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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Table of Contents:
Particulars Chapter I Chapter II Chapter III Chapter IV Chapter V Chapter VI Chapter VII Chapter VIII Chapter IX Chapter X Findings Bibliography Executive Summary Methodology Introduction of Industries Company Profile Introduction of the product Fragies Financial Appraisal Objectives SWOT analysis Topic

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Chapter I

EXECUTIVE SUMMARY

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

EXECUTIVE SUMMARY
Financial Appraisal of project is one of the most crucial aspect in the project finance and investment decisions. This analysis is made on an on going project. It is on the topic Financial Appraisal on Diversification scheme of Fragies. Fragies are sugar cubes in the form of ship. The analysis is based on the financial statement of the company. The main financial statement used is Estimated Profit and Loss A/ C. The financial appraisal of THE UGAR SUGAR WORKS Ltd., is analysed through 5 years projection/ estimation in respect of Cash flow, Profit and Loss A/C statement, Cost of project, Cost of Capital, Opportunity Cost, Net Present Value of project, pay back period and Internal rate of return, sources of finance. The following were the objectives of the study 1. To know the cost of the Project. 2. Time frame required to complete the Project. 3. Financing Method. 4. Cost of Finance. 5. Human Resource Required. 6. Commercial Business. a. Preparation of Profit and Loss Account. b. Preparation of Cash in Flow Statement. c. Calculation of Net Present Value. d. Payback Period. e. Internal Rate of Return. The methodology that was followed was through Primary and Secondary data

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Chapter II

METHODOLOG Y

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Methodology
The project titled Financial Appraisal of diversification scheme is the analysis of financial Appraisal of THE UGAR SUGAR WORKS Ltd., Ugar-Khurd. For this the reliance was on the primary data and secondary data. The primary data was collected through personal interview of the staff of Finance department, HR department, and Project manager. The secondary data was the estimated P&L A/C prepared by the company for the diversification project.

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Chapter III

INTRODUCTION OF INDUSTRY

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Introduction of Industry
India has been known as the original home of sugarcane and sugar. Indians knew the art of making sugar since the fourth century. However the advent of modern sugar industry in India dates back to mid 1930's when a few vacuum pan units were established in the sub-tropical belts of Uttar Pradesh and Bihar. Until the mid 50s, the sugar industry was almost wholly confined to the states of Uttar Pradesh and Bihar. After late fifties or early sixties the industry dispersed into Southern India, Western India and other parts of Northern India. India is the largest consumer and second largest producer of sugar in the world. The sufficient and well distributed monsoon rains, rapid population growth and substantial increases in sugar production capacity have combined to make India the largest consumer and second largest producer of sugar in the world. The Indian sugar industry has not only achieved the singular distinction of being one of the largest producer of white plantation crystal sugar in the world but has also turned out to be a massive enterprise of gigantic dimensions. With over 450 sugar factories located throughout the country, the sugar industry is amongst the largest agro processing industries, with an annual turnover of Rs150bn. It plays a major role in rural development and its importance for India stretches far beyond the role of a sweetener supplier. The sugar factories located in various parts of the country work as nuclei for development of rural areas by mobilizing rural resources and generating employment, transport and communication facilities. Over 45mn farmers, their dependants and a large mass of agricultural labor are involved in sugarcane cultivation, harvesting and ancillary activities constituting 7.5% of the rural population. The sugar industry employs over 0.5mn skilled and unskilled workmen, mostly from the rural areas. Babasabpatilfreepptmba.com Page 7

FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] Since the beginning of planning era, sugar industry operated under a policy of partial control in 1950-51 and 1951-52, followed by a continuous period of six years of decontrol between 1952-53 to 1957-58. This policy was followed under the pragmatic leadership of the then Minister of Food, Shri Rafi Ahmed Kidwai. However, with his departure, the perception of decontrol was lost. After alternating between control and decontrol, the government adopted the policy of partial decontrol in 1967-68 which has since been the mainstay of government policy except for two short periods of decontrol in the 1970's. Under this policy, the government procures 40% of production at controlled prices based on the Statutory Minimum Price for sugarcane, for supply through the Public Distribution System and the balance 60% is allowed to be sold by the mills in free market subject to the monthly release mechanism. The details of past government policies for sugar industry are provided in annexure 1. The levy quota for sugar mills has been brought down from the peak levels of 70% in 1968-69 to the present levels of 40% as a gradual process of deregulation of sugar industry. The number of operating sugar mills in the country has increased from 29 in sugar year (SY) 1930-31 to 412 by SY1996-97 (sugar year = October 1st to September 30th). The addition in number of mills was at its peak during seventies when nearly 100 mills were added between 1970 and 1980 to increase the number of operating units to 300. The development of industry in the past is as given in table below. The average capacity of the sugar mills in the industry has considerably moved up from just 644 ton per day in SY1930-31 to 2656 ton per day. But still the growth in the Indian sugar industry was driven by horizontal growth (increase in number of units) compared to the vertical growth witnessed in other countries (increase in average capacity)

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Sugar year (Oct-Sept) Number of operating Average capacity ton crushed per day 1930-31 1940-41 1950-51 1960-61 1970-71 1980-81 1990-91 . India is the largest consumer (18mn tonnes) and the second largest producer of sugar after Brazil. The country produced 201 lakh tonnes (20.1mn tonnes), the highest ever, in 2002-03. But there was a drastic drop in production in the following two years with just 135.46 lakh tonnes in 2003-04 and 130 lakh tonnes in `04-05. For the current 2005-06 season, the production is expected to be between 180-185 lakh tonnes. While the production in Maharashtra is expected to double from 22.3 lakh tonnes in 2004-05 to 46 lakh tonnes in the coming season, Tamil Nadu, Gujarat, AndhraPradesh, Karnataka and Uttar Pradesh would also witness a significant rise in production. The sugar factories located in various parts of the country work as nuclei for the development of rural areas by mobilizing rural resources and generating employment, transport and communication facilities. Over 45 million farmers, their dependants and a large mass of agricultural labour are involved in sugarcane cultivation, harvesting and ancillary activities. The industry employs over 0.5mn skilled and unskilled workmen, mostly from the rural areas. Page 9 After alternating between control and decontrol, the government adopted the Babasabpatilfreepptmba.com sugar mills 29 148 139 174 215 315 385 644 750 882 1172 1394 1718 2088

FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] policy of partial decontrol in 1967-68 which has since been the mainstay of the government policy except for two short periods of decontrol in the 1970s. Under the present policy, the government reserves 10% of the production at controlled prices for supply through the Public Distribution System (PDS) and the balance 90% is allowed to be sold by the mills in the free market subject to the Monthly Release Mechanism. The levy quota for sugar mills has been brought down from the peak levels of 70% in 196869 to the present level of 10% through a gradual process of deregulation of the sugar industry. The Indian sugar industry has always been highly regulated by way of requirements of essence for setting up or the expanding of the sugar factory restrictions and control on the sale and dispatches of sugar, fixation of satisfactory minimum cane price payable, fixation of levy sugar price, restriction on import and export, restriction on stock holdings and so forth. With the government decision to liberalize the economy since 1991, some of the restrictions were removed The number of operating sugar mills in the country has increased from 29 in 1930-31 to 453 in 2002-03. The average capacity of the sugar mills has considerably moved up from just 644 tonnes per day in 1930-31 to 3343 tonnes per day in 2002-03. The growth in the Indian sugar industry was driven by horizontal growth (increase in number of units) compared to vertical growth witnessed in other countries Indian sugar industry can be broadly classified into two sub sectors, the organised sector, i.e, sugar factories, and the unorganised sector, i.e, manufacturers of traditional sweeteners like gur and khandsari. The latter is considered to be a rural industry and enjoys greater freedom than the sugar mills. The production of traditional sweeteners gur and khandsari is quite substantial. Gur is unrefined sugar and khandsari is non-centrifuged sugar. These are mostly used in villages and rural folk as sweeteners and also as important sources of nutrition. Though the trends indicate a progressive shift from traditional sweeteners to white sugar over the years, they still account for about 37% of total sweetener consumption in India. Since the sugar industry in the country uses only sugarcane as an input, sugar companies have been established in large cane growing states like Uttar Pradesh, Maharashtra, Tamil Nadu, Karnataka, Punjab and Gujarat. Maharashtra leads in the number of sugar mills, which are mainly in the cooperative sector, and also in sugar production, followed by Uttar Pradesh. The farmers cooperatives own and operate the largest of the industry's total capacity. They are concentrated primarily in Maharashtra Babasabpatilfreepptmba.com Page 10

FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] and Eastern Uttar Pradesh. The largest number of sugar companies in the private sector is located in south India, in the states of Tamil Nadu, Karnataka and Andhra Pradesh. Uttar Pradesh has also some private mills which are operating in a very large scale. Out of the 453 sugar mills in the country, 269 are in the cooperative sector, 184 in the private sector and 67 in the public sector. Besides, 136 units in the private sector are in various stages of implementation. In India sugar production follows a 5-7 year cycle. Sugar production increases over a 3-4 year period, reaches a high, which in turn, results in lower sugar prices. As a result of lower sugar price, realizations of sugar mills, the sugarcane arrears increase. The increase in sugarcane arrears results in lower sugarcane production, resulting in lower production for the next 2-3 years. Because of lower sugar production, the prices shoot up resulting in increased area under sugarcane cultivation during the next season. Due to heavy domestic consumption (approximately 18mn tones), India is not in a position to export sugar in large quantities. This year the export could be around five lakh tonnes. The export would be primarily the obligation that the importers of raw sugar would have to fulfil. Moreover, the mills would find it more profitable to sell in the domestic market rather than export it. Currently, export price for white sugar is $340-350 a tonne f.o.b (Rs 15,375-15,825). In the domestic market, medium sugar is ruling at Rs 18,740-19,270 a tonne, while small sugar is quoting at Rs18,110-18,410.

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Chapter IV

COMPANY PROFILE

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Company Profile
History and Origin

About sixty years ago Ugar Khurd was a small hamlet in the erstwhile princely state of Sangli. It was however blessed with two great advantages. On its south flowed the perennial river Krishna and on the north, was situated the railway station of Ugar Khurd on the meter gauge line between Miraj and Bangalore, now changed to broad gauge. Conditions were ideal for somebody to harness the two advantages and exploit the fertility of the loamy soil. An abortive attempt was made in late thirties to start a sugar industry. After that, the then ruler of Sangli invited the late Dr.S.R.Shirgaokar - who had previous experience of setting up a sugar factory at Kolhapur, to embark on the unexplored venture which he did with great dexterity and the slumbering village of Ugar Khurd was transformed into a humming industrial township in a few years. Today, Ugar is equivalent to a mini city with a decent sized population and having agriculture concentrated employment surrounding the sugar manufacturing focused township. Dr. S. R. Shirgaokar deputed his competent nephew Shri.V. S. Shirgaokar to purchase a sugar plant from Moholi Sugar Factory in Sitapur District in Bihar and install it at Ugar Khurd. The Ugar Sugar Works hence found a very competent navigator in one of its visionaries- Late Shri V.S.Shirgaokar. The 500 TCD plant was purchased, installed and the first crushing season was started on the 21st of April, 1942. The crushing capacity of the company underwent further expansion. (10,000TCD) Presently, the crushing capacity of the organization is 14,000 TCD. (Ugar, Unit-Tasgaon SSK, Unit-Phalatan)

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Present Scenario of The Ugar Sugar Works Ltd:


The present capacity of cane crushing is 10 thousand Metric tones per day. The work performed during the season period is in the three shifts. First Shift is from 4.00 am to 12.00 pm, second shift from 12.00 pm to 8.00 pm and third shift from 8.00 pm to 4.00 am. The crushing of sugar cane is carried out in two mills known as 33 X 66 (small mill) and 42 X 84 (big mill). The cane carried through bullock carts is crushed in 33 X 66 and the cane carried through truck and tractors is crushed in 42 X 84. This order will change only if there is any problem to one of the mill. The sugar is packed in 50 kgs. and 100 kgs. Bags. This sugar bagging process is fully automatic.

Board of Directors: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.


Mr. Rajendra V. Shirgaokar Mr. Prafulla V. Shirgaokar Mr. Shishir S. Shirgaokar Mr. Baba N. Kalyani Mr. Bapugouda S. Patil Mr. Shrikrishna N. Inamdar Mr. V. Balsubramaniam Dr. Mallappa R. Desai Mr. Madhusudan B. Karmarkar Mr. Manohar G. Joshi Mr. Algonda B. Kage

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

12.

Mr. Deepchand B. Shah

Group of Companies:
1. 2. 3. 4. 5. 6. The Ugar Sugar Works SB Reshellers Pvt. Ltd. Shantaram Machineries Pvt. Ltd. Sadashiva Sugars Ltd. Tara Tiles Pvt. Ltd. The Pavilion Hotel

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

1. Finance Department
Finance is the most important department in the organization. It plays very important role in the organization. Finance is the life blood of each and every business. Management of financing is planning and controlling of firms financial resource. The finance officer occupies a key position. He is one of the dynamic members of the top management key, and his role day by day is becoming more intensive and significant in solving the complex management problems. The Finance Department is subdivided into three departments as under. A. B. C. Accounts Department Cane Accounts Department Cost and Audit Department Accounts Department: Deals with day to day financial activities of maintaining accounts i.e. entry of day to day transactions, issue of cheque, preparing Trial Balance, Profit and Loss Account, Balance Sheet, maintaining Bank Accounts, Cash Management, Purchase and Sales Accounts. The books of account maintained by the company are: 1) Sales records: Sales records are maintained for each of the sold sugars and other product. 2) Purchase Records: Purchase records are maintained for the purchase of various items. 3) particular period of time. 4) Stock Records: Stock records are Expenses Records: The records are

maintained for the purpose to make entry for various expenses incurred in a

maintained to know the levels of stock of various items for the particular period of time .These are both in terms of rupees and units. Babasabpatilfreepptmba.com Page 16

FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] 5) Budgets: A budget provides an easy method of continuous monitoring of activities of the organization. A master budget, which takes into, accounts all activities of an organization.

Following are the budgets prepared: i. ii. iii. iv. v. vi. vii.
Budget Profit and Loss A/C.

Budget Trading A/C. Budget Fund Flow Statement. Budget Balance Sheet. Sales Budget. Cash Budget. Expenses Budget. Cane Account Department: Deals with the farmers in purchasing cane and

making time to time payment, advance payment, transporting, maintaining the detail information through Weigh Bridge Department about weight of the cane while it comes to the factory, maintaining daily report like Crushing Report, Sugar Bagging Report, Baggasse and other material like Trash, Ash, Sugar, Chemicals and other raw material in and out. Cost and Audit Department: The functions of Cost and Audit Department: 1. The internal audition of various areas of each and every department

including revenue and expenditure side. 2. Cost Accounting work of U.S.W. Ltd. Products like sugar, rectified spirit,

denatured spirit, power and Indian made liquor product. 3. Periodical physical checking of following departments about their inventory

books of accounts of the stores, time keeper office etc. 4. Preparation of additional data feedback for management audit committee or

any other department required. 5. Special audit of various departments like Agriculture Department, Account

Department, Time Keeper Office, R & D Department, Civil Construction Projects, Cane Purchase Department Etc. 6. Checking of Closing Stock Statement. Page 17

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] 7. Suggesting remedial actions in case of increased cost. The software package used in finance department is Tally and Own Created software by the IT Department.

