Study On Capital Budgeting.docx

A STUDY ON CAPITAL BUDGETING WITH REFERENCE TO CHOWEL INDIA (P) LTD ABSTRACT The key function of the financial management is the selection of the most profitable assortment of capital investment and it is the most important area of decision making of the financial manger because any action taken by the manger in this area affects the working and the profitability of the firm for many years to come. The objective of the research is to study on the company's forecasting decision through Capital budgeting technique through which the importance of capital budgeting in an organization and to analyze the capital budgeting process to be adopted by the company in order to take better investment decisions for various business projects. Further, it caters information about cash inflows and outflows of various years. Thus the comparison provides clear idea about investments and return on the same which can be helpful for the years to come. The analyses have been done by the data collected from income and expenditure statements and separate investment report. Capital budgeting techniques like Net Present Value method, Rate of Return method and Payback Period method are used to analyze the collected data. Some other forecasting tools like standard deviation, Correlation analysis and Trend analysis are used in this study

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TABLE OF CONTENTS

CHAPTER

CONTENTS

NO. I

INTRODUCTION

II

COMPANY PROFILE 2.1 Industry Profile 2.2 Company Profile

III

REVIEW OF LITERATURE

IV

RESEARCH METHODOLOGY 4.1 Statement of the problem 4.2 Need for the study 4.3 Objectives of the study 4.4 Scope of the study 4.5 Research Design 4.6 Limitation of the study 4.7 Methods used for the Study

V

DATA ANALYSIS AND INTERPRETATION

VI

FINDINGS

VII

SUGGESTIONS

VIII

CONCLUSION

IX

ANNEXURE BIBLIOGRAPHY BALANCESHEET

2

PAGE NO.

TABLE CONTENTS

SLNO

CONTENTS

1

PAY BACK PERIOD

2

ACCOUNTING RATE OF RETURN (ARR)

PAGE NO.

3 NET PRESENT VALUE PROFITABILITY INDEX

4

STANDARD DEVIATION CALCULATION OF 5

PROFIT AFTER TAX STANDARD DEVIATION CALCULATION OF

6

INVESTMENT STANDARD

7

DEVIATION

CALCULATION

OF

REVENUE CORRELATION CALCULATION OF REVENUE

8

AND EBIT CORRELATION CALCULATION OF SALES AND

9 PAT CORRELATION CALCULATION OF REVENUE 10

AND EBIT MEAN AND STANDARD DEVIATION FOR

11 EXPENSES 12

TREND ANALYSIS -PAT

13

TREND ANALYSIS - EBIT

3

CHART CONTENTS

SLNO

CONTENTS

1

PAY BACK PERIOD

2

ACCOUNTING RATE OF RETURN (ARR)

PAGE NO.

STANDARD DEVIATION CALCULATION OF 3

PROFIT AFTER TAX STANDARD DEVIATION CALCULATION OF

4

INVESTMENT STANDARD

5

DEVIATION

CALCULATION

OF

REVENUE CORRELATION CALCULATION OF REVENUE

6

AND EBIT CORRELATION CALCULATION OF SALES AND

7 PAT CORRELATION CALCULATION OF REVENUE 8

AND EBIT MEAN AND STANDARD DEVIATION FOR

9 EXPENSES 10

TREND ANALYSIS -PAT

11

TREND ANALYSIS - EBIT

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CHAPTER I INTRODUCTION TO THE STUDY In today's rapidly evolving markets, the need for companies to react swiftly to the changing environment is essential. Reporting financial numbers alone is no longer acceptable. Reports should also include analyses and forecasts. Optimally, they should lead the way forward to achieve pre-defined goals. Purpose for reporting is to communicate messages to specific audiences, but more importantly, the performance reports need to induce change and mark the start of corrective actions to ensure targets are achieved. Business analysis and predictive modelling solutions help companies to foresee the future, and thus support today's business decisions, closing the performance management cycle.

Making the right decision in such an atmosphere is easier when there is a clear view on what the future will bring. The future, however, may be predicted only from the moment when a good understanding of the past has been achieved; fast-changing business conditions call for agile planning, budgeting and forecasting.

Corporate Performance Management (CPM) is a set of processes that helps organizations optimize their business performance. Keyrus offers a framework for organizing, automating and analyzing business methodologies, metrics, processes and systems that drive business performance. CPM's business planning & control abilities help the company take corrective action in time to meet bottom line results. It is furthermore useful in risk analysis and predicting outcomes of scenarios and coming up with a plan to overcome potential problems. Forecasting In today's fast moving and uncertain markets, forecasting is becoming the single most important management process. The ability to quickly and accurately detect changes in key external and internal variables and adjust tactics accordingly makes the leaders in the market. Effective forecasting should consider that:

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

Forecasts must integrate both the external and internal drivers of the business as

well as the financial results. 

Absolute forecast accuracy is less important than insight about how current

decisions and future events will interact to shape performance. 

The number is less important than the assumptions and variables that support it -

those are the things that should be tracked to provide advance warning of opportunities or threats. 

Detail does not equal accuracy with respect to forecasts -desire for detail should

match predictive capability. Best practice demonstrates that annual budgets may serve as a basis for estimating the required resources to deliver income and cost estimates within manageable ranges. These budgets are updated every quarter for the quarter ahead to reflect the best current information. The quarterly budgets are then further supported by 12-month rolling forecasts, which allow adapting resource allocations to volatility in the market.

Capital Budgeting Capital budgeting is budgeting for the capital projects. It involves ascertaining or estimating cash inflows and outflows, matching the cash inflows with the outflows appropriately and evaluation of the desirability of the project. Capital budgeting is concerned with the allocation of the firms’ scarce financial resources among the available market opportunities. The consideration of investment opportunities involves the comparison of the expected future streams of earnings from a project, with the immediate and subsequent streams of expenditures. Facing with limited sources of capital, management of any firm should carefully decide whether a particular project is economically acceptable. In the case of more than one project, management must identify a project that will contribute more profits and more value to the firm. The project work entitled “A study on capital budgeting with special reference to Bimetal Bearing Limited”, Coimbatore, aims to analyze the capital budgeting process to be adopted by the company in order to take better investment decisions for various business projects.

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Capital Budgeting Process 

Identification of potential investment opportunities



Preliminary screening



Feasibility study.



Implementation.



Performance review.

a) Identification of Potential Investment Opportunities Identification of appropriate investment opportunities is a complicated exercise primarily because of the innumerable opportunities available to a promoter. To identify such investment opportunities that are prima facie feasible and promising, the promoter has to 

Scan the various investing opportunities that can throw-up promising investment opportunities.



Understand the governmental regulatory framework and policies that have a bearing on the different investments.



Appraise the potential investment in relation to his organizations’ strengths and weakness.

b) Preliminary Screening The list of the promising investment opportunities identified from various sources is first subjected to an analysis within the governmental regulatory framework to obtain a set of feasible investment opportunities that merit further considerations. Since it will be a tedious task to undertake a detailed appraisal of each of these opportunities the list has to be further narrowed down by evaluating the investments against certain specific criteria and selecting only those investments that are prima facie desirable. The criteria that are typically applied for the preliminary evaluation are 

Compatibility with the promoters’ strengths.



Compatibility with governmental priorities



Availability of raw materials and utilities



Size of the potential markets. 7



Reasonableness of cost.



Risk inherent in the project.

c) Feasibility study Once a project opportunity is conceived and it is considered acceptable after preliminary screening, a detailed feasibility study has to be undertaken covering all marketing, technical financial, and economic aspects of the project. A suitable capital budgeting technique should be followed. The study should also concentrate on Estimating market size and demand, Product and manufacturing process, Risk and return, Evaluating from the view point of society. The study in the form of detailed project report will contain fairly specific estimates of project costs, means of financial schedules of implementation, estimates of profitability based on projected sales and production costs, estimates of cost and benefit streams in terms of cash flows, debt servicing capability of the project and social profitability. The ultimate decision whether to go in for the project or not and how to finance it is undertaken after this study which discloses whether the project is technically feasible, economically viable and financially sound. d) Implementation The implementation of a project that is translating the investment proposal into a concrete project is a highly complicated, time consuming, tension fraught and risky affair. The various stages of implementation are: 

Preparation of blue prints and designs for project and plant engineering, selection of machines and equipment.



Negotiating for project finance with various financial institutions, entering into technical knowhow agreements and if necessary, entering into contracts for construction of buildings, supply of machinery, marketing of the company’s products etc.



Actual construction of buildings and other civil works, erection and installation of machinery and equipment.



Training of engineers, technicians, workers



Commissioning of plant and trial run.

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e) Performance Review Once the project has been implemented, the trial run is successful, and commercial production started, a review of the actual performance with the performance projected in the feasibility study is required. This is an integral and vital part of project management because, it throws light on how realistic were the assumptions underlying the project and it is a valuable tool for decision-making in future. Capital Budgeting • Capital Budgeting is a project selection exercise performed by the business enterprise. • Capital budgeting uses the concept of present value to select the projects. • Capital budgeting uses tools such as payback period, net present value, internal rate of return, profitability index to select projects.

