A STUDY ON CAPITAL BUDGETING

A Project Submitted to
University of Mumbai for partial completion of the
degree of B a c h e l o r o f M a n g a m e n t
S t u d i e s (Finance)
Under the Faculty of Commerce

By

Rohit Jain

Under the Guidance of

Prof. A s h a V a r m a

RAV’s
Laxmichand Golwala College Of Commerce

& Economics

Mg Road, Ghatkopar (w), Mumbai -400086

 CERTIFICATE

This is to certify that Mr. Rohit Jain ​has worked and duly completed his
Project Work for the degree of Bachelor of Management studies under the
Faculty of Commerce in the subject of Finance and his project is entitled,​ ​
The Study on Capital Budgeting
I further certify that the entire work has been done by the learner under my
guidance and that no part of it has been submitted previously for any Degree or
Diploma of any University.

It is his own work and facts reported by his personal findings and investigations.

Project Guide Principal

Prof. Asha Varma

External Examiner
Date:

DECLARATION

I the undersigned Mr​. Rohit Jain hereby, declare that the work
​ Ro tjain
embodied in this project work titled ​The Study on Capital Budgeting​,

forms my own contribution to the research work carried out under the

guidance of Prof . ASHA VARMA is a result of my own research

work and has not been previously submitted to any other University

for any other Degree/ Diploma to this or any other University.

Wherever reference has been made to previous works of others, it has

been clearly indicated as such and included in the bibliography.

I, hereby further declare that all information of this document has

been obtained and presented in accordance with academic rules and
ethical conduct.

Student
Mr. ​Rohit Jain
Certified by

Project Guide:
Prof. Asha Varma
 ACKNOWLEDGMENT

To list who all have helped me is difficult because they are so numerous and the
depth is so enormous.

I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.

I take this opportunity to thank the ​University of Mumbai for giving me chance
to do this project.

I would like to thank my Principal, ​Dr. V i j a y M a h i d a

for providing the necessary facilities required for completion of this project.

I take this opportunity to thank our Course Co-coordinator, ​ for her moral
support and guidance.

I ​would also like to express my sincere gratitude towards my project guide

​ Prof.Asha Varma whose guidance and care made the project succesful.

I would like to thank my College Library,

for having provided various reference books and magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly

helped me in the completion of the project especially ​my ​Parents and Peers who
supported me throughout my project.
 INDEX

1. INTRODUCTION & RESEARCH METHODOLOGY 1-7

2. LITERATURE REVIEW 8-23

3. COMPANY PROFILE 24-35

4. DATA ANALYSIS & INTERPRETATION & PRESENTATION 36-69

5. CONCLUSION AND SUGGESTION 70-72

ABBREVIATIONS

BIBLIOGRAPHY
CHAPTER 1: ​INTRODUCTION AND RESEARCH
METHODOLOGY

INTRODUCTION TO BUDGETING

BUDGETING​: -

Budgeting is nothing but technique of expressing largely in financial terms of

management plans for operating & financing the enterprise during periods of time. It
is relating active and stresses what should happen, it has an easements of ‘Wishful
Thinking’ injected into it knowingly as it used a motivation device. It is prepared by
the office of the controller which coordinates the control function. It is prepared for a
period of one year.

An estimation of the revenue & expenses over a specified future period of

time. A budget can be made for a person, a family or a group of people, a business,
government, country or multinational organization or just about anything else that
makes & spends. Money budgets are a microeconomic concept that show the tradeoff
made when one good is exchanged for another. A surplus budget means profits are
anticipated, a balanced budget means revenue are expected to equal expenses; and a
deficit budget means expenses will exceed revenue. Budgets are usually compiled and
re-evaluated on a periodic basis. Adjustments are made to budgets based on the goals
of the budgeting organization. In some cases, budget makers are happy to operate at a
deficit, while in other cases, operating at a deficit is seen as financially irresponsible.

DEFINITION OF BUDGETING: -
“​Budgeting ​is the formulation of plans for future activity that seek to substitute
carefully constructed objectives for hit and miss performance
and provide yard sticks by which deviations from planned achievements can be
measured.​”

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 ​INTRODUCTION TO CAPITAL BUDGETING

INTRODUCTION:
Among the various business decisions capital budgeting decisions are critical
and crucial decisions. Therefore special care must be taken while taking these
decisions.

CONCEPT AND MEANING:

The term capital budgeting refers to “long term planning for proposal
capital outlay and their financing. It includes rising long-term funds and their
utilization. It may be defined as firms, formal process of acquisition and
investment of capital.

Capital Budgeting may also be defined as ​“The decision making

process which the firm evaluates the purchase of major fixed assets. It
involves firm’s decision to invest its current funds for addition, disposition,
modification and replacement of fixed assets”.

It deals exactly with major investment proposals, which are essentially

long-term projects and incurred among the available market opportunities.

Capital budgeting is the process of making investment decision in

capital expenditure. A Capital expenditure may be defined as an expenditure,
the benefits of which are expected to be received over a period of time
exceeding one year. The main characteristic of a Capital expenditure is that the
expenditure is incurred at the one point of time whereas benefits of the
expenditure are related at different point of time in future.

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 NEED & SCOPE OF STUDY:
Capital Budgeting means planning for capital assets. Capital Budgeting
decisions are vital to an organization as to include the decision as to:

● Whether or not funds should be invested in long term projects such as

settings of an industry, purchase of plant and machinery etc.,
● Analyze the proposals for expansion or creating additions capacities.
● To decide the replacement of permanent assets such as building and
equipments.
● To make financial analysis of various proposals regarding capital
investment so as to choose the best out of many alternative proposals.

SCOPE OF STUDY:
Main financial function in modern times is allocation of capital in
efficient resources.

Which is the most crucial step in the firm? These decisions involve
heavy involvement of funds so these long term decisions have a great
implication on the growth and profitability of the firm.

Scope of the study is limited in collecting the financial data of Bevcon

wayors for five years and the budgeted figures for each year.

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 OBJECTIVES OF THE STUDY

1. To make effective utilization of resources.

2. Evaluate the proposal and to see whether the capital invested

yields more returns than determined.

3. To make the proposals which are more beneficial for the firms?

4. To evaluate the company growth and make the decision to gain

the company in the long run.

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 RESEARCH AND METHODOLOGY:

A. Type of research is descriptive research by survey method.

B. Primary data is collected from the Investors and secondary data from
company profile, brochures.

C. Sample Size: 50 investors. Collection Method: personal.

D. Tool: a structural questionnaire was prepared to collect information

pertaining to the study. The questionnaire was administered to the
company

DATA SOURCES:

a) Primary Data​:
The data will be collected though holding discussions with the employees
of the company and discussing the questionnaires with existing customers
of the company.
​b) Secondary Data​:
The present study is based on Secondary data. The various source of secondary
data include
● Internet
● Share prices of different NSE nifty companies.
● Information provided by the company
● Magazines

RESEARCH DESIGN​:
The research is primarily both explanatory as well as descriptive in nature. A
well-structured questionnaire was prepared and personal interviews were
conducted to collect the customer’s requirements, through this questionnaire.

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SAMPLING METHODOLOGY:

a) Sampling Technique​:
Capital budgeting
b) Sampling size:
Sample size refers to number of elements to be included in the study.
Sample size is 50 investors of “Bevcon Wayors”

DATA COLLECTION
Primary data:
Primary data is the data which is collected by interviewing the
concerned executives and this data is gathered from the organization.

