“CAPITAL BUDGETING INAIR-INDIA”

PROJECT REPORT SUBMITTED IN PARTIAL FULFILLMENT OF

THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF
MASTER OF MANAGEMENT STUDIES.
MUMBAI UNIVERSITY

SUBMITTED BY: -
Mr. VISHAL D. JADHAV
M.M.S 09-11 (Finance)

SUBMITTED TO: -
AIR- INDIA LTD.

UNDER THE GUIDANCE: -

Mr. SHOBHAN A. TALAVDEKAR
 DECLARATION

I HEREBY DECLARE THAT I HAVE COMPLETED THIS PROJECT ON “CAPITAL

BUDGETING” IN THE ACADEMIC YEAR 2010-2011. THIS INFORMATION IS TRUE AND
ORIGINAL TO THE BEST OF MY KNOWELEDGE.

ACKNOWLEDGMENT

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It is indeed a great pleasure to express my thanks & gratitude to all those people who helped me
during this summer training period. This project would not have been materialized without the
help from many quarters.

I express a deep sense of gratitude to Miss Pervin Choksey, Asst. General Manger-Finance and
all the members of Capital Budget & Property Control Section, Finance Department. Their
guidance suggestion & expertise have been a source of inspiration & were very helpful to me
during our project work.

I am deeply thankful to Mr. Shobhan Talavdekar, Dy. Manger-Finance and Mr. Bindoo M.
Katti Asst. Manager – Finance for guiding me through general training and providing valuable
advice through out the project work.

INDEX

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Sr. Topic Page no.
No
1 INTRODUCTION TO AIR INDIA 4

2 FINANCE DEPARTMENT IN AIR INDIA 14

3 CAPITAL BUDGETING SECTION 16

4 CAPITAL BUDGET PROCESS 20

5 PREPARATION OF CAPITAL BUDGET 23

6 PROJECT CLASSIFICATION 28

7 CAPITAL EXPENDITURE/INVESTMENT DECISIONS 29

8 ACCOUNTING OF CAPITAL EXPENDITURE 40

9 NACIL CAPITAL BUDGET 2010-11 44

10 CONCLUSION 48

11 RECOMMEDATION 49

12 BIBLIOGRAPHY 50

BRIEF HISTORY OF AIR INDIA

Air India is India’s national Airline. Air India’s history can be

traced to October 15, 1932. On this day J.R.D. Tata, the father of
Civil Aviation in India and founder of Air India, took off from
Drigh Road Airport, Karachi, in a tiny, light single-engine de
Havilland Puss Moth on his flight to Mumbai via Ahmadabad.
Air India was earlier known as Tata Airlines. At the time of its

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Commencement, Tata Airlines consisted of one Puss Moth, one Leopard Moth, one palm-
thatched shed, one whole time pilot, one part-time engineer, and two apprentice-mechanics. Tata
Airlines was converted into a Public Company under the name of Air India in August 1946. On
March 8, 1948, Air India International Limited was formed to start Air India’s international
operations. On June 8, 1948, Air India started its international services with a weekly flight from
Mumbai to London via Cairo and Geneva with a Lockheed Constellation aircraft.

In early 1950s due to deteriorating financial condition of various airlines, the Government
decided to nationalize air transport. On August 1, 1953 two autonomous corporations were
created. Indian Airlines was formed with merger of eight domestic airlines to operate domestic
services, while Air India International was established to operate the overseas services. The word
'International' was dropped in 1962. With effect from March 1, 1994 the airline has been
functioning as Air India Limited. Air India's worldwide network today covers 44 destinations by
operating services with its own aircraft and through code-shared flights. Important destinations
covered by Air India are Bangkok, Hong Kong, Jakarta, Kuala Lumpur, Osaka, Singapore,
Tokyo, Seoul, Dar-es-Salam, Nairobi, Frankfurt, London, Paris, Birmingham, Abu Dhabi, Al
Ain, Bahrain, Dammam, Doha, Dubai, Jeddah, Muscat, Riyadh, Kuwait, Los Angeles, Chicago,
Newark, New York, and Toronto.

INCORPORATION
• Established in 1953 under Air Corporations Act
• Became Public Limited Company in 1994
• Registered Office : New Delhi
• Head Office : Mumbai
• Authorized Capital : Rs 500.00 Crores
• Paid-up Capital : Rs 153.84 Crores

SUBSIDIARY COMPANIES

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Air India has the following Subsidiary Companies with an Authorized / Paid-up Capital
(in Rs. Crores) as under:
Authorised Paid-up
(a) Hotel Corporation of India 41.00 40.00
(b) Air India Charters Ltd. 30.00 30.00
(c) Air India Air Transport Services Ltd. 100.00 0.05
(d) Air India Engineering Services Ltd. 10.00 0.05

Hotel Corporation of India Ltd (HCI)

 Centaur Hotels at Juhu, Mumbai Airport and Rajgir Sold
 Centaur Hotel at Delhi, Chefair-New Delhi and Chefair-Mumbai Under Disinvestment

Air India Charters Ltd (AICL)

 New Airline Air India Express set-up under AICL in 2005. It is Air-India’s low-cost
subsidiary which was established during the aviation boom in India
 All AI Express operations carried out on B-737-800 with a current
Fleet strength of 12.

Air India Air Transport Services Ltd (AIATSL )

 Incorporated in June 2003
 set up to undertake ground handling & other allied activities
 being operational zed at all domestic airports
Air India Engineering Services Ltd (AIESL)
 Incorporated to undertake engineering and other allied activities
 To be operational zed
 Cabinet approval required

INDIAN AIRLINES

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Indian Airlines was India’s first state owned domestic airline. Indian Airlines was set up under
the aegis of federal Union Ministry of Civil Aviation and based in New Delhi. Its main bases
were the international airports in Chennai, Mumbai, Kolkata and New Delhi.

Indian Airlines came into being with the enactment of the Air Corporations Act, 1953. Indian
Airlines started its operations from 1st August, 1953, with a fleet of 99 aircraft and was the
outcome of the merger of seven former independent airlines, namely Deccan Airways, Airways-
India, Bharat Airways, Himalayan Aviation, Kalinga Air Lines, Indian National Airways and Air
Services of India. The year 1964 saw the Indian Airlines moving into the jet era with the
introduction of Caravelle aircraft into its fleet followed by Boeing 737-200 in the early 1970.