Capital Budgeting Tools • Payback Period • Accounting Rate of Return • Net Present Value • Internal Rate of Return • Profitability Index

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CHAPTER II INDUSTRY PROFILE Welding is a precise, reliable, cost-effective, and high-tech method for joining materials in manufacturing industries. In fact, no other technique is so widely used by manufacturers, in India, to join metals and alloys efficiently to add value to their products. Most of the familiar objects in modern society, right from buildings and bridges, to vehicles and medical devices, could not be made without the use of welding. Welding today is applied to a wide variety of materials and products, using such advanced technologies as lasers and plasma arcs. The future of welding holds even greater promise as methods are devised for joining dissimilar and non-metallic materials, and for creating products of innovative shapes and designs. Welding operation is most critical operation of any manufacturing process, and quality of welding has direct impact on quality of final product. Joining technology is an integral part of the manufacturing process and effort has been spent to develop and demonstrate the suitability of various processes for application into both design and structural fabrication. Welding is the core of modern technology and it has gone through a complete evolution today, following the utmost precedence that machines have garnered in our lives. There is a rapid development in this industry and new methods are being discovered and added day by day. Welding is an ever growing discipline which presents challenges and work opportunities for new generations of engineers. In India, welding contributes significantly to the GDP in several ways, such as welding intensive industries, auxiliary products, complementary goods, employment, and user industries. The Indian welding industry was dominated by low technology and very rare technological innovation. However, in recent years, the demand of automatic and semi automatic welding production systems are rising. Simultaneously, low budgets and recession have marked the ongoing popularity of manual, economical techniques. Increased FDI equity inflow in India has contributed to the rise in projects in automotive, offshore activities, oil and gas sector, ship building and heavy machinery industries. Many foreign automobile companies have set up their manufacturing units in India. This has positively affected the rise of consumables and welding equipment. However, economic crisis has impacted the flow of FDI in India which may result in decline in demand of welding equipment over the short period. There has been an overall growth of 10

about 10% in steel industry in India. The rising demand of steel has promoted the use of modern, unique, uses of steel, increasing the demand of welding equipment. In India, welding contributes significantly to the GDP in several ways, such as welding intensive industries, auxiliary products, complementary goods, employment, and user industries. The Indian welding industry was dominated by low technology and very rare technological innovation. However, in recent years, the demand of automatic and semi automatic welding production systems are rising. Simultaneously, low budgets and recession have marked the ongoing popularity of manual, economical techniques. Increased FDI equity inflow in India has contributed to the rise in projects in automotive, offshore activities, oil and gas sector, ship building and heavy machinery industries. Many foreign automobile companies have set up their manufacturing units in India. This has positively affected the rise of consumables and welding equipment. However, economic crisis has impacted the flow of FDI in India which may result in decline in demand of welding equipment over the short period. One of the big challenges faced by the local manufacturers of equipment in India is the considerable import of welding equipment. The increased imports has negatively impacted the market share of local participant in various industries such as shipbuilding, automotive and transportation and white appliances. Another challenge faced by welding electrode plant is the unorganized sector that presently occupies nearly 50-55% of the market. Lack of standard specification and tedious approval process is resulting in the growth of unorganised sector. Indian welding consumables and equipment manufacturers need to produce high quality and unique goods in order to stay competitive in Indian and international markets. With increasing competition and lower profit margins, manufacturers need to improve their service, performance and delivery. CUSTOMER’S PERCEPTION & CHALLENGES Lack of knowledge of end users Due to lack of knowledge of its application and cost economies, to a large extent, higher productivity welding consumables like CO2 continuous welding wires and flux cored wires fail to find higher demand. In view of this it is pertinent to start vigorous marketing efforts by existing leading manufacturers of consumables and equipment to educate the users. 11

No technologies for low installed capacities Majority of organised sector units have quite low installed capacities to enable them to use modern machinery set up like computerised batching plant, X-ray florescent tester, etc. The welding consumable manufacturers should arrange these technologies and try to adopt it for lower capacity plants if possible Lack of testing facilities Testing facilities and quality assurance systems are inadequate in India. Approval of inspection agencies, Indian and foreign, is for limited specific types of consumables. Quality and reliability of other varieties are dependent on Quality Assurance Systems of the manufacturer. The manufacturers need to be exposed to international practices in Quality Assurance Systems like ISO 9000, which are desirable, in order to face international competition. Third party labs Lack of R&D R & D effort in India for welding electrodes is fragmented among few leading manufacturers and WRI, Tiruchy. Very frequently research effort is being spent on already developed products. Majority of the manufacturers cannot offer to carry out research on their own. India’s working-age population will rise by 12.5 crore over the coming decade, and by a further 10.3 crore over the following decade. It is almost a cliché to say India is sitting on a demographic dividend. That is, with its growing young workforce, it can look forward to decades of high productivity, economic growth and upward social mobility. By 2022, it is estimated that unless action is taken, there will be a gap of 10.3 crore skilled labourers in the infrastructure sector, 3.5 crore in auto and 1.3 crore in healthcare, to name a few. Indian government has given a major impetus to skilling over the last few years. MARKET LANDSCAPE – CONSUMABLES  Fragmented industry with 50% being controlled by unorganised players.  Organised market is mainly controlled by established players like ESAB India Ltd., Ador Welding Ltd., D&H Welding Electrodes India Ltd., EWAC Alloys Ltd., etc.

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 Robust outlook of the infrastructure sector , welding consumables market is expected to grow at a CAGR 10-11% over next five years.  Continuous electrodes would witness higher growth compared to Manual Electrodes. MARKET LANDSCAPE – EQUIPMENT  Organised Market accounts for 40 - 45% while Unorganised accounts balance Market  Companies such as ESAB India Ltd., Ador Welding Ltd., Linclon Electric Company India Pvt. Ltd., Kemppi India Pvt. Ltd., Miraj Electrical & Mechanical Co. Pvt. Ltd & ITW India Pvt Ltd. (Miller) are the major established organised players  Imports constitute significant portion of organised market  The welding equipment industry is expected to grow at a CAGR of 6-7% over the next five years. MARKET SEGMENTATION Heavy Engineering  Witnessed a remarkable growth over the last few years driven by increased investments in infrastructure and industrial production  The capital goods & engineering turnover in India is expected to reach US$ 125.4 Bn by FY17  The FDI inflows in the sector during April 2000 to March 2016 stood at around US$ 3,068.1 million Automotive  6th largest producer in the world with average annual production 24 Million vehicles  By 2026, India is expected to be the third largest automotive market by volume in the world  Global OEM’s ramping up investments in India to cater to growing domestic demand

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Railways  4th largest rail freight carrier in the world and network spans more than 66030 kms. making it the world’s 3rd largest rail network  100% FDI has been allowed  Indian railways envisages a prospective investment of USD 130.76 billion in the next 5 years Construction  USD 1 trillion investment projected for infrastructure sector  USD 650 Billion investments in urban infrastructure estimated over next 20 years  Government investment to develop 100 Smart Cities and 500 AMRUT Cities Shipbuilding  One of the major contributor to economy of country  With over 40% of India’s fleet of ships in the 20 plus age group, which holds tremendous opportunity for India’s shipbuilding and ship-repair industry

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COMPANY PROFILE Chowel was established in 1976 by manufacturing welding equipments and built a unique position in Korea. Chowel understood the necessity of welding equipments and started production as this equipment was an important factor to develop the necessary infrastructures like Shipyards, Heavy Industries like Defence, Construction, and Aviation etc. Chowel’s mission is to develop products which have the most advanced technology base, proper quality management system and to produce highly efficient machines in different kinds of welding viz-a-viz ARC / TIG / MIG / MAG / CO2. Chowel is not only developing the equipment but also the service provider of total welding solution and it is producing various kinds of Resistance Welding Machines, controllers which have the worldwide quality and have the greatest market share in the Automobile Industry and so on. Also, CHOWEL is a global player accomplishing specialization of manufacturer of Special Purpose Machine and Automatic Welding Machine line with advanced technology by contributing realization of factory automation. Chowel is committed to customer delight by achieving the customer needs like Quality, Cost, Delivery and better service provider up to the customer satisfaction level. Chowel is leading the way in the Welding Industry. Chowel is a focused supplier of Resistance Welding Products, an Jig & Fixture lines to the Automotive companies. We excel in providing customized Resistance Welding products based on RWMA Standards and Jig & Fixture lines. We have one of the largest manufacturing and technological centers in the world. Thru the years we have rapidly acquired a reputation as an innovator for precision engineered products sold to the automotive markets in Asia, Europe and the United States. Our commitment does not stop with technology. We believe that providing service and support with our product is essential in giving our customers the total confidence and peace of mind that should accompany a custom - engineered product. PRODUCTS 

RESISTANCE WELDING MACHINES



AUTOMATIC WELDING SYSTEMS



ARC WELDING MACHINES



SPOT WELDING MACHINES



SEMI AUTO WELDING MACHINES

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RESISTANCE WELDING MACHINES 

Robot Welding Transformer



Portable Spot Welding Machine (Integrated Type)



Air Spot & Projection Welding Machine



Multiple Welding Transformer



Welding Timer & Contactor



Rocker Arm Spot Welding Machine



Weld Monitor

AUTOMATIC WELDING SYSTEMS 

Axle Casing Co2 Robot Welding Line



Co2 Automatic Welding System (20 - Torch)



Co2 Automatic Welding System (2 - Torch)



Multi Spot Automatic Welding Machine (Multi - 35 Point)



Condenser Projection Automatic Welding Machine (Dual - Type)



Jeep Car Chassis Frame Auto Welding Line



Hyundai Hp Body Complete Assembly Fixture Line



Suzuki YG4 Side Complete Jig Fixture Line



Multi Spot Auto Welding System (Multi - 64 Point)



Cross Member Assembly Auto Jig Welding System



Panel Assembly Jig Welding Line



Fuel Tank Assembly Auto Welding Line



Kia Front Body Assembly Auto Welding Line



Hyundai Rear Member Assembly Jig Welding Line



Rod Stopper Multi Spot Auto Welding System (Multi - 4 Point)



3-Phase Low Frequency Spot/Projection Welding System



MWO Condenser Projection Auto Welding Line

ARC WELDING MACHINES 

Thyristor Control Co2/Mag Arc Welding Machine



Inverter Co2/Mag Arc Welding Machine 16



Cableless Co2/Mag Arc Welding Machine



Inverter DC Pulse Tig Arc Welding Machine



Inverter Air Plasma Cutting Machine



Thyristor Control DC Arc Welding Machine



Submerged Arc Auto Welding Machine



Inverter DC Arc Welding Machine



Inverter DC Pulse Tig Arc Welding Machine

SPOT WELDING MACHINES 

ASPC - 75/100



ASPH - 30/50

SEMI AUTO WELDING MACHINES 

Invert CO2/MAG Semi-Auto Welding Machine

SERVICES 

ARC WELDING MACHINE ASSEMBLY LINE



PORTABLE SPOT WELDING MACHINE ASSEMBLY LINE



VACUUM DRIVE OVEN



WELDING FIXTURE INSPECTION



WELDING FIXTURE ASSEMBLY LINE

ARC WELDING MACHINE ASSEMBLY LINE This line assembles Arc welding machine (CO2, TIG, MIG, MAG and etc.) which is used widely in industry. A bundle of assembly process with high efficiency and strict quality test can satisfy all requirement of customer. PORTABLE SPOT WELDING MACHINE ASSEMBLY LINE This line produce all kind of resistance welding transformer including a portable spot welding machine which are mainly used in automobile industries.The products from this line has excellent durability, weldibility and top class quality. These assembly line consist of mass production system to meet customer's demand. 17

VACUUM DRIVE OVEN Drive-oven is a moulding equipment of welding transfomer used for every type of resistance welding system with multi-purpose. These machines can keep excellent performance by full-mould method against heat; moisture and vibration in sever working condition. WELDING FIXTURE INSPECTION The accuracy is the most important factor in automatic welding fixture of automobil industries. chowel's welding fixture inspection by precision equipment (allowable error: 5/1000mm) can keep welding machine in best quality and are contributed to customer's reliance and productivity. WELDING FIXTURE ASSEMBLY LINE This line consists of efficient assembly system to prevent troubles through the strict inspection by each process from design, manuacture to assembly.

