Evaluation of Investment Decision Through Capital Budgeting Techniques
BY
Satish J Japadiya
Submitted To
Sarvottam Dairy (Bhavnagar District co-operative Milk Producers Union Ltd.)
9TH May 2011
CENTER FOR MANAGEMENT STUDIES DHARAMSINH DESAI UNIVERCITY NADIAD
Preface
“Experience is the best teacher”. Practical training bridges between theoretical knowledge and the practical knowledge. Practical studies also help in developing the ability. In other words practical experience is one of the best types of learning that one can remember throughout the life. The main objective of practical training is to develop practical knowledge. It increases the skills, ability and attitude of a student to perform specific job in any organization. In practical training for M.B.A. it is necessary for every student to visit a business unit for 6 to 8 weak. Such training promotes a student to boost his potentialities and the inner hidden management related qualities, and there by student comes to know about their reality that how the theoretical knowledge works in actual sense in any unit. And this had indeed proved to be very useful to me. Fortunately I got opportunity to visit and complete my summer training in Sarvottam Dairy, at SIHOR. Here, I got chance to see and to be involved in the functions of organization. During this practical training I had undergone on a project of “Analysis of common sized statement and evaluation of investment decision through capital budgeting techniques” I had collected information, views and opinion of group of people who are working in organization. During this whole training I got a lot of experience and came to know about the management practices in real that how it differs from those of theoretical knowledge and the practically in the real life. In practical fulfillment of my subject requirement I have visited Sarvottam Dairy, Sihor. What so information I got from the company I have presented it with best way as possible. This training has helped me in increasing my knowledge in the above subject and organization development. Date: Place: Nadiad Satish j japadiya DHARAMSINH DESAI UNIVERCITY Nadiad
Acknowledgment
Man being a social animal can’t live alone. Similarly an individual cannot progress all by himself. The project on Analysis of common sized statement and evaluation of investment decision through capital budgeting techniques “Sarvottam Dairy “undertaken by me as a part of summer training is a result of guidance & help of not less than a score of people. Above all first I thank to My Family for his grace and blessings at each and every stage of the project. I am extremely thankful to “Sarvottam Dairy”, Bhavnagar for giving me an opportunity to carry out this project in their organization & providing me firsthand experience of the working of the organization. I am really thankful to Mr. Hasmukhbhai Pandya (Production Manager) for making all kinds of arrangements to carry out the project successfully and for guiding and helping me to solve all kinds of quarries regarding the project work. Their systematic way of working and in comparable guidance has inspired the pace of the project to a great extent. I am also thankful to pro. Falguni pandya, (Project Guide) & all my faculty members for their guidance & help provided to me. Without their support this project won’t have been possible. I would like to thank all the employees of “Sarvottam Dairy” have directly or indirectly helped me with their moral support for the completion of my project. Last but not least, I would like to record my deepest sense of gratitude to my friends for their support and constant encouragement. I am thankful all the people who helped me directly or indirectly with the project.
Date: Place: Nadiad
Satish j japadiya DHARAMSINH DESAI UNIVERCITY Nadiad
Executive summary
1) Title: Analysis of common sized statement and evaluation of investment decision through capital budgeting techniques. 2) Organization: Sarvottam Dairy (Bhavnagar District co-operative Milk Producers Union Ltd.) 3) Company Guide: Mr.Hasmukh Pandya (Production Manager) 4) Faculty Guide: Pro. Falguni Pandya 5 Student Name: Satish J Japadiya
General Information
Overview of the Indian Milk Industry
India is the world's highest milk producer and all set to become the world's largest food factory. The country is the largest milk producer all over the world, around 100 million MT.
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Value of output amounted to Rs. 1179 billion (in 2004-05) (Approximately equals combined 1/5thof the world bovine population Milch animals (45% indigenous cattle, 55 % buffaloes, and 10% cross bred cows) Immensely low productivity, around 1000 kg/year (world average 2038 kg/year) Large no. of unproductive animals, low genetic potency, poor nutrition and lack of services are There are different regions – developed, average, below average (eastern states of Orissa, Bihar
output of paddy and wheat!!)
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the main factors for the low productivity
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and NE region) in the dairy industry. Production and Productivity ? Largest milk producer in the world, 100 million MT ? Value of output Rs. 1179 billion (2004 -05) (Almost equals combined output of paddy and wheat!!) ? 1/5thof the world bovine population ? Milch animals (45% indigenous cattle, 55 % buffaloes, and 10% cross bred cows) ? Very low productivity, around 1000 kg/year(world average 2038 kg/year) ? Large no. of unproductive animals, low genetic potential, poor nutrition and lack of services key factors for low productivity ? Different regions –Developed, Average, Below average (eastern states of Orissa, Bihar and NE region)
Tremendous Growth through Operation Flood ? Stagnant milk production during 1950s and 60s ? Major changes in the dairy policy (Operation Flood) ? Linking-up rural producers with the urban consumers ? Large public investment in milk processing sector through cooperatives ? Growth rate of agriculture is stagnant, below 2%, livestock sector growth rate is more than 4.5%
? Marketing ? 15 % of marketable surplus goes through organized sector, rest traditional unorganized sector ? Organized sector until recently was only the co-operatives ? Replication of the AMUL model in the rest of the country, NDDB lead agency ? 3 Tier structure : Village society, district unions federated at state level (headed by IAS officer) ? Model adopted with some variations in different states ? Co-operatives have achieved limited success in many states
Regulatory Environment ? Dairy sector was de-licensed in 1991 ? Milk and Milk Products Order 1992: some controls ? Collection areas/milk sheds specified ? Processing capacity fixed ? Revised MMPO in 2002: controls stand withdrawn ? Private sector investment in dairying has increased considerably ? Previously, co-operatives did not have any competition from the private sector ? To strengthen co-operatives (MACS Act,1995): reduce government interference in mgt. ? farmer freedom to govern the organization Livestock Services ? Agriculture is a state policy in India ? Center cannot enforce policies, driven by the ideologies and interests of the state government. ? Department of Livestock is with the Ministry of Agriculture ? Department of livestock has a network of veterinarians providing livestock veterinary services ? Partial Cost recovery now initiated in several states ? Feed distribution at subsidized rate through co-operatives
Future Potential Dairy demand is income elastic Increase in Income and increase in population-high growth rate for dairy High potential for enhancing farmer incomes from dairy enterprise
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In this situation it is important to assess the critical weaknesses in the dairy value chain. Identify approaches to enable farmers to capitalize on these opportunities
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Summer training objectives
As a part of curriculum students of 2ND semester will have to undergo an summer training, which aims at providing to students additional training that is useful for the job market. All management student must complete the summer training programmed as a masters requirement. The final-year project is a required one-term course that gives students the opportunity to carry out a project under the supervision of a faculty advisor. Projects are tailored by the students by being involved in its design and implementation. Most students use the project as an opportunity to learn, for example leadership, teamwork, planning, decision-making, controlling. Some projects may be assigned in group of two or three students, which encourages the students to integrate their knowledge, skills across their course boundaries. As I find 2ND semester project is the best opportunity for students to demonstrate their master’s achievements.
Introduction
Sarvottam Dairy was established in 21st November, 2004 by The Bhavnagar District co-operative Milk Producer’s Union Ltd. under the Regd. No Sec. Tu 28701 and Regd Date 27-06-2001 at present Mr. Mahendrabhai Panot is the chairman of Sarvottam Dairy. The dairy was started with few employees. At present, the dairy has 35 employees. It is producing milk and buttermilk products.
The Head Office and Plant of Sarvottam Dairy is Located at Bhavnagar Highway Road, Sihor. It is a unique dairy in Sihor a very lovely greenish atmosphere in 20 acres. Sarvottam Dairy was concern with Uttam Dairy Ahmadabad. It has an E.T.P facility. It has ISO 9001:2000 Marko.
The main objective of Sarvottam Dairy is to decrease privatization and increase co-operation. They want to give most benefits to the rural area and want to develop rural area. They want to take revolution as Amul Dairy has given.
Profile of Firm
NAME OF COMPANY
ADRESS OF COMPANY SARVOTTAM DAIRY
SARVOTTAM DAIRY, Bhavnagar-Rajkot High Way Road, Shior, Bhavnagar
PH NO
(02846) 329633,225502
FAX NO BANKERS
91-02846-225501 BHAVNAGAR JILLA SAHKARI BANK LTD. STATE BANK OF SAURASHTRA. I.D.B.I. BHAVNAGAR. BANK OF BARODA.
AUDITOR
Mr. JAGDISHBHAI MEHTA (C.A.)
R.G.NO FORM OF ORGANIZATION BRAND NAME OF PRODUCT
REDG/U28701 CO-OPERATIVE FIRM AMUL GOLD A MUL BUTTER MILK A MUL TEA SPECIAL AMUL TAZZA AMUL SLIM N TRIM SK IM MILK
MAIN PRODUCT
MILK
TOTAL WORKERS & STAFF
73 WORKERS
COMPETITORS
B.D.P.L.,
MOTHER DAIRY, N.D.D.B.
MILK COLLECTION CENTER
SIHOR PALIYAD GADHADA (SWAMI).
AVERAGE MARKETING
FUTURE PLAN
20000 LITER PER DAY
GHEE,SWEETS,CHEESE,CHOCOLATE, ICE-CREAM, ETC.
SLOGAN & PUNCHLINE
SARVOTTAM DOODH PITA HE BHAVNAGAR
Promotes of existing managing group
NAME 1. Mr. MAHENDRABHAI PANOT 2. Mr. H. R. JOSHI 3. Mr. MAVJIBHAI BHALIA 4. Mr. BHIKHABHAI KHODIFAD 5. Mr. GIRIJASANKARBAHI DHANDHALIA 6. Mr. CHUNILAL BARAIYA 7. Mr. DAYARAMBHAI BARAIYA 8. Mr. LAKHUBHAI KAMALIA 9. Mr. MATHURBHAI ZINZALA 10. Mr. JASHABHAI KHER 11. Mrs. SHARDABEN RAJYAGURU 12. Mrs. PRABHABEN VALANKI 13. Mrs. DEVUBEN BHATT 14. DISTRICT REGISTAR 15. REPRESENTATIVE GUJARAT MILK MARKETING FEDRATION DESIGNATION CHAIRMAN DIRECTOR & G.M DIRECTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR
History of Sarvottam Dairy
The Bhavnagar District Co-operative Milk Producer’s Union Ltd. (Sarvottam Dairy) In 1974, Gujarat Dairy Development Corporation (G.D.D.C) had established Bhavnagar dairy, which was running by The Bhavnagar Milk Union. Bhavnagar Dairy was selling milk and ghee in the Bhavnagar district by the brand name “Sauras”. By co-operative members of the district sell their milk to the Union and after the processing on the milk they sold it under the name of Bhavnagar dairy. In the year 1989 the highest milk is purchased from the co-operative members is 42500 liters and they sell all the purchased milk to the different areas of the districts. But somehow the years are passes the dairy’s production is going to the down. And after some crises government close the Bhavnagar Dairy on the date of 24/12/1999. The Union was also enabling to do anything for the crisis of Bhavnagar dairy. When the Union is established in 1974 they take the responsibilities to solve the problems of their co-operative members, but somehow there are no action taken by them or maybe there are not proper response from the government to save the Bhavnagar dairy and to help the small milk producers will. Because of Bhavnagar dairy’s crises the producers of milk of the whole district are comes into financial crises because they hadn’t any option to sell their milk. After sometime the producers of the milk made a meeting in Jilla Panchayat’s ground and the majority of the producers give the responsibilities of reestablishment of Union to Mr. H. R. Nandva and Mr. M. P. Pandya. With the support of the political bodies like Mr. Rajendrashinh Rana and Mr. Mahendrabhai Panot of Bhavnagar district. Mr.H.R.Nandva and Mr.M.P.Pandya send an application to the Gujarat Govt. for the reestablishment of Union in the district. But on the temporary basis government thigh up producers of milk of Bhavnagar district with the Uttam Dairy, Ahmadabad. And government also form a government body under the president ship of Mr. V.C.Joshi to take care the responsibilities of Bhavnagar districts producer and Uttam Dairy, and work as mediator between these two.
As I mentioned above Mr.H.R.Nandva and Mr.M.P.Pandya are the main body of all these work and they are the person’s behalf of the milk producers of Bhavnagar district they started to sell the milk produced by the district to the Uttam Dairy on the date of 3/1/2000 and on the date of 14/4/ 2001 Uttam Dairy established a chilling center in Talaja near Bhavnagar City. This system is temporary. So for a permanent body behalf of milk producers must required to form. For these purpose the meeting of milk producers is held under the chairman ship of Mr. Mahendrabhai Panot. The registrar of Bhavnagar city Mr. K.B.Upadhyay is also support and guides the milk producers
for the further progress. At the end on the date 27/6/2001 under the registration no: REDG. / U 28701 the Union is formed second time. But because of handling of the milk is done by Uttam Dairy, the Union is started to make the members at co-operative level and after sometime they provide animal food and other basic things to their members so that the number of members will increase. At the end with the help of Gujarat Co-operative Milk Marketing Federation (G.C.M.M.F.) the meeting is held between Mr. Mohanbhai Bharwad, the Chairman of Uttam Dairy and Mr. Mahendrabhai Panot, the Chairman of Bhavnagar District Co-operative Milk Producer’s Union Limited, In the meeting it was decided that the chilling center, which was developed by Uttam Dairy and the other dead stock, was purchased by the Union and they start production in Talaja on the rented land. On the date 21/11/2004 the Union is started again and was also started its production and distribution system and by the profit which was made by selling the different items under the name of Sarvottam Dairy was used in the purchasing the land near Sihor and the new plant is established on the date 12/12/05.
Development of the unit
When Sarvottam Dairy was started it had many problems regarding the raw material means the milk which was owns by the milk producers, machinery and labour and not having enough skilled people but they survive under all odds and now they have 1 head distributor in every Taluka and 17 distributors in the Bhavnagar city only. Dairy averagely processed on 60,000 liters of milk per day and from that 60,000 liters of milk 20,000 liters of milk distributed in the district and rest 40,000 liters of milk, which was surplus, is given to the Amul Dairy, Anand. With an experience of 36 year, they are becoming skilled of hard materials Having shows the dairy business with technology and quality they offered they Made an impressive list of clients in various field and have built a good Reputation. Using separator machines and good materials they have establishment Achievement maintained and excelled with production which has been largely accepted by rural people they are providing milk and butter milk product to Distributors and to consumers. Sarvottam Dairy is established on the date 12/12/05, it is a single largest dairy of the district level. Basically the Sarvottam is a brand name of the products which was process by the Bhavnagar District Co-operative Milk Producer’s Union Limited. After the closing of Bhavnagar dairy in the year 1999 the dairy of our own district is needed because other districts have their own dairies and our milk producers had not get the required profit from the other districts dairy. So taking this problem into consideration the political bodies and some business persons of the district started a new venture namely Sarvottam Dairy to solve the problems of milk producers of the district. They are constantly upgrading there technology for their needs of tomorrow. Their main aim is to develop rural areas. They want to decrease privatization and increase co-operative. They want to give the white revolution as Amul Dairy has given they will try to provide maximum benefits and services to the customers
Organizational Structure
Plans are made for implementation of managerial policy and to put these in to practice an administrative structure is created. This is called Organization when large number of people are working for all compiles the objective of the firm, Specific Understanding and clarity are necessary as to what function are to be
performed, who will perform which function, who will issue orders, who will implement them etc. are done by the organization. “Organization Structure refers to determination of entire organization System of an enterprise determine the limits within which the enterprise has to work and progress”. Organizations establish authority responsibility relationship. It is the unit, different parts of which are linked to each other. The human body is the best example of an organization. Assignment of authority is the basic of Organization planning is the brain of a business while organization is its physical Structure. To Clarity the importance of organization a Successful industrialist notes, “Take away our plants; take away our business, oh1! Take away our wealth (Finance) but permit us to retain our organization within no time we shall be on our feet once again. There are mainly four forms of any organization, (1) (2) (3) (4) Line organization Staff or functional organization Line and staff organization Committee organization
Sarvottam dairy has line organization. The entire business is deluded in to department are appointed for every department, Officers are appointed according to the function respective department, Under the officer. These the senior and Join or officer working under him. Workers function under these supervision and officers. The organization, authority flow downward from the top to bottom and responsibility goes upwards from bottom to top. Every person is responsible to his immediate superior
CHAIRMAN (MR.MAHENDRABHAI PANOT) MANAGING DIRECTOR (Mr.H.R.JOSHI)
BOARD OF DIRECTORS GENERAL MANAGER (Mr. H.R.JOSHI) JOINT GENERAL MANAGER (MR.M.P.PANDYA)
HR MANAGER C.D. OFFICER C.D. Supervisor
MARKETING MANAGER MARKETING ASSISTANT
SALESMAN Plant Operator
PRODUCTION MANAGER
Quality Officer Laboratory Ass.
