Sie sind auf Seite 1von 79

A STUDY ON CAPITAL BUDGETING WITH REFERENCE TO CHOWEL

INDIA (P) LTD

ABSTRACT

The key function of the financial management is the selection of the most
profitable assortment of capital investment and it is the most important area of decision
making of the financial manger because any action taken by the manger in this area
affects the working and the profitability of the firm for many years to come.

The objective of the research is to study on the company's forecasting decision


through Capital budgeting technique through which the importance of capital budgeting
in an organization and to analyze the capital budgeting process to be adopted by the
company in order to take better investment decisions for various business projects.

Further, it caters information about cash inflows and outflows of various years.
Thus the comparison provides clear idea about investments and return on the same which
can be helpful for the years to come.

The analyses have been done by the data collected from income and expenditure
statements and separate investment report. Capital budgeting techniques like Net Present
Value method, Rate of Return method and Payback Period method are used to analyze the
collected data. Some other forecasting tools like standard deviation, Correlation analysis
and Trend analysis are used in this study

1
TABLE OF CONTENTS

CHAPTER CONTENTS PAGE NO.

NO.

I INTRODUCTION

II COMPANY PROFILE

2.1 Industry Profile

2.2 Company Profile

III REVIEW OF LITERATURE

IV RESEARCH METHODOLOGY

4.1 Statement of the problem

4.2 Need for the study

4.3 Objectives of the study

4.4 Scope of the study

4.5 Research Design

4.6 Limitation of the study

4.7 Methods used for the Study

V DATA ANALYSIS AND INTERPRETATION

VI FINDINGS

VII SUGGESTIONS

VIII CONCLUSION

IX ANNEXURE

BIBLIOGRAPHY

BALANCESHEET

2
TABLE CONTENTS

SLNO CONTENTS PAGE NO.

1 PAY BACK PERIOD

2 ACCOUNTING RATE OF RETURN (ARR)

3
NET PRESENT VALUE
4 PROFITABILITY INDEX

STANDARD DEVIATION CALCULATION OF


5
PROFIT AFTER TAX

STANDARD DEVIATION CALCULATION OF


6
INVESTMENT

STANDARD DEVIATION CALCULATION OF


7
REVENUE

CORRELATION CALCULATION OF REVENUE


8
AND EBIT

CORRELATION CALCULATION OF SALES AND


9
PAT

CORRELATION CALCULATION OF REVENUE


10
AND EBIT

MEAN AND STANDARD DEVIATION FOR


11
EXPENSES

12 TREND ANALYSIS -PAT

13 TREND ANALYSIS - EBIT

3
CHART CONTENTS

SLNO CONTENTS PAGE NO.

1 PAY BACK PERIOD

2 ACCOUNTING RATE OF RETURN (ARR)

STANDARD DEVIATION CALCULATION OF


3
PROFIT AFTER TAX

STANDARD DEVIATION CALCULATION OF


4
INVESTMENT

STANDARD DEVIATION CALCULATION OF


5
REVENUE

CORRELATION CALCULATION OF REVENUE


6
AND EBIT

CORRELATION CALCULATION OF SALES AND


7
PAT

CORRELATION CALCULATION OF REVENUE


8
AND EBIT

MEAN AND STANDARD DEVIATION FOR


9
EXPENSES

10 TREND ANALYSIS -PAT

11 TREND ANALYSIS - EBIT

4
CHAPTER I

INTRODUCTION TO THE STUDY

In today's rapidly evolving markets, the need for companies to react swiftly to the
changing environment is essential. Reporting financial numbers alone is no longer
acceptable. Reports should also include analyses and forecasts. Optimally, they should
lead the way forward to achieve pre-defined goals.
Purpose for reporting is to communicate messages to specific audiences, but more
importantly, the performance reports need to induce change and mark the start of
corrective actions to ensure targets are achieved. Business analysis and predictive
modelling solutions help companies to foresee the future, and thus support today's
business decisions, closing the performance management cycle.

Making the right decision in such an atmosphere is easier when there is a clear view on
what the future will bring. The future, however, may be predicted only from the moment
when a good understanding of the past has been achieved; fast-changing business
conditions call for agile planning, budgeting and forecasting.

Corporate Performance Management (CPM) is a set of processes that helps organizations


optimize their business performance. Keyrus offers a framework for organizing,
automating and analyzing business methodologies, metrics, processes and systems that
drive business performance. CPM's business planning & control abilities help the
company take corrective action in time to meet bottom line results. It is furthermore
useful in risk analysis and predicting outcomes of scenarios and coming up with a plan to
overcome potential problems.
Forecasting
In today's fast moving and uncertain markets, forecasting is becoming the single most
important management process. The ability to quickly and accurately detect changes in
key external and internal variables and adjust tactics accordingly makes the leaders in the
market. Effective forecasting should consider that:

5
 Forecasts must integrate both the external and internal drivers of the business as
well as the financial results.

 Absolute forecast accuracy is less important than insight about how current
decisions and future events will interact to shape performance.

 The number is less important than the assumptions and variables that support it -
those are the things that should be tracked to provide advance warning of opportunities or
threats.

 Detail does not equal accuracy with respect to forecasts -desire for detail should
match predictive capability.

Best practice demonstrates that annual budgets may serve as a basis for estimating the
required resources to deliver income and cost estimates within manageable ranges. These
budgets are updated every quarter for the quarter ahead to reflect the best current
information. The quarterly budgets are then further supported by 12-month rolling
forecasts, which allow adapting resource allocations to volatility in the market.

Capital Budgeting

Capital budgeting is budgeting for the capital projects. It involves ascertaining or


estimating cash inflows and outflows, matching the cash inflows with the outflows
appropriately and evaluation of the desirability of the project. Capital budgeting is
concerned with the allocation of the firms’ scarce financial resources among the available
market opportunities. The consideration of investment opportunities involves the
comparison of the expected future streams of earnings from a project, with the immediate
and subsequent streams of expenditures.

Facing with limited sources of capital, management of any firm should carefully
decide whether a particular project is economically acceptable. In the case of more than
one project, management must identify a project that will contribute more profits and
more value to the firm. The project work entitled “A study on capital budgeting with
special reference to Bimetal Bearing Limited”, Coimbatore, aims to analyze the capital
budgeting process to be adopted by the company in order to take better investment
decisions for various business projects.

6
Capital Budgeting Process

 Identification of potential investment opportunities


 Preliminary screening
 Feasibility study.
 Implementation.
 Performance review.

a) Identification of Potential Investment Opportunities


Identification of appropriate investment opportunities is a complicated exercise
primarily because of the innumerable opportunities available to a promoter. To identify
such investment opportunities that are prima facie feasible and promising, the promoter
has to

 Scan the various investing opportunities that can throw-up promising


investment opportunities.
 Understand the governmental regulatory framework and policies that have a
bearing on the different investments.
 Appraise the potential investment in relation to his organizations’ strengths
and weakness.

b) Preliminary Screening
The list of the promising investment opportunities identified from various sources
is first subjected to an analysis within the governmental regulatory framework to obtain a
set of feasible investment opportunities that merit further considerations. Since it will be a
tedious task to undertake a detailed appraisal of each of these opportunities the list has to
be further narrowed down by evaluating the investments against certain specific criteria
and selecting only those investments that are prima facie desirable.

The criteria that are typically applied for the preliminary evaluation are

 Compatibility with the promoters’ strengths.


 Compatibility with governmental priorities
 Availability of raw materials and utilities
 Size of the potential markets.

7
 Reasonableness of cost.
 Risk inherent in the project.
c) Feasibility study
Once a project opportunity is conceived and it is considered acceptable after
preliminary screening, a detailed feasibility study has to be undertaken covering all
marketing, technical financial, and economic aspects of the project. A suitable capital
budgeting technique should be followed. The study should also concentrate on Estimating
market size and demand, Product and manufacturing process, Risk and return, Evaluating
from the view point of society.

The study in the form of detailed project report will contain fairly specific
estimates of project costs, means of financial schedules of implementation, estimates of
profitability based on projected sales and production costs, estimates of cost and benefit
streams in terms of cash flows, debt servicing capability of the project and social
profitability. The ultimate decision whether to go in for the project or not and how to
finance it is undertaken after this study which discloses whether the project is technically
feasible, economically viable and financially sound.

d) Implementation
The implementation of a project that is translating the investment proposal into a
concrete project is a highly complicated, time consuming, tension fraught and risky affair.
The various stages of implementation are:

 Preparation of blue prints and designs for project and plant engineering,
selection of machines and equipment.
 Negotiating for project finance with various financial institutions, entering into
technical knowhow agreements and if necessary, entering into contracts for
construction of buildings, supply of machinery, marketing of the company’s
products etc.
 Actual construction of buildings and other civil works, erection and
installation of machinery and equipment.
 Training of engineers, technicians, workers
 Commissioning of plant and trial run.

8
e) Performance Review
Once the project has been implemented, the trial run is successful, and
commercial production started, a review of the actual performance with the performance
projected in the feasibility study is required. This is an integral and vital part of project
management because, it throws light on how realistic were the assumptions underlying
the project and it is a valuable tool for decision-making in future.

Capital Budgeting

• Capital Budgeting is a project selection exercise performed by the business


enterprise.

• Capital budgeting uses the concept of present value to select the projects.

• Capital budgeting uses tools such as payback period, net present value, internal rate
of return, profitability index to select projects.

Capital Budgeting Tools

• Payback Period

• Accounting Rate of Return

• Net Present Value

• Internal Rate of Return

• Profitability Index

9
CHAPTER II

INDUSTRY PROFILE

Welding is a precise, reliable, cost-effective, and high-tech method for joining materials
in manufacturing industries. In fact, no other technique is so widely used by
manufacturers, in India, to join metals and alloys efficiently to add value to their
products. Most of the familiar objects in modern society, right from buildings and
bridges, to vehicles and medical devices, could not be made without the use of welding.
Welding today is applied to a wide variety of materials and products, using such
advanced technologies as lasers and plasma arcs. The future of welding holds even
greater promise as methods are devised for joining dissimilar and non-metallic materials,
and for creating products of innovative shapes and designs. Welding operation is most
critical operation of any manufacturing process, and quality of welding has direct impact
on quality of final product. Joining technology is an integral part of the manufacturing
process and effort has been spent to develop and demonstrate the suitability of various
processes for application into both design and structural fabrication. Welding is the core
of modern technology and it has gone through a complete evolution today, following the
utmost precedence that machines have garnered in our lives. There is a rapid development
in this industry and new methods are being discovered and added day by day. Welding is
an ever growing discipline which presents challenges and work opportunities for new
generations of engineers. In India, welding contributes significantly to the GDP in several
ways, such as welding intensive industries, auxiliary products, complementary goods,
employment, and user industries.

