CAPITAL BUDGETING

INTRODUCTION
Management should be particularly interested in knowing financial strength and
weakness of the firm. Capital budgeting is the important tool in the hand of management to
detect the efficiency of the investment which the firm is going to invest on the new projects.
There are so many techniques to measure the efficiency of the project.
Capital expenditure budget or capital budgeting is a process of making
decision regarding investments in fixed assets which are not means for sale such as land,
machinery or furniture. The working investment refers to the expenditure which is required
to be make in connection with the acquisition and the development of long term facilities
including the fixed assets.
!inance is the study of how investors allocate their assets over time under conditions
of certainty and uncertainty. " key point in finance, which affects decisions, is the time value of
money, which states that a dollar today is worth more than a dollar tomorrow. !inance measures
the risks vs. profits and gives an indication of whether the investment is good or not.
" project is an activity sufficiently self#contained to permit financial and commercial
analysis. $n most cases projects represent expenditure of capital funds by pre#existing which want
to expand or improve their operation.
$n general a project is an activity in which, we will spend money in expansion of
returns in which logically seems to lead itself planning. !inancing and implementations as a unit,
is a specific activity with a specific point and a specific ending point intended to a accomplish a
specific objective of the study.

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Capital budgeting has its going in the natural recourse and infrastructures sectors. The
current demand for infrastructures and capital investments is being fueled by deregulation in the
%FMCG& '!ast Moving Consumer (oods), telecommunication, * transportation sectors, by the
globali+ation of product markets and the needs from manufacturing scale, and by the
privati+ation of government owned entities in developed countries * developing.
,nderstanding the organi+ation-s financial health is a fundamental aspect of
responding to today-s increasingly stringent financial reporting requirements. To avoid risks,
organi+ations must quickly
$dentify ascertain financial ratios and trends across in liabilities and assets
"naly+e and adjust planned and forecasted amounts
"ct to provide regulatory statements as needed
MEANING OF CAPITAL BUDGETING
The long term investment decision of the firm is generally known as the
capital budgeting or capital expenditure decision. Capital budgeting decision may be defined
as the firm.s decisions to invest its current fund most efficiently in the on germ assets
anticipation of an expected flow of benefits over series of years.
/. The exchange of current funds for future benefits.
0. The funds are invested in long term assets.
1. The future benefits will occur to the firm over a series of years
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NATURE OF CAPITAL BUDGETING
The investment decisions of a firm are generally known as the
capital budgeting, or capital expenditure decisions. " capital budgeting decision may be
defined as the firm.s decision to invest its current funds most effectively in the long# term
assets in anticipation of an expanded flow of benefits over a series of years. The long#term
assets are those that affect the firm.s operational beyond the one year period.
$nvestment decisions generally include expansion, acquisitions
moderni+ation and replacement of the long#term assets. 2ale of a division or business is also
an investment decision.
3ecision like the change in the methods of sales distribution, or an
advertisement campaign or a research and development programme have long#term
implications for the firm.s expenditures and benefit, and therefore, they should also be
evaluated as investment decisions.
NEED OF THE STUDY
" capital budgeting decisions may be defined as the firm-s decision to invest is current
funds most effectively * efficiently in the long#term assets in anticipation of an expected flow of
benefits over a series of years. The long#term assets are those that affect the firm-s operations
beyond the one year period.
The firm-s investment decisions would generally includes expansion, acquisition
moderni+ation and replacement of long term assets. 2ale of a division or business is also an
investment decision. 3ecision like the change in the methods of sales distribution, or an
advertisement campaign or research and development program have long #term implications for
the firm-s expenditure and benefits, and therefore they should also be evaluated as investment
decisions.
The rationale underlying the capital budgeting decisions efficiency. Thus, a firm must
replace worn and obsolete plant and machinery, acquire fixed assets for current and new products
and make strategic investment decisions.
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This will enable the firm to achieve its objective of maximi+ing profits either by way
of increased revenues or cost reductions.
The quality of these decisions is improved by capital budgeting. Capital budgeting
decision can be of two types4
To those which expand revenues, and
To those which reduce costs.
OBJECTIVES OF THE STUDY
To analyse the techniques of capital budgeting for decision making and measure the
present value of rupee invested.
To analyse the relevance of capital budgeting in evaluating the analysis for project
finance
,nderstand the nature and importance of investment decisions through the capital
budgeting techniques.
To know the techniques adopted by the organi+ation while investing a capital on a
particular project.
To know the present * previous position of the organi+ation before implementing the
project.
To determine capital projects those are feasible.
To give suggestions for the development of company projects if any required.
To analyse and understand the nature of risk * uncertainty of depositors.
To find out the various cash inflows and cash outflows from 0556 7 05// 8ears
SCOPE OF THE STUDY
Capital investments, representing the growing edge of a business, are deemed to be very
important three inter#related factors
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a. The influence of firm growth in the long term consequences like capital investment
decisions have considerable impact on what the firm can do in future.
b. They affect the risk of the firm, it is difficult to reverse capital investment decisions
because the market for used capital investment in ill organi+ed or most of the capital
equipments bought by a firm to meet its specific requirements.
c. Capital investment decisions involve substantial outlays.
%BHARATHI SOAP WORKS& is a growing concern. Capital budgeting is more or
less a continuous process and it is carried out by different functional areas of management such
as production, marketing, chemical engineering, financial management etc. "ll the relevant
functional departments play a crucial role in the capital budgeting decision process.
LIMITATIONS OF THE STUDY
The following the limitations of the study
a. 2ince the procedure and policies of the company will not allow to disclose confidential
financial information, the project has to be completed with the available data given to us.
b. The accuracy of results may be depends on the accuracy of secondary data.
c. The major constraint for the research was duration of the project which was only
9: days.
d. 3ue to income tax problem eliminate the top secretes of the company. .
e. The study is carried basing on the information and documents provided by the
organi+ation and based on the interaction with the various employees of the respective
departments.
f. The data mostly consists of secondary information.
g. 2tudy is concentrated only on financial aspects of the company.
h. 2tudy is limited only to micro level.
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i. ;imited time also served as a constraint to get full information on issue.
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RESEARCH METHODOLOGY
Methodology is systematic processes of collecting information in order to analy+e
and verifies a phenomenon. The collection of data is two principle sources. They are
discussed as4
$. <rimary data
$$. 2econdary data
Primary Data
3ata that has been collected from first#hand#experience is known as primary data.
<rimary data has not been published yet and is more reliable, authentic and objective.
<rimary data has not been changed or altered by human beings, therefore its validity is
greater than secondary data.
Imprta!"# $ Primary Data
$mportance of <rimary data cannot be neglected. " research can be conducted without
secondary data but a research based on only secondary data is least reliable and may have
biases because secondary data has already been manipulated by human beings. $n statistical
surveys it is necessary to get information from primary sources and work on primary data4 for
example, the statistical records of female population in a country cannot be based on
newspaper, maga+ine and other printed sources. =ne such sources are old and secondly they
contain limited information as well as they can be misleading and biased.
Va%i&ity' >alidity is one of the major concerns in a research. >alidity is the quality of a
research that makes it trustworthy and scientific. >alidity is the use of scientific methods in
research to make it logical and acceptable. ,sing primary data in research can improves the
validity of research. !irst hand information obtained from a sample that is representative of
the target population will yield data that will be valid for the entire target population.
A(t)#!ti"ity' "uthenticity is the genuineness of the research. "uthenticity can be at stake if
the researcher invests personal biases or uses misleading information int he research. <rimary
research tools and data can become more authentic if the methods chosen to analy+e and
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interpret data are valid and reasonably suitable for the data type. . <rimary sources are more
authentic because the facts have not been overdone. <rimary source can be less authentic if
the source hides information or alters facts due to some personal reasons. Their are methods
that can be employed to ensure factual yielding of data from the source.
R#%ia*i%ity' ?eliability is the certainty that the research is enough true to be trusted on. !or
example, if a research study concludes that junk food consumption does not increase the risk
of cancer and heart diseases. This conclusion should have to be drawn from a sample whose
si+e, sampling technique and variability is not questionable. ?eliability improves with using
primary data. $n the similar research mentioned above if the researcher uses experimental
method and questionnaires the results will be highly reliable. =n the other hand, if he relies
on the data available in books and on internet he will collect information that does not
represent the real facts.
S(r"#+ $ Primary Data
2ources for primary data are limited and at times it becomes difficult to obtain data
from primary source because of either scarcity of population or lack of cooperation.
?egardless of any difficulty one can face in collecting primary data@ it is the most authentic
and reliable data source. !ollowing are some of the sources of primary data.
E,p#rim#!t+' Axperiments require an artificial or natural setting in which to perform logical
study to collect data. Axperiments are more suitable for medicine, psychological studies,
nutrition and for other scientific studies. $n experiments the experimenter has to keep control
over the influence of any extraneous variable on the results.
S(r-#y' 2urvey is most commonly used method in social sciences, management, marketing
and psychology to some extent. 2urveys can be conducted in different methods.
Buestionnaire4 is the most commonly used method in survey. Buestionnaires are a list
of questions either open#ended or close #ended for which the respondent give answers.
Buestionnaire can be conducted via telephone, mail, live in a public area, or in an
institute, through electronic mail or through fax and other methods.
$nterview4 $nterview is a face#to#face conversation with the respondent. $n interview
the main problem arises when the respondent deliberately hides information otherwise
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it is an in depth source of information. The interviewer can not only record the
statements the interviewee speaks but he can observe the body language, expressions
and other reactions to the questions too. This enables the interviewer to draw
conclusions easily.
=bservations4 =bservation can be done while letting the observing person know that
he is being observed or without letting him know. =bservations can also be made in
natural settings as well as in artificially created environment.
S#"!&ary Data
3ata collected from a source that has already been published in any form is called as
secondary data. The review of literature in nay research is based on secondary data. MCostly
from books, journals and periodicals.
Imprta!"# $ S#"!&ary Data
2econdary data can be less valid but its importance is still there. 2ometimes it is
difficult to obtain primary data@ in these cases getting information from secondary sources is
easier and possible. 2ometimes primary data does not exist in such situation one has to
confine the research on secondary data. 2ometimes primary data is present but the
respondents are not willing to reveal it in such case too secondary data can suffice4 for
example, if the research is on the psychology of transsexuals first it is difficult to find out
transsexuals and second they may not be willing to give information you want for your
research, so you can collect data from books or other published sources.
S(r"#+ $ S#"!&ary Data
2econdary data is often readily available. "fter the expense of electronic media and
internet the availability of secondary data has become much easier.
P(*%i+)#& Pri!t#& S(r"#+' There are variety of published printed sources. Their credibility
depends on many factors. !or example, on the writer, publishing company and time and date
when published. Cew sources are preferred and old sources should be avoided as new
technology and researches bring new facts into light.
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Dooks4 Dooks are available today on any topic that you want to research. The use of
books start before even you have selected the topic. "fter selection of topics books
provide insight on how much work has already been done on the same topic and you
can prepare your literature review. Dooks are secondary source but most authentic one
in secondary sources.
EournalsFperiodicals4 Eournals and periodicals are becoming more important as far as
data collection is concerned. The reason is that journals provide up#to#date
information which at times books cannot and secondly, journals can give information
on the very specific topic on which you are researching rather talking about more
general topics.
Maga+inesFCewspapers4 Maga+ines are also effective but not very reliable.
Cewspaper on the other hand are more reliable and in some cases the information can
only be obtained from newspapers as in the case of some political studies.
INDUSTRY PROFILE
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"fter expanding at a snail-s pace, the market for personal wash products
appears to have come to grinding halt in 055/. "fter posting modest single digit growth in
/GGH#0555 figures for the first seven months suggest that market for detergent soaps has
actually shrunk.
Astimates about the extent of declines in market si+e vary, Iindustan lever,
which straddles. The category with 65J market share by value, say the market shrunk by
9.:J in value terms in the first half of 055/.
The $ndian 2oap and 3etergent Manufactures "ssociation, puts the decline at
/J. =ther industry sources suggest that the extent of %3e#growth& in the first eight months
of 055: could be as high as HJ.
DEVELOPMENT OF THE DETERGENT INDUSTRY
"lthough the start of the synthetic detergent industry is not shrouded in the
veils of history as were the beginnings of the soap industry, it is nevertheless not easy to
pinpoint exactly when the detergent industry, as such, came into being.
The primary problem is to decide exactly what is being referred to as a synthetic detergent.
The term itself leads to confusion. $n $C3$" the words surfactant or syndet are being used,
whilst in Aurope the term .tenside. 'for tensio#active material) is coming into fashion.
Dut if the shrinking market si+e suggest that $ndian consumers are actually been cutting back
on their use of detergent soaps, this is not really the case. $n volume terms, the market for
detergent soaps has continued to show a growth of /5J in the first eight months of 055:
The major players have certainly managed to sell more detergent soaps by volume but price
competition in the segment and slew of promotional campaigns have reduced the effective
reali+ation per unit sold. This has probably neutrali+ed the gains from volume expansion.
DEFINITIONS
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Many definitions of synthetic detergent have been proposed, all of which are
very wide. The Commit $nternational de 3rives Tensio "ctins has after several years of
deliberation agreed on the following definitions4
D#t#r.#!t
Means the formulation of which is specially devised to promote the development
of detergency.
" detergent is a formulation comprising essential constituents 'surface active
agents) and subsidiary constituents 'builders, boosters, fillers and auxiliaries).
S(r$a"# A"ti-# A.#!t
Chemical compound which, when dissolved or dispersed in a liquid is
preferentially absorbed at an interface, giving rise to a number of physico#chemical or
chemical properties of practical interest. The molecule of the compound includes at least one
group with an affinity for markedly polar surfaces, ensuring in most cases solubili+ation in
water, and a group which has little affinity for water.
Compositions in general are usually mixtures of such compounds.
Amp)ip)i%i" Pr&("t4
<roduct comprising in its molecule, at the same time one or more hydrophilic
groups and one or more hydrophobic groups.
2urface active agents are amphiphilic products.
SYNTHETIC DETERGENTS
The term synthetic detergent is used throughout this article, for a material
which cleans 'or is used for cleaning), but in this definition soap is not included. Aven so,
this is still a wide definition, because, of course, it can refer to the active ingredient, or the
solid, liquid, paste or powder compounded from this active matter.
Iowever, this should not lead to confusion, as the industry itself as yet makes no
distinction in terminology between the basic material and the ready#for#use product.
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The first synthetic detergents which fall into our definition of the term seem to have been
developed by the (ermans the !irst Korld Kar period to allow fats to be utili+ed for other
purposes.
These detergents were of the short#chain alkyl naphthalene sulphonate type,
made by coupling propel or butyl alcohols with naphthalene and subsequent sulphonation,
and appeared under the general name of Cekal.
products proved to be only fair to moderately good detergents, but good wetting
agents and are still being produced in large quantities for use as textile auxiliaries.
$n the late /G05s and early /G15s long#chain alcohols were sulphonated and
sold as the neutrali+ed sodium salts without any further additions except for sodium sulphate
as an extender.
$n the early /G15s long#chain alkyl aryl sulphonates with ben+ene as the
aromatic nucleus, and the alkyl portion made from a kerosene fraction, appeared on the
market in the ,2". "gain, these were available as the sodium salts extended with sodium
sulphate.
Doth the alcohol sulphates and the alkyl aryl sulphonates were sold as such as
cleaning materials, but did not make any appreciable impression on the total market.
"t the end of the 2econd Korld Kar alkyl aryl sulphonates had almost
completely swamped the sales of alcohol sulphates for the limited uses to which they were
applied as general cleaning materials, but the alcohol sulphates were making big inroads into
the shampoo field. "n exception was Teepol, a secondary alcohol sulphate which remained
popular for some years.
$n common, however, with other chemical developments during this century,
progress was not in one direction only. The limiting factor is always the availability of raw
materials in a particular country.
Con#currently with the above developments, there were developed, both in (ermany and the
