Shri Malaprabha Sahakari Sakkare Khakane (N)

INDUSTRY PROFILE

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Shri Malaprabha Sahakari Sakkare Khakane (N)

Industry Overview:History Of The Sugar Industry

Indian sugar industry is highly fragmented with organized and unorganized players. The unorganized players mainly produce Gur and Khandasari, the less refined forms of sugar. Sugar is one of the oldest commodities in the world and traces its origin in 4 th century AD in India and China. In those days sugar was manufactured only from sugar cane. But both countries lost their initiatives to the European, American and Oceanic countries, as the eighteenth century witnessed the development of new technology to manufacture sugar from the beet. The government had a controlling grip over the industry, which has slowly and steadily given way to liberalization. The production of sugarcane is cyclical in nature. Hence the sugar production is also cyclical as it depends on the sugar cane production in the country. However, India is presently a dominant player in the global sugar industry along with Brazil in terms of production. Given the growing sugar production and the structure changes witnessed in Indian sugar industry. India is all set continue its domination at the global level.

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Indian Sugar Industry Scenario

The discovery of sugarcane, from which sugar as it is known today, is derived dates back unknown thousands of years. It is thought to have originated in New Guinea, and was spread along routes to Southeast Asia and India. The process known for creating sugar, by pressing out the juice and then boiling it into crystals, was developed in India around 500 BC. Its cultivation was not introduced into Europe until the middle-ages, when it was brought to Spain by Arabs. Columbus took the plant, dearly held, to the West Indies, where it began to thrive in a most favorable climate. .

It was not until the eighteenth century that sugarcane cultivation was began in the United States, where it was planted in the southern climate of New Orleans. The very first refinery was built in New York City around 1690; the industry was established by the 1830s. Earlier attempts to create a successful industry in the U.S. did not fare well; from the late 1830s, when the first factory was built. Until 1872, sugar factories closed down almost as quickly as they had opened. It was 1872 before a factory, built in California, was finally able to successfully produce sugar in a profitable manner. At the end of that century, more than thirty factories were in operation in the U.S. India has been known as the original home of sugar cane and sugar. Indians knew the art of making sugar since the fourth century. However the advent of modern sugar industry in India dates back to mid 1930s when a few vacuum pan units were established in the subtropical belts of Uttar Pradesh and Bihar. Karnatakas The Mysore Sugar Company Ltd, at Mandya was the Indias first sugar mill established in the year 1933. India is the largest consumer and second largest producer of sugar in the world. The sufficient and well distributed monsoon rains, rapid population growth and substantial BIMS Bagalkot 36

Shri Malaprabha Sahakari Sakkare Khakane (N)

increase in sugar production capacity have combined to make India the largest consumer and second largest producer of in the world. (Source USDA Foreign Agricultural Services). The Indian Sugar industry is the second largest Agro. Industry located in the rural India. The Indian sugar industry has a turnover of Rs. 500 billion p.a. and it contributes Rs. 22.5 billion rupees to the central and state exchanges as tax, cess and Excise duty every year (Source, Ministry of finance, GOI). It is the second largest agro processing industry after the cotton textiles. With the 453 operating sugar mills in different part of the country. Indian sugar industry has been a focal point for socio economic development in the rural areas. About 50 million sugarcane grower (farmers) and a very large number of agricultural laborers are involved I sugar cane cultivation and ancillary activities constituting 7.5% of the rural population. Besides, the industry provides employment to about 2 million skilled / unskilled workers and other mostly from the rural areas (Source, ISMA website accessed on 22nd May 2006). The industry not only generate power for its own operation but surplus power for state electricity grid based on bagassee (by products) And also produce fuel ethanol, rectified spirit (alcohol) and bio fertilizers etc. The sugar industry in the country uses only sugarcane as in put, hence sugar companies have been established in large sugarcane growing states like Uttar Pradesh, Maharashtra, Karnataka, Tamil Nadu, Andhra Pradesh and Gujarat. These six states contribute more than 85% of total sugar production in the country. Uttar Pradesh and Maharashtra together contributes 57% of total production. Indian sugar industry has grown horizontally with large number of small sized sugar plants set up throughout the country as opposed to the consolidation, of capacity in the rest of the important sugar producing countries. Where greater emphasis has been laid on larger capacity of sugar plants.

Structure Of Indian Sugar Industry

36 Indian sugar industry can be broadly classified in to two sub sectors, the organized sector i.e. Sugar-factories and the unorganized sector i.e. manufacturers of traditional BIMS Bagalkot

Shri Malaprabha Sahakari Sakkare Khakane (N)

sweeteners like Gur and Khandasari. The latter is considered to be a rural industry ad enjoys much greater freedom than sugar mills. The Co-operative sector sugar mills own and operate in the largest chunk of the industrys total capacity. They are concentrated primarily in the states of Uttar Pradesh, Maharashtra and North Karnataka. Out of 453 operating sugar mills in the country, 252 are in the co-operative sector, 134 are in the private sector and 67 are in the public sector. Besides 136 units in the private sector are in various stages of implementation. A few such units are under implementation in the co-operative sector as well. But no new units have been proposed in the public sector. The average capaci9ty of the sugar mills in the industry has considerably moved up from just 644 TCD in the year 1930-31 to 250 TCD this year. But still the growth in the Indian sugar industry was driven by horizontal growth (increase in number of Units) compared to the vertical growth witnessed in other countries (increase in average capacity).

Scenario Of The Sugar Industry In Karnataka

Karnataka State is one amongst the major sugarcane and sugar-producing states in the Country as the sugarcane is being cultivated in large areas since many decades for manufacture of jaggery, khandsari and white sugar. It is also a major provider of livelihood to millions of agricultural families and their dependents particularly in rural areas. About a million lakh people depend upon sugar industry, directly or indirectly. Apart from this, sugar factories are considered to be Welfare Centres in rural areas, as they give scope for establishment of educational institutions, hospitals, communication & transportation facilities, etc. Karnataka has conducive agro climatic conditions for sugarcane cultivation resulting in increased sugarcane production year after year, giving scope for establishment of more sugar units in the state. In Karnataka sugarcane is produced to the tune of 387.00 lakh tones in an area of 4.66 lakh ha, in an average productivity of 80 tone / ha during the season of 2007-08.
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established factories. 30 in Private Sector -65%(Capacity) 22 in Cooperative Sector -30% -do-

Installed crushing capacity per annum 280 lakh tons

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2 in Public Sector 1 in Joint Sector

- 4% -do- 1% -do-

About 90% factories work annually Annual sugarcane crushing 250 lakh tons

Karnataka was the second state in the Country to establish a sugar factory. Mysore Sugar Company Ltd., Mandya, is the first Sugar Factory established in the year 1933-34 in public sector. Similarly, India Sugars & Refineries Ltd., Hospet, Bellary Dist. In the private sector was established in 1934-35. The Kampli Co-op. Sugar Factory Ltd., Kampli in Bellary Dist. (now privatized and called M/s. Sundari Sugars Ltd.) in the Co-operative sector was established in the year 1958-59. Over the past four decades there is substantial rise in cane production in Karnataka. On account of this large number of sugar factories have come up as on date 29 factories are operating in private & public sector and 18 under Co-operative sector. Many Sugar units in the State have also increase their installed crushing capacities. The annual crushing capacity is 250 lakh tonne s. In addition by-products like Ethonol, Co-Genaration, Compost making, have become integral part of sugar economy. Global scenario of Sugar Industry Supply and demand In 2007-08, global sugar consumption totalled 157.6 million tonnes vis-a-vis 167.2 million tonnes of global production, creating a 9.6-million tonnes surplus. In 2008-09, however, a reversal of this trend was seen. According to the Czarnikow Research, 2008-09 sugar production is expected to reach 153.5 million tons, down 13.7 million tons from the previous year. The deficit is expected to be around 7.1 million tons. The world consumption is projected at 160.6 million tons, up 1.9% from 2007-08.

