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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 investment of capital.
Capital Budgeting May also be defined as The decision making process by
which a firm evaluates the purchase of major fixed assets. It involves firms decision to
invest its current funds for addition, disposition, modification and replacement of fixed
assets.
It deals exclusively with investment proposals, which an essentially long term
projects and is concerned with the allocation of firms scarce financial resources among
the available market opportunities.
Some of the examples of Capital Expenditure are
(i)
(ii)
(iii)
Definitions:
Capital budgeting is long term planning for making and financing proposed
capital outlays
T.HORNGREEN
Capital budgeting is concerned with allocation of the firms scarce financial
resources among the available market opportunities. The consideration of investment
opportunities. The consideration of investment opportunities involves the comparison
of the expected future streams of earnings from a project with immediate and
subsequent streams of expenditures for it.
REVIEW OF LITERATURE
Introduction
One of the three major decisions made by managers is the decision to invest in
fixed assets. Investments in fixed assets involve large capital outlays and the
consequences of these investments decisions impact a firms operations for a very long
time. Therefore a variety of quantitative and analytical techniques are applied by
managers in project selection to enable them to make good decisions in this area.
2. Literature
It is widely accepted that discounted cash flow methods are the best way to
evaluate capital budgeting proposals. While several decades ago discounted cash flow
methods may not have been widely used (Istvan, 1961) more recent studies (Kim, Crick
and Kim, 1986) suggest that increasingly firms are adopting discounted cash flow
analysis. Much of the empirical research on capital budgeting practices adopted by
corporate managers is based on US data (See for example Mukherjee and Hingorani,
1999.) A few studies such as those by Payne, Heath, and Gale (1999), Jog and
Srivastava (1995) and Keste et. al (1999), examine capital budgeting practices followed
by firms in different countries such as Canada, Australia, Hong Kong, Indonesia,
Malaysia, Philippines and Singapore. This study examines managerial behavior and
preferences with respect to the capital budgeting decision using a sample of German
firms. Our unique sample and the results of our analysis help to fill a gap in finance
literature and provide useful information to managers contemplating German
collaborations.
Capital budgeting is the process by which firms determine how to invest their
capital. Included in this process are the decisions to invest in new projects, reassess the
amount of capital already invested in existing projects, allocate and ration capital across
divisions, and acquire other firms. In essence, the capital budgeting process defines the
set and size of a firms real assets, which in turn generate the cash flows that ultimately
determine its profitability, value, and viability.
3
Third, unsuccessful managers are less likely to retain their jobs and be
promoted. Those who succeed may become overconfident because of a self-attribution
bias. Most people overestimate the degree to which they are responsible for their own
success (Miller and Ross, 1975; Langer and Roth, 1975; Nisbett and Ross, 1980). This
self-attribution bias causes successful managers to become overconfident (Daniel,
Hirshleifer, and Subrahmanyam, 1998; Gervais and Odean, 2001).
Fourth, managers may be more overconfident than the general population
because of a selection bias. Those who are overconfident and optimistic about their
prospects as managers are more likely to apply for these jobs. Moreover, as Goel and
Takor (2008) show, firms may endogenously select and promote on the basis of
overconfidence, as overconfident individuals are more likely to have generated
extremely good outcomes in the past. Finally, as Gervais, Heaton, and Odean (2009)
argue, overconfident managers may simply be easier to motivate than their rational
counterparts and so hiring them is more appealing to firms.
All four stages have common areas of interest including personnel, procedures,
and methods involved, along with the rationale for each. All four stages are critical to
the overall process, but the selection stage is arguably the most involved since it
includes the choices of analytical methods/techniques used, how the cost of capital is
determined, how adjustments for projects risks are assessed and reflected, and how, if
relevant, capital rationing affects project choice. The selection stage has also been the
most investigated by survey researchers, particularly in the area of selection techniques,
resulting in a relative neglect of the other stages. This in turn has led to appeals to
future researchers to consider the other stages in their survey research efforts
1. Large investment:
Hence, it is very important for a firm to plan and control its capital
expenditure.
