CHAPTER: 1

COMPANY
PROFILE

1
1.1 COMPANY PROFILE

PRO-ACE INFOTECH is an ISO 9001:2008 certified organization which has been working in
the field of IT, Embedded System Engineering since last 8 years and has been providing its
clients with exceptional quality in Web Designing, Web Development and SEO services. We
also provide the offshore companies of Australia, US and UK with quality services in the field
of Android Application Development, Embedded Systems, Web Design, Web
Development (PHP), SEO, JAVA.

Apart from this, PRO-ACE INFOTECH is a renowned Engineer Training organization, well
known for providing quality education in advance fields such as PHP, J2EE, EMBEDDED
SYSTEMS, AUTOMATION, VLSI, NETWORING, AutoCAD, PRO-E, CATIA, SOLID
WORKS, REVIT, ANSYS.

SE Division of the company is running under the name SPEAKSOFT. It is a unit of PRO-ACE
INFOTECH, committed to provide grooming ground to the budding professionals to grab key
positions in the esteemed organizations. Our solutions are aligned with the client’s
requirements keeping in focus the demands of the organizations. Our team is highly qualified;
specialists facilitate the learning and development of new and existing skills in order to enhance
the growth potential of students with respect to English Language and Soft Skills Training.

2
1.2 COMPANY OVERVIEW
PRO-ACE INFOTECH is an ISO 9001:2008 certified organization established in 2010 which
has been working in the field of information technology since last 8 years and has been
providing its clients with exceptional quality in Web Designing, Web Development and SEO
services.
Type : Privately Held
Company Size : 20
Website : http://www.proaceinfotech.org
Industry Type : IT Development and Professional
Training Company
Year of Inception : 2010
Opposite ICICI Bank, Lela Bhawan Market,
Corporate Office : Patiala-147001, Punjab
Our Services: Our Clients:
 Web Development  Indian Industries
 Web Designing  Indian Colleges/Universities
 SEO

Company Hierarchy

3
1.3 TECHNOLOGY EXPERTISE
Java Technologies
J2EE, EJB, JSP, J2ME, Servlet, SOAP, Web Services, XML, STRUTS, Spring, Hibernate,
Tapestry

Microsoft Technologies
.NET Framework, ASP.NET, VB.NET, C#.NET, Web Services, SQL Services, Dot NET Nuke
(DNN)

Databases
Oracle 10g, Microsoft SQL Server, Db2, MySQL

PHP Technologies
PHP, JavaScript, Joomla, CakePHP, Drupal, Magneto, Ruby on Rails, MySQL

Data Warehousing / Business Intelligence

Business objects, Cognos, Informatics, Data Stage, Decision Support System (DSS)

Operating System
Window 7, Window 8, XP, Red Hat Linux, Solaris

Mobile Technologies
MS Window Mobile, J2ME, Windows CE, Symbian, iPhone, Google Android

Its Product Range:

 Job Portal
 Online Shopping
 Security Systems
 Bulk SMS

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Its Services:
 Web Development
 Web Designing
 SEO
 iPhone Application Development
 Android Application Development
 2D & 3D Designing

Its Clients:
 Indian Industries
 Indian Colleges/Universities
 Offshore Clients

Its Divisions:
 Development Division
 Design Division
 Learning Division
 HR Division

Its training strengths:

 Extensive Industry expertise
 Latest and evolving program offerings
 Practical work based training modules
 On the job corporate environment
 Overall Development

1.4 VALUES AND HOW IT LIVE UPTO THEM:

 Dynamism: Proactive, Enthusiastic, Cutting Edge
 Sustainability: Long term Focus, Balanced approach, Quality consciousness
 Collaboration: Trust, Transparency, Meaningful Partnership

5
PRO-ACE INFOTECH is a 8 years young organization who is actively involved in the IT field,
Embedded Systems and has been providing its clients with exceptional quality in Web
Designing, Web Development and SEO services. Our clients range from small, medium to
large scale Business houses & individuals.

1.5 PRO-ACE INFOTECH AT A GLANCE

Development Division
PRO-ACE INFOTECH is a 8 year young organization with an ISO Certification which has
been working in the field of IT, Embedded System Engineering and has been providing its
clients with exceptional quality in Web Designing, Web Development and SEO services. This
company also provide the offshore companies of Australia, US and UK. It is an association
which is functioning in the field of Android Application Development, Embedded Systems,
Web Design, Web Development - PHP, SEO, JAVA.

Learning Division
Learning Division of PRO-ACE INFOTECH is a renowned Engineer Training Division, well
known for providing technical and professional skill training to individuals, organizations and
educational institutions in advance fields such as PHP, J2EE, EMBEDDED SYSTEMS,
AutoCAD. Currently these are the largest job-providing sectors. We provide high end training
with comprehensive programs that integrate all aspects required to excel at the corporate level.
With a combination of vast industry experience, cutting-edge infrastructure, evolving
technological tools and a thorough corporate culture, it function to transform an individual into
a success story.

Se Division (Speaksoft)
SE Division of the company is running under the name SPEAKSOFT. It is a unit of PRO-ACE
INFOTECH, committed to provide grooming ground to the budding professionals to grab key
positions in the esteemed organizations. Its solutions are aligned with the client’s requirements
keeping in focus the demands of the organizations. Its team is highly qualified; specialists
facilitate the learning and development of new and existing skills in order to enhance the
growth potential of students with respect to English Language and Soft Skills Training. The

6
company partner with us to create and realize our visions and add tangible value to the
students.
Most employers these days want to hire, retain and promote people who are dependable,
resourceful, ethical, and self-directed, have effective communication, are willing to work and
learn and have a positive attitude. The Indian market is also becoming global, so the attributes
of soft skills become imperative to be imbibed by the youth to show their real potential at intra
and international levels.
SPEAKSOFT has designed Skill Enhancement Program for addressing these needs of the
students who are pursuing technical and professional courses. The company have divided the
Skill Enhancement Program under three main heads according to the requirement of the clients.

1.6 SALIENT FEATURES @ PRO-ACE INFOTECH

PRO-ACE INFOTECH has been the prime institution in the field of Training & Education in
Patiala. With over 1000 students undergoing training every year in field of IT, Electronics and
Management fields, the organization have proven our worth. Only quality can withstand the
test of time in today’s highly demanding market and with professionals hired to provide
training to the student, PRO-ACE aim to give the real industry environment to the student so
that they get ready for it.

1.7 INDUSTRIAL TRAINING IN PATIALA

Industrial Training is very important in Career shaping of Students in Engineering and
Management Stream (Either in B.Tech, Diploma, MCA, MBA and BBA). PRO-
ACEINFOTECH is providing both six weeks and six months Industrial Training. Placement
companies mostly look for the latest technologies used in market. Industrial training is best
place to master skills as needed by companies. Depending on student’s personal interest or
according to his/her strength. Students from various Engineering and Management colleges and
universities undergo training with us. During this period students have to decide field &
technology that would help them find right path for their career and get them great job &
placement.

