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INTRODUCTION

Accounting is often referred to as the language of business. It records prepare

transaction taken place during the accounting period with a view to prepare financial

statements. One of the important objectives of accounting is

1. To measure the profit of the business and

2. To ascertain the financial position of the business.

The former is done through the preparation of Profit and Loss account and the

later on the requires the preparation of Balance sheet. All according is done and

designed to prepare these financial statement periodically, usually once a year. These

statements provide vital information to several groups of affected parties like

shareholders, creditors, employees and other like researches, economist and

FINANCIAL ANALYSIS.

Definition: Before attempting to define accounting, it may be added that there is no

unanimity among accountants as to its precise definition. Out of the various

definitions, the most acceptable one is that given by AICPA committee on

terminology this is under.

Accounting is The art of recording, classifying and summarizing in a significant

manner and in terms of money, transactions and events which are, in part at least, of

financial character and interpreting the results therefore.

The length of operating cycle of a manufacturing firm is the sum of the

financial manager should determine the optimum level of current of shareholders to

be maximize

In our present day economy, finance is defined as the provision of

money at the time when it is required. Every enterprise, whether big, medium or

small, needs finance to carry on its operations and to achieve its targets. In fact,

finance is indispensable today that is rightly said that it is the life-blood of industry.

Without adequate finance, no enterprise can possibly accomplish its objectives.

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Since finance is viewed as the most important factor in every enterprise,

therefore, the management requires special mention and attention. The conventional

approach to finance function in business highlights the procurement of funds on most

economic and favorable terms to the concern, but it ignores the efficient and proper

use of the successful of the enterprise. In very originations funds are needed for

ventures and project. How much to allocate when to allocate and how to allocate the

required funds to a particular project deserves special attention in very concern. The

management has to look into nook and corner of each project, the amount of funds

necessary for them and the source from which to attune. Financial management plays

a vital role in procurement allocation control of funds.

The basics for financial planning and analysis information. Financial

information is needed to predict, compare and evaluate the firms earning ability. It is

also required to aid in economic decision making investment and financing decision-

making. The financial information of an enterprise is contained in the financial

statement or accounting reports. It contains summary information of the firms

financial affairs, organized systematically. They are the means to present the firms

financial situation to owners, creditors and general public. Preparation of these

statements is the responsibility of top management.

FINANCIAL MANAGEMENT

DEFINITION:

According to I.M.PANDEY financial management is that managerial

activity which is concerned with the planning and controlling of the firms financial

resources. Before we begin our odyssey, let us get a birds eye view of financial

management, also referred to as corporate finance or managerial finance,

beginning with its evolution, goal, its system and the statements.

EVOLUTION OF FINANCIAL MANAGEMENT

Financial management emerged as a distinct field of study at the turn of

20th century its evolution may be divided into three broad phases the traditional

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phase, the transitional phase and the modern phase. The traditional phase lasted

for about four decades. The features are the focus of financial management was

mainly on certain episodic events like formation, issuance of capital, major expansion,

merger, liquidation; etc. The approach was mainly descriptive and institutional. The

outsiders point of view was dominate financial management was viewed mainly from

the point of view of the investment bankers, lenders, and other outside interests.

The transitional phase began around the early 1940 and continued through the

early 1950s. Though the nature of financial management during this phase was similar

to that of the traditional phase, greater emphasis was placed on the day-to-day

problems faced by financial manages in the area of funds analysis, planning and

control. The focus shifted to working capital management.

The modern phase began in the mid 1950s and has witnessed an

accelerated pace of development with the infusion of ideas from economic theory and

application of quantitative. The central concern of financial management is

considered to be a rational matching of funds to their uses so as to maximize the

wealth of current shareholders.

Since the beginning of the modern phase, many significant and seminal

development have occurred in the field of capital budgeting, capital structure theory,

efficient market theory, option-pricing theory, financial modeling etc. many more

exciting developments. There are mainly three broad areas of financial decision

making viz. capital budgeting, capital structure and capital structure and working

capital management.

IMPORTANCE OF FINANCE FUNCTIION

The role of the finance manager in a modern economy is ever changing. His

responsibilities are broadening and becoming more vital to the companys over-all

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development. Once, these responsibilities were confided mainly to keeping accurate

financial records, preparing reports, managing the firms cash position and providing

the means for the payments of bills. When liquidity was insufficient for the firms

prospective cash needs, the financial manager was responsible for procuring

additional funds. However, this procurement often included only the mechanical

aspects of raising funds externally on either a short or intermediate, or long-term

basis.

In recent years, the influence of the financial manager has expanded for

beyond these limited functions. Now this concern with

(1) Allocating funds to specific assets and

(2) Obtaining the best mix of financing in relation to the over-all valuation of the

firm.

The former determines the size of the firm, its profits from operations, its

business risk, and its liquidity while the later determines the firms financial charges

and its financial risk. The financial manager needs to have a much broader out-look

than ever before, for this influence reaches into almost all facts of the enterprise and

into the enterprise and into external environmental as well.

Financial management is in many ways an integral part of the jobs of

managers who are involved in planning, allocation of resources and control. The

responsibilities for financial managers are dispersed throughout the organization.

Fox example

The engineer, who proposes a new plant, shapes the investment policy of the

firm.

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The marketing analyst provides inputs in the process of forecasting and

planning.

The purchases manager influences the level of investment in inventories.

The purchase manager has a say in the determination of the receivables policy.

Departmental managers, in general, are important links in the financial control

system of the firm

There are, however, many tasks of financial management and allied areas, like

accounting, which are specialized in nature and which are attended to by specialists.

Financial management can be viewed as a form of applied economics that

draws heavily on economic theory. Financial management also draws certain data

from accounting, another area of applied economies.

ROLE OF FINANCIAL MANAGER

Until the early 1990s, the financial manager in India functioned n a highly

regulated environment and enjoyed very little latitude in designing key financial

policies.

After that, however, the complexion of the economic and financial

environment has changed in many ways. Those may be described as follows:

The industrial licensing framework has been substantially relaxed, leading to

considerable expansion in the scope of private sector investment.

The Monopolies Restrictive Trade Practices Act has been virtually abolished

and the Foreign Exchanges Monetary Act has been substantially liberalized. Freedom has been given to companies in designing and pricing the securities

issued by them.

They system of cash credit has been replaced by a system of working capital

loans.

Stable and administered interest rates have given way to volatile and market-

determined interest rates.

The scope for foreign direct investment has expanded considerably and

foreign portfolio investment has assumed great significance.

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Investors have become more discerning, demanding and assertive.

The pace of merger, acquisitions, and restructuring has intensified.

Derivative instruments such as options and futures have been introduced.

Thanks to these changes, the job of financial manger in India has become

more important, complex and demanding. More so in the wake of global competition,

technological development, volatile financial prices, economic uncertainties, tax low

changes, ethical concerns over financial dealings, and shareholder activism. The

following are the areas in which a financial manager needs to face some key

challenges.

1. Financial structure

2. Mergers, acquisitions and restructuring

3. Working capital management

4. Performance management

5. Risk management

6. Corporate governance

7. Investor relations.

GOAL OF FINANCIAL MANAGEMENT

Much of the theory in corporate finance is based on the assumption that the goals of

the firm should be to maximize the wealth of its current shareholders.

Mr. ALFARED RAPPARPORT says in his book Lets Let Business Be Business.

in a market-based economy which recognizes the rights of private property, the only

social responsibility of business is to create value and do so legally with integrity. It is

a profound error to view increases in a companys value as concern just for its

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shareholders. Enlightened managers and public officials recognize that increases in

stock prices reflect improvement I competitiveness an issue which affects everyone

who has a stake in the company or economy.

Besides the goal of maximizing shareholders wealth, several alternative goals

were suggested, such as maximization of profit, earnings per share return on equity.

