Академический Документы
Профессиональный Документы
Культура Документы
On
CAPITAL BUDGETING
Of
Submitted By:
Ashish Kumar Sahoo
Roll No- 13-MBA-004(13209V132014)
Faculty Guide:
Corporate Guide:
Mr.
ACKNOWLEDGEMENT
Words are indeed inadequate to convey my deep sense of gratitude to all those who have
helped me in completing this summer project to the best of my ability. Being a part of this
project has certainly been a unique and a very productive experience on my part.
I would like to express my sincere gratitude to Sri B.B. Mishra (HOD, Department of
Business Administration, Utkal University) for helping me complete the project in a
successful manner.
I am really thankful to Sri Basant Kumar (Training & Placement Officer, Department of
Business Administration, Utkal University) for giving me the opportunity to work in my
preferred choice of esteemed organization, and assisting me in this project and sharing his
valuable suggestions and experience for the completion of the same.
I would also like to thank my guide Dr. (Mr) Dasarathi Sahu (Lecturer, Department of
Business Administration, Utkal University) for making all kinds of arrangements to carry
out the project successfully and for providing her constant guidance and help to solve all
kinds of queries regarding the project work. His systematic way of working and
incomparable guidance has inspired the pace of the project to a great extent.
Last, but not the least, I would like to thank all the Teachers & Staff Members of MBA
Department, Utkal University for their moral support and help in all respects for the
completion of my work.
Above all in my heart I am quite thankful to my parents, friends, etc whose support directly
or indirectly went into the successful completion of the project.
DECLARATION
I, Ashish Kumar Sahoo, student of Department of Business
Administration, Utkal University hereby declare that the project entitled
CAPITAL BUDGETING is the record of authentic work carried out by
me, during the academic year 2013- 2014 and has not been submitted to any
other university or institutes towards the award of any other degree.
An attempt has been made by me to provide all relevant and important details
regarding the topic to support the theoretical edifice with concrete research
evidence. This will be helpful to clean the fog surrounding the various aspects
of the topic.
I hope that this project will be beneficial for the organization.
Bhubaneswar
C E R T I F I C AT E
This is to certify that the report of the project submitted is an outcome of the Summer
Internship Training entitled Capital Budgeting carried out by Ashish Kumar Sahoo,
bearing Roll No.: 13MBA004 (13209V132014) under my guidance and supervision for
the partial fulfillment of MBA under Department of Business Administration, Utkal
University, Vani Vihar, Bhubaneswar (Odisha), India.
To the best of my knowledge the report,
1. Embodies the work of the candidate himself.
2. Has duly been completed.
3. Fulfils the requirement of the Ordinance relating to the MBA degree of the
University and,
4. Is up to the desired standard for the purpose of which is submitted.
Utkal University
Vani Vihar
Bhubaneswar (Odisha)
3
This is to certify that Mr Ashish Kumar Sahoo has successfully completed the project
work titled Capital Budgeting in partial fulfilment of the requirement for the summer
training of Master of Business Administration
in Department of Business
Date:
Place: OPGC LTD.,
Submitted By
Fortune Tower,
BBSR-751004
INDEX
S. No:
CONTENTS
PAGE NO.
CHAPTER-1
6 - 14
Introduction
Objectives of the study
Need of the study
Scope of the study
Importance of the study
Limitations of the study
Methodology
CHAPTER-2
15 - 35
Review of Literature
CHAPTER-3
36 - 43
Company profile
CHAPTER-4
44 - 56
Data Analysis and Interpretation
CHAPTER-5
57 - 71
Findings
Suggestions
Conclusion
Bibliography
CHAPTER-1
INTRODUCTION
INTRODUCTION
Capital budgeting is an essential part of every companys financial
management. Capital budgeting is a required managerial tool. One duty
of financial manager is to choose investment with satisfactory cash flows
with high returns. Therefore a financial manager must be able to decide
whether an investment is worth undertaking and able to decide and be
able to choose intelligently between two or more alternatives.