2. Personnel Department
This department undertakes the activities like Recruitment, Selection, Labour Welfare Activities, Social Activities. Department holds a meeting once in a week with Top Management. The department has four different committees. 1. 2. 3. 4. Canteen Committee Work/ Grievance Cell Committee Safety Committee House Keeping Committee

Labour Welfare Activities o Statutory Provisions: The Ugar Sugar Works provides the statutory provisions under the Factories Act 1948 like Safety, Health Awareness, Work Environment, Lighting, Ventilation, Drinking Water Provision, Spittoon, and Toilet. The Labour Welfare Officer deals personally with the employee problems may be related to workplace or personal life of the employee. He councils the employee or worker personally and try to settle the problem.

Additional Facilities: Education: Ugar Sugar Works has contributed whole-heartedly in the field of education, towards the betterment of the residents of this region. Babasabpatilfreepptmba.com Page 18

FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] Bal Mandir: This is a playschool for the young children

Shri Hari Vidyalaya: Shri Hari Vidyalaya is a school, which is home to over 3000 students. This school has a curriculum which covers the following mediums of instruction under the primary and secondary sections : English Medium Marathi Medium Kannada Medium

Shri Hari Vidyalaya Pre-University & Degree College:


This college is operating for a number of years at Ugar Khurd. It has Arts, Commerce and Science (first year) facultys for a Bachelors Degree. It houses over a 1000 students

Shri Babukaka Shirgaokar Technical Educational Trusts:


Industrial Training Institute (ITI):

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] The ITI was started in the year 1994 in honour of our then MD, Shri Babukaka Shirgaokar.:

This institute provides technical training in the following disciplines i. ii. iii. iv. v. Fitter Electrician Instrument Mechanic Computer Technology Trade Cutting and Sewing

Hospital: The Dr. Shirgaokar Hospital is very well equiped in the following areas:

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] State of the Art Laboratory X-Ray Units An Air-conditioned Operation Theatre Dental and Orthopedic Section Accommodation for 32 indoor patients (32 beds) Qualified staff of doctors and nurses to take care

of the patients. Quarters Treatment at subsidized rates Eye camp every week Approximately 132 apartments and 400 quarters provided on rent-free basis.

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] Biogas Biogas supplied to workers colony (for 85 quarters at concessional rate) Food Grains Food Grains are distributed to workers free of cost once in a year. Additionally Ugars sugar is provided to shareholders and cane growers at a well discounted rate. TV Cable Connection TV Cable connections are given at nominal charges. Medical Camp Organising various types of medical camps viz. Dental, Eye, Tubectomy, ENT, Diabetic Detection Camp, Blood donation, etc. Workers Day Celebrating workers day on 2nd October every year and felicitating the retired workers and high performers during the year. Training Programme Organizing Workers / Staff Training Programme. Ugar Wartha Circular of monthly Ugar Magazine. Alcoholics Anonymous Group Meeting Conducts the Alcoholics Anonymous meeting for the group of fellows, who desires to give away drinking through the inter group (self-supported) of General Service office of Alcoholics Anonymous (India). Meeting held twice in a week. Sakhar Shala Project The non formal school runs for the childrens of the Harvesting workers(Gabali) during crushing season to bridge the gap of academic year and to keep touch with education during stay at factory(work) site, with the help of social organizations like Lions Club & Mahila Mandal. Shri Vinayakrao Shirgaokar Pratishhtann Babasabpatilfreepptmba.com Page 22

FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Awards:

Shri S V Parthasarathy's Award for outstanding performance in sugar industry for the season 1984-85

National Safety Award 1984 for largest Accident free Period

Social Activities Arranges Camps like Netra Shibir, Dental Camp, Arrangement of Place, Water and other necessary things at the time of Laxmi Yatra once in a year. Provides donations for other religious works, educational institutes, and sufferers of natural calamities.

3. Information Technology (IT) Department:


IT Department distinct The Ugar Sugar Works from other sugar factories. It has its own IT Department, which is very well developed. This department develops the software as per the requirements of the different departments. It efficiently solves any technical problem related to the computer hardware as well as software in the different department. Various qualified and efficient hardware and software engineers are there in this department.

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

4. Purchase Department:
This department accepts the requisitions from the different departments, in which the material needed, quality and quantity is mentioned. They have the vendors list and they ask quotations from them. Finally after receiving the quotation they place the order to appropriate vendor. The purchase order has four copies. From that one has sent to Accounts Department, one to the Vendor, one to the department from which the requisition is received and last is retained with themselves for reference. This department work according to the Just In Time method. Means it does not blocks the funds of the company. Purchase Department does not place orders for capital goods. It deals with the materials, which are necessary to run day-to-day activities of production, stationary material etc. This department uses the software developed by their IT department from FoxPro for keeping records and placing orders. Also they use the other windows programs like Ms-Office (Ms-Word, Ms-Excel, Ms-PowerPoint) for documentation.

5. Issue Department
This department is also known as Stores Department. The material

purchased from Purchase Office first comes to the stores department. Here the stores incharge records the transactions means takes the stock and files the documents received from the vendor and purchase office. Then this department supplies or issues the material to other departments according to their need or requisition.

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

6. Production Department
The Ugar Sugar Works Ltd, production department comprises the Factory Manager with his team of Engineers and Operators. He reports to the chief i.e. works manager. Here the main production is sugar. For producing the sugar there is a very vast process. Engineers and operators do this process. Here one more small but very important process joins to the process of producing sugar i.e. chemical mixing into the cane juice. For this there is a small department called chemical department. Then after this all process the final product i.e. Sugar produces. Within all this some by products are also obtained like baggase, molasses, steam etc. The production department does all above-mentioned process. production of sugar for the last season i.e. 2005-06 is Sugar bagging i.e.

7. Cane Purchase Office Department


This department deals in purchasing cane from farmers for sugar production. It maintains all the details of the farmer and the cane also. In these details they mention the type of sugar cane, area, farmer name, transporter name, no. of kilometers the place or farm is from factory etc. Then they make a bond with the farmer for giving the cane to the factory and lastly issue the Cane Purchase Order to the farmer.

8. Research and Development Department (R&D)


This is one of the most important department in the Ugar Sugar Works Ltd. The company carries the research and development in Sugar cane, process modification for sugar production, quality liquor and Ethanol production, Improvement in Technology, Co-Generation and bio-methanation from press mud and zero effluent discharge system. This results in Product improvement, cost reduction, product development, import substitution etc.

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Sugar Cane: The main objective of the Research and Development team is to make continuous effort to find out dual purpose sugarcane varieties with high sucrose, high yielding potential and reasonably high fibre content. There are 40 odd new sugarcane varieties under trial in this department. Short Duration Crops: The work with wheat, soybean and sunflower is reasonably successful as rotation of crops and useful indications are likely to be obtained.

