A STUDY ON

CAPITAL BUDGETING
IN

K.C.P. SUGAR AND IC LIMITED. LAKSHMIPURAM

A project report submitted to

ACHARYA NAGARJUNA UNIVERSITY

In partial fulfillment of the requirement for the award of the Degree of

MASTER OF BUSINESS ADMINISTRATION

Submitted by

P.ANJANEYULU Regd. No.Y10BU41002

Under the Guidance of Ms. KALPANA, M.B.A., M.PHIL,

DEPARTMENT OF MASTER OF BUSINESS ADMINISTRATION

NOVA P.G COLLEGE

(Affiliated to ACHARYA NAGARJUNA University,)
VIJAYAWADA

YEAR 2010

CONTENTS
Page No CHAPTER I INTRODUCTION

1-8

Need For The Study Scope Of The Study Objectives Of The Study Research Methodology Limitations & Period of the study

CHAPTER II

 INDUSTRY PROFILE

9-24

CHAPTER- III
COMPANY PROFILE

25-45

CHAPTER IV
THEROTICAL FRAMEWORK

OFCAPITAL BUDGETING CHAPTER V

DATA ANALYSIS AND

46-64

INTERPRETATION CHAPTER- VI

65-79

FINDINGS & SUGGESTIONS

85-86

BIBLIOGRAPHY

DECLARATION

I hereby declare that this project report entitled a study on CAPITAL BUDGETING with special reference to K.C.P SUGAR & IC LTD., submitted here is genuine and original work of mine

This project report, written arid submitted to the Department of Management Studies, NOVA P.G COLLEGE, VIJAYAWADA under the guidance of Ms. KALPANA, Project Guide is an original work carried out by me and is not submitted to any other University or Institution for the award of any Degree / Diploma / Certificate or publish any time before. The findings of this report are based on the information collected by me during the study period. I further state that I am alone responsible for omissions and commissions, if any.

Signature Of The Student

Place : (P.ANJANEYULU) Date : Regd. No. Y10BU41002

ACKNOWLEDGEMENT
My sincerest thanks are due to all who have helped me in various ways in the course of the project. I am indebted to my PRICIPAL Mr. T. SUBBA RAO, for his co-operation and support throughout my project. Firstly, I would like to thank Mrs. KALPANA Project guide for their encouragement and guidance through out my project work.

I am thankful to Sri. G. Venkateswara Rao General Manager. K.C.P SUGAR AND INDUSTRIES CORPORATION LTD., & S.Sampath Kumar Marketing Manager for giving me a golden opportunity to do this project work. I am extending my thanks to Ms.KALPANA, M.B.A., M.Com, M. Phil, Head of the Department NOVA P.G COLLEGE, VIJAYAWADA for arranging to families my project work. I am thankful to librarian for helping me locate the relevant material. I am thankful to my parents and friends for all the direct and indirect help they have given me throughout my work.

Signature Of The Student

P.ANJANEYULU Regd. No. Y10BU41002

Introduction

INTRODUCTION

Capital budgeting is the process of making investment decision in capital expenditures. A capital expenditure may be defined as an expenditure the benefits of which are expected to be received over period of time exceeding one year. The main characteristic of a capital expenditure is that the expenditure incurred at one point of time whereas benefits of the expenditure are realized at different points of time in future. In sample language we may say that a capital expenditure is an expenditure incurred for acquiring or improving the fixed assets, the benefits of which are expected to be received over a number of years in future. The following are the some of the examples of capital expenditure

Cost of acquisition of permanent assets as land and buildings, plant and Machinery, good will, etc. Cost of addition, expansion, improvement or alteration in the asset. Cost of replacement of permanent assets. Research and development, project cost etc, fixed

Capital expenditure involves non flexible long term commitment of funds. Thus, capital expenditure decisions are also called as long-term investments decisions. Capital budgeting involves the planning and controlling of capital expenditure.it is the process of deciding whether or not to commit resources to a particular long term projects whose benefits are to be realized over a period of time longer than one year. Capital budgeting is also known as investment decision making, capital expenditure decision, planning expenditure and analysis 0f capital expenditure.

Definitions of capital budgeting:

Capital budgeting is long term process for making and financing proposed capital outlays

- Charles T.Hornggreen
Capital Budgeting involves the entire process of planning expenditures whose returns are expected to extend beyond one year. -Weston and Brigham

FEATURES OF CAPITAL BUDGETING 1. Capital budgeting decisions involve the exchange of current funds from the benefits to be achieved in future. 2. The future benefits are expected to be realized over a series of years. 3. The funds are invested in non-flexible and long-term activities. 4. They have a long term and significant effect on the profitability of the concern. 5. They involve, generally, huge funds. 6. They are irreversible decisions.

IMPORTANCE OF CAPITAL BUDGETING The importance of capital budgeting can be understood from the fact that an unsound investment decision may prove to be fatal to the very existence of the organization. The importance of capital budgeting arises mainly due to the following: 1. Large investment: Capital budgeting decision, generally involves large

investment of funds. But the funds available with the firm are scarce and the demand for funds for exceeds resources. Hence, it is very important for a firm to plan and control its capital expenditure.

2. Long term commitment of funds: Capital expenditure involves not only large amount of funds but also funds for long-term or a permanent basis. The long-term commitment of funds increases the financial risk involved in the investment decision. 3. Irreversible nature: The capital expenditure decisions are of irreversible nature. Once, the decision for acquiring a permanent asset is taken, it becomes very difficult to impose of these assets without incurring heavy losses.

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4. Long term effect on profitability: Capital budgeting decision has a long term and significant effect on the profitability of a concern. Not only the present earnings of the firm are affected by the investment in capital assets but also the future growth and profitability of the firm depends up to the investment decision taken today. Capital budgeting decision has utmost has importance to avoid over or under investment in fixed assets. 5. Notional Importance: Investment decision though taken by individual concern is of national importance because it determines employment, economic activities and economic growth.

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NEED FOR THE STUDY In a perfect world there would be no necessity for current assets and current liabilities because there would be no uncertainty, no transaction costs, information search costs, scheduling costs, or production and technology constraints. However the world in which we live is not perfect. So organization may be faced with an uncertainty regarding availability of sufficient quantity of critical inputs in future at reasonable price. This may necessitate the holding of critical inputs in future at reasonable price. This may necessitate the holding of Inventory i.e., current assets. To ensure that each of the current assets is efficiently managed to ensure the overall liquidity of the unity and at the same time not keeping too high a level of any one of them Capital Budgeting management is a must. Capital Budgeting management ensures smooth working of the unit without any production held ups due to the paucity of funds. Thus as capital budgeting is the life blood and nerve center of a business. It is managed in order to attain a smooth running of the business.

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OBJECTIVES OF THE STUDY To Know how the companies Capital Expenditure has planned

To study the relevance of copies of Capital budgeting in evaluating the Project.

To Study the technique of Capital budgeting for decision making. To under stand an item wise & study of the company financial performance of the organization. To make suggestion if any for improving the financial position if the organization

To offer some useful suggestions in capital budgeting process.

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SCOPE OF THE STUDY The present study is undertaken with an intention that it would be helpful in assessing the Capital Budgeting position in the organization and to make recommendations for the improvement of the Capital Budgeting requirements of KCP Ltd. The Study also highlights the present scenario of the Sugar Industry in the global market as a whole and the contribution of KCP Sugar Ltd in the Indian Market & State Market in Particular. The Study includes various aspects regarding the future plans and diversification activities of KCP Sugars Ltd; in Directors Report. Thus a good deal of ground is covered in the study, including the trends of various components of Capital budgeting, so as to find the effect of each component on Capital Budgeting decision.

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RESEARCH METHODOLOGY The study of Capital Budgeting in KCP Sugar & I.C. Ltd., has been carried out of studying the companies project reports, budget and revenue estimates. The study can broadly divided into two phase. 1) Primary Data 2) Secondary Data Primary Data The data which is collected at first had for the purpose of the study is known as primary data. Primary data which is collected through interaction with the assistant financial manager of K.C.P.Sugar & I.C. Ltd.,. Secondary Data The data which is corrected by some one previously is called by secondary Data. It is already available in the form of internal records of the company and other publications. Collecting relevant Annual Reports Analyzing the Collected data Drafting the report Updating the Final report Collecting the general information about Capital Budgeting from various standard text books Studying the project report of K.C.P.Sugar & I.C. Ltd.,

15

LIMITAIONS OF THE STUDY The topic for the study is very exhaustive and covers several crucial aspects of financial management for which the availabilities of the time is very much limited. Under the pretext of confidentiality the organization has not disclosed the total information. The study is made by secondary data collection and the calculation of various ratios depend on the information in the annual reports of the company. Through this study of the Capital Budgeting position in K.C.P.Sugar & I.C. Ltd., the sources of funds have affected a lot due to major fluctuation in the Capital Budgeting decision. 1) The analysis made on the basis of secondary data 2) The availability of data is only pertaining to four years is one of the constraints. 3) As there is more dependency is secondary data realistic conclusion may not be possible to be made. 4) Even through there are no if indicates for analyzing the financial performance the study includes about liquidity position. 5) There may be approximations 6) The study was carried in K.C.P.Sugar & I.C. Ltd., for a period of 8 weeks.

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PERIOD OF THE STUDY I am pleased to mention that this project work done by me is the out come of two months 1st June, 2010 to 31st July, 2010. Partical training programe at K.C.P.Sugar & I.C. Ltd.,

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INDUSTRY PROFILE

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INDUSTRY PROFILE Indian is considered to the country of origin of sugarcane, symbolically referred to as "Sweet Grass" Sugarcane existed in ancient India. North-eastern India is regarded as the center of the origin and from where Sugarcane was believed to have been carried to China and other places by early travelers and nomads, some time between 1800B.C. and 1700B.C. Later, it spread to Philippines, Java and other places including Caribbean Islands by explorers. The Sugar Industry in India has a long history. Reference to sugar is found even in early medic literature. The story goes that Sugarcane was one of the luxuries provided by Vishwamitra to Trishanku in the special Heaven created for him. In 600AD the Chinese emperor, Tsai Heng sent agents to higher on record of the technical commission, investigating the manufacturing processing to a foreign country . Alexander the great emperor and his soldiers took back along with the Sugarcane, Which they called the 'Honey Read'. There are also many other reasons for believing that India was the original home of sugarcane. It has been established beyond doubt that for the first time the Sugarcane was cultivated in Bengal and the credit of becoming the first to manufacture sugar goes to the state of Bihar. The name of he product of sugarcane in early days was "Shirker". During those days and for a long time thereafter, India had the monopoly of producing " Shakara" and supplying kit to different parts of the world. Therefore, it is not surprising that the world "Sharkara" is found in many languages of the world.

