TITLE :- CAPITAL BUDGETING

AND ITS TECHNIQUES IN

PRATHI SOLUTIONS PRIVATE
LIMITED

CONTENTS

INTRODUCTION TO THE STUDY

CHAPTER-1 INDUSTRY PROFILE
1

CHAPTER-2 COMPANY PROFILE

CHAPTER-3 RESEARCH AND METHODOLOGY
CHAPTER-4 PROJECT PLANNING (
CHAPTER-6 FINANCE AND ACCOUNTS SECTION AT
PRATHI SOLUTIONS PVT LTD
CHAPTER-7 DATA ANALYSIS AND INTERPRETATION
CHAPTER-8 EVALUATION OF CAPITAL BUDGETING
CHAPTER-9 FINDINGS AND SUGGESTIONS
BIBLIOGRAPHY

INTRODUCTION

1.1 INTRODUCTION OF THE STUDY

Every organization irrespective of its size and mission can be viewed as a financial
entity management of an organization. Financial management focuses not only on
the improvement of funds but also on their efficient use with the objective of
maximizing the owners wealth. The allocation of funds is therefore an important
function of financial management. The allocation of funds involves the commitment
of funds to assets and activities.

There are two types of Investment decision:

1. Management of current assets or Working capital management.

2. Long term investment decision.

Long term investment decisions are widely known as capital budgeting or capital
expenditure budgeting. It means as to whether or not money should be invested in
long term project. This part is devoted to an in-depth and comparative decision of
capital budgeting/capital expenditure management.

A project is an activity sufficiently self- contained to permit financial and

commercial analysis. In most cases projects represent expenditure of capital
funds by pre- existing entities which want to expand or improve their
operation.

In general a project is an activity in which, we will spend money in

expectation of returns and which logically seems to lead itself to planning.
Financing and implementation as a unit, is a specific activity with a specific
point and a specific ending point intended to accomplish a specific objective.

To take up a new project, involves a capital investment decision and it is the

top managements duty to make a situation and feasibility analysis of that
particular project and means of financing and implementing it financing is a
rapidly expanding field, which focuses not on the credit status of a company,
but on cash flows that will be generated by a specific project.

Capital budgeting has its origins in the natural resource and infrastructure
sectors.

The current demand for infrastructure and capital investments is

being fueled by deregulation in the power, telecommunications, and

transportation sectors, by the globalization of product markets and the
need for manufacturing scale, and by the privatization of government
owned entities in developed and developing countries.

The capital budgeting decision procedure basically involves the evaluation of

the desirability of an investment proposal. It is obvious that the firm must
have a systematic procedure for making capital budgeting decisions.

The procedure must be consistent with the objective of wealth maximization.

In view of the significance of capital budgeting decisions, the procedure must
consist of step by step analysis.

CHAPTER 3
RESEARCH AND METHODOLOGY
4

3.1 Importance of investment decisions:Capital investments, representing the growing edge of a business, are
deemed to be very important for three inter- related reasons.

1. They influence firm growth in the long term consequences capital

investment decisions have considerable impact on what the firm can do in
future.

2. They affect the risk of the firm; it is difficult to reverse capital investment
decisions because the market for used capital investments is ill organized
and /or most of the capital equipments bought by a firm to meet its specific
requirements.

3. Capital investment decisions involve substantial out lays.

PRATHI SOLUTIONS PVT LTD is a growing concern, capital budgeting is more

or less a continuous process and it is carried out by different functional areas
of management such a production, marketing, engineering, financial
management etc. All the relevant functional departments play a crucial role
in the capital budgeting decision process.

3.2 OBJECTIVES OF THE STUDY:1. To describe the organizational profile of PRATHI SOLUTIONS PVT LTD.
2. To discuss the importance of the management in capital budgeting.
5

3. Determination of proposed investments, inflows and out flows.

4. To evaluate the investment proposal by using capital budgeting
techniques.
5. To summarize and to suggest for the better investment proposal.

3.3 SCOPE OF THE STUDY:-

This study highlights the review of capital budgeting and capital expenditure
management of the company. Capital expenditure decisions require careful planning
and control. Such long term planning and control of capital expenditure is called
Capital Budgeting. The study also helps to understand how the company estimates
the future project cost. The study also helps to understand the analysis of the
alternative proposals and deciding whether or not to commit funds to a particular
investment proposal whose benefits are to be realized over a period of time longer
than one year. The capital budgeting is based on some tools namely Payback
period, Average Rate of Return, Net Present Value, Profitability Index, and Internal
Rate of Return.

3.4 METHODOLOGY:-

The information for the study is obtained from two sources namely.
1. Primary Sources
2. Secondary Sources

Primary Sources:

It is the information collected directly without any references. It is mainly through

interactions with concerned officers & staff, either individually or collectively; some
of the information has been verified or supplemented with personal observation.
These sources include.

a.

Thorough interactions with the various department Managers of

PRATHI SOLUTIONS PVT LTD.

b. Guidelines given by the Project Guide, Mr. SRIRAM TRIPATHY, Dy.

Manager, Budget Section, F & A.

Secondary Sources:

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

a. Collection of required data from annual records, monthly records,

internal Published book or profile of PRATHI SOLUTIONS PVT
LTD.
b. Other books and Journals and magazines
c. Annual Reports of the company

3.5 Limitations:7

Though the project was completed successfully with a few limitations may .
a) Since the procedure and polices of the company will not allow to
disclose confidential financial information, the project has to be
completed with the available data given to us.

b) The period of study that is 6 weeks is not enough to conduct

detailed study of the project.

c) The study is carried basing on the information and documents

provided by the organization and based on the interaction with
the various employees of the respective departments.

1.7 REVIEW OF LITERATURE:-

The concept of Capital Budgeting being a very sensitive area of finance has
outreached the attention of many researchers .A number of studies has been
conducted on the subject. However briefing such studies will highlight the
importance of the present study. It should safeguard to avoid the wrong choice of
the project and investment to be made. It is necessary for the management to give
proper attention to capital budgeting.

The reason for the popularity of Payback period in the order of significance were
stated to be its, simplicity to use and understand, its emphasis on the early
recovery of investment and focus on risk. It was also found that one third of
companies always insisted on the computations of Payback periods for all projects.
8

For about two-third companies standard Payback period ranged between three and
five years.

The reason for the secondary role of Discounted Cash Flow techniques in India
included difficulty in understanding and using these techniques, due to lack of
qualified professional and unwillingness of top management to use Discounted Cash
Flow techniques.

One large manufacturing and marketing organization mentioned that conditions of

its business were such that Discounted Cash Flow techniques were not needed. Yet
another company stated that replacement projects were very frequent in the
company and it was not considered necessary to use Discounted Cash Flow
technique for evaluating such projects.

The present investment appraisal in practice is raising certain questions in the

context.

1. How much importance is assigned to economic analysis of capital

expenditure in practice?
2. What methods are used for analyzing capital expenditure in practice
and what is the reason for underlying these methods?