Secondary data:
Secondary data is data gathered from the publications and the
concerned websites.

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 LIMITATIONS:

(1) All the techniques of capital budgeting presume that various

investment proposals under consideration that are mutually
exclusive which may not practically be true in some particular
circumstances.
(2) The techniques of capital budgeting requires estimation of
future cash inflows and out flows. The future is always
uncertain, and the data collected for future may not be exact.
Obviously, the result based upon wrong data cannot be good.
(3) There are certain factors like morale of employees, goodwill of
the firm, etc., which cannot be correctly qualified but which
otherwise substantially influence the capital decision.
(4) Urgency is another limitation in evaluation of capital investment
decision.
(5) Uncertainty and risk pose the biggest limitation to the
techniques of capital budgeting.

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 CHAPTER 2:​ LITERATURE REVIEW

CAPITAL BUDGETING:
A capital expenditure is an outlay of cash for a project that is expected
to produce a cash inflow over a period of time exceeding one year. Examples
of projects include investments in property, plant, and equipment, research and
development projects, large advertising campaigns, or any other project that
requires a capital expenditure and generates a future cash flow.

Because capital expenditures can be very large and have a significant

impact on the financial performance of the firm, great importance is placed on
project selection. This process is called ​capital budgeting​.

KINDS OF CB DECISIONS:
Capital Budgeting refers to the total process of generating, evaluating,
selecting and following up on capital expenditure alternatives basically; the
firm may be confronted with three types of capital budgeting decisions

(i) Accept reject decisions ​

This is a fundamental decision in capital budgeting. If the project is
accepted, the firm invests in it; if the proposal is rejected, the firm does not
invest in it. In general, all those proposals, which yield rate of return greater
than a certain required rate of return or cost of capital, are accreted and rest are
rejected. By applying this criterion, all independent projects all accepted.
Independent projects are the projects which do not compete with one another in
such a way that the acceptance of one project under the possibility of
acceptance of another. Under the accept-reject decision, the entire independent
project that satisfies the minimum investment criterion should be implemented.

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(i) Mutually exclusive project decision ​
Mutually exclusive projects are projects which compete with other
projects in such a way that the acceptance of one which exclude the acceptance
of other projects. The alternatives are mutually exclusive and only one may be
chosen.

(ii) Capital Rationing Decision ​

Capital rationing is a situation where a firm has more investment
proposals than it can finance. It may be defined as a situation where a
constraint in placed on the total size of capital investment during a particular
period. In such a event the firm has to select combination of investment
proposals which provides the highest net present value subject to the budget
constraint for the period. Selecting or rejecting the projects for this purpose will
require the taking of the following steps:

1) Ranking of projects according to profitability index (PI) or Initial rate of

return (IRR).
2) Selecting of rejects depends upon the profitability subject to the budget
limitations keeping in view the objectives of maximizing the value of
firms.

NATURE OF INVESTMENT DECISSIONS

The investment decisions of a firm are generally known as the capital
budgeting, or capital expenditure decisions. A capital budgeting decision may
be defined as the firm’s decision to invest its current funds most efficiently in
the long term assets in anticipation of an expected flow of benefits over a series
of years. The long term assets are those that affect the firms operations beyond
the one year period. The firm’s investment decisions would generally include
expansion, acquisition, modernization and replacement of the long-term assets.

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 Sale of a division or business (divestment) is also as an investment
decision. Decisions like the change in the methods of sales distribution, or an
advertisement campaign or a research and development programme have
long-term implications for the firm’s expenditures and benefits, and therefore,
they should also be evaluated as investment decisions. It is important to note
that investment in the long-term assets invariably requires large funds to be tied
up in the current assets such as inventories and receivables. As such,
investment in the fixed and current assets is one single activity.

Features of Investment Decisions:-

The following are the features of investment decisions:
● The exchange of current funds for future benefits.
● The funds are invested in long-term assets.
● The future benefits will occur to the firm over a series of years.

Importance of Investment Decisions:-

Investment decisions require special attention because of the following reasons.
● They influence the firms growth in the long run
● They affect the risk of the firm
● They involve commitment of large amount of funds
● They are irreversible, or reversible at substantial loss
● They are among the most difficult decisions to make.

Growth
The effects of investment decisions extend in to the future and have to
be endured for a long period than the consequences of the current operating
expenditure. A firm’s decision to invest in long-term assets has a decisive
influence on the rate and direction of its growth. A wrong decision can prove

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disastrous for the continued survival of the firm; unwanted or unprofitable
expansion of assets will result in heavy operating costs of the firm. On the
other hand, inadequate investment in assets would make it difficult for the firm
to complete successfully and maintain its market share.

Risk
A long-term commitment of funds may also change the risk complexity
of the firm. If the adoption of an investment increases average gain but causes
frequent fluctuations in its earnings, the firm will become more risky. Thus,
investment decisions shape the basic character of a firm.

Funding
Investment decisions generally involve large amount of funds, which
make it imperative for the firm to plan its investment programmes very
carefully and make an advance arrangements for procuring finances internally
or externally.

Irreversibility
Most investment decisions are irreversible. It is difficult to find a market
for such capital items once they have been acquired. The firm will incur heavy
losses if such assets are scrapped.

Complexity
Investment decisions are among the firm’s most difficult decisions.
They are an assessment of future events, which are difficult to predict. It is
really a complex problem to Economic, political, social and technological
forces cause the uncertainty in cash flow estimation.

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TYPES OF INVESTEMENT DECISIONS
There are many ways to classify investments. One classification is as follows:
● Expansion of existing business
● Expansion of new business
● Replacement and modernization.

Expansion and Diversification

A company may add capacity to its existing product lines to expand
existing operations. For example, the Gujarat State Fertilizer Company (GSFC)
may increase its plant capacity to manufacture more urea. It is an example of
related diversification. A firm may expand its activities in a new business.
Expansions of a new business require investment in new products and a new
kind of production activity within the firm. If a packaging manufacturing
company invests in a new plant and machinery to produce ball bearings, which
the firm business or unrelated diversification. Sometimes a company acquires
existing firms to expand its business. In either case, the firm makes investment
in the expectation of additional revenue. Investments in existing or new
products may also be called as revenue-expansion investments.
T And Modernization
The main objective of modernization and replacement is to improve
operating efficiency and reduces costs. Cost savings will reflect in the
increased profits, but the firm’s revenue may remain unchanged. Assets
become outdated and obsolete with technological changes. The firm must
decide to replace those assets with new assets that operate more economically.

Yet another useful way to classify investments is as follows​:

● Mutually exclusive investments
● Independent investments
● Contingent investments.

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Mutually Exclusive Investments
Mutually exclusive investments serve the same purpose and compete with
each other. If one investment is undertaken, others will have to be excluded. A
company may, for example, either use a more labour-intensive, semi-automatic
machine, or employ a more capital-intensive, highly automatic machine for
production. Choosing the semi-automatic machine precludes the acceptance of
the highly automatic machine.

Independent Investments
Independent investments serve different purposes and do not compete with
each other. For example, a heavy engineering company may be considering
expansion of its plant capacity to manufacture additional excavators and
addition of new production facilities to manufacture new product-light
commercial vehicles. Depending on their profitability and availability of funds,
the company can undertake both investments.

Contingent Investments
Contingent investments are dependent projects; the choice of one
investment necessitates undertaking one or more other investments. For
example, if a company decides to build a factory in a remote, backward area, if
may have to invest in houses, roads, hospitals, schools etc. for employees to
attract the work force. Thus, building of factory also requires investments in
facilities for employees. The total expenditure will be treated as one single
investment.