INDUSTRY PROFILE

Indian aquaculture has demonstrated a six and half fold growth over the last two

decades, with freshwater aquaculture contributing over 95 percent of the total

aquaculture production. The production of carp in freshwater and shrimps in

brackishwater form the major areas of activity. The three Indian major carps, namely

catla (Catla catla ), rohu (Labeo rohita ) and mrigal (Cirrhinus mrigala ) contribute the

bulk of production with over 1.8 million tonnes (FAO, 2003); followed by silver carp,

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grass carp and common carp forming a second important group. Average national

production from still water ponds has increased from 0.6 tonnes/ha/year in 1974 to 2.2

tonnes/ha/year by 20012002 (Tripathi, 2003), with several farmers even

demonstrating production levels as high as 812 tonnes/ha/year. The technologies of

induced carp breeding and polyculture in static ponds and tanks virtually

revolutionised the freshwater aquaculture sector and turned the sector into a fast

growing industry. The research and development programs of the Indian Council of

Agricultural Research (ICAR) as well as the development support provided by the

Indian Government through a network of Fish Farmers' Development Agencies and

Brackishwater Fish Farmers' Development Agencies have been the principal vehicles

for this development, additional support has been provided by several other

organisations, departments and financial institutions. The farming of gian river prawn

(Macrobrachium rosenbergii ) has gained increased interest in recent years, due to its

high economic value and an annual production of over 30 000 tonnes has been

achieved through the use of monoculture practices. In addition, the sector has been

witnessing increased interest in diversification with the inclusion of high-valued

species, including medium and minor carps, catfishes, murrels etc. While carp and

other finfishes are grown for the domestic market, a large proportion of freshwater

prawn production is exported. In contrast, the development of brackish water

aquaculture has been confined to a single species, Penaeus monodon , the scientific

farming of which began only recently during the early 1990s. The area devoted to

shrimp farming extends to as much as 152 000 ha producing approximately 115 000

tonnes, the majority of which is destined for export.

Aquaculture in India, in general, is practised with the utilisation of low to moderate

levels of inputs, especially organic-based fertilisers and feed. India utilises only about

40 percent of the available 2.36 million hectares of ponds and tanks for freshwater

aquaculture and 13 percent of a total potential brackishwater resource of 1.2 million

hectares, in other words there is room for both horizontal and vertical expansion of

these sectors. With over 8 000 km of coastline there is immense potential for the

development of mariculture which has taken roots only in recent years with culture of

mussels and oysters. Considering the substantial contribution aquaculture makes

towards socio-economic development in terms of income and employment through

the use of unutilised and underutilised resources in several regions of the country,

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environmentally friendly aquaculture has been accepted as a vehicle for rural

development, food and nutritional security for the rural masses. It also has immense

potential as a foreign exchange earner. Greater R&D support with strong linkages

between research and development agencies, increased investment in fish and prawn

hatcheries, establishment of aquaculture estates, feed mills and ancillary industries

have all been identified as important areas for maintaining the pace of growth of the

sector.

History and general overview

Aquaculture in India has a long history, there are references to fish culture in

Kautilya's Arthashastra (321300 B.C.) and King Someswara's Manasoltara (1127

A.D.). The traditional practice of fish culture in small ponds in eastern India is known

to have existed for hundreds of years, significant advances were made in the state of

West Bengal in the early nineteenth century with the controlled breeding of carp in

bundhs (tanks or impoundments where river conditions are simulated). Fish culture

received notable attention in Tamil Nadu (formerly the state of Madras) as early as

1911, subsequently, states such as Bengal, Punjab, Uttar Pradesh, Baroda, Mysore and

Hyderabad initiated fish culture through the establishment of Fisheries Departments.

Freshwater Aquaculture

The development of freshwater aquaculture in the country only finally became

established following the establishment of the Pond Culture Division at Cuttack in

1949 under the name of the Center of Central Inland Fisheries Research Institute

(CIFRI), West Bengal. Significant developments took place thereafter with the

standardisation of induced breeding techniques and the development of hatchery

systems and composite carp culture with the three Indian major carps and three exotic

carps, including silver and grass carp, forming the basis for carp polyculture systems.

An All India Coordinated Research Project (AICRP) on 'Composite Culture of Indian

and Exotic Fishes' initiated by the CIFRI during 1971 virtually laid the foundation for

scientific carp farming in the country by demonstrating high production levels of 810

tonnes/ha/yr. Subsequently, three more AICRPs on 'Spawn Prospecting', 'Air-

breathing Fish Culture' and 'Brackishwater Fish Culture' were launched. With the

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ready availability of hormone formulations, the production of carp seed through

induced breeding led to a tremendous fillip and subsequently riverine seed collection

and bundh breeding became obsolete. The late 1980s saw the dawn of aquaculture in

India and transformed fish culture into a more modern enterprise. While the focus was

on the development of breeding and culture technologies for different species of carp,

other species such as catfish, murrels and prawns were also addressed.

The culture systems adopted in the country vary greatly depending on the input

available in any particular region as well as on the investment capabilities of the

farmer. While extensive aquaculture is carried out in comparatively large water bodies

with stocking of the fish seed as the only input beyond utilising natural productivity,

elements of fertilisation and feeding have been introduced into semi-intensive culture.

The different culture systems that have been standardised with optimum achievable

production rates are:

Composite carp culture (46 tonnes/ha/yr).

Sewage-fed fish culture (35 tonnes/ha/yr).

Weed-based carp polyculture (34 tonnes/ha/yr).

Biogas slurry-fed fish culture (35 tonnes/ha/yr).

Integrated fish farming with poultry, pigs, ducks, horticulture, etc. (35 tonnes/ha/yr).

Intensive pond culture with supplementary feeding and aeration (1015 tonnes/ha/yr).

Pen culture (35 tonnes/ha/yr).

Cage culture (1015 kg/m/yr).

Running-water fish culture (2050 kg/m/yr) (Gopakumar et al ., 1999).

Successful breeding and larval rearing of the giant river prawn (Macrobrachium

rosenbergii ) and the monsoon river prawn (M. malcolmsonii ) provided scope for the

farmers to diversify their culture practices. Monoculture of M. rosenbergii has

produced production levels of 1.01.5 tonnes/ha in a 78 month production cycle.

During recent years, the freshwater prawn farming sector has witnessed quite

impressive growth, recording a production of over 30 000 tonnes in 20022003 from

approximately 35 000 ha of water. The state of Andhra Pradesh dominates the sector

with over 86 percent of the total production in India with approximately 60 percent of

the total water area dedicated to prawn farming, followed by West Bengal. Mixed

farming of freshwater prawn along with carp is also very much accepted as a

technologically sound culture practice and a viable option for enhancing farm income.

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Thirty five freshwater prawn hatcheries, at present producing about 200 million seed

per annum, cater for the requirements of the country.

With a view to providing a greater boost to aquaculture research and development, the

Indian Council of Agricultural Research in New Delhi reorganised the fisheries

research institutes in 1987, which led to the establishment of three separate institutes

namely: the, Central Institute on Freshwater Aquaculture (CIFA) at Bhubaneswar; the

Central Institute of Brackishwater Aquaculture (CIBA) at Chennai and the National

Research Centre on Coldwater Fisheries (NRCCWF) at Bhimtal in Nainital. The Pond

Culture Division of CIFRI later integrated into CIFA which has been instrumental in

the development of several technologies used in freshwater aquaculture and with their

dissemination through a number of first line extension projects, namely the National

Demonstration Project (NDP), Operational Research Project (ORP), Lab-to-Land

Program (LLP), Krishi Vigyan Kendra (KVK), Trainer's Training Centre (TTC),

Institution-Village Linkage Program (IVLP) and other Mission Mode Programs. The

credit for the development of freshwater aquaculture in the country must also include

a number of other agencies and programs undertaken in different parts of the country.

With fisheries development being considered a state subject, each state has a fully

fledged Fisheries Department, the Ministry of Agriculture of the Government of India

also provides additional coordination of development programs in the different states

and provides for centrally sponsored projects. For encouraging and publicising

freshwater aquaculture, the Indian government introduced a scheme known as the

'Fish Farmers' Development Agency (FFDA)' during 19731974 at the State level,

presently there are 422 FFDAs providing cover to the districts indicating major

potential in the country.

Brackishwater Aquaculture

Brackishwater farming in India is an age-old system confined mainly to the bheries

(manmade impoundments in coastal wetlands) of West Bengal and pokkali (salt

resistant deepwater paddy) fields along the Kerala coast. With no additional input,

except that of trapping the naturally bred juvenile fish and shrimp seed, these systems

have been sustaining production levels of between 500750 kg/ha/year with shrimp

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contributing 2025 percent of the total. The importance of brackishwater aquaculture

was recognised only after the initiation of an All India Coordinated Research Project,

(AICRP) on 'Brackishwater Fish Farming' by ICAR in 1973. The project developed

several technologies pertaining to fish and shrimp farming, however, scientific and

commercial culture at present is restricted to farming of shrimps.

