A STUDY ON “CAPITAL BUDGETING ”
With reference to “PARADEEP PHOSPHATES LTD”
BHUBANESHWAR
A Project Report Report submitted submitted to JNTU, JNTU, KAKINADA in partial partial fulfillment fulfillment for the award of the Degree of
MASTER OF BUSINESS ADMINISTRATION (MBA) Submitted By GORU.SHYAM KUMAR.
Under the Esteemed Guidance of
Mr. SRIRAM TRIPATHY MIRACLE SCHOOL OF MANAGEMENT (AFFILIATED TO JNTU)
MIRACLE CITY MUNJERU (V) BHOGAPURAM (M) VIZIANAGARAM (D.t) 2011-2013 1
DECLARATION
I hereby declare that this project report “ CAPITAL BUDGETTING” with
reference to “PARADEEP PHOSPHATES Ltd,” has been prepared by me during the period 06-05-2012 to 10-06-2012 is partial fulfillment of the requirement for the award of degree of Master of Business Administration Administration of J.N.T.U,KAKINADA. J.N.T.U,KAKINADA.
I also declare that this project is a result of my own effort and that it has not been submitted to any other university for the Award of Any Degree.
Place: VISAKHAPATNAM
(Goru.Shyam Kumar)
Date:
2
ACKNOWLEDGEMENT A successful project can never be prepared by single effort or the person to whom the project is assigned, but it also demand the help and guardianship of some conversant persons who helps in the undersigned actively or passively in the completion of successful project .
With great pleasure, I express my deep sense gratitude to the management of “PARADEEP PHOSPHATES LIMITED ”, BHUBANESHWAR for
giving me this very inspirational opportunity opportunity to do my observation study in their reputed company to take this opportunity to express my deep and profound gratitude to the people concerned who have helped me directly or indirectly in successful completion completion of this project.
I convey my sincere thanks to Mr. M K MUKHERJEE Dy. General Manager, Manager, (F &A), PPL who has motivated me with their valuable suggestion and helped me throughout the project in permitting to perform various tasks in this esteemed organization.
(GORU .SHYAM KUMAR)
3
CONTENTS CHAPTER-1
INTRODUCTION TO THE STUDY
1-11
CHAPTER-2
INDUSTRY PROFILE
12-22
CHAPTER-3
COMPANY PROFILE
23-29
CHAPTER-4
PROJECT PLANNING (CAPITAL BUDGETING)
30-57
CHAPTER-5
FINANCING OF THE PROJECT
58-60
CHAPTER-6
FINANCE AND ACCOUNTS SECTION AT PPL
61-64
CHAPTER-7
DATA ANALYSIS AND INTERPRETATION
65-67
CHAPTER-8
EVALUATION OF CAPITAL BUDGETING
68-79
CHAPTER-9
FINDINGS AND SUGGESTIONS
80
BIBLIOGRAPHY
81
4
CHAPTER 1 INTRODUCTION
1.1 INTRODUCTION OF THE STUDY Every organization irrespective of its size and mission can be viewed as a financial entity management of an organization. Financial management focuses not only on the improvement of funds but also on their efficient use with the objective of maximizing the owners‟ wealth. The allocation of funds is therefore an important function of financial management. The allocation of funds involves the commitment of funds to assets and activities.
There are two types of Investment decision:
1. Management of current assets or Working capital management. 2. Long term investment decision.
Long term investment decisions are widely known as capital budgeting or capital expenditure budgeting. It means as to whether or not money should be invested in long term project. This part is devoted to an in-depth and comparative decision of capital budgeting/capital expenditure management.
A project is an activity sufficiently self- contained to permit financial and commercial analysis. In most cases projects represent expenditure of capital funds by pre- existing entities which want to expand or improve their operation.
5
In general a project is an activity in which, we will spend money in expectation of returns and which logically seems to lead itself to planning. Financing and implementation as a unit, is a specific activity with a specific point and a specific ending point intended to accomplish a specific objective.
To take up a new project, involves a capital investment decision and it is the top management‟s duty to make a situation and feasibility analysis of that particular project and means of financing and implementing it financing is a rapidly expanding field, which focuses not on the credit status of a company, but on cash flows that will be generated by a specific project.
Capital budgeting has its origins in the natural resource and infrastructure sectors. The current demand for infrastructure and capital investments investments is being fueled by deregulation in the power, telecommunications, and transportation sectors, by the globalization of product markets and the need for manufacturing scale, and by the privatization of government – owned entities in developed and developing countries.
The capital budgeting decision procedure basically involves the evaluation of the desirability of an investment proposal. It is obvious that the firm must have a systematic procedure for making capital c apital budgeting decisions.
The
procedure
must
be
consistent
with
the
objective
of
wealth
maximization. In view of the significance of capital budgeting decisions, the procedure must consist of step by step analysis.
6
1.2 Importance of investment decisions:Capital investments, representing the growing edge of a business, are deemed to be very important for three inter- related reasons.
1. They influence firm growth in the long term consequences capital investment decisions have considerable impact on what the firm can do in future.
2. They affect the risk of the firm; it is difficult to reverse capital investment decisions because the market for used capital investments is ill organized and /or most of the capital equipments bought by a firm to meet its specific requirements.
3. Capital investment decisions involve substantial out lays.
“PARADEEP PHOSPHATES LIMITED” is a growing concern, capital capi tal budgeting is more or less a continuous process and it is carried out by different functional areas of management such a production, marketing, engineering, financial management management etc. All the relevant functional departments play a crucial role in the capital budgeting decision process.
1.3 Objectives of the study:1. To describe the organizational profile of “PARADEEP PHOSPHATES Ltd”. 2. To discuss the importance of the management of capital budgeting. 3. Determination of proposal and investments, inflows and out flows. 4. To evaluate the investment proposal by using capital budgeting techniques. 5. To summarize and to suggest for the better investment proposal. 7
1.4 SCOPE OF THE STUDY:This study highlights the review of capital budgeting and capital expenditure management of the company. Capital expenditure decisions require careful planning and control. Such long term planning and control of capital expenditure is called Capital Budgeting. The study also helps to understand how the company estimates the future project cost. The study also helps to understand the analysis of the alternative proposals and deciding whether or not to commit funds to a particular investment proposal whose benefits are to be realized over a period of time longer than one year. The capital budgeting is based on some tools namely Payback period, Average Rate of Return, Net Present Value, Profitability Index, and Internal Rate of Return.
1.5 METHODOLOGY :-
The information for the study is obtained from two sources namely. 1.
Primary Sources
2.
Secondary Sources
Primary Sources: It is the information collected collected directly without without any references. It is mainly mainly through interactions with concerned officers & staff, either individually or
8
collectively; some of the information has been verified or supplemented with personal observation. These sources sources include.
a.
Thorough interactions with the various department Managers of “PARADEEP PHOSPHATES LTD”. LTD”.
b. Guidelines given by the Project Guide, Mr. SRIRAM TRIPATHY, Dy. Manager, Budget Section, F & A.
Secondary Sources: This data is from the number of books and records of the company, the annual reports reports published by the company and other magazines.
The
secondary data is obtained from the following. f ollowing. a. Collection of required data from annual records, monthly records,
internal Published book or profile profile of “PARADEEP “PARADEEP
PHOSPHATES LTD” LTD”. b. Other books and Journals and magazines
c.
Annual Reports of the company
1.6 Limitations:Though the project was completed successfully with a few limitations may . a) Since the procedure and polices of the company will not allow to disclose confidential financial information, the project has to be completed with the available data given to us.
b) The period of study that is 6 weeks is not enough to conduct detailed study of the project. 9
c) The study is carried basing on the information and documents provided by the organization and based on the interaction with the various employees of the respective departments.
1.7 REVIEW OF LITERATURE:-
The concept of Capital Budgeting being a very sensitive area of finance has outreached the attention of many researchers .A number of studies has been conducted on the subject. However briefing such studies will highlight the importance of the present study. It should safeguard to avoid the wrong choice of the project and investment to be made. It is necessary for the management to give proper attention to capital budgeting.
The reason for the popularity of Payback period in the order of significance were stated to be its, simplicity to use and understand, its emphasis on the early recovery of investment and focus on risk. It was also found that one third of companies always insisted on the computations of Payback periods for all projects. For about two-third companies standard Payback period ranged between three and five years.
The reason for the secondary role of Discounted Cash Flow techniques in India included difficulty in understanding and using these techniques, due to lack of qualified professional and unwillingness of top management to use Discounted Cash Flow techniques.
One large manufacturing and marketing organization mentioned that conditions of its business were such that Discounted Cash Flow techniques were not needed. Yet another company stated that replacement projects 10
were very frequent in the company and it was not considered necessary to use Discounted Cash Flow technique for evaluating such projects.
The present investment appraisal in practice is raising certain questions in the context.
1. How much importance is assigned to economic analysis of capital expenditure in practice? 2. What methods are used for analyzing capital expenditure in practice and what is the reason for underlying these methods?
The answers of the above questions are based on a survey of twenty firms varying on several dimensions like industry category, size, financial performance responsible
and for
capital capital
intensity. investment
From
these
evaluation
firms,
and
executives,
capital
budget
preparation were interviewed
11
CHAPTER-2 INDUSTRY PROFILE 2.1 Introduction to Fertilizer Industry: Fertilizer is generally defined as "any material, organic or inorganic, natural or synthetic, which supplies one or more of the chemical elements required for the plant growth".
Since the essential physiological attribute of seeds is their ability to convert a great duel of nutrients into grain. The spread of this variety lead for greater
consumption
of
fertilizers
simultaneously
with
increasing
demographic pressure on the agricultural productivity has assumed more importance. This also contributed to the rising demand for fertilizers.
Agriculture the backbone of Indian Economy still holds its relative importance for more than a billion peoples. The Government of India from time to time has taken considerable steps for the upliftment of Agriculture Sector. Here we have analyzed the performance of Fertilizer Industry being one of the vital parts in agricultural production and Government's policy initiatives for the same.
