CHAPTER-I

INTRODUCTION

INTRODUCTION TO CAPITAL BUDGETING

INTRODUCTION:
Among the various business decisions capital budgeting decisions are
critical and crucial decisions. Therefore special care must be taken while taking these decisions.

CONCEPT AND MEANING:

The term capital budgeting refers to long term planning for proposal capital
outlay and their financing. It includes rising long-term funds and their utilization. It may be
defined as firms, formal process of acquisition and investment of capital.
Capital Budgeting may also be defined as The decision making process which the firm
evaluates the purchase of major fixed assets. It involves firms decision to invest its current
funds for addition, disposition, modification and replacement of fixed assets.
It deals exactly with major investment proposals, which are essentially long-term projects and
incurred among the available market opportunities.
Capital budgeting is the process of making investment decision in capital expenditure. A
Capital expenditure may be defined as an expenditure, the benefits of which are expected to be
received over a period of time exceeding one year. The main characteristic of a Capital
expenditure is that the expenditure is incurred at the one point of time whereas benefits of the
expenditure are related at different point of time in future.
In simple language we may say that a capital expenditure is an expenditure incurred for
acquiring or improving the fixed assets, the benefits of which are to be received over a number
of years in future

OBJECTIVES OF THE STUDY:

This chapter is intended to provide:
An understanding of the importance of capital budgeting in marketing decision making
An explanation of the different types of investment project
An introduction to the economic evaluation of investment proposals
The importance of the concept and calculation of net present value and internal rate of
return in decision making
The advantages and disadvantages of the payback method as a technique for initial
screening of two or more competing projects.

NEED AND IMPORTANCE:

Capital Budgeting means planning for capital assets. Capital Budgeting decisions are vital to
an organization as to include the decision as to:
Whether or not funds should be invested in long term projects such as settings of an
industry, purchase of plant and machinery etc.,
Analyze the proposals for expansion or creating additions capacities.
To decide the replacement of permanent assets such as building and equipments.
To make financial analysis of various proposals regarding capital investment so as to
choose the best out of many alternative proposals.

SCOPE OF THE STUDY:

The efficient allocation of capital is the most important financial function in the
modern times. It involves decision to commit the firms, since they stand the long- term
assets such decision are of considerable importance to the firm since they send to determine
its value and size by influencing its growth, probability and growth.
The scope of the study is limited to collecting the financial data of NAGARJUNA
CEMENTS for four years and budgeted figures of each year.

METHODOLOGY OF THE STUDY

These are two types of methods of data collection.
a) Primary Data
b) Secondary Data.
a. Primary Data:
Primary data is the information collected directly with out any references. In this
study it was mainly through interviews with concerned officers and staffs either individually
or collectively some of the information had been verified or supplemented with personal
observations.
The data includes
Conducting personal interviews with the officers of the financials department.
Guidelines and necessary information taken from my guide.
By using primary methods collected the primary information or data.
- Observation method
-Survey method
- Interview method.
b. Secondary Data:
It was collected from already published sources. This includes magazines and other
internal records.
The data includes:

By referring to the books in the company.

By collecting data from the websites.

By collecting data from company annual reports.

LIMITATIONS:
(1) All the techniques of capital budgeting presume that various investment proposals under
consideration that are mutually exclusive which may not practically be true in some
particular circumstances.
(2) The techniques of capital budgeting requires estimation of future cash inflows and out
flows. The future is always uncertain and the data collected for future may not be exact.
Obviously, the result based upon wrong data can not be good.
(3) There are certain factors like morale of employees, goodwill of the firm, etc., which
cannot be correctly qualified but which otherwise substantially influence the capital
decision.

CHAPTER-II
REVIEW OF LITERATURE

REVIEW OF LITERATURE

Methods of Capital Budgeting

(1) Traditional methods:
Pay back period
Average rate return method
(2) Discount cash flow method
Net present value method
Initial rate return method
Profitability index method
Data collection:
Primary data: The primary data is the data which is collected, by interviewing directly with the organizations
concerned executives. This is the direct information gathered from the organization.
Secondary data: The secondary data is the data which is gathered from publications and websites.
CAPITAL BUDGETING:
A capital expenditure is an outlay of cash for a project that is expected to
produce a cash inflow over a period of time exceeding one year. Examples of projects include
investments in property, plant, and equipment, research and development projects, large
advertising campaigns, or any other project that requires a capital expenditure and generates a
future cash flow.

Because capital expenditures can be very large and have a significant impact on the
financial performance of the firm, great importance is placed on project selection. This process
is called capital budgeting.

Capital Budgeting Decisions:

Learning Objectives:
1. Evaluate the acceptability of an investment project using the net present value method.
2. Evaluate the acceptability of an investment project using the internal rate of return
method.
3. Evaluate an investment project that has uncertain cash flows.
4. Rank investment projects in order of preference.
5. Determine the payback period for an investment.
6. Compute the simple rate of return for an investment.
7. Understand present value concepts and the use of present value tables.
8. Include income taxes in a capital budgeting analysis.

NATURE OF INVESTMENT DECISSIONS

The investment decisions of a firm are generally known as the capital
budgeting, or capital expenditure decisions. A capital budgeting decision 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. The long term assets are those that affect
the firms operations beyond the one year period. The firms investment decisions would
generally include expansion, acquisition, modernization and replacement of the long-term
assets.
Sale of a division or business (divestment) is also as an investment decision.
Decisions like the change in the methods of sales distribution, or an advertisement campaign or
a research and development programme have long-term implications for the firms expenditures
and benefits, and therefore, they should also be evaluated as investment decisions. It is
important to note that investment in the long-term assets invariably requires large funds to be
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tied up in the current assets such as inventories and receivables. As such, investment in the fixed
and current assets is one single activity.

Features of Investment Decisions:The following are the features of investment decisions:

The exchange of current funds for future benefits.
The funds are invested in long-term assets.
The future benefits will occur to the firm over a series of year.

Importance of Investment Decisions:Investment decisions require special attention because of the following reasons.
They influence the firms growth in the long run
They affect the risk of the firm
They involve commitment of large amount of funds
They are irreversible, or reversible at substantial loss
They are among the most difficult decisions to make.

Growth
The effects of investment decisions extend in to the future and have to be endured
for a long period than the consequences of the current operating expenditure. A firms decision
to invest in long-term assets has a decisive influence on the rate and direction of its growth. A
wrong decision can prove disastrous for the continued survival of the firm; unwanted or
unprofitable expansion of assets will result in heavy operating costs of the firm. On the other
hand, inadequate investment in assets would make it difficult for the firm to complete
successfully and maintain its market share.

Risk
A long-term commitment of funds may also change the risk complexity of the firm. If
the adoption of an investment increases average gain but causes frequent fluctuations in its
earnings, the firm will become more risky. Thus, investment decisions shape the basic character
of a firm.
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Funding
Investment decisions generally involve large amount of funds, which make it
imperative for the firm to plan its investment programmers very carefully and make an advance
arrangements for procuring finances internally or externally.

Irreversibility
Most investment decisions are irreversible. It is difficult to find a market for such
capital items once they have been acquired. The firm will incur heavy losses if such assets are
scrapped.

Complexity
Investment decisions are among the firms most difficult decisions. They are an
assessment of future events, which are difficult to predict. It is really a complex problem to
Economic, political, social and technological forces cause the uncertainty in cash flow
estimation.
TYPES OF INVESTEMENT DECISIONS
There are many ways to classify investments. One classification is as follows:
Expansion of existing business
Expansion of new business
Replacement and modernization.

Expansion and Diversification

A company may add capacity to its existing product lines to expand existing operations.
For example, the Gujarat State Fertilizer Company (GSFC) may increase its plant capacity to
manufacture more urea. It is an example of related diversification. A firm may expand its
activities in a new business. Expansions of a new business require investment in new products
and a new kind of production activity with in the firm. If a packaging manufacturing company
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invests in a new plant and machinery to produce ball bearings, which the firm business or
unrelated diversification. Sometimes a company acquires existing firms to expand its business.
In either case, the firm makes investment in the expectation of additional revenue. Investments
in existing or new products may also be called as revenue-expansion investments.

Replacement and Modernization;

The main objective of modernization and replacement is to improve operating efficiency and
reduces costs. Cost savings will reflect in the increased profits, but the firms revenue may
remain unchanged. Assets become outdated and obsolete with technological changes. The firm
must decide to replace those assets with new assets that operate more economically.
If a cement company changes from semi-automatic drying equipment to
finally automatic drying equipment, it is an example of modernization and replacement.
Replacement decisions help to introduce more efficient and economical assets and
therefore, are also called as cost reduction 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
Mutually Exclusive Investments
Mutually exclusive investments serve the same purpose and compete with
each other. If one investment is undertaken, others will have to be excluded. A company
may, for example, either use a more labour-intensive, semi-automatic machine, or employ a
more capital-intensive, highly automatic machine for production. Choosing the semiautomatic machine precludes the acceptance of the highly automatic machine.

