SUMMER TRAINING REPORT

On

Capital Budgeting

JCB LTD.

Submitted to the partial fulfillment of the requirements for the degree of

MASTER OF BUSINESS ADMINISTRATION

Session : 2018-20

Submitted To: Submitted By:

Controller of Examination Prashant Parashar
JCBUST[YMCA], Faridabad MBA 3rd Sem.
Roll No: 18001703031
 DECLARATION

I, Prashant Parashar is a student of the JCBUST, Faridabad hereby declare that the
Training Report entitled “Capital Budgeting ” is an original work and same has not been
submitted to any other institute for the award of any other degree. The suggestions given by
the faculty were duly incorporated.

[Prashant Parashar]
 ACKNOWLEDGEMENT

Research is one of the most important parts of the curriculum of any professional course both
as link between theory and actual industrial practices. I therefore consider myself fortunate to
receive this research on esteemed organization JCB Ltd.

I would like thank the management of JCB LTD. for the wholehearted co-operation and
guidance extended by them which made my research report possible.

I am also thankful to Ms. Jyotsana Chawla [Faculty Guide] of JCBUST, Faridabad for
supporting me in preparing project report.

(Prashant Parashar)
 PREFACE

I have a great pleasure in presenting my report on JCB , which is an integral part of the
curriculum of our Programmed?

Without which one can't consider himself as a qualified capable person. To fulfill this
requirement I have completed my training report on JCB , which is indeed a prestigious
global industry holding leadership in the various power plant. At first every thing seems to be
strange and unheard but as the time pass one understand the concepts and working of the
organization and there by develop the professional relationship.

Initially it is felt as if a classroom study was irrelevant and useless in any concern working
but gradually it is realized that all the basic fundamental concept studies and are linked in one
or other ways but how and what can be done with fundamental depending upon the
intellectual capability of the individual it just a matter of modifying the theory so as to apply
it to a given practical situation.

It presents a sound theoretical exposition along with explanatory notes in a clear and lucid
language. The facts are arranged in logical manners.
 TABLE OF CONTENTS

CHAPTER PARTICULARS
NO.

1 INTRODUCTION

2 INDUSTRY AND COMPANY PROFILE

3 REVIEW OF LITERATURE

4 RESEARCH METHODOLOGY
A.OBJECTIVES OF THE STUDY
B.SCOPE OF STUDY
C.RESEARCH DESIGN
1.PROPULATION AND SIZE OF SAMPLE
2.DATA COLLECTION
3.METHOD OF DATA ANALYSIS
D.LIMITATIONS OF THE STUDY

5 DATA ANALYSIS AND INTERPRETATION

6 CONCLUSIONS AND SUGGESTIONS

ANNEXURE
A.BIBLIOGRAPHY
B. QUESTIONNAIRE
 CHAPTER – 1

INTRODUCTION
 INTRODUCTION

Meaning

Capital budgeting is the technique of making in long term assets. The process in which

business determines whether projects such as building a new plant or investing in a long-term

venture are worth pursuing. The benefits of which will be available over a period of time

longer than one year. Also known as “investment appraisal”.

Definition

“Capital budgeting involves the planning of expenditure for assets, the return from which

will be realized in future time periods.”

Thus, a capital budgeting may be defined as the firm’s decision to invest its funds in the long

term assets in anticipation of an expected flow of benefits over the lifetime of the assets.

These benefits may be either in the form of increased sales or reduced costs capital budgeting

decision regarding expansion, acquisition, modernization and replacement of the long term

assets.

Features

 In capital budgeting decision, funds are invited in long term assets.

 These funds are invested in present times in anticipation of future funds.

 Future profiles will occur the firm over a series of years.

  Capital budging decisions involve a high degree of risk because future

benefits are not certain.

Importance of Capital Budgeting

 Such decision affects the profitability of the firm

Capital budgeting decisions affect the long term profitability of a firm because of the fact

that they relate to fixed assets. A correct investment decision can yield profit otherwise

incorrect decision can endanger the survival of the firm.

 Long term periods

The decision of capital budgeting will be felt by firm over a long time and, affects the future

cost structure of the firm

 Irreversible decision

Capital budgeting decision are not easily reversible without heavy financial loss to the. This

is because it is very difficult to sell the second hand plant.

 Risk

Investment in fixed assets may change the risk complexion of the firm. This is because

different capital. Investment proposals have different degrees of risk. If adoption of an

investment proposal increased average gain, but causes frequent fluctuation in the profit of

firm, the firm will become more risky.

CHAPTER-2

COMPANY
PROFILE
 COMPANY PROFILE

o JCB India limited is a UK based multinational company. JCB is one

of Britain’s great success stories. The Business began on Oct. 23 rd 1945 started by Mr.
Joseph Cyril Bamford.

o Today JCB is Europe’s premier manufacturer of construction

equipment and exports 72% of its products to 140 territories around the world.

JCB WORLDWIDE:
WORLDWIDE:

o World No. 1 Manufacturer of Backhoes

o Largest Manufacturer of Construction Equipment in Europe
o Sales in Over 150 Countries through 500 Dealers
o Production Facilities on Four Continents producing 220 product lines

JCB INDIA:

India’s largest Construction Equipment manufacturer.

o 7600 + JCB machines made and sold in India in 2005.
o 25,000 + machines operating, supported by 38 Dealers with over 204
Service and Parts outlets.

HISTORY:
JCB India Limited started operation in 1979 as a joint venture between the Escorts
group and JCB Excavator (UK). In 2003 JCB acquired 100% share and today JCB is the
fastest growing company in the Indian earthmoving and construction equipment
industry.

WRITE UP FOR FIFTY YEARS OF JCB

1945
Past is always different as a matter of fact. When we see “JCB”, then and again now its
amazing. The journey of JCB till what it is today is worth narrating. It was then when
Mr. Joseph Cyril Bamford had little chance of expansion. Joe rented a lock up garage
that measured 12 feet by 15 feet for 30 sittings a week.

Poverty was troubling in Joseph Cyril Bamford’s life but with a tinge of determination.
In his won words this situation “tended to concentrate my mind”.

His first product was a farm trailer built from a wartime scrap was put up for sale at 90
pounds. It was sold for 45pounds and in lieu a cart was exchanged. Joe renovated the
cart and sold it for 45 pounds again.

1946
It was in 1946 that Joe handled every job himself including cutting, forming and welding
for seven days in a week, which was objected by his landlady so Joe moved to
Crakemarsh Hall, midway between Uttoxeter and Rocester, when he was about to
became a full time employer for the first time.

1947
It was in 1947 Joe was some good member of employees. The employees were Arthur
Harrison, Bill Hirts and Burt Homes. Joe was a little famous also.

This instance explains when John Wheeldon wanted to buy for himself a “Trailer” he
went to Joe Bamford, he became the ambassador for JCB as other customer and people
came to John Wheeldon to enquire about JCB products.

Because of some inherent problems this John Wheeldon himself joined as an employee of
Mr. Joe Bamford and Mr. John also has experience in the field of agriculture and fields.
This was and opportunities for Joe to expand his business are in these days, more were
the employers more opportune was Joe.

MARKET DIVERSIFICATION
Market expansion cannot be complete without market diversification. Joe diversified by
entering into ex-service vehicle market mainly jeeps, vans and trucks and refurbished
them. Joe foresaw a great potential for large number of ex W-D jeeps, ambassadors,
command card, all suitably converted.

1948

In 1948 Europe’s first two-wheeled hydraulic, all steel topping trailer was produced. It
was for operator’s benefit that tipping was made possible from a tractor seat.