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CHAPTER III REVIEW OF LITERATURE CONCEPTUAL REVIEW Capital as Limited Resource The foremost importance is that the capital is a limited resource which is true of any form of capital, whether it is raised through debt or equity. The firms always face the constraint of capital rationing. This may result in the selection of less profitable investment proposals if the budget allocation and utilization is the primary consideration. So the management should make a careful decision whether a particular project is economically acceptable and within the specified limits of the investments to be made during a specified period of time. In the case of more than one project, management must identify the combination of investment projects that will contribute to the value of the firm and profitability. This, in essence, is the basis of capital budgeting. In the form of either debt or equity, capital is a very limited resource. There is a limit to the volume of credit that the banking system can create in the economy. Commercial banks and other lending institutions have limited deposits from which they can lend money to individuals, corporations, and governments. In addition, the Federal Reserve System requires each bank to maintain part of its deposits as reserves. Having limited resources to lend, lending institutions are selective in extending loans to their customers. But even if a bank were to extend unlimited loans to a company, the management of that company would need to consider the impact that increasing loans would have on the overall cost of financing. In reality, any firm has limited borrowing resources that should be allocated among the best investment alternatives. One might argue that a company can issue an almost unlimited amount of common stock to raise capital. Increasing the number of share of company stock, however, will serve only to distribute the same amount of equity among a greater number of shareholders. In other words, as the number of shares of a company increases, the company ownership of the individual stockholder may proportionally decrease.

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The argument that capital is a limited resource is true of any form of capital, whether debt or equity or retained earnings, accounts payable or notes payable, and so on. Even the best known firm in an industry or a community can increase its borrowing up to a certain limit. Once this point has been reached, the firm will either be denied more credit or be charged a higher interest rate, making borrowing a less desirable way to raise capital. In capital budgeting, there are a number of different approaches that can be used to evaluate any given project, and each approach has its own distinct advantages and disadvantages.

All other things being equal, using internal rate of return (IRR) and net present value (NPV) measurements to evaluate projects often results in the same findings. However, there are a number of projects for which using IRR is not as effective as using NPV to discount cash flows. IRR's major limitation is also its greatest strength: it uses one single discount rate to evaluate every investment.

Although using one discount rate simplifies matters, there are a number of situations that cause problems for IRR. If an analyst is evaluating two projects, both of which share a common discount rate, predictable cash flows, equal risk, and a shorter time horizon, IRR will probably work. The catch is that discount rates usually change substantially over time. For example, think about using the rate of return on a T-bill in the last 20 years as a discount rate. One-year T-bills returned between 1% and 12% in the last 20 years, so clearly the discount rate is changing.

In reality, any firm has limited borrowing resources that should be allocated among the best investment alternatives. One might argue that a company can issue an almost unlimited amount of common stock to raise capital. Increasing the number of share of company stock, however, will serve only to distribute the same amount of equity among a greater number of shareholders. In other words, as the number of shares of a company increases, the company ownership of the individual stockholder may proportionally decrease.

20

The argument that capital is a limited resource is true of any form of capital, whether debt or equity or retained earnings, accounts payable or notes payable, and so on. Even the best known firm in an industry or a community can increase its borrowing up to a certain limit. Once this point has been reached, the firm will either be denied more credit or be charged a higher interest rate, making borrowing a less desirable way to raise capital. Research comprises defining and redefining problems, formulated hypothesis or suggested solution, collections, organizing and evaluating data, making deductions and searching for conclusions and at last carefully testing the conclusions to determine whether they fit the formulating hypothesis. Payback Period Payback period is the time duration required to recoup the investment committed to a project. Business enterprises following payback period use "stipulated payback period", which acts as a standard for screening the project. Computation of Payback Period When the cash inflows are uniform the formula for payback period is cash outflow divided by annual cash inflow Computation of Payback Period When the cash inflows are uneven, the cumulative cash inflows are to be arrived at and then the payback period has to be calculated through interpolation. • Here payback period is the time when cumulative cash inflows are equal to the outflows. Payback Reciprocal Rate The payback period is stated in terms of years. This can be stated in terms of percentage also. This is the payback reciprocal rate.

Reciprocal of payback period = [1/payback period] x 100

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Decision Rules A. Capital Rationing Situation • Select the projects which have payback periods lower than or equivalent to the stipulated payback period. • Arrange these selected projects in increasing order of their respective payback periods. • Select those projects from the top of the list till the capital Budget are exhausted.

Decision Rules C. Mutually Exclusive Projects In the case of two mutually exclusive projects, the one with a lower payback period is accepted, when the respective payback periods are less than or equivalent to the stipulated payback period. Determination of Stipulated Payback Period •

Stipulated payback period, broadly, depends on the nature of the business/industry with respect to the product, technology used and speed at which technological changes occur, rate of product obsolescence etc.

•

Stipulated payback period is, thus, determined by the management's capacity to evaluate the environment vis-a-vis the enterprise's products, markets and distribution channels and identify the ideal-business design and specify the time target.

Advantages of Payback Period •

It is easy to understand and apply. The concept of recovery is familiar to every decision-maker. •

Business enterprises facing uncertainty - both of product and technology - will benefit by the use of payback period method since the stress in this technique is on early recovery of investment. So enterprises facing technological

22

obsolescence and product obsolescence - as in electronics/computer industry prefer payback period method. •

Liquidity requirement requires earlier cash flows. Hence, enterprises having high liquidity requirement prefer this tool since it involves minimal waiting time for recovery of cash outflows as the emphasis is on early recoupment of investment.

Disadvantages of Payback Period •

The time value of money is ignored. For example, in the case of project

•

A Rs.500 received at the end of 2nd and 3rd years is given same weightage. Broadly a rupee received in the first year and during any other year within the payback period is given same weight. But it is common knowledge that a rupee received today has higher value than a rupee to be received in future.

•

But this drawback can be set right by using the discounted payback period method. The discounted payback period method looks at recovery of initial investment after considering the time value of inflows.

Accounting Rate of Return Accounting rate of return is the rate arrived at by expressing the average annual net profit (after tax) as given in the income statement as a percentage of the total investment or average investment. The accounting rate of return is based on accounting profits. Accounting profits are different from the cash flows from a project and hence, in many instances, accounting rate of return might not be used as a project evaluation decision. Accounting rate of return does find a place in business decision making when the returns expected are accounting profits and not merely the cash flows.

Computation of Accounting Rate of Return •

The accounting rate of return using total investment. Or Sometimes average rate

of return is calculated by using the following

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Formula: Where average investment = total investment divided by 2 Decision Rules A. Capital Rationing Situation •

Select the projects whose rates of return are higher than the cut-off rate

•

Arrange them in the declining order of their rate of return and

•

Select projects starting from the top of the list till the capital available is

exhausted.

B. No Capital Rationing Situation Select all projects whose rate of return are higher than the cut-off rate.

C. Mutually Exclusive Projects Select the one that offers highest rate of return. Accounting Rate Of Return – Advantages •

It Is Easy To Calculate.

•

The Percentage Return Is More Familiar To The Executives.

Accounting Rate of Return – Disadvantages •

The definition of cash inflows is erroneous; it takes into account profit after tax only. It, therefore, fails to present the true return.

•

Definition of investment is ambiguous and fluctuating. The decision could be biased towards a specific project, could use average investment to double the rate of return and thereby multiply the chances of its acceptances.

Net Present Value (NPV) Net present value of an investment/project is the difference between present value of cash inflows and cash outflows. The present values of cash flows are obtained at a discount rate equivalent to the cost of capital. 24

Computation Of Net Present Value (NPV) • Let 'b' be the cash outflow in period 't' where t = 0,1,2,....n • 'B' be the present value of cash outflows • 'c' be the cash inflow in period 't'=0,1,2,........n • 'C' be the present value of cash inflows • 'K' be the cost of capital

Computation Of Net Present Value (NPV) • When the cash outflow is required for only one year i.e., in the present year, then the Net present value is calculated as follows: • "I" is the initial investment (cash outflow) required by the project.

Decision Rules

A. "Capital Rationing" situation

Select projects whose NPV is positive or equivalent to zero. Arrange in the descending order of NPVs. Select Projects starting from the list till the capital budget allows.