Future Plans of Action: a) compost and Boiler ash. b) zero pollution. c) d) To locate soybean varieties resistant to rust. To find out effective biological measures, which Replacement of Muriate of Potash by organic BioTo popularize the technique of using Wormi-

k, a product of SSP Plant of concentration. Evaporation and drying system for

would cause no ecological problems and shift from the paradigm of pesticidal control to biological control so as to successfully combat white Woolly Aphid trouble (Ceratovacuna lanigera Zehnt) with conobartha aphidivora (Dipha), Micromus Sp.(Brown lace wing) and syrphidfly. e) To identify multipurpose cane varieties, which

can give good yields, good recoveries, high fibre and resistant to insect pests. f) To utilize Moist Hot Air Treatment Plant

(MHAT) to prolong the life of productive good cane varieties. g) Tissue Culture Laboratory. h) point of quality and quantity. Babasabpatilfreepptmba.com Page 26 Replacing 50% chemical fertilizers with suitable To establish Leaf Sheath Moisture, Soil and Plant

combination of organic and bio-fertilizers to get the best cane both from the

FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Different Product Manufactured


The Ugar Sugar Works Limited is the flagship company of the Shirgaokar Group of Companies. This organization is located in a township by the nameUgar Khurd, Karnataka, close to the border of Karnataka & Maharashtra. Ugar Khurd is nicely located on the banks of the river Krishna.

The main businesses of parent company are manufacturing of: 1. 2. 3. 4. 5. 1) Sugar: Sugar Power Indian Made Liquor Industrial Alcohol Ethanol

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] The Ugar Sugar Works Limited is the largest single location manufacturer of sugar in Southern India with a licensed capacity of 10,000 TCD. Ugar manufactures more than 1.5 million bags of sugar annually. The main product of
the sugar manufacturing process is White Crystal Sugar.

This white crystal sugar is manufactured in the following grades : i. ii. iii. M-30 S-30 SS-30

Byproducts: Bagasse: Bagasse is a residual material left after the extraction of juice from sugar cane. In Ugar Sugar, it is captively used as a fuel by which the industry is self sufficient for its fuel requirement. The excess is saved to the tune of 5% of weight of the cane crushed. The saved bagasse can be selectively used as fuel in the lean period / off-season or sold to the interested parties. Filter cake: Filter Cake commonly known as Press mud is the suspended impurities separated during the process of cane juice clarification by the sulphitation process. The material is used as manure and the factory manages to sell the filter cake to the cane growers at concessional rates & achieves recycling of the matter back to fields. Final Molasses:

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] It is a highly viscous left-over material containing sugar / reducing sugar and organic/inorganic impurities. It is a raw material for distilleries of our organization.

2)

Power:

Cogeneration is a process, which simultaneously produces two or more forms of useful energy such as electrical power and steam, electric power and shaft (mechanical) power etc. Ugar has been a pioneer of cogeneration in the sugar industry in India, Over the years, The Ugar Sugar Works has reached (in 2-3 phases) a capacity of 44 MW of power, of which 15 MW is used for captive consumption and the balance 28 MW is fed to the grid (KPTCL). Power shortage has made the sugar industry realize that by using high pressure Boilers and Turbines from the same amount of input fuel, (i.e. Bagasse) they can generate up to 2 to 3 times more power and after meeting the captive requirements, the surplus power can be exported to the grid. A sugar factory requires both electrical power & process steam for its operation. With the Indian Government announcing various fiscal incentives for the use of non-conventional renewable energy for cogeneration in sugar factories, it has Babasabpatilfreepptmba.com Page 29

FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] become a viable proposition to adopt high pressure & efficient boilers using bagasse to generate steam & power economically to make available surplus power for export to the grid.

This is the single largest cogeneration plant in all of India using nonconventional energy sources i.e. bagasse and trash. Our group has now started consulting to sugar industries in India as well as in overseas through our group company - Ugar Power Generation Consultants Pvt. Ltd (UPGCL). The focus of this new outfit revolves around consulting on new co-generation projects, equipment procurement, erection & implementation right up to final commissioning in the cogeneration sector. Lots of steps have also been taken by the organization to ensure maximum conservation of energy.

3) Indian made Liquor:

Ugar currently has two distilleries in premises at Ugar Khurd. The first one is an old distillery of capacity 30,000 LPD, while the second one is a newly constructed distillery from Praj Industries, Pune having a capacity of 45,000 LPD. Babasabpatilfreepptmba.com Page 30

FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] The Praj Distillery runs on the continuous fermentation technology. The whole unit of distillation process is having material of construction in copper, which gives a very good quality of spirit. This plant is having a high level of computerization and automation.

Two distilleries with a total capacity of 75,000 bulk liters per day. The primary products coming out of the distilleries are: i. ii. iii. iv. v. Rectified Spirit Indian Made Liquors Absolute Alcohol (Ethanol) Arrack Industrial Alcohol Some of the well-known brands in the marketplace are Old Castle Premium Whisky, Old Castle Rum, US Rum, US Whisky, Vatted Malt Whisky, Sandpiper Whisky, Gentlemans Whisky, Ugar Doctors Brandy, Gagarin Vodka and US Gin.

New Projects & Growth


Sugar Ship EOU

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] EOU for the Manufacture of Sugar Cubes in the form of Ships. The Ugar Sugar Works Ltd. Has received approval for setting up a 100% Export Oriented Unit for the manufacture of sugar cubes in the form of ships at Ugar Khurd. The Building work is in progress and the machinery will be imported from M/s. Klockner Haensel Processing GMBH Germany (JV Partner) who will be providing the necessary technology. The machinery is expected to be installed between March 2006 & July 2006 and commercial production will begin from August 2006. The entire production of sugar ships will be exported to Fragies Verwaltung GMBH, Germany, who have agreed to purchase the entire production of 45,00,000 boxes p.a. for a period of 5 years

Greenfield Project - Sadashiva Sugars Ltd.

Location

Nainegali Village, Taluka & District: Bagalkot, State: Karnataka.It is about 0.5 km from the NH 13

Land Area

The land measuring about 162000 sq. mts shall be required for the entire factory and administrative setup.

Main Product By Products

White crystal Sugar a) b) c) Cogeneration Power Press-mud

Licenced Capacity

Sugar 2500 TCD (expandable to 5000 TCD) Cogeneration Power Plant 15MW

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] The land acquisition and machinery procurement work is in progress. The installation of machinery will be completed by the end of 2006 and 2006-07 will be a trial crushing season for Sadashiva Sugars.

Greenfield Project-Jewargi Location Malli Village, Taluka: Jewargi, Dist: Gulbarga, State: Karnataka. It is about 15 kms from Sindagi on the State Highway No.12 Land Area The land measuring about 162000 sq. mtrs shall be required for the entire factory and administrative setup Main Product By Products White crystal Sugar a) b) c) Licenced Capacity Cogeneration b) power press-mud

Sugar 2500 TCD (expandable to 5000 TCD) Cogeneration Power Plant 15MW

The land acquisition and machinery procurement work is in progress. The installation of machinery will be completed by the end of 2006 and the 2006-07 crushing season will be a trial season for this new project.

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] Ugar Sugar-Unit Tasgaon SSK The Ugar Sugar Works-Unit Tasgaon SSK (Leased Plant) The Company has taken on lease, Tasgaon Taluka Sahakari Sakhar Karkhana Ltd., Turchi, (Tasgaon). This plant is having a capacity of 2750 TCD per day. The lease agreement with Tasgaon SSK has been signed for a period of 6 years. Commercial pro Ugar Sugar-Unit Tasgaon SSK has crushed a total of 2.22 lac MT for the season 2005-06. The total bagging for this season amounts to 2.50 lac quintals.duction has commenced.