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Even during the ancient periods, India used to export sugar to different parts of the world. It exported sugar to Geneva, Venice and many other parts of Europe. It was also exported to several countries in Africa and Asia. The Indian Sugar was exported through caravan routs of Chiba and Bolan in Northwest India to Europe etc., But by the Middle of the 15th century, the Turks captured Constantinople and, by their policy of heavy extortion from traders, almost stopped the supply of Sugarcane through this route. The second Jolt Which proved perhaps more fatal and which lad to the rise of serious competitor to India sugar was the Navel blocked of France by Great Briton Which forced Napoleon t order the scientists of his country to find out some alternative, sources to produce sugar, The blockage had completely stopped the entry of Indian sugar to France. Napoleon's efforts resulted in the production of sugar from the sugar beets. Although the modem process of manufacturing sugar began for the first time in Europe as early as in 1853, it came to Indian as late as in about 1903. When the first sugar factory having vacuum pan process and modern milling method was commissioned in Bihar Morhowrah in 1904. Indigenous sugarcane has been extensively grown in Indian from ancient times. There was ,however, a revolution in the method in the method of cane cultivation during the lost decade of the 19th century. It was only in 1912 that India established her first Sugarcane breeding station of Coimbatore. In the early part of century, there were a few sugar mills in the country, mostly in Utter Pradesh and Bihar where sugarcane was being grown traditionally.
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The production of sugar was not sufficient to meat the demand of the domestic consumption and so sugar was being imported from Java and other countries. The Indian sugar factories were unable to meat the competition of imported Javanese sugar, which had commanding the Indian market. The government of India then granted protection to the indigenous sugar industry under the sugar industry Protection Act passed in 1932. This Act was followed by another legislation enabling the provincial Governments to enforce the minimum price to be paid by sugar factories to can growers in respect by sugar factories to cane growers in respect of cane supplied by them as per Sugarcane Act of 1934. These two legislation gave significant impetus and encouragement to entrepreneurs to set up new sugar factories in various parts of the country. After independence, with the introduction the five-year plan for the national development, the sugar industry too received considerable amount of support. The development and regulation of the sugar industry was brought under the control of the Government India from May 1952. The Sugar industry in India made a rapid development after protection was granted to this industry in 1932. Accordingly, the import of sugar was almost stopped after 1936-38". The sugar Industry was granted this protection till 1950. Since independence there has been and over all tread of sugar in India. Like other agroindustries, this industry has been subject to wide and some times violent fluctuations. The main reason is that the raw material of this industry i.e.,

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Sugarcane comes from agricultural sector, Which is highly insatiable in India. Some times, it suffers from drought, floods and heavy rains. Other factors like Government policies, Prices, market conditions etc., are also responsible for the fluctuations in production in this country. As against a mere 29 sugar mills in 1930-31, this number has gone up to 408 in 1994-95 with 222 in the co-operative sector, 75 in the Public Sector and the rest in the Private Sector. The total production of sugar during 1991-92 seasons was 132.73 lakh tones with 76.83 lakh tones in the co-operative sector 11.35 lakh tones in the public sector and 44.59 lakh tones in private sector. In 1994-95 the total sugar production has increased to 146.43 lakh tones. The industry has surpassed the targets set for it in the various plan periods and 160 lakh tones per annum has been targeted for the year 2000. In the year 2001 production of sugar has been increased to 184 lakh tones. Sugar industry in India was initially concentrated in the subtropical states of Utter Pradesh and Bihar, but since the second Five year plan, it spread to the Deccan area and the Southern states. About 35 millions farmers constituting 7% of the total rural population portion of the cane crop and provide the farmer with resources to meet his commitments. Each sugar factory deals with thousand of cane growers.

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STA TE- WISE SPREAD OF SUGAR INDUSTRY IN INDIA Sugarcane is grown widely in India In 17 out of 25 states and 2 Union Territories grown sugarcane. Nine states account for 96% of the production and 94% of the total area. These states are : Uttar Pradesh, Maharashtra, Karnataka, Tamilnadu, Andhra Pradesh, Bihar, Haryana, Gujarat and Punjab. Uttar Pradesh ranks first in area and in production During 1990-91, U.P. accounted for 50% of area and 43% of production of sugarcane in India. Maharashtra Which occupies second place has about 1/3 of the area and its production of Sugarcane is almost half that of the production of U.P; Maharashtra exceeds U.P in terms of recovery of Sugar. Gujarat, which has only 1.15 lak hectares under Sugarcane cultivation, has the highest percentage of sugar recovery (11.65). Tamilnadu, which has produced 352.36 lakh tones of Sugarcane, has a mere 8.68% of sugar recovery. This clearly shows that recovery of sugar is based on the fertility of the soil of India fixed the target for production at 15.50 MT and the target for installed capacity at 16.00 MT. The number of factories in the plan periods has also increased rapidly. They increased from 139 in 1959-60 to 408 in 1994-95 with 237in the co-operative sector 75 in the public sector and the rest in the private sector. The sugar production has also been gradually increased in view of the rising demand for sugar in the country. At present, there are 422 installed sugar factories in the country with an annual sugar production capacity of 11.1 million tones and about a 100 new sugar factories are under various stages of construction. The sugar industry is the most advanced processing industry in the agricultural sector in India, located in rural massed and serve as the nerve center for rural development. SUGAR INDUSTRY IN ANDHRA PRADESH
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Sugarcane is on the important commercial crops in Andhra Pradesh, greatly contributing to the agricultural prosperity of the state. Andhra Pradesh is situated in the tropical Zone considered highly suitable for the production of good sugarcane. The average rainfall in the state form June to September in a year is 602mm. Sugarcane is an irrigated crop throughout the state frequency of irrigation varying widely with facilities available. Sugarcane cultivation in the State was known for centuries in the Coastal belt. The rank of Andhra Pradesh in sugarcane acreage and production is finished between 5th and 7th and between 4th and 5th respectively, at the national level. In the past, white sugar was obtained by refining polymer jugglery by the Gur refinery at Samarklakot. Direct manufacture of Sugar started in the year 1934 at Bobbili followed by factories at Thummapala and Etikoppaka in 1935, Vuyyuru in 1936 and Bodhan in 1938. At present in Andhra Pradesh, the total number of sugar factories is 35. These have been established in various viz., Cooperative, public and private sector. Recently, the Government of Andhra Pradesh gave permission to establish 13 more Sugar factories throughout the state under the private sector. There are 18 factories in the co-operative sector, 8 in the public Sector and 10 in the private sector with a crushing capacity expect in the year 198990. There are about 120 licensed Khandasari units in the state and these units crush about 16,797 tones per day. The normal crushing season is spread over a period of 130 days. Out of the total production of sugar 40% is levy sugar and the remaining 60% is for free sale by the Sugar factories. Different varieties of Sugarcane seed are introduced for higher yield and recovery of Sugar, year after year.

ENERGENCE OF CO-OPERATIVE SUGAR FACTORIES

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While in all in other sectors in the country co-operative has either failed or made negligible progress. The successes achieved by the co-operative sugar mills have two positive advantages in their favor. First of all, they get the maximum supply of sugarcane as all most all the sugarcane farmers are members of the co-operative sugar mills. Secondly, profits of the co-operative are distributed among the farmers instead of going into the hands of a few sugar barons. All the sugar factories were setup in the privet sector till 1950. The factories that came up subsequently were mostly in the co-operative sugar factories accounted for only 15% of the total sugar production in the country, they claimed 60.6& in 1992-93. The sugar and allied by-product using industries, particularly, in the cooperative sector have contributed significantly to the increase in employment opportunities and development off the infrastructure like educational institutions, medical facilities and recreational facilities for the entire community at large. The Government has now issued licenses for establishment of more factories in cooperative sector. In the context of new economic policy, based on market responses the Government is planning to provide more freedom to the cooperative sector. This will go a long way in achieving a vibrant economic structure. Co-operative sugar factories are certain to play in even more important role.

THE SUGAR POLICY OF THE GO VERNMENT OF INDIA

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The union Government announces every year a uniform sugarcane price(statutory Minimum Price) on the basis of the Recommendation of the commissions Agricultural Cost and Price (CACP). The Government announced the SMP, which is linked to the sugar recovery of 8.5% fixed as minimum level to be achieved by the sugar units. The actual price paid to Sugarcane farmers is than fixed on the basis of the state advised price (SAP) announced by the State Government which are usually higher than the SMP. The SMP and the SAP guide the sugarcane prices in the market. Under the dual pricing system levy sugar and free sale sugar priced differently. The levy price which is defined by the Essential Commodities Act is equal to or lowers than the cost of production. The cost of production is determined by the Bureau of industrial costs and prices. Levy prices are fixed by the Government of India on the advice of the BICP. At precent, the quota is fixed at aratio of 40:60 for levy and free sugar which means that 40% of the production will be procured from the sugar factories at a fixed levy price and factory will be free 0 sell 60% at the free market price. The sugar factories are expected to earn sufficient profits by selling the free sale quota at the market price and to compensate the loss that they have incurred on the levy quota. However, the Ventral Government indirectly controls the free sale sugar prices through sugar releases each month.

The price of sugar in the market has always been a sensitive political issue. Whenever sugar is in short supply, the Government of India imposed conditions on sugar units to protect the interests of
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the common man. Profitability in the sugar industry is dependent on the sugarcane price paid by the companies and sugar prices under the state imposed dual pricing system. The government's sugar policy was announced in November 1991, retained the minimum economic capacity of 2500 tones of cane crushed per day for issued of fresh licenses. The Government has no intention of nationalizing the sugar factories. Priority would be given to proposals for new units form the co-operatives and the public sector. The Government has permitted the existing mills to raise their capacity.

EXPORT OF SUGAR
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India first started exporting of sugar form the year 1957, since 1970-71 the quantity that was exported steadily rise from 18,000 tones to 9.5 Lakh tones. Whenever there has been a higher sugar production, efforts were made by the industry to get more export quota sanctioned from the International sugar organization. The Government policy is to encourage exports from agrobased industries and the time has come to fix a minimum export quota for sugar every year, so that permanent buyer - seller relations could be established and also better prices realized. Industry sources feel that, at least a minimum quota of one million tones for the export of sugar could be released in the beginning of every season, so that export commitment would be entered into at an appropriate time. According to food industry sources, at present the two major buyers in the International market are Pakistan which needs 3 lakh tones, and Bangladesh which needs 1 lakh tone. As India now can not fulfill its contracts Thailand and Brazil will grab the opportunity. As the industry made contracts based on the Government's decision, India has become a laughing stock among the International community because of its apathetic attitude towards exports.