Investment Evolution Criteria:

Three steps are involved in the evaluation of an investment:
● Estimation of cash flows.
● Estimation of the required rate of return (the opportunity cost of capital)
● Application of a decision rule of making the choice.

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 The first two steps, discussed in the subsequent chapters, are assumed as
given. Thus, our discussion in this chapter is confined to the third step.
Specifically, we focus on the merits and demerits of various decision rules.

Investment decision rule

The investment decision rules may be referred to as capital budgeting
techniques, or investment criteria. A sound appraisal technique should be used
to measure the economic worth of an investment project. The essential property
of a sound technique is that it should maximize the share holder’s wealth. The
following other characteristics should also be possessed by a sound investment
evaluation criterion.
● It should consider all cash flows to determine the true profitability of the
project.
● It should provide for an objective and unambiguous way of separating good
projects from bad projects.
● It should help ranking of projects according to their true profitability.
● It should recognize the fact that bigger cash flows are preferable to smaller
ones and early cash flows are preferable to later ones.
● It should be a criterion which is applicable to any conceivable investment
project independent of others.

Evaluation criteria
A number of investment criteria (or capital budgeting techniques) are in use
in practice. They may be grouped in the following two categories.

1. Discounted cash flow criteria

● Net present value(NPV)
● Internal rate return(IRR)
● Profitability index(PI)

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2. Non discounted cash flow criteria
● Payback period(PB)
● Discounted payback period
● Accounting rate of return(ARR)

Net Present Value

The Net Present Value technique involves discounting net cash flows for
a project, then subtracting net investment from the discounted net cash flows.
The result is called the Net Present Value (NPV). If the net present value is
positive, adopting the project would add to the value of the company. Whether
the company chooses to do that will depend on their selection strategies. If they
pick all projects that add to the value of the company they would choose all
projects with positive net present values, even if that value is just $1. On the
other hand, if they have limited resources, they will rank the projects and pick
those with the highest NPV's.

The discount rate used most frequently is the company's cost of capital.

Net present value (NPV) or net present worth (NPW)​[ is defined as the
total present value (PV) of a time series of cash flows. It is a standard method
for using the time value of money to appraise long-term projects. Used for
capital budgeting, and widely throughout economics, it measures the excess or
shortfall of cash flows, in present value terms, once financing charges are met.

The rate used to discount future cash flows to their present values is a
key variable of this process. A firm's weighted average cost of capital (after
tax) is often used, but many people believe that it is appropriate to use higher
discount rates to adjust for risk for riskier projects or other factors. A variable
discount rate with higher rates applied to cash flows occurring further along the
time span might be used to reflect the yield curve premium for long-term debt.

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 Internal Rate of Return

The internal rate of return (IRR) is a Capital budgeting metric used by

firms to decide whether they should make ​Investments​. It is also called
discounted cash flow rate of return (DCFROR) or rate of return (ROR).

It is an indicator of the efficiency or quality of an investment, as

opposed to Net present value (NPV), which indicates value or magnitude.

The IRR is the annualized effective compounded return rate which can
be earned on the invested capital, i.e., the ​yield on the investment. Put another
way, the internal rate of return for an investment is the discount rate that makes
the net present value of the investment's income stream total to zero.

Another definition of IRR is the interest rate received for an investment

consisting of payments and income that occur at regular periods.

A project is a good investment proposition if its IRR is greater than the rate of
return that could be earned by alternate investments of equal risk (investing in other
projects, buying bonds, even putting the money in a bank account). Thus, the IRR
should be compared to any alternate costs of capital including an appropriate risk
premium.
In general, if the IRR is greater than the project's cost of capital, or ​hurdle rate, the
project will add value for the company.

In the context of savings and loans the IRR is also called effective interest rate.
In cases where one project has a higher initial investment than a second mutually
exclusive project, the first project may have a lower IRR (expected return), but a
higher NPV (increase in shareholders' wealth) and should thus be accepted over the
second project (assuming no capital constraints).

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 IRR assumes reinvestment of positive cash flows during the project at the same
calculated IRR. When positive cash flows cannot be reinvested back into the project,
IRR overstates returns. IRR is best used for projects with singular positive cash flows
at the end of the project period.

Profitability index
Yet another time adjusted method of evaluating the investment proposals is the
benefit-cost (B/C) ratio or profitability index. Profitability index is the ratio of the
present value of cash inflows at the required rate of return, to the initial cash out flow
of the investment.

Evaluation of PI method
Like the NPV and IRR rules, PI is a conceptually sound method of arising
investment projects. It is a variation of the NPV method and requires the same
computations as the NPV method.
● Time value​ it recognizes the time value of money.
● Value maximization it is consistent with the share holder value
maximization principle. A project with PI greater than one will have positive
NPV and if accepted it will increase share holders wealth.
● Relative profitability in the PI method since the present value of cash in
flows is divided by the initial cash out flow , it is a relative measure of
project’s profitability.

Like NPV method PI criterion also requires calculation of cash flows and
estimate of the discount rate.

Payback period
The payback period is one of the most popular and widely recognized
traditional methods of evaluating investment proposals. Payback is the number of
years required to cover the original cash outlay invested in a project. If the project

17
generates constant annual cash inflows, the payback period can be computed by
dividing cash outlay by the annual cash inflow.

Evolution of payback​:
Many firms use the payback period as an investment evaluation criterion
and a method of ranking projects. They compare the project’s payback with
pre-determined standard pay back. The would be accepted if it’s payback period is
less than the maximum or standard payback period set by management as a
ranking method. It gives highest ranking to the project, which has the shortest
payback period and lowest ranking to the project with highest payback period.
Thus if the firm has to choose between two mutually exclusive projects, the project
with shorter payback period will be selected.

Evolution of payback period​.

Pay back is a popular investment criterion in practice. It is considered to
have certain virtues.
● Simplicity
The significant merit of payback is that it is simple to understand and easy to
calculate. The business executives consider the simplicity of method as a virtue.
This is evident from their heavy reliance on it for appraising investment proposals
in practice.
● Cost effective
Payback method costs less than most of the sophisticated techniques that
require a lot of the analyst’s time and the use of computers.

● Short-term
Effects a company can have more favorable short-run effects on earnings per
share by setting up a shorter standard payback period. It should, however, be
remembered that this may not be a wise long-term policy as the company may
have to sacrifice its future growth for current earnings.

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● Liquidity
The emphasis in payback is on the early recovery of the investment. Thus, it
gives an insight into the liquidity of the project. The funds so released can be put
to other uses.

In spite of its simplicity and the so, called virtues, the payback may not be a
desirable investment criterion since it suffers from a number of serious limitations.

● Risk shield
The risk of the project can be tackled by having a shorter standard payback
period. As it may be in a ensured guaranty against its loss. A company has to
invest in many projects where the cash inflows and life expectancies are highly
uncertain. Under such circumstances, pay back may become important, not so
much as a measure of profitability but, as a means of establishing an upper bound
on the acceptable degree of risk.

Discounted payback period

One of the serious objections to the payback method is that it does not
discount the cash flows for calculating the payback period. We can discount cash
flows and then calculate the payback.
The discounted payback period is the no. of. Periods taken in recovering the
investment outlay on the present value basis. The discounted payback period still
fails to consider the cash flows occurring after the payback period.