Along with its wholly owned subsidiary Alliance Air, it flies a fleet of 70 aircraft including
Airbus A300, Airbus A320, Airbus A319, Boeing 737, Dornier Do-228, ATR-4, Airbus A319,
A320 & A321. Along with Indian cities, it flies to many foreign destinations which include
Kuwait, Singapore, Oman, UAE, Qatar, Bahrain, Thailand, Singapore, Malaysia, and Myanmar
besides Pakistan, Afghanistan, Nepal, Bangladesh, Sri Lanka and Maldives.

The main base of the Indian airlines are Chatrapati Shivaji International Airport, Mumbai; Indira
Gandhi International Airport, Delhi; Netaji Subhash Chandra Bose International Airport,
Kolkata; Chennai International Airport, Chennai.
NATIONAL AVIATION COMPANY OF INDIA LIMITED (NACIL)
(Amalgamation of Air India Limited and Indian Airlines Limited)

The Government of India, on 1 March 2007, approved the merger of Air India and Indian
Airlines. Consequent to the above, a new Company viz National Aviation Company of
India Limited (NACIL) was incorporated under the Companies Act, 1956 on 30 March 2007
with its Registered Office at Airlines House, 113 Gurudwara Rakabganj Road, New Delhi.
The Certificate to Commence Business was obtained on 14 May 2007.

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The Scheme of Amalgamation of Air India Limited and Indian Airlines Limited with
National Aviation Company of India Limited was approved by the Board of Directors of all
the three Companies.

Thereafter, the Meetings of Secured and Unsecured Creditors of Air India and Indian Airlines
were held in New Delhi on 28 June 2007, in which the Scheme of Amalgamation was approved
by the Creditors. The final hearing of the merger petition was held on 31 July 2007 wherein
the last date of submissions of objections was fixed on 8 August 2007 and the Order Ministry
of Corporate Affairs is awaited.

The Authorized and Paid-Up Share Capital of the merged entity is Rs.1500,05,00,000/-
and Rs.145,00,00,000/-, respectively.

COMPANY PROFILE:

It has been decided that post merger, the new entity will be known as “Air India” while
“Maharaja” will be retained as its mascot. The logo of the new airline will be a red colored
flying swan with the “Konark Chakra” in orange placed inside it. The flying swan has been
morphed from Air India’s characteristic logo “The Centaur” whereas the “Konark Chakra”
was reminiscent of Indian’s logo. The Corporate Office of NACIL will be at Mumbai.
This new airline is also a member of the Star Alliance, the largest airline alliance.

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 The Government has approved the appointment of Shri V Thulasidas and Dr V Trivedi as
Chairman & Managing Director and Joint Managing Director, respectively, of the merged entity,
with effect from the date of merger.

Presently, the Board of NACIL consists of:

• Shri Raghu Menon, Addl Secretary & Financial Advisor, Ministry of Civil Aviation
• Shri R K Singh, Jt Secretary, Ministry of Civil Aviation
• Shri Rajiv Bansal, Director, Ministry of Civil Aviation

AIR INDIA (NACIL) CURRENT FLEET:

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NACIL Fleet (As on 1st February 2010)
Aircraft type Owned Leased Total
Operational Fleet
Wide Body
B777-200LR NACIL (A) 8 0 8
B777-300ER NACIL (A) 9 0 9
B747-400 NACIL (A) 6* 0 6
B777-200ER NACIL (A) 0 3 3
B777-200A NACIL (A) 0 1 1
A310-300 NACIL (A) 4** 2 6
Wide Body Total 27 8 35

Narrow Body
B737-800 (AIX) NACIL (A) 18 4 22
A320 NACIL (I) 30*** 7 37
A319 NACIL (I) 19 5 24
A321 NACIL (I) 19 0 19
CRJ-700 NACIL (I) 0 4 4
ATR42 NACIL (I) 0 7 7
Beach1900D (Wet Lease) NACIL (I) 0 1 1
Narrow Body Total 86 28 114
Total Operational Fleet 113 36 149
Freighters
A310-300 % NACIL (A) 4**** 0 4
B737-200 NACIL (I) 6 0 6
Freighters Total 10 0 10
NACIL TOTAL 123 36 159

Note:
* Includes 3 under Sale & Lease Back.
** All under Sale & Lease Back.
*** Includes 8 under Sale & Lease Back. and 11 more are under proposal for sale.
**** Includes 2 under Sale & Lease Back.
% 2 A310 Freighters are under process of Lease Out.

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OBJECTIVES

1. To provide safe, efficient, adequate, economical and properly co-ordinate international air
services, and develop such services to the best advantage.

2. To provide high standard of services to passengers and customers on ground and in the air.

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3. To achieve, maintain and improve its rightful place in the international air transport
industry.

4. To make an increasing contribution to the national economy and maximize revenues with
efficient fleet utilization and route network.

5. To promote international tourism to India and improve the nations foreign exchange
resources.

6. To assist in the promotion of nations export trade.

7. To improve the national economy by encouraging local skills and technology to get
equipment and materials other than air crafts, indigenously manufacture with the intention
to curtain imports steadily.

8. To promote healthy relations with the various employees unions for ensuring employees co
operation in the performance of companies activities.

9. To provide wider participation amongst its employees in management functions.

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SWOT ANALYSIS:

STRENGTHS WEAKNESSES
 Professionally qualified team contributing  Ban on recruitment
vital inputs on corporate decisions a) Time-bound promotion policy-inability to
 Expertise in Treasure & currency reward talents
Management in a multi – currency Global b) Ageing, non-qualified/professional staff
environment.  Lack of adequate IT systems and procedure to
 Effective compliance of Govt. audit adapt to the enhanced level of corporate
observation / suggestions resulted in NIL surveillance being introduced by the Govt. at
audit reports from comptroller and Auditor various levels in order to prevent corporate
General (CAG) during the last 4 delinquencies/ bankruptcies.
consecutive years.
 Active participation in international forum
Viz. IATA, ICAO etc relating to
Global Aviation financing issues.
 Negotiating Skills-on financing related
issues with International Banks, financial
institutions, Insurers, underwriters, Fuel
contractors, Export credit Agencies etc.
 Effective monitoring on Repayment of
Aircraft /Non Aircraft loans-resulting in
NO DEFAULT ever in Debt servicing.

