A STUDY ON

CAPITAL BUDGETING
AT
PENNAR INDUSTRIES LTD
A Project Report Submitted i p!rti!" #u"#i""met o# t$e
Re%uiremet& #or t$e !'!rd o# t$e De(ree
)ASTER O* BUSINESS AD)INISTRATION
+A,A-ARLAL NE-RU TEC-NOLOGICAL UNI.ERSITY
Project report &ubmitted b/
DONOOR 0S-I.A 1U)AR
234L53E55356
Uder t$e E&teem (uid!ce o#
)r0)0DORAS,A)Y NAI1
A&&t0 Pro#0 Dept0 o# )BA
TRR COLLEGE O* ENGINEERING
2APPRO.ED BY AICTE 7 A**ILIATED TO +NTU-6
Io"e2869 P!t!c$eru2)69 )ed!:2Di&t69
-YDERABAD
24534;453<6
CERTI*ICATE
TRR COLLEGE O* ENGINEERING
2Appro8ed b/ AICTE9 Reco(i=ed b/ Go8t0 o# A0P !d A##"i!ted to +0N0T0U0-0 -/der!b!d6
Io"e2.69 P!t!c$eru2)69 )ed!:2Di&t6
DEPART)ENT O* )ANAGE)ENT STUDIES
This is to certify that the project work entitled CAPITAL BUDGETING is authentic record of
the research work carried out by DONOOR0 S-I.A 1U)AR (12L01E0010) in partial
fulfillent of the award of the de!ree of )ASTER O* BUSINESS AD)INISTRATION is a
bonafide work carried out by hi"
The inforation ebodied in this report has not been subitted to any other uni#ersity for the
award of the de!ree"
$nternal %uide &ead of the 'epartent
)R0)0DORAS,A)Y NAI1 )r0 P0 1RIS-NA D,AIPAYANA )0CO)
A&&t0pro#0 Pro#e&&or
'ept"of ()* 'ept" of ()*

E>TERNAL E>A)INER
DECLARATION
$ hereby declare that the project work entitled CAPITAL BUDGETING at PENNAR
INDUSTRIES LTD is an authentic record of the research of the work carried out by e for the
award of partial fulfillent for the award of the de!ree )ASTER O* BUSINESS
AD)INISTRATION fro TRR COLLEGE O* ENGINEERING is a bonafied work carried
out by e"
The inforation ebodied in this report has not been subitted to any other uni#ersity for the
award of de!ree"
D!te?
P"!ce? DONOOR 0S-I.A 1U)AR
2 34L53E55356
AC1NO,LEDGE)ENT
*part fro the efforts of e+ the success of this project depends lar!ely on the encoura!eent
and !uidelines of any others" $ take this opportunity to e,press y !ratitude to the people who
ha#e been instruental in the successful copletion of this project"
$ a hi!hly obli!ed to our respected principal prof" 10SRINI.AS RAO for his #aluable support
and interest throu!hout the in#esti!ation"
$ a also #ery uch thankful to )r0P01RIS-NA D,AIPAYANA 2-OD6 for their kind help
durin! y project"
$ would like to e,tent y sincere thanks to )r010Aj!/ ('ept ana!er) of PENNAR
INDUSTRIES LTD" *nd to the ana!eent who helped e a lot in the project work and who
!a#e e an opportunity to do this project in their corporation"
$ a hi!hly indebted to y respected super#isor )r0)0DORAS,A)Y NAI1+ *ssistant
professor ()* departent under whose constant super#ision+ eticulous !uidance and
encoura!eent+ this work has been carried out to copletion" $ thank hi for the freedo of
thou!ht+ e,pression and hi trust+ which was !reatly bestowed upon e"
Last but not least $ thank all other staff ebers and technical staff+ friends who directly or
indirectly assisted us in this project work"
-roject *ssociate
DONOOR S-I.A 1U)AR
235L53E554@6
ABSTRACT
The project titled CAPITAL BUD+ETING IN PENNAR INDUSTRIES LTD ais
at e#aluatin! the capital bud!etin! or in#estent decisions to set up a facility at
-E..*/$.'01T/$E1 LT' for anufacturin! the dru!s for supplies directly fro bulk units"
The followin! capital bud!etin! techni2ues are used for e#aluation assuin! 34 as discountin!
factor"
.on5'iscountin! Techni2ues like -*6 )*78 -E/$9' (-)-)+ *:E/*%E /*TE 9;
/ET0/. (*//)"
'iscountin! Techni2ues like .ET -/E1E.T :*L0E (.-:)+ $.TE/.*L /*TE 9;
/ET0/. ($//)+ and -/9;$T*)$L$T6 $.'E< (-$)"
7apital bud!etin! or in#estent decisions are of considerable iportance to the fir"
1ince they tend to deterine its #alue by influencin! its !rowth+ profitability and risk"
STABLE O* CONTENTS
C$!pter Tit"e P!(e No0
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C-APTER 3? INTRODUCTION
INTRODUCTION
The ter capital bud!etin! refers to lon!5ter plannin! for proposed capital outlays and
their financin!" Thus+ it includes both risin! of lon!5ter funds as well as their utiliDation" $t ay
this be defined as The firEs decision to in#est its current funds ost efficiently in the lon!5
ter assets in anticipation of an e,pected flow of benefits o#er a series of years" The priary
objecti#e of financial analysis is to assist in decision akin!"
*n efficient allocation of capital is the ost iportant finance function in the odern
ties" $t in#ol#es decision to coit the firEs funds to the lon!5ter assets" The in#estent
decisions of a fir are !enerally known as the 7apital )ud!etin! or 7apital E,penditure
'ecisions" * 7apital )ud!etin! 'ecisions aybe defined as the firEs decision to in#est its
current funds ost efficiently in the lon!5ter assets in anticipation of an e,pected flow of
benefits o#er a series of years"
I8e&tmet Deci&io&
9ne of the basic 2uestions faced by the financial ana!er is &ow should the scarce
resources of the fir is allocated to !et the a,iu #alue for the firF This refers to
in#estent decisions+ which deal with in#estent of firEs resources in lon!5ter (fi,ed)
assets and short ter (current) assets or 7apital )ud!etin! 'ecisions and ?orkin!
7apital (ana!eent"
7apital )ud!etin! is a decision akin! process for in#estent in assets that ha#e lon!
ter iplication+ affect the future !rowth and profitably of the fir and basic
coposition and assets i, of the fir"
(easurin! the benefits and costs associated with each alternati#e option in ters of
increental cash flows"
E#aluatin! different proposals in the li!ht of return e,pected by the in#estors of the fir
and the return proised by the proposal
*pplyin! different techni2ues to select an alternati#e with objecti#e of a,iiDation of
#alue of the fir"
Typically+ capital bud!etin! decision in#ol#es rather lar!e cash outlays and coits the
fir to a particular course of action o#er a relati#ely lon! period and conse2uently+ e#ery
care should be taken care of" The future risks and uncertainties should be incorporated in
the e#aluation procedure so the future cash flows occur as they are intended to be"
T/pe& o# i8e&tmet deci&io&?
The followin! are the #arious types of in#estent decisions
Idepedet I8e&tmetG These are proposals+ which do not copete with one another
in a way that acceptance of one precludes the possibility of acceptance of another" The
case of such proposals the fir ay strai!htway accept or reject a proposals+ which
!i#e a hi!her+ return than a certain desired rate of return+ are accepted and the rest are
rejected"
Coti(et i8e&tmet? These are proposals whose acceptance depends on the
acceptance of one or ore other proposals" ;or e,aple a new achine has to be
purchased on account of substantial upon e,pansion of plant" ?hen a contin!ent
in#estent proposal is ade+ it should also contain the proposal on which it is dependent
in order to hate a better perspecti#e of the situation"
)utu!""/ EAc"u&i8e I8e&tmet? These are proposals+ which copete with each other in
a way that the acceptance of one precludes the acceptance of other or others" ;or
e,aple+ if a copany is considerin! in#estent in one of two teperature control
systes+ acceptance of one syste will rule out the acceptance of another" Thus two or
ore utually e,clusi#e proposals cannot be accepted" 1oe techni2ue has to be used
for selectin! the better or the best one" 9nce this is done other alternati#es !et
autoatically !et eliinated"
)!:e Or Bu/ Deci&io? (ake or buy decision is no lon!er a short run operatin!
decision and it becoes a proble of capital e,penditure which necessitates
consideration of re2uired rate of return" * copany has to take this decision+ when it has
to face the followin! choice"
)uy certain part or sub5asseblies fro outside suppliersH or
0se a#ailable capacity to produce the ite within the factory"
$n this decision+ the followin! are ajor considerationsG
7osts that will be incurred under both alternati#es are not rele#ant to the analysis
-otential uses of a#ailable capacity should be considered"
-ertinent 2uantitati#e factors ust be e#aluated in the decision process" These
considerations include price stability fro suppliers+ reliability of deli#ery and 2uality
specifications of aterials or coponents in#ol#ed"
*!ctor& !##ecti( c!pit!" i8e&tmet deci&io&?
The followin! are the four iportant factors+ which are !enerally taken into account while
akin! a capital in#estent decisionG
T$e Amout O# I8e&tmet? $n case a fir has unliited funds for in#estent it can
accept all capital in#estent proposals which !i#e a rate of return hi!her than the
iniu acceptable or cut5off rate" &owe#er+ ost firs ha#e liited funds and
therefore capital rationin! has to be iposed" $n such an e#ent a fir can take only such
projects which are within its eans" $n order to deterine which project should be taken
up on the basis the projects should be arran!ed in an ascendin! order accordin! to the
aount of capital in#estent re2uired"
Comput!tio O# C!pit!" I8e&tmet Re%uired? The ter capital in#estent re2uired
refers to the net cash outflow+ which is the su of all outflows and inflows occurrin! at
Dero tie period" The net outflow it deterined by takin! into account the followin!
factors"
7ost of the new project
$nstallation cost
?orkin! capital
Proceed& #rom &!"e o# !&&et? * new asset ay be purchased for replaceent of an old asset" The
old asset ay therefore be sold away" The cash realiDed on account of such sale will reduce the
cost of new in#estent"
T!A E##ect&?the aount of profit or loss on the sale of assets ay affect the cash flows on
account of ta, affects" The profit or loss is ascertained by takin! into account the cost of
assets+ it book #alue and the aount realiDed on its sale" The ta, liability will be different
in each of the followin! case
?hen the asset is sold at its book #alue"
?hen the asset is sold at a price hi!her than the book #alue but lower than its cost
?hen the asset is sold at a price hi!her than its cost" ?hen the asses is sold lower
than its book #alue"
I8e&tmet A""o'!ce?This is allowed to encoura!e capital in#estent in achinery and
e2uipent" 1uch allowance thus reduces the cost of the initial in#estent of the project"
)iimum R!te O# Retur O I8e&tmet? The ana!eent e,pects a iniu rate
of return on the capital in#estent" The iniu rate of return usually decides on the
basis of the cost of capital" ;or e,aple+ if the cost of capital is 104 the ana!eent
will not like to accept a proposal+ which yields a rate of return less than 104" The project
is !i#in! yield below the desired rate of return will therefore be rejected"
Cut;O## Poit? The cut5off point refers to the point below which a project would not be
accepted" ;or e,aple+ if 104 is the desired rate of return the cut5off point to 104" The
cut5off point ay also be in ters of period" ;or e,aple if the ana!eent desire that
the in#estent in the project should be recouped in three years+ the period of three years
would be taken as the cut5off period"
Retur EApected *orm T$e I8e&tmet? 7apital in#estent decisions are ade in
anticipation of incre>ased return in the future" $t is therefore #ery necessary to estiate
the future the return or benefits accruin! fro the in#estent proposals" There are two
proposals a#ailable for 2uantifyin! benefits fro capital in#estent decisions" They areG
*ccountin! profitG the ter accountin! profit is identical with incoe concept used in
accountin!"
