CAPITAL BUDGETING

1.INTRODUCTION
Cement industry is one of the major and oldest established manufacturing
industries in the modern sector of Indian economy. It is an indigenous industry in which
the company is well endowed with the necessary raw materials, skilled manpower and
equipment & machinery technology.
Cement is a mixture of lime stone, clay, silicon and gypsum. It is a fine powder
which when mixed with water sets to a hard mass as a result of hydrogen of the
constituent compounds. It is the most commonly used construction material.
The first cement factory was established around 1890 by Jinn both in Canada and
Australia, while it was found in 1884 at New Zealand.
The first cement industry in India was produced at washermanpet in Madras in
1904 by, South India industries limited.
Cement is required by firms, bridges, buildings, water supply projects, dams,
roads, hydroelectric power projects, seaports, airports and irrigation schemes. It is thus a
vital industry which assumes a crucial part in the economic development of the country,
thus it regards as major nation building industry wise importance in a developing
economy never be over emphasized.
1.1CAPITAL BUDGETING:
The term capital budgeting refers to long-term planning for proposed capital outlays
and their financing. Thus, it includes both rising of long-term funds as well as their
utilization. It may thus be defined as the firms formal process for the acquisition and
investment of capital. It is the decision making process by which the firms evaluate the
major fixed assets.
Capital budgeting is many-sided activity; it includes searching for new
and more profitable investment proposals, investigating engineering and marketing
consideration to predict the consequences of accepting the investment and making
economic analysis to determine the profit potential of each investment proposal.
CAPITAL BUDGETING



1.2MEANING&DEFINITION:
1. MEANING:
Capital budgeting is the process of making investment decision and capital expenditure.
Capital budgeting is employed to evaluate expenditure decisions which involve current
outlay that are likely to produce benefits over a period of time longer than one year.
The following are some examples of capital expenditure:
Cost of acquisition of permanent assets such as land and building, plant and
machinery, goodwill etc
Cost of addition, expansion, improvement or alteration in the fixed assets
Cost of replacement of fixed assets
Research and development project costs, etc.
2. DEFINITION:
According to CharlesT.Horngreen Capital budgeting is a long term planning for making
and financing proposed capital outlays.
Capital budgeting is concerned with planning and development of available capital for
the purpose of maximizing the long term profitability of the concern.
TYPES OF CAPITAL BUDGETING
Today we will discuss the different types of capital budgeting:
1.) Accept reject decisions: all the investment decisions which give more return than the
cost of capital they are acceptable while the investment decisions which give less return
than the cost of capital they are rejected. Thus firm will make investment only if the
decision is acceptable.
2) Mutually exclusive decisions: these are the decisions which compete with each other
which mean the acceptance of one automatically rejects the other decision. The firm has
various alternatives; once one alternative is selected the other alternatives are
automatically rejected.
3) Capital rationing or ranking decisions: in case the firm has various profitable
investment proposals in that case the firm had only option to rank them as per their
profitability and then accept them.


