CAPITAL BUDGETING

Emerging Dairy Markets:

Food service institutional market: it is growing at double the rate of

consumer market.

Defense market: An important growing market for quality products at reasonable prices.

Ingredients market: A boom is forecast in the market of dairy products

used as raw material in pharmaceutical and allied industries.

Parlor market: The increasing away - from - home consumption trend

opens new vistas for ready - to - serve dairy products which would ride piggyback on the fast food revolution sweeping the urban India.

India, with her sizable dairy industry growing rapidly and on the path of modernization, would have a place in the sun of prosperity for many decades to come. The one index to the statement is the fact that the projected total milk output over the next 15 years (1995 - 2010) would exceed 1457.6 million tones which is twice the total production of the past 15 years!

Penetration of milk products: Western table spreads such as butter, margarine and jams are not very popular in India. All India penetration of butter / margarine is only 4%.This is also largely represented by urban area, where penetration is higher at 9%. In rural areas, butter / margarine have penetrated in 2.1% of households only. The use of these products in the
large metros is higher, with penetration at 15%. Penetration of cheese is almost nil in rural areas and negligible in the urban areas. Per capita consumption even among the cheese - consuming households is a poor 2.4kg pa as compared to over 20kg expensive products and also non - availability in many parts of the country Butter, margarine and cheese products are mainly manufactured by organized sector.

Similarly, penetration of ghee is highest in medium sized towns at 37.2% compared to 31.7% in all urban areas and 21.3% in all rural areas. The all India penetration of ghee is 24 1%. In relative terms, penetration of ghee is significantly higher in North accounts for 57% of ghee consumption and west for 23%. A large part of ghee is College 49

CAPITAL BUDGETING made at home and by small / cottage industry form milk. The relative share of branded products in this category is very low at around 1-2%. Milk powder and condensed milk have not been able to garner any significant consumer acceptance in India as indicated by a very low 4.7% penetration. The penetration is higher at 8.1% in urban areas and lower at 3.5% in rural areas. Within urban areas, it is relatively higher in medium sized towns at 8.5% compared to 7.7% in large metros. Market Size And Growth: Market size for milk (sold in loose / package d form) is estimated to be 36mnMT valued
at Rs 470bn. The market is currently growing at round 4%pa in volume terms. The milk surplus states in India are Uttar Pradesh, Punjab, Haryana, Rajasthan, Gujarat, Maharasthra, Andhra Pradesh, Karnataka and TamilNadu, the manufacturing of milk products is concentrated in these milk surplus States. The top 6 states viz. Uttar Pradesh, Punjab, Rajasthan, Gujarat, Tamil Nadu, and Madhya Pradesh together account for 58% of national production.

Milk production grew by a mere 1% pa between 1947 and 1970. Since the early 70s, under Operation Flood, production growth increased significantly averaging over 5% pa. About 75% of milk is consumed at the household level which is not a part of commercial dairy industry Loose milk has a larger market in India as it is perceived to
be fresh by most consumers. In reality however, it poses a higher risk of adulteration and contamination.

The production of milk products, i.e. milk products including infant milk food, malted food, condensed milk & cheese stood at 3.07 lakh MT in 200 9, whereas that of malted
food is at 65000MT. Cheese and condensed milk production stands at 5000 and 11000 MT respectively in the same year. (Source: Annual Report 2009-2010, DEPI)

Major Players:

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CAPITAL BUDGETING

The packaged milk segment is dominated by the dairy cooperatives. Gujarat Cooperative Milk Marketing Federation (GCMMF) is the largest player. All other local dairy cooperatives have their local brands (For e.g. Gokul, Warana in Maharashtra, Saras in Rajasthan, Verka in Punjab, vijaya in Andhra Pradesh, Aavin in Tamil Nadu, etc). Other private players include J K Dairy, Heritage Foods, Indiana Dairy, Dairy Specialties, etc Amrut Industries, once a leading player in the sector has turned bankrupt and is facing liquidation.

3. EXPORT POTENTIAL: India has the potential to become one of the leading players in milk and milk product exports. Locational advantage: India is associated amidst major milk deficit countries in Asia Africa. Major importers of milk and milk products are Bangladesh, China, Hong Kong, Singapore. Thailand, Malaysia, Philippines, Japan, UAE, Oman and other gulf countries, all located close to India.

Low Cost of Production: Milk production in scale insensitive and labour intensive. Due to low labor cost, cost of production of milk is significantly lower in India. Concerns in export competitiveness are

Quality: Significant investment has to be made in milk procurement, equipments, chilling and refrigeration facilities. Also, training has to be imparted to improve the quality to bring it up to international standards.

