PROJECT REPORT ON CAPITAL BUDGETING AND WORKING

CAPITAL MANAGEMENT

A BUSINESS PROJECT THESIS

Submitted by

ANIRBAN SAMADDAR

In partial fulfillment for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

Under the guidance of

MR. SAYTABRATA DASH

SCHOOL OF MANAGEMENT STUDIES

NATIONAL INSTITUTE OF TECHNOLOGY CALICUT
NIT CAMPUS PO, CALICUT
KERALA, INDIA 673601

November, 2017

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 DECLARATION

I hereby declare that this submission is my own work and that, to the best of my
knowledge and belief, it contains no material previously published or written by
another person nor material which has been accepted for the award of any other
degree or diploma of the university or other institute of higher learning, except
where due acknowledgment has been made in the text.

Place: NIT Calicut Signature

Date: 30.061992 Name: Anirban Samaddar

Reg.No M160028MS

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 CERTIFICATE

This is to certify that the thesis entitled: Project on Capital Budgeting and Working
capital Management submitted by Sri Anirban Samaddar to National Institute of
Technology Calicut in partial fulfillment of the requirements for the award of the
degree of Master in Administration is a bona fide record of the research work
carried out by him under my(our) supervision and guidance. The content of the
project report, in full or parts have not been submitted to any other Institute or
University for the award of any other degree or diploma.

Signed by Research Supervisor(s) with name(s) and date

Mr. Satyabrata Dash,

AGM Finance, NALCO Bhubaneswar

Signature

Date

(Office seal)

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 ACKNOWLEDGEMENT

Firstly I would like to express our immense gratitude towards our institution
National Institute of Technology, Calicut which created a great platform to
attain profound technical skills in the field of MBA, thereby fulfilling our most
cherished goal.

I would thank my project guide, Mr. Satyabrata Dash, Assistant General

Manager, NALCO Bhubaneswar for giving me this privilege of working under
him and guiding me with his expressive knowledge and providing me all the
necessary information concerning the project.

I also want to thank Prof. K. P. Rajendran, course faculty for Finance, National
Institute of Technology, Calicut.

I am also thankful to our MBA course coordinator Dr. Muhammad Shafi, for
extending his cooperation in completion of Project as both mentor and internal
guide.

I wish to express sincere gratitude to our Head of Department, Dr. V.

Madhusudanan Pillai for providing the opportunity to pursue my management
course in this college.

Anirban Samaddar
MBA
School of Management Studies
National Institute of Technology,
Calicut

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 Abstract
This project aims to analyze the use of capital budgeting techniques for NALCO, Bhubaneswar
to undertake projects. Capital budgeting is an essential part of every company’s financial
management. Capital budgeting is a required managerial tool. One duty of financial manager is
to choose investment with satisfactory cash flows with high returns. Therefore a financial
manager must be able to decide whether an investment is worth undertaking and able to decide
and be able to choose intelligently between two or more alternatives.

The major objective of the study is to proper understanding the working capital of NALCO & to
suggest measures to overcome the shortfalls if any. Funds needed for short term needs for the
purpose like raw materials, payment of wages and other day to day expenses are known as
working capital. Decisions relating to working capital (Current assets-Current liabilities) and
short term financing are known as working capital management. It involves the relationship
between a firm’s short-term assets and its short term liabilities. By definition, working capital
management entails short-term definitions, generally relating to the next one year period.

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 Index

Sl. No. Contents Page No.

1 Acknowledgements 4
2 Abstract 5
3 Tables 7
4 Figures 8
Chapter1- Introduction
1.1 Company NALCO 10-13
1.2 The Problem 13-14
1.3 Importance of study 15
1.4 Scope of study 15-16
1.5 Objectives 16-17
1.6 Review of Literature 17-26
1.7 Methods used in the study 26-32
1.8 Conclusion 32-33
Chapter 2- Industry and Company Analysis
2.1 Aluminium industry and NALCO 35-39
2.2 Company History 39-45
2.3 Company Performance 46-48
2.4 Need and Limitations of study 48-49
2.5 Conclusion 49
Chapter 3-Data Analysis
3.1 Data 51-57
3.2 Results and Interpretations 58-71
3.3 Conclusion 71-72
Chapter 4- Summary and Findings
4.1 Summary and Findings 74-76
4.2 Suggestion and Conclusion 76-78
4.3 References 79-81

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 Tables
Table No. Title page no.
1.1 Use of capital budgeting practices in percentage 21-22
1.2 Capital budgeting techniques preferred by companies 23-25

2.1 List of countries by bauxite production 35-36

2.2 The quantum of aluminium production 38

2.3 Physical performance 46

2.4 Production and export 47

2.5 Financial performance 47-48

3.1 Balance sheet 52-54

3.2 Profit and Loss statement 55-56

3.3 Cash flow statements 57

3.4 Payback periods 58

3.5 Cash flow after tax 58

3.6 ARR of projects 59

3.7 NPV of projects 59

3.8 IRR of projects 60

3.9 PI of projects 61

3.10 Working Capital Management 61

3.11 Current ratio 62

3.12 Quick ratio 62

3.13 Working capital turnover ratio 63

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 Figures
Fig No. Title Page No.
3.1 NPV for the projects 64
3.2 Payback periods 65
3.3 IRR 65
3.4 PI 66
3.5 Comparison of NPV and IRR 67
3.6 Comparison of NPV and PI 67
3.7 Working Capital Management 68
3.8 Current ratio 69
3.9 Quick ratio 69
3.10 Total asset turnover ratio 70
3.11 Working capital turnover ratio 71

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 Chapter 1

Introduction

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1.1 Company-Nalco

National Aluminium Company Limited (NALCO) is a Navratna CPSE under Ministry of Mines.
It was established on 7th January, 1981 in the Public Sector, with its registered office at
Bhubaneswar. The Company is a group ‘A’ CPSE having integrated and diversified operations in
mining, metal and power with sales turnover of Rs 7,933 crore in financial year 2016-17.
Presently, Government of India holds 65.36% equity of NALCO.

NALCO is one of the largest integrated Bauxite-Alumina-Aluminium- Power Complex in the

Country. The Company has a 68.25 lakh TPA Bauxite Mine &21.00 lakh TPA(normative
capacity) Alumina Refinery located at Damanjodi in Koraput dist. of Odisha, and 4.60 lakh TPA
Aluminium Smelter & 1200MW Captive Power Plant located at Angul, Odisha. NALCO has
bulk shipment facilities at Vizag port for export of Alumina/Aluminium and import of caustic
soda and also utilises the facilities at Kolkata and Paradeep ports. The company has registered
sales offices in Delhi, Kolkata, Mumbai, Chennai and Bangalore and 11(eleven) stockyards at
various locations in the Country to facilitate domestic marketing.
.

The Company is low cost producer of metallurgical grade alumina in the World as per Wood
McKenzie report. With sustained quality products, the Company’s export earnings accounted for
about 46% of the sales turnover in the year 2016-17 and the Company was rated 2nd highest net
export earning CPSE in 2015-16 as per Public Enterprise Survey report.

With its consistent track record in capacity utilization, technology absorption, quality assurance,
export performance and posting profits, NALCO is a bright example of India’s industrial
capability.

NALCO is the first Public Sector Company in the country to venture into international market in
a big way with London Metal Exchange (LME) registration since May, 1989. The Company is
listed at Bombay Stock Exchange (BSE) since 1992 and National Stock Exchange (NSE) since

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1999. Besides, ISO 9001, ISO 14001, OHSAS 18000 & SA 8000 certification; the Company has
also adopted ISO 50001 standards for energy management system.

Following a New All-Weather Business Model, NALCO has extensive plans for brown field and
green field expansion projects, which include the ongoing 5th Stream Refinery Project of 1
MTPA capacity in existing Alumina Refinery at Damanjodi (Brownfield), development of
Pottangi bauxite mines, Utkal D&E coal mines in Odisha, establishment of 6 lakh TPA
greenfield and 5 lakh TPA brownfield Smelters in Odisha. The power for the proposed smelter
expansions are envisaged to be supplied from the 2400 MW coal based power project in JV with
NTPC.

As a responsible corporate entity the Company has given thrust to renewable energy sector by
commissioning 198 MW wind power plants andis in process of finalising 70 MW solar and 50
MW wind power projects. For backward integration, the Company is going ahead for a 2.7 lakh
TPA caustic soda plant in JV with Gujarat Alkalies& Chemicals Limited (GACL) in Gujarat. As
part of forward integration, NALCO has formed JV Company named ‘Angul Aluminium Park
Private Ltd’ (AAPPL) with Odisha Industrial Infrastructure Development Corporation (IDCO) to
give a boost to ancillary, upstream & downstream products related to aluminium industry. Land
acquisition for this is already completed and pricing mechanism of hot metal has been finalized.

Company’s long term security in terms of raw materials bauxite and coal got a boost with
allocation of Utkal-D&E with a minable reserve of about 160 million ton and commitment for
Pottangi bauxite deposit with a minable reserve of about 75 million ton.

The Company pursues its R&D activities fervently and has already filed 31 patents out of which
9 patents have been granted and 5 have been commercialized. As a part of its effort to convert
waste to wealth, the Company is endeavoring to salvage iron concentrate from red mud, Gallium
from spent liquor. The Company has also successfully commissioned a first of its kind de-
fluoridation process based on nano-technology to de-contaminate the effluent water of Smelter
solving a long standing fluoride contamination problem of the area.

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The Company is actively involved in playing a significant role in the socio-economic
development of the areas where it operates. Rehabilitation of displaced families, employment,
income generation, health care and sanitation of local people, education skill development,
providing safe drinking water, development of infrastructure, pollution control, environmental
measures, rural development, promotion of arts, crafts & culture and various humanitarian
goodwill missions have earned NALCO a place of pride in the corporate world. The Company
earmarks 2% of its average net Profit made during the three immediately preceding financial
years for CSR activities in compliance with provisions of the Company’s Act. Since inception,
NALCO has spent about Rs. 297 crore towards CSR activities till FY 2016-17. NALCO has set
up a standalone Foundation in 2010 for taking up its CSR activities in more empathetic manner
to fulfill the basic needs of the people of the periphery villages of its plants.

NALCO has always been the flag bearer of the Govt. welfare schemes. Under Swachh Vidyalaya
Abhiyan NALCO has constructed 473 toilets (133% of target) in Odisha & Andhra Pradesh
before time. The endeavor of NALCO was duly appreciated by MHRD. Joining hands with
Hon’ble Prime Minister’s call of Beti Bachao & Beti Padhao Abhiyan NALCO has adopted 181
poor & meritorious girls under Nalco Ki Ladli scheme. Under Prime Minister’s Swachh Bharat
Mission and Iconic Shrine Development Programme 13 projects have been taken up for Shri
Jagannath Temple, Puri & its surrounding to upgrade the infrastructure & maintain cleanliness.

In terms of nation building by empowering the youths, NALCO has committed to contribute
10% of CSR fund for Skill Development. A Centre of Excellence for Skill Development in
Mining sector has been inaugurated at Bhubaneswar to facilitate training of unemployed youth.

To provide better health-care services to inhabitants of periphery villages, NALCO is operating 4

Mobile Health Units (MHU) in 163 periphery villages at Mines & Refinery Complex,
Damanjodi and 1 MHU at Pottangi.

To bring tribal children of periphery villages to mainstream education, NALCO collaborated

with reputed residential institutions e.g. (i) Kalinga Institute of Social Science (KISS),

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Bhubaneswar, (ii) Koraput Development Foundation (KDF), Jeypore and (iii) Bikash Vidyalaya,
Koraput for providing quality education to the children of periphery villages of Damanjodi sector
in Koraput. The Company has so far inducted 755 children from 18 tribal dominated periphery
villages for residential education. The total cost towards study, lodging and boarding of those
students till they complete schooling is being borne by NALCO.

1.2 The problem

Capital Budgeting

There are several factors and considerations which make the capital budgeting decisions as the
most important decision of finance manager. The relevance and significance of capital budgeting
may be stated as follows:

Long term effect: Perhaps, the most features of a capital budgeting decisions and which makes
the capital budgeting so significant is that these decisions have a long terms effects on the risk
and return composition of the firm. These decisions affect the future position of the firm to a
considerable extent as the capital budgeting decisions have a long term implications and
consequences. By taking a capital budgeting decision, a finance manager in fact makes a
commitment into the future, both by committing to the future needs of funds of the projects and
by committing to its future implications. The disguising feature between short term decisions and
capital budgeting decisions is the time.

Substantial Commitment: the capital budgeting decisions generally involve large commitment of
funds and as a result substantial portion of capital funds are block in the capital budgeting
decisions. More attention is required for capital is required for capital budgeting decision. In
terms therefore, more attention is required for capital budgeting decisions, otherwise the firm
may suffer from the heavy capital losses in time to come. It is also possible that the return from
projects may not be sufficient enough to justify the capital budgeting decision.

