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The word Capital refers to be the total investment of a company of firm in money, Tangible and intangible assets. Whereas budgeting defined by the Rowland and William it may be said to be the art of building budgets. Budgets are a blue print of a plan and action expressed in quantities and manners. The examples of capital expenditure: 1. Purchase of fixed assets such as land and building, plant and machinery, good will, etc. 2. The expenditure relating to addition, expansion, improvement and alteration to the fixed assets. 3. The replacement of fixed assets. 4. Research and development project


Financial management is one of the important functions in the area of management. The aim of every firm first maximize the wealth of the shareholders and reputation of the company There exist no inseparable relationship between the financial functions and other mangers to achieve its goals and objectives, which are related to the companys investment and financial decisions.

The analysis of the past information helps us to forecast the future accurately since financial statements provide valuable and genuine information concerning the past. Hence financial analysis will help us to analyze the present position and fix future goals.The financial decision making authority vests in the hands of management.

Management should be particularly interested in knowing financial strength and weakness of the firm. Capital budgeting is the important tool in the hand of management to detect the efficiency of the investment which the firm is going to invest on the new projects. There are so many techniques to measure the efficiency of the project


The long term investment decision of the firm is generally known as the capital budgeting or capital expenditure decision. Capital budgeting decision may be defined as the firms decisions to invest its current fund most efficiently in the on germ assets anticipation of an expected flow of benefits over series of years. 1. The exchange of current funds for future benefits. 2. The funds are invested in long term assets. The future benefits will occur to the firm over a series of years.

Capital budgeting is a long-term planning for making and financing proposed capital out lays. -- Charles T. Hrongreen. Capital budgeting is concerned with the allocation of the firms source financial resources among the available opportunities.The consideration of investment opportunities involves the comparison of the expected future streams of earnings from a project with the immediate and subsequent streams of earning from a project, with the immediate and subsequent streams of expenditure. -- G.C. Philippatos. Capital budgeting is acquiring inputs with long-term return. -- Richard and Green law. Capital budgeting consists in planning development of available capital for the purpose of maximizing the long-term profitability of the concern. -- Lyrich.


To know the techniques adopted by the organization while investing a capital on a particular project. To know the present & previous position of the organization before implementing the project. To determine capital projects those are feasible To estimate the expenditure involved. To restrict the capital expenditure on projects within authorized limits.

Compute, interpret and evaluate the accounting rate of return (ARR) and the widely-used traditional capital budgeting technique-the payback period.

Apply the sophisticated capital budgeting techniques-net present value (NPV) and internal rate of return (IRR) to relevant cash flows to choose acceptable as well as preferred capital projects.

Compute and illustrate terminal value (TV) method and profitability index (PI) as capital budgeting evaluation techniques.

To find out long term planning in ITC.


The efficient allocation of capital is the most important financial function in the modern times. It involves decision to commit the firms, 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 ITC for four years and budgeted figures of each year.


Capital budgeting decisions are among the most crucial and critical business decisions; special care should be taken in making these decisions on account of the following reasons.

Involvement of heavy fund:

Capital budgeting decision require large capital outlay in is therefore absolutely necessary that the form should carefully plan its investment programmed so thus it may get the finance at right time and thus are put to most profitable use.

Long term implications:

The firms will feel the effects capital budgeting decision over at long period and wither fore they have a decisive influence on the rate and directions for the growth of the firm.

Irreversible decisions:
In most cases capital budgeting decisions are irreversible this is because it is very difficult to find a market for the capital assets

Most difficult to market:

The capital budgeting decisions require assessment of future events, which are uncertain. It is really a default risk to estimate the probable future event the probable benefit and costs accurately in quantitative term because of economic political social and technologic factors


These are two types of methods of data collection. a) Primary Data. b) Secondary Data.

a. Primary Data:
Primary data is the information collected directly without any references. In this study it was mainly through interviews with concerned officers and staffs either individually or collectively some of the information had been verified or supplemented with personal observations.

The data includes

Conducting personal interviews are with the officers of the financials department. Guidelines and necessary information is taken from my guide. By using primary methods collected the primary information or data. observation method Survey method Interview method.

b. Secondary Data:
It was collected from already published sources. This includes magazines and other internal records.

The data includes: By referring to the books in the company. By collecting data from the websites.

By collecting data from company annual reports.


It is a many sides activity, it includes searching for new and more profitable investment proposals investigating engineering and marketing considerations to predict the consequences of accepting the investment and making economic analysis to determine the profit potential of each investment proposal, its basic features can be summarized as follows.

A. Potentiality of making large anticipated profits i.e., the possibility of anticipating future profits. B. Involves high degree of risk. A high degree of risk is involved since future is uncertain. C. Involves relatively long period between outlay and anticipated returns. There is a long gap between cash out flow and future cash flows.

On the basis of the above discussion it can be concluded that capital budgeting consists in planning the development of available capital for the purpose of maximizing the long term profitability of the firm.

Capital budgeting is also called as capital expenditure budget. Operating budget shows planned operations in the coming period where as capital budget deals exclusively with major investment proposals. It assesses economies of expenditure and investment.

Limitations of Study:
The data mostly consists of secondary information Study is concentrated only on financial aspects of the company. Study is limited only to micro level. Capital expenditure decisions are of considerable significance as the future success and growth of the firm depends heavily on them.

ITC is one of India's foremost private sector companies with a market capitalisation of over US $ 30 billion and a turnover of US $ 6 billion.* ITC is rated among the World's Best Big Companies, Asia's 'Fab50' and the World's Most Reputable Companies by Forbes magazine, among India's Most Respected Companies by Business World and among India's Most Valuable Companies by Business Today. ITC ranks among India's `10 Most Valuable (Company) Brands', in a study conducted by Brand Finance and published by the Economic Times. ITC also ranks among Asia's 50 best performing companies compiled by Business Week.

ITC has a diversified presence in Cigarettes, Hotels, Paperboards & Specialty Papers, Packaging, Agri-Business, Packaged Foods & Confectionery, Information Technology, Branded Apparel, Personal Care, Stationery, Safety Matches and other FMCG products. While ITC is an outstanding market leader in its traditional businesses of Cigarettes, Hotels, Paperboards, Packaging and Agri-Exports, it is rapidly gaining market share even in its nascent businesses of Packaged Foods & Confectionery, Branded Apparel, Personal Care and Stationery.

As one of India's most valuable and respected corporations, ITC is widely perceived to be dedicatedly nation-oriented. Chairman Y C Deveshwar calls this source of inspiration "a commitment beyond the market". In his own words: "ITC believes that its aspiration to create enduring value for the nation provides the motive force to sustain growing shareholder value. ITC practices this philosophy by not only driving each of its businesses towards international competitiveness but by also consciously contributing to enhancing the competitiveness of the larger value chain of which it is a part."

ITC's diversified status originates from its corporate strategy aimed at creating multiple drivers of growth anchored on its time-tested core competencies: unmatched distribution reach, superior brand-building capabilities, effective supply chain

management and acknowledged service skills in hoteliering. Over time, the strategic forays into new businesses are expected to garner a significant share of these emerging high-growth markets in India.

ITC's Agri-Business is one of India's largest exporters of agricultural products. ITC is one of the country's biggest foreign exchange earners (US $ 3.2 billion in the last decade). The Company's 'e-Choupal' initiative is enabling Indian agriculture significantly enhance its competitiveness by empowering Indian farmers through the power of the Internet. This transformational strategy, which has already become the subject matter of a case study at Harvard Business School, is expected to progressively create for ITC a huge rural distribution infrastructure, significantly enhancing the Company's marketing reach.

ITC's wholly owned Information Technology subsidiary, ITC Infotech India Ltd, provides IT services and solutions to leading global customers. ITC Infotech has carved a niche for itself by addressing customer challenges through innovative IT solutions.

ITC's production facilities and hotels have won numerous national and international awards for quality, productivity, safety and environment management systems. ITC was the first company in India to voluntarily seek a corporate governance rating.

ITC employs over 26,000 people at more than 60 locations across India. The Company continuously endeavors to enhance its wealth generating capabilities in a globalising environment to consistently reward more than 4,19,000 shareholders, fulfill 9

the aspirations of its stakeholders and meet societal expectations. This over-arching vision of the company is expressively captured in its corporate positioning statement: "Enduring Value, For the Nation, and For the Shareholder."

The ITC Way:

ITC is a board-managed professional company, committed to creating enduring value for the shareholder and for the nation. It has a rich organisational culture rooted in its core values of respect for people and belief in empowerment. Its philosophy of allround value creation is backed by strong corporate governance policies and systems.

ITCs corporate strategies are:

Create multiple drivers of growth by developing a portfolio of world class businesses that best matches organisational capability with opportunities in domestic and export markets.

Continue to focus on the chosen portfolio of FMCG, Hotels, Paper, Paperboards & Packaging, Agri Business and Information Technology.

Benchmark the health of each business comprehensively across the criteria of Market Standing, Profitability and Internal Vitality.

Ensure that each of its businesses is world class and internationally competitive.

Enhance the competitive power of the portfolio through synergies derived by blending the diverse skills and capabilities residing in ITC are various businesses.


Create distributed leadership within the organisation by nurturing talented and focused top management teams for each of the businesses.