Ugar Sugar-Unit New Phaltan Sugar The Ugar Sugar Works-Unit New Phaltan Sugar W The Company has taken on lease New Phaltan Sugar Works Ltd., situated at Sakharwad Taluka Phaltan Dist.Satara. This plant is approximately 100 kms from Pune.orks (Leased Plant). This plant has a capacity of 1250 TCD. The lease agreement with New Phaltan Sugar has been signed for a period of seven years. Commercial production has commenced. Ugar Sugar-Unit New Phaltan Sugar has crushed a total of 1 lac MT for the season 2005-06.

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Chapter V

INTRODUCTION ABOUT THE DIVERSIFICATIO N FRAGIES


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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Introduction about the Diversification Project


FRAGIES The production of new product called fragies is a sugar cube in the form of ship. This unique project is undertaken in the village Ugar-khurd, Dist:-Belgaum , State:- Karnataka. The company has entered into a buy-back agreement with the Fragies Vorwaltung GMBH Germany. The project is unique in itself. It is first time in the world such a project is undertaken, because the sugar cubes will be introduced in the form of ship. What are fragies:- Fragies are a floating and exciting alternative to the rather dull sugar cubes. To allow easy dosing through their weight is exactly alike, 3 grams. Fragies are produced of three sugar components of different states of aggregation. The sophisticated combination makes floatable fudges out of which the boats are formed. Fragies make the ideal media for any catering, customer client, the showbiz or the convience sector. It has a appealing look.

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] The fragies will be introduced in four varieties. 1.Fragies Coffee 2.Fragies Cappuccino 3.Fragies Tea 4.Fragies Taste

The color make the difference so that fragies taste comes with an additional flavour. As an extra effect all four varieties of fragies exhibit a different dissolving speed. The longer they float the more fun in cup of drinking. By Product Fragies will not have any by product.

Availability of raw materials, water, power. 1) Raw material: The plant is located close to the existing sugar factory. The raw material for fragies is sugar, which is easily and readily available. The raw material i.e. sugar required is 10% of the production i.e. Rs226.80 lacs. 2) Water: Ugar Khurd is blessed on its south flowed the perennial river Krishna. The existing infrastructure at Ugar which caters for the main sugar plant is also available for this plant. 3) Power:

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] Power will be drawn from the co-generation plant of the main product.

Market for finished product: The company has entered into buy-back arrangement with the fragies Verwaltung GMBH, Germany. The Germany Company has agreed to buy 22.5 Million boxes (i.e. approximately 56.25 lakh Kgs.) within period of five years or up to achievement of net profit of 3.5 Million euros by the manufacturer whichever is earlier. The customer will establish the letters of credit for the purchase of the product.

Technology and Know-how: The Germany Company has agreed to provide the necessary technology and Know-how. Kloeckner Hacnsel Processing GMBH, Germany, will supply the entire machinery. The product will be manufactured as per the specification provided by the Germany Company.

Packaging of the Product: Proper packing of fragies is very important. As each fragies consists of just 3 gms. It is very delicate. Importance of this product lies in its shape, design. So care should be taken that the product is handled carefully. So packaging is of utmost important. The product will be accepted only up to maximum 2% of defects. Packaging will be given on contract basis. Ratnagiri will supply the packaging material. One of the company from

Rationale of EOU Plant:


1. As it is located very close to the existing sugar plant at Ugar Khurd, the Page 38

raw material and power availability is in abundance. Babasabpatilfreepptmba.com

FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] 2. 3. five years. 4. 5. This will be an opening for the company in the field of exports. Sugar fragies being a futuristic and fancy product has an appeal in the The company will also save on transportation cost of raw materials. The company has entered into a technological agreement with the

German company who has also agreed to the buy back the production for a period of

urban area across the world.

Chapter V

Financial Appraisal
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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Financial Appraisal
Capital Investment includes all the expenditures which are expected to produce benefits to the firm over a long period of time, encompasses both tangible and intangible assets. Some companies classify capital expenditure in a manner, which provides useful information for decision-making. Which project to be selected is one of the critical decision-making process. It depends on certain criteria. Identifying financial appraisal of project is one of the critically important and complex stage. The shareholder wealth maximization goal states that the management should endeavor to maximize the net present value of the expected future cash flows to the shareholder of the firm. NPV refers to the discounted sum of the expected net cash flows. The shareholder wealth maximization goal reflects the magnitude, timing and risk associated with the cash flows expected to be received in the future by shareholders. The NPV is discounted at the rate of cost of capital. Cost of capital is the minimum expected rate of return. The company must earn, the minimum return so as to satisfy the shareholders.

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Chapter VII

Objectives
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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Objectives of the Project

7. To know the cost of the Project. 8. Time frame required to complete the Project. 9. Financing Method. 10. Cost of Finance. 11. Human Resource Required. 12. Commercial Business. a. Preparation of Profit and Loss Account. b. Preparation of Cash In Flow Statement. c. Calculation of Net Present Value. d. Payback Period. e. Internal Rate of Return.

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Introduction
Finance is regarded as the life blood of the business enterprise. This is because in the modern money oriented economy finance is one of the basic foundations of all kinds of economic activities. Decisions with regard to the investment in the current assets and fixed assets are significant as they determine the size of the firm, financial requirement, extent of business risks etc. Investment decision pertains to long term investment is crucial. It is absolutely necessary that the firm should carefully plan its investment program so that it may get the finances at the right time and they are put to most profitable use. An opportune investment decision can give spectacular results. On the other hand an ill advised and incorrect decision can jeopardize the survival of biggest firm.

1. To Know the Cost of Project:


Cost of the project means the capital expenditure. It includes investment in fixed assets. The overall cost of this new project is estimated to be Rs.22, 70,00,000 i.e. 384745.76 Euro (1 Euro = Rs.59). The main machinery costs Rs.17, 70,00,000, which Babasabpatilfreepptmba.com Page 43

FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] also includes erection cost. The machinery is tailor made. This machinery is

exclusively used for the production of fragies. The machine cannot be alternatively used for production of any other products. The Germany Company has agreed to provide the necessary technology and Know-how. Kloeckner Hacnsel Processing GMBH, Germany, will supply the entire machinery. The cost of ancillary machinery is Rs.2, 00,00,000. The building cost Rs.3, 00,00,000. The project building is erected in the premises of present sugar factory. So there is no any addition investment in the purchase of land. Here we can say that land is efficiently utilized by the organization.

Cost of Project: Particulars Main Machinery Ancillary Machinery Building Total Cost of Project

Amount 17,70,00,000 2,00,00,000 3,00,00,000 22,70,00,000

2. Time frame required to complete the Project:


This project has not still started with the production. The erection of the building and installation of the machinery will be completed by November 2006. The company has entered into buy-back arrangement with the fragies Verwaltung GMBH, Germany. The Germany Company has agreed to buy 22.5 Million boxes (i.e. approximately 56.25 lakh Kgs.) within period of five years or up to achievement of net profit of 3.5 Million euros by the manufacturer whichever is earlier. After five years either the contract may be renewed or the known how will be registered by the name of Ugar Sugar Works.