,2", the lgepon type of compounds of which lgepon#T, the sodium salt of oleyl tauride is an
example, and in (ermany the Mersolates, which are alkane sulphates.
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$n the ,nited Lingdom, Teepol, a secondary olefin sulphate from petrochemical
sources, was manufactured in large quantities and is still being produced in Angland and
Kestern Aurope even to this day.
Aach of these basic materials has its advantages and disadvantages, but in
considering the feasibility of production the following factors must be taken into account
Ke have purposely placed suitability last, as it is only too true that not always is
the best material made available. "s a result of its ease of manufacture and versatility, the
alkyl ben+ene sulphonate very quickly gained a foothold in the market, and after the last war
the existing keryl ben+ene was very quickly replaced by an alkyl ben+ene made from
propylene tetramer coupled to ben+ene '<T ben+ene).
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"vailability of raw materials@
Aase of manufacture@
Cost of raw materials@
Cost of manufacture@
2uitability of finished product.
This <T ben+ene very quickly displaced all other basic detergents and for the
period /G:5#6: considerably more than half the detergents used throughout the world were
based on this.
SYNTHETIC DETERGENTS PRODUCTION
To give an idea about the enormous rise in synthetic detergent production, the following
Ta*%#/0 compiled from figures submitted by the "merican 2oap and 3etergent "ssociation
and the (erman firm of Ienkel * Cie shows both soap and detergent sales in the ,2" for
various years to /GH0.
SALES TURNOVER IN INDIA
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Y#ar+ Sap Sa%#+ 0111 t!+ Sy!t)#ti" +a%#+ 0111 t!+
/G95 /9/5 9::
/G:5 /195 6::
/G65 :M1 /69:
/GH0 :MH 999M
/GM0 605 96M5
/GG0 :M5 9:M5
0550 605 9M:5
05/5 6:5 9G55
GRAPHICAL REPRESENTATION OF SALES
TURNOVER IN INDIA
These figures reveal that immediately after the 2econd Korld Kar synthetics started making
inroads into the production of soap, which now seems to have settled down to a constant
whereas synthetics have increased enormously.
Dy /G:G although the ,2 per capita consumption had somewhat leveled out, total
production was still rising as shown in Ta*%#/2 which has been compiled from the /G61
Census of Manufacturers by the Dureau of Census of the ,2 3epartment of Commerce and
from the Ienkel figures
LOW PRICED BRANDS
$ndustry player commonly attribute the de#growth in the soap market to down
trading. 3etergent soaps are the highest penetrated product with in the !MC( market,
reaching an estimate G:J of the urban and MHJ of the rural households. The fairly high
contribution from the rural markets makes this category sensitive to the fortune of the
agricultural economy.
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The prolonged drought in Corth and Kest of the country 'until 0555) and the
sharp fall in farm disposable income has probably persuaded low income households to the
down trend, that is shift from high to low price brands.
This is indeed supported by the fact that within detergent soaps, it is the discount
segment 'soaps that cost between ?s.:#/5 per H:gms) that has registered the highest growth
rate over the past years.
I;; to appear endorse the phenomenon of down trading. %There has been an
inter#spectral shift in the soap market, with consumer down trading from premium and
popular to discount soaps& explains the company-s spokesperson.
Iowever Mr. Iosherder.L press (odrej consumer care, begs to differ %Ke think
consumers have already pre#committed their incomes for installments on durables. The
substitution of soap with shampoos for hair wash has also impacted the growth& he said.
MORE OFFERINGS
This is despite the fact that this usually sleepy category has seen a spate of new
players- debut new offers in recent times. =ver the past couple of years, C$?M" has
launched a slew of low priced soaps under the banner of C$?M".
Ienkel spik has made a maiden foray in to the market with a far range of
detergent soaps. The market leader I;; to relaynced several detergent soaps.
WASHING IMPROVEMENTS
"fter the war, when detergents started appearing in appreciable quantities on the
retail market, it was noted that white cotton goods were not being washed as white as they
was explained by the fact that although the active material was able to lift the dirt from the
cloth it could not keep it in suspension.
Ience small spots of dirt were being re#deposited uniformly over the whole
surface area of the cloth while in the wash#tub or machine, thus giving the cloth a grey
appearance.
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BETTER 3UALITY
The crowded market place has also brought a few benefits to the consumer
marketers of soap have tried to woo consumers through un graded offerings and better quality
soaps.
"ided by low input prices, the marketers of detergents have increased the
content in their brands, to offer better quality soaps at a low price. $ndustry watchers say the
content in some brands has risen from :5#65J of earlier to H5Jof late.
Therefore, per unit reali+ation soaps have declined, the marketers of soap have actually
sacrificed a part of their margins on hiking the content
TOUGH TIMES A HEAD
Kith competitive pressures on the rise and large number of brands jostling for
consumer attention in sluggish market likely to remain a different one for most players.
2maller players such as (odrej Consumer and Ienkel 2pic have been in a position to report
rebut sales growth in the category over the past years despite the bruising competition.
Iowever, this is partly due to a relatively small base of comparison. ,nless the
market expands, the frenetic promotional activity may soon tell on the growth rate of players.
"nd when it comes to sustaining a high decipel promotional campaign, I;;-s si+e certainly
gives is the where withal to do it.
RURAL REVIVAL
$t appears that a genuine boost to the market si+e for detergent soaps will still
have to come from a survival in rural demand. Avidence from the past does appear to suggest
that a sharp rise in rural incomes would have a cascading affect on market in /GGG, after a
year of sluggish growth in /GGM, demonstrated that a recovery in agricultural output does
have on indirect impact on sales volumes of !MC( products.
This year, reports of a good monsoon in the northern * western parts of the
country have sparked off speculation about a revival in !MC( growth rates. The fact these
two regions account for 65J of the demand for !MC( strengthens this agreement.
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Iowever, it appears to be a bit early in the day to call it revival. !or one, while
the northern * western regions have received satisfactory rein, southern $ndia has been the
victim of very erratic monsoon.
2econd, given that the good monsoon in the current year succeeds two or three
consecutive years of drought in some regions, there could be a substantial time tag before
higher rural incomes translates into better !MC( demand.
Third, farm product prices have dropped sharply in response to built up of
surplus grain stocks. Therefore, even if a good monsoon translates into agricultural output,
there is the question of whether this will actually expand or shrink farm incomes.
These factors suggest that it may be premature to take investment exposures in
companies focused on detergent soaps in the hope of revival. $f may be better to wait for
concrete signs of o pickup in rural demand, which is certainly some way off.
CARBO4YMETHYLCELLULOSE 5CMC6
The sodium salt of carboxymethylcellulose 'CMC) had been known to industry
for many years and, in fact, a !rench patent had been applied for in /G16, / using CMC as an
additive to washing materials.
Iowever, this patent was not developed extensively until the 2econd Korld
Kar, when CMC was used in (ermany on a moderately large scale, initially as an extender
for soap which was in short supply, and then as an additive to the synthetic detergents being
produced as a wartime substitute for soaps.
Khen intelligence reports on the (erman industry were published, the use of
CMC as an additive to synthetic detergent powders was noted and investigated and it was
found that this addition eliminated the redeposit ion problem.
BUILDERS
3espite the considerable advances made in the production of the active detergent
matter, by the end of the 2econd Korld Kar progress in the use of detergents for heavy#duty
'cotton) washing was still relatively slow, although they had already displaced soaps to a
considerable extent in the field of fine laundering and dish#washing.
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To improve the heavy#duty washing properties, manufacturers turned for
analogies to the soap industry. 2oap for cotton washing had for many years been .built. with
alkaline materials such as carbonates, silicates, borax, and orthophosphates. "ll of these
singly and in combination were tried with moderate success.
Condensed phosphates had started appearing on the market in increasing
quantities and from /G9H onwards heavy#duty detergent formulations were introduced,
initially with tetra sodium pyrophosphate and then with sodium tripolyphosphate with
startling success.
ENVIRONMENTAL ISSUES
<ropylene tetramer ben+ene sulphonate held almost undisputed sway as the
major ingredient used in washing operations till the early /G65s. "round this time it was
noted, however, that sewage treatment problems were arising.
The amount of foam on rivers was increasing and where water was being drawn
from wells located close to household discharge points, the water tended to foam when
coming out of the tap.
This was attributed to the fact that propylene#based alkyl ben+ene sulphonates
are not completely degraded by the bacteria naturally present in effluents, and was further
narrowed down to the fact that it is the branched#chain formation of the alkyl ben+ene which
hinders the attack by the bacteria.
Iowever, fatty acid sulphates were found to degrade very easily, and since all
naturally occurring fatty acids from which fatty alcohols are produced are of the straight#
chain variety 'as also are the Niegier alcohols which started appearing in commercial
quantities at about this time), it seemed possible that straight#chain alkyl ben+ene might be
degradable.
Methods of test were developed and it was, in fact, proved that linear alkyl
ben+ene is biodegradable. (ermany introduced legislation prohibiting the discharge of non#
biologically degradable material into sewer systems.
$n the ,2" detergent manufacturers agreed voluntarily to switch over from <T ben+ene to
linear alkyl ben+ene by Eune /G6:. $n the ,nited Lingdom a similar type of .gentleman.s
agreement. was entered into.
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The change to linear alkyl ben+ene 'which can be considered as a return to a purified
form of the keryl ben+ene in use twenty years previously) gave some rather surprising results.
$t was found that the detergency in a heavy#duty formulation using linear alkyl
ben+ene sulphonate was approximately /5 per cent better than when using <T ben+ene
sulphonate, solutions of the neutrali+ed sulphonic acid had a lower cloud point, and pastes
and slurries had a lower viscosity.
The first two results were obviously advantageous and a lower viscosity in
slurries had an advantage when the product was spray#dried to a powder, but when the ;"2
was sold as a liquid or paste detergent, this lower viscosity had to be overcome as sales
appeal was lost.
The manufacture of powders based on ;"2 posed some problems, however.
<owders became sticky and lost their free#flowing characteristics, whether made by spray#
drying or one of the other methods.
Mausner and ?ainer. have indicated that the actual isomer distribution of the
linear alkylate has an effect on the stickiness of the powder, with the 0#phenyl isomer giving
the greatest tendency to stickiness and the :# or 6#phenyl isomer the least. "dditives to
overcome this tendency have therefore been developed.
The switch to linear alkyl ben+ene is not, however, complete. $n many parts of
the world where the problem of sewage treatment is not serious, the <T ben+ene is still being
used in ever#growing quantities. "lso the Niegler alcohols are now competitively priced with
the linear alkyl ben+enes, and alkane sulphonates are reappearing.
Iaving successfully coped with the problem of biodegradation the industry
faced a new attack. $t appeared that in certain lakes and ponds algae started reproducing at an
unprecedented rate.
This was blamed on the extensive use of phosphates which are a food for these
organisms, and again the detergent industry became the whipping boy, because tremendous
amounts of sodium tripolyphosphate are used and then discharged down the sewer. 'The
term eutrophication, meaning nutrition by chemical means, has been applied to this
phenomenon.)
21
$t is not clear whether the blame should be taken solely by the detergent
industry, as concurrently with the increase in the use of detergent phosphates there was an
increase in the use of phosphate fertili+ers, which also find their way into natural water
systems.
Iowever, with the big international preoccupation with ecology the detergent
industry is searching for an efficient substitute for sodium tripolyphosphate.
To date a complete replacement has not been found but in the 2candinavian countries
particularly, formulations of household powders are beginning to appear with appreciable
portions of the phosphate replaced by CT" 'nitrilo triacetic acid) which is a better
sequestering agent than tripolyphosphate but has none of the other properties exhibited by the
phosphate.
There are fears that in time the extended use of CT" might bring new problems
of this sort, as it contains nitrogen which is again a good fertili+er and nutrient for algae.
The search is still going on for a phosphate substitute. CT" on its own will only
partially replace phosphates. " mixture of CT" and borax has been suggested as a complete
replacement but here again the borax might produce more problems than the phosphate is
alleged to produce. 2ome of the hydroxy#polycarboxylic acids not containing nitrogen are
also being considered.
EN7YMES
The biggest single revolutionary trend in the detergent industry in the latter
years has been the use of en+yme additives. An+ymes as aids to washing are not new to the
industry.
<hotolytic en+ymes had been tried as additives to washing powders in (ermany
in the /G05s with only moderate success and again in 2wit+erland in the /G15s. An+ymes,
which can be called organic catalysts, tend to hasten reactions and the photolytic en+ymes
convert or .break down. proteins wholly or partially into amino acids.
The action is rather slow and the production costs high, but with improved
methods of production and purification, strains of en+ymes, usually in admixture with a
22
proportion of amylase which breaks down starches, were developed which were relatively
fast acting.
These were added initially to .pre#soak. detergents and found immediate
acceptance in the Auropean countries where washing habits were such that washing was
normally soaked for a period prior to the wash proper.
Detter and better strains of en+ymes were developed, with stability to a wider pI spectrum,
stability against perborate and quicker action. $n the ,nited 2tates detergent manufacturers
resisted the incorporation of en+ymes into their powders for some years after this type of
powder had almost completely swept the board in Aurope but in /G6M en+ymatic powders
started appearing there as well.
The position at present is that en+ymatic powders are now holding a large
proportion of the household detergent market and formulations appeared made for machine
washing.
2ome washing#machine manufacturers are now producing automatic washing
machines with a .Dio. programme which allows the washing to remain in contact with the
detergent solution for an extended period of time at a relatively low temperature before
beginning the washing and heating cycle.
The future of en+ymes is at the moment obscure as the production of en+ymatic
powders has raised its own problems, and one 2candinavian firm has already decided to
withdraw its powder containing other are taking en+ymes out of some of their powders while
forging ahead with others.
23
COMPANY PROFILE
MFs DI"?"TI$ 2="< K=?L is promoted by a young, dynamic and outstanding
person 2ri ". M"C$CL">A; with his visionable * dynamic leadership, the company has
carved a niche for itself in the market.
$n the initial stage he the factory run with /0 workers with manual labor. ;ater
with his hard work he earned and shifted to (orantla village, (untur manual in /GM:. $n the
factory sri.manickavel has introduced power mortars in (untur for the first time.
$n the initial stage, he ran his factory with /0 workers with manual labour. ;ater
with his hard work, he earned and shifted to 3.Co.6HFD#/ (orantla village, (untur Mandal in
/GM: in his own factory premises with power motors in (untur for the first time
The then brand names were Dlue 3iamond, Dharathi. The main objective is to
sell good quality detergent cakes to middle class and lower class people with low price.
$nitially the products were sold at (untur and <rakasam 3istricts only. Dut
now his hard work and maintence or quality, he has got very good market reputation all over
"ndhra <radesh by appointing sales agents at different areas. Through its good management
and organi+ation, it acquired a good position in the detergent industry.
VISION
The company is planning to introduce quality blue and toilet soap in the short
period. Ie can also to do sellers of detergent cakes washing powder chemicals, dates salt
other general goods. This firm is providing employment to nearly /55 families.
MISSION
2ri .".Manickavel came to (,CT,? in /GM5 and started business with very
low amount and his day by day improvement he decided to give quality soaps low price to
middle class people.
24
Ie is most populari+ed social worker and philanthropist in (untur. Ie directly and
indirectly helped the needy like mission and charity institution. Iome for the aged and men
tall challenged persons. <resident of T"M$; C,;,T?"; "22=C$"T$=C
GROWTH AND E4PANSION OF BHARATHI SOAP WORKS
MFs. DI"?"TI$ 2="< K=?L2 is expanding their day to day production
capacity and supply of goods from time to time. $nitially, MFs. Dharathi 2oap Korks capital
investment is ?s.6:,555F# but now the investment reached ?s.69, GM,M/HF#, hundred times.
Kith MFs. Dharathi 2oap Korks good marketing and promotional activities its
present turnover reached to ?s.M.H/ cores for the year 0556#055H when compared to ?s.09
lakhs at the initial stage.
MFs. DI"?"TI$ 2="< K=?L2 initially manufactured only medium quality
products. Dut now manufacturing <remium and Aconomy quality products. Kith the
increasing market share and to face the competition, it started introducing new brands by
maintaining different styles of packing to suit the desires of the consumers.
The main aim of MFs. DI"?"TI$ 2="< K=?L2 is to supply quality products
to its consumers. Buality is more important than profit. $t is the key for the success of the
company.
The company stress upon the quality of the products rather than its profit
margins. The motive earned huge market at all places in "ndhra <radesh.
WORKERS OF BHARATHI SOAP WORKS
"t present H: workers are at production department and : employees at office, 0
employees at canteen and /M employees as motor transport workers. The company provides
complete facilities to its workers and employees.
"s it provides complete assistance and facilities to the employees, workers
dedicatedly contributed to increase its market share.
25
The working environment brings about a pleasant atmosphere and enables the
employees work dedicatedly, and also he is providing employment for more than /555
families indirectly for marketing his products all over "ndhra <radesh.
FUTURE PLANNING OF BHARATHI SOAP WORKS
The company is planning to manufacture and sell quality Dlue and Toilet soaps within
a short period.
TRADING COMPANY' M8+9 ANNAM TRADERS
2ri ".Manickavel is the Managing partner of "CC"M T?"3A?2. The
above firm was established in the year /GG5. The main activities are selling of 3etergent
cakes, washing powder, Chemicals, 3ates, 2alt and other general goods.
3UALITY POLICY OF THE COMPANY
%2atisfying the costumers by providing quality products and services and striving
towards continual improvements&.
3UALITY OBJECTIVES
To improve sales compares to last year.
To improve the customer satisfaction level.
To reduce the wastage in production process.
To update the knowledge of the employees.
To continually improve the process.
CERTIFICATION