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INDEPENDENT INVESTMENTS
Independent investments serve different purposes and do not compete
with each other. For example, a heavy engineering company may be considering expansion
of its plant capacity to manufacture additional excavators and addition of new production
facilities to manufacture a new product - light commercial vehicles. Depending on their
profitability and availability of funds, the company can undertake both investments.
CONTINGENT INVESTMENTS
Contingent investments are dependent projects; the choice of one investment
necessitates undertaking one or more other investments. For example, if a company decides
to build a factory in a remote, backward area, if may have to invest in houses, roads,
hospitals, schools etc. for employees to attract the work force. Thus, building of factory also
requires investments in facilities for employees. The total expenditure will be treated as one
single investment.
INVESTMENT EVOLUTION CRITERIA:
THREE STEPS ARE INVOLVED IN THE EVALUATION OF AN INVESTMENT:
Estimation of cash flows.
Estimation of the required rate of return (the opportunity cost of capital)
Application of a decision rule of making the choice.
The first two steps, discussed in the subsequent chapters, are assumed as given.
Thus, our discussion in this chapter is confined to the third step. Specifically, we focus
on the merits and demerits of various decision rules.

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INVESTMENT DECISION RULE

The investment decision rules may be referred to as capital budgeting
techniques, or investment criteria. A sound appraisal technique should be used to
measure the economic worth of an investment project. The essential property of a
sound technique is that it should maximize the share holders wealth. The following
other characteristics should also be possessed by a sound investment evaluation
criterion.
It should consider all cash flows to determine the true profitability of the
project.
It should provide for an objective and unambiguous way of separating good
projects from bad projects.
It should help ranking of projects according to their true profitability.
It should recognize the fact that bigger cash flows are preferable to smaller ones
and early cash flows are preferable to later ones.
It should be a criterion which is applicable to any conceivable investment
project independent of others.
EVALUATION CRITERIA
A number of investment criteria (or capital budgeting techniques) are in use in
practice. They may be grouped in the following two categories.
1. DISCOUNTED CASH FLOW CRITERIA
NET PRESENT VALUE(NPV)
INTERNAL RATE RETURN(IRR)
Profitability index(PI)
2. NON DISCOUNTED CASH FLOW CRITERIA
Payback period(PB)
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 Discounted payback period

Accounting rate of return(ARR)

NET PRESENT VALUE:

The Net Present Value technique involves discounting net cash flows for a
project, then subtracting net investment from the discounted net cash flows. The result is called
the Net Present Value (NPV). If the net present value is positive, adopting the project would add
to the value of the company. Whether the company chooses to do that will depend on their
selection strategies. If they pick all projects that add to the value of the company they would
choose all projects with positive net present values, even if that value is just $1. On the other
hand, if they have limited resources, they will rank the projects and pick those with the highest
NPV's.
The discount rate used most frequently is the company's cost of capital.
Net present value (NPV) or net present worth (NPW)[ is defined as the total present value (PV)
of a time series of cash flows. It is a standard method for using the time value of money to
appraise long-term projects. Used for capital budgeting, and widely throughout economics, it
measures the excess or shortfall of cash flows, in present value terms, once financing charges
are met.
The rate used to discount future cash flows to their present values is a key variable
of this process. A firm's weighted average cost of capital (after tax) is often used, but many
people believe that it is appropriate to use higher discount rates to adjust for risk for riskier
projects or other factors. A variable discount rate with higher rates applied to cash flows
occurring further along the time span might be used to reflect the yield curve premium for longterm debt.

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INTERNAL RATE OF RETURN

The internal rate of return (IRR) is a Capital budgeting metric used by firms to decide
whether they should make Investments. It is also called discounted cash flow rate of return
(DCFROR) or rate of return (ROR).
It is an indicator of the efficiency or quality of an investment, as opposed to Net present
value (NPV), which indicates value or magnitude.
The IRR is the annualized effective compounded return rate which can be earned on the
invested capital, i.e., the yield on the investment. Put another way, the internal rate of return for
an investment is the discount rate that makes the net present value of the investment's income
stream total to zero.
Another definition of IRR is the interest rate received for an investment consisting of
payments and income that occur at regular periods.
A project is a good investment proposition if its IRR is greater than the rate of return that
could be earned by alternate investments of equal risk (investing in other projects, buying
bonds, even putting the money in a bank account). Thus, the IRR should be compared to any
alternate costs of capital including an appropriate risk premium.
In general, if the IRR is greater than the project's cost of capital, or hurdle rate, the
project will add value for the company.
In the context of savings and loans the IRR is also called effective interest rate.
In cases where one project has a higher initial investment than a second mutually
exclusive project, the first project may have a lower IRR (expected return), but a higher NPV

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(increase in shareholders' wealth) and should thus be accepted over the second project
(assuming no capital constraints).
IRR assumes reinvestment of positive cash flows during the project at the same
calculated IRR. When positive cash flows cannot be reinvested back into the project, IRR
overstates returns. IRR is best used for projects with singular positive cash flows at the end of
the project period.
PROFITABILITY INDEX
Yet another time adjusted method of evaluating the investment proposals is the benefitcost (B/C) ratio or profitability index. Profitability index is the ratio of the present value of cash
inflows at the required rate of return, to the initial cash out flow of the investment.
EVALUATION OF PI METHOD
Like the NPV and IRR rules, PI is a conceptually sound method of arising investment
projects. It is a variation of the NPV method and requires the same computations as the
NPV method.
Time value it recognizes the time value of money.
Value maximization it is consistent with the share holder value maximization
principle. A project with PI greater than one will have positive NPV and if
accepted it will increase share holders wealth.
Relative profitability in the PI method since the present value of cash inflows is
divided by the initial cash out flow , it is a relative measure of projects
profitability.
PAYBACK PERIOD
The payback period is one of the most popular and widely recognized
traditional methods of evaluating investment proposals. Payback is the number of years
required to cover the original cash outlay invested in a project. If the project generates
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constant annual cash inflows, the payback period can be computed by dividing cash
outlay by the annual cash inflow.

EVOLUTION OF PAYBACK:
Many firms use the payback period as an investment evaluation criterion
and a method of ranking projects. They compare the projects payback with predetermined standard pay back. The would be accepted if its payback period is less
than the maximum or standard payback period set by management as a ranking
method. It gives highest ranking to the project, which has the shortest payback period
and lowest ranking to the project with highest payback period. Thus if the firm has to
choose between two mutually exclusive projects, the project with shorter payback
period will be selected.
EVOLUTION OF PAYBACK PERIOD;.
Pay back is a popular investment criterion in practice. It is considered to have certain virtues.
SIMPLICITY
The significant merit of payback is that it is simple to understand and easy to calculate.
The business executives consider the simplicity of method as a virtue. This is evident from
their heavy reliance on it for appraising investment proposals in practice.
COST EFFECTIVE
Payback method costs less than most of the sophisticated techniques that require a
lot of the analysts time and the use of computers.
SHORT-TERM
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Effects a company can have more favorable short-run effects on earnings per
share by setting up a shorter standard payback period. It should, however, be remembered
that this may not be a wise long-term policy as the company may have to sacrifice its future
growth for current earnings.

LIQUIDITY
The emphasis in payback is on the early recovery of the investment. Thus, it gives an
insight into the liquidity of the project. The funds so released can be put to other uses.
In spite of its simplicity and the so, called virtues, the payback may not be
a desirable investment criterion since it suffers from a number of serious limitations.

RISK SHIELD
The risk of the project can be tackled by having a shorter standard payback period. As it may
be in a ensured guaranty against its loss. A company has to invest in many projects where the
cash inflows and life expectancies are highly uncertain. Under such circumstances, pay back
may become important, not so much as a measure of profitability but, as a means of
establishing an upper bound on the acceptable degree of risk.
DISCOUNTED PAYBACK PERIOD
One of the serious objections to the payback method is that it does not discount the cash

flows for calculating the payback period. We can discount cash flows and then calculate the
payback.
The discounted payback period is the no. of. Periods taken in recovering the investment
outlay on the present value basis. The discounted payback period still fails to consider the cash
flows occurring after the payback period.

