okcapital budgeting piit

8/11/2019 OkCapital Budgeting Piit

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INTRODUCTION

CAPITAL BUDGEING:


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An efcient allocation o capital is the most important nance unction

in modern times. It involves decisions to commit rms unds to long-term

assets. Such decisions are tend to determine the value o company/ rm by

in uencing its gro th! pro tability " ris#.

Investment decisions are generally #no n as capital budgeting or

capital e$penditure decisions. It is clever decisions to invest current in long

term assets e$pecting long-term bene ts rms investment decisions ould

generally include e$pansion! ac%uisition! moderni&ation and replacement o

long-term assets.

Such decisions can be investment decisions! nancing decisions or

operating decisions. Investment decisions deal ith investment o

organi&ations resources in 'ong tern ( $ed) Assets and / or Short term

(*urrent) Assets. +ecisions pertaining to investment in Short term Assets all

under , or#ing *apital anagement . +ecisions pertaining to investment in

'ong term Assets are classi ed as ,*apital 0udgeting decisions.

*apital budgeting decisions are related to allocation o investible unds todi1erent long-term assets. 2hey have long-term implications and a1ect the

uture gro th and pro tability o the rm.

In evaluating such investment proposals! it is important to care ully consider

the e$pected bene ts o investment against the e$penses associated ith it.

3rgani&ations are re%uently aced ith *apital 0udgeting decisions. Any

decision that re%uires the use o resources is a capital budgeting decisions.

*apital budgeting is more or less a continuous process in any gro ing

concern.


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NEED FOR THE STUDY

2he 4ro5ect study is underta#en to analy&e and understand the

*apital 0udgeting process in cement manu acturing sector!

hich gives mean e$posure to practical implication o theory

#no ledge.

2o #no about the companys operation o using various *apital

0udgeting techni%ues.

2o #no ho the company gets unds rom various resources.

OBJECTIVES OF THE STUDY

2o study the relevance o capital budgeting in evaluating the pro5ector pro5ect nance

2o study the techni%ue o capital budgeting or decision- ma#ing.

2o measure the present value o rupee invested.

2o understand an item ise study o the company nancialper ormance o the company.

2o ma#e suggestion i any or improving the nancial position i the

company.

2o understand the practical usage o capital budgeting techni%ues

2o understand the nature o ris# and uncertainty


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METHODOLOGY

2o achieve a oresaid ob5ective the ollo ing methodology has been

adopted. 2he in ormation or this report has been collected through the

primary and secondary sources.

Primary sour !s

It is also called as rst handed in ormation6 the data is collected

through the observation in the organi&ation and intervie ith ofcials. 0y

as#ing %uestion ith the accounts and other persons in the nancial

department. A part rom these some in ormation is collected through the

seminars! hich ere held by 474SI*3

S! o"#ary sour !s

2he secondary data have been collected through the various

boo#s! maga&ines! brouchers " ebsites


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LIMITATION OF THE STUDY :

'ac# o time is another limiting actor! ie.! the schedule period o 8

ee#s are not sufcient to ma#e the study independently regarding

*apital 0udgeting in 474SI*3.

2he busy schedule o the ofcials in the 474SI*3is another limiting

actor. +ue to the busy schedule ofcials restricted me to collect the

complete in ormation about organi&ation.9on-availability o con dential nancial data.

2he study is conducted in a short period! hich as not detailed in all

aspects.

All the techni%ues o capital budgeting are not used in 474SI*3.

2here ore it as possible to e$plain only e methods o capital

budgeting.


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INTRODUCTION OF CEMENT:

2he basic need o human being is ood clothing and shelter love and

a1ection /possession is on never ending process or a human being.

As the time passes on human beings their ants and ishes also

changed rom ancient times to modern times and among them the living

pattern and costruction or#s also have been changed rom temporaryconstruction o house to permanent construction and the basic material used

in construction is ,*ement .

*ement the ord derived rom a latin ord >*7 7922: means stone

chipping such as e used in roman.

*ement the ord as per o$ ord! it is commonly used is any substanceapplied or so t stoc#ing things. 0ut cement means is most vital and

important material or modern constructions. It is a material hich sets and

hardness hen mi$ed ith ater. *ement is basically used in construction

as a building agent. In ancient times clay bric#s and stones have been used

or construction or#s.