HEAD OF ENGINEER DEPARNEMT
FINACEL MANAGER
Account Offi. Clerk Com. Operator
Electrician Helper
Preepeak Operator
Boiler Operator Refrigerator Operator
Store keeper
Dock supervisor
Workers
Workers
Workers
Workers
Workers
Manufacturing Process Of Milk
Manufacture process plays a very important role for making any product. A product can become finished goods only when it has gone under a several procedure. We have to take up most care of it. Every firm or unit tries that its manufacturing process is simple, short less costly and less time consuming. The sarvottam dairy tries to make its products by latest technology and with good quality of raw material. Sarvottam Dairy is a consumer goods production sector. Milk is essential ingredient in our life. In Every stage of life milk is useful to develop and maintain our body. The whole process of manufacturing milk and other products of milk in the sarvottam dairy are very simple. But, it is time consuming and very costly. The following are different stages of manufacturing the different category of milk.
The whole process of milk can be charted out as under.
The Process Of Milk Is As Under:
Receive milk from co-operative Society of milk
Grading (Testing)
Chilling Milk Tank (Storage)
General sampling Standardization and separation
Pasteurization
Store in process tank
Packaging
Dispatch to Distributor
The Process Is Described As Under:
? Received milk from members of co-operative society: Basically the Union itself says that it is a joint effort of the milk producers. There are 10 routs of milk producers. These routs are covering almost all the villages of milk producers. The dairy only accepts the milk from that producer who is its member in co-operative society. Jesar, Gadhada, Timana, Neswad, Tarsara, Vallbhaipur, Goriyali, Gopnath, Bagdana, and Mahuva these are the routs and every route allotted specific time for carrying down their milk to the dairy. ? Milk Tank: In the milk tank they storage the milk for the process. The milk gets the steady temperature in the tank before the process is starts. We can also say that the different process on milk is starts from this tank. ? Taking general FAT and S.N.F.: The dairy do the FAT and Solid Net Fat (S.N.F.) test for the payment to co-operative members because as the FAT and S.N.F. high the member get higher amount of his milk. The part of FAT in the milk is getting to know by using the “SULPHURIC ACID”. And because of heat the FAT part is come out in the liquid form. After that a “SANTRIFUSE” is come out which is measured by “LITEROMETER”. S.N.F. is measured by using “LACTOMETER”. In the boiled milk they put the lactometer in the milk and after using the formula given below they get to know about S.N.F. figure; LACTOMETER NUMBER S.N.F. = 4 There is a certain standards are there for S.N.F. and FAT. They are, The milk of buffalo must contain 6% S.N.F. and 9% FAT The milk of cow must contain 8.5% S.N.F. and 3.5% FAT + 0.21 FAT + 0.36
? Standardization: There are certain standards are set for the milk. Each standard have their own S.N.F. and FAT. It is then decided that what should be the price of the milk. There are four standards,
Full cream: This standard contains 6% FAT and 9% S.N.F. this is the highest or rather say very good standard. Standard: 4.5% FAT and 8.5% S.N.F containing in this standard. This is a general standard. Toned: This standard contains 3% FAT and 8.5% S.N.F. Double toned: 1.5% FAT and 9% S.N.F. ? Pasteurization: On the name of the founder of this process it is called pasteurization. Louie Pasteur is the founder of this method. He found this process to save the liquor of king from the spoiling out. To save the milk from the bacteria they boiled the milk on certain temperature and quickly down the temperature. In the old process they emptied the milk into big utensils and after that they boiled the milk up to 63 degree Celsius temperature for 30 minutes and after that they cool down the temperature for 30 minutes. This method is very time consuming and improper. In the modern era the H.T.S.T. method is used for pasteurization. H.T.S.T. means high temperature short time method. In this method they boiled the milk up to 72 degree Celsius for 16 seconds and after this they quickly level down the temperature up to 5 degree Celsius. They use “GASKET PLATES” for these methods. Gasket plates are adjusted by a specific way that the milk is passing from one gasket to another gasket. The first gasket had hot water in its both the side and the milk is in the middle plate so because of heat from the both the side the milk is boiled out up to 72 degree Celsius and after 16 seconds milk is pass to another gasket which contain cold water in its both the side here the temperature of milk is level down to 5 degree Celsius.
Test of Pasteurization: Because of pasteurization the milk is become bacteria free. To see that the milk is free from bacteria or not there is one test namely “PHOSPHATE TEST”. In this test they set the temperature on 72 degree Celsius. On 72 degree Celsius all the bacteria is fade away and also phosphate enzyme is fade away from the milk. After that they do a test for phosphate enzyme if the phosphate enzyme is still there in the milk the color of milk is become yellow which shows that the pasteurization is not done properly and if there is no change in the color than it is proved that the milk can use for the general purpose. ? Packaging: For the packaging they use the machine of R.M.C.Packaging System Pvt. Ltd. It costs more than 50,000 Rs. The machine can fill 160 pouch of milk in a minute. There are two machines in the dairy for the packaging and the machines are fully automatic, once you set the program and there is rarely any problem arises. ? Dispatch:
There are total 31 distributors in the district. From the 31 distributors 17 distributors are only in Bhavnagar city and rest of the distributor are in the different Taluka. The distributors’ vehicles come to the dairy in the early morning and they get their carats of milk as per requirement. The distributor must book their order before the evening of previous day, and then they get the milk in next morning.
Size of the firm
The Size of the Organization is determined by invest Capital in it. There are Some Standard of government regarding the Size of the Organization. How much capital is invested in enterprise, according to it, Size will be decided. Basically there are 3 types of business units according to their Size. They are, (1) (2) (3) Small Scale Enterprise. Medium Scale Enterprise. Large Scale Enterprise.
The types of the enterprise according to the Capital invested in them are shown in the table as Under.
Total Capital Invested Up to 75 lakh Between 75 lakh to 1 crore More than 1 crore
Type of the Organization Small Scale enterprise Medium Scale enterprise Large Scale enterprise
The Sarvottam dairy is large scale enterprise, because Capital invested is very much more than criteria, Sarvottam dairy invested Rs. 104308980./-
Form of the organization
Choice of a proper from Organization is Crucial for the Success of business enterprise. Determine risk, responsibility, and control of the enterprise as well as division of profit. It is long term deasion because of form of the organization can not be frequently Changed. The right form of organization can help the enterprise not only through initial success but in later growth too – Therefore, it should be selected at tea due care and thought. Form the view point of ownership, there are four (4) main point in which the choice can be made. (1) (2) (3) (4) Sole proprietorship Partnership Joint Stock Company and Society. Co- operative Society.
From the given choice, it is clean that Bhavnagar district co – operative milk producer’s Union Ltd. (Sarvottam dairy) is Co – operative society, under the Gujrat state Co – operative Act 1961. A Company has an artificial legal person having an nondependent legal entity. It satisfies all the requirement of the company format.
Contribution of the Unit to the Industry
The total collection of dairy is 60,000 liters per day. From which they use 20,000 liters of milk for packaging and distributed it in the district and rest of 40,000 liters of milk they sent to AMUL dairy, ANAND. If we take the production part of the dairy, it contributed almost 40% of milk from the whole district and private producers contribute rest 60% milk. But if we take the selling part the dairy only have 10-12% market of Bhavnagar district. There is two reasons for this scarcity, first is that the dairy is started in the year 2005 so it is not have huge amount for marketing. And the second is that the Amul brand is so much popular in the district that people only by Amul milk or the products of Amul and also there are many competitors in this industry. The Sarvottam Dairy is largest producer of milk at district level apart from this dairy the competitors like B.D.P.L., SUGAM, and RAJWADI are also there to compete in the local level.
Research Methodology
Research Methodology
Definition:
Research comprises defining and redefining problems, formulating hypothesis or suggested solutions; collecting, organizing and evaluating data; making deductions and reaching conclusions; and at last carefully testing the conclusions to determine whether they fit the Formulating hypothesis Research as “the manipulation of things, concepts or symbols for the purpose of generalizing to extend, correct or verify knowledge, whether that knowledge aids in construction of theory or in the practice of an art.” Research as a scientific and systematic search for pertinent information on a specific topic. In fact, research is an art of scientific investigation.
OBJECTIVES OF RESEARCH:
The purpose of research is to discover answers to questions through the application of scientific procedures. The main aim of research is to find out the truth which is hidden and which has not been discovered as yet. Though each research study has its own specific purpose, we may think of research objectives as falling into a number of following broad groupings: 1. To gain familiarity with a phenomenon or to achieve new insights into it (studies with this object in view are termed as exploratory or formularize research studies); 2. To portray accurately the characteristics of a particular individual, situation or a group (studies with this object in view are known as descriptive research studies); 3. To determine the frequency with which something occurs or with which it is associated with something else (studies with this object in view are known as diagnostic research studies); 4. To test a hypothesis of a causal relationship between variable
Sources of Data
Internal
External
Primary
Secondary
Data Collection:
This is the first stage in the statistics. Before deciding the source to collect the data one has to make a proper planning of investigation and the purpose of inquiry. The required data for the study are basically secondary in nature and the data are collected from the audited reports of the company.
Methods of data Analysis:
The data are collected were edited, classified and tabulated for analysis. The analytical tools used in this study are: 1) capital budgeting techniques 2) Trend analysis 3) Common size statement 4) Comparative Statement
Sources of data:
Secondary data is available 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, 1) Collection of required data from annual records, monthly records, internal published book or profile of the company. 2) Other books and journals and magazines. 3) Annual reports of the company.
Limitation of the Secondary Data:
The information received through secondary sources is easy to obtain but difficult to use in social research. It requires a keen insight and a capability to distinguish between reliable and unreliable data, to make use of documentary information. Therefore such information should be carefully judged before being utilized. one should use the secondary data with care and fully precaution and should not accept them at their face value as they may be suffering from the following limitations: • • • • • • They may be collected by proper procedure. They may be suitable for a required purpose. The information which was collected on a particular base may not be suitable relevant to an enquiry. They may have been influenced by the biased investigation or personal prejudices. They may be out of data and not suitable to the present period. They may not satisfy a reasonable standard of accuracy. They may not cover the full period of investigation.
Capital Budgeting
Overview:
Financial management is largely concerned with ?nancing, dividend and investment decisions of the ?rm with some overall goal in mind. Corporate ?nance theory has developed around a goal of maximizing the market value of the ?rm to its shareholders. This is also known as shareholder wealth maximization. Although various objectives or goals are possible in the ?eld of ?nance, the most widely accepted objective for the ?rm is to maximize the value of the ?rm to its owners. Financing decisions deal with the ?rm’s optimal capital structure in terms of debt and equity. Dividend decisions relate to the form in which returns generated by the ?rm are passed on to equity-holders. Investment decisions deal with the way funds raised in ?nancial markets are employed in productive activities to achieve the ?rm’s overall goal; in other words, how much should be invested and what assets should be invested in. Throughout this book it is assumed that the objective of the investment or capital budgeting decision is to maximize the market value of the ?rm to its shareholders. The relationship between the ?rm’s overall goal, ?nancial management. Funds are invested in both short-term and long-term assets. Capital budgeting is primarily concerned with sizable investments in long-term assets. These assets may be tangible items such as property, plant or equipment or intangible ones such as new technology, patents or trademarks. Investments in processes such as research, design, development and testing – through which new technology and new products are created – may also be viewed as investments in intangible assets. Irrespective of whether the investments are in tangible or intangible assets, a capital investment project can be distinguished from recurrent expenditures by two features. One is that such projects are signi?cantly large. The other is that they are generally long-lived projects with their bene?ts or cash ?ows spreading over many years. Sizable, long-term investments in tangible or intangible assets have long-term consequences. An investment today will determine the ?rm’s strategic position many years hence. These investments also have a considerable impact on the organization’s future cash ?ows and the risk associated with those cash ?ows. Capital budgeting decisions thus have a longrange impact on the ?rm’s performance and they are critical to the ?rm’s success or failure.
What Does Capital Budgeting Mean?
The process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark. Also known as "investment appraisal".
Capital Budgeting is the process by which the firm decides which long-term investments to make. Capital Budgeting projects, i.e., potential long-term investments, are expected to generate cash flows over several years. The decision to accept or reject a Capital Budgeting project depends on an analysis of the cash flows generated by the project and its cost.
Capital Budgeting Tools:
• Payback Period
• Accounting Rate of Return • Net Present Value • Internal Rate of Return • Profitability Index • MIRR Application of this methods firm needs estimate the cash flow for the new investment decision. The cash flow is
• Payback Period
Payback period is the time duration required to recoup the investment committed to a project. Business enterprises following payback period use "stipulated payback period", which acts as a standard for screening the project. • Computation Of Payback Period When the cash inflows are uneven, the cumulative cash inflows are to be arrived at and then the payback period has to be calculated through interpolation. Here payback period is the time when cumulative cash inflows are equal to the outflows. i.e., Cash inflow /cash out flow
Accounting Rate Of Return :
Accounting rate of return is the rate arrived at by expressing the average annual net profit (after tax) as given in the income statement as a percentage of the total investment or average investment. The accounting rate of return is based on accounting profits. Accounting profits are different from the cash flows from a project and hence, in many instances, accounting rate of return might not be used as a project evaluation decision. Accounting rate of return does find a place in business decision making when the returns expected are accounting profits and not merely the cash flows.
Computation Of Accounting Rate Of Return: The accounting rate of return using total investment. or Sometimes average rate of return is calculated by using the following formula: net profit after tax/average investement Where average investment = total investment divided by 2
Net Present Value (Npv) :
Net present value of an investment/project is the difference between present value of cash inflows and cash outflows. The present values of cash flows are obtained at a discount rate equivalent to the cost of capital. Computation Of Net Present Value (Npv)
• A1 cash flow in the year 1, A2 cash flow at the end of year 2, cash flow at the end of year 3…… • R be the cost of capital of the firm(discount rate) • 'c' be the initial investment
Formula:
Internal Rate Of Return (Irr) :
The internal rate of retyrn method is also known as yield method. The IRR of a project/investment is defined as the rate of discount at which the present value of cash inflows and present value of cash outflows are equal. IRR can be restated as the rate of discount, at which the present value of cash flow (inflows and outflows) associated with a project equal zero.