7ash flowsG in this depreciation char!es and other aortiDation char!es on the fi,ed
assets are not subtracted fro !ross re#enue because no cash e,penditure is in#ol#ed"
OB+ECTI.ES O* T-E STUDY?
The followin! objecti#es of the present study are
To study the in#estent decisions in the select or!aniDation"
To understand the #arious ethods for deterinin! the siDe of the 7apital )ud!et and
e#aluatin! in#estent proposals"
To !i#e appropriate su!!estions on capital bud!etin! techni2ues for the de#elopent of
the select or!aniDation"
NEED *OR T-E STUDY
7apital bud!etin! decisions are the in#estent decisions of the fir !enerally known as
the capital bud!etin!+ or capital e,penditure decisions" * capital bud!etin! decision ay be
defined as the firEs decision to in#est in current funds ost efficiently in the lon! ter assets in
anticipation of an e,pected flow or benefits o#er a series of years" The lon!5ter assets are those
that effect the firEs operations beyond the one year period" The firEs in#estent decision
would !enerally include e,pansion+ ac2uisition+ oderniDation and replaceent of the lon!5ter
assets" 1ale of a di#ision or business is also an in#estent decision" 'ecisions like the chan!e in
the ethods of sales distribution+ or an ad#ertiseent capai!n or research and de#elopent
pro!rae ha#e lon!5ter iplications for the firEs e,penditures and benefits+ and therefore
they should also be e#aluated as in#estent decision" &ence+ the project ais at e#aluatin! the
in#estent proposal for settin! up different facilities in -ennar $ndustries Liited+ &yderabad"
)ET-ODOLOGY
The study has been collected throu!h secondary sources" The secondary data has been
collected fro the A years annual reports (200A50C to 2010511) of the -ennar $ndustries+ )ooks+
=ournals+ (a!aDines+ -eriodicals and copany websites"
SCOPE O* T-E STUDY
The scope and period of study is restricted to the followin!
The scope is liited to the operations of the -ennar"
The inforation obtained fro the priary and secondary data was liited to -ennar"
The 8ey inforation perforances indicated were taken fro 200A50C to 2010511
The -BL+ The )alance sheet was on the last fi#e years"
7oparison analysis was done in coparison of sisters units"
LI)ITATIONS O* T-E STUDY
The followin! are the liitations of the study
The study is conducted with the data a#ailable and analysis is ade accordin!ly"
'ue to the confidential financial records+ the data is not e,posed so the study ay not be
detailed and full5fled!ed"
1ince the study is based on financial data that are obtained fro the financial stateents+
the liitations of financial stateent shall be e2ually applicable"
The analysis ay not be accurate as the a#ailable data is liited"
C-APTER;4
PRO*ILE O* T-E ORGANIBATION
INDUSTRY PRO*ILE
$ndia is the I
th
lar!est producer of steel in the world" $ron and steel for a key coponent
of econoic de#elopent of the country" Econoic de#elopent of $ndia re#ol#es around the
$ron and 1teel $ndustry" $tEs an industry with century old history" 'ue iportance has been !i#en
to $ron and 1teel industry by the !o#ernent policy o#er the last decade"
$tEs a historical fact+ that $ndia occupied a pre5einent position in $ron and 1teel akin! a
day of year" &owe#er+ the era of odern 1teel $ndustry of $ndia be!an only in 130J with a
launchin! of T*T* $ron B 1teel 7opany in =ashedpur+ )ihar" This plant went into operation
in sta!es by 1311512" $n 1330+ the $ron B 1teel copany in )urnpur+ near *sansol in ?est
)en!al" $n 132>+ The (ysore $ron B 1teel work+ the first public sector effort+ coenced
operations in )hadra#ai in 8arnataka"
$n the pre5independence day+ these three units were the ain steel producers in country+
turnin! out 0"1J illion tonnes pi! iron and a illion tonnes steel per year" Today+ the industry
with C inte!rated plants+ J
th
under construction and 1C0 odd any steel plants has coe a lon!
way"
The $ndustrial -olicy stateent of 13AC placed $ron and 1teel in schedule5*+ which
eant that all new units in the industry would setup only by the !o#ernent"
The pri#ate units already in e,istence+ would howe#er be peritted to e,pand their
capacities" *s the policy akers decided to accept the (ahalanobis a odel for de#elopent+
and all5out effort was ade durin! second plant period to lay a stron! industrial base" $n line
with these+ three inte!rated steel plants each with one illion tonne steel in!ot capacity were
setup in /aukela+ )hilai+ and 'ur!apur" These plants cae into operation in sta!es between 13AC
and 13C2" 'urin! this period+ Tata $ron and 1teel 7opany (T$179.) and $$179 doubled their
capacities and the total in !ot capacity rose to C illion tonnes" The steel industry in !eneral is on
the upswin!+ due to stron! !rowth in deand propelled particularly by the deand of steel in
7hina" The world scenario coupled with strin! doestic deand has benefited the $ndia 1teel
$ndustry"
'urin! *pril5'eceber 200A+ production of finished steel recorded a !rowth of @4 o#er
the correspondin! period of the pre#ious year to reach 2I"> illion tonnes" This !rowth rate
howe#er+ was lower that the !rowth rate in precedin! two years" 7onsuption of finished steel
!rew by A"34 and increased to 2@"3 illion tonnes+ durin! the sae period"
The faster !rowth of doestic consuption relati#e to production was reflected in a
declined in the e,port of finished steel by 1I"24 in copared to the correspondin! period of
pre#ious production of $ron bein! consued as a raw aterial in the process itself"
?orld steel prices are risin! fro 'eceber 2001 onwards" The price increase of hot
rolled coils+ durin! =an 2002 to 'ec 2002 fro 01 K1@051JA per tonne to about 01 KAA05CA0 per
tonne" The prices of steel eltin! scrap rose fro a low of 01 K3>53@ per tonnes to 01 K2JA5
2IA per tonne as part of buildin! infrastructureH $ndia has started a treendous pro!rae of
hi!hway construction across the country" *s a result+ doestic steel deand has risen" The
increased production of steel turned led to raise in prices of raw aterials like scraps+ cookin!
coals and etallur!ical coke" The wholesale price inde, of iron and steel has increased by >A4
to 2024 in 200> and 200@ and further to 2>J"I4 in 200@ upto 'ec >1+ 200@"
$ndiaEs 1teel $ndustry is ore than a century old" )efore the econoic refors of the
earlyE 1330Es the $ndia 1teel industry was a predoinantly re!ulated one with the public sector
doinatin! the industry" Tata 1teel was the only ajor pri#ate sector copany in#ol#ed the
production of steel in $ndia" 1ail and Tata 1teel ha#e traditionally been the ajor steel producers
of $ndia" $n 1332+ the liberaliDation of the $ndia econoy led to the openin! up of #arious
industries includin! the steel industry" This led to the increase in the nuber of producer+
increased in#estents in the steel industry and increased production capacity" 1ince 1330+ ore
than /s"13+000crores (01 K@@J0"AI illion) has been in#ested in the steel industry of $ndia"
)A+OR PLAYERS AND +OINT .ENTURES
1teel authority of $ndia Ltd" is the leadin! steel akin! copany in $ndia+ itEs a fully
inte!rated $ron and 1teel aker+ producin! both basic and special steel for doestic construction+
en!ineerin! power+ autooti#e and defense industries and for sale an in e,port arket"
%o#ernent of $ndia owns about IC4 of 1$*LEs e2uity and retains #otin! control of the
copany" &owe#er 1*$L by the #irtue of .a#aratna status+ enjoys ai!nificant operational and
financial autonoy"
)!jor uit& o# SAIL !re !& uder
Ite(r!ted Stee" P"!t&
)hilal 1teel -lant located at 7hhattis!arh"
'ur!apur 1teel -lant located at ?est )en!al"
/ourkela 1teel -lant located at 9rissa"
)okaro 1teel -lant located at =harkhand"
Speci!" Stee" P"!t&
*lloy 1teel -lant in ?est )en!al"
1ale 1teel -lant in Tail .adu"
:is#es#arya $ron 1teel plant in 8arnataka"
Sub&id!rie&
$ndian $ron and 1teel 7opany in ?est )en!al
(aharashtra Electro 1elt Ltd" in (aharashtra"
)hilai 9,y!en Ltd"+ in .ew 'elhi"
+OINT .ENTURES
1*$L has prooted a joint #enture in different are ran!in! fro power plants to e5coerce
.T-7 1*$L -ower 7opany -#t" Ltd setup in arch 2001+ this A05A0 =oint #enture
between 1*$L and national Theral -ower 7orporation operates and ana!es the
capti#e power plant to 'ur!apur and /ourkela"
)okaro -ower 1upply 7opany -#t" Ltd" These A05A0 joint #enture between 1*$L and
the 'aodar :alley corporation fored in =an 2002 in ana!in! the >02 (? power
!eneration and 1II0 tonnes per hours
)hilai electric 1upply copany -#t" Ltd" *nother 1*$L5.T-7 =oint #enture on A05A0
fored in arch 2002 ana!es the JA (? power plants of )ilai 1teel plants which has
additional capacity of producin! 1A0 tonnes of steel per year"
1*$L )ased 1er#ice 7enter -#t" Ltd" 1*$L has fored a joint #enture with )(?
