Capital Budgeting

CHAPTER -1
INTRODUCTION
1. INTRODUCTION
A Budget is a comprehensive plan of action which expressed in

physical and financial terms. It is a blue print of the company's financial
estimates for the future. Budgeting forms the most important part of the
planning function. It's a system of planning and control covering all the
segments of an organization and also giving a sense of direction to the
goals and objectives of an organization. Budget constitutes the principal
instrument for projecting the future cost revenues, which form an essential
part of the management accounting and the foundation of an organization's
financial control.
A budget system should be such that it becomes
imperative for the management to establish goals and objectives, define
policies, allocates resources, set targets, and try to take corrective action
if there are any deviations. A management is said to be effective if it can
accomplish the objectives efficiently with minimum amount of resources
utilization.
In order to attain these set goals within a given set of constraints is
a difficult job; hence with the help of a proper budget one can achieve the
organization goals and objectives.
DEFINITION:
The term capital budgeting refers to "long term planning for

proposed capital outlay and their financing. It includes raising long term
funds and their utilization. It may be defined as a firms formal process of
acquisition and investments of capital. It also defined as decision making
process by which the firm evaluates the fixed assets.
CONCEPT OF BUDGET:
"A budget is a financial and quantitative statement. Prepared and

approved prior to a defined period of time, of be pursued during that
period for the purpose of attaining a given objective". It may include
income, expenditure and the employment of capital". in other words, a
budget is a systematic plan for the better utilization of man, machine,
material and money. In a business organization a budget represents an
estimate of the future cost and revenues.
ESSENTIAL FEATURES OF A BUDGET:

1. It's a written plan of activities for future period of time.
2. It is expressed in quantitative form, physical or monetary units or
both.
3. It relates to the income and expenditure of individuals functions of
the business.
4. It is prepared for a definite period of time, usually for one year.
5. It relates to future period for the objectives or goals have already
been laid down.
6. It is prepared in advance and is derived from the long-term strategy
of the
organization .
OBJECTIVES OF A BUDGET:
Budget serve has a "Blue print" of the desired plan of action.
Budget helps in reduction of wastage and losses by revealing them

in time for corrective action.
Budgets
serve
as
means
of communication. The
organization
communicates the policies and targets to the managers in the

organization and all the responsible to carry out the plan.
Budget serves as the benchmark for the controlling ongoing

operation.
Budgeting facilitate centralized control with delegated authority and

responsibility.
Budgeting brings out the efficiency and improvement in the work of

the organization as all the details are clearly spelled out.
The capital budgeting decisions are difficult to make
because
it involves the assessment of future events which are difficult to

ascertain.
SCOPE OF THE STUDY

The scope of the present study includes the following:
Understanding the importance of capital budgeting in Dr. Reddys
Laboratories Ltd
Evaluating an investment proposal of setting up facility at Dr. Reddys
Laboratories Ltd for manufacturing NEW DRUG 30 for supplies directly from
bulk units.
RESEARCH METHODOLOGY
The primary data needed for the project analysis has been collected through
unstructured interviews and discussions conducted with the finance department.
The secondary sources of data are annual reports, brochures and web resources. A
case study approach has been used for the study of capital budgeting at Dr.
Reddys Laboratories Ltd
LIMITATIONS
The study was conducted with the data available and analysis was made
accordingly.
Due to the confidential financial records, the data is not exposed so the
study may not be detailed and full fledged.
Since the study is based on the financial data that are obtained from the
companys financial statements, the limitations of financial statements shall be

equally applicable.
5
ASSUMPTIONS
Sales and operational levels have been assumed to evaluate the investment
proposal of manufacturing NEW DRUG 30 in Dr. Reddys Laboratories Ltd.
CAPITAL BUDGETTING PROCESS
The process of capital budgeting involves generally the
following steps:-
1.
INVESTMENT SCREENING AND SELECTION :

Project consistent with the corporate strategy are identified.
But projects don't simply walk into corporate headquarters. he firm must
have some system for seeking or generating investment opportunities.
Identifying investment opportunities is not necessarily the task of the
financial managers.
2.
THE CAPITAL BUDGET PROPOSAL :
A capital budgeting is proposed for the project surviving the

screening the and selection process. The budget lists the recommended
projects and the rupee amount of investment needed for each. This
proposal may start as an estimate of expected revenues and costs.
3.
BUDGETING APPROVAL AND AUTHORIZATION:
Projects included in the capital budget are authorized,

allowing further fact gathering and analysis, and approved, allowing
expenditures for the projects, the projects are authorized and approved at
the same time.
6
4.
PROJECT TRACKING:
After a project is approved, work on it begins. The manager

reports periodically on its expenditures, as well as on the any revenues
associated with it. This is referred to as project tracking, the
communication link between the decision makers and the operating
management of the firm.
5.
POST- COMPLETION AUDIT :
Following a period of time, perhaps two or three years after

approval, project are reviewed to see whether they should be continued.
This re-evaluation is referred to as a post- completion audit. Thorough
post-completion audits are not usually performed on every project since
that would be too time consuming
TYPES OF CAPITAL BUDGETING DECISIONS:
REPLACEMENT
DIVERSIFICATION
RESEARCH AND DEVELOPMENT
EXPANSION
MISCELLINIOUS
TECHNIQUES OF CAPITAL BUDGETING:
Non-discounted cash flow criteria
Discounted cash flow criteria
Payback period
Net present value
Accounting rate of return
Internal rate of return
profitability index
Discounted payback period
Net terminal value
TRADITIONAL/NON-DISCOUNTING TECHNIQUES:
PAY BACK PERIOD:-
The payback period is one of the most popular and widely

recognized traditional methods of evaluation investment proposals. It is
defined as the number of years required to recover the original cash outlay
invested in a project. If the project generates constant annual cash flows,
the payback periods can be computed by dividing cash outlay by the
annual cash inflow.
8
Payback period = Initial Investment / Annual cash inflow
AVERAGE/Accounting Rate of Return:-
The Accounting rate of return (ARR) is known as average rate of

