A STUDY ON CAPITAL BUDGETING

AT
MARUTI SUZUKI LIMITED HYDERABAD
Submitted by
GADDAM ANIL
(H.T.No.1302-18-672-129)
Project submitted in partial fulfillment for the award of the Degree
of

MASTER OF BUSINESS ADMINISTRATION

By
Department of Business Administration
Aurora's PG College (MBA)
Ramanthapur

(Affiliated to Osmania University)

2018 – 2020
 DECLARATION

I hereby declare that this Project Report titled CAPITAL BUDGETING AT

MARUTI SUZUKI LIMITED HYDERABAD submitted by me to the Department of

Business Management, O.U., Hyderabad, is a bonafide work undertaken by me and it

is not submitted to any other University or Institution for the award of any degree

diploma / certificate or published any time before.

Name and Address of the Student Signature of the Student

AURORA’S POST-GRADUATE COLLEGE (MBA)

Accredited with A Grade by NAAC

Ramanthapur, Hyderabad – 500 013

CERTIFICATE

This is to certify that the Project Report entitled “CAPITAL BUDGETING AT

MARUTI SUZUKI LIMITED HYEDERABAD” submitted in partial fulfillment for
the award of MBA Programme of Department of Business Management, Aurora’s PG
College, Ramanthapur, affiliated to Osmania University, Hyderabad, was carried out
by GADDMA ANIL H.T.No.1302-18-672-129 under our guidance. This has not been
submitted to any other University or Institution for the award of any
degree/diploma/certificate.

Internal Guide Head of the Department Principal

 ACKNOWLEDGEMENT

This acknowledgement is a humble attempt to earnestly thank all those who are

directly or indirectly involved with my project and were of immense help to me.

First of all, I would like to express my sincere thanks to the Director of college

Dr.M.Madhavi and H.O.D of MBA department, Mr.Ch.Satish Kumar for giving me

this opportunity to carry out the project. I acknowledge with greatest courtesy the

efforts taken by _______________, my internal guide, who took genuine interest in

my project and helped me, understand the basic concepts of the project when

necessary.

I am also thankful to my external guide ____________, at __________________who

was readily willing to help me out in the course of the project.

Name of the Student

 ABSTRACT

Capital budgeting is the process of determining whether a big expenditure is

in a company's best interest. Here are the basics of capital budgeting and how it
works.  Capital Budgeting Basics A company undertakes capital budgeting in order
to make the best decisions about utilizing its limited capital. For example, if you are
considering opening a distribution center or investing in the development of a new
product, capital budgeting will be essential. It will help you decide if the proposed
project or investment is actually worth it in the long run. Identify Potential
Opportunities The first step in the capital budgeting process is to identify the
opportunities that you have. Many times, there is more than one available path that
your company could take. You have to identify which projects you want to investigate
further and which ones do not make any sense for your company. If you overlook a
viable option, it could end up costing you quite a bit of money in the long term. 
Evaluate Opportunities Once you have identified the reasonable opportunities, you
need to determine which ones are the best. Look at them in relation to your overall
business strategy and mission. See which opportunities are actually realistic at the
present time and which ones should be put off for later. Next, you need to determine
how much cash flow it would take to implement a given project. You also need to
estimate how much cash would be brought in by such a project. This process is truly
one of estimating--it takes a bit of guesswork. You need to try to be as realistic as you
can in this process. Do not use the best-case scenario for your numbers. Most of the
time, you need to use a fraction of that number to be realistic. If the project takes off
and the best-case scenario is reached, that is great. However, the odds of that
happening are not the best on new projects.
 INDEX
S. NO. CONTANT PAGE
NO.
LIST OF TABLES
LIST OF FIGURES
1 CHAPTER –I
1.1. INTRODUCTION

1.2. NEED AND IMPORTANCE

1.3. SCOPE OF THE STUDY

1.4. OBJECTIVES OF THE STUDY

1.5. RESEARCH METHODOLOGY

2 CHAPTER –II
LITERATURE REVIEW

3 CHAPTER – III
COMPANY PROFILE

4 CHAPTER – IV
DATA ANALYSIS AND DATA INTERPRETATION

5 CHAPTER – V
5.1. FINDINGS

5.2. SUGGESSIONS

5.3. LIMITATONS

5.4. CONCLUSIONS

6 BIBLIOGRAPHY

7 APPENDICES
APPENDIX - ABBREVIATION
 LIST OF TABLES

1. ANALYSIS OF MARUTI MOTORS LTD

2. CALCULATION OF PAY BACK PERIOD OF MARUTI MOTORS LTD
3. STATEMENT SHOWING CALCULATION OF ARR
4. LET US ASSUME THE DISCOUNT RATE BE 10%:
5. STATEMENT OF SHOWING CALCULATION NPV @88% 89% 90% UNDER
IRR METHOD
6. STATEMENT FOR CALCULATING OF BENEFIT COST RATIO
 LIST OF FIGURES

1. ACCOUNTING FOR RISK IN CAPITAL BUDGETING

2. CAPITAL BUDGETING STEPS
3. CAPITAL BUDGETING METHODS
 CHAPTER-I

INTRODUCTION
 INTRODUCTION

Meaning:

Capital budgeting is the process that companies use for decision making on

capital project. The capital project lasts for longer time, usually more than one year.

As the project is usually large and has important impact on the long term success of

the business, it is crucial for the business to make the right decision.

Capital Budgeting Process

The specific capital budgeting procedures that the manager uses depend on the

manger's level in the organization and the complexities of the organization and the

size of the projects. The typical steps in the capital budgeting process are as follows:

 Brainstorming: Investment ideas can come from anywhere, from the top or the

bottom of the organization, from any department or functional area, or from

outside the company. Generating good investment ideas to consider is the

most important step in the process.

 Project analysis: This step involves gathering the information to forecast cash

flows for each project and then evaluating the project's profitability.

 Capital budget planning: The Company must organize the profitable proposals

into a coordinated whole that fits within the company's overall strategies, and

it also must consider the projects' timing. Some projects that look good when

considered in isolation may be undesirable strategically. Because of financial

and real resource issues, the scheduling and prioritizing of projects is

important.
  Performance monitoring:  In a post-audit, actual results are compared to

planned or predicted results, and any differences must be explained. For

example, how do the revenues, expenses, and cash flows realized from an

investment compare to the predictions? Post-auditing capital projects is

important for several reasons. First, it helps monitor the forecasts and analysis

that underlie the capital budgeting process. Systematic errors, such as overly

optimistic forecasts, become apparent. Second, it helps improve business

operations. If sales or costs are out of line, it will focus attention on bringing

performance closer to expectations if at all possible. Finally, monitoring and

post-auditing recent capital investments will produce concrete ideas for future

investments. Managers can decide to invest more heavily in profitable areas

and scale down or cancel investments in areas that are disappointing.

Complexity of Capital Budgeting Process

The budgeting process needs the involvement of different departments in the

business.  Planning for capital investments can be very complex, often involving

many persons inside and outside of the company. Information about marketing,

science, engineering, regulation, taxation, finance, production, and behavioral issues

must be systematically gathered and evaluated.

The authority to make capital decisions depends on the size and complexity of

the project. Lower-level managers may have discretion to make decisions that involve

less than a given amount of money, or that do not exceed a given capital budget.

Larger and more complex decisions are reserved for top management, and some are

so significant that the company's board of directors ultimately has the decision-
making authority. Like everything else, capital budgeting is a cost-benefit exercise at

the margin.
 NEED AND IMPORTANCE
 Whether or not funds should be invested in long term projects such as

settings of an industry, purchase of plant and machinery etc.,

 Analyze the proposals for expansion or creating additions capacities.

 To decide the replacement of permanent assets such as building and

equipments.

 To make financial analysis of various proposals regarding capital

investment so as to choose the best out of many alternative proposals.

 SCOPE OF THE STUDY

The efficient allocation of capital is the most important financial

function in the modern times. It involves decision to commit the firm’s since

they stand the long- term assets such decision are of considerable importance

to the firm since they send to determine its value and size by influencing its

growth, probability and growth.

The scope of the study is limited to collecting the financial data of MARUTI

SUZUKI for four years and budgeted figures of each year.

 OBJECTIVES OF THE STUDY
 To evaluate the capital budgeting practices relating to various projects of

MARUTI SUZUKI Hyderabad

 To assess the long-term requirements of funds and plan for application of

internal resources and debt servicing.

 To assess the effectiveness of long term investment decisions of MARUTI

SUZUKI.

 To offer conclusion derived from the study and give suitable suggestions for

the efficient utilization of capital expenditure decisions.

 RESEARCH METHODOLOGY

The study is both descriptive and analytical in nature. It is a blend of primary

data and secondary data. The primary data has been collected personally by

approaching the online share traders who are engaged in share market.

Methodology refers to the by which data is obtained. The information has been

collected through various sources

 Websites

 Journals

 Text books
 CHAPTER-II
LITERATURE REVIEW
Capital budgeting is the process of determining whether a big expenditure is in a
company's best interest. Here are the basics of capital budgeting and how it works. 

Capital Budgeting Basics

A company undertakes capital budgeting in order to make the best decisions

about utilizing its limited capital. For example, if you are considering opening a
distribution center or investing in the development of a new product, capital
budgeting will be essential. It will help you decide if the proposed project or
investment is actually worth it in the long run.

Identify Potential Opportunities

The first step in the capital budgeting process is to identify the opportunities
that you have. Many times, there is more than one available path that your company
could take. You have to identify which projects you want to investigate further and
which ones do not make any sense for your company. If you overlook a viable option,
it could end up costing you quite a bit of money in the long term. 

Evaluate Opportunities

Once you have identified the reasonable opportunities, you need to determine
which ones are the best. Look at them in relation to your overall business strategy and
mission. See which opportunities are actually realistic at the present time and which
ones should be put off for later. 

Cash Flow

Next, you need to determine how much cash flow it would take to implement
a given project. You also need to estimate how much cash would be brought in by
such a project. This process is truly one of estimating--it takes a bit of guesswork.
You need to try to be as realistic as you can in this process. Do not use the best-case
scenario for your numbers. Most of the time, you need to use a fraction of that number
to be realistic. If the project takes off and the best-case scenario is reached, that is
great. However, the odds of that happening are not the best on new projects.

Factors Affecting Capital Budgeting:

 While making capital budgeting investment decision the following factors or
aspects should be considered.
 The amount of investment
 Minimum rate of return on investment (k)
 Return expected from the investments. (R)
 Ranking of the investment proposals and
 Based on profitability the raking is evaluated I.e., expected rate of return on
investment.
Factors Influencing Capital Budgeting Decisions:

There are many factors, financial as well as non-financial, which influence

that Budget decisions. The crucial factor that influences the capital expenditure
decisions is the profitability of the proposal. There are other factors, which have to be
in considerations such as.
1. Urgency:
Sometimes an investment is to be made due to urgency for the survival of the
firm or to avoid heavy losses. In such circumstances, the proper evaluation of the
proposal cannot be made through profitability tests. The examples of such urgency are
breakdown of some plant and machinery, fire accident etc.
2. Degree of Certainty:
Profitability directly related to risk, higher the profits, Greater is the risk or
uncertainty. Sometimes, a project with some lower profitability may be selected due
to constant flow of income.
3. Intangible Factors:
some times a capital expenditure has to be made due to certain emotional and
intangible factors such as safety and welfare of workers, prestigious project, social
welfare, goodwill of the firm, etc.,
4. Legal Factors.
Any investment, which is required by the provisions of the law, is solely
influenced by this factor and although the project may not be profitable yet the
investment has to be made.
5. Availability of Funds.
 As the capital expenditure generally requires large funds, the availability of
funds is an important factor that influences the capital budgeting decisions. A project,
how so ever profitable, may not be taken for want of funds and a project with a lesser
profitability may be some times preferred due to lesser pay-back period for want of
liquidity.
6. Future Earnings
A project may not be profitable as compared to another today but it may
promise better future earnings. In such cases it may be preferred to increase earnings.
7. Obsolescence.
There are certain projects, which have greater risk of obsolescence than others.
In case of projects with high rate of obsolescence, the project with a lesser payback
period may be preferred other than one this may have higher profitability but still
longer pay-back period.
8. Research and Development Projects.
It is necessary for the long-term survival of the business to invest in research
and development project though it may not look to be profitable investment.
9. Cost Consideration.
Cost of the capital project, cost of production, opportunity cost of capital, etc.
Are other considerations involved in the capital budgeting decisions?
RISK AND UNCERTANITY IN CAPITAL BUDGETING
All the techniques of capital budgeting require the estimation of future cash
inflows and cash outflows. The future cash inflows are estimated based on the
following factors.
1. Expected economic life of the project.
2. Salvage value of the assets at the end of economic life.
3. Capacity of the project.
4. Selling price of the product.
5. Production cost.
6. Depreciation rate.
7. Rate of Taxation
8. Future demand of product, etc.
But due to the uncertainties about the future, the estimates of demand,
production, sales, selling prices, etc. cannot be exact. For example, a product may
 become obsolete much earlier than anticipated due to unexpected technological
developments. All these elements of uncertainty have to be take in to account in
the form of forcible risk while taking on investment decision. But some
allowances for the elements of the risk have to provide.
ACCOUNTING FOR RISK IN CAPITAL BUDGETING.
The following methods are suggested for accounting for risk in capital
Budgeting.