$ndustries Ltd" on @05C0 bases to proote us ser#ices center of )okaro with objecti#es of
addin! #alue to steel"
/oelt51*$L ($ndia) Ltd" * join! #enture between 1*$L+ .ational (ineral 'e#elopent
7orporation and /ussian propter for akin! /oelt technolo!y de#eloped by /ussia
of reducin! of $ron bearin! aterials+ this is carried out with carbon in sin!le sta!e
reactor with the use of o,y!en"
GO.ERN)ENT POLICY
1ince 1331532 the !o#ernent has announced and ipleented followin! ajor chan!es in the
$ron and 1teel $ndustry"
/eo#al of $ron and 1teel fro the list of industries of reser#ed for he public sector"
E,eption of $ron and 1teel $ndustry fro the pro#isions of copulsory licensin!"
$nclusion of $ron and 1teel in the list of hi!h priority industry for the purpose of forei!n
in#estent"
'ere!ulation of pricin! and distribution of iron and steel"
/eduction of duty on iport of capital !oods"
LiberaliDation of iport and e,port policy"
CO)PANY PRO*ILE?
*n industrial and ser#ices business !roup based in &yderabad stri#in! to eet the
challen!es of a new $ndia" $nspired by !lobal #ision+ propelled by entrepreneurial dri#e and
oti#ated to achie#e+ the -E..*/ !roup is sur!in! a head akin! an in#aluable contribution to
industry+ with a ajor presence in steel+ aluinu+ profiles and cheicals"
L-ennar $ndustries Ltd"L+ the fla!ship copany of the -ennar %roup had its be!innin!s in
13IJ+ in the for of -ennar 1teel Ltd as a stand5alone 7old /ollin! unit+ which has since
e#ol#ed into ulti location enterprises" The Turno#er of the copany has !rown to o#er /s">"C
billion in 133I fro a odest /s"0"@ billion ten years a!o and now present turno#er is /s"@I0
crore per annu"
The coercial production at -ennar $ndustries Ltd was started in ;eb 13II at $snapur in
(edak district at a distance of about @0ks fro &yderabad+ with a capacity of 12+000 tonnes
per annu+ and takin! ad#anta!e of deand and supply isatch in cold rolled steel coils"
*on! A0 cold rolled steel units in $ndia+ -ennar stands aon! the first three" The copany
ade profits in the #ery first year of operation" The capacity has been increased fro 12+000
T-* to >C+000 T-* in (arch" 1331" The capacity a!ain has been enhanced fro >C+000 T-* to
C0+000 T-* durin! 133J to fully e,ploit the deand for the product with total outlay of /s" 2A
crore+ funded by $')$ and ;$7$ to the e,tent of /s" 1I"A crore and throu!h internal accruals of
/s" C"A crore" -resent capacity (200A) is 1+ 20+000 (T per annu"
-ennar $ndustries has recei#ed 1A053002 2uality certification fro /?T0:+ %erany
and has reaffired its coitent to achie#in! e,cellence in the 2uality of products and aiin!
for coplete custoer satisfaction"
-ennar $ndustry Ltd" has been specialiDin! in the anufacture of world class cold rolled
steel in 'eep 'rawin! and E,tra 'eep 'rawin! #arieties" 1ince+ 133> -ennar $ndustries Ltd" has
also focusin! on anufacturin! and arketin! special steel such as 1T @2+ (ediu carbon+
sprin! steels etc" 'urin! 133A+ -ennar $ndustry Ltd" setup press coponents di#ision in line with
its coitent to supply custoers with #alue added products" This di#ision is successfully
caterin! to both auto and white !oods industries" -ennar $ndustries Ltd" finds e,tensi#e
application in the autoobile+ autooti#e coponents+ custoer durables+ bearin! and !eneral
en!ineerin! se!ents" The arketin! offices located at (ubai+ -une+ 7hennai+ )an!alore+
7oibatore+ &yderabad+ ;aridabad and .ew 'elhi caters to a wide custoer base"
$ts one of the ost odern 7old /ollin! (ill cople,es in the country with e2uipent
such as @ &i57old /ollin! (ill L-M%as 'iesel fi,ed annealin! furnaces" 7/ 1ittin! lines+ 7r 7ut5
to5len!th lines etc" 1upplied by anufacturers with in the country with know5howMcollaboration
fro world faous copanies such as wean united 01*+ L9$5%erany+ 1taco501*+ 1ieens5
%erany+ ;lakt51weden etc" The copany is professionally ana!ed by people with
considerable e,perience in the 7old /olled 1teel strips $ndustry" -ennar 1teel has established
itself as a anufacturer of world5class cold rolled coils and sheets of deep drawin! and e,tra
deep drawin! #arieties"
NSL )ERGES INTO PSL
9n the e#enin! of .o#eber 23+ 133J (r" 8"1" /aju+ 7hairan+ .a!arjuna !roup and
(r" ." /ao+ 7hairan of -ennar %roup addressed joint counication eetin! at .1L factory
to forally announce the er!er of .1L factory into -ennar 1teels Ltd to e,tent their business in
the !rowth of steel production B now has been reco!niDed as L-ennar $ndustries LtdL"
.1L was ;la!ship 7opany of .a!arjuna %roup+ fro a cold rolled steel strips
anufacture in 133J+.1L has e,panded its production capacity si, fold and has di#ersified into
hi!h profile !rowth area as cold rolled fored section and leather products in association with
the under license fro world leaders :oest5*lpine $ndustrial 1er#ices (T*$1)+*ustria"
PRODUCT )ANU*ACTURE
-ennar $ndustries Ltd is a ulti5product and ulti5location enterprise" The 7opany
anufactured #ariety of product" -ennar is $195300152000 certified copany fro /?5T0:+
%erany and coitted to achie#in! e,cellence in followin! products"
7old /olled 1teel 1trips"
7old /olled ;ored 1ections"
En!ineerin! 7oponents"
-recision Tubes"
The ;abrication
The anufacturin! facilities of -ennar $ndustries Ltd" are located near &yderabad
($snapurB-atancheru)+ which is considered as !eo!raphical center of $ndia" These facilities
e,peditious ser#icin! of custoers in the arkets located in .orth+ ?est+ 1outh $ndia+ national
le#el and also at international le#el+
COLD ROLLED STEEL STRIPS 2CRSS6
7/11 di#ision with its uni2ue units at -atancheru+ $snapur and 7hennai has cobined an
annual 7old /ollin! capacity of 1"20"000 etric tonnes" -ennar anufactures steel strips fro
C"00 to J"A0 width and thickness ran!e of 0"2A to A both in cold coil and steel fored"
This cold rolled steel strips is applicable inG5
Two5?heeler
;our5?heeler
/efri!erator
*ir conditioner
En!ineerin! -roducts
Proce&& O# )!u#!cturi( O# CRSS A&?;
/aw (aterial
$nspection
&/51littin!
-ickilin!
/ollin!
*nnealin!
1kin -ass
Co"d Ro""ed *ormed Sectio& 2CR*S6
* strate!ic anne,ure of Tarapur based press etal unit of $T !roup of copanies in 133I
has ensured" The eer!ence of -ennar as the undisputed leader of 7old /olled ;orin! (ills+
tools and work force of $T unit at Tarapur ha#e been absorbed in full" $n addition+ 7old /olled
;orin! (ills and all tools e,cludin! work force ha#e been connected fulltie in $T 7hennai
unit" -ennar now ha#e a anufacturin! capacity of ore than about @0+000 (T of 7old /olled
;ored 1ections per annu+ the lar!est in the country"
This 7/;1 is applicable inG
*utoobile
/ailway
7onstruction
-ollution control
%eneral en!ineerin!
(aterial
7/ 1littin!
7ut to len!th
-ackin! B 'ispatch
/oll
;orin!
/"(
/ecei#in!
/aw
(aterials
-ost
;orin!
9ilin! B
-aintin!
;inal
;i!ure 2"1 (anufacturin! -rocess
ENGINEERING CO)PONENT DI.ISION
$n this di#ision the en!ineered ites are produced in press shock operations feedin! to different
industries" This di#ision is e2uipped with hydraulic+ echanical and pneuatic presses+ shearin!+
laths and buffin! achines+ for production operations"
The en!ineerin! coponent is applicable toG5
/efri!erator
Two5?heeler
$ndustrial 7opressor
%eneral en!ineerin! ites
7onstruction
;our5?heeler
DISTRIBUTION O* PRODUCTS )ANU*ACTURED
'ispatch
-ackin!
)L*.8$.%
'/*?$.%51
T/$(($.%
T0/.$.%
)0;;$.%
'/*?$.%52
.9T7&$.%
-$E/7$.%
;L*/$.%
7&*(;E//$.%
$.1-E7T$9.
-*78$.%
'$1-T*7&
-ennar has an e,tensi#e sales network spread all o#er $ndia" $n doestic arket -ennar
supplies their 2uality aterial product to the #arious field such asG
7onstruction sector
*uto5sector
Two5wheeler
;our wheeler sector
Electrical appliances
/ailway sector
So9 t$eir cu&tomer& !re?;
Tata (otor
LBT
*shok Leyland
T:1 (otor
*lston -ower
Eicher (otor
(ahindra B (ahindra
Thera, Ltd
8irloskar 7opeland
:oltas
/eliance
&arsha En!ineerin!