Irreversible decisions: most of the capital budgeting decisions are irreversible decisions. Once
taken, the firm may not be in a position to revert back unless it is ready to absorb heavy losses

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which may result due to abandoning a project in midway. Therefore, the capital budgeting
decisions should be taken only after considering and evaluating each minute detail of the project,
otherwise the financial consequences may be far reaching.

Affect the capacity and strength to compete: the capital budgeting decisions affect the capacity
and strength of a firm to face the competition. A firm may lose competitiveness if the decision to
modernize is delayed or not rightly taken. Similarly, a timely decision to take over a minor
competitor may ultimately result even in the monopolistic position of the firm.

The problem in capital budgeting decisions may be as follows:

Future uncertainty: all capital budgeting decisions involve long term which is uncertain. Even if
every care is taken and the project is evaluated every minute detail, still 100% correct and certain
forecast is not possible. The finance manager dealing with the capital budgeting decisions,
therefore, should try to be as analytical as possible. The uncertainty of the capital budgeting
decisions may be reference to cost of the project, future, legal provisions, political situation etc.

Time Element: The implications of a capital budgeting decision are scattered over a long period,
the cost and benefit of a decision may occur at different point of time. as a result, the cost and
benefits of a capital budgeting decision are generally not comparable unless adjusted for the time
value of money. The cost of a project is incurred immediately; however, it is recovered in
number of years. These total returns may be more than the cost incurred, still the net benefit
cannot be ascertained unless the future benefits are adjusted to make them comparable with the
cost. Moreover, the longer the time period involved, the greater would be the uncertainty.

Measurement Problem: sometimes a finance manager may also face difficulties in measuring the
cost and benefits of projects in quantitative terms. For example: the new product produced to be
launched by a firm may result in increase or decrease due to other factor also.

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1.3 Importance of study
Capital budgeting is of paramount important in financial decision making:

o Decisions affect the probability of the firm, as they also have a bearing on the
competitive positions of the enterprises.
o A capital expenditure decision has its effect over a long time and inevitable affect’s the
company future cost structure.
o The capital investments firm acquires the long-lived assets that generate the firm’s
future cash flows and determine its level of profitability.
o Proper capital budgeting analysis is critical to a firm’s successful performance because
capital investments decisions can improve cash flows.
o Capital investment involves cost of majority of the firms have scarce capital resources.
o Capital decisions are not easily reversible, without much financial loss to the firm.
o To make financial analysis of various proposals regarding capital investment so as to
choose the best out of many alternatives proposals.

1.4 SCOPE OF THE STUDY

“Preparation of capital budgeting is an important tool for efficient and effective managerial
decisions.”

So in every organization they have to examine the capital budgeting process, therefore the financial
manager must be able to decide whether an investment is worth undertaking and able to decide and
be able to choose intelligently between two or more alternatives.

o The process by which company’s appraise investment decision, in particular by which

capital resources are allocated to specific projects.
o Capital budgeting requires firms to account for the time value of money and project risk,
using a variety of more or less formal techniques.
o Capital budgeting decisions affect the profitability in terms of interest of the firm. They also
have a bearing on the competitive position of the enterprise. It’s a diversification burden
o Capital investment involves cost and the majority of the firms have scarce capital resources.

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 o Capital budgeting is a complex process as it involves decisions relating to the investment of
huge resources for the benefit of achievement in future as it is always uncertain.
o Understanding the importance of the capital budgeting of different projects to be
undertaken by NAlCO.

1.5 Objective of the study

Capital Budgeting
The relevance of the capital budgeting process for the company lies in the fact that a significant
amount of money is committed for a long period. This implies that, after the decision to start a
project has been made, its reversal would probably culminate in partial or total loss of the
amount invested.

In addition, long-term decisions require an assessment of the value of money over time, and a
behavior analysis and relevance of costs.

In this context, capital budgeting practices are tools that assist managers in making long-term
decisions. The main reasons behind using capital budget techniques are to understand the
relative risk in long term investments.

o To know the important differences, that can arise in evaluating projects when
using Net Present Value (NPV), Internal Rate of Returns (IRR), Profitability
Index(PI).
o To analyze the strengths and weakness of existing Techniques in capital budgeting.
o To evaluate capital projects using traditional methods of investment appraisal and
discounted cash flows methods.
o To make recommendations and to improve further process of capital budgeting

Working Capital Management

The following are the main objectives of the present study:
o To determine the amount of working capital requirement by NALCO
o To calculate various ratios relating to working capital and compare with standard.
o To make an item wise study of the components of the working capital.

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 o To suggest the steps to be taken to increase the efficiency in management of working
capital.

1.6 Review of Literature

Capital Budgeting

The relevance of the capital budgeting system for the business enterprise lies in the fact that a big
sum of money is devoted for an extended period. This implies that, after the choice to start a task
has been made, its reversal might probably culminate in partial or general lack of the quantity
invested [4].

In addition, long-term decisions require an assessment of the value of money over time, and a
behavior analysis and relevance of costs. In this context, capital budgeting practices are tools that
assist managers in making long-term decisions. Such practices that make up the budget are
commonly divided into: investment analysis, discount rate setting and risk analysis.

Additionally the best set of practices to be used in capital budgeting has been extensive and dull.
That is because the existence of a single and comprehensive method to be used is questioned [5].
It turns out that, in fact, the decision maker must often choose among various practices, based on
numerous criteria, not always having a dominant option. The manager must not only assess each
option and discretion. They must also distinguish the importance related to each option and
discretion to make the final assessment [2].

The existence of various practices available for analysis of the investment budget has prompted
researchers to check which are the most adopted by organizations in the analysis of this budget
step. Studies on the subject have had so much simpler goals to identify which practice is used –
the more detailed the best –, seeking to explain what discount rates are used, how the cash flows
are measured and also which factors are important in capital budgeting decision.

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Capital budgeting practices are generally classified in the literature as: investment analysis,
discount rate setting and risk analysis. The more sophisticated practices for analysis of
investments are the ones of discounted cash flows and comprise Net Present Value (NPV),
Internal Rate of Return (IRR) and Profitability Index (PI). In turn, traditional practices include
the Payback Period (PP) and the Accounting Rate of Return (ARR).

Regarding the definition of the discount rate, the Weighted Average Cost of Capital (WACC)
stands as the most suitable practice to use, compared to the Cost of Capital (CC) and the Debt
Cost (DC). With regard to risk analysis, the simplest practices comprise setting discount rates.
As for the most sophisticated ones, they include sensitivity analysis, scenario analysis, decision
tree, Monte Carlo simulation.

In general, capital budgets in governments have multiple roles: as instruments of fiscal policy
and to improve the net worth of government, and—particularly in the area of economic
infrastructure—as vehicles for economic development [6]. This is usually achieved through
greater reliance on debt than on such conventional sources of financing as taxation.
Governments have introduced capital budgets to serve all these objectives, singly or
collectively, depending on the context. In some cases, more attention has been paid to capital
budgets as a way to reduce deficits caused by an excess of recurrent expenditures versus
revenues [7].

Despite the existence of sophisticated practices, many companies still rely on the simplest ones.
It is believed that the justification for the use of traditional practices is attributable to some
factors, which are: (i) ease of calculation (ii) lack of financial resources and limited use of
computer technology (iii) lack of sophistication from the management and (iv) a demand for a lot
of human resources [8], [9].

Capital budgeting is the process of investment opportunities analysis in long-term assets, which
are expected to produce benefits for more than a year. Thus, one sees that a way of avoiding the
execution of compromising investments is to use practices that reduce future risks and errors. To
conceptualize such tools, this literature review presents the main capital budgeting practices

18
identified in the literature, previous studies examining its adoption and theoretical assumptions
of the research [10].
Practices for investment analysis
The decision to make an equity investment makes up a process which comprises the analysis and
assessment of the various alternatives that meet the company’s specifications. After the
verification of viable alternatives, there will be an examination of which investment analysis
methodologies will be employed.
Practices for investment analysis can be divided into two major groups: (i) for screening; and (ii)
to select projects [11].

In the first category is the so-called classification or cutting methods such as, for example, the
Payback Period (PP) and the Accounting Rate of Return (ARR). In the second category are the
so- called robust methods, which take into account the time value of money, namely: Net Present
Value (NPV), Internal Rate of Return (IRR) and Profitability Index (PI) [12].

NPV is the most known and used robust technique of investment analysis [12]. NPV, as its name
suggests, is the concentration of all the values expected from a cash flow on date zero.

IRR differs from the NPV method because it determines the potential return on investment. IRR
is the rate that will make the present value of the proposed capital expenditure equal to the
present value of cash inflows [13].

Practices in capital investment that recognize the value of money over time and use discounted
cash flow techniques are preferred by most decision makers [14]. However, these non-discounted
methods are not yet used by some managers in practice. Among the most commons are the
Payback Period (PP) and the Accounting Rate of Return (ARR) [15].

An indicator widely used in the screening process is PP. In it, the amount of time needed for a
long-term project to recover or pay the initial investment is assessed. In other words, it measures
how long a project takes to pay itself. The two main weaknesses of PP lie in the fact of not
taking into account the value of money over time and disregarding everything that happens after

19
the recovery period. This last restriction penalizes all of those projects that have small initial
revenues but grow throughout their lives [16].

The Accounting Rate of Return (ARR) is the accounting measure of profit divided by the
accounting amount of the investment. The investment analysis that has as ARR a parameter is
usually employed by leaders of companies concerned with balance sheet results. In this method,
the average projected profits after depreciation and taxes are divided by the investment in the
project or the corresponding net worth and are then compared with the same measure for the
company as a whole or with a pattern of its choice [17].

Practices for setting the discount rate

The discount rate or cost of capital is the percentage that companies use to calculate, discounting
or composing the value of money of cash flows over time [18].

To calculate the discount rates, companies can use, among other practices, Debt Cost (DC), Cost
of Equity (CE) or Weighted Average Cost of Capital (WACC).

Indeed, it appears that the DC – third parties debt cost – is the discount rate that measures the
current cost for the company to take funds for project financing [19].

In turn, the CSP – cost of shareholder capital – is the return expected by the investor of their
capital invested in a given investment, and this return would be likely to be obtained in other
applications of the same market risk [19].

WACC may be understood as the most sophisticated required rate of return on any investment
proposal which have the same level of risk, such as the assets of a company.

With respect to discount rates, assert that the companies should preferably use the weighted
average cost of various funds and sources, including debt, preferred stocks and joint assets [20].
In general, it is recommended that companies employ differential rates for investment projects,
units or divisions. When analyzing the market return, the company can develop different rates for

20
 different and new investments, including projects outside its core business [19].

Studies on capital budgeting practices

Studies on capital budgeting practices have been made in recent decades in different continents,
countries and regions. The methodology used by the authors to question the companies, namely,
respondent managers, involves the use of questionnaires and/or interviews.

Initially, it is noted that there is a peculiarity of time when each search was performed, as well as
the location. Such factors may influence the perception of the results, given the diversity of
socio- economic scenarios, globalization, opening new markets, crises and technological
changes, among others.
Table 1.1 shows studies of capital budgeting that were conducted from 1978 to 2012, covering
some of the practices addressed, namely, for Investment Analysis, Discount Rate Setting and
Risk Analysis.

Table 1.1 [1]

Use of capital budgeting practices in percentage.
Authors Practices for investment analysis Location

Net Internal Rate Profitabili Payback Accounting Real

Present of ty Period Rate of Options Others
Value Return Index Return

Schall et al. (1978) 56 65 – 74 58 – – USA

Pike (1982) 39 57 – 81 49 – – UK
Pike (1985) 32 44 – 73 51 – – UK
Kwong (1986)* 58 60 21 83 57 – 11 MAL
Pike and Sharp (1989) 68 75 – – – – – UK
Pike (1988) 68 75 – 92 56 – – UK
Peel and Bridge (1998) 36 39 – 81 48 – 2 UK
White et al. (1997) 51 58 56 79 67 – – USA
Peel and Bridge (1999) 42 42 – 82 50 – – JAP
35 30 – 90 50 – – GER
Arnold and Hatzopoulos
(2000) 43 48 – 30 26 – – UK
Graham and Harvey (2001) 75 76 – 57 – – – USA
Ryan and Ryan (2002)* 96 92 44 74 33 11 – USA
Sandahl and Sjogren (2003) 52 23 – 78 21 0 6.3 SWE
Block (2003) 11 16 – 43 22 – 7.3 USA
Lazaridis (2004) 13 9 2.6 37 18 – – CYP
Brounen et al. (2004) 47 53 – 69 – – – UK
70 56 – 65 – – – NET
48 42 – 50 – – – GER
35 44 – 51 – – – FRA
Toit and Pienaar (2005) 72 72 11 41 36 – 17 AFR
Hermes et al. (2007) 89 74 – 79 2 – 2 NET

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 49 89 – 84 9 – 0 CHIN
Lam et al. (2007) 72 65 – 85 83 – – HK
Truong et al. (2008) 94 80 72 91 57 32 13 AUS
Correia and Cramer (2008)* 82 79 7.1 54 14 11 – AFR
Holmén and Pramborg
(2009) 69 62 – 79 65 11 – SWE
Brijlal and Quesada (2009) 36 28 – 39 22 – 10 AFR
Bennouna et al., 2010 94 88 – – – 8 – CAN
MID
Chazi et al., 2010 83 83 44 73 49 61 – EAST
Khamees et al. (2010)* 49 56 61 58 51 – – JORD
Hall and Millard (2010) 29 24 4.8 4.8 33 – – AFR
Viviers and Cohen (2011) 75 75 13 62 - – – AFR
Hartwig (2012)*,1 64 26 11 51 22 2.3 – SWE
Maquieira et al. (2012) 72 70 54 62 15 25 18 LAT
Souza and Lunkes (2013) 82 75 83 69 69 81 75 BRA
Pinto et al. (2013) 50 50 50 50 50 0 38 BRA
Zanini et al. (2013) 57 57 71 57 57 57 0 BRA
Lunkes et al. (2014) 100 100 57 100 86 100 – BRA

Capital budgeting practices: Indian scenario

The Indian business environment today has become highly turbulent with companies being
exposed to a multitude of risks such as business cycle risk, slowdown in demand, unantici-pated
actions of competitors, interest rate risk, inflation rate risk, unexpected technological
developments, government policy changes, and above all, exchange rate risks. As per RBI report
(2013–14), the Indian economy is facing serious challenges emanating from a sinking rupee,
stagnating eco-nomic growth (low GDP), depleting forex reserves, decreas-ing foreign
institutional investments (FIIs), mounting inflation, and a high fiscal and current account deficit.