Risk Adjusted Cut off Rate Decision Tree Analysis

Certainty Equivalent Suggestions Co-Efficient of

Method Accounting risk Variation Method
In Capital Budgeting

Sensitivity Technique Standard Deviation Method

Profitability Technique

FIGURE NO. 1

1. Risk-Adjusted cut off rate or method of varying discount rate:

Simple method of accounting for risk in capital Budgeting is to increase the cut-
off rate or the discount factor by certain percentage on account of risk. The projects
which are more risky and which have greater variability in expected returns should be
discounted at a higher rate as compared to the projects which are less risky and are
expected to have lesser variability in returns.
The greatest drawback of this method is that it is not possible to determine the
premium rate appropriately and more over it is the future cash flow, which is
uncertain and requires adjustment and not the discount rate.
2. Certainty Equivalent Method:
 Another simple method of accounting for risk in capital budgeting is to reduce
expected cash flows by certain amounts. It can be employed by multiplying the
expected cash inflows certain cash outflows.
3. Sensitivity Technique:
Where cash inflows are very sensitive under different circumstances, more
than one forecast of the future cash inflows may be made. These inflows may be
regards as “Optimistic”, “Most Likely”, and “Pessimistic”. Further cash inflows may
be discounted to find out the Net present values under these three different situations.
If the net present values under the three situations differ widely it implies that there is
a great risk in the project and the investor’s decision to accept or reject a project will
depend upon his risk bearing abilities.
4. Probability Technique:
A probability is the relative frequency with which an event may occur in the
future. When future estimates of cash inflows have different probabilities the expected
monetary values may be computed by multiplying cash inflow with the probability
assigned. The monetary values of the inflows may further be discounted to find out
the present vales. The project that gives higher net present vale may be accepted.
5. Standard Deviation Method:
If two projects have same cost and there net present values are also the same,
standard deviations of the expected cash inflows of the two projects may be calculated
to judge the comparative risk of the projects. The project having a higher standard
deviation is set to be more risky has compared to the other.
6. Coefficient of variation Method:
Coefficient of variation is a relative measure of dispersion. If the projects have
the same cost but different net present values, relative measure, I,e. coefficient of
variation should be computed to judge the relative position of risk involved. It can be
calculated as follows.
Coefficient of Variation = Standard Deviation X100
Mean
7. Decision Tree Analysis:
In modern business there are complex investment decisions which involve a
sequence of decisions over time. Such sequential decisions can be handled by plotting
decisions trees. A decision tree is a graphic representation of the relationship between
a present decision and future events, future decisions and their consequences. The
sequences of event are mapped out over time in a format resembling branches of a
tree and hence the analysis is known as decision tree analysis. The various steps
involved in a decision tree analysis are
1 Identification of the problem
2 Finding out the alternatives;
3 Exhibiting the decision tree indicating the decision points, chance events, and
other relevant date;
4 Specification of probabilities and monetary values for cash inflows;
5 Analysis of the alternatives.

LIMITATIONS OF CAPITAL BUDGETING

Capital Budgeting Techniques Suffer From the Following
Limitations.
1 All the techniques of capital budgeting presume the various investment
proposals under consideration are mutually exclusive which may not
practically be true in some particular circumstances.
1. The techniques of capital budgeting require estimation of future cash inflows
and outflows. The future is always uncertain and the data collected for future
may not be exact. Obviously the results based upon wrong data may not be
good.
2. There are certain factors like morale of the employees, goodwill of the firm,
etc., which cannot be correctly quantified but which otherwise substantially
influence the capital decision.
3. Urgency is another limitation in the evaluation of capital investment decisions.
4. Uncertainty and risk pose the biggest limitation to the techniques of capital
budgeting.

STEPS INVOLVED IN THE CAPITAL EXPENDITUR

The various steps involved in the control of capital expenditure.
1. Preparation of capital expenditure.
2. Proper authorization of capital expenditure.
3. Recording and control of expenditure.
4. Evaluation of performance of the project.
OBJECTIVES OF CONTROL OF CAPITAL
EXPENDITURE
In the following all the main objectives are on control of capital expenditure:
To make an estimate of capital expenditure and to see that the total cash outlay is
within the financial resources of the enterprise.
1. To ensure timely cash inflows for the projects so that non-availability of cash
may not be a problem in the implementation of the project.
2. To ensure all the capital expenditure is properly sanctioned.
3. To properly co-ordinate the projects of various departments.
4. To fix priorities among various projects and ensure their follow up.
5. To compare periodically actual expenditure with the budgeted ones so as to
avoid any excess expenditure.
6. To measure the performance of the project.
7. To ensure that sufficient amount of capital expenditure is incurred to keep
pace with the rapid technological developments.
8. To prevent over expansion.

CAPITAL BUDGETING PROCESS

Capital Budgeting is a complex process as it involves decisions relating to the
investment of the current funds for the benefit to the achieved in future and the future
always uncertain. However, the following procedure may be adopted in the process of
capital budgeting.
Capital Budgeting Steps:

FIGURE NO. 2
1. Identification of Investment Proposals:
The capital budgeting process begins with the identification of investment
proposals. The proposal or idea about potential investment opportunities may
originate from the top management or may come from the rank and file worker of any
department are from any officer of the organization. The departmental head analyses
the various proposals in the light of the corporate strategies and submits the suitable
proposals to the Capital Expenditure Planning Committee in case of large
organizations or to the officers concerned with the process of long-term investment
decisions.
2. Screening the Proposals:
The expenditure Planning Committee Screens the various proposals received
from different departments. The committee views these proposals from various
angles to ensure that these are accordance with the corporate strategies or selection
criterion of the firm and also do not lead to departmental imbalances.
3. Evaluation of Various Proposals:
The next step in the capital budgeting process is to evaluate the profitability of
proposals. There are many methods that may be used for this purpose such as Pay
Back Period methods, Rate of Return method, Net Present Value method, Internal
Rate of Return method etc. All these methods of evaluating profitability of capital
investment proposals have been discussed.
4. Fixing Priorities:
After evaluating various proposals, the unprofitable or uneconomic proposals
may be rejected straight away. But it may not be possible for the firm to invest
immediately in all the acceptable proposals due to limitation of funds. Hence it is very
essential to rank the various proposals and to establish priorities after considering
urgency, risk and profitability involved therein.
5. Final Approval and Preparation of Capital Expenditure Budget:
Proposals meeting the evaluation and other criteria are finally approved to be
included in the capital expenditure budget. However, proposals involving smaller
investment may be decided at the lower levels for expeditious action. The capital
expenditure budget lays down the amount of estimated expenditure to be incurred on
fixed assets during the budget period.
6. Implementing Proposal:
 Preparation of capital budgeting expenditure budgeting and incorporation of a
particular proposal in the budget does not itself authorized to go ahead with the
implementation of the project. A request for the authority to spend the amount should
further to be made to the capital expenditure committee, which may like to revive the
profitability of the project in the changed circumstances.
Further, while implementing the project, it is better to assign the responsibility
for completing the project within given time frame and cost limit so as to avoid
unnecessary delays and cost over runs. Network techniques used in the project
management such as Pert and CPM can also be applied to control and monitor the
implementation of the project.
7. Performance Review.
The last stage in the process of capital budgeting is the evaluation of the performance
of the project. The evaluation is made through post completion audit by way of
comparison of actual expenditure on the project with the budgeted one, and also by
comparing the actual return from the investment with the anticipated return. The
unfavorable variances, if any should be looked into and the causes of the same be
identified so that corrective action may be taken in future.

KINDS OF CAPITAL BUDGETING DECISIONS

The overall objectives of capital budgeting are to maximize the profitability of
a firm or the return on investment. These objectives can be achieved either by
increasing revenues or by reducing costs. This, capital budgeting decisions can be
broadly classified into two categories.
1. Increase revenue.
2. Reduce costs.
The first category of capital budgeting decisions is expected to increase revenue of
the firm through expansion of the production capacity or size of the firm by reducing
a new product line. The second category increases the earning of the firm by
reducing costs and includes decisions relating to replacement of obsolete, outmoded
or worn out assets. In such cases, a firm has to decide whether to continue the same
asset or replace it. The firm takes such a decision by evaluating the benefit from
replacement of the asset in the form or reduction in operating costs and the cost\ cash
needed for replacement of the asset. Both categories of above decision involve
investments in fixed assets but the basic difference between the two decisions are in
the fact that increasing revenue investment decisions are subject to more uncertainty
as compared to cost reducing investments decisions.
Further, in view of the investment proposal under consideration, capital budgeting
decisions may be classified as:
1. Accept Reject Decision:
Accept reject decisions relate independent projects do not compute with one
another. Such decisions are generally taken on the basis of minimum return on
investment. All those proposals which yields a rate of return higher than the minimum
required rate of return of capital are accepted and the rest rejected. If the proposal is
accepted the firm makes investment in it, and the rest are rejected. If the proposal is
accepted the firm makes investment in it, and if it is rejected the firm does not invest
in the same.
2. Mutually Exclusive Project Decision:
Such decisions relate to proposals which compete with one another in such a
way that acceptance of one automatically excludes the acceptance of the other. Thus
one of the proposals is selected at the cost of the other. For ex: A company has the
option of buying a machine. Or a second hand machine, or taking on old machine hire
or selecting a machine out of more than one brand available in the market. In such a
cases the company can select one best alternative out of the various options by
adopting some suitable technique or method of capital budgeting. Once the alternative
is selected the others are automatically rejected.
3. Capital Rationing Decision:
A firm may have several profitable investment proposals but only limited
funds and, thus, the firm has to rate them. The firm selects the combination of
proposals that will yield the greatest profitability by ranking them in descending
order of their profitability.

METHODS OF CAPITAL BUDGETING

Traditional Methods:
i) Average Rate of Return.
ii) Pay-Back Period Method
Time Adjusted Method or Discounted Method
i) Net Present Value Method
 ii) Internal Rate of Return
iii) Profitability Index.

CAPITAL BUDGETING METHODS

TRADITIONAL METHOD DISCOUNTED CAHS FLOW

METHOD

PLAY BACK ACCOUNTING RATE

PERIOD OF RETURN

NET PRESENT VALUE INTERNAL RATE OF RETURN

PROFITABILITY INDEX

FIGURE NO. 3

TRADITIONAL METHODS

1. Average Rate of Return:

The average rate of return (ARR) method of evaluating proposed capital
expenditure is also known as the accounting rate of return method. It is based upon
accounting information rather than cash flows. There is no unanimity recording the
definition of the rate of return.