return and also return on investment (ROI). It is found out by dividing the
average after tax profit by the average investment. The average investment
would be equal to half of the original investment of it is depreciated
constantly. Alternatively , it can be found out dividing the total of the
investments book value after depreciation by the life of the project.
Accounting rate of return = Average income / Average investment
Average investment = Original investment - Scrap value / 2
ACCEPTANCE RULE:
This method will accept all those project whose ARR is higher than
the minimum rate established by the management and reject those project
which have ARR less than the minimum rate. This method would rank a
project as number as project as number one of it has higher ARR and
lowest rank would be assigned to the project with lowest ARR.
Discounted cash flow criteria:
PARIECULARS
Cash/revenue
---
---
---
---
Cash ---
---
---
---
---
---
---
---
(-)
operating
CIBT
(-)
Depreciations
---
---
---
---
Taxable income
---
---
---
---
(-) Tax (EAT)
---
---
---
---
(+)
Depreciations
---
---
---
---
CIAT
---
---
---
---
(+)
value
year
Salvage --in Nth
---
---
---
(+) Recovary of --the W/C
---
---
---
NET PRESENT VALUE:-
The net present value (NPV) method is the classic economic

method of evaluating the investment proposals, It is method in which we
can convert future cash profits to today's cash profit based on the interest
rate is nothing but cost of capital or the inflation rate or the rate expected
by the investors. If the rate of interest is not given, in India maximum
return expected is 10% so find out the NPV at10% only. If the NPV is +ve,
we will get projects. Accordingly accept/reject decision will be taken.
Net present value = (summation of present value of cash inflows in
each year) (the summation of present values of the net present value of
two mutually exclusive project X and Y.)NPV < 0 RejectNPV > 0 Accept
10
Net Present Value Decision Rule :
If
This means that
And you
NPV>0
The
investment
is Accept the project
expected to increase
share holder wealth.
NPV<0
The
investment
is Reject the project
expected to decrease
NPV=0
The
investment
is Should
indifference
expected not to change between accepting &
rejecting the project.
Internal rate of return:-
The second discounted cash flow or time adjusted method for

apprising capital investment decisions is the internal rare of return (IRR)
method. This technique is also known as yield on investment, marginal
efficiency of capital, marginal productivity of capital. The internal rate of
return is usually the rate of return that a project earns. It is defined as the
discount rate which equates the aggregate present value of net cash flows
which the aggregate present value of cash flows outflows of a project.
IRR = low er rate of return + present value of cash inflows at low er
rate - present value of investment * Difference between the dis rate
chosen
Diff.btw present value
Acceptance of project:
Accept - if IRR > cost of capital
Reject - if IRR < cost of capital
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INTERNAL RATE OF RETURN DECISION RULE:
The internal rate of return of decision rule is to invest in a project if

it provides a return greater than the cost of capital. The cost of capital.
The cost of capital. in the context of the IRR, is a hurdle rate the minimum
acceptable rate of return,
Internal rate of return (IRR) is that rate which the
discounted cash inflows match with discounted cash outflows.
IRR DECISION TABLE :
If
This means that
And you
IRR>1
The
investment
is Accept project
expected to increase
shareholder wealth.
IRR<1
The
investment
is Reject project
expected to decrease
the shareholder wealth.
IRR=1
Investment is expected Should be in difference

not
to
change between accepting or
shareholder wealth.
rejecting the project.
Profitability Index (PI):

Another time adjusted capital budgeting technique is profitability
index or benefit cost of ratio. It is similar to the NPV approach. The
profitability index roach means the present value of returns per rupee
invested, whistle the NPV is a based on the once between the future values
of inflows and the present value of the cash outlays, A major disadvantages of NPV method that being and absolute measure, it is not
reliable method to evaluate projects requiring different initial investments.
The PI method provides a solution to this kind of problem. It may be
defined as the ratio which is obtained dividing the present value of future
cash inflows by the present value of cash outlays.
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PI = Present value of cash inflows / present value of cash outflows * 100
ACCEPTANCE OF THE PROJECT:
If the present value sum total of the compounded reinvested cash

inflows (PVTs)is greater than the present value of the outflows (PVOs) ,
the project is accepted if:
PVTs > PVOs ACCEPT
PVTs < PVOs REJECT
Profitability Index Decision Rule :
If
This means that
And you
P1>1
The investment return Should

more than Rs. 1 p/v project
for
every
Rs.1
invested.
accept
the
P1<1
The investment return Should

less than Rs. 1 p/v for project
every Rs.1 invested.
reject
the
P1=1
The investment return In difference between

Rs. 1
p/v for every accept
and
reject
Rs.1 invested.
project
Net Terminal Value Method (NTV) it can be represented as

NTV = PVTs - PVO
If the NTV is positive, accept the project. If the NTV is negative,
reject the reject. The NTV method is similar to NPV method. Initially the
values are compounded, and in the later they are discounted. Both the
method wills the same results. The same interest rates are used for both
discounting and compounding.
13
CHAPTER-2
REVIEW
OF
LITERATURE
14
REVIEW OF LITERATURE
2.1 Investment Decisions

One of the basic questions faced by financial managers is: How should
the scarce resources of the firms be allocated to get the maximum value for the
firm? This refers to investment decisions, which deal with investment of firms
resources in Long term (fixed) Assets and Short term (current) Assets or Capital
Budgeting Decisions and Working Capital Management.
Capital budgeting is a decision making process for investment in
assets that have long term implications, affect the future growth and profitability
of the firm and basic composition and assets mix of the firm. It involves
Measuring the benefits and costs associated with each alternative option in
terms of incremental cash flows,
Evaluating different proposals in the light of return expected by the
investors of the firm and the return promised by the proposal, and
Applying different techniques to select an alternative with the objective of
maximization of value of the firm.

Typically, Capital Budgeting decisions involve rather large cash
outlays and commit the firm to a particular course of action over a relatively long
period and consequently, every care should be taken care of. The future risks and
uncertainties should be incorporated in the evaluation procedure so that future
cash flows occur as they are intended to be. (R.P.Rustagi 2005, p367)
15
1 Features of Capital Budgeting
The exchange of current funds for future benefits.
The funds are invested in long-term assets.
The future benefits will occur to the firm over a series of years
(I.M.Pandey 2005,p141)
2.1.2
Significance of Capital Budgeting

The significance of capital budgeting may be stated as follows.
INVOLVEMENT OF HEAVY FUNDS: Capital budgeting decisions require large

capital outlays. It is, therefore absolutely necessary that the firm should carefully plan its
investment programmes so that it may get the finances at the right time and they are put
to most profitable use. An opportune investment decision can give spectacular results. On
the other hand, an ill-advised and incorrect decision can jeopardize the survival of even
the big.
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. For example,
if the cost of capital is 10%, the management will not like to accept a proposal, which
yields a rate of return less than 10%. The project s giving a yield below the desired rate of
return will therefore be rejected.
CUT-OFF POINT:
The cut-off point refers to the point below which a project would not be accepted. For
example, if 10% is the desired rate of return, the cut-off rate is 10%. The cut-off point
may also be in terms of period. For example, 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.
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RETURN EXPECTED FROM THE INVESTMENT:

