Capital Budgeting

CHAPTER - I
INTRODUCTION

1

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.”

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.

2

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 longterm 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.

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.
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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.

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 benefitable for the firms?
.
4. To evaluate the company growth and make the decision to gain the company in
the long run.

4

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

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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(1)

LIMITATIONS:
All the techniques of capital budgeting presume that various investment
proposals under consideration that are mutually exclusive which may not

(2)

practically be true in some particular circumstances.
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

(3)

may not be exact. Obviously, the result based upon wrong data cannot be good.
There are certain factors like morale of employees, goodwill of the firm, etc.,
which cannot be correctly qualified but which otherwise substantially influence

(4)
(5)

the capital decision.
Urgency is another limitation in evaluation of capital investment decision.
Uncertainty and risk pose the biggest limitation to the techniques of capital
budgeting.

CHAPTER – II
7

REVIEW
OF
LITERATURE

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 à

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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.

(i)

Mutually exclusive project decision à
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 à
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

2)

(IRR).
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 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.
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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.
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
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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.

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)
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
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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.

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

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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).
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
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cover the original cash outlay invested in a project. If the project 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.



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

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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 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.

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

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 noncash 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.

 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), increase yield and

18

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.

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.

19

CHAPTER – III
INDUSTRY PROFILE
COMPANY PROFILE

20

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,
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

21

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 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.

22

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,



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
23




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.
Strict conformance and compliance to quality of equipment and
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

24

work

BEVCON WAYORS ORGANISATION STRUCTURE

25

DEPARTMENTS OF BW

BW MANAGEMENT

Bevcon Wayors
Regulatory Board
BEVCON WAYORS
Cherlapalli

Complete
Aided
institute

Research &
Development
Sector

Industrial Sector

Services support
Sector

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

26

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
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,
27

success in such mega projects could steer Bevcon Wayors to the company’s stated
goal of industry leadership.

Bevcon Industries Limited
Details of works on hand as on 30.11.2010
Rs. In crores
si.no Name of the work

1

Transportation of iron ore from KALTA
IRON MINES to SAIL in Orissa State

Value of

Value of

Value of

work

work

work to be

awarded

executed

executed

250.00

46.76

203.24

Construction of civil works of DAM
2

spillway and power house at near

335.00

99.34

235.66

152.29

34.34

117.95

77.04

48.55

228

rishikesh, uttranchal sate
Construction of B.G. single line tunnel
No.5 (Bakkal tunnel) from Km43.040
3

to 48.940 on the katra-laole section of
the udahampur srinagar – baramulla
Rail Link project
Investigation preparation of hydraulic

4

particulars,

design

and

drawings

excavation of HNSS Main Canal from
Km15.00 km

28

Investigation, preparation of hydraulic
particulars, design and drawings and
excavation of HNSS Main canal from
5

Km 176.000 to Km 192.000 including
construction of CM&CD works and

58.32

13.31

distributor system to feed an ayacut of
20,900

acres

khariff

I.D.(package

No33)

Awards & Achievements:
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 13th February 2008 at New Delhi.

IE
S

President

Executive Director

29

45.01

Partners:





Progressive Constructions Limited
Ga India Limited
Mytas
NPCC






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

Clients:

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.

30

CHAPTER - IV
DATA ANALYSIS
AND
INTERPRETATIONS

CASH FLOW STATEMENT FOR BEVCON WAYORS PVT LTDFROM

2010-11 TO 2014-15

sno

Particulars

(RS IN MN)

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

(LESS)increase\decrease in stock 22.48

(9.24)

38.69

35.25

38.37

OTHER INCOME

406.89

649.37

640.00

653.35

686.25

LESS OPERATING EXPENSES

340.95

492.27

538.59

545.36

435.13

CASH FLOW BEFORE TAX

65.94

157.10

101.41

107.89

251.12

(Less) depreciation

11.28

12.81

16.87

18.17

18.50

3.

4.

5.

31

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)
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 4th and 5th 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 4TH
YEAR and 5th year the payback period is computed below:

32

Difference in cash flows
PBP = Actual year + ------------------------Next year cash flows
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
Original investment

(ii) Annual average net earnings
Average investment

* 100
* 100

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.

33

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
Mar 2011-12
Mar 2012-13
Mar 2013-14
Mar 2014-15
Total

47.05
133.00
76.04
79.32
221.67
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:

34

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.
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.
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.
35

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

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
36

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.
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

Average CFAT’S =

Total amount
---------------------No of years
37

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

= 126.94

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

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

88.94

The above NPV is negative.
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

38

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+
28+

284.85- 470.00
284.85- 210.12
185.15/ 74.73

X

( 32-28)

X4

IRR = 38%

ACCEPT – REJECT CRITERION:
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:
39

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

Profitability index

CFAT’S
58.33
145.80
92.92
97.49
240.17
Total

PVIF @ 9%
0.917
0841
0.772
0.708
0.649

PV’S
53.48
122.61
71.73
69.02
155.87
472.71

Present value of cash inflows
= -------------------------------------Initial cash outlay.