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ACCOUNTING RATE OF RETURN

The accounting rate of return (ARR) also known as the return on investment (ROI) uses
accounting information as revealed by financial statements, to measure the profitability of an
investment. The accounting rate of return is the ratio of the average after tax profit divided by the
average investment. The average investment would be equal to half of the original investment if it
were depreciated constantly. Alternatively, it can be found out by dividing the total if the
investments book values after depreciation be the life of the project.
VALUATION OF ARR METHOD
The ARR method may claim some merits:
Simplicity

the ARR method is simple to understand and use. It does not involve complicated

computations.
ACCOUNTING DATA
The ARR can be readily calculated from the accounting data, unlike in the
NPV and IRR methods, no adjustments are required to arrive at cash flows of the project.
ACCOUNTING PROFITABILITY
The ARR rule incorporates the entire stream of income in calculating the projects
profitability.
The ARR is a method commonly understood by accountants and frequently used as a
performance measure. As decision criterion, how ever it has serious short comings.
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 CASH FLOWS IGNORED

The ARR method uses accounting profits, not cash flows, in appraising the projects.
Accounting profits are based on arbitrary assumptions and choices and also include non-cash
items. It is, therefore in appropriate to relay on them for measuring the acceptability of the
investment projects.
TIME VALUE IGNORED
The averaging income ignores the time value of money. In fact, this procedure gives more
weight age to the distant receipts.
ARBITRARY CUT-OFF
The firm employing the ARR rule uses an arbitrary cut-off yardstick. Generally, the yardstick
is the firms current return on its assets (book -value). Because of this, the growth companies
earning very high rates on their existing assets may project profitable projects and the less
profitable companies may accept bad projects.
PROJECT CLASSIFICATION
Project classification entails time and effort the costs incurred in this exercise must be
justified by the benefits from it. Certain projects, given their complexity and magnitude, may
warrant a detailed analysis; others may call for a relatively simple analysis. Hence firms
normally classify projects into different categories. Each category is then analyzed somewhat
differently.

22

While the system of classification may vary from one firm to another, the following
categories are found in cost classification.
MANDATORY INVESTMENTS
These are expenditures required to comply with statutory requirements. Examples of
such investments are pollution control equipment, medical dispensary, fire fitting equipment,
crche in factory premises and so on. These are often non-revenue producing investments. In
analyzing such investments the focus is mainly on finding the most cost-effective way of
fulfilling a given statutory need.
REPLACEMENT PROJECTS
Firms routinely invest in equipments means meant to obsolete and inefficient equipment,
even though they may be a serviceable condition. The objective of such investments is to reduce
costs (of labor, raw material and power), increase yield and improve quality. Replacement
projects can be evaluated in a fairly straightforward manner, through at times the analysis may
be quite detailed.
EXPANSION PROJECTS
These investments are meant to increase capacity and/or widen the distribution
network. Such investments call for an expansion projects normally warrant more careful
analysis than replacement projects. Decisions relating to such projects are taken by the top
management.
DIVERSIFICATION PROJECTS
These investments are aimed at producing new products or services or entering into
entirely new geographical areas. Often diversification projects entail substantial risks, involve
large outlays, and require considerable managerial effort and attention. Given their strategic
importance, such projects call for a very through evaluation, both quantitative and qualitative.
Further they require a significant involvement of the board of directors.
RESEARCH AND DEVELOPMENT PROJECTS
Traditionally, R&D projects observed a very small proportion of capital budget in most
Indian companies. Things, however, are changing. Companies are now allocating more funds to
R&D projects, more so in knowledge-intensive industries. R&D projects are characterized by
numerous uncertainties and typically involve sequential decision making.
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Hence the standard DCF analysis is not applicable to them. Such projects are decided
on the basis of managerial judgment. Firms which rely more on quantitative methods use
decision tree analysis and option analysis to evaluate R&D projects.
MISCELLANEOUS PROJECTS
This is a catch-all category that includes items like interior decoration, recreational
facilities, executive aircrafts, landscaped gardens, and so on. There is no standard approach for
evaluating these projects and decisions regarding them are based on personal preferences of top
management.

CHAPTER-III
INDUSTRY PROFILE & COMPANY
PROFILE

24

INDUSTRY PROFILE
In the most general sense of the word, cement is a binder, a substance which sets and
hardens independently, and can bind other materials together. The word "cement" traces to the
Romans, who used the term "opus caementicium" to describe masonry which resembled
concrete and was made from crushed rock with burnt lime as binder. The volcanic ash and
pulverized brick additives which were added to the burnt lime to obtain a hydraulic binder were
later referred to as cementum, cimentum, cement and cement. Cements used in construction are
characterized as hydraulic or non-hydraulic.
The most important use of cement is the production of mortar and concretethe
bonding of natural or artificial aggregates to form a strong building material which is durable in
the face of normal environmental effects.
Concrete should not be confused with cement because the term cement refers only to the dry
powder substance used to bind the aggregate materials of concrete. Upon the addition of water
and/or additives the cement mixture is referred to as concrete, especially if aggregates have been
added.
It is uncertain where it was first discovered that a combination of hydrated nonhydraulic lime and a pozzolan produces a hydraulic mixture (see also: Pozzolanic reaction), but
concrete made from such mixtures was first used on a large scale by engineers. They used both
natural pozzolans (trass or pumice) and artificial pozzolans (ground brick or pottery) in these
concretes. Many excellent examples of structures made from these concretes are still standing,
notably the huge monolithic dome of the Pantheon in Rome and the massive Baths of Caracalla.
The vast system of Roman aqueducts also made extensive use of hydraulic cement. The use of
25

structural concrete disappeared in medieval Europe, although weak pozzolanic concretes

continued to be used as a core fill in stone walls and columns.

Modern cement
Modern hydraulic cements began to be developed from the start of the Industrial
Revolution (around 1800), driven by three main needs:
Hydraulic renders for finishing brick buildings in wet climates
Hydraulic mortars for masonry construction of harbor works etc, in contact with sea water.
Development of strong concretes.
In Britain particularly, good quality building stone became ever more expensive during a
period of rapid growth, and it became a common practice to construct prestige buildings from
the new industrial bricks, and to finish them with a stucco to imitate stone. Hydraulic lime were
favored for this, but the need for a fast set time encouraged the development of new cements.
Most famous was Parker's "Roman cement." This was developed by James Parker in the 1780s,
and finally patented in 1796. It was, in fact, nothing like any material used by the Romans, but
wasNatural cement" made by burning septaria - nodules that are found in certain clay deposits,
and that contain both clay minerals and calcium carbonate. The burnt nodules were ground to a
fine powder. This product, made into a mortar with sand, set in 515 minutes. The success of
"Roman Cement" led other manufacturers to develop rival products by burning artificial
mixtures of clay and chalk.
John Smeaton made an important contribution to the development of cements when he
was planning the construction of the third Eddy stone Lighthouse (1755-9) in the English
Channel. He needed a hydraulic mortar that would set and develop some strength in the twelve
hour period between successive high tides. He performed an exhaustive market research on the
available hydraulic lime, visiting their production sites, and noted that the "hydraulicity" of the
lime was directly related to the clay content of the limestone from which it was made. Smeaton
26

was a civil engineer by profession, and took the idea no further. Apparently unaware of
Smeaton's work, the same principle was identified by Louis Vicat in the first decade of the
nineteenth century. Vicat went on to devise a method of combining chalk and clay into an
intimate mixture, and, burning this, producedartificial cement" in 1817. James Frost,orking in
Britain, produced what he called "British cement" in a similar manner around the same time, but
did not obtain a patent until 1822. In 1824, Joseph Aspdin patented a similar material, which he
called Portland cement, because the render made from it was in color similar to the prestigious
Portland stone.
All the above products could not compete with lime/pozzolan concretes because of fastsetting (giving insufficient time for placement) and low early strengths (requiring a delay of
many weeks before formwork could be removed). Hydraulic limes, "natural" cements and
"artificial" cements all rely upon their belite content for strength development. Belite develops
strength slowly. Because they were burned at temperatures below 1250 C, they contained no
alite, which is responsible for early strength in modern cements. The first cement to consistently
contain alite was made by Joseph Aspdin's son William in the early 1840s. This was what we
call today "modern" Portland cement. Because of the air of mystery with which William Aspdin
surrounded his product, others (e.g. Vicat and I C Johnson) have claimed precedence in this
invention, but recent analysis of both his concrete and raw cement have shown that William
Aspdin's product made at Northfleet, Kent was a true alite-based cement. However, Aspdin's
methods were "rule-of-thumb": Vicat is responsible for establishing the chemical basis of these
cements, and Johnson established the importance of sintering the mix in the kiln.
William Aspdin's innovation was counter-intuitive for manufacturers of "artificial cements",
because they required more lime in the mix (a problem for his father), because they required a
much higher kiln temperature (and therefore more fuel) and because the resulting clinker was
very hard and rapidly wore down the millstones which were the only available grinding
technology of the time. Manufacturing costs were therefore considerably higher, but the product
set reasonably slowly and developed strength quickly, thus opening up a market for use in
concrete. The use of concrete in construction grew rapidly from 1850 onwards, and was soon
the dominant use for cements. Thus Portland cement began its predominant role. it is made from
water and sand