Fertilizer in the agricultural process is an important area of concern. Fertilizer industry in India has succeeded in meeting the demand of all chemical fertilizers in the recent years. The Fertilizer Industry in India started its first manufacturing unit of Single Super Phosphate (SSP) in Ranipet near Chennai with a capacity of 6000 MT a year. Then established the first two large-sized fertilizer plants, one was the Fertilizer & Chemicals Travancore of India Ltd. (FACT) in Cochin, Kerala, and the another one was Fertilizers Corporation of India (FCI) in Sindri, Bihar. These two were 12
established as pedestal fertilizer units to have self sufficiency in the production of food grains. Afterwards, the industry gained impetus in its growth due to green revolution in late sixties, followed by seventies and eighties when fertilizer industry witnessed an incredible boom in the fertilizer production.
Fertilizer consumption of plant nutrients per unit of grossed cropped area in India is still very low average being 91.5 kg/ha. Productivity of food grain crops in the country is also quite low, around 1.6 t/ha, which can certainly be doubled by enhancing per unit average fertilizer use. Fertilizer consumption has to increase substantially in order to achieve the food grain requirement of 220 million tons by the year 2002.
2.2 Origin and Development of Fertilizers Industry in INDIA : The Indian fertilizer industry has succeeded in meeting almost fully the demand of all chemical fertilizers except for MOP. The industry had a very humble beginning in 1906, when the first manufacturing unit of Single Super Phosphate (SSP) was set up in Ranipet near Chennai with an annual capacity of 6000 MT. The Fertilizer & Chemicals Travancore of India Ltd. (FACT) at Cochin in Kerala and the Fertilizers Corporation of India (FCI) in Sindri in Bihar were the first large sized -fertilizer plants set up in the forties and fifties with a view to establish an industrial base to achieve selfsufficiency in food grains. Subsequently, green revolution in the late sixties gave an impetus to the growth of fertilizer industry in India. The seventies and eighties then witnessed a significant addition to the fertilizer production capacity. The Indian fertilizer industry has witnessed a phenomenal growth in the eighties. However, the growth has tapered off in the nineties and in the recent past only public and cooperative sectors have made major 13
investments in this industry. Presently public, private and coop. sector share 45, 33 and 22 percent of capacity, respectively, whereas their share in P2O5 capacity is 26, 64 and 10 per cent respectively. New proposals to government for setting-up fresh capacities in country are mainly from Public and Cooperative sectors. The installed capacity as on 30.01.2003 has reached a level of 121.10 lakh MT of nitrogen (inclusive of an installed capacity of 208.42 lakh MT of urea after reassessment of capacity) and 53.60 lakh MT of phosphatic nutrient, making India the 3rd largest fertilizer producer in the world. The rapid build-up of fertilizer production capacity in the country has been achieved as a result of a favorable policy environment facilitating large investments in the public, co-operative c o-operative and private sectors. Presently, there are 57 large sized fertilizer plants in the country manufacturing a wide range of nitrogenous, phosphatic and complex fertilizers. Out of these, 29 unit produce urea, 20 units produce DAP and complex fertilizers 13 plants manufacture Ammonium Sulphate (AS), Calcium Ammonium Nitrate (CAN) and other low analysis nitrogenous fertilizers. Besides, there are about 64 medium and small-scale units in operation producing SSP. The sector experienced a faster growth rate and presently India is the third largest fertilizer producer.
2.3 MAJOR SEGMENTS IN FERTILIZERS : The Indian fertilizer industry is broadly divided into Nitrogenous, Phosphatic and Potassic segments. In addition to these, nutrients are combined to produce several complex fertilizers. To express the nutrient constitution of fertilizers, the grade of a fertilizer is expressed as a set of three numbers in the order of percent of Nitrogen (N), Phosphate (P), Potash 14
(K) and sulphur(S). The straight nitrogenous fertilizers produced in the country are urea, ammonium Sulphate, calcium ammonium nitrate (CAN) and ammonium chloride. The only straight phosphatic fertilizer being produced in Sector Report: Fertilizer Industry India / Economics the country is SSP. The complex fertilizers include DAP, several grades of Nitro phosphates and NPK complexes. Urea and DAP are the main fertilizers produced indigenously.
(a)
Chart showing different types of fertilizers
2.4 DEMAND AND SUPPLY The Demand-Supply scenario in fertilizers has been worked out by the Working Group on Fertilizers for the Ninth Plan (1997-98 to 2001-02) on the basis of the estimated demand and production projections in terms of N and P2O5 nutrients (Table-2). The increase in production (supply) will be 15
4.86 million tons, most of it is confined to nitrogen resulting from the commissioning of the expansions, new plants or joint ventures abroad. Production of N is expected to increase from 9.7 million tons in 1997-98 to 25.0 million tons in 2007-08. The Group estimated that the available phosphate supply will increase from 2.8 million tons of P2O5 in 1997-98 and reach 7 million tons in 2007-08. The demand for N, P2O5, K2O has also been estimated up to 2006-2007 (terminal year of tenth plan) at 16.35, 6.65 and 2.60 million tonnes, respectively.
2.5 Pricing policy: The fertilizer policy is aimed at increasing consumption to meet the food and fiber requirement of growing population through setting up required production capacities, ensuring that quality fertilizers are made available to the farmers throughout the country at uniform and affordable price. It was also recognized that fertilizer use should be profitable to the farmers for which he must get a certain minimum return for the produce. This led to the announcement of procurement prices and minimum support prices for several crops from 1970 onwards. The Marathe Committee was assigned the task of resolving the issue of keeping Farm Gate Prices (FGP) of fertilizers at an affordable level in the face of rising production/import costs. Its recommendations in 1977 led to the birth of the Retention Price Scheme (RPS). This scheme was intended to ensure that both the fertilizer producers as well as the farmers should find it worthwhile to produce and use fertilizers. The policy aimed that each manufacturer is able to get 12% posttax return on investment on efficient operation regardless of the location, age, technology and cost of production. In addition, the government agreed to reimburse the cost of transportation from factory gate to railhead and also take care of the distribution margin. The RETENTION PRICE SCHEME is now restricted to urea only.
16
2.6 Fertilizer subsidy: The RPS system helped in achieving the objective of increased indigenous availability and supplying it to farmers on affordable and uniform price. The difference between FARM GATE PRICES and RPS is paid to the industry
as subsidy.
(b)
Chart showing subsidy on Fertilizers
Production along with escalation in price of raw material and plant cost, the subsidy amount swelled to huge proportions over the years. In an attempt to reduce the burden of subsidy, the government has increased urea price by 10 % w.e.f February 2005. As a result, domestic urea prices have risen from Rs3320/t (US$ 83/t) to Rs3660/t (US$ 91/t) for bagged deliveries to farmers. The average subsidy pattern of urea is around US$ 84/t. prior to decontrol of phosphatic and potassic fertilizers (in the year 1992) subsidy was available to all domestic and imported fertilizers. The fertilizer subsidy increased from US$ 418 million in 1999-00 to US$ 2446 million in 200417
2005. However, the subsidy bill after the decontrol of phosphatic and potassic fertilizer declined and remained below 1990-91 level. The union budget for 2000-01 raised urea prices by 15 percent; DAP by 7 percent and that of MOP by 15 percent. This move enabled the Government of India (GOI) to prune the subsidy bill to some extent. However, there was no increase in urea price in the union budget for 2001-02. In the long term policy, p olicy, the subsidy withdrawal in a phased manner has h as been proposed. However, modality to phase out the subsidy has not been clearly mentioned.
18
2.7 Import of DAP DAP is mainly imported from Jordan, Germany, Canada, Rumania, U.K, Japan, U.S.A, Norway, Saudi Arabia, Philippines, Mexico, U.S.S.R and others.
DAP YEAR Production
Imports
Consumption
1997-98
28.65
20.77
45.18
1998-99
25.95
14.51
40.52
1999-00
19.51
15.69
34.80
2000-01
28.23
8.65
35.86
2001-02
26.47
15.14
34.51
2002-03
27.59
5.34
36.24
2003-04
36.91
14.60
53.76
2004-05
38.68
21.05
58.28
2005-06
38.63
32.68
69.38
2006-07
48.89
8.60
58.85
2007-08
50.94
9.33
61.81
2008-09
57.76
3.44
72.80**
. ( c) Chart showing import of DAP from 1997-2008
19
2.8 Public Sector Companies in INDIAN Fertilizer Market
There are a number of public sector companies in Indian fertilizer market producing
complex
fertilizers,
ammonium
sulphate,
DAP,
calcium
ammonium nitrate and urea. At present, there are nine public sector undertakings in the Indian fertilizer market and one cooperative society. These function under the supervision of the Department of Fertilizers of India. Of the 63 large units producing fertilizers in India, 9 units are dedicated to the production of ammonium sulphate and 38 units produce urea. There are 79 small and medium scale units dedicated to the production of single super phosphate. The Indian industries producing fertilizers have to total capacity of 56 lakh MT of phosphatic nutrient and 121 lakh MT of nitrogen. Some of the public sector undertakings in this sector are mentioned below:
1. Fertilizer Corporation of India Limited (FCIL) 2. Hindustan Fertilizer Corporation Limited (HFC) 3. Pyrites, Phosphates & Chemicals Limited (PPCL) 4. Rashtriya Chemicals and Fertilizers Limited (RCF) 5. National Fertilizers Limited (NFL) 6. Projects &Development India Limited (PDIL) 7. The Fertilizers and Chemicals Travancore Limited (FACT) 8. Madras Fertilizers Limited (MFL) 9. FCI Aravali Gypsum & Minerals India Limited, Jodhpur
Some of the other companies engaged in the production of fertilizers are listed below: 1. Neyveli Lignite Corporation Ltd. (NLC) 2. Hindustan Copper Limited (HCL) 3. Steel Authority of India Limited (SAIL) 20
Private Companies in Indian Fertilizer Market
A number of private companies in the Indian fertilizer market are engaged in production of the agro-input. Most of the companies also engage in exporting fertilizers in the global market, earning foreign capital from the business. The country stands at the third position among the largest producers of the product in the world. India is also ranks among the highest consumers of fertilizers. The euphoric growth in the business has also facilitated the agricultural industry of India, which is dependent for its optimization on the fertilizer industry.