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In August, 1995 the Government permitted the export of 5 lakh tones of sugar. And of theses 5,00,000 tones were exported in August with 1.5 lakh tones and 3 lakh tones being exported in September and October, respectively. As the country still has a huge stock pile of disposable sugar, the Government decided to create a buffer stock of 5 lakh tones and permit further exports of 5 lakh tones in January, 1996. Meanwhile, sugar industry continues to face a serious liquidity crisis because of this delay.

Majority of the sugar factories in India are not willing to export the sugar as the price of sugar is very low in the world market. If there are little prospects for any price increase in the world market, the major producers are keen to sell more in view of a foreign exchange constraint, and the exports will become more profitable. The convertibility of the Indian rupee will ensure higher benefits to the exporters.

Problems of the sugar Industry

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Sugar industry is controlled by the Government like all the industries in the country. The central Government regulates all the activities of the sugar industry from the purchase of raw material, to the sale of finished products.

The importance of sugar industry in the national economic cannot be over emphasized, as on its prosperity depends on the livelihood of millions of cane growers, workers in the factories and other working in the ancillary industry. It therefore requires careful nursing, but unfortunately it is subjected to great vicissitudes of prosperity and depression.

This industry has a large number of problems-inadequate supply of cane, under utilization of capacity low recovery, old and obsolete machinery, transport difficulties and the pricing policy of the Government. The low level of productivity is crippling the industry. Secondly the output of cane is influenced to a greater extent by the Government's main raw material is dependent upon the prices of competitive food crops on the one hand and the prices of sugarcane fixed by the Government on the other.

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Since the sucrose content of sugarcane begins to deteriorate soon after the stalks have been cut, it is essential that a unit be located in close proximity to the sources of raw material. Then, there is a vast gap between the technology developed by the Research Institutions and the cane growers. Another problem regarding cane supply to the factories is diversion. The sugar factories and Gur and Khandasari units are competitors for sugarcane supply. According to D.C.A Agate, "Gur and Khandasari producers have a leeway over the sugar factories in the matter of procuring sugarcane diverted from sugar factories owing to absence of controls over them and also fiscal advantages they enjoy" Next problem facing the industry is that of transport, In our country the transport system is not up to the requirements, which affect the recovery from sugarcane Utilization of by products. By the fuller utilization of by-products the sugar industry can hope to reduce the cost of production.

SUGAR INDUSTRIES IN ANDHARA PRADESH In Andhra Pradesh there are 34 industries of which 16 are under the cooperative sector, 8 are Under Government management
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and another 9 are under private sector. Khandasari Mills, the counter part of sugar mills have been estimated at a number of 120.

The mill at Bodhan in Nizamabad district is the biggest in Asia. Average cane yield. Per acre in India is 20 tonnes and in Andhra Pradesh. It is 30 tonnes. The crushing capacity of all mills in Andhra Pradesh is 57 lakh tonnes. Private Mills could utilize 70% of the crushing capacity. Where as the other mills could just manage.

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PRIVATE SECTOR IN SUGAR FACTORIES: SL. NO 1. 2. 3. The Andhra Sugars Ltd., 4. 5. 6. 7. 8. The Jeypore Sugars Company Ltd., Sri Saravarya Sugar Mills Limited Deccan Sugar The Kirlampudi Mills The Andhra Sugars Ltd INDUSTRY K.C.P Sugar and Industries Corporation Limited., K.C.P Sugar and Industries Corporation Limited., PLACE DISTRICT

Vuyyuru Krishna Laxmipura Krishna m Tanuku West Godavari Chagallu Chelluru Samalkot East Godavari East Godavari

East Godavari Pitha-Puram East Godavari Taddayahai West Godavari

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PUBLIC SECTORS IN FACTORIES SL.NO 1. 2. 3. 4. 5. 6. 7. 8. INDUSTRY The Nizam Sugars NGS Gayathri Sugars Ltd Sree Kialas Chemicals Ganapathi Sugar Industries Ltd PLACE DISTRICT

Mirayalaguda Nalgonda Sadasiva Nizamabad Nagar Peeru-Voncha Khammam Ranga Reddy Medak Chittor Medak Ranga Reddy Nellore

Sree Vani Sugars and Industries Mudipadu Ltd The Nizam Sugars Ltd Didgi Kairatabad (Hyderabad) Empee Sugars Ltd and Chemicals Naidupeta Ltd The Nizam Sugars Ltd

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CO-OPERATIVE SECTORS IN SUGAR FACTORIES SL. NO 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. INDUSTRY The Amudala -Valasa CoOperative Sugars Ltd., The Chittor Co-Operative Sugars Ltd., The Chodavaram Co-operative Sugars Ltd., The Etikoppoka Co-operative Agricultural industrial Society Ltd., The Kovuur Co-Operative Sugars Factory Ltd., The Nagarjuna Co-Operative Sugars Ltd The Nandyal Co-Opertive Sugars Ltd The N.V.R. Co-Opertive Sugars Ltd The Palair Co-Operative Sugars Ltd Sri A.S.M. Co-Operative Sugars Ltd The Deccan Sugars Ltd Sri Venkateswara Sugar Factory Sri Vijaya Rama Ganapathi Sugars The Thandava Co-Operative Sugars Ltd West Godavari Co-Operative Sugars Ltd The Jaikisan Co-Operative Sugars Ltd The Palkol Co-Operative Sugars Ltd PLACE Amudala Valasa Chittor Govada Eliloppaka Kovuuru Gurazala Nandyala Vemuru Amniagdem Pullapalli Hanuman Junction Ranugunta Karukonda Tuni Ghimdole Hazuragac Palakol DISTRICT Srikakulam Chittor
Visakhapatnam Visakhapatnam

Nellore Guntur Kurnool Guntur Khammam West Godavari Krishna Chittor Vizianagaram East Godavari West Godavari Karim Nagar West Godavari

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Talks are also on with bulk sugar consumers like Hindustan Lever and some other pharma and confectionery companies to enroll them as members of the exchange the sources said. According to the sources, the trading platform made available by the sugar India is expected to integrate both spot and futures trade in sugar.

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ISI CERTIFICTION FOR SUGAR SOON: The Bureau of Indian standards is extending its certification to the sugar industry. The organization is also harmonizing its standards for sugar with the codes standards. According to an official, bureau of Indian Standards Certification would give the sugar industry and advantage in International Market. Like the normal ISI mark, the certification would be issued for one year and if the mills performance was found satisfactory, the certification would be renewed for two more years. The Certification will only be granted on consumer and bulk packs and not on loose. Sugar. The officials will visit sugar mills to check their technology, infrastructure manufacturing process, testing methods, quality control, processing capacity, staff and Waste management, in and around the mills. For improving exports, the industry will have to meet stringent International standards. The bureau of Indian Standards has launched an awareness program to educate the Sugar Industry about the advantage of its certification.

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COMPANY PROFILE

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COMPANY PROFILE The K.C.P Limited was incorporated under the Indian companies act 1913, on the 3rd day July, 1941 and shows that the company is limited. The K.C.P.Ltd., is a company established with limited liability in accordance with subject to the provisions of the Indian companies Act, 1913. As amended firm time to time. The sugar factory has been located at Lakshmipuram in Krishna District, Andhra Pradesh and is about 80 Km from Vijayawada is the nearest railway Junction. Machilipatnam is the District Head Quarters and is about 40 Kms from Lakshmipuram. The head office of the factory is loacted at Madras and its branch office Vijayawada. PROGRAMME OF EXPANSION: K.C.P has taken up the steps for technology up gradation for improvement of productivity and quality of the sugar factory at Lakshmipuram. By 1941-42 m the cane area was 1,800 Acres with a production 39.250 tones of cane. The higher realizations per acre from Sugarcane crop greatly motivated the extension of acreage under Sugarcane and by 1951 the area had increased to 7.240 acres. The above tables shows that the sugar factory that commenced its first expansion in 1951 from 800 TCD to 1200 TCD. Utilized almost the entire quantity of sugarcane. There was a second expansions of 1800 tones in 1952. And this was further raised to 2500 TCD in 1956, all within a span of six years.

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The sugarcane area increased to over 11,000 acres and the factory utilized 3.23 lakh tones of cane in 1956-57. The cultivators readily increased the area under Sugarcane crop with every successive expansion, since the per acre income is better than alternative crop. In 1969-70, the sugar factory went through another substantial expansion to 3.750 tones of cane crushing capacity per day to utilize 4.975 lakh tones of cane per season. From then on by various improvements of plant and machinery, the factory has been rapidly increasing its annual crushing capacity. Crushing Capacity per Day 1941 800 TCD 1951 1200 TCD 1956 2500 TCD 1969 3750 TCD 1977 6000 TCD 1991 7200 TCD 1995 8500 TCD 1998 9250TSD 2001 10500 TCD SOURCE: Engineering department, The K.C.P Sugar Ltd., Lakshmipuram YEAR

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OPERATION OF THE K.C.P SUGAR FACTORY The year wise operations of the factory are given in the following table form 2000-01 to 2008-09. Cane Crushed in Mts 1,85,586 82,658 2,27,826 Sugar Bagged in Qtls 1,75,071 68,658 2,09,638

Season 2000-2001 2001-2002 2002-2003

Recovery % 9.36 9.40 9.07

2003-2004 3,13,619 3,14,879 10.05 2004-2005 3,72,153 4,13,580 11.10 2005-2006 4,35,534 4,61,679 10.63 2006-2007 4,53,307 4,67,905 10.32 2007-2008 2,74,193 2,68,948 9.80 2008-2009 2,27,826 2,09,638 9.07 Source: Annual Report of the The K.C.P Sugar Ltd, 2000 to 2009 This table reveals that there are fluctuations in the sugarcane crushing from year to year. The major reason is that, it is an agricultural product, climate conditions drastically affect the yield. The recovery percentage of sugar is stable during this period. The production trend of sugar is extremely irregular. Thus, the performance in terms of area, cane crushed, and recovery percentage has shown a steady improvement.

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TRANSPORTATION OF SUGAR CANE:Previously, the sugar cane used to be transported mainly by carts, but now due to a larger area of nearly 60 miles radius, most of the cane is being transported by Lorries and tractors. The communication channels are mainly between Vijayawada and Machilipatnam. This factory cruses 8000 tones of cane per day. Total and under sugarcane cultivation is 34,000 areas and this is divided into 11 zones. The factory used 34,000 tones of cane in the year 1941.212 lakh tones in 1952 and at present (1994-95) 10 lakh tone of cane per season. Sugar cane is supplied from nearly 171 villages within the radius of 50 kmsm of the factory that all most of the total percent of sugar cane supply to the factory comes from 74 villages which are situated between 11 to 20 Kms. This indicates that the factory has a dependable source of supply at the relatively close range. The following table shows that the progress in cultivation of sugarcane are in factory zone. The following table also shows the zone wise number of cane village and cane area particulars. The following table show that the progress in cultivation of sugarcane area in factory zone. The following table also shows that zone wise number of cane villages and cane area particulars.

