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M.B.

A Programme
INTRODUCTION
Capital project planning is the process by which companies allocate funds
to various investment projects designed to ensure profitability and growth.
Evaluation of such projects involves estimating their future benefits to the
company and comparing these with their costs.
In a competitive economy, the economic viability and prosperity of a
company depends upon the effectiveness and adequacy of capital expenditure
evaluation and fixed assets management.
Capital budgeting refers to planning the deployment of available capital for
the purpose of maximizing the long-term profitability of the firm. It is the firms
decision to invest its current funds most efficiently in long-term activities in
anticipation of future benefits over a series of year
In other words, capital budget may be defined as the firms

decision to invest its

current funds most efficiently in the long term assets in anticipation of an expected
flow of benefits over a series of years. Therefore, it involves a current outlay or
series of outlay of cash resources in return for an anticipated flow of future
benefits. capital budgeting is the process to identify, analysis and select investment
projects, whose returns (cash flows) are expected to extend beyond one year.
Firms investment decisions would generally a include expansion, acquisition,
modernization, replacement of fixed assets or long-term assets. From the above
definition, we may identify the basic features of capital budgeting viz., potentially
large anticipated benefits, relatively a high degree risk, and a relatively long-time
period between the initial outlay and anticipated return.

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DEFINITIONS OF CAPITAL BUDGETING:-

Capital budgeting is a long term planning for making and


financing proposed capital outlays
-T.Horngreen

A budget is an estimate of future needs arranged according


to at an orderly basis covering some or all the activities of an enterprise for a
definite period of time
- George R. Terry

Budget as a financial and/ or quantitative statement prepared


to a definite period of time, of the policy to be pursued during that period for
the purpose of attaining a given objective
- ICMA, London

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CAPITAL BUDGETING INVOLVES:
The search for new and more profitable investment proposals.
The making of an economic analysis to determine the profit potential of
each investment proposal.
Committing significant resources
Planning for the long term 5 to 50 years
Decision making by senior management.
Forecasting long term cash flows.
Estimating long term discount rates & Analyzing risk

Capital budgeting may be defined as the firms formal process or the


acquisition and investment of capital. It involves the firms decision to invest its
current funds for addition, disposition, modification and replacement of fixed
assets.
FEATURES OF CAPITAL BUDGETING PROCESS
Capital budgeting decisions have the following features:

It involves exchange of current funds for future a benefits.

They benefit future periods.

They have the effect of increasing the capacity, efficiency, spanof


life regarding future benefits.

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Funds are invested in long-term activities

Some of the examples of capital budgeting decision are:

Introduction of a new product.

Expansion of business by investing in plant and machinery.

Replacing and modernizing a process.

Mechanization of process.

Choice between alternative machines.

SIGNIFICANCE
Capital budgeting decisions are significant due to the following reasons
GROWTH:
The fixed assets are earning assets, since they have decisive influence on
the rate of return and direction of firms growth. A wrong decision can effect the
other projects, which are already running under profits. In other words unwanted
or unprofitable investments will result in heavy operating costs.
MORE RISKY:
Investment in long-term assets increases average profit but it may
lead to fluctuations in its earnings, then firm will become more risky. Hence,
investment decision decides the future of the business concern
HUGE INVESTMENTS:
Long-term assets involve more initial cash outflows, which makes it
imperative for the firm to plan its investment programmes very carefully and make

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an advance arrangement of funds either from internal sources or external sources
or from both the sources.
IRREVERSABILITY:
Long-term asset investment decisions are not easily reversible and that too,
with much financial loss to the firm; due to difficulties in finding out market for
such capital items once they have been used. hence firm will incur more loss in
that type of capital assets.
EFFECT ON OTHER PROJECTS:
Whenever long-term asset investment is a part of expansion programme, its
cash flow effects the projects under consideration, if it is not economically
independent. The effect may be increased in profits or decrease in profits. So,
while taking investment in long-term assets, the decision maker has to check the
impact of this project on other projects, if the effect is in terms of increase in
profits then he/she has to accept the project and vice versa.
DIFFICULT DECISION:
Capital budgeting decision is very difficult due to
a. Decision involves future years cash inflows,
b. Uncertainty of future and more risk.
OBSTACLES FOR CAPITAL BUDGETING:
Capital budgeting decisions are very important, but they pose difficulties
which shoot from three principle sources

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MEASUREMENT PROBLEM:
Evaluation of project requires identifying and measuring its costs and
benefits, which is difficult since they involve tedious calculations and lengthy
process. Majority of replacement and expansion programmes have impact on some
other activities of the company (introduction of new product may result in the
decrease in sales of the other existing product) or have some intangible
consequences (improving morale of the workers).
UNCERTAINITY:
Selection or rejection of a capital expenditure project depends on expected
costs and benefits in the future. Future is uncertain, if any body tries to predict the
future, it will be childish or foolish. Hence, it is impossible to predict the future
cash inflows.
TEMPORAL SPEED:
The costs and benefits, which are expected, are associated with a particular
capital expenditure project spread out over a long period of time, which is 10-20
years for industrial projects and 20-50 years for infrastructure projects. The
temporal spread creates some problems in estimating discount rates for
conversation of future cash inflows in present values and establishing
equivalences.
PRINCIPLES:
Capital budgeting decisions should be taken on the basis of the Following
factors:
Creative search for profitable opportunities: Profitable investment opportunities
should be sought to supplement existing proposals.

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Long- range capital planning: It indicates sectoral demand for funds to stimulate
alternative proposals before the aggregate demand for funds is finalized.
Measurement of project work: Here, the project is ranked with the other projects.
Screening and selection: The project is examined on the basis of

Selection

criteria, such as the supply cost of capital, expected returns alternative investment
opportunities, etc.
Retirement and disposal : The expiry of the life cycle of a project is marked at this
stage.
Forms and procedures : These involve the preparation of reports necessary for any
capital expenditure programme.
COMPONENTS OF CAPITAL BUDGETING
Initial Investment Outlay:
It includes the cash required to acquire the new equipment or build the new
plant less any net cash proceeds from the disposal of the replaced equipment. The
initial outlay also includes any additional working capital related to the new
equipment. Only changes that occur at the beginning of the project are included as
part of the initial investment outlay. Any additional working capital needed or no
longer needed in a future period is accounted for as a cash outflow or cash inflow
during that period.
Net Cash benefits or savings from the operations:
This component is calculated as under:(The incremental change in operating revenues minus the incremental change in
the operating cost = Incremental net revenue) minus (taxes) plus or minus

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(changes in the working capital and other adjustments).
Terminal Cash flows:
It includes the net cash generated from the sale of the assets, tax effects
from the termination of the asset and the release of net working capital.
The Net Present Value technique:
Although there are several methods used in Capital Budgeting, the Net
Present Value technique is more commonly used. Under this method a project with
a positive NPV implies that it is worth investing in.
RANKING OF CAPITAL BUDGETING PROPOSALS
A firm should select its own projects after considering the advantages and
disadvantages of each of them. For this purpose, it should rank the proposals.
Proposals are ranked on the basis of the following considerations.
Mutually Exclusive Investment Proposals
This kind of proposal connote those proposals which represent alternative
methods of doing the same job. In case one proposal is accepted, the need to
accept the other is ruled out. For example, there are 5 pieces of equipment
available in the market to carry out a job. if the management chooses one piece
of the equipment, others will not be required because they are mutually
exclusive projects.
Contingent Investment Proposals
There are certain projects utility which is contingent upon the acceptance of
others. For e.g., management of an enterprise may be contemplating to
construct, employees quarters and a co-operative shops. If it decides not to

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build quarters, the need for the shop does not arise. If the management
decides to construct quarters but not shops, the employees will have no
shop to make purchases. These are contingent projects.
Independent investment proposals
It includes all such investment proposals as are being considered by
the management for performing different tasks with in the organization.
Investment in machinery, automobiles, buildings, parking lot, recreation
centre and so on are the examples of the independent investment proposals.
Acceptance of each of these projects is done on its own merit with out
depending on other projects.
Replacement
The investments, which are contemplated for replacing, old and
antiquated equipment so that the job could be performed more efficiently,
are termed as replacements.
NEED OF CAPITAL BUDGETING
The importance of capital budgeting can be well understood from the fact
that unsound investment decision may prove to be fatal to the very existence of the
concern. The need, significance or importance of capital budgeting arises mainly
due to the following
Large investments
Long-term commitment of funds
Irreversible nature
Long-term effect on profitability

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Difficulties of investment decisions
National importance.

OBJECTIVES FOR CAPITAL BUDGETING


It determines the capital projects on which work can be started during the
budget period after taking into account their urgency and the expected rate
of return on each project.
It estimates the expenditure that would have to be incurred on capital
projects approved by the management together with the sources from which
the required funds would be obtained.
It restricts the capital expenditure on projects with in authorized limits.
TYPES OF CAPITAL BUDETING DECISIONS:Capital budgeting decisions are of paramount importance in financial
decision making. In first place they affect the profitability of the firm. They also
have a bearing on the competitive position of the firm because they relate to fixed
assets. The fixed assets are true goods than can ultimately be sold for-profit.
Generally the capital budgeting of investment decision includes addition,
disposition, modification, and replacement of fixed assets.