MFs DI"?"TI$ 2="< K=?L2 is an $2= G55/40555 certified organi+ation and
having other certification from M==38 international certification and ,L"2 quality
management certification.
26
3UALITY MAINTENANCE
The main aim of MFs DI"?"TI$ 2="< K=?L2 is to supply quality products to its
consumers, since quality is more important than profit. $t is the key for the success of
the company
The company stress upon the quality of the products rather than its profit margins.
This motive earned huge market at all places in "ndhra <radesh.
The company is strictly adopting quality preference only in purchases of raw
materials, as well as delivery of finished goods and they assure customer that they
never compromise with quality at all stages.
Buality assurance demands a degree of detail in order to be fully implemented at
every step.
<lanning, for example, could include investigation into the quality of the raw
materials used in manufacturing, the actual assembly, or the inspection processes
used.
The Checking step could include customer feedback, surveys, or other marketing
vehicles to determine if customer needs are being attended or not. $f not, what are the
seasonsO
"cting could mean a total revision in the manufacturing process in order to correct a
technical or cosmetic flaw.
Competition to provide speciali+ed products and services results in breakthroughs as
well as long#term growth and change.
Buality assurance verifies that any customer offering, regardless if it is new or evolved
is produced and offered with the best possible materials, in the most comprehensive
way, with the highest standards.
27
PRODUCTION CAPACITY
<roducts leave factory only after thorough quality check in the laboratory with
qualified technicians under proper supervision at all levels, and it is all done before reaching
to market, so as to satisfy the customers and they feel proud of customer satisfaction.
Company has an excellent production capacity. The present installed production
capacity is 1: To 95 Tons of 3etergent cakes per day and 05 Tons of washing powder per
day. The machines are operated according to the demand in the market.
BHARATHI SOAP WORKS/PRODUCTS