With the development of more commercial hatcheries, a phenomenal increase in the

area under shrimp farming occurred between 19901994, the formation of

Brackishwater Fish Farmers' Development Agencies (BFDA) in the maritime states

and the implementation of various Governmental programs to provide support to the

shrimp farming sector assisted with its further development. Demonstrations of semi-

intensive farming technology with production levels reaching 46 tonnes/ha

(Surendran et al ., 1991), coupled with credit facilities from commercial banks and

subsidies from the Marine Products Export Development Authority (MPEDA) helped

boost the shrimp farming sector. Farmed shrimp production increased from 40 000

tonnes in 19911992 to 115 000 tonnes in 20022003. Currently about 91 percent of

the shrimp farmers in India own less than 2 ha, 6 percent between 2 to 5 ha and the

remaining 3 percent have an area of greater than 5 ha. Out of the total area of 0.152

million ha presently being utilised for shrimp farming in the country, Andhra Pradesh

alone provides 47 percent of the area and contributes 50 percent of the total

production.

Studies on maturation and the breeding of shrimps were initiated by the Central

Marine Fisheries Research Institute (CMFRI) in the early 1970s. In the late 1980s

MPEDA established the Andhra Pradesh Shrimp Seed Production and Research

Centre (TASPARC) and the Andhra Pradesh and Orissa Shrimp Seed Production and

Research Centre (OSPARC) based in Orissa which provided assistance for the

establishment of a number of private hatcheries. At present about 237 shrimp

hatcheries operate in the country providing a total production capacity of 11.425

billion PL 20/year (Anon, 2002).

In India, commercial cultivation of brackishwater finfish is almost non-existent,

though experiments on monoculture as well as the polyculture of milkfish, pearl-spot,

mullets and sand whiting have shown their potential for farming.

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Mariculture

The earliest attempt at mariculture in India was made at the Mandapam centre of

CMFRI in 19581959 with the culture of milkfish (Chanos chanos ), over the last

three decades, CMFRI has developed various technologies for a number of species

including oysters, mussels and clams among sedentary species, as well as for shrimps

and finfish.

The CMFRI initiated a pearl culture program in 1972 and successfully developed the

technology for pearl production in Indian pearl oysters, success in controlled breeding

and spat production of the Japanese pearl oyster (Pinctada fucata ) in 1981 and the

blacklip pearl oyster (P. margaritifera ) in 1984 was another important breakthrough.

CMFRI also took the lead in the development of the technology required for edible

oyster farming during the 1970s. Intensive research on various aspects of the culture

of the Indian backwater oyster (Crassostrea madrasensis ) have been made and the

technology has also been developed for the hatchery production of seed.

In India, two species of marine mussels namely the green mussel (Perna viridis ) and

the Indian brown mussel (P. indica ) are found in rocky coastal areas. Investigation of

the culture possibilities for mussels was initiated in early 1970s by the CMFRI which

resulted in the development of a range of practices for the culture of these species.

Among maritime states, Kerala was the first to recognise the advantages of utilizing

mussel farming technology in rural development, from a meagre production in 1997

cultured mussel production rose to 1 250 tonnes in 2002 with over 250 mussel farms

being established in the estuaries of Kerala.

Human resources

Although aquaculture in India has reached the status of an industry, a database with

details of human resources in aquaculture and allied sectors is lacking due to the

dispersed nature of aquaculture resources and non-availability of a suitable

mechanism for data collection. In a study conducted in six major aquaculture

producing Indian states (Andhra Pradesh, Haryana, Karnataka, Orissa, Uttar Pradesh

and West Bengal), Bhatta (2003) reported the age of fish farmers ranged from

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between 38 years in Andhra Pradesh to 58 years in Haryana with a national average of

47 years. The educational status of these fish farmers varied from 010 years of

schooling, a large percentage of these fish farmers practice aquaculture on a part time

basis with their involvement in the activity ranging from 17 man-days per annum in

Karnataka to the highest of 75 man-days in West Bengal. This study also inferred that

fish farming, though a part time activity, contributes a major share of the income of

these fish farmers, ranging from 14.98 percent in Orissa to 95.26 percent in Andhra

Pradesh, with an average of 79.66 percent.

With the development of shrimp farming the employment opportunities in coastal

areas has increased greatly. The average labour requirement in shrimp farming has

been estimated at about 600 labour days/crop/ha as against 180 labour days/crop/ha in

the case of paddy field cultivation (Rao and Ravindran, 2001). Case studies carried

out at a sea-based farm in the Nellore District of Andhra Pradesh showed an increase

of 215 percent employment and 622 percent income for farm labourers following

the establishment of shrimp farms (CIBA, 1997). In the brackishwater sector,

hatcheries and feed mills are also providing excellent employment opportunities and it

has been estimated that over 300 000 jobs have been generated in the main and

supporting sectors of the shrimp aquaculture sector in rural areas.

Farming systems distribution and characteristics

Aquaculture resources in India include 2.36 million ha of ponds and tanks, 1.07

million ha of beels, jheels and derelict waters plus in addition 0.12 million km of

canals, 3.15 million ha of reservoirs and 0.72 million ha of upland lakes that could be

utilised for aquaculture purposes. Ponds and tanks are the prime resources for

freshwater aquaculture, however, only about 0.80.9 million ha is used for

aquaculture currently. Ponds in eastern India are typically homestead ponds of less

than 1 ha in size, while the watersheds in Western India are larger covering expanses

of between 1525 ha each. In Northern India, open waters with in-flows are common,

while southern India has watersheds, termed as tanks, largely used for crop irrigation.

In several parts of the country ponds and tanks are state-owned or communal and are

leased out for periods of 35 years.

It has been estimated that about 1.2 million ha of potential brackishwater area

available in India is suitable for farming, in addition to this, around 8.5 million ha of

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salt affected areas are also available, of which about 2.6 million ha could be

exclusively utilised for aquaculture due to the unsuitability of these resources for

other agriculture based activities. However, the total area under cultivation is only just

over 13 percent of the potential water area available. The farming of shrimp is largely

dependant on small holdings of less than 2 ha, these farms account for over 90 percent

of the total area utilised for shrimp culture, while large holdings of over 10 ha account

for only 1.54 percent of the total. Many of the farm holdings located in Kerala and

West Bengal belong to the traditional systems of shrimp farming.

Carp hatcheries in both the public and private sectors have contributed towards the

increase in seed production from 6 321 million fry in 19851986 to over 18 500

million fry at present. There are 35 freshwater prawn hatcheries in the coastal states

producing over 200 million seed per annum. Furthermore, the 237 shrimp hatcheries

with a production capacity of approximately 11.425 billion post larvae per year are

meeting the seed requirement of the brackish water shrimp farming sector.

Freshwater aquaculture activity is prominent in the eastern part of the country,

particularly the states of West Bengal, Orissa and Andhra Pradesh with new areas

coming under culture in the states of Punjab, Haryana, Assam and Tripura.

Brackishwater aquaculture is mainly concentrated on the coasts of Andhra Pradesh,

Tamil Nadu, Orissa and West Bengal. With regards to the market, while the main

areas of consumption for freshwater fish are in West Bengal, Bihar, Orissa and north-

eastern India, cultured brackishwater shrimps are destined mainly for export.

Cultured species

While carp form the most important species farmed in freshwater in India, it is the

shrimp from the brackishwater sector which contributes the bulk of the production.

The three Indian major carps, namely, catla (Catla catla ), rohu (Labeo rohita ) and

mrigal (Cirrhinus mrigala ) contribute as much as 87 percent of the total Indian

aquaculture production. Introduced during the 1970s into the carp polyculture systems

in the country, three exotic carps namely, silver carp (Hypophthalmichthys molitrix );

grass carp (Ctenopharyngodon idellus ) and common carp (Cyprinus carpio ) now

form a second important group, together constituting as much as 0.169 million tonnes

(2002). In spite of the fact that the country also possesses several other cultivable

medium and minor carp species which show high regional demand, including, Labeo

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calbasu , L. fimbriatus , L. gonius , L. bata , L. ariza , Cirrhinus mrigala , Puntius

sarana , Hypselobarbus pulchellus , H. kolus and Amblypharyngodon mola as well as

several others, commercial farming of these species has been almost non-existent

(Ayyappan and Jena, 2003).

