INTRODUCTION

Financial management is the managerial activity, which is concerned with the planning and controlling of the firms financial resources. It was a branch of economics till 1890. ill today, it has no uni!ue body of its "nowledge of its own, and draws heavily on economics for its theoretical concepts. Financial management, has an academic discipline has undergone fundamental changes in its scope and coverage. In the early years of its evolution it was treated synonymously with the raising of funds. he sub#ect of financial management is of immense to academicians and practicing managers. Financial management emerged as a distinct field of study at turn of the $0th century. Its evolution may be divided into boar phase% the traditional phase, the transaction phase and the modern phase. he traditional phase lasted for about four decades. It is of great interest to academicians because the sub#ect is still developing, and there are still certain areas where controversies e&it for which no unanimous solution have been reached yet practicing managers are interested in this sub#ect because among the most crucial decisions of the firm are those which related to finance and an understanding of the theory of financial management provides them with conceptual and analytical insights to ma"e those decisions s"illfully. Financial management in the small firm is characteri'ed, in many different cases, by the need to confront a somewhat different set of problems and opportunities than those confronted by a large corporation. (ne immediate and obvious difference is that a ma#ority of smaller firms do not normally have the opportunity to publicly sell issues of stoc"s or bonds in order to raise funds. he owner%manager of a smaller firm must rely primarily on trade credit, ban" financing, lease financing, and personal e!uity to finance the business. (ne therefore faces a much more severely restricted set of financing alternatives than those faced by the financial vice president or treasurer of a large corporation. (ne area of particular concern for the smaller business owner lies in the effective management of wor"ing capital.

)et wor"ing capital is defined as the difference between current assets and current liabilities and is often thought of as the *circulating capital* of the business. +ac" of control in this crucial area is a primary cause of business failure in both small and large firms. Firms create manufacturing capacities for production of goods, some provide services to customers. hey sell their goods or services to earn profit. hey raise funds to ac!uire manufacturing and their facilities. hus, the three most important activities of a business firm are, -roduction .ar"eting Finance / firm secures whatever capital it needs and employees it in financial activities which generate returns on invested capital. Financial management is broadly concerned with the ac!uisition and use of funds by a business firm. In other words, finance management is planning, directing, monitoring, organi'ing, and controlling of the monetary resources of an organi'ation. 0cope of financial management is vast and important to business. It is involve in all level of management and all fields of human activities. 1e can prove that without good financial management, no organi'ation can be alive. (rgani'ation selfish group of is helpful for people and wants welfare of public. 2ut, it need fund, money and cash and for getting it, it uses techni!ues of financial management. 3ence financial management ma"es its place everywhere. )ever understand it as the name of boo" but it is practical science to support business to live respectful life in society.

Financial Planning
It is the duty of management to ensure the ade!uate funds are available to meet the needs of the business. In the short term, funds are re!uired to pay the employers or to invest in stoc"s. In the middle and long term funds are re!uired to ma"e additions to the productive capacity of the business.

 Financial Control
Financial control helps the business to ensure that it is meeting its goals. hrough financial control the firm decides how much to invest in short term assets and how to raise the re!uired funds.

Financial Decision Making

he three primary aspects of financial decision ma"ing are investment, financing and dividends. Investment must be financed in some way for which various alternatives is available. / financing decision is to retain the profits earned by the business or should it should be distributed among the shareholders via dividends. Finance is one of the most important aspects of business management. 1ithout proper financial planning a new enterprise is unli"ely to be successful. .anaging money is essential to ensure a secure future, both for the individual and an organi'ation. It may be difficult to separate the finance functions from production, mar"eting and other functions but the function themselves can be readily identified. hus, finance functions include, +ong term assets mi& or investment decisions. 4apital mi& or financing decisions. -rofit allocation or dividend decisions. /ssort term asset mi& or li!uidity decisions / firm performs finance functions simultaneously and continuously in the normal course of the business.

Investment Decisions
/ firms investment decisions involve capital e&penditures. therefore, referred as a capital budgeting decisions. wo important aspects of investment decisions, he evaluation of the prospective profitability of new investments. hey are,

he measurement of a cut of rate against that the prospective return of an investment could be compared.

Financing Decisions
Financing decisions is the second important function to be performed by the financial manager, broadly, he or she must decide, when, where firm and how to ac!uire funds to meet the firms investment needs. he mi& of debt and e!uity is "nown as the firms capital structure. he financial manager must strive to obtain to best financing mi& or the optimum capital structure for the firm.

Dividend decisions
6ividend decision is the third ma#or financial decision. distribute a portion and retained balance. the retention ratio. he financial manager must decide whether the firm should distribute all profits, or retain them, or he proportion of profits distributed as dividends is called dividend payout ratio and the retained portion of profits is "nown as

Liquidity Decisions
Investment in current assets affects the firms profitability and li!uidity. 4urrent assets management that affects a firms li!uidity is yet another important finance functions. 4urrent assets should be managed efficiently for safeguarding the firm against the ris" of li!uidity. +ac" of li!uidity in e&treme situations can lead to the firms insolvency. he field of capital budgeting is both comprehensive and challenging. It is clearly plays a vital role in assigning most business firms to achieve there various goals 7e.g., profitability, growth, stability, ris" reduction, social goals, etc8 it has been closely allied to the economic problem. his is rather broadly defined as the allocation of scarcer resources among competing alternatives.

4apital budgeting may be defined as the planning, evaluation and selection of capital e&penditure proposal as distinguished from operating year, capital e&penditures represent outlay whose principal benefits will be recogni'ed over longer period of time. 6ecision relating to capital e&penditures as opposed to those for operating e&penditures, are generally irreversible and they re!uire careful selection techni!ues and procedures. !"T I# C"PIT"L $UD%&TIN%' 4apital budgeting is a re!uired managerial tool. (ne duty of a financial manager is to choose investments with satisfactory cash flows and rates of return. be able to choose intelligently between two or more alternatives. ca(ital )udgeting* D&FINITION OF C"PIT"L $UD%&TIN% 4apital budgeting includes are those e&penditure which are e&pected to produce benefits to the firm over more than one year, and encompasses both tangible and intangible assets. .any companies follow the traditional benefits occurring only the e&penditure on tangible fi&ed assets. :4apital budgeting involves the process of planning e&penditure whose returns are e&pected to e&tend beyond one year;. % capital outlay;. -C,arles T*!orngeren F&"TUR&# OF C"PIT"L $UD%&TIN% D&CI#ION. -otentially large anticipated benefits. / relatively high degree of ris". eston + $rig,am :4apital budgeting is long term planning for ma"ing and financing proposed herefore, a financial manager must be able to decide whether an investment is worth underta"ing and o do this, a sound procedure to evaluate, compare, and select pro#ects is needed. his procedure is called

/ relatively long time period between the initial outlay and the anticipated returns.