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India and Brazil continued to dominate global sugar production, followed by EU27, China, Thailand and the US. In SY 2007-08, India and Brazil contributed 61.6 million tonnes, compared with a cumulative 166.7 million tonnes of global production.

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Currently 69% of the world's sugar is consumed in the countries of origin, while the balance is globally traded. India is the largest global sugar consumer while Asia has surpassed global consumption. The long-term potential for consumption growth, particularly in southern African countries, remains positive. Besides, Chinese consumption has increased, thanks to a resurgent economy.

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Governments Control Over Sugar Industry:Pricing Of Sugar Cane

Government of India regulates and controls the rates of sugarcane supplied to the mills by farmers. The rates are fixed based on the Bhargava Committee Recommendations. The Statutory Minimum Price (SMP) announced by GOI year on year is used as a benchmark by the State Governments to fix their State Advised price (SAP). The SAP could be a recovery linked average or just a flat rate. From last few years all the state governments have been using SAP as tool fixing of sugarcane price i.e. 30-22% above the SMP.

Sugar Distribution System

Government enforces a dual pricing policy for the sugar industry. Presently 15% of the production is sold at a fixed price to the government, which is sued for public distribution system and other market operations. The new and expanded sugar mills are exempted form the levy quota for a period of five to eight years, which makes the new sugar units more profitable. But mills under levy are free to sell the remaining 85% of sugar in the open market at the market determined price. Before the levy percentage was 40%. The Government controls supply of sugar in the open market through monthly sugar release notifications based on market conditions and thus influencing the open market prices to a great extent. Though, the incentive scheme has achieved the objective of attracting more players, due to better margin than existing players, the return for older units reduces substantially due to low increase in levy prices for controlling fiscal deficits. However new units face the problem of procuring sugarcane from the farmers and sometimes end up paying a premium to SAP.

Import Export Policy

The sugar export promotion act 1958, governed sugar exports, which stipulates that the Government can sue 20% of the countrys total production for sale abroad. 36

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Till a very recent past imports and exports were routed through Indian Sugar and General Industry Export Corporation Limited (ISGIEC), a consortium of apex organizations of private and co-operative sugar mills and government agencies in India. The imports and exports are mainly resorted to when there is mismatch in domestic sugar production. The government de-canalized exports in 1997, allowing private parties to export sugar. The government has also put sugar imports on Open General License (OGL) allowing private parties to import sugar. The imported sugar has been subjected to a customs duty of 20% from January 1999, so as to provide a level playing field to the domestic industry, which supplies sugar at levy prices to Government of India, for PDS supply. Excise and Taxes for sugar in India Some of the State government imposes purchase cess on the sugarcane purchases made by the sugar mills, which varies from state to state. The GOI charges a higher excise duty on free sale of sugar in comparison to levy quota, so as to recover the subsidy provided for PDS supply. In addition, under the sugar cess act 1982, a cess is charged to sugar sold in the domestic market, which directly goes to sugar development fund (SDF). Currently the government levies an excise duty of Rs. 380 per ton on levy sugar and Rs. 710 per ton on free sale sugar. In addition Rs. 140 per ton is levied as cess for domestic sale of sugar. Production Mix Most of the mills in India are not equipped to make refined sugar. Mills which are designed to produce refined sugar can manufacture sugar not only from sugarcane but also from raw sugar which can be imported. Therefore, such mills can run their production all the year round, as opposed to single stage mills which are dependent upon the seasonal supply of sugarcane Due to good demand and bulk requirement, a lot of millers have shown interest in producing Raw Sugar this year. It is to be seen if this latent demand can be converted into an opportunity and India can establish itself as a bulk exporter of Raw Sugar. 36

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Shri Malaprabha Sahakari Sakkare Khakane (N) Sugar Companies in India:

Bannari Amman Group One of the largest Industrial conglomerates in South India, Bannari Amman Group does manufacturing and trading of sugar, alcohol, liquor, granite, cotton, and yarn. The service sector includes wind power energy, education, health care, and real estate.

Dwarikesh Sugars Dwarikesh Sugars is aiming to be the market leader of the sugar

industry. They also plan 10,000 environmentally friendly trees on the premise as well as in surrounding areas, winning them many laurels.

Rajshree Sugars Listed on both the National Stock Exchange (NSE) and the Bombay

Stock Exchange (BSE), Rajshree Sugars has interests in sugar, distillery, power and biotechnology.

Rana Sugars Since its beginnings in 1993, Rana Sugars has established itself in the

sugar industry. Today, its business spans sugar, alcohol, power generation and textiles. Knowing that sugar is a vital part of the rural economy, Rana Group is actively involved with the farming community.

Shree Renuka Sugars With its focus on sugar, bio-fuels, and allied products of

renewable energy, SRSL is the largest sugar and ethanol producer in coastal India. Its main operations are located in Maharashtra nd Karnataka. With 20% of the market share, SRSL is also currently the leader in fuel ethanol in India. Shree Renuka Sugars Ltd strives to be the most efficient and market driven integrated processor of sugar cane in the world. While achieving this, they aim for a learning and motivating atmosphere that enables the team to grow. They hope to participating in the all round development of the community and deliver consistently on returns to all their shareholders

KK Birla Group of Companies, Kolkata, that own Upper Ganges Sugar & Industries Indias largest sugar and ethanol manufacturer company, Bajaj Hindusthan Ltd., Balrampur Chini Mills Ltd, of Kolkata, West Bengal Bannari Amman Sugars Ltd., Coimbatore, Tamil Nadu Andhra Sugars, West Godavari district, Andhra Pradesh 36

(UGSIL), The Oudh Sugar Mills Ltd & Gobind Sugar Mills Ltd

Mumbai, has many plants in Uttar Pradesh.