Capital
budgeting
involves
the
planning
and
control
of
capital
Investment
Decision
Making,
Capital
Expenditure
Decisions,
of
industrial
engineering,
research
and
development,
and
long
term
investments
such
as
new
machinery,
and
Budgeting
process
in
ODISHA
POWER
GENERATION
10
projects.
Capital budgeting requires firms to account for the time value of
money and project risk, using a variety of more or less formal
techniques.
Capital budgeting decisions affect the profitability in terms of
interest of the firm. They also have a bearing on the competitive
11
12
Lack of time is the major limiting factor, i.e., the schedule period of
6 weeks are not sufficient to make the study independently
regarding Capital Budgeting in OPGC Ltd.
The busy schedule of the officials in the OPGC Ltd. is another
limiting factor. Due to the busy schedule time taken to collect
complete information about organization.
Non-availability of confidential financial data.
The study is conducted in a short period, which was not detailed in
all aspects.
All the techniques of capital budgeting are not used in OPGC.
Therefore it was possible to explain only few methods of capital
budgeting.
The formula has been used according to the availability of the data.
13
Since the procedures and policies of the company does not allow
disclosing of all financial information and has to be completed with
the available data collected with the maximum effort.
RESEARCH METHODOLOGY
SOURCES OF DATA:
The following research methodology has been adopted to achieve the
aforesaid objective. The information for this report has been collected
through the primary and secondary sources.
Primary sources:
Primary sources is also called as first handed information as the data is
collected through the observation in the organization and interviews with
officials. By asking, questions with the accounts and other persons in the
financial department. A part from these some information is collected
through the seminars, which were held by Odisha Power Generation
Corporation Ltd.
Secondary sources:
14
Research Design:
Research design -
Analytical.
Techniques-
CHAPTER 2
15
REVIEW OF LITERATURE
CAPITAL BUDGEING:
INTRODUCTION
An efficient allocation of capital is the most important finance function in
modern times. It involves decisions to commit firms funds to long-term
assets. Such decisions are tend to determine the value of company/firm
by influencing its growth, profitability & risk.
Investment decisions are generally known as capital budgeting or capital
expenditure decisions. It is clever decisions to invest current in long term
assets expecting long-term benefits. Firms investment decisions would
generally include expansion, acquisition, modernization and replacement
of long-term assets.
Such decisions can be investment decisions, financing decisions or
operating decisions. Investment decisions deal with investment of
organizations resources in Long term (fixed) Assets and / or Short term
(Current) Assets. Decisions pertaining to investment in Short term Assets
fall under Working Capital Management. Decisions pertaining to
16
REVIEW OF LITERATURE
Introduction
One of the three major decisions made by managers is the decision to
invest in fixed assets. Investments in fixed assets involve large capital
outlays and the consequences of these investments decisions impact a
firms operations for a very long time. Therefore a variety of quantitative
and analytical techniques are applied by managers in project selection to
enable them to make good decisions in this area.
17
Literature
It is widely accepted that discounted cash flow methods are the best way
to evaluate capital budgeting proposals. While several decades ago
discounted cash flow methods may not have been widely used (Istvan,
1961) more recent studies (Kim, Crick and Kim, 1986) suggest that
increasingly firms are adopting discounted cash flow analysis. Much of
the empirical research on capital budgeting practices adopted by
corporate managers is based on US data (See for example Mukherjee and
Hingorani, 1999.) A few studies such as those by Payne, Heath, and Gale
(1999), Jog and Srivastava (1995) and Keste et. al (1999), examine
capital budgeting practices followed by firms in different countries such
as Canada, Australia, Hong Kong, Indonesia, Malaysia, Philippines and
Singapore. This study examines managerial behavior and preferences
with respect to the capital budgeting decision using a sample of German
firms. Our unique sample and the results of our analysis help to fill a gap
in finance literature and provide useful information to managers
contemplating German collaborations.
Second, capital budgeting decisions are not well suited for learning. As
Kahneman and Lovallo (1993, p. 18) note, learning occurs when closely
similar problems are frequently encountered, especially if the outcomes
of decisions are quickly known and provide unequivocal feedback. In
most firms, managers infrequently encounter major investment policy
decisions, experience long delays before learning the outcomes of
projects, and usually receive noisy feedback.