Compution of IRR: Let cash flow in period as t
Then IRR of the project is found out by solving for the value of 'r' in the following equation: Putting the different rates in the npv method and through cross checking it we can get irr.
Profitability Index (PI) :
Profitability ratio is otherwise referred to as Benefit/Cost ratio. This is an extention of the NPVmethod.this relative valuation index and hence is comparable across different types of projects requiring different quantum of initial investments. Profitability index (PI) is the ratio of present value of cash inflows to the present value of cash outflows. The present values of cash flows are obtained at a discount rate equivalent to the cost of capital.
Computation of PI: PI is always expressed on net basis. Formula of PI is as under. PI = Present value of all cash benefit/present value of initial investment As the value of PI comes more than the 1 than the investment decision would be profitable. Otherwise it would be not acceptable.
Data Analysis & Interpretation
LIABLITIES AUTHORIED share capital 50000000 paid up share capital rs.100 each 31897 rs.1000 each 2629 share reserve Reserves charity reserves education fund animal husbondory fund research and devolopment fund share divident adjoustment account staff gratuity fund dead stock dep fund plant and building dep fund crat dep fund can dep fund manufacturing & processing unit dep fund lab equipment dep fund provision for bed debts staff benefit fund DEPOSITS tender deposite millk trasportation deposite jeep trasportation deposite cooperativee sociaty deposite earnestm deposite Provisions
BALANCE SHEET AMT ASSETS 0 FIXED ASSET 0 LAND 3189700 PLANT AND MACHINERY 2629000 dairy plant building 35672.28 dead stock 2698322.54 manuf and processing unit 4733 laboratory expanse 65769 liabrary purchase 4733 investment 2366 bhav dist cooperative share 1419 g.c.m.m.f share 951 deposites 0 806583 262487 3020870 729959 11645563 730270 461300 89624 1757232 3000000 1000000 0 344000 114500 10000 18076274.5 2 300000 0 67587301.9 2 1890 0 0 3195028 telephone deposite g.e.b deposite sihor g.e.b deposite THADACH l.p.g cielinder deposite fixed deposite s.b.i G.E.B DEPOSITE GADHADA CURRENT ASSETS UTTAM DAIRY DEPOSITE UTTAM DAIRY DEPOSITE GOVT P F g.c.m.m.f T.D S VAT INPUT govt staff gratuity WELL BUILDING advance g.c.m.m.f deposite gayatry enterprise CLOSING STOCK MILk stock stationery stock testing equipment stock can stock can stock crat stock s.m.p stock
AMT 4781635 69254756 27747532 1367974 870917 285357 848 0 105000 1000 0 2500 1865871 2500 362395 41000 554510 0 2039278 23116 3195010 39891 222864 806583 95000 29086920 6604106 0 2961492 189354 302159 1637924 1838793 1482639 1513668 42112768
104308980
106000
2828776
CURRENT LIABLITIES employees P F
uttam dairy ahmedabad subsidy of dairy plant Shreenath enterprise mesers ravubhai tapubhai khachar
36556 4662000 4746014 2951000
packing roll stock medicine stock bank balance bhav dist cooperative bank
20000000 s.b.s shihor outstanding salary security and labour exp outstandind lightbill outstanding milk trasportation exp outstanding deposite interest outstanding LOAN AND LONG TERM LIABLITIES S.b.s C.C SIHOR S.B.S TERM LOAN 1 S.B.S TERM LOAN 2 NET PROFIT 492325 bhav dist cooperaative bank h.o 306745 cash on hand 513035 773119 596335 0 8441325 1378534 15609259 2348964 184620759
252720 99364 0 11952448. 8 13002209. 5 4351 27113
10278113
184620759 24959009.26
current liablities Deposites longterm liablities reserves share capital TOTAL CL CURRENT RATIO LIQUID RATIO QUICK RATIO CA to FA ratio SALES CA-CL 75% OF CA-CL WORKING CAPITAL TURNOVER RATIO inventory turnover ratio 38272157 fixed asset 18844774.5 2 Investment 25429118 Deposites 26282181.5 ADVANCES 4 AND OTHER CLOSING 5818700 STOCK 57116931.5 2 bank balance CA 2009-10 2008-09 1.40376354 5 1.22381492 5 0.43698092 0.76866504 895243311 23061734.7 4 17296301.0 6
LIQUID 104308980 ASSETS LIQUID 106000 LIABLITIES 2828776 42112768 10278113 24959009.3 80178666.3 2007-08
69900553
38.8194262 5
Estimation of cash flow: For the purpose of applying the capital budgeting method the cash flow is estimated by following: • Time horizon of 20 years; • • • • • • • • • Revenues: estimated on the basis of the revenues of the past years data. Cost of investment: 2 corer Working capital need of firm:20 lacks Investment in fixed assets:180 lacks Cost other than depreciation and interest: estimated on the basis of the common sized statement of the last 4 years. Depreciation is calculated on the basis of different rates applied to the differerent assets Tax calculation; as the firm is the co-operative society it need not to pay any taxes. Operating cash flow is obtained through the addition of profit after tax and depreciation. Terminal cash flow is obtained through the addition of recovery of net working capital and salvage value of fixed assets. Reasons for estimating every component: INVESTMENT IN FIXED ASSETS:
NO 1 2 3 4 5 6 7 8 DETAILS LAND PLANT & MACHINERY BUILDING LABORATORY EQUIPMENTS CRATES AND CANS MICROPROCESSING UNIT FURNITURE & FIXURE INSULATED VAN TOTAL INVESTMENT AMOUNT 2000000 10000000 3000000 500000 500000 1000000 200000 800000 18000000
TIME HORIZON OF 20 YEARS:
Time horizon is determined minimum of the following; Physical life of the plant. Technological life of the plant. Product market life of the plant. Investment planning horizon of the firm. As per the production department head, the physical life of the plant is estimated to be 20 to25 years. The machinery needs to be replaced after this period. But the investment planning horizon of the firm is 20 years i.e. the time period for which the firm wishes to forecast for the period of 20 years. Firm has no idea as regarding the technological life of the plant. The basic product of the firm is milk. Therefore, there is no possibility of products being obsolete. REVENUES: Revenues of the new division are estimated on the basis of the revenues of the existing plant. The firm has already a plant in the THADACH (a village of Bhavnagar dist) with the capacity of 80,000 liters. And in shihor with the capacity of 200,000 liters. The sales data of the both plant is as follows: Year 2006-07 2007-08 2008-09 2009-10 sales 150849860 216876774 371599816 895243311 (670659583) growth in sales (%) 43.76% 71.34 % 80.47%
Sales of the last year also include sales of the plant in thadach plant. Therefore taking into account only shihor plant the increase in the sales is only 80%. Sales of the plant with the capacity of 80,000 liters is 22,45,83,728. So the sales of the new plant is expected to be Capacity total sales 280000 liter 895243311
60000 liter
?
So the expected sales would be approx 19,18,37852. New plant that was established last year has the sales of Rs.22,45,83,728. So, according to the account manager sales would rise by minimum of 10% on the basis of the above data it is expected to raise the sales in near future. COST OTHER THAN DEPRECIATION AND INTEREST: To find out the cost other than depreciation and interest, I had prepared the common sized statement of last four years as follows; COMMON SIZED STATEMENT
200607 150849 860 143347 562 750229 8 20072008-09 08 216876 3715998 774 16 201097 3434799 798 71 157789 2811984 76 5 125648 979422 2 2056894 774077 162877 0 80 740950 747678 20092006200720082009-10 10 07 % 08 09 895243 311 100% 100% 100% 100% 853391 95.02 92.724 92.432 95.3250 424 6646 451 7613 8241 418518 4.973 7.2755 7.5672 4.67491 87 3543 4902 3868 7588 267667 0.649 0.5793 0.5535 0.29898 0 2694 5296 2396 7992 5.131 44 0.491 1838 7.5101 5413 0.3447 4784 7.5308 0298 0.5899 5966 4.71152 2832 0.26238 2748
PARTICULARS SALES COST OF GOODS SOLD GROSS PROFIT OTHER INCOMES TOTAL OPERATING EXPANSES NET PROFIT
2798445 421795 0 93 234896 2192289 4
From the trading and balance sheet data of 4 years, it was seen that approx 98.26% of sales (an average figure) is cost other than depreciation and interest. As the sales increases the cost also increases but the trend changes slightly and profit of the firm increases slightly. CALCULATION OF DEPRECIATION: Rates of depreciation for different assets are as follows:
NO DETAILS 1 LAND 2 PLANT & MACHINERY 3 BUILDING RATES OF DEP 10% 5%
LABORATORY 4 EQUIPMENTS 5 CRATES AND CANS MICROPROCESSING 6 UNIT 7 FURNITURE & FIXURE 8 INSULATED VAN
15% 25% 60% 10% 10%
Depreciation on different assets is calculated with the following rates with the reducing balance method. DISCOUNTING FACTOR: Discount rate is estimated on the basis of cost of capital. The firm has 3 options to finance the project. 1) Entire share capital of 2 crore. 2) Entire debt capital of 2 core. 3) Mixed of debt capital and share capital in the following form: Equity capital 75 lacks. Debt capital 125 lacks. 1) For the first option company can finance entire project through equity capital by issuing the share 7500 of Rs.1000 each (75 lacks). Firm has the authorized capital of 50000000 and it has issued capital of 58, 18,700 only. Firm is paying the dividend of 15% every year. So it will be the cost of capital for the firm. So I had taken discount rate of 15% for the calculation of npv. 2) For the second option firm can finance the entire project through debt capital at the rate of 10%.than the cost of capital would be 10% and same will be the discount rate.
3) For the third option they can use the mixed of equity plus debt Cost of equity 15% Cost of debt 10%
CAPITAL AQUIRED COST OF CAPITAL CAPITAL RATE WIGH
SHARE CAPITAL DEBT CAPITAL
15% 10%
7500000 1250000 0 2000000 0
COST 112500 0.15 0 125000 0.1 0 237500 0 WACOC 11.875
Than finding the WACOC, we get the cost of capital as 11.875 which can be used as the discount rate.
NEW INVESTMENT IN PLANT AND MACHINERY:
As guided by my project guide dairy needs to replace its micro processing unit and also needs to reinvest in the van for milk transportation. So there will be new investment in micro processing unit costing 10 lacks and in van 8 lacks. So the total new investment in the new plant will be 18 lacks at the end of 10th year. So the estimated cash flow for the first 5 year would be as follows:
YEAR 1 19183 7852 18850 1095 20500 00 12867 57 0 2 19183 7852 18850 1095 15300 00 18067 57 3 19183 7852 18850 1095 12468 75 20898 82 4 19183 7852 18850 1095 10677 00 22690 57 5 19183 7852 18850 1095 93794 7 23988 10
REVENUES COST OTHER THAN DEP. AND INT. DEPRICIATION PROFIT BEFORE TAX TAX NEW INVESTMENT
12867 PROFIT AFTER TAX 57 NET SALVAGE VALUE OF FIXED ASSETS RECOVERY OF NET WORKING CAPITAL INITIAL OUTLAY OPERATING CASH 33367 FLOW {6+9} 57 TERMINAL CASH FLOW 33367 NET CASH FLOW 57
18067 57
20898 82
22690 57
23988 10
33367 57 3,336, 757
33367 57 33367 57
33367 57 33367 57
33367 57 3,336, 757
CASH FLOW FOR YEAR 6 TO 10:
YEAR 6 30895 6779 30358 2899 83469 1 45391 89.5 7 33985 2457 33394 1188 74784 6 51634 22.6 8 37383 7703 9 41122 1473 10 45234 3620 44447 5722 54761 4 73202 84.5 18000 00 73202 84.5
REVENUES COST OTHER THAN DEP. AND INT. DEPRICIATION PROFIT BEFORE TAX TAX
36733 40406 5307 8838 67258 9 606371 58298 65462 06.4 64
NEW INVESTMENT PROFIT AFTER 45391 TAX 89.5 NET SALVAGE VALUE OF FIXED ASSETS RECOVERY OF NET WORKING CAPITAL INITIAL OUTLAY OPERATING CASH 53738 FLOW {6+9} 80.5 TERMINAL CASH FLOW
51634 22.6
58298 06.4
65462 64
59112 68.6
65023 95.4
71526 35
60678 98.5
YEAR REVENUES COST OTHER THAN DEP. AND INT. DEPRICIATION PROFIT BEFORE TAX TAX NEW INVESTMENT
11 497577 982 488923 294 114726 7 750742 1.3
12 547335 780 537815 623 735234 878492 3.1
13 602069 358 591597 186 544559 992761 3.9
14 662276 294 650756 904 445029 110743 61
15 728503 924 715832 595 384277 122870 52
750742 PROFIT AFTER TAX 1.3 NET SALVAGE VALUE OF FIXED ASSETS RECOVERY OF NET WORKING CAPITAL INITIAL OUTLAY OPERATING CASH 865468 FLOW {6+9} 8.3 TERMINAL CASH FLOW 8,654,6 NET CASH FLOW 88
878492 3.1
992761 3.9
110743 61
122870 52
952015 7.1 9,520,1 57
104721 73 10,472, 173
115193 90 11,519, 390
126713 29 12,671, 329
YEAR
16 692078 728 680040 965 341107 116966 56
17 657474 791 646038 917 306821 111290 54
18 624601 052 613736 971 277745 105863 36
19 593370 999 583050 122 252237 100686 40
20 563702 449 553897 616 229489 957534 4
REVENUES COST OTHER THAN DEP. AND INT. DEPRICIATION PROFIT BEFORE TAX TAX NEW INVESTMENT
116966 PROFIT AFTER TAX 56 NET SALVAGE VALUE OF FIXED ASSETS RECOVERY OF NET WORKING CAPITAL INITIAL OUTLAY OPERATING CASH 120377 FLOW {6+9} 63 TERMINAL CASH FLOW 12,037, NET CASH FLOW 763
111290 54
105863 36
100686 40
957534 4
114358 75 11,435, 875
108640 81 10,864, 081
103208 77 10,320, 877
980483 3 500000 0 14,804, 833
YEAR
16
17
18
19
20
REVENUES COST OTHER THAN DEP. AND INT. DEPRICIATION PROFIT BEFORE TAX TAX NEW INVESTMENT
692078 728 680040 965 341107 116966 56
657474 791 646038 917 306821 111290 54
624601 052 613736 971 277745 105863 36
593370 999 583050 122 252237 100686 40
563702 449 553897 616 229489 957534 4
116966 PROFIT AFTER TAX 56 NET SALVAGE VALUE OF FIXED ASSETS RECOVERY OF NET WORKING CAPITAL INITIAL OUTLAY OPERATING CASH 120377 FLOW {6+9} 63 TERMINAL CASH FLOW NET CASH FLOW 12,037, 763
111290 54
105863 36
100686 40
957534 4
114358 75 11,435, 875
108640 81 10,864, 081
103208 77 10,320, 877
980483 3 500000 0 14,804, 833
AFTER DETERMINING THE CASH FLOW THE FOLLOWING CAPITAL BUDGETING METHODS CAN BE APPLIED:
1) NET PRESENT VALUE METHOD: A) IF THE PROJECT IS FINANCED THROUGH SHARE CAPITAL: Discounting factor 15 %( cost of capital)
YEAR CASH FLOW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 DISCOUNT ED BY 3336757 3,670,433 4037475.9 7 4441224 4,885,346 5,373,881 5,911,269 6,502,395 7,152,635 6,067,898 8,654,688 14,722,587 10,472,173 11,519,390 12,671,329 12,037,763 11,435,875 10,864,081 10,320,877 14,804,833 DISCOUNTED BY (1.15)1 (1.15)2 (1.15)3 (1.15)4 (1.15)5 (1.15)6 (1.15)7 (1.15)8 (1.15)9 (1.15)10 (1.15)11 (1.15)12 (1.15)13 (1.15)14 (1.15)15 (1.15)16 (1.15)17 (1.15)18 (1.15)19 (1.15)20 DISCOUNTE D BY 1 .10 (1.10)2 (1.10)3 (1.10)4 (1.10)5 (1.10)6 (1.10)7 (1.10)8 (1.10)9 (1.10)10 (1.10)11 (1.10)12 (1.10)13 (1.10)14 (1.10)15 (1.10)16 (1.10)17 (1.10)18 (1.10)19 (1.10)20