Types Of Sugars
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Granulated Sugar There are many different types of granulated sugar. Most of these are used only by food processors and professional bakers and are not available in the supermarket. The types of granulated sugars differ in crystal size. Each crystal size provides unique functional characteristics that make the sugar appropriate for the food processor's special need. "Regular" Sugar, Extra Fine or Fine Sugar Regular" sugar, as it is known to consumers, is the sugar found in every home's sugar bowl and most commonly used in home food preparation. It is the white sugar called for in most cookbook recipes. The food processing industry describes "regular" sugar as extra fine or fine sugar. It is the sugar most used by food processors because of its fine crystals that are ideal for bulk handling and are not susceptible to caking. Fruit Sugar Fruit sugar is slightly finer than "regular" sugar and is used in dry mixes such as gelatin desserts, pudding mixes and drink mixes. Fruit sugar has a more uniform crystal size than "regular" sugar. The uniformity of crystal size prevents separation or settling of smaller crystals to the bottom of the box, an important quality in dry mixes and drink mixes. Bakers Special Bakers Specials crystal size is even finer than that of fruit sugar. As its name suggests, it was developed specially for the banking industry. Bakers Special is used for sugaring doughnuts and cookies as well as in some commercial cakes to produce fine crumb texture. Superfine, Ultrafine, or Bar Sugar This sugar's crystal size is the finest of all the types of granulated sugar. It is ideal for extra fine textured cakes and meringues, as well as for sweetening fruits and iced-drinks since it dissolves easily. In England, a sugar very similar to superfine sugar is known as caster or castor, named after the type of shaker in which it is often packaged.

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Confectioners(Powdered)Sugar This sugar is granulated sugar ground to a smooth powder and then sifted. It contains about 3% corn starch to prevent caking. Confectioners sugar is available in three grades ground to different degrees of fineness. The confectioners sugar available in supermarkets is the finest of the three and is used in icings, confections and whipping cream. The other two types of powdered sugar are used by industrial bakers. Coarse-Sugar The crystal size of coarse sugar is larger than that of "regular" sugar. Coarse sugar is normally processed from the purest sugar liquor. This processing method makes coarse sugar highly resistant to color change or Inversion (natural breakdown to fructose and glucose) at high temperatures. These characteristics are important in making fondants, confections and liquors. Sanding-Sugar Another large crystal sugar, sanding sugar, is used mainly in the baking and confectionery industries to sprinkle on top of baked goods. The large crystals reflect light and give the product a sparkling appearance. Sugar produced in India is mainly of granulated type. Granulated sugar is further classified in to various types based on color and grain size. According to the Indian Standards Specifications (ISI), there are around 20 grades of sugar based on the grain size and colors. The color series has four grades designated as 30,29,28 and 27, while the grain size has five grades namely A, B, C, D, E. Bulk of production in the country is of C, D and E grains, branded as large, medium and small and has color specification of 30. The D grade produced in the country is comparable to world standards. BrownSugars-TurbinadoSugar This sugar is a raw sugar which has been partially processed, removing some of the surface molasses. It is a blond color with a mild brown sugar flavor and is often used in tea.

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Brown-Sugar-(lightandDark) Brown sugar consists of sugar crystals coated in a molasses syrup with natural flavor and color. Many sugar refiners produce brown sugar by boiling a special molasses syrup until brown sugar crystals form. A centrifuge spins the crystals dry. Some of the syrup remains giving the sugar its brown color and molasses flavor. Other manufacturers produce brown sugar by blending a special molasses syrup with white sugar crystals. Dark brown sugar has more color and a stronger molasses flavor than light brown sugar. Lighter types are generally used in baking and making butterscotch, condiments and glazes. Dark brown sugar has a rich flavor that is good for gingerbread, mincemeat, baked beans, plum pudding and other full flavored foods. Muscovadoor-BarbadosSugar Muscovado sugar, a British speciality brown sugar, is very dark brown and has a particularly strong molasses flavor. The crystals are slightly coarser and stickier in texture than "regular" brown sugar. FreeFlowing-BrownSugars These sugars are fine, powder-like brown sugars that are less moist than "regular" brown sugar. Since it is less moist it does not lump and is free-flowing like granulated white sugar. Demerara Sugar Popular in England, Demerara sugar is a light brown sugar with large golden crystals which are slightly sticky. It is often used in tea, coffee or on top of hot cereals. Liquid Sugars Liquid sugars were developed before today's methods of sugar processing made transport and handling granulated sugars practical. There are several types of liquid sugar. Liquid sucrose (sugar) is essentially liquid granulated sugar and can be used in products wherever dissolved granulated sugar might be used. Amber liquid sucrose (sugar) is darker in color and can be used where the cane sugar flavor is desirable and the non-sugars are not a problem in the product. 36

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COMPANY PROFILE

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INRODUCTION
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Shri Malaprabha Sahakari Sakkare Khakane (N)

Name of the company Date of registration : Shri Malaprabha Sahakari Sakkare Kharkhane (N) : 13th march, 1961

Date of starting production : 22nd Jan, 1971 Constitution Business/ Activity Address of the company : Co-operative Society. : Manufacturing of sugar and sugar by product. : Shri Malaprabha Sahakari Sakkare Kakane, M.K.Hubli 591153 Tq:Bailhongal, Dist: Belgaum. E-mail Telephone No Products of the company Company Land Total workers : ranisugar@sancharnet.in : 08288-274231, 274941 : Sugar, Distillery and Spirit. : 160 acres : 784

Background And Development:Shri Malaprabha Sahakari Sakkare Khakane (N) is located in M.K.Hubli on Puna Banglore national highway. The quality of the sugar cane is very well because the factory situated near the Malaprabha River that is having fertilized area for the growth of sugarcane. 36

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The factory was registered in the year 1916 is could not make much headway due to several factory including collection of adequate share capital which was conditioned precedent for release of loan by the industrial finance corporation of India. The Managing Director Shri. H. Maharudraiah did pioneer work in the establishment of the factory despite his strenuous duties as Deputy Commissioner and the subsequent Managing Director Shri. Biddayya Puranik ExDeputy Commissioner of Belgaum has also given grate assistance and guidance to bring the factory to the stage of production the factory was staring production on 22.01.1971 with 1250 TCD of sugar per day. The IFC jointly with LIC has sanctioned a loan of Rs.120 lakhs. This gave management to speed up the progress of construction of the factory. Sports Facility To Employees: To maintain mental and physical health of the employees the company has provided the outdo re games like badminton, volley ball, tennis coat, Jim, cricket and Indore games like carom, chees etc are made available in the factory premises. Culture Of The Factory: All employees in the organization are treated equally, there is no discrimination is made between top level, middle level and operational level employees. All the employees are provided with the same uniform this shows the equality between all the employees. Social Responsibility: The company has provided the employment to the village people around the factory and started the nursery. Kannada medium schools and secondary education etc. Membership Of The Company: 30 members these members invest capital or buy shares. This factory was started in the year 22 Jan, 1971. Production Capacity: It has a capacity of crushing of 1250 TCD (tone capacity per day). The crushing capacity was increased to 3500 in the year 1982-83 up to 2001-02.

Nature Of Business Carried:Nature of Business carried by Shri Malaprabha Sahakari Sakkare Khakane is involved in the activity of manufacturing white crystal sugar products which is the main product. The process of production involve conversion of Raw sugarcane to sugar, 36

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Raw sugar into refined sugar, Molasses, Bagasses are its by products.

Vision, Mission And Objectives:VISION: DEVELOPMENT AND STRENGTHING OF RURAL AREAS MISSION: Improved Production: The factory is near to the village area. So that the farmers cannot go for production of jaggary. Instead of going to the other factory. Good Quality of Seeds: The factory is providing the good quality of seeds to the farmers who are producers of cane in their fields. To provide best quality of seeds the factory is making many researches. OBJECTIVES: To develop financial position of the member. To increase sugar production. To produce good quality sugar. Cost of production to minimize time in giving sugar cane from the farmers to the

factory. Production of bi-products and chemical from new product member. To implement various education and cultural schemes produces members. To improvement from development program and irrigation facilities in the area of

operation. To facilitate in wastage and scale. To supply agricultural implements. To scope of farmers.