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Types of modern cement

Portland cement
Cement is made by heating limestone (calcium carbonate), with small quantities of other
materials (such as clay) to 1450C in a kiln, in a process known as calcination, whereby a
molecule of carbon dioxide is liberated from the calcium carbonate to form calcium oxide, or
lime, which is then blended with the other materials that have been included in the mix . The
resulting hard substance, called 'clinker', is then ground with a small amount of gypsum into a
powder to make 'Ordinary Portland Cement', the most commonly used type of cement (often
referred to as OPC).
Portland cement is a basic ingredient of concrete, mortar and most non-speciality grout.
The most common use for Portland cement is in the production of concrete. Concrete is a
composite material consisting of aggregate (gravel and sand), cement, and water. As a
construction material, concrete can be cast in almost any shape desired, and once hardened, can
become a structural (load bearing) element. Portland cement may be gray or white.
Portland cement blends
These are often available as inter-ground mixtures from cement manufacturers, but
similar formulations are often also mixed from the ground components at the concrete mixing
plant.
Portland blast furnace cement contains up to 70% ground granulated blast furnace
slag, with the rest Portland clinker and a little gypsum. All compositions produce high ultimate
strength, but as slag content is increased, early strength is reduced, while sulfate resistance
increases and heat evolution diminishes. Used as an economic alternative to Portland sulfateresisting and low-heat cements.
28

Portland fly ash cement contains up to 30% fly ash. The fly ash is pozzolanic, so that
ultimate strength is maintained. Because fly ash addition allows lower concrete water content,
early strength can also be maintained. Where good quality cheap fly ash is available, this can be
an economic alternative to ordinary Portland cement.
Portland pozzolan cement includes fly ash cement, since fly ash is a pozzolan, but also
includes cements made from other natural or artificial pozzolans. In countries where volcanic
ashes are available (e.g. Italy, Chile, Mexico, the Philippines) these cements are often the most
common form in use.
Portland silica fume cement. Addition of silica fume can yield exceptionally high
strengths, and cements containing 5-20% silica fume are occasionally produced. However, silica
fume is more usually added to Portland cement at the concrete mixer.
Masonry cements are used for preparing bricklaying mortars and stuccos, and must not
be used in concrete. They are usually complex proprietary formulations containing Portland
clinker and a number of other ingredients that may include limestone, hydrated lime, air
entrainers, retarders, waterproofers and coloring agents. They are formulated to yield workable
mortars that allow rapid and consistent masonry work. Subtle variations of Masonry cement in
the US are Plastic Cements and Stucco Cements. These are designed to produce controlled bond
with masonry blocks.
Expansive cements contain, in addition to Portland clinker, expansive clinkers (usually
sulfoaluminate clinkers), and are designed to offset the effects of drying shrinkage that is
normally encountered with hydraulic cements. This allows large floor slabs (up to 60 m square)
to be prepared without contraction joints.
White blended cements may be made using white clinker and white supplementary
materials such as high-purity metakaolin.
Colored cements are used for decorative purposes. In some standards, the addition of
pigments to produce "colored Portland cement" is allowed. In other standards (e.g. ASTM),
pigments are not allowed constituents of Portland cement, and colored cements are sold as
"blended hydraulic cements".
Very finely ground cements are made from mixtures of cement with sand or with slag
or other pozzolan type minerals which are extremely finely ground together. Such cements can
have the same physical characteristics as normal cement but with 50% less cement particularly
29

due to their increased surface area for the chemical reaction. Even with intensive grinding they
can use up to 50% less energy to fabricate than ordinary Portland cements.
Non-Portland hydraulic cements
Pozzolan-lime cements. Mixtures of ground pozzolan and lime are the cements used by
the Romans, and are to be found in Roman structures still standing (e.g. the Pantheon in Rome).
They develop strength slowly, but their ultimate strength can be very high. The hydration
products that produce strength are essentially the same as those produced by Portland cement.
Slag-lime cements. Ground granulated blast furnace slag is not hydraulic on its own,
but is "activated" by addition of alkalis, most economically using lime. They are similar to
pozzolan lime cements in their properties. Only granulated slag (i.e. water-quenched, glassy
slag) is effective as a cement component.
Super sulfated cements. These contain about 80% ground granulated blast furnace slag,
15% gypsum or anhydrite and a little Portland clinker or lime as an activator. They produce
strength by formation of ettringite, with strength growth similar to a slow Portland cement.
They exhibit good resistance to aggressive agents, including sulfate.
Calcium aluminates cements are hydraulic cements made primarily from limestone
and bauxite. The active ingredients are monocalcium aluminates CaAl 2O4 (CaO Al2O3 or CA in
Cement chemist notation, CCN) and mayenite Ca12Al14O33 (12 CaO 7 Al2O3 , or C12A7 in
CCN). Strength forms by hydration to calcium aluminate hydrates. They are well-adapted for
use in refractory (high-temperature resistant) concretes, e.g. for furnace linings.
Calcium sulfoaluminate cements are made from clinkers that include ye'elimite
(Ca4(AlO2)6SO4 or C4A3

in Cement chemist's notation) as a primary phase. They are used in

expansive cements, in ultra-high early strength cements, and in "low-energy" cements.

Hydration produces ettringite, and specialized physical properties (such as expansion or rapid
reaction) are obtained by adjustment of the availability of calcium and sulfate ions. Their use as
a low-energy alternative to Portland cement has been pioneered in China, where several million
tons per year are produced. Energy requirements are lower because of the lower kiln
temperatures required for reaction, and the lower amount of limestone (which must be
endothermic ally decarbonated) in the mix. In addition, the lower limestone content and lower
fuel consumption leads to a CO2 emission around half that associated with Portland clinker.
However, SO2 emissions are usually significantly higher.
30

"Natural" Cements correspond to certain cements of the pre-Portland era, produced by

burning argillaceous limestones at moderate temperatures. The level of clay components in the
limestone (around 30-35%) is such that large amounts of belite (the
low-early strength, high-late strength mineral in Portland cement)
are formed without the formation of excessive amounts of free lime.
As with any natural material, such cements have highly variable
properties.
Geopolymer cements are made from mixtures of water-soluble alkali metal silicates
and aluminosilicate mineral powders such as fly ash and met kaolin.

COMPANY PROFILE
ABOUT US
The Company in terms of the Composite Scheme of Arrangement and Amalgamation of
Nagarjuna Fertilizers and Chemicals Limited, Kakinada Fertilizers and Chemicals Limited,
Ikisan Limited and Nagarjuna Oil Refinery Limited has merged into Kakinada Fertilizers
Limited, its wholly owned subsidiary with Registered Office at A/612, Dalamal Tower, 211,
Nariman point, Mumbai-400021.
Accordingly the name of the Company is now Kakinada Fertilizers Limited with effect from
August 1, 2011.
Ikisan Limited a Company involved in agri informatics, information techology, education
services and micro irrigation has also merged into Kakiinada Fertilizers Limited. Website :
www.ikisan.com
The flagship company of the Nagarjuna Group, Nagarjuna Fertilizers and Chemicals Limited is
a leading manufacturer and supplier of plant nutrients in India. Commencing operations in
1986-87, today our asset base is around Rs. 21 billion. We have the distinction of being the
single largest private sector investment in Southern India. An ISO 9001:2000 certified company,
our operational profits are one of the highest in the industry. We assume market leadership in
the markets we operate.
31

In terms of the Composite Scheme, the name of the Company has been changed to Nagajuna
Fertilizers and Chemicals Limited w.e.f. August 19 2011.

Our broad portfolio of products and services include:

* Nutrition solutions:
Macro and Micro fertilizers and Farm Management services
* Micro Irrigation solutions
We offer our expertise for the management of chemical process plants, which include Specialist
Services and Total Project Management.
Our operations and offerings have been aligned into three strategic business units:
* Straight Nutrition Business
* Nutrition Solutions Business
* Nagarjuna Management Services
To survive, grow and attain leadership position in our areas of operation it is essential for us to
identify and capitalise on emerging opportunities.
Preparing for the future, proactively, we are addressing the most important aspects of our
organisation:
Strategy Having a long term vision for the company
Structure To facilitate achieve our strategy
32

People Aligning related policies with Strategy and Structure. In turn to build the right
capability, attitude and behaviour in employees.
Process To enable employees to work more efficiently and effectively, to have the best in
class internal business processes.
Our endeavour is to unlock the full potential of our people by transforming into a performance
driven organisation that attracts the best talent, nurtures a more productive and results-focused
workforce and implements initiatives, which align people strategies with organisational
objectives.
The key action areas in this road map are:

Facilitating redefinition of organisation structure to support NFCLs business

direction, goals and priorities.

Evolving a people management philosophy and institutionalising systems and policies

that reflect uniformity, fairness and transparency.

Establishing Best in Class HR systems and processes, in line with organisational

requirements.

Facilitating creation of a performance based culture with clear linkages to rewards and
careers.

Defining the organisation capability framework and assessing organisational people

capability to support NFCLs vision.