Private Companies Producing Fertilizers In INDIA 1. Paradeep Phosphates Ltd 2. Khaitan Chemicals and Fertilizers Limited 3. Mangalore Chemicals 4. Nagarjuna Fertilizers 5. Zuari Chambal 6. BEC Fertilizers 7. Gujarat State Fertilizers &Chemicals Limited 8. DSCL
Some of the other private companies engaged in the production of fertilizers in India are listed below: 1. The Scientific Fertilizer Co Pvt Ltd 2. Coromandel Fertilizers 3. Deepak Fertilizers and Petrochemicals Corporation Limited 4. Aries AgroVet 5. Devidayal Agro Chemicals
21
The production of nitrogenous fertilizer in the private sector has been increasing in the past few years. The private sector had only 13% share in the production in 1960-61. The private sector has always retained a higher share in the production of phosphatic fertilizer production
Cooperative Companies Producing Fertilizer in India
1. Indian Farmers Fertilizers Co-operative Ltd.(IFFCO) 2. Krishak Bharati Cooperative Limited KRIBHCO
22
CHAPTER-3 COMPANY PROFILE
3.1 PPL - Historical Developments
Paradeep Phosphates Limited (PPL) is a complex fertilizer unit engaged in the production of Di-Ammonium Phosphate (DAP)/NPK fertilizers with its plant located in the Port town of Paradeep at a distance of 120 Km‟ Km ‟s from the State capital, Bhubaneswar in Orissa on the East Cost of India.
With Registered and Corporate Offices at Bhubaneswar, the Company was incorporated as a joint venture between the Government of India and the Republic of Nauru with an investment of Rs. 630 crores on December 24, 1981.
Subsequently it became a wholly owned Government of India
Enterprise since June 1993 after withdrawal of stake by the Government of Nauru.
Later again the Government of India divested 74% of its own stake in favor of a strategic partner – M/s. Zuari Maroc Phosphates Limited (ZMPL) effective from 28th February 2002. The ZMPL is a (50:50) joint venture of Zuari Industries Limited (ZIL), of the K.K Birla Group and the Maroc Phosphor S.A (A wholly owned subsidiary of the fertilizer giant OCP of Morocco). At present ZMPL holds 80.45% of the company‟s shares and rest with the Government of India.
23
3.2 Plant Capacities and Product Profile
Plant Advantages
In-house production of intermediates with capacity for annual production of 6, 60,000 MT of Sulphuric Acid and 2,25,000 MT of Phosphoric Acid.
Captive Power Plant of 32 MW capacity c apacity for reliable operation.
Huge –storage facilities
Captive Berth at Paradeep Port - Capable of handling panama vessels.
Sophisticated automatic ship unloaders.
Facilities to unload directly both solid & liquid cargo from ship to storage tank/silo.
Plant Site well connected with own broad gauge railway siding, road & close to an irrigational canal.
3.3 Product Profile
Navratna Brand of Di-Ammonium Phosphate (DAP)
NPKS
: 20:20:0:13
NPK
: 12:32:16
NPK
: 10:26:26
NPKS
: 15:15:15:9
Sulphuric Acid Ammonia Gypsum in Bulk and Bags
24
3.4 Plant Assets Port Facility
One sophisticated ship unloader of capacity of 1000 MT/Hr solid cargo. Another automatic automatic ship ship unloader unloader has has a capacity capacity of 600 MT/Hr.
The
handling system also provides for discharging of 500 MT of liquid cargo per hour.
3.1 Km long pipe rack and 3.4 Km long conveyor gallery for transport of liquid and solid cargo directly from the ship to the storage tanks and silos respectively in the plant. p lant.
Sulphuric Acid Plant (SAP)
Two similar SAP streams (1000 MTD each)
Installed Capacity 6, 60,000 MT/year.
Date of commercial production 01.06.1992.
Phosphoric Acid Plant (PAP)
One PAP unit (750 MTD)
Installed Capacity 2, 25,000 MT/year.
Three concentrators (2 nos. 150 MTD each & 1 no. 350 MTD)
Date of commercial production 01.06.1992
Di-Ammonium Phosphate Plant (DAP)
Four trains (600 MTD each)
All trains capable of producing DAP/NP & NPK fertilizers.
Total Installed Capacity 7, 20,000 MT/year.
Date of commercial production 01.08.1986 25
Storage Facilities
Ammonia
-
50,000 MT
Phosphoric Acid
-
60,000 MT
Sulphuric Acid
-
36,000 MT
Rock Phosphate
-
60,000 MT
Sulphur
-
45,000 MT
Finished Product
-
60,000 MT
Imported Fertilizers
-
25,000 MT
Bagging Plant
Eight Stitching lines for bagging
Three Platforms for simultaneous loading into wagons wagons
Additional loading facilities for trucks
Bulk loading facilities for gypsum
Platform for dispatch of bagged imported fertilizers & gypsum
Captive Power Plant
Turbo Generators of 2 x 16 MW capacity
Use waste steam from SAP for generation of power.
Oil fired boiler of 110 MT/hr steam generation capacity.
3.5 Environment and Quality
Effluent Treatment Plant (ETP)
The effluent treatment plant at PPL Plant site is one of the largest of its kind in India with a capacity to handle approximately 200 m3/hr of effluent.
26
The ETP is equipped with a 2050 m 3 capacity equalization basin to contain the effluent from all the plants.
3.6 Environment Management
PPL is a zero effluent plant since 2002. PPL has adopted an environmental policy committed to continuous improvement in environmental standards and protection, prevention of pollution and conservation of resources in the plant and its surrounding areas. It has taken taken major steps in achieving its environmental objectives with the help of an Effluent Treatment Plant which is one of the largest in the Indian Fertilizer Industry. Comprehensive revamping of Sulphuric Acid and Phosphoric Acid Plants, separation of acid and storm water drains, and construction of storage yards, reuse of sulphur muck and a state-of-the-art Alkali Scrubber in the Sulphuric Acid Plant are additional features .
3.7 Quality Control
The product quality is monitored and controlled through continuous checking of nutrients Nitrogen, P2O5 and K2O round the clock during production. The analysis is carried carried out with the use of highly sophisticated sophisticated and accurate „Technician Auto Analyzer‟ Analyzer‟ at the Laboratory.
3.8 Our Assets are our people
An employee friendly outlook is always the strength of the organization. Right from the beginning, the management introduced a system of open communication and and dialogue dialogue with the employees. employees.
Good works done by
employees and useful suggestions from them are being rewarded through an award scheme. The focus of the organization is always to enhance the 27
multi-tasking
ability
of
every
employee
through
various
training
programmes . The Company has on its role 932 qualified and competent employees consisting of 509 executives and 423 non-executives. Of these, 809 employees have been posted at the Corporate Office & factory site and 123 in various marketing offices spread throughout the country. Frequently high production and dispatch records have been set, testifying the diligence of a motivated employee force with accountability. 3.9 Navratna Krishi Vikas PPL
develops
farmers
through
different
methods
so that
fertilizer
consumption is increased for fuelling agricultural growth of the Nation. As a good business sense and a corporate social responsibility, PPL has taken up pilot projects as part of Farm Advisory Services under the name “NAVRATNA KRISHI VIKAS” VIKAS” in Nawarangpur & Nayagarh districts of Orissa and Sarguja & Rajnandgaon districts of Chhattisgarh, to help enhancing of agricultural output of farmers and increasing their farm income through ventures like growing Tissue Culture Bananas, Vermi Compost, Mushroom cultivation and helping Self Help Groups in the villages etc. Two more districts viz. Dhenkanal and Khurda have been taken up starting June 2008
These projects are located within our market areas where fertilizer consumption has been very low. The State Government machineries machineries have been associated with such activities and are actively involved in these projects with a slogan of “Serving Farmers, Saving Farming” .
Various
promotional
training
and
developmental
activities
include
farmer
programmes, demonstration of usage of hybrid seeds and balanced nutrition, soil testing campaigns, crop diversification, dealers and retailers training programmes. For soil testing PPL has both a mobile testing unit and laboratory facilities in the plant.
28
For producing DAP and Complex fertilizer of NPK, PPL manufactures its intermediate raw materials. materials. The main units are:
Sulphuric Acid Plant
Phosphoric Acid Plant
Di-Ammonium Phosphate Plant
Supported with
Bagging Plant with Railway Siding and Platform
Silo and Storage Tanks for storing different raw materials and
products
Captive Power Plant
Off-sites & Utilities
Effluent Treatment Plant
3.10 Plant Township Advantages
PPL has built a modern township for its employees employees at Paradeep. Highlights of the township are
Well built quarters in several colonies
Quarter is provided to all employees
A public school managed by DAV Trust
State-of-the-art Hospital managed by the Sun Hospital Group
Employee Recreation Club
Ladies Club
PPL Employees Consumer Co-operative Store Limited
Paradeep Phosphates Employees Co-operative Credit & Thrift Society Limited
Navratna Park
Temple for religious activities 29
CHAPTER-4 CAPITAL BUDGETING 4.1 MEANING Capital Budgeting is the process of making investment decisions in capital expenditure. A capital expenditure may be defined as an expenditure the benefit of which are expected to be received over a period of time e xceeding one year. The main characteristics of a capital expenditure are that the expenditure is incurred at one point of time whereas benefits of the expenditure are realized at different points of time in future. Capital expenditure involves non-flexible long term commitment of funds. Thus capital expenditure decisions are also called Long-Term Investment Decision. Capital budgeting involves the planning and control of capital c apital expenditure.