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#I%NIFIC"NC& OF T!& #TUD/ 1. $. 5. 9. <. >. ?. 0tudies of this type are useful to the management, employees, suppliers and society. 0tudies of this type are useful to the research scholars who conduct in depth =esearch. 0tudies of this type are useful to the similar organi'ation in assessing the he study has great significance and provides benefits to various parties whom It is beneficial to management of the company by providing crystal clear picture he study is also beneficial to employees and offers motivation by showing how he investors who are interested in investing in the companys shares will also get

financial position directly or indirectly interacts with the company. regarding important aspects li"e li!uidity, leverage, activity and profitability. actively they are contributing for companys growth. benefited by going through the study and can easily ta"e a decision whether to invest or not to invest in the companys shares.

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O$0&CTI1&# OF T!& #TUD/ he following are the ob#ectives of the study 1. $. 5. 9. <. o present theoretical framewor" relating to capital budgeting o evaluate the effectiveness of capital e&penditure decisions of company. o provide support in order to accomplished the over all goal of the capital budgeting system of the company o evaluate the elements consider by the of the company e&pansion pro#ect. o offer findings, suggestions @ conclusion based on the study.

LIMIT"TION# OF T!& #TUD/ he following the limitations of the study, 1. $. 5. 9. <. he pro#ect has to be completed with the available data given to us. he period of study that is > wee"s is not enough to conduct study of the pro#ect he study is carried basing on the information and documents provided by the here was no scope of gathering current information, as the auditing has not been he procedure has to be completed with the available data with us.

organi'ation done by time of pro#ect wor".

M&T!ODOLO%/ OF T!& #TUD/ he study carried with the co%operation of the management who permitted to carry on the study and provided the re!uisite data. sources. #OURC&# OF D"T" 1. -rimary 6ata $. 0econdary 6ata PRIM"R/ D"T", Interviewing a few financial department heads. (fficers and management bodies and staff members of the company form part of primary data. #&COND"R/ D"T", he information collected from 1. /nnual report. $. A&ecutive and staff of financial accounting department. 5. A&ecutives of other departments. DI"%R"M"TIC R&PR&#&NT"TION OF R&#&"RC! M&T!ODOLO%/ he data is collected from the following

6/ / 0(B=4A0

-=I./=C 0(B=4A0

0A4()6/=C 0(B=4A0

./)/DA.A)

=A0-()6A) 0

I)0I6A 3A 4(.-/)C

(B 0I6A 3A 4(.-/)C

-A=0()/+ (20A=E/ )4A

/))B/+ =A-(= 0

AF 2((G0 H(B=)/+0

INDU#TR/ PROFIL&
oday, India is I he (yster; of the global dairy industry. It offers opportunities galore to entrepreneurs world wide, who wish to capitali'e on one of the worlds largest and fastest growing mar"ets for mil" and mil" products. / bagful of Ipearls awaits the international dairy processor in India. he Indian dairy industry is rapidly growing, trying to "eep pace with the galloping progress around the world. /s he e&pands his overseas operation to India many profitable options await him. 3e may transfer technology, sign #oint ventures or use India as a sourcing center for regional e&ports. he liberali'ation of the Indian economy bec"ons to .)4s and foreign investors ali"e. Indias dairy sector is e&pected to triple its production in the ne&t 10 years in view of e&panding potential for e&port to Aurope and the 1est. .oreover with 1 ( regulations e&pected to come into force in coming years all the developed countries which are among big e&porters today would have to withdraw the support and subsidy to their domestic mil" products sector. /lso India today is the lowest cost producer of per liter of mil" in the world, at $? cents, compared with the B.0s >5 cents, and Hapans J$.8 dollars. /lso to ta"e advantage of this lowest cost of mil" production and increasing production in the country multinational companies are planning to e&pand their activities here. 0ome of these mil" producers have already obtained !uality standard certificates from the authorities. his will help them in mar"eting their products in foreign countries in processed form. he urban mar"et for mil" products is e&pected to grow at an accelerated pace of around 55K per annum to around =s.95,<00 4rores by year $00<. his growth is going to come from the greater emphasis on the processed foods sector and also by increase in the conversion of mil" into mil" products. 2y $00<, the value of Indian dairy produce is e&pected to be =s.10,00,000 .illion. -resently, the mar"et is valued at around =s.?, 00,000 .illion.

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$ackground. India with 159mn cows and 1$<mn buffaloes has the largest population of cattle in the world. otal cattle population in the country as on (ctober00 stood at 515mn. .ore than fifty percent of the buffaloes and twenty percent of the cattle in the world are found in India and most of these are mil" cows and mil" buffaloes. Indian dairy sector contributes the large share in agricultural gross domestic products. -resently there are around ?0,000 village dairy cooperatives across the country. he co%operative societies are federated into 1?0 district mil" producers unions, which is turn has $$%state co%operative dairy federation. .il" production gives employment to more than ?$mn dairy farmers. In terms of total production, India is the leading producer of mil" in the world followed by B0/. he mil" production in 1999%00 is estimated at ?8mn . as compared to ?9.<mn . in the previous year. his production is e&pected to increase to 81mn . by $000%01 of this total produce of ?8mn cows mil" constitute 5>mn . while rest is from other cattle. 1hile world mil" production declined by $ percent in the last three years, according to F/( estimates, Indian production has increased by 9 percent. he mil" production in India accounts for more than 15K of the total world output and <?K of total /sias production. he top five mil" producing nations in the world are India, =ussia, Dermany and France. /lthough mil" production has grown at a fast pace during the last three decades 74ourtesy, (peration Flood8, mil" yield per animal is very low. he main reasons for the low yield are +ac" of use of scientific practices in mil"ing Inade!uate availability of fodder in all seasons. Bnavailability of veterinary health service

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T"$L& 2*3 MIL4 /I&LD COMP"RI#ON 4ountry .il" Cield7Ggs per year8 B0/ ?00$ BG <91? 4anada <598 )ew Lealand $9?> -a"istan 10<$ India ?9< 1orld 7/verage8 $0$1 0ource, A&port prospects for agro%based industries, 1orld rade 4entre, .umbai. Production o5 Milk in India.year 1998%99 1999%00 $000%01 $001%0$ $00$%05 $005%09 $009%0< $00<%0> $00>%0? $00?%08 $008%09 $009%$0107A8 $010%$0117 8 A M Astimated M argetN A&pected -roduction in . 98.9 <1.9 <5.? <>.5 <8.> >1.$ >5.< ><.0 >8.< ?0.8 ?9.? ?8.1 81.0