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

CHAPTER-2
INDUSTRY PROFILE

Industry Profile
Software and services
The software and services industry continues to show a robust growth and as per
nasscom estimates, the total value of software and services export was rs. 55,500
crore (us$ 12.5 billion) in 2003-04, an increase of 20.4 per cent in rupee terms and
30 per cent in dollar terms.

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The it enabled services - business process outsourcing (ites-bpo) sector has

emerged as a key driver of growth for the indian software and services industry. The
ites-bpo industry is likely to grow by about 54% in 2003-04 to reach us$ 3.6 billion.
In 2002-03, the indian ites-bpo industry grew by 59% to us$ 2.3 billion. In 2002, the
global business process outsourcing (ites-bpo) market was approximately us$ 773
billion. By 2006, the potential ites-bpo market may increase to us$ 1 trillion.

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

combination of cost-quality-scalability versus competing offshore destinations such
as the philippines and china . Some of the key drivers of the indian ites-bpo industry
include: improved efficiency and higher service levels due to streamlined processes,
quality improvements due to better educated workforce, cost savings between 4050%, increase in offshoring by existing customers, superior project management
skills and availability of a highly skilled, educated and english speaking labour pool.

Indian software companies are trying to increase their presence in europe . The
share of the european market in indian software exports is likely to increase slowly
during 2003-04. Software exports to europe grew by 18 per cent in 2002-03 to rs.
10,200 crore (us$ 2.1 billion) in 2002-03. However, since north america accounts for
around 50 per cent of global it services spending, it is likely to continue to dominate
indian software exports.

The domestic software and services segment is estimated to register a growth of

14.8 per cent to reach rs. 15,400 crore (us$ 3.37 billion) in 2003-04 from rs. 134
billion (us$ 2.78 billion) in 2002-03. Increased spending by the banking, financial
services and insurance (bfsi), government and manufacturing sectors resulted in
this growth.

Software services dominate the segment, accounting for an estimated 66.8 per cent
of the total market in 2003-04. Contribution from packaged software is estimated at
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13.7 per cent, while the domestic ites and software services markets are estimated
to contribute the remaining 19.5 per cent.
During 2003-04, the packaged software segment is likely to grow by 5 per cent to
reach rs. 2,100 crore (us$ 460 million). Companies preferred to deploy expensive,
branded products rather than cheap off-the-shelf options from local vendors,
resulting in higher spending. The sme sector was aggressive in implementing
packaged software applications, but only as long as it was necessary and resulted in
a clear cost benefit in the short run.

The early adopters of business intelligence (bi) solution in the country are banking
and finance, telecom, retail, and fmcg companies. Presently, the demand for bi
solutions is largely being driven by mncs and large enterprises. The bi solution
seems to have gained more acceptances in sectors where customers play a pivotal
role in deciding the future of the company.

Primarily services companies are driving the bi market in india , which is signified by
very high contributions from banking and finance, telecom, and call centre
companies. The indian industry is still in the data mining and data warehousing
phase, with limited cases of sophisticated applications such as churn and business
performance management implemented recently. Most solution providers are
currently not using standard platforms for solution development, leading to nonstructured solutions, which are not compatible with each other and other business
applications.

Given the high churn rate in the telecom sector, an increased demand for customer
relationship management (crm) solutions is witnessed in this sector. Some of the
prominent telecom players in the indian market that have adopted these solutions
include bharti, bpl, and orange . The retail sector is also showing strong demand for
crm solutions.

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The supply chain management (scm) market in india is still in a nascent stage.
Some of the verticals that have gone in for scm solutions include e-manufacturing,
automotive, fmcg, retail, oil and gas. Manufacturing and automotive sectors have
been the leaders in adopting scm solutions in india . In the near future, fmcg and
retail sectors are likely to increase scm adoption.

Despite its smaller size relative to global standards, the services segment has
shown signs of maturity including: outsourcing of facility management and it
operations, consolidation of servers, storage and networks into data centres,
outsourcing of automated help desks and it services, and the formulation of security
policies and procedures.

E-governance can be defined as the use of information and communication

technologies to enhance access and delivery of government services for the benefit
of various stakeholders. Government agencies were among the first to adopt it
systems to manage payrolls, tax collection and records. Developments in internet
technologies have made it possible to assimilate information from an unlimited
number of sources as well as to make government services more friendly and
transparent to citizens.

Indian companies have raised their quality standards in recent years to meet
international demands. The it act of 2000 includes laws and policies concerning data
security and cyber crimes. Other than the it act, the indian copyright act of 1972
deals with copyright issues in computer programs. Indian companies as well as the
government have been proactive in taking appropriate steps to tackle security
concerns.
Since the inception of the it industry in india , players within the country have been
focusing on quality initiatives, to align themselves with international standards. The
industry has set in place processes and procedures for offering world class it
software products and services. The focus on maintaining high quality has lead to
an increasing number of companies getting assessed at key quality standards.
13

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

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

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

India's weakness include - positioning and brand management, infrastructure-urban

mass transportation and aviation, cultural differences, physical distance from north
america and need to back-end it and bpo skills in college education curricula. India
's opportunities include - creation of global household brands, low share in service
lines such as systems integration and it consulting, and deeper penetration in
existing service line, verticals and geographies (europe, china , japan ).

The threats to india include - internal competition for resources, slippage in quality
standards,

rising labor costs, competition from upcoming destinations like

philippines, malaysia, south africa, etc., and stringent visa/work permit

14

CHAPTER-3
COMPANY PROFILE

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

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

Our focus within the recruiting industry allows us to provide our clients a
highly specialized service across all vertical markets, skill-sets and levels of
seniority, through both permanent and contract recruitment.

We believe that successful recruitment services is partnership-based which is

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

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

various industries, domains and technologies. Most of our employees have
varied experience in these fields and with their hands on expertise it helped
us so many times in the past in delivering more than expected.
15

We at Prathi solutions are committed towards helping our clients in realizing a

qualitative, cost effective and a quicker to market solutions

Quality Policy

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

requirements without regression and wastage of time

We at Prathi believe that lack of quality results in long term losses for a
company. Though the objective is to keep the costs low in the services we
render but not at the cost of quality. Modern day companies in search for
sales and projects over commit to their clients and finally end up delivering a
low quality work. We are firmly against it and believe in looking at a long term
picture.

We are committed to make our customers happy and at the same time
ensure that we too are happy. In any deal lack of satisfaction from any end
leads to lack of quality. Hence the prime objective is to ensure that we have a
happier deal in order to delight our customers.

We are strictly adhering to CMMI level III at Prathi Solutions and are on our
way to realizing it very soon.