Capital investment decisions are made in anticipation of increased return in the future. It
is therefore very necessary to estimate the future return or benefits accruing from the
investment proposals. There are two proposals available for quantifying benefits from
capital Investment decisions. They are:
o ACCOUNTING PROFIT: The term accounting profit is identical with
income concept used in accounting.
o CASH FLOWS: In this depreciation charges and other amortization
charges on the fixed assets are not subtracted from gross revenue because no
cash expenditure is involve.
Evaluation Techniques Of Capital Budgeting
Evaluation Techniques of Capital Budgeting are classified into two types:
1. TRADITIONAL TECHNIQUES:
Average rate of return
Pay-back period
2. MODERN OR TIME ADUSTED OR DISCOUNTED CASH FLOW

(DCF) TECHNIQUES:
Net present value (NPV)
Internal rate of return (IRR)
Profitability index (PI) or Benefit-cost ratio (B/C RATIO)
17
2.3.1
Traditional Techniques
2.3.1.1 Average Rate Of Return (ARR)

The average rate of return (ARR) method of evaluating proposed capital
expenditure is also known as the accounting rate of return method. It is based upon
accounting information rather than cash flows. There is no unanimity regarding the
definition of the rate of return. There are a number of alternative methods for calculating
the ARR. The most common usage of the average rate of return (ARR) expresses it as
follows:
ARR =
Average annual profits (after dep & taxes)
* 100
Average investment over the life of the project
ACCEPT-REJECT RULE:
With the help of the ARR, the financial decision maker can decide whether
to accept or reject the investment proposal. As an accept-reject criterion, the actual ARR
would be compared with a predetermined or a minimum required rate of return or cut-off
rate.
Accept if ARR > minimum rate
2.3.1.2 Pay Back Period (PBP)

The pay back method (PB) is the second traditional method of capital
budgeting. It is the simplest and, perhaps, the most widely employed, quantitative method
for appraising capital expenditure decisions. This method answers the question: How
18
many years will it take for the cash benefits to pay the original cost of investment,
normally disregarding salvage value? Cash benefits here represent CFAT ignoring interest
payment. Thus the pay back method measures the number of years required for the CFAT
to pay back the original outlay required in an investment proposal.
Investment
PB =
Constant annual cash flow
ACCEPT-REJECT CRITERION:
The payback period can be used as a decision criterion to accept or reject
investment proposals. One application of this technique is to compare the actual pay back
with a predetermined pay back that is the pay back set by the management in terms of the
maximum period during which the initial investment must be recovered. If the actual
payback period is less than the predetermined pay back, the project would be accepted; if
not it would be rejected.
2.3.2
Accept if PB < standard payback
Discounted Cash Flow (DCF)/Time -Adjusted (TA) Techniques

The distinguishing characteristic of the DCF capital budgeting is that they
take into consideration the time value of money while evaluating the cost and
benefit of a project.
19
2.1.2.1 Net Present Value (NPV)

The first DCF/PV technique is the NPV. NPV may be described as the
summation of the present values of cash proceeds (CFAT) in each year minus the
summation of present value of the net cash outflows in each year. Symbolically,
the NPV for projects having conventional cash flows would be:
NPV =
ct
(1 r )
t 1
- Initial investment
Where ct = cash flow at the end of year t

n = life of the project
r = discount rate
STEPS FOR COMPUTATION OF NPV:
Firstly an appropriate rate of interest should be selected to discount cash
inflows. It is generally known as cost of capital, which is equal to the

minimum rate of return expected by the firm on investment proposals.
Secondly, the present value of cash inflows and cash outflows should be
computed using the cost of capital as discounting rate.
Finally, the present value of cash outflows is subtracted from present value
of cash inflows to get NPV.

ACCEPT-REJECT CRITERION:
NPV>ZERO (accept)
NPV<ZERO (reject)
NPV=ZERO (indifferent)
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2.1.2.2 Internal Rate Of Return (IRR)

The second discounted cash flow (DCF) or time adjusted method for
appraising capital investment decisions is the internal rate of return (IRR) method. This
technique is also known as yield on investment, marginal efficiency of capital, marginal
productivity of capital, rate of return, and time-adjusted rate of return and so on. Like the
present value method, the IRR method also considered the time value of money by
discounting the cash streams.
The internal rate of return is usually the rate of return the project earns. It
is defined as the discount rate(r) which equates the aggregate present value of the net cash
inflows (CFAT) with the aggregate present value of cash outflows of a project. In other
words, it is that rate which gives the project NPV as zero.
COMPUTATION OF IRR
In computing IRR, future cash inflows are discounted in such a way that
their total PV is just equal to the PV of total cash outflows. The time schedule of
occurrence of the future cash flows is known but rate of discount is not. This discount rate
is rtained by trial and error method. This rate of discount so calculated, which equates the
PV of cash inflows with PV of cash outflows is known as IRR.
n
Investment =
ct
(1 r )
t 1
Where
ct = cash flow at the end of year t

r = internal rate of return (IRR)
n = life of the project
21
ACCEPT-REJECT CRITERION
The use of the IRR, as a criterion to accept capital investment decisions,
involves a comparison of the actual IRR with the required rate of return also known as the
cut-off rate or hurdle rate. The project would qualify to be accepted if the IRR(r) exceeds
the cut-off rate (k).If the IRR and the required rate of return are equal, the firm is
indifferent as to whether to accept or reject the project.
Accept if IRR > k
Reject if IRR < k
Project may be accepted if IRR = k
2.1.2.3 Profitability Index (PI) Or Benefit-Cost Ratio (B/C Ratio)

Yet another time-adjusted capital budgeting technique is profitability index
(PI) or benefit cost ratio (B/C RATIO) .It is similar to NPV approach. The
profitability index approach measures the present value of returns per rupee
invested, while the NPV is based on the difference between the present value of
future cash inflows and the present value of cash outlays. A major shortcoming of
the NPV method is that, being an absolute measure, it is not a reliable method to
evaluate projects requiring different initial investments. The PI method provides a
solution to this type of problem. It is, in other words, a relative measure. It may be
defined as the ratio which is obtained by dividing the present value of future cash
inflows by the present value of the cash outlays.
Symbolically,
22
PI =
Present value of cash inflows
Present value of cash outflows
This method is also called as benefit cost ratio because the numerator measures
benefit and the denominator cost. More appropriate description would be present
value index.
ACCEPT-REJECT CRITERION
Using the B/C ratio or the PI, a project will qualify for acceptance
if its PI exceeds one. When PI equals 1; the firm is indifferent to the project.
When PI is greater than, equal to or less than 1, the net present value is greater
than, equal to or less then zero respectively. I n other words, the NPV will be positive
when the PI is greater than 1; will be negative when the PI is less then one. Thus, the
NPV and PI approaches give the same result regarding the investment proposals.
(I.M.Pandey 2005,p143-152)
PI>1 (ACCEPT)
PI<1 (REJECT)
PI=1 (INDIFFERENT)
2.1.2.4 Selecting the appropriate Technique

