A PROJECT ON

"CAPITAL BUDGETING"

Submitted To

University Of Mumbai for Partial Completion of Degree

Of

Bachelor of Commerce (Accounting and Finance)

Semester VI 2018-19

Submitted By:

Mr. OMKAR RANGNATH GAIKWAD

Roll No. 512

Under the Guidance of

Professor: VAISHALI BEHERE

Uttari Bharat Sabha’s

RAMANAND ARYA D.A.V. COLLEGE

DATAR COLONY BHANDUP (E), MUMBAI- 400042.

March, 2018-19

1
 A PROJECT ON

"CAPITAL BUDGETING"

Submitted To

University Of Mumbai for Partial Completion of Degree

Of

Bachelor of Commerce (Accounting and Finance)

Semester VI 2018-19

Submitted By:

Mr. OMKAR RANGNATH GAIKWAD

Roll No. 512

Under the Guidance of

Professor: VAISHALI BEHERE

Uttari Bharat Sabha’s

RAMANAND ARYA D.A.V. COLLEGE

DATAR COLONY BHANDUP (E), MUMBAI- 400042.

2
 March, 2018-19

Uttari Bharat Sabha’s

RAMANAND ARYA D.A.V. COLLEGE

DATAR COLONY BHANDUP (E), MUMBAI- 400042.

2018-19

CERTIFICATE

This is to certify that Mr. OMKAR RANGNATH GAIKWAD, Roll No.512 have
worked and duly completed his project work for the degree of Bachelor of Commerce
(Accounting & Finance) under the faculty of commerce in the subject of management
and his project is entitled, “CAPITAL BUDGETING" under the supervision. I
further certify that the entire work has been done by the learner under my guidance
and that no part of it has been submitted previously for any degree of diploma of any
University.

It is his own work and facts reported by his personal findings and investigation.

Date -____________

Course Co-coordinator Principal

Mrs. Chandrakala Srivastava Dr. Ajay Bhamare

Project Guide / Internal Examiner External Examiner

3
4
 Declaration by Learner

I the undersigned Mr. OMKAR RANGNATH GAIKWAD here by, declare that the
work embodied in this project work titled “CAPITAL BUDGETING”, forms my
own contribution to the research work carried out under the guidance of Prof.Vaishali
Behere is a result of my own research work and as not been previously submitted to
any other University for any other Degree / Diploma to this or any other University.

Wherever reference has been made to previous work of others, it has been clearly
indicated as such and included in the bibliography.

I, here by further declare that all information of this document has been obtained and
presented in accordance with academic rules and ethical conduct.

Name &Signature of the learner

OMKAR RANGNATH GAIKWAD

_________________________

Certified By

Name & Signature of the Guiding Professor

PROF.VAISHALI BEHERE

_________________

Acknowledgement

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To list who all have helped me is difficult because they are so numerous and the depth
is so enormous.

I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to do
this project.

I would like to thank my Principal, Mr. Ajay M Bhamre for providing the necessary
facilities required for completion of this project.

I take this opportunity to thank our Coordinator Mrs. Chandrakala Shrivastava for her
moral support and guidance.

I would also like to express my sincere gratitude towards my project guide Mr/Mrs.
________________ whose guidance and care made the project successful.

I would like to thank College Library, for having provided various reference books
and magazines related to my project.

Lastly, I would like to thank each and every person who directly and indirectly helped
me in the completion of the project especially my parents and peers who supported
me throughout my project.

CONTENTS

6
Chapter Title Page No.
No.
PROJECT REPORT

DECLARATION 4

ACKNOWLEDGEMENT 5

1. INTRODUCTION 8

1.1 Introduction of the Topic 8

1.2 Definitions 9

1.3 Purpose Of Capital Budgeting 10

1.4 Process of Capital Budgeting 11

1.5 Types of Capital Investment Decisions 12 to 14

1.6 Importance of Capital Budgeting 14

1.7 Factors influencing capital budgeting 15 to 17

1.8 Structure Of The Capital Budgeting 18 to 19

1.9 Need for the Study 20

2. PROFILE OF THE INDUSTRY 20 to 23

2.1 Profile Of The Company 24

2.2 Plants Setup 25 to 28

2.3 Awards And Achievements Of The Company 28 to 31

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 2.4 Long Term Capital Budgeting In KESORAM 32 to 33

3. RESEARCH METHODOLOGY 34

3.1 Objectives Of The Project 35 to 36

3.2 Scope Of The Study 37 to 38

3.3 Limitations Of The Study 39

3.4 Types or Techniques of Capital Budgeting 40 to 55

4. REVIEW OF LITERATURE 56 to 57

5. DATA ANALYSIS AND INTERPRETATION 58 to 72

6. FINDINGS AND CONCLUSION 73

7. RECOMMENDATIONS AND SUGGESTIONS 74 to 75

8. BIBLIOGRAPHY 76

CHAPTER 1

1. INTRODUCTION

1.1 Introduction of the Topic

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 . Capital budgeting, and Investment appraisal, is the planning process used
to determine whether an organization's long term Investments such as new
machinery, replacement of machinery, new plants, new products, and research
development projects are worth the funding of cash through the firm's capitalization
structure (Debt, Equity or Retained Earnings).

Capital Budgeting is investment decision making as to whether a project is worth

undertaking. Capital Budgeting is basically concerned with the justification of capital
expenditures. Current expenditures are short-term and are completely written off in
the same year the expenses occur.

It involves firm's decision to invest it current funds for addition, disposition,

modification and replacement of long-term or fixed assets. However, it should be
noted that investment in current assets necessitated on account of investment in a
fixed assets is as to be taken as a capital budgeting decision.

An efficient allocation of capital is the most important finance function in

modern times. It involves decisions to commit firm’s funds to long-term assets. Such
decisions are tend to determine the value of company/firm by influencing its growth,
profitability & risk.

Investment decisions are generally known as capital budgeting or capital

expenditure decisions. It is clever decisions to invest current in long term assets
expecting long-term benefits firm’s investment decisions would generally include
expansion, acquisition, modernization and replacement of long-term assets.

Such decisions can be investment decisions, financing decisions or operating

decisions. Investment decisions deal with investment of organization’s resources in
Long tern (fixed) Assets and / or Short term (Current) Assets. Decisions pertaining to
investment in Short term Assets fall under “Working Capital Management”. Decisions
pertaining to investment in Long term Assets are classified as “Capital Budgeting”
decisions.

1.2Definitions:-

1. “The term capital budgeting generally refers to acquiring inputs with long run
returns.”
- Richards & Greenlaw
9
2. “Capital budgeting is long-term planning for making and financing proposed
capital outlay.”
- Chaeles T. Horngreen

3. “Capita Budgeting is concerned with planning and development of available

capital for the purpose of maximizing the long term profitability of the concern.”

- Lynch

4. “Capital Budgeting involves the entire process of planning expenditures

whose returns are expected to extend beyond one year.”

- Westone and Brigham

1.3 Purpose of Capital Budgeting

The capital budgeting decisions are important, crucial and critical business decisions
due to following reasons:-

a) Substantial Expenditure: - Investment decision are related with fulfillment of

long term objectives and existence of an organization. To invest in project or
projects, a substantial capital investment is required. Based on size of capital and

10
 timing of cash flow, sources of finance are selected. Due to huge capital
investment and associated cost, it is therefore necessary for an entity to make a
decisions after a thorough study and planning.

b) Long Time Period: - The capital budgeting decision has its effect over long
period of time. This decision not only affects the future benefits and costs of the
firm but also influence the rate and direction of growth of the firm.

c) Irreversibility: - Most of the investment decision is irreversible. Once the

decision implemented it is very difficult and reasonably and economically not
possible to reverse the decision. The reason may be upfront payment of amount,
contractual obligations, technological impossibilities etc.

d) Complex Decision: - The capital investment decision involves an assessment of

future event, which in fact is difficult to predict. Further it is quite difficult to
estimate in quantitative terms all the benefits or the costs relating to a particular
investment decision.

1.4 Process of Capital Budgeting

The extent to which the capital budgeting process needs to be formalized and
systematic procedures established depends upon the size of organization; number
projects to be considered; direct financial benefits of each project considered by itself;
the composition of the firm's existing assets and management’s desire to change that
composition; timing of expenditure associated with the projects that are finally accept

1) Planning: - The capital budgeting process begins with the identification of

potential investment opportunities. The opportunity then enters the planning

11
 phase when the potential effect of the firm’s fortune is assessed and the ability
of the management of the firm to exploit the opportunity is determined.
Opportunities having little merit are rejected and promising opportunities are
Advance in the form of a proposal to enter the evaluation phase.