Joe even foresaw competition from Midland Industries Ltd., for Major Loader, so went
to a competitive demonstration of major loader, which reflects his foresight. And with
that Joe thought about double acting ram, which was used 4 years later in MX1
excavator.
However, the major loader was the first Europe hydraulic loader introduced in 1948 by
JCB.

1950
It was in 1950 that JCB outgrow at Crakemarsh and bought Old Wiltshire united dairies
milk processing and cheese factory at Rocestor from farmer John Bailey. The huge
Rocestor complex is there as Joe bought the Old cheese factory after pursanasion, from
Bill Hirst. Therefor the complex moved to Rocestor.

It was here in this new chicken factory converted into machine factory, where the color
was changed to distinctive bright yellow from green, which is now so familiar.
(It was in 1957 that there was publicity campaigning of JCB, like tracing a small example

where Mr. Joe send his wife to an exhibition to distribute leaflets to likely looking

customers)

At the same time JCB launched Mater Loader, a smaller version of Major Loader. After
this mid mounted mover was launched

1953

It was a turning point for JCB, with a world first in the shape of Hydraulic loader, which
was designed by Mr. Bamford.

The JCB’s first backhoe was produced MK1 to which a major loader would fit upon.
This is how Europe’s first backhoe loader was born.

Just before this Ruston B was launched, when there was a technical problem with MK1,
it was rectified with the advice of Mr. Bill Hirts. Therefore he was moved into research
department to develop idea who retired as director service standards in 1991, 45 th year of
JCB.

The next major breakthrough was in 1957 when hydra-digger was launched which was
advertised as earthmovers, which cloud dig through a rock.

For the reminder of 1950’s Mr. Bamford concentrated developing his company
expanding the factory and creating more efficient dealer network, as now profit was
pumped directly back to business.

Then came more sophisticated JCB 4 that replaced Hydra-Digga in 1960 and first time
in JCB featured dual hydraulics, the 3 in 1 back hoe backed.
In 1961 JCB’s unveiled was constantly improved version of JCB 4, 4c vans introduced in
1962.

Standardization: JCB logo is universally known, which is a strictly guarded mark, first
registered in 1938 trademarks act in 25th Jan in 1958 and now covers for registrations.
The company imposes shirt rules that it should not be changed in anyway. Instruction
cover how it should be used what are the specified colors.
The concept angel of angle says that 18 th degree between the lowest straight border and
in imaginary horizontal.

1960

It was a period of pressures as well as innovations for JCB. Infect “JCB” was an outcome
of 60’s, which changed thinking forever.

But the other ace of 60’s was dark also as if faced a supplier’s hydraulic failure of JCB
4C.
A huge amount was spent for rectification and astonishingly in this period the idea of
Electro kettle sprouted in Joe’s mind.
Even the factory began producing JCB3C in March M63 with sheer brilliance of chief
designer Derek Prince.

The most enjoyable aspect of working with JCB is cautious innovation and new ideas
sprouting up as pointed by Alan Coper, the work’s director.

The most brilliant machine launched was JCB with the brilliance of Derek Prince, who
passe out of innovations.

Mr. JCB had another idea of a new machine but put in back when he saw a more process
trial idea of Derek Prince. Now the 3C took off the company with it.

Mr. JCB wanted more innovations, ideas and was not satisfied with his new members.
Alan Cooper was given the task of find Electro kettle, and he at last located in Swiss
manufacturer.

It was connected to 3D machine, replacing a digger, and quoted “Marketing legend was
born”.

Advertisement were passed that for first 1W 3D’s, Joe himself would visit every operator
and hand him little.
It was unbelievable that operators were fighting to get a visit of Joe and have a photo
taken with him. 3D was an overnight success.

Ford supplied skid units to JCB, but all of a sudden could not due to internal problems and
even that could not stop JCB’s production. JCB managed to produce continuously even
with Ford’s.

JCB’S SPREAD IN THE WORLD AND ITS ARRIVAL IN INDIA

In this way JCB took off by different new machines and innovations and JCB spread
over 150 countries. It is wholly owned by J C Bamford Excavators Limited of United
Kingdom which is ranked in the top five manufacturers of earthmoving and construction
equipment in the world. JCB is considered one of the Britain’s most impressive success
stories and id world no. 1 producer of backhoe loaders.
1979

JCB India limited started operations in 1979 and is the fastest growing company in the
Indian earthmoving and construction equipment industry. It had a turnover of more
than RS 450 crores in the year 2002. The company is the pioneer in the industry and has
been recording excellent growth rates.

2000-2001

In 2001-2002 JCB increased its market share in all the product segments despite the
downward trend across the market and today the population of JCB machines is over
17000 in India. The company offers a wide range of equipment such as backhoe loaders
(excavator loaders), loading shovels, newly introduced 7.5 ton and upgraded 21 ton
tracked excavators and skid steer loaders.
In India, JCB is a generic name for backhoe loaders and they are working tirelessly from
high Himalayas to Rajasthan sandy deserts from remote projects to bustling
megapolises. the company boasts of several first the first company to bring in backhoe
loaders and telescopic handlers to India, as also the first to market and service
earthmoving and construction equipment through dealer networks. JCB 3D is today the
single largest selling model in the Indian earthmoving and instruction equipment
industry.

“The movement of earth and the remodeling of the landscape have always being a source of
fascination for man. Man has acted as “Architect” throughout his entire civilized past with the
building and moving of earth constantly playing an important role. But the first traces of our
cultural heritage are not only to be found in art; But also in building and agriculture.

Mining was as early as the Neolithic age when the main desire was obtain flint from chalk to
make weapons and tools. About 6,000 years ago, with the progression from the Neolithic age
to the copper age, the change from hoe farming to the plough culture took place. It was at this
time tat the oldest known piece of earth moving equipment appeared: The Simple Wooden
Plough.

In fact the plough features throughout the history of mankind 5,200 years after it was invented
it was to undergo a tremendous change transforming it into what was to become today’s grader
and scraper and into other importance of earth moving equipment.

Earth moving machines are important part of human culture, they mirror contemporary
thought, technical possibilities and the every day working world of our fore fathers. They
development of earth moving machines tells the story of our culture as does the art or the
history of the peoples and the states.

The quickly forgotten development of building techniques never attracts the same attention as
the history of weapons for example either in public or in museum. It is for these reasons
among others that the history of these machines was finally written down as comprehensively
as possible for safe keeping.
Without the need to build there would be no construction equipment, without construction
equipment there would be no longer stretches of read or rail networks, no great water ways
and or airports. Dams would not be as high as they are there would be no connecting bridges
or tunnels.
Earth moving equipment followed the three stages of development. In early times machines
took over the dredging of ports, canals and the rivers, not to save on manual labour because at
that time labour was cheap but because manual work prove to be impact in practical. These
early machines were building for use on water ways. Then come the next stage of
development with the world changing invention of the railway, earth moving machines were
adopted for use on rails and were use to build the railway as well as being transported by rail.
There appearance change again early this century when they were adopted for road use and
they were increasingly transported by road rather than rail. Large number of these machines
was used in the construction of roads and motor ways especially during the middle of the 28 th
century.

The origins of earth moving machines can certainly be traced back to the early days of
technology, but try to go back further into the past and the traces soon disappear. The drag
bucket pulled along by animals can be seen as the first specialized earth moving device. It was
the development of plough, already thousands of years old when the drag buckets was first
used.

How grade was increase in performance as compared to earlier methods? We cannot be sure
but a worker using a pickaxe and shovel and with a basket on this back could move roughly to
2 cubic meter of earth over a distance of just 200 meter’s in the course of 12 hours a day. By
comparison building of San – Dam in California in 1964 almost 1.5 cubic meters of earth were
moved per second from the sources side 20 km away.