B. "No capital Rationing" Situation

Select every project whose NPV >= 0 C. Mutually Exclusive Projects

Select the one with a higher NPV. Net Present Value (NPV) – Example 25

Assuming that the cost of capital is 6% for a project involving a lumpsum cash outflow of Rs.8,200 and cash inflow of Rs.2,000 per annum for 5 years, the Net Present Value calculations are as follows: a) Present value of cash outflows Rs.8200 Ins of Technology Madras Indian Institute of b) Present value of cash inflows

Susan F. Haka, Michigan State University, USA (2007) has studied “Capital budgeting and investment appraisal” and historical appraisal of the development of current capital budgeting practices and reviews capital budgeting academic research. He has explained modern capital budgeting and its processes. In the late eighteenth and early nineteenth centuries, the industrial revolution was instrumental in creating demand for capital budgeting processes and techniques. Academic research, beginning in the late 1940s and early 1950s, is categorized by its focus on appraisal techniques, individual decision-maker effects, organizational issues, and environmental factors. Experimental, analytical, agency-based, survey-based, and case-based research is reviewed. His study concluded with a compilation of issues identified by academic research and a set of questions that have not yet been addressed. Davina F. Jacobs (2010) is a senior economist in the Fiscal Affairs Department has done a research on capital budgeting practices. His study argues that the key challenge in government budgeting is to define an appropriate balance between current and capital expenditures. Budgeting for government capital investment also remains not well integrated into the formal budget preparation process in many countries. Hence, the research has been prepared with an aim to provide an overview of past and current budgeting practices for public investment. The study will also provide a comparison between the budget practices between low-income countries and developed countries and make a series of recommendations for how to ensure efficient integration of capital planning and budget management in low-income countries. Niels Hermes, Peter Smid and Lu Yao (2006) Faculty of Management and Organization, University of Groningen and Faculty of Economics, University of Groningen, The Netherlands, have made a study on “Capital budgeting practices: A comparative study of the Netherlands and China”. The paper compares the use of capital budgeting techniques of Dutch and Chinese firms, using data obtained from a survey 26

among 250 Dutch and 300 Chinese companies. It aims to analyze the use of capital budgeting techniques by companies in both countries from a comparative perspective to see whether economic development matters. The empirical analysis provides evidence that Dutch Chief Financial Officers on average use more sophisticated capital budgeting techniques than Chinese CFOs do. At the same, however, the result suggests that the difference between Dutch and Chinese firms is smaller than expected based upon the differences in the level of economic development between both countries, at least with respect to the use of methods of estimating the cost of capital and the use of CAPM as the method of estimating the cost of equity. Forecasting for Environmental Decision Making - J. Scott Armstrong

Those making environmental decisions must not only characterize the present, they must also forecast the future. They must do so for at least two reasons. First, if a no-action alternative is pursued, they must consider whether current trends will be favorable or unfavorable in the future. Second, if an intervention is pursued instead, they must evaluate both its probable success given future trends and its impacts on the human and natural environment. Forecasting, by which I mean explicit processes for determining what is likely to happen in the future, can help address each of these areas. Certain characteristics affect the selection and use of forecasting methods. First, the concerns of environmental forecasting are often long term, which means that large changes are likely. Second, environmental trends sometimes interact with one another and lead to new concerns. And third. Interventions can also lead to unintended changes. This chapter discusses forecasting methods that are relevant to environmental decision making, suggests when they are useful, describes evidence on the efficacy of each method, and provides references so readers can get details about the methods. A key consideration is whether or not the forecasting methods are designed to assess the outcomes of interventions. The chapter then examines issues related to presenting forecasts effectively. Finally, it describes an audit procedure for determining whether the most appropriate forecasting tools are being used. A Framework for Forecasting Figure 1 shows possible forecasting methods and how they relate to one another. The figure is designed to represent all approaches to forecasting. The methods are organized according to the types of knowledge. As one moves down the chart, the integration of 27

statistical and judgmental methods increases. Judgmental methods are split into those involving one’s own behavior in given situations (intentions or role-playing) and expert opinions. The intentions method asks people how they would act in a given situation. Role-playing examines how people act in a situation where their actions arc influenced by a role. Experts can be asked to make predictions about how others will act in given situations. They can also identify analogous situations, and forecasts can be based on extrapolations from those situations. Intentions and expert opinions can be quantified by relating their “predictions” to various causal factors with, for example, regression analysis. Expectations about one’s own behavior are referred to as conjoint analysis (e.g., given alternatives having a bundle of features that have been varied according to an experimental plan). Expert opinions about the behavior of others (which can also be based on an experimental design, but are often based on actual data) are referred to as judgmental bootstrapping JOURNALS A Review of the Literature on Capital Budgeting and Investment Appraisal: Past, Present, and Future Musings Abstract This chapter provides a historical appraisal of the development of current capital budgeting practices and reviews capital budgeting academic research. In the late eighteenth and early nineteenth centuries, the industrial revolution was instrumental in creating demand for capital budgeting processes and techniques. Academic research, beginning in the late 1940s and early 1950s, is categorized by its focus on appraisal techniques, individual decision-maker effects, organizational issues, and environmental factors. Experimental, analytical, agency-based, survey-based, and case-based research is reviewed. The chapter concludes with a compilation of issues identified by academic research and a set of questions that have not yet been addressed. 2. Capital Budgeting Theory and Practice: A Review and Agenda for Future Research Applied Economics and Finance Vol. 3, No. 2; May 2017

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Lingesiya Kengatharan1 1Department of Financial Management, University of Jaffna, Sri Lanka The main purpose of this research was to delineate unearth lacunae in the extant capital budgeting theory and practice during the last two decades and ipso facto become springboard for future scholarships. Web of science search and iCat search were used to locate research papers published during the last twenty years. Four criteria have been applied in selection of research papers: be an empirical study, published in English language, appeared in peer reviewed journal and full text research papers. These papers were collected from multiple databases including OneFile (GALE), SciVerse ScienceDirect (Elsevier), Informa - Taylor & Francis (CrossRef), Wiley (CrossRef), Business (JSTOR), Arts & Sciences (JSTOR), Proquest ,MEDLINE (NLM), and Wiley Online Library. Search parameters covered capital budgeting, capital budgeting decision, capital budgeting theory, capital budgeting practices, capital budgeting methods, capital budgeting models, capital budgeting tools, capital budgeting techniques, capital budgeting process and investment decision. Thematic text analyses have been explored to analyses them. Recent studies lent credence on the use of more sophisticated capital budgeting techniques along with many capital budgeting tools for incorporating risk. Notwithstanding, it drew a distinction between developed and developing countries. Moreover, factors impinging on choice of capital budgeting practice were identified, and bereft of behavioral finance and event study methodological approach were highlighted. More extensive studies are imperative to build robust knowledge of capital budgeting theory and practice in the chaotic environment. This research was well thought out in its design and contributed by stating the known and unknown arena of capital budgeting during the last two decades. This scholarship facilitates to academics, practitioners, policy makers, and stakeholders of the company. Recommendation Many research scholars criticized that many researches on capital budgeting were opttesting the methods of capital budgeting and its practices. They were purely finding that actual what methods were in practice. However, in practice, there are enormous factors affecting the capital budgeting practice and it has ―country effect‖ too. In line up with this argument, this research was well thought out in its design and become springboard for future research. This study contributed by stating the known and unknown arena of 29

capital budgeting during the last two decades. In the cutting edge technology world, the way of doing things have been changed and challenging. For example, decision support system become more prevent in making decision and more advanced technological sphere penetrates into assessing capital budgeting practices than ever before. Thus, this rese THEORIES Stewardship Theory Psaros (2009) states that similar to stakeholder theory, the views of stewardship theory differ from agency theory. For example, stewardship theory does not support the view that individuals are utility maximisers and also does not support the assertion that all business decisions are based on economic considerations only. It asserts that some business decisions are based on non-economic returns such as those related to social status in the community. Donaldson and Davis (1991) add that some individuals are motivated in their decisions by an intrinsic satisfaction in undertaking a task that challenges them or/and achieving trust from peers and supervisors. The core of stewardship theory is about how individuals rank their social needs in a community, such as being accepted and valued by their peers and supervisors. Similar to executive remuneration or compensation, ‘these needs help align the individual’s interests with their organisation’s goals’. If the organisation maintains a good relationship with the stakeholders, including the local community, individuals would want to make decisions that identify them with the organisation because that would help promote their social status in the community. If the individuals rank social status high on their list of needs, then it would help them perform harder to achieve the organisation’s goal. Psaros (2009) asserts that stewardship theory states that managers do not start out with the intention of maximising their own utility at the expense of the interests of other stakeholders. In support of stewardship theory, Kiel and Nicholson (2003, p. 190) state that ‘underlying this rationale is the assertion that since managers are naturally trustworthy there will be no major agency costs’. The acceptance of stewardship theory has adverse implications on one theory that has become widely accepted, that having the chair of the board independent of the CEO gives the organisation legitimacy for claiming to have an efficient or sound financial management in place and hence improving the return on equity (ROE) to the shareholders. However, Kiel and Nicholson (2003) state that their findings support Boyd’s (1995) conclusion that the issue of CEO duality is explained better if the size and complexity of the organisations are considered. In highly

30

entrepreneurial firms, for example in the humble beginnings of Microsoft and internet companies the chairman-CEO duality may send a positive message to the market 30 2 Literature Review because it supports stewardship theory and enhances social status by minimizing the agency cost. It can also lead to the organisation being seen as having a clear leadership which may lead to better corporate performance. Resource Dependent Theory In addition to the studies investigating the relationship between board composition and firm performance, sociologists have focussed on the relationship between the firm’s social network and the firm’s performance. These studies formed the resource dependency theory. The resource dependency theory explains how the firm’s success is linked to its ability to control its external resources (Psaros 2009). The board of a company plays several vital roles, such as providing advice to management on operational and strategic issues and monitoring management. Besides these, it is also an important link between the organisation and the external resources which an organisation needs to maximise its performance (Hillman et al. 2000; Pfeffer and Salancik 2003). The more control an organization has on external resources, the lower the costs of resources and the higher the chances that the firm will minimise agency costs. The firm may then maximise the use of resources to maximise the value of the firm. It will also help in making strategic plans more workable and mitigate agency costs. If the success of the organization depends on external resources, then having its members on the board of directors of the resources company who can help to establish a relationship between the organisation and the external resources improves the financial efficiency and management of the organisation, reduces agency costs and hence maximises the value of the firm. It also reduces uncertainty of accessing the resources, and external dependencies (Psaros 2009). Kiel and Nicholson (2003) argue that agency theory, stewardship theory and resource dependence theory all play a vital role in determining what should be appropriate corporate governance policies and structures.