2) Evaluation: - This phase involves the determination of proposal and it’s

investment, inflow and outflow. Investment appraisal techniques, ranging from
the simple payback method and accounting rate of return to the more
sophisticated discounted cash flow techniques, are used to appraise the
proposals. The techniques selected should be the one that enables the
managers to make the best decision in the light of prevailing circumstances.

3) Selection: - Considering the returns and risks associated with the individual’s
projects as well as the cost of capital to the organization, the organization will
choose among the projects so as to maximize shareholders wealth.

4) Implementation: - When the final selection has been made, the firm must
acquire the necessary funds, purchase the assets, and begin the implementation
of the project.

5) Control: - The progress of the project is monitored with the aid of feedback
reports. These reports will include capital expenditure progress reports,
performance reports comparing actual perform against the plans set and post
completion audits.

6) Review: - when a projects terminates, or even before, the organization should

reviews the entire project to explain its success or failure. This phase may
have implication for firms planning and evaluation procedures. Further the
review may produce ideas for new proposals to be undertaken in the future.

1.5 Types of Capital Investment Decisions

There are many ways to classify the capital budgeting decision. Generally capital
investment decisions are classified in two ways. One way is to classify on the basis of
firm's existence. Anotherway to classify them on the basis of decision situation.

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1.5.1On The Basis of Firm’s Existence

The capital budgeting decisions are taken by both newly incorporated firms as well as
by existing firms. The new firms may be required to take decisions in respect of
selection of a plant to be installed. The existing firm may be required to take decisions
to meet requirement of new environment or to face the challenges of competition.
These decisions may be classified as follows:

I. Replacement and Modernization Decisions: - The replacement and

modernization decisions aim at to improve operating efficiency and to reduce
cost. Generally, all types of plant and machinery require replacement either
because of the economic life of the plant or machinery is over or because it
has become technologically outdated. The former decision is known as
replacement decisions and latter is known as modernization decisions. Both
replacement and modernization decisions are called cost reduction decisions.

13
 II. Expansion Decisions: - Existing successful firms may experience growth in
demand of their product line. If such firms experience shortage or delay in the
delivery of their products due to inadequate production facilities, they may
consider proposal to add capacity to existing product line.

III. Diversification Decisions: - These decisions require evaluation of proposals

to diversify into new product lines, new markets etc. for reducing the risk of
failure by dealing in different products or by operating in several markets.
Both expansion and diversification decisions are called revenue expansion
decisions.

1.5.2 On The Basis of Decision Situation

The capital budgeting decisions on the basis of decision situation are classified as
follows:

I. Mutually Exclusive Decisions: - The decisions are said to be mutually

exclusive if two or more alternative proposals are such that the acceptance of
one proposal will exclude the acceptance of the other alternative proposals.
For instance, a firm may be considering proposal to install a semi-automatic or
highly automatic machine. If the firm installs a semi-automatic machine it
excludes the acceptance of proposal to install highly automatic machine.

II. Accept-Reject Decisions: - The accept-reject decisions occur when proposals

are independent and do not compete with each other. The firm may accept or
reject a proposal on the basis of a minimum return on the required investment.
All those proposals which give a higher return than certain desired rate of
return are accepted and the rest are rejected.

III. Contingent Decisions: - The contingent decisions are dependable proposals.

The investment in one proposal requires investment in one or more other
proposals. For example, if a company accepts a proposal to set up a factory in

14
 remote area it may have to invest in infrastructure also e.g. building of roads,
houses for employees etc.

1.6 Importance of Capital Budgeting

 Capital budgeting offers effective control on cost of capital expenditure

projects.

 It helps the management to avoid over investment and under the success and
failure of business mainly depends on how the available resources are being
utilized.

 Main tool of financial management

 All types of capital budgeting decisions are exposed to risk and uncertainty.

 They are irreversible in nature.

 Capital rationing gives sufficient scope for the financial manager to evaluate
different proposals and only viable project must be taken up for investments.

1.7 Factors influencing capital budgeting

The following are the factors which are highly influencing Capital Expenditure
decisions.

Factors influencing capital expenditure decisions

1. Availability of Funds
All the projects are not requiring the same level of investments. Some projects require
huge amount and having high profitability. If the company does not have adequate
funds, such projects may be given up.

2. Minimum Rate of Return on Investment

Every management expects a minimum rate of return or cut-off rate on capital
investment. It refers to the point of below which a project would not be accepted.

15
3. Future Earnings
The future earnings may be uniform or fluctuating. Even though, the company expects
guaranteed future earnings in total which affects the choice of a project.

4. Quantum of Profit Expected

It is necessary to assess the quantum of profit expected on implementation of selected
project. Here, the term profit refers to realized amount of projects as per the
accounting records.

5. Cash Inflows
The term cash inflows refers to profit after tax but before depreciation. The reason is
that recording of depreciation is a book entry and there is no actual cash outflow.
Hence, depreciation amount is included in the cash inflow.

6. Legal Compulsions
The management should consider the legal provisions while-selecting a project. In the
case of leather and chemical industries, there are number of legal provisions created to
protect environment pollution. Now, the management gives much importance to legal
provisions rather than cost and profit.

7. Ranking of the Capital Investment Proposal

Sometimes, a company has two or more profitable projects in hand. If there is only
one profitable project out of many and huge amount is available in the hands of
management, there is no need of ranking of capital investment proposal. Ranking is
necessary if there is many profitable projects in hand and limited funds is available in
the hands of management.

8. Degree of Risk and Uncertainty

Every proposal involves certain risk and uncertainty due to economic conditions,
competition, demand and supply conditions, consumer preferences etc. The degree of
risk and uncertainty affects the profitability of the project. Hence, degree of risk and
uncertainty of the project is taken into consideration for selection.
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9. Urgency
A project may be selected immediately due to emergency or urgency. The reason is
that such immediate selection saves the life of the company i.e. survival of a company
is the primary importance than other factors.

10. Research and Development Projects

Research and Development project is highly required for technology based industries.
The reason is that there is a lot of changes made within short period in technology.
The research and development project gives more benefits in the long run. Hence,
profitability is getting less importance and survival of business is getting much
importance in the case of research and development project.

11. Obsolescence
The replacement of existing fixed assets is compulsory since there is an obsolescence
of plant and machinery.

12. Competitors Activities

Every company should watch the activities of the competitors. The company should
take a decision by considering the activities of the competitors. If so, the company can
withstand in competition by implementing new projects.

13. Intangible Factors

Goodwill of the company, industries relations, safety and welfare of the employees
are considered while selecting a project instead of considering profit alone. These
factors are also high responsible for selection of any project.

 ASSUMPTIONS IN CAPITAL BUDGETING:

 The Capital Budgeting decision process is a multi-faceted and analytical process.

A number of assumptions are required to be made.

1. Certainty with respect to cost & Benefits: It is very difficult to estimate

the cost and benefits of a proposal beyond 2-3 years in future.

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 2. Profit Motive: Another assumption is that the capital budgeting decisions
are taken with a primary motive of increasing the profit of the firm.

1.8 Structure of the Capital Budgeting

Capital budgeting is very obviously a vital activity in business. Vast sums of money
can be easily wasted if the investment turns out to be wrong or uneconomic. The
subject matter is difficult to grasp by nature of the topic covered and also because of
the mathematical content involved. However, it seeks to build on the concept of the
future value of money which may be spent now. It does this by examining the
techniques of net present value, internal rate of return and annuities. The timing of
cash flows is important in new investment decisions and so the chapter looks at this
"payback" concept. One problem which plagues developing countries is "inflation
rates" which can, in some cases, exceed 100% per annum. The chapter ends by
showing how marketers can take this in to account.

Capital budgeting versus current expenditures

A capital investment project can be distinguished from current expenditures by two

features:

a) Such projects are relatively large

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b) a significant period of time (more than one year) elapses between the investment
outlay and the receipt of the benefits..