1.11875 (1.11875)2 (1.11875)3 (1.11875)4 (1.11875)5 (1.11875)6 (1.11875)7 (1.11875)8 (1.11875)9 (1.11875)1 0 (1.11875)1 1 (1.11875)1 2 (1.11875)1 3 (1.11875)1 4 (1.11875)1 5 (1.11875)1 6 (1.11875)1 7 (1.11875)1 8 (1.11875)1 9 (1.11875)2 0
1) INTERNEL RATE OF RETURN METHOD:
CASH FLOW 1 2 3 3336757 3,670,433 4037475.9 7 DISCOUNTE D BY 1 .23 (1.23)2 (1.10)3 DISCOUNT ED BY 1.25 (1.25)2 (1.11875)3
YEAR
DISCOUNTED BY (1.20)1 (1.15)2 (1.15)3
5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
4,885,346 5,373,881 5,911,269 6,502,395 7,152,635 6,067,898 8,654,688 14,722,587 10,472,173 11,519,390 12,671,329 12,037,763 11,435,875 10,864,081 10,320,877 14,804,833
(1.15)5 (1.15)6 (1.15)7 (1.15)8 (1.15)9 (1.15)10 (1.15)11 (1.15)12 (1.15)13 (1.15)14 (1.15)15 (1.15)16 (1.15)17 (1.15)18 (1.15)19 (1.15)20
(1.10)5 (1.10)6 (1.10)7 (1.10)8 (1.10)9 (1.10)10 (1.10)11 (1.10)12 (1.10)13 (1.10)14 (1.10)15 (1.10)16 (1.10)17 (1.10)18 (1.10)19 (1.10)20
(1.11875)5 (1.11875)6 (1.11875)7 (1.11875)8 (1.11875)9 (1.11875)1 0 (1.11875)1 1 (1.11875)1 2 (1.11875)1 3 (1.11875)1 4 (1.11875)1 5 (1.11875)1 6 (1.11875)1 7 (1.11875)1 8 (1.11875)1 9 (1.11875)2 0
2) ACCOUNTING RATE OF RETURN METHOD:
BOOK VALUE OF INVESTMENT 17950000 16420000 15173125 14105425 13167478 12332787 11584941 10912352 10305981 9758367 8611100 7875866 7331307 6886278 6502001 6160894 5854073 5576328 5324091 5094602 196926996 9846350
YEAR 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 TOTA L AVER AGE
PROFIT AFTER TAX 1286757 2140433 2790601 3373524 3947399 4539190 5163423 5829806 6546264 7320284 7507421 8784923 9927614 11074361 12287052 11696656 11129054 10586336 10068640 9575344 145575081 7278754
3) PROFITABILITY INDEX METHOD:
INITIAL INVESTMENT 20000000 PROFITABILITY INDEX
NPV @ 15% 16887759 0.84
NPV @ 10% 35531739 1.78
NPV @ 11.875% 27198032 1.36
4) PAY BACK PERIOD METHOD:
YEA CASH DISCUNTING @ DISCOUNTED R FLOW 15% CASH 1 3336757 0.8696 2901644 2 3,670,433 0.7561 2775214 4037475.9 3 7 0.6575 2654640 4 4441224 0.5718 2539492 5 4,885,346 0.4972 2428994 6 5,373,881 0.4323 2323129 7 5,911,269 0.3759 2222046 8 6,502,395 0.3269 2125633 9 7,152,635 0.2843 2033494 10 6,067,898 0.2472 1499985 11 8,654,688 0.2149 1859893 12 14,722,587 0.1869 2751651 13 10,472,173 0.1625 1701728 14 11,519,390 0.1413 1627690 15 12,671,329 0.1229 1557306 16 12,037,763 0.1069 1286837 17 11,435,875 0.0929 1062393 18 10,864,081 0.0808 877818 19 10,320,877 0.0703 725558 20 14,804,833 0.0611 904575
5) MODIFIED INTERNEL RATE OF RETURN METHOD:
200000 00 180000 0 204449 27 611005 699 29.885 4429 1.1851 4908 18.51%
INITIAL INVESTMENT NEW INVESTMENT AT 10TH YEAR PV OF INVESTMENT @ 15% TERMINAL VALUE OF CASH FLOWS PV / TERMINAL VALUE (PV / TERMINAL VALUE)^(1/20) MIRR
INITIAL INVESTMENT NEW INVESTMENT PV OF INVESTMENT @ 10% TERMINAL VALUE OF CASH FLOWS PV / TERMINAL VALUE (PV / TERMINAL VALUE)^(1/20) MIRR
2000000 0 1800000 20,693,9 78 3735897 70 18.05306 69 1.155653 26 15.56%
INITIAL INVESTMENT NEW INVESTMENT PV OF INVESTMENT @ TERMINAL VALUE OF CASH FLOWS
20000000 1800000 20586060 4.45E+08
PV / TERMINAL VALUE (PV / TERMINAL VALUE)^(1/20) MIRR
21.62778 1.16614 16.61%
DATA INTERPRETATION: From the common sized statement we can see that: 1) Cost of goods sold has in the year 2010; the cost of goods sold has risen from the previous year. The basic reason for that is: Rise in the purchase price of raw material. The price of raw material that is raw milk is 270 liter fat but in the year 2010, it has came to 360 liter fat. This change in price has caused the cost of production to rise. The reason is that consumption of raw material has increased due increase in selling of the dairy. The consumption of milk was 341732327 which increased in the next year and become 823287759. So this rise in the consumption of raw material has increased the cost of production. Other expenses such as transportation expanse and headloard expanse have risen slightly but have not affect the cost of production to that extent. 2) Gross profit has risen in amount but as per the common sized statement it has decreased as compared to the previous year. Sales of the firm have increased but cost of production has increased due to increase in the material cost and material consumption. 3) In the year 2008-09, the cost of production is 92.43% of sales but in 2009-10 the cost of production is 95.32% of sales. Cost of production rose due to increased prices of raw material. Raw material consumption has also increased due to increase in the sales of the product.
Gross profit has decreased due to increase in the cost of production of the firm. Hike in the price of raw material and increase in the consumption of raw material has increased the cost of production and which results in the low gross profit margin as compared to sales. Net profit margin of the firm has increased as compared to the previous year. It was 2192289 in the year 2008-09 and 2348964 in the year 2009-10.Net profit margin of the firm has raised in the amount but it has decreased in proportion to sales as compared to the previous year. The reason for that is increase in the cost of production of the firm and thereby decreases in the cost of production of the firm. From the common sized balance sheet it was found that
Assumption of the capital budgeting methods: 1) Fixed assets required for the investment purpose would be 180 lacks. It was estimated on the basis of the investment in the existing plant. The plant capacity would be 60,000 liters.
2) From the net present value method it is found that the net present value is positive under the 3 options available to the firm
At the discount rate of 15% net present value is Rs.1,68,87,759. At the discount rate of 10% net present value is Rs.3,55,31,739. At the discount rate of 11.875% net present value is Rs.2,71,98,032. For the calculation of net present value cost of capital is taken as the discount rate. If the firm finance the entire project through equity capital than it would have the positive net present value of Rs.1,68,87,759. If the firm finance the entire project through debt capital that is borrowing from banks than it would have the positive net present value of Rs.3,55,31,739. If the firm finance the entire project through mixed of debt capital plus equity capital than it would have the positive net present value of Rs.2,71,98,032. From the above method it was found that investment decision is profitable for the firm any all the three options available. 3) From the internal rate of return method it was found that irr for the new investment decision is 25%. So the irr method suggest that investing in the new plant will give that investment in the new plant will give the return of 25%. 4) From the profitability index method it was found that: At the discount rate of 15% profitability index is At the discount rate of 10% profitability index is At the discount rate of 11.875% profitability index is Profitability index method shows that investment decision is not profitable for the firm to execute as value of pi is less than 1.
5) Accounting rate of return method shows that firm will get 74% account rate of return on the new investment decision. So from the point of view of ARR investment decision is profitable for the firm. 6) Payback period method shows that payback period for the investment decision is 8 year. The investment in the new project could be recovered in the period of 8 year if the discount rate is 15% If the discount rate is 10% than the payback period will be If the discount rate is 11.325% than the payback period will be 7) Modified internal rate of return shows that: At the discount rate of 15% the MIRR is 18.51% At the discount rate of 10% the MIRR is 15.56% At the discount rate of 11.875% the MIRR is 16.61% MIRR method is considered to be more trust worthy than the IRR method. According to this method, the investment decision is profitable for the firm in any of the three alternatives. From the above analysis it was found that: Investment decision is profitable for the firm from the point of view of IRR, NPV, MIRR, PBP, ARR methods. It is not considered profitable from the point of view of profitability index method.
Conclusion: From the above study it was found that, From the common sized statement it was found that cost of production for the firm has grown as compared to the previous year because of the rise in the prices of raw material and increase in the consumption of raw material which leads to increase in the cost of production. The firm needs to raise the price of raw material to maintain the supply of milk to operate efficiently to meet the demand of market. The supply of milk decreases in the slack season, to maintain the supply the firm increases the purchase price of raw material. So that the supply of raw material can be maintained to meet the demand of market. Firm has three option to finance the project of new investment, by equity capital by debt capital and by the combination of equity plus debt mix. The most profitable decision would be finance the project through debt capital but it would not possible for the firm to get the project financed through the entirely of the debt capital. Therefore the firm will use the equity plus debt mix for the investment decision. This would be feasible for the firm.
Alternatives available: Firm is suffering from the problem of high cost of production due to rise in the prices of raw material.
BIBLIOGRAPHY:
TRADING ACCOUNT
TRADING ACCOUNT Opening stock of milk S.m.p stock Packing roll stock Purchase Milk S.m.p Milk transportation exp Hadloard Packing exp Gross profit Total 598303 Sales 208130 Sales of packed milk 128180 Selling through tanker Butter milk selling 819022 276 Butter selling 805875 0 Ghee selling 147752 17 537662 7 995182 1 418518 87 899971 191 Closing stock Packing roll stock S.m.p stock(skimmed milk powder) Milk stock TOTAL 252720 1513668 2961492 899971191
371668509 506337460 16992021 238535 6786
Diesel expanse Washing expanses Laboratory expanses P.c. I expanse Maintenance expanse Light bill Electricity expanse Salary Staff bonus Provident fund expanse Staff welfare expanse Security and labor expanse Stationery expanse Postage expanse Advertisement expanse Bank commission Telephone bill Jeep transportation Rent and wages Vehicle allowance Miscellaneous expanse Wages Interest expanse Adjustment expanse Agreement fee expanse Consultation fees Medicine expanses Audit fees Fire safety expanse Mensal expanse Water expanse Training expanse Tree plantation Income tax Subscription of magazine
PROFIT AND LOSS AC 50841 Profit of milk 41 trading 74953 Profit of tanker 0 selling 31019 Stationery 8 expanses Contract 79514 recovery 89173 9 Visit fee 68413 50 Can rent income 68314 5 Interest income 52295 Miscellaneous 73 income 42327 1 TOTAL 64300 7 11951 7 27735 12 20568 0 10690 18993 8 11186 35 25607 5 89124 1 92484 11321 2 14128 5 24148 6 21908 17 45911 6 12690 0 75824 1 30398 7 10201 8 19110 3238 54809 5 33220 8240 16000 2225
41851 887 13088 5 26877 3 59313 15170 0 74100 0 12035 08 12149 1 44528 557
LIABLITIES AUTHORIED share capital 50000000 Paid up share capital Rs.100 each 31897 Rs.1000 each 2629 Share reserve Reserves Charity reserves Education fund Animal husbondory fund Research and devolopment fund Share divident adjoustment account Staff gratuity fund Dead stock dep fund Plant and building dep fund Crat dep fund Can dep fund Manufacturing & processing unit dep fund Lab equipment dep fund Provision for bed debts Staff benefit fund Deposits Tender deposite Millk trasportation deposite Jeep trasportation deposite Cooperativee sociaty deposite Earnestm deposite
AMT
BALANCE SHEET ASSETS Fixed asset Land
AMT
3189700 Plant and machinery 2629000 35672.28 2698322.5 4 4733 65769 Dairy plant building Dead stock Manuf and processing unit Laboratory expanse Library purchase
4781635 6925471 7 2774753 2 1367974 870917 285357 848
4733 Investment Bhav dist cooperative 2366 share 1419 G.c.m.m.f share 951 Deposits Telephone deposited 806583 G.e.b deposited sihor G.e.b deposited 262487 thadach L.p.g cylinder 3020870 deposited 729959 Fixed deposit s.b.i 11645563 G.e.b deposit gadhada 730270 Current assets 461300 Uttam dairy deposit 89624 Uttam dairy deposit 1757232 3000000 1000000 0 344000 Govt p f G.c.m.m.f t.d s Vat input Govt staff gratuity Well building advance
105000 1000
2500 1865871 2500 362395 41000 554510 0 2039278 23116 3195010 39891 222864 806583 95000 2908692 0 6604106 0 2961492
114500 G.c.m.m.f deposit 10000 Gayatry enterprise 18076274. 52 Closing stock 300000 Milk stock
Provisions Towads the payment of milk society
Current liabilities Employees P F Uttam dairy ahmedabad Subsidy of dairy plant Shreenath enterprise Mesers ravubhai tapubhai khachar
0 67587301. 92 1890 0 0 3195028
Stationery stock Testing equipment stock Can stock Can stock Crat stock S.m.p stock
189354 302159 1637924 1838793 1482639 1513668 252720 99364 0 1195244 8.76 1300220 9.5 4351 27113 1846207 59.3
36556 Packing roll stock 4662000 Medicine stock 4746014 Bank balance Bhav dist cooperative 2951000 bank 20000000 S.b.s shihor Bhav dist cooperative 492325 bank h.o 306745 Cash on hand 513035 773119 596335 0 8441325 1378534 15609259 2348964 184620759 .3
Outstanding salary Security and labor exp outstanding Light bill outstanding Milk transportation exp outstanding Deposit interest outstanding Loan and long term liabilities S.b.s C.C SIHOR S.b.s term loan 1 S.b.s term loan 2 Net profit
doc_857824088.doc
BY
Satish J Japadiya
Submitted To
Sarvottam Dairy (Bhavnagar District co-operative Milk Producers Union Ltd.)