The Network
JCB India limited was the first company in this industry to market and support its
products through a network of dealerships. Today this network comprises of 21 JCB
India marketing offices 38 dealers and over 140 dealership outlets nationwide.
 In addition to the above there are three parts depots at Calcutta, Chennai, and Pune to
provide quick support to the dealerships in the regions. With intelligent parts stocking at
Head Office and depots outlets, response time to any machine has come down
considerably. Today over 95% of parts can be supplied anywhere in the country within
24 hours of receipt of requirement.
At JCB India limited it is believed in the philosophy of lifetime relationship with a
customer. It is our endeavor to become a partner in the prosperity of our customers.
Prompt and efficient product support services ensure that the customer’s JCB machine
is operational at all times.
Although JCB machines are best made and designed to operate in extremely tough
conditions, but we are not satisfied with this alone. JCB has a strong product support
backup throughout the country to ensure that the machine downtime is the bare
minimum.
JCB has dedicated team of 600 trained product support engineers located at more than
140 dealer outlets throughout the country. These engineers constantly strive to keep the
JCB machines of its customers in operational readiness. Each dealer point is also well
stocked with full range of parts, which its customers require from time to time.
JCB believes that a delighted customer is its best JCB ADVOCATE who can help it to
win more customers. Some of ten parts and product support services being provided to
its valued customers are:-

a) Service Campaigns being undertaken from time to time to provide free preventive
maintenance services to its customers at their doorstep
b) Parts Marketing Campaigns to make the customer’s aware about the long-term
benefits of using “JCB Genuine Parts” in their machines.

c) Regular Customer meets which helps in understanding the discerning requirement if

its customers.
d) Training campaigns to upgrade the skills of the machine operators. This helps its
customers to get the best possible output from machine.

JCB PEDIGREE
Joseph Cyril Bamford launched the construction and agricultural equipment
manufacturing company that bears his initials, in 1945. He began his business in a
garage that measured 12 feet by 15 feet.

Today, JCB’s world headquarters is one of the finest engineering factories in Europe.
The company that began as a ‘one man band’ now employs over 4,000 people and
produces over 130 different models on 4 different continents with bases in the UK, USA,
India and South America.
It also sells a full range of equipment in over 150 countries. But JCB’s remarkable
success story can not be fully appreciated by studying a litany of statistics. JCB has
an ethos, a spirit and an identity that cannot be conveyed by facts and figures. Perhaps
one question and one dictionary definition might go some way to explaining why JCB is a
very special company.
The question:
question: ‘How many global brands are still run as a family business?’ The
dictionary definition:
definition: JCB n. Trademark. A type of construction machine with a
hydraulically operated shovel on the front and an excavator arm on the back
(named from the initials of Joseph Cyril Bamford, its English manufacturer).
JCB is a unique company where unique people produce unique products, but it
shares one vitally important characteristic with many other successful global brands.
It never stands still. JCB may have an exciting future because of its illustrious
past but it never takes anything for granted. It is constantly seeking new
horizons.
Today’s successful businesses satisfy the needs of their customers. Tomorrow’s successful
brands have to exceed their customers’ expectations. JCB is always looking for a better
way. It is always prepared to go that extra mile, always determined to do whatever it
can to help its customers to do a better job.
The real JCB difference is that it is a global operation that is run like a family
business. It retains a sense of family and continuity within a highly
sophisticated corporate structure. It is still family owned with no outside shareholders.
In the final analysis, JCB isn’t bout machines. It’s about people. People who believe
in the business, and in the product; People who consider themselves to be part of the
JCB family

JCB is a company with a basic belief in the merits of art work. At the core of his
modern manufacturing giant is an old-fashioned work ethic. Nobody works harder on
behalf of their customers. Nobody tries harder to improve their products and
their service. JCB people believe their products are the best but they still want them to
be better. That’s why JCB is unique.

REACHING NEW HEIGHTS

When you’re a worldwide brand your famous logo is seen in all kinds of locations.
Imagine this.

Glacial Flood defenses are needed in an uninhabited area 16,000 feet up in the
Himalayas in Nepal. The area is completely inaccessible by road and a JCB Backhoe
Loader could make a major contribution – if only it could get to the scene.
Jason Call ear, a Team Leader in the Backhoe Loader Division, was responsible for
delivering the goods.
He assembled the machine, all 8 tones of it, after 300 separate parts were airlifted
in by helicopter.
It took Jason 4 days to assemble the machine which was used to dig a channel to drain
water from a glacial lake and to create a dam to prevent the flooding of villages lower
down the mountain.

MATTER OF TRUST
Of course, being a worldwide brand means that JCB has certain obligations. Part of our
Mission Statement states, ‘we want to help to build a better future for our children where
hard work and dedication is given its just rewards’.
Here are two vivid examples of this commitment. JCB employees in the UK raised
£1 million for the NSPCC through the ‘JCB – Digging Deep for Children’ campaign. A
little further afield, JCB have improved conditions at an under -
privileged Indian school following its adoption by a Trust set up in Lady Bamford’s
name.
The Government High School in the village of Jharsaintli used to house pupils in
tumbledown buildings lacking electricity and drinking water. Now, thanks to the Lady
Bamford Charitable Trust, these facilities have been installed along with proper seats
and desks.
The Trust has also provided funding for three English teachers. Lady Bamford has the
last word, “The work of the Trust is to ensure the school has the most basic facilities that
many of us in Britain would take for granted.”

A RACING CERTAINTY
Rik Kiddle, then Regional Manager for JCB Asia Pacific, ensured that JCB was in pole
position to ensure the safety of drivers and spectators at the inaugural Malaysia
Grand Prix.
Asia’s first ever Formula 1 Grand Prix launched Malaysia’s new state-of-the-art
Sepang international circuit near to Kuala Lumpur and 16 JCB Loadalls were on hand
to function as car recovery vehicles at each of the corners of the brand new circuit. The

Loadalls were called into action on eleven occasions, helping to recover the 200mph,
800hp super cars from the run-off areas.

FIRST AID
Many of the JCB machines delivered to Turkey were first on the scene to provide aid to
the victims of a major Turkish earthquake.

The machines, mainly JCB Backhoe Loaders were pressed into service to assist in a
massive relief effort.
JCB also donated a new JS Excavator which had been held in dealer stock. The
earthquake killed several thousand people and destroyed up to 60,000 houses. Another
40,000 houses were severely damaged in the quake which centered on Izmit, a large
industrialized area 65 miles east of Istanbul, and the tremors caused severe damage
to properties within an 80 mile radius.
CLEANING UP
When the floods that hit the Czech Republic in August 2002 devastated large areas of the
country a JCB JS220 helped with the large-scale clean-up operation.
The JS220 model, which was fresh off JCB’s production line, is capable of
transporting large amounts of silt from a stationary position on the river-bank
through its 15-metre long reach boom.
 It was sent to Magdalena, a village badly affected by the floods, not to help so much
with the cosmetic clean – up process but to help re-build river banks and reinforce
flood defenses.
A JCB spokesman said: "The excavator was originally intended to go to Hungary but it
was diverted to the Czech Republic to help with the clean-up and that is where it will
now stay”.
A spokesman for Chalus, the new owner said: "We have been very satisfied with the
excavator. We were also pleased with the delivery of the machine which took two days to
arrive after the initial order was placed.”
JCB’S PROMISE
We plan to deliver the best customer support in our industry – putting the customer at
the very heart of our business.

JCB Worldwide Product Range

1) Backhoe loaders
4DX
3DX
2) Tracked excavators
JS210
JS75
3) Wheeled loaders
430Z
3DS
4) Skid steer loaders
160/170
S 75 TRACKED EXCAVATOR

3D BACKHOE LOADER
 JCB INDIA LIMITED – PRODUCT RANGE

 JCB 3D & JCB 3D TURBO (BACKHOE LOADER)

FEATURE

KIRLOSKAR ENGINE 4R – 1040 with 4 Cylinders Generates 57 KW (76 HP) at 2200 RPM.