DEFINITION: R.M.LYNCH has defined capital Budgeting as “Capital Budgeting consists of employment of available capital for the purpose of maximizing the long term profitability of the firm”. firm ”.
Capital Budgeting is a many-sided activity. It includes searching for new and more profitable investment proposals, investigating, engineering and marketing considerations to predict the consequences of accepting the investment and making economic analysis to determine the profit potential of each investment proposal. Its basic features can be summarized as follows; 1.
It has the potentiality of making large l arge anticipated profits.
2.
It involves a high degree of risk.
3.
It involves a relatively long-time period between the initial outlay and the anticipated return. 30
Capital Budgeting consists of planning and the development of available capital for the purpose of maximizing the long-term profitability of the firm.
4.2 NEED AND IMPORTANCE OF CAPITAL BUDGETING Capital Budgeting means planning for capital assets. Capital Budgeting decisions are vital to any organization as they include the decision to;
1. Whether or not funds should be invested in long term projects such as setting setting of an industry, purchase of plant and machinery etc., 2. Analyze the proposal for expansion or creating additional capacity. 3. To decide the replacement of permanent assets such as building and equipments. 4. To make financial analysis of various proposal regarding capital investments so as to choose the best out of many alternative proposals. The importance of capital Budgeting can be well understood from the fact that an unsound investment decision may prove to be fatal to the very existence of the concern. The need, significance or importance of capital budgeting arises mainly due to the following.
1. Large Investments
Capital budgeting decisions, generally involves large investment of funds. But the funds available with the firm are always limited and the demand for funds exceeds the resources. Hence it is very important for a firm to plan and control its capital expenditure.
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2. Long-term commitment of Funds Capital expenditure involves not only large amounts of funds but also funds f unds for long-term or more or less on permanent basis. The long-term commitment of funds increases the financial risk involved in the investment decision.
3. Irreversible Nature The capital expenditure decisions are of irreversible nature. Once the decisions for acquiring a permanent asset is taken, it became very difficult to dispose of these assets without incurring heavy losses.
4. Long-term Effect of profitability The investment decisions taken today not only affects present profit but also the future profitability of the business. A profitable project selection is fatal to the business.
5. Difficulties of investment decisions The long term investment decisions are more difficult d ifficult to take because, 1. Decision extends to a series of years beyond the current accounting period. 2. Uncertainties of future and 3. Higher degree of risk.
6. National Importance An investment decision through taken by individual concerns is of national importance because it determines employment, economic activities and economic growth.
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7. Effect on cost structure By taking a capital expenditure decision, a firm commits itself to a sizeable amount of fixed cost in terms of interest, supervisors salary, insurance, building rent etc. If the investment turns out to be unsuccessful in future or produces less than anticipated profits, the firm will have to bear the burden of fixed cost. 8. Impact on firm‟s competitive strength The capital budgeting decisions affect the capacity and strength of a firm to face competition. It is so because the capital investment decisions affect the future profits and costs of the firm. This will ultimately affect the firms competitive strength. 9. Cost control In capital budgeting there is a regular comparison of budgeted and actual expenditures.
Therefore
cost
control
is
facilitated
through
capital
budgeting.
10. Wealth Maximization The basic objective of financial management is to maximize the wealth of the shareholders. Capital budgeting helps to achieve this basic objective. Capital budgeting avoids over investments and under investments in fixed assets. In this way capital budgeting protects the interest of the shareholders and of the enterprise.
4.3 STEPS IN CAPITAL BUDGETING Capital budgeting is a complex process. It involves decision relating to the investment of current funds for the benefit to be achieved in future which is always uncertain. Capital budgeting is a six step process. The following steps are involved in capital budgeting; 33
1. Project generation
The capital budgeting process begins with generation or
identification of
investment proposals. This involves a continuous search for investment opportunities which are compatible with firm‟s objectives.
2. Project screening Each proposal is then subject to a preliminary screening process in order to assess whether it is technically feasible, resources required are available, and expected returns are adequate to compensate for the risks involved.
3. Project evaluation
After screening of project ideas or investment proposals the next step is to evaluate the profitability of each proposal. This involves two steps; a. Estimation of cost and benefit in terms of cash flows b. Selecting an appropriate criterion to judge the desirability of the project.
4. Project selection
After evaluation the next step is the selection and the approval of the best proposal. In actual practice all capital budgeting decision are made at multiple levels and are finally approved by top management. 5. Project execution and implementation
After the selection of project funds are allocated for them and a capital budget is prepared. It is the duties of the top management or capital budgeting committee to ensure that funds are spend in accordance with allocation made in the capital budget. 34
6. Performance review
After the implementation of the project, its progress must be reviewed at periodical intervals. The follow-up or review is made by comparing actual performance with the budget estimates.
4.4 OPERATING BUDGET AND CAPITAL BUDGET Most of the large firms prepare two different budgets each year.
1. OPERATING BUDGET
Operating budget shows planned operations for the forthcoming period and includes sales, production, production cost, and selling and distribution overhead budgets. Capital budgets deals exclusively with major investment proposals.
2. CAPITAL EXPENDITURE BUDGET
Capital Expenditure is a type of functional budget. It is the firm‟s formal plan for the expenditure of money for purchase of fixed assets. The budget is prepared after taking in to account the available production capacities, probable reallocation of existing resources and possible improvements in production techniques. If required, separate budgets can be prepared for each item of capital assets such as a building budget, a plant and machinery budget etc.
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4.5 OBJECTIVES OF CAPITAL EXPENDITURE BUDGET The objectives of Capital Expenditure Budget are as follows. 1. It determines the capital projects on which work can be started during the budget period after taking in to account their urgency and the expected rate of return on each project. 2. It estimates the expenditure that would have to be incurred on capital projects approved by the management together with the source or sources from which the required funds would be obtained. 3. It restricts the capital expenditure on projects within authorized limits.
CONTROL OVER EXPENDITURE THROUGH CAPITAL EXPENDITURE E XPENDITURE BUDGET
The capital expenditure budget primarily ensures that only such projects are taken in hand which are either expected to increase or maintain the rate of return on capital employed. Each proposed project is appraised and only essential project or projects likely to increase the profitability of the organization are included in the budget. In order to control expenditure on each project, the following procedure is adopted.
1. A project sheet is maintained for each project. 2. In order to ensure that the expenditure on different project is properly analyzed. 3. The expenditure incurred on the project is regularly entered on the project sheets from various sources such as invoices of assets purchased, bill for delivery charges etc., 4. The management is periodically informed about expenditure incurred in respect of each project under appropriate heads. 36
5. In case project cost is expected to increase; a supplementary sanction for the same is obtained. 6. In financial books the total expenditure incurred on all projects is separately recorded.
4.6 TACTICAL AND STRATEGIC INVESTMENT DECISION Investment decision can be classified as, 1. Tactical Decision
A Tactical Decision generally involves a relatively small amount of funds and does not constitute a major departure from the past practices of the company. 2. Strategic Decision A Strategic Investment Decision involves a large sum of money and may also result in a major departure from the past practices of the company. Acceptance of a Strategic Investment Decision involves a significant change in the company‟s expected profits associated with a high degree of risk.
4.7 RATIONALE OF CAPITAL EXPENDITURE Efficiency is the rationale underlying all capital decisions. A firm has to continuously invest in new plant or machinery for expansion of its operations or replace worn-out machinery for maintaining and improving its efficiency. The overall objective is to maximize the firm‟s profits and thus optimizing the return on investment. This objective can be achieved either by increased revenues or by cost reduction. Thus capital expenditure can be of two types; 1. Expenditure Increasing Revenue 2. Expenditure Reducing Cost 37
4.8 KINDS OF CAPITAL INVESTMENT PROPOSALS A firm may have several investment proposals for its consideration. It may adopt one of them, some of them or all of them depending upon whether they are independent, contingent or dependent or mutually exclusive.
1. INDEPENDENT PROPOSALS
These are proposals which do not compete with one another in a way that acceptance of one precludes the possibility of acceptance of another. In case of such proposals the firm may straight away “accept or reject” a proposals on the basis of minimum return on investment required. All these proposals which give a higher return than a certain desired rate of return are accepted and the rest are rejected.
2. CONTINGENT OR DEPENDENT PROPOSALS These are proposals whose acceptance depends on the acceptance of one or more other proposals. When a contingent investment proposal is made, it should also contain the proposal on which it is dependent in order to have a better perspective of the situation. 3. MUTUALLY EXCLUSIVE PROPOSALS These proposals which compete with each other in a way that the acceptance of one precludes the acceptance of other or others. Two or more mutually exclusive proposals cannot both or all be accepted. Some techniques have to be used for selecting the better or the best one. Once this is done, other alternative automatically gets eliminated.
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4. REPLACEMENT PROPOSALS These aim at improving operating efficiency and reducing costs. These are called cost reduction decisions. 5. EXPANSION PROPOSALS
This refers to adding capacity to existing product line. 6. DIVERSIFICATION DIVERSIFICATION PROPOSALS Diversification means operating in several markets rather than a single market. It may also involve adding new products to the existing products. Diversification decisions require evaluation of proposals to diversify in to new product lines, new markets etc., for reducing the risk of failure.
7. CAPITAL RATIONING PROPOSALS Capital rationing means distribution of capital in favor of some acceptable proposals. A firm cannot afford to undertake all profitable proposals because it has limited funds to invest. In such a case, these various investment proposals compete for limited funds and the firm has to ration them. Thus the situation where the firm is not able to finance all the profitable investment opportunities due to limited resources is known as capital rationing.
4.9 FACTORS AFFECTING CAPITAL INVESTMENT DECISIONS The following are the four important factors which are generally taken in to account while making a capital investment decision.
