INTRODUCTION
CAPITAL BUDGEING:
An efficient allocation of capital is the most important finance function in modern times. It involves decisions to commit firm’s funds to long-term assets. Such decisions are tend to determine the value of company/firm by influencing its growth, profitability & ris . Investment decisions are generally nown as capital budgeting or capital e!penditure decisions. It is clever decisions to invest current in long term assets e!pecting long-term benefits firm’s investment decisions would generally include e!pansion, ac"uisition, moderni#ation and replacement of long-term assets.
Such decisions can be investment decisions, financing decisions or operating decisions. Investment decisions deal with investment of organi#ation’s resources in $ong tern %fi!ed& Assets and / or Short term %'urrent& Assets. (ecisions pertaining to investment in Short term Assets fall under )*or ing 'apital +anagement,. (ecisions pertaining to investment in $ong term Assets are classified as )'apital -udgeting, decisions. 'apital budgeting decisions are related to allocation of investible funds to different long-term assets. .hey have long-term implications and affect the future growth and profitability of the firm. In evaluating such investment proposals, it is important to carefully consider the e!pected benefits of investment against the e!penses associated with it. /rgani#ations are fre"uently faced with 'apital -udgeting decisions. Any decision that re"uires the use of resources is a capital budgeting decisions. 'apital budgeting is more or less a continuous process in any growing concern.
NEED FOR THE STUDY
? .he 0ro1ect study is underta en to analy#e and understand the 'apital -udgeting process in cement manufacturing sector, which gives mean e!posure to practical implication of theory nowledge.
? .o
now about the company’s operation of using various 'apital -udgeting
techni"ues. ? .o now how the company gets funds from various resources.
OBJECTIVES OF THE STUDY
? .o study the relevance of capital budgeting in evaluating the pro1ect for pro1ect finance ? .o study the techni"ue of capital budgeting for decision- ma ing. ? .o measure the present value of rupee invested. ? .o understand an item wise study of the company financial performance of the company. ? .o ma e suggestion if any for improving the financial position if the company. ? .o understand the practical usage of capital budgeting techni"ues ? .o understand the nature of ris and uncertainty
METHODOLOGY
.o achieve aforesaid ob1ective the following methodology has been adopted. .he information for this report has been collected through the primary and secondary sources.
Primary sour !s
It is also called as first handed information2 the data is collected through the observation in the organi#ation and interview with officials. -y as ing "uestion with the accounts and other persons in the financial department. A part from these some information is collected through the seminars, which were held by 34S/5A+
S! o"#ary sour !s
.he secondary data have been collected through the various boo s, maga#ines, brouchers & websites
LIMITATION OF THE STUDY :
? $ac of time is another limiting factor, ie., the schedule period of 6 wee s are not sufficient to ma e the study independently regarding 'apital -udgeting in 34S/5A+.
? .he busy schedule of the officials in the 34S/5A+is another limiting factor. (ue to the busy schedule officials restricted me to collect the complete information about organi#ation. ? 7on-availability of confidential financial data. ? .he study is conducted in a short period, which was not detailed in all aspects. ? All the techni"ues of capital budgeting are not used in 34S/5A+. .herefore it was possible to e!plain only few methods of capital budgeting.
I7(8S.59 05/:I$4
INTRODUCTION OF CEMENT:
.he basic need of human being is food clothing and shelter love and affection /possession is on never ending process for a human being.
As the time passes on human beings their wants and wishes also changed from ancient times to modern times and among them the living pattern and costruction wor s also have been changed from temporary construction of house to permanent construction and the basic material used in construction is )'ement,.
'ement the word derived from a latin word ;'4+47..8+’ means stone chipping such as we used in roman. 'ement the word as per o!ford, it is commonly used is any substance applied for soft stoc ing things. -ut cement means is most vital and important material for modern constructions. It is a material which sets and hardness when mi!ed with water. 'ement is basically used in construction as a building agent. In ancient times clay bric s and stones have been used for construction wor s. .he 5omans were using a binding or a cementing material that would harden and water. .he first systematic effort was made by )S+4A./7, who undertoo the e!ecution of a new light house in <=>?. @e observed that production obtained by during lime stone was the best cementing material for wor under water.
.he construction in lost centuries was with $ime that was the main e"uipment used for construction wor . .he ancient constructions li e .a1mahal, Autubminar, +ysore 0alace, 5ed fort, 'harminar etc., the evidence of lime construction.
THE INDIAN CEMENT INDUSTRY:
-y staring priduction in <B<C the story of India cement industry is a stage of continuous of growth. India is the fourth largest cement producer after 'hina, Dapan and 8.S.A. so far annual production and demand has been growing a pace at roughly ?6 million tons with an installed capacity of 6E millions tons. In <B<C as the foundation of stable cement Industry was laid as sun above. It was Indian 'ement 'ompany at 0orbandar in Fu1arat. In <BEG, the cement mar eting corporation was formed to promote the sale and distribution of cement. A significant development was made in <BHG when all manufacturers mergers together to form the Associated 'ement 'ompany $imited.
'ement Industry is the ma1or Industry it has ta en rapid strides for a modest beginning at porbandar in <B<C to the <B6G’s with over understanding out of the ?G units, <C units are in the public sectors remaining units are in private sector. Indian endowed with cement grade lime stones %BG -illion tons & and coal %<BG -illion tons &. .he basic raw material re"uired for cement manufacture and self sufficient in manufacturing cement ma ing machineries. (uring nineties it had a particular impressive e!pansion with a growth rate of <GI. .he strength and vitality of cement Industry can be gouged by the intrest shown and support given by *orld -an , considering the e!cellent performance of the industry in utili#ing loans and achieving the ob1ectives and targets. .he *orld -an is e!amine the feasibility of providing a third line of credit for further upgrading Industry in varying areas, which will ma e it global. .herefore, India today totally installed capacity of over HG million tons, employing over a <GG thousand people directly and contributing amount of rupees 6 billion to India’s F(0.
TECHNOLOGY:
'ement may be manufactured employing three alternative technologies.
<. E. H.
.he largely out molded well process technology. .he more modern dry process that re"uires only <BI coal utili#ation. .he latest percallinator technology through which optimum utili#ation may be achieved. @ere the calcinatory or raw.
+aterial is partly or completed carried out before the feud enters the rotator in besides saving power, the adoption of this technology enable in increase in installed capacity by HG-H>I, the HG,GGG tons per day plants being setup in the country use this technology.
TECHNOLOGICAL CHANGES:
'ontinuous technological upgrading and assimilation of latest technology has been going on in the cement industry. 0resently BHI of the total capacity in the industry is based on modern and environment friendly dry process technology and only =I of the capacity is based on old wet and semi-dry process technology. .here is tremendous scope for waste heat recovery in cement plants and there by reduction in emission level. /ne pro1ect for co-generation of power utili#ing waste heat in an Insian cement plant is being implemented with Dapanese assistance under Freen Aid 0lan. .he induction of advanced technology has helped the industry immensely to conserve energy and fuel and to save materials substantially.
India is also producing different varieties of cement li e /rdinary 0ortland 'ement %/0'&, 0ortland 0u##ling 'ement %00'&, 0ortland -last :urnace Slag 'ement %0-:S&, /il *ell 'ement, 5apid @ardening 0ortland 'ement, Sulphate 5esisting 0ortland 'ement, *hite 'ement etc. production of these varieties of cement conform to the -IS Specifications. Also, some cement plants have set up dedicated 1etties for promoting bul transportation and e!port.
TOTAL PRODUCTION:
.he cement industry comprises of <E> large cement plants with an installed capacity of <C6.E6 million tons and more than HGG mini cement plants with an estimated capacity of <<.<G million tons per annum. .he 'ement 'orporation of India, which is a 'entral 0ublic Sector 8nderta ing, has <G units. .here are <G large cement plants owned by various state Fovernments. .he total installed capacity in the country as a whole is <>B.H6 million tons.
Actual cement production in EGGC-G> was <<?.H> million tons as against a production of <G=.BG million tons in EGGH-GC, registering a growth rate of 6.6CI. +a1or players in cement production are Ambu1a cement, Aditya cement, D 3 'ement and $ & . cement. Apart from meeting the entire domestic demand, the industry is also e!porting cement and clin er. .he e!port of cement during EGGH-GC and EGG>-G? was >.<C million tons and ?.BE million tons respectively. 4!port during April-+ay, EGG> was <.H> million tons. +a1or e!porters were Fu1arat Ambu1a 'ements $td. and $ & . $td. .he planning commission for the formulation of J :ive 9ear 0lan constituted a ;*or ing Froup on 'ement Industry’ for the development of cement industry. .he *or ing Froup has identified following thrust areas for improving demand for cement2 <. E. H. :urther push to housing developments programs2 0romotion of concrete @ighways and roads, and 8se of ready-mi! concrete in large infrastructure pro1ects.
'ement industry has been decontrolled from price and distribution on <st march <B6B and delicensed on E>th Duly <BB<. @owever, the performance of the industry and prices of cement are monitored regularly. -eing a ey infrastructure industry, the constraints faced by the
Actual cement production in EGGC-G> was <<?.H> million tons as against a production of <G=.BG million tons in EGGH-GC, registering a growth rate of 6.6CI. +a1or players in cement production are Ambu1a cement, Aditya cement, D 3 'ement and $ & . cement. Apart from meeting the entire domestic demand, the industry is also e!porting cement and clin er. .he e!port of cement during EGGH-GC and EGG>-G? was >.<C million tons and ?.BE million tons respectively. 4!port during April-+ay, EGG> was <.H> million tons. +a1or e!porters were Fu1arat Ambu1a 'ements $td. and $ & . $td.
.he planning commission for the formulation of J :ive 9ear 0lan constituted a ;*or ing Froup on 'ement Industry’ for the development of cement industry. .he *or ing Froup has identified following thrust areas for improving demand for cement2 C. >. ?. :urther push to housing developments programs2 0romotion of concrete @ighways and roads, and 8se of ready-mi! concrete in large infrastructure pro1ects.
'ement industry has been decontrolled from price and distribution on < st march <B6B and delicensed on E>th Duly <BB<. @owever, the performance of the industry and prices of cement are monitored regularly. -eing a ey infrastructure industry, the constraints faced by the industry are reviewed in the Infrastructure 'oordination 'ommittee meetings held in the 'abinet Secretariat under the 'hairmanship of Secretary %'oordination&. .he CCC 'ommittee on Infrastructure also reviews its performance.
DISTRIBUTION SYSTEM:
(istribution of cement was entirely under Fovernment control until <B6E. at present the Industry has to ma e an agreement towards the levy "uota which is to be sold compulsorily to the Fovernment the rest of the output or open mar et "uota may be sold in the open mar et evolved prices the output lifted by the Fovernment is allocated state wise.
NEED AND IMPORTANCE: In India we see rapid industrial development in the last few centuries. Indian industry is growing at considerable ratio which reveals India is a developing country. And there are different industrial sectors are playing a vital role for the economy’s development. .hey are steel cement S/:. Information .echnology +edical Science etc. /ne among them was )'4+47. I7(8S.59, which plays a vital role for the country’s development. In India cement industry is growing rationally and mar eting is the ing pin of all activities particularly to the business because of this changes in the e!ternal environment i.e., social, political, legal, technical and international environment and changes in mar eting. .here
is increased in the salaries in all most in every mar et leading to competition is aspects of price, promotion etc., which help to increase the standard of living of people. .he manufacturers of 'ement li e 3esoram cement, India limited, /rient limited, 8ltratech etc. are providing cement and they are distributing cement through wide networ of dealers. 3esoram cements are doing its business from decades and it is continuously contributing to the national economy. In even Industry now a days there is no special interest for particularly department li e production or manufacturing but now a days total "uality management plays a vital for the company’s success. (istribution channel which plays a vital role for the company success. (istribution channels are lin between the company and consumers.
CHAPTER $
COMPANY PROFILE
PROFILE OF THE COMPANY
/ne among the industrial gains in the country today serving the nation on the industrial front esoram industries limited has a tenured and e!tent full history dating hoc to the twenties when the industrial house of -irla’s en"uired it.*ith only a .e!tile mill under its banner in <BEC,it grew from strength and spread its activities to newer fields li e 5ayon pulp .ransparent 0aper.Spun pipes and 5efectory .yres oil mills and refinery 4!traction. $oo ing to the wide gap between the demand and supply of vital commodity cement which it plays on important role in 7ation -uilding, the government 0rivate entrepreneurs to argument the cement production 3esoram rose to the occasion and decided to set up few cement plants in the country. 3esoram cement is one of the prestigious units in the renowned 3esoram industries group that is one of India’s leaden industrial conglomerates, under the leadership of +r.-.3.-irla, the famous personality of Indian Industry, who owes branches all over India.
3esoram cement Industry is one of the leading manufactures of cement in India 3esoram cement is a division of 3esoram Industries limited. It is a dry process cement plant. It is located at -asant 7agar in 3arimnagar (istrict of Andhra 0radesh with the plant capacity is 6.E? la hs tones per annum. It is 63ms away from the 5amagundam 5ailway Station $ining +adras to 7ew (elhi.