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2.INDUSTRY PROFILE

Cement industry is one of the major and oldest established manufacturing
industries in the modern sector of Indian economy. It is an indigenous industry in which
the company is well endowed with the necessary raw materials, skilled manpower and
equipment & machinery technology.
Cement is a mixture of lime stone, clay, silicon and gypsum. It is a fine powder
which when mixed with water sets to a hard mass as a result of hydrogen of the
constituent compounds. It is the most commonly used construction material.
The first cement factory was established around 1890 by Jinn both in Canada and
Australia, while it was found in 1884 at New Zealand.
The first cement industry in India was produced at washermanpet in Madras in
1904 by, South India industries limited.
Cement is required by firms, bridges, buildings, water supply projects, dams,
roads, hydroelectric power projects, seaports, airports and irrigation schemes. It is thus a
vital industry which assumes a crucial part in the economic development of the country,
thus it regards as major nation building industry wise importance in a developing
economy never be over emphasized.
CEMENT DIVISION:
Lanco Industries Limited as setup a Portland Slag Cement (PSC) plant of
70,000 TPA capacities at Rachagunneri. The cement plant utilizing as raw materials
slag, coke breeze and iron are time being generated by the pig iron plants as by product
and waste.
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By this cement plant LANCO INDUSTRIES LIMITED adding values to by-products
waste generated from pig iron, in addition to solving the problem of storing slag in the
plant premises.
The main plant and machinery installed are lime stone crusher, a raw mill
system for blending and grinding iron are, clay, limestone and coke breeze, a vertical
shift kiln, a cement mill for grinding slag, clinker and gypsum and slag drying system.
CEMENT INDUSTRY HIGHLIGHTS:
The Indian cement industry has high Return on Investment. There exists a large
markets which are not yet been completely tapped. With the existing levels of supply and
growing demand the prices tend to rise. But, the Industry being a fast growing one, many
players are attracted. Every year new capacities are added raising the supply levels, price
stability is thus maintained and the high profits are observed by new entrants.
The per capita consumption of manufacture commodities like steel, power and
cement are indicators of the economic state of a country. Of the total output nearly 95%
is accounted for by the private sector.
However, in terms of usage, the private sector, accounts for only 90% while the
Government sector accounts for 10% . The housing activity accounts for 55% of total
consumption. Nearly 47% of the costs, most of which are administrated prices are beyond
the control of cement units. The cost elements include limestone, coal, transport, freight,
power consumption and excise duty.
CEMENT MANUFACTURING PROCESS:
In wet process, lime stone is crushed and grounded and mixed with
water to form slurry which is fed in to the kiln. The slurry has a water content of 30-40%.
Before
the mineralogical process commence, the water content in the slurry has to be evaporated.
This process consumes high energy and power.
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On the other hand, the dry process is more energy efficient. The raw
materials are dried in a combined drying and grinding plant to reduce the moisture
content to less than 1%.
Due to regular shifts from wet and semi dry process nearly 89% of
the total industries kiln capacity is at dry process. Of the remaining, 9% is wet process
and 2% is semi-dry process. The main advantage of shifting to any process is the 50%
saving of coal consumption. The energy costs reduce by 30-40% and the kiln output also
increases for a given size kiln, the output for dry process is 250-300 /- as compared to
130-150 /- for semi dry and 100% for wet process. The capacity utilization is also higher
for dry process plants.
CEMENT BRANDING:
Cement has emerged as a commodity product. Brands play an
important role especially in metros like Delhi, Mumbai, Calcutta, Chennai etc., where the
established brands suppress the success of small brands.
In order to build up their brand loyalty, companies have tie-ups
with real estate agents and construction companies. Some manufacturers also organize
workshops, training and seminars to educate the consumers on the maximum use of a bag
full of cement.
RAW MATERIALS:
The basic raw material for manufacturing cement is limestone. This is available in
plenty in the form of limestone deposits in nature. Limestone is excavated for mines by
mechanical equipment with the help of stocker & reclaimed the correct blending of
limestone is ensured. The same is passed through crushers to bring it to the required size.
The raw materials consist of limestone, iron ore & bauxite. The correct proportions
are fed into a grinding mill where they are reduced to a very fine of compressed air. The
power from the storage ribs is fed into rotator kiln; the material is subjected to a
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temperature of about 1500
0
C chemical reaction takes place between the various materials
resulting in the formation of cement compound like Tri Calcium silicate (about 24%) die-
calcium silicate (about 20%) Tri Calcium alumina (about 7 to 10%) and albumin ferrite
(about 10 to 12%).
CAPACITY & PRODUCTION:
The cement industry compresses of 125 large. Cement plants with an installed
capacity of 148.28 million tones & more than 300 mini cement plants with an estimated
capacity of 11.10 million tons per annum. The cement corporation of India, which is a
central public sector undertaking, has 10 units. There are 10 large cement plants owned
by various state Government.
The total installed capacity in the country as a whole is 159.38 million tones.
Actual cement production in 2007-08 was 171.95million tones as against a production of
178.60million tones in 2008-09, registering a growth rate of 6.75%.
EXPORTS:
The industry is also exporting cement and clinker. The export of cement during
2008-09& 2007-08 was 5.14 million stones and 6.92 million tons respectively. Export
during April
May, 2008was 1.35 tones, Major exports were Gujarat Abuja Cement Limited and
ultratech.
TECHNOLOGICAL CHANGE:
Cement industry has made tremendous strides in technological up gradation and
assimilation of latest technology. At present 93% of the total capacity in the industry is
basedon modern and environment friendly dry process technology and only 7% of the
capacity is based on old wet & semi-dry process technology.
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India is also producing different varieties of cement take ordinary Portland
cement (OPC), Portland pozzolana cement (PPC), Portland Blast Furnace slag cement
(PBFS), oil will cement rapid hardening Portland cement, sulphate resisting Portland
cement white cement etc., production of these varieties of cement conform to the BIS
specification. It is worth mentioning that some cement plants have set up dedicated jetties
for promoting bulk transportation and export.
Over the next 2 to 3 years, with reasonable growth in demand to the tune of
around 7 to 9% sure to take place, in view of the incentives granted to housing and
infrastructure, the ambitious plans of the Government boost rural housing and kick start
the National Highways development project, all trace of capacity demand mismatch will
vanish.