The Indian welding industry was dominated by low technology and very rare
technological innovation. However, in recent years, the demand of automatic and semi
automatic welding production systems are rising. Simultaneously, low budgets and
recession have marked the ongoing popularity of manual, economical techniques.
Increased FDI equity inflow in India has contributed to the rise in projects in automotive,
offshore activities, oil and gas sector, ship building and heavy machinery industries.
Many foreign automobile companies have set up their manufacturing units in India. This
has positively affected the rise of consumables and welding equipment. However,
economic crisis has impacted the flow of FDI in India which may result in decline in
demand of welding equipment over the short period. There has been an overall growth of

10
about 10% in steel industry in India. The rising demand of steel has promoted the use of
modern, unique, uses of steel, increasing the demand of welding equipment.

In India, welding contributes significantly to the GDP in several ways, such as welding
intensive industries, auxiliary products, complementary goods, employment, and user
industries. The Indian welding industry was dominated by low technology and very rare
technological innovation. However, in recent years, the demand of automatic and semi
automatic welding production systems are rising. Simultaneously, low budgets and
recession have marked the ongoing popularity of manual, economical techniques.
Increased FDI equity inflow in India has contributed to the rise in projects in automotive,
offshore activities, oil and gas sector, ship building and heavy machinery industries.
Many foreign automobile companies have set up their manufacturing units in India. This
has positively affected the rise of consumables and welding equipment. However,
economic crisis has impacted the flow of FDI in India which may result in decline in
demand of welding equipment over the short period.

One of the big challenges faced by the local manufacturers of equipment in India is the
considerable import of welding equipment. The increased imports has negatively
impacted the market share of local participant in various industries such as shipbuilding,
automotive and transportation and white appliances. Another challenge faced by welding
electrode plant is the unorganized sector that presently occupies nearly 50-55% of the
market. Lack of standard specification and tedious approval process is resulting in the
growth of unorganised sector. Indian welding consumables and equipment manufacturers
need to produce high quality and unique goods in order to stay competitive in Indian and
international markets. With increasing competition and lower profit margins,
manufacturers need to improve their service, performance and delivery.

CUSTOMER’S PERCEPTION & CHALLENGES

Lack of knowledge of end users

Due to lack of knowledge of its application and cost economies, to a large extent, higher
productivity welding consumables like CO2 continuous welding wires and flux cored
wires fail to find higher demand. In view of this it is pertinent to start vigorous marketing
efforts by existing leading manufacturers of consumables and equipment to educate the
users.

11
No technologies for low installed capacities

Majority of organised sector units have quite low installed capacities to enable them to
use modern machinery set up like computerised batching plant, X-ray florescent tester,
etc. The welding consumable manufacturers should arrange these technologies and try to
adopt it for lower capacity plants if possible

Lack of testing facilities

Testing facilities and quality assurance systems are inadequate in India. Approval of
inspection agencies, Indian and foreign, is for limited specific types of consumables.
Quality and reliability of other varieties are dependent on Quality Assurance Systems of
the manufacturer. The manufacturers need to be exposed to international practices in
Quality Assurance Systems like ISO 9000, which are desirable, in order to face
international competition. Third party labs

Lack of R&D

R & D effort in India for welding electrodes is fragmented among few leading
manufacturers and WRI, Tiruchy. Very frequently research effort is being spent on
already developed products. Majority of the manufacturers cannot offer to carry out
research on their own.

India’s working-age population will rise by 12.5 crore over the coming decade, and by a
further 10.3 crore over the following decade. It is almost a cliché to say India is sitting on
a demographic dividend. That is, with its growing young workforce, it can look forward
to decades of high productivity, economic growth and upward social mobility. By 2022, it
is estimated that unless action is taken, there will be a gap of 10.3 crore skilled labourers
in the infrastructure sector, 3.5 crore in auto and 1.3 crore in healthcare, to name a few.
Indian government has given a major impetus to skilling over the last few years.

MARKET LANDSCAPE – CONSUMABLES

 Fragmented industry with 50% being controlled by unorganised players.

 Organised market is mainly controlled by established players like ESAB India Ltd.,
Ador Welding Ltd., D&H Welding Electrodes India Ltd., EWAC Alloys Ltd., etc.

12
 Robust outlook of the infrastructure sector , welding consumables market is expected
to grow at a CAGR 10-11% over next five years.

 Continuous electrodes would witness higher growth compared to Manual Electrodes.

MARKET LANDSCAPE – EQUIPMENT

 Organised Market accounts for 40 - 45% while Unorganised accounts balance Market
 Companies such as ESAB India Ltd., Ador Welding Ltd., Linclon Electric Company
India Pvt. Ltd., Kemppi India Pvt. Ltd., Miraj Electrical & Mechanical Co. Pvt. Ltd &
ITW India Pvt Ltd. (Miller) are the major established organised players

 Imports constitute significant portion of organised market

 The welding equipment industry is expected to grow at a CAGR of 6-7% over the next
five years.

MARKET SEGMENTATION

Heavy Engineering

 Witnessed a remarkable growth over the last few years driven by increased investments
in infrastructure and industrial production

 The capital goods & engineering turnover in India is expected to reach US$ 125.4 Bn
by FY17

 The FDI inflows in the sector during April 2000 to March 2016 stood at around US$
3,068.1 million

Automotive

 6th largest producer in the world with average annual production 24 Million vehicles

 By 2026, India is expected to be the third largest automotive market by volume in the
world

 Global OEM’s ramping up investments in India to cater to growing domestic demand

13
Railways

 4th largest rail freight carrier in the world and network spans more than 66030 kms.
making it the world’s 3rd largest rail network

 100% FDI has been allowed

 Indian railways envisages a prospective investment of USD 130.76 billion in the next 5
years

Construction

 USD 1 trillion investment projected for infrastructure sector

 USD 650 Billion investments in urban infrastructure estimated over next 20 years

 Government investment to develop 100 Smart Cities and 500 AMRUT Cities

Shipbuilding

 One of the major contributor to economy of country

 With over 40% of India’s fleet of ships in the 20 plus age group, which holds
tremendous opportunity for India’s shipbuilding and ship-repair industry

14
COMPANY PROFILE

Chowel was established in 1976 by manufacturing welding equipments and built a unique
position in Korea. Chowel understood the necessity of welding equipments and started
production as this equipment was an important factor to develop the necessary
infrastructures like Shipyards, Heavy Industries like Defence, Construction, and Aviation
etc. Chowel’s mission is to develop products which have the most advanced technology
base, proper quality management system and to produce highly efficient machines in
different kinds of welding viz-a-viz ARC / TIG / MIG / MAG / CO2. Chowel is not only
developing the equipment but also the service provider of total welding solution and it is
producing various kinds of Resistance Welding Machines, controllers which have the
worldwide quality and have the greatest market share in the Automobile Industry and so
on. Also, CHOWEL is a global player accomplishing specialization of manufacturer of
Special Purpose Machine and Automatic Welding Machine line with advanced
technology by contributing realization of factory automation. Chowel is committed to
customer delight by achieving the customer needs like Quality, Cost, Delivery and better
service provider up to the customer satisfaction level. Chowel is leading the way in the
Welding Industry. Chowel is a focused supplier of Resistance Welding Products, an Jig &
Fixture lines to the Automotive companies. We excel in providing customized Resistance
Welding products based on RWMA Standards and Jig & Fixture lines. We have one of
the largest manufacturing and technological centers in the world. Thru the years we have
rapidly acquired a reputation as an innovator for precision engineered products sold to the
automotive markets in Asia, Europe and the United States. Our commitment does not stop
with technology. We believe that providing service and support with our product is
essential in giving our customers the total confidence and peace of mind that should
accompany a custom - engineered product.

PRODUCTS

 RESISTANCE WELDING MACHINES


 AUTOMATIC WELDING SYSTEMS
 ARC WELDING MACHINES
 SPOT WELDING MACHINES
 SEMI AUTO WELDING MACHINES

15
RESISTANCE WELDING MACHINES

 Robot Welding Transformer


 Portable Spot Welding Machine (Integrated Type)
 Air Spot & Projection Welding Machine
 Multiple Welding Transformer
 Welding Timer & Contactor
 Rocker Arm Spot Welding Machine
 Weld Monitor

AUTOMATIC WELDING SYSTEMS

 Axle Casing Co2 Robot Welding Line


 Co2 Automatic Welding System (20 - Torch)
 Co2 Automatic Welding System (2 - Torch)
 Multi Spot Automatic Welding Machine (Multi - 35 Point)
 Condenser Projection Automatic Welding Machine (Dual - Type)
 Jeep Car Chassis Frame Auto Welding Line
 Hyundai Hp Body Complete Assembly Fixture Line
 Suzuki YG4 Side Complete Jig Fixture Line
 Multi Spot Auto Welding System (Multi - 64 Point)
 Cross Member Assembly Auto Jig Welding System
 Panel Assembly Jig Welding Line
 Fuel Tank Assembly Auto Welding Line
 Kia Front Body Assembly Auto Welding Line
 Hyundai Rear Member Assembly Jig Welding Line
 Rod Stopper Multi Spot Auto Welding System (Multi - 4 Point)
 3-Phase Low Frequency Spot/Projection Welding System
 MWO Condenser Projection Auto Welding Line

ARC WELDING MACHINES

 Thyristor Control Co2/Mag Arc Welding Machine


 Inverter Co2/Mag Arc Welding Machine

16
 Cableless Co2/Mag Arc Welding Machine
 Inverter DC Pulse Tig Arc Welding Machine
 Inverter Air Plasma Cutting Machine
 Thyristor Control DC Arc Welding Machine
 Submerged Arc Auto Welding Machine
 Inverter DC Arc Welding Machine
 Inverter DC Pulse Tig Arc Welding Machine

SPOT WELDING MACHINES

 ASPC - 75/100
 ASPH - 30/50

SEMI AUTO WELDING MACHINES

 Invert CO2/MAG Semi-Auto Welding Machine

SERVICES

 ARC WELDING MACHINE ASSEMBLY LINE


 PORTABLE SPOT WELDING MACHINE ASSEMBLY LINE
 VACUUM DRIVE OVEN
 WELDING FIXTURE INSPECTION
 WELDING FIXTURE ASSEMBLY LINE

ARC WELDING MACHINE ASSEMBLY LINE

This line assembles Arc welding machine (CO2, TIG, MIG, MAG and etc.) which is used
widely in industry. A bundle of assembly process with high efficiency and strict quality
test can satisfy all requirement of customer.