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 OPPORTUNITIES THREATS
 International Banks - Ready to offer  Introduction of the system of corporate
global cash Management Governance & Accounting at various levels
System. including the establishment of Audit
 Swap Interest/currency- Reduce Interest committees following the implementation of
Burden & cap the burden Due to Naresh Chandra committee recommendation
fluctuation in interest rate. by the Government, resulting in the
 Fuel Hedging- RBI approval received and maintenance & administration of more string
counter party selection in process for stringent standards at various levels in the
hedging in fuel prices for international organizational hierarchy.
uplifts.  Threats of Mergers, Amalgamation,
 Arranging new Aircraft loans to finance Consolidation by Mega carriers and
network & introduction of real time / Marginalization of small carriers, line with
online computerized based systems. practices followed by mega carriers for inter &
intra firm comparison.
 Introduction of US GAAP by many companies
in India in order to provide greater transparency
to International Financial Institution and enable
funding by Export credit Agencies.
 NACIL being an International company and
being a Global player has to train a number of
staffs in the field of provide the cutting edge
financial technology.

FINANCE DEPARTMENT (AIR INDIA)

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In Air India the finance department basically handles the revenue which consists of tickets, cargo
and freight revenue, excess baggage etc. the basic thing that needs to be maintained is that the
sales accounts should be updated time to time so that actual revenue inflow and outflow is
known. From this information funds can be diverted time to time.

One very important function of the finance department in Air india is to arrange finance for
purchase or leasing of aircraft and non aircraft items. Apart from this department also handles
various functions of different sections like taking care of bad debts, payments of salary and
remittances of cash, transfer of funds, banking, insurance, payment of income tax, Octroi. Also it
performs its statutory duties like AGM, conducting Audit etc.

VARIOUS SECTIONS UNDER FINANCE DEPARTMENT:

Capital Budget
Agreement / procurement of the asset including aircraft and non aircraft items and
assigning priorities to different sections.
1. Financial Accounts
Ledger booking of each and every section and preparation of annual report. It keeps
check on all the activities, legal chargers, donations, audit fees and deposits made to
parties and deposits received from outside parties.
Fuel and Oil Section
Manages oil and fuel requirement of each and every station of the corporation time to
time and its payments. It also manages the payments made for the same.
Cash / Banking Section
Deals with the treasury management and bank reconciliation statements.
Credit Control
This section is concerned with the Credits and Loans of Air India.
2. Revenue Pool Section

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 Manages interlinked settlement with different airlines.
Cargo and Mail Section
Manages revenues collected by the cargo.
Taxation
Calculates taxes like VAT, Income Tax, Sales Tax, Service Tax, Octri, Revenue Tax, etc.
Pay Accounts
Concerned with the salary calculation of the employees taking into consideration the
allowances granted to the staff, paid leave, leave without pay, increments, etc.
Internal Audit Section
This section deals with the internal audit of accounts prepared by the Financial
Accounting section.
3. Stores Accounts Section:
Stores are those products which are purchased by Air India to be provided on board to the
travelers or for sale. Purchasing of such products is dealt by this section.
4. Insurance Section:
Deals with aircraft insurance and also non-aircraft insurance like vehicles, machinery and
furniture.

ORGANISATIONAL STRUCTURE OF CAPITAL BUDGETING

SECTION:

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 Assistant General
Manager-Finance

Officer A Officer B Officer C

Approves the tender and Prepare the Capital Budget Authorization of the
prepares the TCR for the year payments

Sub Officer A Sub Officer B
Checks and does the Checks and does the
purchase at the outstation payments related to foreign
orders
Sub Officer C
Checks and does the
payments related to
local purchases in INR

Sub Officer D

Enters the data into the

asset register

Sub Officer E

Calculate and provide

the depreciation of the
asset

Sub Officer F

Enters the scrap

value of the items
from the information

FUNCTION OF CAPITAL BUDGETING SECTION

EXISTING MANUAL SYSTEM

CAPITAL BUDGET

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Capital budget is prepared on yearly basis for new & continuing projects. It is allocation of funds
category wise & department wise for the particular year. Subsequent year’s capital budget is
prepared by considering last year project cost addition & deletions/utilization during the year.

CONTINUING PROJECT
Each department may have some previous year’s project to be continues this year also.

NEW PROJECT
Each department may have some new project to be started this year.

SANCTION REQUEST FORM (SRF)

Approved SRf are sent by the Department for each project, partly or fully to property control
section. Same is sent to purchase Department for procurement action. Along with purchase
requisition form (PR). It is checked that SRF’s risen by departments should not cross the
financial limits of the particular project.

PURCHASE ORDER (PO)

These are prepared sent by stores & purchase department to property control section.

WORK ORDER (WO)

Work order are prepared & properties department & engineering department

VENDOR’S INVOICE:
Invoices are sent by purchase department for advance payments or full & final settlement.
As case may be along with authorization for making par et to property control section with GRN
or installation report.

BILL INTERIM PAYMENTS CERTIFICATE/FINAL FOR PAYMENT

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These are sent by civil work & engineering Department to property control section along with
authorization for making payment advance or full & final as case may be.

CASH VOUCHER (CV)

Cash voucher is prepared for all the invoices received & the amount is debited to respective
capital asset account (nearly 100) or advance account as the case may be. Payment register is
maintained for all cash/cheque payments for party’s invoices received forms s & p as well as
civil work.

JOURNAL VOUCHER (JV)

In case GRN or installation report is received after some period, JV is passed for debiting
appropriate Capital Asset Account adjusting the Advance Account debited earlier. On half yearly
basis, C.W. & P. Engineering Department sends an ABC statement giving status of the various
projects. Referring to that statement for completed project a JV is passed for debiting appropriate
asset account/ work-in-progress account.

DETAIL COLLECTION FOLDER:

These folders are written on the basis of cv’s, jv’s passed at property control section. These
folders are written monthly Account wise. Station wise property purchase Advices & property
receipt advances received from station’s quarterly.

FIXED ASSETS REGISTER (NON AIRCRAFT)

Fixed asset register is written annually using the detail collection folder & maintained account
code wise, station wise, department wise.

FIXED ASSET REGISTER (AIR CRAFT)

This is written on the basis of Jv, prepared & sent by project control section.

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SCRAPPAGE ENTRY
Scrap page advices duly approved & received from various department & control section & JV is
passed for asset value, cumulative depreciation, written down value, sales proceeds, profit & loss
etc. scrapped is maintained account code wise.

CAPITAL BUDGET PROCESS

Capital Budgeting is a complex process which may be divided into the following phases:
• Identification of potential investment opportunities.
• Organizing proposed investment.

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 • Decision making.
• Preparation of capital budgeting appropriations.
• Implementation.
• Performance review.

(A) Identification of potential investment opportunities

The capital budgeting process begins with the identification of investment opportunities.
Typically, the planning body (it may be a individual or a committee organized formally or
informally) develops estimates of future sales which serve as a base for setting production
targets. This information, in turn, is helpful in identifying required investments in plant and
equipments.