All the techniques discussed above attempt to allocate the firms resources
in the most efficient way, although they sometimes do not agree on the right choice to
make. Each of these techniques has its own decision rule.
23
It may be logically stated that much of a choice of the technique depends upon
the situational factors particularly the firm, the funds availability and the relative
importance of a decision etc. Moreover, different firms and different finance managers
may have different acceptance standards. As the circumstances surrounding may vary
over a wide range, any attempt to prescribe the best technique will be futile. However
the following generalization can be made.
The Payback technique ignore the time value of money, the timings of the
cash flows and also the cash flows occurring after the payback period and hence it fails to
be a sound technique. It is uncommon for firms to make capital budgeting decisions
solely on the basis of PB technique. However, firms are likely to employ the PB
technique as the secondary rule either (i) as a constraint in decision making or (ii) as a
way to choose between projects that score equally well on the primary decision rule
The ARR technique would have been a good evaluation
technique if the objective had been profit maximization instead of wealth maximization.
It also ignores the time value of money, timings of return besides ignoring the cash
generations by tax shield of depreciation etc. Only in a case, when the firm is looking for
a return from an investment in terms of profits contributed, the ARR may be applied.
The PI technique can be appropriately used by those firms,
which, in view of the funds constraints, are looking for proposals, which will contribute
more per rupee spent. Also the finance manager can use the PI technique when he wants
to evaluate the effect of future cash flows. However, since the PI technique does not
consider the absolute accruals to the firms wealth by a proposal, it fails to be in line with
the objective of the wealth maximization.
24
Both the basic discounted cash flow techniques ie the NPV and the IRR
impliedly enhance the wealth of the shareholders. These techniques are best suited for
firms, which are working for the objective of wealth maximization, since these techniques
recognize the contribution generated by a proposal towards the wealth. These techniques
can be applied only if the firm is looking for the benefits being brought by the proposal to
the firm.
In particular, the NPV technique is most appropriate for firms
trying for the wealth maximization, by undertaking those projects which are expected to
generate maximum additional [present values. The NPV technique is also suitable to hose
firms, which are interested in ranking of various proposals in order of addition expected
from these proposals. The NPV is the most clear indication of the additional value created
by a proposal. The NPV technique seems to be the most in line with the objective of
wealth maximization. As per the NPV technique, the value of the firm should increase as
it continues to add further projects with NPVs. The firm should take as many projects
with the positive NPV as possible
Obviously, none of the criteria is applicable to all the situations all the
time. A firm needs to use more than one criterion in evaluating any set of capital
budgeting proposals. It may rank different proposals as per the NPV technique but the
benefit per rupee invested (PI technique) may also be considered.(R.P.Rustagi 2005,
p436-437)
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CHAPTER-3
COMPANY PROFILE
26
THE COMPANY
DR. REDDYS LABORATORIES LTD was founded by Dr Anji Reddy, a

entrepreneur-scientist, in 1984. The DNA of the company is drawn from its founder and
his vision to establish Indias first discovery led global pharmaceutical company. In fact,
it is this spirit of entrepreneurship that has shaped the company to become what it is
today.
Dr Anji Reddy, having moved out of Standard Organics Limited, a
company he had successfully co-founded, started DR. REDDYS LABORATORIES LTD
with $ 40,000 in cash and $120,000 in bank loan! Today, the company with revenues of
Rs.2,427 crore (US $546 million), as of fiscal year 2006, is Indias second largest
pharmaceutical company and the youngest among its peer group.
The company has several distinctions to its credit. Being the first
pharmaceutical company from Asia Pacific (outside Japan) to be listed on the New York
Stock Exchange (on April 11, 2001) is only one among them. And as always, Dr. Reddys
chose to do it in the most difficult of circumstances against widespread skepticism. Dr.
Reddys came up trumps not only having its stock oversubscribed but also becoming the
best performing IPO that year.
Dr. Anji Reddy is well known for his passion for research and drug
discovery. Dr. Reddys started its drug discovery programme in 1993 and within three
years it achieved its first breakthrough by out licensing an anti-diabetes molecule to Novo
Nordisk in March 1997. With this very small but significant step, the Indian
industry went through a paradigm shift in its image from being known as just
28
copycats to innovators! Through its success, Dr. Reddys pioneered

drug discovery in India. There are several such inflection points in the companys
evolution from a bulk drug (API) manufacturer into a vertically integrated global
pharmaceutical company today.
Today, the company manufactures and markets API (Bulk
Actives), Finished Dosages and Biologics in over 100 countries worldwide, in addition to
having a very promising Drug Discovery Pipeline. When Dr. Reddys started its first big
move in 1986 from manufacturing and marketing bulk actives to the domestic (Indian)
market to manufacturing and exporting difficult-to-manufacture bulk actives such as
Methyldopa to highly regulated overseas markets, it had to not only overcome regulatory
and legal hurdles but also battle deeply entrenched mind-set issues of Indian Pharma
being seen as producers of 'cheap' and therefore low quality pharmaceuticals. Today, the
Indian pharma industry, in stark contrast, is known globally for its proven high qualitylow cost advantage in delivering safe and effective pharmaceuticals. This transition, a
tough and often-perilous one, was made possible thanks to the pioneering efforts of
companies such as Dr. Reddys.
Today, Dr. Reddys continues its journey. Leveraging on its Low
Cost, High Intellect advantage. Foraying into new markets and new businesses. Taking
on new challenges and growing stronger and more capable. Each failure and each success
renewing the sense of purpose and helping the company evolve.
With over 950 scientists working across the globe, around the
clock, the company continues its relentless march forward to discover and deliver a
breakthrough medicine to address an unmet medical need and
make a difference to
peoples lives worldwide. And when it does that, it would only be
29
the beginning and yet it would be the most important step. As Lao Tzu wrote a long time
ago, Even a 1000 mile journey starts with a single step.
3.1 Business
Dr. Reddy's is a vertically integrated, global pharmaceutical
company with proven research capabilities and presence across the pharmaceutical value
chain. We manufacture Active Pharmaceutical Ingredients and Finished Dosage forms
and market them globally, with a focus on United States, Europe, India and Russia. In
addition, the drug discovery arm of the company conducts basic research in the areas of
diabetes, cardiovascular, inflammation and bacterial infection.
3.2 Board Of Directors
Dr. Reddy's has a board comprising of eminent individuals from
diverse fields. The board acts with autonomy and independence in exercising strategic
supervision, discharging its fiduciary responsibilities, and in ensuring that the
management observes the highest standards of ethics, transparency and disclosure.
Our Directors are experts in the diversified fields of medicine,
chemistry and medical research, human resource development, business strategy, finance
and economics. They review all information relating to significant business decisions,
including strategic and regulatory matters. Every member of the board, including the nonexecutive directors, has full access to any information related to the company.
Committees appointed by the board focus on specific areas, and take
decisions within the authority delegated to them by the board. The committees also make
specific recommendations to the board on various matters from time-to-time.
30
3.3 Corporate Governance