39
1. The Amount of Investment In case a firm has unlimited funds for investment it can accept all capital investment proposals which give a rate of return higher than the minimum acceptable or cut-off rate. 2. Minimum Rate of Return on Investment
The management expects a minimum rate of return on the capital investment. The minimum rate of return is usually decided on the basis of the cost of capital. 3. Return Expected from the Investment
Capital investment decisions are made in anticipation of increased return in the future. It is therefore necessary to estimate the future return or benefits accruing from the investment proposals while evaluating the capital investment proposals. 4. Ranking of the Investment Proposals When a number of projects appear to be acceptable on the basis of their profitability the project will be ranked in the order of their profitability in order to determine the most profitable project.
4.10 METHODS OF CAPITAL BUDGETING OR EVALUATION OF INVESTMENT PROPOSALS A business firm has a number of proposals regarding various projects in which it can invest funds. But the funds available with the firm are always limited and it is not possible to invest funds in all the proposals at a time. The most widely accepted techniques used in estimating the cost returns of investment projects can be grouped under two categories; 40
1. TRADITIONAL METHODS (NON DISCOUNTED CASH FLOW) a. Payback Period Method b. Average rate of Return Method
2. MODERN METHODS (DISCOUNTED CASH FLOW) a. Net Present Value Method b. Internal rate of Return Method c. Profitability Index Method TRADITIONAL METHODS (NON DISCOUNTED CASH FLOW)
A.
PAY BACK PERIOD METHOD
The payback period method is the simplest method of evaluating investment proposals. Payback period represents the number of years required to recover the original investment. The payback period is also called Pay Out or Pay off Period. This period is calculated by dividing the cost of the project by the annual earnings after tax but before depreciation. Under this method the project is ranked on the basis of the length of the payback period. A project with the shortest payback period will be given the highest rank. METHODS OF COMPUTATION OF PAYBACK PERIOD
There are two ways of calculating the payback period. a. When annual cash inflow is constant The formula is find out the payback period if the project generates constant annual cash inflow is; Original cost of the project Payback period =
Annual cash inflow
Annual cash inflow is the annual earning (profit depreciation and after taxes) before 41
b. When annual cash inflow is not constant If the annual cash inflows are unequal the payback period can be found out by adding up the cash inflows until the total is equal to the initial cash outlay of the project. ADVANTAGES OF PAYBACK PERIOD 1. Simple to understand and easy to calculate. 2. It reduces the chances of loss through obsolescence. 3. A firm which has shortage of funds find this method very useful. 4. This method costs less as it requires only very little effort for its Computation. DISADVANTAGES 1. This method does not take in to consideration the cash inflows beyond the payback period. 2. It does not take in to consideration the time value of money. It considers the same amount received in the second year and third year as equal. 3. It gives over emphasis for liquidity. ACCEPTANCE RULE The following are the Payback [P.B.Rules] Accept
P.B
Reject
P.B>cut-off rate
May Accept
P.B
Cut-off rate Cut-off rate is the rate below which a project would not be accepted. If ten percentage is the desired rate of return, the cut-off rate is 10%.The cut-off point may also be in terms of period. If the management desires that the 42
investment in the project should be recouped in three years, the period of three years would be taken as the cut-off period. A project incapable of generating necessary cash to pay for the initial investment in the project with-in three years will not be accepted.
II. AVERAGE RATE OF RETURN (ARR) METHOD
This method otherwise called the Rate of Return Method, takes in to account the earnings expected from the investment over the entire life time of the asset. The various projects are ranked in order of the rate of returns. The project with the higher rate of return is accepted. Average Rate of Return is found out by dividing the average income after depreciation and taxes, i.e. the accounting profit, by the Average Investment.
Average Annual Earnings ARR =
x 100 Average Investment
Where; Average Annual Earnings is the total of anticipated annual earnings after depreciation and tax (accounting profit) divided by the number of years. Average Investment means
i. If there is no salvage (Scrap value) Total Investment
2
43
ii. If there is scrap value Total Investment-Scrap Value + Scrap Value 2 iii. If there is additional working capital
Total Investment-Scrap Value + Scrap +Additional Working Capital 2 ADVANTAGES OF AVERAGE RATE OF RETURN (ARR) METHOD
1.
It is easy to calculate and simple to understand.
2.
Emphasis is placed on the profitability of the project and not on liquidity.
3.
The earnings over the entire life of the project is considered for
4.
ascertaining the Average Rate of Return.
5.
This method makes use of the accounting profit.
DISADVANTAGES
1. Like the payback period method this method also ignores the time value of money. The averaging technique gives equal weight to profits occurring at different periods. 2. This averaging technique ignores the fluctuations in profits of various years. 3. It makes use of the accounting profits, not cash flows, in evaluating the project.
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1. DISCOUNTED CASH FLOW METHODS
The payback period method and the Average rate of Return Method do not take in to consideration the time value of money. They give equal weight to the present and the future flow of incomes. The discounted cash flow methods are based on the concept that a rupee earned today is more worth than a rupee earned tomorrow. These methods take in to consideration the profitability and also the time value of money.
I. NET PRESENT VALUE (NPV) METHOD
The Net Present Value Method (NPV) gives consideration to the time value of money. It views that the cash flows of different years differ in value and they become comparable only when the present equivalent values of these cash flows of different periods are ascertained. For this the net cash inflows of various periods are discounted using the required rate of return, which is a predetermined rate .If the present value of expected cash inflows exceeds the initial cost of the project, the project is accepted. NPV = Present value of cash inflows-Present value of initial investment
STEPS IN NET PRESENT VALUE (NPV) METHOD
1. Determine an appropriate rate of interest to discount cash c ash flows. 2. Compute the present value of total investment outlay (i.e., cash outflow) at the determined discounting rate. 3. Compute the present value of total cash inflows (profit before depreciation and after tax) at the above determined discount rate.
45
4. Subtract the present value of cash outflow (cost of investment) from the present value of cash inflows to arrive at the net present value. 5. If the net present value is negative i.e., the present value cash outflow is more than the present value of cash inflow the project proposals will be rejected .If net present value is zero or positive the proposal can be accepted. 6. If the projects are ranked the project with the maximum positive net present value should be chosen. ADVANTAGES OF NET PRESENT VALUE METHOD
1. It considers the time value of money. 2. It considers the earnings over the entire life of the project. 3. Helpful in comparing two projects requiring same amount of cash outflows. DISADVANTAGES OF NET PRESENT VALUE METHOD 1. Not helpful in comparing two projects with different cash outflows. 2. This method may be misleading is in comparing the projects of unequal lives. II. INTERNAL RATE OF RETURN (IRR) METHOD The Internal Rate of Return for an investment proposal is that discount rate which equates the present value of cash inflows with the present value of cash outflows of the investment. The Internal Rate of Return is compared with a required rate of return. If the Internal Rate of Return of the investment proposal is more than the required rate of return the project is rejected. If more than one project is proposed, the one which gives the highest internal rate must be accepted. acc epted. 46
It can be calculated by the following formula P1-Q IRR = L+
xD P1-P2
Where, L = Lower rate of discount P1 = Present value of cash c ash inflows at lower rate of discount P2 = Present value at higher discount rate Q = Initial Investment D = Difference in rate
ADVANTAGES OF INTERNAL RATE OF RETURN
1. It considers the time value of money. 2. The earnings over the entire life of project is considered. 3. Effective for comparing projects of different life periods and
different timings in timings of cash inflows. DISADVANTAGES
1. Difficult to calculate. 2. This method presumes that the earnings are reinvested at the rate earned by the investment which is not always true. Accept or Reject Rule Internal Rate of Return is the maximum rate of interest which an organization can afford to pay on the capital invested in a project. A project would qualify to be accepted if Internal Rate of Return exceeds the cut-off rate. While evaluating two or more projects, a project giving a higher Internal Rate of Return would be preferred. This is because higher the rate of return, the more profitable is the investment. 47
III. PROFITABILITY INDEX METHOD
Present Value of Cash Inflows Profitability Index = Present Value of Cash Outflows
This is also called Benefit-Cost ratio. This is slight modification of the Net Present Value Method. The present value of cash inflows and cash outflows are calculated as under the NPV method. The Profitability Index is the ratio of the present value of future cash inflow to the present value of the cash outflow, i.e., initial cost of the project.
If the Profitability index is equal to or more than one proposal the proposal will be accepted. If there are more than one investment proposals, the one with the highest profitability index will be preferred.
This method is also known as Benefit-Cost ratio because the numerator measures benefits and the denominator denominator measures costs. ”It is the ratio of the present value of cash inflow at the required rate of return to the initial cash outflow of the investment.
4.11 Cost Effective Analysis In the cost effectiveness analysis the project selection or technological choice, only the costs of two or more alternative choices are considered treating the benefits as identical. This approach is used when the acquisition of how to minimize the costs for undertaking an activity at a given discount rates in case the benefits and operating costs are given, one can minimize the capital cost to obtain given discount.
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4.12 Project Planning: The planning of a project is a technically pre- determined set of inter related activities involving the effective use of given material, human, technological and financial resources over a given period of time. Which in association with other development projects result in the achievement of certain predetermined objectives such as the production of specified goods & services?
Project planning is spread over a period of time and is not a one shot activity. The important stages in the life of a project are:
1.
It‟s Identification
2.
It‟s initial formulation
3.
It‟s evaluation (Whether to select or to project)
4.
It‟s final formulation
5.
It‟s implementation
6.
It‟s completion and operation
The time taken for the entire process is the gestation period of the project. The process of identification of a project begins when we are seriously trying to overcome certain problems. They may be non- utilization to overcome available funds. Plant capacity, expansion etc
Contents of the project report: 1.
Market and marketing
2.
Site of the project
3.
Project engineering dealing with technical aspects of the project.
4.
Location and layout of the project p roject building 49
5.
Building
6.
Production capacity.
7.
Work Schedule
Details of the cost of the Project:-
1.
Cost of land
2.
Cost of Building
3.
Cost of plant and machinery
4.
Engineering know how fee
5.
Expenses on training Erection supervision
6.
Miscellaneous fixed assets
7.
Preliminary expenses
8.
Pre-operative expenses
9.