Among the catfishes, walking catfish, 'magur' (Clarias batrachus ) is the only species

that has received much attention. Stinging catfish, 'Singhi' (Heteropneustes fossilis ) is

another air-breathing catfish species being cultured to a certain extent in swamps and

derelict water bodies, especially in the eastern states. In recent years, attempts have

been made to develop the culture of non-air breathing catfishes like Pangasius

pangasius , Wallago attu , Sperata seenghala , S. aor and Ompok pabda . The other

finfish species of importance include climbing perch (Anabas testudineus ), murrels

(Channa striata and C. marulius ) and tilapia (Oreochromis mossambicus and

Oreochromis niloticus ). Among the freshwater prawns, the giant river prawn

(Macrobrachium rosenbergii ), is the most important species followed by the monsoon

river prawn, M. malcolmsonii .

Introduced in 1952, tilapia posed a serious threat to aquaculture systems due to its

prolific breeding capabilities which forced the country to ban the species for farming

in 1959; however, tilapia is still available in most parts of the country.

In an effort to develop the species positive or useful traits a large number of hybrids

were produced by crossing between Indian major carps, between Indian major carps

and Chinese carps and among Chinese carps, however, no significant advantages have

been able to be established from these hybrids. Selective breeding programs in rohu

based on the combined selection method taken by CIFA at Bhubaneswar in

collaboration with AKVAFORSK from Norway during the last ten years has led to

the production of a genetically improved strain (known as Jayanti ) which has shown

over 50 percent higher growth rates in three generations. This improved strain has

already become available in different parts of the country.

The brackishwater aquaculture sector is mainly supported by shrimp production as

well as giant tiger prawn (Penaeus monodon ), which are responsible for the bulk of

production followed by the Indian white prawn, P. indicus . Although India possesses

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several other potential species of finfish and shellfish, production of these is still very

low key. In seawater the major farmed species are the green mussel (Perna viridis ),

brown mussel (Perna indica ), Indian backwater oyster (Crassostrea madrasensis ),

Japanese pearl oyster (Pinctada fucata ) and seaweed species like Gracilaria edulis .

Practices/systems of culture

Freshwater Aquaculture

Culture of carp

Carp culture is based around the 'polyculture' of the three Indian major carps (catla,

rohu and mrigal) as well as 'composite carp culture' of the three Indian major carps

with the three exotic carps (silver, grass and common carp). Standard practices in carp

culture include:

The stocking of carp at combined densities of between 4 00010 000 fingerlings/ha.

Pond fertilisation with organic manures from cattle or poultry as well as inorganic

fertilisers like urea and single super phosphate.

Provision of supplementary feeds mainly in the form of a mixture of rice bran/wheat

bran and groundnut/mustard oilcake in equal ratio.

The technology for such semi-intensive carp culture has demonstrated production

levels of 35 tonnes/ha/year, several farmers have even demonstrated higher

production levels of 812 tonnes/ha/year. The technologies involved in carp culture

virtually revolutionised freshwater aquaculture, ultimately raising the average Indian

production from still-water ponds from 600 kg/ha/year in 1970s to over 2 200

kg/ha/year at present.

Culture of catfish

The pond culture of catfish involves mainly magur (Clarias batrachus ) and singhi

(Heteropneustes fossilis ) and is practised in states like Bihar, West Bengal and

Orissa. Though modern farming techniques for these species advocates monoculture

at stocking densities of 20 00050 000 fingerlings/ha, inadequate availability of

juveniles has restricted these as a component in carp polyculture systems. Considering

the high market demand for catfish and the availability of a huge potential resource in

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the form of swamps and derelict waters, commercial farming of these species are

being given important attention at present.

Culture of giant river prawn

The giant river prawn (Macrobrachium rosenbergii ) is the largest and fastest growing

species being farmed and possesses considerable demand both in domestic and

international markets. M. rosenbergii is cultured either alone (monoculture) or in

combination with carps (polyculture). The monoculture of giant river prawn is mostly

confined to earthen ponds with moderate stocking densities of between 20 00050

000/ha, fertilisation and supplementary feeding can result in a moderate yield of 600

1 000 kg/ha/8 months using single stocking and both single/multiple harvesting. The

polyculture of freshwater prawn juveniles as densities at 10 00015 000/ha alongside

carp at 3 0004 000/ha has also been demonstrated to be economically viable.

Non-conventional culture systems

Sewage-fed fish culture and rice paddy-cum-fish culture are two important culture

systems practiced in certain areas of the country; sewage-fed fish culture in bheries in

West Bengal is an age-old practice. About 5 700 ha is presently utilised for fish

culture using the input of primary-treated sewage and produces over 7 000 tonnes of

fish per annum, mainly consisting of the major and minor carps. The culture system

usually involves multiple stocking and multiple harvesting approaches, with harvest

size usually in the range of 300500 g. Though stocking densities of 10 00020

000/ha are common, densities as high as 50 000/ha has also been reported from

several farms. Experimental results have shown high potential productivity from these

systems with the record production reaching over 9 tonnes of fish/ha/year. Recently

aquaculture has also been employed as a major option for the treatment of domestic

sewage.

Paddy-cum-fish culture is undertaken in medium to semi-deepwater rice paddy fields

in lowland areas with fairly strong dykes to prevent the escape of cultivated fish

during floods, trenches and pond refuges in the paddy fields provide shelter for the

fish. The system mostly relies on natural stocking, however, modern farming

techniques involving major and minor carps stocked at the densities of 5 00010

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000/ha alongside freshwater prawn are also practiced in several areas. Production

levels of 3.5 tonnes of rice and 0.51.0 tonne of fish/ha can be achieved in a well-

managed paddy-cum-fish farming systems within a year.

Brackishwater Aquaculture

Brackishwater aquaculture in India is restricted to shrimp farming utilising semi-

intensive culture practices mainly with giant tiger prawn at stocking densities of 0.1

0.3 million/ha. With the provision of a high protein diet, water exchange, aeration and

improved health management, production levels of 46 tonnes/ha have been

demonstrated in a production period of 45 months. However, the presence of white

spot syndrome during 19941995 drastically reduced prawn farming activity in the

late 1990s. The adoption of a more cautious approach including moderate stocking

densities and good management practices has helped in the revival of the sector and in

sustaining shrimp production of the country.

Mariculture

The status of mariculture is still low key, involving only a few shellfish species such

as green mussel (Perna viridis ) and brown mussel (P. indica ) using raft or longline

culture methods; Indian backwater oyster (Crassostrea madrasensis ) using rack and

ren, and the rack and tray method; and the farming of Japanese pearl oyster (Pinctada

fucata ) by raft culture.

COMPANY PROFILE

Aquadev India Limited is a world class, Medium scale manufacturing company

partnering with market leaders to offer Aqua products and services. We have a long

history as a producer of active Aqua ingredient formulations. We support customers

with our unique value, extensive product range and global network of associates.

Aquadev India Limited Operates at Andhra Pradesh, Orissa, Weat Bengal, Gujarat,

Maharastra in India and in 7 Countries World Wide (Thaivan, Thailand, Vietnam,

Srilanka, Bangladesh, Malaysia & Nepal).

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Aquadev India Limited was registered on 31 May, 1993. Aquadev India Limited's

Corporate Identification Number (CIN) is L05005AP1993PLC015827, Registeration

Number is 015827. The Company was incorporated with an objective to promote,

establish, improve, develop, administer, own and run aquacultural ponds for culturing

all types of shell fish, fin fish, sea water foods and other crustacean.

The company went into IPO through Prospectus during the year 25.01.1995 and

raised an amount of Rs. 3,00,83,000/- by issuing 3008300 Equity Shares of Rs. 10/-

each at par. After completing the project the Company has undertaken Prawn Culture

at farms located at Garamandal, Korlam Village, Srikakulam.

The Scheme of Arrangement as approved by the Honble High Court of Andhra

Pradesh, effective August 27, 2011, inter-alia provided for:

To reduce the paid-up Capital of the Company from Rs. 4,48,24,000 consisting of

44,82,400 Equity Shares of Rs.10/- each TO Rs. 44,82,400 consisting of 4,48,240

equity shares of Rs.10/- each

Change in Management of the Company from the existing promoters to Mr.

P.V.Krishna Reddy, Mr.M. Rajasekhara Reddy and others;

Change in Main Objects of the Company from Aqua Culture and other allied

Activities to Infrastructure Activities

Our Mission

At Aquadev India Limited, Our Mission and Values are to help People and Business

Throughout the World realize their full Potential.