2. Long term commitment of funds:
Capital expenditure involves not only large amount of funds but also funds for
long-term or an 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 decision
for acquiring a permanent asset is taken, it becomes very difficult to dispose of these
assets without incurring heavy losses.
Capital budgeting decision has a long term and significant effect on the
profitability of a concern. Not only the present earnings of the firm are affected by the
investments in capital assets but also the future growth and profitability of the firm
depends up to the investment decision taken today. Capital budgeting decision has
utmost importance to avoid over or under investment in fixed assets.
5. Difficulties of investment decision:
6. Notional Importance:
10
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Capital budgeting decisions involve long term funds. The different long term
sources of finance generally followed by companies are:
1) Shares
2) Debentures
3) Term Loans.
SHARES:
Shares include ordinary or common shares and preference shares. Ordinary or
common shares are the source of permanent capital since they do not have a maturity
date. The holders of ordinary shares are share holders or stock holders are the legal
owners of the company.
Preference share is considered to be hybrid security as it has many features of
both ordinary shares and debentures. Preference shares may be issued with or without
maturity date. The holders of preference shares get dividend at a fixed rate and have
preference over ordinary share holders.
DEBENTURES:
Debentures are a long term promissory note for raising loan capital. The
debenture trust deed defines the legal relationship between the issuing company and the
debenture trustee who represent the debenture holders.
TERM LOANS:
Term loans for more than a year maturity. It is generally available for a period of
10 years. Interest on term loans is tax deductable. They are obtained from banks and
specially created financial institutions like IFCI, ICICI IDBI etc. the purpose of term
loans is mostly to finance the companys capital expenditure. They are generally
obtained for financing large expansion, modernization or diversification projects.
Hence, this method of financing is also called pro0ject financing. This is the most
widely used source of financing.
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LEASE FINANCING:
A lease 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 lessee. Two important categories of
lease are:
1) Operating leases
2) Financial leases
Operating leases are short term cancelable leases where the risk of obsolescence
is born by the lesser.
Financial leases are long tern non-cancellable leases where any risk in the use of
asset is borne by the lessee and he enjoys the return too.
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 both the lesser and lessee. Other advantages of leasing include convenience and
flexibility as well as specialized services to the lessee. Lease proves handy to those
firms to those firms which cannot obtain loan capital from 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.
CAPITAL BUDGETING PROCESS:
Capital budgeting is a complex process as it involves decisions relating to the
investment of current funds for the benefit to be achieved in future and the future is
always uncertain. However, the following procedure may be adopted in the process of
Capital Budgeting.
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The next step in the capital budgeting process is to various proposals. The
methods, which may be used for this purpose such as, payback period method, Rate of
return method, N.P.V and I.R.R etc.
Priorities:
Implementing Proposals:
Preparation of a capital expenditure budget and incorporation of a particular
proposal in the budget doesnt itself authorize to go ahead with the implementation of
the project. A request for authority to spend the amount should be made to the capital
expenditure committee, which reviews the profitability of the project in the changed
circumstances. Responsibilities should be assigned while implementing the project in
order to avoid unnecessary delays and cost overruns. Network techniques like PERT
and CPM can be applied to control and monitor the implementation of the projects.
Performance Review:
The last stage in the process of capital budgeting is the evaluation of the
performance of the project. The evaluation is made by comparing actual and budgeted
expenditures and also by comparing actual anticipated returns.
The unfavorable
variances, if any should be looked in to and the causes of the same be identified so that
corrective action may be taken in future.