For imaginative identification of investment ideas it is helpful to:

1. Monitor external environment regularly to scout investment opportunities.
2. Formulate a well defined corporate strategy based on thorough analysis of strengths,
weakness, opportunities and threats.
3. Share corporate strategy and perspective with person who are involved in the process of
capital budgeting and,
4. Motivate employees to make suggestions.

(B) Organizing proposed investment

Investment proposals identified by the production department and usually submitted in the
standardized capital investment proposal form. Generally, most of the proposals, before they
reach the capital budgeting committee or some body routed through several people. The purpose
of routing proposal through several people is primarily to ensure that the proposal is viewed from
different angels. It also helps in maintaining a climate for bringing about co-ordination of
interrelated activities.

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Proposals are usually classified into various categories for facilitating decision making
budgeting, and control. An illustration classified is given below:
 Replacement investment
 Expansion investment
 New product/service investment
 Obligatory and welfare investment

(C) Decision making

A problem of rupee gateways usually characterizes capital investment decision making. Under
this system, executives are vested with the power to approve investment proposals up to certain
levels. For example, in one company the plant superintendent can approve investment outlays, up
to Rs. 2.00 crores, the works manager up to Rs. 1.00 crores. Investments requiring higher outlays
need the approval of the board of directors.

(D) Preparation of capital budgeting appropriations

Process involving smaller outlays and which can be decided by executives at lower levels are
covered by blanket appropriation for expeditious action. Projects involving larger capital are
included in the capital budget after necessary approvals. Before undertaking such project an
appropriation order is usually required. The purpose of this check is mainly to ensure that the
funds position of the firm is satisfactory at the time of implementation.

(E) Implementation
Implementing an investment proposal into a concrete project is a complex, time consuming, risk
fraught task. Delays in Implementation, can lead to substantial reduction in rate of return.
For expeditious Implementation at a reasonable cost, the following are helpful.

i. Adequate formulation of project

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The major reason for the delay is inadequate formulation of project, absence of preliminary
studies, absence of detailed formulation and inadequate information. Hence, the need for
adequate formulation of the project cannot be over-emphasized.

ii. Performance review

Performance review, or post completion audit, is a feedback device for preparation of future
budget. It is a means for comparing actual performance with the projected performance. It may
be conducted most appropriately, when the operation of the project has established. It is useful in
several ways:
1. It throws light on how realistic were the assumptions underlying the project;
2. It provides a documented log of experience that is highly valuable for decision making;
3. It helps in uncovering judgmental biases; and
4. It includes a desired caution among project sponsor.

CAPITAL BUDGETING IN AIR INDIA

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Capital Expenditure budgeting in Air India is a departmental budget, annually proposals of
estimated capital expenditure for the following year are invited from each department classified
under major headings such as purchase of aircraft, construction of building, workshops and other
structures, ground handling and ramp equipment , workshop equipment, plant and machinery,
office equipment and furniture and vehicles. The capital budget committee scrutinizes the
proposal in the light of the resources position of the company, government approved outlay as
per Annual Plan Allocation and Operational needs. Capital budget thus formulated is put up to
the Board for approval. Approved capital budget forms part of the administratively sanctioned
projects for items of capital expenditure, which may be incurred by the company in the ensuing
year.

PREPARATION OF CAPITAL BUDGET:

CIRCULAR:
Circular is issued in the month of November/December to all department heads to submit their
requirement/ proposal of estimated capital expenditure for the following year. They send
prescribed formats along with the circular. Proposal are to be submitted in prescribed formats for
each budget category with details justification/ cost breakup duly routed through various
specialized department. (Time for submission 2 months)

Drafting of the Capital Budget Circular:

Circular is drafted every year from the Capital Budget and Property Control Section (CBPS) to
all the corporate directors/ SBU heads and executive directors. It include the following
1. The capital budget covers the major categories:
a) Aircraft projects
b) Aircraft related projects
c) Non- Aircraft projects
1) New schemes
2) Continuing schemes

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 2. The capital budget is prepared and submitted to the board according to departments,
regions and SBU’s (Strategic Business Unit). It is requested to all concerned directors,
executive directors and SBU heads to submit their proposals under New and Continuing
Schemes.
3. The capital budget requirment is to be submitted by the respective director, executive
directors and SBU heads relating to their departments/ unit under the different categories
for the both New and Continuing Schemes uneder the enclosed format specified for each
category.

There are certain guidelines given in the circular which are to be followed for preparing
and compiling the Capital Budget requirement of the department, unit and region.
1. The schemes which are not required to be implemented further are to be deleted.
Wherever additional provisions are required for continuing schemes, same is to be shown
separately with justification along with estimated amount of expenditure.
2. The departmental proposals regarding building/ workshops under new and continuing
schemes are to be routed through Properties and Facilities Department to weigh the
project by them and for obtaining project cost and estimated expenditure for the budgeted
year.
3. The requirement for replacement of vehicles for operational areas pertaining to the
department should be routed through Ground Service Department (GSD) with full details
of stations where GSD representatives are present. Similarly, the requirement for new
vehicle should be approved by head quarters. Without the HQ’s approval the requirement
will not be considered in the budget formation.
4. The Office Equipment, vehicles and miscellaneous items costing less than Rs. 10 lacks
will be budgeted under new schemes only. The balance from last year’s budget under
above categories will not be carried forward and will be lapsed.
5. The project report is to be submitted by departments for project/ schemes costing more
than Rs. 1 crore each giving cost benefit analysis as required by the Board.

25
 6. As per the Institute Of Chartered Accountant manual, Capital expenditure costing less
than rupees 5000 each, is not treated as Capital expenditure and not provided in the
capital budget. The details of such expenditure be included in the Department’s Revenue
Expenditure Budget.
7. It is requested to exercise utmost economy in expenditure and submit the requirements
with full details in the prescribed format for continuing and new schemes under each
category latest by mid of December.
8. On compilation of the information by Capital Budget and Property Control Section, the
proposals will be discussed with the respective Departments/Units/Regions before
finalization and submission to the Board for approval.
9. Capital budget booklet is prepared by Property Control Section for Boards approval. The
proposal approved by the Board are entered in the system category wise and department
wise under new and continuing schemes, including block funds for unforeseen
circumstances.