Values

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As a company, and as individuals, we value integrity, honesty, openness, personal

excellence, constructive self-criticism, continual self-improvement, and mutual

respect.

We are committed to our customers and partners and have a passion for technology.

We take on big challenges, and pride ourselves on seeing them through.

We hold ourselves accountable to our customers, shareholders, partners, and

employees by honoring our commitments, providing results, and striving for the

highest quality.

Vision

To take place in the top class short listed International Aqua Companies.

To Expand both in domestic and international potentional markets.

To produce unique and high quality formulations continuously.

To be recognized as best Aqua feed supplement producers.

Our Products:

Destroyer

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Germi Guard

Livozyme

Odo Clear

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Oflox Forte

Oxy More

Parakill

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Phytomax

REVIEW OF LITERATURE

INTRODUCTION TO CAPITAL BUDGETING

The term capital budgeting includes two different words

1. Capital

2. Budgeting

Capital

Capital means amount brought into the business to do the business.

Budget:

Budget is a financial plan prepared for specific period in future.

BUDGETING:

All steps involved in preparing budgets is named as budgeting or simple words

building budgets is named as budgets.

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CAPITAL BUDGETING

It is a process of investing funds. Current funds which are long term activities

with view to earn more profits. Over a series of years.

CONCEPT OF CAPITAL BUDGETING

Efficient allocation of capital is one of the most important function of the

financial management in modern times. This function involves the firm decision to

commit its funds in long-term assets and other profitable activities. The decision to

invest funds in the long term assets of a firm are quite significant and they will

influence the firms wealth, determine the size, get the pace and direction of its growth

and also affect the business risk.

The capital investment refers to the investment in various fixed assets whose

returns would be available only after a year. The investment in fixed assets will be

quite heavy and to be made immediately, but the returns will be available after a

period of one year. The investment decision of a company is commonly called as the

capital budgeting decisions of capital expenditure decisions.

In Authors View Capital Budgeting Means

Charles T. Horngren:

Capital Budgeting is a long term planning for making and financing proposed

capital outlays.

Robert N. Anthony:

The capital budget is essentially a list of what management believes to be

worth while projects for the acquisition of new assets together with the estimated cost

of each project.

Features of Capital Budgeting

The following are the features of the capital budgeting

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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.

TYPES OF INVESTMENT DECISIONS

There are many ways to classify the investment decisions. One classification is

as follows.

Expansion of existing business

Expansion of new business

Replacement and modernization

Expansion of existing business: A company may add capacity to its existing product

lines to expand existing operations. The firm may makes investment in the

expectation of additional revenue. This is also called Related Diversification.

Expansion of new business: A firm may expand its activities in a new business.

Expansion of new business requires investment in new products and a new kind of

production activity with the firm. This is also called as Unrelated Diversification.

Replacement and Modernization: The main objective of modernization and

replacement is to improve operating efficiency and costs. Replacement decisions helpto introduce more efficient and economical assets and therefore, are also called Cost-

Reduction investments. However, replacement decisions that involve substantial

modernization and technological improvements expand revenues as well as reduce

costs.

CAPITAL BUDGETING PROCESS

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The Capital budgeting process involves generation of investment proposals,

Estimation of cash flows for the proposals, evaluation of cash flows, selection of

projects based on acceptance criterion, and finally the continual revaluation of

investment after their acceptance. The steps involved in capital budgeting process are

as follows.

1. Project generation

2. Project evaluation

3. Project selection

4. Project execution

SIGNIFICANE AND PRESENTATION

Capital budget decisions are among the most crucial business decision. A

number of factors are responsible for capital budget decisions. Care must be taken

while making capital budget decisions influence all the departments of the company

such as production, marketing, personal etc. the other reasons for keeping more

attention include the following.

1. Investment of huge funds

2. Long-term implications

3. Irreversible decisions

4. Capital budgeting decisions are most difficult to take

5. Raising of funds

6. Ability to complete

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RESEARCH METHODOLOGY

The term research design is defined as The ways and methods that are

followed in analyzing the data available.

In the above statement it is quite clear that in order to find out the actual

position of the company the various methods of analysis should be made.

DATA COLLECTION

The study depends upon secondary data from various sources.

SECONDARY DATA:

Secondary Data is collected from Annual reports, schedules, budgets, and

other statements provided by the finance department of Aquadev India Ltd.

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NEED FOR THE STUDY

It is a significant to emphasize that expenditures and benefits of an investment

should be measured in cash. In the investment analysis it is cash flow which is

important not the accounting profit. It may also be pointed out that investment

decisions affect the firms value. The firms value will increase if investments are

profitable and to the shareholders wealth. That investment should be evaluated on the

basis of criterion which is compatible with the objective of the shareholders wealth

maximization. An investment will add to the shareholders wealth. If it yields benefits

in a excess of the minimum benefits as for the opportunity part of capital.

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OBJECTIVES OF THE STUDY

The study of the capital budgeting in Aquadev India ltd is being attempted

with the help of the following objectives.

The main objective of the project is to evaluating the proposed projects

undertaken by Aquadev India ltd., by applying the capital budgeting.

To offer suggestions to the Aquadev India ltd., to improve its financial

performance.

To study the capital budgeting process in Aquadev India ltd.

To analyze and access the financial viability of the investment proposal using

the Traditional and modern methods of capital budgeting.

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SCOPE OF STUDY

The scope of the present study includes the following.

Understanding the importance of the Capital Budgeting in Aquadev India ltd.,

Evaluating an investment proposal of setting up facility at Aquadev India ltd.,

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LIMITATIONS OF THE STUDY

The following are the limitations of the study;

The study was conducted with the data available and analysis was made

accordingly.

Detailed analysis could not be carried for the project work because of the

limited time span.

Since the study is based on the financial data that are obtained from the

companys financial statements, the limitations of financial statements shall be

equally applicable.

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DATA ANAYSIS AND INTERPRETATION

METHODS OF CAPITAL BUDGETING

The capital budgeting appraisal methods or techniques of evaluation of

investment proposals will help the company to decide upon the desirability of an

investment proposals depending upon their relative income generating capacity and

rank them in proposal depending upon their desirability. These methods provide the

company a set of norms on the basis of which, either it has to accept or reject the

investment proposal. Therefore, a sound appraisal method should enable the company

to measure the real worth of the investment proposal.

All Capital Budgeting Techniques Divided in to Two Types

1. Traditional (or) Non Discounted Cash Flow Techniques

A. Pay Back Period Method (P.B.P)

B. Accounting Rate of Return Method (or) Average Rate of Return

Method (A.R.R)

2. Modern (or) Time Adjusted (or) Discount cash flow TechniquesA. Net Present Value Method (N.P.V)

B. Internal Rate of Return Method (I.R.R)

C. Profitability Index Method (P.I.M)

1. Non Discounted Cash Flow (or) Traditional Methods

These methods are based on principles to determine the desirability of an

investment project on the basis of its useful life and expected returns. These methods

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depend upon the accounting information available from the books of accounts of the

company. These will not take into account the concept of time value of money,

which is a significant factor to determine the desirability of a project in terms of

present value.

A) Pay Back Period Method (P.B.P)

Pay Back Period Method is one of the used popular methods in Traditional

cash flow techniques. Here pay back refers The number of years required recovering

the original cash outlay invested in a project.

According to Weston and Brigham The pay back period is the number of

years it takes for the firm to recover its original investment by net returns before

depreciation, but after taxes.

Pay back period method cab be calculated with the help of the following

formula

Acceptance Rules

You should accept the project it pay back period is less

You should reject the project it pay back period is high

Merits of the Method:

1. Easy to understand

2. Easy calculation

3. Less cost

4. Easy availability of information

5. More useful to small sector6. Possibility for quick decision making

34

Cash Out LayPay Back Period = ---------------------------

Annual Cash Inflows


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Demerits of the Method:

Here time value of money is not consider

Maximization of market value not possible

Failure in considering time value of money

Non-consideration of interest factor

Failure in taking magnitude and timing of possible

B) Accounting (or) Average Rate of Return Method (A.R.R)

It is an accounting method, which uses the accounting information revealed by

the financial statements to measure the profitability of an investment proposal. It can

be determined by dividing the average income after taxes by average investment that

is the average book value after depreciation. According to Solomon, according to rate

of return on an investment can be calculated as the ratio of accounting net income to

the initial investment.