KINDS OF CAPITAL BUDGETING DECISIONS
The overall objectives of capital budgeting are to maximize the
profitability of a firm or the return on investment. These objectives can be achieved
either by increasing revenues or by reducing costs. This, capital budgeting decisions
can be broadly classified into two categories. 1. Increase revenue, 2. Reduce costs
The first category of capital budgeting decisions is expected to increase revenue
of the firm through expansion of the production capacity or size of the firm by reducing
a new product line. The second category increases the earning of the firm by reducing
costs and includes decisions relating to replacement of obsolete, outmoded or worn out
assets. In such cases, a firm has to decide whether to continue the same asset or replace
it. The firm takes such a decision by evaluating the benefit from replacement of the
asset in the form or reduction in operating costs and the cost\ cash needed for
replacement of the asset. Both categories of above decision involve investments in
fixed assets but the basic difference between the two decisions are in the fact that
increasing revenue investment decisions are subject to more uncertainty as compared to
cost reducing investments decisions.
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option of buying a machine. Or a second hand machine, or taking on old machine hire
or selecting a machine out of more than one brand available in the market. In such a
cases the company can select one best alternative out of the various options by adopting
some suitable technique or method of capital budgeting. Once the alternative is selected
the others. Are automatically rejected.
Capital Rationing Decision:
A firm may have several profitable investment proposals but only limited funds
and, thus, the firm has to rate them. The firm selects the combination of proposals that
will yield the greatest profitability by ranking them in descending order of their
profitability.
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Traditional methods:
(I) Payback period method (P.B.P)
(II) Accounting Rate of return method (A.R.R)
17
The pay back sometimes called as payout or pay off period method represents
the period in which total investment in permanent assets pay back itself. This method
is based on the principle that every capital expenditure pays itself back within a certain
period out of the additional earnings generated from the capital assets.
Decision rule:
A project is accepted if its payback period is less than the period specific decision rule.
A project is accepted if its payback period is less than the period specified by the
management and vice-versa.
Initial Cash Outflow
Pay Back Period
=
Annual Cash Inflows
ADVANTAGES:
18
DISADVANTAGES:
It does not take into account the cash inflows earned after the payback period
and hence the true profitability of the project cannot be correctly assessed.
This method ignores the time value of the money and does not consider the
magnitude and timing of cash inflows.
It does not take into account the cost of capital, which is very important in
making sound investment decisions.
x 100
19
Net Investment
ADVANTAGES:
It uses the entire earnings of a project in calculating rate of return and hence
gives a true view of profitability.
DISADVANTAGES:
It does not take in to account the cash flows, which are more important than
the accounting profits.
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Accept the project if the NPV of the project is 0 or +ve that is present value
of cash inflows should be equal to or greater than the present value of cash outflows.
ADVANTAGES:
It takes in to account the earnings over the entire life of the project and gives
the true view of the profitability of the investment
DISADVANTAGES:
It may not give good results while comparing projects with unequal
investment of funds.
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4.
PROFITABILITY INDEX
METHOD
OR
as a project having some what lesser NPV achieved in a much shorter span of
life of the asset.
5. INTERNAL RATE OF RETURN METHOD
The internal rate of return method is also a modern technique of capital
budgeting that takes in to account the time value of money. It is also known as timeadjusted rate of return or trial and error yield method. Under this method the cash
flows of a project are discounted at a suitable rate by hit and trial method, which
equates the net present value so calculated to the amount of the investment. The internal
rate of return can be defined as that rate of discount at which the present value of cash
inflows is equal to the present value of cash outflows.
Decision Rule:
Accept the proposal having the higher rate of return and vice versa.
If IRR>K, accept project.
K = cost of capital.
If IRR<K, reject project.
DETERMINANTION OF IRR
a) When annual cash flows are equal over the life of the asset.
Initial Outlay
FACTOR =
x 100
Annual Cash Inflow
b) When the annual cash flows are unequal over the life of the asset:
PV of cash inflows at lower rate - PV of cash outflows
IRR = LR +
x (Hr-Lr)
PV of cash inflows at lower rate-PV of cash inflows at higher rate
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26
27
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RESEARCH METHODOLOGY
SOURCES OF DATA:
To achieve a fore said objective the following methodology has been adopted.