STAGE-I: The proposals when received from various departments are categorized under one
of the following:
a. Building and workshops -Budget category ‘F’
b. Ground Handling and Ramp Equipment - Budget category ‘C’
c. Workshop Equipment and Plant and Machinery -Budget category ‘D’
d. Computer facilities and Equipment - Budget category ‘H’
e. Office Equipment and Furniture including PC’s - Budget category ‘A’
f. Vehicles - Budget category ‘B’
They are checked with reference to need/justification, details cost breakup etc and query list is
prepared (Time 15 days).

STAGE –II: After scrutiny of proposals the query list is sent to respective departments for
further details-clarifications. On receipt of reply a summer for each department category wise is
prepared showing estimated payments of all proposals (time 10 days).

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STAGE-III: The section further scrutinizes the proposal in the light of justification, resources
position of the company (time 10 days).
STAGE-IV: They call department’s representatives for discussions, for further information/
clarification in respect of major projects. Based on this an inclusion/deletion of proposals are
finalized and the budget is sized up. Operational requirement are to be considered first while
sizing up (time 7 days).

STAGE -V: The sized up budget is thereafter forwarded by finance department to Headquarters
for approval of MD/Chairman before it is finalized. For project costing above Rs. 1.00 crore
included in the budget are to be presented by respective department before MD/CMD or Board.

STAGE-VI: The budget proposals so cleared by MD/Chairman, is sent by section to printing

press for preparation of the capital budget booklets. These booklets are then forwarded to HQ
well in time for submitting to the Board members (time 15 days).

PROJECT CLASSIFICATION

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Project analysis entails time and effort. The cost incurred in this exercise must be justified by the
benefits from it, certain projects, given their complexity and magnitude, may warrant detailed
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 most classifications.

(A) Mandatory investments

These are expenditures required to comply with statutory requirements. Examples of such
investments are pollution control equipments, medical dispensary, fire fighting equipments,
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.

(B) Replacement projects.

Firms routinely invest in equipments meant to replace obsolete inefficient equipments, even
though they may be in serviceable condition. The objective of such investment is to reduce costs
(of labour, raw material and power), increased yield, and improve quality. Replacement projects
can be evaluated in a fairly straightforward manner, though at times the analysis may be quite
detailed.

(C) Expansion projects

These projects are meant to increase capacity and/or widen the distribution network. Such
investments call for explicit forecast of growth. Since this can be risky and complex, expansion
projects normally warrant more careful analysis than replacement projects. Decisions relating to
such projects are taken by the top management.

(D) Diversification projects

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These investments are aimed at producing new products and services or entering into nearly new
geographical areas. Often diversification projects entail substantial risks, involve large outlay,
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.

(E) Research and development projects

Traditionally, R&D projects absorbed 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. 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

(F) Miscellaneous projects

This is a catch-all category that includes items like interior decoration, recreational facilities,
executive aircrafts, land spaced 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.

ECONOMIC EVALUATION OF INVESTMENT PROPOSALS

The analysis stipulates a decision rule for:

I) accepting or II) rejecting investment projects

(A) Net present value (NPV)

29
The NPV method is used for evaluating the desirability of investments or projects.

where:

Ct = the net cash receipt at the end of year t

Io = the initial investment outlay
r = the discount rate/the required minimum rate of return on investment
n = the project/investment's duration in years.

The discount factor r can be calculated using:

Examples:

Decision rule:

If NPV is positive (+): accept the project

If NPV is negative(-): reject the project

(B) The internal rate of return (IRR)

 The IRR is the discount rate at which the NPV for a project equals zero. This rate means
that the present value of the cash inflows for the project would equal the present value of its
outflows.
 The IRR is the break-even discount rate.

30
  The IRR is found by trial and error.

where r = IRR

IRR of an annuity:

where:
Q (n,r) is the discount factor
Io is the initial outlay
C is the uniform annual receipt (C1 = C2 =....= Cn).
Economic rationale for IRR:
If IRR exceeds cost of capital, project is worthwhile, i.e. it is profitable to undertake.

(C) The profitability index - PI

This is a variant of the NPV method.

Decision rule:
PI > 1; accept the project
PI < 1; reject the project

If NPV = 0, we have:
NPV = PV - Io = 0
PV = Io
Dividing both sides by Io we get:

PI of 1.2 means that the project's profitability is 20%. Example:

31
 PV of CF Io PI
Project A 100 50 2.0
Project B 1,500 1,000 1.5

Decision:
Choose option B because it maximizes the firm's profitability by $1,500.
Disadvantage of PI:
Like IRR it is a percentage and therefore ignores the scale of investment.

(D)The payback period (PP)

The CIMA defines payback as 'the time it takes the cash inflows from a capital investment
project to equal the cash outflows, usually expressed in years'. When deciding between two or
more competing projects, the usual decision is to accept the one with the shortest payback.
Payback is often used as a "first screening method". By this, we mean that when a capital
investment project is being considered, the first question to ask is: 'How long will it take to pay
back its cost?' The company might have a target payback, and so it would reject a capital project
unless its payback period was less than a certain number of years.
Example 1:

Years 0 1 2 3 4
Project B - 10,000 5,000 2,500 4,000 1,000
Payback period lies between year 2 and year 3. Sum of money recovered by the end of the
second year
= $7,500, i.e. ($5,000 + $2,500)
Sum of money to be recovered by end of 3rd year
= $10,000 - $7,500
= $2,500

= 2.625 years

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Disadvantages of the payback method:
 It ignores the timing of cash flows within the payback period, the cash flows after the end of
payback period and therefore the total project return.
 It ignores the time value of money. This means that it does not take into account the fact that
$1 today is worth more than $1 in one year's time. An investor who has $1 today can
consume it immediately or alternatively can invest it at the prevailing interest rate, say 30%,
to get a return of $1.30 in a year's time.
 It is unable to distinguish between projects with the same payback period.
 It may lead to excessive investment in short-term projects.
Advantages of the payback method:
 Payback can be important: long payback means capital tied up and high investment risk.
The method also has the advantage that it involves a quick, simple calculation and an easily
understood concept.