PORTABLE SPOT WELDING MACHINE ASSEMBLY LINE

This line produce all kind of resistance welding transformer including a portable spot
welding machine which are mainly used in automobile industries.The products from this
line has excellent durability, weldibility and top class quality. These assembly line consist
of mass production system to meet customer's demand.

17
VACUUM DRIVE OVEN

Drive-oven is a moulding equipment of welding transfomer used for every type of


resistance welding system with multi-purpose. These machines can keep excellent
performance by full-mould method against heat; moisture and vibration in sever working
condition.

WELDING FIXTURE INSPECTION

The accuracy is the most important factor in automatic welding fixture of automobil
industries. chowel's welding fixture inspection by precision equipment (allowable error:
5/1000mm) can keep welding machine in best quality and are contributed to customer's
reliance and productivity.

WELDING FIXTURE ASSEMBLY LINE

This line consists of efficient assembly system to prevent troubles through the strict
inspection by each process from design, manuacture to assembly.

18
CHAPTER III

REVIEW OF LITERATURE

CONCEPTUAL REVIEW

Capital as Limited Resource

The foremost importance is that the capital is a limited resource which is true of
any form of capital, whether it is raised through debt or equity. The firms always face the
constraint of capital rationing. This may result in the selection of less profitable
investment proposals if the budget allocation and utilization is the primary consideration.
So the management should make a careful decision whether a particular project is
economically acceptable and within the specified limits of the investments to be made
during a specified period of time. In the case of more than one project, management must
identify the combination of investment projects that will contribute to the value of the
firm and profitability. This, in essence, is the basis of capital budgeting.

In the form of either debt or equity, capital is a very limited resource. There is a
limit to the volume of credit that the banking system can create in the economy.
Commercial banks and other lending institutions have limited deposits from which they
can lend money to individuals, corporations, and governments. In addition, the Federal
Reserve System requires each bank to maintain part of its deposits as reserves. Having
limited resources to lend, lending institutions are selective in extending loans to their
customers. But even if a bank were to extend unlimited loans to a company, the
management of that company would need to consider the impact that increasing loans
would have on the overall cost of financing.

In reality, any firm has limited borrowing resources that should be allocated
among the best investment alternatives. One might argue that a company can issue an
almost unlimited amount of common stock to raise capital. Increasing the number of
share of company stock, however, will serve only to distribute the same amount of equity
among a greater number of shareholders. In other words, as the number of shares of a
company increases, the company ownership of the individual stockholder may
proportionally decrease.

19
The argument that capital is a limited resource is true of any form of capital,
whether debt or equity or retained earnings, accounts payable or notes payable, and so on.
Even the best known firm in an industry or a community can increase its borrowing up to
a certain limit. Once this point has been reached, the firm will either be denied more
credit or be charged a higher interest rate, making borrowing a less desirable way to raise
capital.

In capital budgeting, there are a number of different approaches that can be used to
evaluate any given project, and each approach has its own distinct advantages and
disadvantages.

All other things being equal, using internal rate of return (IRR) and net present value
(NPV) measurements to evaluate projects often results in the same findings. However,
there are a number of projects for which using IRR is not as effective as using NPV to
discount cash flows. IRR's major limitation is also its greatest strength: it uses one single
discount rate to evaluate every investment.

Although using one discount rate simplifies matters, there are a number of situations that
cause problems for IRR. If an analyst is evaluating two projects, both of which share a
common discount rate, predictable cash flows, equal risk, and a shorter time horizon, IRR
will probably work. The catch is that discount rates usually change substantially over
time. For example, think about using the rate of return on a T-bill in the last 20 years as a
discount rate. One-year T-bills returned between 1% and 12% in the last 20 years, so
clearly the discount rate is changing.

In reality, any firm has limited borrowing resources that should be allocated among the
best investment alternatives. One might argue that a company can issue an almost
unlimited amount of common stock to raise capital. Increasing the number of share of
company stock, however, will serve only to distribute the same amount of equity among a
greater number of shareholders. In other words, as the number of shares of a company
increases, the company ownership of the individual stockholder may proportionally
decrease.

20
The argument that capital is a limited resource is true of any form of capital,
whether debt or equity or retained earnings, accounts payable or notes payable, and so on.
Even the best known firm in an industry or a community can increase its borrowing up to
a certain limit. Once this point has been reached, the firm will either be denied more
credit or be charged a higher interest rate, making borrowing a less desirable way to raise
capital.

Research comprises defining and redefining problems, formulated hypothesis or


suggested solution, collections, organizing and evaluating data, making deductions and
searching for conclusions and at last carefully testing the conclusions to determine
whether they fit the formulating hypothesis.

Payback Period
Payback period is the time duration required to recoup the investment committed
to a project. Business enterprises following payback period use "stipulated payback
period", which acts as a standard for screening the project.

Computation of Payback Period


When the cash inflows are uniform the formula for payback period is cash outflow
divided by annual cash inflow
Computation of Payback Period
When the cash inflows are uneven, the cumulative cash inflows are to be
arrived at and then the payback period has to be calculated through interpolation.

• Here payback period is the time when cumulative cash inflows are equal to the
outflows.
Payback Reciprocal Rate
The payback period is stated in terms of years. This can be stated in terms of percentage
also. This is the payback reciprocal rate.

Reciprocal of payback period = [1/payback period] x 100

21
Decision Rules
A. Capital Rationing Situation

• Select the projects which have payback periods lower than or equivalent to the
stipulated payback period.
• Arrange these selected projects in increasing order of their respective payback
periods.
• Select those projects from the top of the list till the capital Budget are exhausted.

Decision Rules
C. Mutually Exclusive Projects
In the case of two mutually exclusive projects, the one with a lower payback period is
accepted, when the respective payback periods are less than or equivalent to the stipulated
payback period.
Determination of Stipulated Payback Period

• Stipulated payback period, broadly, depends on the nature of the


business/industry with respect to the product, technology used and speed at
which technological changes occur, rate of product obsolescence etc.

• Stipulated payback period is, thus, determined by the management's capacity


to evaluate the environment vis-a-vis the enterprise's products, markets and
distribution channels and identify the ideal-business design and specify the
time target.

Advantages of Payback Period

• It is easy to understand and apply. The concept of recovery is familiar to every


decision-maker.

• Business enterprises facing uncertainty - both of product and technology - will


benefit by the use of payback period method since the stress in this technique
is on early recovery of investment. So enterprises facing technological

22
obsolescence and product obsolescence - as in electronics/computer industry -
prefer payback period method.

• Liquidity requirement requires earlier cash flows. Hence, enterprises having


high liquidity requirement prefer this tool since it involves minimal waiting
time for recovery of cash outflows as the emphasis is on early recoupment of
investment.
Disadvantages of Payback Period

• The time value of money is ignored. For example, in the case of project

• A Rs.500 received at the end of 2nd and 3rd years is given same weightage.
Broadly a rupee received in the first year and during any other year within the
payback period is given same weight. But it is common knowledge that a rupee
received today has higher value than a rupee to be received in future.

• But this drawback can be set right by using the discounted payback period
method. The discounted payback period method looks at recovery of initial
investment after considering the time value of inflows.
Accounting Rate of Return
Accounting rate of return is the rate arrived at by expressing the average annual
net profit (after tax) as given in the income statement as a percentage of the total
investment or average investment. The accounting rate of return is based on accounting
profits. Accounting profits are different from the cash flows from a project and hence, in
many instances, accounting rate of return might not be used as a project evaluation
decision. Accounting rate of return does find a place in business decision making when
the returns expected are accounting profits and not merely the cash flows.

Computation of Accounting Rate of Return

• The accounting rate of return using total investment. Or Sometimes average rate
of return is calculated by using the following

23
Formula:
Where average investment = total investment divided by 2

Decision Rules
A. Capital Rationing Situation

• Select the projects whose rates of return are higher than the cut-off rate
• Arrange them in the declining order of their rate of return and
• Select projects starting from the top of the list till the capital available is
exhausted.

B. No Capital Rationing Situation


Select all projects whose rate of return are higher than the cut-off rate.

C. Mutually Exclusive Projects


Select the one that offers highest rate of return.
Accounting Rate Of Return – Advantages

• It Is Easy To Calculate.
• The Percentage Return Is More Familiar To The Executives.

Accounting Rate of Return – Disadvantages

• The definition of cash inflows is erroneous; it takes into account profit after tax
only. It, therefore, fails to present the true return.

• Definition of investment is ambiguous and fluctuating. The decision could be


biased towards a specific project, could use average investment to double the rate
of return and thereby multiply the chances of its acceptances.

Net Present Value (NPV)


Net present value of an investment/project is the difference between present value
of cash inflows and cash outflows. The present values of cash flows are obtained at a
discount rate equivalent to the cost of capital.

24
Computation Of Net Present Value (NPV)

• Let 'b' be the cash outflow in period 't' where t = 0,1,2,....n

• 'B' be the present value of cash outflows

• 'c' be the cash inflow in period 't'=0,1,2,........n

• 'C' be the present value of cash inflows

• 'K' be the cost of capital

Computation Of Net Present Value (NPV)

• When the cash outflow is required for only one year i.e., in the present year, then
the Net present value is calculated as follows:

• "I" is the initial investment (cash outflow) required by the project.

Decision Rules

A. "Capital Rationing" situation

Select projects whose NPV is positive or equivalent to zero.


Arrange in the descending order of NPVs.
Select Projects starting from the list till the capital budget allows.

B. "No capital Rationing" Situation

Select every project whose NPV >= 0


C. Mutually Exclusive Projects

Select the one with a higher NPV.