Productivity: To have an exportable surplus in the long-term and also to maintain cost competitiveness, it is imperative to improve productivity of Indian cattle.

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CAPITAL BUDGETING There is a vast market for the export of traditional milk products such as ghee, paneer, shrikhand, rasgolas and other ethnic sweets to the large number of Indians scattered all over the world.

India's exports of milk products:

Description (Quantity, M.T: Value, Rs. Million)

Skimmed milk powder

2005-06
Quantity 4,638.620 Value 335 320

2006-07
Quantity 282.700 Value 19.640

2007-08
Quantity 5.000 Value 0.375

Milk and milk food for babies

8.270

2.019

111.370

4,270

11.000

2.020

Milk cream
Sweetened condensed milk

332.230
41.730

28 040
2.840

1.000
9.220

0.084 0.970 60.390 7.220

Whey

78.460

3.750

11.500

1.010

6.000

0.342

Ghee / Butter / Butter oil

7,895.080

431.10

299.970

19.20

452.080

238950

Cheese (a) Fresh

(b) Processed

0.100
5.670

0.0130
1.200

2.10

0.375

22.100

2.190

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CAPITAL BUDGETING
(c) Other 66.640 8.350 36.780 0.690 24.840 4.550

Total

872.70

52.40

255 . 600

What does the Indian Dairy Industry has to Offer to Foreign Investors? India is a land of opportunity for investors looking for new and expanding markets. Dairy food processing holds immense potential for high returns Growth prospects in the dairy food sector are termed healthy, according to various studies on the subject The basic infrastructural elements for a successful enterprise are in place. Key elements of free market system Raw material (Milk) availability An established infrastructure of technology Supporting manpower

An entrepreneur's participation is likely to provide attractive returns on the investment in a fast growing market such as India, along with an export potential in the Middle East, Singapore, Malaysia, Indonesia, Korea, Thailand, Hong Kong and other countries in the region. Among several areas of potential' participation by NRI's and foreign investors. The following list outlines a few promising opportunities: Biotechnology:

Dairy cattle breeding of the finest buffaloes and hybrid cows Milk yield increase with recombinant somatotropin Recombinant chymosin, acceptable to vegetarian consumers

Dairy cultures, probiotics, dairy biologies, enzymes and coloring materials for food processing

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CAPITAL BUDGETING Fermentation derived foods and industrial products alcohol, citric acid, lysine,
flavor preparations, etc.

Biopreservative ingredients based on dairy fermentation, viz., Nisin,

Pedicoccin, Acidophilin, Bulgarican contained in dairy powders.
Dairy / food processing equipment:

Potential exists for manufacturing and marketing of cost competitive food processing world - class quality.

machinery of

Food packaging equipment:

Opportunities lie in the manufacturing of both machinery and packaging materials that help develop brand loyalty and a clear edge in the marketing of dairy foods. Distribution channels:

For refrigerated and frozen food distribution, a world class cold chain would help in providing quality assurance to the consumers around the region. Retailing:

There is scope for standardizing and upgrading food retailing in major metropolitan cities to meet the shopping needs of a vast middle class. This area includes grocery stores of European and North American quality, warehousing and distribution.

4. PRODUCT DEVELOPMENT:

Dairy foods can be manufactured and packaged for export to countries where Indian food enjoys basic acceptance. The manufacturing may be carried out in contract plants in India. An option to market the products in collaboration with local establishments or entrepreneurs can also be explored, products exhibiting potential include typical indigenous dairy foods either not available in foreign countries or products whose authenticity may be questionable. Gulabjamuns, Burfi, Peda,
Rasagollas, and a host of other Indian sweets have good business prospects.

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CAPITAL BUDGETING Products typically foreign to India but indigenous to other countries could also be developed for export. Such products can be manufactured in retail package sizes and could be produced from milk of sheep, goats and camel. Certain products are characteristically produced from milk of a particular species. For example, Feta cheese is used in significant tonnage, in Iran. Sheep milk is traditionally used for authentic Feta cheese. Accordingly, India's goat and sheep herds can be utilized for the manufacture of such authentic products. Ingredient manufacture:

Export markets for commodities like dry milk, condensed milk, ghee and certain cheese varieties are well established. These items are utilized as ingredients in foreign countries. These markets can be expanded to include value - added ingredients like aseptically packaged cheese sauce and dehydrated cheese powers

Cheese sauce:

Canned

cheese sauce is made from real cheese to which milk, whey, modified food starch, vegetable oil,

colorings and spices may be added. Cheese sauce is useful in kitchens for the preparation omelet, sandwiches, entrees, and soups. In addition, cheese sauce is used as a topping on dishes.