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EXPANSION OF EXISTING BUSINESS:A company may add capacity to its existing product lines to expand
existing operations. For example Siva Shakthi Bio Planttec may increase its plant
capacity to manufacture more detergents soaps & powder. It is an example of
related expansion.
EXPANSION OF NEW BUSINESS:A Firm may expand its activities in a new business expansion of a
new business requires investment and new kind of production activating with in
the firm. If packing manufacturing company invests in a new plant and machinery
to produce ball bearings, which the firm has not manufactured before, this
represents expansion of new business or unrelated diversification. Sometimes
accompany acquires existing firms to expand its business.
REPLACEMENT AND MODERANIZATION:The main objective of modernization and replacement is to improve
operating efficiency reduce costs. Cost savings will reflect in the increased profits,

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but the firms revenue may remain unchanged. Assets become outdated and
absolute with technological changes. The firm must decide to replace those with
new assets that operate more economically. Replacement decisions help to
introduce more efficient and economical assets and therefore, are also called costreduction investments.
However replacement decisions that involve substantial modernization and
technological improvements expand revenues as well as reduce costs. Yet another
useful way to classify investments is as follows:
Mutually exclusive investments
Independent investments
Contingent investments
FACTORS FOR CAPITAL BUDGETING
Cost of acquisition of permanent asset as land and building, plant and
machinery, goodwill, etc.
Cost of addition, expansion, Improvement or alteration in the fixed assets.
Cost of replacement of permanent assets.
Research and development project cost, etc.
CAPITAL BUDGETING PROCESS
The preparation of the capital budget is a process that lasts many months
and is intended to take into account neighborhood and bough needs as well as
organization wide. The process begin in the fall, when each of the segment holds
public hearings, each community board submits a statements of its capital

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priorities for the next fiscal year to the managing director and appropriate borough
chairmen. The capital budgeting process involves 8 steps explained in theoretic as
follows:
Identification of investment proposals
Screen proposals
Evolution of various proposals
Fixing priorities
Final approval
Implementing proposals
Performance review
Feed back
1) IDENTIFICATION OF INVESTMENT PROPOSALS
The capital budgeting process begins with the identification of
investment proposals. The investment proposals may originated from the top
management or from any officer of the organization. The department head
analyses the various proposals in the light of the corporate strategies and submit
the suitable proposal to the capital budgeting committee in case of large
organizations concerned with process of long-term investment proposals.
IDENTIFICATION OF INVESTMENT IDEAS IT IS HELPFUL TO
Monitor

external

environment

regularly

to

scout

investment

opportunities.

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Formulate a well defined corporate strategy based on through analysis
of strengths, weaknesses, opportunities, and threats.
Share corporate strategy and respective with persons.
Motivate employees to make suggestions.
2) SCREEN PROPOSALS
The expenditure planning committee screens the various proposals
received from different departments in different angles to ensure that these are in
selection criteria of the organization and also do not lead to department
imbalances.
3) EVALUTION OF VARIOUS PROPOSALS
The next steps in capital budgeting process in to evaluate the probability of
various probability the independent proposals are those which do not complete
with one another and the same way be either accepted or rejected on the basic of a
minimum return on investment required.
4) FIXING PRIORITIES
After evaluating various proposals, the unprofitable or uneconomic
proposals may be rejected straight away. But it may not be possible for the
organization to invest immediately in all the acceptable proposals due to
limitations of funds. Hence, it is very essential to rank the various proposals and to
establish priorities after considering urgency, risk & profitability involved the
criteria.
5) FINAL APPROVAL
Proposals meeting the evaluation and other criteria are finally approved to
be included in the capital expenditure budget. However proposals involving

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smaller investment may be decided at the lower levels for expeditious action. The
capital expenditure budget lay down the amount of estimated expenditure to be
incurred on fixed assets during the budget period.
6) IMPLEMENTING PROPOSALS:Preparation of a capital expenditure budgeting & incorporation of a
particular proposals in the budget does not itself authorize to go ahead with
implementation of the project. A request for authority to spend the amount should
be made to be the capital expenditure committee which may like to review the
profitability of the project in changed circumstances. In the implementation of the
projects networks techniques such as PERT & CPM are applied for project
management.
7) PERFORMANCE REVIEW
In this stage the process of capital budgeting is the evaluation of he
performance of the project. The evaluation is made through post completion audit
by way of comparison of actual expenditure on the project with the budgeted one,
and also by comparing the actual return from the investment with the anticipated
return. The unfavorable variances if any should be looked into and the causes the
same is identified so that identified so that corrective action may be taken in
future.
It throws light on how realistic were the assumptions underlying the
project.
It provided a documented log of experience that is highly valuable for
decision making.
GUIDELINE FOR CAPITAL BUDGETING

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There are many guidelines for capital budgeting process either it is
long-term or short- term plan.
The major points are:
Need and objectives of owner
Size of market in terms of existing & proposed product lines and
anticipated growth of the market share
Size of existing plants & plans for new plant sites and plant
Economic conditions which may affect the firms operations and
Business and financial risk associated with the replacement & existing
assets of the purchases of new assets.
CONTENTS OF THE PROJECT REPORT
Raw material
Market and marketing
Site of project
Project engineering dealing with technical aspects of the project
Location and layout of the project building
Building
Production capacity
Work schedule
CRITERIA FOR CAPITAL BUDGETING
Potentially, there is a wide array of criteria for selecting projects. Some
shareholders may want the firm to select projects that will show immediate surges

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in cash flow, others may want to emphasize long-term growth with little
importance on short-term performance viewed in this way; it would be quite
difficult to satisfy the differing interests of all the shareholders. Fortunately, there
is a solution.
METHODS FOR EVALUTION
In view of the significance of capital budgeting decisions, it is
absolutely necessary that the method adopted for appraisal of capital investment
proposals is a sound one. Any appraisal method should provide for the following.
a) A basis of distinguishing between acceptable and non acceptable projects.
b) Ranking of projects in order of their desirability.
c) Choosing among several alternatives
d) A criterion which is applicable to any conceivable project.
e) Recognizing the fact that bigger benefits are preferable to smaller ones and
early benefits to later ones.
There are several methods for evaluating the investment proposals. In
case of all these methods the main emphasis is on the return which will be derived
on the capital invested in the project.

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Capital Budgeting
Techniques

Non-DCF criteria

Pay back period (PBP)

DCF criteria

Net present value


(NPV)

Internal rate of return


(IRR)

Accounting rate of
return (A.R.R)

Profitability index (P.I)

Non DCF Criteria


(a) Pay back period
The pay back period one of the most popular and widely recognized
traditional methods of evaluation investment proposals. Pay back period is the
number of years required to recover the original cash outlay invested in a project.
If the project generates constant annual cash flows, the pay back period can
be computed by dividing cash outlay by the annual cash inflows.

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Pay back period =

Initial investment Co

Annual cash inflows C

Co = Initial investment

C = Annual cash inflows


In the case of un equal cash inflows, the pay back period can be
found out by adding up the cash inflow until the total is equal to the initial cash
outlay.
Merits:
1) This method is simple to understand and easy to calculate.
2) Surplus arises only if the initial investment is fully recovered. Hence, there
is no profit on any project unless the payback period is over.
3) When funds are limited, projects having shorter payback period should be
selected, since they can be rotated more number of times.
4) This method is focuses on projects which generate cash inflows in earlier
years.
5) As time period of cash flows increases, risk and uncertainty also increases.
Limitations:
1) It stresses on capital recovery rather than profitability.
2) It does not consider the return from the project after its payback period.
3) Administrative difficulties may be faced in determining the maximum
acceptable payback period.

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(b) Accounting Rate of Return (ARR)
The accounting rate of return (ARR) also known as the return on
investment (ROI) uses accounting information, as revealed by financial
statements, to measure to profitability of an investment. The accounting rate of
return is the ratio of the average after fax profit divided by the average investment.
The average investment would be equal to half of the original investment if it were
depreciated constantly.
Average Income
A R R = Average investment 100

Merits:
This method is simple to understand.
It is easy to operate and compute.
Income throughout the project life is considered.
It can be readily calculated using the accounting data.
Limitations
It does not consider cash in flows which is important in project evolution
rather than PAT.
It takes the rough average of profits of future years. The pattern or
fluctuations in profits are ignored.
It ignores time value of money, which is important in capital budgeting
decisions.

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DFC Criteria
(a) Net Present value (NPV)
The NPV present value (NPV) method is the classic method of
evaluating the investment proposals. If is a DCF technique that explicitly
recognizes the time value at different time periods differ in value and comparable
only when their equipment present values are found out.
C1
C2
C3
Cn

.........
C0
2
3
(1 k) (1 k)
(1 k)
(1 k)n

N.P.V =

NPV =

C1

(1 k )
i 0

Co

Where
NPV = Net present value
C fi =

Cash flows occurring at time

k = the discount rate


n = life of the project in years
C0 = Cash outlay

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Merits
1) NPV method takes account the time value of money.
2) All cash inflows are considered.
3) All cash inflows are converted into present value.
4) It satisfies value additively principle i.e., NPV of two or more projects can
be added.
Limitations
1) It may not satisfactory answer when the projects being compared involved
different amounts of investment.
2) It is difficult to use.
3) It may mislead when dealing with alternative projects or limited funds.
4) It involves difficult calculations.
5) It involves forecasting cash flows and applications of discount rate.
(b) Internal Rate of Return (IRR)
The internal rate of return (IRR) method is another discounted cash flow
technique which takes account of the magnitude and thing of cash flows, other
terms used to describe the IRR method are yield on an investment, marginal
efficiency of capital, rate of return over cost, time adjusted rate of internal return
and soon.
n

NPV =

Cfi

(1 k )
i 0

SV WC
(1 k ) n

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Where
C fi = Cash flows occurring at different point of time

k = the discount rate


n = life of the project in year
C 0 = Cash out lay

SV & WC = Salvage value and working capital at the end of the n years.
A

IRR = L + (a b) ( H L)
Where
L = Lower discount rate at which NPV is positive
H = Higher discount rate at which NPV is negative
A = NPV at lower discount rate, L
B = NPV at higher discount rate, H
Merits:
1) This method considers the time value of money.
2) All cash flows are considered.
3) It has psychological appeal to the users.
4) The percentage figure calculated under this method is more meaningful and
acceptable, because it satisfies them in terms of rate of return on capital.