Allowing for inflation

So far, the effect of inflation has not been considered on the appraisal of capital investment
proposals. Inflation is particularly important in developing countries as the rate of inflation tends
to be rather high. As inflation rate increases, so will the minimum return required by an investor.
For example, one might be happy with a return of 10% with zero inflation, but if inflation was
20%, one would expect a much greater return.
Example:
Keymer Farm is considering investing in a project with the following cash flows:

ACTUAL CASH FLOWS

TIME Z$
0 (100,000)
1 90,000
2 80,000
3 70,000

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Keymer Farm requires a minimum return of 40% under the present conditions. Inflation is
currently running at 30% a year, and this is expected to continue indefinitely. Should Keymer
Farm go ahead with the project?
Let us take a look at Keymer Farm's required rate of return. If it invested $10,000 for one year on
1 January, then on 31 December it would require a minimum return of $4,000. With the initial
investment of $10,000, the total value of the investment by 31 December must increase to
$14,000. During the year, the purchasing value of the dollar would fall due to inflation. We can
restate the amount received on 31 December in terms of the purchasing power of the dollar at 1
January as follows:
Amount received on 31 December in terms of the value of the dollar at 1 January:

= $10,769
In terms of the value of the dollar at 1 January, Keymer Farm would make a profit of $769 which
represents a rate of return of 7.69% in "today's money" terms. This is known as the real rate of
return. The required rate of 40% is a money rate of return (sometimes known as a nominal rate of
return). The money rate measures the return in terms of the dollar, which is falling in value. The
real rate measures the return in constant price level terms.
The two rates of return and the inflation rate are linked by the equation:
(1 + money rate) = (1 + real rate) x (1 + inflation rate)
where all the rates are expressed as proportions.
In the example,
(1 + 0.40) = (1 + 0.0769) x (1 + 0.3)
= 1.40
So, which rate is used in discounting? As a rule of thumb:
a) If the cash flows are expressed in terms of actual dollars that will be received or paid in the
future, the money rate for discounting should be used.
b) If the cash flows are expressed in terms of the value of the dollar at time 0 (i.e. in constant
price level terms), the real rate of discounting should be used.

34
In Keymer Farm's case, the cash flows are expressed in terms of the actual dollars that will be
received or paid at the relevant dates. Therefore, we should discount them using the money rate
of return.

TIME CASH FLOW DISCOUNT FACTOR PV

$ 40% $
0 (150,000) 1.000 (100,000)
1 90,000 0.714 64,260
2 80,000 0.510 40,800
3 70,000 0.364 25,480
30,540
The project has a positive net present value of $30,540, so Keymer Farm should go ahead with
the project.
The future cash flows can be re-expressed in terms of the value of the dollar at time 0 as follows,
given inflation at 30% a year:

TIME ACTUAL CASH FLOW CASH FLOW AT TIME 0 PRICE LEVEL

$ $
0 (100,000) (100,000)
1 90,000 69,231

2 80,000 47,337

3 70,000 31,862

The cash flows expressed in terms of the value of the dollar at time 0 can now be discounted
using the real value of 7.69%.

TIME CASH FLOW DISCOUNT FACTOR PV

$ 7.69% $
0 (100,000) 1.000 (100,000)
1 69,231 64,246

35
2 47,337 40,804

3 31,862 25,490

30,540
The NPV is the same as before.

Expectations of inflation and the effects of inflation

When a manager evaluates a project, or when a shareholder evaluates his/her investments, he/she
can only guess what the rate of inflation will be. These guesses will probably be wrong, at least
to some extent, as it is extremely difficult to forecast the rate of inflation accurately. The only
way in which uncertainty about inflation can be allowed for in project evaluation is by risk and
uncertainty analysis.
Inflation may be general, that is, affecting prices of all kinds, or specific to particular prices.
Generalized inflation has the following effects:
a) Inflation will mean higher costs and higher selling prices. It is difficult to predict the effect of
higher selling prices on demand. A company that raises its prices by 30%, because the general
rate of inflation is 30%, might suffer a serious fall in demand.
b) Inflation, as it affects financing needs, is also going to affect gearing, and so the cost of
capital.
c) Since fixed assets and stocks will increase in money value, the same quantities of assets must
be financed by increasing amounts of capital. If the future rate of inflation can be predicted with
some degree of accuracy, management can work out how much extra finance the company will
need and take steps to obtain it, e.g. by increasing retention of earnings, or borrowing.
However, if the future rate of inflation cannot be predicted with a certain amount of accuracy,
then management should estimate what it will be and make plans to obtain the extra finance
accordingly. Provisions should also be made to have access to 'contingency funds' should the rate
of inflation exceed expectations, e.g. a higher bank overdraft facility might be arranged should
the need arise.

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(I) PURCHASE V/S LEASING

In many cases it may be found that leasing is economical and advantageous to the company as in
quite a number of countries tax benefits accruing to the lesser are passed on to the lessees.
Besides, leasing terms may provide full or partial maintenance which will save considerable
recurring expenditure incidental to outright purchase.

Further, in either leasing or outright purchase consideration could be given for TSC arrangement
whereby cash outgo can be avoided. The TSC arrangement is moreover advantageous to the
company as the carriage provided on the company’s services is against normal applicable
fares/freight rates whereas in some parts of the world actual sale cost of such transportation may
be less.

Care should be taken that the expenditure proposal related to item of durable nature which can be
easily maintained/ service and also there is a commonality in usage so as to avoid maintenance
problem as well as stocking of excessive inventories of spares, etc, if different items/model are to
be procured.

In terms of delegation of financial power as explained above, financial concurrence is a must. In

case of abstention this requirement would have to be met not only at the station level but also at
the regional level whereby a proposal pertaining to a station requires to be vetted not only by the
Accounts Manager of the station but also by the Regional Director concerned in consultation
with the Regional Finance and Accounts Manager.

Why Should They Lease Equipment Instead of Buy?

 Leasing is flexible

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 Companies have different needs, different cash flow patterns and sometimes irregular-
streams of income. For example, start-up companies typically are characterized by little cash
and limited debt lines. Mature companies might have other needs: to keep debt lines free, to
comply with debt covenants, and avoid committing to equipment that may quickly become
obsolete. Therefore, your business conditions-cash flow, specific equipment needs, and tax
situation- may help define the terms of your lease.

Moreover, a lease provides the use of equipment for specific periods of time at fixed rental
payments. Therefore, leasing allows you to be more flexible in the management of your
equipment.

 Leasing is practical
By leasing, you transfer the uncertainties and risk of equipment ownership to the lesser,
which allows you to concentrate on using that equipment as a productive part of your
business.

 Leasing is cost effective

Equipment is costly and some of the costs are unexpected. When you lease, your risk of
getting caught with obsolete equipment is lower because you can upgrade or add equipment
to best meet your needs.

Further, your equipment needs can change over time due to change in your company, such as
diversification. Leasing allows you to stay on the cutting edge of technology. Sophisticated
business managers have learned that the primary benefits of higher productivity and profit
come from the use of equipment, not owing it.