The information for this report has been collected through the primary and secondary
sources.
Primary sources:
It is also called as first handed information the data is collected through the
observation in the organization and interviews with officials. By asking, questions with
the accounts and other persons in the financial department. A part from these some
information is collected through the seminars, which were held by ANANTHA PVC
PIPES PVT LTD.
Secondary sources:
These secondary data is existing data which is collected data which is collected
by others that is sources are financial journals, annual reports of the ANANTHA PVC
PIPES PVT LTD.,
Research Design:
Research design
Analytical tools-
Analytical
-
Data Sources
Period of study
2007 to 2011
INDUSTRY PROFILE
Introduction:
Plastic have become synonymous with modern living. It is undoubtedly a
product, which has penetrated extensively into the common mans life. No wonder the
industry has achieved in terms of supply of raw material expansion and diversification
of processing capabilities and manufacturing of processing machinery and equipment.
This versatile material with its superior qualities such as light weight, easy
process ability corrosion resistance, energy conservation, no toxicity etc. many
substitute to a large extent many conventional and costly industrial materials like wood,
metal, glass, jute, lather etc., in the future. The manifold applications of plastics in the
field of automobiles, electronics, electrical, packaging and agriculture give enough
evidence of the immense utility of plastics.
At 80 percent of total requirement for raw material and almost all types of
plastic machines required for the industry are indigenously available. The present
investment in all the three segments of the industry namely production of raw materials,
expansion and diversification of processing capacities, manufacturing of processing
machinery and ancillary equipment is Rs.1250 crores and it provides employment to
more than eight lakh people.
On account of their inherent advantage in properties and versatility in adoption
and use, plastics have come to play a vital role in a variety of applications, the world
over. In our country, plastics are used in making essential consumer goods of daily use
for common man such as baskets, shopping bags, water bags, water bottles, school
bags, tiffen boxes, hair combs, tooth brushes, spectacle frames and fountain pens, they
also find applications in field like packaging, automobiles, and transportation,
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average basis and charge freight rate on plastic products on weights basis instead of
volume basis.
Prospects:
The Production of various plastics a raw materials in the country is expected to
double by the end of seventh plan, the consumption of commodity plastics including
LDPE, HDPE, PP, PS AND PVC is immense scope for the use of plastics in
agriculture, electronics, automobile, telecommunications and irrigation and thus, the
plastic industry is on the threshold of an explosive growth.
Role of plastics in national economy
Plastics are got perceived as just simple colorful household products in the mind so
common person. A dominant part of the plastics of the percent and future find their
utilization in the areas.
Agriculture, forestry and water-management.
Automobile and transportation
Electronics and telecommunications, buildings, construction and.
Food processing and packaging
Power and gas distributor.
Importance of Pipes Industry
We shall look at the basic data about plastics and particularly those properties,
which are so, fuse in practical working with plastics. Plastics are man-made materials.
The oldest raw material for producing plastics is carbonaceous material obtained from
coal tar (benzene, phenol).
Today the majority of raw materials are obtained from petrol chemical source
and they can be economically produced in large quantities.
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Plastics have changed our world and day-by-day they are becoming important.
They own their success to whole series of advantage, which they have over
conventional materials such as:
Lightweight
Excellent mould ability
Attractive colors
Low energy requirements for convention
Low labor and cost of manufacture
Low maintenance & High strength weight ratio
Economic role:
Agriculture is the chief occupation in India. For the developing countries like
India modernization of the agriculture practices assumes pivotal places in improving
the economic status and the process of modernization. Includes, usage of higher
productive plastics supplement to greater extent manufacturing of tools required for
new agricultural practices.
The usage of poly vinyl chloride pipes in agricultural fields, lesser water
seepage, which was predominant in earlier practices, with services of P.V.C pipes, water
can be transported efficiently with lesser from the place of higher potential to the place
of lower water potential.