Accounting (or) Average rate of return method can be calculated with the help of the

following formula

Average Income

Average Rate of Return (A.R.R) = ------------------------- X 100

Average Investment

Here

Total Profit Earned by the project in all the years

Average Income = -------------------------------------------------------------

Average Investment

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Initial Investment

Average Investment = ______________________ x 100

2

Acceptance Rules:-

Accept the project if calculated average rate of return is greater than the cost

of capital.

Reject the project if calculated average rate of return is less than cost of

capital.

Merits of the Method:

1. Easy to understand

2. Easy to calculate

3. It can be readily computed with the help of the available accounting data

4. It uses the entire stream of earnings to calculate the ARR

5. It is better method when we compare with pay back period method because

here the entire cash in flow values generated by the project were considered.

Demerits of Method:-

1. Time value money is not considered

2. It is not based on cash flows generated by a project.

3. It does not take into account the fact that the profits can be reinvested.4. It ignores the time value of money.

5. This method does not consider the objective of wealth maximization.

2. Modern (or) Discounted Cash flow methods

The discounted cash flow methods provide a more objective basis for

evaluating and selecting an investment project. These methods considered the

magnitude and timing of cash flow methods enable us to is late the differences in the

timing of cash flow of project by discounting them to know the present value. The

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present value can be analysed to determine the desirability of the project. These

techniques adjust the cash flow over the life of a project for the time value of money.

The discounted cash flow methods are:

a. Net Present Value Method

b. Internal Rate of Return Method, and

c. Profitability Index Method.

A) Net Present Value Method (N.P.V)

Net Present Value method is the wildly used and more sophisticated project

Evaluation methods under discounted cash flow method. It is a superior method

because the value of cash in flow are taken at discounted value of one rupee. Net

present value is calculated by sub stating present value of cash in flow from present

value of cash out flows. It recognizes the importance of time value of money.

According to Ezra Solomon, It is a present value of future returns, discounted

at the required rate of return, minus the present value of the investment. Net present

value method can be calculated with the help of the following formula,

Net Present Value (N.P.V) = Present Value of Cash In Flows Present Value of

Cash Out Flows

Acceptance Rules:-

The present value of investment out lays and cash inflows are to be calculated

using present value table. The decision criteria for accepting or rejecting.

A project a given under:NPV>Zero Accept the proposal

NPVC Accept the proposal

NPV


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Here

NPV = Present value of cash in flows

C= Present value of cash outflows

Zero NPV implies a situation where the

firm can only recover the original investment.

Merits of the Method:-

It consider time value of money, it consider all cash in flow values generated

by the project, it considers the cost of capital for discounting rates of one Rupee

which is more appropriate method it is considered as true method of profitability.

1. Recognition to the time value of money: This method explicitly recognizes the

time value of money, which is inevitable for making meaningful financial decisions.

2. Consideration to total cash in flows: The NPV method considers the total cash in

flows of investment opportunities over the entire lifetime of the project unlike the

payback period method.

Demerits of the Method:

1. Difficult to understand

2. Difficult to calculate

3. The concept of discounting factor may not suttees for all projects in a similar

way

4. The NPV calculated by using the cost of capital as a discount rate. But the

concept of cost of capital it self is difficult to understand and determine.

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B) Internal Rate of Return Method (I.R.R)

The Internal Rate of Return is to be determined by trial and error method. The

following steps can be used for its computation.

1. Compute the present value of the cash flows from an investment, by using an

arbitrarily selected interest rate.

2. Then compare the present value so obtained with investment cost.

3. If the present value is higher than the cost, then the present value of inflows is

to be determined by using higher rate.

4. This procedure is to be continued until the present value of the flows from the

investment are approximately equal to its cost.

5. The interest rate that brings about this equality is the Internal Rate of Return.

If the Internal Rate of Return exceeds the required rate of return, then the

project is accepted. If the projects IRR is lower than the required rate of return, it will

be rejected. In the case of ranking the proposal, the technique of IRR is significantly

used. The projects with highest rate of return will be ranked as firs, compared to the

lowest of return projects.

Internal Rate of Return method can be calculated with the help of the following

formula

Positive Value Investment

I.R.R=Lower Discount Rate+ ------------------------------------- X

Positive Value Negative Value

Difference Between Positive and Negative Constants

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Merits of the Methods:-

1. Consideration of time value of money

2. Consideration of total cash flows

3. Easier appeal to the users

4. Maximization market share possible

5. Provision for risk and uncertainty

6. Elimination of pre-determined discount rate

Demerits of the method:

1. It is very difficult to understand and use

2. It involves a very complicated computational work

3. It may not give unique answer in all situations

4. The assumption re-investment of cash flows may not be possible in

practice

C). Profitability Index Method (P.I)

This method is also known as Benefit cost ratio, According to van Horne,

The profitability index of a project is the ratio of the present value of future net cash

flow to the present value of initial cash out flows.

Profitability index method can be calculated with the help of the following

formula.

Present Value of Cash In Flows

Profitability index(P.I)= --------------------------------------------

Present Value of Cash Out Flows

Acceptance Rules:-

We will accept the project it profitability index is >1

We will reject the project if profitability index is


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Merits of the Method;-

1. It takes into account time value of money

2. It requires less computation work than IRR method

3. It helps to accept/reject investment proposal on the basis of the value of index

4. It is useful to rank the proposal on the basis of the highest/lowest value of the

index

In this work cash inflow values are not given directly. In order to calculate cash in

flow values we will use the following formula

Cash In Flow Values=Depreciation

A number of capital budgeting techniques are used in practice. They may be

grouped as follows

1. Net Present Value Method

2. Internal Rate Of Return Method And

3. Profitability Index method

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TRADITIONAL CAPITAL BUDGETING APPRISAL METHODS RELATED

TO CORPORATION

CONVENTIONAL AND NON-CONVENTIONAL CASH FLOWS

The company has the non-conventional cash flows, as the initial cash out flow

is not followed by a series of cash inflows, weather uniform or not.

The cash flow statement for the year 2008-09 to 2012-13 is given below.

AQUADEV INDIA LTD CASH

FLOW STATEMENT

FOR YEARS 2008-09 TO 2012-13

(Rs. In lakhs)

Sl.

No.

Particulars 2008-09 2009-10 2010-11 2011-12 2012-13

Cash inflow:

1 Sales turnover 3656.50 3755.24 3609.38 4146.77 894604408

2 Other income 47.83 59.48 52.22 57.65 61.53

Total 3704.33 3814.72 3661.60 4204.42 6035.14

3 Add: closing stock 178.25 527.93 456.85 162.32 197.96

Total 3882.58 4342.65 41118.45 4366.74 6233.10

4 Less: Opening stock 428.18 178.25 527.93 456.85 162.32

Other income 3454.40 4164.60 3590.52 3909.89 6070.78

5 Less: operating

expenses

2702.53 3231.92 3110.18 3532.45

Cash flows before tax 751.87 950.18 480.34 377.44

6 Less: depreciation 33.88 32.95 28.02 32.31 31.47

Taxable income 717.98 917.53 452.32 345.32

7 Less: tax (working

note)

100.32 131.18 100.64 135.08

Earning after tax 617.67 786.35 351.68 210.15

8 Add: depreciation 33.88 32.95 28.02 32.31

Cash flow after tax 651.55 819.30 379.70 242.36 1199.42

NOTE: (Cash flows after tax has been taken as an initial investment or cash out flows

for the calculation of capital budgeting techniques)

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Working notes:

Income tax calculations:

(Rs. In lakhas)

INCOME TAX CALCULATION FOR THE YEAR 2008 09 TO 2012-13

Particulars 2008-09 2009-10 2010-11 2011-12 2012-13

Profit for the year 717.99 917.53 452.32 345.06

Other income 47.83 59.48 52.22 57.65 61.53

Less: 90% of other

income

43.05 53.53 47 51.88 55.38

Profit after deduction

of 90% of other

income

674.94 864 405.32 263.18

Less: 80 HHC

deductions

464.33 550.09 178.47 149.92

Taxable Income 253.66 367.44 273.85 113.26

Income tax rate

(incl.s.c%)

39.55% 37.75% 36.75% 35.88% 36.58%

Total tax 100.32 131.18 100.64 135.08 142.89

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1. PAY BACK PERIOD METHOD

Pay back period method is a traditional method of evaluation of capital

budgeting decision. The term pays back out or payoff refers to the period in which the

project will generate the necessary cash and recoup the initial investment or the cash

out flows.