As a result, most medium-sized and large organizations have developed special

procedures and methods for dealing with these decisions. A systematic approach to
capital budgeting implies:

a) The formulation of long-term goals

b) The creative search for and identification of new investment opportunities

c) Classification of projects and recognition of economically and/or statistically

dependent proposals

d) The estimation and forecasting of current and future cash flows

e) A suitable administrative framework capable of transferring the required

information to the decision level

f) the controlling of expenditures and careful monitoring of crucial aspects of

project execution

g) A set of decision rules which can differentiate acceptable from unacceptable

alternatives is required.

The economic evaluation of investment proposals

The analysis stipulates a decision rule for:

I) Accepting
II) Rejecting investment projects

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1.9 Need for the Study

Capital Budgeting are vital to an organization as they include the decisions as to:-

 Whether funds should be invested in the long term projects such as setting of an
Industry, purchase of Plant & Machinery etc.

 To analyze the proposal for expansion or creating additional capacities.

 To decide the replacement of permanent asset such as Building & Equipment.

 To make financial analysis of various proposals regarding capital investment so as

to choose the best out of many alternative proposals.

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 Heavy investment in capital projects

 Long term implications for the firm

 Irreversible decisions and

 Complicated in the decision making.

CHAPTER 2

1. PROFILE OF THE INDUSTRY

The basic need of human being is food clothing and shelter love and
affection /possession is on never ending process for a human being.

As the time passes on human beings their wants and wishes also changed from
ancient times to modern times and among them the living pattern and construction
works also have been changed from temporary construction of house to permanent
construction and the basic material used in construction is “Cement”.

21
 Cement the word derived from a Latin word ‘CEMENTTUM’ means stone
chipping such as we used in roman.

Cement the word as per oxford, it is commonly used is any substance applied
for soft stocking things. But cement means is most vital and important material for
modern constructions. It is a material which sets and hardness when mixed with
water. Cement is basically used in construction as a building agent. In ancient times
clay bricks and stones have been used for construction works.

The Romans were using a binding or a cementing material that would harden
and water. The first systematic effort was made by “SMEATON” who undertook the
execution of a new light house in 1756. He observed that

Production obtained by during lime stone was the best cementing material for work
under water.

The construction in lost centuries was with Lime that was the main equipment
used for construction work. The ancient constructions like Tajmahal, Qutubminar,
Mysore Palace, Red fort, Charminar etc., the evidence of lime construction.

THE INDIAN CEMENT INDUSTRY:

By staring production in 1914 the story of India cement industry is a stage of

continuous of growth.

India is the fourth largest cement producer after China, Japan and U.S.A. so
far annual production and demand has been growing a pace at roughly 68 million tons
with an installed capacity of 82 million tons.

In 1914 as the foundation of stable cement Industry was laid as sun above. It
was Indian Cement Company at Porbandar in Gujarat. In 1920, the cement marketing
corporation was formed to promote the sale and distribution of cement. A significant
22
development was made in 1930 when all manufacturers mergers together to form the
Associated Cement Company Limited.

Cement Industry is the major Industry it has taken rapid strides for a modest
beginning at Porbandar in 1914 to the 1980’s with over understanding out of the 60
units, 14 units are in the public sectors remaining units are in private sector.

TECHNOLOGY:

Cement may be manufactured employing three alternative technologies.

1. The largely out molded well process technology.

2. The more modern dry process that requires only 19% coal utilization.
3. The latest percallinator technology through which optimum utilization
may be achieved. Here the calcinatory or raw.

Material is partly or completed carried out before the feud enters the rotator kin
besides saving power, the adoption of this technology enable in increase in installed
capacity by 30-35%, the 30,000 tons per day plants being setup in the country use this
technology.

TOTAL PRODUCTION:

The cement industry comprises of 125 large cement plants with an installed
capacity of 148.28 million tons and more than 300 mini cement plants with an
estimated capacity of 11.10 million tons per annum. The Cement Corporation of
India, which is a Central Public Sector Undertaking, has 10 units. There are 10 large
cement plants owned by various state Governments. The total installed capacity in the
country as a whole is 159.38 million tons.

Actual cement production in 2004-05 was 116.35 million tons as against a production
of 107.90 million tons in 2003-04, registering a growth rate of 8.84%. Major players

23
in cement production are Ambuja cement, Aditya cement, J K Cement and L & T
cement.

Apart from meeting the entire domestic demand, the industry is also exporting cement
and clinker. The export of cement during 2003-04 and 2005-06 was 5.14 million tons
and 6.92 million tons respectively. Export during April-May, 2005 was 1.35 million
tons. Major exporters were Gujarat Ambuja Cements Ltd. and L & T Ltd.

NEED AND IMPORTANCE:

In India we see rapid industrial development in the last few centuries. Indian industry
is growing at considerable ratio which reveals India is a developing country. And
there are different industrial sectors are playing a vital role for the economy’s
development. They are steel cement SOF. Information Technology Medical Science
etc.

One among them was “CEMENT INDUSTRY” which plays a vital role for
the country’s development. In India cement industry is growing rationally and
marketing is the king pin of all activities particularly to the business because of this
changes in the external environment i.e., social, political, legal, technical and
international environment and changes in marketing. There is increased in the salaries
in all most in every market leading to competition is aspects of price, promotion etc.,
which help to increase the standard of living of people.

The manufacturers of Cement like Kesoram cement, India limited, Orient

limited, and Ultratech etc. are providing cement and they are distributing cement
through wide network of dealers.

Kesoram cements are doing its business from decades and it is continuously
contributing to the national economy. In even Industry now a days there is no special
interest for particularly department like production or manufacturing but know a day’s
total quality management plays a vital for the company’s success.

24
 Distribution channel which plays a vital role for the company success.
Distribution channels are link between the company and consumers.

2.1 PROFILE OF THE COMPANY

One among the industrial gains in the country today serving the nation on the
industrial front kesoram industries limited has a tenured and extent full history dating
hock to the twenties when the industrial house of Birla’s enquiredit.with only a Textile
mill under its banner in 1924,it grew from strength and spread its activities to newer
fields like Rayon pulp Transparent Paper.Spun pipes and Refectory Tyres oil mills and
refinery Extraction.

25
 Looking to the wide gap between the demand and supply of vital
commodity cement which it plays on important role in Nation Building, the
government Private entrepreneurs to argument the cement production Kesoram rose to
the occasion and decided to set up few cement plants in the country.

Kesoram cement is one of the prestigious units in the renowned Kesoram

industries group that is one of India’s leaden industrial conglomerates, under the
leadership of Mr.B.K.Birla, the famous personality of Indian Industry, who owes
branches all over India.

Kesoram cement Industry is one of the leading manufacturer of cement in India

Kesoram cement is a division of Kesoram Industries limited. It is a dry process
cement plant. It is located at Basant Nagar in Karimnagar District of Andhra Pradesh
with the plant capacity is 8.26 lakhs tones per annum. It is 8Kms away from the
Ramagundam Railway Station Lining Madras to New Delhi.

2.2 PLANTS SETUP

The first cement point of Kesoram with a capacity of 2.1 lacks tones per
annum incorporating Humboldt’s suspension preheated system was committed during
the year 1969.

The second unit was setup in the year 1971 with capacity of 2.1lacks tons
which added to the above plant capacities.

26
 The third plant with a capacity of 2.5lacks tons per anum, which went on
stream in the year 1978.

The coal for this company is obtained by singareni collieries and the power is
obtained from APSEB. The power demand capacity for the factory is about 21M.W.
Kesoram has got 20G sets of 4MN each installed in the year1987.

Kesoram cement belongs to the Birla group company’s one of the industrial
giants in the country.

Kesoram cement industries distinguished itself among the cement factories in

India by bagging the national productivity award for two successive years i.e., in
1985-86 and 87. Kesoram cement also got the FAPCCI award for best family
planning effort in the state for the year 1987-88.

Kesoram also bagged NCBCN’S national award for energy conservation for
the year 1989-90. The Kesoram industries look for the welfare of the employees and it
provide various facilities which the employees and it provide various facilities which
the employee feels satisfied with in the organization and after the work they fees
satisfies the worker and works families by providing various welfare schemes and by
providing recreational facilities of a glace.

The company set up “Recreation Club” for the purpose of recrimination facilities
two auditoriums are provided for playing indoor games like chess, shuttle and caroms
and for organizing cultural functions and activities like drama, music, and dance
centers etc.