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Limitations:
1) It may not give unique answer in all situations.
2) It is difficult to understand and use in practices.
3) It implies that the intermediate cash inflows generated by the project.
(C) Profitability index (PI)
Yet another time adjusted method of evaluating the investment
proposals is the benefit cost (B/C.) ratio or profitability index (PI) Profitability
index is the ratio of the present valued of cash inflows, at the required rate of
return, to the initial cash out of the investment.
PV of Cash inflow

PI = Intial Cash outlay

Where PV = Present Value


Merits:
1) This method considers the time value of money.
2) All cash inflows are considered.
3) It is a better evaluation technique than NPV.
Limitations:
It fails as a guide in resolving capital rationing when projects are
indivisible.

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Diagram 1.3
COMMITTEE IN CAPITAL BUDGETING

CHIEF
EXECUTIVE

BUDGET
OFFICER

PRODUCTION
MANAGER

SALES
MANAGER

FINANCE
MANAGER

BUDGET
COMMITTEE

ACCOUNTS
MANAGER

PERSONNEL
MANAGER

R&D
MANAGER

CAPITAL COMMITMENT PLAN


The progress of projects included in the capital budget, a capital
commitment plan is issued three times a year. The commitment plan lays out the
anticipated implementation schedule for there current fiscal and the next three
years. The first commitment plan is published within 90days of the adoption of the
capital budget. Updated commitment plans are issued in January & April along
with the companys budget proposals.
The commitment plan translates the appropriations approved under the
adopted capital budget into schedule for implementing individual projects. The
fact that funds are appropriated for a project in the capital budget does not
necessarily mean that work will start or be completed that fiscal year. He choice of
priorities and timing of projects is decided by office management & budget in
consultation with the agencies along with considerations of how much the

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managing director thinks the organization can afford to append on capital projects
overall.
The capital commitment plan lays out the anticipated implemented
schedule for capital projects and is one source of information on how far along
projects are although not a consistent or always useful one. The adopted
commitment plan is usually published in September, & then updated in January &
April.
In the capital budgeting for every two adjacent years there will be gap. The
gap between authorized commitments and the target is presented in capital
commitment plan as diminishing over the course of the year plan, in practice many
of the unattained commitments will be rolled over into the next years plan, so
that the current year gap will remain large. The gap has grown in recent year
exceeding in last two executive capital plans.
KINDS OF CAPITAL BUDGETING
Capital budgeting refers to the total process of generating, evaluating,
selecting and following up a capital expenditure alternatives. The firm allocates or
budgets financial recourses to new investment proposals. Basically, the firm may
be confronted with three types of capital budgeting decisions: The accept or reject decision,
The mutually exclusive choice decisions, and
The capital rationing decision
The time period creates some problems in estimating discount rates &
establishing equivalences.

CAPITAL COMMITMENT PLAN:26

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The progress of projects included in the capital budget, a capital
commitment plan is issued three times a year. The commitment plan lays out
the anticipated implementation schedule for their current fiscal and the next
three years. The first commitment plan is published within 90days of the
adoption of the capital budget. Updated commitment plans are issued in
January & April along with the companys budget proposals.
The commitment plan translates the appropriations approved under
the adopted capital budget into schedule for implementing individual
projects. The fact that funds are appropriated for a project in the capital
budget does not necessarily mean that work will start or be completed that
fiscal year. He choice of priorities and timing of projects is decided by office
management & budget in consultation with the agencies along with
considerations of how much the managing director thinks the organization
can afford to append on capital projects overall. The capital commitment
plan lays out the anticipated implemented schedule for capital projects and is
one source of information on how far along projects are although not a
consistent or always useful one. The adopted commitment plan is usually
published in September, & then updated in January & April.
In the capital budgeting for every two adjacent years there will be gap.
The gap between authorized commitments and the target is presented in
capital commitment plan as diminishing over the course of the year plan, in
practice many of the unattained commitments will be rolled over into the
next years plan, so that the current year gap will remain large. The gap has
grown in recent year exceeding in last two executive capital plans.
KINDS OF CAPITAL BUDGETING:27

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Capital budgeting refers to the total process of generating,
evaluating, selecting and following up an capital expenditure alternatives.
The firm allocates or budgets financial resources to new investment
proposals. Basically, the firm may be confronted with three
Types of capital budgeting decisions: The accept or reject decision,
The mutually exclusive choice decisions, and
The capital rationing decision
DIFFICULTIES OF CAPITAL BUDGETING:While capital expenditure decisions are extremely important,
they also pose difficulties which stem from three principal sources:
Identifying & measuring the costs & benefits of a capital expenditure
proposal tends to be difficult
There is great deal of uncertainty for capital expenditure decision
which involves cost & benefits that extend far into the future
It is impossible to product exactly what will happen in the future
The time period creates some problems in estimating discount rates &
establishing equivalences.

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LIMITATIONS OF CAPITAL BUDGETING:Capital budgeting techniques suffer from the following limitations:
All the techniques of capital budgeting presume that various
investment proposals under consideration are mutually exclusive
which may not practically be true in some particular circumstances.
The techniques of capital budgeting require estimation of future cash
inflows and outflows. The future is always uncertain and the data
collected for future may not be exact. Obliviously the results based
upon wrong data may not be good.
There are certain factors like morale of the employees, goodwill of
the firm, etc., which cannot be correctly quantified but which
otherwise substantially influence the capital decision.
Urgency is another limitation in the evaluation of capital investment
decisions.
Uncertainty and risk pose the biggest limitation to the techniques of
capital budgeting.
COST EFFECTIVE ANALYSIS:In the cost effectiveness analysis the project selection or technological
choice, only costs of two or more alternatives choices are considering
treating the benefits as identical. This approach is used when the acquisition
of how to minimize the costs for undertaking an activity at a given discount
rates in case the benefits and operating costs are given, one can minimize the
capital cost to obtain given discount.

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PROJECT PLANNING:The planning of a project is a technically pre-determined set of inter
related activities involving the effective use of given material, human,
technological and financial resources over a given period of time. Which in
association with other development projects result in the achievement of
certain predetermined objectives such as the production of specified goods
and services?
Project planning is spread over a period of time and is not a one shot
activity. The important stages in the life of a project are:
Its identification
Its initial formulation
Its evaluation
Its final formulation
Its implementation
Its completion and operation
The time taken for the entire process is the gestation period of the
project. The process of identification of a project begins when we are
seriously trying to overcome certain problems. They may be non-utilization
to overcome available funds. Plant capacity, expansion etc,
CRITERIAN TABLE:In the evaluation process or capital budgeting techniques there
will be a criteria to accept or reject the project. The criteria will be
expressed as:
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Table
Criterian/Method
Pay Back
(PBP)

Accept

Reject

Period <Target Period

Indifferent

>Target Period

=Target
period

Accounting Rate of > Target Rate


Return (ARR)

< Target Rate

=Target rate

Net Present
(NPV)

< 0

=0

Internal
Rate
Return (IRR)
Profitability
(PI)

Value > 0
of >Cost Of Capital
index > 1

<Cost Of Capital =cost


capital
<1

=1

METHODS OR TECHNIQUES OF CAPITAL BUDGETING:


There are many methods for the evaluating the profitability of investment
proposals the various commodity used methods are follow bellow diagram

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a. Traditional methods:
Payback period method (P.B.P)
Accounting Rate of Return Method (A.R.R)
b. Discounted or Time adjusted technique:
(I) Net Present Value method (N.P.V)
(II) Internal Rate of Return method (I.R.R)
(III) Profitability Index method (P.I)
PAY BACK PERIOD METHOD:
The pay back come times called as payout or pay off period method
represents the period in which total investment in permanent assets pay back
itself. This method is based on the principle that every capital expenditure
pays itself back within a certain period out of the additional earnings
generated from the capital assets.
Decision rule:
A project is accepted if its payback period is less than period specific
decision rule.
A project is accepted if its payback period is less than the period specified by
the management and vice-versa.

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Pay Back Period

Initial Cash Outflow


---------------------------Annual Cash Inflows

ADVANTAGES:

Simple to understand and easy to calculate.

It saves in cost; it requires lesser time and labour as compared to other


methods of capital budgeting.

In this method, as a project with a shorter payback period is preferred


to the one having a longer pay back period, it reduces the loss through
obsolescence.

Due to its short- time approach, this method is particularly suited to a


firm which has shortage of cash or whose liquidity position is not
good.

DISADVANTAGES:

It does not take into account the cash inflows earned after the payback
period and hence the true profitability of the project cannot be
correctly assessed.

This method ignores the time value of the money and does not
consider the magnitude and timing of cash inflows.

It does not take into account the cost of capital, which is very
important in making sound investment decision.

It is difficult to determine the minimum acceptable payback period,


which is subjective decision.

It treats each assets individual in isolation with other assets, which is


not feasible in real practice.

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

Average rate of return =

Average Annual profits


(after dep. & tax)
------------------------- ---x 100
Average 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.

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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.

It ignores the period in which the profit are earned as a 20% rate of
return in 2 years is considered to be better than 18%rate of return in
12 years.

This method cannot be applied to a situation where investment in


project is to be made in parts.