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Shri Malaprabha Sahakari Sakkare Khakane (N) Product Profile:Main products of the factory are: White crystal sugar, which is available in the 2 qualities: 1. 2. M-30 [Medium size sugar]. SI-30 [Small size sugar]. The Bi-products are: 1. 2. 3. 4. Molasses. Bagasses Electricity. Distillery unit

1) Molasses: Molasses is mainly used for the manufacture of ethyl alcohol (ethanol), Yeast and cattle feed. 2) Bagasses: Bagasses is usually used as a combustible in the furnaces to produce steam, which in turn is used to generate power; it is also used as raw materials for production of paper and as feedstock for cattle. 3) Power generation plant: Power plant uses the fiber of the processed sugar cane (bagasse) as fuel to generate electricity in an environmentally responsible manner. An integrated 11.2 M.W. power generates and supplies electricity to the state grid produced from sugar cane waste used to rotate turbines 7 M.W. power is utilized in the plant remaining power is supplied to KPTCL. 4) Distillery plant: Distillery plant uses by-product of sugar mill viz; Molasses as raw material for production of spirits and alcohol namely rectified spirit, ethanol and extra neutral alcohol. 36

Area Of Operation:-

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Shri Malaprabha Sahakari Sakkare Khakane (N)

The area of operation comprise of 600 villages namely Bailhongal, Khnapure, Belgaum, Soudatti, Dharwad and Halliyal talukas and villages from Gokak, Soudatti, Haliyal, and Dharwad etc.

Ownership Pattern:Shri Malaprabha Sahakari Sakkare Khakane (N) is a co-operative society. Under the Karnataka co-operative societies act 1959. The main purpose is to help sugarcane growers by purchasing sugar cane in this area. BOARD OF DIRECTORS Shri. D. B. Inamdar Shri. R. C. Ankkalgi Chairman Vice chairman

Shri. V.B. Sanikkop Shri. P.G.Killedar Shri. C.C. Gadad

Director Director Director

Shri. T.A. Bajannavar

Director

Shri. M.B.Sambargi Shri. S. V. Mullimani

Director Director

Shri. B.S. Ashtaputri

Director

Shri. V.B. Sadhunavar

Director

Shri. S. N. Patil

Director

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Board of management is consists the following elected directors. 1. 2. 3. 4. From Sugar growers Non-sugar growers From societies Govt. Nominees -9 Directors - 1 seat - 1 seat - 3 seat including Managing Director

The term of management is 5 years. The elected BODs are electing the president and vice president every 21/2 years. The period of president and vice president is 21/2 years. Generally the above 11 directors are elected by the members of the factory. The BOD are being convened at least once in a two month.

Competitors Information :Shri Malaprabha Sahakari Sakkare Khakane (N) is having many tough competitors they are divided in region wise. If considered region wise fallowing are the competitors competing with Shri Malaprabha Sahakari Sakkare Khakane (N) in the field of sugar cane procurement, marketing and also in gathering talented Human Resource. They are facing competition largely from private players. The following are the region wise competitors for Shri Malaprabha Sahakari Sakkare Khakane. The Godhavari Sugars Ltd. Sameerwadi The Ugar Sugar works Ltd. Ugar (Belgaum Dist.) DKSSK, Chikkodi (Belgaum Dist.) HSSK, Sankeshwar (Belgaum Dist.) Shree Renuka Sugars Ltd. Munoli (Belgaum Dist.) Someshwar Sahakari Sakkare Karkhane Niyamit

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Shri Malaprabha Sahakari Sakkare Khakane (N) Infrastructural Facilities:1) Self contained residential quarters are constructed for officers & worker. 2) The workers & their dependents are provided with free medical facilities. 3) Issued identity cards incorporating name of the blood group of each employees, computerized punching cards to ensure discipline in & out, beside providing uniform to all the employees. 4) provided a well equipped ambulance to employees. 5) The factory has provided a playground at the colony. 6) For the entertainment of the colony residents, the factory has provided with TV antenna. 7)The factory is sanctioning financial assistance to eye and family planning camps. 8)Accommodation is provided to the workers in the premises of the factory

ACHIEVEMENTS/AWARDS: In the year 1987-88 the company has won the Dr. S. V. Parthsarathi Award for largest Sugar Production. In the year 1988-89 the company has won the Dr. S. V. Parthsarathi Award for largest

Sugar Production in South India. In the year 1989-90 the company has won the Dr. S. V. Parthsarathi Award for largest

Sugar Production.

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Work Flow Model:-

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Future Growth And Prospects:New Projects The Company has a well-defined strategy for near future. It has identified certain profitable opportunities that may be captured. These are as follows:

Capacity increase 1. Sugar

Schedule commissioning

for

3500 TCD to 5000 IV quarter of 2012-13 TCD 11.2 MW to 22 MW 60 KLPD to 120 KLPD

2. 3.

Cogeneration Distillery

IV quarter of 2012-13 IV quarter of 2012-13

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Mckenseys 7-S Frame Work

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Mckenseys 7-S Frame Work With Special Referance To Organisation Under Study
Meaning of 7-S framework The 7-S framework of Mckenseys is a management model that describe seven factors to organize a company in holistic and effective way Together these factors determine the way in which a corporation operates. Managers should take in to account all seven of these factors, to be sure of successful implementation of a strategy, large or small. They are all interdependent, so if you fail to pay proper attention to one of them, this may affect all others as well. On the top that, the relative importance of each factor May very over time. Benefits of 7-S model Diagnostic tool for understanding organizations those are ineffective. Guide organizational change Combines rational and hard elements with emotional and soft elements. Managers must act on all S in parallel and all S are interrelated Description The 7-S frame work of Mckenesys is a value based management (VVS) model that describes how one can holistically and effectively organize a company. Together these factors determine the way in which a corporate operates. These fallowing are the subordinate goals of 7-S Mcknsey;s frame work Structure The way of the organizations units relate to each other; centralized, functional divisions (top down); Decentralized (the trend in large organizations); matrix, network, holding etc. Skills Distinctive capabilities of personnel or of the organization as a whole (core competencies Style 36

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Cultural style of the organization and how key managers believe in the achieving the organizational goals (difference management system)

Strategy Plans for the allocation of a firm scares resources over time, to reach identified goals, environment, competition, customers System The procedures, processes and routines that characterized how important work is to be done; financial systems, hiring, promotion and performance appraisal systems, information system. Staff Number and types of personnel within the organization Shared values To interconnecting center of Mckneseys model is shared values, what does the organization stands for and what it believes in. central beliefs and attitudes The fallowing diagram is the Mckinseys 7-S model, Structure Strategy Shared values System

Skills Staff

Style

This model shows the how all the elements of the organization goals interrelated with each other.

I) Structure

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Structure refers to the organizational arrangements for performing tasks and activities. The structure could be line, functional, regional and product wise etc. organizations are economic and social entities in which a number of persons perform multifarious tasks in order to attain common goals. An organizational structure is the framework of reporting relationship, role definitions and accountabilities that intended to assist the firm in meeting its mission and objectives.