​Accounting rate of return

The ​accounting rate of return (ARR) also known as the ​return on
investment (ROI) uses accounting information as revealed by financial statements,
to measure the profitability of an investment. The accounting rate of return is the
ratio of the average after tax profit divided by the average investment. The average
investment would be equal to half of the original investment if it were depreciated

19
constantly. Alternatively, it can be found out by dividing the total if the
investment’s book values after depreciation be the life of the project.

EVALUATION OF ARR METHOD

The ARR method may claim some merits:
● Simplicity the ARR method is simple to understand and use. It does not
involve complicated computations.

● ACCOUNTING DATA
The ARR can be readily calculated from the accounting data, unlike in the
NPV and IRR methods, no adjustments are required to arrive at cash flows of the
project.

● ACCOUNTING PROFITABILITY
The ARR rule incorporates the entire stream of income in calculating the
project’s profitability.
The ARR is a method commonly understood by accountants and frequently
used as a performance measure. As decision criterion, however it has serious short
comings.

● CASH FLOWS IGNORED

The ARR method uses accounting profits, not cash flows, in appraising the
projects. Accounting profits are based on arbitrary assumptions and choices and
also include non-cash items. It is, therefore in appropriate to relay on them for
measuring the acceptability of the investment projects.

● TIME VALUE IGNORED

The averaging income ignores the time value of money. In fact, this
procedure gives more weight age to the distant receipts.

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 ● ARBITRARY CUT-OFF
The firm employing the ARR rule uses an arbitrary cut-off yardstick.
Generally, the yardstick is the firm’s current return on its assets (book -value).
Because of this, the growth companies earning very high rates on their existing
assets may project profitable projects and the less profitable companies may
accepts bad projects.

PROJECT CLASSIFICATION
Project classification entails time and effort the costs incurred in this
exercise must be justified by the benefits from it. Certain projects, given their
complexity and magnitude, may warrant a detailed analysis; others may call for a
relatively simple analysis. Hence firms normally classify projects into different
categories. Each category is then analyzed somewhat differently.
While the system of classification may vary from one firm to another, the
following categories are found in cost classification.

Mandatory investments
These are expenditures required to comply with statutory requirements.
Examples of such investments are pollution control equipment, medical
dispensary, fire fitting equipment, crèche in factory premises and so on. These are
often non-revenue producing investments. In analyzing such investments the focus
is mainly on finding the most cost-effective way of fulfilling a given statutory
need.

Replacement projects
Firms routinely invest in equipments means meant to obsolete and
inefficient equipment, even though they may be a serviceable condition. The
objective of such investments is to reduce costs (of labor, raw material and power),

21
increase yield and improve quality. Replacement projects can be evaluated in a
fairly straightforward manner, through at times the analysis may be quite detailed.

Expansion projects
These investments are meant to increase capacity and/or widen the
distribution network. Such investments call for an expansion projects normally
warrant more careful analysis than replacement projects. Decisions relating to such
projects are taken by the top management.

Diversification projects
These investments are aimed at producing new products or services
or entering into entirely new geographical areas. Often diversification projects
entail substantial risks, involve large outlays, and require considerable
managerial effort and attention. Given their strategic importance, such projects
call for a very through evaluation, both quantitative and qualitative. Further
they require a significant involvement of the board of directors.

Research and development projects

Traditionally, R&D projects observed a very small proportion of capital

budget in most Indian companies. Things, however, are changing. Companies
are now allocating more funds to R&D projects, more so in
knowledge-intensive industries. R&D projects are characterized by numerous
uncertainties and typically involve sequential decision making.
Hence the standard DCF analysis is not applicable to them. Such
projects are decided on the basis of managerial judgment. Firms which rely
more on quantitative methods use decision tree analysis and option analysis to
evaluate R&D projects.

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​Miscellaneous projects

This is a catch-all category that includes items like interior

decoration, recreational facilities, executive aircrafts, landscaped gardens,
and so on. There is no standard approach for evaluating these projects and
decisions regarding them are based on personal preferences of top
management.

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CHAPTER 3: ​INDUSTRY AND COMPANY
PROFILE

Industry Profile
Industry Profile: The Financial Services Industry
The financial services industry covers a broad range of business organizations
including banks, credit card companies, insurance companies, stock brokerages
and investment fund corporations.

Banking

Banking is composed of three different subfields including commercial banks,

savings banks, and credit unions. Commercial banks represent the largest
portion of the industry. Not only do these banks save and invest money but also
are involved in international trading and lending. Savings banks primarily serve
their clients in lending and saving of money. Both commercial and savings
banks are regulated and overseen by one of the 12 Federal Reserve districts and
the FOMC. Banks are required under regulation to hold a percentage of
deposits as required reserves equal to the federal funds rate. Excess reserves
beyond the required reserve rate are used by banks in investment opportunities,
loans, mortgages, or exchanged among banks that are in need of reserves. The
difference between commercial banks and savings banks is seen in the types of
clients and consumers they do transactions with and the amount of services
they provide. People that in one way or another had a "bond", such as members
of a labor union, originally created credit unions,

24
The Foreign Exchange Market (ForEx)

Bloomberg and its competitors all follow the foreign exchange market closely
for their clients. The foreign exchange market (forex) is simply the market in
where currencies from all over the world are traded. The forex market is the
largest financial market in the world. The forex market see's over $2 trillion in
daily trades. This market, with the help of companies such as Bloomberg, is
expected to grow rapidly as businesses become more aware and informed. The
forex market involves the buying of one currency from all over the world,
while at the same time selling another. As global currencies are valued against
one another buyers look for currencies on the rise and try to sell those that are
weak. As one might assume, the most often traded currencies are the U.S.
Dollar, the Euro, the British Pound, the Swiss Franc, and the Japanese Yen.

Investment Services

The investment service industry involves the investment of money into

securities. These securities include stocks, bonds, or mutual funds. Securities
are bought and sold daily on the market by investment service agencies for
clients all over the world.

Insurance

The insurance business involves insurance carriers, brokerages and agencies.

Insurance companies charge premiums to cover the risks of their clients. The
premium that the insurance company charges is based directly on the likelihood
that a client will suffer a financial loss. The insurance companies use formulas
and algorithms to determine the risk of their clients. Insurance companies use
underwriters to measure risk and price the policy accordingly. The premiums
that customers pay are invested in order to build a strong portfolio to cover
client losses. Life insurance, property and casualty insurance, reinsurance,

Bloomberg

Founder, and current mayor of New York City, Michael Bloomberg,

established Bloomberg L.P. in 1981. Bloomberg L.P. provides corporations and
business professionals with global financial information. The goal of the

25
company is to provide as much financial information possible. Clients of
Bloomberg receive financial news and data through multiple mediums
including Bloomberg television and Bloomberg radio. The company's primary
clients are large banks, investment firms, law practices, government agencies,
corporations and news stations.

Bloomberg L.P. includes Bloomberg Professional and Bloomberg Terminal.

Bloomberg Professional is the company's core business and provides clients
with "the world's fastest growing real time financial information
network."(Quotes) Bloomberg Terminal is the core product of the company.
Terminal is a computer system designed to allow clients to follow real time
financial action. It is within Bloomberg Terminal that users can analyze many
different types of financial markets including, but not limited to, the foreign
exchange market, commodities, and equities.

26
 Company profile:
Bevcon Wayors Pvt Ltd, Hyderabad is a major player /
manufacturer of Material Handling Equipments in the India. Bevcon is also one
of the fastest growing.