2he ;omans ere using a binding or a cementing material that ould

harden and ater. 2he rst systematic e1ort as made by ,S 7A239 ho

undertoo# the e$ecution o a ne light house in ?@ B. Ce observed that

production obtained by during lime stone as the best cementing material

or or# under ater.


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2he strength and vitality o cement Industry can be gouged by the

intrest sho n and support given by orld 0an#! considering the e$cellent

per ormance o the industry in utili&ing loans and achieving the ob5ectives

and targets. 2he orld 0an# is e$amine the easibility o providing a third

line o credit or urther upgrading Industry in varying areas! hich ill ma#e

it global.

2here ore! India today totally installed capacity o over KJ million tons!

employing over a ?JJ thousand people directly and contributing amount o

rupees 8 billion to Indias +4.

TECHNOLOGY:

*ement may be manu actured employing three alternative

technologies.

?. 2he largely out molded ell process technology.

H. 2he more modern dry process that re%uires only ?EL coalutili&ation.

K. 2he latest percallinator technology through hich optimum

utili&ation may be achieved. Cere the calcinatory or ra .

aterial is partly or completed carried out be ore the eud enters the rotator

#in besides saving po er! the adoption o this technology enable in increase

in installed capacity by KJ-K L! the KJ!JJJ tons per day plants being setup

in the country use this technology.

TECHNOLOGICAL CHANGES:

*ontinuous technological upgrading and assimilation o latest

technology has been going on in the cement industry. 4resently EKL o the


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total capacity in the industry is based on modern and environment riendly

dry process technology and only @L o the capacity is based on old et and

semi-dry process technology.

2here is tremendous scope or aste heat recovery in cement plants

and there by reduction in emission level. 3ne pro5ect or co-generation o

po er utili&ing aste heat in an Insian cement plant is being implemented

ith Gapanese assistance under reen Aid 4lan. 2he induction o advanced

technology has helped the industry immensely to conserve energy and uel

and to save materials substantially.

India is also producing di1erent varieties o cement li#e 3rdinary 4ortland

*ement (34*)! 4ortland 4u&&ling *ement (44*)! 4ortland 0last =urnace Slag

*ement (40=S)! 3il ell *ement! ;apid Cardening 4ortland *ement! Sulphate

;esisting 4ortland *ement! hite *ement etc. production o these varieties

o cement con orm to the 0IS Speci cations. Also! some cement plants have

set up dedicated 5etties or promoting bul# transportation and e$port.

TOTAL PRODUCTION:

2he cement industry comprises o ?H large cement plants ith an

installed capacity o ?F8.H8 million tons and more than KJJ mini cement

plants ith an estimated capacity o ??.?J million tons per annum. 2he

*ement *orporation o India! hich is a *entral 4ublic Sector :nderta#ing!

has ?J units. 2here are ?J large cement plants o ned by various state

overnments. 2he total installed capacity in the country as a hole is ? E.K8

million tons.


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Actual cement production in HJJF-J as ??B.K million tons as

against a production o [email protected] million tons in HJJK-JF! registering a gro th

rate o 8.8FL. a5or players in cement production are Ambu5a cement!

Aditya cement! G M *ement and ' " 2 cement.

Apart rom meeting the entire domestic demand! the industry is also

e$porting cement and clin#er. 2he e$port o cement during HJJK-JF and

HJJ -JB as .?F million tons and B.EH million tons respectively. 7$port

during April- ay! HJJ as ?.K million tons. a5or e$porters ere u5arat

Ambu5a *ements 'td. and ' " 2 'td.

2he planning commission or the ormulation o N =ive or#ing roup on *ement Industry or the development o

cement industry. 2he or#ing roup has identi ed ollo ing thrust areas or

improving demand or cement6

?. =urther push to housing developments programs6

H. 4romotion o concrete Cigh ays and roads! and

K. :se o ready-mi$ concrete in large in rastructure pro5ects.

*ement industry has been decontrolled rom price and distribution on ? st

march ?E8E and de-licensed on H th Guly ?EE?. Co ever! the per ormance

o the industry and prices o cement are monitored regularly. 0eing a #ey

in rastructure industry! the constraints aced by the

Actual cement production in HJJF-J as ??B.K million tons asagainst a production o [email protected] million tons in HJJK-JF! registering a gro th

rate o 8.8FL. a5or players in cement production are Ambu5a cement!