0ource, 6A-I, /nnual =eport O $009%$010

orld6s ma7or milk (roducers. 7.illion . 08 country India $009%10 ?9.< $010%117/ppro&.8 ?9.<

1$

B0/ =ussia Dermany France -a"istan 2ra'il BG B"raine -oland )ew Lealand )etherlands Italy /ustralia

?1 59 $? $9 $1 $1 19 1< 1$ 11 11 10 9

?9.5 55 $8.< $9.$ $$ $? 19 19 1$ 1$ 11 10 10

O(eration Flood.
he transition of the Indian mil" industry from a situation of net import to that of surplus has been led by the efforts of )ational 6airy 6evelopment 2oards (peration Flood. -rogram under the aegis of the former 4hairman of the board 6r.Gurien. +aunched in 19?0, (peration Flood has led to the moderni'ation of Indias dairy sector and created a strong networ" for procurement processing and distribution of mil" by the co%operative sector. -er capita availability of mil" has increased from 15$ gm per day in 19<0 to over $$0 gm per day in $00?. he main thrust of (peration Flood was to organi'e dairy cooperatives in the mil" shed areas of the village, and to lin" them to the fourth .etro cities, which are the main mar"ets for mil". he efforts underta"en by )662 have not only led to enhanced production, improvement in methods of processing and income generation in the rural areas. It has also led to an improvement in yields, longer lactation periods, shorter calving intervals, etc through the use of modern breeding techni!ues. Astablishment of mil" collection centers and chilling centers has enhanced life of raw

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mil" and enabled minimi'ation of wastage due to dairy development programmed and loo"ing at the success achieved in India by adopting the co%operative route, a few other countries have also replicated the model of Indias 1hite =evolution. "D1"NT"%&# OF INDI"N D"IR/ INDU#TR/ In terms of total bovine population, India occupies the first position on the world, with 1?>.? million cattle and buffaloes. 71orlds total bovine population is 1,9$0 million8. / large bovine population, strong procurement infrastructure, presence of highly s"illed manpower, cheaper labor, and a large number of processing and allied facilities are some of the advantages that the India dairy business has. PRODUCTION TR&ND# -roduction of mil" rose from $0.? million tonnes in $00>%0? to 8.5 million tonnes in $00?%08. 3owever, 9< per cent of the total mil" is still handled by the traditional sector. In $00>, ?? million buffaloes produced about <0 percent of the total mil" production in the country. In the same year, about $00 million cows produced about 9< per cent of the total mil" production. 7)early 1<> million goats, sheep etc produce only about < per cent of the total mil" output.8 &8PORT POT&NTI"L India is not fully utili'ing its e&port potential in respect of dairy products. he cost of mil" production in India is the lowest. /nd the dairy industry is not getting any subsidy. here is an urgent need to pay special attention to !uality of India has to compete with other countries. /t present, the country is e&porting malted mil" foods, ghee, butter and cheese to countries li"e 2angladesh, B/A, )epal, 0ri +an"a, (man and 2ahrain. (f course world mil" prices are sub#ect to dramatic fluctuations. A&port earnings from the live stoc" sector and related products rose to =s.19, $<0 million in $00?%$008 from =s. ?,9$0 million in $00>%0?. DI#"PPOINTIN% F"CT# .il" availability in India is still low at $1$ gramsNday per person. (f course, the per capita availability of mil" in the rural areas is barely 1$1 gramsNday as compared to 900

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gramsNday in urban areas. /nimal productivity remain low, as the national average is only 1.< litresNday. -roductivity of Indian cattle is 10 per cent of the productivity of cattle in Israel and 50 per cent of the level achieved by the developed countries. Bnless mil" productivity is raised, it is difficult to compete with Aurope, /merica and (cceania. 1hat is more, only 10 per cent of the mil" produced is in the organi'ed sector, leaving the remaining portion in the hands of mil"men thus providing chances for adulteration and e&ploitation. /lso, our cattle and buffaloes are slow maturing, show irregular cycling behavior, produce fewer claves in their life%time, and suffer from physical and physiological anomalies in reproduction. here is a serious shortage of conventional feeds for feeding livestoc". 2oth !uantitatively and !ualitatively, there e&ists a wide gap in demand and availability of fodder resources in India. 6uring the last two decades, there has been no change in the cultivated area devoted to fodder. It still stands at 9.9 per cent of the total cropped area. It is estimated that 10 to 1< per cent increases can be recorded in the e&isting mil" production through ade!uate feeding of bovine population. #T&P# T"4&N #O F"R he problem of low productivity of animals can be solved by ensuring availability of feed and fodder. 4oncrete efforts are needed to improve the productivity of fodder crops, develop gra'ing land, and promote agro%forestry systems li"e silvipasture and research on low%cost feed items. A&tensive research has been carried out to find out the utility of items li"e apple pomace, ground nut hulls, mesta ca"e, neem ca"e, salseed meal, soya pulp, rice bran and brewery waste. (n Hune 9, 199$, the Dovt., of India issued an order under section 5 of the essential commodities /ct, 19<<. /ccording to this order, "nown as .il" and .il" -roducts (rder 7..-(8 199$, mil" does not have to mean #ust cow or buffalo mil", it could also be goat mil" or even a mi&ture of the three. he various ob#ectives of ..-( include, Facilitating supply or availability of mil" by balancing uneven supplies in different regions.

1<

 .aintenance and increase of mil" production and supplies and ensuring e!uitable distribution. Astablishment of proper standards and norms for control in handling mil" and mil" products. Astablishment, promotion or registration of any industry related to mil" or mil" products. 0uch other ob#ectives incidental to the effective implementation of the ..-(. he mil" unions are urging the government to either ban (D+ imports of s"immed mil" powder 70.-8 or impose duty on the same. hey argue that prices of imported powder should be at par with those of the domestic products. he price of s"immed mil" powder is coming down under pressure from imports. It is said that levying of minimum import duty of 5< per cent of 0.- would provide a level playing field to the producers. 7India gets about <,000 tonnes of imported mil" powder annually8. L"T&#T D&1&LOPM&NT IN T!& D"IR/ #&CTOR Formation of new dairy 4o%operatives in (peration flood areas to bring 5.< million members under the 4o%operative fold in addition to the 9 million members now being served by dairy 4o%operatives. -roviding vocational opportunities and fostering entrepreneurship among dairy% science student trainees to e!uip them with "nowledge and e&perience so that they may ta"e up dairying as a profession. TOP MO#T PRIORIT/ In the livestoc" sector, productivity holds the "ey. he ma#or thrust should be on genetic up gradation to improve productivity and production. (f course, priority should be given to infrastructure development, feed management and better health care services. CURR&NT #C&N"RIO (f the total mil" output, the organi'ed sector still handles an estimated output of 1$K only, despite vigorous dairy development activities. /t present there are $<.$