9TH May 2011
CENTER FOR MANAGEMENT STUDIES DHARAMSINH DESAI UNIVERCITY NADIAD
Preface
“Experience is the best teacher”. Practical training bridges between theoretical knowledge and the practical knowledge. Practical studies also help in developing the ability. In other words practical experience is one of the best types of learning that one can remember throughout the life. The main objective of practical training is to develop practical knowledge. It increases the skills, ability and attitude of a student to perform specific job in any organization. In practical training for M.B.A. it is necessary for every student to visit a business unit for 6 to 8 weak. Such training promotes a student to boost his potentialities and the inner hidden management related qualities, and there by student comes to know about their reality that how the theoretical knowledge works in actual sense in any unit. And this had indeed proved to be very useful to me. Fortunately I got opportunity to visit and complete my summer training in Sarvottam Dairy, at SIHOR. Here, I got chance to see and to be involved in the functions of organization. During this practical training I had undergone on a project of “Analysis of common sized statement and evaluation of investment decision through capital budgeting techniques” I had collected information, views and opinion of group of people who are working in organization. During this whole training I got a lot of experience and came to know about the management practices in real that how it differs from those of theoretical knowledge and the practically in the real life. In practical fulfillment of my subject requirement I have visited Sarvottam Dairy, Sihor. What so information I got from the company I have presented it with best way as possible. This training has helped me in increasing my knowledge in the above subject and organization development. Date: Place: Nadiad Satish j japadiya DHARAMSINH DESAI UNIVERCITY Nadiad
Acknowledgment
Man being a social animal can’t live alone. Similarly an individual cannot progress all by himself. The project on Analysis of common sized statement and evaluation of investment decision through capital budgeting techniques “Sarvottam Dairy “undertaken by me as a part of summer training is a result of guidance & help of not less than a score of people. Above all first I thank to My Family for his grace and blessings at each and every stage of the project. I am extremely thankful to “Sarvottam Dairy”, Bhavnagar for giving me an opportunity to carry out this project in their organization & providing me firsthand experience of the working of the organization. I am really thankful to Mr. Hasmukhbhai Pandya (Production Manager) for making all kinds of arrangements to carry out the project successfully and for guiding and helping me to solve all kinds of quarries regarding the project work. Their systematic way of working and in comparable guidance has inspired the pace of the project to a great extent. I am also thankful to pro. Falguni pandya, (Project Guide) & all my faculty members for their guidance & help provided to me. Without their support this project won’t have been possible. I would like to thank all the employees of “Sarvottam Dairy” have directly or indirectly helped me with their moral support for the completion of my project. Last but not least, I would like to record my deepest sense of gratitude to my friends for their support and constant encouragement. I am thankful all the people who helped me directly or indirectly with the project.
Date: Place: Nadiad
Satish j japadiya DHARAMSINH DESAI UNIVERCITY Nadiad
Executive summary
1) Title: Analysis of common sized statement and evaluation of investment decision through capital budgeting techniques. 2) Organization: Sarvottam Dairy (Bhavnagar District co-operative Milk Producers Union Ltd.) 3) Company Guide: Mr.Hasmukh Pandya (Production Manager) 4) Faculty Guide: Pro. Falguni Pandya 5 Student Name: Satish J Japadiya
General Information
Overview of the Indian Milk Industry
India is the world's highest milk producer and all set to become the world's largest food factory. The country is the largest milk producer all over the world, around 100 million MT.
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Value of output amounted to Rs. 1179 billion (in 2004-05) (Approximately equals combined 1/5thof the world bovine population Milch animals (45% indigenous cattle, 55 % buffaloes, and 10% cross bred cows) Immensely low productivity, around 1000 kg/year (world average 2038 kg/year) Large no. of unproductive animals, low genetic potency, poor nutrition and lack of services are There are different regions – developed, average, below average (eastern states of Orissa, Bihar
output of paddy and wheat!!)
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the main factors for the low productivity
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and NE region) in the dairy industry. Production and Productivity ? Largest milk producer in the world, 100 million MT ? Value of output Rs. 1179 billion (2004 -05) (Almost equals combined output of paddy and wheat!!) ? 1/5thof the world bovine population ? Milch animals (45% indigenous cattle, 55 % buffaloes, and 10% cross bred cows) ? Very low productivity, around 1000 kg/year(world average 2038 kg/year) ? Large no. of unproductive animals, low genetic potential, poor nutrition and lack of services key factors for low productivity ? Different regions –Developed, Average, Below average (eastern states of Orissa, Bihar and NE region)
Tremendous Growth through Operation Flood ? Stagnant milk production during 1950s and 60s ? Major changes in the dairy policy (Operation Flood) ? Linking-up rural producers with the urban consumers ? Large public investment in milk processing sector through cooperatives ? Growth rate of agriculture is stagnant, below 2%, livestock sector growth rate is more than 4.5%
? Marketing ? 15 % of marketable surplus goes through organized sector, rest traditional unorganized sector ? Organized sector until recently was only the co-operatives ? Replication of the AMUL model in the rest of the country, NDDB lead agency ? 3 Tier structure : Village society, district unions federated at state level (headed by IAS officer) ? Model adopted with some variations in different states ? Co-operatives have achieved limited success in many states
Regulatory Environment ? Dairy sector was de-licensed in 1991 ? Milk and Milk Products Order 1992: some controls ? Collection areas/milk sheds specified ? Processing capacity fixed ? Revised MMPO in 2002: controls stand withdrawn ? Private sector investment in dairying has increased considerably ? Previously, co-operatives did not have any competition from the private sector ? To strengthen co-operatives (MACS Act,1995): reduce government interference in mgt. ? farmer freedom to govern the organization Livestock Services ? Agriculture is a state policy in India ? Center cannot enforce policies, driven by the ideologies and interests of the state government. ? Department of Livestock is with the Ministry of Agriculture ? Department of livestock has a network of veterinarians providing livestock veterinary services ? Partial Cost recovery now initiated in several states ? Feed distribution at subsidized rate through co-operatives
Future Potential Dairy demand is income elastic Increase in Income and increase in population-high growth rate for dairy High potential for enhancing farmer incomes from dairy enterprise
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In this situation it is important to assess the critical weaknesses in the dairy value chain. Identify approaches to enable farmers to capitalize on these opportunities
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Summer training objectives
As a part of curriculum students of 2ND semester will have to undergo an summer training, which aims at providing to students additional training that is useful for the job market. All management student must complete the summer training programmed as a masters requirement. The final-year project is a required one-term course that gives students the opportunity to carry out a project under the supervision of a faculty advisor. Projects are tailored by the students by being involved in its design and implementation. Most students use the project as an opportunity to learn, for example leadership, teamwork, planning, decision-making, controlling. Some projects may be assigned in group of two or three students, which encourages the students to integrate their knowledge, skills across their course boundaries. As I find 2ND semester project is the best opportunity for students to demonstrate their master’s achievements.
Introduction
Sarvottam Dairy was established in 21st November, 2004 by The Bhavnagar District co-operative Milk Producer’s Union Ltd. under the Regd. No Sec. Tu 28701 and Regd Date 27-06-2001 at present Mr. Mahendrabhai Panot is the chairman of Sarvottam Dairy. The dairy was started with few employees. At present, the dairy has 35 employees. It is producing milk and buttermilk products.
The Head Office and Plant of Sarvottam Dairy is Located at Bhavnagar Highway Road, Sihor. It is a unique dairy in Sihor a very lovely greenish atmosphere in 20 acres. Sarvottam Dairy was concern with Uttam Dairy Ahmadabad. It has an E.T.P facility. It has ISO 9001:2000 Marko.
The main objective of Sarvottam Dairy is to decrease privatization and increase co-operation. They want to give most benefits to the rural area and want to develop rural area. They want to take revolution as Amul Dairy has given.
Profile of Firm
NAME OF COMPANY
ADRESS OF COMPANY SARVOTTAM DAIRY
SARVOTTAM DAIRY, Bhavnagar-Rajkot High Way Road, Shior, Bhavnagar
PH NO
(02846) 329633,225502
FAX NO BANKERS
91-02846-225501 BHAVNAGAR JILLA SAHKARI BANK LTD. STATE BANK OF SAURASHTRA. I.D.B.I. BHAVNAGAR. BANK OF BARODA.
AUDITOR
Mr. JAGDISHBHAI MEHTA (C.A.)
R.G.NO FORM OF ORGANIZATION BRAND NAME OF PRODUCT
REDG/U28701 CO-OPERATIVE FIRM AMUL GOLD A MUL BUTTER MILK A MUL TEA SPECIAL AMUL TAZZA AMUL SLIM N TRIM SK IM MILK
MAIN PRODUCT
MILK
TOTAL WORKERS & STAFF
73 WORKERS
COMPETITORS
B.D.P.L.,
MOTHER DAIRY, N.D.D.B.
MILK COLLECTION CENTER
SIHOR PALIYAD GADHADA (SWAMI).
AVERAGE MARKETING
FUTURE PLAN
20000 LITER PER DAY
GHEE,SWEETS,CHEESE,CHOCOLATE, ICE-CREAM, ETC.
SLOGAN & PUNCHLINE
SARVOTTAM DOODH PITA HE BHAVNAGAR
Promotes of existing managing group
NAME 1. Mr. MAHENDRABHAI PANOT 2. Mr. H. R. JOSHI 3. Mr. MAVJIBHAI BHALIA 4. Mr. BHIKHABHAI KHODIFAD 5. Mr. GIRIJASANKARBAHI DHANDHALIA 6. Mr. CHUNILAL BARAIYA 7. Mr. DAYARAMBHAI BARAIYA 8. Mr. LAKHUBHAI KAMALIA 9. Mr. MATHURBHAI ZINZALA 10. Mr. JASHABHAI KHER 11. Mrs. SHARDABEN RAJYAGURU 12. Mrs. PRABHABEN VALANKI 13. Mrs. DEVUBEN BHATT 14. DISTRICT REGISTAR 15. REPRESENTATIVE GUJARAT MILK MARKETING FEDRATION DESIGNATION CHAIRMAN DIRECTOR & G.M DIRECTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR
History of Sarvottam Dairy
The Bhavnagar District Co-operative Milk Producer’s Union Ltd. (Sarvottam Dairy) In 1974, Gujarat Dairy Development Corporation (G.D.D.C) had established Bhavnagar dairy, which was running by The Bhavnagar Milk Union. Bhavnagar Dairy was selling milk and ghee in the Bhavnagar district by the brand name “Sauras”. By co-operative members of the district sell their milk to the Union and after the processing on the milk they sold it under the name of Bhavnagar dairy. In the year 1989 the highest milk is purchased from the co-operative members is 42500 liters and they sell all the purchased milk to the different areas of the districts. But somehow the years are passes the dairy’s production is going to the down. And after some crises government close the Bhavnagar Dairy on the date of 24/12/1999. The Union was also enabling to do anything for the crisis of Bhavnagar dairy. When the Union is established in 1974 they take the responsibilities to solve the problems of their co-operative members, but somehow there are no action taken by them or maybe there are not proper response from the government to save the Bhavnagar dairy and to help the small milk producers will. Because of Bhavnagar dairy’s crises the producers of milk of the whole district are comes into financial crises because they hadn’t any option to sell their milk. After sometime the producers of the milk made a meeting in Jilla Panchayat’s ground and the majority of the producers give the responsibilities of reestablishment of Union to Mr. H. R. Nandva and Mr. M. P. Pandya. With the support of the political bodies like Mr. Rajendrashinh Rana and Mr. Mahendrabhai Panot of Bhavnagar district. Mr.H.R.Nandva and Mr.M.P.Pandya send an application to the Gujarat Govt. for the reestablishment of Union in the district. But on the temporary basis government thigh up producers of milk of Bhavnagar district with the Uttam Dairy, Ahmadabad. And government also form a government body under the president ship of Mr. V.C.Joshi to take care the responsibilities of Bhavnagar districts producer and Uttam Dairy, and work as mediator between these two.
As I mentioned above Mr.H.R.Nandva and Mr.M.P.Pandya are the main body of all these work and they are the person’s behalf of the milk producers of Bhavnagar district they started to sell the milk produced by the district to the Uttam Dairy on the date of 3/1/2000 and on the date of 14/4/ 2001 Uttam Dairy established a chilling center in Talaja near Bhavnagar City. This system is temporary. So for a permanent body behalf of milk producers must required to form. For these purpose the meeting of milk producers is held under the chairman ship of Mr. Mahendrabhai Panot. The registrar of Bhavnagar city Mr. K.B.Upadhyay is also support and guides the milk producers
for the further progress. At the end on the date 27/6/2001 under the registration no: REDG. / U 28701 the Union is formed second time. But because of handling of the milk is done by Uttam Dairy, the Union is started to make the members at co-operative level and after sometime they provide animal food and other basic things to their members so that the number of members will increase. At the end with the help of Gujarat Co-operative Milk Marketing Federation (G.C.M.M.F.) the meeting is held between Mr. Mohanbhai Bharwad, the Chairman of Uttam Dairy and Mr. Mahendrabhai Panot, the Chairman of Bhavnagar District Co-operative Milk Producer’s Union Limited, In the meeting it was decided that the chilling center, which was developed by Uttam Dairy and the other dead stock, was purchased by the Union and they start production in Talaja on the rented land. On the date 21/11/2004 the Union is started again and was also started its production and distribution system and by the profit which was made by selling the different items under the name of Sarvottam Dairy was used in the purchasing the land near Sihor and the new plant is established on the date 12/12/05.
Development of the unit
When Sarvottam Dairy was started it had many problems regarding the raw material means the milk which was owns by the milk producers, machinery and labour and not having enough skilled people but they survive under all odds and now they have 1 head distributor in every Taluka and 17 distributors in the Bhavnagar city only. Dairy averagely processed on 60,000 liters of milk per day and from that 60,000 liters of milk 20,000 liters of milk distributed in the district and rest 40,000 liters of milk, which was surplus, is given to the Amul Dairy, Anand. With an experience of 36 year, they are becoming skilled of hard materials Having shows the dairy business with technology and quality they offered they Made an impressive list of clients in various field and have built a good Reputation. Using separator machines and good materials they have establishment Achievement maintained and excelled with production which has been largely accepted by rural people they are providing milk and butter milk product to Distributors and to consumers. Sarvottam Dairy is established on the date 12/12/05, it is a single largest dairy of the district level. Basically the Sarvottam is a brand name of the products which was process by the Bhavnagar District Co-operative Milk Producer’s Union Limited. After the closing of Bhavnagar dairy in the year 1999 the dairy of our own district is needed because other districts have their own dairies and our milk producers had not get the required profit from the other districts dairy. So taking this problem into consideration the political bodies and some business persons of the district started a new venture namely Sarvottam Dairy to solve the problems of milk producers of the district. They are constantly upgrading there technology for their needs of tomorrow. Their main aim is to develop rural areas. They want to decrease privatization and increase co-operative. They want to give the white revolution as Amul Dairy has given they will try to provide maximum benefits and services to the customers
Organizational Structure
Plans are made for implementation of managerial policy and to put these in to practice an administrative structure is created. This is called Organization when large number of people are working for all compiles the objective of the firm, Specific Understanding and clarity are necessary as to what function are to be
performed, who will perform which function, who will issue orders, who will implement them etc. are done by the organization. “Organization Structure refers to determination of entire organization System of an enterprise determine the limits within which the enterprise has to work and progress”. Organizations establish authority responsibility relationship. It is the unit, different parts of which are linked to each other. The human body is the best example of an organization. Assignment of authority is the basic of Organization planning is the brain of a business while organization is its physical Structure. To Clarity the importance of organization a Successful industrialist notes, “Take away our plants; take away our business, oh1! Take away our wealth (Finance) but permit us to retain our organization within no time we shall be on our feet once again. There are mainly four forms of any organization, (1) (2) (3) (4) Line organization Staff or functional organization Line and staff organization Committee organization
Sarvottam dairy has line organization. The entire business is deluded in to department are appointed for every department, Officers are appointed according to the function respective department, Under the officer. These the senior and Join or officer working under him. Workers function under these supervision and officers. The organization, authority flow downward from the top to bottom and responsibility goes upwards from bottom to top. Every person is responsible to his immediate superior
CHAIRMAN (MR.MAHENDRABHAI PANOT) MANAGING DIRECTOR (Mr.H.R.JOSHI)
BOARD OF DIRECTORS GENERAL MANAGER (Mr. H.R.JOSHI) JOINT GENERAL MANAGER (MR.M.P.PANDYA)
HR MANAGER C.D. OFFICER C.D. Supervisor
MARKETING MANAGER MARKETING ASSISTANT
SALESMAN Plant Operator
PRODUCTION MANAGER
Quality Officer Laboratory Ass.