Approach

16

At Prathi we believe that the key to people and business performance is the
effective integration of your People Management roles and capability, your
People Processes, and your People Development activities.
We can support you in refining and improving each of these areas, and can
help you achieve step-change improvements in performance through
effective integration of the following three which are

People handling
People Development
People Method

Overview of our services

Welcome to the world of Prathi. We hare take pride in our expertise in various
domains, great experience, innovation, process methodology and team work
which has many a time helped us in delivering exquisite solutions. We can
provide you with any kind of service for all your specific IT needs. For the
best results that our experts are always in touch with your team and keep
updating regularly in order to produce the most accurate results with
astonishing quality. Our work path is very flexible in order to suit the clients
needs and we strive to suit to your requirements.

17

The benefits our clients experience by partnering with

us:-

1. High Quality in the work we do due to hiring and retaining of the best
individuals available in the market.

2. Reduced cost since we can do your job in the quickest possible time with
no regression.

3. Quicker reach to the market due to the talent tank we have,

4. Ready Availability always to accommodate every requirement of the client.

5.A win - win partnership where both the parties end up with a happy
experience.

We are based here at India and are looking towards serving all our Indian and
Foreign clients with the best quality and the desired delivery model.

Technology and Industry

18

We are into various technologies and industry domains. Our capability in each
of these domains has been scaled up due to the quality resources we hire and
retain in the market. We also regularly train our employees in order to keep
them to the fore.

Prathi has an expertise in various technologies like

1. C , C++

2. Java /J2EE

3. Business Intelligence and Data Warehousing

4. SAP

5. Oracle and Oracle Apps.

6. Microsoft technologies

7. Enterprise Application Integration

We have our presence in various fields and domains. We have an enriching

experience in all these fields due to our previous projects.

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1. Banking

2. Finance and Mortgage

3. Insurance

4. Technology

5. Manufacturing

6. Retail

Training

We at Prathi have a vision of mastering every technology. We wish to

regularly update ourselves and also enable others in quickly completing the
learning process.

We have a vision to make our organization a hub in Software technical

training. We wish to open our technical training centers very soon and hire
the best faculties to explore every innovation in the field of software
programming.

We wish to give you the quickest solutions when it comes to training your
resources in software programming in any technology. We dream to make it
20

cheaper, quicker and qualitative in order to have your resources quickly

scaled to your immediate requirements.

Life at Prathi

At Prathi we have a vision of where we want to go and what we would like to

become, and it's really exciting, it is filled with challenges, puzzling questions
and what not. Would you like to be a part of this organisation which dreams
to make history by being the best when it comes to staffing services,
software services and training people. And would you like to be with us in our
dream towards making history? If yes, read on. With an unmatched expertise
that we are hiring from the market to ensure that they become great
performers as well as mentors, we hope to make our name heard soon. To
achieve our vision, we are always looking out for quality, ever learning and
goal oriented individuals who are ambitious, who love challenges and who
have a passion to excel!

In order to achieve this we conduct offcampus selections as well as oncampus

selections. Are you ready to dream with us.

Please send in your resume to careers@prathisolutions.com

OUR CLIENTS NETWORK

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We believe that successful recruitment services is partnership-based which is

why we work closely with our clients over a period of time to provide flexible,
tailor-made solutions; from contingency and campaign through to a
comprehensive managed service.
We work with some of the most admired companies:

SNGC India Ltd, INDIA

Pafax Printwell, UK
Outsourcing Matters, UK
Trimco Direct, UK
VBuild Technologies, UK
Pens and Pads, UK
Ennovative Technolgies, UK
CA Online Solutions, Taiwan

CONTACT US AT:
PRATHI SOFTWARE SOLUTIONS PVT. LTD.
Jubilee Hills Road 92,
Hyderabad - 500 033.
Ph: +91 40 31009632
Fax: +91 40 32442076
Email: hr@prathisolutions.com
www.prathisolutions.com
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CHAPTER-4
CAPITAL BUDGETING

4.1 MEANING
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Capital Budgeting is the process of making investment decisions in capital

expenditure. A capital expenditure may be defined as an expenditure the benefit of
which are expected to be received over a period of time exceeding one year.
The main characteristics of a capital expenditure are that the expenditure is
incurred at one point of time whereas benefits of the expenditure are realized at
different points of time in future. Capital expenditure involves non-flexible long term
commitment of funds. Thus capital expenditure decisions are also called Long-Term
Investment Decision. Capital budgeting involves the planning and control of capital
expenditure.

DEFINITION:
R.M.LYNCH has defined capital Budgeting as Capital Budgeting consists
of employment of available capital for the purpose of maximizing the long
term profitability of the firm.

Capital Budgeting is a many-sided activity. It includes searching for new and more
profitable

investment

proposals,

investigating,

engineering

and

marketing

considerations to predict the consequences of accepting the investment and making

economic analysis to determine the profit potential of each investment proposal.

Its basic features can be summarized as follows;

1.

It has the potentiality of making large anticipated profits.

2.

It involves a high degree of risk.

3.

It involves a relatively long-time period between the initial

outlay and the anticipated return.

Capital Budgeting consists of planning and the development of available capital for
the purpose of maximizing the long-term profitability of the firm.

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4.2 NEED AND IMPORTANCE OF CAPITAL BUDGETING

Capital Budgeting means planning for capital assets. Capital Budgeting decisions
are vital to any organization as they include the decision to;

1. Whether or not funds should be invested in long term projects

such as setting of an

industry, purchase of plant and

machinery etc.,
2. Analyze the proposal for expansion or creating additional
capacity.
3. To decide the replacement of permanent assets such as
building and equipments.
4. To make financial analysis of various proposal regarding capital
investments so as to choose the best out of many alternative
proposals.
The importance of capital Budgeting can be well understood from the fact that an
unsound investment decision may prove to be fatal to the very existence of the
concern. The need, significance or importance of capital budgeting arises mainly
due to the following.

1. Large Investments

Capital budgeting decisions, generally involves large investment of funds. But the
funds available with the firm are always limited and the demand for funds exceeds
the resources. Hence it is very important for a firm to plan and control its capital
expenditure.

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2. Long-term commitment of Funds

Capital expenditure involves not only large amounts of funds but also funds for
long-term or more or less on permanent basis. The long-term commitment of funds
increases the financial risk involved in the investment decision.

3. Irreversible Nature
The capital expenditure decisions are of irreversible nature. Once the decisions for
acquiring a permanent asset is taken, it became very difficult to dispose of these
assets without incurring heavy losses.

4. Long-term Effect of profitability

The investment decisions taken today not only affects present profit but also the
future profitability of the business. A profitable project selection is fatal to the
business.

5. Difficulties of investment decisions

The long term investment decisions are more difficult to take because,
1.

Decision extends to a series of years beyond the current

accounting period.

2.

Uncertainties of future and

3.

Higher degree of risk.

6. National Importance
An investment decision through taken by individual concerns is of national
importance because it determines employment, economic activities and economic
growth.
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7. Effect on cost structure

By taking a capital expenditure decision, a firm commits itself to a sizeable amount
of fixed cost in terms of interest, supervisors salary, insurance, building rent etc. If
the investment turns out to be unsuccessful in future or produces less than
anticipated profits, the firm will have to bear the burden of fixed cost.