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dairy plants in the public and 4o%operative sectors including pilot dairies with an average output of 1$.$ million litres. he mil" mar"et covers <$8 ma#or towns, 9 metros and 199 class one and 5?< smaller towns. /bout 500 million supply every day. he mil" production enhancement units are being ade!uately strengthened. he Indian of /griculture =esearch and the :)ational 6airy 6evelopment 2oard; are mounting massive efforts to integrate dairy science research, education, e&tension and development. Federation that was guided by :)ational 4o%operative 6airy Federation of India; the ape& body of mil" 4o%operative societies. / nation wide networ" system of :.ulti tier producers 4o%operative; which are domestic in structural and are professionally managed has been established. /t present this programme is providing a #oint additional income of =s. 1$00 crores from mil". It is heartening to note that the 6airy e!uipment industry has grown to such an e&tent that most of 6airy Industry needs are met indigenously. T&C!NOLO%/ MI##ION he operation flood programme prepared the ground for launching another massive programme at the national level called : echnology .ission on 6airy 6evelopment 7 .668 on Hune 11, 1988. he main ob#ective us to accelerate the pace of growth of dairy industry in India. o achieve this end, the operation flood programmes such as the dairy research programmes processing technology and product manufacturing etc. the mission operation areas has covered appro&imately >0K of the country by 199<. he mission will functions through the adoption of locating specific strategies such as peoples participation, demonstration of e&cellence, better land management cost effective handling and processing system and intensive mar"eting. D"IR/ PROC&##ION T&C!NOLO%/ =esearch studies in dairy technology in )6=I Garnal have led to the development of purely vegetarian processed cheese, a synthetic ghee flavor and Dhee

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ma"ing plant on the principle of 3ydrodynamics and 3eat transfer in hori'ontal thin scalped surface heat e&changes with a capacity to handle <00%>00 "g an hour of creamy butter. / two%fold increase in shelf life in cheese was attained. he methods of manufacturing gri"hand cheese spreads of various flavors etc., have been successfully developed by )662. Per Ca(ita availa)ility o5 milk. Cear 19>0 19>8 19?5 1980 1990 199$ $00< $00> $00? $008 $009 $010 A $011 A M Astimated - M -rovisional Dm N day 1$? 115 111 1$8 1?8 19$ 198 $00 $0$ $05 $1$ $$< $<0

Fres, milk.
(ver <0K of the mil" produced in India is buffalo mil". /nd 9<K is cow mil". he buffalo mil" contribution to total mil" produce is e&pected to be <9K in $000. buffalo mil" 5.>K protein, ?.9K fat, <.<K sugar, 0.8K ash and 8$.?K water where as cow mil" has 5.< protein, 5.?K fat, 9.9K mil" sugar, 0.?K ash and 8?K water. 1hile presently 7for the year $0008 the price of buffalo mil" is ruling at J$>1 O 515 per . that of cow is ruling J1?0%$>? per . . fresh pasteuri'ed mil" is available in pac"aged from. 3owever, a large part of mil" consumed in India is not pasteuri'ed, and is sold in loose form by vendors. 0terili'ed mil" is scarcely available in India. -ac"aged mil" can be divided according to fat content as follows.

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1hole 7full cream8 .il" O >K fat 0tandardi'ed 7toned8 mil" %9.<K fat 6oubled toned 7low fat8 .il" O 5 K fat /nother category of mil", which has a small mar"et is flavored mil". 3* T!& INDI"N M"R4&T 9 " P/R"MID.

Consumer !a)its and Practices

.il" has been an integral pat of Indian food for centuries. he par capital availability of mil" in India has grown from 1?$ gm per person per day in 19?$ to 18$ gm in 199$ and $05 gm in 1988%$008. his is e&pected to increase to $1$ gms for $008% 09. 3owever, a large part of the population cannot afford mil". /t this per capita consumption it is below the world average of $8< gm and even less than $$0 gm recommended by the )utritional /dvisory 4ommittee of the Indian 4ouncil of .edical =esearch. here are regional disparities in production and consumption also. he per capita availability in the north is $?8gm, west 1?9gm, south 198gm and in the east only 95 gm per person per day. his disparity is due to concentration of mil" production in some poc"ets and high cost of transportation. /lso the output of mil" in cereal growing areas is much higher than elsewhere which can be attributed to abundant availability of fodder, crop residues, etc which have a high food value for mil" animals. In India about 9>K of the total mil" produced is consumed in li!uid form and 9?K us converted into traditional products li"e cottage butter, ghee, punier, "hoya, curd, .alay, etc. only ?K of the mil" goes into the production of western products li"e mil" powders, processed butter and processed cheese. he remaining <9K is utili'ed for conversion to mil" products. /mong the mil" products manufactured by the organi'ed sector some of the prominent ones are ghee, butter, cheese, ice creams, mil" powders, malted mil" food, condensed mil" infants foods etc of these ghee alone accounts for 8<K. It is estimated that around $0K of the total mil" produced in the country is consumed at producer%household level and remaining is mar"eted through various

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cooperatives, private dairies and vendors. /lso of the total produce more than <0K is produced by cooperatives and other private dairies. 1hile for cooperatives of the total mil" produced >0K is consumed in fluid form and rest is used for manufacturing processed value added dairy productsP for private dairies only 9<K is mar"eted in fluid form and rest is processed into value added products li"e ghee, ma"han etc. 0till, several consumers in urban areas prefer to buy loose mil" from vendors due to the strong perception that loose mil" is fresh. /lso a current level of processing and pac"aging capacity limits the availability of pac"aged mil". he preferred dairy animal in India is buffalo unli"e the ma#ority of the world mar"et, which is dominated by cow mil". /s high as 98K of mil" is produced in rural India, which caters to ?$K of the total population, whereas the urban sector with $8K population consumes <>K of total mil" produced. Aven in urban India, as high as 85K of the consumed mil" comes from the unorgani'ed traditional sector. -resently, only 1$K of the mil" mar"et is represented by pac"aged and branded pasteuri'ed mil", valued at about =s.8,000 crores. Quality of mil" sold by unorgani'ed sector however is inconsistent and o is the price across the season in local areas. /lso these vendors add water and caustic soda, which ma"es the mil" unhygienic. Indias dairy mar"et is multi%layered. Its shaped li"e a pyramid with the base made up of a vast mar"et for low%cost mil". he bul" of the demand for mil" is among the poor in urban areas whose individual re!uirement is small, may be a glassful for use as whitener for their tea and coffee. )evertheless, it adds up to a si'able volume O millions of liters per day. In the ma#or cities lies an immense growth potential for the modern sector. -resently, barely ??8 out of 5,?00 cities and towns are served by its mil" distribution networ", dispensing hygienically pac"ed wholesome, !uality pasteuri'ed mil". /ccording to one estimate, the pac"ed mil" segment would double in the ne&t five years, giving both

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strength and volume to the modern sector. he narrow tip at the top is a small but affluent mar"et for western type mil" products.
3. &merging Dairy Markets. Food service institutional market: it is growing at double the rate of consumer market. 6efense mar"et, An important growing market for quality products at reasonable prices. Ingredients market: A boom is forecast in the market of dairy products used as raw
material in pharmaceutical and allied industries.