Presently the revolutionary tried in water management speaks much about drip
irrigation, which is developed in Israel and is practiced by all agricultural based nations
in the world. Drip irrigation greatly P.V.C pipes as core tools of implementation with
the services of this sort, P.V.C pipes one way or the other strengthening the hands of
countrys economy.
A part with the referred P.V.C pipes supplemented with fitting is used in houses
for electrical connection and other domestic purposes. Apart from these two
applications it has got wide applications even in industrial sectors. P.V.C pipes with
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much unique heart, chemical and physical characteristics serve many industrial
purposes.
Even characteristics of weight and low price attract many more applications.
Rigid PVC pipes have been manufactured in India from the 60s on imported extrusion
lines and there after indigenous plan were few pipes manufactures up to 1979-83. When
many extrusion lines were imported from batten field, Cincinnati, kraaus-maffi etc. the
Govt. allowed the imports of sophisticated and high output plants, which were not
available indigenously.
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irrigation. Now-a-days PVC pipes replaced the conventional pipes and they constituted
almost 90% in this respect.
35
COMPANY PROFILE
Introduction:
A dynamic entrepreneur Sri S P Y Reddy was established a black pipes
manufacturing company in 1977 and the name of the company is Nandi Pipes Pvt Ltd
at Nandyal, Kurnool district. Anita PVC Pipes Pvt Ltd was incorporated in the year
2002. The factory is situated at NH-7, Hampapuram village, Raptadu mandal, and
Anantapur district and it was taken over by Nandi Group Company. The company is
managed by team of professionals under the guidance of young, experienced, and well
qualified dynamic managing director Mr. S. Sreedhar Reddy.
Origin:
Rayalaseema is economically backward area in Andhra Pradesh, was rare field
region for industries. A dynamic entrepreneur sir S.P.Y.Reddy who is basically
mechanical engineer started a unit at Nandyal, which manufactures black pipes in 1977.
The determination and hard work of Sri S.P.Y.Reddy helped him to overcome the
problems faced by the company in the initial years, and with financial assistance from
local commercial banks. The company could overcome the problems of the merger and
now it is running smoothly.
Later the company started manufacturing of PVC pipes which terminated the
manufacturing of black pipes. This resulted in the formation of a Pvt. Ltd. company
called SUJALA PIPES PVT.LTD. with Sri S.P.Y.Reddy as the Managing Director.
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The only major competitors to the company are Sudhakar pipes, Maharaja
Pipes. The only backdrop to it is the competition from local brands. As the majority of
the customers belong to farmers, they consider the quality. The company has to make
aware of the companys quality standards to them.
Board of directors:
S.P.Y.Reddy:
Sri S.P.Y.Reddy locally well known industrialist with the base at Nandyal, Kurnool
district who has been successful entrepreneur, he is technically qualified person with
B.E (MEC) from R.E.C (Warangal) and with work experience at BAARC (Bombay).
He has daringly ventured and established industries in and around Nandyal from 70s.
As years went of he has established most successfully the following Nandi group of
companies:
Nandi Milk
Nandi Infosys
Promoter:
Sri S Sreedhar Reddy, a computer engineer and a student of IIM, Ahemadabad
has been entrusted the management of ANANTHA PVC PIPES PVT LTD.,
Hampapuram and great assistance and a great upcoming engineer and industrialist.
Branches:
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Pondicherry
Bellary
Sangli
Vellore
Goa
Kerala
Coverage:
At present Andhra Pradesh, parts of southern states of Karnataka, Tamilnadu
and Kerala are ambit of Sujala Pipes Pvt Ltd.
The company extended their sales in the below regions are shown below:
1979
1984.85
1985.86
Telangana Region
1986.87
1988.91
1991.94
Kerala
Sizes:
Various sizes ranging from to 10 are offered to customers. Even pipes with
different gauges and sizes are manufactured to suit specified conditions.