Average annual profits after taxes

ARR = investment X 100
Average life of the project
the

The average profits after taxes are determined by adding up the after-tax
profits expected for each year of the projects life and dividing by the number of the
years. In the case of annuity, the average after tax profits is equal to any year’s profit.
 The average investment is determined by dividing the net investment by two.
This averaging process assumes that the firm is suing straight line depreciation, in
which case the book value of the asset declines at a constant rate from its purchase
price to zero at the end of its depreciable life. This means that, on the average firms
will have one-half of their initial purchase prices in the books. Consequently if the
machine has salvage value, then only the depreciable cost (cost salvage value) of the
machine should be divide by two in ordered to ascertain the average net investment,
as the salvage money will be recovered only at the end of the life of the project.
Therefore an amount equivalent to the salvage value remains tied up in the
project though out its lifetime. Hence no adjustment is required to sum of salvage
value to determine the average investment. Likewise if any additional net working
capital is required in the initial year, which is likely to be released only at the end of
the projects life. The full amount of working capital should be taking determining
relevant investment for the purpose of calculating ARR. Thus,
Average investment = Net Working Capital + Salvage Value + ½ (initial cost of
machine value)
Accept – Reject Value:
With the help of ARR, the financial maker can decide whether to accept or
reject the investment proposal. As an Accept – reject criterion, the actual ARR would
be compared with a predetermined or a minimum required rate of return or cut – off
rate. A project would qualify to be accepted if the actual ARR is higher than the
minimum desired ARR. Otherwise it is liable to be rejected. Alternatively the ranking
method can be used to select or reject proposals under consideration may be arranged
in the descending order of magnitude, starting with the proposals with the highest
ARR and ending with the proposal with the lowest ARR. Obviously projects having
higher ARR would be preferred with projects with lower ARR.
2. Pay Back Period:
The Pay Back method is the second traditional method of capital budgeting. It
is the simplest and, the most widely employed quantitative method for apprising
capital expenditure decisions. This method answers the question. How many years
will it for the cash benefits to pay the original cost of an investment, normally
disregarding salvage value? Cash benefits represent CFAT ignoring interest
payment. Thus the pay back method measures the number of years required for the
CFAT to pay back the original out lay required in an investment proposal.
There are two ways of calculating the payback period. The first method can be
applied when the cash flow stream is in the nature if annuity for each year of the
projects life that is CFAT is uniform. In such a situation the initial cost of the
investment is divided by the constant annual cash flow;
Investment
Constant Annual Cash Flow
For example, an investment of Rs. 40,000 in a machine is expected to produce
CFAT of Rs 8,000 for 10 years.
Rs. 40,000
Rs. 8,000 PB =------------ 5 years.
The second method is used when project cash flows are not uniform (mixed
stream) but vary from year to year. In such a situation, PB is calculated by the process
of cumulating cash flows till the time when cumulative cash flow become equal to the
original investment outlay.
Accept Reject Criteria
The payback period can be use as a decision criterion to accept or reject
investment proposals. One application of this technique is to compare the actual pay
back with a predetermined pay back that is the pay back set up by the management in
terms of the maximum period during which the initial investment will be recovered. If
the actual payback period less than the predetermined pay back, the project would be
accepted. If not, it would be rejected. Alternatively, the pay back can be used as a
ranking method.
When mutually exclusive projects are under consideration, then may be
ranked according length of payback period. Thus, the project has having the shortest
pay back may be assigned rank one followed in that order so that the project with the
longest pay back would be ranked last. Obviously, projects with shorter payback
period will be selected.
DISCOUNTED CASH FLOW/ TIME ADJESTED TECHNIQUES
1. Net Present Value Method:
The net present value is a modern method of evaluating investment proposals.
This method takes into consideration the time value of money and attempts to
calculate the return on investments by introducing the factor of time element. It
recognizes the fact that rupee earned today is worth more than the same rupee earned
tomorrow. Net present values of all inflows and outflows of cash occurring during the
life of the project is determined separately for each year by discounting these flows by
the firm’s cost of capital or a pre – determined rate. The following are the Net Present
value method of evaluating investment proposals:
1) First of all determined an appropriate rate of interest that should be selected as
minimum required rate of return called “cut – off rate” of interest in the market and
the market- on long term loans or it should reflect the opportunity cost of capital of
the investor.
2) Compute the present value of total investment outlay, I.e., cash outflows at the
determined discount rate. If the total investment is to be made in the initial year, the
present value shall be as the cost of investment.
3) Compute the present value of total investment proceeds I,e., inflows (profit before
depreciation and after tax) at the above determined discount rate.
4) Calculate the Net present value of each project by subtracting the present value of
cash inflows from the value of cash outflows for each project.
5)If the Net present value is positive or zero, I.e., when present value of cash inflows
either exceeds or is equal to the present values of cash outflows, the proposal may be
accepted. But in case the present value of inflows is less than the present value of cash
outflows, the proposal should be rejected.
6) To select between mutually exclusive projects, projects should be ranked in order
of net present values, i.e., the first preferences to be given to the project having the
maximum net present value.
The present value of re.1 due in any number of years may be found with the
use of the following the mathematical formula:
1
PV = ( )n
1+ r
Where,
PV = Present Value
R = Rate of interest/ Discount rate
N = Number of years
2. Internal Rate of Return:
 The second discounted cash flow or time-adjusted method of appraising
capital investment decisions is the internal rate of return method. This technique is
also known as yield on investment, marginal efficiency of capital, marginal
productivity of capital, rate of return method. This technique is also known a yield on
investment, marginal efficiency of capital, and marginal productivity of capital, rate
of return, time-adjusted rate of return and so an.
Like the present value method the IRR method also considers the time value
of money by case of the net present value method, the discount rate is the required
rate of return and being a predetermined rate, usually the cost of capital, its
determinants are external to the proposal under consideration. The IRR, on the other
hand it is based on facts, which are internal to the proposals. In other words while
arriving at the required rate of return for finding out present values the cash inflows
as well as outflows are not considered. But the IRR depends entirely on the initial
outlay and the cash proceeds of the projects, which is been evaluated of acceptance
or rejection. It is therefore appropriately referred to as internal rate of return.
The internal rate of return is usually the rate of return that a project
earns. It is defined as the discount rate (r) which equates the aggregate present value
of the Net cash inflows (CFAT) with the aggregate present value of cash outflows
of a project. In other words it is that rate which gives the project of Net present
value is zero.
Accept Reject Criteria:
The use of the IRR, as a criterion to accept capital investment
decisions, involves a comparison of the actual IRR with the required rate of return
also then the cut off rate or hurdle rate. The project would quality to be accepted if
the IRR
(r) Exceeds the cut off rate.
(k). If the IRR and the required rate of return are equal the firm is different as to
whether to accept or reject the project.
3. Profitability Index:
The time adjusted capital budgeting is Profitability Index (P1) or Benefit Cost
Ratio (B / C). It is similar to the approach of NPV. The profitability index approach
measures the present value of returns per rupee invested, while the NPV is based on
the differences between the present value of future cash inflows and the present value
of cash outflows. A major shortcoming of the NPV method is that, being an absolute
measure; it is not reliable method to evaluate project inquiring different initial
investments. The PI method proves a solution to this kind of problem. It is, in other
words, a relative measure. It may be defined as the ratio, which is obtained by
dividing the present value of future cash inflows by the present value of cash inflows.
PI = Present value of cash inflows
Present value of cash outflows
This method is also known as B / C ratio because the numerator measures
benefits and the denominator costs.
Accept Reject Criteria:
Using the B / C ratio or the PI, a project will quality for acceptance if its PI
exceeds one. When PI equals 1 (one), the firm is indifferently to the project.
When PI is greater than, equal to or less than 1 (one), the Net present value is
greater than, equal to or less than zero respectively. In other words, the NPV will be
positive when the PI is greater than 1 (one); will be negative when the PI is less than
1. Thus, the NPV and PI approach give the same results regarding the investments
proposals.

CAPITAL BUDGETING
A capital expenditure is an outlay of cash for a project that is expected to
produce a cash inflow over a period of time exceeding one year. Examples of projects
include investments in property, plant, and equipment, research and development
projects, large advertising campaigns, or any other project that requires a capital
expenditure and generates a future cash flow.

Because capital expenditures can be very large and have a significant impact on the
financial performance of the firm, great importance is placed on project selection.
This process is called capital budgeting.

KINDS OF CB DECISIONS
Capital Budgeting refers to the total process of generating, evaluating, selecting and
following up on capital expenditure alternatives basically; the firm may be confronted with
three types of capital budgeting decisions
Accept Reject Decisions:
This is a fundamental decision in capital budgeting. If the project is accepted,
the firm invests in it; if the proposal is rejected, the firm does not invest in it. In
general, all those proposals, which yield rate of return greater than a certain
required rate of return or cost of capital, are accreted and rest are rejected. By
applying this criterion, all independent projects all accepted. Independent projects
are the projects which do not compete with one another in such a way that the
acceptance of one project under the possibility of acceptance of another. Under
the accept-reject decision, the entire independent project that satisfies the
minimum investment criterion should be implemented.

Mutually exclusive project decision

Mutually exclusive projects are projects which compete with other projects in
such a way that the acceptance of one which exclude the acceptance of other projects.
The alternatives are mutually exclusive and only one may be chosen.

Capital Rationing Decision

Capital rationing is a situation where a firm has more investment proposals

than it can finance. It may be defined as a situation where a constraint in placed on the
total size of capital investment during a particular period. In such a event the firm has
to select combination of investment proposals which provides the highest net present
value subject to the budget constraint for the period. Selecting or rejecting the projects
for this purpose will require the taking of the following steps:
1) Ranking of projects according to profitability index (PI) or Initial
rate of return (IRR).
2) Selecting of rejects depends upon the profitability subject to the
budget limitations keeping in view the objectives of maximizing the
value of firms.

NATURE OF INVESTMENT DECISSIONS

The investment decisions of a firm are generally known as the capital

budgeting, or capital expenditure decisions. A capital budgeting decision may be
defined as the firm’s decision to invest its current funds most efficiently in the long
term assets in anticipation of an expected flow of benefits over a series of years. The
long term assets are those that affect the firms operations beyond the one year period.
The firm’s investment decisions would generally include expansion, acquisition,
modernization and replacement of the long-term assets.

Sale of a division or business (divestment) is also as an investment decision.

Decisions like the change in the methods of sales distribution, or an advertisement
campaign or a research and development programmed have long-term implications
for the firm’s expenditures and benefits, and therefore, they should also be evaluated
as investment decisions. It is important to note that investment in the long-term assets
invariably requires large funds to be tied up in the current assets such as inventories
and receivables. As such, investment in the fixed and current assets is one single
activity.

Features of Investment Decisions:

The following are the features of investment decisions:

 The exchange of current funds for future benefits.

 The funds are invested in long-term assets.
 The future benefits will occur to the firm over a series of year.
Importance of Investment Decisions
Investment decisions require special attention because of the following reasons.

 They influence the firms growth in the long run

 They affect the risk of the firm
 They involve commitment of large amount of funds
 They are irreversible, or reversible at substantial loss
 They are among the most difficult decisions to make.
Growth

The effects of investment decisions extend in to the future and have to be

endured for a long period than the consequences of the current operating expenditure.
A firm’s decision to invest in long-term assets has a decisive influence on the rate and
direction of its growth. A wrong decision can prove disastrous for the continued
survival of the firm; unwanted or unprofitable expansion of assets will result in heavy
operating costs of the firm. On the other hand, inadequate investment in assets would
make it difficult for the firm to complete successfully and maintain its market share.

Risk

A long-term commitment of funds may also change the risk complexity of the
firm. If the adoption of an investment increases average gain but causes frequent
fluctuations in its earnings, the firm will become more risky. Thus, investment
decisions shape the basic character of a firm.

Funding

Investment decisions generally involve large amount of funds, which make it

imperative for the firm to plan its investment programmers very carefully and make
an advance arrangements for procuring finances internally or externally.

Irreversibility

Most investment decisions are irreversible. It is difficult to find a market for such
capital items once they have been acquired. The firm will incur heavy losses if such assets are
scrapped.

Complexity

Investment decisions are among the firm’s most difficult decisions. They are an
assessment of future events, which are difficult to predict. It is really a complex problem to
Economic, political, social and technological forces cause the uncertainty in cash flow
estimation.

TYPES OF INVESTEMENT DECISIONS

There are many ways to classify investments. One classification is as follows:

 Expansion of existing business

 Expansion of new business
 Replacement and modernization.

Expansion and Diversification

A company may add capacity to its existing product lines to expand existing
operations. For example, the Gujarat State Fertilizer Company (GSFC) may increase its plant
capacity to manufacture more urea. It is an example of related diversification. A firm may
expand its activities in a new business. Expansions of a new business require investment in
new products and a new kind of production activity within the firm. If a Packaging
manufacture Company invests in a new plant and machinery to produce ball bearings, which
the firm business or unrelated diversification. Sometimes a company acquires existing firms
to expand its business. In either case, the firm makes investment in the expectation of
additional revenue. Investments in existing or new products may also be called as revenue-
expansion investments.

Replacement and Modernization;

The main objective of modernization and replacement is to improve operating
efficiency and reduces costs. Cost savings will reflect in the increased profits, but the firm’s
revenue may remain unchanged. Assets become outdated and obsolete with technological
changes. The firm must decide to replace those assets with new assets that operate more
economically.

If a cement company changes from semi-automatic drying equipment to finally

automatic drying equipment, it is an example of modernization and replacement.

Replacement decisions help to introduce more efficient and economical assets and
therefore, are also called as cost reduction investments. However, replacement decisions that
involve substantial modernization and technological improvements expand revenues as well
as reduce costs.

Yet another useful way to classify investments is as follows:

 Mutually exclusive investments

 Independent investments
 Contingent investments

Mutually Exclusive Investments

Mutually exclusive investments serve the same purpose and compete with each other.
If one investment is undertaken, others will have to be excluded. A company may, for
example, either use a more labour-intensive, semi-automatic machine, or employ a more
capital-intensive, highly automatic machine for production. Choosing the semi-automatic
machine precludes the acceptance of the highly automatic machine.

Independent Investments
 Independent investments serve different purposes and do not compete with each
other. For example, a heavy engineering company may be considering expansion of
its plant capacity to manufacture additional excavators and addition of new
production facilities to manufacture a new product - light commercial vehicles.
Depending on their profitability and availability of funds, the company can undertake
both investments.

Contingent Investments

Contingent investments are dependent projects; the choice of one investment

necessitates undertaking one or more other investments. For example, if a company
decides to build a factory in a remote, backward area, if may have to invest in houses,
roads, hospitals, schools etc. for employees to attract the work force. Thus, building of
factory also requires investments in facilities for employees. The total expenditure
will be treated as one single investment.

INVESTMENT EVOLUTION CRITERIA

Three steps are involved in the evaluation of an investment:

 Estimation of cash flows.

 Estimation of the required rate of return (the opportunity cost of capital)
 Application of a decision rule of making the choice.
The first two steps, discussed in the subsequent chapters, are assumed as
given. Thus, our discussion in this chapter is confined to the third step. Specifically,
we focus on the merits and demerits of various decision rules.

Investment decision rule

The investment decision rules may be referred to as capital budgeting

techniques, or investment criteria. A sound appraisal technique should be used to
measure the economic worth of an investment project. The essential property of a
sound technique is that it should maximize the share holder’s wealth. The following
other characteristics should also be possessed by a sound investment evaluation
criterion.
  It should consider all cash flows to determine the true profitability of
the project.
 It should provide for an objective and unambiguous way of separating
good projects from bad projects.
 It should help ranking of projects according to their true profitability.
 It should recognize the fact that bigger cash flows are preferable to
smaller ones and early cash flows are preferable to later ones.
 it should be a criterion which is applicable to any conceivable
investment project independent of others.

EVALUATION CRITERIA

A number of investment criteria (or capital budgeting techniques) are in use in

practice. They may be grouped in the following two categories.