-arlor mar"et, The increasing away - from - home consumption trend opens new
vistas for ready - to - serve dairy products which would ride piggyback on the fast food revolution sweeping the urban India. India with her si!able dairy industry growing rapidly and on the path of moderni!ation would have a place in the sun of prosperity for many decades to come.

he one inde& to the statement is the fact that the pro#ected total mil" output over the ne&t 1< years 7199< % $0108 would e&ceed 19<?.> million tones which is twice the total production of the past 1< yearsR

Penetration of milk products:

1estern table spreads such as butter, margarine and #ams are not very popular in India. /ll India penetration of butter N margarine is only 9K. his is also largely represented by urban area, where penetration is higher at 9K. In rural areas, butter N margarine have penetrated
in ".#$ of households only. The use of these products in the large metros is higher with penetration at #%$.

&enetration of cheese is almost nil in rural areas and negligible in the urban areas. &er capita consumption even among the cheese - consuming households is a poor ".'kg pa as compared to over "(kg e)pensive products and also non - availability in many parts of the country *utter margarine and cheese products are mainly manufactured by organi!ed sector. +imilarly penetration of ghee is highest in medium si!ed towns at 3,."$ compared to 3#.,$ in all urban areas and "#.3$ in all rural areas.

The all India penetration of ghee is "' #$. In relative terms penetration of ghee is significantly higher in -orth accounts for %,$ of ghee consumption and west for "3$. A large part of ghee is made at home and by small . cottage industry form milk. The relative share of branded products in this category is very low at around #-"$.

$1

.il" powder and condensed mil" have not been able to garner any significant consumer acceptance in India as indicated by a very low 9.?K penetration. he penetration is higher at 8.1K in urban areas and lower at 5.<K in rural areas. 1ithin urban areas, it is relatively higher in medium si'ed towns at 8.<K compared to ?.?K in large metros.

Market #i:e and %ro;t,.

.ar"et si'e for mil" 7sold in loose N pac"aged form8 is estimated to be 5>mn. valued at =s 9?0bn. he mar"et is currently growing at round 9Kpa in volume terms. he mil" surplus states in India are Bttar -radesh, -un#ab, 3aryana, =a#asthan, Du#arat, .aharasthra, /ndhra -radesh, Garnata"a and amil)adu, the manufacturing of mil" products is concentrated in these mil" surplus 0tates. .il" production grew by a mere 1K pa between 199? and 19?0. 0ince the early ?0s, under (peration Flood, production growth increased significantly averaging over <K pa. About ,%$ of milk is consumed at the household level which is not a part of commercial dairy
industry /oose milk has a larger market in India as it is perceived to be fresh by most consumers. In reality however it poses a higher risk of adulteration and contamination.

he production of mil" products, i.e. mil" products including infant mil" food, malted food, condensed mil" @ cheese stood at 5.0? la"h . in $009, whereas that of malted food is at ><000. . 4heese and condensed mil" production stands at <000 and 11000 . respectively in the same year. 70ource, /nnual =eport $009%$010, 6A-I8

Ma7or Players.
he pac"aged mil" segment is dominated by the dairy cooperatives. Du#arat 4o% operative .il" .ar"eting Federation 7D4..F8 is the largest player. /ll other local dairy cooperatives have their local brands 7For e.g. Do"ul, 1arana in .aharashtra, 0aras in =a#asthan, Eer"a in -un#ab, vi#aya in /ndhra -radesh, /avin in amil )adu, etc8. (ther private players include H G 6airy, 3eritage Foods, Indiana 6airy, 6airy 0pecialties,

$$

etc /mrut Industries, once a leading player in the sector has turned ban"rupt and is facing li!uidation. <* &8PORT POT&NTI"L: India has the potential to become one of the leading players in mil" and mil" product e&ports. +avational advantage, India is associated amidst ma#or mil" deficit countries in /sia /frica. .a#or importers of mil" and mil" products are 2angladesh, 4hina, 3ong
0ong +ingapore. Thailand 1alaysia &hilippines 2apan 3A4 5man and other gulf countries all located close to India.

Lo; Cost o5 Production. .il" production in scale insensitive and

competitiveness are labor intensive. Due to low labor cost, cost of production of milk is significantly lower in India. Concerns in export

=uality. 0ignificant investment has to be made in mil" procurement, e!uipments, chilling and refrigeration facilities. /lso, training has to be imparted to improve the !uality to bring it up to international standards.

Productivity. o have an e&portable surplus in the long%term and also to maintain cost competitiveness, it is imperative to improve productivity of Indian cattle. here is a vast mar"et for the e&port of traditional mil" products such as ghee, paneer, shri"hand, rasgolas and other ethnic sweets to the large number of Indians scattered all over the world.

India>s e?(orts o5 milk (roducts.

6escription 7Quantity, .. ,
!""#$"% (uantity )alue !""%$"& (uantity )alue !""&$"' (uantity )alue

Ealue, Rs. Million

$5

*kimmed powder Milk and

milk milk

+,#,&.#!" &.!%"

,,- ,!" !.".'

!&!.%"" .'.#+"

-."""

".,%-

111.5?0 9,$?0

11.000

$.0$0

food for babies

.il" cream
*weetened condensed milk

55$.$50
+..%,"

$8 090
!.&+"

1.000
'.!!"

0.089 %
".'%" #".,'"

%
%.!!"

/0ey 10ee 2 3utter 2 3utter oil

%&.+#" %,&'-."&"

,.%-" +,..."

...-"" .."." !''.'%" .'.!"

#.""" +-!."&"

".,+! !,&'-"

India is a land of opportunity for investors loo"ing for new and e&panding mar"ets. 6airy food processing holds immense potential for high returns Drowth prospects in the dairy food sector are termed healthy, according to various studies on the sub#ect he basic infrastructural elements for a successful enterprise are in place.