Cheese powders:

cheese powders are formulated for dusting or smearing of popular snacks like potato chips, crackers, etc. they impart flavor and may be blended with spices. With the
globalization of food items, an opportunity should open up for food service and institutional markets

Indian (traditional) Milk Products:

There are a large variety of traditional Indian milk products such as MAKKHAN UNSALTED BUTTER GHEE - BUTTER OIL PREPARED BY
HEAT CLARIFICATION, FOR LONGER SHELF LIFE

KHEER

A SWEET MIX OF BOILED MILK, SUGAR AND RICE

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CAPITAL BUDGETING BASUNDI RABRI DAHI

LASSI

MILK AND SUGAR BOILED DOWN TILL IT THICKENS SWEETENED CREAM

A TYPE OF CURD

CURD MIXED WITH WATER AND SUGAR / SALT

MILK MIXED WITH LACTIC ACID TO COAGULATE.

CHANNA
(PANEER) KHOA MEATS -

EVAPORATED MILK. USED AS A BASE TO PRODUCE SWEET

The market for indigenous based milk food products is difficult to estimate as most of these products are manufactured at home or in small cottage industries catering to local areas.

Consumers while purchasing dairy products look for freshness, quality, taste and texture, variety and convenience. Products like Dahi and sweets like Kheer, Basundi, Rabri are perishable products with a shelf life of less than a day. These products are therefore manufactured and sold by local milk and sweet shops. There are several such small shops within the vicinity of residential areas Consumer loyalty is built by consistent quality, taste and freshness. There are several sweetmeat shops, which have built a strong brand franchise, and have several branches located in various parts of a city.

Branding of Traditional Milk Products: Among the traditional milk products, ghee is the only product which is currently marketed, in branded form. Main ghee brands are Sagar, MilkMan (Britania), Amul (GCMMF), Aarey (Mafco Ltd), Vijaya (AP Dairy Development Cooperative Federation), Verka (Punjab Dairy Cooperative). Everyday (Nestle) and Farm Fresh (Wockhardt).

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CAPITAL BUDGETING

With increasing urbanization and changing consumer preferences, there is possibility of large scale manufacture of indigenous milk products also The equipments in milk
manufacturing have versatility and ca be adapted for several products for instance, equipments used to manufacture yogurt also can be adapted for large scale production of Indian curd products (dhai and lassi). Significant research work has been done on dairy equipments under the aegis of NDDB.

Mafco Limited sells Lassi under the Aarey brand and flavored milk under the Energee franchise (in the western region, mainly in Mumbai). Britannia has launched flavored milk in various flavors in tetra packs.

GCMMF has also made a beginning in branding of other traditional milk products with the launch of packaged Paneer under the Amul brand. It has also created a new umbrella brand Amul Mithaee'', for a first new product Amul Mithaee Gulabjamun has already been launched in major Indian markets.

Western Milk Products:

Western milk products such as butter, cheese, and yogurt have gained popularly in the Indian market only during the last few years. However consumption has been expanding with increasing urbanization.

Butter:

Most Indians prefer to use home made white butter

(Makkhan) for reasons of

taste and affordability.Most of the banded butter is sold in the towns and cities. The major brands are Amul is the leading national brand while theother players have greater shares in their local markets. The latest entrantin the butter market has been Britannia. Britannia has the advantages of a widedistribution reach and a strong brand recall. Priced at par with the Amulbrand, it is expected to give stiff competition to the existing players. In 2009-2010 the butter production is estimated at 4 purposes rest all is in theyellow form.

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Cheese: The present market for cheese in India is estimated at about 9.000 tonnes and is growing at the rate of about 15% per annum. Cheese is mainly consumed in the urban areas. The four metro cities alone account for more than 50% of the consumption. Mumbai is the largest market (accounting for 30% of cheese sold in the country), followed by Delhi (20%), Calcutta (7%) and Chennai (6%). Mumbai has a larger number of domestic consumers, compared to Delhi where the bulk institutional segment (Mainly hotels) is larger.