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Zone I II III IV V VI VII VIII IX X XI TOTAL

No. of Cane Villages 23 25 7 5 9 10 17 17 11 9 38 171

Cane Area ( Acres) 3184.65 3838.63 3013.64 3062.87 3404.90 2820.45 3910.12 2920.32 3008.33 3472.48 3308.84 35985.23

Source: Office Records, Cane Development Council, Lakshmipuram DIVRSIFICATION ACTIVITIES: The KCP Ltd has stared diversification for the first time in 1945, by putting a Distillery for production of Industrial Alcohol using the Molasses. The Distillery one of the biggest and most modern units in Andhra Pradesh with 10 million bulk liters capacity per annum. Sri . V. Rama Krishna's greatest services to the nation as an Industrialist was the establishment of Heavy Engineering complex at Tiruvottiyur, Madras for fabrication of complete plans for sugar, cement, fertilizers, chemicals et, in 195. This is among the most versatile and well integrated of workshops in Asia DISTILLERY;

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The KCP Limited diversified its industry for the first time in the year 1945 by parting up a distillery a Lakshmipuram for the production of industrial alcohol designed to make a profitable use of molasses a by - product of sugar factory, Which was then considered to be a waste product and its disposal was a big problem to the sugar factories. The distillery capacity was expanded from time to time along with the expansion of the sugar factory. This was done to enable the utilization of the entire molasses of the sugar factoiy. This was done become the basic raw material for the production. This is one of the leading and modern distilleries in the state with 10 million B.L capacities per annum, with an annual average alcohol yield of 275. B.L's per tone of molasses as against all India average of 223. B.L's per tone. The contribution this distillery to the state exchequer is considerable. But, during the recent season the price per liter of attract fell to an abnormally low level. This is one of the reasons that the factory was unable was to pay the sugar cane are in the state facing the same problem. WORKSHOP AT LAKSHMIPURAM: The workshop was established at Lakshmipuram to meet the needs of local repairs, maintenance and replacement of a few spare parts. With the expansion of the factory and the distillery the workshop was also expanded. It manufactures most of the machinery required for sugar, cement and mineral processing machinery. The factory provided facilities for in -plant training of students studying in technical institutions. There is a proposal to have further diversification's of the workshop on the northern side of 'pulleru Canal' for which plans are under finalization.

RESEARCH AND DEVELOPMENT:

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To maintain the quality and competitiveness in technology an in house Research and Development was started by KCP early in 1970. This is manned by qualified and experienced Engineers and Technologists. Recently a few project like 'Corp-Weather Relationship in Cane'. " Application of computer technology in the cane development and procurement procedures in can cultivation" has been taken up under Research and Development. FINANCIAL PROFILE: The achievements of the Company can be judged from its financial performance. The company with an equity capital of 7 lakh in 1943 has grown today to have its share capital of Rs. 8547 lakh. The profit of the company to the exchequer by way of Central and State excise duties collected on Sugar, Cement, alcohol machinery etc. The company's return shareholders is also remarkable. Dividends are maintained at a level of 15% for the past ten years. The capital of the company stood at Rs. 1146 Lakh and Reserves stood at Rs. 3304 lakh in the year 1990-91. In the year 1994-95 the capital increased to Rs. 2578 lakh and Reserves to Rs. 5969 lakh. In 1990-91 net profit of the company was Rs. 498 lakh which fell to an abnormally low figure of Rs. 210 Lakh in 1991-92 and again those to the great height of Rs. 3369 lakh in 1994-95. The growth of the company is marked from the year 1992-93. In 1992-93. In 1994-95 the Board of

Directors of the company announced the payment of divided on equity shares at 25% and the founder's centenary bounds dividend of 10%.
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It implies that the sugar industry is essential for the smooth running of Indian economy. The following table shows the financial position of the K.C.P Sugars Ltd., from 2000-2001 to 2005-2006. OBJECTIVE OF THE K.C.P The objective of Company are: To produce the Sugar by double sulphutation at the sugar unit in Lakshmipuram. To produce Ethanol, denatured spirit in the distilley. To manufacture the machinery required for the sugar factories, cement and chemical industries at the central workshop, Tiruvottiyur, Madras. To Produce cement at Rama Krishna Cement, Macherla, Guntur District, and Andhra Pradesh. To create employment opportunities for the local people. To help the nation in growing the agriculture product.

In the early thirties, Lakshmipuram was like any other Indian Village, Show and we added to the conventional ways of agriculture raising mostly, the single crop of paddy. The face of Lakshmipuram
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today is vastly different. The K.C.P Sugar factory disburses in a seasonAbout Rs.6000 lakh to the cane growers, located within radios of 40Km. The letters K.C.P are taken as just lucky letters and do not signify anything more, "property through productivity" is the model and guiding factor of the company.

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YEAR 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

SHARE CAPITAL 1133.85 1133.85 1133.85 1133.85 1133.85 1133.85 1133.85 1133.85 1133.85

RESERVE PROFIT S& BEFORE SURPLUS TAX 6772.84 5384.93 4962.81 6554.82 9012.44 12784.18 14475.97 14342.19 14546.49 1668.16 536.16 577.63 1023.43 6498.84 93912.56 3647.49 761.44 2544.49

PROFIT DIVIDEND AFTER S ON TAX EQUITY 1368.16 340.16 422.13 1911.79 4065.21 5711.04 2355.05 710.97 2544.49 25.00 25.00 25.00 25.00 25.00 25.00 50.00 50.00 50.00

Source: Office Records, Accounts Department, K.C.P Sugars Ltd., Lakshmipuram The above table shows that the capital of the company stood at Ts. 1289.30 lakh and reserves stood at Rs. 3631.39 lakh in the year 1995-96. In 2001-2002 net profit of the company is Rs. Lakh. The growth of the company marketed from the year 1996-97 the Board of Directors of the company announced the payment of dividend on equity shares at 25% and the founders centenary bonus dividend of 10%.

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The Factory pays different taxes like excise duty, purchase tax and income tax. The tax amount is more or less 20% of total sales of the firm. This implies that the firm helps in national development. Excise duty is the primary sources of the Indian Government. It implies that the sugar industry is essential for the smooth running of Indian Economy. EXPORTS: Lakshmipuram sugar factory has earned a very prominent place in the export of sugar from 1959 onwards. Raw sugar and white sugar are being exported every year around 10-50% of its total production and thus, helping the country to earn precious foreign exchange. Sugar was being exported every year by the KCP till 1984. But from 1985 onwards there was no sugar export from the Lakshmipuram sugar factory due to non-profitability. At present, the sugar is being sold on the tender basis at different places only with the country. ORGANIZATIONAL STRUCTURE OF THE K.C.P ORGANIZATION : SOME: THEORETICAL ISSUES: An organization is something which affects everyone especially in the industrialized, urbanized society of today. We are all members of not only one, but several organizations: W.H. White identified " a new breed of executives working for large organizations and whose livers are dominated by them". The word 'organization' can be used in many ways and it is delayed as to form into a whole with interdependent parts. " organization is the form of every human association for the attainment of a common purpose ".

.... MONEY AND RETURN

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The Oxford English Dictionary defines the word ' to organize' as ' to frame and put into working order'. Organization is the relation of efforts and capacities of individuals and groups engaged upon a common tasks in such a way as to secure the desired objective with the least friction and the most satisfaction for whom, he task is done and those engaged in the enterprise. Organization exists to achieve some goals and they usually are either unattainable by individuals working done or, it attainable individually, they can be achieved more efficiently through group effort. This concept explains general agreement with mission of the organization. Organizations whether big or small private or public are the only instruments available for individuals to over come the biological and psychological limitations. Individuals create various types of strategies to fulfill their needs and to achieve their goals.

ORGANIZATIONAL STRUCTURE OF THE K.C.P SUGAR FACTORY IN DETAIL: Keeping the above organizational perspectives in view, it may be stated that organization of the K.C.P Ltd., is via media between the closed and open systems, in the sense that organizational goal of K.C.P Sugar Factory is one of the largest manufacturers of sugar in India. If was established in 1941 and it celebrated the Golden Jubilee Celebrations in 1991.

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THE GENERAL BODY: The General Body, which stands at the apex of the organizational structure of the K.C.P Sugar factory, consists of all the share holders. The share holders are those who are duly registered from time to as holders of shares of any class in the company. Majority of the share holders in the K.C.P are sugarcane growers. The producer -members are very important because they supply sugarcane the main raw material to the factory. They enjoy maximum possible benefits from the factory since the factory vitally affects their financial condition. The number of shares held reflects the shareholders economic position. The General Body Meeting are held every year at the Registered Office of the Company in Madras. The shareholders elect 10 of the 12 Directors on the Board. All the members are entitled to vote in the Annual General Body meeting. Votes can be give either personally or by proxy. Every member shall have one vote for every equity share

THE BOARD OF DIRECTORS:

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The management of the K.C.P Sugar factory is vested in the Board of Directors. There are 12 directors on the board util otherwise determined by the company in the General Body Meeting. The company may by ordinary resolution from time to increase or reduce the number of Directors. Among the 12 Directors 10 Directors are elected by the share holders of the company. The remaining 2 Directors are nominated by outside agencies namely industrial Finance Corporation of India (IFCI) and Industrial Development Bank of India (IDBI) The Board of Directors of the company shall have no power to remove from office the nominee directors. The directors may elect on the their members as the Chairman of the Board of Directors and the Directors and be Director so elected as Chairman shall hold office for a period of 5 years subject to the pleasure of the Board and Subject to his continuing as a Director and he shall preside over all the meetings of the Board and the General meetings during his tenure of office THE MANAGING DIRECTOR: The company is at present managed by a Managing Director under the over all supervision and control of the Board of Directors. The Managing Director is a shared employee except in special circumstances when the chairman or any other director may be asked by the Board of temporarily discharge the functions of MD., usually on an honorary basis. The M.D is selected by Board of Directors. He is appointed on a renewable contract for a period of 5 years. He draw the highest salary among the employee of the K.C.P Director of the company, and also the chairman of the Board whose term of the office expired on 02-04-95 was repainted by the Board of Directors for a further period of 5 years. FACTORY DIVISION:
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The factory division is headed by the Plant Manager who looks after the performance and efficiency of the unit. He sends periodical reports to the Chairman and Managing Director of the K.C.P Limited. The factory division has 22 departments. Each department is headed by a senior. Executive who reports directly to the P.M. This classification of departments is based on functional specialization. Division of work is the main basis of existing hierarchical pattern of the factory. The different departments of the unit perform different functions as detailed below.