4 Gey elements of free mar"et system 4 =aw material 7.il"8 availability 4 /n established infrastructure of technology 4 0upporting manpower

/n entrepreneurSs participation is li"ely to provide attractive returns on the investment in a fast growing mar"et such as India, along with an e&port potential in the .iddle Aast, 0ingapore, .alaysia, Indonesia, Gorea, countries in the region. hailand, 3ong Gong and other

Among several areas of potential' participation by NRI's and foreign

investors. The following list outlines a few promising opportunities:

$iotec,nology.
6airy cattle breeding of the finest buffaloes and hybrid cows

$9

 .il" yield increase with recombinant somatotropin =ecombinant chymosin, acceptable to vegetarian consumers 6airy cultures, probiotics, dairy biologies, en'ymes and coloring materials for
food processing

ermentation derived foods and industrial products alcohol! citric acid! lysine! flavor

preparations! etc. "iopreservative ingredients based on dairy fermentation! vi#.! Nisin! $edicoccin!

Acidophilin! "ulgarican contained in dairy powders.

Dairy @ 5ood (rocessing equi(ment. -otential e&ists for manufacturing and mar"eting of cost competitive food processing machinery of world % class !uality. Food (ackaging equi(ment. (pportunities lie in the manufacturing of both machinery and pac"aging materials that help develop brand loyalty and a clear edge in the mar"eting of dairy foods.

Distri)ution c,annels. For refrigerated and fro'en food distribution, a world class cold chain would help in providing !uality assurance to the consumers around the region. Retailing. here is scope for standardi'ing and upgrading food retailing in ma#or metropolitan cities to meet the shopping needs of a vast middle class. his area includes grocery stores of Auropean and )orth /merican !uality, warehousing and distribution. A* PRODUCT D&1&LOPM&NT: 6airy foods can be manufactured and pac"aged for e&port to countries where Indian food en#oys basic acceptance. he manufacturing may be carried out in contract plants in India. /n option to mar"et the products in collaboration with local establishments or entrepreneurs can also be e&plored, products e&hibiting potential

$<

include typical indigenous dairy foods either not available in foreign countries or products whose authenticity may be !uestionable. Dulab#amuns, 2urfi, -eda,
Rasagollas, and a 0ost of ot0er Indian sweets 0ave good business prospects.5roducts typically foreign to India but indigenous to ot0er countries could also be developed for export. *uc0 products can be manufactured in retail package si6es and could be produced from milk of s0eep, goats and camel. Certain products are c0aracteristically produced from milk of a particular species.

For e&ample, Feta cheese is used in significant tonnage, in Iran. 0heep mil" is traditionally used for authentic Feta cheese. /ccordingly, IndiaSs goat and sheep herds can be utili'ed for the manufacture of such authentic products. Ingredient manu5acture.
7xport markets for commodities like dry milk, condensed milk, g0ee and certain c0eese varieties are well establis0ed. 80ese items are utili6ed as ingredients in foreign countries. 80ese markets can be expanded to include value $ added ingredients like aseptically packaged c0eese sauce and de0ydrated c0eese powers 6 9 7heese sauce Canned c0eese sauce is made from real c0eese to w0ic0 milk, w0ey, modified

food starc0, vegetable oil, colorings and spices may be added. C0eese sauce is useful in kitc0ens for t0e preparation omelet, sandwic0es, entrees, and soups. In addition, c0eese sauce is used as a topping on dis0es.

7heese powders:

c0eese powders are formulated for dusting or smearing of popular snacks like potato c0ips, crackers, etc. t0ey impart flavor and may be blended wit0 spices.8ith
the globali!ation of food items an opportunity should open up for food service and institutional markets.

Indian BtraditionalC Milk used $roducts:

There are a large variety of traditional Indian milk products such as 1A009A- 3-+A/T4: *3TT4; <944 - *3TT4; 5I/ &;4&A;4: *=94AT 7/A;I>I7ATI5- >5; /5-<4; +94/> /I>4

G3AA= 2/0B)6I =/2=I 6/3I

% % % %

/ 01AA .IF (F 2(I+A6 .I+G, 0BD/= /)6 =I4A .I+G /)6 0BD/= 2(I+A6 6(1) I++ I 01AA A)A6 4=A/. / C-A (F 4B=6 3I4GA)0

$>

+/00I
79A--A

%
-

73;: 1I?4: 8IT9 8AT4; A-: +3<A; . +A/T 1I/0 1I?4: 8IT9 /A7TI7 A7I: T5 75A<3/AT4. 4@A&5;AT4: 1I/0. 3+4: A+ A *A+4 T5 &;5:374 +844T 14AT+

G3(/

he mar"et for indigenous based mil" food products is difficult to estimate as most of these products are manufactured at home or in small cottage industries catering to local areas. 4onsumers while purchasing dairy products loo" for freshness, !uality, taste and te&ture, variety and convenience.
&roducts like :ahi and sweets like 0heer *asundi ;abri are perishable products with a shelf life of less than a day. These products are therefore manufactured and sold by local milk and sweet shops. There are several such small shops within the vicinity of residential areas 7onsumer loyalty is built by consistent quality taste and freshness.

$randing o5 Traditional Milk Products.

Among the traditional milk products ghee is the only product which is currently marketed in branded form. 1ain ghee brands are +agar 1ilk1an A*ritaniaB Amul A<711>B Aarey A1afco /tdB @iCaya AA& :airy :evelopment 7ooperative >ederationB @erka A&unCab :airy 7ooperativeB. 4veryday A-estleB and >arm >resh A8ockhardtB. 8ith increasing urbani!ation and changing consumer preferences there is possibility of large scale manufacture of indigenous milk products also The equipments in milk manufacturing have versatility and ca be adapted for several products for instance equipments used to manufacture yogurt also can be adapted for large scale production of Indian curd products Adhai and lassiB. +ignificant research work has been done on dairy equipments under the aegis of -::*.

D4..F has also made a beginning in branding of other traditional mil" products with the launch of pac"aged -aneer under the /mul brand. It has also created a new umbrella brand :/mul .ithaeeSS, for a first new product /mul .ithaee Dulab#amun has already been launched in ma#or Indian mar"ets. estern Milk Products. 1estern mil" products such as butter, cheese, and yogurt have gained popularly in the Indian mar"et only during the last few years. 3owever consumption has been e&panding with increasing urbani'ation. $utter.

$?

.ost Indians prefer to use home made white butter 7.a""han8 for reasons of taste and affordability. .ost of the banded butter is sold in the towns and cities. he ma#or brands are /mul is the leading national brand while theother players have greater shares in their local mar"ets. he latest entrantin the butter mar"et has been 2ritannia. 2ritannia has the advantages of a widedistribution reach and a strong brand recall. -riced at par with the /mulbrand, it is e&pected to give stiff competition to the e&isting players. In $009%$010 the butter production is estimated at 9 purposes rest all is in the yellow form.