Aditya cement! G M *ement and ' " 2 cement.


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Apart rom meeting the entire domestic demand! the industry is also

e$porting cement and clin#er. 2he e$port o cement during HJJK-JF and

HJJ -JB as .?F million tons and B.EH million tons respectively. 7$port

during April- ay! HJJ as ?.K million tons. a5or e$porters ere u5arat

Ambu5a *ements 'td. and ' " 2 'td.

2he planning commission or the ormulation o N =ive or#ing roup on *ement Industry or the development o

cement industry. 2he or#ing roup has identi ed ollo ing thrust areas or

improving demand or cement6

F. =urther push to housing developments programs6

. 4romotion o concrete Cigh ays and roads! and

B. :se o ready-mi$ concrete in large in rastructure pro5ects.

*ement industry has been decontrolled rom price and distribution on ? st

march ?E8E and de-licensed on H th Guly ?EE?. Co ever! the per ormance o

the industry and prices o cement are monitored regularly. 0eing a #ey

in rastructure industry! the constraints aced by the industry are revie ed in

the In rastructure *oordination *ommittee meetings held in the *abinet

Secretariat under the *hairmanship o Secretary (*oordination). 2he FFF

*ommittee on In rastructure also revie s its per ormance.

DISTRIBUTION SYSTEM:

+istribution o cement as entirely under overnment control until

?E8H. at present the Industry has to ma#e an agreement to ards the levy

%uota hich is to be sold compulsorily to the overnment the rest o the

output or open mar#et %uota may be sold in the open mar#et evolved prices

the output li ted by the overnment is allocated state ise.

NEED AND IMPORTANCE:


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In India e see rapid industrial development in the last e centuries.

Indian industry is gro ing at considerable ratio hich reveals India is a

developing country. And there are di1erent industrial sectors are playing a

vital role or the economys development. 2hey are steel cement S3=.

In ormation 2echnology edical Science etc.

3ne among them as ,*7 792 I9+:S2;< hich plays a vital role or

the countrys development. In India cement industry is gro ing rationally

and mar#eting is the #ing pin o all activities particularly to the business

because o this changes in the e$ternal environment i.e.! social! political!

legal! technical and international environment and changes in mar#eting.

2here is increased in the salaries in all most in every mar#et leading to

competition is aspects o price! promotion etc.! hich help to increase the

standard o living o people.

2he manu acturers o *ement li#e 4epsico cement! India limited! 3rient

limited! :ltratech etc. are providing cement and they are distributing cement

through ide net or# o dealers.

4epsico cements are doing its business rom decades and it iscontinuously contributing to the national economy. In even Industry no a

days there is no special interest or particularly department li#e production or

manu acturing but #no a days total %uality management plays a vital or

the companys success.

+istribution channel hich plays a vital role or the company success.

+istribution channels are lin# bet een the company and consumers.


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CHAPTER $

COMPANY PROFILE


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PROFILE OF THE COMPANY

3ne among the industrial gains in the country today serving the nation on

the industrial ront pepsico industries limited has a tenured and e$tent ull

history dating hoc# to the t enties hen the industrial house o 0irlas

en%uired it. ith only a 2e$tile mill under its banner in ?EHF!it gre rom

strength and spread its activities to ne er elds li#e ;ayon pulp 2ransparent

4aper.Spun pipes and ;e ectory 2yres oil mills and re nery 7$traction.

'oo#ing to the ide gap bet een the demand and supply o vital

commodity cement hich it plays on important role in 9ation 0uilding! the

government 4rivate entrepreneurs to argument the cement production

4epsico rose to the occasion and decided to set up e cement plants in the

country.


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4epsico cement is one o the prestigious units in the reno ned

4epsico industries group that is one o Indias leaden industrial

conglomerates! under the leadership o r.0.M.0irla! the amous personality

o Indian Industry! ho o es branches all over India.

4epsico cement Industry is one o the leading manu actures o cement inIndia 4epsico cement is a division o 4epsico Industries limited. It is a dry

process cement plant. It is located at 0asant 9agar in Marimnagar +istrict o

Andhra 4radesh ith the plant capacity is 8.HB la#hs tones per annum. It is

8Mms a ay rom the ;amagundam ;ail ay Station 'ining adras to 9e

+elhi.