PLANTS SETUP:
.he first cement point of 3esoram with a capacity of E.< lac s tones per annum incorporating @umboldt’s suspension preheated system was committed during the year <B?B. .he second unit was setup in the year <B=< with capacity of E.<lac s tons which added to the above plant capacities. .he third plant with a capacity of E.>lac s tons per anum, which went on stream in the year <B=6. .he coal for this company is obtained by singareni collieries and the power is obtained from A0S4-. .he power demand capacity for the factory is about E<+.*. 3esoram has got EGF sets of C+7 each installed in the year<B6=. 3esoram cement belongs to the -irla group companies one of the industrial giants in the country. 3esoram cement industries distinguished it self among the cement factories in India by bagging the national productivity award for two successive years i.e., in <B6>-6? and 6=. 3esoram cement also got the :A0''I award for best family planning effort in the state for the year <B6=-66. 3esoram also bagged 7'-'7’S national award for energy conservation for the year <B6B-BG. .he 3esoram industries loo for the welfare of the employees and it provide various facilities which the employees and it provide various facilities which the employee feels satisfied with in the organi#ation and after the wor they fees satisfies the wor er and wor s families by providing various welfare schemes and by providing recreational facilities of a glace. .he company set up )5ecreation 'lub, for the purpose of recrimination facilities two auditoriums are provided for playing indoor games li e chess, shuttle and caroms and for organi#ing cultural functions and activities li e drama, music, and dance centers etc. It provides $ibrary and reading rooms for the benefit of the
employees more than >GGG boo s are available in the library along with other 7ewspapers and maga#ines. .hey setup 4nglish and .elugu medium schools for the growth of wor ers child. .he company provides )(ispensary, with a "ualified medical offer and +edical staff for the benefit of the employees. A @ouse Dournal in the name of -asant 7agar sam char is brought out "uarterly where an all important activities and information of the plant is published. .he company provides cooperative stores where the supply essential commodities li e rice, wheat, sugar, erosene etc. at cash and credit basis. .hey conduct games for twice a year on the occasion of E?th Danuary 5epublic (ay and <>th August Independence (ay in order to encourage the employees, outside of their wor station. .he family planning camps are held regularly with the help of the (istrict +edical and @ealth Authorities at the Fovernment @ospital. It has got on award for their e!cellent service. 7ot only the employees of the factory are ta en care, butthe company plays a lot of attention towards the rural development activities. .welve villages are adopted and the company has e!tended help in constructing temples, road, and giving programmers to the farmers, 4ye surgical camps health chec up schemes etc.
.o eep the ecological balance, company has also underta en massive tree plantation in and around -asant 7agar and near by villages there by eliminating the pollution and they have been nominated by the government of India for )K583S@A+I.5A A*A5(, but effort of an industrial unit in the state for rural development <BBC-B> presented by '+ in march <BB?.
BRANDS:
3esoram brands with namely -irla Supreme and -irla supreme gold %>H grades& has made a niche with outstanding "uality and commands a premium in the mar et. .he latest offering, )-irla Sha thi, is also very well received and is the most sought offer brand now.
%ESORAMS CAREER:
3esoram has an outstanding trac record. Achieving <GGI capacity utili#ation in productivity and energy conservation. It has provided its distinctions by bagging several awards of national and state level are worthy.
A&ARDS:
• • • • • • •
7ational productivity award for <B6>-6?. 7ational productivity award for <B6?-6=. 7ational award for energy conservation for <B6G-BG. 7ational award for mines safely <B6>-6?, <B6?-6=. 0restigious state award ya1amanya ratna and but management award for the year <B6G. -est :A0''I award for but family planning effort in the state <B6=-66. :A0''I award for best wor ers welfare <BB>-B?.
• • •
-est industrial productivity award of :A0''I. -est management award of state government <BBH. It has got )Kanamitra award, from the government of Andhra 0radesh.
%ESORAM GROUP OF INDUSTRIES
a&.e!tiles 3esoram Industries $td, CE, Farden 5each 5oad 'alcutta-=GGGHC. 3esoram 5ayon .riennia %0./.&, (ist L @oogly, *est -engal. 3esoram Spun pipes &
undries, bansberia %0./.&, (istL @oogly, *est -engal. 3esoram 'ement, -asantnagar->G?<6=, (ist L 3arimnagar, Andhra 0radesh Kasavadatta 'ement,
b&5ayon c&Spun 0ipes
d&'ement
e&'ement
Sedam->6>EEE, (ist L Fulbargah, 3arnata a. f& .yres -irla .yres, Shivam 'hambers, >H, Syed Amir Ali Avenue. 'alcutta-=GGGEB.
Pro#u ' Pro(i)!
.he main brands of cement manufactured areL ? 5AASI F/$( %>H Frade& ? 5AASI S8045 0/*45 ? 5AASI CH Frade cement. All the brands are nown for its best "uality standards.
Huma" R!sour !s
.he 0lant has well "ualified, highly motivated manpower of ?CB employees on its rolls. /ut of ?CB employees, BE are e!ecutive cadre and remaining are in staff and wor men cadre. .he 3I$, 375 manpower is nown for their spirit and commitment.
Po))u'io" Co"'ro)
.he 0lant is commissioned for pollution free environment and installed all the re"uired pollution control e"uipment as per the statutory re"uirement. A separate team will regularly monitor and maintain the said e"uipment.
Sa(!'y
.he 0lant maintains high standards of safety and good house eeping methods in line with ;>S’ techni"ues.
Co"'ri*u'io" 'o '+! !, +!-u!r
3I$, 375 has been contributing around 5s.<=>.GG crores to the e!che"uer in the form of ta!es, royalty etc.
To."s+i/
3I$, 375 has a well planned township consisting of H=6 "uarters having facilities li e • • • • • • • School @ospital .emple Fuest @ouse 'o-operative Stores 5ecreation 'lub 0lay Fround etc.
Rura) D!0!)o/m!"'
3I$, 375 as apart of 5ural & Social (evelopment 0rogramme adopted 6 surrounding villages . .he company e!tends the facilities li e • @ousing
• • • •
*ater School /ld age pension 5oads etc2
-y allocating a budget amount of about 5s.E>.GG la hs per annum.
Industrial Relations
3I$,375 is nown for its best Industrial 5elations practices in this region and won many awards from Fovt. of A.0. and 'hamber of Industries.
Norms
? 5aw +ill 'lin er 'ement ? $ime stone B?I ? Iron ore E.>I ? $aterite <.>I ? 5aw +ill <.> tonnes ? 'oal EGI ? 'lin erB=I ? Fypsum HI
CONCEPTUAL FRAME1&OR%
CAPITAL BUDGEING:
An efficient allocation of capital is the most important finance function in modern times. It involves decisions to commit firm’s funds to long-term assets. Such decisions are tend to determine the value of company/firm by influencing its growth, profitability & ris . Investment decisions are generally nown as capital budgeting or capital e!penditure decisions. It is clever decisions to invest current in long term assets e!pecting long-term benefits firm’s investment decisions would generally include e!pansion, ac"uisition, moderni#ation and replacement of long-term assets. Such decisions can be investment decisions, financing decisions or operating decisions. Investment decisions deal with investment of organi#ation’s resources in $ong tern %fi!ed& Assets and / or Short term %'urrent& Assets. (ecisions pertaining to investment in Short term Assets fall under )*or ing 'apital +anagement,. (ecisions pertaining to investment in $ong term Assets are classified as )'apital -udgeting, decisions. 'apital budgeting decisions are related to allocation of investible funds to different long-term assets. .hey have long-term implications and affect the future growth and profitability of the firm. In evaluating such investment proposals, it is important to carefully consider the e!pected benefits of investment against the e!penses associated with it./rgani#ations are fre"uently faced
with 'apital -udgeting decisions. Any decision that re"uires the use of resources is a capital budgeting decisions. 'apital budgeting is more or less a continuous process in any growing concern.
For E,am/)!: 0urchase of $and is an e!ample of 'apital -udgeting decision. Similarly replacement of outdated e"uipment with modern machines, purchase of a brand or business, computeri#ation and networ ing the organi#ation, investment in research and development of a product launch of a ma1or promotional campaign etc are all e!ample of 'apital -udgeting decisions. @owever, in all cases, the decisions have a long-term impact on the performance of the organi#ation. 4ven a single wrong decision may in danger the e!istence of the firm as a profitable entity.
IMPORTANCE OF CAPITAL BUDGETING:
.here are several factors that ma e capital budgeting decisions among the critical decisions to be ta en by the management. .he importance of capital budgeting can be understood from the following aspects of capital budgeting decisions. <. Lo"2 T!rm Im/)i a'io"s: 'apital -udgeting decisions have long term effects on the ris and return composition of the firm. .hese decisions affect the future position of the firm to a considerable e!tent. .he finance manger is also committing to the future needs for funds of that pro1ect. 34 $4 Su*s'a"'ia) Commi'm!"'s: .he capital budgeting decisions generally involve large commitment of funds. As a result, substantial portion of capital funds is bloc ed. Irr!0!rsi*)! D! isio"s: +ost of the capital budgeting decisions are irreversible decisions. /nce ta en the firm may not be in a position to revert bac unless it is ready to absorb heavy losses which may result due to abandoning a pro1ect midway.
54
A('!r '+! Ca/a i'y a"# S'r!"2'+ 'o Com/!'!: 'apital budgeting decisions affect the capacity and strength of a firm to face competition. A firm may loose competitiveness if the decision to moderni#e is delayed.
PROBLEMS 6 DIFFICULTIES IN CAPITAL BUDGETING:
74 Fu'ur! u" !r'ai"'y: 'apital -udgeting decisions involve long-term commitments. .here is lot of uncertainty in the long term. .he uncertainty may be with reference to cost of the pro1ect, future e!pected returns, future competition, legal provisions, political situation etc. <. Tim! E)!m!"': .he implications of a 'apital -udgeting decision are scattered over a long period. .he cost and benefits of a decision may occur at different point of time. .he cost of a pro1ect is incurred immediately. @owever, the investment is recovered over a number of years. .he future benefits have to be ad1usted to ma e them comparable with the cost. $onger the time period involved, greater would be the uncertainty. $4 Di((i u)'y i" 8ua"'i(i a'io" o( Im/a ': .he finance manger may face difficulties in measuring the cost and benefits of pro1ects in "uantitative terms. E,am/)!: .he new product proposed to be launched by a firm may result in increase or decrease in sales of other products already being sold by the same firm. It is very difficult to ascertain the e!tent of impact as the sales of other products may also be influenced by factors other than the launch of the new product.
ASSUMPTIONS IN CAPITAL BUDGETING:
.he 'apital -udgeting decision process is a multi-faceted and analytical process. A number of assumptions are re"uired to be made. 74 34 C!r'ai"'y .i'+ r!s/! ' 'o os' 6 B!"!(i's: It is very difficult to estimate the cost and benefits of a proposal beyond E-H years in future. Pro(i' Mo'i0! : Another assumption is that the capital budgeting decisions are ta en with a primary motive of increasing the profit of the firm.
T+! a 'i0i'i!s a" *! )is'!# as (o))o.s:
? (is-investments i.e., sale of division or business. ? 'hange in methods of sales distribution. ? 8nderta ings an advertisement campaign. ? 5esearch & (evelopment programs. ? $aunching new pro1ects. ? (iversification. ? 'ost reduction.
FEATURES OF INVESTMENT DECISIONS:
? .he e!change of current funds for future benefits. ? .he funds are invested in long-term assets. ? .he future benefits will occur to the firm over a series of years.
IMPORTANT OF INVESTMENT DECISIONS:
? .hey influence the firm’s growth in long run. ? .hey effect the ris of the firm.
? .hey involve commitment of large amount of funds. ? .hey are irreversible, or reversible at substantial loss. ? .hey are among the most difficult decisions to ma e.
TYPE OF INVESTMENT DECISIONS:
? 4!pansion of e!isting business. ? 4!pansion of new business. ? 5eplacement & +oderni#ation.
INVESTMENT EVALUATION CRITERIA:
? 4stimation of cash flows. ? 4stimation of the re"uired rate of return. ? Application of a decision rule for ma ing the choice. 'onsideration of cash flows is to determine true profitability of the pro1ect and it is an unambiguous way of identifying good pro1ects from the pool. 5an ing is possible it should recogni#e the fact that bigger cash flows are preferable to smaller ones & early cash flows are referable to later ones I should help to choose among mutually e!clusive pro1ects that which ma!imi#es the shareholders wealth. It should be a criterion which is applicable to any considerable investment pro1ect independent of other..here are number of techni"ues that are in use in practice. .he chart of techni"ues can be outlined as followsL
Ca/i'a) Bu#2!'i"2 T! +"i-u!s:
Tra#i'io"a) A//roa + 9or: No"1Dis ou"'!# Cas+ F)o.s 0ay -ac 0eriod %0-& Mo#!r" A//roa + 9or: Dis o""! '!# Cas+ F)o.s 7et 0resent Kalue %70K&
Accounting Rate of Return (ARR)Internal Rate of Return
0rofitability Inde! %0I& (iscounted 0ayable 0eriod
NET PRESENT VALUE :
.he 7et 0resent value method is a classic economic method of evaluating the investment proposals. It is one of the methods of discounted cash flow. It recogni#es the importance of time value of money,. It correctly postulates that cash flows arising of different time period, differ in value and are comparable only when their e"uivalent i.e., present values are found out.
T+! (o))o.i"2 s'!/s ar! i"0o)0!# i" '+! a) u)a'io" o( NPV: ? 'ash flows of the investment pro1ect should be forecasted based on realistic assumptions. ? An appropriate rate of interest should be selected to discount the cash flows, generally this will be the ) 'ost of capital rate, of the company. ? .he present value of inflows and out flows of an investment proposal, has to be computed by discounting them with an appropriate cost of capital rate. ? .he 7et 0resent value is the difference between the )0resent Kalue of 'ash inflows, and the present value of cash outflows.
? 7et present value should be found out by subtracting present value of cash outflows from present value of cash inflows. .he pro1ect should be accepted if 70K is positive. NPV ; Pr!s!"' Va)u! o( Cas+ i"()o. < Pr!s!"' 0a)u! o( '+! as+ ou'()o. A !/'a" ! Ru)!: Accept if 70K M G 5e1ect if 70K N G +ay accept if 70K O G /ne with higher 70K is selected.
INTERNAL RATE OF RETURN METHOD:
.he internal rate of return %I55& method is another discounted cash flow techni"ue ..his method is based on the principle of present value. It ta es into account of the magnitude & timing of cash flows. I55 nothing but the rate of interest that e"uates the present value of future periodic net cash flows, with the present value of the capital investment e!penditure re"uired to underta e a pro1ect. .he concept of internal rate of return is "uite simple to understand in the case of oneperiod pro1ect.
A !/'a" ! Ru)!:
Accept if r M 5e1ect if r N +ay accept if r O where r O rate return O opportunity cost of capital
PROFITABILITY INDE= 9OR: BENEFIT COST RATIO:
9et another time-ad1usted method of evaluating the investment proposals is the benefitcost %-/'& ratio of profitability inde! 0I&. It is benefit cost ratio. It is ratio of present value of future net cash inflows at the re"uired rate of return, to the initial cash outflow of the investment. Pr!s!"' Va)u! o( Cas+ i"()o.s PI ; 11111111111111111111111111111111111111111 Pr!s!"' Va)u! o( Cas+ ou'()o.s
A !/'a" ! Ru)! :
Accept if 0I M < 5e1ect if 0I N <
+ay accept if 0I O < 0rofitability Inde! is a relative measure of pro1ects profitability.