C,eese. he present mar"et for cheese in India is estimated at about 9.000 tonnes and is growing at the rate of about 1<K per annum. 4heese is mainly consumed in the urban areas. he four metro cities alone account for more than <0K of the consumption. .umbai is the largest mar"et 7accounting for 50K of cheese sold in the country8, followed by 6elhi 7$0K8, 4alcutta 7?K8 and 4hennai 7>K8. .umbai has a larger number of domestic consumers, compared to 6elhi where the bul" institutional segment 7.ainly hotels8 is larger. Demand 5or various ty(es o5 c,eese in t,e Indian market. ype of 4heese
5rocessed C0eese spread Mo66arella :lavored 2 *piced ;t0ers -" ," ." -

K of total consumption

he ma#or players are /mul, 2ritannia, and 6abon international dominating the mar"et. (ther ma#or brands were Ei#aya, Eer"a and )andini 7all brands or various regional dairy cooperatives8 and Eadilal. he heavy advertising and promotions being underta"en by these new entrants is e&pected to lead to strong $0K growth in the segment. /mul has also become more aggressive with launch of new variants such as .o''arella cheese 7used in -i''a8, cheese powder, etc, he entry of new players and increased mar"eting activity is e&pected to e&pand the mar"et. /ll the ma#or players are e&panding their capacities.

$8

Milk (o;der. .il" powder is mainly of $ types

4 1hole mil" powder 4 0"immed mil" powder
Whole milk powder contains fat, as distinguished from skimmed milk powder, which is produced by removing fat from milk solids. Skimmed milk powder is preferred by diet conscious consumers. Dairy whiteners contain more fat than skimmed milk powder but less compared to whole milk powder. Dairy whiteners are popular milk substitute for making tea coffee etc. The penetration of these products in milk abundant regions is driven by convenience and non perishable nature (longer shelf life) of the product.

6airy sector of advanced nations e&port mil" products with a subsidy of J1000 per tonne with a level of subsidy more than >0K of the price of mil" powder produced in India, this has led to large scale imports of mil" powder both in whole and s"immed form. o protect the domestic sector from these subsidi'ed imports the central government has recently increased the basic import duty on all imports of mil" powder more than 10000. the basic customs duty has been left unchanged at 1<K. In $009%$010 India is estimated to have imported about 18,000 tonnes of mil" powder against a total estimated production of $.90 +a"h . s. In $010%11 India is e&pected to e&port 10000 . prices to J$500 per . of s"immed mil" powder due to rise in international
1t. These e)pectations are

from last yearSs levels of J1900 per

based on the strong demand from ;ussia 4ast Asia and /atin America and also on tightening of supply in 43 which accounts for ,%$ of the annual global skimmed milk powder e)ports.

Ma7or (layers. .il" powder N 6airy 1hiteners, ma#or s"immed mil" brands are sagar 7D4..F8 and )andini 7Garnata"a .il" Federation8, /mul Full 4ream mil" powder is a whole mil" powder brand.+eading brands in the dairy whitener segment are
/ock0ardt=s >arm >resh and 3ritannia=s 1ilkman :airy 8hitener. <estele=s 4veryday 1CMM:=s Amulya Dalmia industry=s +apan >wality Dairy India=s 0ream0ountry

$9

Condensed Milk. he condensed mil" mar"et has grown from 9000 . in $008 to 11000 . in $009.
7ondensed milk is a popular ingredient used in home - made sweets and cakes. -estle s 1ilkmaid is the leading brand with more than %%$ market share. The only other competitor is <711>Ds Amul.

1alue addition in milk (o;der - in5ant 5oods. )estle is the mar"et leader in the segment. his is a category where brand loyalties are very strong as mothers want the best for their babies 3ein' is the only other significant competitor to )estle in this segment. )estles 4erelac and )estum together have around 80K mar"et
shares and 9ein!Ds >are) has close to #E$ share. 8ockhardt is a relatively new entrant with its >irst >ood *rand. /ockhart also proposes to launch a new baby food 4sau containing mooing Amooing is one of the easily digestible pulsesB The 4sau brand will directly compete with -estles -ostrum Amade from riceB. In infant formula also -estlFGs /actose formula and /actose standard formula are the leading brands with around ,%$ market share.

R&%UL"TOR/ FR"M&

OR4.

he dairy industry was de % licensed in 1991 with a view to encourage private investment and flow of capital and new technology in the segment. /lthough de% licensing attracted a large number of players, concerns on issues li"e e&cess capacity, sale of contaminated N substandard !uality of mil" etc induced the government to promulgate the ..-( 7.il" and .il" -roducts (rder8 in 199$. .il" and .il" -roducts (rder 7..-(8 regulates mil" and mil" products in the country. he order re!uires no permission for units handling less than 10,000 liters of li!uid mil" per day or manufacturing mil" products containing between <00 to 5,?<0 tones of mil" solids per year. -lants producing over ?<,000 liters of mil" per day or more than 5,?<0 tones per year of mil" solids have to be registered with the 4entral Dovernment. he stringent regulations, government controls and licensing re!uirements for new capacities have restricted large Indian and .)4 players from ma"ing significant investments in this product category.

50

1ost of the private sector players have restricted large Indian and 1-7 &layers from making significant investments in this product category. 1ost of the private sector players have restricted themselves to manufacture of value added milk products like baby food dairy whiteners condensed milk etc.

/ll the mil" products e&cept malted foods are covered in the category of industries for which foreign e!uity participation up to <1K is automatically allowed. Ice cream, which was earlier reserved for manufacturing in the small % scale sector, has now been de % reserved. /s such, no license is re!uired for setting up of large % scale production facilities for manufacture of ice cream.
*ubse?uent to de $ canali6ation, exports of some milk based products are freely allowed provided t0ese units comply wit0 t0e compulsory inspection re?uirements of concerned agencies like: <ational Dairy Development 3oard. 7xport Inspection Council etc, 3ureau of Indian standards 0as prescribed t0e necessary standards for almost all milk $ based products, w0ic0 are to be ad0ered to by t0e industry.

Maul6s secret o5 success.

80e system succeeded mainly because it provides an assured market at remunerative prices for producers= milk besides acting as a c0annel to market t0e production en0ancement package. /0at=s more, it does not disturb t0e agro $ system of t0e farmers. It also enables t0e consumer an access to 0ig0 ?uality milk and milk products. Contrary to t0e traditional system, w0en t0e profit of t0e business was cornered by t0e middlemen, t0e system ensured t0at t0e profit goes to t0e participants for t0eir socio $economic upliftment and common good.