APPLICATIONS

 Excavation
 Loading
 Dozing
 Grading
 Grabbing
 Backfilling
 Trenching
 Ditching

 JCB 3DX (LOADER)

FEATURE

KIRLOSKAR Engine 4R – 1040 with 4 Cylinders Generates 57 KW (76 HP) at 2200 RPM.

APPLICATIONS

 Loading

 Dozing

 Grading
 Grabbing

 Backfilling

 Ditching
Attachment of JCB 3D & 3DX
Excavator End Attachments: -

Augur Ditch Cleaning Bucket D-Shackle & Hook Extending Dipper

GP Bucket Hand Held Breaker Jaw Bucket Ripper

Tooth
 JCB 4CX (EXCAVATOR LOADER)

FEATURE

PERKINS Engine with 4

Cylinders Generates
71.5 KW (96 HP) at 2200 RPM

APPLICATIONS

 Similar to 3DS operations

but for heavy operations

 JCB 430Z (WHEELED LOADING SHOVEL)

FEATURES
Maximum operating weight 3300 KGS Ashok Leyland Engine with 6 Cylinders 4 Stroke
generates 127 HP.

APPLICATIONS

 Wagon Loading

 Pallet Handling

 Burgesses Spreading

 Dozing
 JCB JS 75 (TRACKED EXCAVATOR)

FEATURES

Maximum operating weight 8035

KGS KIRLOSKAR Engine 4R 1040
with 4 Cylinders 4 Stroke
generates 67 HP at 1800 RPM.

APPLICATIONS

 Dual Crusher Loading

 Pipe Laying
 Excavating & Loading
 Road Construction
 Closed Area Operation
 Trenching Dozing
 JCB ROBOT (SKID STEER)

FEATURES

Maximum operating
weight 3500 / 3725 KGS
Engine with 4 Cylinders 4 Stroke.

APPLICATIONS

 Road & Industrial Cleaning

 Drilling holes for Poles and Trees
 Loading
 Grading
 Grabbing
 Lock Breaking
 Excavation
 Trenching
 Tilling

CLIENTS LIST
 ACC

 Bhagiratha Engineering (Kerela)

 Bharat Coking Coal Ltd

 Bhilai Steel Plant

 Binani Cement

 Calcutta Port Trust

 Damodar Valley Corporation

 Directorate General Border Roads

 Dodsal

 Eastern Coal Fields

 Hindustan Construction Company

 Hindustan Zinc

 IFFCO

 Indian Petro Chemical Ltd

 Indian Army

 Indian Iron & Steel Company

 Indian Navy

 IRCON

 L&T-ECC

 Madras Port trust

JCB MANAGEMENT HIERARCHY

 John Patterson
[Group Chief Executive]

 Tim Lead beater

[Group Commercial & Planning Director]

 Fracoise Rausch
[MD JCB Sales Ltd.]

 Keith Tipping
[MD Heavy Line]

 Malcom Foe
[MD Branded Products]
 Alan Thomson
[MD Compact Products]
 Alan Staniforth
 [MD Human Resource]

 Paul Keogh
[World wide Marketing and Branded Director]

 Steve Gardner
[Group Purchasing Director]

 David Bell
[MD Agri & Industrial]

 David Miller
[Group Finance Director]

 Steve Yianni
[Director & GM Transmissions]

 Gracme Macdonald
[MD B / L Division]

 Alan Blake

[MD JCB Services Ltd

 CHAPTER-3

REVIEW

OF

LITERATURE
 REVIEW OF LITERATURE

MEANING OF CAPITAL BUDGETING:

An efficient allocation of capital is the most important finance function in modern

times. It involves decisions to commit firm’s funds to long-term assets. Such decisions are

tend to determine the value of company/firm by influencing its growth, profitability & risk.

Investment decisions are generally known as capital budgeting or capital expenditure

decisions. It is clever decisions to invest current in long term assets expecting long-term

benefits firm’s investment decisions would generally include expansion, acquisition,

modernization and replacement of long-term assets.

Such decisions can be investment decisions, financing decisions or operating

decisions. Investment decisions deal with investment of organization’s resources in Long tern

(fixed) Assets and or Short term (Current) Assets. Decisions pertaining to investment in

Short term Assets fall under “Working Capital Management”. Decisions pertaining to

investment in Long term Assets are classified as “Capital Budgeting” decisions.

Capital budgeting decisions are related to allocation of investible funds to different long-term

assets. They have long-term implications and affect the future growth and profitability of the

firm.

In evaluating such investment proposals, it is important to carefully consider the expected

benefits of investment against the expenses associated with it. Organizations are frequently

faced with Capital Budgeting decisions. Any decision that requires the use of resources is a
capital budgeting decisions. Capital budgeting is more or less a continuous process in any

growing concern.

Definition

“Capital budgeting involves the planning of expenditure for assets, the return from which

will be realized in future time periods.”

Thus, a capital budgeting may be defined as the firm’s decision to invest its funds in the long

term assets in anticipation of an expected flow of benefits over the lifetime of the assets.

These benefits may be either in the form of increased sales or reduced costs capital budgeting

decision regarding expansion, acquisition, modernization and replacement of the long term

assets.

Features

 In capital budgeting decision, funds are invited in long term assets.

 These funds are invested in present times in anticipation of future funds.

 Future profiles will occur the firm over a series of years.

 Capital budging decisions involve a high degree of risk because future

benefits are not certain.

Importance of Capital Budgeting

There are several factors that make capital budgeting decisions among the critical decisions

to be taken by the management. The importance of capital budgeting can be understood from

the following aspects of capital budgeting decisions.

 Such decision affects the profitability of the firm

Capital budgeting decisions affect the long term profitability of a irm because of the fact that

they relate to fixed assets. A correct investment decision can yield profit otherwise incorrect

decision can endanger the survival of the firm.

 Long term periods

Capital Budgeting decisions have long term effects on the risk and return composition of the

firm. These decisions affect the future position of the firm to a considerable extent. The

finance manger is also committing to the future needs for funds of that project. The decision

of capital budgeting will be felt by firm over a long time and, affects the future cost

structure of the firm.

 Irreversible decision

Capital budgeting decision are not easily reversible without heavy financial loss to the. This

is because it is very difficult to sell the second hand plant.

  After the Capacity and Strength to Compete: Capital budgeting decisions affect

the capacity and strength of a firm to face competition. A firm may loose

competitiveness if the decision to modernize is delayed.

PROBLEMS & DIFFICULTIES IN CAPITAL BUDGETING:

1. Future uncertainty: Capital Budgeting decisions involve long-term commitments.

There is lot of uncertainty in the long term. The uncertainty may be with reference to

cost of the project, future expected returns, future competition, legal provisions,

political situation etc.

2. Time Element: The implications of a Capital Budgeting decision are scattered over a

long period. The cost and benefits of a decision may occur at different

point of time. The cost of a project is incurred immediately. However, the investment is

recovered over a number of years. The future benefits have to be adjusted to make them

comparable with the cost. Longer the time period involved, greater would be the uncertainty.

3. Difficulty in Quantification of Impact: The finance manger may face difficulties in

measuring the cost and benefits of projects in quantitative terms.

Example: The new product proposed to be launched by a firm may result in increase or

decrease in sales of other products already being sold by the same firm. It is very difficult to

ascertain the extent of impact as the sales of other products may also be influenced by factors

other than the launch of the new product.