PAY BAC% PERIODE METHOD:
/ne of the top concerns of any person or organi#ation investing a large amount of money would be the time by which the money will come bac . .he concern ma ing the investment would want that at least the capital invested is recovered as early as possible. .he pay bac period is defined as the period re"uired for the proposal’s cumulative cash flows to be e"ual to its cash outflows. In other words, the paybac period is the length of time re"uired to recover the initial cost of the pro1ect. .he paybac period is usually stated in terms of number of years. It can also be stated as the period re"uired for a proposal to ;brea even’ on its net investment. .he paybac period is the number of years it ta es the firm to recover its original investment by net returns before depreciation, but after ta!es. If pro1ect generates constant annual cash inflows, the pay bac period is completed as followsL I"i'ia) I"0!s'm!"' Pay Ba > ; 111111111111111111111111 A""ua) as+ i"()o. In case of une"ual cash inflows, the paybac period can be found out by adding up the cash inflows until the total is e"ual to initial cash outlay.
Acceptance 5uleL
? Accept if calculated value is less than standard fi!ed by management otherwise re1ect it. ? If the paybac period calculated for a pro1ect is less than the ma!imum paybac period set up by the company it can be accepted. ? As a ran ing method it gives highest ran to a pro1ect which has lowest pay bac period, and lowest ran to a pro1ect with highest pay bac period.
DISCOUNTED PAY BAC% PERIOD:
/ne of the serious ob1ections to pay bac method is that it does not discount the cash flows. @ence discounted pay bac period has come into e!istence. .he number of periods ta en in recovering the investment outlay on the present value basis is called the discounted pay bac period. (iscounted 0ay -ac rule is better as it does discount the cash flows until the outlay is recovered.
ACCOUNTING RATE OF RETURN 9OR: AVERAGE RATE OF RETURN 9ARR: :
It is also nown as return on investment %5/I&. It is an accounting method, which uses the accounting information revealed by the financial statements to measure the profitability of an investment proposal. According to Solomon, A55 on an investment can be calculated as ) the ratio of accounting net income to the initial investment i.e., .
A0!ra2! N!' I" om! ARR ; 111111111111111111111111111 A0!ra2! I"0!s'm!"'
Average Income Average Investment
O O
Average of after ta! profit @alf of /riginal Investment
A !/'a" ! Ru)!:
? Accept if calculated rate is higher than minimum rate established by the management. ? It can re1ect the pro1ects with an A55 lower than the e!pected rate of return. ? .his method can also help, the management to ran the proposals on the basis of A55. ? A highest ran will be given to a pro1ect with highest A55, whereas a lowest ran to a pro1ect with lowest A55.
CAPITAL BUDGETING METHODS IN PRACTICE
? In a study of the capital budgeting practices of fourteen medium to large si#e companies in India, it was found tat almost all companies used by bac . ? *ith pay bac and/or other techni"ues, about E/Hrd of companies used I55 and about E/>th 70K. I55 s found to be second most popular method. ? 0ay bac gained significance because of is simplicity to use & understand, its emphasis on the early recovery of investment & focus on ris . ? It was found that </Hrd of companies always insisted on computation of pay bac for all pro1ects, </Hrd for ma1ority of pro1ects & remaining for some of the pro1ects. ? 5easons for secondary of (': techni"ues in India included difficulty in understanding & using threes techni"ues, lac of "ualified professionals & unwillingness of top management to use (': techni"ues. ? /ne large manufacturing and mar eting organi#ation mentioned that conditions of its business were such that (': techni"ues were not needed. ? 9et another company stated that replacement pro1ects were very fre"uent in the company, and it was not considered necessary to use (': techni"ues for evaluating such pro1ects. techni"ues in India included difficulty in understanding & using threes techni"ues, lac of "ualified professionals & unwillingness of top management to use (': techni"ues.
PROCESS CAPITAL BUDGETING PROCESS:
Atleast five phases of capital e!penditure planning & control can be identifiedL ? Identification % or /rgani#ation & of investment opportunities. ? (evelopment of forecasts of benefits and costs. ? 4valuation of the net benefits. ? Authori#ation for progressing and spending capital e!penditure. ? 'ontrol of capital pro1ects.
INVESTMENT IDEAS:
Investment opportunities have to be identified or created investment proposals arise at different levels within a firm.
Na'ur! o( I#!a
'ost reduction 5eplacement 0rocess/0roduct (evelopment 4!pansion (iversification
7ew 0roduct +ar eting (ept., % or& 0lant +anager
L!0!)
-----0lant $evel % >GI in India cover this level& .op management In India, it is insignificant
5eplacing an old +achine % or& Improving the 0roduction techni"ues. Investment proposals should be generated to employ the firm’s funds fully well & efficiently. :actory $evel.
FORECASTING :
'ash flow estimates should be development by operating managers with the help of finance e!ecutives. 5is associated should be properly handled. 4stimation of cash flows re"uires collection and analysis of all "ualitative and "uantitative data, both financial and nonfinancial in nature. +IS provide such data.
Corr! ' 'r!a'm!"' s+ou)# *! 2i0!" 'o :
? Additional wor ing capital ? Sale proceeds of e!isting assets. ? (epreciation ? :inancial flows %to be distinguished from operation flows&
EVALUATION :
Froup of e!perts who have no a e to grind should be ta en in selecting the methods of evaluation as 70K, I55, 0I, 0ay -ac , A55 & (iscounted 0ay -ac . 0ay -ac period is used as )0rimary, method & I55/70K as )Secondary, method in India. .he following are to be given due importance. ?r evaluation, minimum rate of return or cut-off is necessary. ? 8sually if is computed by means of weighted Average cost of 'apital %*A''& ? /pportunity cost of capital should be based on ris y ness of cash flow of investment proposals. ? Assessment of ris is an important aspect. Sensitivity Analysis & 'onservative for costs are two important methods used in India.
AUTHORI?ATION:
Screening and selecting may differ from one company to another. *hen large sums are involved usually final approval rests with top management. (elegation of approval authority may be effected sub1ect to the amount of outlay. -udgetary control should be rigidly e!ercised.
CONTROL AND MONITORY:
A 'apital pro1ects reporting system is re"uired to review and monitor the performance of investment pro1ects after completion and during their life.llow up comparison of the actual performance with original estimates to ensure better forecasting besides sharpening the techni"ues for improving future forecasts. As a result company may re-praise its pro1ects and ta e necessary action. Indian 'ompanies use regular pro1ect reports for controlling capital e!penditure reports may be "uarterly, half-yearly, monthly, bi-monthly continuous reporting.. ? 4!penditure to date ? Stage and physical completion ? Approved total cost ? 5evised total cost
DECISION MA%ING LEVEL:
r planning and control purpose three levels of (ecision ma ing have been identified L ? /perating ? Administrative ? Strategic
OPERATING CAPITAL BUDGETING:
Includes routine minor e!penditure, as office e"uipment handled by lower level management.
ADMINISTRATIVE CAPITAL BUDGETING:
:alls in between these two levels involves medium si#e investments such as business handled by middle level management.
STRATEGIC CAPITAL BUDGETING:
Involves large investment as ac"uisition of new business or e!pansion in a new time of business, handled by top management uni"ue nature.
Lo"2 T!rm Ca/i'a) Bu#2!'i"2 I" %ESORAM
PRE < INVESTMNET STAGE:
In a planned economy, as in India, the identification of public sector pro1ects needs to be done within the overall framewor of national the sectoral planning. All pro1ects of every sector
need to be identified scientifically at the time of plan formulation. In actual practice, however, it is observed that ;identification’ stage is the most neglected stage of the pro1ect planning.
.he five year plans indicate the broad strategy of planning economic growth rate and other basic ob1ectives to be achieved during the plan period. .he macro level planning e!ercise underta en at the beginning of every five year plan indicates broadly the role of each sector’s physical targets to be achieved and financial outlays, which could be made available for the development of the sector during the plan period.
.he identification of a pro1ect in the :ive 9ear 0lan is not the sanction of the pro1ect for implementation. It provides only the ;green signal’ for the preparation of feasibility report %:5G for appraisal and investment decision. A preliminary scrutiny of the :5 of the pro1ect is done in the +inistry and thereafter copies of the feasibility report are submitted to the appraising agencies, vi#., 0lanning 'ommission, -ureau of 0ublic 4nterprises and the 0lan :inance (ivision of the +inistry of :inance.
.hus the organi#ational responsibility for identifying these pro1ects rests with the concerned administrative ministry, in consultation with its public enterprises.
.he essential steps for pro1ect identification and preparation relates to studying %i& imports %ii& substitutes %iii& available and raw material %iv& available technology and s ills %v& interindustry relationship %vi& e!isting industry %vii& development plans %viii& old pro1ects etc.
It may be mentioned that in actual practice, these steps are hardly scientifically studied and followed by the administrative ministry public sector underta ing at the time of pro1ect identification. .he public sector pro1ects many a time come spontaneously on the basis of ideas and possibilities of demand or availability of some raw materials and not an outcome of scientific investigation and systematic search for feasible pro1ects.
PROJECT FORMULATION :
.he second stage of )0ro1ect 'ycle, vi#. 0ro1ectrmulation, is a pre-investment e!ercise to determine whether to invest, where to invest, when to invest and how much to invest. .he pro1ect/feasibility reports are meant to provide re"uired information for assessing technical, financial, commercial, organi#ation and economic viability of the pro1ect planning in India, mainly because of relatively late reali#ation of its importance. As a result, the investment decisions for large pro1ects in the past were ta en on half-ba ed and ill-conceived pro1ects and time-over runs and cost-over runs of public sector pro1ects have become a regular feature rather than e!ception.
In early seventies along with the setting up of the 0ublic Investment -oard %0I-& the Fovernment created a new pro1ect Appraisal (ivision in the 0lanning 'ommission. 0ro1ects, in <B=C. .his guidelines, unli e earlier manual, indicates all the information and data re"uired to be presented and analysed in the feasibility report, so as to enable the appraisal agency to carry out %i& technical analysis P to determine whether the specification of technical parameters are realistic, %ii& financial anaylsis P to determine whether the proposal is financially viable, %iii& commercial analysis P to determine soundness of the product specifications, mar eting plans and organi#ation structure and %iv& economic analysis, to determine whether a pro1ect is worthwhile from the point of view of nation and economy as a whole. .his (ivision prepared and circulated )Fuidelines for preparing :easibility 5eports of Industrial
.he guidelines describes in details, the information re"uired to be given and analysed on the following issues L %a& general information of the sector, %b& ob1ective of the proposal, %c& alternative ways, if any of attaining the ob1ectives and better suitability of the proposed pro1ect, %d& pro1ect description P gestation period, costs, technology proposed, anticipated life of the pro1ect etc., %e& demand analysis, total demand / re"uirements of the country, including anticipated imports and e!ports and share of the proposed pro1ect, %f& capital costs and norms assumed, activity wise and year wise, %g& operating costs and norms, %h& revenue and benefits estimation etc.
PROJECT APPRAISAL :
.he appraisal of the pro1ect follows the formulation stage. .he ob1ective of the appraisal process is not only to decide whether to accept or re1ect the investment proposal, but also to recommend the ways in which the pro1ect can be redesigned or reformulated so as to ensure better technical, financial, commercial and economic viabilities. .he pro1ect appraised which is an essential tool for 1udicious investment decisions and pro1ect selection is a multi-disciplinary tas . -ut many a times this is considered doubt, have played an important role in contributing systematic methods for forecasting the future and evolving appraisal methods to "uantify socials costs and benefits, but they alone can not carry out complete appraisal of an investment proposal.
.he need for pro1ect appraisal and investment decisions based on social profitability arises mainly because of the basic characteristics of developing countries limited resources for development and multiple needs P ob1ective of planning being ;4conomic Frowth with Social
Dustice’. .he pro1ect appraisal is a convenient and comprehensive fashion to achieve, the laid down ob1ectives of the economic development plan. .he appraisal wor presupposes availability of a certain minimum among of reliable and up to date data in the country, as well as the availability of trained persons to carry out the appraisal analysis.
As stated earlier the investment decision of public sector pro1ects are re"uired to be ta en within the approved plan frame wor . .he 0ro1ect Appraisal (ivision %0A(& that prepares the comprehensive appraisal note of pro1ects of 'entral 0lans was therefore set up in 0lanning 'ommission. .he :inance +inistry issues e!penditure sanction for all investment proposals within the frame wor of annual budget. .he plan :inance (ivision and the -ureau of 0ublic 4nterprises of the :inance +inistry are also re"uired to e!amine and give comments on the investment proposals of public.
DATA ANALYSIS
All finance activity commences with an investment proposal, which calls for a financial appraisal of a pro1ect. @ere, capital -udgeting has its role. 4ach one of the pro1ects is appraised on following basis, ? 'ost 4stimates. ? 'ost Fenerations.
Cos' Es'ima'!s :1
:easibility 5eport of the pro1ect is prepared based on the cost of similar units prevailing at the time of preparation of pro1ects report of the latest costs are not available, the same should be escalated. 'ollection of data with regard to the cost of the various e"uipment should from part of a continuous planning so tat a realistic cost estimate is made for the pro1ect 5eports for civil wor s are generally based on 34S/5A+ schedule of rates with reasonable premium there on.
Cos' o( G!"!ra'io" :1
.he financing of public sector company is generally based on (ebt 4"uity of HL< the general rate of interest chargeable by the central Fovernment on loan components is <G.>I % 7ow enhanced to <<I& . .he plant life as provided under the 4lectricity Supply Act, <BC6 is E> years and depreciation based on this period has to be calculated on straight line method, on BGI of the cost fi!ed assets. .he operation & maintenance e!penses are generally of the order E.>I of the capital cost based on the above assumptions, the cost of generation could be wor ed out discounted cash flow basis ta ing <EI I55 %Internal 5ate of 5eturn&. .his rate has been generally accepted by various appraising agencies of the power pro1ects. :easibility 5eport based on above methodology and indicating site selection, coal lin age, power distribution e!amined by 'entral 4lectricity Authority in all cases where %0ublic investment is 5s.< 'rore and above. Since 34S/5A+ is public sector underta ing, all the investment decisions have to be formally sanctioned by Fovernment after 0I-’s Investment -oard’s& clearance.