33

Solutions

The potential benefits from improved plant nutrition are virtually limitless. With the right plant
nutrition it is not surprising that the grower can produce higher yields, better flavoured and
greater nutritional content crops of vigour that are less prone to pests and disease attack goals
which form the core of our plant nutrition strategy. It is widely recognized by agronomists that
plant nutrition is responsible for approximately one-third of the increase in world grain
production. The balance is provided by such factors as better irrigation, improved seeds,
cultivation practices, pest control and planting density.
We supply a broad portfolio of nutrition products and services that include both macro and
micro fertilizers. We employ information technology and soil and tissue analysis for nutrient
recommendation and our plans include further strengthening of our analysis portfolio with
advanced tools to measure the actual nutrient requirements and status and deliver customized
nutrition solutions to meet the exact needs of the customer. We provide knowledge-based
solutions to the vast farming community through information technology.
Our Micro Irrigation solutions are an effort towards facing perhaps the most serious challenge
of mankind in the 21st century - lack of fresh water. Our products and services ensure slow,
regular and precise delivery of water and agricultural inputs to the crop.
We offer our expertise for taking over total responsibility of operation and maintenance and
other specialist services for the management of chemical process plants.

34

Our operations and offerings have been aligned into Farming Solutions and Nagarjuna
Management Services.

Farming Solutions

Nagarjuna Fertilizers and Chemicals Limited is involved in the production and marketing of a
wide range of fertilizers. Urea, the widely used nitrogenous fertilizer is both manufactured (at
Kakinada Plant) and marketed through imports (at Vizag and Kakinada Ports). In the vast Urea
market, the brand Nagarjuna is a highly regarded and preferred brand by the farming
community. NFCL currently markets about 1.4 million tons of Manufactured Urea and about 0.6
million tons of Imported Urea per annum. With the aim of providing Total Solutions to the
farmers, NFCL has commenced marketing of fertilizer mixtures through domestic sourcing and
has further plans to enter into Phosphatic and Potassic segments also.
The company also markets a wide range of micronutrients and micronutrient mixes like Zinc
Sulphate, Mahazinc etc. with emphasis on quality.
We have associated with Haifa Chemicals Limited of Israel and Yara of Norway to bring world
class solutions to our customers. We have been importing and marketing water-soluble specialty
fertilizers from Haifa Chemicals Limited (HCL), Israel, since 1997. Haifa Chemicals is a global
leader in the development, production and marketing of specialty fertilizers offering a wide
range of product lines to match the specific needs of different farming programs.
We lay emphasis in providing value-added services to farmers for increasing their farm
productivity through technology transfer. We provide latest scientific farming technology to
farmers and the required training for it so as to increase their knowledge of agriculture and
technology based practices.
35

We have been partnering with some of the well distinguished names in the global arena like
Haldor Topsoe, Denmark and Snamprogetti, Italy.

Environment, Health & Safety

Our commitment to Environment, Health and Safety systems is an integral part of our business
strategy and take precedence over all other considerations. Maintaining highest standards, most
robust and safe technologies, equipment and products as well as qualified, experienced and
trained manpower is essential to our future and growth.
Our EHS mission also encompasses responsibilities of protecting the local community and
environment from potential hazards.
Sustainability Report
Corporate Social Responsibility
CSR Committee
In compliance of Section 135 of the Companies Act, 2013, the Company has constituted a CSR
Committee of Board of Directors on March 14, 2014. The members of the Committee are as
under:

Name of the Director

Dr N C B Nath
Shri K S Raju
Shri K Rahul Raju

Designation
Chairman
Member
Member

The terms of reference of the CSR Committee are as under:

36

1) To formulate and recommend to the Board a CSR Policy in line with the activities mentioned
in Schedule VII of the Companies Act, 2013
2) To recommend the amount of expenditure to be incurred
3) To institute a transparent monitoring mechanism for the implementation of the Policy from
time to time.

At Nagarjuna, CSR is an initiative to create new value to economic, environmental and social
issues. We at Nagarjuna undertook a study in 2008 to assess our various CSR initiatives and
provide a better focus, thrust and consolidate the various activities already being performed by
the Company. Nagarjuna Foundation was established to act as an 'umbrella' for our CSR efforts.
Nagarjuna Foundation has been able to take forward this initiative and contribute to society in
Social Welfare, Education, Environment, Health Care, Sports and Cultural Activities.
Nagarjuna Foundation has supported nearly 250 NGOs and touched the lives of nearly 16,000
infants, children, youth, elderly, several physically disabled and those infected with life
threatening diseases among others across the country where the Corporate Office,
manufacturing facilities and 30 branch offices of the Company are located through contribution
and support which varies from donating various capital goods such as solar water heaters, water
purifiers, geysers, computers, inverters, refrigerators , furniture etc. along with essentials like
groceries, clothes, school uniforms, blankets, medicines, books and other stationary items etc.
Some of the other activities of Nagarjuna Foundation are :
Education
Infrastructure development
- Mother Theresa Municipal High School in Godarigunta, Kakinada
- Zilla Parshid High School, Nandikandi, Sadasivpet
- The Institute of Chartered Accountants of India (ICAI), Kakinada Branch
Education Collaborations and Scholarships
37

- XLRI Jamshedpur
- Prothsaham Scheme, Kakinada

Free Books Distribution Camp

- Alampur Mandal, Mahbubnagar District
- The Aided School for the Blind & Hostel, Kakinada
Environment
Planting of trees
KVK Raju Sundaravanamu ?the Green Belt
Health
Operating the mobile hospital services and extending its reach
Smt. Sitamma Charitable Mobile Health Care Chariot
Health Camp
Mega Health camp at Kakinada with over 1000 patients from 10 villages around Kakinada with
the expertise of 30 doctors of various medical specialties
Providing assistance to Early Intervention Center
Uma Manovikasa Kendram, Kakinada
Medical Support

38

Leprosy home at Vimukthi Colony, Kakinada

Blood Donation Camps
Periodic Blood Donation Camps at Hyderabad and Kakinada
Drinking water
Providing community safe drinking water
- Constructed 4 mineral water plants at Government General Hospital, Kakinada
- Community Safe Drinking Water plant at Ramanayyapet, Kakinada which supports the
drinking water needs of Ramanayyapeta, Valsapakala and Vakalapudi village.
- Free drinking water facility at Investors Services Cell, NFCL, Punjagutta, Hyderabad
Awareness Camps
Community Awareness Programmes
- Multi-Organ Donations in collaboration with MOHAN Foundation
- Hygiene, health and nutrition for the residents of Kondelpeta village
- New advances relating to current medical practices in collaboration with The Medically Aware
and Responsible Citizens of India
Sports
Sponsoring events
- AP State Inter District Masters Athletic Championship
- Senior South Basketball Championship
- Indo Srilanka South Zone Basketball Championship
Sponsoring young talents
- Master Sai Kumar son of our associates
39

Mr Sukumar, Investor Services Cell, created history by captaining the victorious Indian Floor
Hockey Team in the recently held Special Winter Olympics at Idaho, USA
- Master Y Grahesh from Rajahmundry participated in the Asian School Chess Championship at
Colombo, Srilanka and won two Gold Medals at the Championship in single and doubles events
Rehabilitation Services
Relief during Calamities
- Chief Minister's Relief Fund, Andhra Pradesh
- Rescued 10 persons who were trapped in an apartment which collapsed on September, 2011 in
the Kakinada town
- Assistance to a local Phosphate Fertilizer producer during ammonia leakage at their facility at
Kakinada and took preventive measures to reduce the damage
Culture & Heritage
Fostering Cultural Relevance
- Vendanta Cultural Foundation,
- Sahasra Chandi
- Planman Marcom Private Limited, Hindi Akadami - See more at:

40

AWARDS & RECOGNITION

2014

The Company was recognized for Compliance at the Compliance Awards 2014 instituted
by Legasis Services Private Limited, a Mumbai-based company, involved in providing
on-line compliance management system, to recognise and honour Compliance and
Ethics professionals, who excelled in exhibiting the culture of Compliance across the
organizations.

2013

The Company has been awarded the Best Management Award for the Year 2012 from
The Government of Andhra Pradesh. The award was received from Sri. Danam
Nagender, Hon'ble Minister for Labour & Employment, Government of Andhra Pradesh
on May 1, 2013 at Ravindra Bharathi Auditorium.

41

2012
NFCL won the prestigious SILVER EDGE Award bestowed by Information Week in

October 2012 for the Spatial Agronomy Information Application developed in-house by
the IT team.
The CIO 100 Award was awarded by CIO - IDG India in September 2012 to NFCL's CIO

Mr V Srinivas for the Innovate & Cost Effective method followed in mapping the Merger
& Demerger processes in the SAP application during the Organization restructuring in
FY 2011.
ISO 14001: 2004 RC 14001: 2008 certification from M/s UL DQS Inc. {accredited
to American National Accreditation Board (ANAB)}

2011

NFCL was bestowed with the Technology Innovation Award 2011 by the Indian Express
Group in September 2011

Responsible Care Logo

42

British Safety Council Award

2010

NFCL won the prestigious EDGE Award bestowed by Information Week in October
2010 for the Netbook based Mobility Application developed in-house by the IT team.