PLANTS SETUP: The first cement point of Pepsico with a capacity of 2.1 lacks tones per annum

incorporating Humboldts suspension preheated system was committed during the year 1969.

2he second unit as setup in the year ?E@? ith capacity o H.?lac#s

tons hich added to the above plant capacities.

2he third plant ith a capacity o H. lac#s tons per anum! hich

ent on stream in the year ?E@8.

2he coal or this company is obtained by singareni collieries and the

po er is obtained rom A4S70. 2he po er demand capacity or the actory is

about H? . . 4epsico has got HJ sets o F 9 each installed in the

year?E8@.


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4epsico cement belongs to the 0irla group companies one o the

industrial giants in the country.

4epsico cement industries distinguished it sel among the cement

actories in India by bagging the national productivity a ard or t osuccessive years i.e.! in ?E8 -8B and 8@. 4epsico cement also got the =A4**I

a ard or best amily planning e1ort in the state or the year ?E8@-88.

4epsico also bagged 9*0*9S national a ard or energy

conservation or the year ?E8E-EJ. 2he 4epsico industries loo# or the

el are o the employees and it provide various acilities hich the

employees and it provide various acilities hich the employee eels satis ed

ith in the organi&ation and a ter the or# they ees satis es the or#er and

or#s amilies by providing various el are schemes and by providing

recreational acilities o a glace.

2he company set up ,;ecreation *lub or the purpose o recrimination

acilities t o auditoriums are provided or playing indoor games li#e chess!

shuttle and caroms and or organi&ing cultural unctions and activities li#e

drama! music! and dance centers etc.

It provides 'ibrary and reading rooms or the bene t o the

employees more than JJJ boo#s are available in the library along ith

other 9e spapers and maga&ines.

2hey setup 7nglish and 2elugu medium schools or the gro th o or#ers

child. 2he company provides ,+ispensary ith a %uali ed medical o1er andedical sta1 or the bene t o the employees.

A Couse Gournal in the name o 0asant 9agar sam char is brought out

%uarterly here an all important activities and in ormation o the plant is

published.


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2he company provides cooperative stores here the supply essential

commodities li#e rice! heat! sugar! #erosene etc. at cash and credit basis.

2hey conduct games or t ice a year on the occasion o HB th Ganuary

;epublic +ay and ? th August Independence +ay in order to encourage the

employees! outside o their or#station.

2he amily planning camps are held regularly ith the help o the

+istrict edical and Cealth Authorities at the overnment Cospital. It has got

on a ard or their e$cellent service.

9ot only the employees o the actory are ta#en care! butthe

company plays a lot o attention to ards the rural development activities.

2 elve villages are adopted and the company has e$tended help in

constructing temples! road! and giving programmers to the armers! 7ye

surgical camps health chec#up schemes etc.

2o #eep the ecological balance! company has also underta#en massive

tree plantation in and around 0asant 9agar and near by villages there by

eliminating the pollution and they have been nominated by the government

o India or ,O;:MSCA I2;A A A;+ but e1ort o an industrial unit in the

state or rural development ?EEF-E presented by * in march ?EEB.

BRANDS:

4epsico brands ith namely 0irla Supreme and 0irla supreme gold ( K

grades) has made a niche ith outstanding %uality and commands a


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0est industrial productivity a ard o =A4**I.

0est management a ard o state government ?EEK.

It has got ,Oanamitra a ard rom the government o Andhra

4radesh.

PEPSICO GROUP OF INDUSTRIES

a)2e$tiles 4epsico Industries 'td!FH! arden ;each ;oad*alcutta-@JJJKF.

b);ayon 4epsico ;ayon 2riennia (4.3.)!+ist P Coogly! est 0engal.

c)Spun 4ipes 4epsico Spun pipes " =oundries!

bansberia (4.3.)! +istP Coogly!est 0engal.

d)*ement 4epsico *ement!0asantnagar- JB?8@!+ist P Marimnagar! Andhra 4radesh


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e)*ement Oasavadatta *ement!Sedam- 8 HHH!+ist P ulbargah! Marnata#a.

) 2yres 0irla 2yres!Shivam *hambers!K! Syed Amir Ali Avenue.

*alcutta-@JJJHE.

Pro#u & Pro'(!

2he main brands o cement manu actured areP

;AASI 3'+ ( K rade)

;AASI S:47; 43 7;

;AASI FK rade cement.