Dr. Reddy's long-standing commitment to high standards of
corporate governance and ethical business practices is a fundamental shared value of its
Board of Directors, management and employees. The Company's philosophy of corporate
governance stems from its belief that timely disclosures, transparent accounting policies,
and a strong and independent Board go a long way in preserving shareholders trust while
maximizing long-term shareholder value.
Good corporate governance flows out of the commitment of the
Management and the Board of Directors. When the commitment is backed by the
fundamental beliefs of maximizing value for stakeholders; transparent actions in the
business; values of a corporate; and mutual trust amongst all constituents of the business,
the organization transforms itself into a higher plane of leadership.
The forward-looking approach of Dr. Reddy's has always helped it, in
achieving the desired results. This approach has transformed the company's culture to one
that is relentlessly focused on the speedy translation of scientific discoveries into
innovative products. Dr. Reddy's commitment towards Corporate Governance started well
before law mandated such practices.
The company has identified and established its core purpose,
mission and core values for achieving corporate excellence. Dr. Reddy's believes in
crafting an environment where the parameters of conduct and behavior of the company
and its management is constantly aligned with the business environment.
The highlights of Dr. Reddy's Corporate Governance systems are
an independent Board of Directors following international practices, committed
31
management team, internal control systems and dissemination of information to various

stakeholders.
3.4 Awards & Accolades
The Appreciation Certificate of the District Collector for being the
Best Clean Production Industry for the year 2006 awarded to API Unit-V.
The CII "Southern Region Leadership Excellence Award" is won by Dr. Reddy's
for the year 2005.
5The CII "National Award for 'Excellence in Water Management" for the
year 2005 is won by both API Unit-II as well as API Unit-VI.
The Generics Unit of Dr. Reddy's achieves the new ISO 14001:2004
standard on 9th June, 2005.
The "Greentech Environmental Excellence Silver Award" for the year
2004-05 is won by API-Global Business Unit.
32
CHAPTER-4
DATA ANALYSIS
&
INTERPRETATION
33
DATA ANALYSIS & INTERPRETATION
4.1 Presentation & Analysis

The proposal is to set up facility for manufacturing NEW DRUG 30 for supplies
directly from bulk units.
Advantages:
Facility will be constructed in available structure with suitable
modifications and civil finishings.
New Drug 30 is manufactured in this unit.
Building is available without sacrificing any product.
Scope for expansion on service floor.
Built up area available is 250 M2.
QC support available with some augmentation in future.
Disadvantages:
May not possible to expand without major modifications or separate-
block.
Non flameproof equipments area classifications may not be met with
100%.
FEASIBILITY OF THE PROPOSED NEW DRUG 30 MANUFACTURING

FACILITY
Process Development Of Low Cost New Drug 30:
Use RM consumptions and makes of the expicients as used by contract
manufacturer
34
Process development to offer low cost New Drug 30 formula with Fluid
bed processor (FBP) technology.
Process will be developed with suitable alternative aqueous coating
materials.
Low Capital Investment:
Use of low automation and low cost capital equipments, which
competitors use with of course no compromise on quality of products.
HVAC will be 5 microns filtered air once through.
Civil finishes will be suitable as per cGMP requirements.
FBP technology is relatively less labor intensive compared to Auto coater.
Existing Warehouses will be used. Suitable conditioned storage space will
be created for final product storage.
No effluent generation practically other than equipments washings.
OPERATIONAL
REQUIREMENTS
OF
THIS
PROJECT
ON
EXECUTION:
The job involves key operations like manual drug coating and operation of
fluid bed processor.
API operators will be require to be trained in operations, which will be
done during the process of project executions. 3 4 weeks of training will be

sufficient. Thus additional manpower is required.
For Formulations Development support can be taken from FM II or API
may have to have small setup to address smaller customizations required by

the markets.
QC/QA support will be given by Unit III with some augmentation of
resources.
35
Quality Assurance and Regulatory affairs has given clearance for such a
set up in Unit III.
Need for any specific licenses to sell New Drug 30 need to be verified
from Unit-III , however we are doing this activity from Unit-II currently.
PROPOSED INVESTMENT: 216 Lacs
RM cost Rs./ kg
485
Fixed Costs for New Drug 30 Per Month
Rs/ month
Labour
100,833
Utilities
595,620
Repairs & Maintenance
41,667
Depreciation
166,667
Interest
162,000
1,066,787
Investment
2160
36
Net Income Per Annum
COMPUTATION OF NET INCOME PER ANNUM

(Rs in Mns)
(1)
(2)
Operation Level
Sale Price Rs per Kg
(3)
RM Cost Rs per Kg
(4)
30Tn per month

900
850
800
750
700
485
485
485
485
485
Sales Income [(1) * (2)]
27.00
25.50
24.00
22.50
21.00
(5)
Variable Cost - RM Consumed [(1) *

(3)]
14.55
14.55
14.55
14.55
14.55
(6)
Contribution [(4) - (5)]
12.45
10.95
9.45
7.95
6.45
(7)
Other Fixed Costs (Utilities, Labour,

and QC Costs)
1.07
1.07
1.07
1.07
1.07
(8)
Net Income [(6) - (7)]
11.38
9.88
8.38
6.88
5.38
(9)
Total Net Income per annum [(8) *

(12 months)]
136.56
118.56
100.56
82.56
64.56
Investment
21.60
21.60
21.60
21.60
21.60
(10)
Table 1: Computation of Net Income Per Annum for 30 Tons per Month
37
COMPUTATION OF NET INCOME PER ANNUM

(Rs in Mns)
(1)
(2)
Operation Level
Sale Price Rs per Kg
(3)
RM Cost Rs per Kg
(4)
Sales Income [(1) * (2)]
20Tns per month