SHARE CAPITAL :
.he entire share capital is owned by Fovernment of India. (uring the 9ear no addition has been made. @owever the authori#ed capital has been increased from 5s. 6G,GGG million to 5s.<,GG,GGG million and the face value or share has been split to 5s.<G/- each from 5s.<GGG/each.
ROLE OF FINANCE MANAGEMENT IN INVESTMENT DECISIONS IN %ESORAM:
:inance +anager is the number of a pro1ect team. @e plays an important role in
investigation stage of the pro1ect, when various alternatives are analysed & the most optimum solution is decided upon. .he soundness upon the accuracy of the data & as a finance manager has to "uesting and satisfy himself on the validity of the data.
.he power pro1ects are e!tremely capital intensive and before large resources are committed to a scheme a detailed feasibility study need to be prepared covering-
? .he need of the pro1ect ? .he demand pro1ections ? .he alternatives of the site locations ? .he broad parameters of the plant and e"uipment ? .he cost estimates ? .he viability of the scheme. Cos' Es'ima'!s L- 'ost estimates and financial 1ustification and returns of the pro1ects are the areas where financial management has to play its role. 'ost estimates should be prepared by the cost engineers and vetted by the finance manager. 'ost engineering is a speciali#ed filed & need to be developed in the contest of power pro1ects because of insufficient cost data on the components of the pro1ects.
.his raises an important "uestion of the present methodology of preparing the cost estimates without any provision for price contingencies. -ecause of time lag between preparation of cost estimates and investment decisions, after its scrutiny by the appraising agencies, these estimates are already out of data and hence would need updating.
CAPITAL BUDGETING E=AMPLE OF STAGE I 6 II
Sl. Schemes /utlay
<. E. H.
Stage-I % H ! EGGGG +.& Stage- II% H ! >GGGG +.& Stage-III% < ! >GGGG+.&
>,C6,BE,GG,GGG <<,GH,?B,GG,GG <EEB.H6%+illions&
Stage P I consisting outlay of >,C6,BE,GG,GGG this is 5ecovered in > years of time.
RECOVERY OF PROJECTS 9S'a2!1I::
llowing calculations are under consider 8nder (iscounted 0ay -ac 0eriodL Stage P I % H ! EGGGG &/utlay L >,C6,BE,GG,GGG
NET PRESENT VALUE:
Y!ar Cas+ I"()o.s < E H C > 5s. <.<EB.H6C.GGG 5s. <.H<G.6B>.GGG 5s. <.=?<.6=B.GGG 5s. <.=HE.G6?.GGG 5s. E.<BH.G?<.GGG
Dis4 @73A Pr!s!"' Va)u! o( Cas+()o.s G,6BE G,=B= G,=<< G,?H> G,>?= 5s. <.GG=.C<G.>E6 5s. <.GCH.B6?.H<> 5s. <.E>E.?B>.B?B 5s. <.<GB.6=C.?<G 5s. <.ECH.C?>.>6= Rs4 B4C5D45$$4E7E Rs4 B45FG43EE4EEE Rs4 7BF43$$4E7E
Pr!s!"' Va)u! o( Cas+ F)o.s L!ss: Cas+ Ou')ay N!' Pr!s!"' Va)u!
F5A0@ <L
InterpretationL
.he 7et 0resent Kalue is the difference between the ) 0resent value of cash inflows, and )0resent value of cash outflows. PROFITABILITY INDE= 9 P4I:: Y!ar <BBB-GG EGGG-G< EGG<-GE EGGE-GH EGGH-GC EGGC-G> EGG>-G? EGG?-G= EGG=-G6 EGG6-GB EGGB-<G I"0!s'm!"'s 9I" La>+s: E,BC>,G6H.H= H,GCG,EBH.<= H,<BE,CCC.E6 H,G=<,<6H.<< H,>C>,E<G.6= B,GE>,6=C.GG H,BB<,C>B.CG C,GH6,<<C.EG H,??=,CC<.<> =,HH6,GGG.GG E,G6B,==>.GG .otalL 0.K. of 'ash Inflows --------------------------Initial 'ash outlays CB66B? --------->E>GGG Cas+ i"()o.s9P4V4: <6<6G EC=6G C>G=G >C?CG <6?HG <?<EBG <BE<G <<<HG ?>CEG <BEHH ?<HEH 5GFFGC Cas+ Ou' F)o.s 9I"i'ia): EGGGG HGGGG ?GGGG 6GGGG HGGGG EEGGG HHGGG =GGGG CGGGG 6GGGG ?GGGG B3BEEE
0I
O
O
O
G.B>
GRAPH 3 :
Investments (In Lakhs) 10,000,000.00 8,000,000.00 6,000,000.00 4,000,000.00 2,000,000.00 0.00
00 02 04 06 08 99 03 05 01 07 09 10
Investments (In Lakhs)
20
19
20
20
20
I"'!r/r!'a'io":
a& .he profitability inde! of present value of cash inflows and cash out flows is fluctuation from year to year in the year <BBB-GG the present value of cash inflows is <6<6G were as in the year EGGB-<G has been increased with ?<HEH. b& .he highest cash inflows has been recorded in EGGC-EGG> as <?<EBG and lowest has been recorded as <6<6G in the year <BBB-GG.
PAY BAC% PERIOD:
20
Y!ar <BBB-GG EGGG-G< EGG<-GE EGGE-GH EGGH-GC EGGC-G> EGG>-G? EGG?-G= EGG=-G6 EGG6-GB EGGB-<G .otalL
I"0!s'm!"'s 9I" La>+s: CG,GGG.GG ?G,GGG.GG =G,GGG.GG EG,GGG.GG <G,GGG.GG ??,GGG.GG E>,GGG.GG <E,GGG.GG BG,GGG.GG HG,GGG.GG >G,GGG.GG 5D$HEEE4EE
Cas+ i"()o.s9P4V4: 6GGG <?GG EEGG C>GG CGGG HGGG EBGG <<GG <?GG <EGG <6GG $7GEE
Cas+ Ou' F)o.s 9I"i'ia): EGGGG HGGGG ?GGGG 6GGGG HGGGG EEGGG HHGGG =GGGG CGGGG 6GGGG ?GGGG B3BEEE
0ay -ac 0eriod
O
Initial Investments --------------------------Annual 'ash inflows CG,GGG --------6GGG > 9ears
O
F5A0@ HL
Investments (In Lakhs) 100,000.00 80,000.00 60,000.00 40,000.00 20,000.00 0.00
00 04 08 99 01 03 05 07 09 10 02 06
Investments (In Lakhs)
19
InterpretationL
a& In the 0ay -ac method the Investment and the case inflows are fluctuating from year to year where as in the year <BBB-GG it is CGGGG and in the year EGGB-<G is >GGGG. b& 'ash inflows are in the order of increasing to decreasing from <BBB-GG and EGGB<G.
AVERAGE RATE OF RETURN: Y!ar EGGG-G< I"0!s'm!"'s 9La>+s: CGG,GGG.GG A0!ra2! I" om! Cas+ F)o.s a('!r Ta,!s 9T+ousa"#s: EGGGG <GGGGG
20
20
20
20
20
EGG<-GE EGGE-GH EGGH-GC EGGC-G> EGG>-G? EGG?-G= EGG=-G6 EGG6-GB EGGB-<G .otal
C6G,GGG.GG E6G,GGG.GG ECG,GGG.GG <>G,GGG.GG E?G,GGG.GG ?GG,GGG.GG <GG,GGG.GG E>G,GGG.GG >EG,GGG.GG $H3FEHEEE4EE
<>GGG E6GGG 6>GGG =>GGG ?CGGG =6GGG E>GGG <6GGG EEGGG 5$EEEE Average Income ---------------------Average Investments EGGGG --------CGGGGG O G.G?I
E?GGGG CCGGGG =>GGGG <?GGGG EGGGGG HGGGGG ?GGGGG 6GGGGG =>GGGG 5$CEEEE
Average 5ate of 5eturn
O
O
F5A0@ CL
Investments (Lakhs) 800,000.00 600,000.00 400,000.00 200,000.00 0.00 2001-02 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Fuel -ene#at!,n ."m!n!st#at!,n ( /the# 0'+enses Inte#est ( %e+#e)!at!,n 2% F!nan)e 8% *ha#$es 14% Fuel 51% &a' 3% %!v!"en"s 5% eat!ne" ea#n!n$s 17% eat!ne" ea#n!n$s %!v!"en"s &a' Inte#est ( F!nan)e *ha#$es %e+#e)!at!,n
Investments (Lakhs)
2000-01
InterpretationL
a& Average rate of return is calculated based on Average income and Average investment where as Average income in the year EGGH-GC is EGGGG and investments in the year EGGB<G is CGGGGG. b& .he value from EGGH-GC and EGGB-<G are fluctuating from year to year.
DISTRIBUTION OF REVENUE 3E3E13E3E
2002-03
I"'!r/r!'a'io"s:
a& b& In the year EGGB-<G the revenue is distributed in the from of fuel retained earning, dividends is latest finance change, depreciation and for employees. *here as in the year EGGB-<G it is been fluctuated the rates compare to the year EGGB<G.
TABLE D: FY YEAR
EGGC-G> EGG>-G? EGG?-G= EGG=-G6
NET BLOC% 9IN LA%S:
E6C=H6 HEHG6H HE6B<? H6?<G?
EGG6-GB EGGB-<G
CGGH6< >EG6?<
NET BLOC% AND GROSS FI=ED ASSETS
600000 500000 400000 300000 200000 100000 0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 284738 323073 328916 366106 400281 1e#!es1 520761
I"'!r/r!'a'io"s:
a& b& :rom EGG?-EGG= the net bloc and gross fi!ed assets is HE6B<?. *here as the 7et -loc and gross fi!ed asset is been increased in the year EGGB-<G.
TABLE F: FY YEAR
EGGC-G> EGG>-G? EGG?-G= EGG=-G6 EGG6-GB
NET SALES9IN LA%S:
EEBG>> E>6<<= E6?C>H H<>CGG H>>>GE
EGGB-<G
CCGHGE
NET &ORTH AND NET ASSETS
500000 450000 400000 350000 300000 250000 200000 150000 100000 50000 0 04-05 05-06 06-07 07-08 08-09 355501 258117 286453 315040
440201
229045
1e#!es1
09-10
I"'!r/r!'a'io"s:
a& b& 7et worth and net assets has been increasing from year to year from EGG>-G? it is EEBG>> and compare to EGGB-<G it has been increased to CCGHGE. -y observing the chat we can say the net worth and net assets has been increasing from EGG>-G? to EGGB-EG<G.
TABLE G :
FY YEAR
EGGC-G> EGG>-G? EGG?-G= EGG=-G6 EGG6-GB EGGB-<G
PROFIT AFTER TA=
HCEC> H=HH6 H>HB? H?G6> >E?GB =EGHE
PROFIT AFTER TA=
80000 70000 60000 50000 40000 30000 20000 10000 0 34245 37338 35396 36075 52608
72022
1e#!es1
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
I"'!r/r!'a'io"s:
a& .he chart show the increase value after the deduction of ta! in the year EGGB-<G. b& .he 0rofit is changing from year to year in the year EGGC-G> it is HCEC> where as increasing value in the year EGGC-EGG> and decreased, in the year EGGB-<G the value is increased.
TABLE 7E : FY YEAR
EGGC-G> EGG>-G? EGG?-G= EGG=-G6 EGG6-GB EGGB-<G
PO&ER GENERATION 9M UNITS:
=C=G =G6G =GBG <GBEH <B=BG <BEH=
GENERATION AND SALES
25000 20000 15000 10823 10000 5000 0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 7470 7070 7080 1e#!es1 19790 19237
GENERATION IN MUS < SALES IN MILLIONS:
I"'!r/r!'a'io"s:
a& /n the J P airs year are been shown from EGGC-G> to EGGB-<G and the value has been increasing from year to year. b& In the year EGGC-G> the generation and sale has been =C=G and the value has been increasing year to year but EGGB-EGEG the value is decreasing.
:I7(I7FS A7( S8FF4S.I/7S
FINDINGS ANDSUGESSTIONS
? .he 'orporate mission of 34S/5A+ is to ma e available reliable and "uality power in increasingly large "uantities. .he company will spear head the process of accelerated development of the power sector by e!peditiously planning, implementing power pro1ect and operating power stations economically and efficiently. ? As in pro1ect implementation, the station continued to e!cel in power generation with the power station having reached its first goal of total capacity installation. 5amagundam is generating power at consistently high plant load factor. ? .he organi#ation needs the capable personalities as management to lead to organi#ation successfully. .he management ma e the plans and implement of these plans. .hese plans are e!pressed in terms of long-term investment decisions.
? .he special budgets are rarely used in the organi#ation li e long-term budgets, research & development budget and budget and budget for constancy. ? :rom the 5evenue budget for the year EGGG-EGGH, it is clear that the Actual sales % 5s. <?6>>E.>G lac s& are more then the budgeted or 4stimated sales % 5s. <?CEG6.>C lac s&. It is a good sign and the overall earnings of the budget indicate high volume over estimated. ? :uel utili#ation is perfectly carry out in 5S.0S. And 'ash from Ash effectively carry out the 1ob. ? 7ew pro1ects acceptance consider on the basis of 5eturn -enefits. 5is is evaluated while considering the new pro1ects.
CONCLUSIONS
? 4very organi#ation has pre-determined set of ob1ective and goals, but reaching those ob1ectives and goals only by proper planning and e!ecuting of the plans economically. ? *ith in a Short span of its e!istence, the corporation has commissioned <B>GE +* as on H<st +arch, EGGG with an operating capacity of <B.BI. 34S/5A+ today generate EC.BI of nation’s electricity. 34S/5A+ is presently e!ecuting <E 'ement manufacturing 0ro1ects and ? Fas based cement manufacturing pro1ects with a total approved capacity of EB,BH> +. as on H<st +arch EGGC.