1. Discounted cash flow criteria

 Net present value(NPV)
 Internal rate return(IRR)
 Profitability index(PI)
2. Non discounted cash flow criteria
 Payback period(PB)
 Discounted payback period
 Accounting rate of return(ARR)
NET PRESENT VALUE

The Net Present Value technique involves discounting net cash flows for a
project, then subtracting net investment from the discounted net cash flows. The result
is called the Net Present Value (NPV). If the net present value is positive, adopting
the project would add to the value of the company. Whether the company chooses to
do that will depend on their selection strategies. If they pick all projects that add to the
value of the company they would choose all projects with positive net present values,
even if that value is just $1. On the other hand, if they have limited resources, they
will rank the projects and pick those with the highest NPV's. The discount rate used
most frequently is the company's cost of capital.
 Net present value (NPV) or net present worth (NPW)[ is defined as the total
present value (PV) of a time series of cash flows. It is a standard method for using the
time value of money to appraise long-term projects. Used for capital budgeting, and
widely throughout economics, it measures the excess or shortfall of cash flows, in
present value terms, once financing charges are met.

The rate used to discount future cash flows to their present values is a key
variable of this process. A firm's weighted average cost of capital (after tax) is often
used, but many people believe that it is appropriate to use higher discount rates to
adjust for risk for riskier projects or other factors. A variable discount rate with higher
rates applied to cash flows occurring further along the time span might be used to
reflect the yield curve premium for long-term debt.

INTERNAL RATE OF RETURN

The internal rate of return (IRR) is a Capital budgeting metric used by firms to
decide whether they should make Investments. It is also called discounted cash flow
rate of return (DCFROR) or rate of return (ROR).

It is an indicator of the efficiency or quality of an investment, as opposed to

Net present value (NPV), which indicates value or magnitude.

The IRR is the annualized effective compounded return rate which can be
earned on the invested capital, i.e., the yield on the investment. Put another way, the
internal rate of return for an investment is the discount rate that makes the net present
value of the investment's income stream total to zero.

Another definition of IRR is the interest rate received for an investment

consisting of payments and income that occur at regular periods.

A project is a good investment proposition if its IRR is greater than the rate of
return that could be earned by alternate investments of equal risk (investing in other
projects, buying bonds, even putting the money in a bank account). Thus, the IRR
should be compared to any alternate costs of capital including an appropriate risk
premium.
 In general, if the IRR is greater than the project's cost of capital, or hurdle
rate, the project will add value for the company.

In the context of savings and loans the IRR is also called effective interest
rate.

In cases where one project has a higher initial investment than a second
mutually exclusive project, the first project may have a lower IRR (expected return),
but a higher NPV (increase in shareholders' wealth) and should thus be accepted over
the second project (assuming no capital constraints).

IRR assumes reinvestment of positive cash flows during the project at the
same calculated IRR. When positive cash flows cannot be reinvested back into the
project, IRR overstates returns. IRR is best used for projects with singular positive
cash flows at the end of the project period.

PROFITABILITY INDEX

Yet another time adjusted method of evaluating the investment proposals is

the benefit-cost (B/C) ratio or profitability index. Profitability index is the ratio of the
present value of cash inflows at the required rate of return, to the initial cash out flow
of the investment.

Evaluation of PI method

Like the NPV and IRR rules, PI is a conceptually sound method of arising
investment projects. It is a variation of the NPV method and requires the same
computations as the NPV method.

 Time value it recognizes the time value of money.

 Value maximization it is consistent with the share holder value

maximization principle. A project with PI greater than one will have
positive NPV and if accepted it will increase share holders wealth.
  Relative profitability in the PI method since the present value of cash
inflows is divided by the initial cash out flow , it is a relative measure of
project’s profitability.

Like NPV method PI criterion also requires calculation of cash flows and estimate of
the discount rate.

PAYBACK PERIOD

The payback period is one of the most popular and widely recognized
traditional methods of evaluating investment proposals. Payback is the number of
years required to cover the original cash outlay invested in a project. If the project
generates constant annual cash inflows, the payback period can be computed by
dividing cash outlay by the annual cash inflow.

Evolution of payback:

Many firms use the payback period as an investment evaluation criterion and a
method of ranking projects. They compare the project’s payback with pre-determined
standard pay back. The would be accepted if its payback period is less than the
maximum or standard payback period set by management as a ranking method. It
gives highest ranking to the project, which has the shortest payback period and lowest
ranking to the project with highest payback period. Thus if the firm has to choose
between two mutually exclusive projects, the project with shorter payback period will
be selected.

Evolution of payback period

Pay back is a popular investment criterion in practice. It is considered to have

certain virtues.

 Simplicity

The significant merit of payback is that it is simple to understand and

easy to calculate. The business executives consider the simplicity of method as
 a virtue. This is evident from their heavy reliance on it for appraising
investment proposals in practice.

 Cost effective

Payback method costs less than most of the sophisticated techniques

that require a lot of the analyst’s time and the use of computers.

 Short-term

Effects a company can have more favorable short-run effects on

earnings per share by setting up a shorter standard payback period. It should,
however, be remembered that this may not be a wise long-term policy as the
company may have to sacrifice its future growth for current earnings.

 Liquidity

The emphasis in payback is on the early recovery of the investment.

Thus, it gives an insight into the liquidity of the project. The funds so released
can be put to other uses.

In spite of its simplicity and the so, called virtues, the payback may not
be a desirable investment criterion since it suffers from a number of serious
limitations.

 Risk shield

The risk of the project can be tackled by having a shorter standard

payback period. As it may be in ensured guaranty against its loss. A company
has to invest in many projects where the cash inflows and life expectancies are
highly uncertain. Under such circumstances, pay back may become important,
not so much as a measure of profitability but, as a means of establishing an
upper bound on the acceptable degree of risk.

DISCOUNTED PAYBACK PERIOD

 One of the serious objections to the payback method is that it does not
discount the cash flows for calculating the payback period. We can discount cash
flows and then calculate the payback.

The Discounted Payback Period is the number of Periods taken in recovering

the investment outlay on the present value basis. The discounted payback period still
fails to consider the cash flows occurring after the payback period.

ACCOUNTING RATE OF RETURN

The Accounting Rate of Return (ARR) also known as the Return on

Investment (ROI) uses accounting information as revealed by financial statements, to
measure the profitability of an investment. The accounting rate of return is the ratio of
the average after tax profit divided by the average investment. The average
investment would be equal to half of the original investment if it were depreciated
constantly. Alternatively, it can be found out by dividing the total if the investment’s
book values after depreciation be the life of the project.

Evaluation of ARR Method

The ARR method may claim some merits:

 SIMPLICITY the ARR method is simple to understand and use. It does

not involve complicated computations.

 ACCOUNTING DATA

The ARR can be readily calculated from the accounting data, unlike in the
NPV and IRR methods, no adjustments are required to arrive at cash flows of
the project.

 ACCOUNTING PROFITABILITY

The ARR rule incorporates the entire stream of income in calculating the
project’s profitability.
 The ARR is a method commonly understood by accountants and
frequently used as a performance measure. As decision criterion, how ever it
has serious short comings.

 CASH FLOWS IGNORED

The ARR method uses accounting profits, not cash flows, in appraising the
projects. Accounting profits are based on arbitrary assumptions and choices
and also include non-cash items. It is, therefore in appropriate to relay on them
for measuring the acceptability of the investment projects.

 TIME VALUE IGNORED

The averaging income ignores the time value of money. In fact, this
procedure gives more weight age to the distant receipts.

 ARBITRARY CUT-OFF

The firm employing the ARR rule uses an arbitrary cut-off yardstick.
Generally, the yardstick is the firm’s current return on its assets (book -value).
Because of this, the growth companies earning very high rates on their
existing assets may project profitable projects and the less profitable
companies may accept bad projects.

PROJECT CLASSIFICATION

Project classification entails time and effort the costs incurred in

this exercise must be justified by the benefits from it. Certain projects,
given their complexity and magnitude, may warrant a detailed analysis;
others may call for a relatively simple analysis. Hence firms normally
classify projects into different categories. Each category is then analyzed
somewhat differently.

While the system of classification may vary from one firm to

another, the following categories are found in cost classification.
Mandatory investments

These are expenditures required to comply with statutory requirements.

Examples of such investments are pollution control equipment, medical dispensary,
fire fitting equipment, crèche in factory premises and so on. These are often non-
revenue producing investments. In analyzing such investments the focus is mainly on
finding the most cost-effective way of fulfilling a given statutory need.

Replacement projects

Firms routinely invest in equipments means meant to obsolete and inefficient

equipment, even though they may be a serviceable condition. The objective of such
investments is to reduce costs (of labor, raw material and power), increase yield and
improve quality. Replacement projects can be evaluated in a fairly straightforward
manner, through at times the analysis may be quite detailed.

Expansion projects

These investments are meant to increase capacity and/or widen the distribution
network. Such investments call for an expansion projects normally warrant more
careful analysis than replacement projects. Decisions relating to such projects are
taken by the top management.

Diversification projects

These investments are aimed at producing new products or services or

entering into entirely new geographical areas. Often diversification projects entail
substantial risks, involve large outlays, and require considerable managerial effort and
attention. Given their strategic importance, such projects call for a very thorough
evaluation, both quantitative and qualitative. Further they require a significant
involvement of the board of directors.

Research and development projects

Traditionally, R&D projects observed a very small proportion of capital

budget in most Indian companies. Things, however, are changing. Companies are now
allocating more funds to R&D projects, more so in knowledge-intensive industries.
R&D projects are characterized by numerous uncertainties and typically involve
sequential decision making.

Hence the standard DCF analysis is not applicable to them. Such projects are
decided on the basis of managerial judgment. Firms which rely more on quantitative
methods use decision tree analysis and option analysis to evaluate R&D projects.

MISCELLANEOUS PROJECTS

This is a catch-all category that includes items like interior decoration,

recreational facilities, executive aircrafts, landscaped gardens, and so on. There is no
standard approach for evaluating these projects and decisions regarding them are
based on personal preferences of top management.

Once someone has had the idea to invest, the next step is to look at suitable projects:
projects that complement current business, projects that are completely different to
current business and so on. Initially, all possibilities will be considered: along the
lines of a brainstorming exercise.
 ARTICLES

ARTICLES 1:

TITLE : Capital Budgeting and Feasibility Waste Filtering Analysis in

SMEs of Tofu Company in Sumedang Indonesia
AUTHOR(s): Mohammad Benny Alexandri

JOURNAL : International Journal of Science and Research

(IJSR), https://www.ijsr.net/search_index_results_paperid.php?
id=SR20203082238, Volume 9 Issue 2, February 2020, 259 – 262.

DESCRIPTION:

. This study aims to identify and assess the feasibility of fixed asset investment
in buildings and machinery business of the Tofu Sumedang H. Ateng using the
method capital budgeting and to find out investment plans for fixed assets of
buildings and waste screening machines. The methodology used is descriptive
analysis. The results of the study are the feasibility of investing in fixed assets of
buildings and machinery in the Tofu Sumedang H.Ateng business by using the
method capital budgeting is feasible. By converting tofu liquid waste into biogas, tofu
factory owners not only contribute to protecting the environment but also increase
their income by reducing fuel consumption in the tofu making process
ARTICLE 2:

TITLE : Cash Flow Forecasting Process and its Impact on Capital

Budgeting.

AUTHOR(s): Ali Abdusalam Alsharif, Abdalla Meftah Shwairef, Collins Ntim,

Wayne Fiddler.

JOURNAL : International Journal of Science and Research

(IJSR), https://www.ijsr.net/search_index_results_paperid.php?
id=ART20202125, Volume 9 Issue 1, January 2020, 435 – 460

DESCRIPTION:

This paper highlights the role of cash flow forecasting process in capital
budgeting decisions. To achieve this goal, we examine the role of forecasting
procedures and methods in estimating future cash flow related to capital budgeting
decision, as well to test the influence of contingent and institutional variables on the
use of forecasting procedures & methods. Further, this study seeks to ascertain the
key factors associated with the forecasting process, which are data sources,
forecasting horizon, qualification and position of forecaster. Most manufacturing &
oil companies operating in Libya depend on the personal estimates for forecasting
future cash flow, as well as use the payback period and accounting rate of return to
evaluate the investment projects. Statistically, the findings of this research provided
robust evidence that the use of forecasting procedures & methods is significantly
associated with the extent of use of capital budgeting techniques. Subsequently, the
forecasting horizon and the use of multiple data sources in forecasting are
significantly associated with the use of forecasting procedures and methods.
Moreover, the results of this study emphasized that the contingency variables have a
direct and significant impact on the use of forecasting procedures & methods. In this
regard, we found that the influence of the combined contingent variables differs from
public to private sector based on PLS multi-group analysis (PLS-MGA), whereas the
PLS-MGA was exposed opposite result in terms of manufacturing & oil companies.
Moreover, the research findings revealed that there is a significant relationship
between the use of forecasting procedures & methods and the financial performance
of firms*. Even though, the relationship between the extent of use of CBT and the
FPFs is not statistically supported.
ARTICLE 3:

TITLE : What Is Capital Budgeting and Why Is It Important In

Business?
AUTHOR(s): ROSEMARY CARLSON

JOURNAL : THE BALANCE SMALL BUSINESS,

https://www.thebalancesmb.com/capital-budgeting-and-its-importance-
in-business-392912.

DESCRIPTION :

Capital budgeting is the process of determining which long-term capital

investments are worth spending a company's money on, based on their potential to
profit the business in the long-term.

"Capital," in this context, means investments in long-term, fixed assets, such

as capital investment in a building or in machinery. The "budget" refers to the plan
that details anticipated revenue and expenses related to the investment during a
particular time period, often the duration of a project.

Capital budgeting is important to businesses' long-term stability since capital

investment projects are major financial decisions. These projects often involve large
amounts of money. Making poor capital investment decisions can have a disastrous
effect on a business
ARTICLE 4:

TITLE : Capital Budgeting Procedures and Practices of Unsung

Entrepreneur in Delhi.

