Capital budgeting project of IFFCo

PREFACE
In today‘s era of globalization and competition, coping up with technological advancement, which is undergoing evolution at a very fast rate, holds the key to the survival and growth of any organization. Installing technology, well-equipped facilities or going for modification in the existing ones are the means to attain better performance efficiency and hence further the value addition. IFFCO, the largest fertiliser industry of India (by sales turnover) is India‘s sole representative in Fortunes prestigious listing of world‘s largest fertiliser Industry. To maintain strategic edge in the market place, IFFCO has given importance to capital budgeting because capital investment decisions often represent the most important decisions taken by an organization, and they are extremely important, they sometimes also pose difficulties. The evaluation of projects should be performed by a group of experts who have no axe to grind. It is necessary to ensure that an impartial group scrutinizes projects and that objectivity is maintained in the evaluation process. A company in practice should take all care in selecting a method or methods of investment evaluation. The criterion selected should be a true measure of the investment‘s profitability (in terms of cash flows), and it should lead to the net increase in the company‘s wealth (that is, its benefits should exceed its cost adjusted for time value and risk). It should also be seen that the evaluation criteria do not discriminate between the investment proposals. They should be capable of ranking projects correctly in terms of profitability. The NPV method is theoretically the most desirable criterion as it is a true measure of profitability; it generally ranks projects correctly.

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Declaration
I Ms ANU BEHERA bearing Roll number: 205 do hereby declare that this project report titled “Capital Budgeting has been prepared on the basis of my learning through Summer Internship Programme at Indian Farmers Fertiliser Cooperative Ltd. From 15th October 2012 to 28th November 2013 under the joint supervision of Mr. K.K Nayak and Prof. S .K Panda. The findings of the study are

original and the study materials used have been duly recognized in the body of the report. This report has not been submitted to any Institute/University for the award of any degree or diploma in full or part.

( Ms. ANU BEHERA)

Date:

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Acknowledgements
With all humility I would like to express that I am very lucky to undergo summer training at Indian Farmers Fertiliser Cooperative Ltd. Paradeep Unit. It was a golden opportunity for gaining practical experience and self development. Further, I am honoured to have so many wonderful people who helped me insistently in several ways for the completion of this project report. I am extremely thankful to Mr. K.K Nayak who in spite of his busy schedule of work spared his valuable time to listen and guide all through the project period. Without his active support and supervision it was not possible to complete the project work. I sincerely acknowledge my gratitude to Professor Mr. Sangram Kesari Panda who was not only involved in the entire process but also shared his knowledge, encouraged me and gone through the report before it was submitted for evaluation. Thank you, Dear Sir. I would like to thank Dr. R.N Mohapatra Director, Dr. K.K Sahoo, Dean, and Prof. Sangram Keshari Panda for their active support and arrangements to make my learning and life easier at “ IFFCO”. All my friends deserve thanks for their cooperation and sharing of valuable information that helped me in the preparation of this report. Last but not least I owe my heartfelt gratitude to my parents for their constant help, encouragement and emotional support during the entire period of Summer Internship without which this report would not have been completed.

Ms. ANU BEHERA Date:

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CONTENTS CHAPTER - 1  Introduction 1.1 Executive Summary 1.2 Objective 1.3 Scope CHAPTER – 2  Theoretical Overview CHAPTER – 3  Organization Overview CHAPTER – 4  Data Analysis CHAPTER – 5  Project Finding & Conclusion  Suggestions/Recommendation  Bibliography.

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CHAPTER 1 INTRODUCTION

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EXECUTIVE SUMMARY IFFCO is currently India's largest Fertiliser industry by sales with a turnover of Rs. 21673.36 crore and profits of Rs. 728.72 crore for fiscal 2012-13. IFFCO has given importance for capital budgeting because capital

investment decisions often represent the most important decisions taken by an organization, and they are extremely important, they sometime also pose difficulties. In the given sample project the process by which company studies the different aspects of proposal, and decides about feasibility and viability of the project. Moreover it reflects different phases, process of analysis of capital budgeting.

An important step in raising capital is estimating the capital requirements. Some of the capital raised will likely be used to increase working capital. Capital budgeting is the process of identifying and ranking which of these capital investments add the most value to the business. Capital budgeting decisions are not unlike the personal budgeting decisions we make every day. It Consider these common features; PROJECT RANKING

How one chooses to allocate the investment capital raised depends on the set of Investment opportunities. Project ranking is a means of allocating the investment Capital to those projects that contribute the most value to the business.
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MEASUREMENT

There is a variety of methods available for measuring the firms return on an investment project. Three major methods useful in measuring a project value are the pay back, net present value, and IRR methods. Objective of the Study:After studying this chapter the reader should be able:  Define the capital budgeting with in broader prospective management.  Classify investment project on the basis of how they influence the investment decision process.  Broader overview of capital budgeting process.  Appreciate the importance of using computer spreadsheet packages such as excel for capital budgeting computation.  Gain a broad overview of how the material in this book is organized.

METHODOLOGY OF RESEARCH:-

The Research method which I had adopted at IFFCO was conducting exploratory research and personal interviews. Exploratory research design is the unstructured and informal research undertaken to gain background information about the organization. Under exploratory research, the method adopted here was conducting experience survey. Experience survey had
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been conducted in order to gather information from the knowledgeable person on the issues relevant to the research project.

Required Information & Data:I have taken every data from the annual report, capital budget book, cost benefits analysis report and other related sources. Limitations of the study: This study has been carried out only based on information obtained by interviewing personals in F & A Department IFFCO PARADEEP.  Information received was based on secondary data and on the primary guidance given by the employees there at IFFCO PARADEEP. So any Error in source data that may change the Actual Scenario.  This study has been carried out in a period of 45 days which is very less to know and understand an organization like IFFCO PARADEEP.  Major sources of structured information and data or Records up to last 10 Years have been used.  Also to evaluate and ascertain financial position correctly of organization like IFFCO, a student like me of 21 years age is too less.  It was advised to go through only in procedural information & not to use any financial data pertaining to IFFCO as a whole or for IFFCO PARADEEP UNIT.  However at many places figures shown are as not the actual figures.
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sample/Estimate figures &

CHAPTER 2 THEORETICAL OVERVIEW

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Capital Budgeting (overview)
Introduction:An efficient allocation of capital is the most important finance functioning modern times. It involves decisions to commit firm’s funds to longterm assets. Such decisions are tend to determine the value of company/firm by influencing its growth, profitability & risk.Investment decisions are generally known as capital budgeting or capital expenditure decisions. It is clever decisions to invest current in longterm assets expecting long-term benefits firm’s investment decisions would generally include expansion, acquisition, modernization and replacement of long-term assets.Such decisions can be investment decisions, financing decisions or operating decisions. Investment decisions deal with

investment of organization’s resources in Long tern (fixed) Assets and / or Short term(Current) Assets. Decisions pertaining to investment in Short term Assets fall under “Working Capital Management”. Decisions pertaining to investment in Long term Assets are classified as “Capital Budgeting” decisions.Capital budgeting decisions are related to allocation of investible funds to different long-term assets. They have long-term implications and affect thefuture growth and profitability of the firm.In evaluating such investment proposals, it is important to carefully considerthe expected benefits of investment against the expenses associated with it. Organizations are frequently faced with Capital Budgeting decisions. Any decision that requires the use of resources is a capital budgeting decisions.Capital budgeting is more or less a continuous process in any growing concern.
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Capital budgeting is a required managerial tool. One duty of a financial manager is to choose investments with satisfactory cash flows and rates of return. Therefore, a financial manager must be able to decide whether an investment is worth undertaking and be able to choose intelligently between two or more alternatives. To do this, a sound procedure to evaluate, compare, and select projects is needed. This procedure is called capital budgeting. Figure of capital Budgeting:
Goal of the firm Maximising share holders wealth of value of firm

Financing decision

Dividend decision

Investment decision

ddd

Long term Investment

Short term Investment

Capital Budgeting

CONCEPT:The term Capital Budgeting refers to the long-term planning for proposed capital outlays or expenditure for the purpose of maximizing return on investments.