Net Present Value (NPV) – Example
25
Assuming that the cost of capital is 6% for a project involving a lumpsum cash outflow of
Rs.8,200 and cash inflow of Rs.2,000 per annum for 5 years, the Net Present Value
calculations are as follows:
a) Present value of cash outflows Rs.8200 Ins of Technology Madras Indian Institute of

b) Present value of cash inflows

Susan F. Haka, Michigan State University, USA (2007) has studied

“Capital budgeting and investment appraisal” and historical appraisal of the


development of current capital budgeting practices and reviews capital budgeting
academic research. He has explained modern capital budgeting and its processes. In the
late eighteenth and early nineteenth centuries, the industrial revolution was instrumental
in creating demand for capital budgeting processes and techniques. Academic research,
beginning in the late 1940s and early 1950s, is categorized by its focus on appraisal
techniques, individual decision-maker effects, organizational issues, and environmental
factors. Experimental, analytical, agency-based, survey-based, and case-based research is
reviewed. His study concluded with a compilation of issues identified by academic
research and a set of questions that have not yet been addressed.

Davina F. Jacobs (2010) is a senior economist in the Fiscal Affairs Department has done
a research on capital budgeting practices. His study argues that the key challenge in
government budgeting is to define an appropriate balance between current and capital
expenditures. Budgeting for government capital investment also remains not well
integrated into the formal budget preparation process in many countries. Hence, the
research has been prepared with an aim to provide an overview of past and current
budgeting practices for public investment. The study will also provide a comparison
between the budget practices between low-income countries and developed countries and
make a series of recommendations for how to ensure efficient integration of capital
planning and budget management in low-income countries.

Niels Hermes, Peter Smid and Lu Yao (2006) Faculty of Management and
Organization, University of Groningen and Faculty of Economics, University of
Groningen, The Netherlands, have made a study on “Capital budgeting practices: A
comparative study of the Netherlands and China”. The paper compares the use of capital
budgeting techniques of Dutch and Chinese firms, using data obtained from a survey

26
among 250 Dutch and 300 Chinese companies. It aims to analyze the use of capital
budgeting techniques by companies in both countries from a comparative perspective to
see whether economic development matters. The empirical analysis provides evidence
that Dutch Chief Financial Officers on average use more sophisticated capital budgeting
techniques than Chinese CFOs do. At the same, however, the result suggests that the
difference between Dutch and Chinese firms is smaller than expected based upon the
differences in the level of economic development between both countries, at least with
respect to the use of methods of estimating the cost of capital and the use of CAPM as the
method of estimating the cost of equity.

Forecasting for Environmental Decision Making - J. Scott Armstrong

Those making environmental decisions must not only characterize the present, they must
also forecast the future. They must do so for at least two reasons. First, if a no-action
alternative is pursued, they must consider whether current trends will be favorable
or unfavorable in the future. Second, if an intervention is pursued instead, they must
evaluate both its probable success given future trends and its impacts on the human and
natural environment. Forecasting, by which I mean explicit processes
for determining what is likely to happen in the future, can help address each of these
areas. Certain characteristics affect the selection and use of forecasting methods. First, the
concerns of environmental forecasting are often long term, which means that large
changes are likely. Second, environmental trends sometimes interact with one another and
lead to new concerns. And third. Interventions can also lead to unintended changes. This
chapter discusses forecasting methods that are relevant to environmental decision making,
suggests when they are useful, describes evidence on the efficacy of each method, and
provides references so readers can get details about the methods. A key consideration is
whether or not the forecasting methods are designed to assess the outcomes of
interventions. The chapter then examines issues related to presenting forecasts effectively.
Finally, it describes an audit procedure for determining whether the most appropriate
forecasting tools are being used.
A Framework for Forecasting
Figure 1 shows possible forecasting methods and how they relate to one another. The
figure is designed to represent all approaches to forecasting. The methods are organized
according to the types of knowledge. As one moves down the chart, the integration of

27
statistical and judgmental methods increases. Judgmental methods are split into those
involving one’s own behavior in given situations (intentions or role-playing) and expert
opinions. The intentions method asks people how they would act in a given situation.
Role-playing examines how people act in a situation where their actions arc influenced by
a role. Experts can be asked to make predictions about how others will act in given
situations. They can also identify analogous situations, and forecasts can be based on
extrapolations from those situations. Intentions and expert opinions can be quantified by
relating their “predictions” to various causal factors with, for example, regression
analysis. Expectations about one’s own behavior are referred to as conjoint analysis (e.g.,
given alternatives having a bundle of features that have been varied according to
an experimental plan). Expert opinions about the behavior of others (which can also be
based on an experimental design, but are often based on actual data) are referred to as
judgmental bootstrapping

JOURNALS

A Review of the Literature on Capital Budgeting and Investment Appraisal: Past,


Present, and Future Musings

Abstract
This chapter provides a historical appraisal of the development of current capital
budgeting practices and reviews capital budgeting academic research. In the late
eighteenth and early nineteenth centuries, the industrial revolution was instrumental in
creating demand for capital budgeting processes and techniques. Academic research,
beginning in the late 1940s and early 1950s, is categorized by its focus on appraisal
techniques, individual decision-maker effects, organizational issues, and environmental
factors. Experimental, analytical, agency-based, survey-based, and case-based research is
reviewed. The chapter concludes with a compilation of issues identified by academic
research and a set of questions that have not yet been addressed.

2. Capital Budgeting Theory and Practice: A Review and Agenda for Future
Research

Applied Economics and Finance Vol. 3, No. 2; May 2017

28
Lingesiya Kengatharan1 1Department of Financial Management, University of
Jaffna, Sri Lanka

The main purpose of this research was to delineate unearth lacunae in the extant capital
budgeting theory and practice during the last two decades and ipso facto become
springboard for future scholarships. Web of science search and iCat search were used to
locate research papers published during the last twenty years. Four criteria have been
applied in selection of research papers: be an empirical study, published in English
language, appeared in peer reviewed journal and full text research papers. These papers
were collected from multiple databases including OneFile (GALE), SciVerse
ScienceDirect (Elsevier), Informa - Taylor & Francis (CrossRef), Wiley (CrossRef),
Business (JSTOR), Arts & Sciences (JSTOR), Proquest ,MEDLINE (NLM), and Wiley
Online Library. Search parameters covered capital budgeting, capital budgeting decision,
capital budgeting theory, capital budgeting practices, capital budgeting methods, capital
budgeting models, capital budgeting tools, capital budgeting techniques, capital budgeting
process and investment decision. Thematic text analyses have been explored to analyses
them. Recent studies lent credence on the use of more sophisticated capital budgeting
techniques along with many capital budgeting tools for incorporating risk.
Notwithstanding, it drew a distinction between developed and developing countries.
Moreover, factors impinging on choice of capital budgeting practice were identified, and
bereft of behavioral finance and event study methodological approach were highlighted.
More extensive studies are imperative to build robust knowledge of capital budgeting
theory and practice in the chaotic environment. This research was well thought out in its
design and contributed by stating the known and unknown arena of capital budgeting
during the last two decades. This scholarship facilitates to academics, practitioners, policy
makers, and stakeholders of the company.

Recommendation

Many research scholars criticized that many researches on capital budgeting were opt-
testing the methods of capital budgeting and its practices. They were purely finding that
actual what methods were in practice. However, in practice, there are enormous factors
affecting the capital budgeting practice and it has ―country effect‖ too. In line up with
this argument, this research was well thought out in its design and become springboard
for future research. This study contributed by stating the known and unknown arena of

29
capital budgeting during the last two decades. In the cutting edge technology world, the
way of doing things have been changed and challenging. For example, decision support
system become more prevent in making decision and more advanced technological sphere
penetrates into assessing capital budgeting practices than ever before. Thus, this rese

THEORIES

Stewardship Theory Psaros (2009) states that similar to stakeholder theory, the views of
stewardship theory differ from agency theory. For example, stewardship theory does not
support the view that individuals are utility maximisers and also does not support the
assertion that all business decisions are based on economic considerations only. It asserts
that some business decisions are based on non-economic returns such as those related to
social status in the community. Donaldson and Davis (1991) add that some individuals
are motivated in their decisions by an intrinsic satisfaction in undertaking a task that
challenges them or/and achieving trust from peers and supervisors. The core of
stewardship theory is about how individuals rank their social needs in a community, such
as being accepted and valued by their peers and supervisors. Similar to executive
remuneration or compensation, ‘these needs help align the individual’s interests with their
organisation’s goals’. If the organisation maintains a good relationship with the
stakeholders, including the local community, individuals would want to make decisions
that identify them with the organisation because that would help promote their social
status in the community. If the individuals rank social status high on their list of needs,
then it would help them perform harder to achieve the organisation’s goal. Psaros (2009)
asserts that stewardship theory states that managers do not start out with the intention of
maximising their own utility at the expense of the interests of other stakeholders. In
support of stewardship theory, Kiel and Nicholson (2003, p. 190) state that ‘underlying
this rationale is the assertion that since managers are naturally trustworthy there will be
no major agency costs’. The acceptance of stewardship theory has adverse implications
on one theory that has become widely accepted, that having the chair of the board
independent of the CEO gives the organisation legitimacy for claiming to have an
efficient or sound financial management in place and hence improving the return on
equity (ROE) to the shareholders. However, Kiel and Nicholson (2003) state that their
findings support Boyd’s (1995) conclusion that the issue of CEO duality is explained
better if the size and complexity of the organisations are considered. In highly

30
entrepreneurial firms, for example in the humble beginnings of Microsoft and internet
companies the chairman-CEO duality may send a positive message to the market 30 2
Literature Review because it supports stewardship theory and enhances social status by
minimizing the agency cost. It can also lead to the organisation being seen as having a
clear leadership which may lead to better corporate performance.

Resource Dependent Theory

In addition to the studies investigating the relationship between board composition and
firm performance, sociologists have focussed on the relationship between the firm’s
social network and the firm’s performance. These studies formed the resource
dependency theory. The resource dependency theory explains how the firm’s success is
linked to its ability to control its external resources (Psaros 2009). The board of a
company plays several vital roles, such as providing advice to management on
operational and strategic issues and monitoring management. Besides these, it is also an
important link between the organisation and the external resources which an organisation
needs to maximise its performance (Hillman et al. 2000; Pfeffer and Salancik 2003). The
more control an organization has on external resources, the lower the costs of resources
and the higher the chances that the firm will minimise agency costs. The firm may then
maximise the use of resources to maximise the value of the firm. It will also help in
making strategic plans more workable and mitigate agency costs. If the success of the
organization depends on external resources, then having its members on the board of
directors of the resources company who can help to establish a relationship between the
organisation and the external resources improves the financial efficiency and management
of the organisation, reduces agency costs and hence maximises the value of the firm. It
also reduces uncertainty of accessing the resources, and external dependencies (Psaros
2009). Kiel and Nicholson (2003) argue that agency theory, stewardship theory and
resource dependence theory all play a vital role in determining what should be
appropriate corporate governance policies and structures.