Chairman and MD Executive Directors

Executive Vice President

Account Department

Engineering Department

Cane Department

General Account

Cane Account

Manufacturing Department

Computer Section

Stores Section

Time Section

Purchase

Sales

This is the organization Structure of Shri Malaprabha Sahakari Sakkare Khakane, (N) the organization run its business with above departments and each department work with the help of other departments. 36

Skills:-

BIMS Bagalkot

Shri Malaprabha Sahakari Sakkare Khakane (N)

Skills refer to the fact that employees have the skills needed to carry out the company strategies. Training and development ensuring people to know how to do their jobs and stay up to date with the latest techniques. People in organization need various skills such as managerial, engineering, technology, science etc. As basically SMSSKN recruits experienced candidates for all the jobs. So that as per their opinion induction training is not required for new recruited employees they directly provide on the job training to new employees immediately completion of recruitment process. Compared to other companies their recruitment process is very short. As it is a seasonal based industry. They are having two types employees pattern, one is permanent and another seasonal employees. These seasonal employees were recruited only for sugarcane crushing season they are unskilled workers. In existing plant if any vacancy arises then the concerned department head informs to MD, then MD takes the approval from the board and gives the advertisement in selected news paper for vacancy. Then the applications are received and short listed. Short listed candidates are called for interview based on their experience they will appoint.

Style:Style has been observed in the organization that the behaviors of superior towards the subordinates are pleasant they motivate fresher who are working under them. At SMSSKN they fallow top- down system of controlling and managing the human resources with relates to functioning of the day to day activities set to them. Functions are carried under participative manner. Among all these they fallow a very in effable style of functioning. Mangers, staffs are approachable (a perfect blend of formal and informal approach). The staff has very good informal conversations that develop a sense of loyalty motivation, dedication within the employees. The style of the organization, according to Mckinseys framework refers to the reporting relationship between the superiors and subordinates. It also conveys the flow of communication between them. Reporting relationship at SMSSKN fallows a formal channel. The communication fallows the routes formally laid down in the organization structure and deliberately. The activities like quotation processing, equipment stock order generation, bill of material generation, indent generation, raising purchase orders and other production related activities BIMS Bagalkot 36

Shri Malaprabha Sahakari Sakkare Khakane (N)

generates a number of reports which are communicated from one department to other through the formal channel.

Stratergy:Price strategy is a core element of our free market economy. In setting price factory has not free to charge whatever price they wish. Here factory call tenders means it fix the price for sugar in open market through tenders. E.g. the factory receives five tenders or more than that, but factory select that under which is more, like Tender Tender1 Tender2 Tender3 Tender4 Tender5 Price(per Qnt) 1090 1100 1200 1150 1135

Here factory choose tender 3 because it is more price and then price taxes (1200+taxes) and then factory sell sugar on that rate. Settings a price for By- product in order to make the main product price more completive By product of sugar Bagasse: bagasse is main By-products of sugar. The price for bagasse is fixed on the bases of demand from farmers, because bagasse for agriculture purpose. Molasses: molasses is the second By-product of the sugar, here the factory, to use molasses for distillery purpose will adopt some process; the price for molasses is fixed by the state Govt.

System:System refers to the rules and regulations and also procedure both formal and informal that complement the organizational structure. Systems apply to many aspects of the firm. The system model of management shows that communication is needed for carrying out the managerial functions and for linking the organization with its external environment. In SMSSKN promotion is the major criterion for promotion of employees at the operative level Is seniority. However the performance of the employees is not ignored. The BIMS Bagalkot 36

Shri Malaprabha Sahakari Sakkare Khakane (N)

employee should achieve the basic targets or minimum standards set. At management level it is purely on the merit basis or performance of the individual in the key result areas.

SWOT Analysis

SWOT Analysis:Strengths:
1. Distillery daily 30000 liters rectified spirit production capacity.

36

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Shri Malaprabha Sahakari Sakkare Khakane (N)

2. 3. 4. 5. 6. Well atmosphere. Experienced workers. 49% of the company shares are owned by central government. Co-generation scheme now factory have 3500 TCD crushing capacity. In 2004-05 total members of growers of sugar cane in 25,653 acers in that members

send their sugar cane up to 20,622 acers sugar cane.

Weakness:
1. 2. 3. 4. 5. Lack of technology. Unskilled labors. Huge human resource. Lack of modern machines. Lack professionalism.

Opportunities:
1. 2. 3. It has ability to produce ethanol as by-product. It has power to develop the rural area. It can start its own paper mill by using baggasse in future after improvement of financial

position.

Threats:
1. The chief minister of Karnataka announced establishment of new sugar factories, if they are established then it has to compute with them. 2. The Govt of Karnataka announced that from forthcoming year selling of alchohol is

going to be stopped, if it happened then the problem for sale of distillery products.

36

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Shri Malaprabha Sahakari Sakkare Khakane (N)

Learning Experience:I have been very thankful to the members of the SMSSKN for supporting me with the information required by me in various fields and giving me a detailed report on the capital budget and financial statements followed by the company. I have gained a lot of experience in the field of finance and got to know the practical knowledge about the capital budgeting

36

BIMS Bagalkot

Shri Malaprabha Sahakari Sakkare Khakane (N)

General Introduction

36

BIMS Bagalkot

Shri Malaprabha Sahakari Sakkare Khakane (N) Need of the study:Capital budgeting decisions are needed for determining future destiny of the company in order to plan the future cash flow requirements. As there are scarce resources of capital there is a need for correct investment decisions affect then profitability of the firm thus they have competitive advantage over achieving profits. This is brief summary of the project work done on Capital budgeting techniques related to decisions and evaluation of investment proposals in Malaprabha sugar factory. The study was conducted with an finding out the best investment opportunities. Finding the viability of the project and minimizing the losses. and also to increase its return on investments, which will helps in reducing the payback period, and the investment amount will be recovered very soon. A company generally faces complex investment situations and so has to choose among alternatives. The evaluation techniques will handle to take the decisions properly. And calculation part made by using capital budgeting techniques, which shows the company should manufacture the byproduct to earn profit. The study of capital budgeting techniques of company was accomplished by various tools and techniques like statement showing cash flows, Means cash inflows and cash out flows.

Objectives Of The Study:1. To evaluate the various capital budgeting techniques 2. To compare the IRR and PI methods with NPV for financial decision making. 3. To determine the payback period for the existence investment proposal 4. To study the cash flows.

Scope Of The Study:The scope of the study is restricted to finance which comes mainly of cash flows and investments and the concerned departments i.e. production dept, finance dept etc. 36

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Shri Malaprabha Sahakari Sakkare Khakane (N)

The scope is to study and understand objective of Capital Budgeting and understanding various investment proposals where we can come to know which project gives higher rate of return. So the study is strictly restricted to finance department.

Research Methodology:Project Title:Capital budgeting decisions and evaluation of investment proposals in Shri Malaprabha Sahakari Sakkare

Research methodology:1. Sources of data Primary data: Discussion with the company employees and observation Secondary data: Financial records Journals Periodicals

Limitations:Considering the scope mentioned above, some or few limitations are arising i.e. the Shri Malaprabha Sahakari Sakkare is big organization. This finance & accounts is also big departments. But due to shortage of information providing, I am concentrating on equations as per information given by the Accounts Department.