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The capital expenditure may be : (1) Cost of mechanization, automation and replacement. (2) Cost of acquisition of fixed assets. e.g., land, building and machinery etc. (3) Investment on research and development. (4) Cost of development and expansion of existing and new projects. DEFINITION OF CAPITAL BUDGETING:Capital Budget is also known as "Investment Decision Making or Capital Expenditure Decisions" or "Planning Capital Expenditure" etc. Normally such decisions where investment of money and expected benefits arising therefrom are spread over more than one year, it includes both raising of longterm funds as well as their utilization. Charles T. Horngnen has defined capital budgeting as "Capital Budgeting is longterm planning for making and financing proposed capital outlays."

Importance of Capital Budgeting:Capital budgeting is important because of the following reasons: (1) Capital budgeting decisions involve long-term implication for the firm, and influence its risk complexion. (2) Capital budgeting involves commitment of large amount of funds. (3) Capital decisions are required to assessment of future events which are uncertain. (4) Wrong sale forecast ; may lead to over or under investment of resources. (5) In most cases, capital budgeting decisions are irreversible. This is because it is very difficult to find a market for the capital goods. The only alternative available is to scrap the asset, and incur heavy loss.
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(6) Capital budgeting ensures the selection of right source of finance at the right time. (7) Many firms fail, because they have too much or too little capital equipment. (8) Investment decision taken by individual concern is of national importance because it determines employment, economic activities and economic growth.

Objectives of Capital Budgeting:The following are the important objectives of capital budgeting: (1) To ensure the selection of the possible profitable capital projects. (2) To ensure the effective control of capital expenditure in order to achieve by forecasting the long-term financial requirements. (3) To make estimation of capital expenditure during the budget period and to see that the benefits and costs may be measured in terms of cash flow. (4) Determining the required quantum takes place as per authorization and sanctions. (5) To facilitate co-ordination of inter-departmental project funds among the competing capital projects. (6) To ensure maximization of profit by allocating the available investible. Principles Or Factors Of Capital Budgeting Decisions:A decision regarding investment or a capital budgeting decision involves the following principles or factors: (1) A careful estimate of the amount to be invested. (2) Creative search for profitable opportunities.

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(3) A careful estimates of revenues to be earned and costs to be incurred in future in respect of the project under consideration. (4) A listing and consideration of non-monetary factors influencing the decisions. (5) Evaluation of various proposals in order of priority having regard to the amount available for investment. (6) Proposals should be controlled in order to avoid costly delays and cost overruns. (7) Evaluation of actual results achieved against those budget. (8) Care should be taken to think all the implication of long range capital investment and working capital requirements. (9) It should recognize the fact that bigger benefits are preferable to smaller ones and early benefits are preferable to latter benefits.

Types of Capital Expenditure:Capital Expenditure can be of two types :(1) Capital expenditure increases revenue. (2) Capital expenditure reduces costs. (1)Capital Expenditure Increases Revenue: It is the expenditure which brings more revenue to the firm either by expanding the existing production facilities or development of new production line. (2) Capital Expenditure Reduces Costs:
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Such a capital expenditure reduces the cost of present product and thereby increases the profitability of existing operations. It can be done by replacement of old machine by a new one.

Types of Capital Budgeting Proposals:A firm may have several investment proposals for its consideration. It may adopt after considering the merits and demerits of each one of them. For this purpose capital expenditure proposals may be classified into : (1) Independent Proposals (2) Dependent Proposals or Contingent Proposals (3) Mutually Excusive Proposals (1) Independent Proposals: These proposals are said be to economically independent which are accepted or rejected on the basis of minimum return on investment required. Independent proposals do not depend upon each other.

(2) Dependent Proposals or Contingent Proposals: In this case, when the acceptance of one proposal is contingent upon the acceptance of other proposals. it is called as "Dependent or Contingent Proposals." For example, construction of new building on account of installation of new plant and machinery.
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(3)Mutually Exclusive Proposals: Mutually Exclusive Proposals refer to the acceptance one proposal results in the automatic rejection of the other proposal. Then the two investments are mutually exclusive. In other words, one can be rejected and the other can be accepted. It is easier for a firm to take capital budgeting decisions on such projects.

Capital Budgeting Process:The following procedure may be considered in the process of capital budgeting decisions : (1)Requirement of implementation of capital expenditure. (2)Various capital expenditure proposal receive by the company. (3) Identification of profitable investment proposals. (4) Screening and selection of right proposals. (5) Evaluation of measures of investment worth on the basis of profitability and uncertainty or risk. (6) Establishing priorities, i.e., uneconomical or unprofitable proposals may be rejected. (7) Final approval and preparation of capital expenditure budget. (8) Implementing proposal, i.e., project execution. (9) Review the performance of projects.

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2.

1REQUARMENT Requirement of proposal PROPOSSALS

1.

DIFFERENT 3. PROPOSSALS INVESTMENT PROPOSSALS

9. REVIEW PRFORMANCE

8.
IMPLEMENT THE PROPOSSAL

CAPITAL BUDGETING PROCESS

4. SCREEN PROPOSSALS

5. 7. FINAL 6. APPROVAL FIX PRIORITIES EVALUATE VARIOUS PROPOSSALS

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1. REQUIREMENT OF PROPOSSALS :In the first process company/ industry requires the investment propossal for implementing the capital expenditure. 2. DIFFERENT/ CAPITAL EXPENDITURE PROPOSSALS:In this steps various propossals receive by the company. 3. IDENTIFICATION OF INVESTMENT PROPOSSAL:

The capital budgeting process begins with the identifications of investment propossals. The process of idea about potential investment oppertunities may originate from top management or may come from the rank & file worker of any department or from any officer of the organisation. The

dipartmental head anaiyses various propossals in the light of corporate strategies & submit the suitable propossal s to the capital expenditure plannig committee incase of large organisations or to the officer concerned with the process of long term investment. 4. SCREENING PROPOSSALS.:

The expenditure planning committee

sreens

the various propossals

received from different departments. The committee views these proposals from various angels to ensure that these are in accordance with the corporate

strategies or selection criterion of the firm & also do not leads to departmental imbalances.

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5. EVALUATION OF VARIOUS PROPOSSAL :

The next step in capital budgetig proces is to evaluate the profitability of various propossals. There are many method used for this purpose such as pay back period method, rate of retun method , net present value method , internal rate of return method etc. all these methods are used in evaluating the

profitability of investment propossals.

Various propossals to be evaluated may be classified as; (1) Independent Proposals (2) Dependent Proposals or Contingent Proposals (3) Mutually Excusive Proposals 6. FIXING PRIORITIES :

After evaluating variouse propossal, the unprofitable or un economic propossal may be rejected in straight away. But it may not be possible for the firm to invest immediately in all the acceptable propossals due to limitation of fund.Hence it is very essential to rank the various prop[ossal & to establish Priorities after cosidering urgency, risk & profitabity involved there in. 7- FINAL APPROVAL & PREPARATION OF CAPITAL EXPENDITURE BUDGET: Propossal meeting the evaluation & other criteria are final approved propossal to be include in capital expenditure budget. However, the

involviong smaller investment may be decided at the lower level for
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expenditure action. The capital; expenditure budget lays down the amount of estimated expenditure to be incurred on fixed asset during budget period. 7. IMPLEMENTING PROPOSSAL :

Preparation of capital expenditure budgeting & incorporation of a particular in the propossal budget does not itself authorise to go ahed with the implementing of the project. A request for authority to spend the amount

should further be made to the capital expenditure committee which may like to review the profitability of the project in the canged circumtances. 8. PERFORMANCE REVIEW:

The last stage in the process of capital budgeting is evaluation of the performance of the project. The evaluation is made through post completion audit by way of comparision of actual expenditure on the project with the budgeted one , and also by comparing the actual return from the investment with the anticipated return. The unfavourable variances, if any should be looked into and the causes of the same be identified so that corrective action may be in futurer.