Training Modules @ Pro-Ace Infotech 6 Week/ 6 Months Industrial Training Is Available

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In
 MANAGEMENT : HUMAN RESOURCE, FINANCE, MARKETING
 SOFTWARE DEVOLPMENT : PHP, JAVA, ASP.NET, ANDROID ,NETWORKING
 ELECTRONICS & ELECTRICAL: EMBEDDED SYSTEM, PLC
 MECHANICAL & CIVIL: Auto-CAD, Pro/ENGINEER, 2D &3D MAX

1.8 LEVELS OF TRAINING

LEVEL 1 CONCEPTUAL TRAINING

LEVEL 2 ADVANCED TRAINING

LEVEL 3 PROJECT WORK

LEVEL 4 REPORT WRITING

Skill Enhancement Program

Technical and job-related skills are a must, but they are not sufficient when it comes to
progressing up the ladder. Research in many fields such as Sales and Marketing, Software
development, Engineering and law, has shown that to be successful in the workplace,
knowledge alone is not enough. Soft skills are needed to deal with the external world and to
work in a collaborative manner with one’s colleagues. Good soft skills ensure that the
companies are able to capitalize on the wealth of technical knowledge, experience and
efficiency to rule markets. To cater this need PRO-ACE InfoTech has designed an extensive
Personality and Image Building Program. In which the organization prepare people for the
Interviews and other Behavioral skills required for the Industry and outer world. In this
program pro-ace InfoTech provide

 Personality development
 Image building
 Interview skills

8
  Business writing
 Time management
 Mental aptitude

Brief description of the Skill Enhancement Program

LEVEL 1 LEVEL 2
“ASPIRING HIGH” “NURTURING DREAMS”
Initial Learning Module Advanced Learning Module
On On
Skill Enhancement Program Skill Enhancement Program
Aspiring High
Be better equipped to set the sails ‘right’ in the direction of the opportune wind! We all
aspire high to reach our goals which we have set in for ourselves. We all have dreams and
want to achieve our goals. So, what are you waiting for set your seat belts tight and set in
on a journey with us where all your dreams will come true. Let’s collectively work to
bridge the gap between your aspirations and reality. We at PRO-ACE, render our services
to develop corporate solutions that ‘work’ towards strengthening the brand value and
identity.

Nurturing Dreams
The world is turning into a global village and competition is increasing manifolds. There
are many pre-requisites which have to be analyzed and given due consideration to become
successful and reach the goals. At Pro – Ace offer a solution to all the problems which the
students encounter. Pro – Ace has explored all the major issues which become a hindrance
in the student’s career. The organisation have designed our program “NUTURING
DREAMS” which covers all the essential aspects which are required for cracking the
placement process of any company.

Objectives of The Program

 Help students understand the benefits of Personality enhancement and Image Building.
 To improve the communication of the students and guide them to organize and express

9
 their ideas effectively.
 To comprehend the Pronunciation and understand the standard English
 To confidently speak in front of all and remove the fear of judgment
 To acquaint the students with business and professional writing
 To build the aptitude skills of students
 Enhance logical reasoning

Course Outcomes
 Students will be able to handle situations confidently
 They will not feel hesitant while using the International language i.e. English
 It will boost the morale of the students
 Students will become good communicators, self-motivated and ambitious
 See things in different perspectives
 Have a clear vision and overcome obstacles

Methodology
 Open Discussions Individually and in groups
 Group activities
 Games and relevant activities
 Power point presentations
 Perception tasks

Its Core Competency

At PRO-ACE INFOTECH, core competence and Industry experience has allowed us to
expand its service domain to offer a wide array of services across multiple verticals. The
organization believe in working closely with the industry and the same is reflected in our tie-
ups with some of the most prestigious Industries, Institutions and experts from across the
world for offering practical & professional hands on trainings in IT, Electronics &
Communication and Management Sector. In a market that is saturated by IT training
providers, PRO-ACE INFOTECH brings fresh verve, energy, innovation and a commitment

10
to quality education that is unparalleled. Its objective to venture into training and education
stems from its years of industry experience coupled with extensive research and analysis of
various trends which are and were affecting IT training quality in the count

11
 CHAPTER : 2
INTRODUCTION
TO THE STUDY

12
 2. INTRODUCTION

2.1 MEANING OF CAPITAL BUDGETING

Capital budgeting is a required managerial tool. One 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.

2.2 CAPITAL IS LIMITED RESOURCE

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 shares 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.
The argument that capital is a limited resource is true of any form of capital, whether
debt or equity (short-term or long-term, common stock) or retained earnings, accounts
payable or notes payable, and so on. Even the best-known firm in an industry or a

13
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.
Faced with limited sources of capital, management should carefully decide whether a
particular project is economically acceptable. In the case of more than one project,
management must identify the projects that will contribute most to profits and,
consequently, to the value (or wealth) of the firm. This, in essence, is the basis of
capital budgeting.
Capital budgeting is a company’s formal process used for evaluating potential
expenditures or investments that are significant in amount. It involves the decision to
invest the current funds for addition, disposition, modification or replacement of fixed
assets. The large expenditures include the purchase of fixed assets like land and
building, new equipment’s, rebuilding or replacing existing equipment’s, research and
development, etc. The large amounts spent for these types of projects are known as
capital expenditures. Capital Budgeting is a tool for maximizing a company's future
profits since most companies are able to manage only a limited number of large
projects at any one time.
Capital budgeting usually involves calculation of each project's future accounting
profit by period, the cash flow by period, the present value of cash flows after
considering time value of money, the number of years it takes for a project's cash flow
to pay back the initial cash investment, an assessment of risk, and various other factors.
Capital is the total investment of the company and budgeting is the art of building budgets.

2.3 FEATURES :
1. It involves high risk
2. Large profits are estimated
3. Long time period between the initial investments and estimated returns

2.4 IMPORTANCE OF CAPITAL BUDGETING DECISIONS

1. Long-term Implications of Capital Budgeting: A capital budgeting has its effect

14
 over a long time span and inevitably affects the company’s future cost structure and
growth. A wrong decision can prove disastrous for the long-term survival of firm.
On the other hand, lack of
2. investment in asset would influence the competitive position of the firm. So the
capital budgeting decisions determine the future destiny of the company.
3. Involvement of large amount of funds in Capital Budgeting: Capital budgeting
decisions need substantial amount of capital outlay. This underlines the need for
thoughtful, wise and correct decisions as an incorrect decision would not only result
in losses but also prevent the firm from earning profit from other investments which
could not be undertaken.
4. Irreversible decisions in Capital Budgeting: Capital budgeting decisions in most of
the cases are irreversible because it is difficult to find a market for such assets. The
only way out will be scrap the capital assets so acquired and incur heavy losses.
5. Risk and uncertainty in Capital budgeting: Capital budgeting decision is
surrounded by great number of uncertainties. Investment is present and investment
is future. The future is uncertain and full of risks. Longer the period of project,
greater may be the risk and uncertainty. The estimates about cost, revenues and
profits may not come true.
6. Difficult to make decision in Capital budgeting:Capital budgeting decision making
is a difficult and complicated exercise for the management. These decisions require
an overallassessment of future events which are uncertain. It is really a marathon
job to estimate the future benefits and cost correctly in quantitative terms subject to
the uncertainties caused by economic-political social and technological factors.
7. Large and Heavy Investment: The proper planning of investments is necessary
since all the proposals are requiring large and heavy investment. Most of the
companies are taking decisions with great care because of finance as key factor.
8. Permanent Commitments of Funds:The investment made in the project results in
the permanent commitment of funds. The greater risk is also involved because of
permanent commitment of funds.
9. Long term Effect on Profitability: Capital expenditures have great impact on
business profitability in the long run. If the expenditures are incurred only after

15
 preparing capital budget properly, there is a possibility of increasing profitability of
the firm.
10. Complicacies of Investment Decisions:Generally, the long term investment
proposals have more complicated in nature. Moreover, purchase of fixed assets is a
continuous process. Hence, the management should understand the complexities
connected with each projects.
11. Maximize the worth of Equity Shareholders:The value of equity shareholders
is increased by the acquisition of fixed assets through capital budgeting. A proper
capital budget results in the optimum investment instead of over investment and
under investment in fixed assets. The management chooses only most profitable
capital project which can have much value. In this way, the capital budgeting
maximize the worth of equity shareholders.
12. Difficulties of Investment Decisions:The long term investments are difficult
to be taken because decision extends several years beyond the current account
period, uncertainties of future and higher degree of risk.
13. Irreversible Nature: Whenever a project is selected and made investments as in
the form of fixed assets, such investments is irreversible in nature. If the
management wants to dispose of these assets, there is a heavy monetary loss.
14. National Importance:The selection of any project results in the employment
opportunity, economic growth and increase per capita income. These are the
ordinary positive impact of any project selection made by any company.