900
850
800
750
485
485
485
485
485
18.00
17.00
16.00
15.00
14.00
(5)
Variable Cost - RM Consumed [(1) *

(3)]
9.70
9.70
9.70
9.70
9.70
(6)
Contribution [(4) - (5)]
8.30
7.30
6.30
5.30
4.30
(7)
Other Fixed Costs (Utilities, Labour,

and QC Costs)
1.07
1.07
1.07
1.07
1.07
(8)
Net Income [(6) - (7)]
7.23
6.23
5.23
4.23
3.23
(9)
Total Net Income per annum [(8) *

(12 months)]
86.76
74.76
62.76
50.76
38.76
Investment
21.60
21.60
21.60
21.60
21.60
(10)
Table 2: Computation of Net Income Per Annum for 20 Tons per
38
700
Average Rate of Return: Operation Level 30 TNS PER MONTH
AVERAGE RATE OF RETURN

(Rs in Mns)
Operation Level
Sale price Rs per kg
(1) Avg. Income
(2) Avg. Investment
ARR [(1)/(2)*100]
30 Tns per month

900
850
800
750
700
136.56
118.56
100.56
82.56
64.56
10.8
10.8
10.8
10.8
10.8
1264
1098
931
764
598
Table 3: Average Rate of Return for 30 Tons per Month
ARR =

--------------------------------------------------------------- * 100
Average Investment
39
Graph 1: Average Rate of Return for 30 Tons per Month
Interpretations
The ARR more than the pre-specified rate of return is accepted. The
company requires a rate of return of 20%. Therefore, ARR of the project, which is
greater than 20% as specified by management, is accepted but most viable is at a
price of Rs.900 with respect to quantity of 30 Tns per month or 360 Tns per
annum
40
Average Rate of Return: Operation Level 20 TNS PER MONTH

AVERAGE RATE OF RETURN
(Rs in Mns)
Operation Level
20 Tns per month

900
850
800
(1) Avg. Income
86.76
74.76
62.76
(2) Avg. Investment
10.8
10.8
10.8
803
692
ARR [(1)/(2)*100]
581
750
50.76
10.8
470
700
38.76
10.8
359
Table 4: Average Rate of Return for 20 Tons per Month
ARR =
* 100
Graph 2: Average Rate of Return for 20 Tons per Month

Interpretations
The ARR more than the pre-specified rate of return is accepted. The
company requires a rate of return of 20%. Therefore, ARR of the project, which is
greater than 20% as specified by management, is accepted but most viable is at a
price of Rs.900 with respect to quantity of 20 Tns per month or 240 Tns per
annum
41
Payback Period: Operation Level 30 TNS PER MONTH
PAYBACK PERIOD
(Rs in Mns)
Operation Level
30 Tns per month
900
850
(1) Investment
21.6
21.6
(2) Net Income
136.56
118.56
0.16
0.18
Payback Period [(1)/ (2)]
Table 5: Payback Period for 30 Tons per Month
Investment
PB
=
42
800
21.6
750
700
2 1.6
21.6
100.56
82.56
64.56
0.21
0.26
0.33
Graph 3: Payback Period for 30 Tons per Month
Interpretations
The Payback Period calculated for a project is to be compared with some
predetermined target period and Payback Period less than the target period is
accepted. Therefore, target period is 3 years and project less than that is accepted
but the viable is at Rs.900 with respect to the quantity of 30 Tns per month or 360
Tns per annum.
43
Payback Period: Operation Level 20 TNS PER MONTH
PAYBACK PERIOD
(Rs in Mns)
Operation Level
20 Tns per month

900
850
800
750
700
(1) Investment
21.6
21.6
21.6
21.6
21.6
(2) Net Income
86.76
74.76
62.76
50.76
38.76
0.25
0.29
0.34
0.43
0.56
Payback Period [(1)/ (2)]
Table 6: Payback Period for 20 Tons per Month
Investment
PB =
44
Graph 4: Payback Period for 20 Tons per Month
Interpretations
The Payback Period calculated for a project is to be compared with some
predetermined target period and Payback Period less than the target period is
accepted. Therefore, target period is 3 years and project less than that is accepted
but the viable is at Rs.900 with respect to the quantity of 20 Tns per month or 240
Tns per annum.
45
NPV: Operation Level 30 TNS PER MONTH, Project Life 5 Years
Net Present Value of the Project Investment @ discounting rate of 9%

in Mns)
Operation Level
(Rs
30 Tns per month
900
850
800
750
5 years 5 Years 5 Years 5years
(1) Project Life

(2) Present Value factor @ 9%
3.8
(3) Net Income
3.8
136.56 118.56
3.8
100.56
700
5years
3.8
3.8
82.56 64.56
Present Value Net Income for Project Life

(4) [(2) * (3)]
518.93
450.53
21.60
21.60
Net Present Value of the project [(4) (5)] 497.33
428.93
(5) Present Value of Investment
382.13 313.73
21.60
21.60
21.60
360.53 292.13
223.73
Table 7: Net Present Value for 30 Tons per Month, Project Life-5 Years
NPV=
NPV =
ct
(1 r )
t 1
46
245.33
Graph 5: Net Present Value for 30 Tons per Month, Project Life-5 Years
Interpretations
NPV shows present value of the project. The project is accepted if its NPV
is positive and rejected if NPV is negative. Therefore, NPV of 30 Tns per month
or 360 per annum for project life of 5years is showing positive and viable is at a
price of Rs.900 where NPV is Rs.497.33 millions.
47

in Mns)
Operation Level
(Rs
30 Tns per month
900
850
800
750
700
10 years 10 years 10 years 10 years 10 years
(1) Project Life

6.17
(3) Net Income
6.17
6.17
6.17
136.56 118.56
100.56
(4) [(2) * (3)]
842.58
731.52
620.46 509.40
21.60
21.60
21.60
21.60
709.92
598.86
487.80
6.17
82.56 64.56
NPV=
NPV =
ct
(1 r )
t 1
48
398.34
21.60
376.74
Interpretations
or 360 Tns per annum for project life of 10years is showing positive and viable is
at a price of Rs.900 where NPV is Rs.820.98 millions.
49

in Mns)
Operation Level
(Rs
20 Tns per month
900
850
800
750
5 years 5 Years 5 Years 5years
700
(1) Project Life

(3) Net Income
3.8
3.8
3.8
3.8
86.76
74.76
62.76
50.76
5years
3.8
38.76

(4) [(2) * (3)]
329.69 284.09
21.60
Net Present Value of the project [(4) (5)]
238.49
21.60
21.60
308.09 262.49
216.89
NPV=
NPV =
ct
(1 r )
t 1
50
192.89
21.60
171.29
147.29
21.60
125.69
Interpretations
51

in Mns)
Operation Level
20 Tns per month
900
850
800
750
(Rs
700
(1) Project Life