,nder 3$"M=C3 brand, #1# types of detergent cakes are being manufactured, that
are

Dlue 3iamond 4 /0:gms*/:5gms.
(reen 3iamond of 4 /:5gms only.
2imilarly under Triple#P 'PPP) brand, #/H# types of detergent cakes are being
manufacturing.
They are4
Triple#P More washes 'Mini) 4 /55 gms.
Triple#P more washes 'Medium) 4 055 gms.
Triple#P More wash 4 /:5 gms.
Triple#P More wash 4 155 gms.
Triple#P More wash 4 1:5 gms.
Triple#P Aasy wash 4 /0: gms.
Triple#P Aasy wash 4 0:5 gms.
Triple#P '?ose) 4 055 gms.
Triple#P '?ose) 4 /0: gms.
Triple#P 'Khite) 4 0:5 gms.
Triple#P <ink 2uper wash 4 155 gms.
Triple#P <ink 2uper wash 4 /:5 gms.
Triple#P (old 4 055 gms.
2uper Triple#P 'PPP) 4 /:5 gms.
Triple#P "ction 2oap 4 0:5 gms.
28
Triple#P ?aja 2oap 4 1:5 gmsTriple#P ?aja
2oap 4 /H: gms.
,nder MAGIC brand, #0# types of detergent cakes are being manufacturing i.e.#
Magic 4 /0: (ms.
Magic 4 055 (ms.
,nder SAREGAMA brand, #1# types of detergent cakes are being manufacturing, i.e.#
2aregama 4 /:5gms
2aregama 4 055gms@
2aregama 4 155 gms.
,nder TRIPLE/4 5 444 6 RUF : TUF brand, #0# types of dish wash bars are
being manufacturing, i.e.#
T?$<;A#P ?,! * T,! 4/:5gms
T?$<;A#P ?,! * T,! 4155gms.
2imilarly, under Trip%#/4 54446 brand, #/1# types of detergent powders are being
manufacturing.
They are4
Triple#P 2ilver !oam 4 //:5 gms
Triple#P 2ilver !oam 4 / Lg.
Triple#P 2ilver !oam 4 M:5 gms.
Triple#P 2ilver !oam 4 ::5 gms.
Triple#P 2ilver !oam 4 0:5 gms.
Triple#P 2ilver !oam 4 /0: gms.
Triple#P powder pouch 4 /: gms.
Triple#P I$#<=KA? 4 / Lg.
Triple#P I$#<=KA? 4 :55 gms.
Triple#P I$#<=KA? 4 055 gms.
Triple#P 2ilver ;ine 4 1 kg.
DETERGENT POWDER
29
SILVER LINE DETERGENT POWDER
U+a.#' 0 scoop for bucket wash and 0 scoops for machine wash. 2uitable for top
loading machines. 2oap for 15 minutes before washing. !or superior results wash in warm
water.
444 was gives you not just %whiteness& but also %freshness& the power of blue whiteness up
your clothes !or every wash your clothes look and smell as fresh as new
<roduct Came 42ilver;ine
Type 43etergent<owder
<rice 4?s./M:#55
Cet Keight 41 Lg.
=ffer 4 ?s.65F# worth of <lastic bucket !ree with this
pack
SILVER FOAM DETERGENT POWDER
2coop for bucket wash and 0 scoops for machine wash. 2uitable for top loading
machines. 2oak for 15 minutes before washing. !or superior results wash in warm water.
444 was gives you not just %whiteness& but also %freshness& the power of blue whiteness up
your cloths. !or every wash your clothes look and smell as fresh as new
<roduct Came 42ilver!oam
Type 43etergent<owder
<rice 4?s.95.55
Cet Keight 4/.0Lilograms
=ffer 4055gms.MoreKithThis<ack '!ree)

HI / POWER DETERGENT POWDER
U+a.#' 0 scoop for bucket wash and 0 scoops for machine wash. 2uitable for top
loading machines. 2oak for 15 minutes before washing. !or superior results wash in warm
water. 444 was gives you not just %whiteness& but also %freshness& the power of blue
whiteness up your cloths. !or every wash your clothes look and smell as fresh as new
<roduct Came 4Ii#<ower
Type 43etergent<owder
30
<rice 4?s.:5.55
Cet Keight 4/Lg.
=ffer 4 055gms.MediumMoreKash 2oap free

DISH WASH
444 RUF AND TUF
<roduct Came 4?uf*Tuf
Type 43ishKashDar
<rice 4?s./5.55
Cet Keight 4155 grams
TURNOVER OF THE COMPANY
8A"? <?=3,CT2 2";A2 T,?C=>A?'?2)
055/#0550 3etergents * powder :0,/M,9G6.05
0550#0551 3etergents * powder H5,H/,MH5.55
0551#0559 3etergents * powder 66,95,0/G.55
0559#055: 3etergents * powder HH,G/,6G5.65
055:#0556 3etergents * powder /,65,M:,5:/.5H
0556#055H 3etergents * powder 6,5G,:6,/19.56
055M#055G 3etergents * powder H,0H,6G,M/:.11
055G#05/5 3etergents * powder M,H/,/G,/H9.9H
GRAPHICAL REPRESENTATION
31
MFs BHARATHI SOAP WORKS initially manufactured only medium products now
they are manufacturing <remium, Aconomy quality products. To face competition by
improving market share they introduced different types new brands and packing styles to suit
the desires of the consumers.
The main aim of the company is to supply quality products to consumers. Buality is
more important than profit. $t is the key factor for the success of the company. The company
stress upon the quality of the products rather than its profit margins.
This motivational policy to earn huge market share at all places of southern $ndia.
WORKER;S WELFARE

"t present there are H6 workers at production department and : employees at
office, 0 employees in the canteen and /H employees as transport workers. The company
provides complete assistance and facilities to the employees, workers dedicatedly contributed
to increase its market share.
The working environment brings about a pleasant atmosphere and enables the
employees work dedicatedly. "nd also he is providing employment for mare than /555
families in directly for marketing his products all over southern $ndia.
32
ORGANI7ATION STRUCTURE
AWARDS WON BY THE COMPANY
The prestigious awards received by the M"C"($C( 3$?ACT=? of MFs
DI"?"TI$ 2="< K=?L2 are4
33
%Dest entrepreneur for the year of 0559 received on 06
th
Eanuary 055: from the hands of
Ion-ble 3istrict Collector &2"3IDI">"C "K"?3 for the year of 055: received on
0/
st
Covember 055:&
SOCIAL ACTIVITIES

2?$.".M"C$CL">A;, Managing 3irector of Dharathi 2oap Korks is the Ion.
<resident of Tamil Cultural "ssociation. The association main activity is to arrange and
promote cultural programs to their association members and social services like distributing
free note books, uniform to the poor students. This association also contributing the cyclone
relief funds to chief minister of various state governments of $C3$".
Ie is also president for the Cadargal Munnetra sangam. This 2angam is running a
school under the name of kamaraj public school at Tadepalle mandal of (untur district. This
school is providing good education to poor students who are financially poor.
Ie is also enjoying one more honorable post as president of WALC !oundation 'welfare
artificial limb centre). ,nder this foundation he is providing monetary support to this
association to providing freely artificial limbs to the handicapped poor people.

