Beruflich Dokumente
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Project Report
On
“CAPITAL BUDGETING”
At
Dissertation Submitted
In Finance
Submitted By
FinanceManager
CERTIFICATE
DECLARATION
I hereby declare that the project report titled “CAPITAL BUDGETING” submitted in
partial fulfillment of the requirements for the Post Graduation of “Masters Programme In
International Business”, from a bonafide work carried out by me under the guidance of
Mr. T. Koteshwar Rao, Managing Director of Finance, Dr. Reddy’s Laboratories Limited,
FTO – III, Bachupally Hyderabad.
I also declare that this is the result of my own effort and is not submitted to any other
University for the award of any other Degree, Diploma, Fellowship or prizes.
Place:
ACKNOWLEDGEMENT
I take this opportunity to acknowledge, all the people who rendered their valuable advice in
bringing the project to function.
As part of curriculum at college. The project enables us to enhance our skills, expand our
knowledge by applying various theories, concepts and laws to real life scenario which
would further prepare us to face the extremely “Competitive Corporate World” in the near
future.
I express my sincere gratitude to the staff of COLLEGE Hyderabad. I specially thank “the
management and staff of Dr. Reddy’s” for creating out the study and for their guidance and
encouragement that made the project very effective and easy.
Dr. Reddy’s, for his valuable guidance and cooperation throughout my project work.
I would like to thank Mr. Koteshwar Rao, Mr. Kalyan Kumar and Mr. Doki Srinivas ,
for guiding and directing me in the process of making this project report and for all the
support and encouragement.
I am grateful to our Internal Faculty, faculty in MPIB Department for his support and
assistance in my project work.
I have tried my level best to put my experience and analysis in writing this report. I am
grateful to Dr. Reddy’s as an organization and its various employees for helping me to learn
and explore many fields.
INDEX
INTRODUCTION
Capital budgeting (or investment appraisal) is the planning process used to determine
whether a firm'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
NEED and IMPORTANCE FOR CAPITAL BUDGETING
Capital budgeting means planning for capital assets. The importance of capital budgeting
can be well understood from the fact that an unsound investment decision may prove fatal to
the very existence of the concern. The need, significance or importance of capital budgeting
arises mainly due to the following:
1. Large Investments: Capital budgeting decisions involves large investment of funds but
the funds available with the firm are always limited and demand for funds far exceeds
the resources. Hence, it is very important for the firm to plan and control its capital
expenditure.
2. Long – Term Commitment of Funds: It increases the financial risk involved in the
investment decision.
4. Long – Term Effect on Profitability: Capital budgeting decisions have a long - term
and significant effect on the profitability of a concern. Not only are the present earnings
of the firm affected by the investments in capital assets.
5. Difficulties of Investment Decision: The long term investment decisions are difficult to
be taken because decision extends to a series of years beyond the current accounting
period.
The study is done on capital budgeting held by Generics division of Dr. Reddy’s
Laboratories Limited.
The scope of the study includes the Payback period method.
OBJECTIVES OF THE STUDY
Main Objective: -
Sub – Objectives: -
To know the investment criteria done by Dr. Reddy’s lab while evaluating a project.
b) To find out the benefits that the company is going to get from the new projects.
c) To critically evaluate a project using different types of capital budgeting techniques. and
to arrive at the right conclusion.
d) To understand advantages and disadvantages of various techniques.
Capital budgeting means planning for capital assets. The need of capital budgeting can be
well understood from the fact that an unsound investment decision may prove fatal to the
very existence of the concern. It is used to determine whether Dr. Reddy’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.
Since the study covers only Generics division of Dr. Reddy’s Laboratories Limited,
it does not represent the overall scenario of the industry.
Few values taken are on facts basis.
The project is constraint to only one proposal.
This is a study conducted within a period of 45 days.
During this limited period of study, the study may not be a detailed, fully
fledged and utilitarian one in all aspects.
The study contains some assumption based on the demands of the analysis
done by the company executives.
INDUSTRY
PROFILE
The earliest drugstores date back to the middle Ages. The first known drugstore was
opened by Arabian pharmacists in Baghdad in 755 A.D., and many more soon began
operating throughout the medieval Islamic world and eventually medieval Europe. By the
19th century, many of the drug stores in Europe and North America had eventually
developed into larger pharmaceutical companies.