THE DEPARTMENTS The work of factory is divided into the following important departments such as Manufacturing, Engineering, Agriculture, Accounts, General Office Civil Works, Stores, Medical and Sanitation, Transport, Security etc. Each deportment has specified tasks which are performed under the guidance and supervision of its head. Following the recommendations of the Central Wage Board for the sugar industry all the employees in the K.C.P are classified into Ex-board Categories, Managerial Supervision, Skilled Clerks and Semi Skilled categories. However proportions depend on the nature of work. In each department, the orders pass from the senior to the junior levels and reports of compliance with the orders are submitted by the subordinate to the superior.

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1. AGRICULTURAL DEPARTMENT: The Cane Manager is the head of the agricultural department who is assisted by the Deputy Manager (Agriculture). There are 11 zones in the factory division. Senior Cane Development Officers looks after these zones. There are 11 Cane Development Officers (Agricultural Graduates) Who works under his guidance and supervision. Each C.D.O is responsible for supervising the plantation and growth of sugarcane transporting the sugarcane in his zone issuing permits. A group of field men help each C.D.O. They are in closer touch with the sugarcane growers and collect the necessary information about plantation and growth of the cane on each plot in their palmistry. Next in the hierarchy are Agricultural Masteries that help fields men in their work during the crushing season to maintain the harvesting records of each plot.

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2. PERSONNEL DEPARTMENT: In any company, whether public or private the personnel department plays an important role. This department commonly deals with recruitment training and promotional systems. The objectives of personnel management are to attract and retain devotion to duty and service mindedness. Personnel Manager of the K.C.P Ltd., Lakshmipuram is in charge of personnel matters of recruitment, training, appraisal, maintenance of discipline and wage administration. The personnel Manager assists the Plant Manager (in the area of establishment), Time-officer and Security. He takes care of the requirement of manpower according to the seasons after receiving the instructions of the Plant Manager. 3. ENGINEERING DEPARTMENT: The Engineering department headed by the Chief Engineer, is responsible for efficient running and maintenance of the plant and machinery. Shift Engineers, Sectional Supervisors, Mechanics, Fitters and a large number of semi-Skilled and Unskilled workers are employed in the department. 4. MANUFACTURING DEPARTMENT: The manufacturing department headed by the Chief Chemist is responsible for the actual production of Sugar. It has to produce the sugar with a specified quality and with minimum possible loss in the process. Shift Chemists, Lab Chemists and other operators, Skilled, Semi-Skilled and unskilled workers are involved in this work.

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5. ACCOUNTING DEPARTMENT: The Accounts department maintains accounts of all kinds. It is headed by the Manager (Finance), Provides the management with all accounting as well as statistical data for use in the process of planning. Capital and revenue budget are prepared annually by the accounts department. Control over the expenditure against budget release is exercised by this department. This department recommends financial concurrence for all material purchase and disposals materials before they are approved by the competent authority. All proposals for capital expenditure received from different departments are scrutinized by the Accounts Department and put up to the management supervises the internal audit of the factory. It audits the accounts of the unit and sends the reports to the Head office. 6.CIVIL DEPARTMENT: The Civil works department, under the Civil Engineer looks after the Construction and Maintenance of Buildings in the factory the residential colony and Roads used for transporting sugarcane. This department supervises some other sections such as Sanitation and Water supply, light railway track maintenance etc. 7.MECHANICAL DEPARTMENT: Them Mechanical Department is one of the important department on the technical side. It is headed by the Chief Engineer. This department is responsible for the smooth functioning of the factory. It also takes the necessary steps to minimize the work snag due to mechanical break down during the crushing season.

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8. THE STAFF: Manpower is an important aspect of management and administration. Hence it is proposed to discus the manpower planning in various departments in this unit since 1986. The personnel department of the Lakshmipuram sugar factory undertakes the responsibility of recruiting manpower for all the departments is to assess the manpower of factory division. This department headed by Personnel Manager who is assisted by other managerial staff including Labor Welfare Officer and subordinate staff prepares the manpower proposals. These proposals clearly specify the quality of manpower requirement as every enterprise is heavily dependent upon the skills motivation and performance of the manpower. 9. EMPLOYEES COLONY: There are residential quarters of various types for the employees of the factory. All employees are entitled to residential facilities which correspond to their employment status emoluments and seniority of service in the factory. There are officer's quarters near the factory. All the officers of the factory live in these quarters. Apart from the officer's colony, and employee's colony which is named as 'Lakshmana Nagar' is located about 2km away from the factory. It is a colony well-planned on modern lines with all the amenities of life.

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10.MEDICAL AND EDUCATIONAL FACILITIES: There is dispensary within the premises of the sugar factory. One Medical Officer and one lady doctor attend to the sick. Medicines are prescribed for the employees and their family members and the cost of the medicines is reimbursed. Free medical treatment is given to all the workers and their families. The KCP Limited is running a school for the education of the employee's children up to 10th standard within the premises of the "Lakshmana Nagar" the school is well equipped with buildings, laboratories, playgrounds and with qualified staff.

11.OTHER FACILITIES: There is a fully equipped auditorium which is used for holding meerings, staging plays and other cultural programmers. For the recreation of employees there are "Ramakrishna Mahila Seve Mandali" and Durga Mahila Mandali". Every need of theemployee is taken care of by the company. The KCP sugar factory has provided a well maintained canteen to cater to cater to the needs of its employees are taking loans on reasonable rate of interest.

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THE DEVELOPMENT PROGRAMMES K.C.P SUGAR FACTORY: Rural development has been recognized as an important strategy for expanding the process of development in developing countries. Because of the predominance agricultural nature of these countries, the process of rural development is inextricably linked with the agricultural development. Rapid growth of population, poor level of nutrition, failure of industry to absorb unemployed or under employed segment of rural population and realization that a prior condition for any development is an accelerated development of the agricultural sector have contributed to this recognition. Agriculture therefore, tends to receive the most attention in any programmed of rural development in the developing countries including India. Agriculture contributes to the national development in India in different directions. It contributes to the growth of political and economic democracy provides productive employment and makes a provision of food and fiber for a growing population. It provides a terrible basis for industrial development and hastens the process of industrialization.

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AGRICULTURAL DEVELOPMENT: This forms the main rural development activity of the factory and annually amount Rs.2.5 to 3 crore is being spear. An intensive and extensive integrated cane development was vigorously implemented during the past few decades which resulted not only in the increase of cane population but also in the Sugar Recovery and the Sugar production, benefiting both the growers and the factory. Various constraints in the cultivation of sugarcane have been identified and overcome by providing the inputs, on time for effective transfer of appropriate technology for the farmers in the fields. The company is having a view to provide farm education and research facility to the cane growers in sugar factory are prevailed with the help of the Andhra Pradesh Agricultural University to set up a comprehensive sugarcane research center at Lakshmipuram. The company donated 10.76 acres valued at Rs. 25 lakh for the office and the laboratory. Useful research findings have emerged form the Research Station and applied to the farmer's fields. The bore well scheme operated by the company provides free transport of rigs from the factory to the fields and back. Free technical supervision is also arranged by the company. More than 7,000 bore wells have been sunk so far which facilitate summer irrigation for about 95% of the wet land area. The company organizes every year, Kisan-Mela Where high yielding varieties of various crops are exhibited and improved methods of cultivation are discussed with the express in the respective fields. Apart from these training programmers are arranged annually for over 1,000 farmers to enable them to know the latest in cane development and farming techniques.

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The operating cycle of the firm begins with acquisition of raw materials and ends with the collection of receivables. It may be divided into four stages. Raw material and stores stage Work in progress stage Finished goods inventory stage Debtors collection stage

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THEROTICAL FRAMEWORK OFCAPITAL BUDGETING

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THEROTICAL FRAMEWORK OFCAPITAL BUDGETING CAPITAL BUDGETING: CB is a long term investment made by the organization in different projects and it helps the firm in evaluating the projects under taken by different techniques. According to Weston and Brigham CB involves the entire process of planning expenditures whose returns are expected to extend beyond one year. The CB decisions include replacement, expansion, diversification research and development and miscellaneous proposals.

FEATURE OF CAPITAL BUDGETING: The important features, which distinguish capital budgeting decision in other day-today decision, are Capital budgeting decision involves the exchange of current funds for the benefit to be achieved in future. The futures benefits are expected and are to be realized over a series of years. The funds are invested in non-flexible long-term funds. They have a long term and significant effect on the profitability of the concern. They involve huge funds. They are irreversible decisions. They are strategic decision associated with high degree of risk.

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IMPORTANCE OF CAPITAL BUDGETING: The importance of capital budgeting can be understood from the fact that an unsound investment decision may prove to be fatal to the very existence of the organization. The importance of capital budgeting arises mainly due to the following: 1. Large investment: Capital budgeting decision, generally involves large investment of funds. But the funds available with the firm are scarce and the demand for funds for exceeds resources. Hence, it is very important for a firm to plan and control its capital expenditure. 2. Long term commitment of funds: Capital expenditure involves not only large amount of funds but also funds for long-term or a permanent basis. The long-term commitment of funds increases the financial risk involved in the investment decision. 3. Irreversible nature: The capital expenditure decisions are of irreversible nature. Once, the decision for acquiring a permanent asset is taken, it becomes very difficult to impose of these assets without incurring heavy losses. 4. Long term effect on profitability: Capital budgeting decision has a long term and significant effect on the profitability of a concern. Not only the present earnings of the firm are affected by the investment in capital assets but also the future growth and profitability of the firm depends up to the investment decision taken today.
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5. Difference of investment decision: The long-term investment decision are difficult to be taken because uncertainties of future and higher degree of risk. 6. Notional Importance: Investment decision though taken by individual concern is of national importance because it determines employment, economic activities and economic growth.

KINDS OF CAPITAL BUDGETING: Every capital budgeting decision is a specific decision in the situation, for a given firm and with given parameters and therefore, almost infinite number of types or forms of capital budgeting decision may occur. Some projects affect other projects of the firm is considering and analyzing. The project may also be classified as revenue generating or cost reducing projects can be categorized as follows: (i) From the point of view of firms existence: The capital budgeting decision may be taken by a newly incorporated firm or by an already existing firm. New Firm: A newly incorporated firm may be required to take different decision such as selection of a plant to be installed, capacity utilization at initial stages, to set up or not simultaneously the ancillary unity etc. Existing Firm: A firm which already exists may be required to take various decisions from time to time meet the challenge of competition or changing environment. These decisions may be:

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Replacements and Modernization Decision: This is a common type of a capital budgeting decision. All types of plant and machineries eventually require replacement. If the existing plant is to be replaced because of the economic life of the plant is over, then the decisions may be known as a replacement decision. However, if an existing plant is to be replaced because it has become technologically outdated (though the economic life may not be over) the decision any be known as a modernization decision. In case of a replacement decision, the objective is to restore the same or higher capacity, whereas in case of modernization decision, the objectives are to increase the efficiency and/or cost reduction. In general, the replacement decision and the modernization decision are also known as cost reduction decisions.