Furthermore, managers often have difficulty rejecting the notion that
every situation is new in important ways, allowing them to ignore
feedback from past decisions altogether. Learning from experience is
highly unlikely under these circumstances (Einhorn and Hogarth,1978;
Brehmer, 1980).
Third, unsuccessful managers are less likely to retain their jobs and be
promoted. Those who succeed may become overconfident because of a
self-attribution bias. Most people overestimate the degree to which they
are responsible for their own success (Miller and Ross, 1975; Langer and
Roth, 1975; Nisbett and Ross, 1980). This self-attribution bias causes
19
1. Large investment:
Capital budgeting decision, generally involves large investment of funds.
But the funds available with the firm are scarce and the demand for
funds far exceeds resources. Hence, it is very important for a firm to
plan and control its capital expenditure.
2. Long term commitment of funds:
21
Capital expenditure involves not only large amount of funds but also
funds for long-term or a permanent basis. The long-term commitment of
funds increases the financial risk involved in the investment decision.
3. Irreversible nature:
The Capital expenditure decisions are of irreversible nature. Once, the
decision for acquiring a permanent asset is taken, it becomes very
difficult to dispose of these assets without incurring heavy losses.
4. Long terms effect on profitability:
Capital budgeting decision has a long term and significant effect on the
profitability of a concern. Not only the present earnings of the firm are
affected by the investments in capital assets but also the future growth
and profitability of the firm depends up to the investment decision taken
today. Capital budgeting decision has utmost importance to avoid over or
under investment in fixed assets.
5. Difficulties of investment decision:
The long terms investment decisions are difficult to be taken because
uncertainties of future and higher degree of risk.
6. National Importance:
Investment decision though taken by individual concern is of national
importance because it determines employment, economic activities and
economic growth of any region/country.
7. After the Capacity and Strength to Compete:
Capital budgeting decisions affect the capacity and strength of a firm to
face competition. A firm may loose competitiveness if the decision to
modernize is delayed.
There are many, factors financial as well as non financial which influence
the capital expenditure decisions and the profitability of the proposal yet,
there are many other factors which have to be taken into consideration
while taking a capital expenditure decision. They are:
1. URGENCY:
22
2 .DEGREE OF UNCERTAINITY:
Profitability is directly related to risk, higher the profits, greater is the risk
or uncertainty Sometimes, a project with some lower profitability may be
selected due to constant flow of income as compared to another project
with an irregular and uncertain inflow of income.
3. INTANGIBLE FACTORS:
Sometimes, a capital expenditure has to be made due to certain
emotional and intangible factors such as safety and welfare of the
workers, prestigious project, social welfare, goodwill of the firm etc.
4. AVAILABILITY OF FUNDS:
As the capital expenditure generally requires the provisions of law is
solely influenced by this factor and although the project may not be
profitable, yet the investment has to be made.
5. AVAILABILITY OF FUNDS:
As the capital expenditure generally requires large funds the availability
of funds is an important factor that influences the capital budgeting
decisions. A project howsoever profitable may not be taken for want of
funds and a project with lesser profitability may sometimes be preferred
due to lesser pay back period for want of liquidity.
6. FUTURE EARNINGS:
A project may not be profitable as compared to another today, but it may
promise better future earnings. In such cases, it may be preferred to
increase future earnings.
24
and the rest rejected. If the proposal is accepted the firm makes
investment in it, and if it is rejected the firm does not invest in the same.
They
They
They
They
They
capital
investment
budgeting
proposals.
process
The
begins
proposal
with
about
the
identification
potential
of
investment
4. Priorities:
After evaluating various proposals, the unprofitable uneconomical
proposal may be rejected but may not be possible for the firm to invest
immediately in all the acceptable proposals due to limitation of funds.
Therefore, it essential to rank the projects/proposals after considering
urgency, risk and profitability involved there in.
The expenditure
Network
techniques like PERT and CPM can be applied to control and monitor the
implementation of the projects.