)harath Earth (o#ers
Tecuesh
)-L
Electolu, $ndia
:ijay Electricals
Lucas T:1
&industan 7onstruction
&ero &onda
.ISION
-ennarNs :ision it to be a !lobally reputed en!ineered etal product copany+ -ennar endea#ors
to ha#e stron! and endurin! relationship with its custoers based on 2uality and ser#ice"
)ISSION
-ennarNs ission is to le#era!e its ode infrastructure+ technical e,pertise and decades of
e,perience to pro#ide hi!h 2uality and cost effecti#e etal product to its custoers" -ennar is
coitted to ensurin! rewardin! e,perience to its custoers" -ennar works closely with
shareholders+ suppliers+ custoers and eployees to ensure attracti#e econoic returns for all
the stake holders"
CUALITY POLICY
L?e+ at -ennar are coitted to producin! and pro#idin! 1teel based products and associated
ser#ices for custoers all o#er the world" ?e stri#e to achie#e e,cellence in the 2uality of
product" ?e anufacture and the ser#ice we pro#e to our custoer" $t is out endea#ors to create a
workin! en#ironent where oti#ated eployees counicate freely and where inno#ation is
encoura!ed to enable continual ipro#eent in all areasL"
?e work to!ether to achie#e 79(-LETE 701T9(E/ 1*T$1;*7T$9. T&/90%& T9T*L
O0*L$T6 (*.*%E(E.T"
ORGANISATION CULTURE
$n -ennar 1teel $ndustry Ltd" all the eployees are sincere+ honest+ hardworkin! and loyal with
the or!aniDation" They !i#e ephasis to aintain discipline in $ndustry"
-ennarNs people are well5known for tie punctuality" They produce royal 2uality product and
deli#er on the desired tie"
CO)PETITOR *OR PENNAR INDUSTRY LTD
The (ajor 1teel producers in $ndia and ajor copetitor to -ennar $ndustries Ltd"+ are as
followsG5
T$179
Essar 1teel
=indal :ijayna!ar 1teel Ltd
=indal 1trips Ltd
=$179
1aw -ipes
0tta 1teel Ltd
$spat $ndustries Ltd
(ukund $ndustries Ltd
Tata 11L Ltd
1esa %oa Ltd
AC-IE.E)ENT AND A,ARDS
)est supplier award fro *'9. en!ineerin!+ 87L+ TEL79"
;irst 7old /olled ;ored sections business to be awarded $19 3001 certification in
$ndia by /?T0:+ %erany"
9ne of the best 7/11 suppliers+ awarded fro E$7&E/
*utoobile supplier award fro T:1"
,EL*ARE *ACILITIES AT PENNAR INDUSTRIES LTD0
-ennar $ndustries Ltd" is considered bein! one of the hu!e anpower consistin! industries in
&yderabad" 1oe eployees workin! as a peranent and soe as a contract basis" *ll welfare
facilities would coe under different acts like ;actories *ct 13@I+ The 7ontract Labour
(/e!ulation B *bolition) *ct+ 13J0"
This copany appointed a special welfare officer -"/*:$ inside the copany preises to take
the eployees and to sol#e their proble related to work or faily atter"
-ennar $ndustries offers followin! outstandin! welfare facilities to their eployees"
This or!aniDation offers e,cellent edical facilities"
This or!aniDation pro#ides fine transportation ser#ices"
This or!aniDation akes a#ailable tea or coffee at eployeeNs work place"
7opany pro#ides !ood drinkin! water facilities"
9r!aniDation !i#es clean toilet B superior washin!5bathin! aenities"
This or!aniDation pro#ides re!ular health check5up of the eployees" This or!aniDation
affords the housin! facilities"
This copany akes a#ailable trainin! pro!ras"
This or!aniDation supplies the facilities of -";+ $nsurance to secure the future of the
eployees of the copany"
This or!aniDation offers the aternity benefit facilities to the woan eployees"
This copany akes a#ailable well unifor and protecti#e cloth for the eployees"
This copany pro#ides rest roo facilities"
This or!aniDation supply chan!in! roo and locker facilities to their eployees"
This copany pro#ides first5aid bo,es"
This or!aniDation pro#ides all safety e2uipent to the eployees"
This or!aniDation supply facilities of li!htin! and #entilation"
This copany pro#ides spittoon and sittin! facilities" This -ennar $ndustries offer the
facilities of Eployee /eferral 1chee"
ORGANIBATION STRUCTURE
The or!aniDation structure of -ennar $ndustries Ltd (-$L) is #ery wide and deep rooted so as to
ser#e the clients and to fulfill the set tar!ets by the ana!eent" $f we !o throu!h the
or!aniDational chart of -$L+ we can understand the structure+ coponents and way of
adinistration" ;or the benefit of the study+ one has to see the or!aniDational chart with
eticulous thinkin!"
(r".rupender/ao (E,ecuti#e 7hairan)
-rof" La,i.arain
(r" 7" /an!aani (%$7 .oinee)
(r" -" )haskara/ao
(r" :ijaya 7handra -uljal
(r" 7h" *nantha /eddy (E,ecuti#e 'irector)
CO)PANY SECRETARY
(r" -" :" :araprasad
AUDITORS
(Ms /ababuB 7o"+
7hartered *ccountants"
BAN1ERS
1tate )ank of $ndia
1tate )ank of &yderabad
The $')$ )ank Ltd"
)ank of )ahrain B 8uwait )"1"7
STA** )ANAGER
7 ABO.E
D) 7
BELO,
O**ICE SUP0
7 DRI.ERS
TOTAL
7/11 @ 2A .$L 23
7/;1 @ 1C .$L 20
E7' 2 2I .$L >0
7/11 ($1.) > C0 .$L C>
(arketin! C 2A .$L >1
;inance B *ccountin! 2 1I .$L 20
(aterial 1 1 .$L 2
-ersonnel B*dn 1 I 2 11
1yste B $nforation .$L C .$L C
7orporate 2 2 1 A
T9T*L 2A 1I3 > 21J
CRSS PTCR CR*S PTCR ECD TOTAL
9-E/*T9/1 1@I >A > 1IC
*--/E.T$7E1 12 12 nil 2@
OUTLOO1 *OR *UTURE
?ith the fundaentals of the econoy !rowin! stron!er and the auto and buildin!
industries set to !row further+ deand for -ennar products is #ery encoura!in!"
?ith financial reconstruction and association tit strate!ic forei!n in#estor" -ennar is said
to di#ersity further" ?hile also for!in! international linka!es to take copany beyond the $ndian
shores"
Pe!rD& &tr!te(ie& #or di8er&i#ic!tio !d (ro't$ !re?;
a) (anufacturin! auto coponents"
b) ;ocusin! on pre5en!ineered steel industries"
c) *chie#e annual sales of /s" 1000 crore in three yearsE tie"
d) %rowin! e,port #olue"
e) $nor!anic !rowth throu!h ac2uisition of copanies in allied sectors"
-ennar industries+ a copany with a #inta!e of alost two decades in anufacture of cold rolled
steel strips+ cold rolled fored profiles+ en!ineerin! coponents+ E/? tubes+ is plannin! to
#enture into precision tube anufacturin!(7'?) and capacity enhanceent of E/? tube with
wide ran!e co#ered up to 9"' 11@ and thickness up to Cin at -atancheru+ &yderabad" The
project tea has carried out a Techno Econoic ;easibility /eport for the proposed project" The
study findin!s are suariDed as belowG
PRODUCT
* -E) consist of different coponents which are desi!ned in a anner which akes
each of these copatible with other parts" *s nae iplies+ fabrication of these coponents is
carried out in factory under strict 2uality control as per detailed shop drawin! and then these
coponents are transported to the project site with proper arkin!s and assebled as per
erection drawin!s" These features pro#ide -E) an ed!e o#er the con#entional steel structures in
ters of 2uicker output and deli#ery+ reduction in project cost+ fle,ibility and 2uality control and
a one stop solution fro 2ualified professionals throu!h or!aniDed copanies"
(ajor coponents of -E)s are priary fraes+ secondary ebers and sheetin! ade
out of different raw aterial inputs as detailed"
)!r:et A&&e&&met
The use of -E)s in $ndia is considered to be in introductory phase" The present
consuption in $ndia is estiated to be A"A0 $akh (T-* which has !rown at an a#era!e annual
rate of >04 since 2001502 a!ainst this deand the supply is around A"JA lakh (T-* with about
si, ajor players" /e!ionally west leads @14 of the doestic total capacity with south and north
$ndia at >04 and 234 respecti#ely"
Lookin! at the user sectors+ industryN sector leads with a consuption of C04 9f the o#erall
deand followed but a!riculture and a#iation sector rest consued by others"
;or the near future the deand tor -E)s is e,pected to !row at a rate of >05>A4 which will
ipro#e penetration le#el in doestic arket as copared to the present @"A4 le#el" The ajor
dri#ers for future deand are identified asG
a) %rowth in nuber of 1EPs
b) &i!h !rowth in infrastructureM construction sector ass transport projects planned for
future in ultiple cities
*bout J+ @0+000 (Ts of -E)s anufacturin! capacity is e,pected to be added in the ne,t four
years" The clients propose to set up a >0+000 (T-* with one bea line and other supportin!
lines+ achinery and e2uipentEs" Throu!h this project the client plans to offer inte!rated ser#ice
fro desi!nin! the buildin!s to supply and erection ser#ices" The detailed process at each sta!e"
C-APTER;@
T-EORETICAL *RA)E,OR1
C!pit!" Bud(eti(
C!pit!" bud(eti( (or in#estent appraisal) is the plannin! process used to deterine whether
an or!aniDationNs lon! ter in#estents such as new achinery+ replaceent achinery+ new
plants+ new products+ and research de#elopent projects are worth pursuin!" $t is bud!et for
ajor capital+ or in#estent+ e,penditures"
(any foral ethods are used in capital bud!etin!+ includin! the techni2ues such as
*ccountin! /ate of /eturn (*//)
.et -resent :alue (.-:)
-rofitability $nde, (-$)
$nternal /ate of /eturn ($//)
These ethods use the increental cash flows fro each potential in#estent+ or project"
Techni2ues based on accountin! earnin!s and accountin! rules are soeties used 5 thou!h
econoists consider this to be iproper 5 such as the accounting rate of return+ and Lreturn on
in#estent"L 1iplified and hybrid ethods are used as well+ such as payback period discounted
payback period"
Net pre&et 8!"ue
$n finance+ the Net Pre&et .!"ue 2NP.6 or Net Pre&et ,ort$ 2NP,6 of a tie series of cash
flows+ both incoin! and out!oin!+ is defined as the su of the present #alues (-:s) of the
indi#idual cash flows of the sae entity" $n the case when all future cash flows are incoin!
(such as coupons and principal of a bond) and the only outflow of cash is the purchase price+ the
.-: is siply the -: of future cash flows inus the purchase price (which is its own -:)" .-:
is a central tool in 'iscounted 7ash ;low ('7;) analysis+ and is a standard ethod for usin! the
tie #alue of oney to appraise lon!5ter projects" 0sed for capital bud!etin!+ and widely
throu!hout econoics+ finance+ and accountin!+ it easures the e,cess or shortfall of cash flows+
in present #alue ters+ once financin! char!es are et"
The .-: of a se2uence of cash flows takes as input the cash flows and a discount rate or
discount cur#e and outputs a priceH the con#erse process in '7; analysis 5 takin! a se2uence of
cash flows and a price as input and inferrin! as output a discount rate (the discount rate which
would yield the !i#en price as .-:) 5 is called the yield+ and is ore widely used in bond
tradin!"
*ormu"!