ASSUMPTIONS IN CAPITAL

BUDGETING:

The Capital Budgeting decision process is a multi-faceted and analytical process. A number

of assumptions are required to be made.

1. Certainty with respect to cost & Benefits: It is very difficult to estimate the cost and

benefits of a proposal beyond 2-3 years in future.

2. Profit Motive: Another assumption is that the capital budgeting decisions are taken

with a primary motive of increasing the profit of the firm.

The activities can be listed as follows:

 Dis-investments i.e., sale of division or business.

 Change in methods of sales distribution.

 Undertakings an advertisement campaign.

 Research & Development programs.

 Launching new projects.

 Diversification.

 Cost reduction.

FEATURES OF INVESTMENT DECISIONS:

  The exchange of current funds for future benefits.

 The funds are invested in long-term assets.

 The future benefits will occur to the firm over a series of years.

IMPORTANCE OF INVESTMENT DECISIONS:

 They influence the firm’s growth in long run.

 They affect the risk of the firm.

 They involve commitment of large amount of funds.

 They are irreversible, or reversible at substantial loss.

 They are among the most difficult decisions to make.

TYPE OF INVESTMENT DECISIONS:

 Expansion of existing business.

 Expansion of new business.

 Replacement & Modernization.

INVESTMENT EVALUATION CRITERIA:

 Estimation of cash flows.

 Estimation of the required rate of return.

 Application of a decision rule for making the choice.

Consideration of cash flows is to determine true profitability of the project and it is an

unambiguous way of identifying good projects from the pool. Ranking is possible it should

recognize the fact that bigger cash flows are preferable to smaller ones & early cash flows are

referable to later ones I should help to choose among mutually exclusive projects that which

maximizes the shareholders wealth. It should be a criterion which is applicable to any

considerable .
Capital Budgeting Techniques

Traditional Approach Modern Approach

(or) (or)
Non-Discounted Cash Flows Disconnected Cash Flows

Pay Back Period (PB) Net Present Value (NPV)

Accounting Rate of Return (ARR) Internal Rate of Return
Profitability Index (PI)
Discounted Payable Period

NET PRESENT VALUE:

The Net Present value method is a classic economic method of evaluating the

investment proposals. It is one of the methods of discounted cash flow. It recognizes the

importance of time value of money”.

It correctly postulates that cash flows arising of different time period, differ in value

and are comparable only when their equivalent i.e., present values are found out.

The following steps are involved in the calculation of NPV:

  Cash flows of the investment project should be forecasted based on realistic

assumptions.

 An appropriate rate of interest should be selected to discount the cash flows; generally

this will be the “Cost of capital rate” of the company.

 The present value of inflows and out flows of an investment proposal has to be

computed by discounting them with an appropriate cost of capital rate.

 The Net Present value is the difference between the “Present Value of Cash inflows”

and the present value of cash outflows.

 Net present value should be found out by subtracting present value of cash outflows

from present value of cash inflows. The project should be accepted if NPV is positive.

NPV = Present Value of Cash inflow – Present value of the cash outflow

Acceptance Rule:

Accept if NPV > 0

Reject if NPV < 0

May accept if NPV = 0

One with higher NPV is selected.

INTERNAL RATE OF RETURN METHOD

The internal rate of return (IRR) method is another discounted cash flow technique

.This method is based on the principle of present value. It takes into account of the magnitude

& timing of cash flows.

 IRR nothing but the rate of interest that equates the present value of future periodic

net cash flows, with the present value of the capital investment expenditure required to

undertake a project.

The concept of internal rate of return is quite simple to understand in the case of one-

period project.

Acceptance Rule:

Accept if r > k

Reject if r < k

May accept if r = k

Where r = rate return

k = opportunity cost of capital

PROFITABILITY INDEX (OR) BENEFIT COST RATIO:

Yet another time-adjusted method of evaluating the investment proposals is the

benefit-cost (B/C) ratio of profitability index PI). It is benefit cost ratio. It is ratio of present

value of future net cash inflows at the required rate of return, to the initial cash outflow of the

investment.

Present Value of Cash inflows

PI = -----------------------------------------

Present Value of Cash outflows

Acceptance Rule:

Accept if PI > 1

Reject if PI < 1

May accept if PI = 1

Profitability Index is a relative measure of projects profitability.

PAY BACK PERIOD METHOD:

One of the top concerns of any person or organization investing a large amount of

money would be the time by which the money will come back. The concern making the

investment would want that at least the capital invested is recovered as early as possible. The

pay back period is defined as the period required for the proposal’s cumulative cash flows to

be equal to its cash outflows. In other words, the payback period is the length of time

required to recover the initial cost of the project. The payback period is usually stated in

terms of number of years. It can also be stated as the period required for a proposal to ‘break

even’ on its net investment.

The payback period is the number of years it takes the firm to recover its original investment

by net returns before depreciation, but after taxes.

If project generates constant annual cash inflows, the pay back period is completed as

follows:

Initial Investment
 Pay Back = ------------------------

Annual cash inflow

In case of unequal cash inflows, the payback period can be found out by adding up the cash

inflows until the total is equal to initial cash outlay.

Acceptance Rule:

 Accept if calculated value is less than standard fixed by management otherwise reject

it.

 If the payback period calculated for a project is less than the maximum payback

period set up by the company it can be accepted.

DISCOUNTED PAY BACK PERIOD:

One of the serious objections to pay back method is that it does not discount the cash flows.

Hence discounted payback period has come into existence. The number of periods taken in

recovering the investment outlay on the present value basis is called the discounted payback

period.

Discounted Pay Back rule is better as it does discount the cash flows until the outlay is

recovered.
ACCOUNTING RATE OF RETURN (OR)

AVERAGE RATE OF RETURN (ARR):

It is also known as return on investment (ROI). It is an accounting method, which uses the

accounting information revealed by the financial statements to measure the profitability of an

investment proposal. According to Solomon, ARR on an investment can be calculated as “ the

ratio of accounting net income to the initial investment i.e.” .

Average Net Income

ARR = ---------------------------

Average Investment

Average Income = Average of after tax profit

Average Investment = Half of Original Investment

Acceptance Rule:

 Accept if calculated rate is higher than minimum rate established by the management.
  It can reject the projects with an ARR lower than the expected rate of return.

 This method can also help, the management to rank the proposals on the basis of

ARR.

 A highest rank will be given to a project with highest ARR, whereas a lowest rank to a

project with lowest ARR.

CAPITAL BUDGETING METHODS IN PRACTICE

 In a study of the capital budgeting practices of fourteen medium to large size

companies in India, it was found tat almost all companies used by back.

 With pay back and/or other techniques, about 2/3rd of companies used IRR and about

2/5th NPV. IRR s found to be second most popular method.

 Pay back gained significance because of is simplicity to use & understand its

emphasis on the early recovery of investment & focus on risk.

 It was found that 1/3rd of companies always insisted on computation of pay back for

all projects, 1/3rd for majority of projects & remaining for some of the projects.

 Reasons for secondary of DCF techniques in India included difficulty in

understanding & using threes techniques, lack of qualified professionals &

unwillingness of top management to use DCF techniques.

PROCESSES IN CAPITAL BUDGETING

 At least five phases of capital expenditure planning & control can be identified:

 Identification (or Organization) of investment opportunities.

 Development of forecasts of benefits and costs.

 Evaluation of the net benefits.

 Authorization for progressing and spending capital expenditure.

 Control of capital projects.

FORECASTING:

Cash flow estimates should be development by operating managers with the help of

finance executives. Risk associated should be properly handled. Estimation of cash flows

requires collection and analysis of all qualitative and quantitative data, both financial and

non-financial in nature. MIS provide such data.

Correct treatment should be given to:

 Additional working capital

 Sale proceeds of existing assets.