Demand for various types of cheese in the Indian market:

Type of Cheese
Processed Cheese spread Mozzarella Flavored / Spiced Others

% of total consumption
50 30 10 5 5

The major players are Amul, Britannia, and Dabon international dominating the market. Other major brands were Vijaya, Verka and Nandini (all brands or various regional dairy cooperatives) and Vadilal. The heavy advertising and promotions being undertaken by these new entrants is expected to lead to strong 20% growth in the segment. Amul has also become more aggressive with launch of new variants such as Mozzarella cheese (used in Pizza), cheese powder, etd.

The entry of new players and increased marketing activity is expected to expand the market. All the major players are expanding their capacities.

Milk powder:

Milk powder is mainly of 2 types

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CAPITAL BUDGETING Whole milk powder Skimmed milk powder Whole milk powder contains fat, as distinguished from skimmed milk powder, which is produced by removing fat from milk solids. Skimmed milk powder is preferred by diet conscious consumers. Dairy whiteners contain more fat than skimmed milk powder but less compared to whole milk powder. Dairy whiteners are popular milk substitute for making tea coffee etc. The penetration of these products in milk abundant regions is driven by convenience and non perishable nature (longer shelf life) of the product.

Dairy sector of advanced nations export milk products with a subsidy of $1000 per tonne with a level of subsidy more than 60% of the price of milk powder produced in India, this has led to large scale imports of milk powder both in whole and skimmed form. To protect the domestic sector from these subsidized imports the central government has recently increased the basic import duty on all imports of milk powder more than 10000MT the basic customs duty has been left unchanged at 15%. In 2009-2010 India is estimated to have imported about 18,000
tonnes of milk powder against a total estimated production of 2.40 Lakh MTs. In 2010-11 India is expected to export 10000 MT of skimmed milk powder due to rise in international prices to $2300 per MT from last year's levels of $1400 per Mt. These expectations
are based on the strong demand from Russia, East Asia and Latin America, and also on tightening of supply in EU, which accounts for 75% of the annual global skimmed milk powder exports.

Major players: Milk powder / Dairy Whiteners: major skimme d milk brands are sagar (GCMMF) and
Nandini (Karnataka Milk Federation), Amul Full Cream milk powder is a whole milk powder brand.

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CAPITAL BUDGETING Leading brands in the dairy whitener segment are

Dalmia industry's Britannia's Nestele's

Everyday,

GCMMF's

Amulya,

Sapan,

Kwality Dairy India's

KreamKountry,

Wockhardt's

Farm Fresh and

Milkman Dairy Whitener.

Condensed Milk: The condensed milk market has grown from 9000 MT in 2008 to 11000 MT in 2009.
condensed milk is a popular ingredient used in home - made sweets and cakes. Nestle :s Milkmaid is the leading brand with more than 55% market share. The only other competitor is GCMMF's Amul.

Value addition in milk powder - infant foods:

Nestle is the market leader in the segment. This is a category where brand loyalties are very strong as mothers want the best for their babies Heinz is the only other significant competitor to Nestle in this segment. Nestles Cerelac and Nestum together have around 80% market share and Heinz's Farex has close to 18% share. Wockhardt is a relatively new entrant with its First Food Brand. Wockhardt also proposes to launch a new baby food Easum containing moong (moong is one of the easily digestible pulses) The Easum brand will directly compete with Nestles Nestum (made from rice). In infant formula also Nestles Lactogen formula and Lactogen
standard formula are the leading brands with around 75% market share. Other brands are Heinz's Lactodex Farex, Wockhardt's Raptakos, and Arnul's Amulspray

5. REGULATORY FRAME WORK:

The dairy industry was de - licensed in 1991 with a view to encourage private investment and flow of capital and new technology in the segment. Although delicensing attracted a large number of players, concerns on issues like excess capacity, sale of contaminated / substandard quality of milk etc induced the government to promulgate the MMPO (Milk and Milk Products Order) in 1992. Milk and Milk Products Order (MMPO) regulates milk and milk products in the country. The order requires no permission for units handling less than 10,000 liters

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CAPITAL BUDGETING of liquid milk per day or manufacturing milk products containing between 500 to 3,750 tonnes of milk solids per year. Plants producing over 75,000 liters of milk per day or more than 3,750 tonnes per year of milk solids have to be registered with the Central Government. The stringent regulations, government controls and licensing requirements for new capacities have restricted large Indian and MNC players from making significant investments in this product category. Most of the private sector players have restricted large Indian and MNC Players from making significant investments in this product category. Most of the private sector players have restricted themselves to manufacture of value added milk products like baby food, dairy whiteners, condensed milk etc.