31
CHAPTER IV

RESEARCH METHODOLOGY

OBJECTIVES

Primary Objective

To study the performance of capital budgeting and to evaluate the data of capital
budgeting techniques in Chowel India (P) Ltd.

Secondary Objective

 To study and ensure planning for future by setting up various budgets


 To know the budgeting operation in the company
 To analyze the elimination of wastages and increase in profitability.
 The analyse the correlation between Revenue and Sales
 To find out the standard deviation for Total assets

Evaluation of past projects and investment may cater valuable information to be


adapted in the future. Thus, planning for forthcoming days becomes easy. A clear view of
works done by different departments in the organization can be observed.

32
Need for the study

Companies are in a situation to invest a huge amount of money in order to take


their firm to a greater extends of growth. In this case, they have to take a sound
investment decision among various alternatives. If the investment decision taken up on a
project is not worth undertaking, the amount invested on a particular project would not
generate profit or value rather it creates loss to the firm. Hence, to increase wealth and
profit of the firm or to avoid loss, a sound procedure is needed. Thus, the need of capital
budgeting arises.

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


modern times. It involves decisions to commit the firm’s funds to the long term assets.
Capital budgeting or investment decisions are of considerable importance to the firm,
since they tend to determine its value by influencing its growth, profitability and risk.

The process of allocating budget for fixed investment opportunities is crucial


because they are generally long lived and not easily reversed once they are made. So we
can say that this is a strategic asset allocation process and management needs to use
capital budgeting techniques to determine which project will yield more return over a
period of time.

33
Scope of the Study

Duty of a financial manager is to choose investments with satisfactory cash flows


and rates of return. Therefore, a financial manager must be able to decide whether an
investment is worth undertaking and be able to choose intelligently between two or more
alternatives. To do this, a sound procedure to evaluate, compare, and select projects is
needed. This procedure is called Capital Budgeting.

Capital budgeting is the process of making investment decisions in capital


expenditures. A capital expenditure may be defined as an expenditure the benefits of
which are expected to be received over the period of time exceeding one year.

The study has been undertaken to understand the significance of capital budgeting
through which to analyze the performance of the capital budgeting.

 The study can help the organization to take investment decision in forthcoming
years

 It can be used as reference

 It will be helpful for fund allocation

34
Limitations of the Study

 The company’s certain information are kept secret


 The period of study restricted only to ten years.
 The study is based on the past records of the company.
 The study concentrates only on capital budgeting of the company

The whole study focuses on different kind of capital budgeting techniques. Though
these methods have sound advantages there are some computational problems and
disadvantages in adapting these techniques. Though NPV method is easy to use if
forecasted cash flows are known, in practice, it is quite difficult to obtain the estimates of
cash flows due to uncertainty. Discount rate is also difficult in practice to precisely
measure the discount rate. Further, caution needs to be applied in using the NPV method
when alternative projects with unequal lives, or under funds constraint are evaluated.
Ranking of investment projects as per the NPV rule is not independent of the discount
rates.

Likewise payback period method is not an appropriate method of measuring the


profitability of an investment project as it does not consider all cash inflows yielded by
the project. This method fails to consider the pattern of cash inflows. There is no rational
basis for setting a maximum payback period. It is generally a subjective decision.
Payback is not consistent with the objective of maximizing the market value of the firm’s
shares. Share values do not depend on payback periods of investment projects.

35
Research design

The research design is the conceptual structure within which research is


conducted; it constitutes the blueprint for the collection, measurement and analysis of
data. The research design is the arrangement o conditions for collections and analysis of
data in a manner that aims to combine relevance to the research purpose with economy in
procedure.

Descriptive Research

Descriptive research determines the relationship between two or more variables. It


includes surveys and fact finding enquiries of different kinds. The major purpose of
descriptive research is description of the state of affairs as it exists at present. The main
characteristics of this method are that the researcher has no control over the variables, he
can only report for the happening. The method of research utilized in descriptive research
is survey method of all kinds including comparative method and correlation method.

Source of Data

There are two types of data to be collected

 Primary data
 Secondary data
Primary data are those which are collected afresh and for the first time and thus
happen to the original in character.

Secondary data, the data that are already available, it refers to the data which have
already been collected and analyzed by someone else. The secondary data re collected
from company profile and website. Mostly the data used for the project are secondary
data.

36
Method for Analysis

Payback Period Method

The payback period is also called as pay off or payout period method. That
represents the period in which the total investment in permanent assets payback itself.
The 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.
Thus, it measures the period of time for the original cost of the project to be recovered
from the additional earnings of the project itself. Under this method, various investments
are ranked according to the length of their payback period in such a manner that the
investment with a shorter payback period is preferred to the one which has longer
payback period. It is exact amount of time required for a firm to recover its initial
investment in a project as calculated from cash flows.

The payback measures the length of time it takes a company to recover in cash its initial
investment. This concept can also be explained as the length of time it takes the project to
generate cash equal to the investment and pay the company back. It is calculated by
dividing the capital investment by the net annual cash flow. If the net annual cash flow is
not expected to be the same, the average of the net annual cash flows may be used.

The payback method is a one-sidedly derived number which tells a small amount about a
project's beginning phase, but it tells one close to nothing about the full lifetime of the
project. The effortlessness of calculating payback can possibly promote carelessness,
especially in the failure to incorporate all the costs linked with investing in a project, such
as training and maintenance. The payback method does not account for the time value of
money either, and is therefore considered an unsophisticated capital budgeting technique.
Even though the payback method has these cons associated with it, the simplicity of the
method can allow it to be used as a filter for those projects which should go on to a more

37
in-depth method, such as those explained below. If a project is not recommended based
on the payback method, then chances are pretty high the project should not even be
considered for the other methods.

Rate of Return Method

The method takes into account the earnings expected from the investment over
their whole life. It is known as accounting rate of return method for the reason that under
this method, the accounting concept of profit is used rather than cash inflows.

According to this method, various projects are ranked in order of the rate of
earnings or rate or returns. The project with the higher rate of return is selected as
compared to the one with lower rate of returns. This method can also be used to make
decision as to accepting or rejecting the proposal.

The IRR method is another sophisticated capital budgeting technique and is the
most widely used. It is, however, more complicated to calculate by hand, and a scientific
calculator or spreadsheet application may need to be used. Businesspeople typically
would rather see calculation results in the form of annual rates of return instead of actual
dollar returns. This allows them to really compare two or more projects for ranking
purposes to see which project is going to provide more bang for the buck. The IRR
method gives the rate of return result. This is especially important in our current
economic climate, where businesses are trying to cut costs and only invest in those
projects which will yield a higher rate of return.

Net Present Value Method

It is modern method of evaluating investment proposals. This method takes into


consideration the time value of money and attempts to calculate the return on investments
by introducing the factor of time element. The net present values of a inflows and
outflows of cash occurring during the entire life of the project is determined separately for
each year by discounting these flows by the firms cost of capital or predetermined rate.

38
Net Present Value measures the difference between present value of future cash inflows
generated by a project and cash outflows during a specific period of time. With a help of
net present value we can figure out an investment that is expected to generate positive
cash flows.

The NPV method does take into consideration the time value of money, so it is referred to
as a sophisticated capital budgeting technique. Therefore, everything is calculated based
of today's dollars. For example, if $300,000 is expected to be earned in year 5, then its
worth is $155,811 in today's dollars. This method is easier to calculate by hand than the
IRR method. In addition, the NPV method gives a more realistic solution due to the fact
that it takes into consideration that the firm reinvests intermediate cash flows at the
company's cost of capital rate, rather than the high rate specified by the IRR method. The
NPV method is the theoretically preferred method of capital budgeting techniques. (p.
429-430)

The NPV is considered less insightful because it does not measure the interest rates,
profitability, and other benefits relative to the amount invested. This means that NPV
gives one a measure of the expected dollar amount of money made from the proposed
project. Most often, financial managers want to see results measured in annual rate of
return, such as with the IRR method.

In order to calculate net present value (NPV), we first estimate the expected future cash
flows from a project under consideration. The next step is to calculate the present value of
these cash flows by applying the discounted cash flow (DCF) valuation procedures. Once
we have the estimated figures then we will estimate NPV as the difference between
present value of cash inflows and the cost of investment

Net Present Value measures the difference between present value of future cash inflows
generated by a project and cash outflows during a specific period of time. With a help of
net present value we can figure out an investment that is expected to generate positive
cash flows.

In order to calculate net present value (NPV), we first estimate the expected future cash
flows from a project under consideration. The next step is to calculate the present value of
these cash flows by applying the discounted cash flow (DCF) valuation procedures. Once

39
we have the estimated figures then we will estimate NPV as the difference between
present value of cash inflows and the cost of investment

Capital Budgeting Process

Evaluation of Capital budgeting project involves six steps:

 First, the cost of that particular project must be known.


 Second, estimates the expected cash out flows from the project, including residual
value of the asset at the end of its useful life.
 Third, riskiness of the cash flows must be estimated. This requires information
about the probability distribution of the cash outflows.
 Based on project’s riskiness, Management find outs the cost of capital at which
the cash out flows should be discounted.
 Next determine the present value of expected cash flows

4.6 Importance of Capital Budgeting Decisions


Capital budgeting is a process used to determine whether a firm’s proposed investments
or projects are worth undertaking or not. The process of allocating budget for fixed
investment opportunities is crucial because they are generally long lived and not easily
reversed once they are made. So we can say that this is a strategic asset allocation process
and management needs to use capital budgeting techniques to determine which project
will yield more return over a period of time.

The question arises why capital budgeting decisions are critical? The foremost
importance is that the capital is a limited resource which is true of any form of capital,
whether it is raised through debt or equity. The firms always face the constraint of capital
rationing

40
4.7 ADVANTAGES AND DISADVANTAGES OF CAPITAL BUDGETING
TECHNIQUES

Advantages

The payback method is popular with business analysts for several reasons. The first is its
simplicity. Most companies will use a team of employees with varied backgrounds to
evaluate capital projects. Using the payback method and reducing the evaluation to a
simple number of years is an easily understood concept. Identifying projects that provide
the fastest return on investment is particularly important for companies with limited cash
that need to recover their money as quickly as possible. Managers use the payback
method to make quick evaluations of projects with small investment. These small projects
do not necessarily involve a group of employees, and it is not necessary to conduct a
rigorous economic analysis.