Review of literature reveals a continuous progress by the global business as well as the Indian
corporate sector in the area of capital budgeting. However, for a long time, theory has
emphasised financial issues in investment project evalu-ation, not taking into account other
aspects. Some previous studies have also focussed on the importance of non-financial factors in
investment decision making [21]. Studies suggest safety, social concern for employees and
community, necessity of maintaining existing programmes, environmental responsibility (such as
pollution control), competitive position, corporate image, and legal requirements as important
qualitative considerations in evaluating investment proposals. Cost of capital practices also
demonstrated a growing trend of sophistication over the years.

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In the Indian corporate sector, the use of capital budgeting techniques has shifted dramatically
towards increasing adoption of sophisticated DCF techniques like NPV, IRR and ad-vanced
techniques like NPV with Real Options, MIRR and Simulation Analysis [22]. This does not
disregard the usage of old NDCF techniques especially payback period method, which is still
used widely as a secondary criterion.
An encouraging aspect of the study is that an overwhelm-ing majority (91%) of companies use
the theoretically sound DCF techniques in some form or the other. The results are in
conformance with sound corporate finance practices. The NDCF techniques are still rigorously
used, though, mainly as a secondary criterion. About 65 companies (84.5%) used a combination
of both NDCF and DCF techniques. These results are very close to those of who found that all
the respondent companies used both discounted and Non-DCF techniques to evaluate capital
expenditure [23].
Table 1.2 Capital budgeting techniques preferred by companies distributed according to capital
budgeting sizes and sales turnover [23].
Mea
Capital Size of capital Always Rarely Always, Mean Sales/turnover Always Rarely Always, n
or usag
budgeting budget or often never often or usage or often or never often or e
sometime sometime
tool (%) (%) s (%) (%) s
(%) (%)

Payback
period Below Rs. 50 Crore 64.0 16.0 84.0 3.60 <Rs. 100 Crore 20.0 40.0 60.0 2.40
Rs. 100–Rs. 500
Rs. 50–100 Crore 80.0 15.0 85.0 4.05 Crore 67.9 10.8 89.3 3.79
Rs. 500–Rs. 1000
Rs. 100–500 Crore 55.5 16.7 83.3 3.50 Crore 87.5 6.3 93.8 4.31
Rs. 500 Crore and Rs. 1000 Crore & 3.68
above 78.6 7.1 92.9 4.00 above 67.9 17.8 82.2 **
Total 68.9 14.3 85.8 3.77 Total 68.9 14.3 85.8 3.77
Accounting
rate Below Rs. 50 Crore 12.0 56.0 44.0 2.16 <Rs. 100 Crore 20.0 60.0 40.0 2.00
of return Rs. 100–Rs. 500
(ARR) Rs. 50–100 Crore 25.0 65.0 35.0 2.30 Crore 21.6 60.8 39.5 2.29
Rs. 500–Rs. 1000
Rs. 100–500 Crore 22.2 66.7 33.3 2.17 Crore 25.0 37.5 62.5 2.63
Rs. 500 Crore and Rs. 1000 Crore &
bove 14.3 71.5 28.6 2.00 above 10.7 82.1 17.8 1.82
Total 18.2 63.7 36.4 2.17 Total 18.2 63.7 36.4 2.17
Net present Below Rs. 50 Crore 48.0 32.0 68.0 3.08 <Rs. 100 Crore 60.0 20.0 80.0 3.80
value
(NPV) Rs. 100–Rs. 500
Rs. 50 -100 Crore 75.0 15.0 85.0 4.00 Crore 64.3 17.9 82.2 3.61
Rs. 500–Rs. 1000
Rs. 100 -500 Crore 72.2 11.1 88.9 4.00 Crore 68.8 25.1 75.1 3.69
Rs. 500 Crore and 4.29* Rs. 1000 Crore & 3.93
above 85.8 0.0 100.1 * above 71.4 10.7 89.3 *
Total 67.6 16.9 83.2 3.75 Total 67.6 16.9 83.2 3.75
Internal rate Below Rs. 50 Crore 52.0 28.0 72.0 3.32 <Rs. 100 Crore 60.0 20.0 80.0 3.40

23
of
return
(IRR) Rs. 100–Rs. 500
Rs. 50–100 Crore 65.0 30.0 70.0 3.50 Crore 60.7 28.5 71.4 3.50
Rs. 500–Rs. 1000
Rs. 100–500 Crore 83.3 16.7 83.3 3.94 Crore 62.6 31.3 68.9 3.50
Rs. 500 Crore and 4.57 Rs. 1000 Crore &
above 85.7 0.0 100.0 * above 82.1 7.1 92.8 4.18
Total 68.9 20.8 79.3 3.74 Total 68.9 20.8 79.3 3.74
Modified Below Rs. 50 Crore 8.0 72.0 28.0 1.96 <Rs. 100 Crore 20.0 80.0 20.0 1.80
internal rate Rs. 100–Rs. 500
of return Rs. 50–100 Crore 10.0 65.0 35.0 1.90 Crore 7.1 71.4 28.5 1.93
Rs. 500–Rs. 1000
(MIRR) Rs. 100–500 Crore 27.8 50.0 50.0 2.61 Crore 25.0 56.3 43.8 2.31
Rs. 500 Crore and 2.71 Rs. 1000 Crore & 2.57
above 7.1 28.6 71.4 * above 10.7 39.3 60.7 *
Total 13.0 57.2 42.9 2.23 Total 13.0 57.2 42.9 2.23
Hurdle rate Below Rs. 50 Crore 4.0 84.0 16.0 1.56 <Rs. 100 Crore 0.0 100.0 0.0 1.20
Rs. 100–Rs. 500
Rs. 50–100 Crore 10.0 85.0 15.0 1.65 Crore 10.7 85.7 14.3 1.61
Rs. 500–Rs. 1000
Rs. 100–500 Crore 11.2 66.7 33.4 1.89 Crore 18.8 62.6 37.6 2.06
Rs. 500 Crore and Rs. 1000 Crore &
above 35.7 42.8 57.1 2.64 above 14.3 60.7 39.3 2.11
Total 13.0 72.7 27.3 1.86 Total 13.0 72.7 27.3 1.86
Earnings Below Rs. 50 Crore 0.0 92.0 8.0 1.40 <Rs. 100 Crore 0.0 100.0 0.0 1.40
multiple Rs. 100–Rs. 500
approach Rs. 50–100 Crore 10.0 85.0 15.0 1.60 Crore 0.0 92.8 7.1 1.36
Rs. 500–Rs. 1000
Rs. 100–500 Crore 5.6 83.4 16.7 1.50 Crore 18.8 56.3 43.8 2.25
Rs. 500 Crore and Rs. 1000 Crore &
above 0.0 78.5 21.4 1.64 above 0.0 92.9 7.1 1.29
Total 3.9 85.7 14.3 1.52 Total 3.9 85.7 14.3 1.52
Adjusted Below Rs. 50 Crore 4.0 84.0 16.0 1.64 <Rs. 100 Crore 0.0 80.0 20.0 1.80
present Rs. 100–Rs. 500
value
(APV) Rs. 50–100 Crore 20.0 60.0 40.0 2.00 Crore 3.6 85.8 14.3 1.50
Rs. 500–Rs. 1000
Rs. 100–500 Crore 11.1 72.3 27.8 1.83 Crore 31.3 43.8 56.3 2.63
Rs. 500 Crore and Rs. 1000 Crore & 1.68
above 7.1 78.6 21.4 1.86 above 7.2 78.6 21.5 *
Total 13.0 72.7 27.3 1.82 Total 10.4 74.0 26.0 1.82
Discounted Below Rs. 50 Crore 24.0 56.0 44.0 2.44 <Rs. 100 Crore 40.0 20.0 80.0 3.20
payback- Rs. 100–Rs. 500
period Rs. 50–100 Crore 25.0 50.0 50.0 2.60 Crore 17.8 64.3 35.7 2.21
Rs. 500–Rs. 1000
Rs. 100–500 Crore 16.7 66.6 33.4 2.28 Crore 31.3 43.8 56.3 2.81
Rs. 500 Crore and Rs. 1000 Crore &
above 7.1 31.7 57.1 2.64 above 10.7 57.2 42.8 2.32
Total 19.5 54.6 45.5 2.32 Total 19.5 54.6 45.5 2.44
Profitability Below Rs. 50 Crore 16.0 64.0 36.0 2.12 <Rs. 100 Crore 20.0 60.0 40.0 2.20
index (PI) Rs. 100–Rs. 500
Rs. 50–100 Crore 25.0 65.0 35.0 2.40 Crore 10.7 64.3 35.7 2.04
Rs. 500–Rs. 1000
Rs. 100–500 Crore 5.6 50.0 50.0 2.28 Crore 31.3 56.3 43.8 2.56
Rs. 500 Crore and Rs. 1000 Crore &
above 21.4 50.0 50.0 2.64 above 14.2 53.6 46.3 2.50
Total 16.9 58.5 41.6 2.32 Total 16.9 58.5 41.6 2.32
NPV adjusted Below Rs. 50 Crore 0.0 92.0 8.0 1.44 <Rs. 100 Crore 0.0 100.0 0.0 1.60
with real Rs. 100–Rs. 500
options Rs. 50–100 Crore 10.0 70.0 30.0 1.80 Crore 0.0 89.3 10.7 1.39
Rs. 500–Rs. 1000
analysis Rs. 100–500 Crore 5.6 88.9 11.2 1.61 Crore 12.5 75.0 25.0 1.75

24
 Rs. 500 Crore and 2.21 Rs. 1000 Crore & 2.04
above 7.1 57.1 42.8 * above 7.1 67.9 32.1 *
Total 5.2 79.2 20.8 1.71 Total 5.2 79.2 20.8 1.71
Economic
value Below Rs. 50 Crore 0.0 100.0 0.0 1.16 <Rs. 100 Crore 0.0 100.0 0.0 1.20
added
(EVA) Rs. 100–Rs. 500
Rs. 50–100 Crore 15.0 65.0 35.0 2.05 Crore 3.6 92.9 7.2 1.39
Rs. 500–Rs. 1000
Rs. 100–500 Crore 11.0 88.9 66.6 1.67 Crore 18.8 68.8 31.3 2.06
Rs. 500 Crore and Rs. 1000 Crore &
above 7.1 71.4 28.5 2.00 above 7.1 78.6 21.4 1.79
Total 7.8 83.1 16.9 1.66 Total 7.8 83.1 16.9 1.66

Working Capital Management Literature review

Working capital, the money needed for day-to-day operations of a firm, is described as an
investment of the firm’s capital in current assets and the use of current liabilities to fund part of
the investment [24]. Management of these current assets and current liabilities is important in
creating value for shareholders [25]. If a firm can minimize its investment tied up in current
assets, the resulting funds can be invested in value-creating projects, thereby increasing the
firm’s growth opportunities and shareholders’ return [26]. However, management can also
confront liquidity problems due to underinvestment in working capital [25]. The ability of
financial managers to effectively manage receivables, inventories, and payables has a significant
impact on the success of the business.
If capital invested in cash, trade receivables, or inventories is not sufficient, the firm may have
difficulty in carrying out its daily business operations. This may result in declining sales and, in
the end, a reduction in profitability [27].
In the trade-off between liquidity and profitability the working capital management can play an
essential role not only in a firm’s profitability and risk, but also in its value. Decisions regarding
an increase in profitability are likely to involve increased risk, and risk-reducing decisions are
likely to result in a reduction in profitability [28].
Corporations can have a best possible amount of working capital that leads to their value
maximization. On the other hand, maintaining a huge inventory, readily granting credit to
customers, and being willing to wait a longer time to receive payment may result in higher sales
[26]. The downside of granting generous trade credit and maintaining high levels of inventory is
that money is stashed in working capital. On the liabilities side, postponing payment to suppliers
lets a firm to get the goods prior to paying, therefore increases spontaneous financing and thus

25
reduces the need for costly external funding [29].
Efficient working capital management involves managing short-term assets and short-term
liabilities in a way that provides balance between eliminating potential inability to cope with
short-term debts and avoiding unnecessary holdings in these assets [30]. Previous research has
documented that working capital management influences a firm’s profitability [26], [27]. It is
also reported in previous studies that efficient working capital management is one of the crucial
characteristics of financially flourishing firms. Most of the empirical research into the
relationship between working capital management and profitability has confirmed the notion that
reducing current assets in comparison to total assets reduces working capital investment;
therefore, it would positively affect the firm’s profitability. Many scholars have measured
working capital using the cash conversion cycle [27], [29].
Firms which have adequate working capital in relation to their operational size are performed
better than those firms which have less than the required working capital in relation to their
operational size. If firms actual working capital is below the required working capital in relation
to their operational size, firms are forced to produce below their optimal scale and this create
problem to run day to day activities smoothly, so this lead firms to generate low return on their
investment [30].
Working capital management strategies may be implemented to minimize investment in current
assets, at the same time maximize use of financial leverage at the firm’s acceptable financial risk
appetite and concluded that aggressive working capital management policy reflected in low
investments in current asset influences net income positively [31]. There is a strong significant
relationship between the measures of Working Capital Management and corporate profitability.
1.7 Methods used in the study
Capital Budgeting

DATA ANALYSIS TECHNIQUES:

o Payback period
o Accounting Rate of Return
o Profitability Index
o Net Present Value
o Internal Rate of Return.