All the milk products except malted foods are covered in the category of industries for which foreign equity participation up to 51% is automatically allowed. Ice cream, which was earlier reserved for manufacturing in the small - scale sector, has now been de - reserved. As such, no license is required for setting up of large - scale production facilities for manufacture of ice cream. Subsequent to de - canalization, exports of some milk based products are freely allowed provided these units comply with the compulsory inspection requirements of concerned agencies like: National Dairy Development Board. Export Inspection Council etc, Bureau of Indian standards has prescribed the necessary standards for almost all milk - based products, which are to be adhered to by the industry

Amul's secret of success: The system succeeded mainly because it provides an assured market at remunerative prices for producers' milk besides acting as a channel to market the production enhancement package. What's more, it does not disturb the agro - system of the farmers. It also enables the consumer an access to high quality milk and milk products. Contrary to the traditional system, when the profit of the business was cornered by the middlemen, the system ensured that the profit goes to the participants for their socio -economic upliftment and common good.

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CAPITAL BUDGETING Looking back on the path traversed by Amul, the following features make it a pattern and model for emulation elsewhere. Amul has been able to:

Produce an appropriate blend of the policy makers farmers board of management and the professionals: each group appreciation its roles and limitations. Bring at the command of the rural milk producers the best to the technology and harness its fruit for betterment.

Provide a support system to the milk producers without disturbing their agro economic systems

Plough back the profits, by prudent use of men, material and machines in the rural sector for the common good and betterment of the member producers and

Even though, growing with time and on scale, it has remained with the smallest producer members. In that sense, Amul is an example par excellence, of an intervention for rural change.

The Union looks after policy formulation, processing and marketing of milk, provision of technical inputs to enhance milk yield of animals, the artificial insemination service, veterinary care, better feeds and the like - all through the village societies

The village society also facilitates the implementation of various production enhancement and member education programs undertaken by the union. The staff of the village societies have been trained to undertake the veterinary first - aid and the artificial insemination activities on their own.

Amul's success: A model for other districts to follow.

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CAPITAL BUDGETING Amul's success led to the creation of similar structures of milk producers in other districts of Gujarat. They drew on Amul's experience in project planning and execution. Thus the Anand Pattern' was followed not just in Kaira district but in Mehsana, Sabarkantha, Banaskantha, Baroda and surat districts also.

Even before the Dairy Borad of India was born, farmers and their leaders carried out empirical tests of the hypotheses that explained Amul's success. In these districts, milk producers and their leaders experienced significatnt commonalities and found easy and effortless ways to adapt Amul's gameplan to their respective areas.

This led to the Creation of the National Dairy Development Board with the clear mandate of replicating the Anand pattern' in other parts of the country. Initially the pattern was followed for the dairy sector but at a later stage oilseeds, fruit and vegetables, salt, and tree sector also benefited from it's success.

GCMMF: An overview

Gujarat Cooperative Milk Marketing Federation (GCMMF) is India's largest food products marketing organization It is a state level apex body of milk cooperatives in Gujarat which aims to provide remunerative returns to the farmers and also serve the interest of consumers by providing quality products which are good value for money

Members:
union.

12

district

cooperative milk producers'

No. of Producer Members: No. of Village Societies: Total Milk Handling Capacity: Milk Collection (Total 2009-2010): Milk Collection (Dairy Average 2009-10):
Milk Drying Capacity:

2.12 Mill

10,411

6.1 Million liters per day

1.59 billion liters

4.47 million liters 450 Metric Tons Per

Day

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CAPITAL BUDGETING Cattle Feed Manufacturing Capacity:

1450 MTs Per

Day

Sales Turnover 2003-04 2004-05 2005-06 2006-2007 2007-08 2008-09

Rs (Million) 11140 13790 15540 18840 22192

22185

US $ (million) 355 400 450 455 493

493

Major dairy products manufactures: Some of the major dairy products manufacturers in the country: Company Nestle India Limited Brands Milkmaid, Cerelac, Lactogen, Milo, Everyday Milkfood Limited Milkfood Major Products Sweetened condensed milk, malted foods, milk powder and Dairy whithner Ghee, ice cream, and other milk products Smith Kline Beecham Limited Horlicks, Maltova, Viva Malted Milkfood, ghee, butter, powdered milk, milk fluid and other milk based baby foods.