The CIO 100 Award was awarded by CIO - IDG India in September 2010 to NFCL's
CIO Mr V Srinivas for the Netbook based True Online / Offline Mobility Application.

NFCL has bagged two awards from Indian Chemical Council, Mumbai for the year
2009-10. The awards have come in the categories of Water Resource Management In
Chemical Industry under EHS Environment and Certificate of Merit for the Best
Complaint under Responsible Care for Codes Environment Protection and Process
Safety management.

NFCL has bagged FE EVI Green Business Leadership Best Performer award for the
year 2009-10 under Chemicals and Fertilizers category organized by The Financial
Express & Emergent Ventures in India.

Shri K. Rosaiah, Chief Minister of Andhra Pradesh presented the Best Management
Award for the year 2009-10 to NFCL for maintaining excellent cordial industrial
relations and for effective implementation of employee welfare activities on the eve of
May Day at Hyderabad. Mr. R S Nanda, Director & Chief Operating Officer received
the award on behalf of the Company.
43

2009

The CIO 100 Award was awarded by CIO - IDG India in September 2009 to NFCL's
CIO Mr V Srinivas for the Windows Mobile PDA based Mobility Application.

NFCL has bagged Green Leaf 2nd runner-up award in the Global Competition for
Excellence and Innovation in Safety, Health and Environment held by International
Fertilizer Industry Association (IFA). The award ceremony was held during the First
Global Safety Summit conducted by IFA and hosted by Gulf Petrochemical Industries
Company (GPIC), Bahrain. Dr Abdulhussain Mirza, Minister for Oil and Gas Affairs
and Chairman of National Oil and Gas Authority, Bahrain gave away the awards, at a
glittering ceremony at Ritz-Carlton, Bahrain.

NFCL bagged two awards from the Fertilizer Association of India (FAI), New Delhi. It
won the prestigious FAI Environmental Protection Award in the nitrogenous fertilizer
plants category and stood as joint winner for excellence in Safety Award. NFCL has
been awarded for the 3rd consecutive year and 5th time in the span of last 8 years and
this reckoning has been done out of 31 Nitrogenous Fertilizers Plants in the country. The
awards were received by Shri R S Nanda, Director & COO and Mr. Ramashray Singh,
SGM (Plant Operations) in a glittering ceremony held during the 45th FAI Annual
Seminar, which was organized at Hotel Mariott in Hyderabad on 3rd Dec 2009. Shri MK
Alagiri, Honble Minister for Chemicals & Fertilizers, Government of India, gave away
the awards.

NFCL has bagged ICC AWARD for Excellence in Management of

Health/Safety/Environment from Indian Chemical Council, Mumbai. Shri Srikant Jena,
Honble Minister of State for Fertilizers & Chemicals gave away the awards, in a
glittering ceremony held at Mumbai on 4th Dec 2009.
o

The following steps helped to achieve this prestigious award:

For the initiatives taken for improving the environment through CDM (Clean
Development Mechanism).

44

Nil Reportable Accidents for consecutive period of three years (i.e for 2006,
2007 & 2008). For attaining a 0/0 frequency rate / severity rate for the year 2006,
2007 and 2008.

Investor's Desk

We strive to have the highest standards of corporate governance and compliance. We have taken
up several voluntary measures aimed at self-regulation, corporate governance and disclosures.
Giving information for decision making, both financial and non-financial information is
disseminated to investors through Website, Annual Report, Analysts Conference etc.
Payment of Dividend

Members are requested to update their addresses and bank account details after implementation
of Core Banking Solutions immediately.

Members holding shares in the Demat mode may update their bank account details in the
prescribed form to their respective Depository Participants.
Members holdings shares in physical form are encouraged to utilize the National Electronic
Clearing System (NECS) for receiving dividends and are requested to complete the enclosed
NECS Mandate form and forward the same to the Company or the Registrar and Share Transfer
Agent at the earliest.

45

Careers
We believe in creating a culture that encourages values, teamwork, innovation, leadership and
performance.
Our culture, environment and policies make us an employer of choice.
Success may start with a strategy or objective, but it can be achieved only through the skill and
dedication of people working together to attain a common goal. Associates (Employees) are our
key stakeholders and are critical to the success of Nagarjuna. As our future needs to be one of a
shared vision and requires commitment from all Associates, our people policies, processes and
practices are thoroughly reviewed from time to time.
People are critical to our success. Our people policies are continually updated.
We are an equal opportunity employer. Fair and transparent people policies are supported by a
performance oriented culture. We provide an atmosphere of learning, development,
empowerment and accountability.
To explore opportunities please send detailed information about yourself to the following
address:
Head - Human Potential Development Department
Nagarjuna Fertilizers and Chemicals Limited
Nagarjuna Hills, Hyderabad - 500 082
46

Tel: +91-40-23357200 / 23357204 / 23356414 / 23356418

Fax: +91-40-23354788
E-mail: corphpd@nagarjunagroup.com

Contact us

Corporate Office:
Nagarjuna Fertilizers and Chemicals Limited
Nagarjuna Hills,
Hyderabad - 500 082
Andhra Pradesh, India
Tel: +91-40-23357200 / 23357204 / 23356414 / 23356418
Fax: +91-40-23354788
E-mail: prcc@nagarjunagroup.com
Plant:
Nagarjuna Fertilizers and Chemicals Limited
Nagarjuna Road,
Kakinada ?533 003
Andhra Pradesh, India
Tel +91-884-2360390 / 2360391
Fax +91-884-2362084 / 23675020

47

Grams: "NAAGFERTS"
E-mail: prcc@nagarjunagroup.com

CAPITAL BUDGETING: EIGHT STEPS

48

INTRODUCTION
Until now, this web site has broken one of the cardinal rules of financial management.
This page corrects for that problem and presents now, the first part of the subject of Capital
Budgeting.
Many books and chapters and web pages purport to discuss capital budgeting when in
reality all they do is discuss CAPITAL INVESTMENT APPRAISAL. There's nothing wrong
with a discussion of the CIA methods except that authors have a duty to point out that CIA
methods are only one part of a multi stage process: the capital budgeting process.
A discussion of CIA and nothing else means that capital budgeting decisions are being
discussed out of context. That is, by ignoring the earlier and later parts of capital budgeting, we
are never assess where capital budgeting project come from, how alternatives are found and
evaluated, how we really choose which project to choose and then we never review the
projects and how they have been implemented.

DEFINITION

49

Capital budgeting relates to the investment in assets or an organization that is relatively

large. That is, a new asset or project will amount in value to a significant proportion of the total
assets of the organization.
1) The International Federation of Accountants, IFAC, defines capital expenditures as
Investments to acquire fixed or long lived assets from which a stream of benefits is
expected. Such expenditures represent an organization's commitment to produce and sell future
products and engage in other activities. Capital expenditure decisions, therefore, form a
foundation for the future profitability of a company.

Projects don't just fall out of thin air: someone has to have them. The main point here is
that successful, dynamic and growing companies are constantly on the lookout for new projects
to consider. In the largest organizations there are entire departments looking for alternatives and
opportunities.
2) LOOK FOR SUITABLE PROJECTS
Once someone has had the idea to invest, the next step is to look at suitable projects:
projects that complement current business, projects that are completely different to current
business and so on. Initially, all possibilities will be considered: along the lines of a
brainstorming exercise.
As time goes by, and as corporate objectives allow, the initial list of potential projects
will be whittled down to a more manageable number.
3) IDENTIFY AND CONSIDER ALTERNATIVES
Having found a few projects to consider, the organization will investigate any number of
different ways of carrying them out. After all, the first idea probably won't either be the last or
50

the best. Creativity is the order of the day here, as organizations attempt to start off on the best
footing.
As the diagram suggests, at each of these first three stages, we need to consider whether
what we are proposing fits in with corporate objectives. There is no point in thinking of a
project that conflicts with, say, the growth objective or the profitability objective or even an
environmental objective.
A lot of data will be generated in this stage and this data will be fed into stage four:
Capital Investment Appraisal.

4) CAPITAL INVESTMENT APPRAISAL

This is the number crunching stage in which we use some or all of the following methods
Payback (PB)
accounting rate of return (ARR)
Net present value (NPV)
Internal rate of return (IRR)
Profitability Index (PI)
There are other techniques of course; but the technique to be used will depend on a range of
things, including the knowledge and sophistication of the management of the organization, the
availability of computers and the size and complexity of the project under review.
For more information here, go to my page on CIA once you have finished this page.