Disadvantages

The payback method ignores the time value of money. The cash inflows from a project
may be irregular, with most of the return not occurring until well into the future. A project
could have an acceptable rate of return but still not meet the company's required
minimum payback period. The payback model does not consider cash inflows from a
project that may occur after the initial investment has been recovered. Most major capital
expenditures have a long life span and continue to provide income long after the payback
period. Since the payback method focuses on short-term profitability, an attractive project
could be overlooked if the payback period is the only consideration.

Capital Budgeting by Payback Period

41
The most-used method of capital budgeting is determining the payback period. The
company establishes an acceptable amount of time in which a successful investment can
repay the cost of capital to make it. Investment alternatives with too long a payback
period are rejected. Investment alternatives inside the payback period are evaluated on the
basis of the fastest payback. Payback method disadvantages include that it does not
account for the time value of money.

Net Present Value Capital Budgeting

In net present value capital budgeting, each of the competing alternatives for a firm’s
capital is assigned a discount rate to help determine the value today of expected future
returns. Stated another way, by determining the weighted average cost of capital over
time, also called the discount rate, a company can estimate the value today of the
expected cash flow from an investment of capital today. By comparing this net present
value of two or more possible uses of capital, the opportunity with the highest net present
value is the better alternative.

A disadvantage of the net present value method is the method's dependence on correctly
determining the discount rate. That calculation is subject to many variables that must be
estimated.

The Internal Rate of Return Method

An advantage of capital budgeting with the internal rate of return method is that the initial
calculations are easier to perform and understand for company executives who may not
have a financial background. Excel has an IRR calculation function.

The disadvantage of the IRR method is that it can yield abnormally high rates of return by
overestimating the value of reinvesting cash flow over time.

TOOLS USED FOR ANALYSIS:

1. Net present Value (NPV)


2. Payback Period (PBP)
3. Average rate of return (ARR)
4. Profitability Index (PI)
5. Correlation analysis

42
6. Standard Deviation
7. Mean
8. Trend Analysis

DATA ANALYSIS AND INTERPRETATION

PAY BACK PERIOD

The payback measures the length of time it takes a company to recover in cash its initial
investment. This concept can also be explained as the length of time it takes the project to
generate cash equal to the investment and pay the company back. It is calculated by
dividing the capital investment by the net annual cash flow. If the net annual cash flow is
not expected to be the same, the average of the net annual cash flows may be used.

Initial Investment
Payback Period =
Cash Inflow per Period

CALCULATION OF ANNUAL CASH INFLOW

Year 2013 2014 2015 2016 2017

Total Sales 1606310970 1952574983 2062496269 2177381956 2371633523

Less: Costs 1555885007 1815614157 1961324252 2068196415 2286017710

EBDT 50425963 136960826 101172018 128327364 85615818

LESS: - 967090 - 10393113 12541810


Depreciation or
other
exceptional

43
items

EBT 50425963 135993136 101172018 117934251 73074008

LESS: Tax 17100966 100752605 (22354952) 38433857 26851541

PAT (Annual 33324997 35241131 123526969 79500394 46222467


Cash Inflow)

Payback Period Analysis

Year Initial investments Annual cash Inflow Payback period

2013 72368453 33324997 2.17

2014 175080399 35241131 4.97

2015 180236203 123526969 1.46

2016 46246000 79500394 0.58

2017 46246000 46222467 1.00

INTERPRETATION

The shorter the payback period, the sooner the company recovers its cash investment.
Whether a cash payback period is good or poor depends on the company's criteria for
evaluating projects. From the above it is inferred that the company have its highest pay
back on 2014 with 4.97 or 5 years.

The current year (2017) PBP is found to be 1 year. This shows that the company recovers
its investment in 1 year

44
Payback Period Analysis

4.97
5
4.5
4
3.5
3
2.5 2.17
2
1.5 1.46
1
0.5 1
0.58
0
2013
2014
2015
2016
2017

45
ACCOUNTING RATE OF RETURN (ARR)

ARR method uses accounting information as reveals by financial statements, to measure


the profitability of the investment proposals. It is also known as the return on investment.
Sometimes it is called as the Average rate of return.(ARR)

PAT

Average Rate of Return (ARR) = ------------------------------------------- * 100

Original Investment

Year PAT Initial investments Average Rate of


Return

2013 33324997 72368453 0.46

2014 35241131 175080399 0.20

2015 123526969 180236203 0.68

2016 79500394 46246000 1.72

2017 46222467 46246000 1.00

Inference:
The chart shows that, in the year 2014 the company had lower expected rate of return
than the minimum rate so the investment on the particular project can be reduced. In the

46
year 2016 the project has a higher rate of return than the minimum rate. Higher rate of
return indicates that investment made in the particular year has higher cash inflow in the
future. The Average rate of return for the year 2017 is reduced to 1 year.

ACCOUNTING RATE OF RETURN (ARR)

1.8
1.72
1.6

1.4

1.2

1
1
0.8
0.68
0.6 0.46
0.4
0.2
0.2
0
2013
2014
2015
2016
2017

47
NET PRESENT VALUE

Considering the time value of money is important when evaluating projects with different
costs, different cash flows, and different service lives. Discounted cash flow techniques,
such as the net present value method, consider the timing and amount of cash flows. To
use the net present value method, you will need to know the cash inflows, the cash
outflows, and the company's required rate of return on its investments. The required rate
of return becomes the discount rate used in the net present value calculation.

Formula

Present value = Cash flows * Present value of Re. 1 @ 10% discount using present value
table

Net present value = Present value of all cash inflows – present value of initial
investment.

Decision Rule:

Accept: NPV > Zero

Reject: NPV< Zero

48
Net Present Value Analysis

Year PAT Discounting present Present Value Present value of


value of Net Cash Initial
Table Flows investment
(Present value of Re.1
@ 10 %)
2013 33324997 0.909 30292422.27 65782923.78
2014 35241131 0.826 29109174.21 144616409.6

2015 123526969 0.751 92768753.72 135357388.5


2016 79500394 0.683 54298769.1 31586018
2017 46222467 0.621 28704152.01 28718766
235173271.3 406061505.8
TOTAL =

Calculation:

Present value of all cash flows 23, 51, 73, 271.3

Less: Present value of all Initial Investment 40, 60, 61,505.8

Net Present Value (20078-12) (17, 08, 88,234.5)

Interpretation

Above table clearly indicates that the Net Present Value for the five years from
2013 to 2017 is (17, 08, 88,234.5)

49
A negative NPV indicates that the project will probably be unprofitable and
therefore should be adjusted, if not abandoned altogether. NPV enables a management to
consider the time value of money it will invest. This concept holds that the value of
money increases with time because it can always earn interest in a savings account.
Therefore, any other investment of that money must be weighed against how the funds
would perform if simply deposited and saved.

PROFITABILITY INDEX

Profitability index (PI), also known as profit investment ratio (PIR) and value investment
ratio (VIR), is the ratio of payoff to investment of a proposed project. It is a useful tool
for ranking projects because it allows you to quantify the amount of value created per unit
of investment.

The ratio is calculated as follows:

Assuming that the cash flow calculated does not include the investment made in the
project, a profitability index of 1 indicates breakeven. Any value lower than one would
indicate that the project's PV is less than the initial investment. As the value of the
profitability index increases, so does the financial attractiveness of the proposed project.

Rules for selection or rejection of a project:

 If PI > 1 then accept the project


 If PI < 1 then reject the project

50
PAT Discounting present Present Value Present value
Year (Rs. In Crore) value of Net Cash of Initial
Table Flows investment
(Present value of Re.1
@ 10 %)

2013 33324997 0.909 30292422.27 65782923.78


2014 35241131 0.826 29109174.21 144616409.6
2015 123526969 0.751 92768753.72 135357388.5
2016 79500394 0.683 54298769.1 31586018
2017 46222467 0.621 28704152.01 28718766
406061505.8
TOTAL = 235173271.3

PROFITABILITY INDEX = PV OF CASH INFLOWS ÷ INITIAL INVESTMENT

PI = 235173271.3 ÷ 406061505.8

PI = 0.579

DECISION RULE:

Accept: PI >1

Reject: PI<1

INFERENCE:

51
PI is lesser than 1 so Reject the proposal

It indicates that for every one rupee investment there will be 0.579 loss

STANDARD DEVIATION

Statistical measure of the degree to which an individual value in a probability distribution


tends to vary from the mean of the distribution. From a normal distribution, one standard
deviation includes about 66% of the population; two standard deviations include about
95%.

STANDARD DEVIATION CALCULATION OF PROFIT AFTER TAX

(In Crores)

Year PAT (x) X2


= ∑ x/ 5 X=x-

2017 0.4622 0.63562 (0.17342) 0.0300744964

2016 0.7950 0.63562 0.15938 0.0254019844

2015 1.2353 0.63562 0.59968 0.3596161024

2014 0.3524 0.63562 (0.28322) 0.0802135684

2013 0.3332 0.63562 (0.30242) 0.0914578564

∑ X 3.1781 ∑ X2 0.586764008

∑ X2 / n-1 0.146691002

S.D = 0.3830026

52
0.4
0.359616102
0.35

0.3

0.25

0.2

0.15

0.1

0.05 0.030074496 0.080213568 0.091457856


0.025401984
0
2017
2016
2015
2014
2013

INFERENCE:

Standard deviation is used in determination of risk involved in an investment. PAT is


fluctuating throughout the period of study. PAT is high in 2015 with 1.2353 and very low
in 2013. The current year (2017) PAT is decreased to 0.4622 when compared to the
previous year (2016) with 0.7950.

The Standard Deviation for PAT is 0.3830026

Variance for PAT is 0.146691002

53
STANDARD DEVIATION CALCULATION OF INVESTMENT

(In Crores)

Year Investment (x) X2


=∑X/5 X=x-

2017 4.625 10.4038 (5.7788) 33.3945

2016 4.625 10.4038 (5.7788) 33.3945

2015 18.024 10.4038 7.6202 58.0674

2014 17.508 10.4038 7.1045 50.470

2013 7.237 10.4038 (3.1668) 10.029

∑ X 52.019 ∑ X2 185.355

∑ X2 / n-1 46.33875

S.D = 6.0872

54
60 58.0674

50 50.47

40
33.3945
33.3945
30

20

10
10.029
0
2017
2016
2015
2014
2013

INFERENCE:

The Investments of the company has been in the increasing rate till 2015. The company
has the same investment for the last 2 years 2016 and 2017. The investment of the
company has been decreased. In the year 2017 the Investment has been decreased to
4.625.