Each cash inflowMoutflow is discounted back to its present #alue (-:)" Then they are sued"
therefore .-: is the su of all ters
R
t
23 E i6
t
?here
t Q The tie of the cash flow
i Q The discount rate (the rate of return that could be earned on an in#estent in
the financial arkets with siilar risk)H opportunity cost of capital
/t Q The net cash flow (the aount of cash+ inflow inus outflow) at tie t" ;or
educational purposes+ /0 is coonly placed to the left of the su to ephasiDe
its role as (inus) the in#estent
Iter!" R!te O# Retur
T$e Iter!" R!te o# Retur 2IRR6 is a rate of return used in capital bud!etin! to easure and
copare the profitability of in#estents" $t is also called the discounted 7ash ;lo#@+ /ate of
/eturn ('7;/9/) or the rate of return (/9/)" $n the conte,t of sa#in!s and loans the $// is
also called the effecti#e interest rate" The ter internal refers to the fact that its calculation does
not incorporate en#ironental factors (e"!"+ the interest rate or inflation)"
The internal rate of return on an in#estent or project is the LannualiDed effecti#e copounded
return rateL or L/ate of /eturnL that akes the net present #alue (.-: as .ETR$M($S$//) year)
of all cash flows (both positi#e and ne!ati#e) fro a particular in#estent e2ual to Dero"
$n ore specific ters+ the $// of an in#estent is the discount rate at which the net present
#alue of costs (ne!ati#e cash flows) of the in#estent e2uals the net present #alue of the benefits
(positi#e cash flows) of the in#estent"
$nternal rates of return are coonly used to e#aluate the desirability of in#estents or projects"
The hi!her a projectNs internal rate of return+ the ore desirable it is to undertake the project"
*ssuin! all projects re2uire the sae aount of up5front in#estent+ the project with the
hi!hest $// would be considered the best and undertaken first"
* fir (or indi#idual) should+ in theory+ undertake all projects or in#estents a#ailable with
$//s that e,ceed the cost of capital" $n#estent ay be liited by a#ailability of funds to the
fir andMor by the firNs capacity or ability to ana!e nuerous projects"
*ormu"!e
%i#en a collection of pairs (tie+ cash flow) in#ol#ed in a project+ the internal rate of return
follows fro the net present #alue as a function of the rate of return" * rate of return for which
this function is Dero is an internal rate of return"
%i#en the (period+ cash flow) pairs (n+ 7n) where n is a positi#e inte!er+ the total nuber of
periods N+ and the net present #alue .-:+ the internal rate of return is !i#en by r inG
The period is usually !i#en in years+ but the calculation ay be ade sipler if r is calculated
usin! the period in which the ajority of the proble is defined (e"!"+ usin! onths if ost of
the cash flows occur at onthly inter#als) and con#erted to a yearly period thereafter"
*ny fi,ed tie can be used in place of the present (e"!"+ the end of one inter#al of an annuity)H
the #alue obtained is Dero if and only if the .-: is Dero"
$n the case that the cash flows are rando #ariables+ such as in the case of a life annuity+ the
e,pected #alues are put into the abo#e forula"
9ften+ the #alue of r cannot be found analytically" $n this case+ nuerical ethods or !raphical
ethods ust be used"
P!/b!c: Period )et$od
(ethod of e#aluatin! in#estent opportunities and product de#elopent projects on the basis of
the tie taken to recoup the in#estent" This period is copared to the re2uired payback period
to deterine the acceptability of the in#estent proposal" $n contrast to return on in#estent and
net present #alue ethods+ the cash inflows occurrin! after the payback period are not included
in this ethod"
;orulaG -ayback period (in years) T $nitial capital in#estent U *nnual cash5flow fro the
in#estent"
Pro#it!bi"it/ IdeA met$od
-rofitability $nde, is a ratio of discounted benefits o#er the discounted costs" $t is a easure of
profitability of an in#estent that we can copare with that of other in#estents that are under
consideration" *lternati#e in#estents ay #ary in siDe a life span and these ay pro#ide ore
or less net benefits" 6et by usin! profitability inde, ethod+ we can see for oursel#e1 which one
of these in#estents is ore profitable when copared to the rest"
-rofitability $nde, T (-: of future cash flows) U $nitial in#estentG This of course bein! where
-:T the present #alue of the future cash flows in 2uestion"
9r T (.-: S $nitial in#estent) U $nitial $n#estentG *s one would e,pect+ the .-: stands for
the .et -resent :alue of the initial in#estent"
*ormu"!e o# Pro#it!bi"it/ IdeA
The -rofitability inde, shows the nuerator which is the discounted su of benefits and the
denoinator that is the discounted su of costs associated with a particular project" This
particular e2uation ay also be used to infer the internal rate of return which occurs when
profitability inde, is e2ual to 1" ?e will lea#e that discussion to another tutorial+ here we will
ephasiDe the profitability inde, ethod
C-APTER F <
DATA ANALYSIS
7
INTERPRETATION
CONCEPTUAL ISSUES O* CAPITAL BUDGETING
)usiness firs ha#e scares resources that ust be allocated aon! copetiti#e uses" The
financial ana!eent pro#ides a fraework for firs to take these decisions wisely"
The in#estents decisions include not only those that create re#enues and profits but also those
that reduce cost" 1o+ the in#estents decisions and the decisions relatin! to assets coposition of
the fir"
* capital e,penditure+ fro the accountin! point of #iew+ is an e,penditure that is shown as an
asset on the balance sheet" This asset+ e,cept in the case of a non5depreciable asset like land+ is
depreciated o#er its life" $n accountin!+ the classification of an e,penditure as capital e,penditure
or re#enue e,penditure is !o#erned by certain con#entions+ by soe pro#isions of law+ and by
the ana!eentNs desire to enhatice and depress reported profits" 9ften+ outlays on / B '+ aja+
ad#ertisin! canipai!n+ aild reconditionin! of plant and achinery ay be treated as re#enue
e,penditute for accountin! purposes+ e#en thou!h they are e,pected to !enerate a strea of
benefits in future and+ therefore+ 2ualify for bein! capital e,penditures"
*EATURES
V $t in#ol#es e,chan!e of current funds for the benefits to be achie#ed in future"
V ;uture benefits are e,pected to be realiDpd o#er a series of years"
V There is relati#ely hi!h de!ree of risk"
V They are in#isible decisions"
V They ha#e lon!5ter and si!nificant effect on profitability of the concern"
V They !enerally in#ol#e hu!e funds"
SIGNI*ICANCE O* CAPITAL BUDGETING
7apital )ud!etin! is of paraount iportance in financial decision akin!" 7apital
bud!etin! decisions affect the profitability of the fir" They also ha#e a bearin! on the
copetiti#e position of the enterprise" 7apital bud!etin! decision deterines the future destiny
of the copany"

V *n opportunity in#estent decision can yield spectacular returns where as an ill5ad#ised
and incorrect in#estent decisions can endan!er the #ery sur#i#al e#en of the lar!e siDed
firs"
V * capital e,penditure decisions has its effect o#er a lon!5ter tie span and ine#itably
affects the copaniesfuire cost structure"
V 7apital in#estent decisions are not easily re#ersible+ without uch financial loss to the
fir"
V 7apital in#estent in#ol#es cost and the ajority of the firs ha#e scares capital
resources"
V 7apital in#estent decisions are of rational iportance because it deterines
eployent+ econoic acti#ities and econoic !rowth"
LThis underlines the need for thou!htful+ wise and correct in#estent decisionsL
NEED *OR CAPITAL BUDGETING
7apital bud!etin! decisions are thai to an or!aniDation as they include the decisions as to"
V ?hether or not funds should be in#ested in lon!5ter projects such as settin! rstei of an
industry" purchase of plant and achinery etc"
V To analyDe the proposal for e,pansion or creatin! additional capac hies
V To decidethe replaceent of peranent asset such as buildin! and e2uipents"
V To ake financial analysis of #arious proposals re!ardin! capital in#estent so as to
hoose the best out of any alternati#e proposals"
CAPITAL BUDGETING DECISION )A1ING PROCESS
The followin! dia!ra indicates the decision akin! process of 7apital )ud!etin!"
-/9=E7T %E.E/*T$9.
'E:EL9-$.% T&E *LTE/.*T$:E1
TYPES O* CAPITAL BUDGETING DECISION
30 Accept;Reject deci&io&
This is a fundeental decision capital bud!etin!" $f the project is accepted+ the fir in#ests in it"
$f the proposal is rejected+ the fir does not in#est in it so+ by applyin! this criterion+ all
independent projects are accepted" $ndependent projects are projects that do not copete with
one another in such a way the acceptance a project preclude the possibility of acceptance of
another
40 )utu!""/ eAc"u&i8e project deci&io?
These are the projects+ which+ copete with other projects in such a way that the acceptance of
one will e,clusi#e and only one (ay ye chosen" (utually e,clusi#e in#estent acceptable under
accept5reject criterion"
@0 C!pit!" r!tioi( deci&io&?
7apital rationin! refers to situation in which the fir has ore acceptable in#estents re2uirin!
!reater aount of finance then is a#ailable with the fir" $t is concerned with selection of !roup
of in#estent proposals out of any in#estent proposals actable under accept5reject criterion
under financial constraints"
E.ALUATION O* IN.EST)ENT PROPOSAL
:*L0*T$9. 9; *LTE/.*T$:E1
1ELE7T$9. 9; T&E -/9=E7T
$(-LE(E.T*T$9.
-E/;9/(*.7E /E:$E?
*t each point of tie a business fir has a nuber of proposals re!ardin! #arious nuber of
projects in which it can in#est funds" )ut funds a#ailable with the firs are always liited and it
is not possible to in#est in all the proposals at a tie"
$n selectin! the criterion+ the followin! two fundaental principles ust be kept into #iew"
The bi!!er+ the better principleG The+ principle eans that other thin!s bein! e2ual cr
bi!!er are preferable to sall ones"
1o The bird in hand principlesG This principle eans other thin!s bein! e2ual+ early
benefits as other thin!s are seldo e2ual"
)oth the abo#e principles ha#e to be applied to take the ri!ht decisions"
IN.EST)ENT CRITERIA
TEC-NICUES O* CAPITAL BUDGETING
The ethods of appraisin! capital e,penditure proposals can be classed into two broad
cate!oriesG
1" Traditional or un discounted cash flow techni2ues
2" 'iscounted or tie adjusted cash flow techni2ues
DISCOUNTED CAS- *LO, )ET-ODS
The distin!uishin! characteristics of discounted cash flow capital bud!etin! techni2ues are that
they takin! into consideration the tie #alue of oney while e#aluatin! the cost and benefits of
the projects" They also take into consideration the benefits and costs occurin! durin! the entire
life of the project
NET PRESENT .ALUE )ET-OD
$n finance+ the Net Pre&et .!"ue 2NP.6 or Net Pre&et ,ort$ 2NP,6 of a tie series of cash
flows+ both incoin! and out!oin!+ is defined as the su of the present #alues (-:s) of the
indi#idual cash flows of the sae entity" $n the case when all future cash flows are incoin!
(such as coupons and principal of a bond) and the only outflow of cash is the purchase price+ the
.-: is siply the -: of future cash flows inus the purchase price (which is its own -:)" .-:
is a central tool in 'iscounted 7ash ;low ('7;) analysis+ and is a standard ethod for usin! the
tie #alue of oney to appraise lon!5ter projects" 0sed for capital bud!etin!+ and widely
throu!hout econoics+ finance+ and accountin!+ it easures the e,cess or shortfall of cash flows+
in present #alue ters+ once financin! char!es are et"
The .-: of a se2uence of cash flows takes as input the cash flows and a discount rate or
discount cur#e and outputs a priceH the con#erse process in '7; analysis 5 takin! a se2uence of
cash flows and a price as input and inferrin! as output a discount rate (the discount rate which
would yield the !i#en price as .-:) 5 is called the yield+ and is ore widely used in bond
tradin!"