All the brands are #no n or its best %uality standards.

Huma" R!sour !s

2he 4lant has ell %uali ed! highly motivated manpo er o BFE employeeson its rolls. 3ut o BFE employees! EH are e$ecutive cadre and remaining are

in sta1 and or#men cadre. 2he MI'! M9; manpo er is #no n or their spirit

and commitment.


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Po((u&io" Co"&ro(

2he 4lant is commissioned or pollution ree environment and installed all the

re%uired pollution control e%uipment as per the statutory re%uirement. A

separate team ill regularly monitor and maintain the said e%uipment.

Sa)!&y

2he 4lant maintains high standards o sa ety and good house#eeping

methods in line ith > S techni%ues.

Co"&ri*u&io" &o &+! !, +!-u!r

MI'! M9; has been contributing around ;s.?@ .JJ crores to the e$che%uer in

the orm o ta$es! royalty etc.

To."s+i/MI'! M9; has a ell planned to nship consisting o K@8 %uarters having

acilities li#e

School

Cospital

2emple

uest Couse

*o-operative Stores

;ecreation *lub

4lay round etc.

Rura( D!0!(o/m!"&


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MI'! M9; as apart o ;ural " Social +evelopment 4rogramme adopted 8

surrounding villages . 2he company e$tends the acilities li#e

Cousing

ater

School

3ld age pension

;oads etc6

0y allocating a budget amount o about ;s.H .JJ la#hs per

annum.

Industrial Relations

MI'!M9; is #no n or its best Industrial ;elations practices in this region and

on many a ards rom ovt. o A.4. and *hamber o Industries.

Norms

;a ill *lin#er *ement'ime stone EBL

Iron ore H. L

'aterite ?. L

;a ill ?. tonnes

*oal HJL

*lin#erE@L

ypsum KL


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CONCEPTUAL FRAME1%OR2


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CAPITAL BUDGEING:An efcient allocation o capital is the most important nance unction

in modern times. It involves decisions to commit rms unds to long-term

assets. Such decisions are tend to determine the value o company/ rm by

in uencing its gro th! pro tability " ris#.

Investment decisions are generally #no n as capital budgeting or

capital e$penditure decisions. It is clever decisions to invest current in long

term assets e$pecting long-term bene ts rms investment decisions ould

generally include e$pansion! ac%uisition! moderni&ation and replacement o

long-term assets.

Such decisions can be investment decisions! nancing decisions or

operating decisions. Investment decisions deal ith investment o

organi&ations resources in 'ong tern ( $ed) Assets and / or Short term

(*urrent) Assets. +ecisions pertaining to investment in Short term Assets all


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under , or#ing *apital anagement . +ecisions pertaining to investment in

'ong term Assets are classi ed as ,*apital 0udgeting decisions.

*apital budgeting decisions are related to allocation o investible unds to

di1erent long-term assets. 2hey have long-term implications and a1ect theuture gro th and pro tability o the rm.

In evaluating such investment proposals! it is important to care ully consider

the e$pected bene ts o investment against the e$penses associated ith

it.3rgani&ations are re%uently aced ith *apital 0udgeting decisions. Any

decision that re%uires the use o resources is a capital budgeting decisions.

*apital budgeting is more or less a continuous process in any gro ing

concern.

For E,am/(!: 4urchase o 'and is an e$ample o *apital 0udgeting decision.

Similarly replacement o outdated e%uipment ith modern machines!

purchase o a brand or business! computeri&ation and net or#ing the

organi&ation! investment in research and development o a product launch

o a ma5or promotional campaign etc are all e$ample o *apital 0udgeting

decisions.

Co ever! in all cases! the decisions have a long-term impact on the

per ormance o the organi&ation. 7ven a single rong decision may in

danger the e$istence o the rm as a pro table entity.

IMPORTANCE OF CAPITAL BUDGETING:

2here are several actors that ma#e capital budgeting decisions among the

critical decisions to be ta#en by the management. 2he importance o capital


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budgeting can be understood rom the ollo ing aspects o capital budgeting

decisions.

?. Lo"3 T!rm Im/(i a&io"s: *apital 0udgeting decisions have long term

e1ects on the ris# and return composition o the rm. 2hese decisions

a1ect the uture position o the rm to a considerable e$tent. 2he

nance manger is also committing to the uture needs or unds o that

pro5ect.