7. Performance Review:
The last stage in the process of capital budgeting is the evaluation of the
performance of the project. The evaluation is made by comparing actual
and budgeted expenditures and also by comparing actual anticipated
29
Techniques of Capital
Budgeting Decisions
Payback
Period
Method
Accounting
Rate of
Return
Discounted Cash
Flow/Time Adjusted
Methods
Net
Present
Value
30
Internal
Rate of
Return
Profitabilit
y Index
31
32
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= ---------------------------------------------------------100
Net investment
ADVANTAGES:
It is very simple to understand and easy to calculate.
It uses the entire earnings of a project in calculating rate of return
and hence gives a true view of profitability.
As this method is based upon accounting profit, it can be readily
calculated from the financial data.
DISADVANTAGES:
It ignores the time value of money.
It does not take in to account the cash flows, which are more
important than the accounting profits.
This method cannot be applied to a situation where investment in
project is to be made in parts.
33
CFt
.
t
t 0 1 k
NPV
CFt
CF0 .
t
k
t 1
NPV
Decision Rule:
Accept if NPV > 0
Reject if NPV < 0
May accept if NPV = 0
ADVANTAGES:
It recognizes the time value of money and is suitable to apply in a
situation with
uniform cash outflows and uneven cash inflows.
34
It takes in to account the earnings over the entire life of the project
and gives the true view of the profitability of the investment.
Takes in to consideration the objective of maximum profitability.
DISADVANTAGES:
More difficult to understand and operate.
It may not give good results while comparing projects with unequal
investment of funds.
It is not easy to determine an appropriate discount rate.
PI
CFt
1 k
t 1
CF0
Profitability index =
Initial Investment or cash outflows
PV of cash inflows /
Profitability
ADVANTAGES:
Unlike net present value, the profitability index method is used to
rank the projects even when the costs of the projects differ
significantly.
It recognizes the time value of money and is suitable to apply in a
situation with uniform cash outflows and uneven cash inflows.
35
It takes into an account the earnings over the entire life of the
project and gives the true view of the profitability of the
investment.
Takes into consideration the objective of maximum profitability.
DISADVANTAGES:
It may not give good results while comparing projects with Unequal
investment funds.
It is not easy to determine and appropriate discount rate.
It may not give good results while comparing projects with unequal
lives as the project having higher NPV but have a longer life span
may not be as desirable as a project having some what lesser NPV
achieved in a much shorter span of life of the asset.
Decision Rule:
Accept the proposal having the higher rate of return and vice versa.
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:
discount
2. Find out the NPV, & if the NPV is positive, apply higher rate of
discount.
3. If the higher discount rate still gives a positive NPV, increase the
discount rate further. Until, the NPV becomes zero.
If the NPV is negative, at a higher rate, NPV lies between these
two rates.
ADVANTAGES:
It takes into account, the time value of money and can be applied
in situations with even and even cash flows.
It considers the profitability of the projects for its entire economic
life.
The determination of cost of capital is not a pre-requisite for the
use of this method.
It provides for uniform ranking of various proposals due to the
percentage rate of return.
37
DISADVANTAGES:
It is difficult to understand and operate.
The results of NPV and IRR methods may differ when the projects
under evaluation differ in their size, life and timings of cash flows.
This method is based on the assumption that the earnings are
reinvested at the IRR for the remaining life of the project, which is
not a justified assumption.
CHAPTER 3
COMPANY PROFILE
38
COMPANY PROFILE
Odisha Power Generation Corporation (OPGC) was incorporated on 14 th
November, 1984. OPGC started as a wholly owned Govt. company of the
state of Odisha with objective of establishing, operating and maintaining
thermal power generation stations. It is a maiden venture, the company
has set up two thermal power plants with a capacity of 210 MW each in
the IB Valley are of Jharsuguda District in the State of Odisha (Ib Thermal
Power Station) at a cost of Rs.11350 million. The locational advantage of
the power plant lies in its close proximity to the coal mines as well as to
the Hirakud reservoir. This gives the company the distinct advantage of
low cost of Raw Material leading to low cost generation.