AUTHOR(s): Anuradha Yadav.

JOURNAL : International Journal of Science and Research

(IJSR), https://www.ijsr.net/search_index_results_paperid.php?
id=SUB1574, Volume 4 Issue 1, January 2015, 37 – 41

DESCRIPTIVE :

This study investigated the extent to which capital budgeting practices and
procures are employed by unsung entrepreneur of Delhi work in this area has been
focusing on corporate firms, paying little attention to non- profit organizations. The
study design adopted is the survey design. The study focuses on primary data as well
as secondary data. Primary data were obtained from employees of individual firms
using self-designed questionnaire, while secondary data were obtained from financial
reports of the same firms. Data were analyzed using computer software. The findings
in this study indicate that the initial stages of capital budgeting process are being
followed in firms, but minimal implementation follows. This is supported by -
proportion of participants who showed that they normally divert funds, presence of
stalled and idle projects in firms and an indication that modern appraisal techniques of
capital budgeting are not highly applied. A number of capital budgeting techniques
find place in basic as well as advanced text books on Financial Management and
Corporate Finance. Each technique has its pros and cons as a decision making tool.
The research paper investigates the decision making practices of unsung entrepreneur
with respect to Capital Budgeting the techniques employed. The paper also examines
the linkage between the techniques employed and various factors such as, size of
investment outlay, nature of investment, firms size, and growth rate and capital
structure. Also probed is the extent of delegation of decision making authority in
respect of capital budgeting decisions. Further, the respondent’s views on relative
popularity/significance of the techniques and reasons for the same have also been
studied. Furthermore, the differences in techniques and decision making practices of
unsung entrepreneurs and popular companies operating in India have also been
looked. The information/data for the above stated purpose was collected through a
secondary data from some companies. The main findings extracted from the responses
to the questionnaire are, that key decision makers of unsung entrepreneurs are quite
aware of and practically using sophisticated capital budgeting techniques. The study
shows that bigger size companies give greater preference to IRR, while unsung
entrepreneurs rely more on NPV. Also unsung entrepreneurs are keener in estimating
the payback period (PP) as compared to larger companies. Consciously or
unconsciously the unsung entrepreneurs relying more on debt financing or with high
growth rates give more preference to the NPV technique, while low leverage and low
growth colleges rely more on IRR. Unsung entrepreneur account for big percentage of
Indian jobs and yet most of the studies on capital budgeting techniques have been
focused on large firms. A mistake in their capital budgeting process could lead to
disastrous consequences as they do not have the financial clout to recover from them.
The purpose of the paper is to investigate where small unsung entrepreneurs stand in
regard to the use of capital budgeting techniques and risk analysis.
ARTICLE 5:

TITLE : The Effects of Capital Budgeting Techniques on the Growth of

Micro Finance Enterprises in Mombasa.

AUTHOR(s): Stephen O. Menya; Lucy Gichinga

JOURNAL : International Journal of Science and Research

(IJSR), https://www.ijsr.net/search_index_results_paperid.php?
id=SUB153941, Volume 4 Issue 5, May 2015, 42 – 47

DESCRIPITION

Capital budgeting is the process through which firms decide which long-term
investments are expected to generate cash flows over several years. The decision to
accept or reject a capital budgeting decision depends on an analysis of cash flows
generated by the project and it-s costs. The decision rules in capital budgeting
decision are Payback Period, Net Present Values, Internal Rates of Returns,
Accounting Rates of Returns and Profitability Index. A capital budgeting decision
rule must consider all of the project-s cash flows, must consider time value of money
and must always lead to the correct decision when choosing among mutually
exclusive projects. Capital budgeting projects are classified as either Independent
project or mutually exclusive projects. An Independent project is a project whose cash
flows are not affected by the accept/reject decision for other projects. Thus all
Independent projects meeting the capital budgeting criterion should be accepted.
Mutually exclusive projects are a set of from which at most one will be accepted. The
main objective of this research is to determine the effect of capital budgeting on the
growth of MFIs in Mombasa County. The specific objectives of this research are
assessing the extent to which Internal Rate of Returns assist in the investment
appraisal of MFIs in Mombasa County, establishing the factors influencing the usage
of NPV by MFIs in Mombasa County, to assess the extent to which Payback Period
rule affects the growth of MFIs in Mombasa County and to find out the challenges
that MFIs in Mombasa County face in the implementation of Capital Budgeting
Decisions. The study research design employed was a census method. This is a
method of collecting information that represents the views of the whole community
and group. There was collection of quantitative data which was analyzed using
descriptive statistics. The study population consisted of all MFIs operating within
Mombasa County. There are 16 Micro finance Enterprises in Mombasa County as per
data from Association of Micro finance Institutions of Kenya website. The data was
collected from all these Micro-finance enterprises with one of them being used as a
pilot test. Thus data was officially utilized essentially from 15 Micro-finance
Enterprises as the sixteenth one was a pilot test. The data collected was analyzed
using descriptive statistics and regression, presented in tables and charts extracted
from both MS Excel and Statistical Package for Social Studies (SPSS) software tools.
The data collected was presented in tables and charts extracted from both Ms excel
and Statistical Package for Social Studies (SPSS) software tools version 20. The
general findings of the research were that the capital budgeting techniques do indeed
play an essential role in the growth of micro-finance enterprises from Mombasa
County. Recommendations like better communications between micro-finance
enterprises and the essentiality for better trained employees were made further stating
that the government should strive to ensure that micro-finance enterprise managers
are properly trained on emergent financial trends like capital budgeting. Some simple
capital budgeting techniques like payback period should be taught at even technical
colleges.
ARTICLE 6:

TITLE : Capital budgeting practices: A comparative study between a port

company in Brazil and in Spain

AUTHOR(s):Rogério João Lunkes, Vicente Ripoll-Feliu, Arturo Giner-Fillol and

Fabricia Silva da Rosa

JOURNAL : Academic journals, Article Number - 6B3E0B352950, Published: 30

April 2015.

DESCRIPTION:

This study aims to analyze the capital budgeting practices used in port
company in Brazil and another in Spain from a comparative perspective. To meet this
objective an empirical research was conducted to study these two ports and a
questionnaire was administered to collect data. The results showed that the Brazilian
port uses only the internal rate of return for capital budgeting analysis combined with
the random rate to determine the minimum acceptable return, and scenario analysis to
assess investment risks. The Spanish port, compared to the Brazilian one, uses all
methods, including payback, internal rate of return, net present value, real options
valuation, and weighted average capital cost to determine the minimum rate of return,
and scenario and sensitivity analyses, and decision tree to assess investment risks.
ARTICLE 7:

TITLE : A Survey of Capital Budgeting Practices in Corporate India

AUTHOR(s): SATISH VERMA (Department of Economics, Guru Nanak

University, Amritsar) SANJEEVGUPTA (Department of Humanities
and Management at Dr. B. R. Ambedkar National Institute of
Technology, Jalandhar) ROOPALIBATRA.

JOURNAL: Volume: 13 issue: 3, page(s): 1-17 Article first published online: July

1, 2009; Issue published: July 1, 2009

DESCRIPTION:

The present study aims to unveil the status of capital budgeting in India
particularly after the advent of full-fledged globalization and in the era of 0cutthroat
competition, where companies are being exposed to various degrees of risk. For the
above objective a comprehensive primary survey was conducted of 30 CFOs/CEOs of
manufacturing companies in India, so as to find out which capital budgeting
techniques is more preferred, discounted or non-discounted. The study also aims at
examining the capital budgeting methods used for incorporating risk in investment
proposals. It further endeavors to evaluate the impact of different factors or variables
on the selection of a particular capital budgeting technique. For example, it was
investigated that whether there exists any relationship between a size of company's
capital budget and the method of capital budgeting adopted by it. Similarly it was
discovered that is there any systematic relationship between different company related
factors like age of a company, CEO education/qualification and the capital budgeting
method adopted by it.
ARTICLE 8:

TITLE : The Strategic Factors affecting Adoption of Rail Transport in

Kenya
AUTHOR(s): Mohamed Dimbil Hassan; Stanley Kavale

JOURNAL : International Journal of Science and Research

(IJSR), https://www.ijsr.net/search_index_results_paperid.php?
id=ART20177052, Volume 6 Issue 10, October 2017, 71 – 76

DESCRIPTION:

He aim of this study was to determine the strategic factors affecting adoption
of rail transport in Kenya. the specific objectives were, to determine the effect of
establish the effect of corporate governance on the adoption of rail transport in Kenya,
To assess the role of government transport policies on the adoption of rail transport in
Kenya and to identify the influence of staff competency on the adoption of rail
transport in Kenya. The study was based on the resource-based view of the firm
(RBV). It was a case study of the Kenya railway corporation. The sample size was
196 Kenya Railways employees. A questionnaire was the main tool for data
collection. Analysis of the data revealed that staff competence had a significant
influence on adoption of railway transport Kenya. Government policies on transport
had also significant influence on adoption of rail transport in Kenya. However the
positive influence of corporate governance was not statically supported at 0.05
significant levels. Thus the study concluded that staff competencies and transport
policies are key determinants in enhancing use of rail as means of transportation in
Kenya. Therefore the study recommended that policies be constantly reviewed such
that they take into consideration the changing realities in the environment like
customer preferences, taste and competition. Government should channel adequate
funding and facilities at the training institutions to improve technical skills and
training opportunities should be fairly given to employees to motivate them. And
there should be people of integrity especially the senior management to inculcate a
culture of transparency in the organization. The study finally recommended that other
similar studies be undertaken that include other variables like competition and pricing
of substitutes services.
ARTICLE 9:

TITLE : Capital Budgeting and Cost Evaluation Techniques: A

Conceptual Analysis

AUTHOR(S): Frank Oki; Sivanathan Sivaruban

JOURNAL : International Journal of Science and Research

(IJSR), https://www.ijsr.net/search_index_results_paperid.php?
id=ART2019796, Volume 7 Issue 8, August 2018, 1553 – 1557

DESCRIPTION:

Capital budgeting decisions are crucial to a firm's success for several reasons.
Firstly, capital expenditures typically require large outlays of funds. Secondly, firms
must ascertain the best way to raise and repay these funds. Thirdly, most capital
budgeting decisions require a long-term commitment. Finally, the timing of capital
budgeting decisions is important. When large amounts of funds are raised, firms must
pay close attention to the financial markets because the cost of capital is directly
related to the current interest rate or investors expected rate of return. This Published
paper focuses on advances in Capital Budgeting Techniques theory through and
practical. Also its impact in the decisions of the investment while focusing on
evaluation practices such as risk and uncertainty but not considering the numerically
appraising of the principles of investment. The sensitivity analysis of capital
budgeting depends on a number of uncertain independent variables which may have
some impacted on the investment results. The positive value of the investment
appraisal is value added to the firm, and it can be enhanced return for the
shareholders. The success of the project is assessed on stage post completion audit
with proper stage by stage completed.
ARTICLE 10:

TITLE : Capital budgeting practices in Indian companies

AUTHOR(S): Roopali Batra, Satish Verma

JOURNAL: IIMB Management Review

Volume 29, Issue 1, March 2017, Pages 29-44

DESCRIPTION:

The volatility of the global economy, changing business practices,

and academic developments have created a need to re-examine Indian
corporate capital budgeting practices. Our research is based on a sample of
77 Indian companies listed on the Bombay Stock Exchange. Results reveal
that corporate practitioners largely follow the capital budgeting practices
proposed by academic theory. Discounted cash flow techniques of net
present value and internal rate of return and risk adjusted sensitivity analysis
are most popular. Weighted average cost of capital as cost of capital is most
favored. Nevertheless, the theory-practice gap remains in adoption of
specialized techniques of real options modified internal rate of return
(MIRR), and simulation. Non-financial criteria are also given due
consideration in project selection.
 CHAPER-III

COMPANY PROFILE
HISTORY
Maruti Suzuki India Limited, formerly known as Maruti Udyog Limited,
is an automobile manufacturer in India. It is a 56.21%-owned subsidiary of Suzuki
and motorcycle manufacturer Suzuki Motor Corporation. As of January 2017, it had a
market share of 51% of the Indian passenger car market. Maruti Suzuki manufactures
and sells popular cars such as the Ciaz, Ertiga, Wagon R, Alto, Swift, Celerio, Swift
Dzire, Baleno and Baleno RS, Ignis. The company is headquartered at New Delhi. In
February 2012, the company sold its ten millionth vehicles in India.

LOGO OF MARUTI UDYOG

Maruti was established in February 1981 though the actual production commenced
only in 1983. It started with the Maruti 800, based on the Suzuki Alto kei car. As of
May 2007, the Government of India, through Ministry of Disinvestment, sold its complete
share to Indian financial institutions and no longer has any stake in Maruti Udyog.

CHRONOLOGY

Under the Maruti name

In 1970, a private limited company named Surya Ram Maruti technical

services private limited (MTSPL) was launched on November 16, 1970. The stated
purpose of this company was to provide technical know-how for the design,
manufacture and assembly of "a wholly indigenous motor car". In June 1971, a
company called Maruti limited was incorporated under the Companies Act. Maruti
Limited went into liquidation in 1977. Maruti Udyog Ltd was incorporated through
the efforts of Dr V. Krishnamurthy.