It provides Library and reading rooms for the benefit of the

Employees more than 5000 books are available in the library along with other
Newspapers and magazines.

27
 They setup English and Telugu medium schools for the growth of workers child. The
company provides “Dispensary” with a qualified medical offer and Medical staff for
the benefit of the employees.

A House Journal in the name of Basant Nagar Sam char is brought out
quarterly where an all-important activities and information of the plant is published.

The company provides cooperative stores where the supply essential

commodities like rice, wheat, sugar, kerosene etc. at cash and credit basis.

They conduct games for twice a year on the occasion of 26 th January Republic
Day and 15th August Independence Day in order to encourage the employees, outside
of their workstation.

The family planning camps are held regularly with the help of the District
Medical and Health Authorities at the Government Hospital. It has got on award for
their excellent service.

Not only the employees of the factory are taken care, Butte Company plays a
lot of attention towards the rural development activities. Twelve villages are adopted
and the company has extended help in constructing temples, road, and giving
programmers to the farmers, Eye surgical camps health checkup schemes etc.

To keep the ecological balance, company has also undertaken massive tree
plantation in and around Basant Nagar and nearby villages there by eliminating the
pollution and they have been nominated by the government of India for
“VRUKSHAMITRA AWARD” but effort of an industrial unit in the state for rural
development 1994-95 presented by CM in march 1996.

BRANDS:

28
 Kesoram brands with namely Birla Supreme and Birla supreme gold (53
grades) has made a niche with outstanding quality and commands a premium in the
market. The latest offering, “Birla Shakthi” is also very well received and is the most
sought offer brand now.

KESORAMS CAREER:

Kesoram has an outstanding track record. Achieving 100% capacity utilization

in productivity and energy conservation. It has provided its distinctions by bagging
several awards of national and state level are worthy.

2.3 AWARDS

 National productivity award for 1985-86.

 National productivity award for 1986-87.
 National award for energy conservation for 1980-90.
 National award for mines safely 1985-86, 1986-87.
 Prestigious state award yajamanya ratna and but management award
for the year 1980.

29
  Best FAPCCI award for but family planning effort in the state
1987-88.
 FAPCCI award for best workers welfare 1995-96.
 Best industrial productivity award of FAPCCI.
 Best management award of state government 1993.
 It has got “Vanamitra award” from the government of Andhra Pradesh.

KESORAM GROUP OF INDUSTRIES

A) Textiles Kesoram Industries Ltd,

42, Garden Reach Road
Calcutta-700034.

B) Rayon Kesoram Rayon Triennia (P.O.),

Dist.: Hoogly, West Bengal.

C) Spun Pipes Kesoram Spun pipes & Foundries,

Bansberia (P.O.), Dist.: Hoogly,
West Bengal.

D) Cement Kesoram Cement,

Basantnagar-506187,
Dist.: Karimnagar, Andhra Pradesh

E) Cement Vasavadatta Cement,

Sedam-585222,
Dist.:Gulbarga, Karnataka.

F) Tiers Birla Tiers,

Shivam Chambers,
53, Syed Amir Ali Avenue.
Calcutta-700029.
Product Profile

The main brands of cement manufactured are:

 RAASI GOLD (53 Grade)

 RAASI SUPER POWER
 RAASI 43 Grade cement.
All the brands are known for its best quality standards.

30
Human Resources

The Plant has well qualified, highly motivated manpower of 649 employees on its
rolls. Out of 649 employees, 92 are executive cadre and remaining are in staff and
workmen cadre. The KIL, KNR manpower is known for their spirit and commitment.

Pollution Control

The Plant is commissioned for pollution free environment and installed all the
required pollution control equipment as per the statutory requirement. A separate team
will regularly monitor and maintain the said equipment.

Safety

The Plant maintains high standards of safety and good housekeeping methods in line
with ‘5S’ techniques.

Contribution to the exchequer

KIL, KNR has been contributing around Rs.175.00 corers to the exchequer in the
form of taxes, royalty etc.

Township
KIL, KNR has a well-planned township consisting of 378 quarters having facilities
like

 School
 Hospital
 Temple
 Guest House

31
 Co-operative Stores
 Recreation Club
 Play Ground etc.

Rural Development

KIL, KNR as a part of Rural & Social Development Programed adopted 8

surrounding villages. The company extends the facilities like

 Housing
 Water
 School
 Old age pension
 Roads etc;
By allocating a budget amount of about Rs.25.00 lakhs per annum.

Industrial Relations

KIL, KNR is known for its best Industrial Relations practices in this region and won
many awards from Govt. of A.P. and Chamber of Industries.

Norms
 Raw Mill Clinker Cement

32
 Lime stone 96%
 Iron ore 2.5%
 Laterite 1.5%
 Raw Mill 1.5 tones
 Coal 20%
 Clinker97%
 Gypsum 3%

2.4 Long Term Capital Budgeting In KESORAM

PRE – INVESTMNET STAGE:

In a planned economy, as in India, the identification of public sector projects

needs to be done within the overall framework of national the sectorial planning. All
projects of every sector need to be identified scientifically at the time of plan
formulation. In actual practice, however, it is observed that ‘identification’ stage is
the most neglected stage of the project planning.

33
 The five year plans indicate the broad strategy of planning economic growth
rate and other basic objectives to be achieved during the plan period. The macro level
planning exercise undertaken at the beginning of every five year plan indicates
broadly the role of each sector’s physical targets to be achieved and financial outlays,
which could be made available for the development of the sector during the plan
period.

The identification of a project in the Five Year Plan is not the sanction of the
project for implementation. It provides only the ‘green signal’ for the preparation of
feasibility report (FR0 for appraisal and investment decision. A preliminary scrutiny
of the FR of the project is done in the Ministry and thereafter copies of the feasibility
report are submitted to the appraising agencies, viz., Planning Commission, Bureau of
Public Enterprises and the Plan Finance Division of the Ministry of Finance.

Thus the organizational responsibility for identifying these projects rests with the
concerned administrative ministry, in consultation with its public enterprises.

The essential steps for project identification and preparation relates to studying

(i) Imports

(ii) Substitutes

(iii) Available and raw material

(iv) Available technology and skills

(v) Inter-industry relationship

(vi) Existing industry

(vii) Development plans

(viii) Old projects etc.

It may be mentioned that in actual practice, these steps are hardly scientifically
studied and followed by the administrative ministry public sector undertaking at the

34
time of project identification. The public sector projects many a time come
spontaneously on the basis of ideas and possibilities of demand or availability of some
raw materials and not an outcome of scientific investigation and systematic search for
feasible projects.

CHAPTER 3

1. RESEARCH METHODOLOGY

Research methodology implies a systematic attempt by the researcher to obtain

knowledge about subject understudy. This is systematic way to show the problem and
it is important components of the study without which a research may not able obtain
the facts and figures from employees.

35
SECONDARY DATA

Data which are not originally collected but rather obtained published or unpublished
sources are known as secondary data.

Unpublished sources like magazines past research, reports company manuals and its
reports for the year

The collected data is presented in table format. Investment decisions play a dominant
role in setting the fame work for managerial decisions.

The researcher has made use of available articles, books, research studies, reports,
data and information from magazines and journals and visit to relevant websites has
also been made. The Prowess data base of Centre for Monitoring Indian Economy has
been extensively used for secondary data of all companies.

III.1 Objectives of the Project:-

Capital budgets are the key control documents when it comes to the financial planning
for long-term investments such as major equipment purchases, land purchases,
renovations or new buildings. Capital budgeting identifies how much will be spent for
the entire project, tracking each line item separately. It explains how the business will
pay for the capital project and determines payback time and method.

36
Followings are some Objectives of Capital Budgeting:-

 Determine Product Scope

Capital budgeting lets project planners define the financial scope of a project. Because
capital budgeting begins long before the project begins, it spells out how much money
the business plans to spend on each individual aspect of the project. For example, with
a renovation, it determines how much it is willing to spend on improving handicap
accessibility or installing energy-efficient heating units. Capital budgeting also
determines the scope in terms of the length of time the project will take as it also
budgets for labor and potential downtime

 Determine Funding Sources

While capital budgeting spells out the details of project expenses, it also details where
the money is coming from to pay for the project. These sources might include a
capital investment account, cash, bank loans, government or nonprofit grants or stock
offerings. Most often, a project will require a mix of those funding channels. The
capital budgeting process identifies how much money will be needed from each
source and the costs associated with using that funding method

 Determine Payback Method

An important element of capital budgeting is determining the project's payback time.