Established in 1991, Bevcon had a steady growth and now have

established as one of the leading Material Handling, Crushing and Screening
Systems Company in India.

Equipments Manufactured

Bevcon Wayors is into the Business of Bulk Material Handling,

Crushing, and Screening Equipment for all sectors of industries. Bevcon
Wayors Designs, Manufactures, Supplies and undertakes Erection &
commissioning at customers site. All Equipments and products undergo
rigorous quality control checks and are manufactured to the highest
Engineering Standards.
MC’s expertise is outstanding in following project areas: masonry /
Concrete dams spill ways, tunneling, formation of earth dams and bunds,
canals, bridges, roads and buildings. Befittingly, the company has the privilege
of working for or on behalf of such infrastructure majors as the Tehri Hydro
power Development Corporation, steel Authority of India Limited, NTPC,
NHPC, Reliance, and Engineering projects India Limited.

MC’s expertise, virtually in all areas of civil and engineering construction, is

best reflected in the successful execution of following projects.

● Rs.350 Cores Koteshwar Dam for the Tehri Hydro Electric power project in
Uttaranchal,

27
 ● Rs.250 - Crores project for transportation of iron ore form Kalta iron ore
mines to SAIL in orissa state engaging an unprecedented workforce of 4000
people.

● Rs.150-crores project for construction of B.G. single Line Tunnel No.5

(Bakkal Tunnel) form Km 43.040 to 48.940 on the Katra-Laole section of the
Udahampur srinagar- Baramulla Rail Link.

Mr. Ramesh plans to bank from when the change of

● Rs.8-crores Owk Reservoir Complex in Andhra Pradesh, and
● Rs22-cores project for construction of barrage across ponnai River near
Kalavagunta, Chittoor district in Andhra Pradesh.

VISION & MISSION OF THE ORGANIZATION

We envisage being a market leader by 2010 in Bulk Material
Processing & Handling Solutions through satisfying Customers, Stakeholders
and Employee needs.
Our Outlook for the vision:
As a part of our vision we are bringing in the business &
manufacturing expertise from Global Players and forge new business alliances
to bring in Futuristic Technologies to Indian Markets. We have Technology
tie-ups with companies such as
Burwell Technologies of Australia, Sunland - China, Friedrich & Noma -
Germany, Statec – Austria, Nergeco France-Australia, Thermo stop - Canada.
Bevcon has the Professional and Competent Staff with Skills on par
with International Standards to gear up for the above.
Our Mission is to create Smarter Engineering Solutions evolved by a
technology driven team. The Mission is achieved by the following edicts
● Strong Engineering and Design base.

28
● Strict conformance and compliance to quality of equipment and work
procedures.
● Excellence in service to customers
● Honesty, integrity and transparency in all relationships.
● Respect for the individual.

● Quality is not a mere label for us but it is an Organic Reality

29
 BEVCON WAYORS ORGANISATION STRUCTURE

30
Board of directors:

Mr. C. M. Ramesh, Chairman & Managing Director

Operating efficiently out of a network of corporate and project offices across the
country, Ramesh presents the picture of a cutting edge entrepreneur endowed
with exemplary vision, leadership, resource mobilization, and management
skills.

Current diversification plans of Mr.Ramesh include tapping the excellent

hydropower generation opportunities that the highly progressive State of Sikkim
is unfolding.

Mr. C.M. Rajesh Director

Mr. C.M. Rajesh, Director of Bevcon Wayors Limited A graduate in the
Arts from Andhra Loyola College, Vijayawada, Andhra Pradesh is the current
successful Director of the profit-making Bevcon Power Projects Limited in
Khammam district of Andhra Pradesh. He brings a sharp sense of focus,
dynamism, dedication and competitive spirit to the company to shape into a
successful, professionally managed enterprise.

A hands-on leader, Mr. Rajesh’s experience is significant in successful

management of the 6 MW Bio-Mass-based electricity project in Khammam. This
project is recognized as the most significant in its class for implementation of the
power industry’s best practices.

Focus and business:

Power generation, irrigation and highways will dominate the development

agendas of the Indian Government at the center as Well as in States and Union

31
Territories. Consequently, the Bevcon Group’s business strategy too will revolve
around these areas. In the crucial power sector, Bevcon’s associated company
Bevcon power projects Limited has developed a successful 6 MB bio-mass based
electricity project in Khammam district of Andhra Pradesh. Bevcon Group’s
combined capabilities in civil engineering; power generation and highway
building provide an excellent platform for power project development,
particularly in Sikkim given the state Government’s progressive energy policy.

The central and provincial realize that hydroelectric power projects

established in the Southern and western parts of India are increasingly
becoming unviable primarily because of poor river flows. Therefore, the
Government of India has decided to encourage hydroelectric power projects in
the Himalayan region that is endowed with perennial rivers, so necessary to
make power projects meaningful to all from the generator to the consumer.

To make power projects meaningful to all from the generator to the

consumer. To acquire an edge in the highly competitive infrastructure industry,
Bevcon Wayors Limited, entered into an MOU with National projects
constructions Corporation. The MOU entitles the company to 10%
price/purchase preference in all bids submitted by NPCC on MCs behalf
significantly done to be constructed by NTPC and hydropower projects in

Northeast India shall constitute BW’ s thrust areas for the next three years.
Participation in these projects will call for extraordinary expertise and resource
mobilization. Bevcon Wayors has the confidence to generate both. Needless to
stress, success in such mega projects could steer Bevcon Wayors to the
company’s stated goal of industry leadership.

32
Bevcon Industries Limited
Details of works on hand as on 30.11.2010

Rs. In crores
si.n Name of the work Value of Value of Value of
o work work work to
awarded executed be
executed
Transportation of iron ore from
1 KALTA IRON MINES to SAIL in 250.00 46.76 203.24
Orissa State
Construction of civil works of DAM
2 spillway and power house at near 335.00 99.34 235.66
rishikesh, uttranchal sate
Construction of B.G. single line
tunnel No.5 (Bakkal tunnel) from
Km43.040 to 48.940 on the
3 152.29 34.34 117.95
katra-laole section of the udahampur
srinagar – baramulla Rail Link
project
Investigation preparation of
hydraulic particulars, design and
4 77.04 48.55 228
drawings excavation of HNSS Main
Canal from Km15.00 km
Investigation, preparation of
hydraulic particulars, design and
drawings and excavation of HNSS
5 58.32 13.31 45.01
Main canal from Km 176.000 to Km
192.000 including construction of
CM&CD works and distributor

33
 system to feed an ayacut of 20,900
acres khariff I.D.(package No33)

BHARTIYA SHIROMANI
PURASKAR

This certificate of Excellence for

Enhancing the image of India presented by
Dr.Bhishma Narain Singh
(Hon’ble Former Governor of Tamil Nadu & Assam)
To
Bevcon Wayors

Awarded by the “Institute of Economic Studies (IES)”,

New Delhi at the time of the Seminar on
“Economic Development”
Held on 13​th​ February 2008 at New Delhi.

President Executive Director

34
Partners:
● Progressive Constructions Limited
● Ga India Limited
● Mytas
● NPCC

Clients:
● Konkan Railway Corporation Limited
● Tehri Hydro Development Corporation
● Steel Authority of India Limited
● NTPC

Milestones:

● Engaging 4000 workers, executing the largest manual labor contract

in India at Kalta Iron Ore mines in Orissa

● Construction of the district in AP much ahead of the scheduled time.