45 Su*s&a"&ia( Commi&m!"&s: 2he capital budgeting decisions

generally involve large commitment o unds. As a result! substantial

portion o capital unds is bloc#ed.

$5 Irr!0!rsi*(! D! isio"s: ost o the capital budgeting decisions are

irreversible decisions. 3nce ta#en the rm may not be in a position to

revert bac# unless it is ready to absorb heavy losses hich may result

due to abandoning a pro5ect mid ay.

65 A)&!r &+! Ca/a i&y a"# S&r!"3&+ &o Com/!&!: *apital budgeting

decisions a1ect the capacity and strength o a rm to ace competition.

A rm may loose competitiveness i the decision to moderni&e isdelayed.

PROBLEMS 7 DIFFICULTIES IN CAPITAL BUDGETING:

85 Fu&ur! u" !r&ai"&y: *apital 0udgeting decisions involve long-term

commitments. 2here is lot o uncertainty in the long term. 2he

uncertainty may be ith re erence to cost o the pro5ect! uturee$pected returns! uture competition! legal provisions! political

situation etc.

?. Tim! E(!m!"&: 2he implications o a *apital 0udgeting decision are

scattered over a long period. 2he cost and bene ts o a decision may

occur at di1erent point o time. 2he cost o a pro5ect is incurred


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immediately. Co ever! the investment is recovered over a number o

years. 2he uture bene ts have to be ad5usted to ma#e them comparable

ith the cost. 'onger the time period involved! greater ould be the

uncertainty.

$5 Di9 u(&y i" ua"&i' a&io" o) Im/a &: 2he nance manger may

ace difculties in measuring the cost and bene ts o pro5ects in

%uantitative terms.

E,am/(!: 2he ne product proposed to be launched by a rm may

result in increase or decrease in sales o other products already being

sold by the same rm. It is very difcult to ascertain the e$tent o

impact as the sales o other products may also be in uenced by actors

other than the launch o the ne product.

ASSUMPTIONS IN CAPITAL BUDGETING:

2he *apital 0udgeting decision process is a multi- aceted and analytical

process. A number o assumptions are re%uired to be made.

85 C!r&ai"&y .i&+ r!s/! & &o os& 7 B!"!'&s: It is very difcult to

estimate the cost and bene ts o a proposal beyond H-K years in

uture.45 Pro'& Mo&i0! : Another assumption is that the capital budgeting

decisions are ta#en ith a primary motive o increasing the pro t o

the rm.


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T+! a &i0i&i!s a" *! (is&!# as )o((o.s:+is-investments i.e.! sale o division or business.

*hange in methods o sales distribution.

:nderta#ings an advertisement campaign.;esearch " +evelopment programs.

'aunching ne pro5ects.

+iversi cation.

*ost reduction.

FEATURES OF INVESTMENT DECISIONS:

2he e$change o current unds or uture bene ts.

2he unds are invested in long-term assets.

2he uture bene ts ill occur to the rm over a series o years.

IMPORTANT OF INVESTMENT DECISIONS:

2hey in uence the rms gro th in long run.

2hey e1ect the ris# o the rm.

2hey involve commitment o large amount o unds.

2hey are irreversible! or reversible at substantial loss.

2hey are among the most difcult decisions to ma#e.

TYPE OF INVESTMENT DECISIONS:

7$pansion o e$isting business.

7$pansion o ne business.


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;eplacement " oderni&ation.

INVESTMENT EVALUATION CRITERIA:

7stimation o cash o s.

7stimation o the re%uired rate o return.

Application o a decision rule or ma#ing the choice.

*onsideration o cash o s is to determine true pro tability o the pro5ect

and it is an unambiguous ay o identi ying good pro5ects rom the pool.

;an#ing is possible it should recogni&e the act that bigger cash o s are

pre erable to smaller ones " early cash o s are re erable to later ones I

should help to choose among mutually e$clusive pro5ects that hich

ma$imi&es the shareholders ealth. It should be a criterion hich is

applicable to any considerable investment pro5ect independent o

other.2here are number o techni%ues that are in use in practice. 2he chart

o techni%ues can be outlined as ollo sP

Ca/i&a( Bu#3!&i"3 T! +"i-u!s:

Tra#i&io"a( A//roa + Mo#!r" A//roa +

;or< ;oro. ? Pr!s!"& 0a(u! o) &+! as+

ou&>o.