8. Impact on firms competitive strength

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

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

10. Wealth Maximization

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

4.3 STEPS IN CAPITAL BUDGETING

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

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

The capital budgeting process begins with generation or

identification of

investment

for

proposals.

This

involves

continuous

search

investment

opportunities which are compatible with firms objectives.

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

3. Project evaluation

After screening of project ideas or investment proposals the next step is to evaluate
the profitability of each proposal. This involves two steps;
a.Estimation of cost and benefit in terms of cash flows
b. Selecting an appropriate criterion to judge the desirability of the
project.

4. Project selection

28

After evaluation the next step is the selection and the approval of the best proposal.
In actual practice all capital budgeting decision are made at multiple levels and are
finally approved by top management.

5. Project execution and implementation

After the selection of project funds are allocated for them and a capital budget is
prepared. It is the duties of the top management or capital budgeting committee to
ensure that funds are spend in accordance with allocation made in the capital
budget.
6. Performance review

After the implementation of the project, its progress must be reviewed at periodical
intervals. The follow-up or review is made by comparing actual performance with
the budget estimates.

4.4 OPERATING BUDGET AND CAPITAL BUDGET

Most of the large firms prepare two different budgets each year.

1. OPERATING BUDGET

Operating budget shows planned operations for the forthcoming period and includes
sales, production, production cost, and selling and distribution overhead budgets.
Capital budgets deals exclusively with major investment proposals.

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2. CAPITAL EXPENDITURE BUDGET

Capital Expenditure is a type of functional budget. It is the firms formal plan for the
expenditure of money for purchase of fixed assets. The budget is prepared after
taking in to account the available production capacities, probable reallocation of
existing resources and possible improvements in production techniques. If required,
separate budgets can be prepared for each item of capital assets such as a building
budget, a plant and machinery budget etc.

4.5 OBJECTIVES OF CAPITAL EXPENDITURE BUDGET

The objectives of Capital Expenditure Budget are as follows.

1. It determines the capital projects on which work can be started

during the budget period after taking in to account their urgency
and the expected rate of return on each project.
2. It estimates the expenditure that would have to be incurred on
capital projects approved by the management together with the
source or sources from which the required funds would be
obtained.
3. It restricts the capital expenditure on projects within authorized
limits.

CONTROL OVER EXPENDITURE THROUGH CAPITAL EXPENDITURE BUDGET

30

The capital expenditure budget primarily ensures that only such projects are taken
in hand which are either expected to increase or maintain the rate of return on
capital employed. Each proposed project is appraised and only essential project or
projects likely to increase the profitability of the organization are included in the
budget. In order to control expenditure on each project, the following procedure is
adopted.

1. A project sheet is maintained for each project.

2. In order to ensure that the expenditure on different project is
properly analyzed.
3. The expenditure incurred on the project is regularly entered on the
project sheets from various sources such as invoices of assets
purchased, bill for delivery charges etc.,
4. The management is periodically informed about expenditure
incurred in respect of each project under appropriate heads.
5. In case project cost is expected to increase; a supplementary
sanction for the same is obtained.
6. In financial books the total expenditure incurred on all projects is
separately recorded.

4.6 TACTICAL AND STRATEGIC INVESTMENT DECISION

Investment decision can be classified as,

1. Tactical Decision

A Tactical Decision generally involves a relatively small amount of funds and does
not constitute a major departure from the past practices of the company.

2. Strategic Decision

31

A Strategic Investment Decision involves a large sum of money and may also result
in a major departure from the past practices of the company. Acceptance of a
Strategic Investment Decision involves a significant change in the companys
expected profits associated with a high degree of risk.

4.7 RATIONALE OF CAPITAL EXPENDITURE

Efficiency is the rationale underlying all capital decisions. A firm has to continuously
invest in new plant or machinery for expansion of its operations or replace worn-out
machinery for maintaining and improving its efficiency. The overall objective is to
maximize the firms profits and thus optimizing the return on investment. This
objective can be achieved either by increased revenues or by cost reduction. Thus
capital expenditure can be of two types;

1. Expenditure Increasing Revenue

2. Expenditure Reducing Cost

4.8 KINDS OF CAPITAL INVESTMENT PROPOSALS

A firm may have several investment proposals for its consideration. It may adopt
one of them, some of them or all of them depending upon whether they are
independent, contingent or dependent or mutually exclusive.

1. INDEPENDENT PROPOSALS

These are proposals which do not compete with one another in a way that
acceptance of one precludes the possibility of acceptance of another. In case of
such proposals the firm may straight away accept or reject a proposals on the
basis of minimum return on investment required. All these proposals which give a
32

higher return than a certain desired rate of return are accepted and the rest are
rejected.

2. CONTINGENT OR DEPENDENT PROPOSALS

These are proposals whose acceptance depends on the acceptance of one or more
other proposals. When a contingent investment proposal is made, it should also
contain the proposal on which it is dependent in order to have a better perspective
of the situation.

3. MUTUALLY EXCLUSIVE PROPOSALS

These proposals which compete with each other in a way that the acceptance of
one precludes the acceptance of other or others. Two or more mutually exclusive
proposals cannot both or all be accepted. Some techniques have to be used for
selecting the better or the best one. Once this is done, other alternative
automatically gets eliminated.

4. REPLACEMENT PROPOSALS

These aim at improving operating efficiency and reducing costs. These are called
cost reduction decisions.

5. EXPANSION PROPOSALS

33

This refers to adding capacity to existing product line.

6. DIVERSIFICATION PROPOSALS

Diversification means operating in several markets rather than a single market. It

may also involve adding new products to the existing products. Diversification
decisions require evaluation of proposals to diversify in to new product lines, new
markets etc., for reducing the risk of failure.

7. CAPITAL RATIONING PROPOSALS

Capital rationing means distribution of capital in favor of some acceptable

proposals. A firm cannot afford to undertake all profitable proposals because it has
limited funds to invest. In such a case, these various investment proposals compete
for limited funds and the firm has to ration them. Thus the situation where the firm
is not able to finance all the profitable investment opportunities due to limited
resources is known as capital rationing.

4.9 FACTORS AFFECTING CAPITAL INVESTMENT DECISIONS

The following are the four important factors which are generally taken in to account
while making a capital investment decision.

1. The Amount of Investment

34

In case a firm has unlimited funds for investment it can accept all capital
investment proposals which give a rate of return higher than the minimum
acceptable or cut-off rate.

2. Minimum Rate of Return on Investment

The management expects a minimum rate of return on the capital investment. The
minimum rate of return is usually decided on the basis of the cost of capital.

3. Return Expected from the Investment

Capital investment decisions are made in anticipation of increased return in the

future. It is therefore necessary to estimate the future return or benefits accruing
from the investment proposals while evaluating the capital investment proposals.

4. Ranking of the Investment Proposals

When a number of projects appear to be acceptable on the basis of their

profitability the project will be ranked in the order of their profitability in order to
determine the most profitable project.