Continuously strengthen and refine Corporate Governance processes and systems to catalyze the entrepreneurial energies of management by striking the golden balance between executive freedom and the need for effective control and accountability.


ITC was incorporated on August 24, 1910 under the name Imperial Tobacco Company of India Limited. As the Company's ownership progressively Indianised, the name of the Company was changed from Imperial Tobacco Company of India Limited to India Tobacco Company Limited in 1970 and then to I.T.C. Limited in 1974. In recognition of the Company's multi-business portfolio encompassing a wide range of businesses - Cigarettes & Tobacco, Hotels, Information Technology, Packaging, Paperboards & Specialty Papers, Agri-business, Foods, Lifestyle Retailing, Education & Stationery and Personal Care - the full stops in the Company's name were removed effective September 18, 2001. The Company now stands rechristened 'ITC Limited'.

The Companys beginnings were humble. A leased office on Radha Bazar Lane, Kolkata, was the centre of the Company's existence. The Company celebrated its 16th birthday on August 24, 1926, by purchasing the plot of land situated at 37, Chowringhee, (now renamed J.L. Nehru Road) Kolkata, for the sum of Rs 310,000. This decision of the Company was historic in more ways than one. It was to mark the beginning of a long and eventful journey into India's future. The Company's headquarter building, 'Virginia House', which came up on that plot of land two years later, would go on to become one of Kolkata's most venerated landmarks.


Though the first six decades of the Company's existence were primarily devoted to the growth and consolidation of the Cigarettes and Leaf Tobacco businesses, the Seventies witnessed the beginnings of a corporate transformation that would usher in momentous changes in the life of the Company.

ITC's Packaging & Printing Business was set up in 1925 as a strategic backward integration for ITC's Cigarettes business. It is today India's most sophisticated packaging house. In 1975 the Company launched its Hotels business with the acquisition of a hotel in Chennai which was rechristened 'ITC-Welcomgroup Hotel Chola'. The objective of ITC's entry into the hotels business was rooted in the concept of creating value for the nation. ITC chose the hotels business for its potential to earn high levels of foreign exchange, create tourism infrastructure and generate large scale direct and indirect employment. Since then ITC's Hotels business has grown to occupy a position of leadership, with over 100 owned and managed properties spread across India.

In 1979, ITC entered the Paperboards business by promoting ITC Bhadrachalam Paperboards Limited, which today has become the market leader in India. Bhadrachalam Paperboards amalgamated with the Company effective March 13, 2002 and became a Division of the Company, Bhadrachalam Paperboards Division. In November 2002, this division merged with the Company's Tribeni Tissues Division to form the Paperboards & Specialty Papers Division. ITC's paperboards' technology, productivity, quality and

manufacturing processes are comparable to the best in the world. It has also made an immense contribution to the development of Sarapaka, an economically backward area in the state of Andhra Pradesh. It is directly involved in education, environmental protection and community development. In 2004, ITC acquired the paperboard manufacturing facility of BILT Industrial Packaging


Co. Ltd (BIPCO), near Coimbatore, Tamil Nadu. The Kovai Unit allows ITC to improve customer service with reduced lead time and a wider product range.

In 1985, ITC set up Surya Tobacco Co. in Nepal as an Indo-Nepal and British joint venture. Since inception, its shares have been held by ITC, British American Tobacco and various independent shareholders in Nepal. In August 2002, Surya Tobacco became a subsidiary of ITC Limited and its name was changed to Surya Nepal Private Limited (Surya Nepal). In 1990, ITC acquired Tribeni Tissues Limited, a Specialty paper manufacturing company and a major supplier of tissue paper to the cigarette industry. The merged entity was named the Tribeni Tissues Division (TTD). To harness strategic and operational synergies, TTD was merged with the Bhadrachalam Paperboards Division to form the Paperboards & Specialty Papers Division in November 2002. Also in 1990, leveraging it is agri-sourcing competency, ITC set up the Agri Business Division for export of agri-commodities. The Division is today one of India's largest exporters. ITC's unique and now widely acknowledged e-Choupal initiative began in 2000 with soya farmers in Madhya Pradesh. Now it extends to 10 states covering over 4 million farmers. ITC's first rural mall, christened 'Choupal Saagar' was inaugurated in August 2004 at Sehore. On the rural retail front, 24 'Choupal Saagars' are now operational in the 3 states of Madhya Pradesh, Maharashtra and Uttar Pradesh. In 2000, ITC forayed into the Greeting, Gifting and Stationery products business with the launch of Expressions range of greeting cards. A line of premium range of notebooks under brand Paperkraft was launched in 2002. To augment its offering and to reach a wider student population, the popular range of notebooks was launched under brand Classmate in 2003. Classmate over the years has grown to become Indias largest notebook brand and has also increased its portfolio to occupy a greater share of the school bag. Years 2007- 2009 saw the launch of Children Books, Slam Books, Geometry Boxes, Pens and Pencils under the Classmate brand. In 2008, ITC repositioned the 13

business as the Education and Stationery Products Business and launched India's first environment friendly premium business paper under the Paperkraft Brand. Paperkraft offers a diverse portfolio in the premium executive stationery and office consumables segment. Paperkraft entered new categories in the office consumable egment with the launch of Textliners, Permanent Ink Markers and White Board Markers in 2009. ITC also entered the Lifestyle Retailing business with the Wills Sport range of international quality relaxed wear for men and women in 2000. The Wills Lifestyle chain of exclusive stores later expanded its range to include Wills Classic formal wear (2002) and Wills Clublife evening wear (2003). ITC also initiated a foray into the popular segment with its men's wear brand, John Players, in 2002. In 2006, Wills Lifestyle became title partner of the country's most premier fashion event - Wills Lifestyle India Fashion Week - that has gained recognition from buyers and retailers as the single largest B-2-B platform for the Fashion Design industry. To mark the occasion, ITC launched a special 'Celebration Series', taking the event forward to consumers. In 2000, ITC spun off its information technology business into a wholly owned subsidiary, ITC Infotech India Limited, to more aggressively pursue emerging opportunities in this area. Today ITC Infotech is one of Indias fastest growing global IT and IT-enabled services companies and has established itself as a key player in offshore outsourcing, providing outsourced IT solutions and services to leading global customers across key focus verticals - Manufacturing, BFSI (Banking, Financial Services & Insurance), CPG&R (Consumer Packaged Goods & Retail), THT (Travel, Hospitality and Transportation) and Media & Entertainment. ITC's foray into the Foods business is an outstanding example of successfully blending multiple internal competencies to create a new driver of business growth. It began in August 2001 with the introduction of 'Kitchens of India' ready-to-eat Indian gourmet dishes. In 2002, ITC entered the confectionery and staples segments with the launch of the brands mint-o and Candyman confectionery and Aashirvaad Atta (wheat flour). 2003 witnessed the introduction of Sunfeast as the Company entered the biscuits segment. ITC's entered the fast growing branded snacks category with Bingo! In 2007. In eight 14

years, the Foods business has grown to a significant size with over 200 differentiated products under six distinctive brands, with an enviable distribution reach, a rapidly growing market share and a solid market standing.

In 2002, ITC's philosophy of contributing to enhancing the competitiveness of the entire value chain found yet another expression in the Safety Matches initiative. ITC now markets popular safety matches brands like iKno, Mangaldeep, Aim, Aim Mega and Aim Metro. ITC's foray into the marketing is of Agarbattis (incense sticks) in 2003 marked the manifestation of its partnership with the cottage sector. ITC's popular agarbattis brands include Spriha and Mangaldeep across a range of fragrances like Rose, Jasmine, Bouquet, Sandalwood, Madhur, Sambrani and Nagchampa. ITC introduced Essenza Di Wills, an exclusive range of fine fragrances and bath & body care products for men and women in July 2005. Inizio, the signature range under Essenza Di Wills provides a comprehensive grooming regimen with distinct lines for men (Inizio Homme) and women (Inizio Femme). Continuing with its tradition of bringing world class products to Indian consumers the Company launched 'Fiama Di Wills', a premium range of Shampoos, Shower Gels and Soaps in September, October and December 2007 respectively. The Company also launched the 'Superia' range of Soaps and Shampoos in the mass-market segment at select markets in October 2007 and Vivel De Wills & Vivel range of soaps in February and Vivel range of shampoos in June 2008.










Divisional/ Strategic Business Unit (SBU) Management Committees, each headed by a divisional/ SBU Chief Executive Business includes: FMCG, Hotels, Paperboards, Specialty Papers & Packaging, Agri Business and Information Technology

Corporate Functions, each headed by a HOD Corporate Functions include: Planning and Treasury, Accounting, Taxation, Risk Management, Legal, Secretarial, EHS, Human Resources, Corporate Communications, Corporate Affairs, Internal Audit and Research & Development.


Applicable to all directors, senior management and employees of the Company

ITCs Code of Conduct was circulated to the employees more than five years back and is posted on the Companys corporate website. This Code has now been re-drafted for better presentation. This Code is derived from three interlinked fundamental principles, viz. good corporate governance, good corporate citizenship and exemplary personal conduct.