The comprises at paleru, Gollaleru and Thimmaraju earth dams.

● Executing all subcontracts efficiently to become principal contractor

with the potential of bidding for awards worth Rs.200 Crores
independently.

● Large plant and machinery base to undertake any super

Infrastructure project.

● Reservoir of trained, motivated and dedicated manpower to

undertake projects of any complexity or magnitude.

35
 CHAPTER:4 ​DATA ANALYSIS AND INTERPRETATIONS

CASH FLOW STATEMENT FOR BEVCON WAYORS PVT LTDFROM

​2010-11 TO 2014-15 (RS IN MN)

sno Particulars 2010-11 2011-12 2012-13 2013-14 2014-15

Cash inflow

1. Sales turnover (revenue) 381.98 656.30 600.10 617.68 637.82

2. Other income 2.42 2.31 1.21 0.42 10.06

TOTAL 384.4 658.61 601.31 618.10 647.88

3. (LESS)increase\decrease in 22.48 (9.24) 38.69 35.25 38.37

stock
OTHER INCOME 406.89 649.37 640.00 653.35 686.25

4. LESS OPERATING 340.95 492.27 538.59 545.36 435.13

EXPENSES
CASH FLOW BEFORE TAX 65.94 157.10 101.41 107.89 251.12

5. (Less) depreciation 11.28 12.81 16.87 18.17 18.50

Taxable income 54.66 144.29 84.54 89.82 232.62

Less tax 3.50 11.00 8.50 10.50 10.95

Loss on sales of assets 4.11 0.29 0.00 0.00 0.00

Earning after tax 47.05 133.00 76.04 79.32 221.67

(Add) depreciation 11.28 12.81 16.87 18.17 18.50

Cash flow after tax 58.33 145.81 92.91 97.49 240.17

Note: (cash outflows and cash flows after tax is taken as initial investment for
capital budgeting calculations)

36
 BEVCON WAYORS PVT LTD has entail investment of 470.00millions
And the annual cash flows from 2010-15 then the payback period may be
calculated as follows.

Payback period:
Calculation of cash flow after taxes (cfat)
(RS IN MN)

Serial no Years Cash flows Cumulative cash

flows
1 2010-11 58.33 58.33
2 2011-12 145.81 204.14

3 2012-13 92.91 297.06

4 2013-14 97.49 394.55

5 2014-15 240.17 634.72

From the table it shows that pay back periods lies the 4​th​ and 5​th​ year with
394.55 and 634.72 i.e. initial investments of 470 millions

The amount has been recovered in the fourth year and the
remaining amount in FIFTH YEAR (470.00 - 394.55= 75.45)
recovered in 2 years. This means the payback period lies between
4​TH​ YEAR and 5​th​ year the payback period is computed below:

Difference in cash flows

PBP = Actual year + -------------------------
Next year cash flows

37
 PBP = 4 + ​75.45
240.17

4+ 0.314 = 4.314 YEARS

Pay back period (PBP) = 4.31 YEARS

ACCEPT – REJECT CRITERION:

Pay back is used as criterion to accept or reject an investment

Proposal. A proposal for the pay back which is more than the
standards predetermined by the management.

So the payback period which is calculated helps the management to

know the investment is recovered in 4.31 years which can be accepted.

AVERAGE RATE OF RETURN:

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.

It may be calculated according to any one formula

(i) ​Annual average net earnings

38
 Original investment * 100

(ii) ​Annual average net earnings​ * 100

Average investment

The term average annual net earnings 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 may be accepted.

The amount of average investment can be calculated according to any of

the following methods:

(a) Original investment

------------------------
2

(b) Original investment +scrap value

------------------------------------------
2
Cash flows of Bevcon wayors are shown in cash flow
statement. ARR is calculated as follows:

Statement showing calculation of ARR (RS IN MILLIONS)

YEARS EARNINGS AFTER TAX (EAT)

Mar 2010-11 47.05

Mar 2011-12 133.00
Mar 2012-13 76.04
Mar 2013-14 79.32
Mar 2014-15 221.67

39
Total 557.08

​ ARR = Average annual EAT’S

------------------------------- x 100
Original investment

Average Annual EAT’S = ​TOTAL AMOUNT

NO OF YEARS

: = ​557.08
5
= 111.41

Original investment = 470 millions (as shown above)

.
ARR= ​111.41
470.00 = 0.23* 100

AVERAGE RATE OF RETURN = 23%

ACCEPT – REJECT CRITERION:

Average rate of return method allows the management of Bevcon wayors to

fix a minimum rate of return. So any project below the minimum rate is
rejected finally the ARR WHICH IS 30% efficient and accepted
TIME ADJUSTED (OR) DISCOUNTED CASH FLOW METHOD:

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.

40
 1. NET PRESENT VALUE METHOD: (NPV)

Net present value method or NPV is one of the discounted cash flows
methods. The method is considered to be one of the best of evaluating
the capital investment proposals. Under this method cash inflows and
outflows associated with each project are first calculated.

​Role of discounting factor:

The cash inflows and out flows are converted to the present values
using discounting factor which is the actuary discount factor of
Bevcon wayors is 9%

The rate of return is considered as cut off rate or required

rate or rate generally determined on the basis of cost of capital to allow
for the risk element involved in the project.

STEPS FOR CALCULATION OF NPV:

1) 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 to
arrive at
Cash flow after tax.

41
 2) This cash flow after tax are multiplied with the values obtained from
the
Table (the present value annuity table against the 8% actuary discount
Rate i.e. in the case of project.

3) NPV is derived by deducting the sum of present values from the

initial
Investment.

4) Initial investments are the sum of cash flows of three years shown
in
Capital expenditure table i.e.

NPV AT 9%

STATEMENT SHOWING CALCULATION OF NPV (RS IN MN)

.
Serial no YEARS CFATS PVIF AT 9% PV` S
1 2010-11 58.33 0.917 53.48

2 2011-12 145.80 0.841 122.61

42
3 2012-13 92.92 0.772 71.73

4 2013-14 97.49 0.708 69.02

5 2014-15 240.17 0.649 155.87

Total 472.71

Less initial investment 470.00

Npv 2.71

Accept reject criterion: The accept reject decision of NPV is very

simple. If the NPV is positive the project should be accepted 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 Bevcon wayors the project is npv is positive so the project
can be accepted.

INTERNAL RATE OF RETURN

Internal rate of return is that rate of return at which the sum of discounted cash
inflows equals to the sum of discounted cash outflows.
In this method the discount rate is not known but the cash inflows or outflows
are known.

Step 1: Calculate cash flow after tax.

Step 2:​ Calculate fake payback period.
Step 3:​ Look for the factor in the present value annuity table in the years
column until you arrive at the figure closest to fake payback period.
​Step 4:​ Note the corresponding percentage.