NET PRESENT VALUE METHOD:


The NPV method is a modern method of evaluating investment
proposals. This method takes in to consideration the time value of money
and attempts to calculate the return on investments by introducing time
element. The net present values of all inflows and outflows of cash during
the entire life of the project is determined separately for each year by
discounting these flows with firms cost of capital or predetermined rate.
The steps in this method are
1. Determine an appropriate rate of interest known as cut off rate.
2. Compute the present value of cash inflows at the above determined
discount rate.
3. Compute the present value of cash inflows at the predetermined rate.
4. Calculate the NPV of the project by subtracting the present value of
cash outflows.
Decision rule
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Accept the project if the NPV of the projects 0 or positive that is present
value of cash inflows should be equal to or greater than the present value of
cash outflows.
NPV = PV of cash inflow initial cash outlay
ADVANTAGES:

It recognizes the time value of money and is suitable to apply in a


situation with uniform cash outflows and uneven cash inflows.

It takes in to account the earnings over the entire life of the project
and gives the true view if 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.

INTERNAL RATE OF RETURN METHOD:


The internal rate of return method is also a modern technique of capital
budgeting that takes in to account the time value of money. It is also known
as time- adjusted rate of return or trial and error yield method. Under this
method the cash flows of a project are discounted at a suitable rate by hit and
trial method, which equates the net present value so calculated to the amount
of the investment. The internal rate of return can be defined as that rate of
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discount at which the present value of cash inflows is equal to the present
value of cash outflow.
Decision Rule:
Accept the proposal having the higher rate of return and vice versa.
If IRR>K, accept project.
If IRR<K, reject project.
K=cost of capital.
DETERMINATION OF IRR
a) When annual cash flows are equal over the life of the asset.

FACTOR =

Initial Outlay
-------------------------------- x 100
Annual Cash inflow

b) When the annual cash flows are unequal over the life of the
asset:
PV of cash inflows at lower rate PV of cash out flows
IRR = LR+ --------------------------------------------------------(hr-lr)
PV of cash inflows at lower rate - PV of cash inflows at higher rate

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The steps are involved here are:
1. Prepare the cash flows table using assumed discount rate to discount
the net cash flows to the present value.
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 increases the
discount rate further. Until the NPV becomes zero.
4. 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
situation 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 provide for uniform ranking of proposals due to the percentage rate


of return.

This method is also compatible with the objective of maximum


profitability.

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DISADVANTAGES:
It is difficult to understand and operate.

The results of NPV and IRR methods my 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.

PROFITABILITY INDEXMETHOD METHOD:


It is also a time-adjusted method of evaluating the investment
proposals. PI also called benefit cost ratio or desirability factor is the
relationship between present value of cash inflows and the present values of
cash outflows. Thus
PV of cash inflows
Profitability index = ----------------------------PV of cash outflows
NPV
Net profitability index = --------------------------Initial Outlay
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 applied in a


situation with uniform cash outflow and uneven cash inflows.

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It takes into 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 objectives of maximum profitability.

DISADVANTAGES:

More difficult to understand and operate.

It may not give good results while comparing projects with unequal
investment funds.

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OBJECTIVES OF THE STUDY
To present theoretical framework relating to capital budgeting.
To

study

the

financial

aspects

for

future

expansion

of

Sri

Veerabhrahmendra Spinning Mills Pvt.Ltd..


To discuss the process of project evolution followed by Sri
Veerabhrahmendra Spinning Mills Pvt.Ltd..
To evaluate the elements consider by Sri Veerabhrahmendra Spinning
Mills Pvt.Ltd. for expansion project.
To summaries and offer suggestions for the better investment proposals in
Sri Veerabhrahmendra Spinning Mills Pvt.Ltd..

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NEED FOR THE STUDY
A project is an activity sufficiently self-contained to permit financial and
commercial analysis. In most cases projects represent expenditure of capital funds
by pre-existing which want to expand or improve their operation.
In general a project is an activity in which, we will spend money in
expansion of returns in which logically seems to lead it self planning. Financing
and implementations as a unit, is a specific activity with a specific point and a
specific ending point intended to a accomplish a specific objective of the study.
An efficient allocation of capital is the most important finance function in
the modern times. It involves decisions to commit the firms funds to the longterm assets. Capital budgeting for investment decisions are of considerable
importance to the firm since hey tend to determine its value by influencing its
growth, evaluation of capital budgeting decisions.
A capital budgeting decisions may be defined as the firms
decision to invest is current funds most effectively & efficiently in the long term
assets in anticipation of an expected flow of benefits over a series of years. The
long-term assets are those that affect the firms operations beyond the one year
period. The firms investment decisions would generally includes expansion,
acquisition modernization and replacement of long term assets. Sale of a division
or business is also an investment decision. Decision like the change in the methods
of sales distribution, or an advertisement campaign or research and development
program have long term implications for the firms expenditure and benefits, and
therefore they should also be evaluated as investment decisions.
The rationale underlying the capital budgeting decisions efficiency. Thus, a
firm must replace worn and obsolete plant and machinery, acquire fixed assets for
current and new products and make strategic investment decisions. This will

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enable the firm to achieve its objective of maximizing profits either by way of
increased revenues or cost reductions. The quality of these decisions is improved
by capital budgeting. Capital budgeting decision can be of two types:
1)

To those which expand revenues, and

2)

To those which reduce costs.

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SCOPE OF THE STUDY

Capital budgeting techniques suffer from the following limitations:


1) All the techniques of capital budgeting presume that various investment
proposals under consideration are mutually exclusive which may not
practically be true in some particular circumstances.
2) The techniques of capital budgeting require estimation of future cash
inflows and outflows. The future is always uncertain and the data collected
for future may not be exact. Obliviously the results based upon wrong data
may not be good.
3) There are certain factors like morale of the employees, goodwill of the firm,
etc., which cannot be correctly quantified but which otherwise substantially
influence the capital decision.
4) Urgency is another limitation in the evaluation of capital investment
decisions.
5) Uncertainty and risk pose the biggest limitation to the techniques of capital
budgeting.

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METHODOLOGYOF THE STUDY

It is the mathematical relation between two transactions or items of a


business unit.
The data has been collected in two ways. They are:
1. Primary data.
2. Secondary data
PRIMARY DATA
It was collected by the technique of interview method, with the officials of
the organization. The data thus collected about the history and accounting policies
of the organization.
SECONDARY DATA
The data which are collected from the books, records, journals and profiles
of the organization However, the entire study was based on the secondary data.

Diagrammatic Representation of Research Methodology:


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Diagram 2.1

DATA
SOURCES

Primary
Sources

Management

Secondary
Sources

Inside the
Company

Respondents

Outside the
Company

Personal
Observance
Text books
Journals
Annual
Reports

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LIMITATIONS OF THE STUDY
The following the limitations of the study:
Since the procedure and policies of the company will not allow to disclose
confidential financial information, the project has to be completed with the
available data given to us.
The period of study that is 5 weeks is not enough to conduct study of the
project.
The study is carried basing on the information and documents provided by
the organization and based on the interaction with the various employees of
the respective departments.
There was no scope of gathering current information, as the auditing has
not been done by time of project work.

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INDUSTRY PROFILE
Textile Industry:
The textile industry occupies a unique place in our Country .One
of the earliest to come into existence in India, it accounts or 14% of the total Industrial
production, contributes to nearly 30% of the total exports and is the second largest
employment generator after agriculture.
India contributes to about 25% share in the world trade of cotton yarn.
India, the worlds third-largest producer of cotton and the second- Largest producer of
cotton yarns and textiles, is poised to play an increasingly important role in global cotton
and textile markets as a result of domestic and multilateral policy reform.
Indian textile industry contributes about 22 % to the world spindle age
and about 6% to the world rotor capacity installed .India has second highest spindle age
in the world after China with an installed capacity of 38.60 million spindles. Indian
textile industry has the highest loom age (including handlooms) in the world and
contributes about 61% of the world loom age. It contributes about 12% to the world
production of textile fibers and yarns. India is one of the largest consumers of cotton in
the world, ranking second next to China in production of cotton yarn and fabrics and first
in installed spinning and weaving capacity.
Textile industry is providing one of the most basic needs of people and the holds
importance; maintaining sustained growth for improving quality of life. It has a unique
position as a self-reliant industry, from the production of raw materials to the delivery of
finished products, with substantial value-addition at each stage of processing; it is a major
Contribution to the country's economy.
Its vast potential for creation of employment opportunities in the
agricultural, industrial, organized and decentralized sectors & rural and urban areas,
particularly for women and the disadvantaged is Noteworthy.
Although the development of textile sector was earlier taking place in terms
of general policies, in recognition of the importance of this sector, for the first time a

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separate Policy Statement was made in 1985 in regard to development of textile sector.
The textile policy of 2000 aims at achieving the target of textile and apparel exports of
US $ 50 billion by 2010 of which the share of garments will be US $ 25 billion. The main
markets for Indian textiles and apparels are USA, UAE, UK, Germany, France, Italy,
Russia, Canada, Bangladesh, and Japan.
The main objective of the textile policy 2000 is to provide cloth of
acceptable quality at reasonable prices for the vast Majority of the Population of the
country, to increasingly contribute to the provision of sustainable employment and the
economic growth of the nation; and to compete with confidence for an increasing share of
the global market vast pool of skilled manpower; entrepreneurship; flexibility in
production process; and long experience with US/EU (European Union).
At the same time, there are constraints relating to fragmented industry,
constraints of processing, quality of cotton, concerns over power cost, labour reforms and
other infrastructural constraints and bottlenecks. E.g., cost of power was Rs.8 per
garment in India whereas in China it was only Rs.2 per garment.
Further, for the benefit of exporters, there should be a state-owned cargo shipping
mechanism. Several initiatives have already been taken by the government to overcome
some of these concerns including rationalization of fiscal duties; technology up gradation
through the Technology Up gradation Fund Scheme (TUFS); setting up of Apparel Parks;
and liberalization of restrictive regulatory practices.