 Depreciation

 Financial flows (to be distinguished from operation flows)

EVALUATION:

Group of experts who have no ake to grind should be taken in selecting the methods of

evaluation as NPV, IRR, PI, Pay Back, ARR & Discounted Pay Back.
Pay Back period is used as “Primary” method & IRR/NPV as “Secondary” method in India.

The following are to be given due importance.

 For evaluation, minimum rate of return or cut-off is necessary.

 Usually if is computed by means of weighted Average cost of Capital (WACC)

 Opportunity cost of capital should be based on risky ness of cash flow of

investment proposals.

 Assessment of risk is an important aspect. Sensitivity Analysis & Conservative

for costs are two important methods used in India.

AUTHORIZATION:

Screening and selecting may differ from one company to another. When large sums are

involved usually final approval rests with top management. Delegation of approval authority

may be effected subject to the amount of outlay. Budgetary control should be rigidly

exercised.

CONTROL AND MONITORY:

A Capital projects reporting system is required to review and monitor the performance of

investment projects after completion and during their life. Follow up comparison of the actual

performance with original estimates to ensure better forecasting besides sharpening the

techniques for improving future forecasts. As a result company may re-praise its projects and

take necessary action.

DECISION MAKING LEVEL:

For planning and control purpose three levels of Decision making have been identified :

 Operating

 Administrative

 Strategic

OPERATING CAPITAL BUDGETING:

Includes routine minor expenditure, as office equipment handled by lower level

management.

ADMINISTRATIVE CAPITAL BUDGETING:

Falls in between these two levels involves medium size investments such as business

handled by middle level management.

STRATEGIC CAPITAL BUDGETING:

Involves large investment as acquisition of new business or expansion in a new time of

business, handled by top management unique nature.

Long Term Capital Budgeting In JCB Ltd.

PRE – INVESTMNET STAGE

In a planned economy, as in India, the identification of public sector projects needs to be done

within the overall framework of national the sect oral planning. All projects of every sector

need to be identified scientifically at the time of plan formulation. In actual practice,

however, it is observed that ‘identification’ stage is the most neglected stage of the project

planning.

The five year plans indicate the broad strategy of planning economic growth rate and other

basic objectives to be achieved during the plan period. The macro level planning exercise

undertaken at the beginning of every five year plan indicates broadly the role of each sector’s
physical targets to be achieved and financial outlays, which could be made available for the

development of the sector during the plan period.

The identification of a project in the Five Year Plan is not the sanction of the project for

implementation. It provides only the ‘green signal’ for the preparation of feasibility report

(FR0 for appraisal and investment decision. A preliminary scrutiny of the FR of the project is

done in the Ministry and thereafter copies of the feasibility report are submitted to the

appraising agencies, viz., Planning Commission, Bureau of Public Enterprises and the Plan

Finance Division of the Ministry of Finance.

PROJECT APPRAISAL

The appraisal of the project follows the formulation stage. The objective of the appraisal

process is not only to decide whether to accept or reject the investment proposal, but also to

recommend the ways in which the project can be redesigned or reformulated so as to ensure

better technical, financial, commercial and economic viabilities.

The project appraised which is an essential tool for judicious investment decisions and

project selection is a multi-disciplinary task. But many a times this is considered doubt, have

played an important role in contributing systematic methods for forecasting the future and

evolving appraisal methods to quantify socials costs and benefits, but they alone can not carry

out complete appraisal of an investment proposal.

The need for project appraisal and investment decisions based on social profitability arises

mainly because of the basic characteristics of developing countries limited resources for

development and multiple needs – objective of planning being ‘Economic Growth with
Social Justice’. The project appraisal is a convenient and comprehensive fashion to achieve,

the laid down objectives of the economic development plan. The appraisal work presupposes

availability of a certain minimum among of reliable and up to date data in the country, as well

as the availability of trained persons to carry out the appraisal analysis.

As stated earlier the investment decision of public sector projects are required to be taken

within the approved plan frame work. The Project Appraisal Division (PAD) that prepares

the comprehensive appraisal note of projects of Central Plans was therefore set up in

Planning Commission. The Finance Ministry issues expenditure sanction for all investment

proposals within the frame work of annual budget.

Primary Data has been collected through discussions and observation of various people

involved in the business whereas Secondary Data through annual reports of the company,

newspaper, magazines, journals and internet.

Net Present Value

Here's another perspective on the meaning of NPV. If we accept a project with a negative

NPV of -$2,422, this is financially equivalent to investing $2,422 today and receiving nothing

in return. Therefore, the total value of the firm would decrease by $2,422. This, of course,

assumes that the various components (cash flow estimates, discount factor, etc.) used in the

computation are correct.

In practice, financial managers are rarely presented with zero-NPV projects for at least two

reasons. First, in an abstract sense, zero is just another of the infinite number of values the

NPV can take; as such, the likelihood of obtaining any particular number is small. Second,

(and more pragmatically), in most large firms, capital investment proposals are submitted to
the Finance group from other areas (e.g., the industrial engineering group) for analysis. Those

submitting proposals recognize the ambivalence associated with zero NPVs and are less

likely to send them to the Finance group in the first place.

Conceptually, a zero-NPV project earns exactly its required return. Assuming that risk has

been adequately accounted for, investing in a zero-NPV project is equivalent to purchasing a

financial asset in an efficient market. In this sense, one would be indifferent between the

capital expenditure project and the financial asset investment. Further, since firm value is

completely unaffected by the investment, there is no reason for shareholders to prefer either

one.

However, several real-world considerations make comparisons such as the one above

difficult. For example, adjusting for risk in capital budgeting projects can be problematic.

And, some investment projects may be associated with benefits that are difficult to quantify,

but exist, nonetheless. (Consider, for example, an investment with a low or zero NPV but

which enhances a firm's image as a good corporate citizen.) Additionally, the secondary

market for most physical assets is substantially less efficient than the secondary market for

financial assets. While, in theory, one could adjust for differences in liquidity, the adjustment

is, again, problematic. Finally, some would argue that, all else equal, some investors prefer

larger firms to smaller; if true, investing in any project with a nonnegative NPV may be

desirable.

Internal Rate of Return

Internal rate of return (IRR) is the rate that makes the present value of the future cash flows

equal to the initial cost or investment. In other words, it is the discount rate that gives a

project a $0 NPV.
IRR rule-the investment is acceptable if its IRR exceeds the required return.

Assume: To comply with the Air Quality Control Act of 1989, a company must install three

smoke stack scrubber units to its ventilation stacks at an installed cost of $355,000 per unit.

An estimated $100,000 per unit could be saved each year over the five-year life of the

ventilation stacks. The cost of capital is 14% for the firm. The analysis of the investment

results in a NPV of -$11,692.

Despite the financial assessment dictating rejection of the investment, public policy might

suggest acceptance of the project. By fiat, certain types of pollution controls are required. But

should the firm exceed the minimum legal limits and be responsible for the environment,

even if this responsibility leads to a wealth reduction for the firm? Is environmental damage

merely a cost of doing business? Could investment in a healthier working environment result

in lower long-term costs in the form of lower future health costs? If so, might this decision

result in an increase in shareholder wealth? Notice that if the answer to this second question

is yes, it suggests that our original analysis omitted some side benefits to the project.

ADVANTAGES

 People seem to prefer talking about rates of return to dollars of value.

 NPV requires a market discount rate; IRR relies only on the project cash

flows.

DISADVANTAGES

 Nonconventional cash flows- Multiple rates of return-if cash flows

alternate back and forth between positive and negative (in and out), more

than one IRR is possible. NPV rule still works just fine. Also,if the cash

flows are of loan type, meaning money in at first and cash out later, the
 IRR is really a borrowing rate and lower is better. The IRR is sometimes

called the IBR (internal borrowing rate) in this case.