26
 o Cash flow after tax

TECHNIQUES OF CAPITAL BUDGETING

Capital budgeting decision process involves estimation of cost and benefits of a proposal,
estimation of required rate of return, and evaluation of different proposals in order to select
one. These cost and benefits are expressed in terms of cash flows arising out of a proposal.
Once the proposal completed we can discussed the various techniques to arrive at the optimal
investment decision.

The method of evaluation of capital expenditure proposal can be classified in to two broad
categories:

Traditional or Non-Discounting Techniques.

Discounted Cash Flows or Time Adjusted Techniques.

TRADITIONAL AND NON-DISCOUNTING TECHNIQUES:

Pay Back Period Method.

Post Pay Back Profitability Method.

Pay back reciprocal Method.
Rate of Return Method or Accounting Method (ARR).

DISCOUNTING CASH FLOWS OR TIME ADJUSTE TECHNIQUES:

Net Present Value Method (NPV).

Internal Rate of Return Method (IRR).

Profitability Index or benefit cost ration Method (PI).

TRADITIONAL AND NON-DISCOUNTING TECHNIQUES:

The traditional techniques do not discount the cash flows to find out their present worth.

27
There are two such techniques available to find out. They are:

PAY BACK PERIOD METHOD:

The pay back sometimes called as payout or pay off period method represents the length of
period of cash proceeds produce by the investment to be equal to the original cash outlay, i.e.
the time required for the project to pay for itself back within a certain period. This method is a
traditional method of evaluation of capital budgeting decisions.

PAY BACK PERIOD = INITIAL INVESTMENT

ANNUAL CASH INFLOWS

It is the ratio of the initial fixed investment over the annual cash inflows for the recovery period.

AVERAGE RATE OF RETURN OR ACCOUNTING RATE OF RETURN(ARR):

Under this method average profit after tax and deprecation is calculated and then it is divided
by the total capital outlay or total investment in the project. In other words it establishes the
relationship between average annual profits to total investment.

ARR= AVERAGE ANNUAL PROFIT AFTER TAX × 100

AVERAGE INVESTMENT IN THE PROJECT

DISCOUNTING CASH FLOWS OR TIME ADJUSTE TECHNIQUES:

The distinguishing characteristic of the discounted cash flow capital budgeting techniques is
that they have taken into consideration the time value of money while evaluating the cost and
benefits of the project.

NET PRESENT VALUE (NPV) METHOD:

28
The NPV method is a modern method of evaluating investment proposals. This method takes
into consideration the time value of money and attempts to calculate the return on investment
by introducing time element.

PRESENT VALUE (PV) = 1

(1+r)n

INTERNAL RATE OF RETURN (IRR) METHOD:

IRR is a modern technique of capital budgeting that takes into account the time value of
money. It is also known as time-adjusted rate of return, discounted rate of return or yield
method. In this method, the cash flows of the project are discounted at return as a suitable rate
by hit and trail method, which equates the NPV so calculated to the amount of investment.
Under this method, since the discount rate is discounted internally, it is called as internal rate of
return method.

It is defined as the discount rate, which equates the aggregate present value, i.e., net cash
inflows after tax (CFAT) with the aggregation present value of cash outflow of a project.

PROFITABILITY INDEX METHOD (OR) BENEFIT-COST RATIO:

It is also a time – adjusted method of evaluating the investment proposals. Profitability Index is
also called a Benefit- Cost Ratio or Desirability Factor is the relationship between the present
values of cash inflow at the required rate of return to the initial cash outlay of the investment.
The formula to calculate Benefit – Cost Ratio or Profitability Index as follow:

PROFITABILITY INDEX (PI) = PV OF CASH INFLOWS

INTITAL CASH OUTLAY

29
Working capital management

o Calculation of working capital

o Current assets
o Current liabilities
o Current ratio
o Acid test or quick ratio
o Total asset turnover ratio
o Working capital turnover ratio

CURRENT ASSET
Total assets are basically classified in two parts as fixed assets and current assets.
Fixed assets are in the nature of long term or life time for the organization. Current assets convert
in the cash in the period of one year. It means that current assets are liquid assets or assets which
can convert in to cash within a year

CURRENT LIABILITIES
Current liabilities mean the liabilities which have to pay in current year. It includes sundry
creditor’s means supplier whose payment is due but not paid yet, thus creditors called as current
liabilities. Current liabilities also include short term loan and provision as tax provision. Current
liabilities also includes bank overdraft. For some current assets like bank overdrafts and short
term loan, company has to pay interest thus the management of current liabilities has importance.

CURRENT RATIO:
The current ratio is calculated by dividing the total current assets by total current liabilities.

Current Assets
Current ratio =
Current Liabilities

30
Current ratio may be defined as the relationship between current assets and current liabilities.
This ratio also known as working capital ratio is a measure of general liquidity & most widely
used to make the analysis of a short-term financial position or liquidity position of the firm.
Current assets include cash and those assets, which can be converted into cash within a year such
as marketable securities, debtors and inventories, bills receivable and prepaid expenses. All
obligations maturing within a year are included in current liabilities. Current liabilities include
creditors, Bills payable accrued expenses, short-term bank loans. Income –tax liabilities and
long-term debt maturing in the current year.
As a conventional rule a current ratio of 2:1 or more is considered to be satisfactory it represents
the margin of safety for creditors. An extremely high ratio of current asset to current liability is
an indication of slack management, poor credit management and excessive inventories for the
current requirement.

Acid Test or Quick Ratios

This ratio is calculated by dividing Total liquid assets by Total current liabilities.
Quick Assets
Quick Ratio = -------------------------
Current Liabilities
Acid test or quick ratio is a more rigorous test of liquidity than the current ratio. The term
‘’Liquidity” refers to the ability of a firm to pay its short-term obligations as and when they
become due. Quick ratio may be defined as the relationship between quick liquid assets and
current or liquid liabilities. An asset is liquid if it can be converted into cash immediately or
reasonably soon without a loss of value. Cash in hand and cash at bank are the most liquid assets.
The other assets, which can be included in the liquid assets, are bills receivable, sundry debtors,
marketable securities and short-term or temporary investments.
Generally a quick ratio of 1:1 is considered satisfactory. Usually a high acid test ratio is an
indication that the company is liquid and has the ability to meet its current liabilities in time and
on the other hand, a low quick ratio represents that the company’s liquidity position is not good.
A company with a high value of quick ratio can suffer from the shortage of funds if it has slow
paying, doubtful and long duration outstanding book debts (receivable) and it can really

31
prospering with a low value of quick ratio if it is realizing cash efficiently from inventories and
paying its current obligations in time.

TOTAL ASSETS TURNOVER RATIO

The total assets turnover ratio is calculated by dividing Net sales by total assets.
Net Sales
Total assets turnover ratio =

Total Assets
The total assets turnover ratio is a significant ratio since it shows the firm’s ability of generating
sales from all the financial resources committed to the company. As this ratio increases there is
more revenue generated per rupee of total investment in assets.

WORKING CAPITAL TURNOVER RATIO

NET SALES
Working Capital Turnover Ratio = ---------------------
NET WORKING CAPITAL

Net working capital = Current Asset – Current Liability

1.8 Conclusion

o The study is conducted in short period. The time period of study has been limited to 60
days. The period is small to study the practical investment decision of a company like
NALCO.
o It does not consider all the new unapproved schemes.

32
o The study is conducted with the available data, gathered from annual reports of
NALCO.
o The formula has been used according to the availability of the data.
o All the techniques of capital budgeting presume that various investment proposals
under considerations are mutually exclusive which may not practically be true in some
particular circumstance.
o Uncertainty and risk pose the biggest limitation to the technique of capital budgeting.
o Since the procedures and policies of the company does not allow disclosing of all
financial information and has to be completed with the available data collected with the
maximum effort.

33
 Chapter 2
Industry and Company Profile

34
2.1 Alumium Industry
In the Earth's crust, aluminium is the most abundant (8.3% by weight) metallic element and the
third most abundant of all elements (after oxygen and silicon). Because of its strong affinity to
oxygen, it is almost never found in the elemental state; instead it is found in oxides or silicates.
Although aluminium is an extremely common and widespread element, the common aluminium
minerals are not economic sources of the metal. Almost all metallic aluminium is produced from
the ore bauxite (AlOx(OH)3–2x). Bauxite occurs as a weathering product of low iron and silica
bedrock in tropical climatic conditions. Large deposits of bauxite occur in Australia, Brazil,
Guinea and Jamaica and the primary mining areas for the ore are in Australia, Brazil, China,
India, Guinea, Indonesia, Jamaica, Russia and Suriname.

Table 2.1 presents lists of countries by bauxite production in 2015.

Table 2.1 List of countries by bauxite production [31]
Ran Bauxite
k Country/Region (tonnes)

World 213,000,000

1 Australia 62,428,000

2 Brazil 25,460,700

3 India 22,999,000

4 China 21,600,000

5 Indonesia 16,000,000

6 Jamaica 14,567,738

8 Russia 6,053,900

9 Suriname 5,273,195

10 Venezuela 5,000,000

11 Kazakhstan 4,962,600

12 Guyana 2,248,928

35
13 Greece 2,220,000

14 Sierra Leone 1,169,036

15 Ghana 1,033,368

16 Turkey 863,404

17 Bosnia and Herzegovina 800,546

18 Montenegro 667,053

19 Hungary 515,061

20 Iran 500,000

21 France 160,000

22 Malaysia 156,785

23 United States 128,742

24 Vietnam 80,000

25 Pakistan 18,082

26 Mozambique 11,800

27 Tanzania 5,003

Aluminium Industry: Indian scenario [33]

First attempt to manufacture aluminium in India was started when Aluminium Corporation of
India was formed in 1937. But its first venture to produce aluminium was delayed. Meanwhile,
Indian Aluminium Company started its production at Aluminium in Kerala.
In 1958, Hindustan Aluminium Corporation was incorporated.
36
 1. Indian Aluminium Company (I.AC.): First Indian company established to manu facture
aluminium.
2. Aluminium Corporation of India (A.C.I.): One of the oldest aluminium plant in India is
situated at Jaykaya Nagar in West Bengal.
3. Hindustan Aluminium Corporation (H.A.C.): Hindustan Aluminium Corpora tion has its
plant at Renukot in Uttar Pradesh, since 1962, performance of this plant is very
satisfactory
4. Madras Aluminium Co.: Started production in 1965.
5. BALCO: Bharat Aluminium Company has its plant at Korba in Madhya Pradesh and
Koyna in Maharashtra. The final phase of this plant was completed and the plant was
commissioned in 1984. Due to depletion of the reserve in earlier mines of Amarkantak
plateau, it is now trying to collect bauxite from Panchpatmali mine of NALCO.
6. NALCO: National Aluminium Company Limited was incorporated only in 1981, to
exploit large reserve in the bauxite mines of Panchpatmali of Koraput district. Alumina
processing plant is located at Angul of Dhenkanal district.
Since the beginning of aluminium industry in India, within a span of only 40 years, production
increased 90 times from 1950. This is indeed a rare distinction achieved by any industry. At
the initiation of the First Five Year Plan, total Indian aluminium production was only 4
thousand tones. Due to heavy demand of energy in the conversion of alumina from bauxite, it
was not possible to raise the production, despite massive bauxite reserves in the country.
Special care had been taken to improve hydel-power projects for the development of
aluminium industry as hydel power is much cheaper and economic than any other form of
energy.
Table 4 shows the present aluminium production in India.