2.5 TYPES OF CAPITAL BUDGETING DECISIONS

Capital budgeting refers to the total process of generating, evaluating, selecting and following up on
capital expenditure alternatives. The firm allocates or budgets financial resources to new
Investment proposals. Basically, the firm may be confronted with three types of capital budgeting
decisions:

1. Accept-Reject Decision.

2. Mutually Exclusive Project Decision.

16
 3. Capital Rationing Decision.

Accept-Reject Decision:
This is a fundamental decision in capital budgeting. If the project is accepted, the firm would invest
in it; if the proposal is rejected, the firm does not invest in it. By applying this criterion, all
independent projects are accepted. Independent projects are the projects that do not compete with
one another in such a way that the acceptance of one precludes the possibility of acceptance of
another.

Mutually Exclusive Project Decision:

Mutually Exclusive Projects are those which compete with other projects in such a way that the
acceptance of one will exclude the acceptance of the other projects. The alternatives are mutually
exclusive and only one may be chosen. Thus, mutually exclusive projects acquire significance
when more than one proposal is acceptable under the accept-reject decision.

Capital Rationing Decision:

Capital rationing refers to a situation in which a firm has more acceptable investments than it can
finance. It is concerned with the selection of a group of Investment proposals out of many investment
proposals acceptable under the accept-reject decision. The projects can be ranked on the basis of a pre-
determined criterion such as the rate of return. The projects are ranked in descending order of the rate of
return.

2.6 CAPITAL BUGETING PROCESS

A) Project identification and generation:
The first step towards capital budgeting is to generate a proposal for investments.
There could be various reasons for taking up investments in a business. It could be
addition of a new product line or expanding the existing one. It could be a proposal to
either increase the production or reduce the costs of outputs.

B) Project Screening and Evaluation:

This step mainly involves selecting all correct criteria’s to judge the desirability of a

17
proposal. This has to match the objective of the firm to maximize its market value. The
tool of time value of money comes handy in this step. Also the estimation of the
benefits and the costs needs to be done. The total cash inflow and outflow along with
the uncertainties and risks associated with the proposal has to be analyzed thoroughly
and appropriate provisioning has to be done for the same.

C) Project Selection:
There is no such defined method for the selection of a proposal for investments as
different businesses have different requirements. That is why, the approval of an
investment proposal is done based on the selection criteria and screening process
which is defined for every firm keeping in mind the objectives of the investment being
undertaken.
Once the proposal has been finalized, the different alternatives for raising or acquiring
funds have to be explored by the finance team. This is called preparing the capital
budget. The average cost of funds has to be reduced. A detailed procedure for
periodical reports and tracking the project for the lifetime needs to be streamlined in
the initial phase itself. The final approvals are based on profitability, Economic
constituents, viability and market conditions.

D) Implementation:
Money is spent and thus proposal is implemented. The different responsibilities like
implementing the proposals, completion of the project within the requisite time period
and reduction of cost are allotted. The management then takes up the task of
monitoring and containing the implementation of the proposals.
E) Performance review:
The final stage of capital budgeting involves comparison of actual results with the
standard ones. The unfavorable results are identified and removing the various
difficulties of the projects helps for future selection and execution of the proposals.

2.7 TECHNIQUES OF CAPITAL BUDGETING:

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a) Payback period
By how much cash inflow you expect to receive each year; this will give you the total
number of years or the payback period. For The payback period is the most basic and
simple decision tool. With this method, you are basically determining how long it will
take to pay back the initial investment that is required to undergo a project. In order to
calculate this, you would take the total cost of the project and divide it example, if you
are considering buying a gas station that is selling for $100,000 and that gas station
produces cash flows of $20,000 a year, the payback period is five years. As you might
surmise, the payback period is probably best served when dealing with small and
simple investment projects. This simplicity should not be interpreted as ineffective,
however. If the business is generating healthy levels of cash flow that allow a project
to recoup its investment in a few short years, the payback period can be a highly
effective and efficient way to evaluate a project. When dealing with mutually
exclusive projects, the project with the shorter payback period should be selected.

b) Net Present Value (NPV)

The net present value decision tool is a more common and more effective process of
evaluating a project. Perform a net present value calculation essentially requires
calculating the difference between the project cost (cash outflows) and cash flows
generated by that project (cash inflows). The NPV tool is effective because it uses
discounted cash flow analysis, where future cash flows are discounted at a discount
rate to compensate for the uncertainty of those future cash flows.
The term "present value" in NPV refers to the fact that cash flows earned in the future
are not worth as much as cash flows today. Discounting those future cash flows back
to the present creates apples to apples comparison between the cash flows. The
difference provides you with the net present value.
The general rule of the NPV method is that independent projects are accepted when
NPV is positive and rejected when NPV is negative. In the case of mutually exclusive
projects, the project with the highest NPV should be accepted.

c) Internal Rate of Return (IRR)

19
The internal rate of return is a discount rate that is commonly used to determine how
much of a return an investor can expect to realize from a particular project. Strictly
defined, the internal rate of return is the discount rate that occurs when a project is
break even, or when the NPV equals 0. Here, the decision rule is simple: choose the
project where the IRR is higher than the cost of financing. In other words, if your cost
of capital is 5%, you don't accept projects unless the IRR is greater than 5%. The
greater the difference between the financing cost and the IRR, the more attractive the
project becomes.
The IRR decision rule is straightforward when it comes to independent projects;
however, the IRR rule in mutually-exclusive projects can be tricky. It's possible that
two mutually exclusive projects can have conflicting IRRs and NPVs, meaning that
one project has lower IRR but higher NPV than another project. These issues can arise
when initial investments between two projects are not equal. Despite the issues with
IRR, it is still a very useful metric utilized by businesses.
Businesses often tend to value percentages more than numbers (i.e., an IRR of 30%
versus an NPV of $1,000,000 intuitively sounds much more meaningful and effective),
as percentages are more impactful in measuring investment success. Capital budgeting
decision tools, like any other business formula, are certainly not perfect barometers, but
IRR is a highly-effective concept that serves its purpose in the investment decision
making process.

2.8 ADVANTAGES OF CAPITAL BUDGETING:

Capital budgeting helps a company to understand various risks involved in an
investment opportunity and how these risks affect the returns of the company.

 It helps the company to estimate which investment option would yield the best
possible return
 It helps the company to make long-term strategic investments.
 A company can choose a technique/method from various techniques of capital
budgeting to estimate whether it is financially beneficial to take on a project or not.
 It helps to make an informed decision about an investment taking into

20
 consideration all possible options.
 It helps a company in a competitive market to choose its investments wisely.
 All the techniques/methods of capital budgeting try to increase shareholders wealth
and give the company an edge in the market.
 Capital budgeting presents whether an investment would increase the company’s
value or not.
 It offers adequate control on expenditure for projects.
 Also, it allows management to abstain from over investing and under investing.
 Capital budgeting decisions are for long term and are majorly irreversible in nature.