2ri.Manickavel is a most popular social worker and philanthropist in (untur. Ie is
directly or indirectly helped and helping the needy, like missions and charity institutions,
orphanages, home for the aged mentally challenged persons. Ie is also helping through lions
club and rotary club, by conducting free eye testing camps etc.
Ie has also donated to natural calamity funds to all states in $ndia regularly. Avery year he
has been donating educational funds for books, cloths, fees etc to poor children directly
through Dala Dharathi in (untur.
Ie is also interested to participate in the spiritual, cultural and sports activities in the
city and entire "< and donating the funds to the conductors * participants.
CONCEPTUAL FRAME WORK
CAPITAL BUDGETING
34
Capital budgeting is the process of making investment decisions in capital
expenditures. " capital expenditure may be defined as an expenditure the benefits of which
are expected to be received over a period of time exceeding one year.
The main characteristic of a capital expenditure is that the expenditure is incurred at
one point of time whereas benefits of the expenditure are reali+ed at different points of time
in future.
$n simple language we may say that a capital expenditure is an expenditure incurred
for acquiring or improving or improving the fixed assets, the benefits of which are expected
to be received over a number of years in future.
This project presents two versions of heuristic algorithm to solve a model of capital
budgeting problems in a decentrali+ed multidivisional firm involving no more than two
exchanges of information between headquarters and divisions.
Iead quarters make an allocation of funds to each division based upon its cash
demand and its potential growth rate. Aach division determines which projects to accept.
Then, an additional iteration is performed to define the solution
To take up a new project, involves a capital investment decision and it is the top
management-s duty to make a situation and feasibility analysis of that particular project and
means of financing and implementing it financing is a rapidly expanding field, which focuses
not on the credit status of a company, but on cash flows that will be generated by a specific
project
The capital budgeting decisions procedure basically involves the evaluation of the
desirability of an investment proposal. $t is obvious that the firm must have a systematic
procedure for making capital budgeting decisions.
The procedure for making capital budgeting decisions must be consistent with
objective of wealth maximi+ation. $n view of the significance of capital budgeting decisions,
the procedure must consist of step by step analysis of the data to bridging the gap in the
organi+ation.
The capital program is generally financed by borrowing money usually
through the sales of bonds. This differs from the company-s expenses budget, which covers
day#to#day operating expenditures * is financed by company-s taxes and other revenues
along with other companies in the industry.
35
The capital budgeting strategy presents the goals, policy constraints, assumptions the
organi+ation-s capital needs over the next /5 years. The document also provides the
anticipated sources of financing, and the implications of the strategy, including any possible
economic, social and environmental effects.
"fter a public hearing and a report by the organi+ation planning commission or board
of directors, the final version of the strategy is released with the executive budget in every
year.
The strategy presents capital projects in broad categories that reflect organi+ation-s
agency goals. There are various ways the organi+ation records the progress of capital
projects. $n general, they measure financial transaction, spending and obligation, rather than
what most department come about the status of work on a particular project.
"lthough information is publicly available on annual capital spending by budget line,
no information is currently made publicly available that provides detailed project level
information on the status of capital projects.
DEFINITIONS OF CAPITAL BUDGETING
%Capital budgeting is a long term planning for making and financing proposed capital
outlays&
' / T9Hr!.r##!
<" budget is an estimate of future needs arranged according to at an orderly basis
covering some or all the activities of an enterprise for a definite period of time&
' / G#r.# R9 T#rry
<Dudget as a financial andF or quantitative statement prepared to a definite period of
time, of the policy to be pursued during that period for the purpose of attaining a given
objective&
' / ICMA= L!&!
Nat(r#= Imprta!"# a!& typ#+ $ i!-#+tm#!t &#"i+i!+
Nat(r#
36
The investment decisions of a firm are generally known as the capital budgeting, or
capital expenditure decisions. " capital budgeting decision may be defined as the firm-s
decision to invest its current funds most efficiently in the long#term assets in anticipation of
an expected flow of benefits over a series of years. The long#term assets are those that affect
the firm-s operation beyond the one#year period. The firm-s investment decisions would
generally include expansion@ acquisition decisions would generally include expansion,
acquisition, moderni+ation and replacement of the long#term assets. 2ale of a division or
business 'divestment) is also as an investment decision. 3ecisions like the change in the
methods of sales distribution, or an advertisement campaign or a research and capital. $n this
chapter, we assume that the investment project-s opportunity cost of capital is known.
Imprta!"# $ i!-#+tm#!t &#"i+i!+
$nvestment decisions require special attention because of the following reasons4
Q They affect the risk of the firm
Q They involve commitment of large amount of funds
Q They are irreversible, or reversible at substantial loss
Q They are influence the firm-s growth in the long run
"mong the most difficult decisions to make
Gr>t)
The effects of investment decisions extend into the future and have to be endured for
a longer period than the consequences of the current operating expenditure. " firm-s decision
to invest in long#term assets has a decisive influence decision to invest in long#term assets
has a decisive influence on the rate and direction of its growth. " wrong decision can prove
disastrous for the continued survival of the firm@ unwanted or unprofitable expansion of
assets will result in heavy operating costs to the firm. =n the other hand, inadequate
investment in assets would make it difficult for the firm to compete successfully and maintain
its market share.
Ri+?
" long#term commitment of funds may also change the risk complexity of the firm, if the
adoption of am investment increases average gain but causes frequent fluctuations in its
earnings, the firm will become more risky. Thus, investment decisions shape the basic
37
character of a firm.
F(!&i!.
$nvestment decisions generally involve large amount of funds, which make it imperative
for the firm to plan its investment programmers very carefully and make an advance
arrangement for procuring finances internally or extremely.
Irr#-#r+i*i%ity
Most investment decisions are irreversible. $t is difficult to find a market for such capital
items once they have been acquired. The firm will incur heavy losses if such assets are
scrapped.
Cmp%#,ity
$nvestment decisions are among the firm-s most difficult decisions. They are an
assessment of future events, which are difficult to predict. $t is really a complex problem to
correctly estimate the future cash flows of an investment economic, political, social and
technological forces cause the uncertainty in cash flow estimation.
I!-#+tm#!t D#"i+i!+ Typ#+
T)#r# ar# ma!y >ay+ t "%a++i$y i!-#+tm#!t9 O!# "%a++i$i"ati! i+ a+ $%%>+'
Q Axpansion of existing business
Q Axpansion of new business
Q ?eplacement and moderni+ation.
E,pa!+i! a!& &i-#r+i$i"ati!
" company may add capacity to its existing product lines to expand existing
operations. !or example, the (ujarat state fertili+er company '(2!C) may increase its plant
capacity to manufacture more urea. $t is an example of related diversification. " firm may
expand its activities in a new business. Axpansion of a new business requires investment in
new products and a new kind of production activity within the firm. $f a packaging
38
manufacturing company invests in a new plant and machinery to produce ball bearing, which
the firm has not manufactured before, this represents expansion of new business or unrelated
diversification. 2ometimes a company acquires existing firms to expand its business. $n either
case, the firm makes investment in the expectation of additional revenue. $nvestments in
existing or new products may also be called as revenue#expansion investments.
R#p%a"#m#!t a!& m&#r!i@ati!
The main adjective of moderni+ation and replacement is to improve operating
efficiency and reduce costs, cost savings will reflect in the increased profits, but the firm-s
revenues may remain unchanged. "ssets become outdated and obsolete with technological
changes. The firm must decide to replace those assets with new assets that operate more
economically. $f a cement company changes from semi#automatic drying equipment to fully
automatic drying equipment, it is an example of moderni+ation and replacement.
?eplacement decisions help to introduce more efficient and economical assets and therefore,
are also called cost#reduction investments however@ replacement decisions that involve
substantial moderni+ation and technological improvement expand revenues as well as reduce
costs
39
CIPAce Capital Planning and Budgeting Solution Lifecycle
Diagram
40
PROCESS OF INVESTMENT DECISIONS
Capital Budgeting is a c!ple" p#cess $%ic% !a& %e di'ided int t%e
(ll$ing p%ases.
Figu#e ( Capital Budgeting P#cess
)* Identi(icatin ( In'est!ent Opp#tunities
The capital budgeting process begins with the identification of potential investment
opportunities. Typically, the planning body 'it may be an individual or committee organi+ed
formally or informally) develops estimates of future sales which serves as the basis for setting
production targets. This information, in turn, is helpful in identifying required investments in
plant and equipment.
Identi(icatin ( in'est!ent ideas it is %elp(ul t:
1. Monitor external environment regularly to scout investment opportunities.
0. !ormulate a well defined corporate strategy based on through analysis of strengths,
weaknesses, opportunities, and threats.
3. 2hare corporate strategy and respective with persons.
9. Motivate employees to make suggestions.
41
Identi(icatin (
In'est!ent
Opp#tunities
Asse!+ling (
in'est!ent
p#psals:

Decisin Ma,ing
Pe#(#!ance
Re'ie$
I!ple!entatin
P#epa#atin ( capital
Budget-
.. Asse!+ling ( in'est!ent p#psals
$nvestment proposals identified by the production department and other departments are
usually submitted in a standardi+ed capital investment proposal form. (enerally, most of the
proposals, before they reach the capital budgeting committee or somebody which assembles
them are rated through several persons. The proposal is viewed from different angles. $t also
helps in creating a climate for bringing about co # ordination of inter related activities.
$nvestment, proposals are usually classified into various categories for facilitating decision#
making, budgeting, and control.
I. ?eplacement investments
II. Axpansion investments.
III. Cew product investments
IV. =bligatory and welfare investments.
/* Decisin Ma,ing- " system of rupee gateways usually characteri+es capital
investment decision making. ,nder this system executive are vested with the power to okay
investment proposals up to certain limits.
0* P#epa#atin ( Capital Budget-
6. <rojects involving smaller out lays and which can be decided by executives at lower
levels are often covered by a blanket appropriation for expenditures action. <rojects
involving larger out lays are included in the capital budget after necessary approvals.
0* I!ple!entatin
Translating an investment proposal into a concrete project is a complex time
consuming, and risk# fraught task.
> Adequate formulation of proe!t"
> #"e of t$e prin!iple of re"pon"i%ilit& a!!ountin'
> (erforman!e )e*ie+
42


1#2
P#cess ( Capital Budgeting-
,$e *ariou" "tep" in*ol*ed in !apital %ud'etin' pro!e"" depend upon lar'e num%er of
fa!tor" "u!$ a" "i-e of t$e !on!ern. nature of proe!t". t$eir num%er". !omple/itie" and
di*er"itie" and "o on. ,$e follo+in' li*e "tep" are in*ol*ed in t$e pro!e"" of !apital
%ud'etin'.
1. (roe!t 'eneration
2. (roe!t e*aluation
43
3. (roe!t "ele!tion
4. (roe!t e/e!ution
5. 0ollo+ up
)* P#3ect Gene#atin-
A !ontinuou" 'eneration of !apital e/penditure propo"al" li1e propo"al" e/pandin'
t$e re*enue" and propo"al" redu!in' t$e !o"t i" $i'$l& e""ential to ma1e effi!ient and full
u"e of fund" of t$e !on!ern. If t$e propo"al" e/pandin' t$e re*enue" relate to t$e propo"al"
to add ne+ produ!t" and to e/pand t$e !apa!it& in e/i"tin' line". t$e propo"al" redu!in' t$e
!o"t" are de"i'ned to %rin' "a*in'" in !o"t in e/i"tin' line" +it$out !$an'in' t$e "!ale of
operation".
.* P#3ect E'aluatin-
,$i" pro!e"" deal" +it$ ud'in' t$e "uita%ilit& of a proe!t %& I,2 la&in' *ariou"
!riteria. ,$u" t$e pro!e"" of proe!t e*aluation in*ol*e" e"timatin' t$e !o"t" and %enefit" in
term" of !a"$ flo+". and "ele!tin' an appropriate !riterion for ud'in' t$e de"ira%ilit& of t$e
proe!t".
/* P#3ect Selectin-
,$i" "tep deal" +it$ "!reenin' and "ele!tin' t$e proe!t". #"uall&. proe!t" under
!on"ideration !an %e "!reened at *ariou" le*el" of mana'ement. 3ut t$e final appro*al of
t$em "$ould %e 'i*en %& t$e top mana'ement
4* P#3ect E"ecutin-
After t$e proe!t" are "ele!ted. t$e fund" are to %e allo!ated for t$em. 4u!$ a formal
plan for t$e allo!ation of fund i" 1no+n a" !apital %ud'et. ,$e top mana'ement or e/e!uti*e
!ommittee "$ould en"ure t$at fund" are "pent a" per t$e allo!ation made in t$e !apital
%ud'et".
0* Fll$5up-
44
0ollo+5up deal" +it$ !ompari"on of a!tual performan!e +it$ t$e %ud'eted data. ,$i"
+ill en"ure %etter fore!a"tin' and al"o $elp in "$arpenin' t$e te!$nique of fore!a"tin'.
In'est!ent E'aluatin C#ite#ia-
,$ree "tep" are in*ol*ed in t$e e*aluation of in*e"tment.
1. 6"timation of !a"$ flo+"
2. 6"timation of t$e required rate of return 7t$e opportunit& !o"t of !apital8
3. I,2 i" of a de!i"ion rule for ma1in' t$e !$oi!e.
E'aluatin C#ite#ia-
A num%er of in*e"tment !riteria 7or !apital %ud'etin' te!$nique"8 are in u"ed in
pra!ti!e. ,$e& ma& %e 'rouped in t$e follo+in' t+o !ate'orie".
NEED OF CAPITAL BUDGETING
The importance of capital budgeting can be well understood from the fact that
unsound investment decision may prove to be fatal to the very existence of the concern. The
need, significance or importance of capital budgeting arises mainly due to the following
;arge investments
;ong#term commitment of funds
$rreversible nature
;ong#term effect on profitability
45
3ifficulties of investment decisions
Cational importance.
OBJECTIVES FOR CAPITAL BUDGETING
$t determines the capital projects on which work can be started during the
budget period after taking into account their urgency and the expected rate of
return on each project.
$t estimates the expenditure that would have to be incurred on capital projects
approved by the management together with the sources from which the
required funds would be obtained.
FACTORS FOR CAPITAL BUDGETING
Cost of acquisition of permanent asset as land and building, plant and machinery,
goodwill, etc.
Cost of addition, expansion, $mprovement or alteration in the fixed assets.
Cost of replacement of permanent assets.
?esearch and development project cost, etc.
PROCESS OF CAPITAL BUDGETING
(eneral process of capital budgeting is discussed below with diagram
46
09 PrA#"t G#!#rati!
The generation of capital expenditure proposals likes proposals expanding. The
revenues and proposal reducing the cost is highly essential to make efficient and full use
of funds of the concern.
29 PrA#"t #-a%(ati!
$t is deals with judging the suitability and desirability of a project by applying
various criteria
B9 PrA#"t +#%#"ti!
$t deals with screening the selecting the projects
C9 PrA#"t #,#"(ti!
"fter the project selected .the funds are to be allocated them .the allocation of funds is
known as capital budgeting
47
DIAGRAMATIC REPRESENTATION OF CAPITAL BUDGETING
06 IDENTIFICATION OF INVESTMENT PROPOSALS
The capital budgeting process begins with the identification of investment
proposals. The investment proposals may originate from the top management or from any
officer of the organi+ation.
The department head analyses the various proposals in the light of the corporate strategies
and submit the suitable proposal to the capital budgeting committee in case of large
organi+ations concerned with process of long#term investment proposals.
48
26 SCREEN PROPOSALS
The expenditure planning committee screens the various proposals received
from different departments in different angles to ensure that these are in selection criteria
of the organi+ation and also do not lead to department imbalances.
B6 EVALUATION OF VARIOUS PROPOSALS
The next steps in capital budgeting process in to evaluate the probability of
various probability the independent proposals are those which do not complete with one
another and the same way be either accepted or rejected on the basic of a minimum return
on investment required.
C6 FI4ING PRIORITIES
"fter evaluating various proposals, the unprofitable or uneconomic proposals
may be rejected straight away. Dut it may not be possible for the organi+ation to invest
immediately in all the acceptable proposals due to limitations of funds.
Ience, it is very essential to rank the various proposals and to establish priorities after
considering urgency, risk * profitability involved the criteria.
D6 FINAL APPROVAL
<roposals meeting the evaluation and other criteria are finally approved to be
included in the capital expenditure budget. Iowever proposals involving smaller
investment may be decided at the lower levels for expeditious action.
The capital expenditure budget lay down the amount of estimated expenditure
to be incurred on fixed assets during the budget period.
E6 IMPLEMENTING PROPOSALS
49
<reparation of a capital expenditure budgeting * incorporation of a particular
proposals in the budget does not itself authori+e to go ahead with implementation of the
project.
" request for authority to spend the amount should be made to be the capital
expenditure committee which may like to review the profitability of the project in
changed circumstances.
$n the implementation of the projects networks techniques such as <A?T * C<M are
applied for project management.
F6 PERFORMANCE REVIEW
$n this stage the process of capital budgeting is the evaluation of the
performance of the project. The evaluation is made through post completion audit by
way of comparison of actual expenditure on the project with the budgeted one, and also
by comparing the actual return from the investment with the anticipated return.
The unfavorable variances if any should be looked into and the causes the same
be identified so that identified so that corrective action may be taken in future.
G6 FEEDBACK
The last step in the capital budgeting process is feedback from employee
involved in the organi+ation. $f any consequences are there the process come to /st step
of the process.
GUIDELINE FOR CAPITAL BUDGETING
50
There are many guidelines for capital budgeting process either it is long#
term or short# term plan. The major points are4
2i+e of market in terms of existing * proposed product lines and anticipated
growth of the market share
2i+e of existing plants * plans for new plant sites and plant
Aconomic conditions which may affect the firm-s operations and
Dusiness and financial risk associated with the replacement * existing assets of
the purchases of new assets.
COMMITTEE IN CAPITAL BUDGETING
Committee in capital budgeting is very important to take decision in project
.decision making is very important for the committee is formed .members involved in this
are
R Chief executive
R Dudget officer
R Dudget committee
R <roduction manager
R 2ales manager
R !inance manager
R "ccounts manager
R <ersonnel manager
R ?esearch *development manager
T)i+ "a! *# i! &ia.rammati" $rm i! *#%>
51
CAPITAL COMMITMENT PLAN
The progress of projects included in the capital budget, a capital commitment plan is
issued three times a year. The commitment plan lays out the anticipated implementation
schedule for their current fiscal and the next three years.
The first commitment plan is published within G5days of the adoption of the capital
budget. ,pdated commitment plans are issued in Eanuary * "pril along with the
company-s budget proposals.
The commitment plan translates the appropriations approved under the adopted
capital budget into schedule for implementing individual projects. The fact that funds are
appropriated for a project in the capital budget does not necessarily mean that work will
start or be completed that fiscal year.
The choice of priorities and timing of projects is decided by office management *
budget in consultation with the agencies along with considerations of how much the
managing director thinks the organi+ation can afford to append on capital projects overall.
The capital commitment plan lays out the anticipated implemented schedule for
capital projects and is one source of information on how far along projects are although
52
not a consistent or always useful one. The adopted commitment plan is usually published
in 2eptember, * then updated in Eanuary * "pril.
$n the capital budgeting for every two adjacent years there will be gap. The gap
between authori+ed commitments and the target is presented in capital commitment plan
as diminishing over the course of the year plan, in practice many of the %unattained
commitments& will be rolled over into the next year-s plan, so that the current year gap
will remain large. The gap has grown in recent year exceeding in last two executive
capital plans.
LIMITATIONS OF CAPITAL BUDGETING
Capital budgeting techniques suffer from the following limitations4
a9 "ll the techniques of capital budgeting presume that various investment proposals
under consideration are mutually exclusive which may not practically be true in some
particular circumstances.
*9 The techniques of capital budgeting require estimation of future cash inflows and
outflows. The future is always uncertain and the data collected for future may not be
exact. =bliviously the results based upon wrong data may not be good.
"9 There are certain factors like morale of the employees, goodwill of the firm, etc.,
which cannot be correctly quantified but which other wise substantially influence the
capital decision.
&9 ,rgency is another limitation in the evaluation of capital investment decisions.
#9 ,ncertainty and risk pose the biggest limitation to the techniques of capital budgeting.
COST EFFECTIVE ANALYSIS
$n the cost effectiveness analysis the project selection or technological choice, only
costs of two or more alternatives choices are considering treating the benefits as identical.
This approach is used when the acquisition of how to minimi+e the costs for undertaking an
activity at a given discount rates in case the benefits and operating costs are given, one can
minimi+e the capital cost to obtain given discount.
53
PROJECT PLANNING
The planning of a project is a technically pre#determined set of inter related activities
involving the effective use of given material, human, technological and financial resources over a
given period of time.
Khich in association with other development projects result in the achievement of
certain predetermined objectives such as the production of specified goods and servicesO
<roject planning is spread over a period of time and is not a one shot activity. The
important stages in the life of a project are4
$t-s identification
$t-s initial formulation
$t-s evaluation
$t-s final formulation
$t-s implementation
$t-s completion and operation
The time taken for the entire process is the gestation period of the project. The process of
identification of a project begins when we are seriously trying to over come certain problems.
They may be non#utili+ation to overcome available funds. <lant capacity, expansion etc,
CONTENTS OF THE PROJECT REPORT
?aw material
Market and marketing
2ite of project
<roject engineering dealing with technical aspects of the project
;ocation and layout of the project building
Duilding
54
CRITERIA FOR CAPITAL BUDGETING
<otentially, there is a wide array of criteria for selecting projects. 2ome shareholders
may want the firm to select projects that will show immediate surges in cash flow, others may
want to emphasi+e long#term growth with little importance on short#term performance viewed in
this way@ it would be quite difficult to satisfy the differing interests of all the shareholders.
!ortunately, there is a solution.
Capital budgeting is divided into two forms i.e.,
Con discounting factor criteria
<ayback period
"ccounting rate of return
3iscounting factor criteria
Cet present value
$nternal rate of return
<rofitability index
They are discussed below with diagram
55
METHODS FOR EVALUTION
NON DCF CRITERA
'a) PAYBACK PERIOD The payback period is one of the most popular and widely
recogni+ed traditional methods of evaluation investment proposals. <ayback period is
the number of years required to recover the original cash outlay invested in a project.
$f the project generates constant annual cash flows, the pay back period can be computed by
dividing cash outlay by the annual cash inflows.
56
Pay*a"? p#ri& H