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CHAPTER IV RESEARCH METHODOLOGY OBJECTIVES Primary Objective To study the performance of capital budgeting and to evaluate the data of capital budgeting techniques in Chowel India (P) Ltd. Secondary Objective 

To study and ensure planning for future by setting up various budgets



To know the budgeting operation in the company



To analyze the elimination of wastages and increase in profitability.



The analyse the correlation between Revenue and Sales



To find out the standard deviation for Total assets

Evaluation of past projects and investment may cater valuable information to be adapted in the future. Thus, planning for forthcoming days becomes easy. A clear view of works done by different departments in the organization can be observed.

32

Need for the study Companies are in a situation to invest a huge amount of money in order to take their firm to a greater extends of growth. In this case, they have to take a sound investment decision among various alternatives. If the investment decision taken up on a project is not worth undertaking, the amount invested on a particular project would not generate profit or value rather it creates loss to the firm. Hence, to increase wealth and profit of the firm or to avoid loss, a sound procedure is needed. Thus, the need of capital budgeting arises. An efficient allocation of capital is the most important finance function in the modern times. It involves decisions to commit the firm’s funds to the long term assets. Capital budgeting or investment decisions are of considerable importance to the firm, since they tend to determine its value by influencing its growth, profitability and risk. The process of allocating budget for fixed investment opportunities is crucial because they are generally long lived and not easily reversed once they are made. So we can say that this is a strategic asset allocation process and management needs to use capital budgeting techniques to determine which project will yield more return over a period of time.

33

Scope of the Study 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. Capital budgeting is the process of making investment decisions in capital expenditures. A capital expenditure may be defined as an expenditure the benefits of which are expected to be received over the period of time exceeding one year. The study has been undertaken to understand the significance of capital budgeting through which to analyze the performance of the capital budgeting.  The study can help the organization to take investment decision in forthcoming years  It can be used as reference  It will be helpful for fund allocation

34

Limitations of the Study 

The company’s certain information are kept secret



The period of study restricted only to ten years.



The study is based on the past records of the company.



The study concentrates only on capital budgeting of the company

The whole study focuses on different kind of capital budgeting techniques. Though these methods have sound advantages there are some computational problems and disadvantages in adapting these techniques. Though NPV method is easy to use if forecasted cash flows are known, in practice, it is quite difficult to obtain the estimates of cash flows due to uncertainty. Discount rate is also difficult in practice to precisely measure the discount rate. Further, caution needs to be applied in using the NPV method when alternative projects with unequal lives, or under funds constraint are evaluated. Ranking of investment projects as per the NPV rule is not independent of the discount rates. Likewise payback period method is not an appropriate method of measuring the profitability of an investment project as it does not consider all cash inflows yielded by the project. This method fails to consider the pattern of cash inflows. There is no rational basis for setting a maximum payback period. It is generally a subjective decision. Payback is not consistent with the objective of maximizing the market value of the firm’s shares. Share values do not depend on payback periods of investment projects.

35

Research design The research design is the conceptual structure within which research is conducted; it constitutes the blueprint for the collection, measurement and analysis of data. The research design is the arrangement o conditions for collections and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure. Descriptive Research Descriptive research determines the relationship between two or more variables. It includes surveys and fact finding enquiries of different kinds. The major purpose of descriptive research is description of the state of affairs as it exists at present. The main characteristics of this method are that the researcher has no control over the variables, he can only report for the happening. The method of research utilized in descriptive research is survey method of all kinds including comparative method and correlation method. Source of Data There are two types of data to be collected 

Primary data



Secondary data

Primary data are those which are collected afresh and for the first time and thus happen to the original in character. Secondary data, the data that are already available, it refers to the data which have already been collected and analyzed by someone else. The secondary data re collected from company profile and website. Mostly the data used for the project are secondary data.

36

Method for Analysis Payback Period Method The payback period is also called as pay off or payout period method. That represents the period in which the total investment in permanent assets payback itself. The method is based on the principle that every capital expenditure pays itself back within a certain period out of the additional earnings generated from the capital assets. Thus, it measures the period of time for the original cost of the project to be recovered from the additional earnings of the project itself. Under this method, various investments are ranked according to the length of their payback period in such a manner that the investment with a shorter payback period is preferred to the one which has longer payback period. It is exact amount of time required for a firm to recover its initial investment in a project as calculated from cash flows. The payback measures the length of time it takes a company to recover in cash its initial investment. This concept can also be explained as the length of time it takes the project to generate cash equal to the investment and pay the company back. It is calculated by dividing the capital investment by the net annual cash flow. If the net annual cash flow is not expected to be the same, the average of the net annual cash flows may be used. The payback method is a one-sidedly derived number which tells a small amount about a project's beginning phase, but it tells one close to nothing about the full lifetime of the project. The effortlessness of calculating payback can possibly promote carelessness, especially in the failure to incorporate all the costs linked with investing in a project, such as training and maintenance. The payback method does not account for the time value of money either, and is therefore considered an unsophisticated capital budgeting technique. Even though the payback method has these cons associated with it, the simplicity of the method can allow it to be used as a filter for those projects which should go on to a more

37

in-depth method, such as those explained below. If a project is not recommended based on the payback method, then chances are pretty high the project should not even be considered for the other methods.

Rate of Return Method The method takes into account the earnings expected from the investment over their whole life. It is known as accounting rate of return method for the reason that under this method, the accounting concept of profit is used rather than cash inflows. According to this method, various projects are ranked in order of the rate of earnings or rate or returns. The project with the higher rate of return is selected as compared to the one with lower rate of returns. This method can also be used to make decision as to accepting or rejecting the proposal. The IRR method is another sophisticated capital budgeting technique and is the most widely used. It is, however, more complicated to calculate by hand, and a scientific calculator or spreadsheet application may need to be used. Businesspeople typically would rather see calculation results in the form of annual rates of return instead of actual dollar returns. This allows them to really compare two or more projects for ranking purposes to see which project is going to provide more bang for the buck. The IRR method gives the rate of return result. This is especially important in our current economic climate, where businesses are trying to cut costs and only invest in those projects which will yield a higher rate of return. Net Present Value Method It is modern method of evaluating investment proposals. This method takes into consideration the time value of money and attempts to calculate the return on investments by introducing the factor of time element. The net present values of a inflows and outflows of cash occurring during the entire life of the project is determined separately for each year by discounting these flows by the firms cost of capital or predetermined rate.

38

Net Present Value measures the difference between present value of future cash inflows generated by a project and cash outflows during a specific period of time. With a help of net present value we can figure out an investment that is expected to generate positive cash flows. The NPV method does take into consideration the time value of money, so it is referred to as a sophisticated capital budgeting technique. Therefore, everything is calculated based of today's dollars. For example, if $300,000 is expected to be earned in year 5, then its worth is $155,811 in today's dollars. This method is easier to calculate by hand than the IRR method. In addition, the NPV method gives a more realistic solution due to the fact that it takes into consideration that the firm reinvests intermediate cash flows at the company's cost of capital rate, rather than the high rate specified by the IRR method. The NPV method is the theoretically preferred method of capital budgeting techniques. (p. 429-430) The NPV is considered less insightful because it does not measure the interest rates, profitability, and other benefits relative to the amount invested. This means that NPV gives one a measure of the expected dollar amount of money made from the proposed project. Most often, financial managers want to see results measured in annual rate of return, such as with the IRR method. In order to calculate net present value (NPV), we first estimate the expected future cash flows from a project under consideration. The next step is to calculate the present value of these cash flows by applying the discounted cash flow (DCF) valuation procedures. Once we have the estimated figures then we will estimate NPV as the difference between present value of cash inflows and the cost of investment Net Present Value measures the difference between present value of future cash inflows generated by a project and cash outflows during a specific period of time. With a help of net present value we can figure out an investment that is expected to generate positive cash flows. In order to calculate net present value (NPV), we first estimate the expected future cash flows from a project under consideration. The next step is to calculate the present value of these cash flows by applying the discounted cash flow (DCF) valuation procedures. Once 39

we have the estimated figures then we will estimate NPV as the difference between present value of cash inflows and the cost of investment

Capital Budgeting Process Evaluation of Capital budgeting project involves six steps: 

First, the cost of that particular project must be known.



Second, estimates the expected cash out flows from the project, including residual value of the asset at the end of its useful life.



Third, riskiness of the cash flows must be estimated. This requires information about the probability distribution of the cash outflows.



Based on project’s riskiness, Management find outs the cost of capital at which the cash out flows should be discounted.



Next determine the present value of expected cash flows

4.6 Importance of Capital Budgeting Decisions Capital budgeting is a process used to determine whether a firm’s proposed investments or projects are worth undertaking or not. The process of allocating budget for fixed investment opportunities is crucial because they are generally long lived and not easily reversed once they are made. So we can say that this is a strategic asset allocation process and management needs to use capital budgeting techniques to determine which project will yield more return over a period of time. The question arises why capital budgeting decisions are critical? The foremost importance is that the capital is a limited resource which is true of any form of capital, whether it is raised through debt or equity. The firms always face the constraint of capital rationing

40

4.7 ADVANTAGES AND DISADVANTAGES OF CAPITAL BUDGETING TECHNIQUES Advantages The payback method is popular with business analysts for several reasons. The first is its simplicity. Most companies will use a team of employees with varied backgrounds to evaluate capital projects. Using the payback method and reducing the evaluation to a simple number of years is an easily understood concept. Identifying projects that provide the fastest return on investment is particularly important for companies with limited cash that need to recover their money as quickly as possible. Managers use the payback method to make quick evaluations of projects with small investment. These small projects do not necessarily involve a group of employees, and it is not necessary to conduct a rigorous economic analysis. Disadvantages The payback method ignores the time value of money. The cash inflows from a project may be irregular, with most of the return not occurring until well into the future. A project could have an acceptable rate of return but still not meet the company's required minimum payback period. The payback model does not consider cash inflows from a project that may occur after the initial investment has been recovered. Most major capital expenditures have a long life span and continue to provide income long after the payback period. Since the payback method focuses on short-term profitability, an attractive project could be overlooked if the payback period is the only consideration. Capital Budgeting by Payback Period

41

The most-used method of capital budgeting is determining the payback period. The company establishes an acceptable amount of time in which a successful investment can repay the cost of capital to make it. Investment alternatives with too long a payback period are rejected. Investment alternatives inside the payback period are evaluated on the basis of the fastest payback. Payback method disadvantages include that it does not account for the time value of money.