4.10 METHODS OF CAPITAL BUDGETING OR EVALUATION

OF INVESTMENT PROPOSALS

A business firm has a number of proposals regarding various projects in which it can
invest funds. But the funds available with the firm are always limited and it is not
35

possible to invest funds in all the proposals at a time. The most widely accepted
techniques used in estimating the cost returns of investment projects can be
grouped under two categories;
1. TRADITIONAL METHODS (NON DISCOUNTED CASH FLOW)

a. Payback Period Method

b. Average rate of Return Method

2. MODERN METHODS (DISCOUNTED CASH FLOW)

a.
b.
c.

Net Present Value Method

Internal rate of Return Method
Profitability Index Method

TRADITIONAL METHODS (NON DISCOUNTED CASH FLOW)

A. PAY BACK PERIOD METHOD

The payback period method is the simplest method of evaluating investment
proposals. Payback period represents the number of years required to recover the
original investment. The payback period is also called Pay Out or Pay off Period. This
period is calculated by dividing the cost of the project by the annual earnings after
tax but before depreciation. Under this method the project is ranked on the basis of
the length of the payback period. A project with the shortest payback period will be
given the highest rank.
METHODS OF COMPUTATION OF PAYBACK PERIOD

There are two ways of calculating the payback period.

a. When annual cash inflow is constant
The formula is find out the payback period if the project generates constant annual
cash inflow is;
36

Original cost of the project

Payback period =

Annual cash inflow

Annual cash inflow is the annual earning (profit depreciation and after taxes) before

b. When annual cash inflow is not constant

If the annual cash inflows are unequal the payback period can be found out by
adding up the cash inflows until the total is equal to the initial cash outlay of the
project.

ADVANTAGES OF PAYBACK PERIOD

1. Simple to understand and easy to calculate.

2. It reduces the chances of loss through obsolescence.
3. A firm which has shortage of funds find this method very
useful.
4. This method costs less as it requires only very little effort
for its Computation.
DISADVANTAGES

1. This method does not take in to consideration the cash

inflows beyond the payback period.
2. It does not take in to consideration the time value of
money. It considers the same amount received in the
second year and third year as equal.
3. It gives over emphasis for liquidity.
ACCEPTANCE RULE
The following are the Payback [P.B.Rules]
Accept

P.B<cut-off rate

Reject

P.B>cut-off rate
37

May Accept

P.B<cut-off rate

Cut-off rate

Cut-off rate is the rate below which a project would not be accepted. If ten
percentage is the desired rate of return, the cut-off rate is 10%.The cut-off point
may also be in terms of period. If the management desires that the investment in
the project should be recouped in three years, the period of three years would be
taken as the cut-off period. A project incapable of generating necessary cash to pay
for the initial investment in the project with-in three years will not be accepted.

II. AVERAGE RATE OF RETURN (ARR) METHOD

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

Average Annual Earnings

ARR =

x 100
Average Investment

Where;

38

Average Annual Earnings is the total of anticipated annual earnings after

depreciation and tax (accounting profit) divided by the number of years.

Average Investment means

i. If there is no salvage (Scrap value)

Total Investment

ii. If there is scrap value

Total Investment-Scrap Value
+ Scrap Value
2

iii. If there is additional working capital

Total Investment-Scrap Value

+ Scrap +Additional Working Capital
2

ADVANTAGES OF AVERAGE RATE OF RETURN (ARR) METHOD

39

1.
2.

It is easy to calculate and simple to understand.

Emphasis is placed on the profitability of the project and not on

3.
4.
5.

liquidity.
The earnings over the entire life of the project is considered for
ascertaining the Average Rate of Return.
This method makes use of the accounting profit.

DISADVANTAGES

1. Like the payback period method this method also ignores the time
value of money. The averaging technique gives equal weight to
profits occurring at different periods.
2. This averaging technique ignores the fluctuations in profits of
various years.
3. It makes use of the accounting profits, not cash flows, in evaluating
the project.

1. DISCOUNTED CASH FLOW METHODS

The payback period method and the Average rate of Return Method do not take in
to consideration the time value of money. They give equal weight to the present and
the future flow of incomes. The discounted cash flow methods are based on the
concept that a rupee earned today is more worth than a rupee earned tomorrow.
These methods take in to consideration the profitability and also the time value of
money.

I. NET PRESENT VALUE (NPV) METHOD

40

The Net Present Value Method (NPV) gives consideration to the time value of money.
It views that the cash flows of different years differ in value and they become
comparable only when the present equivalent values of these cash flows of different
periods are ascertained. For this the net cash inflows of various periods are
discounted using the required rate of return, which is a predetermined rate .If the
present value of expected cash inflows exceeds the initial cost of the project, the
project is accepted.
NPV = Present value of cash inflows-Present value of initial
investment

STEPS IN NET PRESENT VALUE (NPV) METHOD

1. Determine an appropriate rate of interest to discount cash flows.

2. Compute the present value of total investment outlay (i.e., cash
outflow) at the determined discounting rate.
3. Compute the present value of total cash inflows (profit before
depreciation and after tax) at the above determined discount rate.
4. Subtract the present value of cash outflow (cost of investment) from
the present value of cash inflows to arrive at the net present value.
5. If the net present value is negative i.e., the present value cash
outflow is more than the present value of cash inflow the project
proposals will be rejected .If net present value is zero or positive the
proposal can be accepted.
6. If the projects are ranked the project with the maximum positive net
present value should be chosen.

ADVANTAGES OF NET PRESENT VALUE METHOD

1. It considers the time value of money.

2. It considers the earnings over the entire life of the project.
3. Helpful in comparing two projects requiring same amount of cash
outflows.
41

DISADVANTAGES OF NET PRESENT VALUE METHOD

1. Not helpful in comparing two projects with different cash outflows.

2. This method may be misleading is in comparing the projects of
unequal lives.
II. INTERNAL RATE OF RETURN (IRR) METHOD

The Internal Rate of Return for an investment proposal is that discount rate which
equates the present value of cash inflows with the present value of cash outflows of
the investment. The Internal Rate of Return is compared with a required rate of
return. If the Internal Rate of Return of the investment proposal is more than the
required rate of return the project is rejected. If more than one project is proposed,
the one which gives the highest internal rate must be accepted.
It can be calculated by the following formula

P1-Q
IRR = L+

xD
P1-P2

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

ADVANTAGES OF INTERNAL RATE OF RETURN

42

1. It considers the time value of money.

2. The earnings over the entire life of project is considered.
3. Effective for comparing projects of different life periods and
different timings in timings of cash inflows.
DISADVANTAGES

1. Difficult to calculate.
2. This method presumes that the earnings are reinvested at the rate
earned by the investment which is not always true.
Accept or Reject Rule

Internal Rate of Return is the maximum rate of interest which an organization can
afford to pay on the capital invested in a project. A project would qualify to be
accepted if Internal Rate of Return exceeds the cut-off rate. While evaluating two or
more projects, a project giving a higher Internal Rate of Return would be preferred.
This is because higher the rate of return, the more profitable is the investment.
III. PROFITABILITY INDEX METHOD

Present Value of Cash Inflows

Profitability Index =
Present Value of Cash Outflows

This is also called Benefit-Cost ratio. This is slight modification of the Net Present
Value Method. The present value of cash inflows and cash outflows are calculated as
under the NPV method. The Profitability Index is the ratio of the present value of
future cash inflow to the present value of the cash outflow, i.e., initial cost of the
project.
43

If the Profitability index is equal to or more than one proposal the proposal will be
accepted. If there are more than one investment proposals, the one with the highest
profitability index will be preferred.