Most businesses expect a new building, new equipment or renovation to eventually
pay for itself. Some projects will pay for themselves quicker than others. As there are
several ways of calculating payback method, some involving the present value of

37
money and inflation, the capital budget will have to identify which method the
company plans to use. It will also include an estimate of how long it will take for the
business to realize a return on their capital investment.

 Control Project Costs

Capital budgets act as control documents throughout the life of the project. As the
project progresses, the project managers track costs and try to ensure that the project
stays within budget. When there is an overage or a significant underage, the project
managers must provide explanations for the variances and the business must make
sure it has money to complete the project. Typically a capital budget for a specific
project is maintained until the payback period is complete.

 Ongoing Projects

Capital budgets are also used for ongoing capital purchases. These include major
repairs, rolling computer upgrades and preventive maintenance. Because some of
these type of expenses occur on an emergency basis, capital budgeting allows a
business to be prepared in a crisis and not have to incur extra debt. This type of capital
budgeting creates a fund that sets money aside for necessary capital expenses,
whether they can be anticipated or not.

3.2 Scope of the Study:-

Generally, the capital budgeting decisions are related to long term investments. The
general scope of capital budgeting decisions is discussed briefly below:-

1. Mechanization of Process
The manual production process is replaced by mechanization of process. The very
purpose of this type of change is to reduce costs. The future cash inflows on this

38
investment are the savings resulting from the lower operating costs. Now, the
company considers the worth of mechanization of process.

2. Expansion Decisions
Sometimes, a company can expand its operation by increasing production and sales.
In this context, a company can acquire new machinery; construct additional building,
merger or takeover of other business. They require huge amount and evaluate future
earnings.

3. Replacement Decision
A company can replace an old machine with a new machine by considering latest
technology. It brings down the operating expenses and increases the productivity.
Such replacement decision will be evaluated in terms of savings in operating costs or
the cash profits from additional volume of production by new machine or both.

4. Buy or Lease Decision

The fixed assets can be purchased or arranged on lease arrangements. The purchase of
fixed assets requires huge amount initially. If the same asset is used on lease basis, the
company requires less amount initially and heavy amount in total. Hence, a
comparative study can be made with reference to future benefits from these two
mutually exclusive alternatives.

5. Choice of Equipment
Two types of machines are available to perform a same work. The cost of each
machine differs from one another. Moreover, pros and cons of buying each machine
are evaluated and screened for selection of best one. Capital budgeting process helps a
lot in such selections.

39
 6. Product or Process Innovation
A new product may be find out or innovated. Sometimes, a new production process
may be innovated. The research and development department of a company is finding
a new product or innovation in a product or process. These require huge amount for
implementation. In this case also, a comparative study of net cash outflow (costs of
the project) and net cash inflow (i.e. future earnings) is highly useful for taking a
decision. The decision is based on the profitability of the product or process.

7. Housekeeping Projects
These projects are creating an indirect impact on production. Such projects are legally
required for implementation and useful for the boost up the morale and level of
motivation among the employees. Health and safety projects, service department
projects, welfare projects, education, training and development projects, status
projects and research and development projects are the examples of Housekeeping
Projects.

The financial feasibility, quantum of amount required, sources of finance and

profitability of the housekeeping projects are not considered for implementation.

3.3 Limitations of the Study:-

The following are the limitations of capital budgeting.

 The period of the study is limited.

40
 Financial matters are sensitive in nature, the same could not acquire easily.

 It may be due to restrictions imposed by management.

 The sources of data are based on cash flows.

 The study was conducted with the data available and analysis was made
accordingly.

 Due to the confidential matters of 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 company's
financial statements, the limitations of financial statements shall be equally
applicable.

 Data is collected for five projects which is limited.

 The study is confined to secondary data source and figures are taken from reports
and suggestions of various accountants.

Capital budgeting is the planning process used to determine a firm’s expenditure on

assets whose cash flows are expected to extend beyond one year such as machinery,
equipment investments etc.It is the process of analyzing and selecting investment

41
projects whose cash flows are expected to extend beyond one year such as research
and development of the project

3.4 Types or Techniques of Capital Budgeting

TYPES OR TECHNIQUES OF CAPITAL BUDGETING

Non-Discounted Discounted
Techniques Techniques

 Non-Discounted Techniques
a) Pay Back Period
b) Payback Reciprocal.
c) Payback Profitability.
d) Accounting Rate of Return (ARR).

 Discounted Techniques
a) Net Present Value ( NPV )
b) Profitability Index ( PI )
c) Internal Rate of Return ( IRR )

42
CAPITAL BUDGETING TECHNIQUES

In order to maximize the return to the shareholders of a company, it is important that

the best or most profitable investment projects are selected as the results for making a
bad long-term investment decision can be both financially and strategically
devastating, particular care needs to be taken with investment project selection and
evaluation.

There are a number of techniques available for appraisal of investment proposals and
can be classified as presented below:

Organizations may use any or more of capital investment evaluation techniques; some
organizations use different methods for different types of projects while others may
use multiple methods for evaluating each project. These techniques have been
discussed below – net present value, profitability index, internal rate of return,
modified internal rate of return, payback period, and accounting (book) rate of return.

 TRADITIONAL OR NON-DISCOUNTING TECHNIQUES

These techniques of capital Budgeting does not consider discounted cash flows. There
are two such techniques namely:-

 Payback Period.
 Payback Reciprocal.
 Payback Profitability.
 Accounting Rate of Return.

I. Payback Period: - The payback period of an investment is the length of time

required for the cumulative total net cash flows from the investment to equal
the total initial cash outlays. At that point in time, the investor has recovered
the money invested in the project.

Steps in Payback Period Technique:-

43
(a) The first steps in calculating the payback period is determining the total initial
capital investment and

(b) The second step is calculating/estimating the annual expected after-tax net cash
flows over the useful life of the investment.

1. When the net cash flows are uniform over the useful life of the project, the number
of years in the payback period can be calculated using the following equation:

Initial Investment
Pay Back Period=
Annual Cash InFlow
Example :-Suppose a project costs ₨ 20,00,000 and yields annually a profit o
₨3,00,000 after depreciation @ 12.5% (straight line method) but before t

The first step would be to calculate the cash inflow from this project. The cash inflow
is ₨ 4,00,000 calculated as follows:

Particulars (₨)
Profit Before Tax 3,00,000
Less: Tax @50% ( 1,50,000 )
Profit After Tax 1,50,000
Add: Depreciation @12.5% 2,50,000
Total Cash Inflow 4,00,000

While calculating cash inflow, depreciation is added back to profit after tax since it
does not result in cash outflow. The cash generated from a project therefore is equal to
profit after tax plus depreciation. The payback period of the project shall be:

₨ .20,00,000
Pay Back Period =
4,00,000

44
Some Accountants calculate payback period after discounting the cash flows by a
predetermined rate and the payback period so calculated is called, ‘Discounted
payback period’.

2. When the annual net cash flows are not uniform, the cumulative cash inflow from
operations must be calculated for each year. The payback period shall be
corresponding period when total of cumulative cash inflows is equal to the initial
capital investment. However, if exact sum does not match then the period in which it
lies should be identified. After that we need to compute the fraction of the year that is
needed to complete the total payback. This method can be understood with the help of
an example

Example: - Investment ₨. 1 Lakh

Estimated Life 10 Years

Tax Rate 50%

Year Profit Before Depreciation Profit After Tax @50%

Depreciation Depreciation
( ₨.) ( ₨.) ( ₨.) ( ₨.)
1 40,000 10,000 30,000 15,000
2 60,000 10,000 50,000 25,000
3 50,000 10,000 40,000 20,000
4 50,000 10,000 40,000 20,000

It’s payback period shall be computed by using cumulative cash flows as follows:

Solution:-

Year PAT + Depreciation = Cash Flow Cumulative

( ₨.) ( ₨.) ( ₨.) Cash Flow

45
 ( ₨.)
1 15,000 10,000 25,000 25,000
2 25,000 10,000 35,000 60,000
3 20,000 10,000 30,000 90,000
4 20,000 10,000 30,000 1,20,000

Initial Outlay ₨. 1,00,000 Then Payback period between 3 to 4 years, Since up to 3

years a sum of ₨. 90,000 shall be recovered balance of ₨. 10,000 shall be recovered
in the part (fraction) of 4th year computed as follows:

1 year 30,000 12months 30,000

? 10,000 ? 10,000

= 0.33 year = 4 months

Thus, total cash outlay of ₨. 1,00,000 shall be recovered in 3 years & 4 months’
time.