(ii) Expansion: Sometimes, the firm may be interested in increasing the Installed production capacity so as to increase the market share. In such a case, the finance manager is required to evaluate the expansion program in terms of marginal costs and marginal benefits.
i.

Diversification:

Sometimes, the firm may be interested to diversify into new product lines, new markets; production of spares parts etc. in such a case, the finance manager is required to evaluate not only the marginal cost and benefits, but also the effect of diversification on the existing market share and profitability. Both the expansion and diversification decisions may be also be known as revenue increasing decisions. The capital budgeting may also be classified from the point of view of the decision situation as follows:
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Independent project Decision: This is a fundamental decision in Capital Budgeting. It also called as accept /reject criterion. If the project is accepted, the firm invests in it. In general all these proposals, which yield a rate of return greater than a certain required rate of return on cost of capital, are accepted and the rest are rejected. By applying this criterion all independent projects with one in such a way that the acceptance of one precludes the possibility of acceptance of another. Under the accept-reject decision all independent projects that satisfy the minimum investment criterion should be implemented.

(ii) Mutually Exclusive Projects Decision: Mutually Exclusive project are those, which compete with other projects in such a way that the acceptance of one will exclude the acceptance of the other projects. The alternatively are mutually exclusive and only one may be chosen. Suppose a company is intending to buy a new machine. There are three competing brands, each with a different initial investment adopting costs. The three machines represent mutually exclusive alternatives as only one of these can be selected. It may be noted here that the mutually exclusive projects decisions are not independent of the accept-reject decisions.

(iii) Capital Rationing Decision: In a situation where the firm has unlimited funds all independent investment proposals yielding return greater than some pre71

determined levels are accepted. However this situation does not prevail in most of the business firms in actual practice. They have a fixed capital budget. A large number of investment proposals compete for these limited funds, the firm must therefore ration them. The firm allocates funds to projects in a manner that it maximizes long run returns; this rationing refers to a situation in which a firm has more acceptance investment than it can finance. It is concerned with the selection of a group of investment proposals acceptable. Under the accept-reject decision capital rationing employees ranking of the acceptable investment projects. The project can be ranked on the basis of a predetermined criterion such as the rate of return. The project is ranked in the descending order of the rate of return.

PROBLEMS AND BUDGETING:

DIFFICULTIES

IN

CAPITAL

The problems in Capital budgeting decision may be as follows: Future uncertainty: Capital budgeting decision involves long-term commitments. However there is lot of uncertainty in the long term. Uncertainty may be with reference to cost of the project, future expected returns, future competition, legal provisions, political situation etc.

Time Element: The implication of a Capital Budgeting decision are scattered over a long period. The cost and benefit of a decision may occur at different points of time. The cost of project is incurred immediately.
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However the investment is recovered over a number of years. The future benefits have to be adjusted to make them comparable with the cost. Longer the time period involved, greater would be the uncertainty.

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Difficulty in quantification of impact: The finance manager may face difficulties in measuring the cost and benefits of projects in quantitative terms. For example, the new products proposed to be launched by a firm may result in increase or decrease in sales of other products already being sold by the same firm. It is very difficult to ascertain the extent of impact as the sales of other products may also be influenced by factor other than the launch of the new products. ASSUMPTION IN CAPITAL BUDGETING: The capital budgeting decision process is a multi-faceted and analytical process. A number of assumptions are required to be made. These assumptions constitute a general set of condition within which the financial aspects of different proposals are to be evaluated. Some of these assumptions are:
1.

Certainty With Respect To Cost and Benefits:

It is very difficult to estimate the cost and benefits of a proposal beyond 2-3 years in future. However, for a capital budgeting decision, it is assumed that the estimate of cost and benefits are reasonably accurate and certain.

2.

Profit Motive:

Another assumption is that the capital budgeting decisions are taken with a primary motive of increasing the profit of the firm. No other motive or goal influences the decision of the finance manager.

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3. No Capital Rationing: The capital Budgeting decisions in the present chapter assume that there is no scarcity of capital. It assumes that a proposal will be accepted or rejected in the strength of its merits alone. The proposal will not be considered in combination with other proposals to the maximum utilization of available funds.

CAPITAL BUDGETING PROCESS: Capital budgeting is complex process as it involves decision relating to the Investment of current funds for the benefit for the benefit to be achieved in Future and the future are always uncertain. However, the following procedure may be adopted in the process of Capital Budgeting.

Identification of investment proposals: The capital budgeting process begins with the identification of investment Proposals. The proposal about potential investment opportunities may originate either from top management or from any officer of the organization. The departmental head analysis various proposals in the light of the corporate strategies and submits the suitable proposals to the capital expenditure planning.

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Screening proposals: The expenditure planning committee screens the various proposals received from different departments. The committee reviews these proposals from various angles to ensure that these are in accordance with the corporate strategies or selection criterion of the firm and also do not lead departmental imbalances.

Evaluation of Various proposals: The next step in the capital budgeting process is to various proposals. The method, which may be used for this purpose such as, payback period method, rate of return method, N.P.V and I.R.R etc. Fixing priorities: After evaluating various proposals, the unprofitable uneconomical proposal may be rejected and it may not be possible for the firm to invest immediately in all the acceptable proposals due to limitation of funds. Therefore, it essential to rank the project/proposals after considering urgency, risk and profitability involved in there. FINAL APPROVAL AND PREPARATION OF CAPITAL EXPENDITURE BUDGET: Proposals meeting the evaluation and other criteria are approved to be included in the capital expenditure budget. The expenditure budget lays down the amount of estimated expenditure to be incurred on fixed assets during the budget period.

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Implementing proposals: Preparation of a capital expenditure budget and incorporation of a particular Proposal in the budget doesnt itself authorize to go ahead with the implementation of the project. A request for the authority to spend the amount should be made to the capital Expenditure committee, which reviews the profitability of the project in the changed circumstances. Responsibilities should be assigned while implementing the project in order to avoid unnecessary delays and cost overruns. Network technique likes PERT and CPM can be applied to control and monitor the implementation of the projects.

Performance Review: The last stage in the process of capital budgeting is the evaluation of the performance of the project. The evaluation is made by comparing actual and budget expenditures and also by comparing actual anticipated returns. The unfavorable variances, if any should be looked in to and the causes of the same be identified so that corrective action may be taken in future.

METHODS OR TECHNIQUES OF CAPITAL BUDGETING:

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There are many methods for the evaluating the profitability of investment proposals the various commodity used methods are TECHNIQUES OF CAPITAL BUDGETING Traditional Methods 1. Pay Back Period 2. Accounting Rate of Return Time Adjusted Methods 1.N.P.V 2.I.R.R 3. P.I Traditional methods: Payback period method (P.B.P) Accounting Rate of Return Method (A.R.R) Time adjusted or discounted technique: (I) Net Present Value method (N.P.V) (II) Internal Rate of Return method (I.R.R) (III) Profitability Index method (P.I)

PAY BACK PERIOD METHOD: The pay back come times called as payout or pay off period method represents the period in which total investment in permanent assets
78

pay back itself. This method is based on the principle that every capital expenditure pays itself back within a certain period out of the additional earnings generated from the capital assets.

Decision rule: A project is accepted if its payback period is less than period specific decision rule. A project is accepted if its payback period is less than the period specified by the management and vice-versa.

Initial Cash Outflow Pay Back Period = ---------------------------Annual Cash Inflows

ADVANTAGES:

Simple to understand and easy to calculate. It saves in cost; it requires lesser time and labour as compared to other methods of capital budgeting.
79

In this method, as a project with a shorter payback period is preferred to the one having a longer pay back period, it reduces the loss through obsolescence. Due to its short- time approach, this method is particularly suited to a firm which has shortage of cash or whose liquidity position is not good.

DISADVANTAGES:

It does not take into account the cash inflows earned after the payback period and hence the true profitability of the project cannot be correctly assessed. This method ignores the time value of the money and does not consider the magnitude and timing of cash inflows. It does not take into account the cost of capital, which is very important in making sound investment decision. It is difficult to determine the minimum acceptable payback period, which is subjective decision. It treats each assets individual in isolation with other assets, which is not feasible in real practice.

80

ACCOUNTING RATE OF RETURN METHOD: This method takes into account the earnings from the investment over the whole life. It is known as average rate of return method because under this method the concept of accounting profit (NP after tax and depreciation) is used rather than cash inflows. According to this method, various projects are ranked in order of the rate of earnings or rate of return. Decision rule: The project with higher rate of return is selected and vice-versa. The return on investment method can be in several ways, as Under this method average profit after tax and depreciation is calculated and then it is divided by the total capital out lay.

Average Annual profits (after dep.& tax) Average rate of return = ------------------------- ---Average Investment x 100

ADVANTAGES:

It is very simple to understand and easy to calculate. It uses the entire earnings of a project in calculating rate of return and hence gives a true view of profitability.
81

As this method is based upon accounting profit, it can be readily calculated from the financial data.

82

DISADVANTAGES:

It ignores the time value of money. It does not take in to account the cash flows, which are more important than the accounting profits. It ignores the period in which the profit are earned as a 20% rate of return in 2 years is considered to be better than 18%rate of return in 12 years. This method cannot be applied to a situation where investment in project is to be made in parts.

NET PRESENT VALUE METHOD: The NPV method is a modern method of evaluating investment proposals. This method takes in to consideration the time value of money and attempts to calculate the return on investments by introducing time element. The net present values of all inflows and outflows of cash during the entire life of the project is determined separately for each year by discounting these flows with firms cost of capital or predetermined rate. The steps in this method are 1. Determine an appropriate rate of interest known as cut off rate. 2. Compute the present value of cash inflows at the above determined discount rate. 3. Compute the present value of cash inflows at the predetermined rate. 4. Calculate the NPV of the project by subtracting the present value of cash outflows.

Decision rule
83

Accept the project if the NPV of the projects 0 or positive that is present value of cash inflows should be equal to or greater than the present value of cash outflows.

ADVANTAGES:

It recognizes the time value of money and is suitable to apply in a situation with uniform cash outflows and uneven cash inflows. It takes in to account the earnings over the entire life of the project and gives the true view if the profitability of the investment Takes in to consideration the objective of maximum profitability.

DISADVANTAGES:

More difficult to understand and operate. It may not give good results while comparing projects with unequal investment of funds. It is not easy to determine an appropriate discount rate.