37
Table 2.2 The quantum of aluminium produced by the major aluminium producers during the last three years and
current year are given below [33].

State Production Unit Production (in thousand tonnes)

2011-12 2012-13 2013-14 2014-15(P)
upto December,
2014
Chhattisgarh Bharat Aluminium Company 246 248 253 240
Limited (Korba)
Madhya HINDALCO (Singaruli) -- -- 56 127
Pradesh
Odisha National Aluminium Company 413 403 316 244
Limited(Angul)
Vedanta Aluminium 429 527 542 406
(Jharsuguda)
HINDALCO 156 145 153 159
(Hirakud&Sambalpur)
Uttar Pradesh HINDALCO (Renukoot) 418 397 403 307
TOTAL 1662 1720 1723 1483

Aluminum industry NALCO

The 2, 30,000 tpa capacity Aluminium Smelter is located at Angul in Orissa. Based on energy
efficient state-of-the-art technology of smelting and pollution control, the Smelter Plant is in
operation since early 1987.
Presently, the capacity is being expanded to 3, 45,000 tpa.

o Advanced 180 KA cell technology

o Micro-processor based pot regulation system
o Fume treatment plant with dry-scrubbing system for pollution control and fluoride salt
recovery Integrated facility for manufacturing carbon anodes, bus bars, anode tems etc.
o 4 x 35 tone and 4 x 45 tone furnaces and 2 x 15 tph and 2 x 20 tph ingot casting machines
o 4 x 45 tonne furnaces and 2 x 9.5 tph wire rod mills
o 2 x 45 tonne furnaces and 60/42 per drop billet casting machine
o 2 x 1.5 tonne induction furnace with a 4 tph alloy ingot casting machine
o 26,000 tpa strip casting machines
With the acquisition and subsequent merger of International Aluminium

38
Products Limited (IAPL) with Nalco, the 50,000 tpa export-oriented Rolled Products Unit is all
set to produce foil stock, fin stock, can stock, circles, coil stock, cable wraps, standard sheets and
coils

CAPTIVE POWER PLANT

Close to the Aluminium Smelter at Angul, a Captive Power Plant of 720 MW capacity,
comprising 6 x 120 MW clusters, has been established for firm supply of power to the Smelter.
Presently, the capacity is being expanded to 960 MW.
The salient features:
o Micro-processor based burner management system for optimum thermal efficiency
o Computer controlled data acquisition system for on-line monitoring
o Automatic turbine run-up system
o Specially designed barrel type high pressure turbine
o Electrostatic precipitators with advanced intelligent controllers
o Wet disposal of ash
The water for the Plant is drawn from River Brahmani through a 7 km long double circuit
pipeline. The coal demand is met from a mine of 3.5 million tpacapacity opened up for Nalco at
Bharatpur in Talcher by Mahanadi Coalfields Limited. The Power Plant is inter-connected with
the State Grid.

2.2 Company History

National Aluminium Company (Nalco) was incorporated in 1981, as a public sector enterprise
under the Ministry of Mines.
The total capital cost of Rs 2408 crore was funded through the Government of India's
contribution of Rs1289 crore and a euro–dollar loan from a consortium f Iinternational banks of
Rs1119 crore.
The company has Asia's largest integrated aluminium complex, encompassing bauxite mining,
alumina refining, aluminium smelting and casting, power generation, rail and port operations.
Commissioned during 1985–87, Nalco has emerged to be a star performer in production, export
of alumina and aluminium, and more significantly, in propelling a self–sustained growth.

39
Nalco, since its inception, has taken adequate steps for pollution control and effective
environment management.
Nalco's technology associate Aluminum Pechiney (AP), France, with its experience of stringent
pollution control standards in Europe, has ensured eco–friendly process technology. With the
growing environmental awareness in India and framing of stringent and statutory regulations,
Nalco achieved all statutory clearances before starting its production.
Strict adherence to approved EMP and constant monitoring has helped Nalco to achieve
considerable success in the field of environment management.
The company’s bauxite mine is located at Panchpatmali Hills in Koraput district of Orissa. It is a
fully mechanized open–cast mine, in operation since 1985. It serves feed–stock to alumina
refinery. The capacity of mine has increased from 24,00,000 tonnes per year (tpy) to 48,00,000
tpy.
Nalco’s alumina refinery is located at Damanjodi in Koraput district, which began operations in
1986. It is amongst the top ten alumina refineries in the world. The refinery operates three
production streams, each of 5.25 lakh tpy and 3x18.5 MW co–generation of power. The capacity
of the refinery has increased from 8,00,000 tpy to 15,75,000 tpy.
Its aluminium smelter is located at Angul in Orissa, which is in operation since 1987. It
comprises integrated casting & rolling facilities and energy–efficient state–of–the–art Pechiney
technology (France). The capacity of smelter has increased from 2,18,000 tpy to 3,45,000 tpy
A captive power plant is located close to smelter. It also has captive rail system for coal transport
from Talcher Coalfields. The plant feeds uninterrupted power to smelter and is connected to state
grid for sale of surplus power. The capacity of power plant has increased from 600 MW to 960
MW
Port facilities are also located on the inner harbour of Visakhapatnam Port with mechanized
storage and ship handling facilities for exporting alumina and importing caustic soda. The
storage capacity is of 75,000 tonnes of alumina and 30,000 tonnes of caustic soda and can handle
up to 1 million tonnes of alumina export per year.
Nalco operates a rolled product unit, which is a 100% export oriented unit and is located close to
the smelter plant at Angul. The company acquired this unit from IAPL in March 2000. It has a
product mix of aluminium alloy coils and sheets with capacity of 50,000 tpy.

40
Exports – The company exports alumina products to countries namely USA, Georgia, Iran,
China, Russia, Australia, Indonesia and the UAE.
It exports aluminium products to countries namely Italy, Bahrain, Germany, China, Philippines,
Pakistan, Sri Lanka, Nepal, Bangladesh, Myanmar, Thailand, Malaysia, Singapore, Indonesia,
Hong Kong, Taiwan, South Korea, UAE, Japan, Turkey, USA and Vietnam
The R&D centres at Angul and Damanjodi are recognized by Ministry of Science and
Technology, Government of India.
1980
A Memorandum of Understanding was signed in January, by the Government of India for
technical collaboration and financing of an integrated alumina-aluminium complex with
Aluminium Pechiney of France. NALCO presently has its units of captive power plants (each of
120 MW capacity). To meet the increased demand for power, a 6th plant of 120 MW was
undertaken.

1981
The Company was Incorporated on 7th January, as a wholly owned enterprise of Government of
India. The Company Manufacture aluminium hydrate, calcined alumina, aluminium ingots.

1993
NALCO signed a project co-operation agreement with Hydro Aluminium AG, Norway to carry
out a joint study for feasibility of setting up a 100% export oriented aluminium plant of 0.9
million tonnes per annum capacity. 1,28,86,19,200 No. of shares allotted.

1994
The Company proposed to undertake expansion of bauxite mine from 2.4 million t.p.a. to 4.8
million t.p.a. and alumina refinery from 8,00,000 t.p.a. to 13,50,000 t.p.a. This was subject to
necessary clearances. It was proposed to undertake expansion of aluminium smelter capacity
from 2,30,000 t.p.a. and that of captive power plant from 6 x 120 MW to 8 x 120 MW. To
augment the smelting capacity, debottlenecking of smelter by addition of balancing equipment
was under implementation. The debottlenecking programme was to enhance the smelter capacity
of 2,30,000 tpa. The Company in collaboration with various government agencies was setting up

41
facilities for extraction of gallium metal with an annual capacity of 950 kg. at Damanjodi unit.

1995
A Smelter plant at Angul was undertaken with a capacity of 26000 TPY of strip casting facility.
A special Alumina plant at Damanjodi was undertaken with a capacity of 20,000 TPY. A 10,000
TPY detergent grade Zeolite (Zeolite-A) plant at Damanjodi, was undertaken. A 1000 Kg. per
annum 5 N purity Gallium plant at Damanjodi based on indigenous technology was undertaken.
The Company is planning to set up a 100% Export Oriented Unit for aluminium rolled products
based on its own liquid metal in equity participation with International Aluminium Products Ltd.
(IAPL). It was proposed to set up a 100% EOU for aluminium rolled products based on liquid
metal. As at 31st March 350,00,900 equity shares were disinvested.

1996
The proposal to expand the capacities of bauxite mine at Panchpatmali from 24 lakh tonnes to 48
lakh tonnes and alumina refinery at Damanjodi from 8 lakh tonnes to 15.75 lakh tonnes was
approved by the Government on 18.12.1996. The Company's proposed to expand its smelting
capacity to 3.45 lakh tonnes and power generation from 720 MW to 840 MW was cleared by
PIB. However, CCEA approval was awaited. The Company also explored the possibility of
diversification in terms of few other value added products such as special grade, alumina,
Zeolite, aluminium cast wheel etc. The stock yard at Jagadhri in Haryana was closed down
following insufficient sales while a new stockyard was opened in Bhiwandi near Mumbai. Also,
a market development cell was set up to explore and define marketing strategies for speciality
products.

1997
Subject to necessary approvals being obtained the company proposed to convert 50% of its
existing equity capital into debt. The public sector aluminium giant, National Aluminium
Company (NALCO) set up in technical collaboration with Pachiney, France is the largest
integrated aluminium company in Asia. National Aluminium Company Ltd (Nalco), country's
largest aluminium company, has opened a stockyard at Bhiwandi in Thane district. National
Aluminium Company (Nalco), India's largest producer and exporter, got the ISO 14001
certification for environmental excellence. The National Aluminium Company, Bhubaneswar,

42
signed an agreement of national importance with the NRDC for licensing from the NRDC the
knowhow to manufacture gallium from the sodium alumina plant. National Aluminium
Company (NALCO) has signed a pact with National Research Development Corporation
(NRDC) for manufacturing gallium with indigenous technology. The public sector National
Aluminium Company (Nalco) has entered into an agreement with National Securities Depository
Ltd, (NSDL) for admitting its shares in the depository system and for dematerialising the shares.
The Union Cabinet is set to clear a joint venture aluminium company with Nalco Ltd. and
Mukand Ltd. as partners. The National Aluminium Company Limited (Nalco), staved off a major
disaster in its smelter plant at Anugul, when the workers called off a three-day cat-call strike in
protest against what they called `barbaric' attack on them by the Central Industrial Security Force
(CISF).

1998
The company has been forced to curtail its power generation capacity due to a drastic reduction
in intake by Gridco - the nodal power transmission and distribution agency in Orissa.
National Aluminium Company, the country's leading manufacturer, exporter of alumina and
aluminium, has bagged the top export award of Chemical and Allied Products Export Promotion
Council (Capexil) for 1997-98. This is the 11th time in succession that Nalco has won this
award.

1999
The Investment Information and Credit Rating Agency (Icra) has assigned a LAAA rating to the
National Aluminium Company Ltd's (Nalco) Rs 644-crore (Rs 100 crore = Rs 1 billion) non-
convertible debenture (NCD) issue. The rating indicates highest safety.
The National Aluminium Company Ltd (NALCO) a Government of India undertaking is setting
up a plant for extraction of gallium at its aluminium refinery complex at Damanjodi..

2000
Icra has retained the Laaa rating for the Rs 642.58-crore non-convertible debenture issue of the
company, while it has assigned an A1 rating to the Rs 5-crore CP issue of Narmada Chematur
Petrochemicals.

43
The Company will commission the plant of its recently-acquired Indian Aluminium Products
Ltd. by March 2001 and produce value-added aluminium products like sheets and rolls.
The Officers went on an indefinite hunger strike from November 17.

2001
A public sector aluminium company making a foray into detergent business sounds out of place.
But if senior officials of National Aluminium Company (Nalco) are to be believed, the country’s
second largest aluminium company will be doing that at its zeolite plant.