Most of today's major pharmaceutical companies were founded in the late 19th and
early 20th centuries. Key discoveries of the 1920s and 1930s, such as insulin and penicillin,
became mass-manufactured and distributed. Switzerland, Germany and Italy had
particularly strong industries, with the UK, US, Belgium and the Netherlands following suit.
Cancer drugs were a feature of the 1970s. From 1978, India took over as the primary
center of pharmaceutical production without patent protection
The pharmaceutical industry entered the 1980s pressured by economics and a host of
new regulations, both safety and environmental, but also transformed by new DNA
chemistries and new technologies for analysis and computation. Drugs for heart disease and
for AIDS were a feature of the 1980s, involving challenges to regulatory bodies and a faster
approval process.
Intermediates
Drug Discovery
&
Development API Finished Dosages
Branded Generics
(source: )
Table 1:
Phase I
Early Years
•Market share domination by foreign companies
•Relative absence of organized Indian companies
Over-the-Counter Medicines
The Indian market for over-the-counter medicines (OTCs) is worth about $940
million and is growing 20 percent a year, or double the rate for prescription medicines. the
government is keen to widen the availability of OTCs to outlets other than pharmacies, and
the Organization of Pharmaceutical Producers of India (OPPI) has called for them to be sold
in post offices.
Developing an innovative new drug, from discovery to worldwide marketing, now
involves investments of around $1 billion, and the global industry's profitability is under
constant attack as costs continue to rise and prices come under pressure. Pharmaceutical
production costs are almost 50 percent lower in India than in Western nations, while overall
R&D costs are about one-eighth and clinical trial expenses around one-tenth of Western
levels.
“India's largest-selling drug products are antibiotics, but the fastest growing are Diabetes,
cardiovascular and central nervous system treatments”.
The industry's exports were worth more than $3.75 billion in 2005-06 and they have
been growing at a compound annual rate of 22.7 percent over the last few years, according
to the government's draft National Pharmaceuticals Policy for 2007, published in January
2007. The Policy estimates that, by the year 2010, the industry has the potential to achieve
$22.40 billion in formulations, with bulk drug production going up from $1.79 billion to
$5.60 billion: “India's rich human capital is believed to be the strongest asset for this
knowledge-led industry. Various studies show that the scientific talent pool of 4 million
Indians is the second-largest English-speaking group worldwide, after the USA.”
VAT :
In April 2005, the government introduced value-added tax for the first time and
abolished all other taxes derived from sales of goods. So far, 22 states have implemented
VAT, which is set at 4 percent for medicines. This led to pharmaceutical wholesalers and
retailers cutting their stocks dramatically, which severely affected drug manufacturers' sales
for several months.
Opportunities
The main opportunities for the Indian pharmaceutical industry are in the areas of:
Generics (including biotechnology generics)
Biotechnology
Outsource and R&D (outsourcing).
Pricing (including contract manufacturing, information technology (IT)
COMPANY PROFILE
OVERVIEW OF DR.REDDY’S LABORATORIES LIMITED
Dr. Reddy’s Laboratories Limited (Dr. Reddy’s) together with its subsidiaries
(collectively, the company) is a leading India- based pharmaceutical company head quarter
in Hyderabad, India. The company’s principal areas of operation are formulations, active
pharmaceutical ingredients and intermediates, generics, custom pharmaceutical services,
critical care and biotechnology and drug discovery. The company’s principal reached and
developed and manufacturing facilities are located in Andhra Pradesh, India and Cuernavaca
cuautla, Mexico with principal marketing facilities in India, Russia, United States, United
Kingdom, Brazil, and Germany. The company’s shares trade on several stock exchanges in
India and, since April 11, 2001, on the NYSE and in the US as of March 31, 2007.
Since Dr. Reddy’s Laboratories inception in 1984, it has chosen to walk the path of
discovery and innovation in health science. Dr. Reddy’s has been a quest to sustain and
improve the quality of life and Dr. Reddy’s had more than three decades of creating safe
pharmaceutical solution with the ultimate purpose of making the world a healthier place. Dr.
Reddy’s competencies cover the entire pharmaceutical value chain – API and Intermediates,
Finished Dosages (Branded and Generic) and NCE research.