2.9 DISADVANTAGES:
 Most of the times, these techniques are based on the estimations and assumptions
as the future would always remain uncertain.
 Capital budgeting still remains introspective as the risk factor and the discounting
factor remains subjective to the manager’s perception.
 Capital budgeting still remains introspective as the risk factor and the discounting factor
remains subjective to the manager’s perception
.

21
CHAPTER: 3
REVIEW OF
LITERATUR
E

22
 3. REVIEW OF LITERATURE
3.1 INTRODUCTION:-Making a capital budgeting decision is one of the most
important policy decisions that a firm makes. A firm that does not invest in long-term
investment projects does not maximise stakeholder interests, especially shareholder
wealth. Optimal decisions B. Kalyebara and S.M.N. Islam, Corporate Governance,
Capital Markets, and Capital Budgeting, Contributions to Management Science, #
Springer-Verlag Berlin Heidelberg 2014/in capital budgeting optimise a firm’s main
objective – maximising the shareholders’ wealth – and also help the firm to stay
competitive as it grows and expands. These decisions are some of the integral parts of
overall corporate financial management and corporate governance. A company grows
when it invests in capital projects, such as plant and machinery, to generate future
revenues that are worth more than the initial cost (Ross et al. 2011; Shapiro 2005).

Aggarwal (1993) states that capital budgeting decisions are important because of their
long-term financial implications to the firm, and therefore they are crucial. The effects
of capital budgeting decisions extend into the future, and the firm endures them for a
longer period than the consequences of operating expenditure. Some of the definitions
of capital budgeting includes the following: Seitz and Ellison (1999) define capital
budgeting as ‘the process of selecting capital investments’. According to Agarwal and
Taffler (2008) capital budgeting decisions possess the distinguishing characteristics of

23
exchange of funds for future benefits, investment of funds in long- term activities and
the occurrence of future benefits over a series of years. This study uses the term capital
budgeting synonymously with investment decision making and investment appraisal.
Therefore, capital budgeting may be defined in many ways, but in a nutshell, it is the
decisions made by an organisation to allocate capital resources most efficiently in
long-term activities in the hope that aggregate future benefits exceed the initial
investment so as to maximise shareholders’ wealth and other stakeholders’ interests.
Figure 2.1 shows how investment appraisal is related to other financial decisions and
the goal of the firm. A firm’s decision to invest in long-term assets has an impact on
the rate and direction of its growth. A wrong decision can prove disastrous for the
long-term survival of the firm. The purchase of unwanted long-term capital assets
results in unnecessary capital allocation and heavy operating costs to the firm
(Aggarwal 1993). Heavy operating costs may render an organisation unsustainable.
Again, the fact that the firm needs to raise and commit ‘large sums of money’ in long-
term capital projects, makes capital budgeting decisions most important, requiring
careful planning and implementation (Brealey et al. 2011

3.2 SIGNFICANCE OF CAPITAL BUDGETING IN CORPORATE

FINANCIAL MANAGEMENT:-
Corporate financial management includes investing, financing, working capital and
dividend decisions (Brealey et al. 2011; Myers and Pogue 1974). Capital budgeting is
an integral part of corporate financial management. It requires simultaneous
consideration ofall ofthe above types ofdecisions. Itentailsplanningfor the firm to
achieve its objective. Decisions in different departments may be decentralised, and
they should all be well coordinated to achieve the goal of the firm. Good corporate
financial management should include the following, among others:

 Investment decisions: Allocating capital resources to projects with the highest NPV.

 Financing decisions: Sourcing capital from the cheapest source first – pecking order theory.

24
 Working capital: Managing working capital within business operations to promptly meet its
obligations as they fall due. Working capital is calculated by subtracting current liabilities (due rent,
telephone bills, wages and salaries, accounts payable, trade advances) from current assets (cash,
inventories, accounts receivable). Working capital indicates the firm’s ability to meet its short-term
liabilities as they fall due. A firm without enough liquid assets to pay off its current liabilities is
compelled to borrow on short notice to meet its shortterm liabilities. Usually, short-notice
borrowings carry high interest rates, which increase the cost expense and in turn increase financial
risk to the firm.
 Dividend decisions: In theory, dividends to the shareholders should be paid only
when available investments with positive NPV are fully financed, because the
internal source of capital is the cheapest, followed by debt and then equity last
(following the pecking order theory). However, in practice, decisions to pay
dividends follow the firm’s established dividend policy to keep its existing
shareholders and attract more potential shareholders.
•
3.3 CORPORATE fiNANCIAL MANAGEMENT ALSO
INCLUDES THE FOLLOWING:

 Reviewing and refining financial budgeting, revenue and cost forecasting;

 Seeking funding options for business expansion – both short and long-term financing;

 Analysing the financial position of the business using various methods including ratios;

 Understandingthevarioustechniquesusedinprojectappraisalandassetvaluation;

 Applying sound investment appraisal techniques; and

 Understanding valuation techniques for businesses, portfolios and intangible assets.

25
Fig. 3.2 Link between investment, financing/dividend decisions and corporate strategic
planning (Source: Knott 2004)
Figure 3.2 shows that investment appraisal (in bold) is one of the two decisions which
has a direct link to all other business activities and objectives via strategic planning.
The second decision is financing. Capital budgeting is one of the integral parts of
corporate financial management, because without investing in long-term projects,
organisations do not grow. Capital budgeting has a direct impact on operational
planning and control of a firm. Operational planning and control, in turn, directly
impact on the fixed and working capital requirements of a firm and its
profitability.Profits can then be either distributed to shareholders in the form of
dividends or retained and channelled for financing decisions. Therefore, it can be said
that all corporate financial planning activities are inter related or have to be carried out
simultaneously to achieve the goals of the organisation. The different components of
corporate financial management have either a direct or an indirect impact on each
other. Firms need money for day-to-day operations and for strategic objectives.
Organisations achieve their long-term objectives through allocating capital resources
to long-term assets, such as buildings, plant and machinery. Investment projects are
evaluated to identify those that maximise the value of the firm by the use of NPV. The
two main decisions financial managers make are investment decisions (capital

26
budgeting or investment appraisal) and financing decisions. Financing decisions
explain how the chosen capital projects should be funded by equity or debt or a mix of
both. If the organisation decides to fund the chosen investments using both equity and
debt, the next question is: what should be the proportion? That is, how much should be
raised through equity and how much through debt. The answer to this question is not
easy because it depends on various factors, including the level of risk the capital
market assigns to the company, the type of industry the company operates in, the
written policies and guidelines the company has in place, etc. The investment and
financing decisions have a relationship which is complementary, though they are
independent of one another; but both aim at maximising the value of the firm. The
most popular traditional investment appraisal method uses net present value (NPV) to
measure the performance of capital projects (Seitz and Ellison 1999). The NPV is
calculated by discounting future net cash flows using a risk-adjusted discount rate to
find the present value (PV) and then subtracting the initial investment from the sum of
the present values. The use of NPV alone as the only measure of performance does not
serve the interests of all stakeholders, because not all stakeholders are interested in
NPV, but in other units of measure such as minimising agency costs, etc

3.4 CAPITAL BUDGETING METHODS AND MODELS

In practice, there are a number of capital budgeting techniques which can be used by
financial managers for investment appraisal (Ross et al. 2011). The capital budgeting
methods and models are broadly grouped in two categories: the discounted cash flow
(DCF) and the non-discounted cash flow (NDCF) methods. The DCF methods
(sometimes referred to as sophisticated methods) discount expected net future cash
flows using a risk-adjusted discount rate to find the present value, and they consider
the time value of money. These include net present value (NPV), the internal rate of
return (IRR) and the profitability index (PI). The NDCF methods (sometimes referred
to as naive methods) do not discount the net future cash flow, and therefore do not
consider the time value of money and ignore project, financial and business risks.
These include the payback period (PBP) and the accounting rate of return (ARR). The
ARR does not use cash flow, but instead it uses average profit and average investment.