THE PARTNERSHIP:
As a part of reforms in the energy sector of the state 49% of the equity
was divested in favour of a private investor i.e. AES Corporation, USA in
early 1999. AES is one of the largest global power company. It generates
and distributes electric power to millions of people in 26 countries. It has
123 countries power generation facilities. It generates over 44000MW of
electricity. It has 14 distribution companies. Odisha Power Generation
Corporation is seen making progress with its Ib Valley power plant
expansion project in Jharsuguda district.
THE PRESENT BUSINESS:
39
Shareholder
Percenta
ge
No. of
Shares
Amount (In
Rs.)
Govt. of Odisha
AES India Pvt. Ltd.
AES OPGC Holding
(incorporated in
Mauritius)
Total
51
16.25
32.75
25,00,109
7,96,178
16,05,887
25,00,109,000
7,96,178,000
16,05,887,000
100
49,02,174
49,02,174,000
VISION
power,
enhancing
value
for
all
stake
holders
and
for
STRENGTH OF OPGC
This is a Pithead Power plant with coal field located nearby & a
Merry go round system for Coal transportation.
Long term PPA with the State Power Transmission utility i.e. GRIDCO
for 100% off-take.
41
OPGC received the CII award (1st) in Best Practices on SHE on 20th
Nov, evening from Honorable Chief Minister, Odisha with his
message "Well done OPGC & Congratulation".
by
Directorate
of
Factories
and
Boilers,
Odisha,
42
IBTPS has received OHSAS 18000 certification from BVQI from 05th
May 2005.
43
Environment
Management
System
(EMS)
established
&
Safety award from Chief inspector, Factories and Boiler Odisha for
the year 1999 for zero accident in industry.
44
infrastructure
support
in
our
operational
areas,
water
ITPS Periphery
schools.
Supply of furniture to 6 periphery schools.
Financial support to 5 periphery schools.
Supply of drinking water to 25 periphery villages.
Day to day maintenance of periphery pipelines for supply of
drinking water to 17
villages.
village Dhubadera.
Upgradation of periphery road from ITPS boundary towards
Adhapada.
Painting and distempering of boundary wall of Vattarika Temple at
Kumarbandh.
Construction of 2 nos. of bathing ghats at village Kantatikra.
Upgradation of internal road of village Sardhapali.
Repairing of Upper Primary School at village Banharpalli.
Renovation of leading channel of Baragad MIP.
Di-siltation of Hatipada Pond at village Adhapada.
Distribution of Mosquito net at village Bhaludole.
Dengue awareness campaign in the periphery villages.
Free Health Camps to 3 periphery Ashram Schools.
Anti-mosquito fogging spray in periphery villages.
Free Tailoring training to 130 women and adolescent girls of
Mines periphery
Socio economic survey report for MGR was finalized and submitted
to respective
Collectors.
Cleaning of roads and construction of fair weather roads were
completed.
Draft R&R Plan was prepared by Project Team and Architect for
46
This has helped maintaining healthy relationship with the people around
the plant area.
CHAPTER - 4
DATA ANALYSIS AND
INTERPRETATION
47
INTRODUCTION:
In OPGC Ltd. a number of new projects are going on. 3 examplary
projects are selected for the study. Some of the essential aspects of the
projects are Depreciation Rate, Corporate Income Tax Rate and The
Discounting Factor. The Depreciation rate considered is 4.75%, the
Corporate Income Tax Rate is 34% (approximately) and the Discounting
Factor is 15% which is normally followed by the corporate houses. The
following table gives the abstract for these projects of the company.
SL.
NO
.
01.
PROJECT NAME
Project A
BUDGET
ESTIMAT
ES
60 crores
DEPRECIAT
ION
4.75%
34%
15%
02.
Project B
25 crores
4.75%
34%
15%
03.