6.17
6.17
86.76
74.76
535.31
461.27
387.23
313.19
239.15
21.60
21.60
21.60
21.60
21.60
439.67 365.63
291.59
(3) Net Income
6.17
6.17
62.76 50.76
6.17
38.76

(4) [(2) * (3)]
NPV=
NPV =
ct
(1 r )
t 1
52
217.55
Interpretations
53
IRR: Operation Level 30 TNS PER MONTH, Project Life 5
INTERNAL RATE OF RETURN FOR 5 YEARS
(Rs in
Mns)
Operation Level
30 Tns per month
900
850
800
750
700
Investment
-21.60
-21.6
-21.6
-21.6
-21.6
136.56
118.56
100.56 82.56
64.56
136.56
118.56
100.56 82.56
64.56
136.56
118.56
100.56 82.56
64.56
136.56
118.56
100.56 82.56
64.56
Net Income per annum for

5years
100.5
5
136.56
118.56
82.56
IRR
632%
549%
465%
382%
64.56
299%
Table 11: Internal Rate of Return for 30 Tons per Month, Project Life-5 years
IRR
= Investment =
t 1
54
ct
(1 r )
Graph 9: Internal Rate of Return for 30 Tons per Month, Project Life-5 years
The project is accepted if IRR is more than the minimum rate, which is 9%
for this project. Thus, the project at a sale price of Rs.900 is getting greater than
40%, which is more than the minimum rate of return of 9% at a quantity of 30 Tns
per month or 360 Tns per annum for project life of 5yearS
55
IRR: Operation Level 30 TNS PER MONTH, Project Life 10 Years
(Rs in
Mns)
Operation Level
30 Tns per month
900
850
800
750
700
Investment
-21.60
-21.6
-21.6
-21.6
-21.6
136.56
118.56
100.56
82.56
64.56
136.56
118.56
100.56
82.56
64.56
136.56
118.56
100.56
82.56
64.56
136.56
118.56
100.56
82.56
64.56
136.56
118.56
100.56
82.56
64.56
136.56
118.56
100.56
82.56
64.56
136.56
118.56
100.56
82.56
64.56
136.56
118.56
100.56
82.56
64.56
136.56
118.56
100.56
82.56
64.56
10
136.56
118.56
100.56
82.56
64.56
IRR
632%
549%
466%
382%
299%
Net Income
10years
per
annum
for
Table 12: Internal Rate of Return for 30 Tons per Month, Project Life-10 Years
IRR
= Investment =
t 1
56
ct
(1 r )
Graph 10: Internal Rate of Return for 30 Tons per Month, Project Life-10 Years
Interpretations
The project is accepted if IRR is more than the minimum rate which is 9%
40% which is more than the minimum rate of return of 9% at a quantity of 30 Tns
per month or 360 Tns per annum for project life of 10years.
57
(Rs in
Mns)
Operation Level
20 Tns per month
900
850
800
750
700
Investment
-21.6
-21.6
-21.6
-21.6
-21.6
86.76
74.76
62.76
50.76
38.76
86.76
74.76
62.76
50.76
38.76
86.76
74.76
62.76
50.76
38.76
86.76
74.76
62.76
50.76
38.76
86.76
74.76
62.76
50.76
38.76
IRR
402%
346%
290%
234%
178%
Net Income per annum for 5years
: Internal Rate of Return for 20 Tons per Month, Project Life-5 Years
IRR
= Investment =
ct
(1 r )
t 1
58
Interpretations
59
(Rs in
Mns)
Operation Level
20 Tns per month
900
850
800
750
700
Investment
-21.6
-21.6
-21.6
-21.6
-21.6
86.76
74.76
62.76
50.76
38.76
86.76
74.76
62.76
50.76
38.76
86.76
74.76
62.76
50.76
38.76
86.76
74.76
62.76
50.76
38.76
86.76
74.76
62.76
50.76
38.76
86.76
74.76
62.76
50.76
38.76
86.76
74.76
62.76
50.76
38.76
86.76
74.76
62.76
50.76
38.76
86.76
74.76
62.76
50.76
38.76
10
86.76
74.76
62.76
50.76
38.76
IRR
402%
346%
291%
235%
179%
Net Income
10years
per
annum
for
Table 13: Internal Rate of Return for 20 Tons per Month, Project Life-10 Years
IRR
= Investment =
ct
(1 r )
t 1
60
Interpretations
61
P. I: Operation Level 30 TNS PER MONTH, Project Life 5 Years
PROFITABILITY INDEX FOR 5 YEARS

(Rs in Mns)
Operation Level
30 Tns per month
900
850
800
750
700
(1) Project Life
5 years 5 years 5 years 5 years
5 years
(2) Present Value of factor @ 9%
3.8
3.8
3.8
(3) Net income
136.56 118.56
82.56
64.56
3.8
Present Value Net Income for Project Life 518.9

(4) [(2) * (3)]
3
450.53
(5)
21.6 21.6
Present Value of Investment
3.8
100.56
382.13
21.6
313.73 245.33
21.6
21.6
24.0
PI [(4)/ (5)]
20.86
17.69
14.52
Table 14: Profitability Index for 30 Tons per Month, Project Life-5 Years

PI =
62
11.36
Graph 13: Profitability Index for 30 Tons per Month, Project Life-5 Years
Interpretations
PI is 24.02, which is more than 1 and also NPV is positive hence the
project is more viable at a sale price of Rs.900 with respect to the quantity of 30
Tns per month or 360 per annum for a project life of 5years.
63

(Rs in Mns)
Operation Level
30 Tns per month
900
(1) Project Life
850
800
750
700
6.17
6.17
6.17
6.17
6.17
136.56
118.56
100.56
82.56
64.56
Present Value Net Income for Project

(4) Life [(2) * (3)]
842.58 731.52
620.46
509.40
398.34
(5)
21.6
21.6
(3) Net income

PI [(4)/ (5)]
21.6
21.6
39.01
33.87
28.72
23.58

PI =
64
21.6
18.44
Interpretations
PI is 39.01 which is more than 1 and also NPV is positive hence the
65

(Rs in Mns)
Operation Level
20 Tns per month
900
850
800
750
700
(1) Project Life
3.8
3.8
3.8
3.8
3.8
(3) Net income
86.76
74.76
62.76
50.76
38.76

(4) Life [(2) * (3)]
329.69
284.09
238.49
192.89
147.29
(5)
21.6
21.6
21.6
21.6
21.6
15.26
13.15
11.04
8.93
6.82