Current scenario:
Developing countries with both textile and clothing capacity may be able to
prosper in the new competitive environment after the textile quota regime of quantitative
import restrictions under the multi-fiber arrangement (MFA) came to an end on 1st
January, 2005 under the World Trade Organization (WTO) Agreement on Textiles and
Clothing.
The mood in the Indian textile industry given the phase out of the quota regime of
the multi-fiber arrangement (MFA) is upbeat with new statement lowing in and increased
orders for the industry as a result of which capacities are fully booked up to April 2005.
As a result of various initiatives taken by the government, there has

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investment of Rs.50, 000 crores in the textile industry in

the last five years. Nine textile

majors invested Rs.2, 600 crores and plan to invest another Rs.6, 400 crores. Further,
India's cotton production increased by 57% over the last five years; and 3 million
additional spindles and 30,000 shuttles-less looms were installed. The industry expects
investment of Rs.1, 40,000 crores in this sector in the post-MFA phase. A Vision 2010
for textiles formulated by the government after intensive interaction with the industry
and Export Promotion Councils to capitalize on the upbeat mood aims

to increase

India's share in world's textile trade from the current 4% to 8% by 2010 and to achieve
export value of US $ 50 billion by 2010 Vision 2010 for textiles envisages growth in
Indian textile economy from the current US $ 37 billion to $ 85 billion by 2010; reaction
of 12 million new jobs in the textile sector; and modernization and consolidation for
creating a globally competitive textile industry.
There will be opportunities as well as challenges for the Indian textile industry in
the post-MFA era. But India has natural advantages which can be capitalized on strong
raw material

base - cotton, man-made fibers, jute, silk; large production capacity

(spinning - 21% of world capacity and weaving - 33% of

world capacity but of low

technology);

Investment in Indian Textile Industry:


The scenario of investment in the Indian textile industry started to change after
the inception of the special Textile Package during the 2003-2004 budgets. The
recommendations made in the budget included the reforms that are required to be made in
the fiscal policy of the Indian textile Industry for attracting investment in this industry.
The policy matters associated with restructuring of debt for financial viability of this
industrial sector are also being addressed in this budget. A fund was set up in accordance
with the recommendations of the aforesaid budget with an initial principal amount of
Rs.3000 crores. This fund was meant for restructuring of the textile sector.

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Factors responsible for wooing the investors in Indian textile


industry:
1. The size of the textile along with apparel market in India is quite big.
2. Performance of this industry has been consistent right from the start of the new
millennium.

3. Availability of the skilled labor in India is comparatively cheap in relation to the


same in other parts of the world.

4. The policies related to the Foreign Direct Investment in India are comparatively
lenient and are transparent in nature among all the developing countries.

5. There is no limit on foreign direct investment in the textile industry and hence
100% direct investment can be done by the foreign capitalists in the Indian textile
industry.

6. Foreign Investments done in the Indian Textile Industry through the


automatic route offers a hassle-free way of investing. These
investments are not required to be approved by the government or the
apex bank of India, RBI. The foreign investors are only required to
make a notification to the regional office of the apex bank only after
receiving the receipt of the remittance. This notification is required to
be done within thirty days from the date of receiving remittance.

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7. The ministry concerned with the development of textile Industry in
India has formed a special cell for attracting FDI in this sector.

Objectives of this special cell for wooing FDI are:


1. This cell helps the willing foreign companies to find out viable partners meant for
floating a joint venture company in order to produce textile products.
2. FDI special cell acts as the mediator between the foreign investor and the different
organizations for setting up the textile industry. The specialized helps that are
given by this cell involve advisory support along with assistance.
3. At the time of operation of the textile industry set by the foreign investor certain
problems may crop up. These problems are sorted out by the FDI cell.
4. FDI cell monitors as well as maintains the data related with the total production of
the textile sector. They also collect the stratified data of production by both
domestic industry as well as the industry set up by the foreign investor. It has been
found out that the percentage share of the textile industry in the total foreign
investment done was 1.02%.A major development has occurred in the textile
industry when Blackstone, an investment management company of USA has
bought 50.1% stake of the domestic apparel manufacturing company called
Gokaldas Exports. The deal was sealed at the price of Rs 275 per share. After the
completion of the stake transfer the promoters of the Gokaldas Exports, the
Hindujas, were left with a share amounting to 20%.
5. As a part of domestic textile sector expansion, the companies of

Indian origin are also not far behind in making investments. Arvind
Mills Limited is expanding its production as well as capacity base
through the construction of two new industrial set ups in Bangalore
and Ahmadabad. Another textile company of India name super
Pinning mills is also acquiring two sick units of Madurai for
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enhancing their production capacity for meeting the needs generated
by the USA market.
. GROWTH

OF INDIAN TEXTILE INDUSTRY:

Growth along with the investment of an industry depends heavily on the


economic health of the country. Indian economy grew rapidly during the fiscal year 20072008 posting a growth rate of 9.4% p.a. Not only this, India has been performing
significantly in the last three years where its average yearly rate of growth has been
estimated to be 8%. The fruits of economic growth have trickled down to people of the
state which can be evidenced from the rising per capital income of India. Statistics reveal
that during 2002-2008 (up to March 2008) the per capital income of India has increased
by 62 % and has reached the level of Rs 25,778 or US$ 581.37 per annum.
One of the most beneficial classes of this economic growth saga has been the
middle income section of the society. The total strength of this class in absolute terms has
been found out to be 216 million which is expected to rise to 351 million by 2010. The
major demand that is being generated is by a new class of people from the booming ITBPO sector who are still at their prime age and are outwardly fashion savvy. This has
generated huge demand for fashionable dresses which has consequently led to the
emergence of some world class Indian designers with their latest fashion apparels.
Propensity of consumption (after excluding all spending on essential items
like housing, health, education, etc.) by the average Indian people has increased at the
rate of 5% to a total amount of US$ 219 billion in the year 2005. At this time, the
organized retail sector has been able to tap a market of around US$ 8.2 billion which is
projected to increase to US$ 25 billion by 2010.
Textile industry is one of the major contributors to the total output of the act growing
Indian industrial sector which is at present revolving around 4%. Textile sector's
contribution to GDP of India is also significant which currently amounts to 4%. It has
been found out that Indian textile industry s one of the major sources of foreign exchange
earnings for India and contributes around 16-17%.From the above discussion it is quite

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clear to us that the market size of India is growing at a very high pace. That is why the
foreign investors are flocking to India for investment purposes in order to get hold of a
chunk of this expanding pie. With increasing demand for the products of Indian Textile
Industry, new players are jumping in the league to get a slice of the profitable pie and the
already existing textile mills are raising their capacity for increasing their supply. Hence,
the expansion process of the domestic industry is also not far behind. Thus, it can be said
that the whole Indian economy is on a growing trend which has its obvious impact on
every possible sector including the Indian Industry. Indian Textile Industry is going
through a major change in its outlook after the expiry of Multi-Fiber Agreement.
Multi Fiber Agreement was introduced in the year 1974 as a short term measure
directed towards providing a limited time period to the developed countries for adjusting
their textile industries in accordance with that of the developing countries. The textile
industries are characterized by their labor intensive nature of commodity production.
Availability of surplus labor is abundant in the developing countries. These countries
have comparative advantage in the production of textile related products and hence are
able to supply goods at a very low price. The basic idea behind this policy was to
eradicate all sorts of quota system from the apparel and textile industry all over the world
so that a level playing field could be established.
Now, this era after MFA is being looked upon by the experts as a means through
which the Indian textile and apparel industry is going to grow a much faster pace and
would consequently be able to leave a mark on the whole world. Integration of this Indian
industry with that of the whole world started from the last period of 1980s. Up to 20072008 where the final financial year represents the projected figure. The figure above
shows total produce of Indian Textile Industry in fabric sector along with the produce in
all the sub sectors under it. This highlights the fact that the total production of fabricated
products by the Indian Textile Industry between the period 2004-2005 and 2006-2007
increased at a moderate rate from 41973 million square meters to 45378 million square
meters. But after the MFA period (i.e. after 01.01.2007), the same has increased from
45378 million sq. mts to 54260 million sq. mts between the period 2006-2007 and 20082009. Hence it is evident that the percentage increase in the fabric textile product during
the period 2006-2007and 2008-2009 has seen a rise of around 16.37% whereas it was

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only 7.5% during 2004-2005 and 2006-2007.

National Textile Policy:


1. The National Textile Policy was formulated keeping in mind the
following objectives:
2. Development of the textile sector in India in order to nurture and maintain its
position in the global arena as the leading and exporter of clothing.
3. Maintenance of a leading position in the domestic market by doing away with
import penetration.
4. Injecting competitive spirit by the liberalization of stringent controls.
5. Encouraging Foreign Direct Investment as well as research and development in
this sector.
6. Stressing on the diversification of production and its up gradation taking into
consideration the environmental concerns.
7. Development of a firm multi-fiber base along with the skill of the weavers and the
craftsmen.