Project C
20 crores
4.75%
34%
15%
48
TAX
PV
FACTOR
1. Project A
(Estimated Budget Rs 60 crores )
Total
PBDT
35.00
38.20
40.00
42.50
42.50
198.20
Less:
Dep
@
4.75%
PBT
Less:
Tax
@ 34%
PAT
Add:
Dep
CFAT
CCFAT
2.85
2.85
2.85
2.85
2.85
14.25
32.15
10.93
35.35
12.02
37.15
12.63
39.65
13.48
39.65
13.48
183.95
62.54
21.22
2.85
23.33
2.85
24.52
2.85
26.17
2.85
26.17
2.85
121.41
14.25
24.07
24.07
26.18
50.25
27.37
77.62
29.02
106.64
29.02
135.66
135.66
B. Calculation of ARR:
ARR = AVERAGE ANNUAL PAT/ AVERAGE INVESTMENT 100
ARR= 24.282/30 100
= 80.94%
ARR = 80.94%
C. Calculation of NPV:
Year
0
1
2
3
4
5
Cash Flows
PV @ 15%
(60.00)
1.00
24.07
0.870
26.18
0.756
27.37
0.658
29.02
0.572
29.02
0.497
Total Cash Flow
NPV
PV of Cash
Flows
(60.00)
20.94
19.79
18.01
16.59
14.42
89.75
29.75
Cash Flows
PV @ 18%
0
1
2
3
4
5
(60.00)
24.07
26.18
27.37
29.02
29.02
1.00
0.847
0.718
0.609
0.516
0.437
50
PV of Cash
Flows
(60.00)
20.38
18.79
16.66
14.97
12.68
83.48
23.48
PV of CF at Ri - PV of COF
(Rh Ri)
PV of CF at Ri PV of CF at Rh
IRR = 15 +
89.75 60
89.75 83.48
(18 15)
= 29.2
IRR = 29.2%
2. Project B
(Estimated Budget Rs 25 crores)
Calculation of Cash Flow after Tax (CFAT)
Year
Total
PBDT
Less:
Dep
@
4.75%
PBT
Less:
Tax
@ 34%
PAT
10.25
1.1875
15.84
1.1875
20.50
1.1875
20.50
1.1875
20.50
1.1875
87.59
5.9375
9.0625
3.08125
14.6525
4.98185
19.3125
6.56625
19.3125
6.56625
19.3125
6.56625
81.6525
27.7538
5
5.98125
9.67065
12.7462
5
12.7462
5
12.7462
5
53.8906
5
51
Add:
Dep
CFAT
1.1875
1.1875
1.1875
1.1875
1.1875
5.9375
7.16875
7.16875
13.9337
5
31.9606
13.9337
5
45.8943
5
13.9337
5
59.8281
59.8281
CCFAT
10.8581
5
18.0269
Cash Flows
PV @ 15%
(25.00)
1.00
10.25
0.870
15.84
0.756
20.50
0.658
20.50
0.572
20.50
0.497
Total Cash Flow
NPV
52
PV of Cash
Flows
(25.00)
8.9175
11.9750
13.489
11.726
10.1885
56.29604
31.29604
Therefore to decrease the cash flow we increase the rate. Let the new rate
be 18%
Year
Cash Flows
PV @ 18%
PV of Cash
Flows
0
(25.00)
1.00
(25.00)
1
10.25
0.847
8.68175
2
15.84
0.718
11.37312
3
20.50
0.609
12.4845
4
20.50
0.516
10.578
5
20.50
0.437
8.9585
Total Cash Flow
52.07587
NPV
27.07587
PV of CF at Ri - PV of COF
PV of CF at Ri PV of CF at Rh
IRR = 15 +
56.29604 25.00
56.29604 52.07587
(18 15)
= 37.23
IRR = 37.23%
E. Calculation of Profitability Index
PROFITABILITY INDEX (PI) = PV OF CASH
INFLOWS/INTITAL CASH OUTLAY
PI= 56.29604/25
Profitability Index (PI) = 2.25 times
3. Project C
(Estimated Budget Rs 20 crores)
Year
PBDT
Less:
Dep
@
4.75%
PBT
Total
80.31
4.75
6.88
75.56
12.47
18.05
53
19.08
19.08
Less:
Tax
@ 34%
PAT
Add:
Dep
CFAT
CCFAT
2.3392
4.2398
6.137
6.4872
6.4872
25.6904
4.5408
0.95
8.2302
0.95
11.913
0.95
12.5928
0.95
12.5928
0.95
49.8696
4.75
5.4908
5.4908
9.1802
14.671
12.863
27.534
13.5428
41.0768
13.5428
54.6196
54.6196
ANNUAL
PAT/
AVERAGE
Cash Flows
PV @ 15%
(20.00)
1.00
7.83
0.870
13.42
0.756
19.00
0.658
20.03
0.572
20.03
0.497
Total Cash Flow
NPV
54
PV of Cash
Flows
(20.00)
6.8121
10.14552
12.502
11.45716
9.95491
50.87169
30.87169
Cash Flows
0
1
2
3
4
5
PV @ 18%
(20.00)
1.00
7.83
0.847
13.42