2002

Nalco's alumina refinery capacity increased to 15.75 lakh tone. Department of Company Affairs
(DCA) approves the merger of International Aluminium Products Ltd (IAPL) with National
Aluminium Company Ltd (Nalco) Mr C.V. Venkataramana appointed as Chairman-cum-
Managing Director of National Aluminum Company Ltd Cabinet panel approves Nalco
disinvestment roadmap. Hindalco acquires 4% stake in Nalco. Govt decides to postpone Nalco
divestment. LN Mittal group quits Nalco disinvestment race. Chinese metals group, Yankuang
withdraws from Nalco disinvestment process. Govt. calls off due diligence process for Nalco
Commissions one unit of Captive Power Plant with a capacity of 120 MW and 120 pots of
Smelter with a capacity to produce 57,500 MT of Aluminium per year

2004
National Aluminium Company Limited (NALCO) has informed that Madras Stock Exchange
Limited vide its letter dated December 22, 2003 have withdrawn the admission granted to
dealings on their exchange for the securities of NALCO i.e both equity shares and 14.5% Non-
convertible Redeemable Secured Debentures and the quotation for the said securities have been
removed from the Daily Official List of the Exchange w.e.f December 22, 2003, in terms of
SEBI (Delisting of Securities) Guidelines 2003. Nalco open offer to acquire 20% stake for
Ondeo Nalco India. The trading in 14.5% Non-covertiable redeemable secured debentures
(Series-N2) shall be suspended w.e.f. Febrauary 13, 2004 on account of part redemption:

2005

44
Nalco inks agreement with NMDC. Nalco gets five-star export house status. Nalco gets Capexil
award. Nalco, Jindal cleared to set up aluminium plants in Vizag. Nalco to build coal block in
Orissa

2010
National Aluminium Company Ltd (Nalco), India's third-largest aluminium maker that also
exports alumina and aluminium via much-watched global tenders, has bagged the approval for a
new bauxite mining lease in eastern India, as per a senior government official. National
Aluminium Company Ltd. (NALCO) has bagged EEPC (Engineering Export Promotion Council,
Eastern Region) Gold Trophy, as Top Exporter in the Large Enterprise Category for outstanding
export performance during 2007-08. National Aluminium Company Ltd. (NALCO) has received
the Best Listed Central Public Sector Enterprises Award.

2011
National Aluminium Company Limited (NALCO) has decided to invest a sum of Rs. 274 crore
in a Wind power project at Gandikota in Kadapa district of Andhra Pradesh. One of the world's
leading and the sixth largest, integrated aluminium complex, National Aluminium Company
Limited (Nalco) CMD, B L Bagra said that the company will acquire a stake of 49% for a price
of Rs 1,700 crore in the Kakrapar nuclear power plant whose size would be 2X700 MW in phase
II.

2015 -NALCO awarded for proactive climate change action -Nalco institutes awards for Eminent
Sanskrit Scholars -Navratna Nalco has instituted ‘NALCO Smiles Award’National Aluminium
Company Limited (NALCO) has bagged the Odisha Inc Best Brand Award -NALCO’s Refinery
bags Business Excellence Star Award -NALCO bags Performance Excellence Award -NALCO
institutes Green Awards for Engineering Excellence

2016 - NALCO signs MoU with IMIDRO for Aluminium smelter in Iran - NALCO inks MoU
with NTPC for Power Projects and Business Collaborations.

45
2.3 Company Performance

Physical Performance

Table 2.3

Production Unit 2016-17 2015-16

Bauxite MT 68,25,000 63,40,142
Alumina Hydrate MT 21,00,100 19,53,000
Aluminium MT 3,87,422 3,72,183
Electricity (Net)-CPP MU 6,066 5,841
Wind Energy MU 206 156

Bauxite Mines has achieved highest ever production with Bauxite transportation of 68.25 lakh
MT (achieving 100% capacity utilisation) and has surpassed previous best of 63.40 lakh MT
achieved in last financial year registering a growth of 7.65%. Bauxite excavation of 68.25 lakh
MT during the year is also highest ever since inception surpassing the previous best of 62.89
lakh MT achieved in 2015-16.

Aluminium Smelter achieved cast metal production of 3.87 lakh MT, registering a
growth of 4.03 % over previous year.
CPP achieved ‘Net Power Generation’ of 6,066 MU, registering a growth of 3.85% over
previous year.
Wind Power: 3 wind power units at Gandikota, Andhra Pradesh, Devikot, Rajasthan &
Jaisalmer, Rajasthan have generated 206 MU against 156 MU achieved last year,
registering a growth of 32.05%.

Sales Performance

Chemicals

The Company achieved total chemical sale of 12,94,900 MT in 2016-17 compared to

12,19,926 MT achieved during 2015-16. This includes Calcined Alumina Export of

46
12,43,103 MT made during 2016-17 as compared to 11,74,224 MT export made during
2015-16.

Metal

The total metal sales during 2016-17 was 3,85,518 MT as compared to 3,72,424 MT
during 2015-16. Total metal sale consists of domestic sale of 2,84,926 MT and metal
export of about 1,00,591 MT. The total metal inventory at the end of financial year 2016-
17 was about 3,092 MT.

Table 2.4

Particulars Unit Year Ending Year Ending

31.03.2017 31.03.2016
Export
Alumina MT 12,43,103 11,74,224
Aluminium MT 1,00,591 94,671
Domestic
Alumina & Hydrate MT 51,797 45,702
Aluminium MT 2,84,926 2,77,753
Total Metal Sale MT 3,85,518 3,72,424
Total Chemical Sale MT 12,94,900 12,19,926

Out of total domestic metal sales of 2,84,926 MT, sale of 1,89,416 MT was effected from
Smelter plant at Angul and sale of 95,510 MT was effected from eleven stockyards located at
Kolkata, Baddi, Jaipur, Faridabad, Bhiwandi, Silvassa, Bangalore, Chennai, Vizag, Vadodara
and Delhi.

Financial Performance

Table 2.5

Particulars 2016-17 2015-16

Revenue from Operations(Gross) 8,050 7,269
Other Income 408 605
Total Income 8,458 7,874
Cost of materials consumed 1,182 1,104
Power & Fuel 2,213 1,865
Employee benefits expenses 1,537 1,398

47
Other Expenses 2,041 1,946
Depreciation & amortization expenses 480 426
Total Expenses 7,453 6,739
Profit Before Exceptional items 1,005 1,135
Add/(Less):Exceptional items (40) 54
Profit before Tax 965 1,189
Tax Expenses 296 402
Profit After Tax 669 787

Dividend and Appropriations

Your Company has paid dividend of `2.80 per share for the financial year 2016-17. The total
dividend payout for the financial year 2016-17 works out to 541.22 crores as against 467.13
crores (`2.00 per share) for the previous year. Dividend including dividend distribution tax
works out to a payout of 97.44% of PAT.

2.4 NEED OF THE STUDY

o The project study is undertaken to analyze and understand the Capital Budgeting
process in NALCO, which gives mean exposure to practical implication of theory
knowledge.
o To know about the company’s operations of using various capital budgeting techniques.
o The financial department can implement and can get positive results by maintaining
proper financial reports.
o To analyze the proposal for expansion or creating additional capacities
o To make financial analysis of various proposals regarding capital investment so as to
choose the best out of many alternatives proposals.

2.5 LIMITATION OF THE STUDY

o The study is conducted in short period. The time period of study has been limited to 60
days. The period is small to study the practical investment decision of a company like
NALCO.
o It does not consider all the new unapproved schemes.

48
 o The study is conducted with the available data, gathered from annual reports of
NALCO.
o The formula has been used according to the availability of the data.
o All the techniques of capital budgeting presume that various investment proposals
under considerations are mutually exclusive which may not practically be true in some
particular circumstance.
o Uncertainty and risk pose the biggest limitation to the technique of capital budgeting.
o Since the procedures and policies of the company does not allow disclosing of all
financial information and has to be completed with the available data collected with the
maximum effort.

2.6 Conclusion
The financial performance of NALCO is very sound and good. The Sales performance shows
growth in export and also demand in domestic market has increased and the production has
increased as well. Also the financial performance shows a growth in present fiscal year than the
other. The working capital of the company has increased. The company has generated good
revenue from its investment on some of the previous projects. The investment in new projects
opens up new opportunity for the company as it promises new scopes for growth and for
strengthening of company.

49
 Chapter 3
Data Analysis

50
3.1 Data Used

The data used for the project was taken from the annual report published by the company. For
the construction and calculation of working capital and for evaluation of different projects the
following things were used;

1. Balance sheet of NALCO

2. Profit and Loss Statement of NALCO
3. Cash Flow statement of NALCO
4. Seven projects were selected for the evaluation based on capital Budgeting techniques.
5. For net working capital calculation and for working capital management evaluation five
year balance sheet of the company was used.

The different projects that are taken into consideration for the internship project are:

Project 1- Aluminium Refinery, Damanjori, Odisha

Project 2- Captive power plant, Angul, Odisha

Project 3- Aluminium refinery in collaboration with GMDC, Kutch dist., Gujrat

Project 4- Smelter and Power plant, Sundargarh dist., Odisha

Project 5- Bauxite mines and alumina refinery, Visakhapatnam, AP

Project 6- Caustic soda plant in collaboration with GACL, Dahnej, Gujrat

Project 7- Nuclear power in collaboration with NPCIL, Kakkarpur, Gujrat

51
Table 3.1

------------------- in Rs. Cr. ------------------

Balance Sheet [32] -
Mar 17 Mar 16 Mar 15 Mar 14 Mar 13

12 mths 12 mths 12 mths 12 mths 12 mths

EQUITIES AND LIABILITIES

SHAREHOLDER'S FUNDS

Equity Share Capital 966.46 1,288.62 1,288.62 1,288.62 1,288.62

Total Share Capital
Reserves and Surplus
Total Reserves and Surplus
Total Shareholders Funds
NON-CURRENT LIABILITIES
966.46 1,288.62 1,288.62 1,288.62 1,288.62
9,239.33 11,619.06 11,508.68 10,833.83 10,643.83
9,239.33 11,619.06 11,508.68 10,833.83 10,643.83
10,205.79 12,907.68 12,797.30 12,122.45 11,932.45

Deferred Tax Liabilities [Net] 1,245.58 1,110.09 1,105.27 910.13 903.13

Other Long Term Liabilities 70.24 68.26 65.30 54.96 70.82
Long Term Provisions 328.11 223.72 242.76 218.22 208.62
Total Non-Current Liabilities 1,643.93 1,402.07 1,413.33 1,183.31 1,182.57
CURRENT LIABILITIES

Short Term Borrowings 51.09 0.00 0.00 0.00 0.00

Trade Payables 844.46 581.38 455.46 531.12 503.56
Other Current Liabilities 1,639.31 1,350.45 1,325.37 2,564.38 2,545.70
Short Term Provisions 117.07 277.41 186.21 147.25 162.67
Total Current Liabilities 2,651.93 2,209.24 1,967.04 3,242.75 3,211.93
Total Capital And Liabilities 14,501.65 16,518.99 16,177.67 16,548.51 16,326.95
ASSETS
NON-CURRENT ASSETS

Tangible Assets 7,018.63 6,328.89 6,509.21 6,688.80 6,523.80

Intangible Assets 125.80 138.61 136.21 103.14 105.09
Capital Work-In-Progress 514.65 661.36 549.73 768.74 1,001.92
Intangible Assets Under
Development 51.35 0.00 0.00 0.00 0.00
Fixed Assets 7,710.43 7,128.86 7,195.15 7,560.68 7,630.81
Non-Current Investments 39.55 811.08 1.04 1.04 161.04
Long Term Loans And Advances 80.60 1,347.55 1,221.85 1,517.27 1,422.80

52
Other Non-Current Assets 1,015.28 49.48 47.45 43.32 36.49
Total Non-Current Assets 8,845.86 9,336.97 8,465.49 9,122.31 9,251.14
CURRENT ASSETS

Current Investments 1,221.13 66.00 950.00 1,244.00 1,329.02

Inventories 1,155.93 1,126.97 1,165.56 1,173.66 1,380.64
Trade Receivables 184.25 235.21 120.82 243.57 142.99
Cash And Cash Equivalents 2,287.23 4,933.53 4,627.98 4,048.29 3,504.38
Short Term Loans And Advances 36.70 586.67 607.54 481.38 525.00
OtherCurrentAssets 770.55 233.64 240.28 235.30 193.78
Total Current Assets 5,655.79 7,182.02 7,712.18 7,426.20 7,075.81

14,501
Total Assets .65 16,518.99 16,177.67 16,548.51 16,326.95
OTHER ADDITIONAL
INFORMATION
CONTINGENT LIABILITIES,
COMMITMENTS

2,880.
Contingent Liabilities 68 2,864.70 2,706.96 2,858.08 3,255.54
CIF VALUE OF IMPORTS

Raw Materials 0.00 107.02 114.78 201.79 396.56

Stores, Spares And Loose Tools 0.00 52.44 76.00 79.10 79.63
Trade/Other Goods 0.00 40.14 107.89 204.68 0.00
Capital Goods 0.00 35.03 5.11 29.35 68.57
EXPENDITURE IN FOREIGN
EXCHANGE

Expenditure In Foreign Currency 288.80 10.92 6.38 8.48 9.38

REMITTANCES IN FOREIGN
CURRENCIES FOR
DIVIDENDS
Dividend Remittance In Foreign
Currency - - - - -
EARNINGS IN FOREIGN
EXCHANGE

3,277.
FOB Value Of Goods 32 2,953.17 3,159.48 3,615.31 3,376.35
Other Earnings - 55.01 1.23 1.89 1.15
BONUS DETAILS

53
Bonus Equity Share Capital 483.23 644.31 644.31 644.31 644.31
NON-CURRENT INVESTMENTS

Non-Current Investments Quoted

Market
- - - - 160.92
Value
Non-Current Investments
Unquoted Book
39.55 1.08 1.04 1.04 1.04
Value
CURRENT INVESTMENTS

Current Investments Quoted

Market 1,221.
13 66.04 1,021.06 1,323.69 1,410.73
Value
Current Investments Unquoted
Book - - - - -