ITC is a professionally managed organisation and the core value underlying our corporate philosophy is "trusteeship". We believe this organisation has been handed to us by the various stakeholders in "trust" and we as professionals are the "trustees" of these stakeholders. It is therefore our responsibility to ensure that the organisation is managed in a manner that protects and furthers the interests of our stakeholders. We recognize society as an important stakeholder in this enterprise and therefore it is part of our responsibility to practice good corporate citizenship. It is also our belief that in order to serve the interests of our stakeholders in perpetuity, we must build ITC into an institution whose dynamism and vitality are anchored in its core values.


Corporate Governance Policy

The Corporate Governance Policy is the apex level instrument guiding conduct of the affairs of the Company and clearly delineates the roles, responsibilities and authorities of the key entities in the governance structure of the Company. This Code forms an integral part of the Companys Governance Policy. The directors, senior management and employees must adhere to the Corporate Governance Policy of the Company.

Good Corporate Citizenship

In the conduct of the Companys business, the practice of good corporate citizenship is a prerequisite and embraces the following:

Dealing with People in the Organisation:

In dealing with each other, directors, senior management and employees shall uphold the values which are at the core of our HR Philosophy - trust, teamwork, mutuality and collaboration, meritocracy, objectivity, self respect and human dignity. Indeed, these values form the basis of our HR management systems and processes. In selection and recruitment, while meritocracy will be a prime criterion, managers will scrupulously consider all factors that go towards securing the interests of the Company. ITC will focus on meritocracy, equity and upholding of Company values in all people processes including performance management systems, appraisals, remuneration and rewards.

A Gender Friendly Workplace

As a good corporate citizen, ITC is committed to a gender friendly workplace. It seeks to enhance equal opportunities for men and women, prevent/stop/redress sexual harassment at the workplace and institute good employment practices. Sexual harassment includes unwelcome sexually determined behavior such as: unwelcome physical contact; a demand or request for sexual favors sexually colored remarks; showing 18

pornography and any other unwelcome physical, verbal or non-verbal conduct of a sexual nature. ITC maintains an open door for reportees; encourages employees to report any harassment concerns and is responsive to employee complaints about harassment or other unwelcome and offensive conduct. A Grievance Committee on Gender Issues has been constituted to enquire into complaints and to recommend appropriate action, wherever required. ITC demands, demonstrates and promotes professional behavior and respectful treatment of all employees.

Relationships with Suppliers and Customers

All directors, senior management and employees shall ensure that in their dealings with suppliers and customers, the Companys interests are never compromised. Accepting gifts and presents of more than a nominal value, gratuity payments and other payments from suppliers or customers will be viewed as serious breach of discipline as this could lead to compromising the Companys interests.

Legal Compliance
It is the Companys policy to comply fully with all applicable laws and regulations. Ensuring legal and regulatory compliance is the responsibility of the Chief Executives of the Businesses and the Divisional Management Committees. The Company cannot accept practices which are unlawful or may be damaging to its reputation. Divisional Management Committees must satisfy themselves that sound and adequate arrangements exist to ensure that they comply with the legal and regulatory requirements impacting each business and identify and respond to developments in the regulatory environment in which they operate. In the event the implication of any law is not clear, the Companys Legal Department shall be consulted for advice.


Health and Safety

The Company attaches great importance to a healthy and safe work environment. ITC is committed to provide good physical working conditions and encourages high standards of hygiene and housekeeping. Particular attention should be paid to training of employees to increase safety awareness and adoption of safe working methods, particularly designed to prevent serious or fatal accidents.

Environment Policies
The Company believes that commitment to sustainable development is a key component of responsible corporate citizenship and therefore deserves to be accorded the highest priority. Accordingly, the Company is committed to Best Practices in environmental matters arising out of its business activities and expects each business to fully demonstrate this commitment. In addition to complying with applicable laws and regulations, Businesses must establish procedures for assessing the environmental effects of their present and future activities. They should adopt Best Practices in their environmental policies and procedures.

Personal Conduct
All directors, senior management and employees have the obligation to conduct themselves in an honest and ethical manner and act in the best interest of the Company at all times. They are expected to demonstrate exemplary personal conduct through adherence to the following:

Avoidance of Conflict of Interest

All directors, senior management and employees must avoid situations in which their personal interest could conflict with the interest of the Company. This is an area in which it is impossible to provide comprehensive guidance but the guiding principle is that


conflict, if any, or potential conflict must be disclosed to higher management for guidance and action as appropriate.

Transparency and Audit ability

All directors, senior management and employees shall ensure that their actions in the conduct of business are totally transparent except where the needs of business security dictate otherwise. Such transparency shall be brought about through appropriate policies, systems and processes, including as appropriate, segregation of duties, tiered approval mechanism and involvement of more than one manager in key decisions and maintaining supporting records. It shall be necessary to voluntarily ensure that areas of operation are open to audit and the conduct of activities is totally auditable.

Protection of Confidential Information

No director, senior management and employee shall disclose or use any confidential information gained in the course of employment/ association with the Company for personal gain or for the advantage of any other person. No information either formally or informally shall be provided to the press, other publicity media or any other external agency except within approved policies.

Company Facilities
No director, senior management and employee shall misuse Company facilities. In the use of Company facilities, care shall be exercised to ensure that costs are reasonable and there is no wastage.


Leading by Example
The organizations directors and senior management set the professional tone for the Company. Through both their words and their actions, the organizations leadership conveys what is acceptable and unacceptable behavior. ITCs directors, senior management and employees must constantly reinforce through their actions and behavior that ITCs stated beliefs of responsible corporate citizenship are rooted in individual conviction and personal integrity.

Any waiver of any provision of this Code of Conduct for a director, senior management or employee must be placed for approval before the Companys Board of Directors/ Corporate Management Committee, as appropriate.

Non Adherence
Any instance of non-adherence to the Code of Conduct / any other observed unethical behavior on the part of those covered under this Code should be brought to the attention of the immediate reporting authority, who shall in turn report the same to the Head of Corporate Human Resources. * Senior management for the purpose of this Code would mean the following: Managers at Grade & A & SBU Corporate its equivalent, Chief and above


Executives HODs.

* This Code of Conduct, as adopted by the Board of Directors of the Company on 26th March, 2005, was amended on 29th March, 2006.



Over the years, ITC has evolved from a single product company to a multibusiness corporation. Its businesses are spread over a wide spectrum, ranging from cigarettes and tobacco to hotels, packaging, paper and paperboards and international commodities trading. Each of these businesses is vastly different from the others in its type, the state of its evolution and the basic nature of its activity, all of which influence the choice of the form of governance. The challenge of governance for ITC therefore lies in fashioning a model that addresses the uniqueness of each of its businesses and yet strengthens the unity of purpose of the Company as a whole. Since the commencement of the liberalization process, India's economic scenario has begun to alter radically. Globalization will not only significantly heighten business risks, but will also compel Indian companies to adopt international norms of transparency and good governance. Equally, in the resultant competitive context, freedom of executive management and its ability to respond to the dynamics of a fast changing business environment will be the new success factors. ITC's governance policy recognizes the challenge of this new business reality in India.

Definition and Purpose:

ITC defines Corporate Governance as a systemic process by which companies are directed and controlled to enhance their wealth generating capacity. Since large corporations employ vast quantum of societal resources, we believe that the governance process should ensure that these companies are managed in a manner that meets stakeholders aspirations and societal expectations.


Core Principles:
ITC's Corporate Governance initiative is based on two core principles. These are : Management must have the executive freedom to drive the enterprise forward without undue restraints; and This freedom of management should be exercised within a framework of effective accountability. ITC believes that any meaningful policy on Corporate Governance must provide empowerment to the executive management of the Company, and simultaneously create a mechanism of checks and balances which ensures that the decision making powers vested in the executive management is not only not misused, but is used with care and responsibility to meet stakeholder aspirations and societal expectations.

From the above definition and core principles of Corporate Governance emerge the cornerstones of ITC's governance philosophy, namely trusteeship, transparency, empowerment and accountability, control and ethical corporate citizenship. ITC believes that the practice of each of these leads to the creation of the right corporate culture in which the company is managed in a manner that fulfils the purpose of Corporate Governance.

ITC believes that large corporations like itself have both a social and economic purpose. They represent a coalition of interests, namely those of the shareholders, other providers of capital, business associates and employees. This belief therefore casts a responsibility of trusteeship on the Company's Board of Directors. They are to act as trustees to protect and enhance shareholder value, as well as to ensure that the Company fulfills its obligations and responsibilities to its other stakeholders. Inherent in the concept


of trusteeship is the responsibility to ensure equity, namely, that the rights of all shareholders, large or small, are protected.

ITC believes that transparency means explaining Company's policies and actions to those to whom it has responsibilities. Therefore transparency must lead to maximum appropriate disclosures without jeopardizing the Company's strategic interests. Internally, transparency means openness in Company's relationship with its employees, as well as the conduct of its business in a manner that will bear scrutiny. We believe transparency enhances accountability.

Empowerment and Accountability:

Empowerment is an essential concomitant of ITC's first core principle of governance that management must have the freedom to drive the enterprise forward. ITC believes that empowerment is a process of actualizing the potential of its employees. Empowerment unleashes creativity and innovation throughout the organisation by truly vesting decisionmaking powers at the most appropriate levels in the organisational hierarchy. ITC believes that the Board of Directors are accountable to the shareholders, and the management is accountable to the Board of Directors. We believe that empowerment, combined with accountability, provide an impetus to performance and improve effectiveness, thereby enhancing shareholder value.