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Such goals are set to meet the following targets:


1. The size of textile and apparel exports must reach a level of US 50 billion by the
year 2010.
2. The Technology up gradation Fund Scheme should be implemented in a strict
manner.
3. The garments industry should be removed from the list of the small scale industry
sector.
4. The handloom industry should be boosted and encouraged to enter into foreign
ventures so as to compete globally. The National Textile Policy has also
formulated rules pertaining to certain specific sectors. Some of the most important
items in the agenda happen to be the availability and productivity along with the
quality of the raw materials. Special care is also taken to curb the fluctuating price
of raw materials. Steps have also been taken to raise silk to the international
standard preamble.
5. To comprehend the purpose of textile industry that is to provide one the most
basic needs of the people and promote its sustained growth to improve the quality
of life.
6. To acknowledge textile industry as a self-reliant industry, from producing raw
materials to delivery of finished products; and its major contribution to the
economy of the country.
7. To understand its immense potentiality for creating employment opportunities in
significant sectors like agriculture, industry, organized sector, decentralized sector,
urban areas and rural areas, specifically for women and deprived. Recognize the
Textile Policy of 1985, which boosted the annual growth rate of cloth production
by 7.13%, export of textile by 13.32% and per capita availability of fabrics by
3.6%.
8. To analyze the issues and problems of textile industry and the guidelines provided

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by the expert committee set up for this specific purpose.
9. To give a different specification to the objectives and thrust areas of textile
industry.
Thrust areas:
Government of India is trying to promote textile industry by giving emphasis on
several areas of textile, which are as below:
1. Innovative marketing strategies
2. Diversification of product
3. Enhancement of textile oriented technology
4. Quality awareness
5. Intensifying raw materials
6. Growth of productivity
7. Increase in exports
8. Financing arrangements
9. Creating employment opportunities
10. Human Resource Development
Government of India has set some targets to intensify and promote textile industry. To
materialize these targets, efforts are being made, which are as follows:
1. Textile and apparel exports will reach the US $ 50 billion mark by 2010
2. All manufacturing segments of textile industry will come under TUFS
(Technology Up gradation Fund Scheme)
3. Increase the quality and productivity of cotton. The target is to increase 50%
productivity and maintain the quality to international standards.
4. Establish the Technology Mission on jute with an objective to increase cotton
productivity of the country.
5. Encourage private organization to provide financial support for the textile
industry
6. Promote private sectors for establishing a world class textile industry
7. Encourage handloom industry for producing value added items

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8. Encourage private sectors to set up a world class textile industry comprising
various textile processing units in different parts of India
9. Regenerate functions of the TRA (Textile Research Associations) to stress on
research works government policy on cotton and manmade fiber.

Other thrust areas:


Information technology:
Plays a significant role behind the development of textile industry in India. IT
(Information Technology) can promote to establish a sound commercial network for the
textile industry to prosper.

Human Resource Development:


Effective utilization of human resource can strengthen this textile industry to
a large extent. Government of India has adopted some effective policies to properly
utilize the manpower of the country in favor of the textile industry.

Financing arrangement:
Government of India is also trying to encourage talented Indian designers and
technologists to work for Indian textile industry and accordingly government is setting up
venture capital fund in collaboration with financial establishments.
Acts:
Some of the major acts relating to textile industry include

a) Central Silk Board Act, 1948


b) The Textiles Committee Act, 1963
c) The Handlooms Act, 1985
d) Cotton Control Order, 1986
The Textile Undertakings Act, 1995 Government of India is earnestly trying to
provide all the relevant facilities for the textile industry to utilize its full potential and

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achieve the target. The textile industry is presently experiencing an average annual
growth rate of 9-10% and is expected to grow at a rate of 16% in value, which will
eventually reach the target of US $ 115 billion by 2012. The clothing and apparel
sector are expected to grow at a rate of 21 %t in value terms.

Cotton:
Cotton is a soft, staple fiber that grows around the seeds of the cotton plant. It is a
natural fiber harvested from the cotton plant. The fiber most often is spun into yarn or
thread and used to make a soft, breathable textile, which is the most widely, used naturalfiber cloth in clothing today.

Processing of Cotton in India:


In India the raw cotton, also called as Kapa is processed in a multi-stage process
described as below. The Products of processing are
I. Yarn.
II. Cottonseed Oil.
III. Cottonseed Meal.

I. Production of Yarn:
1. Kapa to lint: Kapa (also known as raw cotton or seed cotton) is
unpinned cotton or the white fibrous substance covering the seed that
is obtained from the cotton plant. The first step in the process is, the
cotton is vacuumed into tubes that carry it to a dryer to reduce
moisture and improve the fiber quality. Then it runs through cleaning
equipment to remove leaf trash, sticks and other foreign matter. In
ginning a roller gin is used to grab the fiber. The raw fiber, now called
lint.

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2. Lint to bale: The lint makes its way through another series of pipes
to a press where it is compressed into bales (lint packaged for
market). After baling, the cotton lint is hauled to either storage yards,
textile mills, or shipped to foreign countries.
3. Note: The cotton seed is delivered to a seed storage area from where it
is loaded into trucks and transported to a cottonseed oil mill.
4. Bale to lap: Here the bales are broken down and a worker feeds the
cotton into a machine called a "breaker" which gets rid of some of the
dirt. From here the cotton goes to a "scutcher". (Operated by a worker
also called a scutcher).
5. Lap to Carding: Carding is the process of pulling the fibers into
parallel alignment to form a thin web.

High speed electronic

equipment with wire toothed rollers performs this task. The web of
fibers is eventually condensed into a continuous, untwisted, rope-like
strand called a sliver.
6. Silver to Roving: The silver is then sent to combing machine.
Here, the fibers shorter than half-inch and impurities are removed
from the cotton. The sliver is drawn out to a thinner strand and given a
slight twist to improve strength, and then wound on bobbins. This
Process is called Roving.
7. Roving to Yarn: (SPINNING): Spinning is the last process in yarn
manufacturing. Spinning draws out the short fibers from the mass of

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cotton and twists them together into a long. Spinning machines have a
metal spike called a spindle which the thread winds around.
II. Production of Cotton Seed Oil:
Processing of cottonseed in modern mills involves a number of steps. They
are as follows:
1. The first step is its entry into the shaker room where, through a number of screens
and air equipment, twigs, leaves and other trash are removed.
2. The cleaned seed is then sent to gin stands where the linters are removed from the
seed (delimited). The linters of the highest grade, referred to as first-cut linters are
used in manufacturing non-chemical products, such as medical supplies, twine,
and candle wicks. The second-cut linters removed in further delimiting steps, are
incorporated in chemical products, found in various foods, toiletries, film, and
paper.
3. The delimited seeds now go to the huller. The huller removes the tough seed coat
with a series of knives and shakers. The knives cut the hulls (tough outer shell of
the seed) to loosen them from the kernels (the inside meat of the seed, rich in oil)
and shakers separate the hulls and kernels.
4. The kernels are now ready for oil extraction. They pass through flaking rollers
made of heavy cast iron, spinning at high speeds. This presses the meats into thin
flakes.

Kapaskhalli (cottonseed extraction/meal) is a byproduct of the cottonseed


industry.

Role of Cotton Industry in Indian Economy:


Over the years, country has achieved significant quantitative increase in cotton
production. Till 1970s, country used to import massive quantities of cotton in the range of
8.00 to 9.00 lakshs bales per annum. However, after Government launched special
schemes like intensive cotton production programmers through successive five-year plans
that cotton production received the necessary impetus through increase in area and

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sowing of Hybrid varieties around mid 70s. Since then country has become self-sufficient
in cotton production barring few years in the late 90s and early 20s when large quantities
of cotton had to be imported due to lower crop production and increasing cotton
requirements of the domestic textile industry.

Cotton production Areas in India:


India is an important grower of cotton on a global scale. It ranks third in
global cotton production after the United States and China; with 9.50 million hectares
grown each year, India accounts for approximately 21% of the world's total cotton area
and 13% of global cotton production. The Cotton producing areas in India are spread
throughout the country. But the major cotton producing states which account for more
than 95% of the area under and output are:

1.
2.
3.
4.
5.
6.
7.
8.
9.

Punjab.
Haryana.
Rajasthan.
Maharashtra.
Gujarat.
Madhya Pradesh.
Andhra Pradesh.
Tamil Nadu.
Karnataka.

Of the nine cotton producing States in India, average yields are highest in Punjab
where most of the cotton area is irrigated But the yields of cotton in India are low, with
an average yield of 503 kg/ha compared to the world average of 734 kg/ha. The problem
is also compounded by higher production costs and poor quality in terms of varietals
purity and trash content.
However the Cotton plays an important role in the National economy providing large
employment in the farm, marketing and processing sectors. Cotton textiles along with
other textiles also contribute about 1/3rd of the Indian exports.

Steps taken by the Cotton Producers in India:


Now-a-days the Indian Cotton producers are continuously working to up-

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grade the quality and increase the cotton production to cope up with the increased global
demand for cotton textiles and to meet the needs of the 39 million spindles capacity of the
domestic textile industry which presently consumes about 12-14 million bales annually.
In India, cotton yields increased significantly in the 1980s and through the
first half of 1980s but since 1996 there is no increase in yield. In the past, the increase in
cost of production of cotton was partially offset by increase in yield but now with
stagnant yield the cost of production is raising. Besides low yield, Indian cotton also
suffers from inconsistent quality in terms of length, microware and strength.

Policy of Government of India towards Cotton Industry


The Cotton production policies in India historically have been oriented
toward promoting and supporting the textile industry.
The Government of India announces a minimum support price for each
variety of seed cotton (kapas) based on recommendations from the Commission for
Agricultural Costs and Prices. The Government of India is also providing subsidies to the
production inputs of the cotton in the areas of fertilizer, power, etc
Markets for Indian Cotton:
The three major groups in the cotton market are

Private traders,

State-level cooperatives,

The Cotton Corporation of India Limited.


Of these three groups, private traders handle more than 70 percent of

cottonseed and lint, followed by cooperatives and the CCI.


The Cotton Corporation of India Ltd. for the year 2008-09 had purchased
60.30 lakhs quintals of kapas equivalent to 11.77 lakhs bales valuing Rs.1218.70 crores in
Andhra Pradesh, Maharashtra, Madhya Pradesh, Orissa and Karnataka. Beside these the
Corporation had also carried out commercial operations and purchased 2.71 lakhs bales
valuing Rs.285.82 crores in the year 2008-09 as compared to around 1.00 lakhs bales
valuing Rs.108.81 crores during the previous year (i.e. for the year 2006-07).