This method is also known as Benefit-Cost ratio because the numerator measures
benefits and the denominator measures costs. It is the ratio of the present value of
cash inflow at the required rate of return to the initial cash outflow of the
investment.

4.11 Cost Effective Analysis

In the cost effectiveness analysis the project selection or technological choice, only
the costs of two or more alternative choices are considered treating the benefits as
identical. This approach is used when the acquisition of how to minimize the costs
for undertaking an activity at a given discount rates in case the benefits and
operating costs are given, one can minimize the capital cost to obtain given
discount.

4.12 Project Planning:

The planning of a project is a technically pre- determined set of inter related

activities involving the effective use of given material, human, technological and
financial resources over a given period of time. Which in association with other
development projects result in the achievement of certain predetermined objectives
such as the production of specified goods & services?
44

Project planning is spread over a period of time and is not a one shot activity. The
important stages in the life of a project are:

1.

Its Identification

2.

Its initial formulation

3.

Its evaluation (Whether to select or to project)

4.

Its final formulation

5.

Its implementation

6.

Its completion and operation

The time taken for the entire process is the gestation period of the project. The
process of identification of a project begins when we are seriously trying to
overcome certain problems. They may be non- utilization to overcome available
funds. Plant capacity, expansion etc

Contents of the project report:

1. Market and marketing

2. Site of the project
3. Project engineering dealing with technical aspects of the project.
4. Location and layout of the project building
5. Building
6. Production capacity.
7. Work Schedule
45

Details of the cost of the Project:-

1. Cost of land
2. Cost of Building
3. Cost of plant and machinery
4. Engineering know how fee
5. Expenses on training Erection supervision
6. Miscellaneous fixed assets
7. Preliminary expenses
8. Pre-operative expenses
9. Provision for contingencies

4.13 RISK AND UNCERTAINITY IN CAPITAL BUDGETING

All the techniques of capital budgeting requires the estimation of future cash inflow
and cash outflows. The cash flows are estimated abased on the following factors.

Expected economic life of the project.

Salvage value of the asset at the end of the economic life.

Capacity of the product.

Selling price of the product.

Production cost.

Depreciation.
46

Rate of Taxation

Future demand of the product, etc.

But due to uncertainties about the future the estimates of demand, production,
sales costs, selling price, etc cannot be exact, for example a product may become
obsolete much earlier than anticipated due to un expected technological
developments all these elements of uncertainties have to be take into account in
the form of forcible risk while making an investment decision. But some allowances
for the element of risk have to be proved.

4.14 FACTORS INFLUENCING CAPITAL EXPENDITURE

DESCISIONS:

There are many factors financial as well as non financial which influence the capital
expenditure decisions and the profitability of the proposal yet, there are many other
factors which have to be taken into consideration while taking a capital expenditure
decisions. They are

1. URGENCY
Sometime an investment is to be made due to urgency for the survival of the firm or
to avoid heavy losses. In such circumstances, proper evaluation cannot be made
though profitability tests. Examples of each urgency are breakdown of some plant
and machinery fire accidents etc.

2. DEGREE OF UNCERTAINTY

47

Profitability is directly related to risk, higher the profits, greater is the risk or
uncertainty.

INTANGIBLE FACTORS

Sometimes, a capital expenditure has to be made due to certain emotional and

intangible factors such as safety and welfare of the workers, prestigious projects,
social welfare, goodwill of the firm etc.

1. AVAILABILITY OF FUNDS

As the capital expenditure generally requires the previsions of laws solely influence
by this factor and although the project may not be profitable. Yet the investment
has to be made.

2. FUTURE EARNINGS

A project may not be profitable as competed to another today, but it may be

profited to increase future earnings.

Sometimes project with some lower profitability may be selected due to constant
flow of income as compared to another project with an irregular and uncertain
inflow of income.

4.15 CAPITAL EXPENDITURE CONTROL

48

Capital expenditure involves no-flexible long-term commitments of funds. The

success of an enterprise in the long run depends up on the effectiveness with which
the management makes capital expenditure decision. Capital expenditure decisions
are very important as their impact is more or less permanent on the well being and
economic health of the enterprise. Because of this large scale mechanization and
automation and importance of capital expenditure for increase in the profitability of
a concern. It has become essential to maintain an effective system of capital
expenditure control.

4.16 OBJECTIVES CONTROL OF CAPITAL EXPENDITURE

To make an estimate of capital expenditure and to see that the

total cash outlay is within the financial resources of the

enterprise
To ensure timely cash inflows for the projects so that no
availability of cash may not be problem in the implementation of

4.17

the problem.
To ensure that all capital expenditure is properly sanctioned.
To properly coordinate the projects of various departments
To fix priorities among various projects and ensure their follow-

up.
To compare periodically actual expenditure with the budgeted

ones so as to avoid any excess expenditure.

To measure the performance of the project.
To ensure that sufficient amount of capital expenditure is

incurred to keep pace with rapid technological development.

To prevent over expansion.

STEPS

INVOLVED

IN

CONTROL

OF

CAPITAL

EXPENDITURE

49

Preparation of capital expenditure budget.

Proper authorization of capital expenditure.

Recording and control of expenditure.

Evaluation of performance.

LEASE FINANCING

Lease finance is an agreement for the use of an asset for a specified rental. The
owner of the asset is called the lesser and the user the lesser
1)

Operating leases

2)

Financial leases

Operating leases are short-term no-cancel able leases where the risk of
obsolescence in borne by the lesser
Financial leases are long-term non-cancelable leases where any risk in the use of
asset is borne by the lessee and he enjoys the return too.

Preliminary budget estimates for the year following the budget year.

GENERAL GUIDELINES:-

The capital funds budget is to be prepared under six major heads.

1)

Continuing schemes

2)

New schemes

3)

Modernization and rationalization

50

4)

Township

5)

Science and technology

6)

EDP schemes

CONTINUING SCHEMES

These schemes include all such schemes which are under implementation of which
funds prevision has been made in the current year /prevision is required in the
budget year.

NEW SCHEMES

This scheme includes all such schemes, which are proposed to be initiated in the
budget year and for which under provisions is required in the budget year. Normally,
such schemes are included in the five-year plan of the company approved by the
planning commission.