-I-$I/F5A0@9
R!(!r!" !s :
:inancial accounting 'ost and management accounting :inancial accounting Accounting for management
&!*si'! : www.google.com www.34S/5A+.com www.yahoofinance,com
doc_917579004.doc
CAPITAL BUDGEING:
An efficient allocation of capital is the most important finance function in modern times. It involves decisions to commit firm’s funds to long-term assets. Such decisions are tend to determine the value of company/firm by influencing its growth, profitability & ris . Investment decisions are generally nown as capital budgeting or capital e!penditure decisions. It is clever decisions to invest current in long term assets e!pecting long-term benefits firm’s investment decisions would generally include e!pansion, ac"uisition, moderni#ation and replacement of long-term assets.
Such decisions can be investment decisions, financing decisions or operating decisions. Investment decisions deal with investment of organi#ation’s resources in $ong tern %fi!ed& Assets and / or Short term %'urrent& Assets. (ecisions pertaining to investment in Short term Assets fall under )*or ing 'apital +anagement,. (ecisions pertaining to investment in $ong term Assets are classified as )'apital -udgeting, decisions. 'apital budgeting decisions are related to allocation of investible funds to different long-term assets. .hey have long-term implications and affect the future growth and profitability of the firm. In evaluating such investment proposals, it is important to carefully consider the e!pected benefits of investment against the e!penses associated with it. /rgani#ations are fre"uently faced with 'apital -udgeting decisions. Any decision that re"uires the use of resources is a capital budgeting decisions. 'apital budgeting is more or less a continuous process in any growing concern.
NEED FOR THE STUDY
? .he 0ro1ect study is underta en to analy#e and understand the 'apital -udgeting process in cement manufacturing sector, which gives mean e!posure to practical implication of theory nowledge.
? .o
now about the company’s operation of using various 'apital -udgeting
techni"ues. ? .o now how the company gets funds from various resources.
OBJECTIVES OF THE STUDY
? .o study the relevance of capital budgeting in evaluating the pro1ect for pro1ect finance ? .o study the techni"ue of capital budgeting for decision- ma ing. ? .o measure the present value of rupee invested. ? .o understand an item wise study of the company financial performance of the company. ? .o ma e suggestion if any for improving the financial position if the company. ? .o understand the practical usage of capital budgeting techni"ues ? .o understand the nature of ris and uncertainty
METHODOLOGY
.o achieve aforesaid ob1ective the following methodology has been adopted. .he information for this report has been collected through the primary and secondary sources.
Primary sour !s
It is also called as first handed information2 the data is collected through the observation in the organi#ation and interview with officials. -y as ing "uestion with the accounts and other persons in the financial department. A part from these some information is collected through the seminars, which were held by 34S/5A+
S! o"#ary sour !s
.he secondary data have been collected through the various boo s, maga#ines, brouchers & websites
LIMITATION OF THE STUDY :
? $ac of time is another limiting factor, ie., the schedule period of 6 wee s are not sufficient to ma e the study independently regarding 'apital -udgeting in 34S/5A+.
? .he busy schedule of the officials in the 34S/5A+is another limiting factor. (ue to the busy schedule officials restricted me to collect the complete information about organi#ation. ? 7on-availability of confidential financial data. ? .he study is conducted in a short period, which was not detailed in all aspects. ? All the techni"ues of capital budgeting are not used in 34S/5A+. .herefore it was possible to e!plain only few methods of capital budgeting.
I7(8S.59 05/:I$4
INTRODUCTION OF CEMENT:
.he basic need of human being is food clothing and shelter love and affection /possession is on never ending process for a human being.
As the time passes on human beings their wants and wishes also changed from ancient times to modern times and among them the living pattern and costruction wor s also have been changed from temporary construction of house to permanent construction and the basic material used in construction is )'ement,.
'ement the word derived from a latin word ;'4+47..8+’ means stone chipping such as we used in roman. 'ement the word as per o!ford, it is commonly used is any substance applied for soft stoc ing things. -ut cement means is most vital and important material for modern constructions. It is a material which sets and hardness when mi!ed with water. 'ement is basically used in construction as a building agent. In ancient times clay bric s and stones have been used for construction wor s. .he 5omans were using a binding or a cementing material that would harden and water. .he first systematic effort was made by )S+4A./7, who undertoo the e!ecution of a new light house in <=>?. @e observed that production obtained by during lime stone was the best cementing material for wor under water.
.he construction in lost centuries was with $ime that was the main e"uipment used for construction wor . .he ancient constructions li e .a1mahal, Autubminar, +ysore 0alace, 5ed fort, 'harminar etc., the evidence of lime construction.
THE INDIAN CEMENT INDUSTRY:
-y staring priduction in <B<C the story of India cement industry is a stage of continuous of growth. India is the fourth largest cement producer after 'hina, Dapan and 8.S.A. so far annual production and demand has been growing a pace at roughly ?6 million tons with an installed capacity of 6E millions tons. In <B<C as the foundation of stable cement Industry was laid as sun above. It was Indian 'ement 'ompany at 0orbandar in Fu1arat. In <BEG, the cement mar eting corporation was formed to promote the sale and distribution of cement. A significant development was made in <BHG when all manufacturers mergers together to form the Associated 'ement 'ompany $imited.
'ement Industry is the ma1or Industry it has ta en rapid strides for a modest beginning at porbandar in <B<C to the <B6G’s with over understanding out of the ?G units, <C units are in the public sectors remaining units are in private sector. Indian endowed with cement grade lime stones %BG -illion tons & and coal %<BG -illion tons &. .he basic raw material re"uired for cement manufacture and self sufficient in manufacturing cement ma ing machineries. (uring nineties it had a particular impressive e!pansion with a growth rate of <GI. .he strength and vitality of cement Industry can be gouged by the intrest shown and support given by *orld -an , considering the e!cellent performance of the industry in utili#ing loans and achieving the ob1ectives and targets. .he *orld -an is e!amine the feasibility of providing a third line of credit for further upgrading Industry in varying areas, which will ma e it global. .herefore, India today totally installed capacity of over HG million tons, employing over a <GG thousand people directly and contributing amount of rupees 6 billion to India’s F(0.
TECHNOLOGY:
'ement may be manufactured employing three alternative technologies.
<. E. H.
.he largely out molded well process technology. .he more modern dry process that re"uires only <BI coal utili#ation. .he latest percallinator technology through which optimum utili#ation may be achieved. @ere the calcinatory or raw.
+aterial is partly or completed carried out before the feud enters the rotator in besides saving power, the adoption of this technology enable in increase in installed capacity by HG-H>I, the HG,GGG tons per day plants being setup in the country use this technology.
TECHNOLOGICAL CHANGES:
'ontinuous technological upgrading and assimilation of latest technology has been going on in the cement industry. 0resently BHI of the total capacity in the industry is based on modern and environment friendly dry process technology and only =I of the capacity is based on old wet and semi-dry process technology. .here is tremendous scope for waste heat recovery in cement plants and there by reduction in emission level. /ne pro1ect for co-generation of power utili#ing waste heat in an Insian cement plant is being implemented with Dapanese assistance under Freen Aid 0lan. .he induction of advanced technology has helped the industry immensely to conserve energy and fuel and to save materials substantially.
India is also producing different varieties of cement li e /rdinary 0ortland 'ement %/0'&, 0ortland 0u##ling 'ement %00'&, 0ortland -last :urnace Slag 'ement %0-:S&, /il *ell 'ement, 5apid @ardening 0ortland 'ement, Sulphate 5esisting 0ortland 'ement, *hite 'ement etc. production of these varieties of cement conform to the -IS Specifications. Also, some cement plants have set up dedicated 1etties for promoting bul transportation and e!port.
TOTAL PRODUCTION:
.he cement industry comprises of <E> large cement plants with an installed capacity of <C6.E6 million tons and more than HGG mini cement plants with an estimated capacity of <<.<G million tons per annum. .he 'ement 'orporation of India, which is a 'entral 0ublic Sector 8nderta ing, has <G units. .here are <G large cement plants owned by various state Fovernments. .he total installed capacity in the country as a whole is <>B.H6 million tons.
Actual cement production in EGGC-G> was <<?.H> million tons as against a production of <G=.BG million tons in EGGH-GC, registering a growth rate of 6.6CI. +a1or players in cement production are Ambu1a cement, Aditya cement, D 3 'ement and $ & . cement. Apart from meeting the entire domestic demand, the industry is also e!porting cement and clin er. .he e!port of cement during EGGH-GC and EGG>-G? was >.<C million tons and ?.BE million tons respectively. 4!port during April-+ay, EGG> was <.H> million tons. +a1or e!porters were Fu1arat Ambu1a 'ements $td. and $ & . $td. .he planning commission for the formulation of J :ive 9ear 0lan constituted a ;*or ing Froup on 'ement Industry’ for the development of cement industry. .he *or ing Froup has identified following thrust areas for improving demand for cement2 <. E. H. :urther push to housing developments programs2 0romotion of concrete @ighways and roads, and 8se of ready-mi! concrete in large infrastructure pro1ects.
'ement industry has been decontrolled from price and distribution on <st march <B6B and delicensed on E>th Duly <BB<. @owever, the performance of the industry and prices of cement are monitored regularly. -eing a ey infrastructure industry, the constraints faced by the
Actual cement production in EGGC-G> was <<?.H> million tons as against a production of <G=.BG million tons in EGGH-GC, registering a growth rate of 6.6CI. +a1or players in cement production are Ambu1a cement, Aditya cement, D 3 'ement and $ & . cement. Apart from meeting the entire domestic demand, the industry is also e!porting cement and clin er. .he e!port of cement during EGGH-GC and EGG>-G? was >.<C million tons and ?.BE million tons respectively. 4!port during April-+ay, EGG> was <.H> million tons. +a1or e!porters were Fu1arat Ambu1a 'ements $td. and $ & . $td.
.he planning commission for the formulation of J :ive 9ear 0lan constituted a ;*or ing Froup on 'ement Industry’ for the development of cement industry. .he *or ing Froup has identified following thrust areas for improving demand for cement2 C. >. ?. :urther push to housing developments programs2 0romotion of concrete @ighways and roads, and 8se of ready-mi! concrete in large infrastructure pro1ects.
'ement industry has been decontrolled from price and distribution on < st march <B6B and delicensed on E>th Duly <BB<. @owever, the performance of the industry and prices of cement are monitored regularly. -eing a ey infrastructure industry, the constraints faced by the industry are reviewed in the Infrastructure 'oordination 'ommittee meetings held in the 'abinet Secretariat under the 'hairmanship of Secretary %'oordination&. .he CCC 'ommittee on Infrastructure also reviews its performance.
DISTRIBUTION SYSTEM:
(istribution of cement was entirely under Fovernment control until <B6E. at present the Industry has to ma e an agreement towards the levy "uota which is to be sold compulsorily to the Fovernment the rest of the output or open mar et "uota may be sold in the open mar et evolved prices the output lifted by the Fovernment is allocated state wise.
NEED AND IMPORTANCE: In India we see rapid industrial development in the last few centuries. Indian industry is growing at considerable ratio which reveals India is a developing country. And there are different industrial sectors are playing a vital role for the economy’s development. .hey are steel cement S/:. Information .echnology +edical Science etc. /ne among them was )'4+47. I7(8S.59, which plays a vital role for the country’s development. In India cement industry is growing rationally and mar eting is the ing pin of all activities particularly to the business because of this changes in the e!ternal environment i.e., social, political, legal, technical and international environment and changes in mar eting. .here
is increased in the salaries in all most in every mar et leading to competition is aspects of price, promotion etc., which help to increase the standard of living of people. .he manufacturers of 'ement li e 3esoram cement, India limited, /rient limited, 8ltratech etc. are providing cement and they are distributing cement through wide networ of dealers. 3esoram cements are doing its business from decades and it is continuously contributing to the national economy. In even Industry now a days there is no special interest for particularly department li e production or manufacturing but now a days total "uality management plays a vital for the company’s success. (istribution channel which plays a vital role for the company success. (istribution channels are lin between the company and consumers.
CHAPTER $
COMPANY PROFILE
PROFILE OF THE COMPANY
/ne among the industrial gains in the country today serving the nation on the industrial front esoram industries limited has a tenured and e!tent full history dating hoc to the twenties when the industrial house of -irla’s en"uired it.*ith only a .e!tile mill under its banner in <BEC,it grew from strength and spread its activities to newer fields li e 5ayon pulp .ransparent 0aper.Spun pipes and 5efectory .yres oil mills and refinery 4!traction. $oo ing to the wide gap between the demand and supply of vital commodity cement which it plays on important role in 7ation -uilding, the government 0rivate entrepreneurs to argument the cement production 3esoram rose to the occasion and decided to set up few cement plants in the country. 3esoram cement is one of the prestigious units in the renowned 3esoram industries group that is one of India’s leaden industrial conglomerates, under the leadership of +r.-.3.-irla, the famous personality of Indian Industry, who owes branches all over India.
3esoram cement Industry is one of the leading manufactures of cement in India 3esoram cement is a division of 3esoram Industries limited. It is a dry process cement plant. It is located at -asant 7agar in 3arimnagar (istrict of Andhra 0radesh with the plant capacity is 6.E? la hs tones per annum. It is 63ms away from the 5amagundam 5ailway Station $ining +adras to 7ew (elhi.