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DETERMINATION OF CASH FLOWS

Determination of year-wise cash flows is the most crucial step of the financial analysis. The cash flows shall be determined for three components namely: a) Initial Investment b) Operating Cash Flows c) Terminal Cash Flow

a) Initial Investment

This component of cash flow mainly represents net cash outlay in the period in which the asset is purchased or constructed. In other words, initial investment shall comprise of the total project cost as indicated in the capital investment proposal and shall also include incremental value of working capital, wherever required. a) Operating Cash Flows

This component of cash flow presents year-wise cash flow generated from operations after the project has been commissioned. The determination of operating cash flows shall, therefore, entail estimating year-wise operating income, input/ raw material cost and operating expenses during the project life.

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Operating Income :Operating income of a project represents total realization or savings from the operations, after implementation of the project.

INPUT/ RAW MATERIAL COST:Landed cost of inputs / raw material shall include all the incidental costs involved including present rate of custom duties.

OPERATING EXPENSES :-

The operating expenditure of the project shall include the cost of chemicals and consumables, utilities (like power, water, and fuel) repairs and maintenance, wages and salaries, rent and insurance, depreciation, other administrative expenses etc. b) TERMINAL CASH FLOW:The cash flow in the terminal year of the project mainly represents the salvage value of the project plus release of incremental working capital. Salvage value shall be considered as under:  Land to be valued at original cost.  Tax on capital gain should be considered. Capital gains shall be taken as terminal value minus written down value as per income tax act. Methods of Evaluating Capital Investment Proposals:

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There are number of appraisal methods which may be recommended for evaluating the capital investment proposals. We shall discuss the most widely accepted methods. These methods can be grouped into the following categories : I. Traditional Methods:

Traditional methods are grouped in to the following : (1) Pay-back period method or Payout method. (2) Improvement of Traditional Approach to Pay-back Period Method. (a) Post Pay-back profitability Method. (b) Discounted Pay-back Period Method. (c) Reciprocal Pay-back Period Method. (3) Rate of Return Method or Accounting Rate of Return Method.

II.

Time Adjusted Method or Discounted Cash Flow Method

Time Adjusted Method further classified into: (1) Net Present Value Method. (2) Internal Rate of Return Method. (3) Profitability Index Method.

CAPITAL BUDGETING PROCESS IN IFFCO The first question concerns the firm's long-term investments. The process of planning and managing a firm's long-term investments is called capital budgeting. In capital budgeting, the financial manager tries to identify investment
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opportunities that are worth more to the firm than they cost to acquire. This means that the value of the cash flow generated by an asset exceeds the cost of that asset. BUDGET: A budget is a financial and / or quantitative statement, prepared prior to a defined period of time, of the policy to be perused

during that period for purpose of attaining the given objective. A budget is blue print of desired plan of actions or operations. Plans covering the entire organization and all its functions like purchase, production, sales, financial management, research & development are expressed through budget. A budget can be expressed in terms of money or quantity, or both.

BUDGETING : Budgeting can be defined as “The statement of plan of activities of an Organization expressed in financial and quantitative term for a definite future period approved in advance by Top Management.” Objectives of Budgeting : 1. To control economic expenditures 2. To ensure availability of adequate working capital for efficient operation of plants. 3. To prevent wastes 4. To ensure adequate return on capital employed.
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Capital Budget: Capital Budget is prepared for Procurement of Capital nature items or for Capital nature works to be done during Budgeted year. The items so procured or work so to be done are not the part of Profit & Loss Account, but are to be shown at Assets side of Balance Sheet. However, Depreciation calculated for Assets already having with Organization and Assets procured during the year is calculated and is to be shown in Profit & Loss Account for particular year. Capital Budget is prepared for next Financial Year commencing from April to March. Capital budget projections:They are projected for a time frame covering Revised Estimate: Budget Estimates: Projections for current year Projections for coming Year

Capital budget- coverage:Sanctions:In this head approvals for creation of facility will be projected on the basis of facilities. It covers existing sanctions, addition/ deletions and fresh sanctions. Commitments:In this head commitments made against facilities head will be projected.

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Expenditure:It is a head in which incurrence of actual expenditure incurred against each facility head will be projected. Process for preparation of Capital Budget in IFFCO:1. Intimation from Head Office to send proposals for next Financial year. 2. Collection of various estimates from Indentors/ H.O. 3. Compilation of various data in specially designed Proformas. 4. Put-up to Unit Head for consideration. 5. Meeting by Unit Head with various Head of Departments / Sectional Heads. 6. Final proposals to be sent to Head Office.

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CHAPTER 3 ORGANISATION OVERVIEW

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INDIAN FERTILIZER INDUSTRY

India is the second biggest consumer of fertilizer in the world next only to China. The Indian Fertilizer companies produced around 37.6 million tonnes of fertilizer in the year 2012-13 with a 9% rise in comparison to 34.6 million tonnes of last year ( 2011-12 ) production. However, the total availability was short of demand and was met through imports. Of total fertiliser production, urea output increased to 23.3 million tonnes in FY12-13 from 21.8 million tonnes in FY11-12 due to better capacity utilization. While production of di-ammonium phosphate (DAP) 4 million tones this year, output of NPK

(nitrogen, phosphate and potassium) 10 million tonnes in the current period. The entire requirement of around five million tonnes of potassic fertilisers would be met through imports as India does not have
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commercially viable sources of potash. With a view to make the nation selfsufficient in urea fertiliser, the Fertiliser Ministry has moved a proposal to boost investment in the sector. The fertilizer subsidy bill for FY 2012-13 is expected to increase by Rs 10,000 crore in respect of the budgeted estimates. In current financial year FY 2012-13 the subsidy bill would reach to Rs 70,974 crore while it was estimated as Rs 60,974 crore in the budget. The government planned to contain subsidy within 2% of the GDP in FY 2012-13 but due to international conditions like depreciating Rupee and oil prices subsidies rose to 2.6 % of GDP.

India is meeting 80 per cent of its urea requirement through indigenous production but is largely import dependent for its requirements of phosphatic and potassic (P & K) fertilizers either as finished fertilizers or raw materials. Its entire potash requirement, about 90 per cent of phosphatic requirement, and 20 per cent urea requirement is met through imports.

In addition to urea, 25 grades of P & K fertilizers namely diammonium phosphate (DAP), muriate of potash (MOP), mono-ammonium phosphate (MAP), triple super phosphate (TSP), ammonium sulphate (AS), single super phosphate (SSP) and 18 grades of NPKS complex fertilizers are provided to farmers at subsidized prices under the Nutrient Based Subsidy (NBS) Policy.

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Farmers pay only 50 per cent of the delivered cost of P & K fertilizers, the rest is borne by the Government of India in the form of subsidy. The Government has also included seven new grades of NPKS complex fertilizers under the NBS Policy. At present 25 grades of P & K fertilizers are under the NBS Policy.

INTRODUTION OF IFFCO:During mid- sixties the Co-operative sector in India was responsible for distribution of 70 percent of fertilisers consumed in the country. This Sector had adequate infrastructure to distribute fertilisers but had no production facilities of its own and hence dependent on public/private Sectors for supplies. To overcome this lacuna and to bridge the demand supply gap in the country, a new cooperative society was conceived to specifically cater to the requirements of farmers. It was an unique venture in which the farmers of the country through their own Co-operative Societies created this new institution to safeguard their interests. The number of Co-operative Societies associated with IFFCO have risen from 57 in 1967 to 39,824 at present. Indian Farmers Fertiliser Co-operative Limited (IFFCO) was registered on November 3, 1967 as a Multi-unit Co-operative Society. On the enactment of the Multistate Co-operative Societies act 1984 & 2002, the Society is deemed to be registered as a Multistate Co-operative Society. The Society is primarily engaged in production and distribution of fertilisers. The byelaws of the Society provide a broad frame work for the activities of IFFCO as a Co-operative Society.