Affiliation with Suzuki

In 1982, a license & Joint Venture Agreement (JVA) was signed between
Maruti Udyog Ltd, and Suzuki of Japan. At first, Maruti Suzuki was mainly an
importer of cars. In India's closed market, Maruti received the right to import 40,000
fully built-up Suzukis in the first two years, and even after that the early goal was to
use only 33% indigenous parts. This upset the local manufacturers considerably.
There were also some concerns that the Indian market was too small to absorb the
comparatively large production planned by Maruti Suzuki, with the government even
considering adjusting the petrol tax and lowering the excise duty in order to boost
sales.[16] Finally, in 1983, the Maruti 800 was released. This 796 cc hatchback was
based on the SS80 Suzuki Alto and was India’s first afmarutiable car. Initial product
plan was 40% saloons, and 60% Maruti Van. [16] Local production commenced in
December 1983.[12] In 1984, the Maruti Van with the same three-cylinder engine as
the 800 was released and the installed capacity of the plant in Gurgaon reached
40,000 units.

In 1985, the Suzuki SJ410-based Gypsy, a 970 cc 4WD off-road vehicle, was

launched. In 1986, the original 800 was replaced by an all-new model of the 796 cc
hatchback Suzuki Alto and the 100,000th vehicle was produced by the company.[15][dead
link]
 In 1987, the company started exporting to the West, when a lot of 500 cars were
sent to Hungary. By 1988, the capacity of the Gurgaon plant was increased to 100,000
units per annum.

Market liberalization

In 1989, the Maruti 1000 was introduced and the 970 cc, three-box was India’s

first contemporary sedan. By 1991, 65 percent of the components, for all vehicles
produced, were indigenized. After liberalization of the Indian economy in
1991, Suzuki increased its stake in Maruti to 50 percent, making the company a 50-50
JV with the Government of India the other stake holder.

In 1993, the Zen, a 993 cc, hatchback was launched and in 1994 the

1298 cc Esteem was introduced. Maruti produced its 1 millionth vehicle since the
commencement of production in 1994. Maruti's second plant was opened with annual
capacity reaching 200,000 units. Maruti launched a 24-hour emergency on-road
vehicle service. In 1998, the new Maruti 800 was released, the first change in design
since 1986. Zen D, a 1527 cc diesel hatchback and Maruti's first diesel vehicle and a
redesigned Omni were introduced. In 1999, the 1.6 litre Maruti Baleno three-
box saloon and Wagon R were also launched.
 In 2000, Maruti became the first car company in India to launch a Call
Center for internal and customer services. The new Alto model was released. In
2001, Maruti True Value, selling and buying used cars was launched. In October of
the same year the Maruti Versa was launched. In 2002, Esteem Diesel was introduced.
Two new subsidiaries were also started: Maruti Insurance Distributor Services and
Maruti Insurance Brokers Limited. Suzuki Motor Corporation increased its stake in
Maruti to 54.2 percent.

In 2003, the new Suzuki Grand Vitara XL-7 was introduced while the Zen and
the Wagon R were upgraded and redesigned. The four millionth Maruti vehicle was
built and they entered into a partnership with the State Bank of India. Maruti Udyog
Ltd was listed on BSE and NSE after a public issue, which was oversubscribed
tenfold. In 2004, the Altobecame India's bestselling car overtaking the Maruti
800 after nearly two decades. The five-seater Versa 5-seater, a new variant, was
created while the Esteem was re-launched. Maruti Udyog closed the financial year
2003-04 with an annual sale of 472,122 units, the highest ever since the company
began operations and the fiftieth lakh (5 millionths) car rolled out in April 2005. The
1.3 L Suzuki Swift five-door hatchbacks were introduced in 2005.

In 2006 Suzuki and Maruti set up another joint venture, "Maruti Suzuki
Automobiles India", to build two new manufacturing plants, one for vehicles and one
for engines.[17] Cleaner cars were also introduced, with several new models meeting
the new "Bharat Stage III" standards.[17] In February 2012, Maruti Suzuki sold its ten
millionth vehicle in India.[12] For the Month of July 2014, it had a Market share of
>45 %.

Joint venture related issues

Relationship between the Government of India, under the United Front

(India) coalition and Suzuki Motor Corporation over the joint venture was a point of
heated debate in the Indian media until Suzuki Motor Corporation gained the
controlling stake. This highly profitable joint venture that had a near monopolistic
trade in the Indian automobile market and the nature of the partnership built up till
then was the underlying reason for most issues. The success of the joint venture led
Suzuki to increase its equity from 26% to 40% in 1987 and to 50% in 1992, and
further to 56.21% as of 2013. In 1982, both the venture partners entered into an
agreement to nominate their candidate for the post of Managing Director and every
Managing Director would have tenure of five years

Manufacturing facilities

Maruti Suzuki has three manufacturing facilities in India.[22] All manufacturing

facilities have a combined production capacity of 1,700,000 vehicles annually.
The Gurugram manufacturing facility has three fully integrated manufacturing plants
and is spread over 300 acres (1.2 km2).[23] The Gurgaon facilities also manufacture
240,000 K-Series engines annually. The Gurgaon Facilities manufactures the Alto
800, WagonR, Ertiga, S-Cross, Vitara Brezza, Ignis and Eeco.

The Manesar manufacturing plant was inaugurated in February 2007 and is spread

over 600 acres (2.4 km2).[23] Initially it had a production capacity of 100,000 vehicles
annually but this was increased to 300,000 vehicles annually in October 2008. The
production capacity was further increased by 250,000 vehicles taking total production
capacity to 800,000 vehicles annually. The Manesar Plant produces the Alto 800, Alto
K10, Swift, Ciaz, Baleno, Baleno RS and Celerio. On 25 June 2012, Haryana State
Industries and Infrastructure Development Corporation demanded Maruti Suzuki to
pay an additional Rs 235 crore for enhanced land acquisition for its Haryana plant
expansion. The agency reminded Maruti that failure to pay the amount would lead to
further proceedings and vacating the enhanced land acquisition.[25] The launch of the
Dzire was happened in the month of May 2017 and the variant is said to have good
mileage.

The Gujarat manufacturing plant became operational in February 2017. The

plant current capacity is about 250,000 units per year. But with new investments
Maruti Suzuki has plan to take it to 450,000 units per year. 

In 2012, the company decided to merge Suzuki Powertrain India Limited

(SPIL) with itself.[28] SPIL was started as a JV by Suzuki Motor Corp. along with
Maruti Suzuki. It has the facilities available for manufacturing diesel engines and
transmissions. The demand for transmissions for all Maruti Suzuki cars is met by the
production from SPIL.

Industrial relations
 Since its founding in 1983, Maruti Udyog Limited has experienced problems
with its labour force. The Indian labour it hired readily accepted Japanese work
culture and the modern manufacturing process. In 1997, there was a change in
ownership, and Maruti became predominantly government controlled. Shortly
thereafter, conflict between the United Front Government and Suzuki started. In 2000,
a major industrial relations issue began and employees of Maruti went on an
indefinite strike, demanding among other things, major revisions to their wages,
incentives and pensions.

Employees used slowdown in October 2000, to press a revision to their

incentive-linked pay. In parallel, after elections and a new central government led
by NDA alliance, India pursued a disinvestment policy. Along with many other
government owned companies, the new administration proposed to sell part of its
stake in Maruti Suzuki in a public offering. The worker's union opposed this sell-off
plan on the grounds that the company will lose a major business advantage of being
subsidised by the Government, and the union has better protection while the company
remains in control of the government.

The standoff between the union and the management continued through 2001.
The management refused union demands citing increased competition and lower
margins. The central government privatized Maruti in 2002 and Suzuki became the
majority owner of Maruti Udyog Limited.

Manesar violence

On 18 July 2012, Maruti's Manesar plant was hit by violence. According to

Maruti management. The production workers at one of its auto factories attacked
supervisors and started a fire that killed a company General Manager of Human
Resources Avineesh Dev and injured 100 other managers, including two Japanese
expatriates. The workers also allegedly injured nine policemen. However Maruti
Suzuki Workers Union (MSWU) President Sam Meher alleged that management
ordered 300 hired security guards to attack the workforce during the violence.  The
incident is the worst-ever for Suzuki since the company began operations in India in
1983.

Since April 2012, the Manesar union had demanded a three-fold increase in
basic salary, a monthly conveyance allowance of 10,000, a laundry allowance of
3,000, a gift with every new car launch, and a house for every worker who wants one
or cheaper home loans for those who want to build their own houses. According to the
Maruti Suzuki Workers Union a supervisor had abused and made discriminatory
comments to a low-caste worker, Jiya Lal,. These claims were denied by the company
and the police. Maruti said the unrest began, not over wage discussions, but after the
workers' union demanded the reinstatement of Jiya Lal who had been suspended for
allegedly beating a supervisor. The workers claim harsh working conditions and
extensive hiring of low-paid contract workers which are paid about $126 a month,
about half the minimum wage of permanent employees. On 27 June, 2013, an
international delegation from the International Commission for Labor Rights (ICLR)
released a report alleging serious violations of the industrial right of workers by the
Maruti Suzuki management. Company executives denied harsh conditions and claim
they hired entry-level workers on contracts and made them permanent as they gained
experience. [38]Maruti employees currently earn allowances in addition to their base
wage.

The police, in its First Information Report (FIR), claimed on 21 July that

Manesar violence is the result of a planned violence by a section of workers and union
leaders and arrested 91 people. Maruti Suzuki in its statement on the unrest,
[45]
 announced that all work at the Manesar plant has been suspended indefinitely.
[37]
 The shutdown of Manesar plant is leading to a loss of about Rs 75 crore [46] per day.
[47]
 On 21 July 2012, citing safety concerns, the company announced
a lockout under The Industrial Disputes Act, 1947 pending results of an inquiry the
company has requested of the Haryana government into the causes of the disorder.
Under the provisions of The Industrial Disputes Act for wages, the report claimed,
employees are expected to be paid for the duration of the lockout. [46] On 26 July 2012,
Maruti announced employees would not be paid for the period of lock-out in
accordance with Indian labour laws. The company further announced that it will stop
using contract workers by March 2013. The report claimed the salary difference
between contract workers and permanent workers has been much smaller than initial
media reports – the contract worker at Maruti received about 11,500 per month, while
a permanent worker received about 12,500 a month at start, which increased in three
years to 21,000-22,000 per month. In a separate report, a contractor who was
providing contract employees to Maruti claimed the company gave its contract
employees the best wage, allowances and benefits package in the region.

Shinzo Nakanishi, managing director and chief executive of Maruti Suzuki India, said
this kind of violence has never happened in Suzuki Motor Corp's entire global
operations spread across Hungary, Indonesia, Spain, Pakistan, Thailand, Malaysia,
China and the Philippines. Mr. Nakanishi apologised to affected workers on behalf of
the company, and in press interview requested the central and Haryana state
governments to help stop further violence by legislating decisive rules to restore
corporate confidence amid emergence of this new 'militant workforce' in Indian
factories. He announced, "we are going to de-recognise Maruti Suzuki Workers’
Union and dismiss all workers named in connection with the incident. We will not
compromise at all in such instances of barbaric, unprovoked violence." He also
announced Maruti plans to continue manufacturing in Manesar, that Gujarat was an
expansion opportunity and not an alternative to Manesar.

The company dismissed 500 workers accused of causing the violence and re-
opened the plant on 21 August, saying it would produce 150 vehicles on the first day,
less than 10% of its capacity. Analysts said that the shutdown was costing the
company 1 billion rupees ($18 million) a day and costing the company market
share. In July 2013, the workers went on hunger strike to protest the continuing jailing
of their colleagues and launched an online campaign to support their demands.

A total of 148 workers were charged with the murder of Human Resources
Manager Avineesh Dev. The court dismissed charges against 117 of the workers. On
17 March 2017, 31 workers were found guilty of variety of offences. 18 were
convicted on charges of rioting, trespassing, causing hurt and other related offences
under Indian Penal Code sections. The remaining 13 workers were sentenced to life in
imprisonment after being found guilty of the murder of General Manager of Human
Resources Avineesh Dev. Twelve of the thirteen sentenced were office-bearers of the
Maruti Suzuki Workers Union at the time of the alleged offences. The prosecution
had sought the death penalty for the thirteen. 

Both prosecution and defence have announced they will appeal the sentences.
Defence counsel Vrinda Grover stated, “We will file appeals against all convictions in
the HC. The evidence, as it stands, cannot withstand legal scrutiny. There is no
evidence to link these workers to the murder. The 13 who have been convicted, it’s
important to remember that they were the leaders of the union. Therefore, it is clear
that this is targeted framing of these persons. We hope for justice in the superior
court.”

The Maruti Suzuki Workers Union is continuing to organise industrial action

and protests calling for the workers to be released and criticising the judgement and
sentences an unjust. An international appeal for the release of the workers has been
made by the International Committee for the Fourth International (ICFI) and other
organisations such as the People’s Alliance for Democracy and Secularism. 