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

3. Financing Method:
One of the important function of finance manager is to assemble required amount of funds from different sources. Problem of finance is not much felt by the sole trading organization, partnership firms etc. because they are run on small scale. But the real financial problem is faced by corporate enterprises, which are operated on a very large scale. It is necessary to be familiar with different sources of funds for meeting various financial requirements of an organization. The method of collecting funds is linked up with the period and the purpose for which funds are required. It is also necessary to consider the cost of capital before taking any decision relating to the selection of sources funds supply. The Ugar Sugar Works Ltd. Is a Public Ltd. Company under private sector. Public company is a company where the shareholders are more than fifty. Ugar Sugar Works has 18000 shareholders with share capital of Rs.9 Cr. These shares are listed in Bombay stock exchange with the face value of Rs.1 each. As per the Companies Act of 1956 the company is allowed to issue only equity share. The company cannot issue debentures and preference shares. The additional fund requirement is fulfilled by borrowings i.e. long-term loans. A firms capital generally consists of own fund and borrowed funds that represent combine investment in a business. The optimum capital structure is one that maintains the ideal ratio between different types of securities issued by the company. For this new project i.e. the production of fragies the company has not issued any equity shares. It has raised funds through internal/retained earnings i.e. promoters contribution and borrowings. This unit is 100% export oriented. Promoters contribution: Promoters contribution is nothing but the retained earnings. The entire amount of profit is not distributed by the way of dividend to the shareholders. It is also referred to as self- financing or internal financing or reinvestment. It is nothing but the re-investment of on savings accumulated over the years by transferring certain portion of the net profit to the reserves of a company. When the company uses the fund of one unit to the unit, it is known as Intra Fund Transferring. It is a most economical method of financing. It is an ideal source of financing for expansion, modernization and diversification. It is neither expensive nor subject to any legal complications. Babasabpatilfreepptmba.com Page 45

FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Borrowings / Loans: Generally loans are meant to serve the long term financial purposes of a business concern. Loans represent and advance granted on a separate account called loan account. Interest is charged on the whole amount sanctioned to the customers. The loan is borrowed from Robo Financial Institution, Singapore Branch at rate of 4.5%. The company will get the loan in the form of Euros, which will be then converted, into Indian currency. The company has to pay back the loan again in the form of Euro. As the devaluation of currency is subject to fluctuation the company, uses forward cover/hedging to avoid risk. After every 6 months this forward cover/hedging is renewed. Capital Structure: Particulars Borrowing / Loan from Robo International Promoters Contribution / Internal Fund Amount 14,16,00,000 8,54,00,000 22,70,00,000

4. Cost of Financing / Capital:


Cost in simple terms means sacrificing something such as time, money, material, man hours for the production of goods any other factor, it too has cost. The projects cost of capital is the minimum required rate of return on funds committed to the project, which depends on the riskiness of its cash flows. The investment project undertaken by a firm may differ in risk, each one of them will have its own unique cost of capital. Cost of capital determines the suitability of investment proposals. When a company has before it, two different investment proposal, in order to select best investment proposal, which will give more return, the calculation of cost of capital is essential. Thus the cost of capital is The Rate that must be paid to obtain funds for business activities. It is the minimum rate of return a company earns on its investment in order to give expected income to the equity shareholders.

Significance of Cost of Capital: Babasabpatilfreepptmba.com Page 46

FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

a. Investment Evaluation: The primary purpose of measuring the cost of capital is its use as a financial standard for evaluating the investment project. In the NPV method, an investment project is accepted if it has a positive NPV. The projects NPV is calculated by discounting its cash flow by the cost of capital. In the sense, the cost of capital is the discount rate used for evaluating the desirability of an investment project. In the IRR method, the investment project is accepted if it has an internal rate of return greater than the cost of capital.

b. Designing Debt Policy: The debt policy of a firm is significantly influenced by the cost consideration. The interest tax shield reduces the overall cost of capital, though it also increases the financial risk of the firm. In designing the financial policy, that is, the proportion of debt and equity in the capital structure, the firm aims at maximizing the firm value by minimizing the overall cost of capital. The cost of capital can also be useful in deciding about the methods of financing at a point of time.

c. Performance Appraisal: The cost of capital framework can be used to evaluate the financial performance of the top management. Such an evaluation will involve a comparison of actual profitability of the investment projects undertaken by the firm with the projected overall cost of capital, and the appraisal of the actual cost incurred by the management in raising the required fund. Component of Cost of Capital: The cost of capital consists of different sources of capital. i. Cost of Equity ii. Cost of Preference Shares iii. Cost of Retained Earning iv. Cost of Debt Babasabpatilfreepptmba.com Page 47

FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

i. Cost of Retained Earning: Undistributed and accumulated profit represents Retained Earning. Retained Earning is also a source of funds that can be used by a company conveniently without having to pay any dividend on these funds. Therefore, it is assumed that the source of finance is cost free. In fact, retained earnings have opportunity cost. The opportunity cost of retained earning is dividend sacrificed by the shareholders. Had this dividend been paid to the shareholders, they would have invested on some other company shares and earned at least a minimum rate of return which is calculated in a similar manner as the cost of equity capital, without giving effect to income tax and brokerage cost consideration. Computation of cost of Retained Earnings: Kr = Ke ( 1 t ) ( 1 b ) Here: Kr = Cost of Retained Earning Ke = Cost of Equity T = Tax Rate B = Brokerage Rate Ke = 8% T = Nil The project is 100% export oriented so the tax is exempted. B = Nil Kr = Ke ( 1 t ) ( 1 b ) Kr = 8% ii. Cost Debt Capital:

Cost of debt capital is the rate of return expected by the lenders. It is the rate of interest and debt advance. Therefore cost of debt is equal to the rate of interest payable on debt (before tax). Interest payable by the company is subject to tax deduction. Hence, cost of debt before tax should be adjusted for tax effect. Computation of cost of Debt after tax: Kda = kd ( 1 t ) Here: Kd Kda = = Cost of Debt before Tax Cost of Debt after Tax Page 48

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] T = Tax Rate

Kd = 4.5% i.e. the interest rate T = Nil The project is 100% export oriented so the tax is exempted. Kda = kd ( 1 t ) Kda = 4.5% ( 1 t ) Kda = 4.5% Weighted Average Cost of Capital (WACC): In financial decision making, overall cost of capital known as composite cost of capital is more useful than specific cost of capital. Overall cost of capital is an average of the cost of each source of funds employed by the company. Weighted average method is one of the methods of calculating the overall cost of capital. WACC is the weighted average of the cost of different sources of finance, weights being attached on the basis of proportion which each source of finance bears to the total fund. According to ICMA (London) Weighted Average Cost of Capital is the average cost of companys finance weighted according to the proportion each element bears to the total pool of capital, weighing is usually based on market valuation current yields and cost after tax. Weighted Average Cost of Capital plays an important role in determining the capital structure, because the optimum capital structure lies at that point where WACC is minimum. In the evaluation of investment project, WACC is considered to be the minimum rate of return required from a project so as to enable the firm to pay an expected rate of return to the investors. Computation of Overall Cost of Capital Capital Proportion Cost of Capital After Retained Earnings / Promoters 8,54,00,000 Contribution Borrowings/Debt 14,16,00,000 22,70,00,000 37.62% 62.37% 100% Tax 8% = 0.08 4.5% = 0.045 3.00% 2.80% 5.80% Page 49

Name

WACC

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] WACC = 5.80%

Computation of Cost of Debt after Tax. Kda = kd ( 1 t ) Kda = 4.5% ( 1 t ) Kda = 4.5% Computation of Cost of Retained Earnings. Kr = Ke ( 1 t ) ( 1 b ) Kr = 8% Working Note: 1. Calculation of proportion of different sources of capital. 8,54,00,000 a. Proportion of Retained Earnings = 22,70,00,000 = 37.62% 14,16,00,000 b. Proportion of Debt = 22,70,00,000 = 62.37% Option II: The company if totally depends on equity the cost of capital is 8%. Which is more than WACC. If the company totally depends upon borrowing the cost of capital is between 8% to 9%, which is again more than the WACC. Therefore the optimal capital structure is one which has comprises Debt and Equity. As per the workout the cost of capital is less when the capital structure consists of different sources, which can be concluded from the above computations.