27
The PBP uses cash flow, but it does not discount it. However, the PBP can be modified
to use discounted cash flow. The various NDCF and DCF techniques are discussed in
detail below.

 Accounting Rate of Return:-The accounting rate of return (ARR) represents the

proportion of the average annual net profits to either the original net investment or the average
investment in the project. The formula for ARR is written as follows:

ARR = Average annual net profit

Initial investment/Average investment

Very often ARR is calculated using the original net investment rather than the average
investment. Once the ARR has been determined, the next step is to compare it to a
desired rate of return. The decision rule is that if the ARR calculated above is equal to
or greater than the desired rate of return (subjectively chosen), the project is accepted.
When management decides to use ARR for investment appraisal, they have to make a
number of assumptions based on the message they want to send to the users of
financial statements. The operating corporation tax rate and the depreciation rate for
the life of the project have to be assumed. The disadvantages of ARR include not using
the cash flow ignoring the popular metric for measuring wealth and ignoring the time
value of money – an important concept in finance. The size of investments in terms of
investment outlay is not considered in the ARR calculation. The ARR does not
conform to the principles of shareholder wealth maximisation, because wealth is not
measured in terms of ARR but in terms of cash flow. The advantage of ARR is that it
is simple to understand and easy to calculate, and many financial managers are familiar
with it.

 Payback Period
The payback period (PBP) represents the number of years required to recover the initial outlay using
net cash flows after tax. Once the PBP has been calculated, it is then compared with the minimum
acceptable payback period which is chosen arbitrarily (Brealey et al. 2007; Keown et al. 2011). The

28
decision rule is that if the calculated PBP is equal to or less than the desired period, the project is
accepted, because, the shorter the time taken to recover the initial investment the better. The
disadvantages of PBP include: giving equal weight to all cash flows before the initial investment
recovery date; not considering the cash flows beyond the payback period; not using time value of
money; not taking into account of project risk; and not distinguishing between projects of different
sizes in terms of investment outlay (Campsey and Brigham 1991, p. 499). This can be partly overcome
by using the discounted cash flow to calculate payback period. The PBP may be useful as a liquidity
measure of the projects, but is not a profitability measure are other better methods available for
considering risk, time value of money, etc., including the net present value and internal rate of return.
The advantages of PBP include being simple to calculate, if and when the initial investment is recovered
it can be re-invested to earn more return, and its concept is easy to understand by most investors
including non-financial managers. In practice, it is very popular in Japan but not in the West.

 Internal Rate of Return

The internal rate of return (IRR) is described as the discount rate that equates the
present value of the expected future net cash inflows with its initial outlay or which
projects have a NPV equal to zero. Another way of describing IRR is the rate of
growth a project is expected to generate. In general, the higher the IRR the capital
project has the more profitable the project is. The advantages of the IRR include:
considering the project risk; considering time value of money; and using cash flows.
The disadvantages of the IRR include: assuming that net cash flows may be “re-
invested” at a rate of return equal to the IRR; and giving more than one IRR when the
cash flows are not conventional. This produces conflicting results including non-
separation between mutually exclusive projects of different sizes, and it also assumes
that different cash flows have the same opportunity cost (Brealey et al. 2007; Keown et
al. 2011). The decision rule is that when the IRR is equal to or greater than the cost of
capital after tax, the project is accepted. In case of mutually exclusive projects, the
project with the higher IRR is accepted. Despite the number of disadvantages in theory
associated with IRR, Hendricks (1980); Anderson (1982) and Mukherjee (1988) found
that in practice IRR was the most popular method used in capital decision making in
Australia, followed by NPV. However the use of IRR is decreasing and the use of

29
NPV is increasing. The preference for IRR over NPV is based on the convenience and
ease of understanding (Mukherjee 1988).

 Profitability Index or Benefit-Cost Ratio

The profitability index (PI) includes the discounting of future net cash flows, and then
the present values are added up. The sum of all the present values is divided by the
initial investment. The decision rule is to accept all capital projects with the PI of one
or greater than one. When the PI is greater than one, the present value of future cash
flows is greater than the initial outlay. Therefore, the capital project has a positive net
present value, so it adds value to the firm and should be accepted. The IRR is similar to
NPV but is expressed in different metrics. The IRR uses an index and NPV uses cash
flows. The disadvantages of the PI include the possibility of misleading when dealing
with two projects which are mutually exclusive. Project one may have a higher
positive net present value and project two may have a higher profitability index, but
because they are mutually exclusive, the firm is supposed to choose between the two
projects. In such a case Brealey et al. (2007) and Keown et al. (2011) recommend the
use of the NPV that adds up, rather than with a PI which does not add up.

 Net Present Value

In theory, the net present value (NPV) is the preferred method, and therefore, it is the
most popular capital budgeting method with academics. The NPV involves
management estimating future relevant revenue and expenses to find expected future
net cash flows from the capital project. It is also assumed that the cash flows occur at
the end of each period being considered and occur evenly throughout the period –
mostly the year. The scrap value of the project is also assumed, but in most cases it is
assumed to be negligible or zero. NPV is calculated by discounting the future net cash
flows after tax using the firm’s risk-adjusted cost of capital. Then all the present values
of the future cash flows are added up. Then the initial outlay is subtracted from the
sum of the present values. The decision rule is to accept all projects if the NPV is equal
to zero or greater than zero, provided there is no capital rationing. When there is not

30
enough money to cover all projects with a positive NPV, then rationing of the funds is
necessary. Then the decision rule is to first accept the capital project with the highest
NPV, then the next capital project with the second highest NPV and so on until the
available funds are exhausted. A positive NPV means that the capital project adds
value to the company and a negative NPV diminishes the value of the company. The
advantages of the NPV include considering time value of money, using all cash flows,
considering project risk, and its use maximising the value of the company. The
disadvantages of NPV include not considering the financing costs in the form of
interest and dividends in the calculation of the cash flows, and difficulties in
calculation.

31
 CHAPTER:4
NEED, OBJECTIVES,
SCOPE & IMPORTANCE

32
4.1 NEED OF THE STUDY

 The project study is undertaken to analyze and understand the Capital Budgeting process in
which gives mean exposure to practical implication of theory knowledge.

 To know about the company’s operations of using various capital budgeting techniques.

 The financial department can implement and can get positive results by maintaining proper
financial reports.

 To analyze the proposal for expansion or creating additional capacities

 To make financial analysis of various proposals regarding capital investment so as to choose the
best out of many alternatives proposals.

33
4.2 OBJECTIVES OF THE STUDY

 To know the important differences, that can arise in evaluating projects when using
Net Present Value (NPV), Internal Rate of Returns (IRR), Profitability Index(PI).

 To analyze the strengths and weakness of existing Techniques in capital budgeting.