Dr. Reddy’s research centre uses cutting-edge technology and has discovered
breakthrough pharmaceutical solutions in select therapeutic areas. In a short span of
operations, Dr. Reddy’s have filed for more than 75 patents. Dr. Reddy’s is the first Indian
company to out-license an NCE molecule for clinical trials. To strengthen their research
arm, it has set up a research subsidiary, Reddy US Therapeutics Inc., in Atlanta, USA
“The company set to spread our wings further and touch more lives across the
globe.
Auditors
BSR & Co. audited the financial statements of 2008 – 2009 prepared under the Indian
GAAP.
The Company had also appointed KPMG as independent auditors for the purpose of issuing
opinion on the financial statements prepared under the US GAAP.
Belarus Cambodia
Albania
Cayman islands China Dmpr
Ghana Guyana Haiti
Iraq Jamaica Kazakhstan
Kenya Kyrgyzstan Malaysia
Mauritius Myanmar Oman
Romania Russia Singapore
Sri Lanka St.Kitts St.lucia
Sudan Tanzania Trinidad
Uganda Ukraine Uzbekistan
Venezuela Vietnam Yemen
SHARE CAPTIAL :
(Rs in Thousands)
PARTICULARS 2004-05 2005-06 2006-2007 2007-08
1200000
1000000
800000
Equity
600000
Debt
400000
200000
0
2004 2005 2006 2007
Graph 1:
Source
33,601,607 19.95
Sub Total
Foreign Holding:
Table 3:
Source
1) 2008 - 2009, the company launched 116 new generic products, filed 110 new generic product
registrations and filed 55 DMFs globally.
2) The Board of Directors of the Company have recommended a final dividend of Rs.
6.25 (125%) per equity share of Rs. 5/- face value, subject to the approval of
shareholders at the ensuing Annual General Meeting.
3) Revenues in India increase to Rs. 8.5 billion ($167 million) in FY09 from Rs.8.1billions
5) New products launched in the last 36 months contribute 14% to total revenues in FY09
Dr. Reddy’s
Extracted from the Audited Income Statement for the year ended March 31,
2009
FY 09 FY 08
Growth
Particulars ($) (Rs.) % ($) (Rs.) (%)
%
Revenues 1,365 69,441 100 983 50,006 100 39
Cost of revenues 648 32,941 47 484 24,598 49 34
Gross profit 718 36,500 53 499 25,408 51 44
Operating Expenses
Selling, General &
413 21,020 30 331 16,835 34 25
Administrative Expenses(a)
Research & Development
79 4,037 6 69 3,533 7 14
Expenses, net
Write down of intangible assets 62 3,167 5 59 3,011 6 5
Write down of goodwill 213 10,856 16 2 90 0 -
Other (income)/expenses, net 5 253 0 (8) (402) (1) -
Notes
:
(a) Includes amortization charges of Rs. 1,503 million in FY09 and Rs.
1,588 million in FY08
(b) Includes forex gain of Rs. 739 million in FY08
(c) Includes forex loss of Rs. 634 million in FY09.
In modern times, the efficient allocation of capital resources is a most crucial function of
financial management. This function involves organization’s decision to invest its resources
in long-term assets like land, building facilities, equipment, vehicles, etc. The future
development of a firm hinges on the capital investment projects, the replacement of existing
capital assets, and/or the decision to abandon previously accepted undertakings which turns
out to be less attractive to the organization than was originally thought, and diverting the
resources to the contemplation of new ideas and planning. For new projects such as
investment decisions of a firm fall within the definition of capital budgeting or capital
expenditure decisions.
Capital budgeting refers to long-term planning for proposed capital outlays and their
financing. Thus, it includes both rising of long-term funds as well as their utilization. It may,
thus, be defined the “firm’s formal process for acquisition and investment of capital”. To be
more precise, capital budgeting decision may be defined as “the firms’ decision to invest its
current find more efficiently in long-term activities in anticipation of an expected flow of
future benefit over a series of years.” The long-term activities are those activities which
affect firms operation beyond the one year period. Capital budgeting is a many sided
activity. It contains searching for new and more profitable investment proposals,
investigating, engineering and marketing considerations to predict the consequences of
accepting the investment and making economic analysis to determine the profit potential of
investment proposal.
As capital budgeting involves substantial initial outlay and years( at least more
than one year) to reap the benefits, it is critically important to understand some of
the cardinal principles or rules or guidelines when performing this capital
budgeting exercise.