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CAPITAL BUDGETING Indodan Industries Limited Indana Condensed milk whitener, milk Gujarat Co-operative Milk Marketing Federation Limited H.J. Heinz Limited
Farex, Compan, Glactose, Bonniemix, Vitamilk Infant Milkfood Milkfood, Malted

milk, skimmed dairy milk chilled and processed

powder,

Amul

Butter, cheese and other milk products

Britannia

Milkman

Flavored milk, cheese, Milk Powder, Ghee

Cadbury

Bournvita

Malted Food

6. FUTURE PROSPECTS:

India is the world's highest milk producer and all set to become the world's largest food factory. In celebration, Indian Dairy sector is now ready to invite NRIs and Foreign investors to find this country a place for the mammoth investment projects. Be it investors, researchers, entrepreneurs, or the merely curious - Indian Dairy sector has something for everyone.

Milk production is relatively efficient way of converting vegetable material into animal food. Dairy cow's buffalo's goats and sheep can eat fodder and crop by products which are not eaten by humans. Yet the loss of nutrients energy and equipment required in milk handling inventory make milk comparatively expensive food. Also if dairying is to play its part in rural development policies, the price to milk producers has to be remunerative. In a situation of increased international

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CAPITAL BUDGETING prices low availabilities of food aid and foreign exchange constraints, large scale subsidization of milk conception will be difficult in the majority of developing countries.

Hence in the foreseeable future, in most of developing countries milk and milk products will not play the same roll in nutrition as in the affluent societies of developed countries. Effective demand will come mainly from middle and high income consumers in urban areas.

There are ways to mitigate the effects of unequal distribution of incomes. In Cuba where the Government attaches high priority to milk in its food and nutrition policy, all pre - school children receive a daily ration of almost a liter of milk fat the reduced price. Cheap milk and milk products are made available to certain other vulnerable groups, by milk products outside the rationing system are sold price which is well above the cost level. Until recently, most fresh milk in the big cities of China was a reserved for infants and hospitals, but with the increase in supply, rationing has been relaxed.

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CHAPTER-IV

NON DCF CRITERIA Table 3.1; (a)

PAY BACK PERIOD (PBP):- (Rs in lakhs_)

The pay back period (PB) is one of the most popular and widely recognized traditional methods of evaluating investment proposals. Pay back is the number of years required to recover the original cash outlay invested in a project.

If the project generates constant annual cash inflows, the pay back period can be computed by dividing cash outlay by the annual cash in flow.

Pay Back Period: Initial Investment Annual Cash Inflow

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CAPITAL BUDGETING C0
C : : Initial Investment Annual Cash in flow

In case of un equal cash inflows, the pay back period can be found out by adding up the cash inflows until the total is equal to the initial cash outlay.

PAY BACK PERIOD

YEAR

INCOME (PAT) (RS

LAKHS

DEPRECIATIO N (RS LAKHS ) 16089603.00

19701376.88 39089995.71 40369063.00 52675282.00

CASH FLOW
LAKHS

IN (RS

CUMULATIVE CASH IN FLOWS (RS LAKHS) 28662966.72

60937707.32 122761269.70 210145700.60 361607914.60

1 2
3 4 5

12573363.72
12573363.72 22733566.67 47015367.90 98786932.00

28662966.72
32274740.60 61823562.38 87384430.90 151462214.00

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CAPITAL BUDGETING Initial outlay = 254955806.95 (lakhs)

254955806.95-210145700.60

Pay back period

4+ 151462214.00

44810106.35 4+ 151462214.00

0.296

= 4.30 Months

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CAPITAL BUDGETING

Criteria for evaluation: The pay back period computed for a project is less than the pay back period set by management of the company, it would be accepted. A project actual pay back period is more than the determined period by the management, it will be rejected. Decision: The standard payback period is set by TIRUMALA MILK PRODUCTS PRIVATE LTD for considering the expansion project is six years, where as actual payback period is 4.30 months. Hence we accept the Project.

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CAPITAL BUDGETING Table3.2(b)

AVERAGE RATE OF RETURN (ARR) (OR)ACCOUNTING RATE OF RETURN (ARR): as in lakhs
The accounting rate

of return (ARR) also known as the return on investment (ROI) uses accounting information, as revealed by financial statements, to measure the profitability of an investment. The Accounting rate of return is the ratio of the average after fax profit divided by the average inv estment. The average investment would be equal to half of the original

AVERAGE OR ACCOUNTING RATE OF RETURN YEAR 1 2 EBT 12573363.72 12573363.72 TAXATION 4266274,00 4341000.00 CASH IN FLOWS 8307089.72 8232363.72

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CAPITAL BUDGETING 3 4 5 22733566.67 47015367.90 98786932.00 8446490.00 13794988.00 32986706.00 14287076.67 33220379.90 65800226.00