 To evaluate capital projects using traditional methods of investment appraisal and

discounted cash flows methods.

 To make recommendations and to improve further process of capital budgeting

 To measure the profitability of the project by considering all cash flow

34
4.3 SCOPE OF THE STUDY

“Preparation of capital budgeting is an important tool for efficient and effective managerial
decisions.”

So in every organization they have to examine the capital budgeting process, therefore the financial
manager must be able to decide whether an investment is worth undertaking and able to decide and
be able to choose intelligently between two or more alternatives.
 The process by which company’s appraise investment decision, in particular by which
capital resources are allocated to specific projects.

 Capital budgeting requires firms to account for the time value of money and project risk,
using a variety of more or less formal techniques.

 Capital budgeting decisions affect the profitability in terms of interest of the firm. They also
have a bearing on the competitive position of the enterprise. It’s a diversification burden

 Capital investment involves cost and the majority of the firms have scarce capital resources.

 Capital budgeting is a complex process as it involves decisions relating to the investment of

huge resources for the benefit of achievement in future as it is always uncertain.

 Understanding the importance of the capital budgeting .

35
4.4 IMPORTANCE OF THE STUDY

Capital budgeting is of paramount important in financial decision making:

 Decisions affect the probability of the firm, as they also have a bearing on the competitive
positions of the enterprises.

 A capital expenditure decision has its effect over a long time and inevitable affect’s the
company future cost structure.

 The capital investments firm acquires the long-lived assets that generate the firm’s future cash
flows and determine its level of profitability.

 Proper capital budgeting analysis is critical to a firm’s successful performance because capital
investments decisions can improve cash flows.

 Capital investment involves cost of majority of the firms have scarce capital resources.

 Capital decisions are not easily reversible, without much financial loss to the firm.

 To make financial analysis of various proposals regarding capital investment so as to choose the
best out of many alternatives proposals.

36
 CHAPTER:5
RESEARCH
METHODOLOGY

37
5.1 RESEARCH METHODOLOGY
Research methodology is a way to systematically solve the research problem. The research
methodology includes the various methods and techniques for conducting a research. The
research process followed by us consists of following steps:

5.2 RESEARCH DESIGN:

Research design is blue print of data collection, measurement and analysis of data. It indicate
both structure of problem and plan of investigation use to obtain empirical evidence on those
relationship. The design of studies must be rigid and not flexible and most focus attention on
the following:

5.3 SOURCES OF DATA COLLECTION: -

There are two types of data collection-:

1. Primary data.
2. Secondary data

We have used only secondary data.

Secondary data- It is mainly based upon regards Account sheets and other published
documents of PRO-ACE INFOTECH COMPANY. Data has been collected, then complied
and thereafter statistical analysis of the information has been done. The secondary data needed
for the study was collected from published sources such as annual reports, returns and internal
records, reference from text books and journal management. Further data needed for the study
was collected from:-

 Collection of required data from annual records of the company.

 Reference from text books and journals relating to financial management.

1. Sampling design:-

 Sampling unit: Financial statements.

 Sampling size: Last 5 years financial statements from 2014-15 to 2018-19.

38
2. Tools of data analysis and presentation:- To analyze and presenting the data following
tools are used

 Payback period

 Accounting Rate of Return

 Profitability Index

 Net Present Value

 Internal Rate of Return

39
 CHAPTER-6
DATA ANALYSIS
AND
INTERPREATATION

40
6.1 DATA ANALYSIS

Preparing budgeting
As firms grow, the amount of control that a firm owner has on their firm reduces significantly.
It is therefore important that you remain in control of the firm by budgeting to increase profits
and performance. Consequently, budgeting allows you to think ahead to control the
management of your firm. As you will see, budgeting is based largely on the objectives of the
firm. To meet their firm’s objectives they need to prepare the budgeting to estimate the
forecast, so that they can coordinate the budget to help achieve them.
Without budgeting, many businesses carry the threat of failure and for those that do budget:
failing to carry out the task correctly can have the same effect.
Many businesses overlook budgeting as they feel it is just more paperwork that ties away time
that can be used elsewhere: they can do without more work in their already tight schedule. In
fact, budgeting can help eliminate the pressure of time as it prepares for the future and foresees
problems before they occur.
“Budgeting prepares for the future and foresees problems before they occur”
Hopefully, after reading the article, you will learn that budgeting is an integral process in
business and realize that the way forward comes from successful planning.
Budgeting period has been determined (weekly, monthly, yearly, etc), the manager needs to
gather information to guide him when compiling the budgeting. This will include past and
current performance figures obtain from the cash flows and present value factors. It can be very
risky and uncertain.

6.2 CAPITAL BUDGET

Preparing a budget is vital to any company or business for a number of reasons. A capital
budget is needed to increase revenue while decreasing costs and expenses. Many corporations
normally plan an annual budget that will assist management in evaluating the total performance
of the organization. Capital budgets, on the other hand, focus more on the long term
investments. At the same time, management can examine and analyze the costs of purchasing
or upgrading equipment and other fixed assets.

41
6.3 A CAPITAL BUDGET HELPS THE MANAGEMENT IN:
To examine the existing financial objectives and capital development goals and determine what
level the company is at. It helps in ranking of projects according to their true profitability. It
helps to choose among mutually exclusive projects, that project with the maximization of the
shareholder’s wealth. Determining the future cash flows of the firm. Application of decision
rule making a choice for long-term investments.

6.4 CAPITAL BUDGETING’S MAIN USES ARE:

 The formulation of long-term goals.
 The creative search for and identification of new investment opportunities.
 Classification of projects and recognition of economically and/or statistically.
 The estimation and forecasting of current and future cash flows.
 A suitable administrative framework capable of transferring the required information to
the decision level.
 The controlling of expenditures and careful monitoring of crucial aspects of project
execution.
 A set of decision rules which can differentiate acceptable from unacceptable alternatives
is required.

6.5 BASIC STEPS OF CAPITAL BUDGETING:

Step1: Estimate the cash flows
Step2: Assess the riskiness of the cash flows.
Step3: Determine the appropriate discount rate.
Step4: Find the PV of the expected cash flows.
Step5: Accept the project if PV of inflows > costs.IRR > Hurdle Rate and pay<policy.
The capital budgeting will be analyzed the process of evaluating how we invest in capital
assets; i.e. assets that provide cash flow benefits for more than one year. Therefore, we will
focus much of our attention on present values so that we can understand how expenditures
today influence values in the future.

42
6.6 CAPITAL BUDGETING PREPARATION:-
The Company has the advantage of its good distribution network. It walks with an objective –
by providing world class products and services in explosives, initiating systems, mining and
infrastructure projects with special emphasis on safety events to total customer satisfaction.
To achieve this objective, “Preparation of capital budgeting is a key as it is the roadmap to
the financial success and independence of an organization. It also helps in managerial
decisions to an investment appraisal in a company and also in Financial decisions to earning
their goals”.
The organization prepares a “Capital budgeting” for every financial year April 1st –March 31st,
before the commencement of the next financial year. The capital budgeting is prepared by
using the methods (PBP, NPV, ARR, PI, IRR).
The Finance Manager with the help of Planning & Development department is responsible for
preparing the capital budgeting, which looks after the capital budgeting decisions for collection
of data and had a discussion with the official’s engaged in the capital budgeting process. The
data that has been collected from the planning and development department has been recast by
me to present the same in an appreciable and easily understandable manner.

The procedure with regard to the capital budgeting is explained in detail.