84

INTERNAL RATE OF RETURN METHOD The internal rate of return method is also a modern technique of capital budgeting that takes in to account the time value of money. It is also known as time- adjusted rate of return or trial and error yield method. Under this method the cash flows of a project are discounted at a suitable rate by hit and trial method, which equates the net present value so calculated to the amount of the investment. The internal rate of return can be defined as that rate of discount at which the present value of cash inflows is equal to the present value of cash outflow.

Decision Rule: Accept the proposal having the higher rate of return and vice versa. If IRR>K, accept project. K=cost of capital. If IRR<K, reject project. DETERMINATION OF IRR a) When annual cash flows are equal over the life of the asset.

Initial Outlay FACTOR = -------------------------------- x 100 Annual Cash inflow

85

b) When the annual cash flows are unequal over the life of the asset:
PV of cash inflows at lower rate PV of cash out flows IRR = LR+ --------------------------------------------------------(hr-lr)

PV of cash inflows at lower rate - PV of cash inflows at higher rate

The steps are involved here are: 1. Prepare the cash flows table using assumed discount rate to discount the net cash flows to the present value. 2. Find out the NPV, & if the NPV is positive, apply higher rate of discount. 3. if the higher discount rate still gives a positive NPV increases the discount rate further. Until the NPV becomes zero. 4. if the NPV is negative, at a higher rate, NPV lies between these two rates. ADVANTAGES:

it takes into account, the time value of money and can be applied in situation with even and even cash flows. It considers the profitability of the projects for its entire economic life. The determination of cost of capital is not a pre-requisite for the use of this method. It provide for uniform ranking of proposals due to the percentage rate of return.
86

This method is also compatible with the objective of maximum profitability.

DISADVANTAGES:

It is difficult to understand and operate. The results of NPV and IRR methods my differ when the projects under evaluation differ in their size, life and timings of cash flows. This method is based on the assumption that the earnings are reinvested at the IRR for the remaining life of the project, which is not a justified assumption.

PROFITABILITY INDEXMETHOD OR BENEFIT COST RATIO METHOD: It is also a time-adjusted method of evaluating the investment proposals. PI also called benefit cost ratio or desirability factor is the relationship between present value of cash inflows and the present values of cash outflows. Thus PV of cash inflows Profitability index = ----------------------------PV of cash outflows

87

NPV Net profitability index = --------------------------Initial Outlay

ADVANTAGES:

Unlike net present value, the profitability index method is used to rank the projects even when the costs of the projects differ significantly.

It recognizes the time value of money and is suitable to applied in a situation with uniform cash outflow and uneven cash inflows.

It takes into account the earnings over the entire life of the project and gives the true view of the profitability of the investment. Takes into consideration the objectives of maximum profitability.

88

DISADVANTAGES:

More difficult to understand and operate. It may not give good results while comparing projects with unequal investment funds.

89

ANALYSIS AND INTERPRETATION

90

ANALYSIS AND INTERPRETATION PAYBACK PERIOD: Generally this payback period is used to know in how many years we will recover the investment. This payback period ignores the both time & profitability. It does not bother about the profitability on the initial investment. If the annual cash flows are uniform then Payback period = Initial Investment/Annual cash flows If the Annual cash flows are not uniform then we take cumulative of annual cash flows and calculate the payback period. Annual cash flows= PAT + Dep Where PAT=Profit after Tax. Dep. means depreciation. CALCULATION OF PAYBACK PERIOD:
Profit After Years Tax(PAT) in Lakhs Depreciation in lakhs Annual Cash flows in lakhs Cumulative Annual Cash flows in lakhs

2005 2006 2007 2008 2009

710.97 1132.88 4065.21 5711.05 6355.05

1059.37 1085.35 619.97 743.45 1001.49

1770.34 2218.23 4685.18 6454.5 7356.54

1770.34 3988.57 8673.75 15128.25 22485.04

91

C om pu tatio n P a y B ac k P eriod
2 50 00 22 48 5.04

2 00 00

15 12 8.25 1 50 00

1 00 00

86 73 .7 5 63 55 .05

57 11 .05 50 00 17 7 0.3 4 71 0.9 7 0 2 00 5 2 00 6 2 00 7 Y e ars P ro fit A fter T ax(P A T ) in L akC u m ula tive A n nu al C a s h flo w s in la kh s hs 2 00 8 39 88 .5 7 4 06 5.21

1 13 2.88

2 00 9

In the above table the annual cash flows are not uniform, and then we can take the cumulative annual cash flows and calculate the payback period. Here the Initial Investment = 13,220.20 lakhs PAY BACK PERIOD = 3 + 13220.20 8673.75 6454.5

PAY BACK PERIOD = 3 + 4546.45

92

6454.5

PAY BACK PERIOD = 3+0.70

PAY BACK PERIOD = 3.7 YEARS

93

INTERPRETATION: The Initial Investment of K.C.P. sugar & industries corporation Ltd. company is Rs. 13220.20 lakhs will recover within 3 years 7 months of time span so the company recovery capital within the timespan.

94

ARR: ARR means Average Rate of Return or Accounting rate of return. ARR is usually taken the earnings expected from the investment throughout the whole life of the period.

CALCULATION OF ARR: Years 2005 2006 2007 2008 2009 Profit After Depreciation in Tax(PAT) in Lakhs lakhs 710.97 1132.88 4065.21 5711.05 6355.05 1059.37 1085.35 619.97 743.45 1001.49 Annual Cash flows in lakhs 1770.34 2218.23 4685.18 6454.5 7356.54

Annual profit = PAT +Depreciation. We are calculating the ARR for the above table by Using the below formula. ARR=Average Annual Profits/Average investment 100. Average Annual profit=Sum of annual profits/no. of years. Average investment=Initial Investment/2.

95

C o m p u ta tio in o f A ve ra g e R a te o f R e tu rn
7000 6 3 5 5 .0 5 6000 5 7 1 1 .0 5

5000 4 0 6 5 .2 1 4000

3000

2000 1 1 3 2 .8 8 1000 7 1 0 .9 7

0 2005 2006 2007 P ro fit A fte r T a x (P A T ) in L a k h s 2008 2009

Average Annual profit = Sum of annual profits/no. of years = 1770.34+2218.23+4685.18+6454.5+7356.54/5 = 22484.79/5 = 4496.96

Average investment = Initial Investment/2. = 13220.20 /2

96

= 6610.1

ARR = Average Annual Profits/Average investment 100 = 4496.96/6610.1100. = 0.6803 100. = 68.03%. INTERPRETATION: The objective of this analysis of ARR is to measure the profitability of the investing proposals. ARR is usually taken the earnings expected from the investment throughout the whole life of the period. So Finally Average Rate of Return is 68.03% for the K.C.P. sugar & industries corporation Ltd.

97

PROFITABILITY INDEX: Profitability Index is also called as Benefit cost ratio. It is similar to the net present value method. In net Present value method, we determine NPV by using the present value of cash inflows and outflows. The only difference between NPV and PI is In NPV method; we are calculating the difference between the inflows and outflows. Where as in PI method we determine PI by division of present value of cash inflows and initial investment. In this method a required discounting factor is assumed and determines the present value of cash inflows. Profitability Index: PV Cash In Flows Initial Investment If NPV is positive then the project is accepted otherwise the project is rejected. If NPV>0 then the project is accepted. If NPV< 0then the project is rejected. If PI>1 then the project is accepted. If PI<1 then the project is rejected.

98

NET PRESENT VALUE: NPV means net present value. The net present value method is also known as discounted cost benefit ratio. Under this method a required discounting factor is assumed and determines the present value of cash flows.

CALCULATION OF NPV & PI: Cash Discounting Factor inflows(laks) @ 10% 1770.34 2218.23 4685.18 6454.5 7356.54 0.909 0.826 0.751 0.683 0.621 Present value of cash inflows 1609.23 1832.25 3518.57 4408.42 4568.41 15936.88

Years 2005 2006 2007 2008 2009 Total

NPV=Net present value

99

NPV=Present value of cash inflows-initial cash outlay Initial cash out lay= initial investment NPV=Present value of cash inflows-initial cash outlay = 15936.88-13220.20 = 2716.68 PI= Present value of cash inflows/ initial cash outlay = 15936.88/13220.20 =1.21 Finally NPV=2716.68; PI=1.21

100

Computation of Net Present Value

8000 7356.54 7000 6454.5 6000

5000

4685.18 4408.42

4568.41

4000

3518.57

3000 2218.23 2000 1770.34 1609.23 1832.25

1000

0 2005 2006 2007 2008 2009

Cash Inflows(Lakhs) Present value of cash inflows

INTERPRETATION: The above table represents the NPV and PI of 5 years. In NPV and PI methods, the present values of cash flows are determined. Under these methods present values of cash flows are determined by using the Discounting factor. In NPV and PI methods, we assume the discounting factor as 10% and determine the present values of cash flows. By multiplying the cash flows with discounting factor then we get the present value of cash flows.

101

In this project, the NPV is 2716.68. Here NPV>0 So this project is good for the firm. In this project, the Pi is 1.21. Here PI>1 So this project is good for the firm. Hence the project is accepted and it is good for the firm.

102

CALCULATION OF INTERNAL RATEOF RETURNS (IRR) Present Years Cash flows value @ 20% 2005 2006 2007 2008 2009 1770.34 2218.23 4685.18 6454.5 7356.54 0.833 0.694 0.578 0.482 0.401 Total present values 1474.69 1539.45 2708.03 311.6 2949.97 11777.741 Present value @ 21% 0.826 0.683 0.564 0.466 0.385 Total present values 1462.30 1515.05 2642.44 3007.79 2832.26 11459.84

Total present values FAIT PAYBACK = FAIT PAYBACK = FAIT PAYBABCK = 2.94 IRR = 10 + x = 10+4.53 =14.53%

103

Cash flows after tax 8000 7356.54 7000 6454.5 6000

5000

4685.18

4000

3000 2218.23 2000 1770.34

1000

0 2005 2006 2007 Cash flows after tax 2008 2009

INTERPRETATION: The Initial Investment of K.C.P. sugar & industries corporation Ltd. company is Rs. 13220.20 lakhs. Difference in calculated present values and required net cash outlay is 1442.46 and Difference in calculated present is 317.9 now finally the IRR value is 14.53%. As we have assumed the cost of capital as 10 %( Discount factor), at IRR NPV=0, PI=1. In the given case the company is carrying minimum expected return.