HEAD OF ENGINEER DEPARNEMT
FINACEL MANAGER
Account Offi. Clerk Com. Operator
Electrician Helper
Preepeak Operator
Boiler Operator Refrigerator Operator
Store keeper
Dock supervisor
Workers
Workers
Workers
Workers
Workers
Manufacturing Process Of Milk
Manufacture process plays a very important role for making any product. A product can become finished goods only when it has gone under a several procedure. We have to take up most care of it. Every firm or unit tries that its manufacturing process is simple, short less costly and less time consuming. The sarvottam dairy tries to make its products by latest technology and with good quality of raw material. Sarvottam Dairy is a consumer goods production sector. Milk is essential ingredient in our life. In Every stage of life milk is useful to develop and maintain our body. The whole process of manufacturing milk and other products of milk in the sarvottam dairy are very simple. But, it is time consuming and very costly. The following are different stages of manufacturing the different category of milk.
The whole process of milk can be charted out as under.
The Process Of Milk Is As Under:
Receive milk from co-operative Society of milk
Grading (Testing)
Chilling Milk Tank (Storage)
General sampling Standardization and separation
Pasteurization
Store in process tank
Packaging
Dispatch to Distributor
The Process Is Described As Under:
? Received milk from members of co-operative society: Basically the Union itself says that it is a joint effort of the milk producers. There are 10 routs of milk producers. These routs are covering almost all the villages of milk producers. The dairy only accepts the milk from that producer who is its member in co-operative society. Jesar, Gadhada, Timana, Neswad, Tarsara, Vallbhaipur, Goriyali, Gopnath, Bagdana, and Mahuva these are the routs and every route allotted specific time for carrying down their milk to the dairy. ? Milk Tank: In the milk tank they storage the milk for the process. The milk gets the steady temperature in the tank before the process is starts. We can also say that the different process on milk is starts from this tank. ? Taking general FAT and S.N.F.: The dairy do the FAT and Solid Net Fat (S.N.F.) test for the payment to co-operative members because as the FAT and S.N.F. high the member get higher amount of his milk. The part of FAT in the milk is getting to know by using the “SULPHURIC ACID”. And because of heat the FAT part is come out in the liquid form. After that a “SANTRIFUSE” is come out which is measured by “LITEROMETER”. S.N.F. is measured by using “LACTOMETER”. In the boiled milk they put the lactometer in the milk and after using the formula given below they get to know about S.N.F. figure; LACTOMETER NUMBER S.N.F. = 4 There is a certain standards are there for S.N.F. and FAT. They are, The milk of buffalo must contain 6% S.N.F. and 9% FAT The milk of cow must contain 8.5% S.N.F. and 3.5% FAT + 0.21 FAT + 0.36
? Standardization: There are certain standards are set for the milk. Each standard have their own S.N.F. and FAT. It is then decided that what should be the price of the milk. There are four standards,
Full cream: This standard contains 6% FAT and 9% S.N.F. this is the highest or rather say very good standard. Standard: 4.5% FAT and 8.5% S.N.F containing in this standard. This is a general standard. Toned: This standard contains 3% FAT and 8.5% S.N.F. Double toned: 1.5% FAT and 9% S.N.F. ? Pasteurization: On the name of the founder of this process it is called pasteurization. Louie Pasteur is the founder of this method. He found this process to save the liquor of king from the spoiling out. To save the milk from the bacteria they boiled the milk on certain temperature and quickly down the temperature. In the old process they emptied the milk into big utensils and after that they boiled the milk up to 63 degree Celsius temperature for 30 minutes and after that they cool down the temperature for 30 minutes. This method is very time consuming and improper. In the modern era the H.T.S.T. method is used for pasteurization. H.T.S.T. means high temperature short time method. In this method they boiled the milk up to 72 degree Celsius for 16 seconds and after this they quickly level down the temperature up to 5 degree Celsius. They use “GASKET PLATES” for these methods. Gasket plates are adjusted by a specific way that the milk is passing from one gasket to another gasket. The first gasket had hot water in its both the side and the milk is in the middle plate so because of heat from the both the side the milk is boiled out up to 72 degree Celsius and after 16 seconds milk is pass to another gasket which contain cold water in its both the side here the temperature of milk is level down to 5 degree Celsius.
Test of Pasteurization: Because of pasteurization the milk is become bacteria free. To see that the milk is free from bacteria or not there is one test namely “PHOSPHATE TEST”. In this test they set the temperature on 72 degree Celsius. On 72 degree Celsius all the bacteria is fade away and also phosphate enzyme is fade away from the milk. After that they do a test for phosphate enzyme if the phosphate enzyme is still there in the milk the color of milk is become yellow which shows that the pasteurization is not done properly and if there is no change in the color than it is proved that the milk can use for the general purpose. ? Packaging: For the packaging they use the machine of R.M.C.Packaging System Pvt. Ltd. It costs more than 50,000 Rs. The machine can fill 160 pouch of milk in a minute. There are two machines in the dairy for the packaging and the machines are fully automatic, once you set the program and there is rarely any problem arises. ? Dispatch:
There are total 31 distributors in the district. From the 31 distributors 17 distributors are only in Bhavnagar city and rest of the distributor are in the different Taluka. The distributors’ vehicles come to the dairy in the early morning and they get their carats of milk as per requirement. The distributor must book their order before the evening of previous day, and then they get the milk in next morning.
Size of the firm
The Size of the Organization is determined by invest Capital in it. There are Some Standard of government regarding the Size of the Organization. How much capital is invested in enterprise, according to it, Size will be decided. Basically there are 3 types of business units according to their Size. They are, (1) (2) (3) Small Scale Enterprise. Medium Scale Enterprise. Large Scale Enterprise.
The types of the enterprise according to the Capital invested in them are shown in the table as Under.
Total Capital Invested Up to 75 lakh Between 75 lakh to 1 crore More than 1 crore
Type of the Organization Small Scale enterprise Medium Scale enterprise Large Scale enterprise
The Sarvottam dairy is large scale enterprise, because Capital invested is very much more than criteria, Sarvottam dairy invested Rs. 104308980./-
Form of the organization
Choice of a proper from Organization is Crucial for the Success of business enterprise. Determine risk, responsibility, and control of the enterprise as well as division of profit. It is long term deasion because of form of the organization can not be frequently Changed. The right form of organization can help the enterprise not only through initial success but in later growth too – Therefore, it should be selected at tea due care and thought. Form the view point of ownership, there are four (4) main point in which the choice can be made. (1) (2) (3) (4) Sole proprietorship Partnership Joint Stock Company and Society. Co- operative Society.
From the given choice, it is clean that Bhavnagar district co – operative milk producer’s Union Ltd. (Sarvottam dairy) is Co – operative society, under the Gujrat state Co – operative Act 1961. A Company has an artificial legal person having an nondependent legal entity. It satisfies all the requirement of the company format.
Contribution of the Unit to the Industry
The total collection of dairy is 60,000 liters per day. From which they use 20,000 liters of milk for packaging and distributed it in the district and rest of 40,000 liters of milk they sent to AMUL dairy, ANAND. If we take the production part of the dairy, it contributed almost 40% of milk from the whole district and private producers contribute rest 60% milk. But if we take the selling part the dairy only have 10-12% market of Bhavnagar district. There is two reasons for this scarcity, first is that the dairy is started in the year 2005 so it is not have huge amount for marketing. And the second is that the Amul brand is so much popular in the district that people only by Amul milk or the products of Amul and also there are many competitors in this industry. The Sarvottam Dairy is largest producer of milk at district level apart from this dairy the competitors like B.D.P.L., SUGAM, and RAJWADI are also there to compete in the local level.
Research Methodology
Research Methodology
Definition:
Research comprises defining and redefining problems, formulating hypothesis or suggested solutions; collecting, organizing and evaluating data; making deductions and reaching conclusions; and at last carefully testing the conclusions to determine whether they fit the Formulating hypothesis Research as “the manipulation of things, concepts or symbols for the purpose of generalizing to extend, correct or verify knowledge, whether that knowledge aids in construction of theory or in the practice of an art.” Research as a scientific and systematic search for pertinent information on a specific topic. In fact, research is an art of scientific investigation.
OBJECTIVES OF RESEARCH:
The purpose of research is to discover answers to questions through the application of scientific procedures. The main aim of research is to find out the truth which is hidden and which has not been discovered as yet. Though each research study has its own specific purpose, we may think of research objectives as falling into a number of following broad groupings: 1. To gain familiarity with a phenomenon or to achieve new insights into it (studies with this object in view are termed as exploratory or formularize research studies); 2. To portray accurately the characteristics of a particular individual, situation or a group (studies with this object in view are known as descriptive research studies); 3. To determine the frequency with which something occurs or with which it is associated with something else (studies with this object in view are known as diagnostic research studies); 4. To test a hypothesis of a causal relationship between variable
Sources of Data
Internal
External
Primary
Secondary
Data Collection:
This is the first stage in the statistics. Before deciding the source to collect the data one has to make a proper planning of investigation and the purpose of inquiry. The required data for the study are basically secondary in nature and the data are collected from the audited reports of the company.
Methods of data Analysis:
The data are collected were edited, classified and tabulated for analysis. The analytical tools used in this study are: 1) capital budgeting techniques 2) Trend analysis 3) Common size statement 4) Comparative Statement
Sources of data:
Secondary data is available 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, 1) Collection of required data from annual records, monthly records, internal published book or profile of the company. 2) Other books and journals and magazines. 3) Annual reports of the company.
Limitation of the Secondary Data:
The information received through secondary sources is easy to obtain but difficult to use in social research. It requires a keen insight and a capability to distinguish between reliable and unreliable data, to make use of documentary information. Therefore such information should be carefully judged before being utilized. one should use the secondary data with care and fully precaution and should not accept them at their face value as they may be suffering from the following limitations: • • • • • • They may be collected by proper procedure. They may be suitable for a required purpose. The information which was collected on a particular base may not be suitable relevant to an enquiry. They may have been influenced by the biased investigation or personal prejudices. They may be out of data and not suitable to the present period. They may not satisfy a reasonable standard of accuracy. They may not cover the full period of investigation.
Capital Budgeting
Overview:
Financial management is largely concerned with ?nancing, dividend and investment decisions of the ?rm with some overall goal in mind. Corporate ?nance theory has developed around a goal of maximizing the market value of the ?rm to its shareholders. This is also known as shareholder wealth maximization. Although various objectives or goals are possible in the ?eld of ?nance, the most widely accepted objective for the ?rm is to maximize the value of the ?rm to its owners. Financing decisions deal with the ?rm’s optimal capital structure in terms of debt and equity. Dividend decisions relate to the form in which returns generated by the ?rm are passed on to equity-holders. Investment decisions deal with the way funds raised in ?nancial markets are employed in productive activities to achieve the ?rm’s overall goal; in other words, how much should be invested and what assets should be invested in. Throughout this book it is assumed that the objective of the investment or capital budgeting decision is to maximize the market value of the ?rm to its shareholders. The relationship between the ?rm’s overall goal, ?nancial management. Funds are invested in both short-term and long-term assets. Capital budgeting is primarily concerned with sizable investments in long-term assets. These assets may be tangible items such as property, plant or equipment or intangible ones such as new technology, patents or trademarks. Investments in processes such as research, design, development and testing – through which new technology and new products are created – may also be viewed as investments in intangible assets. Irrespective of whether the investments are in tangible or intangible assets, a capital investment project can be distinguished from recurrent expenditures by two features. One is that such projects are signi?cantly large. The other is that they are generally long-lived projects with their bene?ts or cash ?ows spreading over many years. Sizable, long-term investments in tangible or intangible assets have long-term consequences. An investment today will determine the ?rm’s strategic position many years hence. These investments also have a considerable impact on the organization’s future cash ?ows and the risk associated with those cash ?ows. Capital budgeting decisions thus have a longrange impact on the ?rm’s performance and they are critical to the ?rm’s success or failure.
What Does Capital Budgeting Mean?
The process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark. Also known as "investment appraisal".
Capital Budgeting is the process by which the firm decides which long-term investments to make. Capital Budgeting projects, i.e., potential long-term investments, are expected to generate cash flows over several years. The decision to accept or reject a Capital Budgeting project depends on an analysis of the cash flows generated by the project and its cost.
Capital Budgeting Tools:
• Payback Period
• Accounting Rate of Return • Net Present Value • Internal Rate of Return • Profitability Index • MIRR Application of this methods firm needs estimate the cash flow for the new investment decision. The cash flow is
• Payback Period
Payback period is the time duration required to recoup the investment committed to a project. Business enterprises following payback period use "stipulated payback period", which acts as a standard for screening the project. • Computation Of Payback Period When the cash inflows are uneven, the cumulative cash inflows are to be arrived at and then the payback period has to be calculated through interpolation. Here payback period is the time when cumulative cash inflows are equal to the outflows. i.e., Cash inflow /cash out flow
Accounting Rate Of Return :
Accounting rate of return is the rate arrived at by expressing the average annual net profit (after tax) as given in the income statement as a percentage of the total investment or average investment. The accounting rate of return is based on accounting profits. Accounting profits are different from the cash flows from a project and hence, in many instances, accounting rate of return might not be used as a project evaluation decision. Accounting rate of return does find a place in business decision making when the returns expected are accounting profits and not merely the cash flows.
Computation Of Accounting Rate Of Return: The accounting rate of return using total investment. or Sometimes average rate of return is calculated by using the following formula: net profit after tax/average investement Where average investment = total investment divided by 2
Net Present Value (Npv) :
Net present value of an investment/project is the difference between present value of cash inflows and cash outflows. The present values of cash flows are obtained at a discount rate equivalent to the cost of capital. Computation Of Net Present Value (Npv)
• A1 cash flow in the year 1, A2 cash flow at the end of year 2, cash flow at the end of year 3…… • R be the cost of capital of the firm(discount rate) • 'c' be the initial investment
Formula:
Internal Rate Of Return (Irr) :
The internal rate of retyrn method is also known as yield method. The IRR of a project/investment is defined as the rate of discount at which the present value of cash inflows and present value of cash outflows are equal. IRR can be restated as the rate of discount, at which the present value of cash flow (inflows and outflows) associated with a project equal zero.