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

5. Human Resource Required:


The machinery used for the production of fragies is fully automatic. It requires maximum 10 skilled employees to control the machinery. It is estimated that other 35 workers will be needed for packaging and loading of finished product. Therefore the total workers required are estimated to be 45. The 10 skilled employees are given special training to handle the machinery. The expenses incurred for training is 7.5 lakhs. Every year the unit has to incur the expense of Rs.1.5 lakhs for food hygiene.

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

6. Commercial Business: a. Preparation of Projected Profit and Loss Account

Particulars
Income
Gross Sales Less: Excise Duty Net Sales Expenditures Raw Materials Consumed Purchase of traded items Store spares etc. consumed Subtotal(A) Power, Fuel and Water Repairs and Maintenance Staff Cost
Depreciation and Amortisation

30/09/06

30/09/07

30/09/08

30/09/09

30/09/10

30/09/11

28.28 (28.28) (28.28)

2369.21 2369.21 226.80 226.80 184.05 32.85 37.13 292.14 546.16 772.96 772.96 38.65 734.31 1634.89 532.00 50.90 1052.00 1052.00

2493.90 2493.90 226.80 226.80 184.05 32.85 40.84 248.08 505.81 732.61 732.61 38.65 36.63 731.63 1759.27 540.10 39.59 1179.58 1179.58

2493.90 2493.90 2493.90 2493.90 226.80 226.80 184.05 32.85 42.88 210.73 470.51 697.31 697.31 36.63 34.87 226.80 226.80 184.05 32.85 42.88 179.08 438.86 665.66 665.66 34.87 33.28

2618.60 2618.60 226.80 226.80 184.05 32.85 42.88 152.25 412.03 638.83 638.83 33.28 672.11 1946.49 548.21 5.66 1392.62 1392.62

Subtotal(B) A+B Opening WIP Closing WIP Cost of Goods Produced Opening Stock of Finished Goods Closing Stock of Finished Goods Cost of Production Gross Profit Admin & Selling Exp Interest Cost Operating Profit Other Incomes Profit before Tax

699.08 667.24 1794.82 1826.66 540.10 540.10 28.28 16.97 1226.44 1269.59 1226.44 1269.59

b. Preparation of Cash In Flow Statement. An analysis of cash flows is useful for short run planning. A firm needs sufficient cash to pay debt maturing in the near future, to pay interest and other Babasabpatilfreepptmba.com Page 52

FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] expenses and to pay dividend to shareholders. The firm can make projections of cash inflows and outflows for the near future to determine the availability of cash.

Cash inflow statement for the year 2007

Particulars
Sales Revenue Less: Operating Expenses Raw Materials Power, Fuel and Water Repairs and Maintenance Staff Cost Administration Interest Cost Depreciation PBT Add: Depreciation Cash In Flow -

Amount
23,69,21,000 2,26,80,000 1,84,05,000 32,85,000 37,13,000 5,32,00,000 50,90,000 2,92,14,000 10,13,34,000 2,92,14,000 13,05,48,000

Cash inflow statement for the year 2008


Particulars
Sales Revenue Less: Operating Expenses Raw Materials Power, Fuel and Water Repairs and Maintenance Staff Cost Administration Interest Cost Depreciation Babasabpatilfreepptmba.com -

Amount
24,93,90,000 2,26,80,000 1,84,05,000 32,85,000 40,84,000 5,40,10,000 39,59,000 2,48,08,000 Page 53

FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] PBT Add: Depreciation Cash In Flow 11,81,59,000 2,48,08,000 14,29,67,000

Cash inflow statement for the year 2009


Particulars
Sales Revenue Less: Operating Expenses Raw Materials Power, Fuel and Water Repairs and Maintenance Staff Cost Administration Interest Cost Depreciation PBT Add: Depreciation Cash In Flow -

Amount
24,93,90,000 2,26,80,000 1,84,05,000 32,85,000 42,88,000 5,40,10,000 28,28,000 2,10,73,000 12,28,21,000 2,10,73,000 14,38,94,000

Cash Inflow Statement for the Year 2010


Particulars
Sales Revenue Less: Operating Expenses Raw Materials Power, Fuel and Water Repairs and Maintenance Staff Cost Administration Interest Cost Depreciation PBT Add: Depreciation Cash In Flow -

Amount
24,93,90,000 2,26,80,000 1,84,05,000 32,85,000 42,88,000 5,40,10,000 16,97,000 1,79,08,000 12,71,17,000 1,79,08,000 14,50,25,000

Cash Inflow Statement for the Year 2011


Particulars
Sales Revenue Less: Operating Expenses Raw Materials Power, Fuel and Water Repairs and Maintenance Babasabpatilfreepptmba.com -

Amount
26,18,60,000 2,26,80,000 1,84,05,000 32,85,000 Page 54

FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] Staff Cost Administration Interest Cost Depreciation PBT Add: Depreciation Cash In Flow 42,88,000 5,48,21,000 5,66,000 1,52,25,000 14,25,90,000 1,52,25,000 15,78,15,000

C H A R T S H O W IN G E S T IM A T E D A N N U A L C A S H F L O W S
180000000 160000000 140000000 120000000 100000000 80000000 60000000 40000000 20000000 0 2007 2008 2009 Y E AR 2010 2011

CASH FLOWS IN RS

YE AR C A S H IN F L O W S

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

c. Calculation of Net Present Value. The reorganization of the time value of money and risk is extremely vital in financial decision-making. If the timing and risk of cash flows is not considered the firm may make decisions that may allow it to miss its objectives of maximizing the owners welfare. The welfare of owners would be maximize when wealth or NPV is created from making financial decisions. Time Preference for money: Time Preference for money is an individuals preference for possession of a given amount of money now, rather than the same amount at some future time. Most individuals value the opportunity to receive money now higher than waiting for one or more periods to receive the same amount. Three reasons to the individuals time preference for money I. Risk As an individual it is not certain about future cash receipts he/she prefers receiving cash now. II. Preference for Consumption Preference for consumption over future consumption of goods and services either because of urgency of their present wants or because of the risk of not been in a position to enjoy future consumption. III. Investment Opportunities Most individuals prefer present cash to future cash because of available investment opportunities to which they can put present cash to earn additional cash.

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] Required Rate of Return : The time preference for money is generally expressed by an interest rate. This rate will be positive in the absence of any risk. It may be therefore called the risk free rate. The required rate of return may also be called the opportunity cost of capital of comparable risk.

Present Value: Present Value of a future cash flow (inflow or outflow) is the amount of current cash that is of equivalent value to the decision maker. Discounting is the process of determining present value of a series of future cash flows. Net Present Value: Net present value of a financial decision is the difference between the present value of cash inflows and present value of cash outflows. In the NPV method, an investment project is accepted if it has a positive NPV. The project NPV is calculated by discounting its cash flow by the cost of capital.