ITC believes that control is a necessary concomitant of its second core principle of governance that the freedom of management should be exercised within a framework of appropriate checks and balances. Control should prevent misuse of power, facilitate timely management response to change, and ensure that business risks are pre-emotively and effectively managed.


Ethical Corporate Citizenship:

ITC believes that corporations like itself have a responsibility to set exemplary standards of ethical behavior, both internally within the organisation, as well as in their external relationships. We believe that unethical behavior corrupts organisational culture and undermines stakeholder value

Board of Directors Chairman

Y C Deveshwar

Executive directors
Nakul Anand P V Dhobale K N Grant

Non-executive directors
A Baijal S H Khan H G Powell Basudeb Sen S Banerjee S B Mathur P B Ramanujam K Vaidyanath 26 AV Girija Kumar D K Mehrotra Anthony Ruys B Vijayaraghavan

Corporate Management Committee


Y C Deveshwar Chairman

Nakul Anand Executive Director

P V Dhobale Executive Director

K N Grant Executive Director

Anand Nayak Human Resources

T V Ramaswamy R&D, Projects, EH&S

S Sivakumar Agri & IT Businesses

K S Suresh Legal

Rajiv Tandon Finance

B B Chatterjee Secretarial


Global Honors
ITC constantly endeavors to benchmark its products, services and processes to global standards. The Company's pursuit of excellence has earned it national and international honors. ITC is one of the eight Indian companies to figure in Forbes A-List for 2004, featuring 400 of "the world's best big companies". Forbes has also named ITC among Asia's'Fab 50' and the World's Most Reputable Companies. ITC has several firsts to its credit: ITC is the first from India and among the first 10 companies in the world to publish its Sustainability Report in compliance (at the highest A+ level) with the latest G3 guidelines of the Netherlands-based Global Reporting Initiative (GRI), a UN-backed, multi stakeholder international initiative to develop and disseminate globally applicable Sustainability Reporting Guidelines. ITC is the first Indian company and the second in the world to win the prestigious Development Gateway Award. It won the $100,000 Award for the year 2005 for its trailblazing ITC e-Choupal initiative which has achieved the scale of a movement in rural India. The Development Gateway Award recognizes ITC's e-Choupal as the most exemplary contribution in the field of Information and Communication Technologies (ICT) for development during the last 10 years. ITC e-Choupal won the Award for the importance of its contribution to development priorities like poverty reduction, its scale and replicability, sustainability and transparency.
ITC has won the inaugural 'World Business Award', the worldwide business

award recognizing companies who have made significant efforts to create sustainable livelihood opportunities and enduring wealth in developing countries. The award has been instituted jointly by the United Nations Development Programme (UNDP), International Chamber of Commerce (ICC) and the HRH Prince of Wales International Business Leaders Forum (IBLF).


ITC is the first Corporate to receive the Annual FICCI Outstanding Vision Corporate Triple Impact Award in 2007 for its invaluable contribution to the triple bottom line benchmarks of building economic, social and natural capital for the nation. ITC has won the Golden Peacock Awards for 'Corporate Social Responsibility (Asia)' in 2007, the Award for CSR in Emerging Economies 2005 and Excellence in Corporate Governance' in the same year. These Awards have been instituted by the Institute of Directors, New Delhi, in association with the World Council for Corporate Governance and Centre for Corporate Governance. ITC Hotel Royal Gardenia, Bengaluru is the first Indian Hotel and world's largest, to get the LEED Platinum rating - the highest green building certification globally. The Company's Green Leaf threshing plants at Chirala and Anaparti in Andhra Pradesh are the first units of their kind in the world to get ISO 14001environment management systems certification. ITC's cigarette factory in Kolkata is the first such unit in India to get ISO 9000 quality certification and the first among cigarette factories in the world to be awarded the ISO 14001 certification. ITC Maurya in New Delhi is the first hotel in India to get the coveted ISO 14001 Environment Management Systems certification. ITC Filtrona is the first cigarette filter company in the world to obtain ISO 14001. ITC Infotech finds pride of place among a select group of SEI CMM Level 5 companies in the world. ITC's Green Leaf Threshing plant in Chirala is the first in India and among the first 10 units in the world to bag the Social Accountability (SA 8000) certification. ITC's R&D Centre at Peenya, Bengaluru has the distinction of being the first independent R&D centre in India to get ISO 9001 accreditation and certified with ISO 14001 for Environment Management Systems by DNV. The R&D 29

Centre is also certified for the standard ISO/IEC17025:2005, by National Accreditation Board for Testing and Calibration Laboratories (NABL). This certification is awarded for "General requirement for the competence of Testing & Calibration Laboratories". ITC Chairman Y C Deveshwar has received several honors over the years. Notable among them are: Year Award 2010 The U.S.-India Business Council (USIBC) Award for Global Leadership. 2007 SAM/SPG Sustainability Leadership Award conferred at the International Sustainability Leadership Symposium, Zurich. Business Person of the Year from UK Trade & Investment, the UK Government organization that supports overseas businesses in that country.


2006 Inducted into the `Hall of Pride' by the 93rd Indian Science Congress. 2005 Honored with the Teacher's Lifetime Achievement Award. Manager Entrepreneur of the Year from Ernst & Young.

2001 Retail Visionary of the Year from Images, India's only fashion and retail trade magazine. 1998 Honorary Fellowship from the All India Management Association 1996 Distinguished Alumni Award from IIT, Delhi.

Some of the other notable recognitions are:

The Stockholm Challenge 2006 for the e-Choupal initiative. This award is for using Information Technology for the economic development of rural communities. United Nations Industrial Development Organisation (UNIDO) Award at the international conference on Sharing Innovative Agribusiness Solutions 2008 at Cairo for ITC's exemplary initiatives in agri business through the e-Choupal. 30

The Corporate Social Responsibility Crown Award for Water Practices from UNESCO and Water Digest for its distinguished work carried out in the water sector in India. ITC also received the National Award for Excellence in Water Management 2007 in the 'beyond the fence' category from the CII Sohrabji Godrej Green Business Centre for its leadership role in implementing water and watershed management practices. The watershed programmed also won the Asian CSR Award 2007 for Environmental Excellence given by the Asian Institute of Management. The Award recognizes and honors Asian companies for outstanding, innovative and world-class projects. The Company also received the Ryutaro Hashimoto Incentive Prize 2007 for Environment & Development from the Asia Pacific Forum. This Award aims at promoting information dissemination of good practices towards sustainable development in the Asia-Pacific region. The Readers' Digest Pegasus Award for corporate social responsibility, recognizing outstanding work done by socially conscious companies. The Corporate Award for Social Responsibility 2008 from The Energy and Resources Institute (TERI) in recognition of its exemplary initiatives in implementing integrated watershed development programmers across 7 states in India. The company also won the award in 2004 for its e-Choupal initiative. The Award provides impetus to sustainable development and encourages ongoing social responsibility processes within the corporate sector. The Best Corporate Social Responsibility Practice Award 2008 jointly instituted by the Bombay Stock Exchange, Times Foundation and the NASSCOM Foundation. The NASSCOM - CNBC IT User Award 2008 in the Retail & Logistics category. The Company has been recognized for its pro-active and holistic approach to IT adoption and the seamless alignment of IT with business strategy. This is the fourth Time that ITC has won Nasscom's Best IT User Award since it was instituted in 2003.


ITC's EHS Policy:

The Institute of Chartered Accountants of India Award for Excellence in Financial Reporting with its Annual Report and Accounts, adjudged as a commendable entry under the Category 'Manufacturing and Trading Enterprises'. The Business Today Award for the Best Managed Company in recognition of its outstanding initiatives in the consumer products segment. The only Indian FMCG Company to have featured in the Forbes 2000 list. The Forbes 2000 is a comprehensive ranking of the world's biggest companies, measured by a composite of sales, profits, assets and market value. The list spans 51 countries and 27 industries. The NDTV Profit Business Leadership Award for being the Best Food Company of 2007. The Award has been instituted to recognize organizational excellence. The CNBC-TV18's International Trade Award 2008 for Outstanding Exporter of the Year in the FMCG & Food category. ITC continues its dominance of The Economic Times' Brand Equity listing of India's 100 Biggest FMCG Brands, with three brands from its stable making it to the top five. Gold Flake remains India's biggest FMCG brand in terms of sales. Navy Cut ranks at No. 4. ITC's Scissors brand ranks at No 5 and is the only new entrant into the top 10.

ITCs mission is to sustain and enhance the wealth-generating capacity of its portfolio of businesses in a progressively globalizing environment. As one of Indias premier corporations employing a vast quantum of societal resources, ITC seeks to fulfill larger role by enlarging its contribution to the society of which it is a part. The trusteeship role related to social and environmental resources, aligned to the pursuit of economic objectives, is the cornerstone of ITCs Environment, Health and Safety philosophy. ITCs EHS philosophy cognizes for the twin needs of conservation and creation of productive resources.