Net Present Value Capital Budgeting In net present value capital budgeting, each of the competing alternatives for a firm’s capital is assigned a discount rate to help determine the value today of expected future returns. Stated another way, by determining the weighted average cost of capital over time, also called the discount rate, a company can estimate the value today of the expected cash flow from an investment of capital today. By comparing this net present value of two or more possible uses of capital, the opportunity with the highest net present value is the better alternative. A disadvantage of the net present value method is the method's dependence on correctly determining the discount rate. That calculation is subject to many variables that must be estimated. The Internal Rate of Return Method An advantage of capital budgeting with the internal rate of return method is that the initial calculations are easier to perform and understand for company executives who may not have a financial background. Excel has an IRR calculation function. The disadvantage of the IRR method is that it can yield abnormally high rates of return by overestimating the value of reinvesting cash flow over time. TOOLS USED FOR ANALYSIS: 1. Net present Value (NPV) 2. Payback Period (PBP) 3. Average rate of return (ARR) 4. Profitability Index (PI) 5. Correlation analysis 42

6. Standard Deviation 7. Mean 8. Trend Analysis

DATA ANALYSIS AND INTERPRETATION PAY BACK PERIOD The payback measures the length of time it takes a company to recover in cash its initial investment. This concept can also be explained as the length of time it takes the project to generate cash equal to the investment and pay the company back. It is calculated by dividing the capital investment by the net annual cash flow. If the net annual cash flow is not expected to be the same, the average of the net annual cash flows may be used.

Payback Period =

Initial Investment Cash Inflow per Period

CALCULATION OF ANNUAL CASH INFLOW Year

2013

2014

2015

2016

2017

Total Sales

1606310970 1952574983 2062496269 2177381956 2371633523

Less: Costs

1555885007 1815614157 1961324252 2068196415 2286017710

EBDT LESS:

50425963

136960826

101172018

128327364

85615818

-

967090

-

10393113

12541810

Depreciation or other exceptional

43

items EBT

50425963

135993136

101172018

117934251

73074008

LESS: Tax

17100966

100752605

(22354952)

38433857

26851541

PAT (Annual

33324997

35241131

123526969

79500394

46222467

Cash Inflow)

Payback Period Analysis Year

Initial investments

Annual cash Inflow

Payback period

2013

72368453

33324997

2.17

2014

175080399

35241131

4.97

2015

180236203

123526969

1.46

2016

46246000

79500394

0.58

2017

46246000

46222467

1.00

INTERPRETATION The shorter the payback period, the sooner the company recovers its cash investment. Whether a cash payback period is good or poor depends on the company's criteria for evaluating projects. From the above it is inferred that the company have its highest pay back on 2014 with 4.97 or 5 years. The current year (2017) PBP is found to be 1 year. This shows that the company recovers its investment in 1 year

44

Payback Period Analysis

4.97

5 4.5 4 3.5

3 2.5

2.17

2 1.5

1.46

1 0.5

0.58

1

0 2013

2014

2015

45

2016

2017

ACCOUNTING RATE OF RETURN (ARR) ARR method uses accounting information as reveals by financial statements, to measure the profitability of the investment proposals. It is also known as the return on investment. Sometimes it is called as the Average rate of return.(ARR) PAT Average Rate of Return (ARR) = ------------------------------------------- * 100 Original Investment

Year

PAT

Initial investments

Average Rate of Return

2013

33324997

72368453

0.46

2014

35241131

175080399

0.20

2015

123526969

180236203

0.68

2016

79500394

46246000

1.72

2017

46222467

46246000

1.00

Inference: The chart shows that, in the year 2014 the company had lower expected rate of return than the minimum rate so the investment on the particular project can be reduced. In the 46

year 2016 the project has a higher rate of return than the minimum rate. Higher rate of return indicates that investment made in the particular year has higher cash inflow in the future. The Average rate of return for the year 2017 is reduced to 1 year.

ACCOUNTING RATE OF RETURN (ARR)

1.8

1.72

1.6 1.4 1.2 1

1

0.8 0.6

0.68

0.46

0.4 0.2

0.2 0 2013

2014

2015

47

2016

2017

NET PRESENT VALUE Considering the time value of money is important when evaluating projects with different costs, different cash flows, and different service lives. Discounted cash flow techniques, such as the net present value method, consider the timing and amount of cash flows. To use the net present value method, you will need to know the cash inflows, the cash outflows, and the company's required rate of return on its investments. The required rate of return becomes the discount rate used in the net present value calculation. Formula Present value = Cash flows * Present value of Re. 1 @ 10% discount using present value table Net present value = Present value of all cash inflows – present value of initial investment. Decision Rule: Accept: NPV > Zero Reject: NPV< Zero

48

Net Present Value Analysis Year

PAT

Discounting present

Present Value

Present value of

value

of Net Cash

Initial

Table

Flows

investment

(Present value of Re.1 @ 10 %) 2013

33324997

0.909

30292422.27

65782923.78

2014

35241131

0.826

29109174.21

144616409.6

2015

123526969

0.751

92768753.72

135357388.5

2016

79500394

0.683

54298769.1

31586018

2017

46222467

0.621

28704152.01

28718766

235173271.3

406061505.8

TOTAL = Calculation: Present value of all cash flows

23, 51, 73, 271.3

Less: Present value of all Initial Investment

40, 60, 61,505.8

Net Present Value (20078-12)

(17, 08, 88,234.5)

Interpretation Above table clearly indicates that the Net Present Value for the five years from 2013 to 2017 is (17, 08, 88,234.5) 49

A negative NPV indicates that the project will probably be unprofitable and therefore should be adjusted, if not abandoned altogether. NPV enables a management to consider the time value of money it will invest. This concept holds that the value of money increases with time because it can always earn interest in a savings account. Therefore, any other investment of that money must be weighed against how the funds would perform if simply deposited and saved.

PROFITABILITY INDEX Profitability index (PI), also known as profit investment ratio (PIR) and value investment ratio (VIR), is the ratio of payoff to investment of a proposed project. It is a useful tool for ranking projects because it allows you to quantify the amount of value created per unit of investment. The ratio is calculated as follows:

Assuming that the cash flow calculated does not include the investment made in the project, a profitability index of 1 indicates breakeven. Any value lower than one would indicate that the project's PV is less than the initial investment. As the value of the profitability index increases, so does the financial attractiveness of the proposed project. Rules for selection or rejection of a project: 

If PI > 1 then accept the project



If PI < 1 then reject the project

50

Year

PAT

Discounting present

Present Value

Present value

(Rs. In Crore)

value

of Net Cash

of Initial

Table

Flows

investment

(Present value of Re.1 @ 10 %) 2013

33324997

0.909

30292422.27

65782923.78

2014

35241131

0.826

29109174.21

144616409.6

2015

123526969

0.751

92768753.72

135357388.5

2016

79500394

0.683

54298769.1

31586018

2017

46222467

0.621

28704152.01

28718766 406061505.8

TOTAL =

235173271.3

PROFITABILITY INDEX = PV OF CASH INFLOWS ÷ INITIAL INVESTMENT PI = 235173271.3 ÷ 406061505.8 PI = 0.579 DECISION RULE: Accept: PI >1 Reject: PI<1 INFERENCE: 51

PI is lesser than 1 so Reject the proposal It indicates that for every one rupee investment there will be 0.579 loss

STANDARD DEVIATION Statistical measure of the degree to which an individual value in a probability distribution tends to vary from the mean of the distribution. From a normal distribution, one standard deviation includes about 66% of the population; two standard deviations include about 95%. STANDARD DEVIATION CALCULATION OF PROFIT AFTER TAX

(In Crores) Year

PAT (x)

= ∑ x/ 5

X=x-

X2

2017

0.4622 0.63562

(0.17342)

0.0300744964

2016

0.7950 0.63562

0.15938

0.0254019844

2015

1.2353 0.63562

0.59968

0.3596161024

2014

0.3524 0.63562

(0.28322)

0.0802135684

2013

0.3332 0.63562

(0.30242)

0.0914578564

∑ X

3.1781

∑ X2

0.586764008

∑ X2 / n-1

0.146691002

S.D

52

= 0.3830026

0.4 0.359616102

0.35 0.3 0.25 0.2 0.15

0.1 0.05

0.030074496

0.080213568

0.025401984

0.091457856

0 2017

2016

2015

2014

2013

INFERENCE: Standard deviation is used in determination of risk involved in an investment. PAT is fluctuating throughout the period of study. PAT is high in 2015 with 1.2353 and very low in 2013. The current year (2017) PAT is decreased to 0.4622 when compared to the previous year (2016) with 0.7950. The Standard Deviation for PAT is 0.3830026 Variance for PAT is 0.146691002

53

STANDARD DEVIATION CALCULATION OF INVESTMENT

(In Crores) Year

Investment (x)

=∑X/5

X=x-

X2

2017

4.625 10.4038

(5.7788)

33.3945

2016

4.625 10.4038

(5.7788)

33.3945

2015

18.024 10.4038

7.6202

58.0674

2014

17.508 10.4038

7.1045

50.470

2013

7.237 10.4038

(3.1668)

10.029

∑ X2

185.355

∑ X2 / n-1

46.33875

∑ X

52.019

S.D

54

= 6.0872

60

58.0674 50.47

50 40

33.3945

33.3945

30 20 10 10.029 0 2017

2016

2015

2014

2013

INFERENCE: The Investments of the company has been in the increasing rate till 2015. The company has the same investment for the last 2 years 2016 and 2017. The investment of the company has been decreased. In the year 2017 the Investment has been decreased to 4.625. The standard deviation of Investment is 6.0872 The Variance is 46.33875

55

Standard deviation is applied to an investment to measure the investment's volatility. Standard deviation is also known as historical volatility and is used by investors as a gauge for the amount of expected volatility.