Provision for contingencies
4.13 RISK AND UNCERTAINITY IN CAPITAL BUDGETING All the techniques of capital budgeting requires the estimation of future cash inflow and cash outflows. The cash flows are estimated abased on the following factors.
Expected economic life of the project.
Salvage value of the asset at the end of the economic life.
Capacity of the product.
Selling price of the product.
Production cost.
Depreciation.
Rate of Taxation 50
Future demand of the product, etc.
But due to uncertainties about the future the estimates of demand, production, sales costs, selling price, etc cannot be exact, for example a product may become obsolete much earlier than anticipated due to un expected technological developments all these elements of uncertainties have to be take into account in the form of forcible risk while making an investment decision. But some allowances for the element of risk have to be proved.
4.14 FACTORS INFLUENCING CAPITAL EXPENDITURE DESCISIONS: There are many factors financial as well as non financial which influence the capital expenditure decisions and the profitability of the proposal yet, there are many other factors which have to be taken into consideration while taking a capital expenditure decisions. d ecisions. They are
1. URGENCY Sometime an investment is to be made due to urgency for the survival of the firm or to avoid heavy losses. In such circumstances, proper evaluation cannot be made though profitability tests. Examples of each urgency are breakdown of some plant and machinery fire accidents etc.
2. DEGREE OF UNCERTAINTY
Profitability is directly related to risk, higher the profits, greater is the risk or uncertainty.
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INTANGIBLE FACTORS
Sometimes, a capital expenditure has to be made due to certain emotional and intangible factors such as safety and welfare of the workers, prestigious projects, social welfare, goodwill of the firm etc. 1. AVAILABILITY OF FUNDS As the capital expenditure generally requires the previsions of laws solely influence by this factor and although the project may not be profitable. Yet the investment has to be made.
2. FUTURE EARNINGS
A project may not be profitable as competed to another today, but it may be profited to increase future earnings.
Sometimes project with some lower profitability may be selected due to constant flow of income as compared to another project with an irregular and uncertain inflow of income.
4.15 CAPITAL EXPENDITURE CONTROL Capital expenditure involves no-flexible long-term commitments of funds. The success of an enterprise in the long run depends up on the effectiveness with which the management makes capital expenditure decision. Capital expenditure decisions are very important as their impact is more or less permanent on the well being and economic health of the enterprise. Because of this large scale mechanization and automation and importance of capital expenditure for increase in the profitability of a concern. It has become essential to maintain an effective system of capital expenditure control. 52
4.16 OBJECTIVES CONTROL OF CAPITAL EXPENDITURE
To make an estimate of capital expenditure and to see that the total cash outlay is within the financial resources of the enterprise
To ensure timely cash inflows for the projects so that no availability of cash may not be problem in the implementation of the problem.
To ensure that all capital expenditure is properly sanctioned.
To properly coordinate the projects of various departments
To fix priorities among various projects and ensure their followup.
To compare periodically actual expenditure with the budgeted ones so as to avoid any excess expenditure.
To measure the performance of the project.
To ensure that sufficient amount of capital expenditure is incurred to keep pace with rapid technological development.
To prevent over expansion.
4.17 STEPS INVOLVED IN CONTROL OF CAPITAL EXPENDITURE
Preparation of capital expenditure budget.
Proper authorization of capital expenditure.
Recording and control of expenditure.
Evaluation of performance.
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LEASE FINANCING
Lease finance is an agreement for the use of an asset for a specified rental. The owner of the asset is called the lesser and the user the lesser 1)
Operating leases
2)
Financial leases
Operating leases are short-term no-cancel able leases where the risk of obsolescence in borne by the lesser Financial leases are long-term non-cancelable leases where any risk in the use of asset is borne by the lessee and he enjoys the return too.
Preliminary budget estimates for the year following the budget year.
GENERAL GUIDELINES:The capital funds budget is to be prepared under six major heads. 1)
Continuing schemes
2)
New schemes
3)
Modernization and rationalization
4)
Township
5)
Science and technology
6)
EDP schemes
CONTINUING SCHEMES These schemes include all such schemes which are under implementation of which funds prevision has been made in the current year /prevision is required in the budget year.
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NEW SCHEMES This scheme includes all such schemes, which are proposed to be initiated in the budget year and for which under provisions is required in the budget year. Normally, such schemes are included in the five-year plan of the company approved by the planning commission. MODERNIZATION AND RATIONALIZATION (M&R) This includes item of plant and machinery etc for which funds required in the budget year and the following year. All item included in M&R should result
in
cost
reduction/quality
improvement/rebottle
necking/replacement/productivity, improvement and welfare. The M&R items are to be submitted in the following main characteristics accompanied with full justification on the agenda of facilities increased output and production, quality requirements bottlenecks.
1. Replacement / modernization. 2. Balancing facilities (essentially to increase production). 3. Operational requirements including material handling 4. Quality/testing facilities. 5. Welfare 6. Minor works. These requirements should be protested term wise. A separate proposal is required for M&R items costing more than Rs. 10, 00,000. TOWNSHIP
Township budget is divided into two parts.
Continuing township schemes
New townships schemes. 55
Funds required under each schemes should be backed up with full data on number on quarter/scope of work to be completed against the funds requirements phasing of budgeted funds for current year, budget year and following year etc, should be given similar information on number of quarter/scope of work already completed, expenditure incurred till last year, satisfaction level it is to be added in the above back up information for each scheme.
SCIENCE AND TECHNOLOGY
This budget can be divided into in to two categories
Continuing schemes.
New schemes to be taken up in the budget year.
The schemes should fall in any of the above cartages giving details on physical and financial progress etc.
EDP SCHEMES
All funds requirements for computer are information system should be grouped under EDP schemes and projects accordingly.
BUYING OR PROCURING
Buying or procurement involves purchasing an asset permanently in the form of cash or credit.
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LEASING VS BUYING Leasing equipment has the tax advantage of depreciation, which can mutually benefit the lesser and lessee, other advantage of leasing, include convenience and flexibility as well as specialized services to the lessee. Lease privies handy to those linens, which cannot obtain loan capital form normal sources.
The pros and cons of leasing and buying are to be examined thoroughly before deciding the method of procurement i.e. leasing or buying.
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CHAPTER-5 FINANCING OF PROJECT Project financing is considered right from the time of the conception of the project. The proposal of the project progress working capital, so, in general a project is considered as a „mini firm‟ is a part and parcel of the organization.
5.1 Sources of Finance:
Loan Financing
Security Financing
Internal Financing
Loan Financing: (a). Short-
Term Loans & Credits
Short – Term Loans & Credits are raised by a firm for meeting its working capital requirements. These are generally for a short period not exceeding the accounting period i.e., one – year.
Types of Short Term Loans & Credits:
1. Trade Credit. 2. Installment Credit. 3. Advances. 4. Commercial papers 5. Commercial banks 6. Cash Credits 7. Over Drafts 8. Public Deposits. 58
(b). Term Loans:
Term loans are given by the financial institutions and banks, which form the primary source of long term debt for both private as well as the Government organizations. Term loans are generally employed to finance the acquisition of fixed assets that are generally repayable in less than 10 years. In addition to short- term loans, company will raise medium term and long term loans.
5.2 Security Financing: Corporate Securities can be classified into two categories. (a)
Ownership Securities or capital stock.
(b)
Creditor ship Securities or debt Capital.
(a)
Ownership Securities or capital Stock: Types of Ownership Securities or Capital Stock:
i)
Equity Capital:
Equity Capital is also known as owner‟s capital in a firm. The holders of these shares are the real owners of the company. They have a control over the working of the company. Different ways to raise the equity capital. o
Initial public offering.
o
Seasoned offering
o
Rights issue.
o
Private placement
o
Preferential allotment.
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ii)
Preference Capital:
These shares have certain preferences as compared to other type of shares. 1.
Payment of Divided
2.
Repayment of the capital at the time of liquidation of the company.
b)
Types of Creditor ship Securities:
Debentures:
Debentures are an alternative to the term loans and are instruments for raising the debt finance. Debenture holders are the creditors of a company and the company and the company have the obligations to pay the interest and principal at specified times. Debentures provide more flexibility, with respect to maturity, interest rate, security and repayment Debentures may be fixed rate of interest or floating rate or may be zero rates. Debentures & Ownership Securities help the management of the company to reduce the cost of capital.
5.3 Internal Financing: A new company can raise finance only through external sources such as shares, debentures, loans and public deposits. For existing company they need to raise funds through internal source. Such as retained earnings depreciation as a source of funds. Some other innovative source of finance
Venture Capital
Seed Capital
Bridge Finance
Lease Financing
Euro- Issues 60
CHAPTER-6 INTRODUCTION TO FINANCE AND ACCOUNTS DEPARTMENT
Finance is the lifeblood of the business .According to Howard and Upton “Finance is that administrative area or set of administrative function in organizations which relate with the arrangements of cash and credit so that the organization may have the means to carry out of its objective as possible.”
6.1 Functions Of Finance and Accounting Department Finance & Accounts Department of BHUBANESHWAR Unit is controlled by Head Of the Department i.e. C.F.O. His main function is to co-ordinate all activities related to Finance & Accounts and report to Head Office‟s Finance & Accounts Department / Finance Director as well Unit Head. Finance & Accounts Department function various type of activities as per the Guidelines issued by Head Office, Purchase Procedure, Service Rules, Powers of officer etc. At present to carry out all the related activities, following four sectional heads are reporting to him for work connected to their Sections. All the four sectional heads independently report to Departmental Head. However, in case, Departmental Head happens on tour or on leave, the next senior sectional head takes the charge of the department and remaining here sectional head will report to him for all the work connected to their Sections.
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6.2 FINANCE DEPARTMENT COMPRISES OF 1. Pay roll section 2. Raw materials 3. Fixed assets & insurance 4. Works bill section 5. Purchase bill section 6. Books & budgets 7. Financial concurrence
PAY ROLL SECTION Pay roll section takes care of all the financial issues of employees in coordination with Administrative & Personnel Department. Its functions includes management of salaries, TA/DA, loans & advances, misc payment related to employees, Perk/There allowance payments etc. Here records of each employee are maintained regarding basic pay, leave encashment, medical, salary, increments, promotion based perks, etc.