PLANTS UNDER THE GROUP:
The pig iron and Lanco Cement are two plants, which are presently under the
name of M/s. Lanco Industries Limited and Lanco Construction Limited is the sister of
concern of it.
ADMINISTRATION:
The general administration of the company is carried out by Managing
Director, and General Manager of Finance, Commercial, Operations, Materials, Purchase,
Human Resource and Administration.
The Chairman and Managing Director are holding overall control on
administration in all aspects, with the help of Vice-president and other General Managers.
The Board consists of five member Directors, Vice-Chairman, a Managing Director and a
Company Secretary.


CAPITAL BUDGETING




COMPANY PROFILE
LANCO INDUSTRIES LTD:
The company LANCO INDUSTRIES LTD. was incorporated in the year 1997
having its Head Quarters in the same premises.
The idea is to utilize the internally generated Blast Furnace Slag and produce
Portland Slag Cement. Besides PS cement posses license for Ordinary Portland Cement
& Sulphur Resistant Cement too.
Necessary steps are being taken to enhance the production capacity from
1.0Lakh Tons per annum to 1.5Mt Tons per annum.
ESTABLISHMENT
The name LANCO has been derived from the promoter of the group Shri.
Lagadapati Amarappa Naidu. The LANCO group is a diversified multi faced
conglomerate with the business interested in Pig Iron, Cement, Power, Graded, Casting,
Spun pipes, Information Technology and Infrastructure Development. The LANCO
group is promoted by young Technocrats with exceptional entrepreneur skills with
mission and great vision and the top agenda to put the group and the global corporate
may be during the next two years.
The Lanco Group of companies seeded in 1998. When it is started founded two
young techno craters, it was with a vision and resolution to aspire for youth and synergies
that would make Lanco a leader in the core sector.
The study foundation of the company is constituted of dynamic term of managers.
Young techno craters who are in turn fortified with the expertise of a term of highly
experienced professionals. Three youthful technocrats Sri.L.Ragagopal,
Sri.L.Madhusudan Rao and Sri.G.Bhaskar Rao over the last decade have parternered and
promoted all the ventures of Lanco Group.


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LOCATION OF THE PLANT:
Lanco Industries limited is located at Rachagunneri Village in Sri Kalahasthi
Mandal
of Chittoor District .The salient features of this location follows
1. Sophisticated facilities like plenty of water, uninterrupted electricity, cheap labor,
road & rail transport etc.
2. Presence of own limestone mines.
3. Low heat of hydration for better soundness.
4. Low magnesia content to ensure reduced tensile cracks.
5. Specially designed setting time to suit Indian working conditions.
MANUFACTURING UNITS
The following are the manufacturing units under the name lanco industriesltd .
PIG - IRON DIVISION:
Established in the year of 1993. An ISO - 9002 Company, with a state of the art,
integrated manufacturing facility for Pig Iron through Mini Blast Furnace route
conforming to the latest international technology with initial capacity of 1,00,000 TPA
and subsequently expanded and modernized to 1.75 LTPA. Its quality products of SG
Grade Pig Iron are being supplied to foundries in the Southern India. The uninterrupted
power requirement for the energy intensive plant is being met through a 2.5 MW Co
Generation Power Plant.