A !/&a" ! Ru(!:

Accept i 94O Q J

;e5ect i 94O R J

ay accept i 94O J

3ne ith higher 94O is selected.

INTERNAL RATE OF RETURN METHOD:

2he internal rate o return (I;;) method is another discounted cash

o techni%ue .2his method is based on the principle o present value. It

ta#es into account o the magnitude " timing o cash o s.

I;; nothing but the rate o interest that e%uates the present value o

uture periodic net cash o s! ith the present value o the capital

investment e$penditure re%uired to underta#e a pro5ect.

2he concept o internal rate o return is %uite simple to understand in

the case o one-period pro5ect.


33/68

A !/&a" ! Ru(!:

Accept i r Q #

;e5ect i r R #

ay accept i r #

here r rate return

# opportunity cost o capital

PROFITABILITY INDE@ ;OR< BENEFIT COST RATIO:

o.s

PI = 11111111111111111111111111111111111111111

Pr!s!"& Va(u! o) Cas+ ou&>o.s

A !/&a" ! Ru(! :


34/68

Accept i 4I Q ?

;e5ect i 4I R ?

ay accept i 4I ?

4ro tability Inde$ is a relative measure o pro5ects pro tability.

PAY BAC2 PERIODE METHOD:

3ne o the top concerns o any person or organi&ation investing a large

amount o money ould be the time by hich the money ill come bac#.

2he concern ma#ing the investment ould ant that at least the capital

invested is recovered as early as possible. 2he pay bac# period is de ned

as the period re%uired or the proposals cumulative cash o s to be e%ual

to its cash out o s. In other ords! the paybac# period is the length o

time re%uired to recover the initial cost o the pro5ect. 2he paybac# period

is usually stated in terms o number o years. It can also be stated as the

period re%uired or a proposal to >brea# even on its net investment.

2he paybac# period is the number o years it ta#es the rm to recover its

original investment by net returns be ore depreciation! but a ter ta$es.


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I pro5ect generates constant annual cash in o s! the pay bac# period iscompleted as ollo sP

I"i&ia( I"0!s&m!"&

Pay Ba = 111111111111111111111111 A""ua( as+ i">o.

In case o une%ual cash in o s! the paybac# period can be ound out

by adding up the cash in o s until the total is e%ual to initial cash outlay.

Acceptance ;uleP

Accept i calculated value is less than standard $ed by management

other ise re5ect it.

I the paybac# period calculated or a pro5ect is less than the

ma$imum paybac# period set up by the company it can be accepted.

As a ran#ing method it gives highest ran# to a pro5ect hich has lo est

pay bac# period! and lo est ran# to a pro5ect ith highest pay bac#

period.

DISCOUNTED PAY BAC2 PERIOD:

3ne o the serious ob5ections to pay bac# method is that it does not

discount the cash o s. Cence discounted pay bac# period has come into

e$istence. 2he number o periods ta#en in recovering the investment outlay

on the present value basis is called the discounted pay bac# period.

+iscounted 4ay 0ac# rule is better as it does discount the cash o s until

the outlay is recovered.

ACCOUNTING RATE OF RETURN ;ORo.s Dis584

Pr!s!"& Va(u! o)Cas+>o.s

? ;s.?.?HE.K8F.JJJ

J!8EH ;s. [email protected]?J. H8

H ;s.?.K?J.8E .JJJ

J!@E@ ;s. ?.JFK.E8B.K?

K ;s.?.@[email protected] J!@?? ;s. ?.H H.BE .EBE

F ;[email protected]

J!BK ;s. [email protected]?J

;s.H.?EK.JB?.JJJ

J! B@ ;s. ?.HFK.FB . 8@

Pr!s!"& Va(u! o) Cas+F(o.s

Rs5 5 6 56$$5 8

L!ss: Cas+ Ou&(ay Rs5 56 54 5

N!& Pr!s!"&

Va(u!

Rs5 8 54$$5 8


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InterpretationP

2he 9et 4resent Oalue is the di1erence bet een the , 4resent value o cash

in o s and ,4resent value o cash out o s.

PROFITABILITY INDE@ ; P5Io.s;P5V5

okcapital budgeting piit

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