RAW MATERIALS Different types of Raw Materials that are required at PPL, PARADEEP Unit are as follows : 1. Sulphuric Acid 2. Phosphoric Acid 3. Ammonia 4. Potash 5. MAP 6. Urea 7. Filler
62
Raw Material section in F & A department does the accounting of above mentioned raw-material which includes receipt of raw- material are purchased, monthly consumption as per the production department and payment to the suppliers.
MISCELLANEOUS ACCOUNTS
The miscellaneous jobs can be broadly divided into following categories:
1.
Passing of bills of miscellaneous nature;
2.
Accounting of cash imprested and advances for expenses;
3.
Miscellaneous recoveries from outside agencies.
Miscellaneous bills includes rates contracts for service contract for air conditioner, water coolers, weighing machines, franking machines, knitting of chairs, etc. Others miscellaneous bills includes telephone rentals, STD calls, local calls, teleprinters , fax, service bills, advertisement bills, electricity bills, printing and block making bills, bills of travel agents, bills of canteen purchases, etc. Annual Contracts and Hiring of taxi, motors, etc. is also included in this.
WORKS BILLS
Work bills section is entrusted with the task of checking and authentication of APF received from various departments such as Civil, Plant, and Township etc. They have to keep record and maintain account. They have to verify with respect to measurements, Tax provisions like TDS and other deductions like EMD, Security and penalty etc.
63
PURCHASE BILLS
In purchase bill, treatment is given to the bills on purchase of machinery and tools and spares etc. for accounting requirements and book keeping as well as record maintenance and tax deductions and authentication of AFP on purchase of Goods and Services.
FINANCIAL CONCURRENCE
Financial concurrence deals with crosschecking and green signaling the requisition for purchases made by various indent departments of the unit. They check for the availability of budget and ascertain its necessity and critically for regular and smooth operations of the plants and activities of various departments.
BOOKS & BUDGETS
Books and budget deal with revenue budget compilation, monitoring and control, reconciliation of inter unit accounts, maintenance of books of accounts and submission of monthly / quarterly / annual reports, COP processing and attending internal / statutory / tax auditors.
64
CHAPTER-7 DATA ANALYSIS AND INTERPRETATION
7.1 Production (2006-2007 to 2010-2011) (In MT) Particulars
06-07
07-08
08-09
09-10
10-11
DAP
822395
879765
470155
764464
657550
NPK
486415
401580
552085
447995
541352
182
178
142
168
167
Production
% Capacity utilization
7.1 Sales: Manufactured Fertilizers(2006-2007 to 2010-2011) (In MT) Particulars
06-07
07-08
08-09
09-10
10-11
DAP
838586
892212
469694
776715
649407
NPK
479529
423187
545728
458248
519185
7.2 Sales: Traded Fertilizers (2006-2007 to 2010-2011) (In MT) Particulars
06-07
07-08
08-09
09-10
10-11
DAP
---
---
46766
112954
159739
MOP
142152
80530
129733
110883
117753
65
7.3 Balance Sheet (2006-2007 (2006-2007 to 2010-2011) (In lacs) Particulars
06-07
07-08
08-09
09-10
10-11
Auth share capital
100000
100000
100000
100000
100000
Paid up capital
57545
57545
57545
57545
57545
---
---
---
10791
28500
Secured loan
13619
2785
85072
104307
113987
Unsecured loan
76475
75788
42725
8329
---
147639
136118
185342
180972
200032
73251
75734
77436
79349
83178
26887
25706
24149
23652
25419
Investments Investme nts
---
---
82130
605
5
Deferred tax Assets
---
---
---
3369
2037
Inventories Inventori es
28595
21496
55159
37363
50023
Sundry Debtors
68236
56541
86632
60052
51764
Others
6130
47507
103523
117391
107567
Total
102961
125544
245314
214806
209354
48770
73207
170615
61460
36783
54191
52337
74699
153346
172571
131
---
---
---
---
66430
58075
4364
---
---
147639
136118
185342
180972
200032
Sources of Funds:
Reserve and surplus
Total sources of funds
Application of Funds: Gross Block(including CWIP) Net Block(including CWIP)
Current Assets
Current Liabilities and Provisions Net Current Assets Deferred Revenue Exp Accumulated Loss TotalApplication(funds) TotalApplication(fun ds)
66
7.4 Profit and Loss Statement(2006-2011) Statement(2006-2011) (In Lacs) 06-07
07-08
08-09
09-10
10-11
119793
120663
94368
119831
128297
86276
124527
417077
178583
222170
652
3487
49530
18153
12597
206721
248677
560975
316927
363064
187719
230047
484485
288612
327032
(19002)
(18630)
(76490)
(28315)
(36032)
3402
3817
3347
3048
2470
15600
14813
73143
25267
33562
4613
6387
5262
7294
9644
10987
8426
67881
17973
23918
Taxes including FBT
59
70
14170
6187
8278 82 78
Debit/(Credit) for deferred
---
---
---
(3369)
1332
---
---
---
---
(3400)
10928
8356
53711
15155
17708
Working results Sales Subsidy Other Income Total Cost Of Sales(including prior period adj but excluding Dep and Interest)
Gross Margin Depreciation Depreciatio n Profit/(loss) before Int and Taxes
Interest Interes t Profit/(loss) before taxes
tax TaxationExpenses Credited NET PROFIT/(LOSS)
67
CHAPTER-8 EVALUATION OF PROJECT USING CAPITAL BUDGETING TECHNIQUES 8.1 PROJECT EVALUATION Name of the Project: Baggaging plant with handling system . Project Estimate: Ventured into the market and got a quote for 300 Cr. Project Cost: 300 Cr Assumption: The Company has currently a dispatch mechanism which is mechanized for dispatching or bagging 3,300 MT/day. The company plans to increase its production level to 16, 00,000 MT/annum. So, the dispatch system should be increased to an additional 1,550 Mt/day so that the total dispatching to be done per day goes up to 4,850Mt/day. So, as to ensure the smooth functioning of the dispatching system and this can be done by setting up a new baggaging plant… Present Capacity-3,330MT/day New Capacity - 4,850MT/day Difference or excess production - (4850-3300)MT/day=1,550M (4850-3300)MT/day=1,550MT/day T/day
8.2 STEPS IN THE EVALUATION OF THE PROJECT STEP1: Capital Budget Estimates: The first and the foremost step in the evaluation of a project is the budget estimate of the project. And here the estimate of the project is 300 crores. This includes:1.
Extension of Bagging Plant.
2.
Conveyor System for extended portion of Bagging plant.
3.
Shed for covering extended Bagging Plant. 68
4.
Railway siding modification.
5.
Shed for covering extended portion of Bagging plant.
STEP2: Project Finance and Source of Funds : The second step in the evaluation of the project is to find the funds to install or to establish a project.
1. Debt/Loan Funds/Long term Loans 2. Internal Generation of funds
In this project we have funding of 75% from a bank at 11% rate of interest P.a. providing with long term loans and the rest 25% from Internal generation. With a moratorium of one year and repayment schedule of 5 years.
STEP3: Phasing of Capital Expenditure: Expenditure: The third step in the evaluation of the project is the phasing of the expenses or expenditure on the project. And here the phasing of the project expenditure is as below:
Bank Loan Interest On LTL Internal Generation Total value Of the project
PHASING OF CAPITAL EXPENDITURE 2012-13 2013-14 2014-15 50.00 100.00 75.00 6.88 32.90 15.40 20.00 35.00 20.00 76.88 167.90 110.40
(Rs in crores) Total 225.00 55.17 75.00 355.17
69
Step4: Repayment Schedule of the Long Term Loan (LTL): The fourth step in the evaluation of the project is preparing the repayment schedule of the Long Term Loan (LTL). And here the project repayment schedule is. REPAYMENT SCHEDULE OF LONG-TERM LOAN (Rs in Crores)
11%
Opening Balance 1-Oct-12
Repayment
Closing Balance
Addition
Total
75
75
75
Interest '@11% p.a
1-Jan-13
75
100
175
175
2.06
1-Apr-13
175
125
300
300
4.81
1-Jul-13
300
300
300
8.25
1-Oct-13
300
300
300
8.25
1-Jan-14
300
300
3.75
296.25
8.25
1-Apr-14
296.25
296.25
8.75
287.5
8.15
1-Jul-14
287.5
287.5
15.00
272.5
7.91
1-Oct-14
272.5
272.5
15.00
257.5
7.49
1-Jan-15
257.5
257.5
15.00
242.5
7.08
1-Apr-15
242.5
242.5
15.00
227.5
6.67
1-Jul-15
227.5
227.5
15.00
212.5
6.26
1-Oct-15
212.5
212.5
15.00
197.5
5.84
1-Jan-16
197.5
197.5
15.00
182.5
5.43
1-Apr-16
182.5
182.5
15.00
167.5
5.02
1-Jul-16
167.5
167.5
15.00
152.5
4.61
1-Oct-16
152.5
152.5
15.00
137.5
4.19
1-Jan-17
137.5
137.5
15.00
122.5
3.78
1-Apr-17
122.5
122.5
15.00
107.5
3.37
1-Jul-17
107.5
107.5
15.00
92.5
2.96
1-Oct-17
92.5
92.5
15.00
77.5
2.54
1-Jan-18
77.5
77.5
15.00
62.5
2.13
1-Apr-18
62.5
62.5
15.00
47.5
1.72
1-Jul-18
47.5
47.5
15.00
32.5
1.31
1-Oct-18
32.5
32.5
15.00
17.5
0.89
1-Jan-19
17.5
17.5
11.25
6.25
0.48
1-Apr-19
6.25
6.25
6.25
0
0.17
Year
Year wise Principal repayment
Year wise Interest repayment
2012-13
0
6.88
2013-14
12.5
32.90
2014-15
60.00
29.15
2015-16
60.00
22.55
2016-17
60.00
15.95
2017-18
60.00
9.35
2018-19
47.50
2.85
119.63
70
Interest Repaid Principal Repaid Total
REPAYMENT OF LONG TERM LOAN(LTL) 2012-13 2013-14 2014-15 2015-16 6.88 32.90 29.15 22.55 0 12.5 60.00 60.00 6.88 45.40 89.15 82.55
2016-17 15.95 60.00 75.95
2017-18 9.35 60.00 69.35
(Rs in crores) 2018-19 2.85 47.50 50.35
STEP5: PREPARING THE PROFITABILITY STATEMENT OF THE PROJECT: The fifth step in the evaluation of the project is preparing the profitability statement of the project and the profitability statement of the project here is.