PI [(4)/ (5)]

PI =
66
Interpretations
67

(Rs in Mns)
Operation Level
20 Tns per month
900
850
800
750
700
(1) Project Life
6.17
6.17
6.17
6.17
6.17
(3) Net income
86.76
74.76
62.76
50.76
38.76

(4) Life [(2) * (3)]
535.31
461.27
387.23
313.19
239.15
(5)
21.6
21.6
21.6
21.6
21.6
24.78
21.36
17.93
14.50
11.07

PI [(4)/ (5)]

PI =
68
Interpretations
69
CHAPTER- 5
FINDINGS
&
CONCLUSIONS
70
SUMMARY
The Project Report is based on the Capital Budgeting DR. REDDYS

LABORATORIES LTD. The profile of the Company given briefly is collected
from the official website of the DR. REDDYS LABORATORIES LTD &
brochures and the introduction, literature review on topic Capital Budgeting is
text based. The Capital Budgeting procedure at DR.REDDYS is studied and the
same is applied with respect to the Pay back period, average rate of return, net
present value, profitability index and internal rate of return, calculated and
analyzed. Various tables and charts have been shown in order to compare the
increase or decrease of profitability of the project.
Capital Budgeting is an extremely important aspect of a firm's financial
management. Although capital assets usually comprise a smaller percentage of a
firm's total assets than do current assets, capital assets are long-term. Therefore, a
firm that makes a mistake in its capital budgeting process has to live with that
mistake for a long period of time.
71
FINDINGS
The following are the findings during the study of the project:
Average Rate of Return: As per the management, the minimum rate of
return expected is 20%. The project showing ARR greater than 20% is
accepted with respect to operation level 30 Tons or 20 Tons or 10 Tons per
month variation in sales price.
Pay Back Period: The project is accepted when Pay Back is less than 3
years which is standard payback period set by the management. The project,
which gives lesser payback period among difference in sales price and
quantity to be produced, is accepted and it is at price of Rs.900 whether the
quantities are 30 Tons or 20 Tons or 10 Tons.
Net Present Value: The net income of the project is discounted at the
minimum required rate of return 9% and NPV is positive for different sales
price and at different operational levels.
Internal Rate of Return: The capital invested is getting return of more
than 40%, which is greater than 9% (cost of capital).
Profitability Index: The project showing PI more than 1 and also where
NPV is positive is taken up.
As sales price rises, demand factor also needs to be taken into
consideration.
72
CONCLUSIONS
It is concluded that the project is viable and profitable as the ARR is
getting more than 20%.
The PBP indicates that investment is fully recovered in short period
depending upon sales price and quantity.
NPV of the project is considered as better because of its higher Net Present
Value.
The IRR of the project is giving more than 40% Rate of Return whatever
be the sales price and operational level.
The PI more than 1 and where project shows NPV as positive is given first
preference.
The company has to sell at lesser price for more quantity produced and sell
at higher price for less quantity produced.
73
CHAPTER-6
BIBLIOGRAPHY
74
BIBLIOGRAPHY
Books
R.P. Rustagi, (2005), Financial Management Theory, Concepts and Problems
(Incorporating the Emerging trends in Indian Capital Market) (Second
Revised Edition), Galgotia Publishing Company, New Delhi
Prasanna Chandra, (2006), Financial Management Theory and Practice (Sixth
Edition), Tata McGraw-Hill, New Delhi
I. M. Pandey, (2005), Financial Management (Ninth Edition), Vikas Publishing
House Private Ltd, New Delhi
V.K. Saxena & C.D Vashist, (2002), Cost and Management Accounting, Sultan
Chand & Sons, New Delhi
a. Web Sites
www.drreddys.com
www.wikipedia.org/wiki/capital_budgeting
www.studyfinance.com
www.netmba.com/finance/capital/budgeting
www.eximfm.com/training/capitalbudgeting.doc
www.investorwords.com
75
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Capital Budgeting

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Capital Budgeting

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CHAPTER -1

A Budget is a comprehensive plan of action which expressed in

The term capital budgeting refers to "long term planning for

"A budget is a financial and quantitative statement. Prepared and

ESSENTIAL FEATURES OF A BUDGET:

Budget serve has a "Blue print" of the desired plan of action.

Budget helps in reduction of wastage and losses by revealing them

communicates the policies and targets to the managers in the

Budget serves as the benchmark for the controlling ongoing

Budgeting facilitate centralized control with delegated authority and

Budgeting brings out the efficiency and improvement in the work of

The capital budgeting decisions are difficult to make

it involves the assessment of future events which are difficult to

SCOPE OF THE STUDY

Understanding the importance of capital budgeting in Dr. Reddys

Evaluating an investment proposal of setting up facility at Dr. Reddys

study may not be detailed and full fledged.

companys financial statements, the limitations of financial statements shall be

INVESTMENT SCREENING AND SELECTION :

THE CAPITAL BUDGET PROPOSAL :

A capital budgeting is proposed for the project surviving the

BUDGETING APPROVAL AND AUTHORIZATION:

Projects included in the capital budget are authorized,

After a project is approved, work on it begins. The manager

POST- COMPLETION AUDIT :

Following a period of time, perhaps two or three years after

TYPES OF CAPITAL BUDGETING DECISIONS:

RESEARCH AND DEVELOPMENT

TECHNIQUES OF CAPITAL BUDGETING:

Non-discounted cash flow criteria

Discounted cash flow criteria

Net present value

Accounting rate of return

Internal rate of return

Discounted payback period

Net terminal value

PAY BACK PERIOD:-

The payback period is one of the most popular and widely

Payback period = Initial Investment / Annual cash inflow

AVERAGE/Accounting Rate of Return:-

The Accounting rate of return (ARR) is known as average rate of

Discounted cash flow criteria:

(-) Tax (EAT)

Salvage --in Nth

(+) Recovary of --the W/C

NET PRESENT VALUE:-

The net present value (NPV) method is the classic economic

Net Present Value Decision Rule :

This means that

Internal rate of return:-

The second discounted cash flow or time adjusted method for

INTERNAL RATE OF RETURN DECISION RULE:

The internal rate of return of decision rule is to invest in a project if

This means that

Investment is expected Should be in difference

Profitability Index (PI):

PI = Present value of cash inflows / present value of cash outflows * 100

ACCEPTANCE OF THE PROJECT:

If the present value sum total of the compounded reinvested cash

This means that

The investment return Should

The investment return Should

The investment return In difference between

Net Terminal Value Method (NTV) it can be represented as