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

= 1.00

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)

40

Questionnaire Analysis
1. When deciding on an investment opportunity, risk consideration is always
vital?

A
B
C

Particulars
Yes
No
Not sure
Total

No. of respondents
45
3
2
50

Interpretation:


The employees deciding on an investment opportunity, risk consideration is
always vital.



Majority of absolute response is given to option A.

41

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

A
B
C

Particulars
Yes
No
Not sure
Total

No. of respondents
13
34
3
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 .

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

42

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

Particulars
Yes
No
Not sure
Total

A
B
C

No. of respondents
12
18
21
50

Interpretation:




The capital budgeting data given in the statement should be rearranged 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.

43

4. Is implementation and control to achieve the target is always the way the
think tanks has thought of in the first place?

Particulars
Yes
No
Not sure
Total

A
B
C

No. of respondents
15
14
21
50

Interpretation:



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.

44

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
Yes
No
Not sure
Total

A
B
C

No. of respondents
18
12
20
50

Interpretation:


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

45



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
Yes
No
Not sure
Total

A
B
C

No. of respondents
14
15
21
50

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.
46



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.

A
B
C

Particulars
Yes
No
Not sure
Total

Interpretation:

47

No. of respondents
32
11
7
50



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?

A
B
C

Particulars
Yes
No
Not sure
Total

Interpretation:
48

No. of respondents
29
10
11
50



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?

A
B
C

Particulars
Yes
No
Not sure
Total

49

No. of respondents
12
18
20
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.

10. Has rewards been beneficial and shown to have increase in value due to
helpful and encouraging movement in the concerned variables?

A
B
C

Particulars
Yes
No
Not sure
Total

50

No. of respondents
12
23
15
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.

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?

A
B
C

Particulars
Agree
Disagree
Not satisfied
Total

51

No. of respondents
20
14
16
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.

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

A
B
C

Particulars
Agree
Disagree
Not satisfied
Total

52

No. of respondents
16
23
11
50

Interpretation:


The above graph clearly suggest that employees-2 and emplooyes-3 are
not satisfied with the need for the 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).

A
B
C

Particulars
Agree
Disagree
Not satisfied
Total

53

No. of respondents
23
16
11
50

Interpretation:


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

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

A
B
C

Particulars
Agree
Disagree
Not satisfied
Total

54

No. of respondents
14
20
16
50

Interpretation:




There is a bit criticism about the
the capital budgeting simulation major goals are always to increase 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 other anal
ysis because it allows and introduces uncertainty for many variables to be
considered?

A
B
C

Particulars
Agree
Disagree
Not satisfied
Total

55

No. of respondents
16
17
17
50

Interpretation:




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?

A
B
C

Particulars
Agree
Disagree
Not satisfied
Total

56

No. of respondents
36
12
2
50

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?

A
B
C

Particulars
Agree
Disagree
Not satisfied
Total

57

No. of respondents
9
33
8
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.

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

A
B
C

Particulars
Agree
Disagree
Not satisfied
Total

58

No. of respondents
13
11
26
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.

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

A
B
C

Particulars
Agree
Disagree
Not satisfied
Total

Interpretation:
59

No. of respondents
15
23
12
50



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

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

A
B
C

Particulars
Agree
Disagree
Not satisfied
Total

Interpretation:
60

No. of respondents
29
11
10
50





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.

CHAPTER – V
FINDINGS
&
SUGGESTIONS

61

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 reorganized because as it is one of the procedure for preparing the financial
statement.
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

62

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
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.

63

ABBREVIATIONS

PI

à

Profitability index.

CB

à

Capital budgeting

CF’S

à

Cash flows.

CCF’S

à

Cumulative cash flows.

EAT

à

Earnings after tax.

EBIT

à

Earnings before investment and tax.

CFAT

à

Cash flows after tax.

PV’S

à

Present value of cash flows.

PVIF

à

Present value of inflows.

PBP

à

Pay back period.

ARR

à

Average rate return.

NPV

à

Net present value.

IRR

à

Internal rate return.

B/C

à

Benefit cost ratio.

Bibliography
Reference Text Books
 Prasanna Chandra, 2006, Financial Management Theory and Practice,
6th Edition, Tata McGraw Hill.
 I.M. Pandey : Financial Management, Vikas Publishers.
 Brigham, E.F. and Ehrhardt.M.C., 2006, Financial Management Theory and
Practice, 10th 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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