Compution of IRR: Let cash flow in period as t
Then IRR of the project is found out by solving for the value of 'r' in the following equation: Putting the different rates in the npv method and through cross checking it we can get irr.
Profitability Index (PI) :
Profitability ratio is otherwise referred to as Benefit/Cost ratio. This is an extention of the NPVmethod.this relative valuation index and hence is comparable across different types of projects requiring different quantum of initial investments. Profitability index (PI) is the ratio of present value of cash inflows to the present value of cash outflows. The present values of cash flows are obtained at a discount rate equivalent to the cost of capital.
Computation of PI: PI is always expressed on net basis. Formula of PI is as under. PI = Present value of all cash benefit/present value of initial investment As the value of PI comes more than the 1 than the investment decision would be profitable. Otherwise it would be not acceptable.
Data Analysis & Interpretation
LIABLITIES AUTHORIED share capital 50000000 paid up share capital rs.100 each 31897 rs.1000 each 2629 share reserve Reserves charity reserves education fund animal husbondory fund research and devolopment fund share divident adjoustment account staff gratuity fund dead stock dep fund plant and building dep fund crat dep fund can dep fund manufacturing & processing unit dep fund lab equipment dep fund provision for bed debts staff benefit fund DEPOSITS tender deposite millk trasportation deposite jeep trasportation deposite cooperativee sociaty deposite earnestm deposite Provisions
BALANCE SHEET AMT ASSETS 0 FIXED ASSET 0 LAND 3189700 PLANT AND MACHINERY 2629000 dairy plant building 35672.28 dead stock 2698322.54 manuf and processing unit 4733 laboratory expanse 65769 liabrary purchase 4733 investment 2366 bhav dist cooperative share 1419 g.c.m.m.f share 951 deposites 0 806583 262487 3020870 729959 11645563 730270 461300 89624 1757232 3000000 1000000 0 344000 114500 10000 18076274.5 2 300000 0 67587301.9 2 1890 0 0 3195028 telephone deposite g.e.b deposite sihor g.e.b deposite THADACH l.p.g cielinder deposite fixed deposite s.b.i G.E.B DEPOSITE GADHADA CURRENT ASSETS UTTAM DAIRY DEPOSITE UTTAM DAIRY DEPOSITE GOVT P F g.c.m.m.f T.D S VAT INPUT govt staff gratuity WELL BUILDING advance g.c.m.m.f deposite gayatry enterprise CLOSING STOCK MILk stock stationery stock testing equipment stock can stock can stock crat stock s.m.p stock
AMT 4781635 69254756 27747532 1367974 870917 285357 848 0 105000 1000 0 2500 1865871 2500 362395 41000 554510 0 2039278 23116 3195010 39891 222864 806583 95000 29086920 6604106 0 2961492 189354 302159 1637924 1838793 1482639 1513668 42112768
104308980
106000
2828776
CURRENT LIABLITIES employees P F
uttam dairy ahmedabad subsidy of dairy plant Shreenath enterprise mesers ravubhai tapubhai khachar
36556 4662000 4746014 2951000
packing roll stock medicine stock bank balance bhav dist cooperative bank
20000000 s.b.s shihor outstanding salary security and labour exp outstandind lightbill outstanding milk trasportation exp outstanding deposite interest outstanding LOAN AND LONG TERM LIABLITIES S.b.s C.C SIHOR S.B.S TERM LOAN 1 S.B.S TERM LOAN 2 NET PROFIT 492325 bhav dist cooperaative bank h.o 306745 cash on hand 513035 773119 596335 0 8441325 1378534 15609259 2348964 184620759
252720 99364 0 11952448. 8 13002209. 5 4351 27113
10278113
184620759 24959009.26
current liablities Deposites longterm liablities reserves share capital TOTAL CL CURRENT RATIO LIQUID RATIO QUICK RATIO CA to FA ratio SALES CA-CL 75% OF CA-CL WORKING CAPITAL TURNOVER RATIO inventory turnover ratio 38272157 fixed asset 18844774.5 2 Investment 25429118 Deposites 26282181.5 ADVANCES 4 AND OTHER CLOSING 5818700 STOCK 57116931.5 2 bank balance CA 2009-10 2008-09 1.40376354 5 1.22381492 5 0.43698092 0.76866504 895243311 23061734.7 4 17296301.0 6
LIQUID 104308980 ASSETS LIQUID 106000 LIABLITIES 2828776 42112768 10278113 24959009.3 80178666.3 2007-08
69900553
38.8194262 5
Estimation of cash flow: For the purpose of applying the capital budgeting method the cash flow is estimated by following: • Time horizon of 20 years; • • • • • • • • • Revenues: estimated on the basis of the revenues of the past years data. Cost of investment: 2 corer Working capital need of firm:20 lacks Investment in fixed assets:180 lacks Cost other than depreciation and interest: estimated on the basis of the common sized statement of the last 4 years. Depreciation is calculated on the basis of different rates applied to the differerent assets Tax calculation; as the firm is the co-operative society it need not to pay any taxes. Operating cash flow is obtained through the addition of profit after tax and depreciation. Terminal cash flow is obtained through the addition of recovery of net working capital and salvage value of fixed assets. Reasons for estimating every component: INVESTMENT IN FIXED ASSETS:
NO 1 2 3 4 5 6 7 8 DETAILS LAND PLANT & MACHINERY BUILDING LABORATORY EQUIPMENTS CRATES AND CANS MICROPROCESSING UNIT FURNITURE & FIXURE INSULATED VAN TOTAL INVESTMENT AMOUNT 2000000 10000000 3000000 500000 500000 1000000 200000 800000 18000000
TIME HORIZON OF 20 YEARS:
Time horizon is determined minimum of the following; Physical life of the plant. Technological life of the plant. Product market life of the plant. Investment planning horizon of the firm. As per the production department head, the physical life of the plant is estimated to be 20 to25 years. The machinery needs to be replaced after this period. But the investment planning horizon of the firm is 20 years i.e. the time period for which the firm wishes to forecast for the period of 20 years. Firm has no idea as regarding the technological life of the plant. The basic product of the firm is milk. Therefore, there is no possibility of products being obsolete. REVENUES: Revenues of the new division are estimated on the basis of the revenues of the existing plant. The firm has already a plant in the THADACH (a village of Bhavnagar dist) with the capacity of 80,000 liters. And in shihor with the capacity of 200,000 liters. The sales data of the both plant is as follows: Year 2006-07 2007-08 2008-09 2009-10 sales 150849860 216876774 371599816 895243311 (670659583) growth in sales (%) 43.76% 71.34 % 80.47%
Sales of the last year also include sales of the plant in thadach plant. Therefore taking into account only shihor plant the increase in the sales is only 80%. Sales of the plant with the capacity of 80,000 liters is 22,45,83,728. So the sales of the new plant is expected to be Capacity total sales 280000 liter 895243311
60000 liter
?
So the expected sales would be approx 19,18,37852. New plant that was established last year has the sales of Rs.22,45,83,728. So, according to the account manager sales would rise by minimum of 10% on the basis of the above data it is expected to raise the sales in near future. COST OTHER THAN DEPRECIATION AND INTEREST: To find out the cost other than depreciation and interest, I had prepared the common sized statement of last four years as follows; COMMON SIZED STATEMENT
200607 150849 860 143347 562 750229 8 20072008-09 08 216876 3715998 774 16 201097 3434799 798 71 157789 2811984 76 5 125648 979422 2 2056894 774077 162877 0 80 740950 747678 20092006200720082009-10 10 07 % 08 09 895243 311 100% 100% 100% 100% 853391 95.02 92.724 92.432 95.3250 424 6646 451 7613 8241 418518 4.973 7.2755 7.5672 4.67491 87 3543 4902 3868 7588 267667 0.649 0.5793 0.5535 0.29898 0 2694 5296 2396 7992 5.131 44 0.491 1838 7.5101 5413 0.3447 4784 7.5308 0298 0.5899 5966 4.71152 2832 0.26238 2748
PARTICULARS SALES COST OF GOODS SOLD GROSS PROFIT OTHER INCOMES TOTAL OPERATING EXPANSES NET PROFIT
2798445 421795 0 93 234896 2192289 4
From the trading and balance sheet data of 4 years, it was seen that approx 98.26% of sales (an average figure) is cost other than depreciation and interest. As the sales increases the cost also increases but the trend changes slightly and profit of the firm increases slightly. CALCULATION OF DEPRECIATION: Rates of depreciation for different assets are as follows:
NO DETAILS 1 LAND 2 PLANT & MACHINERY 3 BUILDING RATES OF DEP 10% 5%
LABORATORY 4 EQUIPMENTS 5 CRATES AND CANS MICROPROCESSING 6 UNIT 7 FURNITURE & FIXURE 8 INSULATED VAN
15% 25% 60% 10% 10%
Depreciation on different assets is calculated with the following rates with the reducing balance method. DISCOUNTING FACTOR: Discount rate is estimated on the basis of cost of capital. The firm has 3 options to finance the project. 1) Entire share capital of 2 crore. 2) Entire debt capital of 2 core. 3) Mixed of debt capital and share capital in the following form: Equity capital 75 lacks. Debt capital 125 lacks. 1) For the first option company can finance entire project through equity capital by issuing the share 7500 of Rs.1000 each (75 lacks). Firm has the authorized capital of 50000000 and it has issued capital of 58, 18,700 only. Firm is paying the dividend of 15% every year. So it will be the cost of capital for the firm. So I had taken discount rate of 15% for the calculation of npv. 2) For the second option firm can finance the entire project through debt capital at the rate of 10%.than the cost of capital would be 10% and same will be the discount rate.
3) For the third option they can use the mixed of equity plus debt Cost of equity 15% Cost of debt 10%
CAPITAL AQUIRED COST OF CAPITAL CAPITAL RATE WIGH
SHARE CAPITAL DEBT CAPITAL
15% 10%
7500000 1250000 0 2000000 0
COST 112500 0.15 0 125000 0.1 0 237500 0 WACOC 11.875
Than finding the WACOC, we get the cost of capital as 11.875 which can be used as the discount rate.
NEW INVESTMENT IN PLANT AND MACHINERY:
As guided by my project guide dairy needs to replace its micro processing unit and also needs to reinvest in the van for milk transportation. So there will be new investment in micro processing unit costing 10 lacks and in van 8 lacks. So the total new investment in the new plant will be 18 lacks at the end of 10th year. So the estimated cash flow for the first 5 year would be as follows:
YEAR 1 19183 7852 18850 1095 20500 00 12867 57 0 2 19183 7852 18850 1095 15300 00 18067 57 3 19183 7852 18850 1095 12468 75 20898 82 4 19183 7852 18850 1095 10677 00 22690 57 5 19183 7852 18850 1095 93794 7 23988 10
REVENUES COST OTHER THAN DEP. AND INT. DEPRICIATION PROFIT BEFORE TAX TAX NEW INVESTMENT
12867 PROFIT AFTER TAX 57 NET SALVAGE VALUE OF FIXED ASSETS RECOVERY OF NET WORKING CAPITAL INITIAL OUTLAY OPERATING CASH 33367 FLOW {6+9} 57 TERMINAL CASH FLOW 33367 NET CASH FLOW 57
18067 57
20898 82
22690 57
23988 10
33367 57 3,336, 757
33367 57 33367 57
33367 57 33367 57
33367 57 3,336, 757
CASH FLOW FOR YEAR 6 TO 10:
YEAR 6 30895 6779 30358 2899 83469 1 45391 89.5 7 33985 2457 33394 1188 74784 6 51634 22.6 8 37383 7703 9 41122 1473 10 45234 3620 44447 5722 54761 4 73202 84.5 18000 00 73202 84.5
REVENUES COST OTHER THAN DEP. AND INT. DEPRICIATION PROFIT BEFORE TAX TAX
36733 40406 5307 8838 67258 9 606371 58298 65462 06.4 64
NEW INVESTMENT PROFIT AFTER 45391 TAX 89.5 NET SALVAGE VALUE OF FIXED ASSETS RECOVERY OF NET WORKING CAPITAL INITIAL OUTLAY OPERATING CASH 53738 FLOW {6+9} 80.5 TERMINAL CASH FLOW
51634 22.6
58298 06.4
65462 64
59112 68.6
65023 95.4
71526 35
60678 98.5
YEAR REVENUES COST OTHER THAN DEP. AND INT. DEPRICIATION PROFIT BEFORE TAX TAX NEW INVESTMENT
11 497577 982 488923 294 114726 7 750742 1.3
12 547335 780 537815 623 735234 878492 3.1
13 602069 358 591597 186 544559 992761 3.9
14 662276 294 650756 904 445029 110743 61
15 728503 924 715832 595 384277 122870 52
750742 PROFIT AFTER TAX 1.3 NET SALVAGE VALUE OF FIXED ASSETS RECOVERY OF NET WORKING CAPITAL INITIAL OUTLAY OPERATING CASH 865468 FLOW {6+9} 8.3 TERMINAL CASH FLOW 8,654,6 NET CASH FLOW 88
878492 3.1
992761 3.9
110743 61
122870 52
952015 7.1 9,520,1 57
104721 73 10,472, 173
115193 90 11,519, 390
126713 29 12,671, 329
YEAR
16 692078 728 680040 965 341107 116966 56
17 657474 791 646038 917 306821 111290 54
18 624601 052 613736 971 277745 105863 36
19 593370 999 583050 122 252237 100686 40
20 563702 449 553897 616 229489 957534 4
REVENUES COST OTHER THAN DEP. AND INT. DEPRICIATION PROFIT BEFORE TAX TAX NEW INVESTMENT
116966 PROFIT AFTER TAX 56 NET SALVAGE VALUE OF FIXED ASSETS RECOVERY OF NET WORKING CAPITAL INITIAL OUTLAY OPERATING CASH 120377 FLOW {6+9} 63 TERMINAL CASH FLOW 12,037, NET CASH FLOW 763
111290 54
105863 36
100686 40
957534 4
114358 75 11,435, 875
108640 81 10,864, 081
103208 77 10,320, 877
980483 3 500000 0 14,804, 833
YEAR
16
17
18
19
20
REVENUES COST OTHER THAN DEP. AND INT. DEPRICIATION PROFIT BEFORE TAX TAX NEW INVESTMENT
692078 728 680040 965 341107 116966 56
657474 791 646038 917 306821 111290 54
624601 052 613736 971 277745 105863 36
593370 999 583050 122 252237 100686 40
563702 449 553897 616 229489 957534 4
116966 PROFIT AFTER TAX 56 NET SALVAGE VALUE OF FIXED ASSETS RECOVERY OF NET WORKING CAPITAL INITIAL OUTLAY OPERATING CASH 120377 FLOW {6+9} 63 TERMINAL CASH FLOW NET CASH FLOW 12,037, 763
111290 54
105863 36
100686 40
957534 4
114358 75 11,435, 875
108640 81 10,864, 081
103208 77 10,320, 877
980483 3 500000 0 14,804, 833
AFTER DETERMINING THE CASH FLOW THE FOLLOWING CAPITAL BUDGETING METHODS CAN BE APPLIED:
1) NET PRESENT VALUE METHOD: A) IF THE PROJECT IS FINANCED THROUGH SHARE CAPITAL: Discounting factor 15 %( cost of capital)
YEAR CASH FLOW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 DISCOUNT ED BY 3336757 3,670,433 4037475.9 7 4441224 4,885,346 5,373,881 5,911,269 6,502,395 7,152,635 6,067,898 8,654,688 14,722,587 10,472,173 11,519,390 12,671,329 12,037,763 11,435,875 10,864,081 10,320,877 14,804,833 DISCOUNTED BY (1.15)1 (1.15)2 (1.15)3 (1.15)4 (1.15)5 (1.15)6 (1.15)7 (1.15)8 (1.15)9 (1.15)10 (1.15)11 (1.15)12 (1.15)13 (1.15)14 (1.15)15 (1.15)16 (1.15)17 (1.15)18 (1.15)19 (1.15)20 DISCOUNTE D BY 1 .10 (1.10)2 (1.10)3 (1.10)4 (1.10)5 (1.10)6 (1.10)7 (1.10)8 (1.10)9 (1.10)10 (1.10)11 (1.10)12 (1.10)13 (1.10)14 (1.10)15 (1.10)16 (1.10)17 (1.10)18 (1.10)19 (1.10)20