36

Introduction To Capital Budgeting:BIMS Bagalkot

Shri Malaprabha Sahakari Sakkare Khakane (N)

Capital budget is the process which companies allocate funds to various investment projects designed to ensure profitability and growth. Evaluation of such project involves estimation their future benefits to the company and comparing these with their costs. In a competitive economy, the economic viability and prosperity of a company depends upon the effectiveness and adequacy of a capital expenditure evaluation and control procedure. Decision in respect of acquisition of fixed assets is directly linked with the profitability. Hence, a scientific evaluation and control procedure is necessary condition to ensure judicious use of capital resources of a company. Capital budgeting is defined as the firms process for the acquisition and investment of capital. It involves firms decision to invest its current funds for addition, disposition, modification and replacement of fixed assets.

Meaning of Capital Budgeting

After analyzing the above definitions the meaning of the term capital Budgeting is explained on the following lines: Capital Budgeting refers to planning the development of available capital for the purpose of maximizing the long-term profitability of firm. It is the firms decision to invest its current funds most efficiently in long-term activities in anticipation of flow of future benefits over a series of years. Capital Budgeting involves the search for new and more profitable investment proposals and the making of an economic analysis to determine the profit potential each investment proposal. It is process by which available cash and credit resources are allocated among competitive long-term investment opportunities so as promote the higher profitability to company over a period of time. It refers to the total process of Generating, Evaluating, Selecting and Follow up on capital expenditure alternatives.

IMPORTANCE OF CAPITAL BUDGETING

Capital budgeting decisions are most important business decisions. All types of capital investment are made after evaluating its cost-benefits analysis. Following are the cause of its importance in management decisions. The success and failure of business is mainly it depends on how the available sources are being utilized. Right decision for the right expenditure or investment takes the business firm to success. Bad decision once made for investments takes the company to a disastrous situation. Wise decisions always aimed at achieving the efficiency, reduction of costs and increase in margin. Therefore capital budgeting is one of the BIMS Bagalkot 36

Shri Malaprabha Sahakari Sakkare Khakane (N)

main tool of financial management. All Capital budgeting decisions are made for future period. The management has to have proper vision about their future plans. The expenditure or investment made today will assist the company to achieve the goals. Unwanted or unwarranted investments made today will keep the investment idle and in turn it losses its opportunity cost. Therefore only the essential and objective oriented investment is to be made. This can be through budgeting. All types of capital budgeting decisions are exposed to risk and uncertainty. It is practically a difficult task to the corporate to predict the changes in political and socioeconomic fields. Technological advancement is another factor which after the capital budgeting decision. Hence, as far as possible, these factors must be analyzed and expressed in quantitative terms to make comfortable decisions. Capital budgeting decisions are irreversible in nature. Decision once made cannot be taken back or changed. The wrong capital investment decision keeps the companys assets illiquid and unmarketable. Therefore, each investment is to be made carefully. As the finance is the scare resource to the business firm, it has to be utilised more judiciously. Capital rationing gives sufficient scope for the financial manager to evaluate different proposals and only viable project must be taken up for investments. This could be done by capital budgeting and capital rationing techniques of financial management. The preliminary expenses or installation expenditure of a project has to be incurred by a business by a business firm without anticipating immediate returns. On some occasion, due to unavoidable reasons, implementation of the project may require longer period. During this period market may experience inflation and escalation of prices of goods and services. All the adjustments are made only through Capital Budgeting. Capital budgeting helps the management to avoid over investment and under investments. Capital Budgeting Process: Capital Budgeting involves the following steps: Project Generation. Project Evaluation. Project Selection. Project Execution. 36

Project Generation:
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Shri Malaprabha Sahakari Sakkare Khakane (N)

Generating the proposals for investment is the first process of capital budgeting, for an ongoing business concern, Investment proposals of various types may originate at different levels within a firm. The investment proposal may fall into one of the following categories: Proposals to add new product to the product line, and Proposals to expand production capacity in existing product line. Proposals to reduce the costs of the output of the existing products Generation of above mentioned investment proposals may originate within the firm outside the firm. Within the firm, it may come either from top, middle or bottom management. Sometimes, ordinary workers can also be considered as the source for generating such ideas. Sales campaigning, trade fairs, people in the industry, R/D institutes, conferences and seminars will also offer wide variety of innovations on capital assets, that could be taken up for the investment. It may be for a plant or machinery or new product, or new production techniques. The healthy firm must always keep a watch as these developments and must exploit such opportunities for the welfare of the business firm.

without altering the scale of operation.

Project Evaluation:
Project Evaluation involves two steps Estimation of benefits and costs. Selection of an appropriate criterion to judge the desirability of the project.

The benefits and costs of the project are measured in terms of cash flows. The estimation of the cash inflows and cash outflows mainly depends on future uncertainties. The risk associated with each project must be carefully analyzed and sufficient provision must be made for covering the different types of risks. The role of the financial manager is very crucial here because he has to consult and seek the opinion of the executives (production marketing and purchase) before making a final decision. Proper co-ordination must be established in evaluating such proposals. Many at times the suggestions made by production department may not be suitable to finance and purchase manger. Similarly, proposal made by finance and purchase manager may not be relevant or suitable to production manager. Therefore, each proposal must be scrutinized on the basis of its merits. If needed, it is advisable to seek expert advice on the matter. As far as possible, the criterion selected must be consistent with the 36

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Shri Malaprabha Sahakari Sakkare Khakane (N)

firms objective of maximizing its market value. The techniques of time value of money may come as a handy tool in evaluation such proposals.

Project selection:
No standard administrative procedure can be laid down for approving the investment proposal. The screening and selection procedures are different from firm to firm. In a real life situation all capital budgeting decisions are made by top management. However, the projects can scientifically be screened by middle level management in consulting with the head of finance department.

Project Execution:
Once the proposal for capital expenditure or investment is finalized, it is the duty of the finance manager to explore the different alternatives available for acquiring the funds. He has to prepare mobilized must be carefully spent or deployed on capital assets or on the projects. For the effective control over the flow of funds, he has to prepare periodical reports and must seek prior permission from the Top management. Systematic procedure should be developed to review the performance of projects during their lifetime and after completion. The followup, comparison of actual performance of projects during their ensures better forecasting but also helps in sharpening the techniques for improving future forecasts.

Methods of Appraisal of Capital Budgeting or methods of Investment Evaluation

As discussed earlier, the capital budgeting techniques or evaluation of investment proposals have considerably gained the importance. This is truer in the modern business environment. After the introduction of New Economic Policy, the environments in the industry and service sector have considerably changed. Number of merges, acquisitions, joint venture and continuous innovation are being experienced in the market. Therefore, it is very difficult to arrive at a decision for financing the project. It is absolutely essential for every business entity to make use of this scarce resource on the most profitable lines. Following are some of the important methods used in practice in evaluating the investment proposals. There are many methods for evaluating or ranking the capital investment proposals. In all these methods, the basic approach is to compare the investments in the project to the benefits derived there from. These methods can be categorized as follows. 36 1. Traditional Methods Payback period method and

BIMS Bagalkot

Shri Malaprabha Sahakari Sakkare Khakane (N)

2. Accounting rate of return method Discounted cash flow methods The net present value method Internal rate of return Profitability index method or Benefit cost ration method.