Computation of Net Present Value:


Year I. II. III. IV. V. Cash Inflow 13,05,48,000 14,29,67,000 14,38,94,000 14,50,25,000 15,78,15,000 Discount Rate @ 6% 0.943 0.890 0.840 0.792 0.747 Present Value of Cash Flow 12,31,06,000 12,72,40,000 12,08,70,000 11,48,59,000 11,78,87,000 60,39,62,000

Present Value of Cash Flow Less: Investment Net Present Value Babasabpatilfreepptmba.com

= =

60,39,62,000 22,70,00,000 37,69,62,000 Page 57

FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

d. Payback Period This is traditional method of evaluating the investment project. It is also known as Pay Off method of Capital Budgeting. Under this method, time required to recover the original cost of investment through the income, it generates is found out to measure the suitability of project. In other words, pay back period implies, the number of years required for capital expenditure to pay for itself. An investment project the cost of which can be recovered within a shortest period of time can be adjudged to be an ideal investment project. In order to determine the pay back period, the net income generated by investment project without depreciation is considered. Net income after charging tax but before depreciation is determined in order to know the actual cash generated by a project. Pay back period represents length of time required to recover the original cost of investment through the cash flows generated by it. If the cash flow is constant for all the years the pay back period can be ascertained with the help of following formula. Cost of Investment Pay Back Period = Net Cash Benefits after Tax The cash inflow of this project is uneven. So the pay back period is calculated in the following manner. Computation of Pay Back Period Cash Inflow 13,05,48,000 14,29,67,000 14,38,94,000 Babasabpatilfreepptmba.com Cash Outflow / Investment 22,70,00,000 9,64,52,000 Page 58

FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] 14,50,25,000 15,78,15,000 Pay Back Period = 1 Year 8 Month

For Rs. 14,29,67,000 For Rs. 9,64,52,000

= 12 Months = ? = 9,64,52,000 * 12 Months 14,29,67,000 = 8 Months

e.Internal Rate of Return: This is one of the discounted cash flow methods of evaluating investment projects. It is also known as yield method, marginal efficiency of capital method, time adjusted rate of return method etc. This method gives time value to money by applying appropriate discount rate to the future cash flows. Internal rate of return method attempts to find out present value of streams of net cash inflows resulting from an investment project to equate with the present value of cash outflows. An appropriate discount rate cannot be found out at stretch. Internal rate of return is nothing but the rate of earning of an investment project. It is the discounting rate which equates present value of total net cash inflows resulting from an investment proposal with the present value of total cash outflows. If the internal rate of return is higher than the cut off rate the investment project may be accepted, otherwise rejected. In case of single investment project, if the internal rate of return is greater than the cut off rate, the project will be accepted and if it is less than the cut off rate is rejected. Excess NPV Over Cost of Investment Difference Between NPV Calculate at Higher Rate & Lower Rate Difference Between Lower Rate and Higher Rate

IRR

= Lower Rate

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Computation of IRR Computation of IRR Discount Rate @ 6% Year I. II. III. IV. V. Cash Inflow 13,05,48,000 14,29,67,000 14,38,94,000 14,50,25,000 15,78,15,000 Discount Rate @ 6% 0.943 0.890 0.840 0.792 0.747 Present Value of Cash Flow 12,31,06,000 12,72,40,000 12,08,70,000 11,48,59,000 11,78,87,000 60,39,62,000

Computation of IRR Discount Rate @ 40% Year I. II. III. IV. V. Cash Inflow 13,05,48,000 14,29,67,000 14,38,94,000 14,50,25,000 15,78,15,000 Discount Rate @ 40% 0.714 1.224 1.589 1.849 2.035 Present Value of Cash Flow 9,32,11,000 17,49,91,000 22,86,47,000 26,81,51,000 32,11,53,000 1,08,61,53,000

Computation Of IRR Discount Rate @ 50% Year I. II. III. IV. V. Cash Inflow 13,05,48,000 14,29,67,000 14,38,94,000 14,50,25,000 15,78,15,000 Discount Rate @ 50% 0.667 0.444 0.296 0.198 0.133 Present Value of Cash Flow 8,70,75,516 6,34,77,348 4,25,92,624 2,87,14,950 2,08,31,580 24,26,92,018

Computation of IRR Discount Rate @ 60% Year I. Cash Inflow 13,05,48,000 Discount Rate @ 60% 0.625 Present Value of Cash Flow 8,15,92,500 Page 60

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI] II. III. IV. V. 14,29,67,000 14,38,94,000 14,50,25,000 15,78,15,000 0.391 0.244 0.153 0.095 5,59,00,097 3,51,10,136 2,21,88,825 1,49,92,425 20,97,83,983

Investment Higher NPV Over Investment Lower NPV Over Investment

= = =

22,70,00,000 24,26,92,018 20,97,83,983 Difference Between Lower Rate and Higher Rate

IRR

= Lower Rate +

Excess NPV Over Cost of Investment Difference Between NPV Calculate at Higher Rate & Lower Rate

IRR

= 50% = 50 + 4.76 = 54.76 %

1,56,92,018 3,29,08,035

* ( 60 50 )

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Chapter VIII

SWOT ANALYSIS

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

SWOT Analysis
Strength: 1. Assured Market: The Market is assured for final Product. Verwaltung GMBH, Germany will take the final product. 2. Unique Project: The production of sugar cubes in the shape of ship will be introduced first time in the market. 3. Availability of Raw Material: Sugar is the raw material for the production of fragies, which is easily available from the existing sugar factory. The plant will even not face the shortage of power and water, as it is available from the existing main plant. Weakness: 1. Employee Requirement: The employees required should be highly skilled and trained. 2. Maintenance & Repair: For the maintenance and repair of the machinery the company has to depend on the contracted company. Threats: 1. Fluctuation: Fluctuation in the foreign currency is the only threat. Opportunity: 1. International Market: It is the good opportunity to enter in the International Market. 2. To Nation: It helps nation to earn foreign currency.

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Chapter IX

FINDINGS

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Findings
Profit & Loss Account: From the estimated profit and loss account it is estimated that the cost of production will gradually go on decreasing. The production is almost constant. The profit will also go on increasing gradually. Financing Method: The project is financed through debt and promoters contribution in the ratio of 1.6 : 1. The accepted debt equity ratio is 2 : 1. As the ratio of debt is 1.6 the capital structure is in good position. The unit in case of need of cash can still borrow the debt. Cost of Capital: The capital structure for this project consists of debt and promoters contribution. The project has three options of financing. Option-I. 100% Borrowings. If the project is 100% financed through borrowings the cost of capital would be between 8% to 9%. Option-II 100% Equity. If the project is 100% financed through equity the cost of capital would be 8%. Option-III. The project is actually financed through borrowings and promoters contribution. As we have seen in the earlier computation, the overall cost of capital is 5.80% i.e. 6%. Hence, the cost of capital of the project is less. Net Present Value: Net Present Value of this project is 37,69,62,000. As per the acceptance rule positive NPV is accepted. As the NPV of this project is positive, we can say that the project can be accepted.

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Pay Back Period: An investment project the cost of which can be recovered within a shortest period of time can be adjudged to be an ideal investment project. As per the calculation the pay back period of this project is very short i.e. just 1 year 8 months, which is very profitable. Internal Rate of Return: If the internal rate of return is higher than the cut off rate the investment project may be accepted, otherwise rejected. In case of single investment project, if the internal rate of return is greater than the cut off rate, the project will be accepted. The cut off rate of this project is 6% and IRR is 54%. Hence this project is very profitable to the company. Overall we can say that the project will turn to be very profitable to the company.

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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]

Chapter X

BIBLIOGRAPHY

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BIBLIOGRAPHY
1. FINANCIAL MANAGEMENT BY 2. FINANCIAL MANAGEMENT BY 3. FINANCIAL MANAGEMENT BY 4. COMPANY WEBSITE 5. MAGAZINES 6. ANNUAL REPORTS I M PANDEY KHAN AND JAIN A D BHAT

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