PLANTS SETUP:
.he first cement point of 3esoram with a capacity of E.< lac s tones per annum incorporating @umboldt’s suspension preheated system was committed during the year <B?B. .he second unit was setup in the year <B=< with capacity of E.<lac s tons which added to the above plant capacities. .he third plant with a capacity of E.>lac s tons per anum, which went on stream in the year <B=6. .he coal for this company is obtained by singareni collieries and the power is obtained from A0S4-. .he power demand capacity for the factory is about E<+.*. 3esoram has got EGF sets of C+7 each installed in the year<B6=. 3esoram cement belongs to the -irla group companies one of the industrial giants in the country. 3esoram cement industries distinguished it self among the cement factories in India by bagging the national productivity award for two successive years i.e., in <B6>-6? and 6=. 3esoram cement also got the :A0''I award for best family planning effort in the state for the year <B6=-66. 3esoram also bagged 7'-'7’S national award for energy conservation for the year <B6B-BG. .he 3esoram industries loo for the welfare of the employees and it provide various facilities which the employees and it provide various facilities which the employee feels satisfied with in the organi#ation and after the wor they fees satisfies the wor er and wor s families by providing various welfare schemes and by providing recreational facilities of a glace. .he company set up )5ecreation 'lub, for the purpose of recrimination facilities two auditoriums are provided for playing indoor games li e chess, shuttle and caroms and for organi#ing cultural functions and activities li e drama, music, and dance centers etc. It provides $ibrary and reading rooms for the benefit of the
employees more than >GGG boo s are available in the library along with other 7ewspapers and maga#ines. .hey setup 4nglish and .elugu medium schools for the growth of wor ers child. .he company provides )(ispensary, with a "ualified medical offer and +edical staff for the benefit of the employees. A @ouse Dournal in the name of -asant 7agar sam char is brought out "uarterly where an all important activities and information of the plant is published. .he company provides cooperative stores where the supply essential commodities li e rice, wheat, sugar, erosene etc. at cash and credit basis. .hey conduct games for twice a year on the occasion of E?th Danuary 5epublic (ay and <>th August Independence (ay in order to encourage the employees, outside of their wor station. .he family planning camps are held regularly with the help of the (istrict +edical and @ealth Authorities at the Fovernment @ospital. It has got on award for their e!cellent service. 7ot only the employees of the factory are ta en care, butthe company plays a lot of attention towards the rural development activities. .welve villages are adopted and the company has e!tended help in constructing temples, road, and giving programmers to the farmers, 4ye surgical camps health chec up schemes etc.
.o eep the ecological balance, company has also underta en massive tree plantation in and around -asant 7agar and near by villages there by eliminating the pollution and they have been nominated by the government of India for )K583S@A+I.5A A*A5(, but effort of an industrial unit in the state for rural development <BBC-B> presented by '+ in march <BB?.
BRANDS:
3esoram brands with namely -irla Supreme and -irla supreme gold %>H grades& has made a niche with outstanding "uality and commands a premium in the mar et. .he latest offering, )-irla Sha thi, is also very well received and is the most sought offer brand now.
%ESORAMS CAREER:
3esoram has an outstanding trac record. Achieving <GGI capacity utili#ation in productivity and energy conservation. It has provided its distinctions by bagging several awards of national and state level are worthy.
A&ARDS:
• • • • • • •
7ational productivity award for <B6>-6?. 7ational productivity award for <B6?-6=. 7ational award for energy conservation for <B6G-BG. 7ational award for mines safely <B6>-6?, <B6?-6=. 0restigious state award ya1amanya ratna and but management award for the year <B6G. -est :A0''I award for but family planning effort in the state <B6=-66. :A0''I award for best wor ers welfare <BB>-B?.
• • •
-est industrial productivity award of :A0''I. -est management award of state government <BBH. It has got )Kanamitra award, from the government of Andhra 0radesh.
%ESORAM GROUP OF INDUSTRIES
a&.e!tiles 3esoram Industries $td, CE, Farden 5each 5oad 'alcutta-=GGGHC. 3esoram 5ayon .riennia %0./.&, (ist L @oogly, *est -engal. 3esoram Spun pipes &
undries, bansberia %0./.&, (istL @oogly, *est -engal. 3esoram 'ement, -asantnagar->G?<6=, (ist L 3arimnagar, Andhra 0radesh Kasavadatta 'ement,b&5ayon c&Spun 0ipes
d&'ement
e&'ement
Sedam->6>EEE, (ist L Fulbargah, 3arnata a. f& .yres -irla .yres, Shivam 'hambers, >H, Syed Amir Ali Avenue. 'alcutta-=GGGEB.
Pro#u ' Pro(i)!
.he main brands of cement manufactured areL ? 5AASI F/$( %>H Frade& ? 5AASI S8045 0/*45 ? 5AASI CH Frade cement. All the brands are nown for its best "uality standards.
Huma" R!sour !s
.he 0lant has well "ualified, highly motivated manpower of ?CB employees on its rolls. /ut of ?CB employees, BE are e!ecutive cadre and remaining are in staff and wor men cadre. .he 3I$, 375 manpower is nown for their spirit and commitment.
Po))u'io" Co"'ro)
.he 0lant is commissioned for pollution free environment and installed all the re"uired pollution control e"uipment as per the statutory re"uirement. A separate team will regularly monitor and maintain the said e"uipment.
Sa(!'y
.he 0lant maintains high standards of safety and good house eeping methods in line with ;>S’ techni"ues.
Co"'ri*u'io" 'o '+! !, +!-u!r
3I$, 375 has been contributing around 5s.<=>.GG crores to the e!che"uer in the form of ta!es, royalty etc.
To."s+i/
3I$, 375 has a well planned township consisting of H=6 "uarters having facilities li e • • • • • • • School @ospital .emple Fuest @ouse 'o-operative Stores 5ecreation 'lub 0lay Fround etc.
Rura) D!0!)o/m!"'
3I$, 375 as apart of 5ural & Social (evelopment 0rogramme adopted 6 surrounding villages . .he company e!tends the facilities li e • @ousing
• • • •
*ater School /ld age pension 5oads etc2
-y allocating a budget amount of about 5s.E>.GG la hs per annum.
Industrial Relations
3I$,375 is nown for its best Industrial 5elations practices in this region and won many awards from Fovt. of A.0. and 'hamber of Industries.
Norms
? 5aw +ill 'lin er 'ement ? $ime stone B?I ? Iron ore E.>I ? $aterite <.>I ? 5aw +ill <.> tonnes ? 'oal EGI ? 'lin erB=I ? Fypsum HI
CONCEPTUAL FRAME1&OR%
CAPITAL BUDGEING:
An efficient allocation of capital is the most important finance function in modern times. It involves decisions to commit firm’s funds to long-term assets. Such decisions are tend to determine the value of company/firm by influencing its growth, profitability & ris . Investment decisions are generally nown as capital budgeting or capital e!penditure decisions. It is clever decisions to invest current in long term assets e!pecting long-term benefits firm’s investment decisions would generally include e!pansion, ac"uisition, moderni#ation and replacement of long-term assets. Such decisions can be investment decisions, financing decisions or operating decisions. Investment decisions deal with investment of organi#ation’s resources in $ong tern %fi!ed& Assets and / or Short term %'urrent& Assets. (ecisions pertaining to investment in Short term Assets fall under )*or ing 'apital +anagement,. (ecisions pertaining to investment in $ong term Assets are classified as )'apital -udgeting, decisions. 'apital budgeting decisions are related to allocation of investible funds to different long-term assets. .hey have long-term implications and affect the future growth and profitability of the firm. In evaluating such investment proposals, it is important to carefully consider the e!pected benefits of investment against the e!penses associated with it./rgani#ations are fre"uently faced
with 'apital -udgeting decisions. Any decision that re"uires the use of resources is a capital budgeting decisions. 'apital budgeting is more or less a continuous process in any growing concern.
For E,am/)!: 0urchase of $and is an e!ample of 'apital -udgeting decision. Similarly replacement of outdated e"uipment with modern machines, purchase of a brand or business, computeri#ation and networ ing the organi#ation, investment in research and development of a product launch of a ma1or promotional campaign etc are all e!ample of 'apital -udgeting decisions. @owever, in all cases, the decisions have a long-term impact on the performance of the organi#ation. 4ven a single wrong decision may in danger the e!istence of the firm as a profitable entity.
IMPORTANCE OF CAPITAL BUDGETING:
.here are several factors that ma e capital budgeting decisions among the critical decisions to be ta en by the management. .he importance of capital budgeting can be understood from the following aspects of capital budgeting decisions. <. Lo"2 T!rm Im/)i a'io"s: 'apital -udgeting decisions have long term effects on the ris and return composition of the firm. .hese decisions affect the future position of the firm to a considerable e!tent. .he finance manger is also committing to the future needs for funds of that pro1ect. 34 $4 Su*s'a"'ia) Commi'm!"'s: .he capital budgeting decisions generally involve large commitment of funds. As a result, substantial portion of capital funds is bloc ed. Irr!0!rsi*)! D! isio"s: +ost of the capital budgeting decisions are irreversible decisions. /nce ta en the firm may not be in a position to revert bac unless it is ready to absorb heavy losses which may result due to abandoning a pro1ect midway.
54
A('!r '+! Ca/a i'y a"# S'r!"2'+ 'o Com/!'!: 'apital budgeting decisions affect the capacity and strength of a firm to face competition. A firm may loose competitiveness if the decision to moderni#e is delayed.
PROBLEMS 6 DIFFICULTIES IN CAPITAL BUDGETING:
74 Fu'ur! u" !r'ai"'y: 'apital -udgeting decisions involve long-term commitments. .here is lot of uncertainty in the long term. .he uncertainty may be with reference to cost of the pro1ect, future e!pected returns, future competition, legal provisions, political situation etc. <. Tim! E)!m!"': .he implications of a 'apital -udgeting decision are scattered over a long period. .he cost and benefits of a decision may occur at different point of time. .he cost of a pro1ect is incurred immediately. @owever, the investment is recovered over a number of years. .he future benefits have to be ad1usted to ma e them comparable with the cost. $onger the time period involved, greater would be the uncertainty. $4 Di((i u)'y i" 8ua"'i(i a'io" o( Im/a ': .he finance manger may face difficulties in measuring the cost and benefits of pro1ects in "uantitative terms. E,am/)!: .he new product proposed to be launched by a firm may result in increase or decrease in sales of other products already being sold by the same firm. It is very difficult to ascertain the e!tent of impact as the sales of other products may also be influenced by factors other than the launch of the new product.
ASSUMPTIONS IN CAPITAL BUDGETING:
.he 'apital -udgeting decision process is a multi-faceted and analytical process. A number of assumptions are re"uired to be made. 74 34 C!r'ai"'y .i'+ r!s/! ' 'o os' 6 B!"!(i's: It is very difficult to estimate the cost and benefits of a proposal beyond E-H years in future. Pro(i' Mo'i0! : Another assumption is that the capital budgeting decisions are ta en with a primary motive of increasing the profit of the firm.
T+! a 'i0i'i!s a" *! )is'!# as (o))o.s:
? (is-investments i.e., sale of division or business. ? 'hange in methods of sales distribution. ? 8nderta ings an advertisement campaign. ? 5esearch & (evelopment programs. ? $aunching new pro1ects. ? (iversification. ? 'ost reduction.
FEATURES OF INVESTMENT DECISIONS:
? .he e!change of current funds for future benefits. ? .he funds are invested in long-term assets. ? .he future benefits will occur to the firm over a series of years.
IMPORTANT OF INVESTMENT DECISIONS:
? .hey influence the firm’s growth in long run. ? .hey effect the ris of the firm.
? .hey involve commitment of large amount of funds. ? .hey are irreversible, or reversible at substantial loss. ? .hey are among the most difficult decisions to ma e.
TYPE OF INVESTMENT DECISIONS:
? 4!pansion of e!isting business. ? 4!pansion of new business. ? 5eplacement & +oderni#ation.
INVESTMENT EVALUATION CRITERIA:
? 4stimation of cash flows. ? 4stimation of the re"uired rate of return. ? Application of a decision rule for ma ing the choice. 'onsideration of cash flows is to determine true profitability of the pro1ect and it is an unambiguous way of identifying good pro1ects from the pool. 5an ing is possible it should recogni#e the fact that bigger cash flows are preferable to smaller ones & early cash flows are referable to later ones I should help to choose among mutually e!clusive pro1ects that which ma!imi#es the shareholders wealth. It should be a criterion which is applicable to any considerable investment pro1ect independent of other..here are number of techni"ues that are in use in practice. .he chart of techni"ues can be outlined as followsL
Ca/i'a) Bu#2!'i"2 T! +"i-u!s:
Tra#i'io"a) A//roa + 9or: No"1Dis ou"'!# Cas+ F)o.s 0ay -ac 0eriod %0-& Mo#!r" A//roa + 9or: Dis o""! '!# Cas+ F)o.s 7et 0resent Kalue %70K&
Accounting Rate of Return (ARR)Internal Rate of Return
0rofitability Inde! %0I& (iscounted 0ayable 0eriod
NET PRESENT VALUE :
.he 7et 0resent value method is a classic economic method of evaluating the investment proposals. It is one of the methods of discounted cash flow. It recogni#es the importance of time value of money,. It correctly postulates that cash flows arising of different time period, differ in value and are comparable only when their e"uivalent i.e., present values are found out.
T+! (o))o.i"2 s'!/s ar! i"0o)0!# i" '+! a) u)a'io" o( NPV: ? 'ash flows of the investment pro1ect should be forecasted based on realistic assumptions. ? An appropriate rate of interest should be selected to discount the cash flows, generally this will be the ) 'ost of capital rate, of the company. ? .he present value of inflows and out flows of an investment proposal, has to be computed by discounting them with an appropriate cost of capital rate. ? .he 7et 0resent value is the difference between the )0resent Kalue of 'ash inflows, and the present value of cash outflows.
? 7et present value should be found out by subtracting present value of cash outflows from present value of cash inflows. .he pro1ect should be accepted if 70K is positive. NPV ; Pr!s!"' Va)u! o( Cas+ i"()o. < Pr!s!"' 0a)u! o( '+! as+ ou'()o. A !/'a" ! Ru)!: Accept if 70K M G 5e1ect if 70K N G +ay accept if 70K O G /ne with higher 70K is selected.
INTERNAL RATE OF RETURN METHOD:
.he internal rate of return %I55& method is another discounted cash flow techni"ue ..his method is based on the principle of present value. It ta es into account of the magnitude & timing of cash flows. I55 nothing but the rate of interest that e"uates the present value of future periodic net cash flows, with the present value of the capital investment e!penditure re"uired to underta e a pro1ect. .he concept of internal rate of return is "uite simple to understand in the case of oneperiod pro1ect.
A !/'a" ! Ru)!:
Accept if r M 5e1ect if r N +ay accept if r O where r O rate return O opportunity cost of capital
PROFITABILITY INDE= 9OR: BENEFIT COST RATIO:
9et another time-ad1usted method of evaluating the investment proposals is the benefitcost %-/'& ratio of profitability inde! 0I&. It is benefit cost ratio. It is ratio of present value of future net cash inflows at the re"uired rate of return, to the initial cash outflow of the investment. Pr!s!"' Va)u! o( Cas+ i"()o.s PI ; 11111111111111111111111111111111111111111 Pr!s!"' Va)u! o( Cas+ ou'()o.s
A !/'a" ! Ru)! :
Accept if 0I M < 5e1ect if 0I N <
+ay accept if 0I O < 0rofitability Inde! is a relative measure of pro1ects profitability.