43
 ​Step 5:​ Calculate npv at that percentage.
​Step 6​: If npv is positive take a rate higher and calculate npv.
​Step 7:​ Continue step 5 until you arrive at two rates one giving positive and
other negative npv.
​Step 8:
Actual irr can be calculated as
Lower rate + ​present value at lower rate- cash outflows ​* diff rate
Present value at lower rate-present value higher rate
FORMULATION OF STEPS:
STEP 1​: Calculation of cash flows after taxes

YEARS CASH FLOW AFTER TAXES

(CFAT)
2010-11 58.33

2011-12 145.81

2012-13 92.92

2013-14 97.49

2014-15 240.17

TOTAL 634.72

(Above table has already been calculated)

STEP 2: Calculation of fake payback period (FPBP):

Initial investment
FPBP = ------------------------------
Average CFAT’S

Total amount
Average CFAT’S = ----------------------

44
 No of years

634.72
= ------------------- = 126.94
5

Initial investment is 470 millions

Fake payback period = ​470.00

126.94 = 3.7025

3.7025 lies between 28% and 32% of IRR

STEP 3​: Present value of taxes (PVAT) tables indicates the values closes to
3.7025 lies at 28%

Statement showing calculation of NPV @ 28% under IRR method (Rs mill)
YEARS CFATS PVIF @ 28% PV’S

2010-11 58.33 0.781 45.55

2011-12 145.81 0.610 88.94

2012-13 92.92 0.476 44.22

2013-14 97.49 0..372 36.26

2014-15 240.17 0.291 69.88

Total 284.85

Intial investment 470.00

NPV -185.15

The above NPV is negative.

45
Statement showing calculation of NPV @ 28% under IRR method (Rs in mill)

YEARS CFATS PVIF @ 28% PV’S

2010-11 58.33 0.757 44.15

2011-12 145.80 0573 83.54

2012-13 92.92 0.434 40.32

2013-14 97.49 0.329 32.07

2014-15 240.17 0.249 59.80

TOTAL 259.88

Less initial 470.00

investment
NPV -210.12

NPV IS NEGATIVE
ANNUITY LIES BETWEEN 28% AND 32%

​ Net present value of lower rate

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

Difference in present value Cash inflows.

= 28+ ​284.85- 470.00

284.85- 210.12 X ( 32-28)

28+​ ​ 185.15/ 74.73 X4

IRR = 38%

ACCEPT – REJECT CRITERION:

46
IRR is the maximum rate of interest, which an organization can afford to pay
on capital, invested in, is accepted if IRR exceeds the cutoff rates and rejected
if it is below the cutoff rate.
The cutoff rate of BEVCON WAYORS IS 9% which is less than the IRR i.e.
38.00 hence the acceptance of project is quiet a good investment decision taken
by management.

3. PROFITABILITY INDEX: (BCR OR PI)

Profitability index method is also known as time adjusted method of
evaluating the investment proposals. Profitability also called as benefit cost
ratio (B\C) in relationship between present value of cash inflows and the
present value of cash out flows.
Present value of cash inflows
Profitability index = --------------------------------------
Present value of cash outflows.

Present value of cash inflows

Profitability index = -----------------------------------------
Initial cash outlay

CALCULATIONS OF BCR:
STEP1: Calculations of cash flows after taxes
STEP2: Calculations of Present values of cash inflows @ 8%.
STEP3: Application of the formula.

Statement for calculating of benefit cost ratio

YEARS CFAT’S PVIF @ 9% PV’S

2010-11 58.33 0.917 53.48
2011-12 145.80 0841 122.61

47
 2012-13 92.92 0.772 71.73
2013-14 97.49 0.708 69.02
2014-15 240.17 0.649 155.87
Total 472.71

Present value of cash inflows

Profitability index = --------------------------------------
Initial cash outlay.

472.71
= ------------------ = 1.00
470.00
​Profitability index = 1year

​ACCEPT-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 < 1 (REJECT).

The acceptance of by the management is evaluated through

Profitability Index method of as the PI > 1 (i.e. 1.00)

48
 Questionnaire Analysis

1. When deciding on an investment opportunity, risk consideration is

always vital?

Particulars No. of respondents

A Yes 45
B No 3
C Not sure 2
Total 50

Interpretation:

● The employees deciding on an investment opportunity, risk

consideration is always vital.

● Majority of absolute response is given to option A.

49
2. Evaluating investment decision based on capital budgeting is not easy
as the process itself is based on a hierarchy?

Particulars No. of
respondents
A Yes 13
B No 34
C Not sure 3
Total 50

Interpretation:

● Here, 34 people have opted to option B because ​committed to ​Investment

decision based on capital budgeting is not easy as the process itself is based on a
hierarchy​.

50
 ● The other reasons for choosing option A is we can also know profit/loss
occurred by the company in the particular financial year.

3. Exploring and evaluating the alternatives course of actions available is

easier for you.

Particulars No. of respondents

A Yes 12
B No 18
C Not sure 21
Total 50

Interpretation:

51
 ● The capital budgeting data given in the statement should be
re-arranged or re-organized because as it is one of the procedure
for preparing the financial statement.
● The question here is confused so that many of them chose to
option C.

4. Is implementation and control to achieve the target is always the way

the think tanks has thought of in the first place?

Particulars No. of respondents

A Yes 15
B No 14
C Not sure 21
Total 50

Interpretation:

52
 ● Analysis is basically study of relationship between various
financial facts and figure as given in a set of financial statements.
● The employees in all he division of the company interact with
each is implementation and control to achieve the target is always
the way the think tanks has thought of in first place.

5. For your firm an average rate of returns and simple payback method
effectively deal with the opportunity cost concept associated with
investment decision.

Particulars No. of respondents

A Yes 18
B No 12
C Not sure 20
Total 50

53
 Interpretation:
● The above payback method says that the capital budgeting is a
formal process to know the risk and profitability of the company.

● The graph clearly indicates that the employees have clear

information an average rate of returns and simple payback method
effectively deal with the opportunity cost concept associated with
investment decision.

6. For time bounded projects and from execution point of view NPV
technique for estimating capital budgeting is more significant in
nature.

Particulars No. of respondents

A Yes 14
B No 15
C Not sure 21
Total 50

54
 Interpretation:

● The values in common size statement are expressed in percentages

only.
● The information from the above the employees are satisfied with
their time bounded projects and from execution point of view
NPV technique for estimating capital budgeting is more
significant in nature.
● Here in the above analysis 14 of them opted to option A which is
the correct answer for it.

7​. ​NPV concept focuses on opportunity cost and helping to take risk in
accountant thereby covers uncertainty f cash flows in better way​.

Particulars No. of respondents

A Yes 32
B No 11
C Not sure 7
Total 50

55
 Interpretation:
● The employees are satisfied with the information they received
from the concept of NPV focuses on opportunity cost and helping
to take risk in accountant thereby covers uncertainty f cash flows
in better way.

● The above data shows that most of them have chosen the option A
which is the absolute answer for the question.

8. Does your firm use Net Present Value (NPV) technique?

Particulars No. of respondents

A Yes 29
B No 10
C Not sure 11

56
 Total 50

Interpretation:

● From the data we can observe that 29 of them have answered

“YES” which is majority for this question.

● The information from the above the employees are satisfied with
their ​firm use Net Present Value (NPV) technique.

9. While using NPV technique do you conduct sensitivity and simulation

test in order to develop an understanding about both reward and
challenges entailing from the uncertainties of variables to the
investment?

57
 Particulars No. of respondents
A Yes 12
B No 18
C Not sure 20
Total 50

Interpretation:

● The employees are able to find the using NPV technique do you
conduct sensitivity and simulation test in order to develop an
understanding about both reward and challenges entailing from
the uncertainties of variables to the investment
● The obtained analysis here shows mean of the three options.

​ 0. Has rewards been beneficial and shown to have increase in value

1
due to helpful and encouraging movement in the concerned
variables?

58
 Particulars No. of respondents
A Yes 12
B No 23
C Not sure 15
Total 50

Interpretation:
● The information suggests that the employees get the rewards been
beneficial and shown to have increase in value due to helpful and
encouraging movement in the concerned variables.
● The above analysis shows that the most of them have chosen the
option B which the absolute response for it.

