year it is highly positive and

in some year it is negative. The unevenness is not good.

67
 SUGGESTIONS

It is important to study the size of Capital Budgeting of any enterprise.

It decides the need for best owing attention in the management of this component.

In the enterprise under the study inventory formed a major percentage of total assets.

It varied between the lowest of 55 percent and the highest of 60 percent to total assets.

The composition of current assets is dominated by inventory and receivable in 2007-2008 the

composition of current assets are dominated by inventory and other current assets.

The inventory index and growth rate of P.M.P.C is so even for instance the annual growth of

P.M.P.C Ltd is negative.

The receivable index in P.M.P.C Ltd is highly uneven.

68
 CONCLUSION

During the year 2012 -2013 the company sells the milk and milk products is higher than the other
years and competitors

During the year 2012 -2013 the company Investment on equipment is 600lakhs higher than the
other years.

The Prakasam milk producer company following the FIFO (First in first out) method to issue the
inventory it is following the best method.

The Prakasam Milk Producer company sells 50000 liters of milk daily and it is increasing day by
day.

The tools such as ratios and correlation between sales and profit from this study

the conclusion derived that the inventory management of the company is good.

69
 GLOSSARY

Capital Budgeting: A budget is an estimate of future needs arranged according to at an

orderly basis covering some or all the activities of an enterprise for a definite period of
time

General: The Accounts are prepared on historical cost convention and in accordance with
normally accepted Accounting Standards.
Fixed Assets: Fixed Assets are stated at historical cost less accumulated depreciation.
Depreciation: Depreciation is provided on the written down value method at the rates and in the
manner specified in Schedule XIV of the Company Act, 1956.
Capital Budgeting Decisions: Capital Budgeting decisions are of paramount importance in
financial decision making. In first place they affect the profitability of the firm. They also have a
bearing on the competitive position of the firm because they relate to fixed assets. The fixed
assets are true goods than can ultimately be sold for-profit.
Marketable Securities: The current account deposits shown in the table are those that are the
credit balances with the sales deposits account. These will instantly transfer to the main branch
overdraft account, the current accounts will not yield any interest so this is transferred to the
overdraft account where there is debit Balance.
Capital Budgeting Process: The preparation of the Capital budget is a process that lasts
many months and is intended to take into account neighborhood and bough needs as well
as organization wide.
Pay Back Period: The payback period one of the most popular and widely recognized
traditional methods of evaluation investment proposals. Payback period is the number of
years required to recover the original cash outlay invested in a project.
Initial investment Co
Payback period =
Annual cash inflows C
Accounting Rate of Return: The accounting rate of return (ARR) also known as the return on
investment (ROI) uses accounting information, as revealed by financial statements, to measure to
profitability of an investment.
Average Income
Average Rate of Return = 100
Average investment

70
 Net Present value: The NPV present value (NPV) method is the classic method of evaluating the
investment proposals. If is a DCF technique that explicitly recognizes the time value at different
time periods differ in value and comparable only when their equipment present values are found
out.

C1 C2 C3 Cn
......... C0
Net Present Value = (1 k) (1 k) 2
(1 k) 3
(1 k) n
Internal Rate of Return : The internal rate of return (IRR) method is another discounted cash
flow technique which takes account of the magnitude and thing of cash flows, other terms used to
describe the IRR method are yield on an investment, marginal efficiency of Capital, rate of return
over cost, time adjusted rate of internal return and soon.

A
Internal Rate of Return = L + (H L)
(a b)
Profitability index: Time adjusted method of evaluating the investment proposals is the
benefit cost (B/C.) ratio or profitability index (PI) Profitability index is the ratio of the present
valued of cash inflows, at the required rate of return, to the initial cash out of the investment.
PV of Cash inflow
Profitability Index =
Intial Cash outlay

71
 BIBLIOGRAPHY

Sl. No. Book Title Author Publisher Year Page. No

1. Financial Management Prasanna TMH, 2001 112-115

Chandra
New Delhi

2. Financial Management Khan & Jain TMH, 2001 152-157

New Delhi 182-194

3. Financial Management V.K. Bhalla ANMOL, 1998 52-68

New Delhi

4. Production&Operation S.N. Charry TMH, 2000 83-91

Management
New Delhi 115-120

5. Financial Management I.M. Pandey TMH, 2001 170-210

New Delhi

OTHER REFERENCES:

Manuals of P.M.P.C LTD.

Manuals of Stores Department.

Ten Year Balance Sheets (2006-2015).

Web Sites:

www.indiandiary.com www.P.M.P.C.Ltd.com

www.wikipedia.org www.capitalbudgeting.com

72