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IFFCO commissioned an ammonia - urea complex at Kalol and the NPK/DAP plant at Kandla both in the state of Gujarat in 1975. Another ammonia urea complex was set up at Phulpur in the state of Uttar Pradesh in 1981. The ammonia - urea unit at Aonla was commissioned in 1988. In 1993, IFFCO had drawn up a major expansion programme of all the four plants under overall aegis of IFFCO VISION 2000. The expansion projects at Aonla, Kalol, Phulpur and Kandla were completed on schedule. All the projects conceived as part of VISION 2000 had been realised without time or cost overruns. All the production units of IFFCO have established a reputation for excellence and quality. Another growth path was chalked out to realise newer dreams and greater heights through Vision 2010. As part of this vision, IFFCO has acquired fertiliser unit at Paradeep in Orissa in September 2005. As a result of these expansion projects and acuisition, IFFCO's annual capacity has been increased to 3.69 million tonnes of Urea and NPK/DAP equivalent to 1.71 million tonnes. In pursuit of its growth and development, IFFCO had embarked upon and successfully implemented its Corporate Plans, ‘Mission 2005’ and ‘Vision 2010’. These plans have resulted in IFFCO becoming one of the largest producer and marketeer of Chemical fertilisers by expansion of its existing Units, setting up Joint Venture Companies Overseas and Diversification into new Sectors. IFFCO has now visualized a comprehensive plan titled ‘Vision-2015’ which is presently under implementation.

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IFFCO, to day, is a leading player in India's fertiliser industry and is making substantial contribution to the efforts of Indian Government to increase foodgrain production in the country. Indian Farmers Fertiliser Cooperative Limited, also known as IFFCO, is the world's largest fertiliser cooperative federation based in India which is registered as a Multistate Cooperative Society. IFFCO has 40,000 member cooperatives. In1993, IFFCO had drawn up a major expansion programme of all the four plants under overall aegis of IFFCO VISION 2000 . The expansion projects at Aonla, Kalol, Phulpur and Kandla have been completed on schedule. Thus all the projects conceived as part of Vision 2000 have been realized without time or cost overruns. All the production units of IFFCO have established a reputation for excellence and quality. A new growth path has been chalked out to realize newer dreams and greater heights through Vision 2010 which is presently under implementation. As part of the new vision, IFFCO has acquired fertiliser unit at Paradeep in Orissa in September 2005 from M/s Oswal Chemical Fertilizer Limited (OCFL). As a result of these expansion projects and acquisition, IFFCO's annual capacity has been increased to 3.69 million tonnes of Urea and NPK/DAP equivalent to 1.71 million tonnes of P2O5. IFFCO has 5 production units which are as follows:1) Kandla unit 2) Kalol unit
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3) Aonla a) Aonla-1 b) Aonlal-2 4) Phulpur a) Phulpur-1 b) Phulpur-2 5) Paradeep

Head Office Kandla Kalol Aonla -1 Aonla Aonla-2 Phulpur Phulpur-1 paradeep

Phulpur-2

IFFCO has made strategic investments in several joint ventures. Godavari Fertilisers and Chemicals Ltd (GFCL) & Indian Potash Ltd (IPL) in India, Industries Chimiques du Senegal (ICS) in Senegal and Oman India Fertiliser Company (OMIFCO) in Oman are important fertiliser joint ventures. Indo Egyptian Fertiliser Co
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(IEFC) in Egypt is under implementation. As part of strategic diversification, IFFCO has entered into several key sectors. IFFCO-Tokio General Insurance Ltd (ITGI) is a foray into general insurance sector. Through ITGI, IFFCO has formulated new services of benefit to farmers. 'Sankat Haran BimaYojana' provides free insurance cover to farmers along with each bag of IFFCO fertiliser purchased. To take the benefits of emerging concepts like agricultural commodity trading, IFFCO has taken equity in National Commodity and Derivative Exchange (NCDEX) and National Collateral Management Services Ltd (NCMSL). IFFCO Chattisgarh Power Ltd (ICPL) which is under implementation is yet another foray to move into core area of power. IFFCO is also behind several other companies with the sole intention of benefiting farmers. The distribution of IFFCO's fertiliser is undertaken through over 39862 cooperative societies. The entire activities of Distribution, Sales and Promotion are cocoordinated by Marketing Central Office (MKCO) at New Delhi assisted by the Marketing officesin the field. In addition, essential agro-inputs for crop production are made available to the farmers through a chain of 158 Farmers Service Centre (FSC). IFFCO has promoted several institutions and organizations to work for the welfare of farmers, strengthening cooperative movement, improves Indian agriculture. Indian Farm Forestry Development Cooperative Ltd (IFFDC), Cooperative Rural Development Trust (CORDET), IFFCO Foundation, KisanSewa Trust belongs to this category. An ambitious project 'ICT Initiatives for Farmers and Cooperatives' is launched to promote e-culture in rural India. IFFCO obsessively nurtures its relations with farmers and undertakes a large number of agricultural extension activities for their benefit every year.
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At IFFCO, the thirst for ever improving the services to farmers and member co-operatives is insatiable, commitment to quality is insurmountable and harnessing of mother earths' bounty to drive hunger away from India in an ecologically sustainable manner is the prime mission. All that IFFCO cherishes in exchange is an everlasting smile on the face of Indian Farmer who forms the moving spirit behind this mission.

IFFCO, to day, is a leading player in India's fertiliser industry and is making substantial contribution to the efforts of Indian Government to increase food grain production in the country.

VISION:To augment the incremental incomes of farmers by helping them to increase their crop productivity through balanced use of energy efficient fertilizers, maintain the environmental health and to make cooperative societies economically & democratically strong for professionalized services to the farming community to ensure an empowered rural India. MISSON: To make plants energy efficient and continually review various scheme to converse an energy.  Commitment to health, safety, environment and forestry development to enrich the quality of community life.  Commitment to social responsibility to strong social fabric.
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 To provide to farmers high quality fertilizer in right time and in adequate quantity with an objective to increase crop productivity  To ensure growth in core and non-core sector.  Foster a culture of trust, openess and mutual concern to make working a stimulating and challenging experience for stakeholders.  To acquire, assimilate and adopt reliable, efficient and cost effective technologies.  Sourcing raw materials fo production of phosphatic fertiliser at economical cost entering in to joint ventures outsideIndia.

Type Founded

Cooperative 3 November 1967 IFFCO Sadan C-1, District Centre, Saket Place, New Delhi-110017, India India

Headquarters

Area served

Key people

Natwarlal Pitambardas Patel, Chairman Dr. Udai Shanker Awasthi, CEO

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Products Revenue Net income Website

Fertilizers 2384.97 crore (2012–13) 728.72 crore (2012–13) www.iffco.in

Production and sales:During the year 2012–13 IFFCO produced 79,02,000 tonnes of fertiliser material; registering overall capacity utilisation of 99.2% percent for nitrogenous(N) and 75% per cent for phosphate fertiliser. Plant productivity during the year stood at 1671 tonnes/person. IFFCO achieved sales of 100.54 lakh tonne of fertiliser. Financial performance :The Sale turn over of the society has was Rs 21673 crore during 2012-2013 as against Rs 25599 crore in the previous year. The reduction in sale due to the lower production and imports was a strategic decision in view of erratic mansoon and decline in fertiliser demand.The performance is even more satisfying when viewed in the light of challenging business environment in the fertiliser industry.