6.7 INTRODUCTION:
A number of new projects are going on. Out of which 3 projects are selected for the study.
Some of the essential aspects of the projects are Depreciation Rate, Corporate Income Tax
Rate and The Discounting Factor. In this the Depreciation rate is 4.75% as their given, the
Corporate Income Tax Rate is 34% (approximately) and the Discounting Factor is 15%
which is normally followed by the corporate houses. The following table gives the abstract
for these projects of the company.

43
S.No. PROJECT BUGDET DEPRECIATION TAX PV
NAME ESTIMATION FACTOR

1. PROJECT 25 LAKHS 4.75% 34% 15%

A

2. PROJECT 25 LAKHS 4.75% 34% 15%

B

3. PROJECT 10 LAKHS 4.75% 34% 15%

C

44
 1. Project A : (Estimated budget Rs 25 LAKHS)
Calculation of Cash Flow after Tax (CFAT)

YEAR 1 2 3 4 5 TOTAL

PBDT 10.25 15.84 20.50 20.50 20.50 87.59

LESS:DEP 1.1875 1.1875 1.1875 1.1875 1.1875 5.9375

@ 4.75%

PBT 9.0625 14.6525 19.3125 19.3125 19.3125 81.6525

LESS:TAX 3.08125 4.98185 6.56625 6.56625 6.56625 27.75385

@34%

PAT 5.98125 9.67065 12.74625 12.74625 12.74625 53.89065

ADD:DEP 1.1875 1.1875 1.1875 1.1875 1.1875 5.9375

CFAT 7.16875 10.85815 13.93375 13.93375 13.93375 59.8281

CCFAT 7.16815 18.0269 31.9606 45.89435 59.8281 162.8787

45
Calculation of payback period:
The payback period lies between 2 and 3 years. Therefore the exact payback period will
Be as follows:

Payback period = Base year + required CFAT

Next year CFAT

Exact payback period = 2 + 25.00 – 18.0269

13.93375
= 2 + 0.5 = 2.5

PBP = 2.5

Calculation of ARR:

AVERAGE ANNUAL PAT

*100

AVERAGE INVESTMENT

= 10.77813
*100
125

= 86.2%

ARR = 86.2%

46
Calculation of NPV:
YEAR CASH FLOW PV @ 15% PV of Cash Flows

0 (25.00) 1.00 (25.00)

1 10.25 0.870 8.9175

2 15.84 0.756 11.97504

3 20.50 0.658 13.489

4 20.50 0.572 11.726

5 20.50 0.497 10.1885

Total Cash flow 56.29604

NPV 31.29604

NPV = PV OF CASH FLOW – PV OF CASH OUTFLOW

PV of cash flow @ 15% = 31.29604

Cash out flow = 25.00

Therefore to decrease the cash flow we increase the rate.

47
Let the new rate be 18%

Year Cash flow PV @ 18% PV of Cash Flow

0 (25.00) 1.00 (25.00)

1 10.25 0.847 8.68175

2 15.84 0.718 11.37312

3 20.50 0.609 12.4845

4 20.50 0.516 10.578

5 20.50 0.437 8.9585

Total of cash flow 52.07587

NPV 27.07587

Calculation of IRR & IR:

The IRR is usually the rate of return that a project earns. PI measures the present value of
returns per rupee invested.
IRR = Ri + PV of CF at Ri – PV of COF * (Rh – Ri)

PV of CF at Ri – PV of CF at Rh

= 15 + 56.29604 – 25.00 * (18 – 15)

56.29604 – 52.07587
= 37.23
IRR = 37.23%

PROFITABILITY INDEX (PI) = PV OF CASH INFLOWS

INTITAL CASH OUTLAY

48
 = 56.29604
25
Profitability Index (PI) = 2.25 times
2. Project B:
(Estimated Budget Rs 20 LAKHS)
Calculation of Cash Flow after Tax (CFAT)
YEAR 1 2 3 4 5 TOTAL

PBDT 7.83 13.42 19.00 20.03 20.03 80.31

LESS:DEP@ 0.95 0.95 0.95 0.95 0.95 4.75

4.75%

PBT 6.88 12.47 18.05 19.08 19.08 75.56

LESS:TAX 2.3392 4.2398 6.137 6.4872 6.4872 25.6904

@ 34%

PAT 4.5408 8.2302 11.913 12.5928 12.5928 49.8696

ADD:DEP 0.95 0.95 0.95 0.95 0.95 4.75

CFAT 5.4908 9.1802 12.863 13.5428 13.5428 54.6196

CCFAT 5.4908 14.671 27.534 41.0768 54.6196

Calculation of payback period:

The payback period lies between 2 and 3 years. Therefore the exact payback period will Be as
follows:
Payback period = Base year + required CFAT

Next year CFAT

Exact payback period = 2+ 20 – 14.671

12.863

49
 = 2.04
PBP = 2.04
Calculation of ARR:
ARR = AVERAGE ANNUAL PAT

*100

AVERAGE INVESTMENT

= 9.97392 * 100
10
= 99.73%
ARR = 99.73%
Calculation of NPV:
YEAR CASH FLOW PV @ 15% PV OF CASH
FLOWS

0 (20.00) 1.00 (20.00)

1 7.83 0.870 6.8121

2 13.42 0.756 10.14552

3 19.00 0.658 12.502

4 20.03 0.572 11.45716

5 20.03 0.497 9.95491

TOTAL CASH FLOW 50.87169

NPV 30.87169

NPV = PV OF CASH INFLOW – PV OF CASH OUTFLOW

50
 PV of cash flow @ 15 % = 30.87169
Cash Out Flow = 20.00

YEAR CASH FLOW PV @ 18% PV OF CASH

FLOWS

0 (20.00) 1.00 (20.00)

1 7.83 0.847 6.63201

2 13.42 0.718 9.63556

3 19.00 0.609 11.571

4 20.03 0.516 10.33548

5 20.03 0.437 8.75311

TOTAL CASH FLOW 46.92716

NPV

Therefore to decrease the cash flow we increase the rate. Let the new rate be 18
Calculation of IRR & IR:
The IRR is usually the rate of return that a project earns. PI measures the present value of returns
per rupee invested.
IRR = Ri + PV of CF at RI – PV of COF

*(Rh –Ri)

PV of CF at Ri – PV of CF at Rh

= 15 + 50.87169 – 20.00
*(18 – 15)
50.87169 – 46.92716
= 38.47
IRR = 38.47%
PROFITABILITY INDEX (PI) = PV OF CASH INFLOWS

51
 INTITAL CASH OUTLAY

= 50.87169
20
Profitability Index (PI) = 2.5 times
3 Projects C:
(Estimated Budget Rs 20 LAKHS)
Calculation of Cash Flow after Tax (CFAT)
YEAR 1 2 3 4 5 TOTAL

PBDT 0.50 1.83 2.05 2.05 2.05 9.38

LESS:DEP 0.475 0.475 0.475 0.475 0.475 2.375

@ 4.75%

PBT 0.025 1.355 1.575 1.575 1.575 6.105

LESS:TAX 0.0085 0.4607 0.5355 0.5355 0.5355 2.0757

@ 34%

PAT 0.0165 0.8943 1.0395 1.0395 1.0395 4.0293

ADD:DEP 0.475 0.475 0.475 0.475 0.475 2.375

CFAT 0.4915 1.3693 1.5145 1.5145 1.5145 6.4043

CCFAT 0.4915 1.8608 3.3753 4.8898 6.4043

Calculation of payback period:

52
As the cumulative cash flows are less than initial investments of Rs. 10 LAKHS, therefore the
cash flows are not recoverable in the project duration. For this project, the discounted pay back
period is not existed
Calculation of ARR:
ARR = AVERAGE ANNUAL PAT

*100

AVERAGE INVESTMENT

= 0.80586
*100
5

ARR = 16.11%
Calculation of NPV:
YEAR CASH FLOW PV PV OF CASH
FLOWS

0 (10.00) 1.00 (10.00)

1 0.50 0.870 0.435

2 1.83 0.756 1.38348

3 2.05 0.658 1.3489

4 2.00 0.572 1.144

5 3.00 0.497 1.491

TOTAL CASH FLOW 4.4189

NPV (5.5811)

As the total cash flows, are less than the out flows. The NPV is also negative. In this situation,

53
 the company earning or internal rate of returns also negative. Even if calculated IRR it will
become an interactive and complicated process. It can better solved by the MIRR method.