*ormu"!
Each cash inflowMoutflow is discounted back to its present #alue (-:)" Then they are sued"
therefore .-: is the su of all ters+
Rt
23 E i6
t
?here
t Q The tie of the cash flow
i Q The discount rate (the rate of return that could be earned on an in#estent in
the financial arkets with siilar risk)H opportunity cost of capital
/t Q The net cash flow (the aount of cash+ inflow inus outflow) at tie t" ;or
educational purposes+ /0 is coonly placed to the left of the su to ephasiDe
its role as (inus) the in#estent
T$e &tep& to be #o""o'ed #or !dopti( t$e NP. met$od
'eterine an appropriate rate of interest that should be selected as a iniu re2uired
rate of return" This rate should be the iniu rate of return below which the in#estor
considers that does not pay hi the in#ested aount"
7opute the present #alue of total in#estent outlayH if the total in#estent is to be
ade in the initial year+ the present #alue sall is the sae as the cost of in#estent"
7opute the present #alue of total in#estent proceeds i"e"+ each in flows at the abo#e
deterined discount rate"
7alculate the .-: of each project by subtractin! the present #alue of cash outflow for
each project"
The present #alue of rupee ldue in any nuber of years can be found by usin! the followin!
forula"
P. G 3H 2IEr6t
?here+ PV Tpresent #alue
rTrate of interest
tTnuber of years
ACCEPT OR RE+ECT CRITERION
$f .-: W PE/9+ *77E-T
$f .-: X PE/9+ /E=E7T
$n case of utually e,clusi#e projects+ the #arious proposal would be ranked in order of
descendin! order" The proposal with hi!her .-: is to be accepted"
)ERITS?

$t reco!niDes the tie #alue of oney"
$t is sound ethod of appraisal as it considers the total benefits arisin! out of the proposal
o#er its lifetie"
7han!in! discount rate can be built in to the .-: calculation by alterin! the
denoinator" This rate norally chan!es because lon!er the tie span+ lower the #alue of
oney and hi!her the discount rate"
This ethod is #ery useful for selection of naturally e,clusi#e projects"
DE)ERITS?
$t is difficult to calculate as understand"
This present #alue ethod in#ol#es the calculation of re2uired rate of return to discount
the cash flows+ which present serious probles"
$t is an absolute easure"
This ethod ay not !i#en satisfactory results in case of projects ha#e different effecti#e
li#es"
INTERNAL RATE O* RETURN 2IRR6
T$e Iter!" R!te o# Retur 2IRR6 is a rate of return used in capital bud!etin! to easure and
copare the profitability of in#estents" $t is also called the discounted 7ash ;low /ate of
/eturn ('7;/9/) or the rate of return (/9/)"E11 $n the conte,t of sa#in!s and loans the $// is
also called the effecti#e interest rate" The ter internal refers to the fact that its calculation does
not incorporate en#ironental factors (e"!"+ the interest rate or inflation)"
The internal rate of return on an in#estent or project is the LannualiDed effecti#e e'
copounded return rate or L/ate of /eturnL that akes the net present #alue (.-: as 7r
.ETR1M(1S$//) year) of all cash flows (both positi#e and ne!ati#e) fro a particular s
in#estent e2ual to Dero"
$n ore specific ters+ the $// of an in#estent is the discount rate at which the net present
#alue of costs (ne!ati#e cash flows) of the in#estent e2uals the net present #alue of the benefits
(positi#e cash flows) of the in#estent"
$nternal rates of return are coonly used to e#aluate the desirability of in#estents or projects"
The hi!her a projects internal rate of return+ the ore desirable it is to undertake the project"
*ssuin! all projects re2uire the sae aount of up5front in#estent+ the -roject with the
hi!hest $// would be considered the best and undertaken first"
* fir (or indi#idual) should+ in theory+ undertake all projects or in#estents a#ailable with
$//s that e,ceed the cost of capital" $n#estent ay be liited by a#ailability of funds to the
fir andMor by the firNs capacity or ability to ana!e nuerous projects"
*ormu"!e
%i#en a collection of pairs (tie+ cash flow) in#ol#ed in a project+ the internal rate of return
follows fro the net present #alue as a function of the rate of return" * rate of return for which
this function is Dero is an internal rate of return"
%i#en the (period+ cash flow) pairs (n+ 7n) where n is a positi#e inte!er+ the total nuber of
periods N+ and the net present #alue .-:+ the internal rate of return is !i#en by r inG
The period is usually !i#en in years+ but the calculation ay be ade sipler if r is calculated
usin! the period in which the ajority of the proble is defined (e"!"+ usin! onths if ost of
the cash flows occur at onthly inter#als) and con#erted to a yearly period thereafter"
*ny fi,ed tie can be used in place of the present (e"!"+ the end of one inter#al of an annuity)H
the #alue obtained is Dero if and only if the .-: is Dero"
$n the case that the cash flows are rando #ariables+ such as in the case of a life annuity+ the
e,pected #alues are put into the abo#e forula"
9ften+ the #alue of r cannot be found analytically" $n this case+ nuerical ethods or !raphical
ethods ust be used"
ACCEPT OR RE+ECT CRITERION?
*77E-TG $f the $// is !reater than the cost of the capital" /E=E7TG $f the $// is less than the
cost of capital"
)ERITS
$t reco!niDes the tie #alue of oney
$t considers all cash flows occurrin! o#er the entire life of the project to calculate its
return or risk
$t is consistent with the shareholders wealth a,iiDations objecti#e
DE)ERITS
$t !i#es isleadin! and inconsistent results when the .-: of a project does not decline
with discount rates
$t also fails to indicate a correct choice between utually e,clusi#e projects under certain
situations
1. PRO*ITABILITY INDE> )ET-OD 2PI6?
$t is the ratio of the present #alue of cash inflow at the re2uired rate of return to the initial cash
outflow of the in#estent" 0sin! the -rofitability $nde, (-$) or )enefit 7ost /atio ()7/) a
project will 2ualify for acceptance if its -$ e,ceeds one" The .-: will be positi#e when the -$ is
!reater than one will ne!ati#e when the -$ is less than one" Thus+ .-:B -$ approaches !i#e the
sae results re!ardin! the in#estent proposal" The selection of project with the -$ ethod can
also be done on the basis of rankin!" -$ depends up on cash flows before depreciation and after
ta," $t takes into consideration the scrap #alue" The forula to calculate -$ or )7/ is as follows"
PI G Tot!" pre&et 8!"ue o# c!&$ I#"o'&
Tot!" pre&et 8!"ue o# c!&$ out#"o'&
)ERITS?
$ts !i#es due consideration to the tie #alue of oney"
1ince the present #alue cash inflows is di#ided by initial cash outflows it is a relati#e
easure of the projects profitability"
DE)ERITS?
$tEs difficult to understand"
$t in#ol#es ore coputation the traditional ethods"
TRADITIONAL OR NON;DISCOUNTED TEC-NICUES?
"6 PAY BAC1 PERIOD )ET-OD?
-ay back easures the nuber of years re2uired for the cash flow after ta, to payback the
ori!inal outlay re2uired is an in#estent proposal" it depends upon cash inflows before
depreciation and after ta," -ayback period does not consider the scrap #alue" There two ways of
calculatin! the -)-"
The first ethod can be applied when the cash inflows are unifor"
PBP G Ori(i!" I8e&tmet
Co&t!t Au!" C!&$ I#"o'&
The annual cash flows represent i"e" estiated cash sa#in!s resultin! fro the proposed
in#estent"
$f the calculated -)- is less than the standard+ project is accepted and #ice #ersa"
The second ethod is used when projects cash flow are not e2ual and #ery fro year to year"
-ay back period is calculated"
DISCOUNTED PAY BAC1 )ET-OD
This de#eloped due to the liitation of the -)- ethod that i!nores tie #alue of oney" &ence+
an ipro#eent is ade where the present #alues of all inflows are cuulated in order of tie"
The tie period at which the cuulated present #alue of cash in flows e2ual the present #alue of
cash outflows is known as discounted -)-" The project+ which !i#es a shorter discounted pay
back period+ is accepted"
REASONS *OR POPULARITY O* PBP
'espite its serious shortcoin! the -)- is widely used in appraisin! in#estents"
The -)- ay be re!arded rou!hly as the reciprocal for the $// when the annual cash
flow is constant and the life of the project fairly lon!"
The -)- is soewhat akin to the breake#en point" * rule of thub+ it th ser#es as a
useful shortcut in e process of inforation of !eneration and e#aluation"
ACCEPT OR RE+ECT CRITERION
The pay back period ethod can be used as a decision criterion or reject in#estent proposal" $f
a sin!le in#estent is bein!" 7onsidered+ if the annual pay back period is less than the pre5
deterined pay back period is the project will be accepted if not it would be rejected"
?hen the utually e,clusi#e projects consideration they ay be ranked ac endin! to the len!th
of the pay back period" The project the shortest payback ay be assi!ned rank one and so on"
)ERITS
$t the best ethod in case of e#aluation of sin!le project"
$t is easy to calculate and siple to understand"
$t is based on the cash flow analysis"
DE)ERITS
$t copletely i!nores all cash flows after the payback period
$t copletely i!nores tie #alue of oney"
$n case the cash flow are une2ual the pay back period can be found by addin! up the cash flows
until the total is e2ual to the initial cash out lay of project"
2) ACCOUNTING RATE O* RETURN 2ARR6
*#era!e rate of return is also known as accountin! rate of return ethod" $t is based an
accountin! inforation (profit) rather than cash flows" *// is techni2ue that helps us in
knowin! the particular project+ fro which decision can be ade to accept or reject the
in#estent proposal"
*ccordin! to *//+ as an acceptMreject criterion+ the actual *// would be copared with the
predeterined or a iniu re2uired rate of return or cut off rate" * project can be accepted
if the actual *// is hi!her than the iniu+ desired *//+ otherwise it is liable to rejected"
*// depends upon profit depreciation and ta, (-*T)" *// ne!lects the scrap #alue" The
tie #alue of oney is not taken into consideration"
ARR G A8er!(e Au!" Pro#it A#ter T!A A 355
A8er!(e I8e&tmet
A8er!(e I8e&tmet G Net !dditio!" 'or:i( c!pit!" ES!"8!(e 8!"ue E I
2Ori(i!" i8e&tmet;S!"8!(e 8!"ue6
A8er!(e Au!" Pro#it A#ter T!A G Tot!" C!&$ *"o' A#ter T!A
Li#e O# T$e project
ACCEPT OR RE+ECT CRITERION
The actual a#era!e rate of return is copared with predeterined or iniu re2uired rate of
return or cut off rate" * project would 2ualify to be acceptedH if the actual rate of return is hi!her
then the iniu desired a#era!e return"
$f ore than one alternati#e proposal are under consideration+ the a#era!e rate of return ay be
arran!ed in descendin! order 7onsideration+ the a#era!e rate of return ay be arran!ed in
descendin! order of a!nitude startin! with the proposal with the hi!hest a#era!e rate of return"
)ERITS

$t is siple to understand and easy to calculate"
The entire strea of incoes is used to calculate the a#era!e rate of return"
RIS1 AND DUNCERTAINTY IN CAPITAL BUDGETING
*ll the techni2ues of capital bud!etin! re2uire estiation of future cash inflow and cash out
flow" The cash flows are estiated+ based on the followin! factors"
E,pected econoics life of the projects
1al#a!e #alue of the asset at the end of the econoic life
7apacity of the product
1ellin! price of the product
-roduction cost
'epreciation rate
/ate of ta,ation
;uture deand of the product+ etc"
)ut due to uncertainties about the future+ the estiates of deand+ production+ sale costs+ sellin!