MODERNIZATION AND RATIONALIZATION (M&R)

This includes item of plant and machinery etc for which funds required in the budget
year and the following year. All item included in M&R should result in cost
reduction/quality

improvement/rebottle

necking/replacement/productivity,

improvement and welfare. The M&R items are to be submitted in the following main
characteristics accompanied with full justification on the agenda of facilities
increased output and production, quality requirements bottlenecks.

1. Replacement / modernization.
51

2.
3.
4.
5.
6.

Balancing facilities (essentially to increase production).

Operational requirements including material handling
Quality/testing facilities.
Welfare
Minor works.

These requirements should be protested term wise. A separate proposal is required

for M&R items costing more than Rs. 10, 00,000.

TOWNSHIP

Township budget is divided into two parts.

Continuing township schemes

New townships schemes.

Funds required under each schemes should be backed up with full data on number
on quarter/scope of work to be completed against the funds requirements phasing
of budgeted funds for current year, budget year and following year etc, should be
given similar information on number of quarter/scope of work already completed,
expenditure incurred till last year, satisfaction level it is to be added in the above
back up information for each scheme.

SCIENCE AND TECHNOLOGY

This budget can be divided into two categories

Continuing schemes.

New schemes to be taken up in the budget year.

The schemes should fall in any of the above cartages giving details on physical and
financial progress etc.
52

EDP SCHEMES

All funds requirements for computer are information system should be grouped
under EDP schemes and projects accordingly.

BUYING OR PROCURING

Buying or procurement involves purchasing an asset permanently in the form of

cash or credit.

LEASING VS BUYING

Leasing equipment has the tax advantage of depreciation, which can mutually
benefit the lesser and lessee, other advantage of leasing, include convenience and
flexibility as well as specialized services to the lessee. Lease privies handy to those
linens, which cannot obtain loan capital form normal sources.

The pros and cons of leasing and buying are to be examined thoroughly before
deciding the method of procurement i.e. leasing or buying.

53

CHAPTER-5
FINANCING OF PROJECT

Project financing is considered right from the time of the conception of the project.
The proposal of the project progress working capital, so, in general a project is
considered as a mini firm is a part and parcel of the organization.
54

5.1 Sources of Finance:

Loan Financing
Security Financing
Internal Financing

Loan Financing:
(a). Short-

Term Loans & Credits

Short Term Loans & Credits are raised by a firm for meeting its working capital
requirements. These are generally for a short period not exceeding the accounting
period i.e., one year.

Types of Short Term Loans & Credits:

1.

Trade Credit.

2.

Installment Credit.

3.

Advances.

4.

Commercial papers

5.

Commercial banks

6.

Cash Credits

7.

Over Drafts
55

8.

Public Deposits.

(b). Term Loans:

Term loans are given by the financial institutions and banks, which form the primary
source of long term debt for both private as well as the Government organizations.
Term loans are generally employed to finance the acquisition of fixed assets that are
generally repayable in less than 10 years. In addition to short- term loans, company
will raise medium term and long term loans.

5.2 Security Financing:

Corporate Securities can be classified into two categories.

(a)

Ownership Securities or capital stock.

(b)

Creditor ship Securities or debt Capital.

(a)

Ownership Securities or capital Stock:

Types of Ownership Securities or Capital Stock:

i)

Equity Capital:

Equity Capital is also known as owners capital in a firm. The holders of these shares
are the real owners of the company. They have a control over the working of the
company. Different ways to raise the equity capital.
o

Initial public offering.

56

ii)

Seasoned offering

Rights issue.

Private placement

Preferential allotment.

Preference Capital:

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

1.

Payment of Divided

2.

Repayment of the capital at the time of liquidation of the

company.

b)

Types of Creditor ship Securities:

Debentures:

Debentures are an alternative to the term loans and are instruments for raising the
debt finance. Debenture holders are the creditors of a company and the company
and the company have the obligations to pay the interest and principal at specified
times. Debentures provide more flexibility, with respect to maturity, interest rate,
security and repayment Debentures may be fixed rate of interest or floating rate or
may be zero rates. Debentures & Ownership Securities help the management of the
company to reduce the cost of capital.
57

5.3 Internal Financing:

A new company can raise finance only through external sources such as shares,
debentures, loans and public deposits. For existing company they need to raise
funds through internal source. Such as retained earnings depreciation as a source of
funds. Some other innovative source of finance
Venture Capital
Seed Capital
Bridge Finance
Lease Financing

Euro- Issues

CHAPTER-6
INTRODUCTION TO FINANCE AND ACCOUNTS DEPARTMENT

Finance is the lifeblood of the business .According to Howard and Upton Finance
is that administrative area or set of administrative function in organizations which
relate with the arrangements of cash and credit so that the organization may have
the means to carry out of its objective as possible.

6.1 Functions Of Finance and Accounting Department

58

Finance & Accounts Department of BHUBANESHWAR Unit is controlled by Head Of

the Department i.e. C.F.O. His main function is to co-ordinate all activities related to
Finance & Accounts and report to Head Offices Finance & Accounts Department /
Finance Director as well Unit Head. Finance & Accounts Department function various
type of activities as per the Guidelines issued by Head Office, Purchase Procedure,
Service Rules, Powers of officer etc. At present to carry out all the related activities,
following four sectional heads are reporting to him for work connected to their
Sections. All the four sectional heads independently report to Departmental Head.
However, in case, Departmental Head happens on tour or on leave, the next senior
sectional head takes the charge of the department and remaining here sectional
head will report to him for all the work connected to their Sections.

6.2 FINANCE DEPARTMENT COMPRISES OF

1. Pay roll section

2. Raw materials
3. Fixed assets & insurance
4. Works bill section
5. Purchase bill section
6. Books & budgets
7. Financial concurrence

59

PAY ROLL SECTION

Pay roll section takes care of all the financial issues of employees in co-ordination
with Administrative & Personnel Department. Its functions includes management of
salaries, TA/DA, loans & advances, misc payment related to employees, Perk/There
allowance payments etc. Here records of each employee are maintained regarding
basic pay, leave encashment, medical, salary, increments, promotion based perks,
etc.

MISCELLANEOUS ACCOUNTS

The miscellaneous jobs can be broadly divided into following categories:

1.

Passing of bills of miscellaneous nature;

2.

Accounting of cash imprested and advances for expenses;

3.

Miscellaneous recoveries from outside agencies.

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

WORKS BILLS
60

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

PURCHASE BILLS

In purchase bill, treatment is given to the bills on purchase of machinery and tools
and spares etc. for accounting requirements and book keeping as well as record
maintenance and tax deductions and authentication of AFP on purchase of Goods
and Services.

FINANCIAL CONCURRENCE

Financial concurrence deals with crosschecking and green signaling the requisition
for purchases made by various indent departments of the unit. They check for the
availability of budget and ascertain its necessity and critically for regular and
smooth operations of the plants and activities of various departments.