Advantages of Payback Period:-

 It is easy to compute.
 It is easy to understand as it provides a quick estimate of the time needed for
the organization to recoup the cash invested.
 The length of the payback period can also serve as an estimate of a project’s
risk; the longer the payback period, the riskier the project as long-term
predictions are less reliable. In some industries with high obsolescence risk
like software industry or in situations where an organization is short on cash,
short payback periods often become the determining factor for investments.

Disadvantages of Payback Period:-

 It ignores the time value of money. As long as the payback periods for two
projects are the same, the payback period technique considers them equal as

46
 investments, even if one project generates most of its net cash inflows in the
early years of the project while the other project generates most of its net cash
inflows in the latter years of the payback period.

 A second disadvantage of this technique is its failure to consider an

investment’s total profitability; it only considers cash flows from the initiation
of the project till its payback period is being reached, and ignores cash flows
after the payback period.

 Lastly, use of the payback period technique may cause organizations to place
too much emphasis on short payback periods thereby ignoring the need to
invest in long-term projects that would enhance its competitive position.

II. Payback Reciprocal:-

This is a variant of the payback period method. The payback period expresses the
profitability of the project in terms of period i.e. in years but it does not show any
return as a measure of profitability. Pay back reciprocal aims to show the return rather
than period as a measure of project profitability. The higher the reciprocal the more
profitable is the projects and vice-versa.

In practice, the payback reciprocal is a helpful tool for quickly estimating the rate of
return of a project provided its life is at least twice the payback period.

The payback reciprocal can be calculated as follows:

Average
Annual Cash InFlow
Pay Back Reciprocal=
Initial Investment

47
Example: - Suppose a project requires an initial investment of ₨. 20,000 and it
would give annual cash inflow of ₨. 4,000. The useful life of the project is estimated
to be 5 years. In this example payback reciprocal will be:

₨ . 4,00,000
= 20%
₨ .20,000

The above payback reciprocal provides a reasonable approximation of the internal

rate of return, i.e. 19%.

III. Payback Profitability :-

This is modification of payback period method. It considers total net cash flows
remaining after recovering cost of investment. The selection of the projects is
based on the profitability after the pay-off period.

Payback Profitability =
Annual Cash Inflow (Estimated Life— Payback Period)

The real profitability of an investment depends on the number of years it will continue
to operate after the payback period.

IV. Accounting Rate of Return (ARR)

The accounting rate of return of an investment measures the average annual net
income of the project (incremental income) as a percentage of the investment.

Average
Annual Net Income ×100
Accounting Rate of Return=
48
Average Investment
 Accept or Reject Criterion:

Under the method, all project, having Accounting Rate of return higher than the
minimum rate establishment by management will be considered and those having
ARR less than the pre-determined rate.

This method ranks a Project as number one, if it has highest ARR, and lowest rank is
assigned to the project with the lowest ARR

Avergare Investment=¿

( Cost Of Machinhe−Scrap
2
value
)+ Add .Working Cap .+ Scrap Value

Advantages

1. It is very simple to understand and use.

2. This method takes into account saving over the entire economic life of the
project. Therefore, it provides a better means of comparison of project than
the payback period.

3. This method through the concept of net earnings ensures a compensation of

expected profitability of the projects and

4. It can readily be calculated by using the accounting data.

Disadvantages

1. It ignores time value of money.

2. It does not consider the length of life of the projects.

49
3. It is not consistent with the firm & objective of maximizing the market value of
shares.

4. It ignores the fact that the profits earned can be reinvested.

 DISCOUNTING TECHNIQUES

These techniques consider time value of money and discount the cash flows to their
Present Value. These techniques are also known as Present Value techniques. First let
us discuss about Determination of Discount rate and it will be followed by the three
techniques

a) Net Present Value ( NPV )

b) Profitability Index ( PI )
c) Internal Rate of Return ( IRR )

Compounding And Discounting Factors:-

Compounding Factor:- Refers to the addition of interest to the principal at periodic

intervals. This helps in establishing a new value for subsequent computations. This
process is continued till the end of the final year.

Compounding is done using the formula:-

A = P (1+i)n

Discounting Factor: - Is just opposite of compounding. Here, one computes the

present value which is to be received at a future period.

50
 Discounting is done using the Formula:-

A
P=
(1+i)n

Where, A = Principal + Interest

P = the Principal Amount

i = Rate of Interest

n = Number of year

To convert Present Value into Future Value Compounding is required and in order
to convert the Future Value into Present Value Discounting Is required.

Compounding

Present Value Future Value

Discounting

Discounted cash flow technique involves the following steps:

51
  Calculation of cash inflow and out flows over the entire life of the asset.

 Discounting the cash flows by a discount factor

 Aggregating the discounted cash inflows and comparing the total so obtained
with the discounted out flows.

I. Net Present Value Technique (NPV)

The net present value technique is a discounted cash flow method that considers the
time value of money in evaluating capital investments. An investment has cash flows
throughout its life, and it is assumed that an ngultrum of cash flow in the early years
of an investment is worth more than an ngultrum of cash flow in a later year.

The net present value method uses a specified discount rate to bring all subsequent net
cash inflows after the initial investment to their present values (the time of the initial
investment is year 0). The net present value of a project is the amount, in current
value of ngultrum, the investment earns after paying cost of capital in each period.

Net Present Value(NPV )=¿

Present Value of Cash inflow – Present Value Of Cash Outflow

Accept or Reject Criteria:

1. For a single project, take it if and only if its NPV is positive.

2. For many independent projects, take all those with positive NPV.

52
3. For mutually exclusive projects, take the one with positive and highest NPV.

Advantages

1. It recognizes the time value of money.

2. It considers the cash inflow of the entire project.

3. It estimates the present value of their cash inflows by using a discount rate
equal to the cost of capital.

4. It is consistent with the objective of maximizing the wealth of owners.

Disadvantages

1. It is very difficult to find and understand the concept of cost of capital

2. It may not give reliable answers when dealing with alternative projects under
the conditions of unequal lives of project.

3. It requires the predetermination of the required rate of return which may give
NPV wrong results.

It ignores the difference in initial outflows, size of the different proposals etc. While
evaluating mutually exclusive projects

II. Profitability Index /Desirability Factor/Present Value Index Method (PI)

In the students may have seen how with the help of discounted cash flow technique,
the two alternative proposals for capital expenditure can be compared. In certain cases
we have to compare a number of proposals each involving different amounts of cash
inflows. One of the methods of comparing such proposals is to work out what is
known as the ‘Desirability factor’, or ‘Profitability index’ or ‘Present Value Index
Method’. Mathematically

53
The Profitability Index (PI) is calculated as below:

PV Of Cash Inflows
Profitability Index ( PI )=
PV Of CashOutflow

ACCEPT OR REJECT CRITERION

 For independent projects: Accept all projects with PI greater than one (this is
identical to the NPV rule)
 For mutually exclusive projects: Among the projects with PI greater than one,
accept the one with the highest PI.

IF PI ≥ 1 Accept the Proposal

IF PI ≤ 1 Reject the Proposal

In case of mutually exclusive projects; project with higher PI should be selected.

Advantages

 It recognizes the time value of money.

 It consistent with the shareholder’s value maximization principal.

 It requires calculation of cash flow and estimate of discount rate.

54
 Disadvantages

1. Profitability index fails as a guide in resolving capital rationing where projects

are indivisible.
2. Once a single large project with high NPV is selected, possibility of accepting
several small projects which together may have higher NPV than the single
project is excluded

III. Internal Rate of Return Method (IRR)

It is that rate at which the sum of discounted cash inflows equals the sum of
discounted cash outflows. It is the rate at which the net present value of the
investment is zero.

It is the rate of discount which reduces the NPV of an investment to zero. It is called
internal rate because it depends mainly on the outlay and proceeds associated with
the project and not on any rate determined outside the investment.