PRODUCTS AND SERVICES

Current models

Model Launched Category Image

Omni 1984 Minivan

Gypsy King 1985 SUV

WagonR 1999 Hatchback

Swift 2005 Hatchback

DZire 2008 Sedan

Eeco 2009 Minivan –

K10 2010 Hatchback

Ertiga 2012 Mini MPV

Alto 800 2012 Hatchback

Celerio 2014 Hatchback

Ciaz 2014 Sedan

Baleno 2015 Hatchback

S-Cross 2015 Mini SUV

Vitara Brezza 2016 Mini SUV

Ignis 2017 Hatchback

Baleno RS 2017 Hatchback

DISCONTINUED MODELS

Launche
Model Discontinued Category Image
d

Hatchbac
800 1983 2012
k
Gypsy E 1985 2000 SUV

1000 1990 2000 Sedan

Hatchbac
Zen 1993 2006
k

Esteem 1994 2008 Sedan

Baleno 1999 2007 Sedan

Hatchbac
Alto 2000 2012
k

Versa 2001 2010 Minivan

Grand Vitara
2003 2007 Mini SUV
XL7

Grand Vitara 2007 2015 Mini SUV

Hatchbac
Zen Estilo 2007 2013
k

Hatchbac
A-star 2008 2014
k

SX4 2008 2014 Sedan

Hatchbac
Ritz 2009 2016
k

Kizashi 2011 2014 Sedan

SALES AND SERVICE NETWORK

 Maruti Suzuki has 1,820 sales outlets across 1,471 cities in India. The
company aims to double its sales network to 4,000 outlets by 2020. It has 3,145
service stations across 1,506 cities throughout India. Maruti’s dealership network is
larger than that of Hyundai, Mahindra, Honda, Tata, Toyota and Maruti
combined. Service is a major revenue generator of the company. Most of the service
stations are managed on franchise basis, where Maruti Suzuki trains the local staff.
Other automobile companies have not been able to match this benchmark set by
Maruti Suzuki. The Express Service stations help many stranded vehicles on the
highways by sending across their repair man to the vehicle.

NEXA

In 2015 Maruti Suzuki launched NEXA, a new dealership format for its
premium cars.[64]

Maruti currently sells the Baleno, Baleno RS, S-Cross, Ciaz

and Ignis[65] through NEXA outlets. S-Cross was the first car to be sold through
NEXA outlets. Several new models will be added to both channels as part of the
Company’s medium term goal of 2 million annual sales by 2020.

Maruti Insurance

Launched in 2002 Maruti Suzuki provides vehicle insurance to its customers

with the help of the National Insurance Company, Bajaj Allianz, New India
Assurance and Royal Sundaram. The service was set up the company with the
inception of two subsidiaries Maruti Insurance Distributors Services Pvt. Ltd and
Insurance Brokers Pvt. Limited.

This service started as a benefit or value addition to customers and was able to
ramp up easily. By December 2005 they were able to sell more than two million
insurance policies since its inception.

Maruti Finance

To promote its bottom line growth, Maruti Suzuki launched Maruti Finance in
January 2002. Prior to the start of this service Maruti Suzuki had started two joint
ventures Citicorp Maruti and Maruti Countrywide with Citi Group and GE
Countrywide respectively to assist its client in securing loan. Maruti Suzuki tied up
with ABN Amro Bank, HDFC Bank, ICICI Limited, Kotak Mahindra, Standard
Chartered Bank, and Sundaram to start this venture including its strategic partners in
car finance. Again the company entered into a strategic partnership with SBI in March
2003 Since March 2003, Maruti has sold over 12,000 vehicles through SBI-Maruti
Finance. SBI-Maruti Finance is currently available in 166 cities across India.

Citicorp Maruti Finance Limited is a joint venture between Citicorp Finance India and
Maruti Udyog Limited its primary business stated by the company is "hire-purchase
financing of Maruti Suzuki vehicles". Citi Finance India Limited is a wholly owned
subsidiary of Citibank Overseas Investment Corporation, Delaware, which in turn is a
100% wholly owned subsidiary of Citibank N.A. Citi Finance India Limited holds
74% of the stake and Maruti Suzuki holds the remaining 26%. [72] GE Capital, HDFC
and Maruti Suzuki came together in 1995 to form Maruti Countrywide. Maruti claims
that its finance program offers most competitive interest rates to its customers, which
are lower by 0.25% to 0.5% from the market rates.

Maruti True Value

Maruti True service offered by Maruti Suzuki to its customers. It is a market

place for used Maruti Suzuki Vehicles. One can buy, sell or exchange used Maruti
Suzuki vehicles with the help of this service in India. As of 10 August 2017 there are
1,190 outlets across 936 cities.

N2N Fleet Management

N2N is the short form of End to End Fleet Management and provides lease
and fleet management solution to corporate. Clients who have signed up of this
service include Gas Authority of India Ltd, DuPont, Reckitt Benckiser, Doordarshan,
Singer India, National Stock Exchange of India and Tran world. This fleet
management service includes end-to-end solutions across the vehicle's life, which
includes Leasing, Maintenance, Convenience services and Remarketing.

Maruti Accessories

Many of the auto component companies other than Maruti Suzuki started to
offer components and accessories that were compatible. This caused a serious threat
and loss of revenue to Maruti Suzuki. Maruti Suzuki started a new initiative under the
brand name Maruti Genuine Accessories to offer accessories like alloy wheels, body
cover, carpets, door visors, fog lamps, stereo systems, seat covers and other car care
products. These products are sold through dealer outlets and authorized service
stations throughout India.

Maruti Driving School

A Maruti Driving School in Bangalore

As part of its corporate social responsibility Maruti Suzuki launched the

Maruti Driving School in Delhi. Later the services were extended to other cities of
India as well. These schools are modelled on international standards, where learners
go through classroom and practical sessions. Many international practices like road
behaviour and attitudes are also taught in these schools. Before driving actual vehicles
participants are trained on simulators.

At the launch ceremony for the school Jagdish Khattar stated "We are very
concerned about mounting deaths on Indian roads. These can be brought down if
government, industry and the voluntary sector work together in an integrated manner.
But we felt that Maruti should first do something in this regard and hence this
initiative of Maruti Driving Schools."

Awards and recognition

The Brand Trust Report published by Trust Research Advisory, a brand analytics

company, has ranked Maruti Suzuki in the thirty seventh position in 2013 and
eleventh position in 2014 among the most trusted brands of India.
Viewers' Choice Car of the Year published by CNBC-TV18 OVERDRIVE,
Overdrive is Indias No.1 Auto Publication for Cars and Bikes in India has awarded
Maruti Suzuki Baleno the Viewers' Choice Car of the Year 2016.

CHAIRMAN'S MESSAGE:  
Dear Shareholders,
Another eventful year has passed by and I am happy to share my thoughts with
you yet again on our performance and prospects through this annual report. However,
before I proceed further, I would like to express my heartfelt grief at the unfortunate
natural calamity in Uttarakhand. Let us take a moment to remember those who have
lost their lives or have been impacted by this tragedy.
Last year, I had communicated to you the difficult economic conditions that
prevailed in 2011–12. The economy had substantially slowed down; there was high
inflation; interest rates were adversely affecting demand; rise in petrol prices was
unprecedented, while the difference with diesel prices had reached a level that was
resulting in a massive swing away from petrol to diesel cars. I have to regretfully
report that 2012–13 was even a worse year for the economy, and for the
manufacturing sector. GDP growth that had fallen to 6.2 per cent in 2011–12,
declined further to 5 per cent in 2012–13. The manufacturing sector's growth
decreased from 2.7 per cent to 1.9 per cent. The current account deficit for the year
was 4.8 per cent, as against 4.2 per cent in the previous year. The dollar fell from Rs.
51 on 31st March 2012 to Rs. 54 on 31st March 2013. Consumer sentiment, which
plays a significant role in influencing decisions to buy cars, had become even more
negative during the year. And then there was a silver lining. The fiscal deficit was
controlled at 5.2 per cent. A decision was taken that diesel prices would be increased
by about Rs. 0.50 per month, and the under–recovery on this fuel would end in about
18 months or so. The gap between petrol and diesel prices has narrowed from Rs. 25
in 2012–13 to Rs. 13 presently. To reduce the outgo on subsidies, a scheme of direct
transfer is being gradually introduced. However, results in terms of better sentiment,
or higher investments, or rising consumer demand for cars are yet to be seen.
The general adverse operating environment was not the only handicap facing us. In
July 2012, a section of the workers indulged in a blatantly criminal activity that led to
the death of a valued senior colleague. There was no cause for the workers to go on a
violent rampage, and there was no warning or notice of any brewing dissatisfaction.
In fact, the workers' demands raised in 2011 had been all addressed and resolved. A
lock out had to be declared, as the Company decided that the safety and welfare of our
employees had to be given overriding priority. The management and supervisors of
Mansard showed great resilience and courage, and work resumed after a month when
adequate safety arrangements had been made. Production gradually increased to
normal levels.
Your Company has shown that its employees have great resilience and can
work with great resolve to overcome the most difficult situations. During the year,
sales volumes increased by 3.3 per cent, while profits increased from Rs. 1,635 crores
to Rs. 2,392 crores. Our market share also went up from 38.3 per cent to 39.1 per
cent. I am sure all of you will join me in saluting the workers, supervisors and
management who made this happen.
During 2012–13, following the increase in diesel prices and narrowing of the
gap with petrol, the demand for diesel vehicles also started to fall. During the first
three months of this year, the industry recorded a fall of 10.4 per cent in passenger
cars, while utility vehicles' demand grew by 5.2 per cent.
We are convinced that your Company will remain the market leader and its
products will be the choice of most customers. The first four best selling cars in India
are MSIL products. We are determined to keep introducing products that will ensure
our preeminent position. Consistent with that objective, we are continuing with all our
planned investments to increase production capacity and introduce new products from
time to time. Work on the Gujarat site has commenced and we expect to start
production by the end of 2015–16. The Mansard 3rd line will be commissioned soon,
as also phase 1 of the diesel engine line in Gurgaon. The R&D centre continues to
develop. We are also investing in strengthening our sales and service facilities all over
the country. The capital investment proposed this year is approximately Rs. 3,500
cores. And this will only increase as we go ahead.
Suzuki Japan has decided that India will now be responsible for the export
markets of Africa, the Middle East and our neighboring countries. We have to ensure
adequate sales and marketing arrangements in these countries, with the help of Japan.
We also have to determine the products to be manufactured for these markets and, if
necessary, establish assembly plants overseas. This decision will greatly help the
growth of our exports.
 We are continuing with our efforts to reduce costs, and localize inner parts.
Quality improvement has also to be a priority. We believe that in the difficult times
ahead, the Company has to make greater efforts than ever before in these directions.
We are now in the election year, and traditionally, the governments in power are
reluctant to introduce unpopular measures at this time. The UPA Government, aware
of the way manufacturing activity is progressing, the current account deficit and the
weakness of the Rupee, is promising several reforms. The Prime Minister is also
pushing for the implementation of infrastructure projects under the PPP model. If all
these happen, I believe there will be a change in sentiment, and car buying may again
pick up. The festive season is also not far away. We are hoping that with steps
undertaken by the government, and our own efforts, we will lead resurgence in the
automobile industry. After all, the leader has that responsibility.
We all have to be optimists. Along with that, we have to work with
determination, resolve and resilience, and nobody can stop us from being successful.
All those who proudly say that they are Maruti Suzuki employees believe in this, and
on their behalf, I can assure you that we will overcome all obstacles and ensure that
the Indian automobile industry has a respected position in the world.
Regards,
R. C. Bhargava Chairman 
 CHAPTER-IV

DATA ANALYSES AND INTERPRETATION

FINACIAL ANALYSIS
ANALYSIS OF MARUTI MOTORS LTD
(Rs. In crores)

Capita Share
Long
Total Total Fixed Net l Holder
YEARS Term
Sales Assets Assets Profit Emplo s’
Funds
yed Funds
- 1,66,71 45.45
2014-15 5397.88 5299.52 3041.39 4165.56
210.21 9
- 2,16,25 45.45
2015-16 5919.20 5020.35 2146.86 2814.99
379.74 4
- 2,35,45 45.45
2016-17 5710.82 4985.43 2729.17 2965.51
329.23 8
- 3,66,19 109.77
2017-18 5080.91 4516.67 2306.59 2796.97
517.55 4
- 109.77
2018-19 4873.37 4581.52 1516.35 3106.28 4002.84
366.68
TABLE NO. 1

TRADITIONAL METHODS:
1. PAY BACK PERIOD METHOD
Payback period method is a traditional method of evaluation of capital
budgeting decision. The term payback or pay out or payoff refers to the period in
which the project will generate the necessary cash and recoup the initial
investment or the cash out flows.

To calculate the pay period, the cumulative cash flows will be calculated and
by using interpolation the exact period may be calculated.

The MARUTI MOTORS LTD has Rs. 5639.78 cores of initial investment
and the annual cash flows for the years 2018 to 2019. Then the payback period is
calculated as follows:

CALCULATION OF PAY BACK PERIOD OF MARUTI MOTORS LTD

(Rs. In crores)
 SI .NO YEAR CASH INFLOW CUMULATIVE CASH
FLOWWS

1 2014-2015 7198.91 7198.91

2 2015-2016 6959.35 16168.26

3 2016-2017 6254.32 20405.98

4 2017-2018 5857.72 26263.70

5 2018-2019 5639.78 31903.48

TABLE NO. 2

The above table shows that, the initial investment RS.14547.56 Cr… lies
between second years with 17203.50 Cr.

Difference∈cash flows
PBP= Actual(Base ) year +
Next year cash flows

16168.26
PBP=1+
20405.26

=1+0.69

=1.69 year

Payback period (PBP) = 1.69 year.

ACCEPT-REJECT CRITERION

PBP can be used as a criterion to accept or reject an investment proposal. A

Proposal whose actual payback period is more than what is pre-determined by the
management.

PBP thus, is useful for the management to accept the investment decision on
MARUTI MOTORS LTD and also to assist the management to know that the initial
investment is recovered in 1.69 years.