59
11 .Has challenges evolved from balancing the possibility for such
benefits and gains against the odds of losses arising out of adverse or
opposite movement in the variables concerned?

Particulars No. of respondents

A Agree 20
B Disagree 14
C Not satisfied 16
Total 50

Interpretation:

The employees are clear about the challenges evolved

from balancing the possibility for such benefits and gains against the
odds of losses arising out of adverse or opposite movement in the
variables concerned.

60
12. Fluctuations of any kind or quantity, (financial, economic and political
variablesranging fromexchange rates, interest rates, commodity prices or
political turmoil) have always had destabilizing effects on investment
strategies and performance on your firm?

Particulars No. of respondents

A Agree 16
B Disagree 23
C Not satisfied 11
Total 50

Interpretation:
● The above graph clearly suggest that employees-2 and
emplooyes-3 are not satisfied with the need for the

61
 Fluctuations of any kind or quantity have always had destabilizing
effects on investment strategies and performance on your firm.

● The respondents here have chosen mostly as option B which is not

satisfied by the correct answer.

13. Is your firm familiar with Simulation analysis (appraises and evaluates
the future cash flow and returns on investments when more than
one uncertain element is involved).

Particulars No. of respondents

A Agree 23
B Disagree 16
C Not satisfied 11
Total 50

Interpretation:

● The analysis here shows the correct response that the respondents
are agreed with the question.

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14. ​ In the capital budgeting simulation major goals are always to increase
market value of the investment by keeping pace with innovations and
technology?

Particulars No. of respondents

A Agree 14
B Disagree 20
C Not satisfied 16
Total 50

Interpretation:

● There is a bit criticism about the

the capital budgeting simulation major goals are always to increase

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 market value of the investment by keeping pace with innovations and
technology.
● The response which we obtained is not correct because most of them
have chosen the option B.

15.​Do you think that simulation analysis is more realistic than any othe
r analysis because it allows and introduces uncertainty for many
variables to be considered?

Particulars No. of respondents

A Agree 16
B Disagree 17
C Not satisfied 17
Total 50

Interpretation:

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 ● The opinion showing that think that simulation analysis is more
realistic than any other analysis because it allows and introduces
uncertainty for many variables to be considered
● The response which we got is average and can be acceptable.

16. Do you think that rationality and adequate discount rate helps in
handling the risk?

Particulars No. of respondents

A Agree 36
B Disagree 12
C Not satisfied 2
Total 50

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 Interpretation:
● The information suggests that the employees get rationality and adequate
discount rate helps in handling the risk.

17. ​As an investor do you take help of profitability index to determine

which of the project will provide highest value per rupees of investment?

Particulars No. of respondents

A Agree 9
B Disagree 33
C Not satisfied 8
Total 50

Interpretation:

● The information above depicts that the employees-1 are not

recognized for their help of profitability index to determine which
of the project will provide highest value per rupees of investment.

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18.​ Do you think that investment decisions should be made only on the
outcome of profitability?

Particulars No. of respondents

A Agree 13
B Disagree 11
C Not satisfied 26
Total 50

Interpretation:

● The employees are clear about the ​challenges investment decisions should
be made only on the outcome of profitability

● The question here is not agreeable because it does not show different
level of assets of the company.

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19​. By sound forecasting techniques your firm may predict the ways to
negotiate the risk involved in capital budgeting?

Particulars No. of respondents

A Agree 15
B Disagree 23
C Not satisfied 12
Total 50

Interpretation:

● The graph clearly says that sound forecasting techniques your firm
may predict the ways to negotiate the risk involved in capital
budgeting.

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20. ​Do you think that to avoid mistakes, it is important that a
decision-maker identify the risks and devise ways to mitigate those
risks?

Particulars No. of respondents

A Agree 29
B Disagree 11
C Not satisfied 10
Total 50

Interpretation:

● The employees in all he division ​think that to avoid

mistakes, it is important that a decision-maker identify the risks
and devise ways to mitigate those risks
● The data states here is absolutely right as many of them agree
with the question.

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 CHAPTER 5: ​FINDING AND SUGGESTIONS

FINDINGS

1. It is observed that company is able to increase the profits from year to

year continuously.

2. Even the gross profits from the year 2010-2015 were consistently in

increasing mode.

3. It is observed that net worth of the company is considerably in good

mode.

4. By source and application of funds it is known that the company is

increasing its operations.

5. The sound forecasting techniques your firm may predict the ways to

negotiate the risk involved in capital budgeting

6. The employees deciding on an investment opportunity, risk

consideration is always vital.

7. The capital budgeting data given in the statement should be re-arranged

or re-organized because as it is one of the procedure for preparing the

financial statement.

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8. The employees in all he division of the company interact with each is

implementation and control to achieve the target is always the way the

think tanks has thought of in first place.

9. The information from the above the employees are satisfied with their

time bounded projects and from execution point of view NPV technique

for estimating capital budgeting is more significant in nature.

10. The employees are able to find the using NPV technique do you conduct

sensitivity and simulation test in order to develop an understanding

about both reward and challenges entailing from the uncertainties of

variables to the investment.

SUGGESTIONS

1. Various developments are taking place in the chemical industry so to

pace with the technological developments the company has to develop
the full fledged research department.
2. Company need to control operating expenses which may affect the
profitability of the firm.
3. Management need to tap the opportunities in the industry which
enhance the growth of the company.
4. In respect of service activities the system of recording of receipts and
issues and delivery of items were considerable and need to be much
effective.
5. In some cases, several zero NPV discount rates may exist, so there is no
unique IRR
6. Despite a strong academic preference for NPV, surveys indicate that
executives prefer IRR over NPV although they should be used in
concert

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7. Capital budgeting investments and projects must be funded through
excess cash provided through the raising of debt capital, equity capital,
or the use of retained earnings
8. As large sum of money is involved which influences the profitability of
the firm making capital ​budgeting​ an important task.
9. Long term investment once made can not be reversed without
significance loss of invested capital.
10. The investment becomes sunk, and mistakes, rather than being readily
rectified, must often be borne until the firm can be withdrawn through
depreciation charges or liquidation. It influences the whole conduct of
the business for the years to come.
11. Investment decision are the base on which the profit will be earned and
probably measured through the return on the capital. A proper mix of
capital investment is quite important to ensure adequate rate of return on
investment, calling for the need of capital budgeting.

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 ABBREVIATIONS

PI Profitability index.
CB Capital budgeting

CF’S Cash flows.

CCF’S Cumulative cash flows.

EAT Earnings after tax.

EBIT Earnings before investment and tax.

CFAT Cash flows after tax.

PV’S Present value of cash flows.

PVIF Present value of inflows.

PBP Pay back period.

ARR Average rate return.

NPV Net present value.

IRR Internal rate return.

B/C Benefit cost ratio.

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 Bibliography

Reference Text Books

● Prasanna Chandra, 2006, Financial Management Theory and Practice,
6​th​ Edition, Tata McGraw Hill.
● I.M. Pandey : Financial Management, Vikas Publishers.
● Brigham, E.F. and Ehrhardt.M.C., 2006, Financial Management Theory
and Practice, 10​th​ Edition, Thomson South-Western.
● Khan M.Y., and Jain.P.K., 2007, Management Accounting, IV edition,
Tata Mc Graw Hill, New Delhi.

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