 Leasing has tax advantages

38
 Rather than deal with depreciation schedules and Alternative Minimum Tax (AMT)
problems, you, the lessee, simply make the lease payment and deduct it as a business
expense.

 Leasing helps conserve your operating capital

Leasing keeps your lines of credit open. You don’t tie up your cash in equity. Also, you
avoid costly down payments. With other advantages such as off balance sheet financing,
leasing helps you better manage your balance sheet.

CONTROLS

Capital expenditure budget itself is a system of controlling in advance, after assessing the
requirements of various operating units and which are duly vetted by the Finance Department.
Board’s approval is merely an administrative sanction as mentioned before, but before the
expenditure is actually committed and incurred, a process known as Executive Sanction or
Sanction Request Form has to be progressed. Delegation of powers to departmental/station heads
specify the powers of financial limits up to which the departmental/station heads can operate the
budget and accord Executive Sanction which thus provide an opportunity to have a second look
before committing funds on capital expenditure. Major items of expenditure, by this process
have always to be cleared by the Chief Executive, which means that expenditure on such items
cannot be simply committed merely for the reason that there is an administrative approval in
existence. This is a very useful and effective system of controlling capital expenditure and in fact
provides the organization with every opportunity of reviewing the expenditure on capital items
even right up to the time of actual procurement action.

39
ACCOUNTING OF CAPITAL EXPENDITURE

40
With executive sanction for incurring the capital expenditure having been obtained as stated
above, actual procurement action may be taken after following the usual store procedure abd
necessary purchase order issued. Payment of capital expenditure would be made on the strength
of the sanction request form (SRF), purchase order, and goods received not or in its absence
certification by the person responsible for the receipt of such capital items. Payments made in
this fashion world require to be debited to the respective asset account head as per the description
of the item and as given in the accounts code books.

1. Property control procedures:

41
 Property control i.e. accounting, recording, inventory and vouching is primarily accounts
responsibility. Tag no. Should be affixed to all assets of the corporation as per the tag no.
Indicated in the SRF. Each sanction is allotted a block of tag no. By the property control
division and metal tags duly embossed with the prefix and Sr. No. Is supplied from the
Santacruz, if required then the tag no are assigned. Motor vehicles are identified by their
registration no. And buildings are identified by their registration no. And buildings are
identified by the municipal door no.

2. Property purchase Advice

Stations are required to send a monthly list of capital asset purchased by the 10th of the
following month to the property control division, accounts department, santacruz as per
specimen enclosed (attachment C).

3. Asset/Inventory register
Wide format D encloses stations that may maintain an up to date record of capital assets
location-wise and category-wise, annually as per the directions issued in this regard every
year. Certified inventories of not only those items which are taken up for physically
verification but also of all assets held at the station are required to be forwarded to the
property control division by the 30 th may of every year. It may be noted that the furniture
in office premises need not be physically verified. Physical inventory of residential furniture
etc. Is compulsory, every year.

4. Need for proper asset inventory control

Maintenance of asset record location-wise and item-wise, apart from the necessity of
keeping a proper record of the fixed assets which largely represents the net worth of the
company vis-a-vis creditors and lending financial institutions, it is also an audit requirement
as usually the auditors have to satisfy themselves about the correctness and completeness of

42
 the asset records maintained by the company and record their remarks to this effect in the
published annual accounts and auditors report.

Asset inventory helps proper evaluation of capital expenditure proposals either for replacing
an existing item or procuring a new/additional item. It further helps retirement and write-off
of assets in a systematic way.

From our far-flung stations in the network, we usually ensure receipt of certified physical
inventories each year and biannually cover the physical verification of the considerably
large quantum of assets held at the headquarters base on a selective basis.

5. Retirement of property and scrap page

Before any asset is retired or disposed off, approval for scrap page of the same has to be
obtained from the departmental head concerned. After receipt of the scrap page approval
stations may arrange to dispose may arrange to dispose of the items after following the usual
stores property and not to asset account. When the disposal involves a huge lot of items upon
a closure of a station or off-line office or due to renovation or moving to new premises, and
in case of disposal of major equipments as well as motor vehicles, the bits received should be
put to controller of stores and purchases for his prior clearance before the sale is affected. In
such case usually it is advisable to have a local committee consisting of the managers,
accounts manager and representative of the user division to go into all aspect of sale and
make the appropriate tender noting. Scrap page advice worlds require to be issued as per
format E attached. It should also be noted that the disposal of an item would not
automatically entitle replacement of the same, as the normal process of budgeting, executive
sanction and other process would require to be gone through before items can be replaced.

43
 NATIONAL AVIATION COMPANY OF INDIA LIMITED
CAPITAL BUDGET OF 2010-2011

1. The Annual Plan Outlay for the year 2010-11 was framed at Rs 4434.80 crores.
However, approval of the Annual Plan 2010-11 from Ministry of Civil Aviation has been
received for Rs 5634.80 crores i.e. after adding Rs 1200 crores as Gross Budgetary
Support (GBS) in the form of Equity Infusion during the year by the Govt of India.

2. The Capital Budget for the year 2010-11 has accordingly been made within the
Annual Plan Outlay of Rs 4434.80 crores submitted to the Ministry of Civil Aviation.
The details of the Capital Budget 2010-11 are as follows:
(Rs in Crores)
(A) Aircraft Projects
i) Payments to Aircraft Manufacturers for new Boeing Aircraft 3330.36
ii) Payments to Aircraft Manufacturers for new Airbus aircraft 204.97
iii) Interest to be capitalized for new Boeing Aircraft 251.52
iv) Payment for Spare Engines for new Boeing aircraft 261.22
v) Payment towards infrastructure for new Airbus aircraft 116.81 4164.88

(B) Non-Aircraft Projects

i) Other Capital Expenditure 269.92

TOTAL 4434.80

3. The total outgo under Aircraft Projects is estimated to be Rs 4164.88 crores as

detailed above. During the year, 5 new aircraft are to be received by the company
comprising of 1 A-321 aircraft from Airbus Industrie and 4 B 777-300 ER aircraft from
Boeing. The total payments to aircraft manufacturers during the year for these aircraft is
estimated to be Rs 3786.85 crores. In addition, 3 GE spare engines shall be received from
GE Aircraft Engines during 2010-11 at an estimated outgo of Rs 261.22 crores. The outgo
on account of infrastructural support payments for induction of new aircraft, which
includes payment for spare parts, ground handling, engineering workshop equipment etc,
is estimated to be Rs 116.81 crores during the year.