MBP is case, to calculate the pay period, the cumulative cash flows will be

calculated and by using interpolation the exact period my be calculated.

The MBP of AQUADEV INDIA LTD has Rs. 1546.60 lacks and the initial

investment (as shown in the capital expenditure table of MBP and the annual cash

flows for the year 2003, 2004, 2005, 2006 and 2007. Then the pay back period may be

calculated as follows.

CALCULATION OF PAY BACK PERIOD OF AQUADEV INDIA LTD

2008-09

80 HHC exemption=export turnover /total turnover x profit after deduction 90% of

other income x 80%

464.33

Sl. No. YEAR CASH IN FLOW CUMULATIVE

CASH FLOWS

1 2008-09 651.55 651.55

2 2009-10 819.30 1470.85

3 2010-11 379.70 1850.55

4 2011-12 242.91 2092.915 2012-13 1191.42 3292.33

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2009-10

80HHC exemption= export turnover/total turnover x profit after deduction 90% of

other income x 70%

550.09

2010-11


other income x 50%

178.47

2011-12


other income x 30%

149.92

2012-13


other income x Nil

The above table shows that, the pay back period lies in second and third year

with Rs. 1470.85 and 1850.55 i.e initial investments 1546.05.

The amount has been recovers in the second year and the remaining amount in

third year (1546.05-1470.85=75.20) recovered in 3 years. This means the pay back

period lies between second and third year. The pay back period is computed below.

Different in cash flows

Pay back period = Actual year +

Next year cash flows

75.2Pay Back Period = 2 + -----------

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379.70

= 2 + 0.19

= 2.19 years

Pay back period (PBP) = 2.19 year.

ACCEPT-REJECT CRITERION

PBP can be used as criterion to accept or reject an investment proposal. A

proposal whose actual pay back period is more than what is pre-determined by the

management.

PBP thus is useful for the management to accept the investment decision on

the AQUADEV INDIA LTD and also to assist management to know that the initial

investment is recorded in 2.19 years

MERITS:

This method makes it clear that no profit arise till the pay back period is over

This method is simple to understand and equal to calculate.

This method prefers investment in short-term periods therefore it reduces the

possibility of loss on account of obsolescences

DEMERITES:

This method does not take into account the time value of money. A rupee

today is definitely worth more than a rupee after a year. This basic fact

ignored by this method.

Hazy as long term out look when future is uncertain is uncertain on account

conditional, this method may be appropriate but not always suitable.

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II. ACCOUNTING OR AVERAGE RATE OF RETURN METHOD:

It is another traditional method of capital budgeting evaluation. According to

this method the capital investment proposals are judged on the basis of their relative

profitability. The capital employed and related incomes are determined according to

the commonly accepted accounting principles and practices over the certain life of

project and the average yield is calculated. Such a rate is called the accounting rate of

return or the average return or ARR.

Accounting Rate of Return method can be calculated with the help of the

following formula

Average Income

Average Rate of Return (A.R.R) = ------------------------- X 100

Average Investment

Here

Total Profit Earned by the project in all the years

Average Income = -------------------------------------------------------------Average Investment

Initial Investment

Average Investment = ______________________ x 100

2

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The term average annual net are the average of the earnings after depreciation

and tax. Over the whole of the economic life of the project order and these giving on

ARR above the required rate of may be accepted.

CALCULATION OF ACCOUNTING RATE OF RETURN METHOD OF

AQUADEV INDIA LTD

3292.33

Average Income = -------------------

5

= 658.47

1546.05

Average Investment = -----------------

2

= 773.025

658.46

Average Rate of Return = ------------------- x 100

773.025

= 85.18

Sl. No. YEAR CASH IN FLOW CUMULATIVE

CASH FLOWS

1 2008-09 651.55 651.55

2 2009-10 819.30 1470.85

3 2010-11 379.70 1850.55

4 2011-12 242.91 2092.915 2012-13 1191.42 3292.33

INTIAL INVESTMENT 1546.05

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Interpretation

The Average Rate of Return of the project is 85.18% which is higher than the

rate specified by the Aquadev India ltd


ARR method allows AQUADEV INDIA LTD to fix a minimum rate of return.

Any project expected to give a return below it will be straight away rejected. The

average rate of return is as good as 40% of MBP depicts the prospects of management

efficiency.

MERITS:

It is very simple to understand and easy to operate.

It uses the entire earnings of the projects in calculating rate of return and not

only the earning up to the pay back period and hence gives a better view of

profitability as compared to pay period.

As this method is based upon accounting concept of profit, it can be readily

calculated from the financial data.DEMERITES:

This method also like payback method ignore the time value of money as the

profits are earned at different points of time are given equal weight by

averaging the profits. It ignores the fact that rupee to day is more value than

the rupee earned a year after or so.

It does not take into consideration those cash flows, which are more importantthan the accounting profits.

This method cannot be applied to a situation where investment in a project is

to be maid in parts.

TIME ADJUSTED (OR) DISCOUNTED CASH FLOW METHOD

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The time adjusted or discounted cash flow methods into accounts the

profitability time value of money. These methods are also called the modern methods

of capital budgeting.

1. NET PRESENT VALUE METHOD (NPV)

Net present value method or NPV is one of the best of evaluating the capital

investment proposals. Under this method cash flows and outflows associated with

each project are first calculated.

ROLE OF DISCOUNTING FACTOR

The cash inflows and outflows are converted to the present values using

discounting factors which is the actually discounted factor of mangampet barites

project of AQUADEV INDIA LTD is 8%. The rate of return is considering as cut off

rate or required rate or rate generally determined on the bases of cost of capital to

allow for the risk element involved in the project.

STEPS FOR CALCULATION OF NET PRESENT VALUE METHOD

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Calculation of each cash flows after taxes of three years, which is arrived at by

deducting depreciation, interest and tax from earnings before tax and interest

(EBIT). This residue is profit after tax arrives at cash flow after tax.

This cash flow after tax are multiplied with the value obtained from the A-3table (the present value annuity table against the 8% actuary discount. Rate i.e.

in the case of mangampet barites project.

NPV is derived be deducting the sum of present values from the initial

investment.

Initial investments are the sum of cash flows of 5 years shown in capital

expenditure table i.e., 1546.05.

NPVAT 8%

Statement showing calculation of NPV

(Rs. In lacks)

YEARS CFATS PVIF@8% PVS

2008-09 651.55 0.926 603.33

2009-10 819.30 0.857 702.14

2010-11 379.70 0.794 301.48

2011-12 242.91 0.735 178.13

2012-13 1191.42 0.680 815.60

TOTAL 2600.68

LESS: Initial investment 1546.05

NPV 1054.63

Net Present Value (N.P.V) = Present Value of Cash In Flows Present Value of

Cash Out Flows

Net Present Value = 2600.68 1546.05

= 1054.63

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Interpretation

The Net Present Value method we will accept the project. The decision criteria

for accepting this project because the Net Present Value project is positive value. So

this project is acceptable.


The accept reject decision of NPV is very simple. If the NPV is positive the

project should be accept and if NPV is negative the project should be accepted and if

NPV is negative the project should be rejected.

NPV > 0 (ACCEPT)

NPV > 0 (REJECT)

Hence in the case of managampet barites project it is visible that the positive

NPV shows the acceptance and importance of the project.

MERITS:

It recognizes the time value of money and is suitable to be applied in situations

with

Uniform cash outflows and uneven cash flows at different periods of time.

It takes into account the earnings over the entire life profitability of the

investment proposal can be evaluated.

It takes into consideration of objective of maximum profitability.

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DEMERITES:

As compared to the traditional method, the NPV is more difficult tounderstand.

It may not give good result wile comparing projects with unequal investment

of funds.

It is not easy to determine an appropriate discount rate.

2. INTERNAL RATE OF RETURN METHOD (IRR)

The internal rate of return method is also a modern technique of capital

budgeting that takes into account the time value of money. It is also known as TIME

ADGUSTED RATE OF RETURN DISCOUNTED CASH FLOW

DISCOUNTED RATE OF RETURN, YEILD METHOD and TRAIL AND

ERROR YEILD METHOD.

IRR is the rate the sum of discounted cash inflows equals the sum of

discounted cash outflows. It equals the present value of cash inflow to present value

of cash outflow.