The standard deviation of Investment is 6.0872

The Variance is 46.33875

55
Standard deviation is applied to an investment to measure the investment's volatility.
Standard deviation is also known as historical volatility and is used by investors as a
gauge for the amount of expected volatility.

STANDARD DEVIATION CALCULATION OF REVENUE

(In Crores)

Year REVENUE (x) X2


=∑X/5 X=x-

2017 23.716 20.379 17.3598 301.368656

2016 21.965 20.379 15.6088 245.6346374

2015 20.625 20.379 14.2688 203.5986534

2014 19.526 20.379 13.1698 173.443632

2013 16.063 20.379 9.7068 94.22196624

∑ X 101.895 ∑ X2 1016.261545

∑ X2 / N 254.0654

S.D = 15.93943

56
REVENUE (X)

25 23.716
21.965
20.625
19.526
20
16.063
15

10

0
2017 2016 2015 2014 2013
REVENUE (X)

INFERENCE:

The greater the S.D, the greater will be the magnitude of the deviations of the values from
the mean. The S.D measures the variability of values. Revenue is in a increasing
position. Revenue is high in 2017 with 23.716 when compared to the previous year 2016
with 21.965.

The Standard Deviation for Revenue is 15.93943

The Variance is 254.0654

57
CORRELATION ANALYSIS

CORRELATION CALCULATION OF REVENUE AND EBIT

Year REVENUE (X) X2 EBIT(Y) Y2 XY

2017 23.716 562.4487 0.856 0.732736 20.3009

2016 21.965 482.4612 1.283 1.646089 28.1811

2015 20.625 425.3906 1.012 1.024144 20.8725

2014 19.526 381.2647 1.37 1.8769 26.75062

2013 16.063 258.02 0.504 0.504 8.095752

∑ = 101.895 2109.585 5.025 5.533885 104.2014

CORRELATION 0.449147

58
.

25
23.716
21.965
20 20.625
19.526

16.063
15

10

0.856 1.283 1.012 1.37


0 0.504
2017 2016 2015 2014 2013

REVENUE (X) EBIT(Y)

INFERENCE:

There is a high degree of correlation between Revenue and EBIT as the correlation value
0.449147 is more than 0.05. It measures the closeness of relationship between Revenue
and EBIT and they both have a positive correlation

59
CORRELATION CALCULATION OF SALES AND PAT

Year SALES (X) X2 PAT (Y) Y2 XY

2017 23.5 552.25 0.4622 0.21362884 10.8617

2016 21.8 475.24 0.7950 0.632025 17.331

2015 20.5 420.25 1.2353 1.52596609 25.32365

2014 18.3 334.89 0.3524 0.124102224 6.44892

2013 15.7 246.49 0.3332 0.11102224 5.23124

∑= 99.8 2029.12 3.1781 2.606828 65.19651

CORRELATION 0.377508531

60
CORRELATION CALCULATION OF SALES AND PAT- CHART

25
23.5
21.8
20 20.5
18.3

15.7
15

10

0.795 1.2353
0 0.4622 0.3524 0.3332
2017 2016 2015 2014 2013

SALES (X) PAT (Y)

INFERENCE:

There is a high degree of correlation between Sales and Profit after Tax because the
correlation value (0.377508531) is more than 0.05. It measures the closeness of
relationship between Sales and Profit after Tax and they both have a positive correlation.

61
CORRELATION CALCULATION OF EXPENSES AND PAT

Year EXPENSES (X) X2 PAT(Y) Y2 XY

2017 22.9 524.41 0.4622 0.21362884 10.58438

2016 20.7 428.49 0.7950 0.632025 16.4565

2015 19.6 384.16 1.2353 1.52596609 21.21188

2014 18.1 327.61 0.3524 0.124102224 6.41368

2013 15.5 240.25 0.3332 0.11102224 5.19792

∑= 96.80 1904.92 3.1781 2.606828 62.86436

CORRELATION 0.297873

62
CHART- CORRELATION CALCULATION OF EXPENSES AND PAT

25
22.9
20.7
20 19.6
18.1

15 15.5

10

0.795 1.2353
0 0.4622 0.3524 0.3332
2017 2016 2015 2014 2013

EXPENSES (X) PAT (Y)

INFERENCE:

There is a high degree of correlation between Expenses and PAT, the correlation value is
0.297873 above than 0.05. It measures the closeness of relationship between Expenses
and PAT and they both have a positive correlation.

63
MEAN

The Mean of a data set illustrates an average. To find the mean, add all of the numbers in
a data set and then divide by how many numbers given in the data set. The mean would
be significantly affected if one of the numbers in a data set is an outlier. The mean is a
good measure of central tendency to use when a data set doesn’t have any outliers

CALCULATION OF MEAN AND STANDARD DEVIATION FOR EXPENSES

i. CALCULATION OF MEAN FOR EXPENSES

YEAR EXPENSES( x)

2013 1555885007

2014 1815614877

2015 1961324252

2016 2068196415

2017 2286017710

∑ x= 9687038261

64
9687038261

= ---------------------------- = 1937407652

ii. CALCULATION OF STANDARD DEVIATION FOR EXPENSES

YEAR EXPENSES( x) (X- 1937407652) X2

2013 1.555885007 -0.381522645 0.145559529

2014 1.815614877 -0.121792775 0.01483348

2015 1.961324252 0.023916600 0.000572004

2016 2.068196415 0.130788763 0.017105701

2017 2.286017710 0.348610058 0.121528973

∑ x= 9.687038261 0.299599686

0.299599686

= ----------------------------------------

5-1

VARIANCE = 0.074899921 or 74, 89,921

STANDARD DEVIATION= 0.2736785 or 27, 36,785

65
CHART- EXPENSES

Expenses

2.28601771
2.068196415
1.961324252
1.815614877
1.555885007

2013 2014 2015 2016 2017

Expenses

Inference:

From the above calculation,

The average Expenses for 5 years are found to be 1,93,74,07,652.

The Variance for expenses is found to be 0.074899921 or 74, 89,921

The Standard Deviation is found to be 0.2736785 or 27, 36,785

66
TREND ANALYSIS

Trend analysis is based on the idea that what has happened in the past gives traders an
idea of what will happen in the future. Trend analysis has a great advantage that it can
also be used to predict the future events. This is possible by forecasting the future cash
flow based on the data available of the past. With the help of trend analysis, you can
predict the future and track the variances to add performance.

Y=a+b(x)

TREND ANALYSIS -PAT

Y=a+b(x)
Year
PAT(y) x X2 xy

2013 0.3332 -2 4 -0.6664 0.4955

2014 0.3524 -1 1 -0.3524 0.56556

2015 1.2353 0 0 0 0.63562

2016 0.7950 1 1 0.795 0.70568

2017 0.4622 2 4 0.9244 0.77574

Σ y = 31.781 Σ x2=10 0.7006

Y=a +b (x)

a = Σy /n
67
b= Σxy / Σ x2

a= 0.63562

b= 0.07006

For: 2018

Let us assume x=3

Y=a + b(x)

Y= 6.3562 +0.0368737 *3

Y= 0.7462411

PAT

1.4

1.2 1.2353

0.8 0.795 0.77574 0.746


0.70568
0.6 0.63562
0.56556
0.4955
0.4622
0.4
0.3332 0.3524

0.2

0
2013 2014 2015 2016 2017 2018

PAT(y) Y=a+b(x)

INTERPRETATION

 The PAT is increasing at an increasing rate for the all the five years. The company
has the highest PAT on 2015 with 1.2535

68
 The PAT trend is found to be increasing rate this is due to the gradual decrease of
expenses for the first 3 years. In the year 2017 the PAT is tend to decrease this is
due to the increase in the interest and expenses of the company.
 The PAT trend is decreasing so the company should take necessary steps to
increase the profit of the company by decreasing the expenses and debtors

EBIT

Y=a+b(x)
Year EBIT(y)
x X2 xy

2013 0.504 -2 4 -1.008 0.8776

2014 1.360 -1 1 -1.36 0.9403

2015 1.012 0 0 0 1.003

2016 1.283 1 1 1.283 1.0657

2017 0.856 2 4 1.712 1.1284

5.015 Σ x2=10 0.627

Y=a +b (x)

a = Σy /n

b= Σxy / Σ x2

a=1.003

b=0.0627

For: 2018

Let us assume x=3

69
Y=a + b(x)

Y= 1.003 +0.033*3

Y= 1.102

EBIT

1.6

1.4
1.36
1.283
1.2
1.1284 1.102
1.0657
1 1.012
1.003
0.9403
0.8776 0.856
0.8

0.6
0.504
0.4

0.2

0 EBIT(y) Y=a+b(x)
2013 2014 2015 2016 2017 2018

INTERPRETATION

 The EBIT is fluctuating for the all the five years. The company has the highest
EBIT on 2014 with 13.60
 The EBIT trend is found to be increasing rate this is due to the gradual Increase of
Sales

70
 The EBIT trend is decreasing in 2017 this may due to increase in the expenses and
high interest.

FINDINGS

1. The current year (2017) PBP is found to be 1 year. This shows that
the company recovers its investment in 1 year

2. The Average rate of return for the year 2017 is reduced to 1 year
the Net Present Value for the five years from 2013 to 2017 is (17, 08, 88,234.5).
A negative NPV indicates that the project will probably be unprofitable and
therefore should be adjusted, if not abandoned altogether.

3. PI is lesser than 1 so Reject the proposal. It indicates that for every


one rupee investment there will be 0.579 loss

4. The current year (2017) PAT is decreased to 4.622 when compared


to the previous year (2016) with 7.950.

5. The Standard Deviation for PAT is 3.425679518 and Variance for


PAT is 11.73528016

6. In the year 2017 the Investment has been decreased to 4.625.

7. The standard deviation of Investment is 6.089. The Variance is


37.071

8. Revenue is high in 2017 with 23.716 when compared to the


previous year 2016 with 21.965.

9. The Standard Deviation for Revenue is 14.25665841. The Variance


is 203.252309

71
10. There is a high degree of correlation between Revenue and EBIT
as the correlation value 0.449147 is more than 0.05. It measures the closeness of
relationship between Revenue and EBIT and they both have a positive correlation.