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Diversification and joint ventures :      

Indian Potash Limited In India Industries Chimiques du Senegal (ICS) in Senegal Oman India Fertiliser Company (OMIFCO) in Oman Indo Egyptian Fertiliser Company (IEFCO) in Egypt, Jordan India Fertiliser Company in Jordan IFFCO-Tokio General Insurance (ITGI) Equity in National Commodity and Derivatives Exchange (NCDEX) and National Collateral Management Services Limited

   

IFFCO Chattisgarh Power Limited IFFCO Kisan Sanchar Ltd (IKSL) KISAN Special Economic Zone (IKSEZ) at Nellore in Andhra Pradesh. In February 2010, it was announced that IFFCO had entered into a joint venture partnership with GrowMax Agri Corp, a subsidiary of Americas Petrogas Inc.

Corporate social responsibility:   

Indian Farm Forestry Development Cooperative Ltd (IFFDC), Cooperative Rural Development Trust (CORDET), IFFCO Foundation Kisan Sewa Trust

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INTRODUCTION OF IFFCO-PARADEEP

PARADEEP Unit – Location

State State Capital District Nearest Airport Railway Station Road

Odisha, India Bhubaneswar Jagatsinghpur Bhubaneswar Airport Paradeep station ( 12 Km from plant ) Adjacent to Paradeep Port Trust on National
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Highway NH-5 , Temperature ( o C ) Rainfall (mm):Longitude :Latitude Address ::40 (Max.) in summer to 10 (Min.) in winter. Average 86°39'42"E 20°18'36"N IFFCO -ParadeepUnit, Village- Musadia, P.O- Paradeep, Dist – Jagatsinghpur, Pin-754141 Odisha, INDIA Phones Voice:FAX ::06722-228201 to 07 +919937294619 06722-224112 (ED's Office), 224113 (ED's Residence) 06722-224131(F&A),228174 (Materials) 228160 (EPBX) Website:E-Mail:www.Iffco.In / www.iffco.org [email protected]

IFFCO has acquired fertiliser unit at Paradeep in Orissa in September 2005 from M/s Oswal Chemical Fertilizer Limited (OCFL). In paradeep have a 3 production plant sulfuric acid plant (SAP), phosphoric acid plant (pap),NPK plant, T and G,
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boiler, power plant. IFFCO PARADEEP has many explanation of plant after acquiring.

ACHIEVEMENTS of IFFCO Paradeep Unit:  Confederation Of Indian Industries (CII) Awards -2012  Best Importer Award From Paradeep Port Trust (PPT) - 2012-13  National Energy Management Award – 2011  Awards From Indian National Suggestion Schemes Association (INSSAN)  FAI Awards - 2012  13th Annual Greentech Environment Award  Krushak Bandhu Award - 2012  IFFCO Paradeep Unit Has Won " Kalinga Csr Award 2011"  FAI Technical Innovation Award - 2011  National Award For Excellence In Water Management - 2011  Greentech Environment Award  IFFCO Paradeep Unit Bags Prestigious FAI Awards

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CHAPTER 4 DATA ANALYSIS

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Proforma of Preparation of capital budgeting in IFFCO (Year wise):INDIAN FARMERS FERTILISER COOPERATIVE LIMITED PARADEEP UNIT CAPITAL BUDGET 2011BUDGET CODE N.I N.II N.III N.IV N.V N.VI N.VII N.VIII N.IX N.X N.XI N.XII N.XIII ITE MS Ener Ope gy Reli rati Savi Safe abili onal ng Repl ty ty nec stat Syst ace requ imp Min essit uota ems men irem Insp rove or ies ry /Sch t of Res ent ecti men mod requ Ad ems agei earc on t ifica Asso irem min ng h & facil com tion ciat ent/ strai equi devl Secu ity pute ed Gov on Tota pme ope rity r & area t. & l nt men facil com s dire offic t ity pute like ctiv e equi r welf es & buil pem syst are, requ ding ent em colo irem , ny, ents furn ame of itur nitie inpu e s,gu t and esth COST ESTIMA TE Rs' xx Lacs xx xx xx xx xx xx xx xx xx xx xx xx xxx 2012 COMMITMENT During During During 2011xx 2012 xx xx xx xx xx xx xx xx xx xx xx xx xxx 2012xx 2013 xx xx xx xx xx xx xx xx xx xx xx xx xxx 2013xx 2014 xx xx xx xx xx xx xx xx xx xx xx xx xxx EXPENDITURE During During During 2011xx 2012 xx xx xx xx xx xx xx xx xx xx xx xx xxx 2012xx 2013 xx xx xx xx xx xx xx xx xx xx xx xx xxx 2013xx 2014 xx xx xx xx xx xx xx xx xx xx xx xx xxx

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CAPITAL BUDGET CONTROL After receiving the copy of approved Capital Budget, Finance & Accounts Department intimate all Departments/Sections about approval of items related to their area. Budget for each & every item is entered in the Budget Module meant for Budget Control in Financial Accounting Systems. After receipt of intimation of sanctioned budget, indenter raise MPR/WOI (Material Purchase Requisition / work of indent) and send it to F & A Department through Materials Department for Budget Availability Certification. F & A Department certify Budget Availability after scrutiny of MPR/WOI comparing the same with Budget sanctioned & sent it to materials Department for further action for procurement.

Once material Department completes all formalities for placing of order on supplier/contractor, proposal sent to F&A for entering the landed cost in Budget Module. F&A dept is responsible to assure that the material is not procured/contract is not placed beyond the sanctioned budget. To control Capital Budget commitment, monthly meetings are held under the Chairmanship of Unit Head with all HODs / SHs and measures are taken to utilize the budget timely. For this monthly commitment/expenditure report is prepared by F & A Dept & is circulated to all HODs/SHS. To appraise Head office about the progress of capital Budget, Quarterly report for high value items are sent to Head Office in prescribed proformas.
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Mainly in IFFCO, they are using in 3 types of budgeting 1) Capital budgeting 2) Revenue budgeting 3) Administrative HR Budget

I.

Traditional Methods:

(1)

Pay-back Period Method : Pay-back period is also termed as "Pay-out period" or Pay-off

period. Payout Period Method is one of the most popular and widely recognized traditional method of evaluating investment proposals. It is defined as the number of years required to recover the initial investment in full with the help of the steam of annual cash flows generated by the project.

Calculation of Pay-back Period:-

Pay-back period can be calculated into the following two different situations : (a) In the case of constant annual cash inflows. (b) In the case of uneven or unequal cash inflows. (a) In the case of constant annual cash inflows : If the project generates constant cash flow the
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Pay-back period can be computed by dividing cash outlays (original investment) by annual cash inflows.

The following formula can be used to ascertain pay-back period : Pay back period = Cash outlays(Initial Investment)/Annual cash Inflow Example :

A project requires initial investment of Rs. 40,000 and it will generate an annual cash inflows of Rs. 10,000 for 6 years. You are required to find out pay-back period.

Solution: Calculation of Pay-back period :Pay-back Period = 40000 10000 Pay-back period is 4 years, i.e., the investment is fully recovered in 4 years Cash outlays (Initial Investment) Annual cash Inflow = 4 Yrs

=

(b)

In the case of Uneven or Unequal Cash Inflows:

In the case of uneven or unequal cash inflows, the Pay-back period is determined with the help of cumulative cash inflow. It can be calculated by adding up the cash inflows until the total is equal to the initial investment.