1.11875 (1.11875)2 (1.11875)3 (1.11875)4 (1.11875)5 (1.11875)6 (1.11875)7 (1.11875)8 (1.11875)9 (1.11875)1 0 (1.11875)1 1 (1.11875)1 2 (1.11875)1 3 (1.11875)1 4 (1.11875)1 5 (1.11875)1 6 (1.11875)1 7 (1.11875)1 8 (1.11875)1 9 (1.11875)2 0
1) INTERNEL RATE OF RETURN METHOD:
CASH FLOW 1 2 3 3336757 3,670,433 4037475.9 7 DISCOUNTE D BY 1 .23 (1.23)2 (1.10)3 DISCOUNT ED BY 1.25 (1.25)2 (1.11875)3
YEAR
DISCOUNTED BY (1.20)1 (1.15)2 (1.15)3
5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
4,885,346 5,373,881 5,911,269 6,502,395 7,152,635 6,067,898 8,654,688 14,722,587 10,472,173 11,519,390 12,671,329 12,037,763 11,435,875 10,864,081 10,320,877 14,804,833
(1.15)5 (1.15)6 (1.15)7 (1.15)8 (1.15)9 (1.15)10 (1.15)11 (1.15)12 (1.15)13 (1.15)14 (1.15)15 (1.15)16 (1.15)17 (1.15)18 (1.15)19 (1.15)20
(1.10)5 (1.10)6 (1.10)7 (1.10)8 (1.10)9 (1.10)10 (1.10)11 (1.10)12 (1.10)13 (1.10)14 (1.10)15 (1.10)16 (1.10)17 (1.10)18 (1.10)19 (1.10)20
(1.11875)5 (1.11875)6 (1.11875)7 (1.11875)8 (1.11875)9 (1.11875)1 0 (1.11875)1 1 (1.11875)1 2 (1.11875)1 3 (1.11875)1 4 (1.11875)1 5 (1.11875)1 6 (1.11875)1 7 (1.11875)1 8 (1.11875)1 9 (1.11875)2 0
2) ACCOUNTING RATE OF RETURN METHOD:
BOOK VALUE OF INVESTMENT 17950000 16420000 15173125 14105425 13167478 12332787 11584941 10912352 10305981 9758367 8611100 7875866 7331307 6886278 6502001 6160894 5854073 5576328 5324091 5094602 196926996 9846350
YEAR 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 TOTA L AVER AGE
PROFIT AFTER TAX 1286757 2140433 2790601 3373524 3947399 4539190 5163423 5829806 6546264 7320284 7507421 8784923 9927614 11074361 12287052 11696656 11129054 10586336 10068640 9575344 145575081 7278754
3) PROFITABILITY INDEX METHOD:
INITIAL INVESTMENT 20000000 PROFITABILITY INDEX
NPV @ 15% 16887759 0.84
NPV @ 10% 35531739 1.78
NPV @ 11.875% 27198032 1.36
4) PAY BACK PERIOD METHOD:
YEA CASH DISCUNTING @ DISCOUNTED R FLOW 15% CASH 1 3336757 0.8696 2901644 2 3,670,433 0.7561 2775214 4037475.9 3 7 0.6575 2654640 4 4441224 0.5718 2539492 5 4,885,346 0.4972 2428994 6 5,373,881 0.4323 2323129 7 5,911,269 0.3759 2222046 8 6,502,395 0.3269 2125633 9 7,152,635 0.2843 2033494 10 6,067,898 0.2472 1499985 11 8,654,688 0.2149 1859893 12 14,722,587 0.1869 2751651 13 10,472,173 0.1625 1701728 14 11,519,390 0.1413 1627690 15 12,671,329 0.1229 1557306 16 12,037,763 0.1069 1286837 17 11,435,875 0.0929 1062393 18 10,864,081 0.0808 877818 19 10,320,877 0.0703 725558 20 14,804,833 0.0611 904575
5) MODIFIED INTERNEL RATE OF RETURN METHOD:
200000 00 180000 0 204449 27 611005 699 29.885 4429 1.1851 4908 18.51%
INITIAL INVESTMENT NEW INVESTMENT AT 10TH YEAR PV OF INVESTMENT @ 15% TERMINAL VALUE OF CASH FLOWS PV / TERMINAL VALUE (PV / TERMINAL VALUE)^(1/20) MIRR
INITIAL INVESTMENT NEW INVESTMENT PV OF INVESTMENT @ 10% TERMINAL VALUE OF CASH FLOWS PV / TERMINAL VALUE (PV / TERMINAL VALUE)^(1/20) MIRR
2000000 0 1800000 20,693,9 78 3735897 70 18.05306 69 1.155653 26 15.56%
INITIAL INVESTMENT NEW INVESTMENT PV OF INVESTMENT @ TERMINAL VALUE OF CASH FLOWS
20000000 1800000 20586060 4.45E+08
PV / TERMINAL VALUE (PV / TERMINAL VALUE)^(1/20) MIRR
21.62778 1.16614 16.61%
DATA INTERPRETATION: From the common sized statement we can see that: 1) Cost of goods sold has in the year 2010; the cost of goods sold has risen from the previous year. The basic reason for that is: Rise in the purchase price of raw material. The price of raw material that is raw milk is 270 liter fat but in the year 2010, it has came to 360 liter fat. This change in price has caused the cost of production to rise. The reason is that consumption of raw material has increased due increase in selling of the dairy. The consumption of milk was 341732327 which increased in the next year and become 823287759. So this rise in the consumption of raw material has increased the cost of production. Other expenses such as transportation expanse and headloard expanse have risen slightly but have not affect the cost of production to that extent. 2) Gross profit has risen in amount but as per the common sized statement it has decreased as compared to the previous year. Sales of the firm have increased but cost of production has increased due to increase in the material cost and material consumption. 3) In the year 2008-09, the cost of production is 92.43% of sales but in 2009-10 the cost of production is 95.32% of sales. Cost of production rose due to increased prices of raw material. Raw material consumption has also increased due to increase in the sales of the product.
Gross profit has decreased due to increase in the cost of production of the firm. Hike in the price of raw material and increase in the consumption of raw material has increased the cost of production and which results in the low gross profit margin as compared to sales. Net profit margin of the firm has increased as compared to the previous year. It was 2192289 in the year 2008-09 and 2348964 in the year 2009-10.Net profit margin of the firm has raised in the amount but it has decreased in proportion to sales as compared to the previous year. The reason for that is increase in the cost of production of the firm and thereby decreases in the cost of production of the firm. From the common sized balance sheet it was found that
Assumption of the capital budgeting methods: 1) Fixed assets required for the investment purpose would be 180 lacks. It was estimated on the basis of the investment in the existing plant. The plant capacity would be 60,000 liters.
2) From the net present value method it is found that the net present value is positive under the 3 options available to the firm
At the discount rate of 15% net present value is Rs.1,68,87,759. At the discount rate of 10% net present value is Rs.3,55,31,739. At the discount rate of 11.875% net present value is Rs.2,71,98,032. For the calculation of net present value cost of capital is taken as the discount rate. If the firm finance the entire project through equity capital than it would have the positive net present value of Rs.1,68,87,759. If the firm finance the entire project through debt capital that is borrowing from banks than it would have the positive net present value of Rs.3,55,31,739. If the firm finance the entire project through mixed of debt capital plus equity capital than it would have the positive net present value of Rs.2,71,98,032. From the above method it was found that investment decision is profitable for the firm any all the three options available. 3) From the internal rate of return method it was found that irr for the new investment decision is 25%. So the irr method suggest that investing in the new plant will give that investment in the new plant will give the return of 25%. 4) From the profitability index method it was found that: At the discount rate of 15% profitability index is At the discount rate of 10% profitability index is At the discount rate of 11.875% profitability index is Profitability index method shows that investment decision is not profitable for the firm to execute as value of pi is less than 1.
5) Accounting rate of return method shows that firm will get 74% account rate of return on the new investment decision. So from the point of view of ARR investment decision is profitable for the firm. 6) Payback period method shows that payback period for the investment decision is 8 year. The investment in the new project could be recovered in the period of 8 year if the discount rate is 15% If the discount rate is 10% than the payback period will be If the discount rate is 11.325% than the payback period will be 7) Modified internal rate of return shows that: At the discount rate of 15% the MIRR is 18.51% At the discount rate of 10% the MIRR is 15.56% At the discount rate of 11.875% the MIRR is 16.61% MIRR method is considered to be more trust worthy than the IRR method. According to this method, the investment decision is profitable for the firm in any of the three alternatives. From the above analysis it was found that: Investment decision is profitable for the firm from the point of view of IRR, NPV, MIRR, PBP, ARR methods. It is not considered profitable from the point of view of profitability index method.
Conclusion: From the above study it was found that, From the common sized statement it was found that cost of production for the firm has grown as compared to the previous year because of the rise in the prices of raw material and increase in the consumption of raw material which leads to increase in the cost of production. The firm needs to raise the price of raw material to maintain the supply of milk to operate efficiently to meet the demand of market. The supply of milk decreases in the slack season, to maintain the supply the firm increases the purchase price of raw material. So that the supply of raw material can be maintained to meet the demand of market. Firm has three option to finance the project of new investment, by equity capital by debt capital and by the combination of equity plus debt mix. The most profitable decision would be finance the project through debt capital but it would not possible for the firm to get the project financed through the entirely of the debt capital. Therefore the firm will use the equity plus debt mix for the investment decision. This would be feasible for the firm.
Alternatives available: Firm is suffering from the problem of high cost of production due to rise in the prices of raw material.
BIBLIOGRAPHY:
TRADING ACCOUNT
TRADING ACCOUNT Opening stock of milk S.m.p stock Packing roll stock Purchase Milk S.m.p Milk transportation exp Hadloard Packing exp Gross profit Total 598303 Sales 208130 Sales of packed milk 128180 Selling through tanker Butter milk selling 819022 276 Butter selling 805875 0 Ghee selling 147752 17 537662 7 995182 1 418518 87 899971 191 Closing stock Packing roll stock S.m.p stock(skimmed milk powder) Milk stock TOTAL 252720 1513668 2961492 899971191
371668509 506337460 16992021 238535 6786
Diesel expanse Washing expanses Laboratory expanses P.c. I expanse Maintenance expanse Light bill Electricity expanse Salary Staff bonus Provident fund expanse Staff welfare expanse Security and labor expanse Stationery expanse Postage expanse Advertisement expanse Bank commission Telephone bill Jeep transportation Rent and wages Vehicle allowance Miscellaneous expanse Wages Interest expanse Adjustment expanse Agreement fee expanse Consultation fees Medicine expanses Audit fees Fire safety expanse Mensal expanse Water expanse Training expanse Tree plantation Income tax Subscription of magazine
PROFIT AND LOSS AC 50841 Profit of milk 41 trading 74953 Profit of tanker 0 selling 31019 Stationery 8 expanses Contract 79514 recovery 89173 9 Visit fee 68413 50 Can rent income 68314 5 Interest income 52295 Miscellaneous 73 income 42327 1 TOTAL 64300 7 11951 7 27735 12 20568 0 10690 18993 8 11186 35 25607 5 89124 1 92484 11321 2 14128 5 24148 6 21908 17 45911 6 12690 0 75824 1 30398 7 10201 8 19110 3238 54809 5 33220 8240 16000 2225
41851 887 13088 5 26877 3 59313 15170 0 74100 0 12035 08 12149 1 44528 557
LIABLITIES AUTHORIED share capital 50000000 Paid up share capital Rs.100 each 31897 Rs.1000 each 2629 Share reserve Reserves Charity reserves Education fund Animal husbondory fund Research and devolopment fund Share divident adjoustment account Staff gratuity fund Dead stock dep fund Plant and building dep fund Crat dep fund Can dep fund Manufacturing & processing unit dep fund Lab equipment dep fund Provision for bed debts Staff benefit fund Deposits Tender deposite Millk trasportation deposite Jeep trasportation deposite Cooperativee sociaty deposite Earnestm deposite
AMT
BALANCE SHEET ASSETS Fixed asset Land
AMT
3189700 Plant and machinery 2629000 35672.28 2698322.5 4 4733 65769 Dairy plant building Dead stock Manuf and processing unit Laboratory expanse Library purchase
4781635 6925471 7 2774753 2 1367974 870917 285357 848
4733 Investment Bhav dist cooperative 2366 share 1419 G.c.m.m.f share 951 Deposits Telephone deposited 806583 G.e.b deposited sihor G.e.b deposited 262487 thadach L.p.g cylinder 3020870 deposited 729959 Fixed deposit s.b.i 11645563 G.e.b deposit gadhada 730270 Current assets 461300 Uttam dairy deposit 89624 Uttam dairy deposit 1757232 3000000 1000000 0 344000 Govt p f G.c.m.m.f t.d s Vat input Govt staff gratuity Well building advance
105000 1000
2500 1865871 2500 362395 41000 554510 0 2039278 23116 3195010 39891 222864 806583 95000 2908692 0 6604106 0 2961492
114500 G.c.m.m.f deposit 10000 Gayatry enterprise 18076274. 52 Closing stock 300000 Milk stock
Provisions Towads the payment of milk society
Current liabilities Employees P F Uttam dairy ahmedabad Subsidy of dairy plant Shreenath enterprise Mesers ravubhai tapubhai khachar
0 67587301. 92 1890 0 0 3195028
Stationery stock Testing equipment stock Can stock Can stock Crat stock S.m.p stock
189354 302159 1637924 1838793 1482639 1513668 252720 99364 0 1195244 8.76 1300220 9.5 4351 27113 1846207 59.3
36556 Packing roll stock 4662000 Medicine stock 4746014 Bank balance Bhav dist cooperative 2951000 bank 20000000 S.b.s shihor Bhav dist cooperative 492325 bank h.o 306745 Cash on hand 513035 773119 596335 0 8441325 1378534 15609259 2348964 184620759 .3
Outstanding salary Security and labor exp outstanding Light bill outstanding Milk transportation exp outstanding Deposit interest outstanding Loan and long term liabilities S.b.s C.C SIHOR S.b.s term loan 1 S.b.s term loan 2 Net profit
doc_857824088.doc