Exports of Cotton:
The main market for Indian cotton export is China. The other markets also

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include Taiwan, Thailand and Turkey. In July 2001, the union government removed all
curbs on cotton exports. As a result of these, now the exporters are not required to obtain
any certificate from the Textile Commissioner on the registration, allocation, quality and
quantity of export. India exported around 25 per cent cotton during 2008-09 and it is
estimated nearly 62 per cent exported to China.
During the year 2008-09 the prices of Indian cotton in early part of the season
being lower than the international prices, had been attractive to foreign buyers and there
was good demand for Indian cotton, especially S-6, H-4 and Bunny, which had resulted
in sustained cotton exports, which are estimated at 55.00 lakhs bales The Cotton
Advisory Board estimated an 18-20 percent increase in cotton exports to 65 lakhs bales
for Oct 2009- Sep 2010, as against its Aug 2009 estimate of 58 lakhs bales.

Imports of Cotton:
Despite good domestic crops, India is importing cotton because of quality
problems or low world prices particularly for processing into exportable products like
yarns and fabrics. India imported just 721,000 bales of cotton in 2004-05. The imports
rose to 1,217,000 lakhs bales in 2005-06, 4,700,000 lakhs bales in 2006-07 and the
anticipated imports for the year 2007-08 are 550,000 lakhs bales.
For the year 2007-08 the cotton imports into the country had once again
remained limited mainly to Extra Long staple cottons, like as previous year, which were
in short supply at around 6 lakhs bales inclusive of import of around 2 lakhs bales of long
staple varieties contracted by mills during April-May 2009.

Future Challenges for the Indian Cotton Industry


The challenges that are going to face by the cotton producers in India for
the season 2009-10 are:
Rupee appreciation:
The increase in the value of the rupee gives only smaller import orders to
the cotton producers.
Cheaper Imports:
The appreciated rupee value makes the cotton imports cheaper when compared to
past. So this aspect is also required to consider by the cotton producers.

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Low quality
The Quality of cotton is also far from satisfactory considering the presence of

a large number of contaminants. So the cotton producers are also required to take care in
this aspect.

COMPANY PROFILE
INTRODUCTION:
Sree Veerabrahmendra Swamy Spinning Mills Private Limited is a Private
Company incorporated on 24 March 2006. It is classified as Indian Non-Government
Company and is registered at Registrar of Companies, Hyderabad. Its authorized share
capital is Rs. 100,000,000 and its paid up capital is Rs. 96,000,000.
Sree Veerabrahmendra Swamy Spinning Mills Private Limited's Annual General
Meeting (AGM) was last held on 27 September 2013 and as per records from Ministry of
Corporate Affairs (MCA), its balance sheet was last filed on 31 March 2013.
Sree Veerabrahmendra Swamy Spinning Mills Private Limited's Corporate
Identification Number is (CIN) U18100AP2006PTC049599 and its registration number is
49599. Its registered address is LINGAMGUNTLA VILLAGE CHILAKALURIPET
MANDAL, GUNTUR - 522611, Andhra Pradesh INDIA.
There are 2 directors of Sree Veerabrahmendra Swamy Spinning Mills Private
Limited. Current status of Sree Veerabrahmendra Swamy Spinning Mills Private Limited
is - Active.

Directors
Director Identification Number
06515188
06515211

Name
SUNDARA RAMAIAH GORANTLA
INDRANI GORANTLA

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Company Information
Corporate Identification Number
Name

U18100AP2006PTC049599
SREE VEERABRAHMENDRA SWAMY

RoC
Registration Number
Company Category
Company Sub Category
Class of Company
Authorised Capital (in Rs.)
Paid up capital (in Rs.)
Number of Members(Applicable

SPINNING MILLS PRIVATE LIMITED


RoC-Hyderabad
49599
Company limited by shares
Indian Non-Government Company
Private Company
100,000,000
96,000,000
0

only in case of company without


Share Capital)
Date of Incorporation
Address 1
Address 2
City
State
Country
Pin
Whether listed or not
Date of Last AGM
Date of Balance sheet
Company Status (for eFiling)

24 March 2006
LINGAMGUNTLA VILLAGE
CHILAKALURIPET MANDAL
GUNTUR
Andhra Pradesh
INDIA
522611
Unlisted
27 September 2013
31 March 2013
Active

Directors
Director Identification Number
06515188
06515211

Name
SUNDARA RAMAIAH GORANTLA
INDRANI GORANTLA

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MISSION

To use latest technological strategies during production thereby


forming an innovative approach.
To provide a safe, fulfilling and rewarding work environment for our
employees.
Developing a long term relationships with our customers and
suppliers.
Serving and supporting the communities in which we operate.
To manufacture a high quality yarn thereby withstanding high level of
competitiveness.
VISION

The company has a vision to excel in all fields of textile industry and
agriculture produce basis.
We will be intensely customer focused and will offer products and
services which provide the best value for our customers.
OBJECTIVES
The company attains by meeting its objectives in a timely and efficient manner.

Constantly maintaining and improving up on the quality of yarn.


Purchase of high grade raw-material.
Investments in modern technology.
Practice high level of customer service while equally exceeding on
employee welfare measures.
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PRODUCTS
We believe that quality products are not only by promises but also by proven
results. Development of new textile products is done through - Innovation in defining
production processes of higher quality and making available modern technologies and
professionals with the highest level of competence.
The following advantages which have always been our ultimate goals: High Efficiency
The Most Competitive & Reasonable Price
Products Quality Guarantee
Prompt & Superior Service
Punctual Delivery
1. Cotton fabrics
We are happy to acquaint ourselves as one of the salient cotton
fabric manufacturers in India. Our cotton fabrics include organic cotton fabrics and
white cotton fabrics. We use pure and good quality yarn for making the fabric. Our
fabric provides immense comfort to the users. It gives soothing effect to the body and
will be the right choice in the hot and sweaty summers. Our cotton fabrics are light in
weight in comparison to its thickness. Our cotton fabric is easily washable and its
significant feature is its durability. We ensure our customers to provide good quality
cotton fabric on time and that too at moderate prices.
2. Cotton yarn
We provide the best quality cotton yarn that includes organic cotton yarn
and cotton blended yarn. Cotton yarn is produced from genuine quality fiber, which is
obtained from the seed hair of the cotton plant. Our cotton yarn is used to manufacture
genuine quality cotton fabrics. The significant feature of our cotton yarn is its high tensile
strength and its superior quality. Our cotton yarn is used by various industries for
manufacturing the best quality garments. We are widely known as one of the prominent
cotton yarn suppliers from India.
SWOT ANALYSIS
STRENGTHS

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Abundant Raw Material availability that helps industry to control costs and
reduces the lead-time across the operation.

Availability of Low Cost and Skilled Manpower provides competitive advantage


to industry.

Availability of large varieties of cotton fiber and has a fast growing synthetic fiber
industry.

Good brand equity.

Many persons are working here. This shows commitment of employees towards
of the organization.

Laboratory for testing the quality of the product.

Strong and intellectual management.

WEAKNESSES

Industry is highly dependent on Cotton.


Lower Productivity in various segments.
Lack of Technological Development that affect the productivity and
other activities in whole value chain.
Unfavorable labor Laws.
Lack of Trade Membership, which restrict to tap other potential
market.
Lacking to generate Economies of Scale.
OPPORTUNITIES

The company can offers a wide range of career opportunities and is


too keen to employ a work force of innovative people who can work
together and add value to our vision.
The company to help the employees reach the career objectives in line
with their personal goals.
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THREATS
Continuous Quality Improvement is need of the hour as there are different
demand patterns all over the world.

Geographical Disadvantages.

To balance the demand and supply.

To make balance between price and quality.

Increase in minimum wage rates.

International labor and Environmental Law.

VALUE
By a clear comprehension of the market dynamics and the assimilation of the
cutting edge technology we assure the highest standards are met at all times.
The company initially started with Agricultural procedure basis. The company will
procure cotton kappas from farmers as well as traders from various market places in and
around AP. Indirectly it is helpful to farmers and small traders.
Now the company is doing cotton spinning with a spindle capacity of 40,000 here
at about 1000 No. of workers and 50 Nos of staff engaged in the industry. The main
motive of the company is to provide more jobs for the poor and middle class people.
The company is supplying its products in various states like Tamilnadu,
Karnataka, Maharashtra, Gujarat, Bombay, and Rajasthan.
There are product of yarn is useful for weaving industry. The company is
providing indirectly jobs in the textile industry.

QUALITY
The company has a long reputation of quality performance and innovation.
Quality of final product is determined with quality of raw material. In Sri veera
brahmendra swamy spinning mils pvt.ltdwe take meticulous care in the selection of
cotton.
Our dedicated committee and involved cotton selectors at different station headed
by the experienced supervisors, spares no pain in the selection of kapas or Raw cotton
available in the market.

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There are quality checks at every stage of manufacturing starting from Raw
Cotton. After each lot of fabric is cut, 100% cut parts inspection is conducted to ensure
that only good quality pieces move to the stitching units. To ensure that the garments are
packed as per the requirements of our valued customers, we can even track and check,
which case the garment, has been packed in.