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Calculation of Pay back Period method

IFFCO ltd producing article by manual labour & considering to replace it by a new machine, prepare a statement of profitability showing the pay back period. cost of capital 10% Estimation for Replacement of Acid & Slurry Services pumps in PAP RS 19500000 Cost of dismantling, erection & commissioning of Acid & Slurry Service pumps in PAP Rs 500000 Annual saving Rs 4000000/Stdown time of equipment @ 10 days/Annum maintenance & repairing job Rs 500000

Calculation of Annual Cash Inflow Cost for Revamping of Replacement of Acid & slurry service pumps in PAP Description 1 Internal estimation for replacement of Acid & slurry service pumps in PAP 2 cost for dismantling, erection & commissioning of Acid & slurry service pumps in PAP 3 Total cost in Rs Annual saving aginst replacement of Acid & Slurry service
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financial implication Amout in Lakh) 195

5

200

pumps in PAP 4 Annual saving aginst maintenance & Repairing job 5 Annual saving against down time eqipments @ 10 days/Annum 6 Net annual savings 7 Pay back period in years = Capital cost of the project / Net annual savings 45 4.444 5 40

Accept or Reject Criterion:-

Investment decisions based on pay-back period used by many firms to accept or reject an investment proposal. Among the mutually exclusive or alternative projects whose pay-back periods are lower than the cut off period/ estimated life of the project. The project would be accepted. if not it would be rejected.

Advantages of Pay-back Period Method:-

(1) It is an important guide to investment policy. (2) It is simple to understand and easy to calculate. (3) It facilitates to determine the liquidity and solvency of a firm. (4) It helps to measure the profitable internal investment opportunities.

(5) It enables the firm to select an investment which yields a quick return on cash funds. (6) It used as a method of ranking competitive projects. (7) It ensures reduction of cost of capital expenditure.
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Disadvantages of Pay-back Period Method: (1) It does not measure the profitability of a project. (2) It does not value projects of different economic lives. (3) This method does not consider income beyond the pay-back period. (4) It does not give proper weight to timing of cash flows. (5) It does not indicate how to maximize value and ignores the relative profitability of the project. (6) It does not consider cost of capital and interest factor which are very important factors in taking sound investment decisions.

2. Improvement of Traditional Approach to Pay-back Period The demerits of the pay-back period method may be eliminated in the following ways: (a) Post Pay-back Profitability Method: One of the limitations of the pay-back period method is that it ignores the post pay-back returns of project. To rectify the defect, post pay-back period method considers the amount of profits earned after the pay-back period. This method is also known as Surplus Life Over Payback Method.

According to this method, pay-back profitability is calculated by annual cash inflows in each of the year, after the pay-back period. This can be expressed in percentage of investment.

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Post Pay-back Profitability = Annual Cash Inflow x (Estimated Life - Pay-back Period) The post pay-back profitability index can be determined by the

following equation :

Post pay-back profitability index =

Post pay back profit Initial Investments

*100

(c)

Discounted Pay-back Method:

This method is designed to overcome the limitation of the payback period method. When savings are not levelled, it is better to calculate

the pay-back period by taking into consideration the present value of cash inflows. Discounted pay-back method helps to measure the present value of all cash inflows and outflows at an appropriate discount rate. The time period at which the cumulated present value of cash inflows equals the present value of cash outflows is known as discounted pay-back period.

Example:-

IFFCO ltd producing article by manual labour & considering to replace it by a new machine, prepare a statement of profitability showing the pay back period. cost of capital 10% Estimation for Replacement of Acid & Slurry Services pumps in PAP
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Rs 19500000 Cost of dismantling, erection & commissioning of Acid & Slurry Service pumps in PAP Rs 500000 Annual saving Rs 3500000/Stdown time of equipment @ 10 days/Annum maintenance & repairing job Rs 500000

Annual Cash year Cash outflow cash inflow cash inflow cash inflow cash inflow cash inflow cash inflow 6 35 5 35 4 35 3 35 2 35 1 35 0 -200 1 inflow Discounting Fact. 10%

Present vsalue of cash inflow Cummulative Cashflow

-200

0.909090909 31.81818182

31.81818182

0.826446281 28.92561983

60.74380165

0.751314801 26.29601803

87.03981968

0.683013455 23.90547094

110.9452906

0.620921323 21.73224631

132.6775369

0.56447393 19.75658755

152.4341245

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cash inflow cash inflow cash inflow cash inflow cash inflow cash inflow 12 35 0.318630818 11.15207862 238.4792138 238.4792138 11 35 0.350493899 12.26728648 227.3271352 10 35 0.385543289 13.49401513 215.0598487 9 35 0.424097618 14.84341664 201.5658336 8 35 0.46650738 16.32775831 186.7224169 7 35 0.513158118 17.96053414 170.3946586

Pay back period

=8yr+

(200-186) 14.84

= 8.894509896

(c) Reciprocal Pay-back Period Method:

This methods helps to measure the expected rate of return of income generated by a project. Reciprocal pay-back period method is a close approximation of the Time Adjusted Rate of Return, if the earnings are levelled
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and the estimated life of the project is somewhat more than twice the pay-back period. This can be calculated by the following formula:

1 Reciprocal pay back period = pay back period *100

In previouse example,

Pay back period = Reciprocal pay back period =

8.89451 1 pay back period 1 8.894509896 *100

=

*100

= =

0.1124289 *100 11.24289041

3. Average Rate of Return Method (ARR) or

Accounting Rate of Return Method: Method is also termed as

Average Rate of Return

Accounting Rate of Return Method. This method focuses on the average net income generated in a project in relation to the project's average investment outlay. The accounting rate of return is based on accounting profits.This method involves accounting profits not cash flows and is similar to the performance measure of return on capital employed. The average rate of return. can be determined by the following equation;
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AverageEBIT(1ARR= t) Average Investment *100

ARR=

Average income Average investment

X

100

Example:A project costing Rs10lacs. EBITD(Earning before Depriciation, Interest ,& Taxes) during the last five years is expected to be Rs250000, Rs300000, Rs350000, Rs400000, & Rs 500000. Assume 33.99% tax & 30% depriciation on WDV method.

Computation of project ARR Project cost Particulars EBITD Less:Depriciation30% EBIT Less: Tax @33.99% 1000000 Yrs1 250000 300000 -50000 Yrs2 Yrs3 Yrs4 Yrs5 Average 360000 166386 193614 65809 127805 PAT -50000 76404 134000 196116 282503 127805
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300000 350000 400000 500000 210000 147000 102900 72030

90000 203000 297100 427970 13596 69000 100984 145467

Boook value of investment: Begning End Total Average 1000000 700000 700000 490000 343000 240100 490000 343000 240100 168070

1700000 1190000 833000 583100 408170 850000 595000 416500 291550 204085 471427

ARR=

AverageEBIT(1-t) Average Investment 127805 471427 27.11% *100

*100

= =

(NOTE: Unabsorbed depriciation of Yrs1 is carried forward & set-off against profit of Yrs2. Tax is calculate on the balance of profit.)

Advantages :1. It considers all the years involved in the life of a project rather than only payback years. 2. It applies accounting profit as a criterion of measurement and not cash flow. 3. It Is Easy To Calculate. 4. The Percentage Return Is More Familiar To The Executives. Disadvantages: (1) It applies profit as a measure of yardstick not cash flow.
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(2) The time value of money is ignored in this method. (3) Yearly profit determination may be a difficult task.

II. Discounted Cash Flow Method (or) Time Adjusted Method:

Discount cash flow is a method of capital investment appraisal which takes into account both the overall profitability of projects and also the

timing of return. Discounted cash flow method helps to measure the cash inflow and outflow of a project as if they occurred at a single point in time so that they can be compared in an appropriate way. This method recognizes that the use of money has a cost, i.e., interest foregone.

In this method risk can be incorporated into Discounted Cash Flow computations by adjusting the discount rate or cut off rate.