 Mutually exclusive investment decisions-if taking one project means

another is not taken, the projects are mutually exclusive. The IRR can

provide conflicting rankings when mutual exclusive projects are analyzed.

Comparison of the NPV and IRR Methods

NPV Profiles

Net present value profile is a graph of an investment's NPV at various discount rates. The

graph illustrates the NPV changes as the cost of capital changes. The IRR is not a function of

the cost of capital.

 Risk

Investment in fixed assets may change the risk complexion of the firm. This is because

different capital. Investment proposals have different degrees of risk. If adoption of an

investment proposal increased average gain, but causes frequent fluctuation in the profit of

firm, the firm will become more risky.

Capital budgeting is investment decision-making as to whether a projects orth undertaking.

Capital budgeting is basically concerned with the justification of capital expenditures

.Current expenditures are short-term and are completely written off in the same year that

expenses occur. Capital Budgeting is the process by which the firm decides which long term
investment to make. Capital budgeting projects, i.e., potential long-term investment, are

expected to generate cash flows over several years. The decision to accept or reject a capital

Budgeting project depends on an analysis of the cash flows generated by the project and its

cost,. Popular methods of capital budgeting include net present value(NPV), internal rate of

return(IRR), discounted cash flow(DCF) and payback period. The following three Capital

Budgeting decision rules will be presented:

 Payback period

 Net Present Value(NPV)

 Internal Rate of Return(IRR)

Capital Budgeting Phases

The phases of the capital budgeting process include:

 Description of the need or opportunity;

 Identification of alternatives;

 Evaluation of the options and the relevant cash flows of each;

 Selection of best alternative; and

 Conducting a post-completion audit of the projects.

Identifying Capital Budgeting Needs

The first step is to identify the need or opportunity. This is usually done at the mid-

management level and is the result of a shared vision of company goals and strategies

coupled with a “where the rubber meets the road” perspective of local”

clients needs, tastes and behavior. They see a need or opportunity and communicate it to

senior management, usually in the form of proposals which both include identification of the

need or opportunity, and potential solution and/ or recommendations. Senior management

then evaluates the merit of each proposed opportunity and makes a determination of whether

or not to look into it further.

While project need identification is usually a de-centralized function, capital initiation and

location decisions tend to remain a highly centralized undertaking.

The reason for this revolves around the need for capital rationing, especially when funds are

limited and upper-management wishes to maximize its returns/benefits from any capital

projects undertaken.The information needed to make this determination usually comes from

both internal and external sources, and is based on both financial and non-financial

considerations. Interestingly enough, the factors examined in this process can be both firm-

specific and market-based in nature. It is that this point that companies should be seeking

qualified financial guidance since the consequences of both a poor decision and of the

implementation of a good decision can be far-reaching.

Risk Analysis in Capital Budgeting Decisions

Conceptually, a capital budgeting decision is simplicity itself. The analyst determines the

upfront cost of a project, as well as the periodic future ash flows resulting from the project.

Those cash flows are then used to calculate it her the net present value(NPV) of the

project- using the firm’s weighted-average cost-of- capital(WACC) as a discount rate

–or the internal rate of return(IRR) for the object. If the NPV is positive, or if the IRR

exceeds the WACC, the firm undertakes the project; otherwise it doesn’t.

The difficulty in making capital budgeting decisions arises as a consequences of the

difficulty in determining the upfront costs, the periodic cash flows, even the proper WACC.

All of these quantities must be estimated, and all he ensuing stimates will contain some

degree of uncertainty; the process in inherently risky.

  The life of the project is long time.

Merits

 It takes time value of money.

 Final life of the project is taken into consideration.

Demerits

 It is difficult to understand and implement.

 It is difficult in fixing the required rate of return.

NPV Example

Assume you have the following information on project X:

Initial outlay-$1,100 Required return=10%

Annual cash revenues and expenses are as follows:

Year Revenues Expenses

1 $1,000 $500

2 2,000 1,000

Draw a time line and computer the NPV of project X

Example:
Consider the previous investment project analyzed with the NPV rule.

The initial cost is $600 million. It has been decided that the project should be

accepted if the payback period is 3 years or less. Using the payback rule, should

this project be undertaken?

Year Cash Flow Accumulated cash

Flow

1 $200.00 $200.00

2 220.00

3 225.00

4 210.00
Example: Calculating the payback period: the projected cash flows a

proposed investment are listed below. The initial cost is $500. What is the

payback period for investment?

Year Cash flow Accumulated Cash

Flow

1 $100.00 $100.00

2 200.00

3 500.00
Comparison of IRR and NPV

IRR and NPV rules lead to identical decision when the following conditions are

satisfied

 Conventional Cash Flows: the first cash flow ( the initial investment )is

Negative and all the remaining cash flows are positive.

 Project is independent: A project is independent if the decision to accept or

reject the project does not affect the decision to accept or reject any other

project.

When one or both of these conditions are not met, problems with using the IRR

rule can result.

Internal rate of return (IRR)

Meaning

It is also Known as time adjustment rate of return. It is based on internal

facts of a proposal. It is determined entirely by the cash inflow and cash

outflows of the project irr is usually the rate of return that a project

earns.

In other words, it is the rate which npv of the project is zero.

Evaluating

If IRR exceeds the rate of return, the project would be accepted. If it is

less than expected rate of return, project will be rejected.

The formula of calculating of IRR is

IRR = lower discount rat + NPV at lower discount rate / NPV at lower

Discount rate – NPV at higher discount rate * difference in discount rate

Merits

 It takes into consideration the time value of money.

 It is consistent with the overall objective of maximizing the

shareholder wealth.

Demerits
  It involves tedious calculation.

 It becomes difficult to accept or reject the proposal.

IRR illustrated

Initial outlay = -$200

Year Cash Flow

1 50
2 100
3 150

Find the IRR such that NPV = 0

0 = -200 + 50 + 100 + 150

(1+IRR)1 (1+IRR)2 (1+IRR)3

200 = 50 + 100 + 150

(1+IRR)1 (1+IRR)2 (1+IRR)3

A capital Budgeting decision rule should satisfy the flowing criteria.

 Must consider all of the project’s cash flows.

 Must consider the time value of money
 Must always lead to correct decision when choosing among
mutually Exclusive Projects.
NPV

NPV(k)

IRR

K1 Discount rate K2
NPV(k2)0

Figure .1 NPV vs. IRR independent projects

NPV

$1 363.64

B
$954.55 A

0 k0 20% 21%
Discount rate
 Figure .2 NPV vs. IRR: Dependent projects

NPV

$3,409.00

$1,230.50

0 20% 21% 30%

Discount rate
 CHAPTER- 4

RESEARCH
METHODOLOGY
 RESEARCH METHODOLOGY

When we talk of research methodology, we not only talk of the research methods but also the

comparison of the logic behind the methods, we used in this context of our research study and

explain why we are using a particular method or technique and why using the other. Research

methodology is a way to systematically solve the research problem. It may be understood as a

science of studying how research is done systematically. In this, we study the various steps

that are generally adopted by researcher in studying his research problem along with the logic

behind them.

“The present study is based upon the case study method of research to investigate procedures

at micro level”.

As the study is analyzing probing in nature, thus, entirely based on the secondary data

gathered through the annual reports of the industry. Therefore it provides a historical

perspective of decisions.

OBJECTIVES OF THE STUDY:

1. To know about affect of capital budgeting decision on profitability of firm.

2. To know about process of capital budgeting are long they or not.

3. To know about various types of capital budgeting decision.

4. To know about difficulty level of capital budgeting decision.

SCOPE THE STUDY:

 The data of study of project collected of investor or capital structure may not

applicable in all the situations.