IRR Definition:

Internal rate of return for an investment proposal is the discount rate that equates the
present value of the expected net cash flows with the initial cash outflow. This IRR is
then compared to a criterion rate of return that can be the organization’s desired rate
of return for evaluating capital investments

PVD 1−PVC
Internal Rate Of Return ( IRR )=D 1+ ×( D 2−D 1)
PVD 1−PVD 2

55
Where,

D1 = 1st Annuity Factor

D2 = 2nd Annuity Factor

PVD1 = Present Value of Annuity Factor of 1st

PVD2 = Present Value of Annuity Factor of 2nd

PVC = Present Cash Outflow

ACCEPT OR REJECT CRITERION

 For independent projects: Accept a project if its IRR is greater than some fixed
IRR, the threshold rate.
 For mutually exclusive projects: Among the projects having IRR’s greater than
IRR, accept one with the highest IRR

MERITS

1. It consider the time value of money

2. Calculation of cost of capital is not a prerequisite for adopting IRR

3. IRR attempts to find the maximum rate of interest at which funds invested in
the project could be repaid out of the cash inflows arising from the project.

4. It is not in conflict with the concept of maximizing the welfare of the equity
shareholders.

5. It considers cash inflows throughout the life of the project.

6. IRR is based on the cash flows rather than accounting profit.

56
DEMERITS

1. Computation of IRR is tedious and difficult to understand

2. It is very complicated trial and error procedure.

3. Both NPV and IRR assume that the cash inflows can be reinvested at the
discounting rate in the new projects. However, reinvestment of funds at the
cut off rate is more appropriate than at the IRR.

4. IT may give results inconsistent with NPV method. This is especially true in
case of mutually exclusive project.

5. Since, the IRR is a scaled measure. It tends to be biased towards small

projects. When are much more likely to yield high percentage return over the
larger project

57
 CHAPTER 4

4. REVIEW OF LITERATURE

Capital Budging decision refers to assets that are in operations and yield a return over
a period of time, usually exceeding one year. It is a long term investment decision
involving huge capital expenditures.

The main characteristics of a capital expenditure are that the expenditure is incurred at
one point of time whereas benefits of the expenditure are realized at different points
of time in future.

Capital Budgeting process involves planning, availability and controlling, allocation

and expenditure of long term investment funds.

Capital Budgeting means a decision relating to planning for capital assets

(e.g. purchase of a new machine or setting up of a factory) as to whether or not money
should be invested in the long-term projects. Capital budgeting involves a financial
analysis of the various alternative proposals regarding a capital expenditure and to
select / choose the best out of the several alternatives.

The term Capital Budgeting is used interchangeably with capital expenditure

decisions and long-term investment decisions. Capital budgeting is decision making
process for making investment decisions in capital expenditures or fixed assets.
Capital Budgeting is also known as “Freezing of Capital” in Fixed Assets.

58
Capital expenditure includes all those expenditure which are expected to produce
benefits to the firm over more than one year, and encompasses both tangible and
intangible assets. But mainly it includes expenditure on tangible fixed assets. Capital
expenditure involves a huge investments for long-term in the fixed assets

The following are some of the examples of capital expenditure:

Cost of acquisition of permanent assets such as land and building plant and
machinery, goodwill etc.

Cost of addition, expansion, improvement or alteration in the fixed assets.

Cost of replacement of permanent assets.

Research and development project costs etc.

59
 CHAPTER 5

 DATA ANALYSIS AND INTERPRETATION

All finance activity commences with an investment proposal, which calls for a
financial appraisal of a project. Here, capital Budgeting has its role. Each one of the
projects is apprised on following basis”

 Cost Estimates.
 Cost Generations.

 Cost Estimates:-

Feasibility Report of the project is prepared based on the cost of similar units
prevailing at the time of preparation of projects report of the latest costs are not
available, the same should be escalated. Collection of data with regard to the cost of
the various equipment should from part of a continuous planning so that a realistic
cost estimate is made for the project Reports for civil works are generally based on
KESORAM schedule of rates with reasonable premium there on.

 Cost of Generation:-

The financing of public sector company is generally based on Debt Equity of

3:1 the general rate of interest chargeable by the central Government on loan
components is 10.5% ( Now enhanced to 11%) . The plant life as provided under the
Electricity Supply Act, 1948 is 25 years and depreciation based on this period has to
be calculated on straight line method, on 90% of the cost fixed assets. The operation
& maintenance expenses are generally of the order 2.5% of the capital cost based on
the above assumptions, the cost of generation could be worked out discounted cash
flow basis taking 12% IRR (Internal Rate of Return). This rate has been generally
accepted by various appraising agencies of the power projects.

Feasibility Report based on above methodology and indicating site selection,

60
coal linkage, power distribution examined by Central Electricity Authority in all cases
where investment is Rs.1 Cr. and above. Since KESORAM is public sector
undertaking, all the investment decisions have to be formally sanctioned by
Government after PIB’s (Public Investment Board’s) clearance.

SHARE CAPITAL:

The entire share capital is owned by Government of India. During the Year no
addition has been made. However the authorized capital has been increased from Rs.
80,000 million to Rs.1,00,000 million and the face value or share has been split to
Rs.10/- each from Rs.1000/- each.

ROLE OF FINANCE MANAGEMENT IN INVESTMENT

DECISIONS IN KESORAM:

Finance Manager is the number of a project team. He plays an important role

in investigation stage of the project, when various alternatives are analyses & the most
optimum solution is decided upon. The soundness upon the accuracy of the data & as
a finance manager has to questing and satisfy himself on the validity of the data.

The power projects are extremely capital intensive and before large resources
are committed to a scheme a detailed feasibility study need to be prepared covering-

 The need of the project

 The demand projections
 The alternatives of the site locations
 The broad parameters of the plant and equipment
 The cost estimates
 The viability of the scheme.

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Cost Estimates: - Cost estimates and financial justification and returns of the
projects are the areas where financial management has to play its role. Cost estimates
should be prepared by the cost engineers and vetted by the finance manager. Cost
engineering is a specialized filed & need to be developed in the contest of power
projects because of insufficient cost data on the components of the projects.

This raises an important question of the present methodology of preparing the

cost estimates without any provision for price contingencies. Because of time lag
between preparation of cost estimates and investment decisions, after its scrutiny by
the appraising agencies, these estimates are already out of data and hence would need
updating.

CAPITAL BUDGETING

EXAMPLE OF STAGE I & II

Sl. Schemes Outlay

1. Stage-I (3 x 20000 MT) 5,48,92,00,000
2. Stage- II (3 x 50000 MT) 11,03,69,00,00
3. Stage-III (1 x 50000MT) 1229.38(Millions)

Stage – I consisting outlay of 5,48,92,00,000 this is recovered in 5 years of time.

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RECOVERY OF PROJECTS (Stage-I):

Following calculations are under consider

Under Discounted Pay Back Period:

Stage – I (3 x 20000) Outlay : 5,48,92,00,000

NET PRESENT VALUE:

Year Cash Inflows Dis. @12% Present Value of Cashflows

1 Rs. 1.129.384.000 0,892 Rs. 1.007.410.528

2 Rs. 1.310.895.000 0,797 Rs. 1.043.986.315

3 Rs. 1.761.879.000 0,711 Rs. 1.252.695.969

4 Rs. 1.732.086.000 0,635 Rs. 1.109.874.610

5 Rs. 2.193.061.000 0,567 Rs. 1.243.465.587

Present Value of Cash Flows Rs. 5.647.433.010

Less: Cash Outlay Rs. 5.489.200.000

Net Present Value Rs. 158.233.010

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GRAPH 1:

Year
Cash Inflows
Present Value of Cashflows

1 2 3 4 5

Interpretation:

The Net Present Value is the difference between the “Present value of cash inflows”
and “Present value of cash outflows.