Average profit = 129847136.01 = 25969427.20 5 Average investment = 254955806.95 = 127477903.48 2

ARR = 25969427.20 x 100 2 = 0.20 x 100

= 20.00
ROI
=

Average profit__ x 100 Initial investment

25969427.20 x 100 254955806.95 = 0.10 x 100 = 10.00

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CAPITAL BUDGETING

Criteria for evaluation: According to this method ARR is lower than minimum rate of return set by the management are accepted. The project is having dissatisfactory ARR so the management has to reject the project. PBP>SPBP- Rejected PBP<SPBP- Accepted
PBP - Indifferent

Decision: The standard Average Rate of Return set by TIRUMALA MILK PRODUCTS PRIVATE LTD management is 21%. The actual ARR is 20.00% is lower than the standard ARR set by the management, hence we reject the project because the rate of return of the project is lower than the standard.

DCF CRITERIA: Table 3.3

(a)

Net Present Value:- Rs in lakhs

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CAPITAL BUDGETING The NPV present value (NPV) method is the classic economic method of evaluating the investment proposals. If is a DCF technique that explicitly recogniges the time value at different time periods differ in value and are comparable only when their equipment present values- are found out. N P V =

C1 -C 0
(n+k)

C2

C3

+ ..+

(1+k)2

(1+k)3

(1+k)n
( o r )

n NPV=
i=0 (1+k) i

Ci -C0

Where N P V = Net present value Cfi = Cash flows occurring at time

k = The discount rate n = life of the project in years C0 = Cash out lay

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CAPITAL BUDGETING NET PRESENT VALUE

YEAR

EAT

DEP

CASH INFLOWS )

DCF (12%

PRESENT VALUE

12573363.72
12573363.7 2 22733566.6 7

16089603.00
19701376. 88 39089995. 71

28662966.72
32274740.6 0 61823562.3 8

0.893
0.797

25596029.28
25722968.2 6 4401837641

2 3
4

0.712

47015367.90 98786932.00

40369036.00 52675282.00

87384430.90 151462214.00

0.636 0.567

55576498.05 85879075.34

NPV = 236792947.34 - 254955806 95 -18162859.61

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Criteria for evaluation: In case of calculated NPV is positive or zero, the project should be accepted. If the calculated NPV is negative, the project is rejected. Decision:

The Net Present Value of TIRUMALA MILK PROUDCTS PRIVATE LTD is Positive. So the project should be acceptedTable 3.4

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(b) INTERNAL RATE OF RETURN:

Rs in lakhs

The internal rate of return (IRR) method is another discounted cash flow technique which takes account of the magnitude and thing of cash flows, other terms used to describe the IRR method are yield on an investment, marginal efficiency of capital, rate of return over cost, time- adjusted rate of internal return and soon.

i=0 NPV=

Cfi

SV+WC

(1+k) i

(1+k) n

Where Cfi = Cash flows occurring at different point of time k = The discount rate n = life of the project in years C0

= Cash out lay

SV & WC = Salvage value and Working Capital at the end of the n years.
(or)

IRR

= L

(H-L)

(A-B)
Where L H :Lower discount rate at which NPV is positive

:Higher discount rate at which NPV is negative

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CAPITAL BUDGETING A B :NPV at lower discount rate, L : NPV at higher discount rate, H INTERNAL RATE OF RETURN

YEAR

EAT

DEP

CASH IN FLOWS

DCF
(12%)
0.893 0.797 0.712 0.636

PRESENT VALUE
25596029.28 25722968.26 44018376.41 55576498.05

1 2

12573363.72 12573363.72 22733566.67

16089603:00 19701376.88 39089995.71 40369036.00

28662966.72 32274740.60 61823562 38 87384430.90

3 4 47015367.90

98786932.00

52675282.00

151462214.0

0.567

85879075.34

IRR

12 + 236792947.34-254955806.95

x (12-14)

236792947.34-222028074.10 18162859.61
=

12 + 14764873.24
= 12 + (-1.23* -2)
= 12 + 2.46 = 14.46

x2

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Criteria for evaluation: In this method the project is accepted when IRR is higher than its cost of capital or cut out rate. If the project is not accepted when the IRR is less than cost of capital.
Decision:

The project is accepted because of the calculation IRR is higher than its cost
of capital. The cost of capital fixed by management is 10%; the actual is more than its standard. Hence, the project is accepted.