BOOKS & BUDGETS

Books and budget deal with revenue budget compilation, monitoring and control,
reconciliation of inter unit accounts, maintenance of books of accounts and
submission of monthly / quarterly / annual reports, COP processing and attending
internal / statutory / tax auditors.
61

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

07-08

08-09

09-10

10-11

11-12
62

Sources of Funds:
Auth share capital

100000

100000

100000

100000

100000

57545

57545

57545

57545

57545

---

---

---

10791

28500

Secured loan

13619

2785

85072

104307

113987

Unsecured loan
Total sources of funds

76475

75788

42725

8329

---

147639

136118

185342

180972

200032

73251

75734

77436

79349

83178

26887

25706

24149

23652

25419

Investments

---

---

82130

605

Deferred tax Assets

---

---

---

3369

2037

Inventories

28595

21496

55159

37363

50023

Sundry Debtors

68236

56541

86632

60052

51764

Others

6130

47507

103523

117391

107567

Total

102961

125544

245314

214806

209354

Provisions
Net Current Assets

48770
54191

73207
52337

170615
74699

61460
153346

36783
172571

Deferred Revenue Exp

131

---

---

---

---

66430

58075

4364

---

---

147639

136118

185342

180972

200032

Paid up capital
Reserve and surplus

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

Current Assets

Current Liabilities and

Accumulated Loss
TotalApplication(fund
s)

7.2 Profit and Loss Statement(2007-2012)

(In Lacs)
63

Working results
Sales
Subsidy
Other Income
Total

07-08
119793

08-09
120663

09-10
94368

10-11
119831

11-12
128297

86276

124527

417077

178583

222170

652

3487

49530

18153

12597

206721

248677

560975

316927

363064

187719

230047

484485

288612

327032

(19002)

(18630)

(76490)

(28315)

(36032

Cost Of Sales(including prior

period adj but excluding Dep
and Interest)

Gross Margin

3402

3817

3347

3048

)
2470

15600

14813

73143

25267

33562

4613

6387

5262

7294

9644

10987

8426

67881

17973

23918

Debit/(Credit) for deferred

59
---

70
---

14170
---

6187
(3369)

8278
1332

tax
TaxationExpenses Credited
NET PROFIT/(LOSS)

--10928

--8356

--53711

--15155

(3400)
17708

Depreciation
Profit/(loss) before Int and
Taxes

Interest
Profit/(loss) before taxes
Taxes including FBT

64

CHAPTER-8
EVALUATION OF PROJECT USING CAPITAL BUDGETING
TECHNIQUES

8.1 PROJECT EVALUATION

Name of the Project: Baggaging plant with handling system .

Project Estimate: Ventured into the market and got a quote for 300 Cr.

Project Cost: 300 Cr

Assumption:

The

Company

has

currently

dispatch

mechanism

which

is

mechanized for dispatching or bagging 3,300 MT/day. The company plans to

increase its production level to 16, 00,000 MT/annum. So, the dispatch system
should be increased to an additional 1,550 Mt/day so that the total dispatching to be
done per day goes up to 4,850Mt/day. So, as to ensure the smooth functioning of
the dispatching system and this can be done by setting up a new baggaging plant
Present Capacity-3,330MT/day
New Capacity - 4,850MT/day
Difference or excess production - (4850-3300)MT/day=1,550MT/day

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

65

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

Cost of the Project- 355.18 Cr

Year

2015-16

2016-17

2017-18

2018-19

2019-20

Amount

140.93

134.55

139.33

144.11

148.82

Calculation Of Pay Back Period:

S.no

Year

Cash Inflows

Cumulative Inflows

2015-16

140.93

140.93

2016-17

134.55

275.48

2017-18

139.33

414.81

2018-19

144.11

558.92

2019-20

148.82

707.74

66

(a)

Cash Outlay : 355.18 Cr

(b)

Payback Period :

INITIAL INVESTMENT
ANNUAL CASH FLOW

79.70
2 +

414.81

2.2 years

Pay Back Period:

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

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

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

a good project

And here we have got a pay-back period of 2.2 years. So, the project can be
considered
67

2. Evaluation of the Project Using Internal Rate of Return Method:

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

Year

2015-16

2016-17

2017-18

2018-19

2019-20

Amount

140.93

134.55

139.33

144.11

148.82

Internal Rate of Return:

Discount rate taken as 24%

(in

crores)

Sl. No

Years
1 2015-16

Cash Inflows
140.93

DCF (24%)

Present
Values of
Inflows

.806

113.58

68

2 2016-17

134.55

.660

88.80

3 2017-18

139.33

.524

73.00

4 2018-19

144.11

.422

60.81

5 2019-20

148.82

.341

50.74

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

Discount rate taken as 26%

386.93

(in

crores)

69

Sl. No

Years

Cash Inflows

DCF (26%)

Present
Values of
Inflows

1 2015-16

140.93

.787

110.91

2 2016-17

134.55

.620

83.421

3 2017-18

139.33

.488

68.00

4 2018-19

144.11

.384

55.34

5 2019-20

148.82

.302

50.74

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

366.412

70

Discount rate taken as 28%

(in

crores)

Sl. No

Years

Cash Inflows

DCF (28%)

Present
Values of
Inflows

1 2015-16

140.93

.781

110.06

2 2016-17

134.55

.600

80.73

3 2017-18

139.33

.465

64.78

4 2018-19

144.11

.361

52.02

5 2019-20

148.82

.279

41.52

6
7
8
9
10
11
12
13
14
71

15
Total Present Values of Inflows

349.11

Calculation of Internal Rate of Return

IRR

L+

A - Cash out lay

(H L)

A-B

26+

355.18 - 349.123

(355.18-349.123) +

X (28-26)

2
72

(366.412-355.18)

6.07

26 +

6.07+11.232
=

26 +

26.7
0

0.350

Internal Rate of Return (IRR):

In this calculation, is done on the basis of trail and errors. By taking various
percentage of (DCF).So that an appropriate percentage of Internal Rate of Return
can be judge out.

Calculated figure is 26.70%, so we can take it as 30% because at market

Uncertainity.

Suggestion:

Any project which has an Internal Rate of Return Between 16% to 20% is considered
as a good project

And here for this project the Internal Rate of Return is 26.70%. So, the project can
be considered.

73

CHAPTER-9
FINDINGS AND SUGGESTIONS

9.1 FINDINGS:

It was found that the payback Period of the project is 2 year and 2 months.

The Payback Period shows that the initial investment can be recovered within a
short period of time.

The investment is ideal because normally an investment should be recoverable

within 5 years.

4.

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

74

9.2 SUGGESTIONS:

.
1.

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

2.

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

3.

The company has to analyze the proposal for expansion or creating additional
capacity.

4.

The company may plan and control its capital expenditure.

5.

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

6.

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

BIBLIOGRAPHY:

Financial Management-

I. M. Pandey

Financial Management-

Prasanna Chandra
75

Financial Management-

Financial Management -

M. Y. Khan & Jain

Shashi.K.Gupta, R.K.Sharma

and
Neeti gupta

PRATHI SOLUTIONS profile & Annual Reports

Web Sites:

URL: http://www.google.com
URL: http://www.Wikipedia.com

76