CAPITAL BUDGETING



CEMENT DIVISION;
Established in the year of 1996 the basic raw material is slag, produced in the Pig
Iron Manufacturing process to install the Cement Plant with a capacity of 90,000 TPA.
SPUN PIPE DIVISIONS:
Established in 1997 and strategically located in close proximity to the Mini Blast
Furnace of the Pig Iron Plant. It has a clear economic mileage over other casting sites.
The moltenmetal from the Blast Furnace is directly used as basic raw material to produce
Graded Castings, Cast Iron Pipes and Ductile Iron Pipes with a capacity of 90,000 TPA.
COKE OVEN PLANT:
Established in 2005 the basic raw materials for the mini blast furnace, the Coke Oven
plant capacity of 9000 TPM.
POWER PLANT:
It has proposed to set up a Power Plant of 12 MW Power Plant will be sent up
in the existing land of Coke Oven Plant. Waste heat of flue gas from coke oven will be
utilized in waste heat recovery Boiler to produce steam. Steam produced in the above
process will be utilized to run on T.G.Set for generating power.
Power generated from the power plant will be used for in house consumption and
balance power will be fed into the APSEDB grid.
LANCO CONSTRUCTION LIMITED
This group company was established in the year 1993 and has executed most
demanding and difficult projects in the field of civil construction engineering on schedule

essaying repute as world class Construction Company in a very short time span. The
company is mainly executing prestigious work in the fields of irrigation, pipeline
projects,
CAPITAL BUDGETING



highways, housing and industrial construction project and successfully compared several
housing complex roads, irrigation canals, bridges and industrial complexes at Lanco
diverse dimensions of growth is achieved through converging rays of vision, rays of
vision creating dimensions.
KALAHASTHI CASTING LIMITED
Established in 1997 and strategically located in close proximity to the mini-blast
furnace of the Pig Iron plant, it has clear economic mileage over and ductile iron spun
pipes
with a capacity of 60,000 TPA, which will be gradually Expanded for the to meet the
surging demand of the products. The UPS to the pipe plant will be met through 10MW
captive power to emerge to meet the Necessities and the self sufficiency; it was decided
to enhance the production capacity from 60,000TPA to 90,000TPA from 2003.

OBJECTIVES OF THE COMPANY:
To provide employment to the local employees.
To supply best cement at economical prices.
To get the optimum utilization of the raw materials available of there own mines.
Manufacturing quality cement and to stand as a market lead in Sound India.
MISSION:
Shared ambition: Effective and Efficient
To become the most effective and most efficient cement manufacturer and
distributor in to the world.
OUR VISION:
Most Admired Integrated Infrastructure Enterprise.


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OUR VALUES:
Integrity
We choose to be honest in all our Business Interactions and Transactions and remain
steadfast even when challenged. We strive for consistency between what we Think,
what we Say and what we Do.
Humility & Respect
We are consistently humble in our approach to and interactions with people. We treat
every person with respect at all times, unconditionally.
Organization Before Self
Innovation
We value and encourage application of creative ideas that enhance the effectiveness of
our business. We freely express ideas and take actions to generate successful Solutions.

Accountability
We own up to our words, actions and outcome. When we commit to do something, we
own it and we do it decisively and responsibly.
APPROACH:
Cement aggregates and ready-mixed concrete mixture and distribution are local
business. Around the world we serve local customers in local markets with local needs.
WAY OF WORKING
Technical leadership is our goal, ambition we are committed to increasing the
value of group, companies, products and services, the capabilities of our employees and
the logical standards by which we operate.


CAPITAL BUDGETING




OBIECTIVES AND RESEARCH DESIGIN
1.3 NEED FOR THE STUDY
Capital budgeting decisions refers to assets which are in operations and yield a
return of a period of time, usually 1 year.
It is along term investment decision involving hung capital expenditure.
They are irreversible decisions.
Analyze the proposal for expansion or creating additional capacities.
They have long term significant effect on profitability of concern.
Future benefits are expected realize over series of years.
It involves exchange of current funds for the benefits to be achieved in futures.

1.4SCOPE OF THE STUDY
The scope of this project will not only be limited to understanding the financial capital
budgeting practices employed in LANCO , but it will also analyze the financial decisions
taken by these units using stranded capital techniques there by analyzing the various
projects undertaken by the LANCO.
To know the how money is acquired and from what sources.
In what way individual capital project alternatives are identified and evaluated by
LANCO.
How minimum requirements of acceptability are set.
How final project selections are made by LANCO.