STANDARD DEVIATION CALCULATION OF REVENUE

(In Crores) Year

REVENUE (x)

=∑X/5

X=x-

X2

2017

23.716 20.379

17.3598

301.368656

2016

21.965 20.379

15.6088

245.6346374

2015

20.625 20.379

14.2688

203.5986534

2014

19.526 20.379

13.1698

173.443632

2013

16.063 20.379

9.7068

94.22196624

∑ X2

1016.261545

∑ X2 / N

254.0654

∑ X

101.895

S.D

56

= 15.93943

REVENUE (X) 25

23.716 21.965 20.625

20

19.526 16.063

15

10

5

0 2017

2016

2015 REVENUE (X)

2014

2013

INFERENCE: The greater the S.D, the greater will be the magnitude of the deviations of the values from the mean.

The S.D measures the variability of values. Revenue is in a increasing

position. Revenue is high in 2017 with 23.716 when compared to the previous year 2016 with 21.965. The Standard Deviation for Revenue is 15.93943 The Variance is 254.0654 57

CORRELATION ANALYSIS CORRELATION CALCULATION OF REVENUE AND EBIT

Year

REVENUE (X)

X2

EBIT(Y)

Y2

XY

2017

23.716 562.4487

0.856

0.732736

20.3009

2016

21.965 482.4612

1.283

1.646089

28.1811

2015

20.625 425.3906

1.012

1.024144

20.8725

2014

19.526 381.2647

1.37

1.8769

26.75062

2013

16.063 258.02

0.504

0.504

8.095752

101.895 2109.585

5.025

5.533885

104.2014

∑

=

CORRELATION 0.449147 58

.

25 23.716 21.965 20.625

20

19.526 16.063

15

10

5

0

0.856 2017

1.283 2016

1.37

1.012 2015 REVENUE (X)

2014

0.504 2013

EBIT(Y)

INFERENCE: There is a high degree of correlation between Revenue and EBIT as the correlation value 0.449147 is more than 0.05. It measures the closeness of relationship between Revenue and EBIT and they both have a positive correlation

59

CORRELATION CALCULATION OF SALES AND PAT

X2

PAT (Y)

Y2

Year

SALES (X)

XY

2017

23.5

552.25

0.4622 0.21362884

10.8617

2016

21.8

475.24

0.7950 0.632025

17.331

2015

20.5

420.25

1.2353 1.52596609

25.32365

2014

18.3

334.89

0.3524 0.124102224

6.44892

2013

15.7

246.49

0.3332 0.11102224

5.23124

∑=

99.8

2029.12

3.1781 2.606828

65.19651

CORRELATION 0.377508531

60

CORRELATION CALCULATION OF SALES AND PAT- CHART

25 23.5 21.8 20.5

20

18.3 15.7

15

10

5

0

0.4622 2017

1.2353

0.795 2016

2015 SALES (X)

0.3524 2014

0.3332 2013

PAT (Y)

INFERENCE: There is a high degree of correlation between Sales and Profit after Tax because the correlation value (0.377508531) is more than 0.05. It measures the closeness of relationship between Sales and Profit after Tax and they both have a positive correlation.

61

CORRELATION CALCULATION OF EXPENSES AND PAT

X2

PAT(Y)

Y2

Year

EXPENSES (X)

2017

22.9

524.41

0.4622 0.21362884

10.58438

2016

20.7

428.49

0.7950 0.632025

16.4565

2015

19.6

384.16

1.2353 1.52596609

21.21188

2014

18.1

327.61

0.3524 0.124102224

6.41368

2013

15.5

240.25

0.3332 0.11102224

5.19792

∑=

96.80

1904.92

3.1781 2.606828

62.86436

CORRELATION

62

XY

0.297873

CHART- CORRELATION CALCULATION OF EXPENSES AND PAT

25 22.9 20.7

20

19.6 18.1 15.5

15

10

5

0

0.4622 2017

1.2353

0.795 2016

2015 EXPENSES (X)

0.3524 2014

0.3332 2013

PAT (Y)

INFERENCE: There is a high degree of correlation between Expenses and PAT, the correlation value is 0.297873 above than 0.05. It measures the closeness of relationship between Expenses and PAT and they both have a positive correlation.

63

MEAN The Mean of a data set illustrates an average. To find the mean, add all of the numbers in a data set and then divide by how many numbers given in the data set. The mean would be significantly affected if one of the numbers in a data set is an outlier. The mean is a good measure of central tendency to use when a data set doesn’t have any outliers

CALCULATION OF MEAN AND STANDARD DEVIATION FOR EXPENSES i.

CALCULATION OF MEAN FOR EXPENSES YEAR

EXPENSES( x)

2013

1555885007

2014

1815614877

2015

1961324252

2016

2068196415

2017

2286017710

∑ x=

9687038261

64

9687038261 = ---------------------------- = 1937407652 5

ii.

CALCULATION OF STANDARD DEVIATION FOR EXPENSES

YEAR

EXPENSES( x)

(X- 1937407652)

X2

2013

1.555885007

-0.381522645

0.145559529

2014

1.815614877

-0.121792775

0.01483348

2015

1.961324252

0.023916600

0.000572004

2016

2.068196415

0.130788763

0.017105701

2017

2.286017710

0.348610058

0.121528973

∑ x=

9.687038261

0.299599686

0.299599686 = ---------------------------------------5-1 VARIANCE = 0.074899921 or 74, 89,921 STANDARD DEVIATION= 0.2736785 or 27, 36,785

65

CHART- EXPENSES

Expenses 2.28601771 1.961324252

2.068196415

1.815614877 1.555885007

2013

2014

2015

2016

Expenses

Inference: From the above calculation, The average Expenses for 5 years are found to be 1,93,74,07,652. The Variance for expenses is found to be 0.074899921 or 74, 89,921 The Standard Deviation is found to be 0.2736785 or 27, 36,785

66

2017

TREND ANALYSIS Trend analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future. Trend analysis has a great advantage that it can also be used to predict the future events. This is possible by forecasting the future cash flow based on the data available of the past. With the help of trend analysis, you can predict the future and track the variances to add performance. Y=a+b(x) TREND ANALYSIS -PAT Y=a+b(x) Year PAT(y)

x

X2

2013

0.3332

-2

4

-0.6664

0.4955

2014

0.3524

-1

1

-0.3524

0.56556

2015

1.2353

0

0

0

0.63562

2016

0.7950

1

1

0.795

0.70568

2017

0.4622

2

4

0.9244

0.77574

Σ y = 31.781

Σ x2=10

Y=a +b (x) a = Σy /n 67

xy

0.7006

b= Σxy / Σ x2 a= 0.63562 b= 0.07006

For: 2018 Let us assume x=3 Y=a + b(x) Y= 6.3562 +0.0368737 *3 Y= 0.7462411

PAT 1.4 1.2353

1.2 1 0.8

0.795 0.70568

0.77574

0.746

0.63562

0.6

0.56556

0.4955 0.4 0.3332

0.4622 0.3524

0.2 0 2013

2014

2015

2016

PAT(y)

2017

2018

Y=a+b(x)

INTERPRETATION  The PAT is increasing at an increasing rate for the all the five years. The company has the highest PAT on 2015 with 1.2535 68

 The PAT trend is found to be increasing rate this is due to the gradual decrease of expenses for the first 3 years. In the year 2017 the PAT is tend to decrease this is due to the increase in the interest and expenses of the company.  The PAT trend is decreasing so the company should take necessary steps to increase the profit of the company by decreasing the expenses and debtors

EBIT Y=a+b(x) Year

EBIT(y) x

X2

xy

2013

0.504

-2

4

-1.008

0.8776

2014

1.360

-1

1

-1.36

0.9403

2015

1.012

0

0

0

1.003

2016

1.283

1

1

1.283

1.0657

2017

0.856

2

4

1.712

1.1284

Σ x2=10

5.015

Y=a +b (x) a = Σy /n b= Σxy / Σ x2 a=1.003 b=0.0627 For: 2018 Let us assume x=3 69

0.627

Y=a + b(x) Y= 1.003 +0.033*3 Y= 1.102

EBIT

1.6 1.4

1.36 1.283

1.2 1 0.8776

0.8

0.9403

1.012 1.003

1.0657

1.1284

1.102

0.856

0.6 0.504 0.4 0.2 0 2013

2014

EBIT(y) 2015

Y=a+b(x) 2016

2017

2018

INTERPRETATION  The EBIT is fluctuating for the all the five years. The company has the highest EBIT on 2014 with 13.60  The EBIT trend is found to be increasing rate this is due to the gradual Increase of Sales

70

 The EBIT trend is decreasing in 2017 this may due to increase in the expenses and high interest.

FINDINGS 1.

The current year (2017) PBP is found to be 1 year. This shows that

the company recovers its investment in 1 year 2.

The Average rate of return for the year 2017 is reduced to 1 year

the Net Present Value for the five years from 2013 to 2017 is (17, 08, 88,234.5). A negative NPV indicates that the project will probably be unprofitable and therefore should be adjusted, if not abandoned altogether. 3.

PI is lesser than 1 so Reject the proposal. It indicates that for every

one rupee investment there will be 0.579 loss 4.

The current year (2017) PAT is decreased to 4.622 when compared

to the previous year (2016) with 7.950. 5.

The Standard Deviation for PAT is 3.425679518 and Variance for

PAT is 11.73528016 6.

In the year 2017 the Investment has been decreased to 4.625.

7.

The standard deviation of Investment is 6.089. The Variance is

8.

Revenue is high in 2017 with 23.716 when compared to the

37.071

previous year 2016 with 21.965. 9.