104

Computation Of Internal Rate Of Return: Years 2005 2006 2007 2008 2009 Total Cash flows after tax(CFAT) 1770.34 2218.23 4685.18 6454.5 7356.54 22484.79

Cash flows after tax 8000 7356.54 7000 6 454 .5 6000

5000

4685.18

4000

3000 2218.23 2000 1770.34

1000

0 2005 2006 2007 Cash flows after ta x 2 008 20 09

105

Payback period

Initial investment =----------------------------------Average cash flow after tax

Total of cash flow after tax Avg cash flows after tax=---------------------------------------Total no of years

22484.79 Avgafter cash flows after tax=------------------------------=4496.96 5yrs

10294 FPBP = ------------------=2.29 4496.96 The above 2.29 rate indicates between 24% and 25% in net present worth table. So let us the calculate the CFAT s at 24% and 25% present value

106

Calculation of profitability index: It is also a time adjust method of the evaluating the investment proposals.
Years 2005 2006 2007 2008 2009 Total
PV of cash inflows Profitability Index= --------------------------------PV of cash out flows 15936.88 profitability index= --------------------- =1.20 rounded of to 2% 13220.20

Cash inflows 1770.34 2218.23 4685.18 6454.5 7356.54

PV @ 10% 0.909 0.826 0.751 0.683 0.621

PV of cash inflows 1609.23 1832.25 3518.57 4408.42 4568.41 15936.88

107

Computation of Net Present Value

8000 7356.54 7000 6454.5 6000

5000

4685.18 4408.42

4568.41

4000

3518.57

3000 2218.23 2000 1770.34 1609.23 1832.25

1000

0 2005 2006 2007 2008 2009

Cash Inflows(Lakhs) Present value of cash inflows

Inter Preatation: The profitability Index is 2%. It is grater than 1. So it is also accepted.

108

FINDINGS The inventory has varied year to year. This is proportional to the demand in the market for the products of that company. There is an increasing trend in the cash & bank balances. This acceptable and shows the positive trend as the costs raise year to year. The increase in cash and bank is essential to meet the increased costs of overhead. The slope of the trend equation is also +ve The decrease in the current assets show that the slope of the trend eq is negative. It is appreciated only when the current liabilities are also decreasing with respect to current assets. The slope of the trend equation is positive stating that the loans and advances are increasing year by year. This type of fluctuations are not desirable.

109

 The slope of the trend equation is positive, indicating that the C.L are increasing year by year. But the CA are decreasing year by year. This is contradict as per the quick ratio is considered. The ideal value should be one which means the CA & CL should be equal But, the situations show that they are inversely related and the quick ratio is approaching the value zero. The slope of the equation is -ve, stating that, the CA is reducing year by year.

110

SUGGESTIONS

The basic objective of a company is to maximize shareholders wealth. This is possible only when the company earns sufficient profits. The amount of such profits depends largely upon the magnitude of sales. There is always time gap between the sale of goods and receipt of cash. The level of any firm depends upon its efficient management of Capital Budgeting.

To ensure higher profitability, liquidity and sound structural health of organization it is essential to use the sources of funds and cash effectively.

During the year 2003-2004 the total income of the company was 14,947.76 lakhs and also they paid a higher tax rate of 20.34%. There has been major fluctuation in the Capital Budgeting that will effect the current assets and liabilities and sources of funds have effected a lot. So the firm has to find ways to increase the sources of funds. There has been no issued of share capital during the years, which may affect the expansion of the company. So the company has to go for the issuing of shares. The relationship between the employees and management must be satisfactory as there have not been any strikes occurred during the years on account of negotiations.
111

 The company should finance some parts of its currents assets with short-term funds. It should not depend on long-term funds as they involve higher interest payments.

Over all the company has favorable Capital Budgeting position. However it has to maintain optimum Capital Budgeting position.

112

CONCLUSION To ensure that each of the current asset is efficiently managed to ensure that overall liquidity of the unity and at the same time not keeping too high a level of any one of them Capital Budgeting management is a must. Capital Budgeting attains a proper balance between the amount of current assets and the current liabilities in such liabilities in such a way that the firm is always able to meet its short term obligations. Capital Budgeting management ensures smooth working of the unit without any production held ups due to the paucity of funds. Thus as Capital Budgeting is the lifeblood and nerve center of a business. It is managed in orders to attain a smooth running of the business. During the years under the review Capital Budgeting fluctuated as the year 1999-2000 the Capital Budgeting increased to 16.87 crores. But the following years Capital Budgeting showed downward trend year by up to 2003-2004. During the years under the review that over all Financial Postion of KCP Sugars Ltd is good.

113

BIBLIOGRAPHY
FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT FUNDAMENTALS OF FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT AND POLICY SURVEY OF INDIAN INDUSTRIES - THE HINDU (BUSINESS LINE) - JAMES. C. VANHORNE. - JAMES. C. VANHORNE. - I.M. PANDEY. - M.Y. KHAN & JAIN. - PRASANNA CHANDRA.

ANNUAL REPORTS OF K.C.P SUGARS & I.C.L LAKSHMIPURAM:

Annual Report 2004-05 Annual Report 2005-06 Annual Report 2006-07 Annual Report 2007-08 Annual Report 2008-2009

Website:

114

Balance sheet

Profit & Loss account of KCP Sugar Ind Corp

Mar '06

------------------- in Rs. Cr. -------------------

Mar '07

Mar '08

Mar '09

Mar '10

12 mths

12 mths

12 mths

12 mths

12 mths

Income

Sales Turnover

359.13

330.50

250.69

194.20

258.96

Excise Duty

16.44

26.80

25.38

14.12

11.53

Net Sales

342.69

303.70

225.31

180.08

247.43

Other Income

0.08

4.79

3.66

3.60

4.10

Stock Adjustments

-0.49

-2.74

-3.23

3.21

-18.44

Total Income

342.28

305.75

225.74

186.89

233.09

Expenditure

Raw Materials

172.95

199.71

153.03

105.50

136.93

Power & Fuel Cost

2.48

2.46

1.74

1.69

1.44

Employee Cost

26.33

24.41

21.71

23.38

24.67

Other Manufacturing Expenses

11.29

13.54

14.54

9.15

5.62

115

Selling and Admin Expenses

17.50

9.99

7.06

9.14

0.00

Miscellaneous Expenses

5.09

6.33

4.91

4.98

16.32

Preoperative Exp Capitalised

0.00

0.00

0.00

0.00

0.00

Total Expenses

235.64

256.44

202.99

153.84

184.98

Mar '06

Mar '07

Mar '08

Mar '09

Mar '10

12 mths

12 mths

12 mths

12 mths

12 mths

Operating Profit

106.56

44.52

19.09

29.45

44.01

PBDIT

106.64

49.31

22.75

33.05

48.11

Interest

3.59

3.52

4.60

3.60

3.20

PBDT

103.05

45.79

18.15

29.45

44.91

Depreciation

7.43

10.01

10.59

10.85

10.63

Other Written Off

0.00

0.00

0.00

0.00

0.00

Profit Before Tax

95.62

35.78

7.56

18.60

34.28

Extra-ordinary items

0.18

0.70

2.80

0.07

0.00

PBT (Post Extra-ord Items)

95.80

36.48

10.36

18.67

34.28

Tax

36.80

12.92

3.25

6.93

10.57

Reported Net Profit

57.11

23.55

7.11

11.33

23.74

116

Total Value Addition

62.69

56.72

49.97

48.34

48.04

Preference Dividend

0.00

0.00

0.00

0.00

0.00

Equity Dividend

17.01

5.67

5.67

7.94

8.50

Corporate Dividend Tax

2.39

0.96

0.96

1.35

1.45

Per share data (annualised)

Shares in issue (lakhs)

1,133.85

1,133.85

1,133.85

1,133.85

1,133.85

Earning Per Share (Rs)

5.04

2.08

0.63

1.00

2.09

Equity Dividend (%)

150.00

50.00

50.00

70.00

75.00

Book Value (Rs)

12.28

13.77

13.65

13.83

15.05

Profit & loss

This data can be easily copy pasted into a Microsoft Excel sheet

Previous Years

KCP Sugar Ind Corp

Profit & Loss account

------------------- in Rs. Cr. -------------------

Mar '06

Mar '07

Mar '08

Mar '09

Mar '10

12 mths

12 mths

12 mths

12 mths

12 mths

117

Income

Sales Turnover

359.1 3

330.5 0

250.6 9

194.2 0

258.9 6

Excise Duty

16.44

26.80

25.38

14.12

11.53

Net Sales

342.6 9

303.7 0

225.3 1

180.0 8

247.4 3

Other Income

0.08

4.79

3.66

3.60

4.10

Stock Adjustments

-0.49

-2.74

-3.23

3.21

-18.44

Total Income

342.2 8

305.7 5

225.7 4

186.8 9

233.0 9

Expenditure

Raw Materials

172.9 5

199.7 1

153.0 3

105.5 0

136.9 3

Power & Fuel Cost

2.48

2.46

1.74

1.69

1.44

Employee Cost

26.33

24.41

21.71

23.38

24.67

Other Manufacturing Expenses

11.29

13.54

14.54

9.15

5.62

Selling and Admin Expenses

17.50

9.99

7.06

9.14

0.00

Miscellaneous Expenses

5.09

6.33

4.91

4.98

16.32

Preoperative Exp Capitalised

0.00

0.00

0.00

0.00

0.00

118

Total Expenses

235.6 4

256.4 4

202.9 9

153.8 4

184.9 8

Mar '06

Mar '07

Mar '08

Mar '09

Mar '10

12 mths

12 mths

12 mths

12 mths

12 mths

Operating Profit

106.5 6

44.52

19.09

29.45

44.01

PBDIT

106.6 4

49.31

22.75

33.05

48.11

Interest

3.59

3.52

4.60

3.60

3.20

PBDT

103.0 5

45.79

18.15

29.45

44.91

Depreciation

7.43

10.01

10.59

10.85

10.63

Other Written Off

0.00

0.00

0.00

0.00

0.00

Profit Before Tax

95.62

35.78

7.56

18.60

34.28

Extra-ordinary items

0.18

0.70

2.80

0.07

0.00

PBT (Post Extra-ord Items)

95.80

36.48

10.36

18.67

34.28

Tax

36.80

12.92

3.25

6.93

10.57

Reported Net Profit

57.11

23.55

7.11

11.33

23.74

119

Total Value Addition

62.69

56.72

49.97

48.34

48.04

Preference Dividend

0.00

0.00

0.00

0.00

0.00

Equity Dividend

17.01

5.67

5.67

7.94

8.50

Corporate Dividend Tax

2.39

0.96

0.96

1.35

1.45

Per share data (annualised)

Shares in issue (lakhs)

1,133. 85

1,133. 85

1,133. 85

1,133. 85

1,133. 85

Earning Per Share (Rs)

5.04

2.08

0.63

1.00

2.09

Equity Dividend (%)

150.0 0

50.00

50.00

70.00

75.00

Book Value (Rs)

12.28

13.77

13.65

13.83

15.05

120