In the multi-business context of ITC, Corporate Strategies are designed to create enduring value for the nation and the shareholder, through leadership in each business and the attainment of world-class competitive capabilities across the value chain. The objective of leadership extends to all facets of business operations including Environment, Health and Safety. ITC is, therefore, committed to conducting its operations with due regard for the environment, and providing a safe and healthy workplace for each employee. Various international and national awards and accreditations stand testimony to ITCs commitment to EHS. Such external recognition further reinforces the need to direct the collective Endeavour of the Companys employees at all levels towards sustaining and continuously improving standards of Environment, Health and Safety in a bid to attain and exceed benchmarked standards, whether regulatory or otherwise. In particular, it is ITCs EHS policy: To contribute to sustainable development through the establishment and implementation of environment standards that is scientifically tested and meets the requirement of relevant laws, regulations and codes of practice. To take account of environment, occupational health and safety in planning and decision-making. To provide appropriate training and disseminate information to enable all employees to accept individual responsibility for Environment, Health and Safety, implement best practices, and work in partnership to create a culture of continuous improvement. To instill a sense of duty in every employee towards personal safety, as well as that of others who may be affected by the employees actions. To provide and maintain facilities, equipment, operations and working conditions which are safe for employees, visitors and contractors at the Companys premises. To ensure safe handling, storage, use and disposal of all substances and materials that is classified as hazardous to health and environment.


To reduce waste, conserve energy, and promote recycling of materials wherever possible.

To institute and implement a system of regular EHS audit in order to assure compliance with laid down policy, benchmarked standards, and requirements of laws, regulations and applicable codes of practice.

To proactively share information with business partners towards inculcating worldclass EHS standards across the value chain of which ITC is a part. All employees of ITC are expected to adhere to and comply with the EHS Policy and

Corporate Standards on EHS. ITCs EHS Policy extends to all sites of the Company. It will be the overall responsibility of the Divisional/SBU Chief Executives, through the members of their Divisional Management Committees, General Managers and Unit Heads, to ensure implementation of this Policy and Corporate Standards on EHS, including formation of various committees and designating individuals for specific responsibilities in respect of their Division/SBU. The Corporate EHS Department is responsible for reviewing and updating Corporate Standards on EHS, and for providing guidance and support to all concerned.


About ITC Ltd Paper & Specialty Paper Division:

The Paper Boards & Specialty paper Divisions came into existence in November 2002 with the amalgamation of ITC Bhadrachalam Paper Boards Ltd. The New Company was set up as integrated paper board manufacturing facility and commenced operations at Bhadrachalam in Andhra Pradesh, 300 Km east of Hyderabad. The Bhadrachalam mill today produces 2,10,000 TPY of papers & boards and it the largest single location mill in India. The mill is focused on producing paper boards for packaging and graphic segments and product range includes cyber XLpac (folding box boards), Pearl/Sapphire Graphic/ (Solid bleached boards high value boards a part from the Echovirus range of recycled boards. The mill also makes liquid packaging boards for Tetrapak in India.

With the commissioning of the new fiber line in September, 2007 the Bhadrachalam mill have a Elemental Chlorine free pulp capacity of 2,40,000 TPY. The Bhadrachalam location today has three board machines and two smaller paper machines. A new paper machine of 90,000 tons per year capacity is scheduled for commissioning in April 08. This line will have the capability to make both uncoated and coated wood free and communication papers. The unit is ISO 9002: 2000 series accredited. The unit is also ISO 14001 certified for Environment management system.

The Tribeni Tissues unit has a hoary history and traces its founding to British American Tobacco and commenced operations in 1949 manufacturing papers for the cigarette industry. Between 1961 & 1988 Tribeni was part of the Wiggins Tape co. of UK. It merged with ITC Ltd. In 1992 modernized the mill with an investment of USD 35 million and refurbished two of the paper machines with latest drives and electronic controls. The Tribeni mill has a capacity of 33,000 TPY and has expanded its product range beyond cigarette tissues to fine papers, packaging paper and specialties the unit now has three paper machines making a stunningly diverse range of cigarette Tissues and components, Laminating Base Tissue. Acid-Free and Antirust tissues, Low Gramm age


printing papers, Decor papers to Insulation Grade Medical and Grade Papers. The unit is ISO 9001: 2000 version and ISO 14001 accredited.

The third manufacturing location at Bollaram near Hyderabad produces 5000 TPY of cost coated papers and Boards, 10,000 TPY of poly extrusion coated boards and 10,000 TPY of C2S art boards any Ivory cards. The Unit is ISO 9001:2000 series accredited.

The division is the market leader in south Asia in Carton boards and ranks second in turnover within the Indian paper industry. ITC provide paper boards for most leading fast moving consumer goods brands in India. ITC is the largest exporter of coated boards from India. About 20 years of ITC sales supplied to the international markets in Malaysia, Srilanka, Bangladesh, Iran, Australia, UAE, Turkey, and china, Singapore, UK, Greece, Germany and USA.

The Paper board facility at Coimbatore was acquired from BILT industries packing company in March 2004. The mill is located at Thekkampati Village near Mettupalayam in Coimbatore Dist of Tamilnadu. The commercial production management began on 29th March 2004.

The mill at present has single board machine with a capacity of 90,000 TPY. The main products are coated duplex boards a Grey back and white back made with 100% recycled fiber. The board machine was 3-wire fourdrinier section, MGclyliner, size press and three coaters. A siemens DCs system and measurex QCS system ensures that machine can deliver high quality recycle boards for demanding print and converting applications.

A modern finishing house ensures the delivery of rolls and sheets, with short turnaround and times. The fiber supply to the Board machine was supplemented with a deinking line in early 2006. A lamination line has been added at the unit to produce composite solid boards in high calipers for the publishing display and package.


ECO naturo and Eco naturo-HS are the two grades of coated Duplex Grey Back board made from this unit. For almost the first time in India a customer has the option to buy higher bulk and of Grey back Board (GD2 grade) for his Cason requirements.

The unit has made rapid strides in becoming a word-class producer and has achieved ISO 9001, ISO 14001 and OHSAS 18001 Certifications. The product range, true to ITCs innovative streak, has been enlarged by developing cone boards for textiles cones and grey boards for book binding boards.

Addition of power block and deinking facility will increase the competitiveness of the unit, with potential to make 2,00,000 TPA of Recycled Boards for Indian and export markets.

To be a Valued Player in the Global Paperboard & Paper Industry by Leadership in quality Products, Processes, Service & People. Continuous enhancement of value for all stakeholders, and Upholding societal values and expectations

To manufacture and market 500,000 TPY of premium coated paperboards & specialty papers by the year 2005. To be a customer-driven company with strong focus on: Customer's needs & total satisfaction

Continuous product innovation to develop new paperboard packaging solutions


Award won by ITC PSPD (Bhadrachalam Unit)

Paper mill of the year by Indian paper manufacturers association in the year 200506

National award for excellence in energy management best innovative project award and national award for excellence in water management.

The Greentech environment excellence gold award in 2006.

National award for energy conservation in 2005.

Certification of appreciation award for excellence in energy management 2006 by CII Hyderabad.

ISO 9002(2000): Unit Bhadrachalam - Assurance for Quality Management Systems certified by DNV, the Netherlands. We are in the process of getting the accreditation for ISO 9001(2000)

ISO 14001(1996): Unit Bhadrachalam Environment Healthy and Safety systems certified by DNV (Det Norske Veritas), The Netherlands.


Innovation of Paper:
Paper is a unique product used for communicating strong and transporting messages. The credit of innovating paper goes to TSAI-LUN A resident of china in 105 AD. He soaked bark of trees hemp waste all contained cellulose for someone to tenderize them. He then macerated them by beating them under a motor into individual fiber, until they were fabricated and swollen due to this action. He dispersed them further into diluted suspension & formed a thin flat sheet of fibrous material by staining that material through a screen held in a frame of mold

The tender sheet was then transferred to wool felt and pressed to higher consistency the wt web was dried under the sun the sheet was then polished flat and smooth with stones to give the suitable material for writing. Even after many countries the same techniques are used. But the only difference is modernization of the production process.

The Paper making techniques was brought into India by Arabs who acquired it form the chine prisoners. The local paper makers were termed as kagazis William care is credited with the mechanization of production process of papers in India, he was success in this experiment by the co-ordination of the local Kagazis in todays world the basic paper & board making process right from the raw material to the product paper can be represented in a simplified form as.













Products (Bhadrachalam Unit)

ITC is the largest manufacturer of packaging and graphic boards in south Asia accompanied by diverse range of specialty papers & Boards fulfilling a variety of needs. The band width of products has increased continuously and moved up on the value. Quality scale and today represents one of the preferred set of choices for any discerning global customer. Seeking a more effective medium to present pack and protest content or products are in a world overloaded with message.

ITC- Pspd (Badrachalam) has 6 machines. These machines are producing different types of papers.

In these machines one machine was newly installed.

The following types of papers of each machine producing in ITC-Pspd (Badrachalam)

Machine- I

Absorbent Kraft, I L Faced Kraft line Deluxe Kraft paper Deluxe Kraft paper (Special) Folding B.Board special Duplex Board Liner Board Single coated grey back White duplex Board (coated) Coated match


Machine- II

Alfa plus Hi brite Paper CPM shade Hi Brite Paper Hi bulk Hi strength cost coating base Hi Brite paper SS Maplitho (T) cb SS Maplitho (NS) SS ml mcb Writing, printing stocks.

Machine III Mg poster paper.