The usage of methods of evaluation of capital investments does not have uniformity. It differs from firm to firm. Large scale business undertakings may use all techniques for evaluating and comparing the projects. Smaller firms may use only one method. The selection of a particular of a method is mainly based on its merits and demerits and its relevance to the present circumstances.

Pay Back Period Method

The term payback period refers to the period in which the project will generate the necessary cash to recover the initial investment. It is a traditional, simple method of evaluating the projects. It does not take the effect of time value of money. It emphases more on annual cash inflows, economic life of the project and the original investments. Cash inflows refer to profit before depreciation and after taxes. Formula: a) If the annual cash inflows are uniform: Original Investment of the Project Pay Back Period= Annual Cash Inflow and the Project The selection of the project is based on the earning capacity of a project. Here the financial managers aim is to know how soon the original investments are recovered. During the process of comparison be always keeps firms cut-off rate (Recovery of investments period) and compares the same with payable period of the proposals. If the pay back period is more than the cut-off rate, the proposals are rejected. If the payback period is less than the cut-off rate such proposals are selected for investments. [cut-off rate=cost of funds or in terms of period, if a firms cost of capital is 15%, payback period = 100/15=6.6 years] 36

Merits
1. It is a traditional and old method.

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Shri Malaprabha Sahakari Sakkare Khakane (N)

2. 3. 4. 5. It involves simple calculation. Selection or rejection of the project can be made easily. The results obtained under this method are more reliable. It is the best method for evaluating high-risk projects.

Demerits
1. 2. 3. 4. 5. It is based on the principle of rule of thumb. It does not recognize the importance of time value of money. It consider the profitability of economic life of the project [ earnings till payback period It does not recognize the pattern of cash flows and its timing. Payback period concept does not reflect all the relevant dimensions of profitability. Therefore, to evaluate the project the entire amount of earning or cash inflow must be consider as cash inflows.

is only considered]

Average Rate of Return Method

Average rate of return considers the earnings of the project of the economic life. This method is based on conventional accounting concepts. The rate of return is expressed as percentage of the earnings of the investment in a particular project. This method has been introduced to overcome the disadvantage of payback period. The profits under this method are calculated as profit after depreciation and tax of the entire life of the project. Formula: Average annual income after tax and depreciation ARR = (100) Initial investment Average annual income (after tax and depreciation) ARR= (100) Average investment Original investment Where, Average Investment = 2 This method of ARR is not commonly accepted in assessing the profitability of capital expenditure. Because the method does to consider the heavy cash inflow during the project 36

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Shri Malaprabha Sahakari Sakkare Khakane (N)

period as the earnings with be averaged. The cash flow advantage derived by adopting different kinds of depreciation is also not considered in this method. Accept or Reject Criterion: Under the method, all project, having Accounting Rate of Return higher than the minimum rate establishment by management will be considered and those having ARR less than the predetermined rate. This method ranks a Project as number one, if it has highest ARR, and lowest rank is assigned to the project with the lowest ARR.

Merits:
1. 2. period. 3. 4. This method through the concept of net earnings ensures a compensation of It can readily by calculated by using the accounting data. expected profitability of the projects and It is very simple to understand and use. This method takes into account saving over the entire economic life of the

project. Therefore, it provides a better means of comparison of project than the pay back

Demerits:
1. 2. 3. 4. It ignores time value of money. It does not consider the length of life of the projects. It is not consistent with the firms objective of maximising the market value of shares. It ignores the fact that the profits earned can be reinvested.

Discounted Cash Flow Method

Discounted cash flow method or time adjusted technique is an improvement over pay back method and ARR. An investment is essentially out flow of funds aiming at fair percentage of return in future. The presence of time as a factor in investment is fundamental for the purpose of evaluating investment. Time is crucial factor, because, the real value of money fluctuates over a period of time. A rupee received today has more value than a rupee received tomorrow. In evaluating investments projects, it is important to consider the timing of returns on investment. Discounted cash flow technique takes into account both the interest factor and the return after the payback period. 36 Discounted cash flow technique involves the following steps; BIMS Bagalkot

Shri Malaprabha Sahakari Sakkare Khakane (N)

1. 2. 3. Calculation of cash inflow and outflows over the entire life of the asset. Discounting the cash flows by a discount factor. Aggregating the discounted cash inflows and comparing the total so obtained with the

discounted outflows.

DCF methods of evaluating capital investment: 1. 2. 3. The Net present value Method Internal Rate and Return Method Cost Benefit Ratio and profitability Index

Net Present Value Method

Net present value method recognizes the impact of time value of money. It is considered as the best method of evaluating the capital investment proposal. It is widely used in practice. The cash inflow to be received at different period of time will be discounted at a particular discount rate, (Rate of return or interest rate). The present values of the cash inflow are compared with the original investment. The difference between the two will be used for accept or reject criteria. If the different yields (+) positive value, the proposal is selected for investment. If the difference shows (-) negative values, the proposed project is rejected for investment. Steps An appropriate rate of interest should be selected to discount cash flows. Generally it is The present value of cash inflow will the calculated by using this discounted rate. The discounted cash inflow is used to find its difference with original investment or cash referred to the cost of capital.

outflows.

Accept or Reject Criterion:

Net present value is used as an accept or reject criteria. In case NPV is positive the project is selected for investment. If NPV is negative, the project is rejected. BIMS Bagalkot

36

Shri Malaprabha Sahakari Sakkare Khakane (N)

If NPV>Zero Accept; If NPV<Zero- Reject.

Merits
1. 2. 3. 4. It recognizes the time value of money. It considers the cash inflow of the entire project. It estimates the present value of their cash flows by using a discount rate equal to the It consistent with the objective of maximizing the welfare of owners. The present value

cost of capital. of one rupee received after particular period of time at a particular rate of discount is calculated using the following formula: 1 PV = (1+i)^n Where i= Discount rate and n= No of year after which the Rupee is received.

Demerits
1. 2. 3. NPV method is based on discount rate. In real life situation, it is very difficult to find It may not give reliable answers when dealing with alternative projects under the Decision arrived at may not be satisfactory, and when the project being compared and understand the concept of cost of capital. conditions of unequal lives of project. involve different amount of investment.

Internal Rate of Return Method

Internal rate of return is that rate at which the sum of discounted cash inflows equals the sum of discounted cash outflows. It is that rate at which the net present value of the investment is zero. In other words, it is the rate of discount which reduces the net present value of an investment to zero. It is called internal rate because it depends mainly on the outlay and proceeds associated with the project and not on any rate determined outside the investment. This method was advocated by Joel Dean, in which the magnitude and timings of cash flows has been mainly considered. This method is also known as: 1. 2. 3. 4. BIMS Bagalkot Marginal efficiency of capital Rate of return over cost Time adjusted rate of return Yield of an investment 36

Shri Malaprabha Sahakari Sakkare Khakane (N)

Accept or Reject Criterion: Accept the project if the internal rate of return is higher than or equal to the minimum required rate of return. The minimum required rate of return is also known as cut off rate or firms cost of capital. A project shall be rejected if its IRR is lower than the cut-off rate. While evaluating two or more projects, project giving higher internal rate of return would be preferred.