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Table 3.5

(C) PROFITABILITY INDEX:

Yet another time- adjusted method of evaluating the investment

proposals is the benefit- cost

(B/C.) ratio or profitability index (PI) Profitability Index is the ratio of the present valued of
cash inflows, at the required rate of return, to the initial cash out flow of the investment.

PV of cash inflow PI
=

Initial Cash outlay

Where PV: Present Value

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PROFITABILITY INDEX

YEAR

EAT

DEPRECIATION

CASH IN FLOW (RS lakhs)

1 2 3 4 5

12573363.72 12573363.72 22733566.67 47015367.90 98786932.00

16089603.00 19701376.88 39089995.71 40369036.00 52675282.00

286629336.72 32274740.60 61823562.38 87384430.90 151462214.00

307637088.95 254955806.95 = 1.21

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Criteria for evaluation: A project can be accepted if its Profitability Index is greater than one. If the PI is less than one we should reject the project. P.I> 1= Accepted P.I < 1= Rejected P.I = 1= Indifferent Decision: Profitability index of proposed expansion project is found our 1.21 this is more than the cash outflow. Hence we accept the project

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CHAPTER-V

FINDINGS 1. From the analysis it was observed that the payback period is 4.3 years but standard pay back period by TIRUMALA MILK PROUDCTS PRIVATE LTD is 6 years. The actual payback period is lower than the standard set by the company management because of high yield from the investment as well as higher cash inflows during the initial years of capital investment period 2. The study results reveals that Average rate of return is fixed by the TIRUMALA MILK PROUDCTS PRIVATE LTD 21%. But the actual ARR is College 83

CAPITAL BUDGETING 20.00%. The actual ARR is lower than TIRUMALA MILK PROUDCTS PRIVATE LTD. Because the capital investment required is very low investment required is very low investment, by TIRUMAL MILK PRODUCTS PVT LTD. 3. It was observed that the acceptance rule of net present value during the period of study a project is accepted if the Net Present Value is positive. The project NPV is -18162859.61 (lakhs) for a capital expenditure of 254955806.95. 4. It was observed that the project investment yields an internal rate of return of 12%. For the period of study, which is more than the it's Cost of capital of 14% 5. It was observed that the profitability index of the proposed expansion project is more than one. Due to thee positive NPV. Than the project can be accepted. While P.I is 1.21 lines that is for every One rupee invested is the project yields 1.21 rupees 6. The study needs found that at proposal the company using the payback period technique for evaluating its capital as budgeting proposal.

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SUGGESTIONS:

1. From the study it has been suggested that the company has to maintain the Pay back period as though it is prevailing at present ten the actual PBP is less than the standard PBP. So the project is to be accepted.

2. From the analysis it has been suggested that the company has it maintained the Average rate of return as it is in the present situation. As the actual ARR is less than the standard ARR so the project is to be accepted.

3. It has been suggested that the company has to maintained positive NPV value. As the NPV is positive the project is to be accepted.

4. It has been suggested that the company has to maintained the IRR as it is the present situation while calculating the IRR the cost of capital is taken in to consideration on the bases of weighted average cost of capital.

5. It has been suggested that the company has to maintain the PI as it is in the present situation. As the PI is more than 1 due to the Positive the project can be accepted.

6. It has been recommended to adopt the DCF based CBDT for the proposal of evaluating its capital investment proposals alternatives. 7. The calculated payback period is 4.30 years. But standard payback period was 6 years by TIRUMALA MILK PROUDCTS PRIVATE LTD management.

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CONCLUSION
Based on the study in TIRUMALA MILK PROUDCTS PRIVATE LTD there is forecasting project cash flow involves numerous estimates and many individuals and departments participate in this exercise. The role of the finance manager in to coordinate the efforts of various departments and obtain information from them, ensure that the forecasts are based on a set of consistent economic assumptions, keep to the exercise focused on relevant variables and minimize the bias is inherent in cash flow forecasting .

In the study I know that the company is following pay back period. Based on the data shows that the company can use any criteria to get return on the investment.

The project "A Study on Capital budgeting' in TIRUMALA MILK PROUDCTS PRIVATE LTD, it is suggested to hold the company is the same situation.

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BIBILOGRAPHY FINANCIAL MANAGEMENT : I.M PANDEY

FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT

: PRASANNA CHANDRA : M.Y.KHAN&JAIN

FINANCIAL MANAGEMENT

: V.K.BHALLA

WEBSITES WWW.GOOGLE.COM WWW.ASK.COM WWW.TIRUMALA MILK PRODUCTS PVTLTD.AC.IN

WWW.TIRUMALA MILK PRODUCTS PVTLTD.COM

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