Packing:
Packing plays less important role into the products like PVC pipes because the
hallow space inside can be utilized. For, the purpose of cubic space utilization in trucks
while transport, organization is adopting the technique like pipes in pipes.
Payment period:
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For monarch brand the company adopts zero credit policy and goods are not
delivered unless cash remittances are made. For monarch and sagar brands credit is
entitled up to a week. The difference between these brands is due to brand image.
The required length of the pipe is cut with a planetary saw. The cut lengths are
titled by titling units and get corrected in the pipe rack attached to the titling frames.
Later they are stocked separately. The company has entered into a technical with its
own processing technology.
Channels of distribution:
ANANTHA PVC PIPES PVT LTD. has got zero level and single level channel
of distribution.
MANUFACTURER
MANUFACTURER
CONSUMER
DEALER
CONSUMER
ANANTHA PVC PIPES PVT LTD. has an extensive network of 350 dealers in
Andhra Pradesh and who are directly serviced by company sales force and 620 dealers
in South India.
Transportation:
Transportation vehicles of ANANTHA PVC PIPES PVT LTD. outnumber the
fleet of the competitors vehicle. This unique strength of the organization enables the
delivery system to be efficient. This event helps the dealers to reduce inventory levels
to the minimum. The dealers are also supplemented with the benefit of the lower paid
up capital in the form of inventory.
ANANTHA PVC PIPES PVT LTD:
ANANTHA PVC PIPES PVT LTD. was incorporated in the year Feb 2002. The
factory is situated at NH-7, Hampapuram village, Raptadu mandal, and Anantapur
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district. It was taken over by Nandi group company, and it is one of the sister company
among the Nandi groups.
Its annual production capacity is 18,000 mts. And it is one of the leading
manufacturers of PVC pipes in south India. This company is equipped with technical
collaboration from Batten field of West Germany. It has made possible few other small
ventures. Pipes are sold under the brand names of MONARCH, KOHINOOR and
KRISHNA.
ANANTHA PVC PIPES with their good quality, trouble free services, durability
and commercial use are a better choice than mild steel, galvanized steel, cast iron and
plastic pipes.
The company is managed by a term of professionals under the guidance of a
young, experienced and well qualified dynamic managing director Mr. Sreedhar Reddy.
Mission Statement:
The mission statement of ANANTHA PVC PIPES PVT LTD. is as follows:
To create new values in the quality for our customers and employees.
Vision Statement:
The vision statement of ANANTHA PVC PIPES PVT LTD. is as follows:
Creating new values in quality by working together for you
Functional departments of the company:
Financial department:
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Through initially the company approached the external source for financial aid,
now the financial status of the company is very sound and is being run only with self
finance excepting for loans taken for hypothecation of machinery and stock from SBI
Nandyal.
The company follows cash and carry policy for monarch brand. The product is
not delivered until the cash is paid and financial department with the help of marketing
department looks after these transactions.
Marketing department:
Marketing Department is headed by the Executive Director. Marketing Manager
is in charge of all operations who reports to the Executive Director. Marketing Manager
and 35 Sales Representatives are under the control of Executive Director. There are also
20 salesmen who have to report to the sales representatives above them.
Personal Department:
The Personal department consists the details of the executives and workers of
the organization. The organization is formed with Sri.S.P.Y.Reddy as the managing
Director. Two Marketing managers, financial managers, public relations officer and
quality control officer who all reports to executive director. Other, than executives there
are thousands workers in the organization.
Panel consisting of managing director, executive director and managers of
concerned departments makes the recruitment and selections of persons. Apart from the
attractive salaries company provides health card facilities.
Purchasing department:
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The perplexing situation i.e. conformed by the manufactures of the PVC pipes is
scarcity of resin. Though the government of India has taken various steps to improve
the supply conditions of PVC resin, the Indian manufactures could meet only 50
percent of demand and remaining 50 percent is met from imports. The major
petrochemical company is Reliance Petrochemical Ltd. The lead time for the
acquisition of raw materials is 4 days.