0.718
19.00
0.609
20.03
0.516
20.03
0.437
Total Cash Flow
NPV
PV of Cash
Flows
(20.00)
6.63201
9.63556
11.571
10.33548
8.75311
46.92716
26.92716
PV of CF at Ri - PV of COF
PV of CF at Ri PV of CF at Rh
IRR = 15 +
50.87169 20.00
(18 15)
50.87169 46.92716
= 38.47
IRR = 38.47%
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Project
Names
Discount
ed
PBP
(years)
ARR
(%)
NPV
(Rs in
crores)
PI
(times)
IRR
(%)
2.35
80.94
29.75
1.49
29.2
2.5
86.2
31.29604
2.25
37.23
2.04
99.73
30.87169
2.5
38.47
56
1.5
1
2.35
2.5
PROJECT A
PROJECT B
2.04
0.5
0
PROJECT C
INTERPRETATION:
3 projects are showing the positive values, therefore the projects
are accepted.
In project 3 we can recover the investment within a short period of
time i.e., 2.04 years, when compare with the other projects.
ARR (%)
120
100
80
ARR (%)
60
40
80.94
86.2
PROJECT A
PROJECT B
99.73
20
0
PROJECT C
57
INTERPRETATION:
When compare to all the projects of ARR, in the 3 project i.e., Project C
the ARR % is 99.73%, so in this project the average rate of return is
more.
30
31.3
29.5
29
30.87
29.75
28.5
PROJECT A
PROJECT B
PROJECT C
INTERPRETATION:
The NPV should be greater than the cash outflow then only the project
should be accepted. All projects are showing the positive values only.
When compare to all the projects the NPV value is more in 2nd project.
58
25
20
15
37.23
38.47
PROJECT B
PROJECT C
29.2
10
5
0
PROJECT A
INTERPRETATION:
When compare to all the projects the IRR percentage is more in 3rd
project i.e., 38.47, better we can choose the 3rd project.
PROFITABILITY INDEX
(%)
1.5
2.25
2.5
1.49
0.5
0
PROJECT A
PROJECT B
PROJECT C
INTERPRETATION:
59
When compare to all the projects the Profitability Index is more in 3rd
project i.e., 2.5 times. But we can choose the project 1, because we can
recover over investment with short period in this project i.e., 1.49 times.
CHAPTER 5
FINDINGS, SUGGESTIONS &
CONCLUSION
60
FINDINGS
The followings points were observed from the capital budgeting is as
follows:
The first project i.e., Project A is generating unequal cash flows for
5 years. The initial investment is Rs. 60 crores.
The ARR is 80.94% which is greater than the companys rate
of return.
The discounted pay back period is 2.35 years.
NPV and IRR are positive for the proposal.
The Profitability Index (PI) is 1.49 > 1.
return.
The discounted pay back period is 2.04years.
NPV and IRR are positive for the proposal.
The Profitability Index (PI) is 2.5 times which is higher among all
projects. As its returns are high, the project is also risky.
61
62
CONCLUSION
63
BIBLIOGRAPHY
1. M. PANDEY: Financial Management: Vikas publishing house pvt. ltd,
9th edition.
2. PRASANNA CHANDRA: Financial Management: Tata McGraw-Hill, 7th
edition.
3. I.M. PANDEY: Financial Management: Tata McGraw-Hill, 4th edition.
4. Annual report of OPGC Ltd.
Websites:
www.google.com
www.opgc.co.in
www.studyfinance.com
www.wikipedia.org/wiki/capital_budgeting
www.eximfm.com/training/capital budgeting.doc
www.yahoofinance.com
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