Guideline No1:
Use Cash Flows And Not Accounting Profit. You need to adjust accounting profit
to arrive at the relevant cash flows .
Guideline No 2:
Focus on Incremental Cash flows. Simply it means that you should compare the
total cash flows of the company with and without the project. After determining
the incremental cash flows, you need to consider the tax implication on these
cash flows viz focus only on “after-tax incremental cash flows” in the capital
budgeting analysis.
Guideline No.3:
Consider any synergistic effect on the project. For example, when this new
product, the firm is going to introduce, will the sales of the existing products also
increase- are they complementary to each other. In financial terms, therefore we
need to consider the sales of the new products plus the increase in sales of the
existing products.
Guideline No.4:
Consider the opposite of rule no 3 re: the existing sales might reduce with the
introduction of the new products. Factored the loss of revenue from such existing
products into the capital budgeting analysis.
Guideline No.5:
Ignore sunk costs and consider only those costs which are relevant to the
projects.
Guideline No.6:
Incorporate any NET additional working capital requirements into the capital
budgeting analysis for example the need to have additional inventories, accounts
receivables and or cash (increase in current assets) minus additional financing
from accounts payable, bank borrowings (current liabilities) .
Guideline No.7:
Excludes Interest Payments as this is already reflected in the discount rate (this
rate implicitly accounts for the cost of raising the financing).
APPRAISAL CRITERIA
A number of criteria have been evolved for evaluating the financial desirability of a
project. The important investment criteria, classified into two broad categories—non-
discounting criteria and discounting criteria—are shown in exhibit subsequent sections
describe and evaluate these criteria in some detail:
Evaluation Criteria
These criteria can be classifies as follows:
Many formal methods are used in capital budgeting, including the techniques such as
Discounting Criteria
These methods use the incremental cash flows from each potential investment, or project.
Techniques based on accounting earnings and accounting rules are sometimes used - though
economists consider this to be improper - such as the accounting rate of return, and "return
on investment."
Non-Discounting Criteria
Simplified and hybrid methods are used as well, such as
Payback Period
Discounting Criteria
1. Net Present Value
Each potential project's value should be estimated using a discounted cash flow (DCF)
valuation, to find its net present value (NPV). (First applied to Corporate Finance by Joel
Dean in 1951). This valuation requires estimating the size and timing of all of the
incremental cash flows from the project. These future cash flows are then discounted to
determine their present value. These present values are then summed, to get the NPV. See
also Time value of money. The NPV decision rule is to accept all positive NPV projects in
an unconstrained environment, or if projects are mutually exclusive, accept the one with the
highest NPV (GE).
The NPV is greatly affected by the discount rate, so selecting the proper rate - sometimes
called the hurdle rate - is critical to making the right decision. The hurdle rate is the
minimum acceptable return on an investment. It should reflect the riskiness of the
investment, typically measured by the volatility of cash flows, and must take into account
the financing mix. Managers may use models such as the CAPM or the APT to estimate a
discount rate appropriate for each particular project, and use the weighted average cost of
capital (WACC) to reflect the financing mix selected. A common practice in choosing a
discount rate for a project is to apply a WACC that applies to the entire firm, but a higher
discount rate may be more appropriate when a project's risk is higher than the risk of the
firm as a whole. The formula is as follows:
PV = 1
(1+r)n
Where PV = Present Value
r = rate of interest / discount rate
n = number of years
Decision Rules
Example
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
c) Net present value = present value of cash inflows - present value of cash
outflows = 8424 -8200 = Rs.224
Since the net present value of the project is positive (Rs.224), the project is accepted.
2. Profitability Index
Profitability Index is also known as Profit Investment Ratio, abbreviated to P.I. and Value
Investment Ratio (V.I.R.). Profitability index is a good tool for ranking projects because it
allows you to clearly identify the amount of value created per unit of investment.
A ratio of 1 is logically the lowest acceptable measure on the index. Any value lower than
one would indicate that the project's PV is less than the initial investment. As values on the
profitability index increase, so does the financial attractiveness of the proposed project.
Decision Rule
Example
A new machine costs Rs.8,200 and generates cash inflow (after tax)per annum of
Rs.2,000 during its life of 5 years. Let us assume that the cost of capital for the
company is 6%.