price+ etc" cannot be e,act" ;or e,aple a product ay becoe obsolete uch earlier than
anticipated due to une,pected technolo!ical de#elopents" *ll these eleents of uncertainties
ha#e to be taken into account in the for of forcible risk while takin! a decision on in#estent
proposals" $t is perhaps the ost difficult task while akin! an in#estent decision" )ut soe
allowances for the leent of risk ha#e to be pro#ed"
*ACTORS IN*LUENCING CAPITAL E>PENDITURE DECISIONS
There are any factors financial as well as non5financial which influence the capital e,penditure
decisions and the profitability of the proposal" 6et there are any others factors which ha#e to be
taken in to consideration while takin! a capital e,penditure decision+ They are

1" 0/%E.76G 1oe tie an in#estent is to be ade due to ur!ency for the sur#i#al of
the fir or to a#oid hea#y loses" $n such circustances+ proper e#olution cannot be ade
throu!h profitability tests" E,aples of each an ur!ency are breakdown of soe plant and
achinery fir accident etc"
2" 'E%/EE 9; 0.7E/T*$.T6G -rofitability is directly related to risk+ hi!her the profits+
!reater is the risk uncertainty"
>" $.T*.%$)LE ;*7T9/1G *s the capital e,penditure has to ake due to certain
eotional and intan!ible factors such as safety and welfare of the workers+ presti!ious
project+ social welfare+ !oodwill of the fir etc"
@" *:*$L)$L$T6 9; ;0.'1G *s the capital e,penditure !enerally re2uires the pro#isions
of lows solely influence by this factor and althou!h the project ay not be profitable" 6et
the in#est haste be ade"
A" ;0T0/E E*/.$.%1G a project ay not be profitable as copared to another today+ but
it ay be preferred to increase future earnin!s"
C" 1oeties+ project with sonic lower profitability ay be selected due to constant flow of
incoe as copared to another project with an irre!ular and uncertain inflow of incoe"
CAPITAL E>PENDITURE CONTROL
7apital e,penditure in#ol#es non5fle,ible lon!5ter coitent of funds" The success of an
enterprise in the lon! run depends upon the effecti#eness with which the ana!eent akes
capital e,penditure decision" 7apital e,penditure decision is #ery iportant as there ipact is
ore or less peranent on the well5bein! and econoic health of the enterprise" )ecause of it
lar!e5scale echaniDation and autoation and iportance of capital e,penditure for increase in
the profitability of a concern" $t has becoe essential to aintain an effecti#e syste of capital
e,penditure control"
OB+ECTI.ES O* CONTROL O* CAPITAL E>PENDITURE
To ake an estiate of capital e,penditure and to see that the total cash outlay is within
the financial resources of the enterprise"
To ensure tiely cash inflows for the projects so that non a#ailability of a cash ay not
be proble in the ipleentation of the proble"
To ensure that all capital e,penditure is properly sanctioned"
To properly coordinates the projects of #arious departents"
To fi, priorities aon! #arious projects and ensure their follow up"
To copare periodically actual e,penditure with the bud!eted ones so as to a#oid any
e,cess e,penditure"
To easure the perforance of the project"
To ensure that sufficient aount of capital e,penditure is incurred to keep pact with the
rapid technolo!ical de#elopent
STEPS IN.OL.ED IN CONTROL O* CAPITAL E>PENDITURE?
-reparation of capital e,penditure bud!et
-roper authoriDation of capital e,penditure
/ecordin! and control of e,penditure
E#aluation of perforance of the projects"
STEPS IN.OL.ED
i" $dentifyin! the need of the project
ii" -reparation of the project repot with respect to
a" 0tiliDation
b" Efficiency
c" 7apacity of the particular project
d" ;uture projected arket
iii" -reparation of feasibility report based $// B .-7
i#" =ustification based on
a" (oney earnin!s
b" Loss of arket
c" Loss of !oodwill
d" Technolo!ical re2uireent
#" The dele!ation of powers
T$e project propo&!"& !re &!ctioed i t$e #o""o'i( b!&i&
1l" .o -/9=E7T
$.:E1T(E.T
'ELE%*T$9. 9;
-9?E/
-E/ *..0(
1" 20 L*8&1 E"'M0.$T @ 7/9/E1
2" W20 L*8&1 5 X A
7/9/E1
7(' 5.$L5
>" WA 7/9/E1 5 X A0
7/9/E1
)9*/' 5.$L5
@" W A0 7/9/E1 %9:E/.(E.T 5.$L5
E.ALUATION O* NE, SC-E)E PRO+ECT
7alculation of cash flows after ta, (2"1 centraliDed blade shop)
'epreciation rate T 1C4 Ta, T .il $n#estent T /s" @+1@AM5 (in Lakhs)
6E*/ 7;)'T 'E- 1;)T T*< 7;)'T E*T
200I503 1000 CC>"2 >>C"2 55 1000 >>C"I
2003510 1>2I CC>"2 CC@"I 55 1>2I CC@"I
2010511 2C@2 CC>"2 13JI"I 55 2C@2 13JI"I
2011512 2C@2 CC>"2 13JI"I 55 2C@2 13JI"I
201251> 2C@2 CC>"2 13JI"I 55 2C@2 13JI"I
T9T*L 55 102A@ C3>I"00
Iterpret!tio?
The abo#e table re#eals that earnin! after ta, (E*T)" The copany has earned E*T 13JI"I in
2010511" *fter that soethin! followed
7alculation of pay back period ethod
6E*/ 7;*T 70(0L*T$:E 7;*T
200I503 1000 1000
2003510 1>2I 2>2I
2010511 2C@2 @3J0
2011512 2C@2 JC12
201251> 2C@2 102A@
7alculation of payback period
-)- T 2S1I1JM2C@2 T 2 S 0"C3 T 2 years and J onths
Iterpret!tio?
The abo#e table re#eals the -)- cost of the project is @+@1A lakhs" The initial in#estent can be
recorded in 2 years and J onths+ since the cutoff point is > years
7alculation of *//
*#era!e incoe T C3>IMA T 1>IJ"C0
*#era!e in#estent T @1@AM2 T 20J2"A
*// T 1>IJ"CM20J2"AR100 T CC"3A4
Iterpret!tio
The a#era!e incoe of the project is 1>IJ"C0 lakhs and the a#era!e in#estent of the project is
20J2"A0 lakhs" *ccountin! rate of return of the project is CC"3A4
C!"cu"!tio o# NP. J KI
6E*/ 7;*T -: Y 34 -:7;
200I503 1000 "31J 31J"00
2003510 1>2I "I@2 111I"1I
2010511 2C@2 "JJ2 20@0"00
2011512 2C@2 "J0I 1IJ0"A@
201251> 2C@2 "C@3 1J1@"CC
T9T*L JCC0">I
(5)$nitial $n#estent @1@A
.-: S>A1A">I
Iterpret!tio?
The abo#e table re#eals that .ET -resent :alues (.-:) Y 34" The present #alue of annuity 9ne
rupee for present #alue of one rupee Y34 discountin! factor+ because the cash inflows occurs
J+CC0">A lakhs+ on this #alue subtract with the initial in#estent /s @+1@A lakhs" &ence+ the
decision role associated with the net present #alues is accepted the project+ i"e"+ positi#e #alue of
the project"
7alculation of cash flows after ta, ( 2"2 0p !radation of e,itin! %T test facilities)
'epreciation /ate T 124 Ta, T .il $n#estent T 2CI (in lakhs)
6E*/ 7;)'T 'E- 7;)T T*< 7;*T E*T
200I503 >A >2"1C 2"I@ 55 >A 2"I@
2003510 @0 >2"1C J"I@ 55 @0 J"I@
2010511 10> >2"1C J0"I@ 55 10> J0"I@
2011512 10> >2"1C J0"I@ 55 10> J0"I@
201251> A0C >2"1C @J>"I@ 55 A0C @J>"I@
T9T*L JIJ C2C"20
Iterpret!tio?
$n the abo#e table re#eals that Earnin! *fter Ta, (E*T)" The copany has earned J0"I@ in 20115
12" *fter ne,t year as follow the sae ta,"
7alculation of pay back period ethod
6E*/ 7;*T 70(0L*T$:E 7;*T
200I503 >A >A
2003510 @0 JA
2010511 10> 1JI
2011512 10> 2I1
201251> A0C JIJ
-)- T > S 30M10> T > years and 3 onths
Iterpret!tio?
The abo#e table re#eals that -)- payback period cost of the project is 2CI lakhs" The initial
in#estent can be recorded in > years and 3 onths+ since the cutoff point is @ years"
7alculation of *//
*#era!e $ncoe T C2C"2MA T 12A"2@
*#era!e in#estent T 2CIM2 T 1>@
*// T 12A"2@M1>@R100 T 3>"@C4
Iterpret!tio?
The a#era!e incoe of the project is 12A"2@ lakhs and the a#era!e in#estent of the project is
1>@ lakhs" *ccountin! rate of return of the project is 3>"@C4
C!"cu"!tio o# NP. J KI
YEAR C*AT P. J KI P.C*
200I503 >A "31J >2"03
2003510 @0 "I@2 >>"CI
2010511 10> "JJ2 J3"A2
2011512 10> "J0I J2"32
201251> A0C "C@3 >2I">3
T9T*L A@C"C
(5)$nitial $n#estent 2CI"0
.-: S2JI"C
Iterpret!tio?