Disadvantages: The following are some of the limitations of Discounted Pay-back Period Method: (1)There may be difficulty in accurately establishing rates of interest over the cash flow period. (2) Lack of adequate expertise in order to properly apply the techniques and interpret results. (3) These techniques are based on cash flows, whereas reported earnings are based on profits. The inclusion of Discounted Cash Flow Analysis may cause projected earnings to fluctuate considerably and thus have an adverse on share prices.
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1. Net Present Value Method (NPV) : This is one of the Discounted Cash Flow technique which explicitly recognizes the time value of money. In this method all cash inflows and outflows are converted into present value (i.e., value at the present time) applying an appropriate rate of interest (usually cost of capital).

In other words, Net Present Value Method discount inflows and outflows to their present value at the appropriate cost of capital and set the present value of cash inflow against the present value of outflow to calculate Net Present Value. Thus, the Net Present Value is obtained by subtracting the present value of cash outflows from the present value of cash inflows.

Net Present Value = Present value of cash inflow - Present value of cash out flow

Example:
Calculation of Net Present Value
Acid & Slurry Service Pumps valueRs' 200 lacs Annual Cash inflow 40 lacs Estimated life 19 yrs Cost of capital 10% Tax 30%
Rs' Lacs Year Rs in Depreciation WDV PBT Tax PAT Cash discounting Present

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lakh (F)=(c)(A) Initial out flow Cash Inflow Cash Inflow Cash Inflow Cash Inflow Cash Inflow Cash Inflow Cash Inflow Cash Inflow Cash Inflow Cash Inflow Cash Inflow Cash Inflow Cash Inflow Cash Inflow Cash Inflow Cash Inflow Cash Inflow Cash Inflow Cash Inflow 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 -200 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 10.5263 10.5263 10.5263 10.5263 10.5263 10.5263 10.5263 10.5263 10.5263 10.5263 10.5263 10.5263 10.5263 10.5263 10.5263 10.5263 10.5263 10.5263 10.5263 10.5263 200 189.474 178.947 168.421 157.895 147.368 136.842 126.316 115.789 105.263 94.737 84.211 73.684 63.158 52.632 42.105 31.579 21.053 10.526 0.000 29.474 29.474 29.474 29.474 29.474 29.474 29.474 29.474 29.474 29.474 29.474 29.474 29.474 29.474 29.474 29.474 29.474 29.474 29.474 8.842 8.842 8.842 8.842 8.842 8.842 8.842 8.842 8.842 8.842 8.842 8.842 8.842 8.842 8.842 8.842 8.842 8.842 8.842 20.632 20.632 20.632 20.632 20.632 20.632 20.632 20.632 20.632 20.632 20.632 20.632 20.632 20.632 20.632 20.632 20.632 20.632 20.632 (B) (C) (D)=(c)/19 (E)=(c)-(D) (D) (G)=(F)*30 % (H)=(F)(G)

Inflow

10%

value

(I)=(H)+(D)

(J)

(K)=(I)*(J)

1.000 31.158 31.158 31.158 31.158 31.158 31.158 31.158 31.158 31.158 31.158 31.158 31.158 31.158 31.158 31.158 31.158 31.158 31.158 31.158 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 0.350 0.319 0.290 0.263 0.239 0.218 0.198 0.180 0.164

-200.000 28.325 25.750 23.409 21.281 19.347 17.588 15.989 14.535 13.214 12.013 10.921 9.928 9.025 8.205 7.459 6.781 6.164 5.604 5.095

NPV

60.633

Rules of Acceptance:-

If the rate of return from a project is greater than the return from an equivalent risk investment in securities traded in the financial market, the Net Present Value will be positive. Alternatively, if the rate of return is lower, the Net Present Value will be negative.

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In other words, if a project has a positive Net Present Value it is considered to be viable because the present value of the inflows exceeds the

present value of the outflows. If the projects are to be ranked or the decision is to select one or another. the project with the greatest Net Present Value should be chosen.

Symbolically the accept or reject criterion can be expressed as follows: Where NPV > Zero Accept the proposal NPV < Zero Reject the Proposal Advantages of Net Present Value Method:-

(1) It recognizes the time value of money and is thus scientific in

its approach.

(2) All the cash flows spreadover the entire life of the project are used for calculations. (3) It is consistent with the objectives of maximizing the welfare of the owners as it depicts the positive or otherwise present value of the proposals.

Disadvantages: (1) This method is comparatively difficult to understand or use. (2) When the projects in consideration involve different amounts of

investment, the Net Present Value Method may not give satisfactory results. 2. Internal Rate of Return Method (IRR) :Internal Rate of Return Method is also called as "Time Adjusted Rate of Return Method." It is defined as the rate which equates the present value
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of each cash inflows with the present value of cash outflows of an investment. In other words, it is the rate at which the net present value of the investment is zero. Horngren and Foster define “Internal Rate of Return as the rate of interest at which the present value of expected cash inflows from a project equals the present value of expected cash outflows of the project”.

The Internal Rate of Return can be found out by Trial and Error Method. First, compute the present value of the cash flow from an investment, using an arbitrarily selected interest rate, for example 10%. Then compare the present value so obtained with the investment cost. If the present value is higher than the cost of capital, try a higher interest rate and go through the procedure again. On the other hand if the calculated present value of the expected cash inflows is lower than the present value of cash outflows, a lower rate should be tried. This process will be repeated until and unless the Net Present Value becomes zero. The interest rate that brings about this equality is defined as the Internal Rate of Return.

Alternatively, the internal rate can be obtained by Interpolation Method when we come across 2 rates. One with positive Net Present Value and other with negative Net Present Value. The IRR is considered as the highest rate of interest which a business is able to pay on the funds borrowed to finance the project out of cash inflows generated by the project. The Interpolation formula can be used to measure the Internal Rate of Return as follows :

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IRR=lower interest rate+

NPV lower rate Total difference

X Difference in rate

Calculation of Internal rate of return (IRR).
Project cost Cash inflows : Yrs 1 Yrs 2 Yrs 3 Yrs 4 Rs60000 Rs 20000 Rs 10000 Rs 50000 RS 110000

Solution:
Internal Rate of Return will be calculated by trail & error method. The cash flow is not uniform. To have an approximate idea about such rate, we can calculate the "factor". It represent the Same relationship of investment & cash inflows in case of pay back calculation. F = F = I/c Factor

origionl investment I= C= Average cash inflow per annum 110000 Factor for the project= 35000 = 3.14

The Factor will be located fropm the table "pv" of "Annuity of Rs. 1".
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The approximate value of 3.14 is located against 10% in 4 years. we will now apply 10% & 12% to get (+) NPV & (-) NPV

P>V@ Year cash Inflows (Rs) 1 2 3 4 60000 20000 10000 50000 P.V of Inflow Less: Initial investment NPV 110000.00 2738.20 110000.00 -1590.99 112738.20 108409.01 0.9091 0.8264 0.7513 0.6830 P.V @ 10% DCFAT (Rs) 54545.45 16528.93 7513.15 34150.67 0.8929 0.7972 0.7118 0.6355 12% DCFAT (Rs) 53571.43 15943.88 7117.80 31775.90

P>V@ 11.27% DCFAT (Rs) 0.8989 0.8080 0.7263 0.6529 53933.55 16160.16 7263.12 32643.83

110000.67

110000.00 0.67

Calculations of Internal rate of return
Forward method: Taking10% IRR=lower interest rate+ NPV lower rate * Difference in rate Total difference

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2738.20094 (12%= 10% + 10%) 4329.18794 = = = 10% 10% + + 2738.201 4329.188 1.27% * 2%

11.27%

Backward method: taking 12%

NPV higher rate Higher rate of interest IRR= = = = 12% -

* Difference

Total difference
1590.987 4329.188 0.73% * 2%

in rate

12% 11.27%

Evaluation:A popular discounted cash flow method, the internal rate of return criterion has several virtues : (1) It takes into account the time value of money. (2) It considers the cash flows over the entire life of the project. (3) It makes more meaningful and acceptable to users because it satisfies them in terms of the rate of return on capital. Limitations:Page 63 of 75

(1) The internal rate of return may not be uniquely defined. (2) The IRR is difficult to understand and involves complicated computational problems. (3) The internal rate of return figure cannot distinguish between lending and borrowings and hence high internal rate of return need not necessarily be a desirable feature.