In this method discounted rate is not known, but the cash inflows and cash

outflows are known. It is the rate of return, which equates the present value of cash

inflows to out flows or it, is the rate of return, which renders NPV TO ZERO.

STEPS INVOLVED IN THE CALCULATION OF IRR

1) Calculation of out flow after tax.

2) Calculation fake pay back period or factor the initial investment by average cash

flows.

Initial Investment

i.e. Factor of facke pay back period = -----------------------Average cash flows

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3) Look for the factor in the present annuity table in the years column until arriving

at the figure, which is at the closest to the fake pay back period.

4) Note corresponding percentage.

5) Calculated NPV at that percentage

6) If NPV is positive take the higher rate and if the NPV is negative take the rate

lower and once again calculated NPV.

7) Continue step 5 until arriving at two rates, one giving the positive NPV and the one

negative

8) Using interpolation to arrive at the actual IRR i.e. actual IRR can be calculated by

using the following formula.

Present value of lower rate cash out flow

Lower rate+----------------------------------------------x Difference in rates

Present value of lower rate present value of higher rates

FORMULATION OF STEPS

STEP 1: Calculation of cash flows after taxes

YEARS CASH FLOWS

AFTER TAXES

(CFAT)

2008-09 651.55

2009-10 819.30

2010-11 379.70

2011-12 242.36

2012-13 1199.42

TOTAL 3292.33

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STEP 2: Calculation of fake pay back period (FPBP)

Initial investment

FPBP = -------------------------------

Average CFAATS

Total Amount

Average CFATS = -------------------

No. of years

= 3292.33-------------- = 658.46

5

Initial investment = 1546.05

1546.05

FPBP = ---------------- = 2.5063

616.85

1.5063 lies between 28% and 32% of IRR method.

STEP3 : Present value of taxes (PVAT) tables indicate the values closes to 2.5063

against five years are 2.5320 at 28%

Statement showing calculation ofNPV@28% under IRR method

(Rs. In lacks)


2008-09 651.55 0.781 508.86

2009-10 819.30 0.610 499.77

2010-11 379.70 0.476 180.73

2011-12 242.91 0.372 90.15

2012-13 1199.42 0.291 349.03

TOTAL 1628.54


NPV 82.49

The above NPV is positive

STEP 4 : calculation of NPV is negative by taking 32%

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Statement showing calculation ofNPV@32% under IRR method

(Rs. In lacks)


2008-09 651.55 0.757 493.22

2009-10 819.30 0.574 470.272010-11 379.70 0.435 165.16

2011-12 248.36 0.392 79.73

2012-13 1199.42 0.249 298.65

TOTAL 1507.0354


NPV -39.04

Annuity lies between 28% and 32%

Net present value of lowerIRR=Lowe rate+.. x difference in rate

Difference in present value cash flows

1628.54 1546.05

=28+ ----------------------- x (32-28)

1628.54-1507.03

82.49

=28+ ----------- x 4

121.51=30.72%

INTERNAL RATE OF RETURN= 30.72%

Interpretation

The Internal Rate of Return method we will accept the project. Based on rules

this project is more than the IRR is 10% for this project.

ACCET-REJECT CRITERION

IRR is the maximum rate of interest which an organization can afford capital

invested in, is accepted if IRR exceeds the cutoff rates and rejected if it is bellow the

cutoff rate.

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The cutoff rate of MBP in AQUADEV INDIA LTD is 8% which is less than

the IRR i.e. 30.72. Hence the acceptance of MBP is quit a good investment decision

taken by management.

MERITS:

It takes into account the time value of money can be usually applied in

situation with even as well as uneven cash flows at different periods.

It considers the profitability of the project for its entire economic life and

hence enables evaluation of the profitability.

It provides for uniform ranking of various proposals due to the percentage

rate of return.

It is also compatible with the objectives of maximum profitability and is

considered to be more reliable technique of capital budgeting.

DEMERITS:

It is difficult to understand and is most difficult method of

evaluating investment proposals.

The result of NPV method and IRR method may differ with the

projects under evaluation differ in the size, life and timing of cash

flows.

3. PROFITABILITY INDEX

Profitability index method is also known as time adjusted method of

evaluating the investment proposals. Profitability also called as benefit cost ratio in

relationship between present value of cash inflows and the present value of cash

outflows.

Present value of cash inflows

Profitability index= ------------------------------------------------Present value of cash outflows

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Profitability index= -------------------------------------------

Initial cash outlay

CALCULATION OF BCR:

STEP 1: Calculation of cash flows after taxes

STEP 2: Calculation of present values of cash inflows @8%

STEP 3: APPLICATION OF THE FORMULA

STATEMENT FOR CALCULATION OF BENEFIT COST RATIO


2008-09 651.55 0.926 603.33

2009-10 819.30 0.857 702.14

2010-11 379.70 0.794 301.48

2011-12 242.36 0.735 178.13

2012-13 1191.42 0.680 815.60TOTAL 2600.68


Profitability index= -------------------------------------------

Initial cash outlay

2600.68

-------------

1546.05

Profitability Index = 1.68

Interpretation

Based on the acceptance rule Profitability Index method we will accept the

project. Because the Profitability Index is greater than 1 that 1.68, so the project is

accepted.

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ACCET-REJECT CRITERION

There is a slight difference between present value index method and

profitability index method. Under profitability index method the present value of cash

inflows and cash outflows are taken as accept reject decision.

i.e. The accept reject criterion is

if profitability index > 1 (ACCEPT)

profitability index < (REJECT)

STATEMENTS SHOWING CAPITAL BUDGETING OF AQUADEV INDIA

LTD FOR 5 YEARS 2008-09 TO 2012-13

PARTICULARS 2008-

09

2009-10 2010-11 2011-12 2012-13 TOTAL

(I)

(A)

MANAGAMENT

BARYTES PROJECT

MINIG

1) Electrification of second

pump station to deal with

water at CMR/RC mine

side

6.60 6.60

2) Additional pipes &

accessories3.00 3.00

3) Floods lights to the

mine(4nos Towers)9.00 9.00 9.00 9.00 3.50 39.50

4) Purchase of pumps (4nos 10.00 10.00

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100HP pumps motor with

base plate)

5) Construction of mines

minarates room1.20 1.20

6) Construction of shed insecond pump station at

RR mine side

1.00 1.00

7) Purchase of 31/2cx185sq.

mm cable 300 mts.x2 (to

meet the requirement in

case of failure of cable)

2.40 2.40 4.80

8) Purchase of 31/2cx95sq.

mm cable 300 mts.x2 (to

meet the requirement in

case of failure of cable)

0.75 0.75 1.00 2.50

9) Starters and MCCB (4

nos. each to meet in case

of failures)

3.20 3.20 3.20 3.20 3.20 16.30

10) 150 hp pump motor set-1

nos. (as spare for

monsoon)

4.00 4.00

11) 100 hp pump motor set-2

nos. (as spare for

monsoon)

5.00 5.00

12) 10 tones capacity

Magazine with

corresponding capacity of

donators

10.00 15.00 15.00 15.00 15.00 70.00

13) Construction of shed in

third pump station in mine0.75 1.00 1.00 2.75

14) Purchase of 2cx 120sq.mm cable 300 mts (to

meet in case of failure)

6.50 6.50

15) Purchase of 31.2cx185

sq.mm cable 1500 mts0.85 0.85

16) Water coolers (for plant,

mine and weight bridge)0.45 0.45 0.90 1.50 3.30

17) De-watering pump sets of

higher capacity with

higher load 6 nos. D4set

of 590KVA+electrical

60.00 20.00 80.00

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COS+ accessories

18) De-watering pump sets of

higher capacity with

higher load 4 nos.

20.00 20.00

19) Electrification of 3

rd

pumpstation

4.00 4.00 4.00 12.00

20) V.T. Centre construction

& furnishing10.00 10.00

21) Total station (survey dept) 7.40 7.40

TOTAL 63.15 37.80 115.90 68.35 49.50 334.70

PARTICULARS 2008-

09

2009-

10

2010-11 2011-12 2012-13 TOTAL

(B) GEOLOGY

1) Flood lights for plots 4.00 4.00 4.00 4.00 4.00 20.00

2) Roofing of lab, storesplant office

3.00 3.00 3.00 3.00 3.00 15.00

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3) Computerized weighing

machine for labor

aqua dev india ltd

Documents