The abo#e table re#eals that .ET -resent :alues (.-:) Y 34" The present #alue of annuity 9ne
rupee for present #alue of one rupee Y34 discountin! factor+ because the cash inflows occurs
A@C"C lakhs+ on this #alue subtract with the initial in#estent /s 2CI"0 lakhs" &ence+ the decision
role associated with the net present #alues is accepted the project+ i"e"+ positi#e #alue of the
project"
C!"cu"!tio o# c!&$ #"o'& !#ter t!A 2 40@ *!ci"itie& #or m!u#!cturi( &peci!" too"&6
'epreciation /ate T I4 Ta, T .il $n#estent T 221"00 (in lakhs)
6E*/ 7;)'T 'E- 7;)T T*< 7;*T E*T
200I503 20 1J"CI 2">2 55 20 2">2
2003510 @A 1J"CI 2J">2 55 @A 2J">2
2010511 C0 1J"CI @2">2 55 C0 @2">2
2011512 >A 1J"CI 1J">2 55 >A 1J">2
201251> @2 1J"CI 2@">2 55 @2 2@">2
T9T*L 202 11>"C
Iterpret!tioG5
$n the abo#e table re#eals that Earnin! *fter Ta, (E*T)" The copany has earned E*T
2@">2 in 201251>"
7alculation of pay back period ethod
6E*/ 7;*T 70(0L*T$:E 7;*T
200I503 20 20
2003510 @A CA
2010511 C0 12A
2011512 >A 1C0
201251> @2 202
Iterpret!tio?
The abo#e table re#eals that -)- payback period cost of the project is 221 lakhs" The initial
in#estent can be recorded in the year 201251> i"e"+ A
th
year
C!"cu"!tio o# ARR
*#era!e $ncoe T 11>"C2MA T 22"J2
*#era!e in#estent T 221M2 T 110"A
*// T 22"J2M110"AR100 T 20"A34
$nterpretationG
The a#era!e incoe of the project is 22"J2 lakhs and the a#era!e in#estent of the project is
110"A lakhs" *ccountin! rate of return of the project is 20"A34
C!"cu"!tio o# NP. J KI
6E*/ 7;*T -: Y 34 -:7;
200I503 20 "31J 1I">@
2003510 @A "I@2 >J"I3
2010511 C0 "JJ2 @C">2
2011512 >A "J0I 2@"JI
201251> @2 "C@3 2J"2C
T9T*L 1A@"A3
(5)$nitial $n#estent 221"00
.-: 5CC"J1
Iterpret!tio?
The abo#e table re#eals that .ET -resent :alues (.-:) Y 34" The present #alue of cash flow
221" The re2uired rate of return and copared with the ori!inal in#estent" &ence the present
#alue 1A@"A3 inus the ori!inal in#estent 221" The loss is 5CC"J1" 1o the project is rejected"
7alculation of cash flows after ta, ( 2"@ 3; %T% and *u!" of new ;acilities)
'epreciation /ate T 124 Ta, T .il $n#estent T >1I"00 (in lakhs)
6E*/ 7;)'T 'E- 7;)T T*< 7;*T E*T
200I503 >00 >I"1C 2C1"I@ 55 >00 2C1"I@
2003510 1A00 >I"1C 1@C1"I@ 55 1A00 1@C1"I@
2010511 1A00 >I"1C 1@C1"I@ 55 1A00 1@C1"I@
2011512 1A00 >I"1C 1@C1"I@ 55 1A00 1@C1"I@
201251> 1A00 >I"1C 1@C1"I@ 55 1A00 1@C1"I@
T9T*L C>00 C103"20
Iterpret!tio?;
$n the abo#e table re#eals that Earnin! *fter Ta, (E*T)" The copany has earned E*T 1@C1"IA
in 2003510"
CALCULATION O* PAY BAC1 PERIOD )ET-OD
6E*/ 7;*T 70(0L*T$:E 7;*T
200I503 >00 >00
2003510 1A00 1I00
2010511 1A00 >100
2011512 1A00 @C00
201251> 1A00 C>00
-)- T 1 S 1IMA00 T 1 S 0"012 T 1 year and 1 onth
Iterpret!tio?
The abo#e table re#eals that -)- payback period cost of the project is >1I lakhs" The initial
in#estent can be recorded in 1 years and 1 onths+ since the cutoff point is 2 years"
CALCULATION O* ARR
*#era!e $ncoe T C103"2MA T 1221"I@
*#era!e in#estent T >1IM2 T 1A3
*// T 1221"I@M1AIR100 T JCI"@A4
Iterpret!tio?
The a#era!e incoe of the project is 122"I@ lakhs and the a#era!e in#estent of the project is
1A3 lakhs" *ccountin! rate of return of the project is JCI"@A4
CALCULATION O* NP. J KI
6E*/ 7;*T -: Y 34 -:7;
200I503 >00 "31J 2JA"1
2003510 1A00 "I@2 12C>"0
2010511 1A00 "JJ2 11A"I
2011512 1A00 "J0I 10C2
201251> 1A00 "C@3 3J>"A
T9T*L @J>1"C
(5)$nitial $n#estent >1I
.-: S@@1>"C
Iterpret!tio?
The abo#e table re#eals that .ET -resent :alues (.-:) Y 34" The present #alue of annuity 9ne
rupee for present #alue of one rupee Y34 discountin! factor+ because the cash inflows occurs
@J>1"C lakhs+ on this #alue subtract with the initial in#estent /s >1I lakhs" &ence+ the decision
role associated with the net present #alues is accepted the project+ i"e"+ positi#e #alue of the
project"
7;)'*T G 7*1& ;L9? )E;9/E '-E/E7$*T$9. *.' T*<
'E- G 'E-/E7$*T$9.
7;)T G 7*1& ;L9?1 )E;9/E T*<
7;*T G 7*1& ;L9?1 *;TE/ T*<
E*T G E*/.$.% *;TE/ T*<
-)- G -*6 )*78 -E/$9'
-: G -/E1E.T :*L0E
.-: G .ET -/E1E.T :*L0E
-:7; G -/E1E.T :*L0E 9; 7*1& ;L9?
*// G *:E/*%E /*TE 9; /ET0/.
C-APTER;L
*INDINGS
7
SUGGESTIONS
*INDINGS
2"1 7entraliDed blade shop initial in#estent is /s"@1@A lakh" -ayback period of the
project in#estent will reco#ered within 2 years J onths" The a#era!e rate of return
CC"3A4 in the year 200I5201>"The net present #alue is calculated based on discountin!
factor at 34 this #alue be positi#e then the project of initial capital of /s">A1A lakh"
&ence the copany should in#est in the project"
2"2 0p !radation of e,itin! !rant turno#er test facilities initial in#estent /s"2CI lakh"
-ayback period of the project in#estent will reco#ered within > years 3 onths" The
a#era!e rate of return 3>"@C4 in the year 200I5201>" The net present #alue is calculated
based on discountin! factor at 34 this #alue be positi#e then the project of initial capital
of /s"2JI"C lack" &ence the copany should in#est in the project"
2"> ;acilitatin! for anufacturin! special tools initial in#estent /s"221 lac" -ay back
period of the project in#estent will reco#ered within A years A onths" The a#era!e rate
of return 20"A34 in the year 200I5201>" The net present #alue is calculated based on
discountin! factor at 34 this #alue be ne!ati#e then the project of initial capital of /s"5
CC"J1 lakh" &ence the copany should not in#est in the project"
2"@ 3; %T% new facilities initial in#estent /s">1I lac" -ay back period of the project
in#estent will reco#ered within 1 year 1 onth" The a#era!e rate of return JCI"@A4 in
the year 200I5201>" The net present #alue is calculated based on discountin! factor at 34
this #alue be positi#e then the project of initial capital of is /s"@@1>"1C lakh" &ence the
copany should in#est in the pro
SUGGESTIONS
The -ay )ack -eriod of centraliDed blade shop the project in#estent reco#er 2 years and
J onths" The .-: of the centraliDed blade shop is positi#e that is its >A1A">I (%ain)
*nd the *#era!e /ate of /eturn is CC"3A 4"
19 T&E 79(-*.6 1&90' $.:E1T $. T&$1 -/9=E7T"
The -ay )ack -eriod of the %T Test facilities project in#estent reco#ers > years and 3
onths"
The .-: of the %T Test facilities project is positi#e that /s 2JI"C0 (%ain)
*nd the *#era!e /ate of /eturn is uch hi!her i"e" 3>"@C4"
19 T&E 79(-*.6 1&90L' $.:E1T 1. T&$1 -/9=E7T"
The -ay )ack -eriod of the ;acilities for anufacturin! special tools -roject is e,ceedin!
life of the project The .-: of ;acilities for anufacturin! tools is .e!ati#e i"e" /s CC"J1
(Loss)
*nd the *#era!e /ate of /eturn is 20"AC 4"
19 T&E 79(-*.6 1&90L' .9T $.:E1T $. T&$1 -/9=E7T"
The -ay )ack -eriod of 3; %T% and *u!" of .ew ;acilities project in#estent is
reco#ered in the first year itself"
The .-: of 3; %T% and *u!" new facilities is positi#e i"e" /s @@1>"C (%ain)
The *#era!e /ate of /eturn is JCI"@A 4"
19 T&E 79(-*.6 1&90L' $.:E1T $. T&$1 -/9=E7T"
C-APTER;M
CONCLUSION
CONCLUSIONS
The copany has reasonable syste of deterination of unser#iceable stores+ raw
aterials and finished !oodsH an ade2uate pro#ision has been ade in the accounts for
loss arisin! in the respect of ite so deterined"
There are ade2uate internal control procedures coensurate with the siDe of the
copany and the nature of its business for the purchase of stores+ raw aterials includin!
coponents+ plant and achinery e2uipent and other assets for sale of !oods" *s per
the inforation !i#en and e,planations pro#ided+ the copany has not ade any
purchase of !oods+ aterials and ser#ices in pursuance of contract or a!reeent"
The capital bud!etin! decision procedure basically in#ol#es the e#aluation of the
desirability of an in#estent proposal" $t is ob#ious that the fir ost ha#e a systeatic
procedure for akin! capital bud!etin! decisions" The procedure for akin! capital
bud!etin! decision"
The procedure ust be consistent with the objecti#e of wealth a,iiDation" $n #iew of
the si!nificance of capital bud!etin! decisions+ the procedure ust consist of step by step
analysis"
BIBILOGRAP-Y
BIBILIOGRAP-Y
*uthor Title of book -ublisher
$"(" -anday ;inancial (ana!eent :ikas -ublishers
("6 8han
B
-"8" =ain
(ana!eent *ccountin! T*T* (c%raw5&ill
publishin! house
-rasanna 7handra ;inancial (ana!eent T*T* (c%raw5&ill
publishin! house
1udhendra )hatt ;inancial (ana!eent E,cel )ooks
:" 8" 1a,ena
B
7" '" :ashist
7ost *ccountin!
1" ." (aheshwari ;inancial (ana!eent
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