The Standard Deviation for Revenue is 14.25665841. The Variance

is 203.252309 71

10.

There is a high degree of correlation between Revenue and EBIT

as the correlation value 0.449147 is more than 0.05. It measures the closeness of relationship between Revenue and EBIT and they both have a positive correlation. 11.

There is a high degree of correlation between Sales and Profit after

Tax because the correlation value (0.377508531) is more than 0.05. It measures the closeness of relationship between Sales and Profit after Tax and they both have a positive correlation. 12.

There is a high degree of correlation between Expenses and PAT,

the correlation value is 0.288887458 above than 0.05. It measures the closeness of relationship between Expenses and PAT and they both have a positive correlation. 13.

The average Expenses for 5 years are found to be 1,93,74,07,652.

14.

The Variance for expenses is found to be 0.074899921 or

74, 89,921 15.

The Standard Deviation is found to be 0.2736785 or 27, 36,785

16.

The PAT is increasing at an increasing rate for the all the five

years. The company has the highest PAT on 2015 with 1.2535 17.

The PAT trend is found to be increasing rate this is due to the

gradual decrease of expenses for the first 3 years. 18.

In the year 2017 the PAT is tend to decrease this is due to the

increase in the interest and expenses of the company. 19.

The EBIT is fluctuating for the all the five years. The company has

the highest EBIT on 2014 with 1.360 20.

The EBIT trend is found to be increasing rate this is due to the

gradual Increase of Sales

72

SUGGESTIONS 1. The shorter the payback period, the sooner the company recovers its cash investment. Whether a cash payback period is good or poor depends on the company's criteria for evaluating projects. Higher rate of return indicates that investment made in the particular year has higher cash inflow in the future. 2. A negative NPV indicates that the project will probably be unprofitable and therefore should be adjusted, if not abandoned altogether. 3. NPV enables a management to consider the time value of money it will invest. This concept holds that the value of money increases with time because it can always earn interest in a savings account. Therefore, any other investment of that money must be weighed against how the funds would perform if simply deposited and saved. 4. The PAT trend is decreasing so the company should take necessary steps to increase the profit of the company by decreasing the expenses and debtors 5. The EBIT trend is decreasing in 2017 this may due to increase in the expenses and high interest. So the company should take necessary actions to decrease the expenses.

73

CONCLUSION Capital budgeting or investment appraisal is the planning process used to determine whether an organization’s long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is budget for major capital, or investment, expenditures. It is a process used to determine whether a firm’s proposed investments or projects are worth undertaking or not. The process of allocating budget for fixed investment opportunities is crucial because they are generally long lived and not easily reversed once they are made. So we can say that this is a strategic asset allocation process and management needs to use capital budgeting techniques to determine which project will yield more return over a period of time. Through this study it is very clear that capital budgeting essentially involves evaluation of the worth of capital investment proposals based on estimates of cash inflows and outflows. The study emphases that efficient allocation of capital is the most important finance function in the modern times. Thus, capital budgeting or investment decisions are of considerable importance to the firm, since they tend to determine its value by influencing its growth, profitability and risk. The analysis of payback period and Average Rate of Returns conclude that management should take efforts to perform the capital budget in efficient manner.

74

Consolidated five years Balance Sheet of Chowel India (P) Ltd Income and Expenditure

PARTICULARS

2013

2014

2015

2016

2017

Rs. Crore (Non-Annualised) Total income Sales Industrial sales

10.229 9.713 9.713

10.642 10.152 10.152

12.177 11.685 11.685

13.944 13.316 13.316

12.793 12.312 12.312

Income from non-financial services Income from financial services Interest

0

0

0

0

0

0.488 0.18

0.461 0.153

0.47 0.135

0.601 0.174

0.406 0.255

0.19 0.118 0.017 0.011

.222 0.086 0.012 0.017

.25 0.085 0.012 0.01

0.098 0.329 0.014 0.013

.142 0.009 0.055 0.02

-0.029

0.189

0.383

-0.316

-0.075

9.379 4.161 0 0 0.863 1.006 1.048 0

9.942 4.423 0 0 0.709 1.123 1.254 0

11.677 5.596 0 0 0.708 1.264 1.356 0

12.893 6.715 0 0 0.855 1.418 1.054 0

11.824 5.205 0 0 1.123 1.598 0.89 0

Dividends Treasury operations Other income Prior period income & extraordinary income Change in stock Total expenses Raw material expenses Packaging expenses Purchase of finished goods Power, fuel & water charges Compensation to employees Indirect taxes Royalties, technical know-how fees, etc.

75

Lease rent & other rent Repairs & maintenance Insurance premium paid Outsourced mfg. jobs (incl. job works, etc.) Outsourced professional jobs Directors' fees Selling & distribution expenses Travel expenses Communication expenses Printing & stationery expenses Miscellaneous expenses

0.011 0.234 0.031 0.224

0.011 0.218 0.027 0.346

0.011 0.242 0.02 0.489

0.015 0.265 0.014 0.351

0.016 0.305 0.029 0.308

0.005 0.002 0.576 0.153 0.042 0 0.314

0.008 0.002 0.56 0.177 0.039 0 0.306

0.007 0.002 0.674 0.187 0.039 0 0.335

0.01 0.002 0.727 0.208 0.045 0 0.444

0.01 0.002 0.896 0.186 0.041 0 0.404

Other operational exp. of indl. Enterprises Other oper. exp. of non-fin. service enterprises Share of loss in subsidiaries/JVs,etc. Lease equalisation adjustment Loss on securitisation of assets/loans Fee based financial service expenses Treasury operations expenses Total provisions Write-offs Less: Expenses capitalized Less: DRE & expenses charged to others

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0 0

0 0

0 0

0 0

0 0

0.015

0.017

0.022

0.025

0.021

0 0 0.006 0.026 0.024

0 0 0.007 0.03 0

0 0.003 0.011 0.074 0.03

0 0.025 0.004 0.072 0.047

0.064 0 0.001 0.029 0.036

0

0.005

0.011

0

0.003

0.015 0 0

0.012 0 0

0.023 0 0

0.045 0 0

0.052 0 0

0.393 0 0.33 0.821

0.396 0 0.332 0.889

0.416 0 0.365 0.883

0.375 0 0.415 0.735

0.35 0 0.385 0.894

0.1559 0.1544 0.1151

0.1629 0.1617 0.1221

1.687 1.664 1.248

1.57 1.525 1.15

1.681 1.629 1.279

Prior period & extraordinary expenses Interest paid Financial charges on instruments Expenses incurred on raising deposits/debts Depreciation Amortisation Provision for direct taxes PAT PBDITA PBDTA PBT

76

7.2 Investments Report PARTICULARS

2013

2014

2015

2016

2017

Rs. Crore (Non-Annualised) Investments In equity shares Group companies Other than group companies In debt instruments Other than government debentures/bonds Other than group companies In bonds/debentures of government/local bodies In mutual funds Other than group companies In others Less: Provision for diminution in value of investments Book value of quoted investments Market value of quoted investments Marketable securities

77

3.347 0.397 0.223 0.174 0.776 0.775

3.255 0.401 0.223 0.178 0.636 0.635

2.962 0.412 0.223 0.189 0.565 0.564

2.899 0.417 0.219 0.198 0.352 0.351

2.91 0.42 0.219 0.201 0.116 0.116

0.775 0.001

0.635 0.001

0.564 0.001

0.351 0.01

0.116 0

2.159 2.159 0.024 0.009

2.225 2.225 0 0.007

1.99 1.99 0.004 0.01

2.161 2.161 0 0.032

0.238 2.38 0 0.006

0.288 0.415 2.447

0.292 0.426 2.517

2.292 2.065 2.292

2.328 0.831 2.328

2.55 0.859 2.55

Report Showing Appreciation of Profit

PARTICULARS

2013

2014

2015

2016

2017

Rs. Crore (Non-Annualised) PBDITA Depreciation Amortisation

1.559 0.393 0

1.629 0.396 0

1.687 0.416 0

1.57 0.375 0

1.681 0.35 0

PBIT Interest paid Financial charges on instruments Fee based financial services expenses

1.166 0.015 0

1.233 0.012 0

1.271 0.023 0

1.195 0.045 0

1.331 0.052 0

0

0

0

0

0

PBT Provision for direct tax Corporate tax Deferred tax Less: Deferred tax assets / credit Other direct tax Fringe benefits tax

1.151 0.33 0.336 0 0.026

1.221 0.332 0.355 0 0.039

1.248 0.365 0.35 0 0.005

1.15 0.415 0.401 0 0.005

1.279 0.385 0.42 0 0.035

0.02 0.02

0.016 0.016

0.02 0.02

0.019 0.019

0 0

PAT

0.821

0.889

0.883

0.735

0.894

78

Prior period & extraordinary income Prior period & extraordinary expenses Net prior period & extraordinary transactions PBDITA net of P&E PBIT net of P&E PBT net of P&E PAT net of P&E

0.011

0.017

0.01

0.013

0.02

0

0.005

0.011

0

0.003

-0.011

-0.012

0.001

-0.013

-0.017

1.548 1.155 1.14 0.81

1.17 1.221 1.209 0.877

1.688 1.272 1.249 0.884

1.557 1.182 1.137 0.722

1.664 1.314 1.2.62 0.877

100 2.43093923

100 2.46591583

100 2.38853503

100 2.08209399

Distribution of profits (%) PBDITA 100 Depreciation & 2.5208467 Amortisation Financial charges 0.096215523 Tax 2.1167415 PAT 5.26619628 Non—provisions Diminution in investement Sundry debtors Loans & advances including NPAs Loans & advances to group cos. Interest expenses Power expenses Gratuity Others

0.073664825 0.136336692 0.286624204 0.309339679 2.03806016 2.16360403 2.6433121 2.29030339 5.45733579 5.23414345 4.68152866 5.31826294

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0

0

0

0

0

0 0 0 0

0 0 0 0

0 0 0 0

0 0 0 0

0 0 0 0

79