CAPITAL BUDGETING

Capital budgeting and Investment appraisal is the planning process used to determine
whether an organization's long term investments such as new machinery, replacement of
machinery, new plants, new products, and research development projects are worth the
funding of cash through the firm's capitalization structure (debt, equity or retained earnings).
It is the process of allocating resources for major capital, or investment, expenditures. One
of the primary goals of capital budgeting investments is to increase the value of the firm to
the shareholders.

Many formal methods are used in capital budgeting, including the techniques such as

 Accounting rate of return

 Average accounting return

 Payback period

 Net present value

 Profitability index

 Internal rate of return

 Modified internal rate of return

 Equivalent annual cost

 Real options valuation

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." Simplified and hybrid methods are used as well, such as payback
period and discounted payback period.
 COMPANY PROFILE

Bharat Sanchar Nigam Limited (abbreviated BSNL) is an Indian state-

owned telecommunications company headquartered in New Delhi. It was incorporated on
15 September 2000 and assumed the business of providing telecom services and network
management from the erstwhile Central Government Departments of Telecom Services
(DTS) and Telecom Operations (DTO) as of 1 October 2000 on a going-concern basis. It is
the largest provider of fixed telephony with more than 49% market share, and is the fourth
largest mobile telephony provider in India. BSNL is India's oldest communication service
provider and its history can be traced back to the British era. During the British era, the
first telegraph line, was established between Calcutta and Diamond Harbour. The British
East India Company started using the telegraph in 1851 and till 1854 telegraph lines were
laid across the country. In 1854, the telegraph service was opened to the public and the first
telegram was sent from Mumbai to Pune. In 1885, the Indian Telegraph Act was passed by
the British Imperial Legislative Counsel. After the bifurcation of post and Telegraph
department in 1980s, the creation of Department of Telecom by 1990s eventually led to the
emergence of the State-owned telegraph and telephone company BSNL. BSNL then
continued the telegraph services in India until it shut down telegraph services completely on
15 July 2013.

BUDGETING TECHNIQUES USED BY BSNL

Capital outlay is taken in proportion to the figures in the BSNL fixed assets schedule

2014-15.

Anticipated revenue and expenditures are in proportion to the expenditure of 2014-15.

Cash flows = total revenue – total expenses in 000’s = 120000 - 84000 = 36000
PAYBACK PERIOD

Payback period = capital investment / annual cash flows

= 500000 / 36000

= 13.88 years

Interpretation:

From the above we observe that the payback period i.e., the time period required for the
recovery of the initial investment in the project is 13 years and 10 months .the project can
be accepted if the payback period is less than the maximum benchmark perod.if any .the
lower the payback period, the better it is ,since the initial investment will be recouped faster.

ACCOUNTING RATE OF RETURN METHOD

Average return during period

ARR = ------------------------------------- X 100
Average investment
Where,
Average investment = original investment /2
= 500000/2
= 250000

Average rate of return = average return during period / average investment

= 18000/250000 X100
= 7.2%
Interpretation:
the project can be accepted if the ARR is higher than the hurdle rate established by the
management, if any and rejected if the project has ARR less than the hurdle rate.in case, it
is 7.2%.
(hurdle rate = cost of capital = risk premium)
NET PRESENT VALUE

YEAR CASH FLOWS PVF @ 10% PV OF CF’S

0 -500000 1 -500000

1 36000 0.909 32724

2 36000 0.826 29736

3 36000 0.751 27036

4 36000 0.683 24588

5 36000 0.621 22356

6 36000 0.564 20304

7 36000 0.513 18468

8 36000 0.467 16812

9 36000 0.424 15264

10 36000 0.386 13896

11 36000 0.350 12600

12 36000 0.319 11484

13 36000 0.290 10440

14 36000 0.263 9468

NPV = PRESENT VALUE OF CASH FLOWS – PRESENT VALUE OF CASH OUT FLOWS

NPV = 234824

Interpretation:
From the above table, we observe that the NPV is rs.234824.hence the project can be
accepted as the NPV is positive and greater than zero.
INTERNAL RATE OF RETURN

Year Cash flows pvf@10% Pv of cf’s pvf@15% Pv of cf’s

0 -100000 1 -500000 1 -500000

1 36000 0.909 32724 0.870 31320

2 36000 0.826 29736 0.756 27216

3 36000 0.751 27036 0.658 23688

4 36000 0.683 24588 0.572 20592

5 36000 0.621 22356 0.497 17892

6 36000 0.564 20304 0.432 15552

7 36000 0.513 18468 0.376 13536

8 36000 0.467 16812 0.327 11772

9 36000 0.424 15264 0.284 10224

10 36000 0.386 13896 0.247 8892

11 36000 0.350 12600 0.215 7740

12 36000 0.319 11484 0.187 6732

13 36000 0.290 10440 0.163 5868

14 36000 0.263 9460 0.140 5040

234824 293936

Present value at lower rate

IRR = lower rate + -------------------------------------------- X difference in rates
PV at lower rate – PV at higher rate
 234824
IRR = 10% + ------------------------ X (15-10) %
234824 + 293936
=12.22%

Interpretation:
From the above, we observe that the IRR is the rate of return earned on the initial investment
made in the project. The project can be accepted if the IRR is greater than the cut off rate.

PROFITABILITY INDEX

NPV
PI = 1 + ----------------------------------
INITIAL INVESTMENT

234824
= 1+-----------------
500000
= 1.47

Interpretation:
From the above, we observe that profitability index is 1.47 which is greater than one. hence
the project is accepted.
In bsnl, capital budgeting as a whole cannot be analysed based on traditional methods
mentioned above since projects are decentralized at SSA / circle levels accordingly.

Taking this as a constraint, the fallowing analysis based on capital investment and physical
performance is made.
 FINDINGS

The fallowing points were observed from the capital budgeting as fallows.
The project i.e., expansion of mobile services in Telangana is generating unequal cash flows
for past 14 years.
The initial investment is 50 crores.
The ARR is 7.2% which is greater than the company’s rate of return.
This discounted payback period is 13.88 years.
NPV and IRR are positive for the proposal.
The PI is 1.47>1 Financial position of Bharath sanchar nigam limited is not good from the
last three years.
There is good coordination in departments in BSNL.
BSNL is concentrating in increasing revenue from operations.
The remuneration to staff of company cannot be controlled. this is one of the reasons for net
profits decreasing year by year.
Also, there is a drastic decline in revenue of BSNL in recent years.
The working capital of the company is not up to the mark.
Financial position is much better in 2010- 11.
Telephone connections are decreased in the year 2013-14.
 REFERENCE

 https://en.wikipedia.org/wiki/Bharat_Sanchar_Nigam_Limited

 https://en.wikipedia.org/wiki/Capital_budgeting

 https://www.slideshare.net/imgud2bbad/capital-budgeting-at-bsnl
 CONTENT

SR. NO. TOPIC

1 Capital Budgeting

2 Company profile

3 Interpretation

4 Findings

5 Reference
NARAYAN ZANTYE COLLEGE OF COMMERCE

INVESTMENT AND FINANCIAL

DECISIONS

ASSIGNMENT

SUBMITTED BY:

Ashwini S. Gawas

M.Com - Part II

Roll No.: 2004