11. There is a high degree of correlation between Sales and Profit after
Tax because the correlation value (0.377508531) is more than 0.05. It measures
the closeness of relationship between Sales and Profit after Tax and they both
have a positive correlation.

12. There is a high degree of correlation between Expenses and PAT,


the correlation value is 0.288887458 above than 0.05. It measures the closeness of
relationship between Expenses and PAT and they both have a positive correlation.

13. The average Expenses for 5 years are found to be 1,93,74,07,652.

14. The Variance for expenses is found to be 0.074899921 or


74, 89,921

15. The Standard Deviation is found to be 0.2736785 or 27, 36,785

16. The PAT is increasing at an increasing rate for the all the five
years. The company has the highest PAT on 2015 with 1.2535

17. The PAT trend is found to be increasing rate this is due to the
gradual decrease of expenses for the first 3 years.

18. In the year 2017 the PAT is tend to decrease this is due to the
increase in the interest and expenses of the company.

19. The EBIT is fluctuating for the all the five years. The company has
the highest EBIT on 2014 with 1.360

20. The EBIT trend is found to be increasing rate this is due to the
gradual Increase of Sales

72
SUGGESTIONS

1. The shorter the payback period, the sooner the company recovers its cash
investment. Whether a cash payback period is good or poor depends on the
company's criteria for evaluating projects. Higher rate of return indicates that
investment made in the particular year has higher cash inflow in the future.
2. A negative NPV indicates that the project will probably be unprofitable and
therefore should be adjusted, if not abandoned altogether.
3. NPV enables a management to consider the time value of money it will invest.
This concept holds that the value of money increases with time because it can
always earn interest in a savings account. Therefore, any other investment of
that money must be weighed against how the funds would perform if simply
deposited and saved.

4. The PAT trend is decreasing so the company should take necessary steps to
increase the profit of the company by decreasing the expenses and debtors

5. The EBIT trend is decreasing in 2017 this may due to increase in the expenses
and high interest. So the company should take necessary actions to decrease
the expenses.

73
CONCLUSION

Capital budgeting or investment appraisal is the planning process used to


determine whether an organization’s long term investments such as new machinery,
replacement machinery, new plants, new products, and research development projects are
worth pursuing.

It is budget for major capital, or investment, expenditures. It is a process used to


determine whether a firm’s proposed investments or projects are worth undertaking or
not. The process of allocating budget for fixed investment opportunities is crucial because
they are generally long lived and not easily reversed once they are made. So we can say
that this is a strategic asset allocation process and management needs to use capital
budgeting techniques to determine which project will yield more return over a period of
time.

Through this study it is very clear that capital budgeting essentially involves evaluation of
the worth of capital investment proposals based on estimates of cash inflows and
outflows. The study emphases that efficient allocation of capital is the most important
finance function in the modern times. Thus, capital budgeting or investment decisions are
of considerable importance to the firm, since they tend to determine its value by
influencing its growth, profitability and risk. The analysis of payback period and Average
Rate of Returns conclude that management should take efforts to perform the capital
budget in efficient manner.

74
Consolidated five years Balance Sheet of Chowel India (P) Ltd

Income and Expenditure

PARTICULARS 2013 2014 2015 2016 2017


Rs. Crore (Non-Annualised)

Total income 10.229 10.642 12.177 13.944 12.793


Sales 9.713 10.152 11.685 13.316 12.312
Industrial sales 9.713 10.152 11.685 13.316 12.312
Income from non-financial 0 0 0 0 0
services
Income from financial services 0.488 0.461 0.47 0.601 0.406
Interest 0.18 0.153 0.135 0.174 0.255

Dividends 0.19 .222 .25 0.098 .142


Treasury operations 0.118 0.086 0.085 0.329 0.009
Other income 0.017 0.012 0.012 0.014 0.055
Prior period income & 0.011 0.017 0.01 0.013 0.02
extraordinary income
Change in stock -0.029 0.189 0.383 -0.316 -0.075

Total expenses 9.379 9.942 11.677 12.893 11.824


Raw material expenses 4.161 4.423 5.596 6.715 5.205
Packaging expenses 0 0 0 0 0
Purchase of finished goods 0 0 0 0 0
Power, fuel & water charges 0.863 0.709 0.708 0.855 1.123
Compensation to employees 1.006 1.123 1.264 1.418 1.598
Indirect taxes 1.048 1.254 1.356 1.054 0.89
Royalties, technical know-how 0 0 0 0 0
fees, etc.

75
Lease rent & other rent 0.011 0.011 0.011 0.015 0.016
Repairs & maintenance 0.234 0.218 0.242 0.265 0.305
Insurance premium paid 0.031 0.027 0.02 0.014 0.029
Outsourced mfg. jobs (incl. job 0.224 0.346 0.489 0.351 0.308
works, etc.)
Outsourced professional jobs 0.005 0.008 0.007 0.01 0.01
Directors' fees 0.002 0.002 0.002 0.002 0.002
Selling & distribution expenses 0.576 0.56 0.674 0.727 0.896
Travel expenses 0.153 0.177 0.187 0.208 0.186
Communication expenses 0.042 0.039 0.039 0.045 0.041
Printing & stationery expenses 0 0 0 0 0
Miscellaneous expenses 0.314 0.306 0.335 0.444 0.404

Other operational exp. of indl. 0 0 0 0 0


Enterprises
Other oper. exp. of non-fin. 0 0 0 0 0
service enterprises
Share of loss in 0 0 0 0 0
subsidiaries/JVs,etc.
Lease equalisation adjustment 0 0 0 0 0
Loss on securitisation of 0 0 0 0 0
assets/loans
Fee based financial service 0.015 0.017 0.022 0.025 0.021
expenses
Treasury operations expenses 0 0 0 0 0.064
Total provisions 0 0 0.003 0.025 0
Write-offs 0.006 0.007 0.011 0.004 0.001
Less: Expenses capitalized 0.026 0.03 0.074 0.072 0.029
Less: DRE & expenses charged to 0.024 0 0.03 0.047 0.036
others

Prior period & extraordinary 0 0.005 0.011 0 0.003


expenses
Interest paid 0.015 0.012 0.023 0.045 0.052
Financial charges on instruments 0 0 0 0 0
Expenses incurred on raising 0 0 0 0 0
deposits/debts
Depreciation 0.393 0.396 0.416 0.375 0.35
Amortisation 0 0 0 0 0
Provision for direct taxes 0.33 0.332 0.365 0.415 0.385
PAT 0.821 0.889 0.883 0.735 0.894

PBDITA 0.1559 0.1629 1.687 1.57 1.681


PBDTA 0.1544 0.1617 1.664 1.525 1.629
PBT 0.1151 0.1221 1.248 1.15 1.279

76
7.2 Investments Report

PARTICULARS 2013 2014 2015 2016 2017


Rs. Crore (Non-Annualised)
-
Investments 3.347 3.255 2.962 2.899 2.91
In equity shares 0.397 0.401 0.412 0.417 0.42
Group companies 0.223 0.223 0.223 0.219 0.219
Other than group companies 0.174 0.178 0.189 0.198 0.201
In debt instruments 0.776 0.636 0.565 0.352 0.116
Other than government 0.775 0.635 0.564 0.351 0.116
debentures/bonds
Other than group companies 0.775 0.635 0.564 0.351 0.116
In bonds/debentures of 0.001 0.001 0.001 0.01 0
government/local bodies
In mutual funds 2.159 2.225 1.99 2.161 0.238
Other than group companies 2.159 2.225 1.99 2.161 2.38
In others 0.024 0 0.004 0 0
Less: Provision for diminution in value 0.009 0.007 0.01 0.032 0.006
of investments

Book value of quoted investments 0.288 0.292 2.292 2.328 2.55


Market value of quoted investments 0.415 0.426 2.065 0.831 0.859
Marketable securities 2.447 2.517 2.292 2.328 2.55

77
Report Showing Appreciation of Profit

PARTICULARS 2013 2014 2015 2016 2017

Rs. Crore (Non-Annualised)


-
PBDITA 1.559 1.629 1.687 1.57 1.681
Depreciation 0.393 0.396 0.416 0.375 0.35
Amortisation 0 0 0 0 0

PBIT 1.166 1.233 1.271 1.195 1.331


Interest paid 0.015 0.012 0.023 0.045 0.052
Financial charges on 0 0 0 0 0
instruments
Fee based financial 0 0 0 0 0
services expenses

PBT 1.151 1.221 1.248 1.15 1.279


Provision for direct tax 0.33 0.332 0.365 0.415 0.385
Corporate tax 0.336 0.355 0.35 0.401 0.42
Deferred tax 0 0 0 0 0
Less: Deferred tax assets / 0.026 0.039 0.005 0.005 0.035
credit
Other direct tax 0.02 0.016 0.02 0.019 0
Fringe benefits tax 0.02 0.016 0.02 0.019 0

PAT 0.821 0.889 0.883 0.735 0.894

78
Prior period & extra- 0.011 0.017 0.01 0.013 0.02
ordinary income
Prior period & extra- 0 0.005 0.011 0 0.003
ordinary expenses
Net prior period & -0.011 -0.012 0.001 -0.013 -0.017
extraordinary transactions

PBDITA net of P&E 1.548 1.17 1.688 1.557 1.664


PBIT net of P&E 1.155 1.221 1.272 1.182 1.314
PBT net of P&E 1.14 1.209 1.249 1.137 1.2.62
PAT net of P&E 0.81 0.877 0.884 0.722 0.877

Distribution of profits (%)


PBDITA 100 100 100 100 100
Depreciation & 2.5208467 2.43093923 2.46591583 2.38853503 2.08209399
Amortisation
Financial charges 0.096215523 0.073664825 0.136336692 0.286624204 0.309339679
Tax 2.1167415 2.03806016 2.16360403 2.6433121 2.29030339
PAT 5.26619628 5.45733579 5.23414345 4.68152866 5.31826294

Non—provisions 0 0 0 0 0
Diminution in 0 0 0 0 0
investement
Sundry debtors 0 0 0 0 0
Loans & advances 0 0 0 0 0
including NPAs
Loans & advances to 0 0 0 0 0
group cos.
Interest expenses 0 0 0 0 0
Power expenses 0 0 0 0 0
Gratuity 0 0 0 0 0
Others 0 0 0 0 0

79

Das könnte Ihnen auch gefallen