Cost Elements Interest on Loan
In terms of cost of Asset p.a 11%
Insurance Salary and Wages Contract Labour Repairs and Maintenance Chemicals Packing cost Power, Fuel and Water Depreciation
2% 3% 2% 3% 5% 0.50% 5% 5.25%
Tax Depreciation as Per IT Act
32.445% 15%
71
Incremental Sales
PROFITABILITY STATEMENT OF THE PROJECT 2015-16 2016-17 2017-18 2018-19 1534.50 1534.50 1534.50 1534.50
(Rs in Crores) 2019-20 1534.50
TOTAL REVENUE("A")
1534.50
1534.50
1534.50
1534.50
1534.50
EXPENDITURE Raw Materials Interest On Loan Insurance Salary and Wages Contract labor Repairs and maintenance Chemicals Packaging Cost Power, Fuel and Water
1227.60 13.75 7.10 10.66 7.10 10.66 17.76 1.78 17.76
1227.60 22.55 7.10 10.66 7.10 10.66 17.76 1.78 17.76
1227.60 15.95 7.10 10.66 7.10 10.66 17.76 1.78 17.76
1227.60 9.35 7.10 10.66 7.10 10.66 17.76 1.78 17.76
1227.60 2.85 7.10 10.66 7.10 10.66 17.76 1.78 17.76
TOTAL EXPENDITURE ("B")
1314.16
1322.96
1316.36
1309.76
1303.26
PROFITS BEFORE DEPRECIATION AND TAX "C"(C=A-B)
220.34
211.54
218.14
224.74
231.24
Less: DEPRECIATION "D"
18.65
18.65
18.65
18.65
18.65
PROFIT BEFORE TAX "E"(E=C-D)
201.69
192.89
199.49
206.09
212.59
Less: TAX(AS PER IT ACT)
60.77
58.34
60.16
61.98
63.77
PROFIT AFTER TAX
140.93
134.55
139.33
144.11
148.82
Computation of tax: COMPUTATION OF TAX 2015-16 201.69
2016-17 192.89
2017-18 199.49
2018-19 206.09
2019-20 212.59
18.65 220.34
18.65 211.54
18.65 218.14
18.65 224.74
18.65 231.24
Less:Depreciation (as Per IT Act)
33.05
31.73
32.72
33.71
34.69
Profit After Depreciation
187.29
179.81
185.42
191.03
196.55
TAX
60.77
58.34
60.16
61.98
63.77
Profit Before Tax(PBT) Add:Depreciation(As Companies Act) TOTAL
Per
72
STEP6: STEP6: Valuation of the Asset: The sixth step in the evaluation of the project is the valuation of the project at different times or at different periods at different years to come in the future.
Opening Balance Addition Total
2015-16 0.00 355.17 355.17
VALUATION OF THE ASSET 2016-17 2017-18 2018-19 301.90 256.61 218.12 0.00 0.00 0.00 301.90 256.61 218.12
2019-20 185.40 0.00 185.40
(Rs In Crores) 2021-22 2022-23 157.59 133.95 0.00 0.00 157.59 133.95
Less:Deletion Total Less:Depreciation
0.00 355.17 53.28
0.00 301.90 45.28
0.00 256.61 38.49
0.00 218.12 32.72
0.00 185.40 27.81
0.00 157.59 23.64
0.00 133.95 43.46
ClOSING BALANCE
301.90
256.61
218.12
185.40
157.59
133.95
90.49
STEP7: Preparation of Cash Flow Statement: The seventh step in the evaluation of the project is the preparation of the Cash Flow Statement. And we need the cash flows to find out the Payback Period and the Internal Rate of Return of the project
Cash Out Flow Capital Expenditure Project
on
201213
CASH FLOW STATEMENT 201320142015201614 15 16 17
76.88
167.90
201718
(Rs in Crores) 2018201919 20
139.33
144.11
the 110.40
Cash In Flow Incremental Profit After Tax
140.93
134.55
148.82
73
Step8: To Find the Viability of the Project by Using Different Techniques Of Capital Budgeting: Here in PPL the Techniques of capital budgeting used are :
1. Pay-Back Period Method 2. Internal Rate Of Return
1. Evaluation of the Project Using Pay Back Period Method: It was estimated that the cash in-flows in -flows will start from 2015-2016
Cost of the Project- 355.18 Cr Year
2015-16
2016-17
2017-18
2018-19
2019-20
Amount
140.93
134.55
139.33
144.11
148.82
Calculation Of Pay Back Period: S.no
Year
Cash Inflows
1
2015-16
140.93
Cumulative Inflows 140.93
2
2016-17
134.55
275.48
3
2017-18
139.33
414.81
4
2018-19
144.11
558.92
5
2019-20
148.82
707.74
74
(a)
Cash Outlay : 355.18 Cr
(b)
Payback Period :
INITIAL INVESTMENT ANNUAL CASH CASH FLOW
=
2 +
79.70 414.81
=
2.2 years
Pay Back Period: It is assumed that the profit earning of the project will start from 20152016.
We should increase this period with same exception as there may be any additional factor and other cause so rounding of 2.2 to 3 years will be right, so that it will give more assistance to the calculation.
Suggestion: Any project which has a pay-back period of 3 to 5 years is considered as a good project…
And here we have got a pay-back period of 2.2 years. So, the project can be considered
75
2. Evaluation of the Project Using Internal Rate of Return Method: It was estimated that the cash in-flows in -flows will start from 2015-2016 Cost of the Project- 355.18 Cr Year
2015-16
2016-17
2017-18
2018-19
2019-20
Amount
140.93
134.55
139.33
144.11
148.82
Internal Rate of Return: Discount rate taken as 24%
Sl. No
(in crores)
DCF (24%)
Present Values of Inflows
.806
113.58
134.55
.660
88.80
3 2017-18
139.33
.524
73.00
4 2018-19
144.11
.422
60.81
5 2019-20
148.82
.341
50.74
Years 1 2015-16
Cash Inflows 140.93
2 2016-17
6 7 8 9 10 11 12 13 14 15 Total Present Values of Inflows
386.93 76
Discount rate taken as 26%
Sl. No
(in crores)
DCF (26%)
Present Values of Inflows
.787
110.91
134.55
.620
83.421
3 2017-18
139.33
.488
68.00
4 2018-19
144.11
.384
55.34
5 2019-20
148.82
.302
50.74
Years 1 2015-16
Cash Inflows 140.93
2 2016-17
6 7 8 9 10 11 12 13 14 15 Total Present Values of Inflows
366.412
77
Discount rate taken as 28%
Sl. No
(in crores)
DCF (28%)
Present Values of Inflows
.781
110.06
134.55
.600
80.73
3 2017-18
139.33
.465
64.78
4 2018-19
144.11
.361
52.02
5 2019-20
148.82
.279
41.52
Years 1 2015-16
Cash Inflows 140.93
2 2016-17
6 7 8 9 10 11 12 13 14 15 Total Present Values of Inflows
349.11
78
Calculation of Internal Rate of Return
IRR
=
A - Cash out lay
L+
X
(H – L)
A-B
=
355.18 - 349.123
26+
(355.18-349.123) + (366.412-
X (28-26)
X 2
355.18)
=
26 +
6.07
X
2
X
2
6.07+11.232 =
26 +
=
26.70
0.350
Internal Rate of Return (IRR): In this calculation, is done on the basis of trail and errors. By taking various percentage of (DCF).So that an appropriate percentage of Internal Rate of Return can be judge out.
Calculated figure is 26.70%, so we can take it as 30% because at market Uncertainity.
Suggestion: Any project which has an Internal Rate of Return Between 16% to 20% is considered as a good project…
And here for this project the Internal Rate of Return is 26.70%. So, the project can be considered. 79
CHAPTER-9 FINDINGS AND SUGGESTIONS 9.1 FINDINGS: 1
It was found that the payback Period of the project is 2 year and 2 months.
2
The Payback Period shows that the initial investment can be recovered within a short period of time.
3
The investment is ideal because normally an investment should be recoverable within 5 years.
4.
The Internal Rate of Return shows 26.70 % This also ensures a profitable investment.
9.2 SUGGESTIONS:
1.
The company may fix the the time period for the capital capital asset for replacement.
2.
The company may effectively use the available resources for attaining maximum profit.
3.
The company company has to analyze analyze the proposal for expansion expansion or creating additional capacity.
4.
The company may plan and control its capital expenditure.
5.
The company company has to ensure that the funds must be invested invested in long term project or not.
6.
The company may evaluate the estimation of cost and benefit in terms of cash flows.
80
BIBLIOGRAPHY:
Financial Management
-
I. M. Pandey
Financial Management -
Prasanna Chandra
Financial Management
M. Y. Khan & Jain
Financial Management -
-
Shashi.K.Gupta, Shashi.K.Gupt a, R.K.Sharma and Neeti gupta
PPL profile & Annual Reports
Web Sites:
URL: http://www.Paradeepphos http://www.Paradeepphosphates.com phates.com URL: http://www.google.com http://www.google.com URL: http://www.Wikipedia.co http://www.Wikipedia.com m
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