Calculation of IR:
PROFITABILITY INDEX (PI) = PV OF CASH INFLOW

INTITAL CASH OUTLAY

= 4.4189
10
=0.44
Profitability Index (PI) = 0.44 times
Comparative Analysis of all the 3 projects
PROJECT DISCOUNTED ARR (%) NPV (RS IN PI (TIMES) IRR (%)
NAMES PBP (YEARS) LAKHS)

1.PROJECT 2.5 86.2 31.29604 2.25 37.23

A

2.PROJECT 2.04 99.73 30.87169 2.5 38.47

B

3.PROJECT - 16.11 (5.5811) 0.44 -

C

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DISCOUNT PAY BACK PERIOD

2.5

1.5

0.5

0
project A Project B Project C

INTERPRETATION:
When compare to all the 3 projects except the 3thproject i.e., Project C does not have the PBP,
because the project investment is not recover inthe present cash flows, it shows the negative
value of the project, therefore the project should be rejected. Other 2 projects are showing the
positive values, therefore the projects are accepted.
In project 2 we can recover the investment within a short period of time i.e., 2.04 years,

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ARR

ARR
120

100

80

60
ARR

40

20

0
Project A Project B Project B

INTERPRETATION:
When compare to all the projects of ARR, in the 2 project i.e. Project B the ARR % is 99.73%,
so in this project the average rate of return ismore.
When compare to all projects expects the Project C i.e., project 3 is less than the companies
minimum required rate of return.

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NPV

NPV
35

30

25

20

15

10

0
Project A Project B Project C

INTERPRETATION:
The NPV should be greater than the cash outflow then only the project should be Accepted.
Except 3th projects all projects are showing the positive values only. In the 3thproject the NPV
is less than the cash outflow, therefore the project should be rejected. It shows the negative
value of the project.
When compare to all the projects the NPV value is more in 2nd project
(Project b) i.e., 30.87169.

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IRR

IRR
38.6

38.4

38.2

38

37.8

37.6

37.4

37.2

37

36.8

36.6
Project A Project B Project C

INTERPRETATION:
In the 3rd project we cannot calculate the IRR because the NPV is less than the project
investment.
When compare to all the projects the IRR percentage is more in 2nd project
(ProjectB) i.e., 38.47, better we can choose the 2rdproject.

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PROFITABLE INDEX

Profitability index
3

2.5

1.5

Profitability index

0.5

0
Project A Project B Project C

INTERPRETATION:
The above projects Profitability Index are more than1 but in the 3rdproject it fails toearn a
profit of 0.44 at rupee of investment.
When compare to all the projects the Profitability Index is more in 2nd project i.e., 2.5 times.
But we can choose the project 1, because we can recover over investment with short period in
this project i.e., 2.25 times.
NOTE: Here the profitability index is more than 1 otherwise the project should be
rejected

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CHAPTER – 7
FINDINGS,
SUGGESTIONS
&
CONCLUSION

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7.1 FINDINGS
The followings points were observed from the capital budgeting is as follows:
The 1st project is Project A is generating unequal cash flows for 5 years The initial investment
is Rs. 25 Lakhs.
 The ARR is 86.2% more than required rate of return. Therefore, accept on ARR basis
(traditional method).
 NPV is positive for the project and the IRR > ARR.
 The discounted payback period is 2.5 years.
 The Profitability of the project on every one rupee of its investment is 2.25 times.
The 2nd project is Project B is also generating unequal cash flows for 5 years. The initial
investment is Rs. 20 Lakhs.
 The ARR is 99.73% which is greater than the required rate of return.
 The discounted payback period is 2.04years.
 NPV and IRR are positive for the proposal.
 The Profitability Index (PI) is 2.5 times which is higher among all projects. As its returns
are high, the project is also risky.
The 3rd project is Project C is the 3rd project generating unequal cash flows for 5 years. The
initial investment is 10 lakhs. But in this the investment will not recoverable in the project
duration.
 The ARR is 16.11% which is less than the required rate of return.
 We cannot calculate the discount payback period because in this project the investment is
not recoverable.
 NPV negative. If NPV negative then the project is not worthy or in other words at present
the company will not get profits if it invests now.
 The Profitability Index (PI) is 0.4 which is less than 1 (0.4 < 1), which is not good sign.

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7.2 SUGGESTIONS AND RECOMMENDATIONS
Few of my suggestions are based on the results observed in three of the projects which were as
follows:
 The 1st project is Project A is profitable in all contexts. PBP, ARR, NPV, IRR and PI are
positive. As it returns are positive, accept the project.
 The 2nd project is Project B is having a high Accounting Profit (ARR) no 99.73% and
remaining all techniques are positive, but this is a risky project as its returns are high.
Therefore, the project is accepted.
 The 3rd project is Project c is not profitable project, it is generating losses at present.
Therefore the project is rejected.

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7.3 CONCULSION
When an organization is setting up a capital budgeting for the business, they are planning for
the outcome of the month. How involved the project budgeting is individual will be depends on
their investment decisions in a business.
When making the capital budgeting decision, the financial manager effectively analyzed the
long term investment programmes, so that it will improve the business over all.
Many businesses ignore or forget the other half of the budgeting. Capital budgeting are too
often proposed, discussed and accepted. It can be used to influence managerial action for long-
term implications and affect the future growth and profitability of the firm. Good management
looks at what that difference means to the business.
Remember to keep the records that have been created. The company should have capital
budgeting records of the projects always on file, so that it gives the future course of action for
the investment proposal for long-term period.
Organizations must make sure that, more attention should be paid upon the investment proposal
or course of action whose benefits are likely to be available in future over the lifetime of the
project, as the demand on resources is almost always higher than the availability of resources.

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BIBLIOGRAPHY

64
 BIBLIOGRAPHY
BOOKS
1. :http://en.wikipedia.org/wiki/Working_capital
2. . Ravi M. Kishore, “Advanced Management Accounting”
3. http://www.dtsc.ca.gov/AssessingRisk/Upload/pce.pdf
4. C.R.Kothari, Research methodology.
5. Vijay Prakash Joshi, 1995 Working Capital Management, New Delhi.
6. I.M.Pandey: 2000 “Financial Management theory and practices”, Vikas publishing
house Pvt. Ltd., New Delhi.
7. Ravi .M. Kishore, 2005 “Financial Management Tax and Cases” taxman publishing
company, New Delhi.

WEBSITE:
1. www.capitaline.com
2. www.economictimes.com
3. www.blonnet.com
4. www.moneycontrol.com
5. www.reportgallery.com
6. www.annualreportservice.com

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