OBJECTIVES OF THE STUDY
1. To analyze the financial performance of the company with reference to its capital
budgeting components
2 .To examine the feasibility of present system of Managing cash flow of the LANCO
CAPITAL BUDGETING



Capital budgets are the key control documents when it comes to the financial planning for
3. long-term investments such as major equipment purchases, land purchases, renovations
or new buildings.
4 .Capital budgeting identifies how much will be spent for the entire project, tracking
each line item separately.
5. It explains how the business will pay for the capital project and determines payback
time and method.
RESEARCH METHODOLOGY
The Definition of research methodology is the process used to collect data and other
types of information for use in making business decisions. Examples of this type of
methodology include interviews, surveys, and research of publications. All of these types
include the use of present and historical information. When someone is doing theoretical
work, paradigims can be used to satisfy most of the criteria that are set forth for
methodology. The use of paradigms work because they are a constructive frame work.
To achieve a fore said objective the following methodology has been adopted. The
information for this report has been collected through the following sources,
1. Primary sources
2. Secondary sources
1. PRIMARY SOURCES:
It is also called as first handed information the data is collected through the observation
in the organization and interviews with officials. Information is collected by circulating
questionnaires to the officials of the finance department. Apart from these
some information is collected through the personal interviews and suggestions collected from
required personals.
2. SECONDARY SOURCES:
These secondary data is the existing data which is collected by others that is sources are
financial journals, annual reports of the LANCO or LANCO website, and other concerned
publications.

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LIMITATIONS OF THE STUDY
Lack of time is another limiting factor the schedule period 3 weeks are not sufficient
to make the study independently regarding Capital budgeting in LANCO.
The busy schedule of the officials in the LANCO is another Limiting factor. Due to
the busy schedule of officials may restrict me in collecting the complete information
about organization.
Availability of confidential financial data is a constraint
There is no scope of gathering current information, as the auditing has not been done
by the time of the project work.
TOOLS OF TECHNIQUES
There are many methods for evaluating the profitability of investment proposals.
The various commonly used methods are

Traditional methods:
(I) Payback period method (P.B.P)
(II) Accounting Rate of return method (A.R.R)
Time adjusted or discounting techniques:
(I) Net Present value method (N.P.V)
(II) Internal rate of return method (I.R.R)
(III) Profitability index method (P.I)
1. PAY-BACK PERIOD METHOD:
The pay back sometimes called as payout or pay off period method represents
the period in which total investment in permanent assets pay back itself. This method is
based on the principle that every capital expenditure pays itself back within a certain
period out of the additional earnings generated from the capital assets.
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Decision rule:
A project is accepted if its payback period is less than the period specific decision rule.
A project is accepted if its payback period is less than the period specified by the
management and vice-versa.
Pay Back Period
Initial Cash Outflow
=
Annual Cash Inflows

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

Average Rate of Return Method:
Under this method average profit after tax and depreciation is calculated and then it
is divided by the total capital out lay.

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

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3. NET PRESENT VALUE METHOD:
The NPV method is a modern method of evaluating investment proposals. This
method takes in to consideration the time value of money and attempts to calculate the
return on investments by introducing time element. The net present values of all inflows
and outflows of cash during the entire life of the project is determined separately for each
year by discounting these flows with firms cost of capital or predetermined rate.
Decision rule
Accept the project if the NPV of the project is 0 or +ve that is present value of
cash inflows should be equal to or greater than the present value of cash outflows.

4. PROFITABILITY INDEX METHOD OR BENEFIT COST RATIO
METHOD:-

It is also a time-adjusted method of evaluating the investment proposals. PI also
called benefit cost ratio or desirability factor is the relationship between present value of
cash inflows and the present values of cash outflows. Thus

PV of cash inflows
Profitability index =
Initial Investment or cash outflows

Net profitability index = Profitability index - 1

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

If IRR>K, accept project.

K = cost of capital.

If IRR<K, reject project.
DETERMINANTION OF IRR
a) When annual cash flows are equal over the life of the asset.
Initial Outlay
FACTOR = x 100
Annual Cash Inflow

b) When the annual cash flows are unequal over the life of the asset:

PV of cash inflows at lower rate - PV of cash outflows
IRR = LR + x (Hr-Lr)
PV of cash inflows at lower rate-PV of cash inflows at higher rate