 The study of capital structure analysis of company financial position may be affected

or not.

 The calculations and methods adopted in my study may be carried an appropriately.

 Due to time constant of 45 days, the data of the study may on way net present overall

view of the capital structure.

 It is dipped to judge the results-valve due to the change market valves of the firm.

RESEACH DESIGN

Research design involves defining the research problem, determining how to collect the data

and from whom, establishing the way the data will be analyzed estimating costs and the

preparation of the research approach. For this study, descriptive research was selected.

TYPE OF RESEARCH DESIGN

1. Historical Research Design

2. Case and Field Research Design

3. Descriptive or Survey design

4. Exploratory Research design

I used descriptive research design in this study

1. POPULATION AND SIZE OF SAMPLE

SAMPLE DESIGN

The method used for sample technique is convenient sampling method.

SIZE OF SAMPLE:

I collected the data from 50 employees.

2. DATA COLLECTION:

The data are collected from both primary and secondary sources.

Primary Data

Primary data collected through face to face interview, observation, and by participation in the

selecting process.

Secondary Data

The secondary data is collected from website, magazine, memorandum, journals, books and

some other relevant sources.

Both primary data and secondary will be used to generate this report. Primary data sources

are scheduled, survey, informal discussion with professionals. Secondary data sources are the

data used previously for the analysis and the results are undertaken for next process.

METHOD OF DATA ANALYSIS

I used various data and graphs in this study

LIMITATIONS OF THE STUDY:

 The respondents were limited and cannot be treated as the whole population.

 The respondents may be biased.

 Time was the major constraint.

 The accuracy of indications given by the respondents may not be consider adequate.

 This data does not cover the whole budgeting impact.

 CHAPTER –5

DATA ANALYSIS
AND
INTERPRETATION
DATA ANALYSIS

The term analysis means the computation of certain measures or indices along with
searching for patterns of relationship that exists among data group. Merely collection of data
cannot be the aim of any research activity but with the help of collected data a researcher tries
to draw the conclusions made generalization, establishes relationship between two or more
variable, test the hypothesis. Under the processes of analysis of data some statistical methods
are used to make data meaningful and self explanatory. The process of analysis of data made
the data to speak about themselves. By analysis, mean the determination of certain indices or
measures along with searching for pattern of relationship that exists among the data group.

INTERPRETATION
Interpretation means drawing inferences from the collected facts after the analytical study.
According to C. William Emory, interpretation has two major aspects namely establishing
continuity in research through linking the results of a given study with those of another and
the establishment of some relationship with the collected data. Interpretation is the device
through which the factors that seem to explain what has been observed by researcher in the
course of the study can be better understood. Interpretation provides a theoretical conception
which can serve as a guide for further research.
1 Capital budgeting decision affects the profitability of the firm.

Categories Total no. of respondents

Yes 50
No 25
Others 25

Fig. – Profitability of the firm

Interpretation: The responses of the respondents are 50% the decisions affect the
profitability of the firm.

2 Decision are taken by any organization.

Categories Total no. of respondents

Yes 45
No 30
Others 25

Fig. – Decisions taken by organization

Interpretation: The response of the respondents is 45% in favor of decision taken by
organization.

3 Funds are invested in the long term asset.

Categories Total no. of respondents

Yes 70
No 20
Others 10

Fig. - Funds invested in long term assets

 Interpretation: The 70% respondents are response in invested in the Long term assets
which are beneficial of the company.

4 Future profits are not certain.

Categories Total no. of respondents

Yes 40
No 50
Others 10
 Fig. - Profits are not certain

Interpretation: Future profits are not certain is considered by 40% from the point of view of
the respondents.

5 The process of decision are lengthy.

Categories Total no. of respondents

Yes 45
No 40
Others 15

Fig. - Lengthy process

Interpretation: Capital budgeting decisions are very lengthy process is viewed by 45%
respondents.
6 Involve high risk

Categories Total no. of respondents

Yes 30
No 30
Others 40

Fig. - Involve high risk

Interpretation: The responses of the respondents is 30% in favor of

involvement of risk in capital budgeting decision.
7 Capital budgeting decision is a difficult decision

Categories Total no. of respondents

Yes 55
No 30
Others 15

Fig. -10 Difficult decisions

Interpretation: 15% respondents are in favor of the difficulty in capital budgeting.

8 Capital budgeting decision is easy to change

Categories Total no. of respondents

Yes 60
No 35
Others 05

Fig. - Easy to change

Interpretation: The responses of the respondents are 60% considered that

capital budgeting decisions are easy to change.
9 Process should be simple and easy to predict

Categories total no. of respondents

Yes 20
No 70
Others 10

Fig - Simple process

Interpretation: Only 20% respondents are responses that procedures of

capital budgeting decision should be simple and 70% are said that its procedures are not very
easy.
10 Require large amount of funds

Categories Total no. of respondents

Yes 25
No 35
Others 40

Fig. - Large amount of funds

Interpretation: Only 25% respondents are responses that requirement of

funds are large in the company.
 CHAPTER-6

CONCLUSIONS
AND
SUGGESTIONS
 CONCLUSIONS

The conclusion of the whole report is the capital budgeting is very important part of firm.
Through capital budgeting, we find the budget of the firm. We find that how much the firm
invest in a particular assets, how we maintain the budget of firm.

Emerging as a dynamic organization, focusing on strategic, seizing opportunities for

generating and building upon past success. My view about compensation &benefits is that it
is better descriptive statements of and ineffective behaviors’ varying from least to most
effective. So, a rater must indicate which behaviors on each scale best describes an
employee’s performance, But there are some key areas which should be taken into
consideration.

Thus, in short it can be said that budgeting decision are the beneficial part of the firm. It
maintains the finance an to help in developing the firm.
 SUGGESTIONS

 Carefully estimate expected future cash flows.

 Select a discount rate consistent with the risk of those future cash
flows.
 Compute a “base-case” NPV.
 Identify risks and uncertainties. Run a sensitivity analysis.
 Exists whenever enterprises cannot, or choose not to, accept all value-
creating investment projects.
 Relax and eliminate the budget constraint.
 Manage the process rather than the outcomes.
 Develop a corporate culture committed to value creation.
ANNEXURE
 QUESTIONNAIRE

Q:1 Do you think capital budgeting decisions affect the Profitability of the firm for the long
time period?
Ans. Yes No don’t know

Q :2 “Capital budgeting decision are the long term decision, “Do you think such decision
are taken by any organization?
Ans. Yes No don’t know

Q :3 Do you thing organization’s funds are invested in long term assets?

Ans. Yes No don’t know

Q :4 “In capital budgeting decision, future benefits are not certain.” Are you satisfied of this
statement?
Ans. Yes No don’t know

Q :5 Do you think capital budgeting decisions are the lengthy procedures?

Ans. Yes No don’t know

Q :6 Do you think capital budgeting decision involve a high degree of risk?

Ans. Yes No don’t know
Q :7 Do you think capital budgeting decision are the most difficult decision which is to be
taken by the firm?
Ans. Yes No don’t know

Q:8 Do you think once capital budgeting decision are taken, it is easy to change?
Ans. Yes No don’t know

Q :9 Do you think the procedures of capital budgeting decision should be simple or easy to
predict?
Ans. Yes No don’t know

Q:10 Do you think capital budgeting decisions require large amount of funds?
Ans. Yes No don’t know
 BIBLIOGRAPHY

Books
 Goel R., Financial Management, A vichal Publishing company, Edition
2nd, 2011.
 Eugene F. Brigham, Fundamental Management, South Esteem, Edition
2nd, 1998.

Websites

 www.jcbindia.com