4. The non aircraft projects include an outgo of Rs 269.92 crores under the head of
“Other Capital Expenditure” which includes Rs 82.73 crores for New Schemes and
Rs.187.19 crores for Continuing Schemes. The expenditure under this head represents the
payments to be made towards other capital projects such as Building Projects, Computer

44
& Communication Equipment, IT Projects, Ground Support Equipment, Workshop
Equipment Plant & Machinery and Other Miscellaneous Assets etc.

5. Apart from the above outgo of Rs 4434.80 crores, the Miinistry of Civil
Aviation has made a provision of Rs 1200 crores as budgetary support in the form of
equity infusion in the company during the year 2010-11.

I) New Schemes – Rs. 82.73 crores

The new projects to be undertaken and capital expenditure thereon required to be

incurred during the financial year 2010-11 are as under:

45
 Particulars Project Cost Outgo
2010-11
(Rs in Crores)
1) Buildings & Workshops
a) Northern Region
i) Civil/Interior & allied works at Terminal 3 New Delhi 27.43 10.00
ii) Satellite Hangar/Workshop at Terminal 3 New Delhi 10.40 4.00
b) Eastern Region
i) Construction of GSE Complex Workshop at Kolkata. 3.80 0.10
c) SBU-Cargo
i) Drop Box Outlets at six metros 3.00 0.30
ii) Warehouse at Mumbai & Chennai 5.00 0.50
iii) Sales Offices at six metros 1.20 0.20
d) MRO-Engine & Components
i) Merging of APU Centre Module I & II at Kolkata 5.00 1.00
ii) Construction of 3 rd & 4 th Floor over Annexure Building in 1.30 0.10
New Hangar Complex at Kolkata
e) Other Departments/SBUs 4.85 2.06
Total of (1) 61.98 18.26
2) Ground Handling & Ramp Equipment
a) SBU Ground Handling
i) GH Equipment viz AC Unit, GPUs, Tractors etc 10.00 10.00
b) Other Departments(SBU-Cargo) 1.00 1.00
Total of (2) 11.00 11.00
3) Workshop Equipment, Plant & Machinery
a) Engine Overhaul
i) CNC Milling Machine at OAP 2.00 0.50
b) MRO-Engine & Components
i) Setting up of CFM 56-5B engine servicing facility at 41.00 10.00
JEOC New Delhi
ii) Test Bench for CIDS Director 5.04 1.00
iii) Universal Hydraulic Component Test Stand for 9.00 2.00
Accessory Overhaul Mumbai
iv) Renovation and upgradation of Hi-Flow facility 5.00 0.50
v) APU Testing Facility Kolkata 21.32 3.00
vi) Setting up of servicing facility for A-320 Kolkata 4.55 2.00
c) Other Departments/SBUs 28.07 10.87
Total of (3) 115.98 29.87
4) Computer Facilities/Equipment
a) Information Technology
i) Centralized Oracle DB Server 1.00 0.10
ii) New SAN Box 1.20 0.10
iii) New PROS Project 6.00 0.50
b) Quality Management System (QMS)
i) Fuel & Operational Efficiency Management 10.00 5.00
c) Other Departments/SBUs 4.45 1.90
Total of (4) 22.65 7.60

5) Office Equipment - Block Provision 8.00 8.00

6) Vehicles - Block Provision 4.00 4.00
7) Unforeseen Expenditure - Block Provision 4.00 4.00

Total New Schemes-Non Aircraft 227.61 82.73

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 II-a) Continuing Schemes – Rs. 187.19 crores

The Capital Expenditure on Continuing Schemes for 2010-11 is placed at Rs. 187.19 crores.
These Continuing Schemes also include an additional cost of Rs.32.62 crores due to
operational requirements as under, for which specific approval of the Board is required:

(Rs in Crores)
Particulars Additional
Cost
1) Buildings & Workshops
a) Southern Region
i) Setting up of common booking offices at various stations 0.10

2) Workshop Equipment, Plant & Machinery

a) Materials Management
i) Automated Storage Retrieval System for aircraft spares 0.50
b) Engine Overhaul
i) Aviation Software Package for Maintenance including MRO 25.00
Management & Operations
ii) Video Boroscope 0.15

3) Computer Facilities/Equipment
a) Information Technology
i) Network Up gradation 0.37
b) Central Planning & Control Systems
i) Setting up of Central Planning & Control Systems (CPCS) 6.50

Total (1 to 3) 32.62

II-b) Under Continuing Schemes, certain old projects/schemes where there had been no
expenditure/outgo for two years or more have been dropped from Continuing Schemes and the
same can be reinstated as New Schemes in future as and when operational necessity arises. The
total Project Cost of such Continuing Schemes which have been dropped is Rs 40.16 crores.

47
CONCLUSION

The Scope of our project was limited to capital budgeting for the Non-Aircraft section.
Air india like every other airlines has been making losses due to
• Excess capacity
• Lower yield
• Drop in passenger numbers
• An increase in fuel prices
• The Effects of the global slowdown

Though It has shown good sign as its operating loss has decreased by 39 per cent from `5,672
crore in 2008-09 to `3,472 crore in 2009-10, while the net loss dipped by 23 per cent from `7,189
crore in 2008-09 to `5,551 crore in 2009-10. However still a lot needs to be done as the company
is struggling to cover even its total variable costs.

The role of capital budgeting section is very significant in such scenario as fixed assets and lease
expenses form major source of cash outflow in an airline industry. The expenditure for workshop
equipment, plant and machinery and Computer facilities/equipments has been increased over the
previous year. This indicates that the efforts are being made to improve the productivity of
existing business by the application of improved modern and technological applications.

48
RECOMMENDATION

• Equity of Air India should be restricted so that they can have a much wider equity on
which they can build up debt.
• The government should immediately provide some amount as equity as per AI estimates,
for financial restructuring of Air India which would raise the paid-up share capital of Air
India.
• A priority based capital budgeting with the cash inflows from one project be reinvested
into another project will reduce its capital demand on long run.
• Management information system (MIS) and Database management system needs to be in
place in order to increase efficiency and should be effectively enforced via capital
budgeting process.
• As Voluntarily retirement schemes and very few recruitment, the workforce is likely to
decrease in the coming years and it will lead to decrease in expenses however to maintain
the productivity the employees need to be provided with additonal training in computers
and its cost vs beneefit needs to be considered.

49
BIBLIOGRAPHY

 http://www.air-india.com
 Financial Management by Khan & Jain.
 Nacil capital budget annual handbook.
 Various magazines and reports published by Air-India

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