The present value of the cash inflows at 6% discount rate is 2000 * 4.212 = 8424.
The present value of outflow is 8,200. The profitability index is (8424/8200) =
1.027.
The internal rate of return (IRR) is defined as the discount rate that gives a net present
value (NPV) of zero. It is a commonly used measure of investment efficiency.
The IRR method will result in the same decision as the NPV method for (non-mutually
exclusive) projects in an unconstrained environment, in the usual cases where a negative
cash flow occurs at the start of the project, followed by all positive cash flows. In most
realistic cases, all independent projects that have an IRR higher than the hurdle rate should
be accepted. Nevertheless, for mutually exclusive projects, the decision rule of taking the
project with the highest IRR - which is often used - may select a project with a lower NPV.
One shortcoming of the IRR method is that it is commonly misunderstood to convey the
actual annual profitability of an investment. However, this is not the case because
intermediate cash flows are almost never reinvested at the project's IRR; and, therefore, the
actual rate of return is almost certainly going to be lower. Accordingly, a measure called
Modified Internal Rate of Return (MIRR) is often used.
Decision Rules
The interest factor 4.1 for a 5 year project corresponds to a discount rate of 7%. So the IRR
of the project is 7%. An interest factor of 4.100 indicates that the present value of one Rupee
MIRR is the discount rate that makes the future value of the project equal to its initial cost.
MIRR requires a reinvestment rate.
(2) Calculate the future value of all cash inflows at the last year of the project’s life.
(3) Determine the discount rate that causes the future value of all cash inflows
determined in step 2, to be equal to the firm’s investment at time zero. This discount
rate is known as the MIRR.
Decision rule
Disadvantages
It is often used when comparing investment projects of unequal lifespan. For example if
project A has an expected lifetime of 7 years, and project B has an expected lifetime of 11
years it would be improper to simply compare the net present values (NPVs) of the two
projects, unless the projects could not be repeated.
The use of the EAC method implies that the project will be replaced by an identical project.
Real Options
Real options analysis has become important since the 1970s as option pricing models have
gotten more sophisticated. The discounted cash flow methods essentially value projects as if
they were risky bonds, with the promised cash flows known. But managers will have many
choices of how to increase future cash inflows, or to decrease future cash outflows. In other
words, managers get to manage the projects - not simply accept or reject them. Real options
analyses try to value the choices - the option value - that the managers will have in the
future and adds these values to the NPV.
Ranked Projects
The real value of capital budgeting is to rank projects. Most organizations have many
projects that could potentially be financially rewarding. Once it has been determined that a
particular project has exceeded its hurdle, then it should be ranked against peer projects (e.g.
- highest Profitability index to lowest Profitability index). The highest ranking projects
should be implemented until the budgeted capital has been expended.
Non-Discounting Criteria
1. 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. Of Technology Madras
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. i.e.,
∑ Inflows = Outflows
Decision Rules
Example
There are two projects (project a and b) available for a Company, with a life of 6
years each and requiring a capital outlay of rs.9,000/- each; and additional working
capital of rs.1000/- each.
The cash inflows comprise of profit after tax + Depreciation + Interest (Tax
adjusted) for five years and salvage value of Rs.500/- for each project plus working
capital released in the 6th year. This company has prescribed a hurdle payback
period of 3 years. Which of the two projects should be selected?
Example - Data
Cumulative Cumulative
Project A Cash Inflows Project B Cash Inflows
of Project A of Project B
3,000 2,000
Year 1 3,000 2,000
6,500 4,500
Year 2 3,500 2,500
10,000 7,000
Year 3 3,500 2,500
11,000 9,500
Year 4 1,500 2,500
13,000 12,500
Year 5 1,500 3,000
16,000 18,000
Year 6 3,000 5,500
Example
(Note: Interpolation technique is used here to identify the exact period at which cumulative
cash inflows will be equal to outflows. The amount required to equate is Rs.500, while the
returns from the 5th year is 3,000. Hence the addition time duration required to compute the
payback period is (500/3000) x 12 which is 2 months. The interpolation technique is used
based on the assumption that cash inflows accrue uniformly throughout the year.)
The investment decision will be to choose Project A with a payback period of 3 years
and reject Project B with a payback period of 4 years and 2 months.