C
C
o
inflows cash "nnual
investment $nitial
o
C
S $nitial investment
C S "nnual cash inflows
$n the case of unequal cash inflows, the payback period can be found out by
adding up the cash inflow until the total is equal to the initial cash outlay.
Pay*a"? p#ri&HEIB8C
ASCo of years immediately preceding the year of recovery
DSDalance amount of investement to be recovered
CS savings'cash inflow during the year of final recovery)
ADVANTAGES
The following are the advantages
$t is an important guide to investment policy
$t lays a great emphasis of liquidity
$t is simple to operate and easy to understand.
This method costs less as it requires only very little effort for its computation.
It weighs early returns heavily and ignores distant returns
DISADVANTAGES
The following are the disadvantages
$t ignores time value of money
$t ignores cash inflows after payback period
57
$t is not an appropriate method of measuring the profitability of an investment
5*6 ACCOUNTING RATE OF RETURN 5ARR6
The accounting rate of return '"??) also known as the return on investment '?=$)
uses accounting information, as revealed by financial statements, to measure to profitability of an
investment.
The accounting rate of return is the ratio of the average after Tax profit divided by
the average investment. The average investment would be equal to half of the original investment
if it were depreciated constantly.
A R R H
=n the basis of this method ,the company can select all those projects whose "?? is
higher than the minimum rate established by the company it can reject the projects with an "??
lower than the expected rate of return
MERITS
The following are the Merits
$t is very simple to understand and calculate
$t can be readily computed with the help of the available accounting data
$t uses the entire stream of earnings to calculate the "??
DEMERITS
The following are the 3emerits
$t is not based on cash inflows generated by a project
58
/55
investment "verage
$ncome "verage

This method does not consider the object of wealth maximi+ation

$t ignores the length of the projects useful life
$t does not take into account the fact that the profits can be re#invested
$t ignores the time value of money
DCF CRITERIA
5a6 NET PRESENT VALUE 5NPV6
The C<> present value 'C<>) method is the classic method of evaluating the
investment proposals. $f is a 3C! technique that explicitly recogni+es the time value at different
time periods differ in value and comparable only when their equipment present values 7 are
found out.
N9P9V H 5
n
n
1
1
0
0 /
k) '/
C
.........
k) '/
C
k) '/
C
k) '/
C
C
+
+
+
+
+
+
+
+
NPV S

+
n
i
o
C
k
C
5
/
/
) / '
Khere
C<> S Cet present value
fi
C
S Cash flows occurring at time
59
k S the discount rate
n S life of the project in years
5
C
S Cash outlay
MERITS
The following are the Merits
?ecognition to the time value of money
Consideration to total cash inflows
Dest decision criteria for mutually exclusive projects
Changing discount rate
Maximi+ation of the shareholders wealth
DEMERITS
The following are the 3emerits
$t is difficult to understand and use
The C<> is calculated by using the cost of capital as a discount rate .but the concept of
cost of capital itself is difficult to understand and determine
$t does not give solutions when the comparable projects are involved in different amounts
of investment
5*6 INTERNAL RATE OF RETURN 5IRR6
The internal rate of return '$??) method is another discounted cash flow
technique which takes account of the magnitude and thing of cash flows, other terms used to
describe the $?? method are yield on an investment, marginal efficiency of capital, rate of return
over cost, time 7 adjusted rate of internal return and soon.
60
NPV H

=
+
+
+
+
n
i
n
fi
k
WC SV
k
C
5
/
) / ' ) / '
Khere
fi
C
S Cash flows occurring at different point of time
k S the discount rate
n S life of the project in year
5
C
S Cash out lay
2> * KC S 2alvage value and working capital at the end of the n years.
IRR H L I
) ; I '
) b a '
"

Khere
; S ;ower discount rate at which C<> is positive
I S Iigher discount rate at which C<> is negative
" S C<> at lower discount rate, ;
D S C<> at higher discount rate, I
61
MERITS
The following are the merits
Consideration of time value of money
Consideration of total cash inflows
Aasier appeal to the user
Maximi+ation market share possible
<rovision for risk and uncertainty
DEMERITS
The following are the 3emerits
$t is very difficult to understand and use
62
$t involves a very complicated computational work
$t may not give unique answer in all situations
The assumption of re#investment of each cash flows may not be possible in practice
5C6 PROFITABILITY INDE4 5PI6
8et another time 7 adjusted method of evaluating the investment proposals is the
benefit 7 cost 'DFC.) ratio or profitability index '<$) <rofitability index is the ratio of the present
valued of cash inflows, at the required rate of return, to the initial cash out of the investment.
PI =
outlay Cash of <>
flow Cash of <>
Khere <> S <resent >alue
MERITS
The following are the Merits
$t takes into account the time value of money
$t requires less computational work than $?? method
$t helps to acceptFreject investment proposals on the basis of value of the index
DEMERITS
The following are the 3emerits
$t is somewhat difficult to understand
63
2ome people may feel no limitation for index numbers due to several limitations
involved in their computation
THE CRITERIA TABLE
$n the evaluation process or capital budgeting techniques there will be a criteria
to accept or reject the project. The criteria will be expressed as4
CriterionFMethod "ccept ?eject $ndifferent
<ay Dack <eriod '<D<) TTarget <eriod UTarget <eriod STarget period
"ccounting ?ate of
?eturn '"??)
U Target ?ate T Target ?ate STarget rate
Cet <resent >alue 'C<>) U 5 T 5 S 5
$nternal ?ate of ?eturn
'$??)
UCost =f Capital TCost =f Capital Scost of capital
<rofitability index '<$) U / T / S /
ANALYSIS : INTERPRETATION
3ata analysis and interpretation is the process of assigning meaning to the
collected information and determining the conclusions, significance, and implications of the
findings. The steps involved in data analysis are a function of the type of information
collected, however, returning to the purpose of the assessment and the assessment questions
will provide a structure for the organi+ation of the data and a focus for the analysis.
The analysis of Cumerical 'Buantitative) 3ata is represented in mathematical
terms. The most common statistical terms include4
Mean 7 The mean score represents a numerical average for a set of responses.
64
2tandard deviation 7 The standard deviation represents the distribution of the
responses around the mean. $t indicates the degree of consistency among the
responses. The standard deviation, in conjunction with the mean, provides a better
understanding of the data. !or example, if the mean is 1.1 with a standard deviation
'2t3) of 5.9, then two#thirds of the responses lie between 0.G '1.1 7 5.9) and 1.H '1.1
V 5.9).
!requency distribution 7 !requency distribution indicates the frequency of each
response. !or example, if respondents answer a question using an agreeFdisagree
scale, the percentage of respondents who selected each response on the scale would be
indicated. The frequency distribution provides additional information beyond the
mean, since it allows for examining the level of consensus among the data.
Iigher levels of statistical analysis 'e.g., t#test, factor analysis, regression, "C=>")
can be conducted on the data, but these are not frequently used in most programFproject
assessments.
The analysis of C"??"T$>A 'B,";$T"T$>A) 3"T" is conducted by organi+ing the data
into common themes or categories. $t is often more difficult to interpret narrative data since it
lacks the built#in structure found in numerical data. $nitially, the narrative data appears to be a
collection of random, unconnected statements. The assessment purpose and questions can
help direct the focus of the data organi+ation. The following strategies may also be helpful
when analy+ing narrative data.
F"(+ .r(p+ a!& I!t#r-i#>+
?ead and organi+e the data from each question separately. This approach permits
focusing on one question at a time 'e.g., experiences with tutoring services,
characteristics of tutor, student responsibility in the tutoring process).
(roup the comments by themes, topics, or categories. This approach allows for
focusing on one area at a time 'e.g., characteristics of tutor 7 level of preparation,
knowledge of content area, availability).
D"(m#!t+
Code content and characteristics of documents into various categories 'e.g., training
manual 7 policies and procedures, communication, responsibilities).
65
O*+#r-ati!+
Code patterns from the focus of the observation 'e.g., behavioral patterns 7 amount of
time engagedFnot engaged in activity, type of engagement, communication,
interpersonal skills).
The analysis of the data via statistical measures andFor narrative themes should provide
answers to the assessment questions. $nterpreting the analy+ed data from the appropriate
perspective allows for determination of the significance and implications of the assessment.
NON DCF CRITERIA 5 DISCOUNTED CASH FLOW 6
a6PAY BACK PERIOD 5PBP6
66