5) ANALYSIS OF FEASIBILITY

51

Stage four is the number crunching stage. This stage is where the decision is made as to
which project is to be assessed as acceptable. That is, which project is feasible? .
In order to choose the project, management needs some hurdles:
What must the payback be
What rate of ARR is acceptable
What is the NPV cut off
What IRR is the least that we can accept

Some projects will be discarded as a result of this stage. For example, if the PB cut off is, say, 2
years, and a project has a PB of 3 years, it will be rejected. The same is true of the ARR, NPV,
IRR and PI.
Capital rationing might be a problem here, too, if the organization has general cash flow
problems.
CAPITAL BUDGETING POLICY MANUAL
Let's pause at this point to make the point that what we have just said about cut off rates
and so on come from formal procedures and documents. One such formal document is the
Capital Budgeting Policy Manual, in which formal procedures and rules are established to
assure that all proposals are reviewed fairly and consistently. The manual helps to ensure that
managers and supervisors who make proposals need to know what the organization expects the
proposals to contain, and on what basis their proposed projects will be judged.

52

The managers who have the authority to approve specific projects need to exercise that
responsibility in the context of an overall organizational capital expenditure policy.
In outline, the policy manual should include specifications for:
1. an annually updated forecast of capital expenditures
2. the appropriation steps
3. the appraisal method(s) to be used to evaluate proposals
4. the minimum acceptable rate(s) of return on projects of various risk
5. the limits of authority
6. the control of capital expenditures
7. the procedure to be followed when accepted projects will be subject to an actual
performance review after implementation
(See IFAC document The Capital Expenditure Decision October 1989 for full details of the
manual)

6) CHOOSE THE PROJECT

Once we have determined the feasible/acceptable projects, we then have to make a
decision of which to accept.
If we have capital rationing problems, we might be restricted to one project only. If we
have no cash problems, we might choose two or more.
Whatever the cash position, we would like to invest in all projects that have a positive
NPV, whose IRR is greater than our cut off rate and so on.
7) MONITOR THE PROJECT
As with any part of the organization, the project must be monitored as it progresses. If
the project can be kept as a separate part of the business, it might be classed as its own
department or division and it might have its own performance reports prepared for it. If it's to be
53

absorbed within one or more parts of the organization then it could be difficult to monitor it
separately: this is something that management has to decide as they implement their new
projects.
8) POST COMPLETION AUDIT
The final stage: once the project has been up and running for six months or a year or so,
there must be a post completion audit or a post audit. A post audit looks at the project from start
to finish: stages 1 - 7 and looks at how it was thought of, analyzed, chosen, implemented, and
monitored and so on.
The purpose of the post audit is to test whether capital budgeting procedures have been
fully and fairly applied to the project under review.
Of course, any weaknesses that might be found during the post audit might be specific to
one project or they might relate to capital budgeting systems for the organization as a whole. In
the latter case, the auditor will report back to his superiors and to management that systems need
to be overhauled as a result of what has been found.

CHAPTER-IV

54

DATA ANALAYSIS AND

INTERPRETATION

DATA ANALYSIS AND INTERPRETATION

NAGARJUNA CEMENTS MINES CASHFLOW STATEMENT FOR THE YEARS 20092010 TO 2012-2014
(Rs. In crorers)
SI.NO PARTICULARS
2009-2010 2010-2011 2011-2012 2012-2013 20131-2014
Cash inflow:
1.
2.

Sales turnover
(revenue)
Other income

3413.73

3629.10

3790.55

4499.67

5500.39

319.29

330.38

316.37

384.48

470.99

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Total:

3.

3733.02

3959.48

4106.92

4884.15

5971.38

49.94

110.56

82.25

13.11

14.25

3782.96

4070.04

4189.17

4897.26

5985.63

16.56

49.94

110.56

82.25

13.11

3766.40

4020.10

4078.61

4815.01

5972.52

57.56

58.51

83.36

87.18

80.63

3708.84

3961.59

3995.25

4727.83

5891.89

194.82

212.60

217.75

244.77

249.19

3514.02

3748.99

3777.5

4483.06

5642.70

3.36

11.31

7.29

2.03

3.28

Earnings after tax:

3510.66

3737.68

3770.21

4481.03

5639.42

Add: depreciation

194.82

212.60

217.75

244.77

249.19

3705.48

3950.28

3987.96

4725.8

5888.61

Add: Closing stock

Total:

4.

Less: operating
stock
Other income:

5.

Less: operating
expenses
Cash flow before
tax:

6.

Less: depreciation
Taxable income:

7.

Less: tax

8.

Cash flow after tax:

TRADITIONAL CAPITAL BUDGETING APPRISAL METHODS

RELATED TO RDTK Project

1.

PAY BACK PERIOD METHOD:

Payback period method is a traditional method of evaluation of capital budgeting

decision. The term payback or pay out or payoff refers to the period in which the project will
generate the necessary cash and recoup the initial investment or the cash out flows.

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To calculate the pay period, the cumulative cash flows will be calculated and by using
interpolation the exact period may be calculated.
The APTDC has Rs. 7683.708 lacks of initial investment and the annual cash flows for
the years 2009 to 2011. Then the payback period is calculated as follows:
CALCULATION OF PAY BACK PERIOD OF NAGARJUNA CEMENTS MINES
SI .NO

YEAR

(Rs. In crorers)
CASH INFLOW
CUMULATIVE CASH
FLOWWS

2009-2010

3705.48

3705.48

2010-2011

3950.28

7655.76

2011-2012

3987.96

11643.72

2012-2013

4725.80

16369.52

2013-2014

5888.61

22258.13

The above table shows that, the initial investment RS.4451.626 Lacks lies between first and
second years with Rs. 3705.48and 7655.76 lacks
The amount has been recovered in the first year and the remaining amount in second year
(1907.896-1311.533=596.363)

Difference in cash flows

PBP = Actual (Base) year + ---------------------------------Next year cash flows
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PBP =

746.146
1 + ------------3950.28

1 + 0.1884

1.1884 year

Payback period (PBP) = 1.1884 year.

ACCEPT-REJECT CRITERION:
PBP can be used as a criterion to accept or reject an investment proposal. A proposal
whose actual payback period is more than what is pre-determined by the
management.
PBP thus, is useful for the management to accept the investment decision on the APTDC
and also to assist the management to know that the initial investment is recovered
in 1.1884years.

II. ACCOUNTING OR AVERAGE RATE OF RETURN METHOD:

It is another traditional method of capital budgeting evaluation. According to this method the
capital investment proposals are judged on the basis of their relative profitability. The capital
employed and related incomes are determined according to the commonly accepted accounting
principles and practices over the certain life of project and the average yield is calculated. Such a
rate is called the accounting rate of return or the average return or ARR.
It may be calculated according to any one of the following methods:

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(i)

Annual average net earnings

---------------------------------- X 100
Original investment

(ii)

Annual average net earnings

----------------------------------- X 100
Average investment

(iii)

Increase in expected future annual net earnings

----------------------------------------------------------- X 100
Initial increase in required investment
The term average annual net earnings are the average of the earnings after depreciation and tax.
Over the whole of the economic life of the project order and these giving on ARR above the
required rate may be accepted.

The amount of average investment can be calculated according to any of the

following methods:
(a)

Original investment
-----------------------2

(b)

Original investment +scrap value

-----------------------------------------2

(c) Original investment +scrap value + net additional + scrap value

Working capital
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--------------------------------------------------------------------------------2
Cash flows of the NAGARJUNA CEMENTS are shown in cash flow statement. ARR is
calculated as follows:

Statement showing calculation of ARR

YEARS

(Rs. In lakes)
EARNINGS AFTER TAX (EAT)

2009-2010

3510.66

2010-2011

3737.68

2011-2012

3770.21

2012-2013

4481.03

2013-2014

5639.42

TOTAL

21139.00

ARR

Average annual EATS

= ------------------------------- x 100
Average investment

Total amount
Average Annual EATS = --------------------No of years

21139.00
= -----------------5
Average investment =4451.626
4227.8
ARR = ---------------- X 100

= 95%
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= 4227.8

4451.626
Average Rate of Return = 95%

ACCEPT-REJECT CRIT ARR method allows APTDC to fix a minimum rate of

return. Any project expected to give a return below it will be straight away rejected. The
average rate of return is as good as 95% of APTDC depicts the prospects of management
efficiency.

TIME ADJUSTED (OR) DISCOUNTED CASH FLOW METHOD:

The time adjusted or discounted cash flow methods take into accounts the profitability
time value of money. These methods are also called the modern methods of capital budgeting.
1.