2. ACCOUNTING OR AVERAGE RATE OF RETURN METHOD

It is another traditional method of capital budgeting evaluation. According to
this method the capital investment proposals are judged on the basis of their relative
profitability. The capital employed and related incomes are determined according to
the commonly accepted accounting principles and practices over the certain life of
project and the average yield is calculated. Such a rate is called the accounting rate of
return or the average return or ARR.

It may be calculated according to any one of the following methods:

Annual averagenet earnings

(I) Original investmen x 100

Increase ∈expected furure annual net eanings

(II) initial increase ∈required inve stment x 100

The term average annual net earnings are the average of the earnings after
depreciation and tax. Over the whole of the economic life of the project order and
these giving on ARR above the required rate may be accepted.

The amount of average investment can be calculated according to any of the

following methods:

Original investment
1. 2

Original investment + scrapvalue

2. 2

Original investment + scrap value+ net addditional+ Srap value Workin capital
3. 2

Cash flows of the MARUTI MOTORS LTD are shown in cash flow
statement. ARR is calculated as follows:

STATEMENT SHOWING CALCULATION OF ARR

(Rs. In Corers)
 YEARS EARNINGS AFTER TAX (EAT)

2014-2015 7198.91

2015-2016 6959.35

2016-2017 6254.32

2017-2018 5857.72

2018-2019 5639.78
TOTAL 31903.48
TABLE NO. 3

Anerage annual EAT ' s

ARR = Average investment
x 100

Total amount
Average annual EAT’S = number of years

31903.48
= 5

=6380.69

Average investment =3832.0

3832.05
ARR = 6380.69 X 100

Average Rate of Return = 60.05 %

ACCEPT-REJECT critters method allows MARUTI MOTORS LTD to
fix a minimum rate of return. Any project expected to give a return below it will be
straight away rejected. The average rate of return is as good as 60.05 % of MARUTI
MOTORS LTD depicts the prospects of management efficiency.
TIME ADJUSTED METHOD OR DISCOUNTED CASH
FLOW METHOD
The time adjusted or discounted cash flow methods take into accounts the
profitability time value of money. These methods are also called the modern methods
of capital budgeting.

1. NET PRESENT VALUE METHOD: (NPV)

Net present value method or NPV is one of the discounted cash flows
methods. The method is considered to be one of the best of evaluating the capital
investment proposals. Under this method cash inflows and outflows associated with
each project are first calculated.

ROLE OF DISCOUNTING FACTOR:

The cash inflows and out flows are converted to the present values using
discounting factor which is the actuary discount factor of Regulated display tool kit
project of MARUTI MOTORS LTD is 10%.

The rate of return is considered as cut off rate or required rate or rate generally
determined on the basis of cost of capital to allow for the risk element involved in the
project.

STEPS FOR CALCULATION OF NPV:

1) Calculation of each cash flows after taxes of three years, which is arrived at by
deducting depreciation, interest and tax from earning before tax and interest
(EBIT). This residue is profit after tax to arrive at cash flow after tax.
2) This cash flow after tax are multiplied with the values obtained from the Table
(the present value annuity table against the 8% actuary discount Rate i.e. in the
case of project.
3) NPV is derived by deducting the sum of present values from the initial
Investment.
4) Initial investments are the sum of cash flows of three years shown inCapital
expenditure table
LET US ASSUME THE DISCOUNT RATE BE 10%
YEARS CFAT’S PVIF @ 10% PV’S

7198.91 0.909
2014-2015 6534.71

6959.35 0.826
2015-2016 5748.42

6254.32 0.751
2016-2017 4696.99

5857.72 0.683
2017-2018 4000.82

5639.78 0.620
2018-2019 3496.66

TOTAL: 24477.62

LESS: Initial 14547.56

Investment:

NPV: 11930.06

TABLE NO. 4

ACCEPT-REJECT CRITERION:
The Accept -reject decision of NPV is very simple. If the NPV is positive then
the project should be accepted and if NPV is negative then the project should be
rejected.

I.e. If NPV > 0 (ACCEPT)

And

NPV < 0 (REJECT)

Hence in the case of MARUTI MOTORS LTD project it is visible that the
positive NPV shows the acceptance and importance of the project.

2. INTERNAL RATE OF RETURN METHOD: (IRR)

 The internal rate of return method is also a modern technique of capital
budgeting that takes into account the time value of money. It is also known as
“TIME ADGUSTED RATE OF RETURN”, “DISCOUNTED CASH FLOW”,
“DISCOUNTED RATE OF RETURN”, “YIELD METHOD” and “TRAIL AND
ERROR YIELD METHOD”.

IRR is the rate the sum of discounted cash inflows equals the sum of
discounted cash outflows. It equals the present value of cash inflow to present value
of cash outflows. In this method discount rate is not known, but the cash inflows and
cash out flows are known. It is the rate of return, which equates the present value of
cash inflows to out flows or it, is the rate of return, which renders NPV TO ZERO.

STEPS INVOLVED IN THE CALCULATION OF IRR:

1) Calculation of NPV with given discount rate
2) Calculation of NPV with assumed discount rate
3) Select the higher NPV of both
4) Let R be the higher discount rate
5) Let R1 be the difference of discount rates
6) Calculation of difference of P Vs (Always higher NPV-lower NPV)
Higher NP
7) IRR = R+ XR
Difference of PVs
8) Decision making (Accepting- Rejecting the proposal).
FORMULATION OF STEPS

STATEMENT OF SHOWING CALCULATION NPV @88% 89% 90%

UNDER IRR METHOD

(Rs. Crores)

YEARS Annua Discount Discount Discount

l CFA Rate-88% Rate-89% Rate-90%
Ts
PVF PV PVF PV PVF PV
2014- 7198.91 0.531 3819.31 0.529 3802.93 0.526 3781.36

2015

2015- 6959.35 0.2921 2032.82 0.2799 1947.92 0.277 1927.74

2016

2016- 6254.32 0.1779 987.55 0.1681 926.26 0.165 906.87

2017

2017- 5857.72 0.0858 502.59 0.0783 458.65 0.076 445.19

2018

2018- 5639.78 0.0461 259.99 0.0416 233.48 0.04 225.59

2019

      7600.28 7369.26 7286.76

TABLE NO. 5

From the above calculations the following can be observed.

PV 0f net cash flows at 88% is: 7600.28cr

PV 0f net cash flows at 89% is: 7369.26cr

DECISION:
Since the initial investment Rs. 14547.56cr is lies between 88% and >80% the
company can determine the IRR as >80%
 Hence IRR=>80%

ACCEPT-REJECT CRITERION:

IRR is the maximum rate of interest, which an organization can afford to pay
on capital, invested in, is accepted if IRR exceeds the cutoff rates and rejected if it is
below the cutoff rate.

The cutoff rate of MARUTI MOTORS LTD is 10%, which is less than the
IRR i.e. >80% hence the acceptance of MARUTI MOTORS LTD is quiet a good
investment decision taken by management.

3. PROFITABILITY INDEX: (BCR OR PI)

Profitability index method is also known as time adjusted method of evaluating

the investment proposals. Profitability also called as benefit cost ratio (B\C) in
relationship between present value of cash inflows and the present value of cash out
flows. Thus

present valueof cash inflows

Profitability index = Present value of cash outflows

(OR)

Present value of cash ∈flows

Profitability index = Present value of cash outflows

CALCULATIONS OF BCR:
STEP1: Calculations of cash flows after taxes

STEP2: Calculations of Present values of cash inflows @10%.

STEP3: Application of the formula.

STATEMENT FOR CALCULATING OF BENEFIT COST RATIO

YEARS CFAT’S PVIF @ 10% PV’S

7198.91 0.909
2014-15 6534.71

6959.35 0.826
2015-2016 5748.42

6254.32 0.751
2016-2017 4696.99

5857.72 0.683
2017-2018 4000.82

5639.78 0.62
2018-2019 3496.66

TOTAL: 24477.62

TABLE NO. 6

Present value of cash inflows

Profitability index = Intial Investment

24477.62
= 14547.56
=1.95

Hence PI = 1.95 years.

ACCEPT-REJECT CRITERION:
There is a slight difference between present value index method and
profitability index method. Under profitability index method the present value of cash
inflows and cash outflows are taken as accept-reject decision.

I.e. the accept reject criterion is:

If Profitability Index > 1 (ACCEPT)

Profitability Index < 1 (REJECT)

The Acceptance of by the management is evaluated through Profitability Index

method of as the PI > 1 (i.e.1.95 years).
 CHAPTER-V

I. FINDINGS
II. SUGGESSIONS
III. LIMITATONS
IV. CONCLUSIONS
 I. FINDINGS
 The amount of total investment in assets as increased significantly from
4516.67 Cr to Rs. 4581.52 cr.
 The amount of sales has increased from 4873.37 Cr to 5080.91 2Cr (2018-
2019) this increased sales helped the organization to improve its business
turn over in different sectors
 Payback period for the project will be 1.69 years it indicates the project
earns good yield in future also.
 Average rate of return for MARUTI MOTORS LTD is 60.05 %.
 NPV and IRR show a good path for the organization to develop In future
markets and also the investments for the investors.
 During the same period profit before tax has decreased from Rs.-377.19 Cr
to Rs.-366.68 Cr.
 The ratio of fixed assets to long-term borrowings has not been showing
any consistent trend. It has varied from -0.51 times to 0.28 (2018-2019).
 The initial ratio’s of the investment are decreased from 10709 Cr to
11930.06 Cr (2018-2019) constantly increased period of 5 years.
 II. SUGGESTIONS
 As large sum of money is involved which is influences the profitability of the

firm making capital budget an important task.

 Long term investment once made cannot be reversed without significance loss

of invested capital. The investment becomes sunk and mistakes, rather than

being readily rectified, must often be born until the firm can be withdrawn

through depreciation charges or liquidation. It influences the whole conduct of

the business for the years to come.

 Investment decision are the base on which the profit will be earned and

probably measured through the return on the capital. A proper mix of capital

investment is quite important to ensure adequate rate of return on investment,

calling for the need of capital budgeting.

 The implication of long term investment decisions are more extensive than

those of short run decisions because of time factor involved, capital budgeting

decisions are subject to the higher degree of risk and uncertainty than short run

decision.
 III. LIMITATIONS

 The study is limited to MARUTI SUZUKI only.

 The study is limited to certain projects of MARUTI SUZUKI only.

 Period of the study is restricted to five years only.

 The present study cannot be used for inter firm comparison.

 Limited span of time is a major limitation for this project.

 The act and figures of the study is limited to the period of FIVE years i.e.

2015-2019.

 The data used in reports are taken from the annual reports, published at the

end of the years.

 The result does not reflect the day-to-day transactions.


 IV. CONCLUSION
 The budgeting exercise in MARUTI MOTORS LTD also covers the long term
capital budgets, including annual planning and provides long term plan for
application of internal resources and debt servicing translated in to the
corporate plan.
 The scope of capital budgeting also includes expenditure on plant betterment,
and renovation, balancing equipment, capital additions and commissioning
expenses on trial runs generating units.
 To establish a close link between physical progress and monitory outlay and to
provide the basis for plan allocation and budgetary support by the government.
 The manual recommends the computation of NPV at a cost of capital /
discount rate specified from time to time.
 A single discount rate should not be used for all the capacity budgeting
projects.
 The analysis of relevant facts and quantifications of anticipated results and
benefits, risk factors if any, must be clearly brought out.
 Inducting at least three non -official directors the mechanism of the Search
Committee should restructure the Boards of these PSUs.
 Feasibility report of the project is prepared on the cost estimates and the cost
of generation.
 Scope of capital budgeting in MARUTI MOTORS LTD are
 * Approved and ongoing schemes
 New approved schemes
 Unapproved schemes
 Capital budgets for plant betterment’s
 Survey and investigation
 Research and development budget.
 BIBLIOGRAPHY

BOOKS:
1. Financial Management Prasanna Chandra
2. Management Accounting R.K.Sharma & Shashi K.Gupta
3. Management Accounting S.N.Maheshwary
4. Financial Management Khan and Jain
5. Research Methodology K.R.Kothari

INTERNET SITES:

1. http\\:www.google.com
2. www.marutisuzuki.com
3. http\\:www.icici.com
4. http\\:www.googlefinance.com
5. https://www.sciencedirect.com/science/article/pii/S0970389617300587#!
6. https://www.ijsr.net/
7. https://www.ijsr.net/show_abstract.php
8. https://www.ijsr.net/archive/v4i1/SUB1574.pdf
9. https://www.edupristine.com/blog/capital-budgeting
10. https://www.ijsr.net/search_index_results.php
11. https://www.ijsr.net/archive/v6i10/ART20177052.pdf
12. Academic journals, Article Number - 6B3E0B352950, Published: 30 April
2015.
13. International Journal of Science and Research (IJSR) ISSN (Online): 2319-
7064 Index Copernicus Value (2013): 6.14 | Impact Factor (2013): 4.438.
 ABBREVIATIONS

PI  Profitability index.

CB  Capital budgeting

CF’S  Cash flows.

CCF’S  Cumulative cash flows.

EAT  Earnings after tax.

EBIT  Earnings before investment and tax.

CFAT  Cash flows after tax.

PV’S  Present value of cash flows.

PVIF  Present value of inflows.

PBP  Payback period.

ARR  Average rate return.

NPV  Net present value.

IRR  Internal rate return.

B/C  Benefit cost ratio.