54
Table 3.2

------------------- in Rs. Cr. ------------------

Profit & Loss statement [32] -
Mar '17 Mar '16 Mar '15 Mar '14 Mar '13

12 mths 12 mths 12 mths 12 mths 12 mths

Income

Sales Turnover 8,050.02 7,269.20 7,891.53 6,780.85 7,354.20

Excise Duty 506.98 453.20 508.72 0.00 437.72
Net Sales 7,543.04 6,816.00 7,382.81 6,780.85 6,916.48
Other Income 368.12 590.02 821.06 508.34 511.05
Stock Adjustments 96.59 8.99 -2.90 -58.55 64.25
Total Income 8,007.75 7,415.01 8,200.97 7,230.64 7,491.78
Expenditure

Raw Materials 1,500.36 1,498.92 1,451.43 1,536.54 1,549.82

Power & Fuel Cost 2,236.71 1,888.79 1,826.37 2,038.26 2,456.07
Employee Cost 1,537.44 1,361.36 1,377.91 1,245.33 1,153.93
Miscellaneous Expenses 1,285.47 1,137.88 1,018.18 967.97 914.04
Total Expenses 6,559.98 5,886.95 5,673.89 5,788.10 6,073.86
Mar '17 Mar '16 Mar '15 Mar '14 Mar '13

12 mths 12 mths 12 mths 12 mths 12 mths

Operating Profit 1,079.65 938.04 1,706.02 934.20 906.87

PBDIT 1,447.77 1,528.06 2,527.08 1,442.54 1,417.92
Interest 2.69 1.21 0.00 0.00 7.45
PBDT 1,445.08 1,526.85 2,527.08 1,442.54 1,410.47
Depreciation 480.36 424.09 413.66 524.73 505.43
Profit Before Tax 964.72 1,102.76 2,113.42 917.81 905.04
PBT (Post Extra-ord Items) 964.72 1,102.76 2,113.42 917.81 905.04
Tax 296.19 371.75 791.57 275.46 312.21
Reported Net Profit 668.53 731.01 1,321.85 642.35 592.83
Total Value Addition 5,059.62 4,388.03 4,222.46 4,251.56 4,524.04
Equity Dividend 541.22 515.45 451.02 386.59 322.15
Corporate Dividend Tax 110.18 105.40 90.18 65.70 53.26

55
Per share data (annualised)

Shares in issue (lakhs) 19,329.29 25,772.39 25,772.39 25,772.39 25,772.39

Earning Per Share (Rs) 3.46 2.84 5.13 2.49 2.30
Equity Dividend (%) 56.00 40.00 35.00 30.00 25.00
Book Value (Rs) 52.80 50.08 49.66 47.04 46.30

56
57
3.2 Results

Capital Budgeting

Table 3.4 Payback periods

Projects Project 1 Project 2 Project 3 Project 4 Project 5 Project 6 Project 7

Initial 4570 2700 4065 16345 6000 800 11495
investments
(in crores)
Estimated 800 430 630 1675 820 95 1220
annual
cashflow
Payback 5.71 6.27 6.45 9.75 7.31 8.42 9.42
period (in
years)

The payback period for the projects can be seen from the above table. Project 1 takes the lowest
tome of 5.71 years among the seven projects selected for evaluation. Then it is followed by
Project 2 and 3. Project 4 has the highest payback period. It is taking 9.75 years to payback the
initial amount or for break even.

Table 3.5 Cash flow after tax for the projects

Project 1 2 3 4 5 6 7

Profit 800 430 630 1675 820 95 1220

before
depreciation
and tax (in
cores)
Cash flow 542.4 291.5 427.2 1135.6 556 64.35 827.1
after tax (in
crores)

Cash flows for the selected projects obtained above indicate that Project 4 which would
generate highest cash flow of Rs. 1135.6 crores. It is followed by project 7 and project 5. They
would generate Rs. 827.1 crores and Rs. 556 crores. The lowest cash flow would be generated
by Project 6. It would generate only 64.35 crores.

58
Table 3.6 ARR for the projects

Project 1 2 3 4 5 6 7

Initial 4570 2700 4065 16345 6000 800 11495

investment(in
crores)
Average 800 430 630 1675 820 95 1220
income(in
crores)
ARR(in 17.5 15.9 15.49 10.24 13.66 11.87 10.61
percentage)

ARR for the selected projects obtained above indicate that Project 1 which has a ARR of 17.5.
It is followed by project 2 and project 3. They have an ARR of 15.9 and 15.49. The lowest
ARR is by Project 4. It is only 10.24. It is followed by project 7 having an ARR of 10.61.

Table 3.7 NPV for the projects

Projects 1 2 3 4 5 6 7
Discount 7.5 7.5 7.5 7.73 7.5 7.5 7.5
rates(in
percentage)
Average 20 20 20 20 20 20 20
years of
service
NPV(in 3585.59 1608 2357.53 730.78 2359.5 168.47 942.27
crores)

NPV for the selected projects obtained above indicate that Project 1 generate highest NPV of
Rs. 3585.59 crores. It is followed by project 5 and project 3. They would generate Rs. 2359.5
crores and Rs. 2357.53 crores. The lowest NPV would be generated by Project 6. It would
generate only 168.47 crores. It is followed by project 4 having NPV of 730.78 crores.

59
Table 3.8 IRR for the projects

Projects 1 2 3 4 5 6 7
Initial 4570 2700 4065 16345 6000 800 11495
investment(in
crores)
Average cash 800 430 630 1675 820 95 1220
inflow(in
crores)
IRR(in 16.709 14.943 14.457 8.08 12.331 10.16 8.56
percentage)

IRR for the selected projects obtained above indicate that Project 1 which has an IRR of
16.709. It is followed by project 2 and project 3. They have an IRR of 14.943 and 14.457. The
lowest IRR is by Project 4. It is only 8.08. It is followed by project 7 having an IRR of 8.56.

Table 3.9 PI for different projects

Projects 1 2 3 4 5 6 7
Initial 4570 2700 4065 16345 6000 800 11495
cash
outflow(in
crores)
Cash 800 430 630 1675 820 95 1220
inflow(in
crores)
PI 1.7846 1.6236 1.58 1.04 1.4 1.21 1.08

PI for the selected projects obtained above indicate that Project 1 which has a PI of 1.7846. It is
followed by project 2 and project 3. They have PI of 1.6236 and 1.58. The lowest PI is by
Project 4. It is only 1.04. It is followed by project 7 having a PI of 1.08.

60
Working Capital management

Table 3.10 CALCULATION WORKING CAPITAL (Rs. In

Crores )

Particular 2016-17 2015-16 2014-15 2013-14 2012-13

current assets
IVENTORIES 1155.93 1126.97 1165.56 1173.66 1380.64
SUNDRY DEBTORS 184.25 235.21 120.82 243.57 142.99
CASH &BANK 2287.23 4933.53 4627.98 4048.29 3504.38
BALANCE
LOAN & ADVANCES 1903.13 2217.34 2117.12 2277.27 2178.07
Total current assets 5530.54 8513.05 8031.48 7742.49 7206.08
CURRENT
LIBELITIES &
PROVISIONS
CURRENT 2534.86 1894.8 1734.6 1603.4 1318.31
LIBELITIES
PROVISIONS 117.07 87.15 87.31 329.84 222.57
Total current 2651.93 1981.95 1821.91 1933.24 1540.88
liabilities
Net working capital 2878.61 6531.1 6209.57 5809.25 5665.2

The working capital management of the company has been calculated. The above table shows
the net working capital of the company for the past five years. From the above table we could
infer that the working capital of the company has decreased from the previous year. The
working capital for the year 2015-16 was Rs. 6531.1 crores. This has reduced to Rs. 2878.61
crores in the year 2016-17. The highest net working capital for the company can be observed to
be on the fiscal year 2015-16 and the lowest to be on 2016-17. They have a net working capital
of Rs. 6531.1 crores and Rs. 2878.61 crores respectively. The net working capital of year 2014-
15 is also as high as Rs. 6209.57 crores.

61
Table 3.11 Current ratio

Particulars 2012-13 2013-14 2014-15 2015-16 2016-17

Curret assets 7206.08 7742.49 8031.48 8513.05 5530.54
Current 1540.88 1933.24 1821.91 1981.95 2651.93
liabilities
Current 4.67 4.0 4.4 4.29 2.08
ratio
Amount in crores

Current ratio of the company is only 2.08 for the year 2016-17. It was 4.29 the previous year. It
was highest in the year 2012-13 having a current ratio of 4.67. The current ratio of year 2014-
15 is also high as it is 4.4.

Table 3.12 Quick Ratio

Particulars 2012-13 2013-14 2014-15 2015-16 2016-17

Quick assets 5253.04 4129.36 4864.5 5034.15 3686.91
Current 1540.88 1933.24 1821.91 1981.95 2651.93
liabilities
Quick ratio 3.4 2.13 2.67 2.54 1.39

Amount in crores

Quick ratio of the company is 1.39 for the year 2016-17. It was 2.54 the previous year. It was
highest in the year 2012-13 having a Quick ratio of 3.4. The Quick ratio of year 2014-15 is
moderate with Quick ratio having a value of 2.67.

Table 3.13 Total Asset Turnover Ratio

Particulars 2012-13 2013-14 2014-15 2015-16 2016-17

Net sales 6916.48 6780.85 7382.81 6816 7543.04
Total Assets 16326.95 16548.51 16251.60 16710.19 14510.65
Total asset 0.42 0.40 0.45 0.40 0.53
turnover
ratio
Amount in crores

62
Total asset turnover ratio of the company for the past five years can be seen above. Total asset
turnover ratio of the company is 0.53 for the year 2016-17. It was 0.40 the previous year. It was
highest in the year 2014-15 having a total asset turnover ratio of 0.45. The total asset turnover
ratio of year 2012-13 is found to be 0.42.

Table 3.14 Working Capital turnover ratio

Particulars 2012-13 2013-14 2014-15 2015-16 2016-17

Net sales 6916.48 6780.85 7382.81 6816 7543.04
Net working 5665.2 5809.25 6209.27 6531.1 2878.61
Capital
Working 1.2 1.16 1.18 1.04 2.6
capital
turnover
ratio

Working capital turnover ratio of the company for the past five years can be seen above.
Working capital turnover ratio of the company is 2.6 for the year 2016-17. It was 1.04 the
previous year. It is highest in the year 2016-17 having a Working capital turnover ratio of 2.6.
The Working capital turnover ratio of year 2012-13 is found to be 1.2 and that of fiscal year
2013-14 to be 1.16.

63
Graphical representation of the findings

Capital Budgeting

NPV(in crores)
4000
3500
3000
2500
2000
NPV(in crores)
1500
1000
500
0
1 2 3 4 5 6 7

Fig. 3.1 NPV of projects

The above figure shows the graphical representation of NPVs of different projects. In the figure
x-axis is number of projects and y-axis is NPV in crores. NPV for the selected projects
obtained above indicate that Project 1 generate highest NPV of Rs. 3585.59 crores. It is
followed by project 5 and project 3. They would generate Rs. 2359.5 crores and Rs. 2357.53
crores. The lowest NPV would be generated by Project 6. It would generate only 168.47 crores.
It is followed by project 4 having NPV of 730.78 crores.

64
 Payback period
12

10

6
Payback period
4

0
1 2 3 4 5 6 7

Fig. 3.2 Payback period of projects

The above figure shows the graphical representation of payback periods of different projects. In
the figure x-axis is number of projects and y-axis is payback period in years. Project 1 takes the
lowest tome of 5.71 years among the seven projects selected for evaluation. Then it is followed
by Project 2 and 3. Project 4 has the highest payback period. It is taking 9.75 years to payback
the initial amount or for break even.

IRR(in percentage)
18
16
14
12
10
8 IRR(in percentage)

6
4
2
0
1 2 3 4 5 6 7

Fig. 3.3 IRR of projects

65
The above figure shows the graphical representation of IRR of different projects. In the figure
x-axis is number of projects and y-axis is IRR in percentage. IRR for the selected projects
obtained above indicate that Project 1 which has an IRR of 16.709. It is followed by project 2
and project 3. They have an IRR of 14.943 and 14.457. The lowest IRR is by Project 4. It is
only 8.08. It is followed by project 7 having an IRR of 8.56.

PI
2
1.8
1.6
1.4
1.2
1
PI
0.8
0.6
0.4
0.2
0
1 2 3 4 5 6 7

Fig. 3. 4 PI of projects

The above figure indicates the PI’s for all the projects. PI for the selected projects obtained
above indicate that Project 1 which has a PI of 1.7846. It is followed by project 2 and project 3.
They have PI of 1.6236 and 1.58. The lowest PI is by Project 4. It is only 1.04. It is followed by
project 7 having a PI of 1.08.

66
 NPV vs IRR
4000
3500
3000
2500
Axis Title

2000
1500
1000
500
0
1 2 3 4 5 6 7
NPV 3585.59 1608 2357.53 730.78 2359.5 168.47 942.27
IRR 16.709 14.943 14.457 8.08 12.331 10.16 8.56

Fig. 3.5 NPV vs IRR

The graphical representation of NPV and IRR in a single graph is shown in the above figure. The
figure is used to show the relationship between the NPV’s and IRR’s of different projects. It can
be easily seen that due to very less values of IRR in comparison to that of NPV the movement in
NPV cannot be noticed.