Merits of IRR Method

1. 2. 3. 4. 5. It consist the time value of money. Calculation of cost of capital is not a perquisite for adopting IRR. IRR attempts to find the maximum rate of interest at which funds invested in the project It is not in conflict with the concept of maximizing the welfare of the equity It considers cash inflows throughout the life of the project

could be repaid out of the cash arising from the project. shareholders.

Demerits
a) b) Computation of IRR is tedious and difficult to understand. Both NPV and IRR assume that the cash inflows can be reinvested at the discounting

rate in the new projects. However, reinvestment of funds at the cut off rate is more appropriate than at the IRR. Hence, NPV method is more reliable than IRR for ranking two or more projects. c) It may give results inconsistent with NPV method. This is especially true in case of

mutually exclusive project i.e., projects where acceptance of one would result in the rejection of the other. Such conflict of results arises due to the following: a. b. c. Different in cash outlays Unequal life of project Different pattern of cash flows. 36

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Shri Malaprabha Sahakari Sakkare Khakane (N)

Analysis And Interpretation

CASH FLOWS (CFAT)

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BIMS Bagalkot

Shri Malaprabha Sahakari Sakkare Khakane (N)

Year 2006-07 2007-08 2008-09 2009-10 Profit 61,96,618 1,01,98,292 57,12,729 10,09,912 Depreciation 22,48,216 20,94,185 12,33,113 18,68,157 Cash flow after tax and + dep 84,44,834 1,22,92,477 69,45,842 28,78,069

Initial investment is: 2, 20, 00,000 on sugar refinery plant in the year 2006

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Shri Malaprabha Sahakari Sakkare Khakane (N)

PAYBACK PERIOD METHOD

Year 2006-07 2007-08 2008-09 2009-10

Cash inflows 84,44,834 1,22,92,477 69,45,842 28,78,069

Cumulative cost flow 84,44,834 2,07,37,311 2,76,83,153 3,05,61,222

Pay Back Period = Remaining cash outflow 3th year cash inflow

1262689 = 6945842 = BIMS Bagalkot 65.70 *365 36

Shri Malaprabha Sahakari Sakkare Khakane (N)

= So the Pay Back Period is 2Years 2 Month and 3 days

ANALYSIS: As the payback period of the project is less than estimated life of the project. So the project is acceptable.

ANNUAL RATE OF RETURN METHOD

Average Annual Income of the project Formulae = Average investment * 100

Average annual income =

30,561,222 4 years

= 7,640,305 22,000,000 Average Investment = 2 = 11,000,000 36

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Shri Malaprabha Sahakari Sakkare Khakane (N)

7,640,305 Annual Rate of Return = 11,000,000 * 100

= 69.46

ANALYSIS: As the average rate of return is more than the cost of capital i.e. 10%, so the project is acceptable.

NET PRESENT VALUE METHOD

Present Value of Cash Inflow after referring table value Less: Initial Investment Net Present Value xxx xxx xxx

Year 2006-07 2007-08 2008-09 2009-10

Discount factor @ 10% 0.909 0.826 0.751 0.683

Cash flow 84,44,834 1,22,92,477 69,45,842 28,78,069

Present value cash inflow 76,76,354 1,01,53,586 52,16,327 19,65,721 36

Present value of cash inflow

2,50,11,988

BIMS Bagalkot

Shri Malaprabha Sahakari Sakkare Khakane (N)

Less: Initial Investment Net Present Value 2,20,00,000 30,11,988

ANALYSIS: From the above calculations as the net present value of after discounting and deducting the initial investment is positive of the project so the project is acceptable as the Acceptance Rule says Acceptance Rule: NPV is POSITIVE i.e. NPV>0

INTERNAL RATE OF RETURN C-O IRR = A + CD Year Cash Inflow Discount factor @ 8% 0.926 0.857 0.794 0.735 Present Value of Cash Inflow 78,19,916 1,05,34,65 2 55,14,998 21,15,381 Discountin g factor @ 12% 0.893 0.797 0.712 0.635 Present Value of cash inflow 75,41,237 97,97,104 49,45,439 18,27,574 * (B A)

2006-07 2007-08 2008-09 2009-10

84,44,834 1,22,92,47 7 69,45,842 28,78,069

TOTAL

2,5984947

2,41,11,354

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Shri Malaprabha Sahakari Sakkare Khakane (N)

= 8+ 2, 59, 84,947 2, 20, 00,000 *(12-8) 2, 59, 84,947 2, 41, 11,354

= 8+ 8.48 = 16.48

ANALYSIS: The IRR considers comparison of the actual IRR with the required rate of return. The project would qualify to be accepted if the IRR (r) exceeds the cut off rate (k) (r > k). As in this project IRR is more than 10%. So the project can be accepted.

PROFITABILITY INDEX
Formula: Present Value of Cash Inflows PI = Initial Investment Year 2006-07 2007-08 2008-09 2009-10 Discount factor @ 10% 0.909 0.826 0.751 0.683 Cash flow 84,44,834 1,22,92,477 69,45,842 28,78,069 Present value cash inflow 76,76,354 1,01,53,586 52,16,327 19,65,721

Present value of cash inflow Less: Initial Investment

2,50,11,988 2,20,00,000 36

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Shri Malaprabha Sahakari Sakkare Khakane (N)

2,50,11,988 Profitability Index = 2,20,00,000 = 1.14

ANALYSIS: As the profitability index is more than one, the investment is acceptable as compared to acceptance rule Acceptance Rule: PI > 1 (the investment proposal is acceptable)

Findings: The capital budgeting decisions taken by the Company for implementing project is

favorable. And the five techniques used in project are NPV, PBP, IRR, ARR and PI.

ARR is 69.46% which appears to be attractive and hence it is profitable.

The NPV of the project is Rs 30,11,988.

IRR for this investment is 16.48% which is more than the cost of capital (Kwacc) i.e 10%

and this makes this project viable.

Since at 10% discount factor the PI is more than one (I;e 1.14), the expansion can be 36

accepted.

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Shri Malaprabha Sahakari Sakkare Khakane (N)

Suggestions: Company should mainly focus on modern approaches of capital budgeting.

In all five techniques Net Present Value is the best technique for the evaluation of the

project.

The company should try to increase its return on its investments, which helps it to 36

reduce the payback period, and the investment amount will be recovered very soon.

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Shri Malaprabha Sahakari Sakkare Khakane (N)

Conclusion:The malaprabha cooperative sugar factory has been successfully carrying out its business activities. The aim of the industry is to develop the financial position of the farmer so that it leads to economic development in the recent years the performance of the factory is satisfactory in the way of industry progress. Under capital budgeting techniques the NPV method is best alternative situations. For these reasons NPV emerges as a theoretically correct and better technique for evaluation of projects. So the project has preferred for the industry under NPV techniques. 36

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Bibliography:

Financial management By M.Y. KHAN & P K JAIN Financial management BY PRASANNA CHANDRA WEB SITE: ranisugar@bsnl.in

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BIMS Bagalkot 62