PAY BAC% PERIODE METHOD:
/ne of the top concerns of any person or organi#ation investing a large amount of money would be the time by which the money will come bac . .he concern ma ing the investment would want that at least the capital invested is recovered as early as possible. .he pay bac period is defined as the period re"uired for the proposal’s cumulative cash flows to be e"ual to its cash outflows. In other words, the paybac period is the length of time re"uired to recover the initial cost of the pro1ect. .he paybac period is usually stated in terms of number of years. It can also be stated as the period re"uired for a proposal to ;brea even’ on its net investment. .he paybac period is the number of years it ta es the firm to recover its original investment by net returns before depreciation, but after ta!es. If pro1ect generates constant annual cash inflows, the pay bac period is completed as followsL I"i'ia) I"0!s'm!"' Pay Ba > ; 111111111111111111111111 A""ua) as+ i"()o. In case of une"ual cash inflows, the paybac period can be found out by adding up the cash inflows until the total is e"ual to initial cash outlay.
Acceptance 5uleL
? Accept if calculated value is less than standard fi!ed by management otherwise re1ect it. ? If the paybac period calculated for a pro1ect is less than the ma!imum paybac period set up by the company it can be accepted. ? As a ran ing method it gives highest ran to a pro1ect which has lowest pay bac period, and lowest ran to a pro1ect with highest pay bac period.
DISCOUNTED PAY BAC% PERIOD:
/ne of the serious ob1ections to pay bac method is that it does not discount the cash flows. @ence discounted pay bac period has come into e!istence. .he number of periods ta en in recovering the investment outlay on the present value basis is called the discounted pay bac period. (iscounted 0ay -ac rule is better as it does discount the cash flows until the outlay is recovered.
ACCOUNTING RATE OF RETURN 9OR: AVERAGE RATE OF RETURN 9ARR: :
It is also nown as return on investment %5/I&. It is an accounting method, which uses the accounting information revealed by the financial statements to measure the profitability of an investment proposal. According to Solomon, A55 on an investment can be calculated as ) the ratio of accounting net income to the initial investment i.e., .
A0!ra2! N!' I" om! ARR ; 111111111111111111111111111 A0!ra2! I"0!s'm!"'
Average Income Average Investment
O O
Average of after ta! profit @alf of /riginal Investment
A !/'a" ! Ru)!:
? Accept if calculated rate is higher than minimum rate established by the management. ? It can re1ect the pro1ects with an A55 lower than the e!pected rate of return. ? .his method can also help, the management to ran the proposals on the basis of A55. ? A highest ran will be given to a pro1ect with highest A55, whereas a lowest ran to a pro1ect with lowest A55.
CAPITAL BUDGETING METHODS IN PRACTICE
? In a study of the capital budgeting practices of fourteen medium to large si#e companies in India, it was found tat almost all companies used by bac . ? *ith pay bac and/or other techni"ues, about E/Hrd of companies used I55 and about E/>th 70K. I55 s found to be second most popular method. ? 0ay bac gained significance because of is simplicity to use & understand, its emphasis on the early recovery of investment & focus on ris . ? It was found that </Hrd of companies always insisted on computation of pay bac for all pro1ects, </Hrd for ma1ority of pro1ects & remaining for some of the pro1ects. ? 5easons for secondary of (': techni"ues in India included difficulty in understanding & using threes techni"ues, lac of "ualified professionals & unwillingness of top management to use (': techni"ues. ? /ne large manufacturing and mar eting organi#ation mentioned that conditions of its business were such that (': techni"ues were not needed. ? 9et another company stated that replacement pro1ects were very fre"uent in the company, and it was not considered necessary to use (': techni"ues for evaluating such pro1ects. techni"ues in India included difficulty in understanding & using threes techni"ues, lac of "ualified professionals & unwillingness of top management to use (': techni"ues.
PROCESS CAPITAL BUDGETING PROCESS:
Atleast five phases of capital e!penditure planning & control can be identifiedL ? Identification % or /rgani#ation & of investment opportunities. ? (evelopment of forecasts of benefits and costs. ? 4valuation of the net benefits. ? Authori#ation for progressing and spending capital e!penditure. ? 'ontrol of capital pro1ects.
INVESTMENT IDEAS:
Investment opportunities have to be identified or created investment proposals arise at different levels within a firm.
Na'ur! o( I#!a
'ost reduction 5eplacement 0rocess/0roduct (evelopment 4!pansion (iversification
7ew 0roduct +ar eting (ept., % or& 0lant +anager
L!0!)
-----0lant $evel % >GI in India cover this level& .op management In India, it is insignificant
5eplacing an old +achine % or& Improving the 0roduction techni"ues. Investment proposals should be generated to employ the firm’s funds fully well & efficiently. :actory $evel.
FORECASTING :
'ash flow estimates should be development by operating managers with the help of finance e!ecutives. 5is associated should be properly handled. 4stimation of cash flows re"uires collection and analysis of all "ualitative and "uantitative data, both financial and nonfinancial in nature. +IS provide such data.
Corr! ' 'r!a'm!"' s+ou)# *! 2i0!" 'o :
? Additional wor ing capital ? Sale proceeds of e!isting assets. ? (epreciation ? :inancial flows %to be distinguished from operation flows&
EVALUATION :
Froup of e!perts who have no a e to grind should be ta en in selecting the methods of evaluation as 70K, I55, 0I, 0ay -ac , A55 & (iscounted 0ay -ac . 0ay -ac period is used as )0rimary, method & I55/70K as )Secondary, method in India. .he following are to be given due importance. ?
r evaluation, minimum rate of return or cut-off is necessary. ? 8sually if is computed by means of weighted Average cost of 'apital %*A''& ? /pportunity cost of capital should be based on ris y ness of cash flow of investment proposals. ? Assessment of ris is an important aspect. Sensitivity Analysis & 'onservative for costs are two important methods used in India.AUTHORI?ATION:
Screening and selecting may differ from one company to another. *hen large sums are involved usually final approval rests with top management. (elegation of approval authority may be effected sub1ect to the amount of outlay. -udgetary control should be rigidly e!ercised.
CONTROL AND MONITORY:
A 'apital pro1ects reporting system is re"uired to review and monitor the performance of investment pro1ects after completion and during their life.
llow up comparison of the actual performance with original estimates to ensure better forecasting besides sharpening the techni"ues for improving future forecasts. As a result company may re-praise its pro1ects and ta e necessary action. Indian 'ompanies use regular pro1ect reports for controlling capital e!penditure reports may be "uarterly, half-yearly, monthly, bi-monthly continuous reporting.. ? 4!penditure to date ? Stage and physical completion ? Approved total cost ? 5evised total costDECISION MA%ING LEVEL:
r planning and control purpose three levels of (ecision ma ing have been identified L ? /perating ? Administrative ? StrategicOPERATING CAPITAL BUDGETING:
Includes routine minor e!penditure, as office e"uipment handled by lower level management.
ADMINISTRATIVE CAPITAL BUDGETING:
:alls in between these two levels involves medium si#e investments such as business handled by middle level management.
STRATEGIC CAPITAL BUDGETING:
Involves large investment as ac"uisition of new business or e!pansion in a new time of business, handled by top management uni"ue nature.
Lo"2 T!rm Ca/i'a) Bu#2!'i"2 I" %ESORAM
PRE < INVESTMNET STAGE:
In a planned economy, as in India, the identification of public sector pro1ects needs to be done within the overall framewor of national the sectoral planning. All pro1ects of every sector
need to be identified scientifically at the time of plan formulation. In actual practice, however, it is observed that ;identification’ stage is the most neglected stage of the pro1ect planning.
.he five year plans indicate the broad strategy of planning economic growth rate and other basic ob1ectives to be achieved during the plan period. .he macro level planning e!ercise underta en at the beginning of every five year plan indicates broadly the role of each sector’s physical targets to be achieved and financial outlays, which could be made available for the development of the sector during the plan period.
.he identification of a pro1ect in the :ive 9ear 0lan is not the sanction of the pro1ect for implementation. It provides only the ;green signal’ for the preparation of feasibility report %:5G for appraisal and investment decision. A preliminary scrutiny of the :5 of the pro1ect is done in the +inistry and thereafter copies of the feasibility report are submitted to the appraising agencies, vi#., 0lanning 'ommission, -ureau of 0ublic 4nterprises and the 0lan :inance (ivision of the +inistry of :inance.
.hus the organi#ational responsibility for identifying these pro1ects rests with the concerned administrative ministry, in consultation with its public enterprises.
.he essential steps for pro1ect identification and preparation relates to studying %i& imports %ii& substitutes %iii& available and raw material %iv& available technology and s ills %v& interindustry relationship %vi& e!isting industry %vii& development plans %viii& old pro1ects etc.
It may be mentioned that in actual practice, these steps are hardly scientifically studied and followed by the administrative ministry public sector underta ing at the time of pro1ect identification. .he public sector pro1ects many a time come spontaneously on the basis of ideas and possibilities of demand or availability of some raw materials and not an outcome of scientific investigation and systematic search for feasible pro1ects.
PROJECT FORMULATION :
.he second stage of )0ro1ect 'ycle, vi#. 0ro1ect
rmulation, is a pre-investment e!ercise to determine whether to invest, where to invest, when to invest and how much to invest. .he pro1ect/feasibility reports are meant to provide re"uired information for assessing technical, financial, commercial, organi#ation and economic viability of the pro1ect planning in India, mainly because of relatively late reali#ation of its importance. As a result, the investment decisions for large pro1ects in the past were ta en on half-ba ed and ill-conceived pro1ects and time-over runs and cost-over runs of public sector pro1ects have become a regular feature rather than e!ception.In early seventies along with the setting up of the 0ublic Investment -oard %0I-& the Fovernment created a new pro1ect Appraisal (ivision in the 0lanning 'ommission. 0ro1ects, in <B=C. .his guidelines, unli e earlier manual, indicates all the information and data re"uired to be presented and analysed in the feasibility report, so as to enable the appraisal agency to carry out %i& technical analysis P to determine whether the specification of technical parameters are realistic, %ii& financial anaylsis P to determine whether the proposal is financially viable, %iii& commercial analysis P to determine soundness of the product specifications, mar eting plans and organi#ation structure and %iv& economic analysis, to determine whether a pro1ect is worthwhile from the point of view of nation and economy as a whole. .his (ivision prepared and circulated )Fuidelines for preparing :easibility 5eports of Industrial
.he guidelines describes in details, the information re"uired to be given and analysed on the following issues L %a& general information of the sector, %b& ob1ective of the proposal, %c& alternative ways, if any of attaining the ob1ectives and better suitability of the proposed pro1ect, %d& pro1ect description P gestation period, costs, technology proposed, anticipated life of the pro1ect etc., %e& demand analysis, total demand / re"uirements of the country, including anticipated imports and e!ports and share of the proposed pro1ect, %f& capital costs and norms assumed, activity wise and year wise, %g& operating costs and norms, %h& revenue and benefits estimation etc.
PROJECT APPRAISAL :
.he appraisal of the pro1ect follows the formulation stage. .he ob1ective of the appraisal process is not only to decide whether to accept or re1ect the investment proposal, but also to recommend the ways in which the pro1ect can be redesigned or reformulated so as to ensure better technical, financial, commercial and economic viabilities. .he pro1ect appraised which is an essential tool for 1udicious investment decisions and pro1ect selection is a multi-disciplinary tas . -ut many a times this is considered doubt, have played an important role in contributing systematic methods for forecasting the future and evolving appraisal methods to "uantify socials costs and benefits, but they alone can not carry out complete appraisal of an investment proposal.
.he need for pro1ect appraisal and investment decisions based on social profitability arises mainly because of the basic characteristics of developing countries limited resources for development and multiple needs P ob1ective of planning being ;4conomic Frowth with Social
Dustice’. .he pro1ect appraisal is a convenient and comprehensive fashion to achieve, the laid down ob1ectives of the economic development plan. .he appraisal wor presupposes availability of a certain minimum among of reliable and up to date data in the country, as well as the availability of trained persons to carry out the appraisal analysis.
As stated earlier the investment decision of public sector pro1ects are re"uired to be ta en within the approved plan frame wor . .he 0ro1ect Appraisal (ivision %0A(& that prepares the comprehensive appraisal note of pro1ects of 'entral 0lans was therefore set up in 0lanning 'ommission. .he :inance +inistry issues e!penditure sanction for all investment proposals within the frame wor of annual budget. .he plan :inance (ivision and the -ureau of 0ublic 4nterprises of the :inance +inistry are also re"uired to e!amine and give comments on the investment proposals of public.
DATA ANALYSIS
All finance activity commences with an investment proposal, which calls for a financial appraisal of a pro1ect. @ere, capital -udgeting has its role. 4ach one of the pro1ects is appraised on following basis, ? 'ost 4stimates. ? 'ost Fenerations.
Cos' Es'ima'!s :1
:easibility 5eport of the pro1ect is prepared based on the cost of similar units prevailing at the time of preparation of pro1ects report of the latest costs are not available, the same should be escalated. 'ollection of data with regard to the cost of the various e"uipment should from part of a continuous planning so tat a realistic cost estimate is made for the pro1ect 5eports for civil wor s are generally based on 34S/5A+ schedule of rates with reasonable premium there on.
Cos' o( G!"!ra'io" :1
.he financing of public sector company is generally based on (ebt 4"uity of HL< the general rate of interest chargeable by the central Fovernment on loan components is <G.>I % 7ow enhanced to <<I& . .he plant life as provided under the 4lectricity Supply Act, <BC6 is E> years and depreciation based on this period has to be calculated on straight line method, on BGI of the cost fi!ed assets. .he operation & maintenance e!penses are generally of the order E.>I of the capital cost based on the above assumptions, the cost of generation could be wor ed out discounted cash flow basis ta ing <EI I55 %Internal 5ate of 5eturn&. .his rate has been generally accepted by various appraising agencies of the power pro1ects. :easibility 5eport based on above methodology and indicating site selection, coal lin age, power distribution e!amined by 'entral 4lectricity Authority in all cases where %0ublic investment is 5s.< 'rore and above. Since 34S/5A+ is public sector underta ing, all the investment decisions have to be formally sanctioned by Fovernment after 0I-’s Investment -oard’s& clearance.