In investment decisions, the number of years it takes for an investment to recover its initial
cost after accounting for inflation, interest, and other matters affected by the time value of
money, in order to be worthwhile to the investor. It differs slightly from the payback period
rule, which only accounts for cash flows resulting from an investment and does not take
into account the time value of money. Each investor determines his/her own discounted
payback period rule and, as such, it is a highly subjective rule. In general, however, short-
term investors use a short number of years — or even months — for their discounted
payback period rules, while long-term investors measure their rules in years or even
decades.
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.
Decision Rules
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.
Time value of money is not considered here.
Example
There are two projects (Project A and B) available for a business enterprise, with a
life of 6 years each and requiring a capital outlay of Rs.9,000/- each and additional
working capital of Rs.1000/ each. The cash inflows comprise of profit after tax +
depreciation + interest (Tax adjusted) for five years and salvage value of Rs.500/- for
each project at year 6 plus working capital released also in the 6th year.
6 80 1,880
Taking into account the working capital released in the 6th year and salvage value of the
investment, the total investment will be (10,000- 1,500) Rs.8500 and the average investment
Project A
Project B
1330 * 100 = 15.6%
8500
The investment decision will be to select Project B since its rate of return is higher than that
of Project A if they are mutually exclusive. If they are independent projects both can be
accepted if the minimum required rate of return is 11.7% or less.
a) General difficulties:
b) Measurement problem:
While calculating the NPV, IRR, PAY BACK PERIOD, AND PROFITABILITY
INDEX, we have to be very much careful with the calculations values throw it is a very
difficult job to remember many values at a time but we have to be care full because it will
effect on the total output of project in decision making.
Different capital investment proposals have different degrees of risk and uncertainly there is
a slight difference between risk and uncertainty risk involves situations in which the
probabilities of a particular event occurring are known where as in uncertainty these
probabilities are unknown.
In many cases these two terms are used inter changeably. Risk in capital investments may
be due to the general economic conditions competition, technological developments,
consumer preferences etc.
One to these reasons the revenues costs and economic life of a particular investment are not
certain. While evaluating capital investment proposals a proper adjustment should therefore
be made for risk and uncertainty
Sales and volumes are taken as per the BFROW strategic plan.
Quotations from Gland, for the following products: (Indian manufacturing charges)
Liquid Vial (Zoledronic Acid) $0.75
Lypo Vial (Amifostin) $1.00
The cost includes the purchase of assets for the production purpose and the depreciation is
on the straight line method.
First let us see if the product is given on contract then what is the cost that Dr. Reddy’s is
going to incur:
Non -
Zoledronic Acid – Liq 0.75 30.00 10.00
Lyophilised
-
Lyophilised Amifostin – Lyo 1.00 40.00 10.00
-
Prefilled
Enoxaparin Na 0.50 20.00 10.00
Syringes
CC = Conversion Cost
And if the product is manufactured at Dr. Reddy’s, then what is the cost the organization is
going to incur:
Type of Vial LL Location Equivalent Injection USD CC CC (In Rs) Frieght Royalty (Rs) Equivalent Injection
60
50
40
Prices 30
20
10
0
Liquid Lypo Pfs
Cost Component FY FY FY FY FY FY FY
11 12 13 14 15 16 17
Manpower Cost 1.39 1.50 1.62 1.75 1.89 2.04 2.20
Utility cost 1.56 1.64 1.72 1.81 1.90 1.99 2.09
Depreciation 2.32 2.32 2.32 2.32 2.32 2.32 2.32
Others - - - - - - -
QC/QA 4.20 2.73 1.15 0.95 0.72 0.71 0.69
Conversion Cost (per Vial) 9.46 8.19 6.81 6.83 6.82 7.06 7.30