4000

3500

3000

2500

2000 NPV(in crores)

PI
1500

1000

500

0
1 2 3 4 5 6 7

Fig. 3.6 NPV vs PI

The graphical representation of NPV and PI in a single graph is shown in the above figure. The
figure is used to show the relationship between the NPV’s and PI’s of different projects. It can be

67
easily seen that due to very less values of PI in comparison to that of NPV the movement in NPV
cannot be noticed.

Working Capital Management

Net working Capital( in crores)

7000
6000
5000
Axis Title

4000
3000
2000
1000
0
2012- 2013- 2014- 2015- 2016-
13 14 15 16 17
Net working Capital( in
5665.2 5809.25 6209.57 6531.1 2878.61
crores)

Fig. 3.7 Net working capital

The above figure graphically represents the net working capital of NALCO for the past five
years. The working capital management of the company has been calculated. The above table
shows the net working capital of the company for the past five years. From the above table we
could infer that the working capital of the company has decreased from the previous year. The
working capital for the year 2015-16 was Rs. 6531.1 crores. This has reduced to Rs. 2878.61
crores in the year 2016-17. The highest net working capital for the company can be observed to
be on the fiscal year 2015-16 and the lowest to be on 2016-17. They have a net working capital
of Rs. 6531.1 crores and Rs. 2878.61 crores respectively. The net working capital of year 2014-
15 is also as high as Rs. 6209.57 crores.

68
 Current ratio
5
4.5
4
3.5
3
Axis Title

2.5
2
1.5
1
0.5
0
2012-13 2013-14 2014-15 2015-16 2016-17
Current ratio 4.67 4 4.4 4.29 2.08

Fig. 3.8 Current ratio

The above graph shows the change in current ratio of the company for the past five years. The
current ratio firstly decreases and then increase and finally decreases by a great extent as can be
seen from the graph. Current ratio of the company is only 2.08 for the year 2016-17. It was
4.29 the previous year. It was highest in the year 2012-13 having a current ratio of 4.67. The
current ratio of year 2014-15 is also high as it is 4.4.

Quick Ratio
4
3.5
3
Axis Title

2.5
2
1.5
1
0.5
0
Particula
2012-13 2013-14 2014-15 2015-16 2016-17
rs
Series1 0 3.4 2.13 2.67 2.54 1.39
Series2

Fig. 3.9 Quick ratio

The above graph shows the change in Quick ratio of the company for the past five years. The
Quick ratio firstly increases and finally decreases by a great extent as can be seen from the

69
graph. Quick ratio of the company is 1.39 for the year 2016-17. It was 2.54 the previous year. It
was highest in the year 2012-13 having a Quick ratio of 3.4. The Quick ratio of year 2014-15 is
moderate with Quick ratio having a value of 2.67.

Total asset turnover ratio

0.6
0.5
0.4
Axis Title

0.3
0.2
0.1
0
2012-13 2013-14 2014-15 2015-16 2016-17
Total asset turnover
0.42 0.4 0.45 0.4 0.53
ratio

Fig. 3.10 Total asset turnover ratio

The above graph shows the change in total asset turnover ratio of the company for the past five
years. The total asset turnover ratio initially increases by some extent and finally increases by a
great extent as can be seen from the graph. Total asset turnover ratio of the company for the
past five years can be seen above. Total asset turnover ratio of the company is 0.53 for the year
2016-17. It was 0.40 the previous year. It was highest in the year 2014-15 having a total asset
turnover ratio of 0.45. The total asset turnover ratio of year 2012-13 is found to be 0.42.

70
 Working capital turnover ratio
3

2.5

2
Axis Title

1.5

0.5

0
2012-13 2013-14 2014-15 2015-16 2016-17
Working capital
1.2 1.16 1.18 1.04 2.6
turnover ratio

Fig. 3.11 Working capital turnover ratio

The above graph shows the change in working capital turnover ratio of the company for the
past five years. The working capital turnover ratio initially decreases by some fractions and
finally increases by a great extent as can be seen from the graph. Working capital turnover ratio
of the company for the past five years can be seen above. Working capital turnover ratio of the
company is 2.6 for the year 2016-17. It was 1.04 the previous year. It is highest in the year
2016-17 having a Working capital turnover ratio of 2.6. The Working capital turnover ratio of
year 2012-13 is found to be 1.2 and that of fiscal year 2013-14 to be 1.16.

3.3 Conclusion

All the data are verified efficiently and effectively. For the capital budgeting of different projects
that are to be taken by NALCO different techniques are used. The results generated from the
calculations are given above with inference of each of the tables and figures. Tables provide for
the value generated and figures show the real time deviations. The net working capital of the
company is also calculated. For comparison the net working of the company for present fiscal
year is calculated with previous four years. Hence the net working capital of five years is
calculated to gain the exact position of the company in present scenario. It also helps to identify

71
the net working capital its utilizations. Capital budgeting, and investment appraisal, is the
planning process used to determine whether an organization's long term investments such as new
machinery, replacement of machinery, new plants, new products, and research development
projects are worth the funding of cash through the firm's capitalization structure (debt, equity or
retained earnings). It is the process of allocating resources for major capital, or investment,
expenditures. One of the primary goals of capital budgeting investments is to increase the value
of the firm to the shareholders.

Working capital management involves the relationship between a firm's short-term assets
and its short-term liabilities. The goal of working capital management is to ensure that a firm is
able to continue its operations and that it has sufficient ability to satisfy both maturing short-term
debt and upcoming operational expenses. The management of working capital involves
managing inventories, accounts receivable and payable, and cash.

72
 Chapter 4

Summary and Findings

73
4.1 Summary and Findings

Capital Budgeting

Capital budgeting is the process in which a business determines and evaluates potential expenses
or investments that are large in nature. These expenditures and investments include projects such
as building a new plant or investing in a long-term venture. Often times, a prospective project's
lifetime cash inflows and outflows are assessed in order to determine whether the potential
returns generated meet a sufficient target benchmark, also known as "investment appraisal." The
analysis of projects to be undertaken by NALCO using capital budgeting techniques showed that
the projects are appealing. Investment in the projects would generate not only revenues but will
also help the company to diversify into many different fields. As we know that mining activities
and the ROI are risky as change in business practices and policies create difficult situations.
Diversifying into related industry like power generation and mining related other activities would
actually help. Also diversifying into unrelated activities like investing in sugar industry is also
profitable.

In terms of Payback period the least duration is taken by Project 1 taking 5.71 years and followed
by project 2 and 3 taking 6.27 and 6.45 years respectively.

While comparing cash flow after tax project 4 with 1135.6 crores is the highest followed by
project 7 having 827.1 crores. The other high cash flow after tax are project 5 and project 1 have
556 crores and 542.4 crores respectively.

If we take into account the ARR project 1 has the highest ARR of 17.5% followed by project 2
and 3 having 15.9% and 15.49%.Project 4 and project 7 have the lowest ARR of 10.24 and
10.61.

While calculating NPV we found that four of the projects show high NPV growth. The highest
NPV is shown by project 1 of 3585.59 crores. Project 5 has the second highest NPV followed by
project 3and then project 2. Each having NPV’s of 2359.5 crores, 2357.53 crores and 1608
crores respectively.

The internal rate of return for first three projects are 16.709%, 14.943%, 14.457%.

74
All projects have profitability index greater than 1. But project 1, 2 and 3 have the highest.

Working capital management

Working capital management is the way a company manages the relationship between assets and
liabilities in the short term. Simply put, working capital management is how a company manages
its money for day to day operations as well as any immediate debt obligations. When managing
working capital, the company has to manage accounts receivable, accounts payable, inventory,
and cash. The goal of working capital management is to have adequate cash flow for continued
operations and have the most productive usage of resources.

The net working capital of the company has decreased in the year 16-17. It was growing for the
previous four years. But it had dropped down significantly. In the fiscal year 0f 15-16 the net
working capital was 6531.1 crores and it had reduced to 2878.61 crores.

The current ratio indicates the availability of funds to payment of current liabilities in the form of
current assets. A higher ratio indicates that there were sufficient assets available with the
organization which can be converted in cash, without any reduction in the value. It is very high
4.67 in 2012-13, but regularly decreases. In 2016-17 it comes at 2.08.

There has been a gradual increase in Quick ratio for the three previous years of 2013-14, 2014-
15, and 2015-16. But later in the year 2016-17 it has again dropped to 1.39. The liquid ratio of
1:1 is suppose to be standard or ideal but here ratio is more than 1:1 over the period of time, it
indicates that the firm maintains the over liquid assets than actual requirement of such assets.

The total asset turnover ratio in 2012-13 was 0.42 which has reduced to 0.40 in 2013-14. Then in
2016-17 it has increased to 0.53. The reduction in ratio is mainly due to lower realization and
increase in asset of the company due to expansion activities. Higher ratios are indicative of
efficient management and utilisation of resources. It is good for the company.

High working capital ratio indicates the capability of the organization to achieve maximum sales
with the minimum investment in working capital. The working capital turnover ratio for the
75
previous four years is found to be relatively closer. But in the fiscal year 2016-17 it has rose
significantly to 2.6 from its previous year of 1.04.

4.2 Suggestions

Capital Budgeting

Few of my suggestions based on capital budgeting for the projects to be undertaken by NALCO
are as below:

Project 1 is very profitable and company could easily give a green signal for its implementation.
All the different techniques used for evaluating the project have given a positive result. The
company should also focus on other projects. Like in case of sugar industry investment the
revenue generated is low but the ROI is very appealing and supportive. The company should
definitely show concern in the project as well.

In terms of Payback period the least duration is taken by Project 1 taking 5.71 years and followed
by project 2 and 3 taking 6.27 and 6.45 years respectively.

Apart from project 1 and 6 project 2,3 and 5 also show decent ROI. The company should also
look into these projects as the PI, IRR and NPV of these projects also shows positive and sound
results.

While calculating NPV we found that four of the projects show high NPV growth. The highest
NPV is shown by project 1 of 3585.59 crores. Project 5 has the second highest NPV followed by
project 3and then project 2. Each having NPV’s of 2359.5 crores, 2357.53 crores and 1608
crores respectively.

Working Capital Management

Suggestions can be use by the firm for the betterment increased of the firm after study and
analysis of project report on study and analysis of working capital. I would like to recommend.
1. Company should increase the inventory holding period. It is the major part of working capital
of company.

76
2. Company has to take control on cash balance because cash is non earning assets and increase
cost of funds.
3. Company should raise it fund through short term sources for short term requirement of funds.
4. Nalco must try to maintain a low working capital by lowering the investment in current assets as
the working capital is too high.
5. It should not keep its current assets idle which makes the current ratio too high.
6. The inventory turnover ratio is too long which must improve by maintaining low stock.
7. The Company must try to increase its profitability ratios by increasing investment which will
improve the capacity of the firm to face adverse economic conditions like low demand, price
competition, etc.

4.3 Conclusion

Capital Budgeting
When an organization is setting up a capital budgeting for the business, they are planning for the

outcome of the month. How involved the project budgeting is individual will be depends on their

investment decisions in a business.

When making the capital budgeting decision, the financial manager effectively analyzed the long

term investment programmes, so that it will improve the business over all.

Many businesses ignore or forget the other half of the budgeting. Capital budgeting are too often

proposed, discussed and accepted. It can be used to influence managerial action for long-term

implications and affect the future growth and profitability of the firm. Good management looks

at what that difference means to the business.

Remember to keep the records that have been created. The company should have capital

budgeting records of the projects always on file, so that it gives the future course of action for

the investment proposal for long-term period.

77
Organizations must make sure that, more attention should be paid upon the investment proposal

or course of action whose benefits are likely to be available in future over the lifetime of the

project, as the demand on resources is almost always higher than the availability of resources.

From the project I would like to conclude that the company should take project 1, 2, 3 and 5. As

because for all the criteria we have taken to examine have worked well with these projects.

Project 1 takes least time for breakeven and is providing highest NPV. Also PI is highest for the

project. Same with other projects like 2, 3 and 5. Though they have lesser NPV than project 1

but they still promise to generate high NPV’s and PI’s are also impressive.

Working capital
After studying the components of working capital management system of NALCO it is found
that the company has a sound and effective policy and its performance is very good. Company is
competing well at the domestic as well as the international level and it is among the low cost
producers of aluminium in the world only because of its proper management of finance, specially
the short term finance known as the working capital. The company is a matured one and it has
contributed well in the countries growth and development and will also continue to perform and
contribute to the whole nation. In conclusion, we can say that the companies management is an
effective one and knows well the management of finance, its working capital management
system is very good because of which only the company has got the status of NAVRATNA
company.
Working capital management is important aspect of financial management. The study of working
capital management of NALCO has revealed that the Net Working Capital has decreased for the
fiscal year 2016-17.

78
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