Machine IV

Art Naestrd Base Carte Perona Base Coated FBBD stocks Cyber XL PAC coated Cyber XL pak CLC Triplex Board Coated Cypalc LP Board MG Triplex Board Pearl Graphic Pearl Graphic Uncoated Pearl XL Pac Safire XL Pac 42

Sbs base board uncoated Safire cote Sbs board Tr, Triplex board, uncoated caste Lcemina.

Machine V

Carte persona Base Elc triplex Board Coated Board white Back Coated FBBD stocks Coated Folding Box Boards Coated Gravure Board Cyber Propac Cyber XL Pac Cyber XL Pac uncoated Coated Board (GB) Laminating Base Board (white Black) MG triplex Board Pearl graphic Pearl XL Pac SBS base Board uncoated Single coated grey back Sbs board TV Unconventional coated board (GB) White DX board super white back Production (in metric Tons)




Finance may be defined as the art and science of managing money. The major areas of finance are: a. FINANCIAL SERVICES b. MANAGERIAL FINANCE or FINANCIAL MANAGEMNT. a. FINANCE SERVICES: It is concerned with design and delivery of advice and financial products to individuals, businesses and governments. b.FINANCIAL MANAGEMENT: It is concerned with the duties of the financial managers in the business firm.

Financial management is as an application of general managerial principles to the area of financial decision-making.

-- Howard and Upton.

Financial management is an area of financial decisionmaking, harmonizing individual motives and enterprise goals.

-- Weston and Brigham.

Financial management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operations.

--Joshep and Massie



Financial management is one of the important parts of overall management, which is directly related with various functional departments like personnel, marketing and production. Financial management covers wide area with multidimensional approaches the following are the important scope of financial management. 1. Financial Management and Economics: Economic concepts like micro and macroeconomics are directly applied with the financial management approaches. Investment decisions, micro and macro environmental factors are closely associated with the functions of financial manager. 2. Financial Management and Accounting: Accounting records includes the financial information of the business concern. Hence, we can easily understand the relationship between the financial management and accounting. 3. Financial Management or Mathematics: Modern approaches of the financial management applied large number of mathematical and statistical tools and techniques. They are also called as econometrics.

The investment decision relates to the section of assets in which funds will be invested by firm .The assets which can be acquired fall into broad groups. i. ii. Long term assets which yield a return over a period of the in time in future. Short term or current assets, defined as those assets which in the normal course of business are convertible into cash without diminution in value, usually within a year.



Capital Budgeting may be defined as The decision making process which the firm evaluates the purchase of major fixed assets. It involves firms decision to invest its current funds for addition, disposition, modification and replacement of fixed assets. It deals exactly with major investment proposals, which are essentially long-term projects and incurred among the available market opportunities. Capital budgeting is the process of making investment decision in capital expenditure.


Capital budgeting consists in planning development of available capital for the purpose of maximizing the long-term profitability of the concern.

-- Lyrich.


By matching the available resources and projects it can be invested. The funds available are always living funds. There are many considerations taken for investment decision process such as environment and economic conditions. The methods of evaluations are classified as follows: (A) Traditional methods (or Non-discount methods) (i) Pay-back Period Methods (ii) Post Pay-back Methods (iii) Accounts Rate of Return (B) Modern methods (or Discount methods) (i) Net Present Value Method (ii) Internal Rate of Return Method (iii) Profitability Index Method





Pay back method

Post pay back method PERIOD

Accounting rate of return

NPV method

IRR method

PI method



It views of the significance of capital decision, it is absolutely necessary that the method adopted for appraisal of capital investment proposals is a sound one.

There are several methods for evaluating and ranking the capital investment proposals. In case of all these methods the main emphasis is on the return which will be derived on the capital invested in the projects.

Traditional Methods:
Payback period method:
The term pay back refers to the period in which the project will generate the necessary cash to recoup the initial investment. Initial investment Payback period = -------------------------------------------Annual cash inflow Accept or reject criteria The payback period can be used as criteria to accept or reject an investment proposal. A project whose actual payback period is more than what has been

predetermined by the management will be straight away rejected. Taking into the account the reciprocal of the cost is the maximum acceptable payback period.

1. It is an important guide to investment policy. 2. It lays a great emphasis on liquidity 3. It is simple to operate and easy to understand. 4. This method costs less as it requires only very little effort for its computation. 5. It weighs early returns heavily and ignores distant returns.


1. It fails to consider the period over which an investment is likely to fetch incomes. 2. It ignores the value of money. 3. This method does not take into consideration the cash flows beyond the payback period.

Accounting/Average Rate of Returns:

Average rate of returns is average of the net profit after taxes over the whole of the economic life of the project are taken. Under this method return, is expressed as

percentage of capital or investment. Accounting rate of returns may be calculated using any one of the following formulas. Average net profit after tax ARR = -------------------------------------------Average investment The amount of average net profit after taxes and Average Investment are calculated as Total net profit after taxes A. Average net profit after tax = ----------------------------------------------------No. of years Investment Scrap value + Additional working capital + Scrap value B. Average Investment = -------------------------------------------------------------------------2

Accept or reject criteria:

In case of independent projects, calculated ARR of the project will be accepted otherwise rejected. While evaluating mutually exclusive projects, calculated ARR of the alternatives will be compared to judge the profitability. which has higher rate of return, will be accepted. The projects,


1. It is simple to calculate and easy to understand and hence it is widely used. 2. It uses the entire earnings of a project in calculating rate of return. 3. It facilitates the comparison of new product project with that of cost reducing project or other projects of competitive nature.

1. This method is like payback period method, ignores the time value of money. 2. This method cannot be applied to a situation where investment in a project is to make in parts.

Discounted cash flow techniques:

1. Net present value method

NPV is considered the best method or evaluating the capital investment proposals. In case of this method cash inflow and cash out flow associated with each project are first worked out. The manager then calculates the present values of these, cash inflow and out flows at the rate of acceptable. This rate of return is considered as the cut off rate and is generally determined based on cost of capital. Cash out flows represent the investment and commitment of cash in the project at various points of time. The working capital is taken as a cash outflow in the year the project starts commercial production. The NPV is the difference between the total present value of future cash inflows and the total present value of future cash out flows.


The equation for calculating NPV in case of conventional cash flows can be put as follows.

A1 A2 A3 An NPV = ---------- + ---------- + ---------- + .. + ----------- - C (1+r)1 (1+r)2 (1+r)3 (1+r)n

Where NPV = Net present value, A1, A2, A3An = Annual cash inflows R = Discounting rate / cost of capital 1, 2, 3.n = no. of years C = Cash out flows.

Accept or reject criteria:

Net present value be used as an accepted or rejection in case the NPV is positive, the project should be accepted. However, if the NPV is negative the project should be rejected. Symbolically represents

NPV > 0 Accept the proposal NPV < 0 Reject the proposal

1. It is generally accepted by economist 2. It is superior to other methods of evaluating the economic worth of investments. 3. It recognizes the time value of money. 4. It recognizes all cash flows throughout the life of the project.


1. It may not give good results while comparing project with unequal lives and investment. 2. It is not easy to determine an appropriate discount rate.

3. As compared to the traditional methods the net present value method is more difficult
to understand.

2. Profitability Index:
Profitability index is one of the methods of evaluating the investment proposal. It is also called as benefit cost ratio and measures the relationship between present values of cash out flows and cash inflows. Thus, it can be calculated by using formula. Present value of inflow Profitability index = ---------------------------------------------------Present value of cash out flow

Accept or reject criteria:

The proposal is accepted if the profitability index is more than one and rejected in case the profitability index is less than one. In case of mutually exclusive projects and capital rationing situation projects are ranked in orders of their profitability index and accepted.

1. It evaluates the worth of projects in terms of their relative magnitude. Hence, it is superior to.P.V. Method. 2. It can used to choose between mutually exclusive projects by computing in gemental benefit- Cost ratio.


1. It involves more calculations than the traditional methods and hence it is very difficult to understand. 2. In some cases of mutually exclusive nature, P.I is interior to N.P.V method.

3. Internal rate of returns:

Internal rate of return is that rate at which the sum of discounted cash inflows equals the sum of discounted cash out flows. In other words, it is the rate which discounts the cash flows to zero. It can be stated in the form of a ratio as follows.

Cash in flows Cash out flows


The equation for calculation of conventional cash flows. C= R1 + (1+r) R2 (1+r)2 + R3 . (1+r)3

Where C = Initial outlay at time zero. R1, R2.Rn = Future cash flow at different period r = Rate of discount 1,2,.n = Number of years.

Accept or reject criteria:

Internal rate of return is the maximum rate of interest, which an organization can afford to pay on the capital invested in a project would qualify to be accepted of IRR exceeds the cut off rate. While evaluating two or more projects, a project giving the higher rate of return would be preferred. This is because the higher the rate of return, the more profitable is the investment. 53

1. It provides more precise information regarding profitability. 2. It helps the form to choose from among different alternatives. 3. It considers the profitability of the project for its entire economic life and hence enables evaluating of true profitability.

1. It is different to understand and is most difficult method of evaluation of investment proposal. 2. It does not provide significant answers under all situations.

Kinds of Capital Budgeting:

Capital Budgeting refers to the total process of generation evaluating, selecting and following up on capital expenditure alternatives. The firm allocates or budgets financial resource to new investment proposals. Basically the firms may be confronted with three types of capital budgeting decisions.