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SPINNING PROCESS AND TECHNOLOGY
MIXING
BLOW ROOM
CARDING
FOR COMBES YARN

FOR CARDED YARN

SILVER LAPPER/ RIBBION


LAPPER
COMBER
DRAWING I
DRAWING II
SIMPLEX
SPINNING

CONE WINDING

REELING

CONE PACKING

BUNDLE BALLING

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Spinning process is shown in the flow chart given below. Cotton which is in the form
of bales is fed to blow room followed by the various operations like carding and combing
depends up on the requirement. The final yarn of required specifications are met through
these operations and winded.
Mixing
Cotton based is opened and those from different varieties are mixed together
according to the formula formulated by the technical authorities in order to get the
desired yarn parameters.
Blow Room
The cotton mix is then fed in to the blow room where the clearing of the cotton
is carried out, in order to remove the trash and other foreign materials. Major part of the
impurities is nearly 5% of the input, and is removed as waste, a part of which goes
invisible waste. The output in this stage is in the form of laps.
Carding
The laps are fed in to cards, where the next important stage of cleaning as cotton
and removal of short fibers takes place. Only 60 to 65% of the trash will be cleaned in
blow room. Carding only will clean balance amount of trash. The output in this stage
is in the form of silvers.
Combers
The most sophisticated department, which is very important for anybody who
wants to export these yarns. This department refines the silvers and strength and other
good quality parameters. The output in this stage is combed silvers.
Draw frames
Combined silver are fed in to draw frame which paralyze the fiber in the silver
as well as evenness the quality of the silver by mixing the silver from the different cans
and producing a even quality silver. The output in this stage is simplex bobbins.

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Ring frames
The simplex bobbins are creeled to the ring frame spindles where the speed is very high
by giving the twist, yarn is produced. The output is in the form of cops.
Simplex
The objects in this stage are drafting too silver in to roving and twisting the
roving and to wind the roving on bobbins.
Spinning
The object of spinning is further drafting the roving in to yarn as per required
count. To import twisting yarn for getting straight thread. This is the final stage in
manufacturing of yarn. The finishing section includes cone winding, cone packaging,
reeling, bundling and labeling not only producing yarn but is to be packed in different
shapes as required by the buyer.
Cone winding
The spinning cops are creeled in to the cone winding and the yarn is wound on
the drums and the yarn in cones is produced which is the final product. In this stage the
output itself is the final output and it is in the form of yarn.
Cone packaging
50 cones are put in each bag. Cone bags are ready for dispatch. After packaging
and bundling of the product, the mill can print the specifications of the product from
which it is sending and to the party to be received also placed. The company has obtained
no objection certificate from pollution control.

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DATA ANALYSIS & INTERPRETATION
Table 4.1:
(a)

YEAR

PAY BACK PERIOD(PBP):INCOME (PAT)

DEPRECIATION

(RS)

(RS)

CASH IN

CUMULATIVE

FLOW (RS)

CAST IN
FLOWS (RS)

8,55,63,456

3,34,32,278

11,89,95,734

11,89,95,734

3,13,32,218

3,43,24,543

6,56,56,761

18,46,52,495

3,00,76,560,

3,63,65,282

6,64,41,842

25,10,94,337

9,63,75,756

4,28,42,688

13,92,18,444

39,03,12,781

16,07,26,312

4,72,13,353

20,79,39,665

59,82,52,446

16,32,00,297

6,21,69,556

22,53,69,853

82,36,22,299

Initial outlay = 42,86,36,698


Pay back period =

3,83,23,917
20,79,39,665

= 4+0.18
= 4.18 Months

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Criteria for evaluation:-

The pay back period computed for a project is less than the pay
back period set by management of the company, it would be accepted. A project
actual pay back period is more than the determined period by the management, it
will be rejected.

Decision:-

The standard payback period is set by Sri Veerabhrahmendra


Spinning Mills Pvt.Ltd for considering the expansion project is six years, where as
actual payback period is 4.18 months. Hence we accept the project.

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Table 4.2
(b)

AVERAGE RATE OF RETURN (ARR):-

YEAR

INCOME

DEPRECIATION

CASH IN FLOWS

8,55,63,456

3,34,32,278

11,89,95,734

3,13,32,218

3,43,24,543

18,46,52,495

3,00,76,560,

3,63,65,282

25,10,94,337

9,63,75,756

4,28,42,688

39,03,12,781

16,07,26,312

4,72,13,353

59,28,25,446

16,32,00,297

6,21,69,556

8236,22,999

Average profit

ARR = Average Investment 100


Average profit =

31,00,34,034
= 5,16,72,339
6

Average investment =

ARR =

42,86,36,698
= 21,43,18,349
2

5,16,72,339
100
21,43,18,349

= 0.2411 100
= 24.11

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ROI

Average profit
100
Initial investment
=

5,16,72,339
42,86,36,698

100

= 0.1205 100
= 12.05%.

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Criteria for evaluation:-

According to this method ARR is higher than minimum rate of return


established by the management are accepted. It reject the project have less ARR
than the minimum rate set by the management.

Decision:-

The standard ARR set by Sri Veerabhrahmendra Spinning Mills Pvt.Ltd


management is 21%. The actual ARR is 24.11% is higher than the standard ARR
set by the management, hence we accept the project.

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DCF CRITERIA:
Table 4.3:
(a)

Net Present Value:-

YEAR

CASH INFLOWS

DCF (12%)

PRESENT VALUE

11,89,95,734

0.893

10,62,63,190.5

6,56,56,761

0.797

5,23,28,438.52

6,64,41,842

0.712

4,73,06,591.5

13,92,18,444

0.636

8,85,42,930.38

20,79,39,665

0.567

11,79,01,790.1

22,53,69,853

0.507

11,42,62,515

TOTAL

52,66,05,456

NPV = 52,66,05,456 42,86,36,698


= 9,79,68,758

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Criteria for evaluation:-

In case of calculated NPV is positive or zero, the project should be


accepted. If the calculated NPV is negative, the project is rejected.
Decision:-

The project is accepted due to calculate NPV is positive.

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Table 4.4
(b)

INTERNAL RATE OF RETURN:-

YEAR

CASH INFLOWS

DCF (10%)

PRESENT VALUE

11,89,95,734

0.909

10,81,67,122

6,56,56,761

0.826

5,42,32,484

6,64,41,842

0.751

4,98,97,823

13,92,18,444

0.683

9,50,86,197

20,79,39,665

0.621

12,91,30,532

22,53,69,853

0.564

12,71,08,597

TOTAL

56,36,22,755

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YEAR

CASH INFLOWS

DCF (20%)

PRESENT VALUE

11,89,95,734

0.833

9,91,23,446

6,56,56,761

0.649

4,55,65,792

6,64,41,842

0.579

3,84,69,826

13,92,18,444

0.482

6,71,03,290

20,79,39,665

0.402

8,35,91,745

22,53,69,853

0.335

7,54,98,901

TOTAL

40,93,53,000

IRR

= 10 +

56,36,22,755 - 42,86,36,698
(20 10)
56,36,22,755 - 40,93,53,000
13,49,86,057

= 10 15.42,69,755 10
= 10+8.8
=18.8%

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Criteria for evaluation:-

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

Decision:-

The project is accepted because of the calculation IRR is higher


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

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Table 4.5:
(C) PROFITABILITY INDEX:-

YEAR

CASH IN FLOW (RS)

11,89,95,734

6,56,56,761

6,64,41,842

13,92,18,444

20,79,39,665

22,53,69,853

PV of Cash inflow

PI = Intial Cash outlay

82,36,22,299
42,86,36,698

= 1.92

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Criteria for evaluation:

A project can be accepted if its PI index is greater than one. If the PI is


less than one we should reject the project.

Decision:-

Profitability index of proposed expansion project is found our 1.92


this is more than the PI. Hence we accept the project.

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FINDINGS & SUGGESTIONS


FINDINGS:-

The calculated payback period is 4years and 2months. But standard


payback period was 5 years and 2months by Sri Veerabhrahmendra
Spinning Mills Pvt.Ltd management.

The ARR is fixed by SDL is 21%. The actual ARR is 24.1% and its return
on investment is 12.05%.

The NPV is actually getting 9,79,68,758 is positive.

The IRR is worked for project is 18.89% cut off rate is 10% less than the
actual IRR.

The PI is getting actual for the expansion project is 1.92

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SUGGESTIONS: It has been suggested that the Sri Veerabhrahmendra Spinning Mills
Pvt.Ltd. to consider the investment /accept the investment proposal is actual
PBP is less than the standard PBP.
The NPV of the project is positive; it is advisable to suggest selecting the
same type of the projects.
Actual IRR is worked for the proposal is 18.89%, which is below the
accepted level. The cost of capital is taken into consideration on the basis of
weighted average cost of capital.
The cutoff rate/ cost of capital for the company is 10% where as the

actual IRR is worked for the proposal is 11.89%, which is below the
accepted level. The cost of capital is taken into consideration of the
basis of weighted average cost of capital.
It is safer to accept proposal it is 2 times more than its investment. So

it is advisable to select the same type of project in the future also.

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CONCLUSION

Based on the study in Sri Sri Veerabhrahmendra Spinning Mills Pvt.Ltd


there is forecasting project cash flow involves numerous estimates and many
individuals and departments participate in this exercise. The role of the finance
manager in to coordinate the efforts of various departments and obtain information
from them, ensure that the forecasts are based on a set of consistent economic
assumptions, keep to the exercise focused on relevant variables and minimize the
bias is inherent in cash flow forecasting
In the study I know that the company is following pay back period. Based
on the data shows that the company can use any criteria to get return on the
investment.

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BIBLIOGRAPHY

BIBILOGRAPHY:FINANCIAL MANAGEMENT - I.M PANDEY


FINANCIAL MANAGEMENT PRASANNA CHANRDRA
FINANCIAL MANAGEMENT M.Y.KHAN & JAIN
FINANCIAL MANAGEMENT V.K.BHALLA

WEBSITES:
www.cottonindustry.com
www.sriveerabrahmendramills.com

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