The following lines highlight the human resources policies and practices:
Effective utilization of manpower.
To provide good working condition.
To promote industrial development.
Application of PVC pipes:
Air-condition ducting.
Building installations.
Industrial ducting.
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PRODUCT PROFILE
Pipe hollow structure usually cylindrical, for conducting materials. It is used
primarily to convey liquids, gases or solid suspended in a liquid for e.g. slurry and also
used for electric wires. The earliest pipes were probably made of bamboo. Used by the
Chinese to carry water c.5000 BC. The Egyptians made the first metal pipe of copper
c.3000 BC until the cost iron became relatively, Copper or bronze. Modern materials
include cast iron weight iron, steel, copper, brass, bead, concrete, wood, and glass,
plastic. In lying an oil pipeline, 40ft (12-m) sections of seamless steel pipe are
electrically welded together while held over a trench. Before being lowered into place
the pipe is coated with a protective paint and wrapped with a substance composed of
treated asbestos felt and fiberglass.
Pumping section located 50 to 75 ml (80-120km). A part boosts the dwindling
pressure backup as much as 1500lb per inch. The piping must be kept clean either by
applying a negative electronic charge to the pipe or by regular use of a pig, or
scrubbing ball, inserted at one end and carried along by the current. An oil pipe line 6
inches (15 cm) to 24 inches (60 cm) in diameter will move it contents at about 3 to 6 ml
(5-10) per hr. Water has moved since ancient times in pipelines called aqueducts.
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All these methods of capital budgeting techniques are explained in detail below
Initial Investment 2,00,00,000 Rs. Tax percentage 25% (such as 10%) and the
depreciation the company will be provided in the Balance Sheet. these are all the based
to calculate the Profit after Tax and cash flows.
3.
Cumulative
2007
374540
2432956
tax
2807496
cash flows
2807496
2008
3049546
2167152
5216698
8024195
2009
4380048
2437146
6817194
14841389
2010
5300374
3102096
8402470
23243860
2011
7567635
5611603
13179238
36423098
Year
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Inference:
From the point of Pay Back Period the project can be accepted, because to get
the initial investment of Rs. 2, 00, 00,000, it is taking a time of 3 years 2months 20
days.
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X 100
Book Value of the Investment
Tax25% (include
Year
2007
10%surcharge
483278
108737
49
374540
The
2008
2009
2010
2011
3934898
5651675
6839192
9829346
885352
1271626
1538818
2261711
3049546
4380048
5300374
7567635
Calculation of A.R.R:
Total Net Profit after Tax
Average Net Profit after Tax =
Number of years
2,06,72,143
=
41,34,428.6
5
Initial Investment
Book Value of Investment =
2
2,00,00,000
=
= 1,00,00,000
2
41,34,428.6
X 100
1, 00, 00,000
= 41.34%
50
Inferences:
From the point of ARR method, project should be accepted, the initial
investment we can get with in less time.
cash flow 1
cash flow n
51
cash flow t
- C0
PROFIT
AFTER
PRESENT
AFTER
TAX
VALUE
YEARS
TAX
DEPRICIATION
2007
374540.91
2432956
NPV @5%
2807496.91 0.9523809523
52
CASH FLOW
2673806
2008
3049546.32
2167152
5216698.32 0.9070294784
4731699
2009
4380048.12
2437146
6817194.12 0.8638375985
5889075
2010
5300374.35
3102096
8402470.35 0.8227024747
6912768
2011
7567635
5611603
13179238
10326277
0.783526165
Total
30533625
2, 00, 00,000
= 1,05,33,625 Rs.