The accepts reject decision The mutual exclusive choices decision. The capital rationing decision.


Production Machine I Machine II Machine III Machine IV Machine V Total Production 2006-07 62,658 26,421 6,121 1,34,650 26,212 2,56,061 2007-08 59,621 25,250 6,718 1,32,921 76,813 3,01,321 2008-09 67,492 25,262 6,923 1,33,629 87,740 3,21,046 2009-10 66,397 23,431 6,449 1,49,768 93,126 3,39,192

Total production:
350000 300000 250000 200000 150000 100000 50000 0 2006-07 2007-08 2008-09 2009-10

Interpretation: In the year 2006-07, the total production of all five machines is 2, 56,061 units. Whereas in the year 2009-10, the total production is increased to 3, 39,192 units.


68,000 66,000

62,000 60,000 58,000 56,000 54,000 2006-07 2007-08 2008-09 2009-10

Interpretation: In the 2006-07 the production of machine 1 is 62,658 units. Compare to previous year, the production of machine 1 is decreased to 59,621 units in the year 2007-08. Compare to previous year, the production of machine 1 is increased to 67,492 units in the year 2008-09. Compare to previous year, the production of machine 1 is decreased to 66,397 units in the year 2009-10.

26,500 26,000 25,500 25,000 24,500 24,000 23,500 23,000 22,500 22,000 21,500 2006-07 2007-08 2008-09 2009-10



Interpretation: In the 2006-07 the production of machine 2 is 26,421 units. Compare to previous year, the production of machine 2 is decreased to 25,250 units in the year 2007-08. Compare to previous year, the production of machine 2 is increased to 25,262 units in the year 2008-09. Compare to previous year, the production of machine 2 is decreased to 23,431 units in the year 2009-10.

7,000 6,800 6,600 6,400 6,200 6,000


5,600 2006-07 2007-08 2008-09 2009-10

Interpretation: In the 2006-07 the production of machine 3 is 6,121 units. Compare to previous year, the production of machine 3 is increased to 6,718 units in the year 2007-08. Compare to previous year, the production of machine 3 is increased to 6,923 units in the year 2008-09. Compare to previous year, the production of machine 3 is decreased to 6,449 units in the year 2009-10.


150000 145000 140000 135000 130000 125000 120000 2006-07 2007-08 2008-09 2009-10

Interpretation: In the 2006-07 the production of machine 4 is 1,34,650 units. Whereas in the year 2009-10, the production of machine 4 is increased to 1, 49,768 units. 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2006-07 2007-08 2008-09 2009-10


In the 2006-07 the production of machine 5 is 2, 56, 061 units. Whereas in the year 2009-10, the production of machine 4 is increased to 3, 39, 192 units.


Initial investment Payback = -------------------------------------Total cash inflows

1. Budget Title
Auto values for caustic 3, 00,000 = ------------------- = 7.2 months 5, 00,000

2. Budget Title
Installation of separate lighting transformers for lighting circuits

40, 00,000 Payback = -------------------11, 54,000 = 3 years (4 months)

3. Budget Title
Basis control weight valves instrumentation 18, 44,000 Payback = -------------------10, 60,000 = 1.74 years

4. Budget Title
Street c pulper, carrying system 1, 47, 63,000 Payback = -------------------6, 84, 00,000 = 0.2 years = 2.59 months


5. Budget Title
Consistency transmitters for horizontal chests 3, 4, 6 and 7. 28, 00,000 Payback = -----------------7, 58,000 = 3 years 6 months =24 months.

6. Budget Title
Top layer clear filtrate lime to SFT-B 5, 00,000 Payback = --------------------2, 52,000 = 2 years

7. Budget Title
Energy efficient vacuum pump for PM1&3 30, 00,000 Payback = -------------------18, 30,000 = 19 months

8. Budget Title
Replacement of old vacuum pump with energy efficient vacuum pump at PM1 8, 50,000 Payback = -------------------5, 06,000 = 1years 8 months (approx)


9. Budget Title
VFDs for stock pump 20, 98,000 Payback = ---------------------12, 45,000 = 1.6 year (20 months)

10. Budget Title

Water conservation measures 37, 18,000 Payback = --------------------15, 38,000 = 2.4 year (29 months)

11. Budget Title

Clamp truck 39, 72,000 Payback = ----------------------12, 00,000 =3.3 years (39 months)

12. Budget Title

Chest auto cleaning 47, 98,000 Payback = --------------------36, 00,000 =1.3 years (15 months)

13. Budget Title

250 KW VFD Pumps
8, 83,000 Payback = ---------------------7, 43,000 = 1.18 year (14 months) 61


1. Budget Title
Auto valves for caustic A1 A2 A3 A4 A5 An NPV = ----------- + ----------- + ---------- + ---------- + ---------- + ---------- - C (1+r) 1 (1+r)2 (1+r)3 (1+r)4 (1+r)5 (1+r)n 5, 00,000 5, 00,000 5, 00,000 5, 00,000 5, 00,000 = -------------- + -------------- + ---------------- + -------------- + ------------ - 2, 98,849 (1+0.12)1 (1+0.12)2 (1+0.12)3 (1+0.12)4 (1+0.12)5 5, 00,000 5, 00,000 5, 00,000 5, 00,000 5, 00, 000 = -------------- + -------------- + ---------------- + -------------- + -------------- -2,98,849 1.12 1.2544 1.4049 1.5735 1.7623 = 446428+398597+355897+317763+283720 - 298849 = 1,80,2405 2, 98,849 = 1,50,3556

2. Budget Title
Installation of Separate Lighting Transformers for Lighting Circuits

11 ,54 ,000 11 ,54 ,000 11 ,54 ,000 11 ,54 ,000 11 ,54 ,000 NPV = ------------- + ------------- + ------------- + ------------- + ------------- -30,32,477 1.12 1.2544 1.4049 1.5735 1.7623 = 10,30,357 + 9,19,962 + 8,21,411 +7,33,397+ 6,54,826 30,32,477 = 41, 59,953 30, 32,477 = 11, 27,476


3. Budget Title
Basis control weight valves instrumentation

10, 60,000 10, 60,000 10,60,000 10, 60,000 10,60,000 NPV = ------------ + ------------- + ------------- + ------------- + ------------- - 18, 43,990 1.12 1.2544 1.4049 1.5735 1.7623 = 9,46,428.57+8,45,025.51+ 7,54,502.09 + 6,73,657.45 + 6,01,486.69 18,43,990 = 3821100.31 18, 43,990 = 19, 77,110.31

4. Budget Title
Street c pulper, carrying system

6,84,00,000 6, 84,00,000 6,84,00,000 6, 84,00,000 6,84,00,000 NPV = -------------- + -------------- + -------------- + --------------+ --------------- -1 ,47,83,403 1.12 1.2544 1.4049 1.5735 1.7623 =6,10,71,428.57+5,45,28,061.22+4,86,86,739.27+4,34,69,971.4+3,88,12,914.94 1,47,83,403 = 20, 74, 46,141.1 1, 47, 83,403 = 19, 26, 62,738.1

5. Budget title
Consistency Transmitters for Horizontal Chests 3 , 4, 6and 7 7, 58, 000 7, 58,000 7, 58,000 7, 58,000 7, 58,000 NPV = -------------- + -------------- + -------------- + --------------+ --------------- - 27, 98,519 1.12 1.2544 1.4049 1.5735 1.7623 = 6, 76, 786 +6, 04, 273 +5, 39, 540 +4, 81,728 +4, 30,120 -27, 98,519 =27, 32,447-27, 98,519

= (-66072) NOTE: It will not Taken the Negative Value.


6. Budget Title
Top Layer Clear Filtrate Lime to SFT-B 2, 52,000 2, 52,000 2, 52,000 2, 52, 000 2, 52,000

NPV = -------------- + -------------- + --------------- + --------------+ ------------- - 4, 98,560 1.12 1.2544 1.4049 1.5735 1.7623

= 2,25,000+2,00,893+1,79,372+1,60,153+1,42,995 4, 98, 560 = 9, 08,443 4, 98,560 = 4, 09, 853

7. Budget Title
Energy Efficient Vacuum Pump for PM1 & 3 18, 30,000 18,30 ,000 18,30,000 18, 30,000 18,30,000 NPV= -------------- + -------------- + -------------- + --------------+ ------------- - 26, 59,560 1.12 1.2544 1.4049 1.5735 1.7623 =16,33,929+14,58,865+13,02,584+11,63,012+10,38,414 26, 59,560 =65, 96,804 26, 59,560 = 39, 37,244

8. Budget Title
Replacement of Old Vacuum Pump with Energy Efficient Vacuum pump at PM1 5, 06,000 5, 06,000 5,06,000 5, 06,000 5,06,000 NPV = -------------- + -------------- + -------------- + -------------- + ------------- -8, 47,345 1.12 1.2544 1.4049 1.5735 1.7623 = 4,51,786+4,03,380+3,60,168+3,21,576+2,87,125 8,47,345 = 18, 24,025 8, 47,345 = 9, 76,690


9. Budget Title
VFDs for stock pump 12,45,000 12 ,45,000 12,45,000 12 ,45,000 12,45,000 NPV = -------------- + -------------- + -------------- + --------------+ --------------- - 20,97, 974 1.12 1.2544 1.4049 1.5735 1.7623 = 11, 11,607.14+992506.37+886184.07+791229.74+7, 06,463.14 20, 97,974 = 44, 87,990.46 20, 97,974 = 23, 90,016.46