3.Profitability Index Method:-

Profitability Index is also known as Benefit Cost Ratio. It gives the present value of future benefits, computed at the required rate of return on the initial investment. Profitability Index may either be Gross Profitability Index or Net Profitability Index. Net Profitability Index is the Gross Profitability Index minus one. The Profitability Index can be calculated by the following equation:

Present value of cash inflow profitability index = Initial cash outlay / P.V of cash outflow

If,

P.I>1 P.I <1

Project is accepted Project is rejected

(The P.I signifies present value of inflow per rupee of outflow. It helps to coparat
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the projects involving different amount of initial investment).

In this method, a project with a PI greater than 1 is accepted, but a project is rejected when its PI is less than 1. Note that the PI method is closely related to the NPV approach. In fact, if the net present value of a project is positive, the PI will be greater than 1. On the other hand, if the net present value is negative, the project will have a PI of less than 1. The same conclusion is reached, therefore, whether the net present value or the PI is used. In other words, if the present value of cash flows exceeds the initial investment, there is a positive net present value and PI greater than 1, indicating that the project is acceptable.

Example:A project is in the consideration of a firm. The initial outlay of the project is Rs. 1000lac’ and it is expected

to generate cash inflows of Rs. 4,00lac’s, Rs. 3,00lac’s, Rs. 5,00 lac’s, and Rs. 2,00lac’s, in four years to follow. Assuming 10% rate of discount, calculate the Net Present Value and Benefit Cost Ratio of the project.

Calculation of Profitability Index Initial outlay of the project 1000lacs Rs lacs Y ear 1 Cash inflow 400 Discouted factor 10% 0.9091 present cash flow 363.6364
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2 3 4

300 500 200 Net Present value of cash inflow

0.8264 0.7513 0.6830

247.9339 375.6574 136.6027

1123.8303

Net present value= Present value of cash inflows- values of cash out flow

Present value of cash inflows- values of cash Net present value= out flow 1123.830339-1000= 123.830339

Present value of Gross profitability index = cash inflow Initial cash outlay 1123.830339 1000 1.12383

= = Net profitability Index =

Gross profitability index - 1.0
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= 1.12383 - 1.0 = 0.12383

Rule of Acceptance:

As per the Benefit Cost Ratio or Profitability Index a project with Profitability Index greater than one should be accepted as it will have Positive Net Present Value. Likewise if Profitability Index is less than one the project

is not beneficial and should not be accepted.

Advantages of Profitability Index: (1) It duly recognizes the time value of money. (2) For calculations when compared with internal rate of return method it Requires less time. (3) It helps in ranking the project for investment decisions. (4) As this method is capable of calculating incremental benefit cost ratio, it can be used to choose between mutually exclusive projects.

Among all the method IFFCO are mainly using the Pay back period method.

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CHAPTER 5 ANALYSIS & CONCLUSION

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MAJOR FINDINGS
FINDINGS:

 A good atmosphere to work at & with employees of IFFCO.  Safety level is at high point.  A well Future Set Plan MISSION 2015.  A Strong Team of Directors from all over India.  Great Support of Government of India & Fertilizer Ministry.  A Strong Financial States.  A good training to employees.  Sales are main source of Income.  Raw Materials Cost consists of 90% of Total Cost. So Change in Raw Materials Price will strongly affect the Total Cost.  As all most all the Raw Materials are imported, Change in Foreign currency, USD may impact a lot to the Cost of Production.  For Continuity in Production there should be continuous Raw Material supply. So any deficiency in supply of Raw Materials will affect the Production.  Whatever Project is undertaken at IFFCO paradeep up to date all Projects duration and Cost were achieved within the specified limit or budget figure.  Continuously from last 15 Years IFFCO is providing the Dividend at the rate of 20% per Year.  Punctuality in Timings and Management work is excellent at IFFCO.  A well equipped System facility providing the LAN and VAN access for speedy communication.  Environment control policy adopted by ISO - 14001 Certified.  Best Employees welfare facility (Residence for all the employees at IFFCO Township).
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 Every Employees Work is interlinked.  Year at IFFCO Paradeep. No Interest is paid to vendor and same amount is being lying in the society current Account..  Great Support of Government of India & Fertilizer Ministry.  A team work from Top Management to Lower Grade Staff to achieve the targets.  A Chain (H.O.) between Management Plants (Kalol, Kandla, Aonla & Phulpur, Paradeep & Marketing office) all over India.  IFFCO seems a good pay master for employees as well as suppliers.  Work Load on employees are equally divided. No body is loaded with too much Work or too less work.

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SUGGESTION & CONCLUSION
SUGGESTIONS:-.
 Media Support should be taken to change the minds of farmers to use fertilizer in their farms.  Employees should motivated to invest in IFFCO itself during their service & even after Retirement in FDR scheme of IFFCO at H.O.  If employees agree at the time of retirement to convert his PF, Gratuity etc. in to FDR & as a special care Ex-Employees should be paid higher rate of interest on his investment interest to be paid to Ex-Employees on monthly basis so the fund remain safe in the hand of IFFCO & Ex-Employees gets its return on monthly basis to pull out his remaining life happily & safely.  IFFCO one of the country’s largest producer of fertilizer in industry fertilizer is situated at PARADEEP but then also there are many villages in Kachchh only where still Concept of Scientific fertilizer in farms is not Clear & popular. Still there are many farmers using the old concept of Cow Dung as the only way of fertilizer in there farms. So proper suggestion and guidance should be given to change there mind set up.

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CONCLUSION
I have carried out our training period of 45 days in Finance and Account Department (F&A), IFFCO PARADEEP). During this period we have studied in brief and have taken overview of the activities of each section of F&A Department at IFFCO PARADEEP. And after the study I conclude that practices and procedures followed here at par with the industry standard and comply with legal and regulatory requirements.

During out training we have studied and analyzed IFFCO’s annual report for the financial year 2006-07 and found that IFFCO is financially very strong due to its large reserves and has good credit in market, due to its high share of equity. It has paid 20% dividend which is ever highest by any P.S.U. or co-operative society in India. Successful realization of VISION 2010 and MISSION 2005 will definitely made the society to emerge at top position in India. Also this would solve to its objective of being a socially responsible organization and work for welfare of farmers not only in India but also in abroad. IFFCO is also Socially Responsible Organization who dose not only look after the wellbeing of their employees and share holder only but they also look after the welfare of farmers by many promotional programmers carried out under the schemes of IFFCO Kisan Sewa Trust and by the Indian Farm Forestry Development Cooperative(IFFDC).

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RECOMMENDATION
I undersigned, have no experience and my age is too less to valuate any industry giant like IFFCO. Also the training period of 45 days is too less to understand and analyze the vast functions procedure and regulatory requirements that needs to be carried out in cash section of finance and account department of IFFCO paradeep. Yet I have tried my best and declare that the below mentioned few suggestions that can be better coated than recommendations are no way on attempt or intention to criticize organization like IFFCO & its management or employees, but only they are to serve as indicators of level of our understanding of the activities carried out in various sections of Finance and Account Department of IFFCO paradeep.



The whole process of implementing Capital budgeting is not only a tedious job, but also a costly affair.

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Trend of re-appropriation of budgets is not a healthy task.

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BIBLIOGRAPHY
Books:

Name Financial management

Author I. M. Pandey , R.k sharma & Sashi Gupta

Cost Accounting Financial management & international finance Research methodology

S.P Jain & K.L Narang Prasanna Chandra

C. R. Kothari

Magazines : Paradeep Baivaba , IFFCO paradeep
Web side : www.iffco.nic.co Other Company report: capital budget report, Cost benefit analysis report
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