PROFITABILITY INDEX (P.I):

Year Investments (In Lakhs) Cash inflows(P.V.) Cash Out Flows (Initial)
1999-00 2,945,083.37 18180 20000
2000-01 3,040,293.17 24780 30000
2001-02 3,192,444.28 45070 60000
2002-03 3,071,183.11 54640 80000
2003-04 3,545,210.87 18630 30000
2004-05 9,025,874.00 161290 22000
2005-06 3,991,459.40 19210 33000
2006-07 4,038,114.20 11130 70000
2007-08 3,667,441.15 65420 40000
2008-09 7,338,000.00 19233 80000
2009-10 2,089,775.00 61323 60000
Total: 498896 525000
PV Of Cash Inflows
Profitability Index ( PI )=
PV Of CashOutflow

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 498896
Profitability Index ( PI )=
525000
= 0.95

GRAPH 2:

Interpretation:

a) The profitability index of present value of cash inflows and cash out
flows is fluctuation from year to year in the year 1999-00 the present
value of cash inflows is 18180 were as in the year 2009-10 has been
increased with 61323.
b) The highest cash inflows has been recorded in 2004-2005 as 161290
and lowest has been recorded as 18180 in the year 1999-00.

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PAY BACK PERIOD:

Year Investments (In Lakhs) Cash inflows(P.V.) Cash Out Flows (Initial)
1999-00 40,000.00 8000 20000
2000-01 60,000.00 1600 30000
2001-02 70,000.00 2200 60000
2002-03 20,000.00 4500 80000
2003-04 10,000.00 4000 30000
2004-05 66,000.00 3000 22000
2005-06 25,000.00 2900 33000
2006-07 12,000.00 1100 70000
2007-08 90,000.00 1600 40000
2008-09 30,000.00 1200 80000
2009-10 50,000.00 1800 60000
Total: 473,000.00 31900 525000

Initial Investment
Pay Back Period =
Annual Cash InFlow

40,000
Pay Back Period =
8000
= 5 Years

GRAPH 3:

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Interpretation:

a) In the Pay Back method the Investment and the case inflows are
fluctuating from year to year where as in the year 1999-00 it is 40000
and in the year 2009-10 is 50000.
b) Cash inflows are in the order of increasing to decreasing from 1999-00
and 2009-10.

AVERAGE RATE OF RETURN:

67
Year Investments (Lakhs) Average Income Cash Flows after Taxes
(Thousands)
2000-01 400,000.00 20000 100000
2001-02 480,000.00 15000 260000
2002-03 280,000.00 28000 440000
2003-04 240,000.00 85000 750000
2004-05 150,000.00 75000 160000
2005-06 260,000.00 64000 200000
2006-07 600,000.00 78000 300000
2007-08 100,000.00 25000 600000
2008-09 250,000.00 18000 800000
2009-10 520,000.00 22000 750000
Total 3,280,000.00 430000 4360000

Average
Annual Net Income ×100
Accounting Rate of Return=
Average Investment
20000
Accounting Rate of Return= ×100
400000
= 0.06%

GRAPH 4:

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Interpretation:

a) Average rate of return is calculated based on Average income and Average

investment whereas Average income in the year 2003-04 is 20000 and
investments in the year 2009-10 is 400000.
b) The value from 2003-04 and 2009-10 are fluctuating from year to year.

DISTRIBUTION OF REVENUE 2020-2020

69
 DISTRIBUTION OF REVENUE
2

14

3
Fuel

5 Retained Eaarning

Divindends
51

tax

Interest and Finance

17 Charges

depreciation

Interpretations:

a) In the year 2009-10 the revenue is distributed in the form of fuel retained
earnings, dividends is latest finance change, depreciation and for
employees.

b) Where as in the year 2009-10 it is been fluctuated the rates compare to the
year 2009-10.

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TABLE 7:
FY YEAR NET BLOCK (IN LAKS)
2004-05 284738
2005-06 323083
2006-07 328916
2007-08 386106
2008-09 400381
2009-10 520861

NET BLOCK AND GROSS FIXED ASSETS

600000

520761
500000

400000 400281
366106
323073 328916
300000 284738 Series1

200000

100000

0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Interpretations:

a) From 2006-2007 the net block and gross fixed assets is 328916.

b) Whereas the Net Block and gross fixed asset is been increased in the year
2009-10.

TABLE 8:

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 FY YEAR NET SALES(IN LAKS)
2004-05 229055
2005-06 258117
2006-07 286453
2007-08 315400
2008-09 355502
2009-10 440302

NET WORTH AND NET ASSETS

500000
450000 440201
400000
350000 355501
315040
300000 286453
250000 258117 Series1
229045
200000
150000
100000
50000
0
04-05 05-06 06-07 07-08 08-09 09-10

Interpretations:

a) Net worth and net assets has been increasing from year to year from 2005-
06 it is 229055 and compare to 2009-10 it has been increased to 440302.

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 b) By observing the chat we can say the net worth and net assets has been
increasing from 2005-06 to 2009-2010.

TABLE 9:
FY YEAR PROFIT AFTER TAX
2004-05 34245
2005-06 37338
2006-07 35396
2007-08 36085
2008-09 52609
2009-10 72032

PROFIT AFTER TAX

80000
72022
70000

60000 52608
50000
37338 35396 36075
40000 34245 Series1

30000

20000

10000

0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Interpretations:

a) The chart show the increase value after the deduction of tax in the year 2009-
10.

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 b) The Profit is changing from year to year in the year 2004-05 it is 34245
whereas increasing value in the year 2004-2005 and decreased, in the year
2009-10 the value is increased.

TABLE 10:
FY YEAR POWER GENERATION (M UNITS)
2004-05 7470
2005-06 7080
2006-07 7090
2007-08 10923
2008-09 19790
2009-10 19237

GENERATION AND SALES

25000

19790 19237
20000

15000
10823 Series1
10000
7470 7070 7080

5000

0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

GENERATION IN MUS – SALES IN MILLIONS:

Interpretations:

74
a) On the X – airs year are been shown from 2004-05 to 2009-10 and the value
has been increasing from year to year.

b) In the year 2004-05 the generation and sale has been 7470 and the value has
been increasing year to year but 2009-2020 the value is decreasing.

CHAPTER 6

 FINDINGS AND CONCLUSION:

CONCLUSIONS

75
  Every organization has pre-determined set of objective and goals, but reaching
those objectives and goals only by proper planning and executing of the plans
economically.

 Within a Short span of its existence, the corporation has commissioned 19502
MW as on 31st March, 2000 with an operating capacity of 19.9%. KESORAM
today generate 24.9% of nation’s electricity. KESORAM is presently
executing 12 Cement manufacturing Projects and 6 Gas based cement
manufacturing projects with a total approved capacity of 29,935 MT as on 31 st
March 2004.

Relevance of the Project

Capital Budgeting is a many-sided activity it includes searching for new and more
profitable investment proposals, Investigating, Engineering and Marketing
considerations to predict the consequences of accepting the investment and making
economic analysis to determine the profit potential of each investment proposal. Its
basic feature can be summarized as follows.

It has the potentiality of making large anticipated profits.

It involves high degree of risk.

It involve a relatively long-time period between the initial outlay and the anticipated
return.

On the basis of the above discussion it can be concluded that Capital Budgeting
consists in planning the development of available capital for the purpose of
maximizing the long term profitability.

CHAPTER 7

RECOMMENDATIONS AND SUGGESTIONS

76
 The Corporate mission of KESORAM is to make available reliable and quality
power in increasingly large quantities. The company will spear head the
process of accelerated development of the power sector by expeditiously
planning, implementing power project and operating power stations
economically and efficiently.

 As in project implementation, the station continued to excel in power

generation with the power station having reached its first goal of total capacity
installation. Ramagundam is generating power at consistently high plant load
factor.

 The organization needs the capable personalities as management to lead to

organization successfully. The management make the plans and implement of
these plans. These plans are expressed in terms of long-term investment
decisions.

 The special budgets are rarely used in the organization like long-term budgets,
research & development budget and budget and budget for constancy.

 From the Revenue budget for the year 2000-2003, it is clear that the Actual
sales (Rs. 168552.50 lacks) are more than the budgeted or estimated sales (Rs.
164208.54 lacks). It is a good sign and the overall earnings of the budget
indicate high volume over estimated.

 Fuel utilization is perfectly carry out in RSTPS. And Cash from Ash
effectively carry out the job.

77
 New projects acceptance consider on the basis of Return Benefits. Risk is
evaluated while considering the new projects.

 BIBLIOGRAPHY

 Prasanna Chandra: Financial Management: Theor4y and Practice 5 th edition

2001.

78
 Arvind A. Dhond: Financial Management: Vipul’s Prakashan

 ICAI: IPCC Study Materials

 WEBSITES

 WWW.STUDYFINANCE.COM

 WWW.INVESTOPIDA.COM

 www.KESORAM.com

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