NET PRESENT VALUE METHOD: (NPV)

Net present value method or NPV is one of the discounted cash flows methods. The method is
considered to be one of the best of evaluating the capital investment proposals. Under this
method cash inflows and outflows associated with each project are first calculated.
ROLE OF DISCOUNTING FACTOR:
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The cash inflows and out flows are converted to the present values using discounting factor
which is the actuary discount factor of Regulated display tool kit project of NAGARJUNA
CEMENTS is 8%.
The rate of return is considered as cut off rate or required rate or rate generally
determined on the basis of cost of capital to allow for the risk element involved in the project.
STEPS FOR CALCULATION OF NPV:
1) Calculation of each cash flows after taxes of three years, which is arrived at by deducting
depreciation, interest and tax from earnings before tax and interest (EBIT). This residue is
profit after tax to arrive at cash flow after tax.
2) This cash flow after tax are multiplied with the values obtained from
table (the present value annuity table against the 8% actuary discount Rate i.e. in the
case of project.
3) NPV is derived by deducting the sum of present values from the initial
Investment.
4) Initial investments are the sum of cash flows of three years shown in
Capital expenditure table

Let us assume the discount rate be 10%:

Statement showing calculation of NPV.
YEARS

CFATS

(Rs. In lakhs)

PVIF @ 10%

PVS

2009-2010

3705.48

0.909

3368.28

2010-2011

3950.28

0.826

3262.93

2011-2012

3987.96

0.7513

2996.15

2012-2013

4725.80

0.683

3227.72

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2013-2014

5888.61

0.620

3650.90
TOTAL:

LESS: Initial Investment:

NPV:

16505.98
4451.62
12054.98

ACCEPT-REJECT CRITERION:
The accept -reject decision of NPV is very simple. If the NPV is positive then the project should be
accepted and if NPV is negative then the project should be rejected
i.e .If

NPV > 0

(ACCEPT)
and

NPV < 0

(REJECT)

Hence in the case of NAGARJUNA CEMENTS project it is visible that the positive NPV shows
the acceptance and importance of the project.

1.

INTERNAL RATE OF RETURN METHOD: (IRR)

The internal rate of return method is also a modern technique of capital budgeting that takes
into account the time value of money. It is also known as

TIME ADGUSTED RATE

OF RETURN, DISCOUNTED CASH FLOW, DISCOUNTED RATE OF

RETURN, YIELD METHOD and TRAIL AND ERROR YIELD METHOD.
IRR is the rate the sum of discounted cash inflows equals the sum of discounted cash
outflows. It equals the present value of cash inflow to present value of cash outflows.

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In this method discount rate is not known, but the cash inflows and cash out flows are
known. It is the rate of return, which equates the present value of cash inflows to out flows
or it, is the rate of return, which renders NPV TO ZERO.
STEPS INVOLVED IN THE CALCULATION OF IRR:
1)

Calculation of NPV with given discount rate

2)

Calculation of NPV with assumed discount rate

3)

Select the higher NPV of both

4)

Let R be the higher discount rate

5)

Let R1 be the difference of discount rates

6)

Calculation of difference of P Vs (Always higher NPV-lower NPV)

IRR= LR +

LR-IF
---------------------------- X LR-HR
LR-HR.

7) Decision making(Accepting- Rejecting the proposal)

FORMULATION OF STEPS:
STATEMENT OF SHOWING CALCULATION NPV @88%,89%,90% UNDER
METHOD
(R s corers)
YEARS
Annual
Discount
Discount
Discount
CFA Ts
Rate-88%
Rate-89%
Rate-90%
PVF

PV

PVF

PV

PVF

PV

2009-2010

3705.48

0.5405 2002.81

0.5291

1960.56

0.526

1949.08

2010-2011

3950.28

0.2921 1153.87

0.2799

1105.68

0.277

1094.22

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IRR

2011-2012

3989.96

0.1579 630.01

0.1481

590.91

0.145

578.54

2012-2013

4725.80

0.0858 405.40

0.0783

370.03

0.076

359.16

2013-2014

5888.61

0.0461 271.46

0.0414

243.78

0.040

235.54

4463.55

4270.96

4216.54

From the above calculations the following can be observed.

PV 0f net cash flows at 88% is: 4463.55 lacks
PV 0f net cash flows at 89% is: 4270.96lacks

DECISION:
Since the initial investment RS.4451.626 lacks is lies between 88% and 89% the company
APTDC can determine the IRR as 88.5%
Hence IRR=88.5%

ACCEPT-REJECT CRITERION:
IRR is the maximum rate of interest, which an organization can afford to pay on capital invested
in, is accepted if IRR exceeds the cutoff rates and rejected if it is below the cutoff rate.
The cutoff rate of NAGARJUNA CEMENTS is 10%, which is less than the IRR i.e 88.5%
Hence the acceptance of NAGARJUNA CEMENTS is quiet a good investment decision taken by
management.
3. PROFITABILITY INDEX: (BCR OR PI)

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Profitability index method is also known as time adjusted method of evaluating the
investment proposals. Profitability also called as benefit cost ratio (B\C) in relationship between
present value of cash inflows and the present value of cash out flows. Thus
Present value of cash inflows
Profitability index =

-------------------------------------Present value of cash outflows.

(OR)

Profitability index

Present value of cash inflows

= - ---------------------------------------Initial cash outlay

CALCULATIONS OF BCR:
STEP1: Calculations of cash flows after taxes
STEP2: Calculations of Present values of cash inflows @10%.
STEP3: Application of the formula.

Statement for calculating of benefit cost ratio

YEARS
2009-2010
2010-2011

CFATS
3705.48
3950.28

PVIF @ 10%
0.909
0.826

2011-2012

3989.96

0.751

2996.15

2012-2013

4725.80

0.683

3227.72

2013-2014

5888.61

0.620

3650.90

TOTAL:

PVS
3368.28
3262.93

16505.98

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Profitability index

Present value of cash inflows

-------------------------------------Initial Investment

16505.98
= -----------------4451.62

= 3.707

Hence PI = 3.707 years.

ACCEPT-REJECT CRITERION:
There is a slight difference between present value index method and profitability
index method. Under profitability index method the present value of cash inflows and cash
outflows are taken as accept-reject decision.
I.e. the accept reject criterion is:
If Profitability Index
Profitability Index

> 1 (ACCEPT).
< 1

(REJECT).

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The acceptance of by the management is evaluated through Profitability Index

method of as the PI > 1 (i.e.3.707 years)
MERITS AND DEMERITS:
This method is slight modification of net present value method. The net present value
method has one drawback that, it is not easy to rank the projects on the basis of this method,
particularly when the costs of the projects differ significantly. To evaluate such projects, the
profitability index method is most suitable. The other advantages and disadvantages of this
project are similar to net present value method.

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CHAPTER-V
FINDINGS, SUGGESTIONS AND
CONCLUSION

FINDINGS:

It is observed that the company is able to increase its profits from year

The Gross profits from 2009 to 2014 increased from year to year

It is observed that the companies net worth is increasing considerably.

By observing the sources & applications, it is clear that the company is actively
increasing or standardizing its operations.

SUGGESTIONS

69

to year.

There are various developments taking in the industry to challenge so as

to the

company should develop as a fully fledged research and developed Department for
bringing technological changes and improvements in its design & process.

The management has physically verified the stock of finished goods and work-inprogress at the end of the year.

Company needs to identify the potential business revenue generation which results
to profit on operations.

In respect of service activities, there is a reasonable system of recording

receipts,

issues and consumption of materials and stores of allocation of materials consumed

to the relative job. Commensurate with its size and nature of its business.

CONCLUSION
The budgeting exercise in NAGARJUNA also covers the long term capital budgets,
including annual planning and provides long term plan for application of internal
resources and debt servicing translated in to the corporate plan.

70

 The scope of capital budgeting also includes expenditure on plant betterment, and
renovation, balancing equipment, capital additions and commissioning expenses on trial
runs generating units.
To establish a close link between physical progress and monitory outlay and to provide
the basis for plan allocation and budgetary support by the government.
The manual recommends the computation of NPV at a cost of capital / discount rate
specified from time to time.
A single discount rate should not be used for all the capacity budgeting projects.
The analysis of relevant facts and quantifications of anticipated results and benefits, risk
factors if any, must be clearly brought out.
Feasibility report of the project is prepared on the cost estimates and the cost of
generation.

ABBREVIATIONS
PI

Profitability index.

CB

Capital budgeting

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CFS

Cash flows.

CCFS

Cumulative cash flows.

EAT

Earnings after tax.

EBIT

Earnings before investment and tax.

CFAT

Cash flows after tax.

PVS

Present value of cash flows.

PVIF

Present value of inflows.

PBP

Payback period.

ARR

Average rate return.

NPV

Net present value.

IRR

Internal rate return.

B/C

Benefit cost ratio.

BIBLIOGRAPHY
Prasanna Chandra, Financial Management Theory and Practice, 2008.
6th Edition, Tata McGraw Hill.
I.M. Pandey : Financial Management, Vikas Publishers.

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 E.F. Brigham, and M.C Ehrhardt.., 2006, Financial Management Theory and Practice,
10th Edition, Thomson South-Western.
M.Y.Khan and P.K, Jain. Management Accounting, 2009, IV edition, Tata Mc Graw Hill,
New Delhi.

WEBSITE
www.google.com
www.Nagarjunacements.com
www.wickipedia.com

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