PA6 BAC7 PERIOD8 Initial in'est!ent
5555555555555555555555
Annual Cas% in (l$s

)9 409 /:9 ;</* 00
) = 8 5555555555555555555
)09 4.9 .:>* /0

8 )9 >09 0:904;* 5 )9;:9:;9//;*; 1)9;:9:;9//;* ;0
5/49<<94?0*/:2

)= >*4. 8 ):*. Mnt%s*


C?$TA?$" !=? A>";,"T$=C W $CTA?<A?T"T$=C
67
YEAR
NET INCOME
R+9

INCOME
AFTER
DEPRECIATI
ON

R+9
INCOME
AFTER TA4
R+9
CASH
INFLOW RS9
211F/211G CB=J2=J2E9B0 BB=D1=BJE92B C2=ED=GDF911 BC=FF=CED9B1
211G/211J 0=0J=2J=FFC9J0 CF=22=DFF911 D=FJ=2EJ911 0=E1=FB=1G29J1
211J/2101 C=2D=CD=00C900 910
0=1F=1G=1DG9EE5/6
E0= E0=0C=JB2911
5I6
E0=EE=EC1911 B0=FG=DBC9CD
2101/2100 C=DE=CB=1FD9G2 EG=JD=FDC911 0=B1=11=111 B=JD=BG=G2J9G1
2100/2102 D=1C=G1=JFG9C2 FJ=C2=E0D9D1 2=CJ=DJ=2D09G B=BC=EC=BC29J2
Tta% 02=CB=BJ=1EG9B
The pay backperiod computed for a project is less than the pay back period set by management of the
company,it would be accepted."project actual pay back period is more than the determined period by
the management,it will be rejected.
The standard pay back period is set by DI"?"TI$ 2="< K=?L2forconsidering the expansion
project is six years, where as actual pay back period is 9.H1 months. Ience accept the project.
.A-#ra.# Rat# $ R#t(r!
A-#ra.# pr$it
H
//////////////////////
Tta% !(m*#r y#ar
02=CB=BJ=1EG9BF
H ////////////////////// H 2=CG=EF=G0B9EF
D
A-#ra.# i!-#+tm#!t 0=G1=1G=BBG9GD
H ////////////////////// J1=1C=0EJ9C2
2
ROI H
/55
investment $nitial
profit "verage

2=CG=EF=G0B9EF
H ///////////////////// ,011
0=G1=1G=BBG9GD
H 09BG,011 H 0BG911
CRITERIA FOR EVALUATION : INTERPRETATION ROI
"ccording to this method "?? is higher than minimum rate of return established by the
management are accepted. $t reject the project have less "?? than the minimum rate set by the
management.
The standard "?? set by DI"?"TI$ 2="< K=?L2 management is 0:J. The actual
ARR is 0:J is equal to the standard "?? set by the management, hence we accept the project.
68


NET PRESENT VALUEH 5 NPV6





NPV H J=DG=GB=2DE92 /0=G1=1G=BBG9GDH F=FG=FC=J0F9BD
69
YEAR CASH IN FLOW
RS
DCF 0CK
DISCOUNTED
CASH FLOW
RS
PRESENT VALUE
RS
211F/211G BC=FF=CED9B1 19GFF B1=D1=CB29 D1
211G/211J 0=E1=FB=1G29J1 19FEJ 0=2B=E1=2119F1
211J/2101 B=0F=GD=BCF9CD 19EFD 2=0C=DD=01J9 D1
2101/2100 B=JD=BG=D2J9G1 19DJ2 2=BC=1E=JGF9 11
2100/2102 B=BC=EC=BC29J2 19C2B 0=C0=DD=C0F9 11
TOTAL J=DG=GB=2DE9 21
CRITERIA FOR EVALUATION : INTERPRETATION
$n case of calculated C<> is positive or +ero, the project should be accepted. $f the calculated
C<> is negative, the project is rejected.
The project is accepted due to calculate C<> is positive.
INTERNAL RATE OF RETURN 5IRR6

70
YEAR
CASH IN FLOW
RS
DCF0EK
PRESENT
VALU
211F/211G BC=FF=CED9B1
:*;?. .>9><90<0*::
211G/211J 0=E1=FB=1G29J1
:*<4/ )9)>94.9/::*0
:
211J/2101 B=0F=GD=BCF9CD
:*?4) .9:/9<494:<*<
:
2101/2100 B=JD=BG=D2J9G1
:*00. .9);9.094/4*:
:
2100/2102 B=BC=EC=BC29J2
:*4): )9/<9.:9/;:*:
:
TOTAL
<9:;9?:9:><*.
:




IRR8 <9:;9?:9:><*.: 5)9;:9:;9//;*;08 09.;90)9<0;*/0
A
IRR H L = 5555555555555555555 @ 1 A 5 L2
1a5+2
<9 <;9 <49>)<* /0
)4 = 555555555555555555555555
"1)?5)42B
>90;9;/9.0 5 <9 :;9 ?:9
<9;<94>9)<:*/0
)4= 5555555555555555555555 @ 1)?5)42 B
.09:.9/)90;*;:
)4 = /*)). @ . C):: 8 :*:?; 8
)4*?:RS
CRITERIA FOR EVALUATION : INTERPRETATIO
In t$i" met$od t$e proe!t i" a!!epted +$en I)) i" $i'$er t$an it" !o"t of !apital or !ut out
rate. If t$e proe!t i" not a!!epted +$en t$e I)) i" le"" t$an !o"t of !apital.
,$e pre!t i" a!!epted %e!au"e of t$e !al!ulation I))i" $i'$er t$an it" !o"t of !apital. ,$e
!o"t of !apital fi/ed%& mana'ement i" 209.t$e a!tual i" mnore t$an it" "tandard.:en!e t$e
proe!t i" a!!epted.

71
PI 8 PROFITABILIT6 INDE@






PV $ Ca+)$%>
PI = 55555555555555555555555
PV $ Ca+) (t%ay

>09;;9/.0?*.:
8 555555555555555555555555 8 0*/.
)9;:9:;9//;*;0
CRITERIA FOR EVALUATION : INTERPRETATION
" project can be accepted if its <$ index is greater than one. $f the <$ is less than
one we should reject the project.
(rofita%ilit& inde/ of propo"ed e/pan"ion proe!t i" found our 11.48 t$i" i" more
t$an t$e .
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6EAR CASA IN
FLODS
Rs
.::<5.::; /:90:94/.* 0:
.::;5.::> )9./9?:9.::*<:
.::>5.:): .9)49009):>*0:
.:):5.:)) .9/49:?9>;<*::
.:))5
.:).
)94)90094)<*::
TOTAL >90;9;/9.0?*.:
!$C3$C(
The payback period is9years and Hmonths. Dut standard payback period was six years by
%DI"?"TI$ The calculated 2="< K=?L2& management
e "?? is fixed by is 0:%DI"?"TI$ 2="< K=?L2&J. The actual "?? is 0:J and its
return on investment is /0.:J.
The C<> is actually getting /,9/,/0,:MM.10 is positive.
The $?? is worked for project is 0M.//J but the expected $?? is 05J less than the actual
$??.
The <$ is getting actual for the expansion project is six times more than the investment.






73


SUGGESTIONS
$t has been suggested that the %DI"?"TI$ 2="< K=?L2& management that the
payback period is fixed for expansion project is 6 years. Dut the actual is less than the
standard. $t is advisable to fix payback period is less than standard payback period.
$t is suggesting to%DI"?"TI$ 2="< K=?L2& management that is better to fix
?=$ is more than the standard ?=$. 2o it is advisable to maintain same consideration
of project in the future also.
The C<> of the project is positive, it is advisable to suggest selecting the same type
of the projects.
The expected cost of capital for the company is 05J where as the actual $?? is
worked for the proposal is 0M.//J, which is below the accepted level.
$t is safer to accept proposal it is 6 times more than its investment. 2o it is advisable
to select the same type of project sin the future also.
.
74
CONCLUSION
Dased on the study on %DI"?"TI$ 2="< K=?L2& $ came to know that,
there are two sides of a project, vi+ the investment side * the financing side. The separation
principle says that the cash flows associated with these sides should be separated. Khile
estimating the cash inflowing on the investment side do not consider the financing changes like
interest or dividend.
!orecasting the project cash flows involves numerous estimates * many individuals *
departments participate in this exercise. The role of the finance manager is to co#ordinate the
efforts of various departments and obtains information from them, ensures that the exercise
focused on relevant variables, and minimi+es the biases inherent in cash flow forecasting
$n the study $ know that the company is following payback period. Dased
on the analysis of data shows that the company can adopt any criteria to get return on investment
in time
The project %" 2T,38 =C AP<"C2$=C <?=EACT TI?=,(I
C"<$T"; D,3(AT$C( $C DI"?"TI$ 2="< K=?L2& states that the company is in good.,
position.$T is suggested to hold the company in the same level.$T also reveals that cash flows
havige ups* downs due expansion of assets simultaneously in depreciation
75
BIBLIOGRAPHY
REFFERED BOOKS
!$C"CC$"; M"C"(AMACT # $. M. <"C3A8
M"C"(AMACT "CC=,CT"CC8 # <$;;"$ * D"(">"T$
M"C"(AMACT "CC=,CT$C( 7 2I"?M" * (,<T"
INTERNET SITE
www.ercap.org
www.wikipedia.com
www.nwda.gov.in

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