10. Budget Title

Water conservation measures

15, 38,000 15, 38,000 15, 38,000 15, 38,000 15, 38,000 NPV = -------------- + -------------- + -------------- + --------------+ --------------- -37, 18,413 1.12 1.2544 1.4049 1.5735 1.7623 =1373214.28+1226084+1094739.83+977438.83+872723.14 37, 18,413 = 5544200.26 37, 18,413 = 18, 25,787.26


Budget Title
Clamp truck

12, 00,000 12, 00,000 12, 00,000 12, 00,000 12, 00,000 NPV = -------------- + -------------- + -------------- + --------------+ --------------- - 39, 72,299 1.12 1.2544 1.4049 1.5735 1.7623 = 1071428.57+956632.65+854153.32+762631.07+680928.33 39, 72,299 = 43, 25,773.94 39, 72,299 = 3, 53,474.94


12. Budget Title

Chest auto cleaning

36, 00,000 36, 00,000 36, 00,000 36, 00,000 36, 00,000 NPV = -------------- + -------------- + -------------- + --------------+ --------------- - 47, 97,852 1.12 1.2544 1.4049 1.5735 1.7623 = 3214285.71+2869897.95+2562459.96+2287893.23+2042784.99 47, 97,852 = 12977321.84 47, 97,852 =8179469.86

13. Budget Title

250 KW VFD pumps

7, 43,000 7, 43,000 7, 43,000 7, 43,000 7, 43,000 NPV = -------------- + -------------- + -------------- + --------------+ --------------- - 8,82,617 1.12 1.2544 1.4049 1.5735 1.7623

= 663392.85+592315.05+528863.26+472195.74+421608.1 8, 82,617 = 26, 78,375 882617 = 17, 95,758.


S.No SCHEME 1 2 Auto Valves for Caustic Installation of Separate Lighting Tran formers for lighting circuits Basis Control Weight values Instrumentation Street-capulper Carrying system Consistency transmitters for Horizontal Chests 3 , 4,6and 7 Top Layer clear filtrate lime to SFT-B Energy Efficient Vacuum pump for PM1&3 Replacement of old Vacuum pump with energy efficient Vacuum pump at PM1 VFDs for stock pump Water conservation measures Clamp truck Chest auto cleaning 250 kw VFD Pumps

INVESTMENT 2, 99,000 30,32,000

PAYBACK (months) 7 32

NPV 15,03,556 11,27,476





4 5

1,47,63,000 27, 99, 000

3 42

19,26,62,738.1 (-66072)


4, 99,000











9 10

20,98,000 37,18,000

20 29

23,90,016.46 18,25,787.26


11 12 13

39,72,000 47,98,000 8,83,000

39 15 14

3,53,474.94 81,79,469.84 17,95,758


(Ranking as per Net Present value)




13 12 11 10 9 8 PROJECTS 7 6 5 4 3 2 1 -50000 0 50000 100000 VALUE IN 1000'S 150000 200000 250000 NET PRESENT VALUE INVESTMENT


Budget Title: - Auto Valves for Caustic
Cost Benefit: 5.00 lakhs per annum Payback = 7 months Cost Benefit is taken as cash inflows.

Budget Title: - Installation of separate lighting Transformers for lighting circuits.

Total mill lighting load is- 816.8 kW Envisaged savings in % - 20% Power saving per hour 163kw Annual running hours @ 10 hrs /day-3650 hours Annual savings in kWh -594950 Annual saving @Rs 1.94/kwh Rs 11.54 lakh Cost benefit is taken cash inflows.

Budget Title: - Basis control weight values instrumentation.

After replacing Basis control in PMC Loss per ton = Rs. 6000 Net saving = 170 / 2 = 85 MT/annum, = 85 MT x 6000 = Rs. 5.10 lakh

Paper M/c 2 Estimate saving of fiber = 7.0 kg/hour = 168 kg/day = 168 x 330 days = 55000 kg /annum


Fiber saving @ Rs. 10,000-00 MT = 55 x 10,000 =Rs.5.5 lack

Total Saving = Rs. 5.10 lakhs + 5.5 lakhs =Rs. 10.60 lakh/annum Cost benefits are taken as cash inflows.

Budget Title: Street-capulper, carrying system

Capacity enhanced by 950 Mt per month Cost benefit = 950 mt x 6000 (Diff of contribution between VAP and grey back) = 57 lakh per month = 6, 84, 00,000 per annum Investment = 147.63 lakhs Payback = 12 weeks Here costs Benefit are taken as cash inflows.

Budget Title: - Consistency Transmitters for Horizontal Chests,3, 4,

6and 7

Cost Benefit : 7.58 lakhs /per year Pay back =3 year 6 months Here cost benefits are taken as cash inflows.

Budget Title: Top Layer clear filtrate lime to SFT-B

Fresh water saving 7000m3/month*Rs 3*12 =2.52 lakhs/yr Annual savings: Rs. 2.52 lakhs Payback: 2 Years Cost benefits are taken as cash inflows.


Budget Title: Energy Efficient vacuum pump for PM1 & 3

Cost benefit: 18.30 lakh/annum Investment: 30 lakhs Payback: 19 months Cost benefits are taken as cash inflows.

Budget Title: Replacement of old Vacuum pump with energy efficient Vacuum
pump at PM1
Cost benefit: 5.06 lakh Power saving per/annum = 5.06 Payback period: 1 year 8 months Cost benefit are taken as cash inflows

Budget Title: Chest Auto Cleaning

Cost benefit:Reduction in down time is 2 hours per sheet. Total reduction per annual is 24 hours.

Addl. Contribution = 24 x 10 tph x Rs. 15000/7 = Rs. 36 lakhs/Annum Reduction in contract Labor is 48/ annual Therefore addl. Reduction in cost is 48x 123.73 = Rs. 5939/annum

Payback: 16 months Cost benefit taken as cash flows.


Budget Title: Clamp Truck

Cost Benefit: Rs. 12 lakh per annum Pay back = 3.3 years

Cost benefits are taken as cash inflows.

Budget Title: 250 kW VFD pumps

By implementing in this scheme

1. Installation of 1 x 250 kW VFD for process water pumps. 2. Optimization of power consumption for process water pump by VFD

Cost benefit: Rs. 7.43 Lac /annum This is taken as cash inflows.

Budget Title: VFDs for stock pump

By implementing in this scheme 1. To eliminate energy loss due to throttling of pump delivery value due to variable draw from paper machine based on GSM.

Cost benefit:Power saving by VFD is 94.23 kW Annual hours considered is 7920 hrs Annual energy savings is 7.46 lakh kWh Cost of generation is Rs. 1.6/ Kwh Annual savings is Rs. 1245 Lakh

Annual savings are taken as cash inflows.


Scheme Title: - Water conservation measures

In this scheme we have to implement 2 proposals Copex proposal Title: Proposals: 1. Water conservation Proposal- Chemical recovery plant (SRP) Proposals: 2. Water conservation Proposal paper machine 2 & 3

By implementing the proposal Fto congerve 1300 m3/day of process water consumption at limekiln and caustic zing through recycling bases on findings of CII water audit.

By implementing the Proposals are 2. To conserve 1500 m3/day of process water consumption at pm 2/3 from vacuum pumps & refiners sealing water by installing fan & finless cooling tower through recycling.

The Cost Benefit:

Proposal: 1: Rs. 935 lakh (1300 m3 1 day + 333days + Rs. 1.65) Proposal: 2: Rs 10.78 lakh (1500 m3 1day + 333 days + 2.16) Total saving: 15.37 lakh

This is taken as cash inflows.


It is observed that the company is able to increase its profits from year to year.

The Gross profits from 2005 to 2010 increased from year to year

It is observed that the companies net worth is increasing considerably.

By observing the sources & applications, it is clear that the company is actively increasing or standardizing its operations.


A business may like to reduce its risk by operating in several markets rather than in a single market.

I suggest capital investment may become necessary for purchase of new machinery and facilities to handle the new products.

Company needs to identify the potential business revenue generation which results to profit on operations.

A firm may have to expand its productions capacity on account of high demand for its products as inadequate production capacity.


1. In ITC-PSPD there is no debt in the capital structure that means the interest outflow are totally nil. In view of the above ITC-PSPO has calculated NPV by discounting at 12%.

2. ITC PSPD is the parent company is No.1 paper production in India. Especially they are pioneered in the premium products. This has helped them in capturing exports markets. So the capital investment is in this company enrich good sales and they are by good returns.

3. In this organization capital budgeting technique are being implemented even for capital assets which are having values lesser than 7 lakhs.

4. They invest the maximum capital production, development and equipment and attraction of machines and to develop them for best utilize.

5. They maintain check list for every scheme even to minimum valued and minimum valued.

6. Simple pay back should not be more than 36 months and NPV at 5 year period should be positive particularly in the small investments.

7. Further there is substantially growth in paper industry. This will enable the company to increase sales there by maximum the profits.

8. Only two techniques of capital budgetings are implemented.



Financial Management Fundamentals of financial Management Financial Management

D. Chandra Bose Chandra I.M.Pandy

1. 2. 3.