CC (per Vial) excl dep 7.14 5.87 4.49 4.51 4.50 4.74 4.98
1 (260.37
260.37 - ) 1.00 (260.37) (260.37)
2 (260.37
260.37 - - - ) 1.00 (260.37) (520.74)
3
- - - - 1.00 - (520.74)
4
143.88 2.45 11.75 158.09 1.00 158.09 (362.65)
5
57.40 183.42 7.50 15.93 149.46 1.00 149.46 (213.19)
6
225.06 18.95 26.94 270.95 1.00 270.95 57.76
7
258.27 24.12 33.25 315.65 1.00 315.65 373.41
8
397.02 66.60 53.43 517.05 1.00 517.05 890.45
9
416.89 70.72 28.03 515.64 1.00 515.64 1,406.09
10
437.36 74.24 29.35 540.95 1.00 540.95 1,947.04
Payback Period is 5 years 8 months
9 238.5
8 238.58 1.00 238.58 865.79
Payback is 5 Years 2
Months
Year Project Liquid Lypo PFS SEZ Net In DCF @ Discntd Cum
Cost Vials Vials Flow 0% In flow Discntd In
flow
1 - - - -
285.37 (285.37 1.00 (285.37) (285.37)
)
2 - - - -
285.37 (285.37 1.00 (285.37) (570.74)
)
3 - - - - - -
1.00 (570.74)
4
143.88 2.45 1.00 11.75 159.09 1.00 159.09 (411.65)
5
82.40 183.42 7.50 9.20 15.93 133.66 1.00 133.66 (277.99)
6
225.06 18.95 100.04 26.94 370.98 1.00 370.98 93.00
7
258.27 24.12 143.67 33.25 459.32 1.00 459.32 552.31
8
397.02 66.60 219.42 53.43 736.47 1.00 736.47 1,288.78
9
416.89 70.72 228.88 28.03 744.51 1.00 744.51 2,033.30
10
437.36 74.24 238.58 29.35 779.54 1.00 779.54 2,812.83
Payback period:
The Cash Outflow is the project cost i.e., the investment done by the company.
Calculation of Inflows:
The company has made a market research and has given the estimated volumes for the
product from US, EU and RoW (Rest Of World).
And then has multiplied it with the savings of each product to get the inflows.
For example:
Volumes of US (liquid vials) : 5.8
Savings for liquid vials : 24.82
Cash inflow for liquid vials: 143.88
1
285.37 - - - - (285.37) 1.00 (285.37)
2
285.37 - - - - (285.37) 0.75 (213.19)
3
- - - - - - 0.56 -
4
- 143.88 2.45 1.00 11.75 159.09 0.42 66.33
5
82.40 183.42 7.50 9.20 15.93 133.66 0.31 41.64
6
- 225.06 18.95 100.04 26.94 370.98 0.23 86.33
7
- 258.27 24.12 143.67 33.25 459.32 0.17 79.85
8
- 397.02 66.60 219.42 53.43 736.47 0.13 95.65
9
- 416.89 70.72 228.88 28.03 744.51 0.10 72.24
10
- 437.36 74.24 238.58 29.35 779.54 0.07 56.51
NPV of CC savings 0%
IRR of CC savings 34%
Company is getting its payback after 4 years (approximately 4.33 years) Project can
be approved such that company can get back its profit with in a limited period.
Company is getting its “Discounted Pay Back” within 5.75 years even after
discounting cost of capital.
NPV (Net Present Value) of the company is positive “194.65” so project the project
can be approved.
IRR (Internal Rate of Return) is more than the cost of capital “34% so approve the
project.
Decision
Result Approve? Why?
Method
4.33
Payback Yes Well, cause we get our money back
years
Discounted 5.75 Because we get our money back, even after
Yes
Payback years discounting our cost of capital.
Because NPV is positive (reject the project if NPV
NPV 194.65 Yes
is negative)
Profitability
1.2980 Yes Cause we make money
Index
IRR 34% Yes Because the IRR is more than the cost of capital
Dr. Reddy’s takes Payback period method only into consideration because they want their
returns at the earliest as Pharmacy industry is a fasting moving industry with lot of
innovative ideas year after year.
Bibliography
The information required for successful completion of the project has been collected
through primary and secondary sources.
Primary Source Data
The data has been gathered through interactions with the various officials and employees
working in the division. Some important information has been gathered through couple of
instructed interviews.
Referred text books for collecting the information regarding the theoretical aspects of the
topic.
Financial Management - I .M Pandey
Management Accounting – R. P. Trivedi
Annual Report of Dr. Reddy’s – 2007-2008
Annual reports, magazines published by the company are used for collecting the required
information. Even help is taken from internet.
www.drreddy.com
http://money.rediff.com
http://www.pharmaceutical-drug-manufacturers.com/pharmaceutical-industry/
http://en.wikipedia.org