Inferences:
53
Profitability Index:
It is also called as Benefit Cost Ratio. It is also a time-adjusted method of
evaluating the investing proposals. It is the relationship between present value of cash
inflows and the present value of cash outflows. Thus
Present Value of cash inflows
Profitability Index =
Initial Investment of or cash out flows
SHOWING CALCULATION OF PROBILITTY INDEX
54
Profit
after
Present Value
Years
Tax
Depreciation
After Tax
NPV @5%
Cash flow
2007
374540.91
2432956
2807496.91
0.9523809523
2673806.58
2008
2009
2010
2011
3049546.32
4380048.12
5300374.35
7567635
2167152
2437146
3102096
5611603
5216698.32
6817194.12
8402470.35
13179238
0.9070294784
0.8638375985
0.8227024747
0.783526165
4731699.15
5889075.77
6912768.69
10326277
Total
(In Rupees)
30533625
= 3,05,33,625
3,05,33,625
Profitability Index
=
2, 00, 00,000
= 1.5266
55
Inferences:
IRR = LR+
(Hr - Lr)
Hr=
ACCEPTANCE RULE
The accept project rule, using the IRR method, is to accept the project if its internal
rate of return is higher than the opportunity cost of capital (r>k) note that k is also
known as the required rate of return or cut-off rate. The project shall be rejected if its
internal rate of return is lower than the opportunity cost of capital. Thus the IRR
acceptance rules are:
Accept if r>k
Reject if r<k
May accept if r=k
SHOWING THE CALCULATIONS OF INTERNAL RATE OF RETURN
(In Rupees)
57
PROFIT
CASH
PRESENT
PRESENT
FLOW
VALUE
VALUE
CASH
NPV
CASH
AFTER
DEPRI-
AFTER
YEARS
TAX
CIATION
TAX
NPV @10%
FLOW
@20%
FLOW
2007
374540.91
2432956
2807496.91
0.9090909
2552269
0.83333
2339580
2008
3049546.38
2167152
5216698.32
0.8264462
4311320
0.69444
3622706
2009
4380048.64
2437146
6817194.12
0.7513447
5121858
0.57870
3945135
2010
5300374.35
3102096
8402470.35
0.6830134
5739000
0.48422
4052117
2011
7567635
5611603
13179238
0.6209213
8183270
0.40187 5296440
Total
25907717
Total
LR+
x Rate Difference
Present value @ L R Present value @ H R
59,07,717
=
10% +
x 10
66,51,739
=
=
10% + 0.889 x 10
18.89%
58
19255978
Inferences:
Therefore, IRR lies at 18.89%. It is a point where outflow = inflow
And IRR>K, Therefore it is accepted.
FINDINGS
59
The company had taken longer period i.e., payback period is 3 years 2 months
20 days to recover its initial investment.
The average rate of return is not good i.e., ARR = 41.34% as it was just to
compensate the marginal profits.
The net present value of ANANTHA PVC PIPES PVT. Ltd is satisfactory as
NPV = 3,05,33,625.
The internal rate of return i.e., IRR= 18.89% is fairly good.
The profitability index is fairly good is it was gradually increasing in each year
as shown graphically.
The unit cost and other expenditures are eligible to claim from the potential
buyer as approved by the Regulatory Commission
SUGGESTIONS
60
CONCLUSION
61
Under the light of inferences drawn from the analysis the company has to
concentrate on Pay Back Period and NPV for acceptance of the project. The
discounting methods are most preferable as the rate of returns is depending on the
present values. All the techniques which was used for the project resulted positively
expect on Pay Back Period. Finally it is concluded that firm can generate huge profits
by investing in more projects diversifying its operations.
BIBLOGRAPHY
62
1. M. PANDEY: Financial Management: vikas publishing house pvt ltd, 9th edition.
2. PRASANNA CHANDRA: Financial Management: Tata McGraw-Hill, 7th edition.
3. I.M. PANDEY: Financial Management: Tata McGraw-Hill, 4th edition.
WEBSITES
www.google.co.in
www.nandi pipes.com
63