SHARE CAPITAL :
.he entire share capital is owned by Fovernment of India. (uring the 9ear no addition has been made. @owever the authori#ed capital has been increased from 5s. 6G,GGG million to 5s.<,GG,GGG million and the face value or share has been split to 5s.<G/- each from 5s.<GGG/each.
ROLE OF FINANCE MANAGEMENT IN INVESTMENT DECISIONS IN %ESORAM:
:inance +anager is the number of a pro1ect team. @e plays an important role in
investigation stage of the pro1ect, when various alternatives are analysed & the most optimum solution is decided upon. .he soundness upon the accuracy of the data & as a finance manager has to "uesting and satisfy himself on the validity of the data.
.he power pro1ects are e!tremely capital intensive and before large resources are committed to a scheme a detailed feasibility study need to be prepared covering-
? .he need of the pro1ect ? .he demand pro1ections ? .he alternatives of the site locations ? .he broad parameters of the plant and e"uipment ? .he cost estimates ? .he viability of the scheme. Cos' Es'ima'!s L- 'ost estimates and financial 1ustification and returns of the pro1ects are the areas where financial management has to play its role. 'ost estimates should be prepared by the cost engineers and vetted by the finance manager. 'ost engineering is a speciali#ed filed & need to be developed in the contest of power pro1ects because of insufficient cost data on the components of the pro1ects.
.his raises an important "uestion of the present methodology of preparing the cost estimates without any provision for price contingencies. -ecause of time lag between preparation of cost estimates and investment decisions, after its scrutiny by the appraising agencies, these estimates are already out of data and hence would need updating.
CAPITAL BUDGETING E=AMPLE OF STAGE I 6 II
Sl. Schemes /utlay
<. E. H.
Stage-I % H ! EGGGG +.& Stage- II% H ! >GGGG +.& Stage-III% < ! >GGGG+.&
>,C6,BE,GG,GGG <<,GH,?B,GG,GG <EEB.H6%+illions&
Stage P I consisting outlay of >,C6,BE,GG,GGG this is 5ecovered in > years of time.
RECOVERY OF PROJECTS 9S'a2!1I::
llowing calculations are under consider 8nder (iscounted 0ay -ac 0eriodL Stage P I % H ! EGGGG &/utlay L >,C6,BE,GG,GGGNET PRESENT VALUE:
Y!ar Cas+ I"()o.s < E H C > 5s. <.<EB.H6C.GGG 5s. <.H<G.6B>.GGG 5s. <.=?<.6=B.GGG 5s. <.=HE.G6?.GGG 5s. E.<BH.G?<.GGG
Dis4 @73A Pr!s!"' Va)u! o( Cas+()o.s G,6BE G,=B= G,=<< G,?H> G,>?= 5s. <.GG=.C<G.>E6 5s. <.GCH.B6?.H<> 5s. <.E>E.?B>.B?B 5s. <.<GB.6=C.?<G 5s. <.ECH.C?>.>6= Rs4 B4C5D45$$4E7E Rs4 B45FG43EE4EEE Rs4 7BF43$$4E7E
Pr!s!"' Va)u! o( Cas+ F)o.s L!ss: Cas+ Ou')ay N!' Pr!s!"' Va)u!
F5A0@ <L
InterpretationL
.he 7et 0resent Kalue is the difference between the ) 0resent value of cash inflows, and )0resent value of cash outflows. PROFITABILITY INDE= 9 P4I:: Y!ar <BBB-GG EGGG-G< EGG<-GE EGGE-GH EGGH-GC EGGC-G> EGG>-G? EGG?-G= EGG=-G6 EGG6-GB EGGB-<G I"0!s'm!"'s 9I" La>+s: E,BC>,G6H.H= H,GCG,EBH.<= H,<BE,CCC.E6 H,G=<,<6H.<< H,>C>,E<G.6= B,GE>,6=C.GG H,BB<,C>B.CG C,GH6,<<C.EG H,??=,CC<.<> =,HH6,GGG.GG E,G6B,==>.GG .otalL 0.K. of 'ash Inflows --------------------------Initial 'ash outlays CB66B? --------->E>GGG Cas+ i"()o.s9P4V4: <6<6G EC=6G C>G=G >C?CG <6?HG <?<EBG <BE<G <<<HG ?>CEG <BEHH ?<HEH 5GFFGC Cas+ Ou' F)o.s 9I"i'ia): EGGGG HGGGG ?GGGG 6GGGG HGGGG EEGGG HHGGG =GGGG CGGGG 6GGGG ?GGGG B3BEEE
0I
O
O
O
G.B>
GRAPH 3 :
Investments (In Lakhs) 10,000,000.00 8,000,000.00 6,000,000.00 4,000,000.00 2,000,000.00 0.00
00 02 04 06 08 99 03 05 01 07 09 10
Investments (In Lakhs)
20
19
20
20
20
I"'!r/r!'a'io":
a& .he profitability inde! of present value of cash inflows and cash out flows is fluctuation from year to year in the year <BBB-GG the present value of cash inflows is <6<6G were as in the year EGGB-<G has been increased with ?<HEH. b& .he highest cash inflows has been recorded in EGGC-EGG> as <?<EBG and lowest has been recorded as <6<6G in the year <BBB-GG.
PAY BAC% PERIOD:
20
Y!ar <BBB-GG EGGG-G< EGG<-GE EGGE-GH EGGH-GC EGGC-G> EGG>-G? EGG?-G= EGG=-G6 EGG6-GB EGGB-<G .otalL
I"0!s'm!"'s 9I" La>+s: CG,GGG.GG ?G,GGG.GG =G,GGG.GG EG,GGG.GG <G,GGG.GG ??,GGG.GG E>,GGG.GG <E,GGG.GG BG,GGG.GG HG,GGG.GG >G,GGG.GG 5D$HEEE4EE
Cas+ i"()o.s9P4V4: 6GGG <?GG EEGG C>GG CGGG HGGG EBGG <<GG <?GG <EGG <6GG $7GEE
Cas+ Ou' F)o.s 9I"i'ia): EGGGG HGGGG ?GGGG 6GGGG HGGGG EEGGG HHGGG =GGGG CGGGG 6GGGG ?GGGG B3BEEE
0ay -ac 0eriod
O
Initial Investments --------------------------Annual 'ash inflows CG,GGG --------6GGG > 9ears
O
F5A0@ HL
Investments (In Lakhs) 100,000.00 80,000.00 60,000.00 40,000.00 20,000.00 0.00
00 04 08 99 01 03 05 07 09 10 02 06
Investments (In Lakhs)
19
InterpretationL
a& In the 0ay -ac method the Investment and the case inflows are fluctuating from year to year where as in the year <BBB-GG it is CGGGG and in the year EGGB-<G is >GGGG. b& 'ash inflows are in the order of increasing to decreasing from <BBB-GG and EGGB<G.
AVERAGE RATE OF RETURN: Y!ar EGGG-G< I"0!s'm!"'s 9La>+s: CGG,GGG.GG A0!ra2! I" om! Cas+ F)o.s a('!r Ta,!s 9T+ousa"#s: EGGGG <GGGGG
20
20
20
20
20
EGG<-GE EGGE-GH EGGH-GC EGGC-G> EGG>-G? EGG?-G= EGG=-G6 EGG6-GB EGGB-<G .otal
C6G,GGG.GG E6G,GGG.GG ECG,GGG.GG <>G,GGG.GG E?G,GGG.GG ?GG,GGG.GG <GG,GGG.GG E>G,GGG.GG >EG,GGG.GG $H3FEHEEE4EE
<>GGG E6GGG 6>GGG =>GGG ?CGGG =6GGG E>GGG <6GGG EEGGG 5$EEEE Average Income ---------------------Average Investments EGGGG --------CGGGGG O G.G?I
E?GGGG CCGGGG =>GGGG <?GGGG EGGGGG HGGGGG ?GGGGG 6GGGGG =>GGGG 5$CEEEE
Average 5ate of 5eturn
O
O
F5A0@ CL
Investments (Lakhs) 800,000.00 600,000.00 400,000.00 200,000.00 0.00 2001-02 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Fuel -ene#at!,n ."m!n!st#at!,n ( /the# 0'+enses Inte#est ( %e+#e)!at!,n 2% F!nan)e 8% *ha#$es 14% Fuel 51% &a' 3% %!v!"en"s 5% eat!ne" ea#n!n$s 17% eat!ne" ea#n!n$s %!v!"en"s &a' Inte#est ( F!nan)e *ha#$es %e+#e)!at!,n
Investments (Lakhs)
2000-01
InterpretationL
a& Average rate of return is calculated based on Average income and Average investment where as Average income in the year EGGH-GC is EGGGG and investments in the year EGGB<G is CGGGGG. b& .he value from EGGH-GC and EGGB-<G are fluctuating from year to year.
DISTRIBUTION OF REVENUE 3E3E13E3E
2002-03
I"'!r/r!'a'io"s:
a& b& In the year EGGB-<G the revenue is distributed in the from of fuel retained earning, dividends is latest finance change, depreciation and for employees. *here as in the year EGGB-<G it is been fluctuated the rates compare to the year EGGB<G.
TABLE D: FY YEAR
EGGC-G> EGG>-G? EGG?-G= EGG=-G6
NET BLOC% 9IN LA%S:
E6C=H6 HEHG6H HE6B<? H6?<G?
EGG6-GB EGGB-<G
CGGH6< >EG6?<
NET BLOC% AND GROSS FI=ED ASSETS
600000 500000 400000 300000 200000 100000 0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 284738 323073 328916 366106 400281 1e#!es1 520761
I"'!r/r!'a'io"s:
a& b& :rom EGG?-EGG= the net bloc and gross fi!ed assets is HE6B<?. *here as the 7et -loc and gross fi!ed asset is been increased in the year EGGB-<G.
TABLE F: FY YEAR
EGGC-G> EGG>-G? EGG?-G= EGG=-G6 EGG6-GB
NET SALES9IN LA%S:
EEBG>> E>6<<= E6?C>H H<>CGG H>>>GE
EGGB-<G
CCGHGE
NET &ORTH AND NET ASSETS
500000 450000 400000 350000 300000 250000 200000 150000 100000 50000 0 04-05 05-06 06-07 07-08 08-09 355501 258117 286453 315040
440201
229045
1e#!es1
09-10
I"'!r/r!'a'io"s:
a& b& 7et worth and net assets has been increasing from year to year from EGG>-G? it is EEBG>> and compare to EGGB-<G it has been increased to CCGHGE. -y observing the chat we can say the net worth and net assets has been increasing from EGG>-G? to EGGB-EG<G.
TABLE G :
FY YEAR
EGGC-G> EGG>-G? EGG?-G= EGG=-G6 EGG6-GB EGGB-<G
PROFIT AFTER TA=
HCEC> H=HH6 H>HB? H?G6> >E?GB =EGHE
PROFIT AFTER TA=
80000 70000 60000 50000 40000 30000 20000 10000 0 34245 37338 35396 36075 52608
72022
1e#!es1
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
I"'!r/r!'a'io"s:
a& .he chart show the increase value after the deduction of ta! in the year EGGB-<G. b& .he 0rofit is changing from year to year in the year EGGC-G> it is HCEC> where as increasing value in the year EGGC-EGG> and decreased, in the year EGGB-<G the value is increased.
TABLE 7E : FY YEAR
EGGC-G> EGG>-G? EGG?-G= EGG=-G6 EGG6-GB EGGB-<G
PO&ER GENERATION 9M UNITS:
=C=G =G6G =GBG <GBEH <B=BG <BEH=
GENERATION AND SALES
25000 20000 15000 10823 10000 5000 0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 7470 7070 7080 1e#!es1 19790 19237
GENERATION IN MUS < SALES IN MILLIONS:
I"'!r/r!'a'io"s:
a& /n the J P airs year are been shown from EGGC-G> to EGGB-<G and the value has been increasing from year to year. b& In the year EGGC-G> the generation and sale has been =C=G and the value has been increasing year to year but EGGB-EGEG the value is decreasing.
:I7(I7FS A7( S8FF4S.I/7S
FINDINGS ANDSUGESSTIONS
? .he 'orporate mission of 34S/5A+ is to ma e available reliable and "uality power in increasingly large "uantities. .he company will spear head the process of accelerated development of the power sector by e!peditiously planning, implementing power pro1ect and operating power stations economically and efficiently. ? As in pro1ect implementation, the station continued to e!cel in power generation with the power station having reached its first goal of total capacity installation. 5amagundam is generating power at consistently high plant load factor. ? .he organi#ation needs the capable personalities as management to lead to organi#ation successfully. .he management ma e the plans and implement of these plans. .hese plans are e!pressed in terms of long-term investment decisions.
? .he special budgets are rarely used in the organi#ation li e long-term budgets, research & development budget and budget and budget for constancy. ? :rom the 5evenue budget for the year EGGG-EGGH, it is clear that the Actual sales % 5s. <?6>>E.>G lac s& are more then the budgeted or 4stimated sales % 5s. <?CEG6.>C lac s&. It is a good sign and the overall earnings of the budget indicate high volume over estimated. ? :uel utili#ation is perfectly carry out in 5S.0S. And 'ash from Ash effectively carry out the 1ob. ? 7ew pro1ects acceptance consider on the basis of 5eturn -enefits. 5is is evaluated while considering the new pro1ects.
CONCLUSIONS
? 4very organi#ation has pre-determined set of ob1ective and goals, but reaching those ob1ectives and goals only by proper planning and e!ecuting of the plans economically. ? *ith in a Short span of its e!istence, the corporation has commissioned <B>GE +* as on H<st +arch, EGGG with an operating capacity of <B.BI. 34S/5A+ today generate EC.BI of nation’s electricity. 34S/5A+ is presently e!ecuting <E 'ement manufacturing 0ro1ects and ? Fas based cement manufacturing pro1ects with a total approved capacity of EB,BH> +. as on H<st +arch EGGC.
-I-$I/F5A0@9
R!(!r!" !s :
:inancial accounting 'ost and management accounting :inancial accounting Accounting for management
&!*si'! : www.google.com www.34S/5A+.com www.yahoofinance,com
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