+oo"ing bac" on the path traversed by /mul, the following features ma"e it a pattern and model for emulation elsewhere. /mul has been able to,

-roduce an appropriate blend of the policy ma"ers farmers board of management 2ring at the command of the rural mil" producers the best to the technology and

and the professionals, each group appreciation its roles and limitations.

harness its fruit for betterment.

-rovide a support system to the mil" producers without disturbing their agro %

economic systems
-lough bac" the profits, by prudent use of men, material and machines in the rural

sector for the common good and betterment of the member producers and

51

 Aven though, growing with time and on scale, it has remained with the smallest

producer members. In that sense, /mul is an e&ample par e&cellence, of an intervention for rural change. he Bnion loo"s after policy formulation, processing and mar"eting of mil", provision of technical inputs to enhance mil" yield of animals, the artificial insemination service, veterinary care, better feeds and the li"e % all through the village societies. he village society also facilitates the implementation of various production enhancement and member education programs underta"en by the union. he
artificial insemination activities on t0eir own. staff of t0e village societies 0as been trained to undertake t0e veterinary first $ aid and t0e

/mulSs success, / model for other districts to follow. /mulSs success led to the creation of similar structures of mil" producers in other districts of Du#arat. hey drew on /mulSs e&perience in pro#ect planning and e&ecution. hus the /nand -atternS was followed not #ust in Gaira district but in .ehsana, 0abar"antha, 2anas"antha, 2aroda and surat districts also. Aven before the 6airy
3oard of India was born, farmers and t0eir leaders carried out

empirical tests of t0e 0ypot0eses t0at explained @mul=s success. In t0ese districts, milk producers and t0eir leaders experienced significatnt commonalities and found easy and effortless ways to adapt @mul=s gameplan to t0eir respective areas.

80is led to t0e Creation of t0e <ational Dairy Development 3oard wit0 t0e clear mandate of replicating t0e @nand pattern= in ot0er parts of t0e country. Initially t0e pattern was followed for t0e dairy sector but at a later stage oilseeds, fruit and vegetables, salt, and tree sector also benefited from it=s success.

%CMMF. "n overvie; Du#arat 4ooperative .il" .ar"eting Federation 7D4..F8 is IndiaSs largest food products mar"eting organi'ation It is a state level ape& body of mil" cooperatives in Du#arat which aims to provide remunerative returns to the farmers and also serve the interest of consumers by providing !uality products which are good value for money . .embers,
.! district cooperative milk producers= union.

5$

)o. of &roducer 1embers: )o. of @illage +ocieties: otal .il" 3andling 4apacity, .il" 4ollection 7 otal $009%$0108, .il" 4ollection 76airy

!..! Mill .",+.. #.. Million liters per day ..-' billion liters

/verage

$009%108,

+.+%

million

liters

1ilk :rying 7apacity:

+-" Metric 8ons 5er :ay

0ales urnover
!""+$"!""-$"# !""#$"% !""%$!""& !""&$"' !""'$."

=s 7.illion8
...+" .,%'" .--+" .&&+" !!.'! !!.&-

B0 J 7million8
,-+"" +-" +-+', +',

4attle Feed .anufacturing 4apacity,

19<0 . s -er 6ay

55

Ma7or dairy products manufacture: 4ompany )estle India +imited 2rands .il"maid, 4erelac, +actogen, .ilo, Averyday .il"food +imited 0mith +imited Gline 2eecham .il"food 3orlic"s, .altova, Eiva .a#or -roducts 0weetened condensed mil", malted foods, mil" powder and 6airy whithner Dhee, ice cream, and other mil" products .alted .il"food, ghee, butter, powdered mil", mil" fluid and other mil" based baby foods. Indodan Industries +imited Indana 4ondensed mil", s"immed mil" powder, dairy mil" whitener, chilled and

processed mil" Du#arat 4o%operative .il" .ar"eting Federation +imited 3.H. Aein6 Bimited
:arex, Compan, 1lactose, 3onniemix, )itamilk Infant Milkfood Milkfood, Malted

/mul

2utter, cheese and other mil" products

3ritannia

Milkman

:lavored milk, c0eese, Milk 5owder, 10ee

Cadbury

3ournvita

Malted :ood

D*

%T%R& $R'($&)T(:

59

India is the worldSs highest mil" producer and all set to become the worldSs largest food factory. In celebration, Indian 6airy sector is now ready to invite )=Is and Foreign investors to find this country a place for the mammoth investment pro#ects. 2e it investors, researchers, entrepreneurs, or the merely curious % Indian 6airy sector has something for everyone. .il" production is relatively efficient way of converting vegetable material into animal food. 6airy cowSs buffaloSs goats and sheep can eat fodder and crop by products which are not eaten by humans. Cet the loss of nutrients energy and e!uipment re!uired in mil" handling inventory ma"e mil" comparatively e&pensive food. /lso if dairying is to play its part in rural development policies, the price to mil" producers has to be remunerative. In a situation of increased international prices low availabilities of food aid and foreign e&change constraints, large scale subsidi'ation of mil" conception will be difficult in the ma#ority of developing countries. 3ence in the foreseeable future, in most of developing countries mil" and mil" products will not play the same roll in nutrition as in the affluent societies of developed countries. Affective demand will come mainly from middle and high income consumers in urban areas. here are ways to mitigate the effects of une!ual distribution of incomes. In 4uba where the Dovernment attaches high priority to mil" in its food and nutrition policy, all pre % school children receive a daily ration of almost a liter of mil" fat the reduced price. 4heap mil" and mil" products are made available to certain other vulnerable groups, by mil" products outside the rationing system are sold price which is well above the cost level. Bntil recently, most fresh mil" in the big cities of 4hina was a reserved for infants and hospitals, but with the increase in supply, rationing has been rela&ed.

5<

COMP"N/ PROFIL&
1e have established a dairy unit named irumala .il" products 7-8 +imited, at Gadivedu Eillage, 4hilla"ur .andal, )ellore 6istrict, /ndhra -radesh and commissioner for commercial production for mar"eting during 0eptember 1999 to handle $,$<,000 liters of mil" per day. he plant is located on 4alcutta%4hennai )ational 3igh way, 9"ms from Dudur town towards 4hennai, in an are of 15.00 acres. 1. $. 5. 9. Inception Eision .ission -olicies he unit is registered under 0.0.I. he mil" is bul" is being purchased from other dairies processed, homogeni'ed, pac"ed and mar"eted mainly in 4hennai, 2angalore and .ysore cites. he mil" is being also sold in Duduru, irupathi and )ellore towns basing on consumers demand. 2y mar"eting the mil" in various towns, assured mar"et. (ut let is provided to large number of village mil" producers for their surplus are applied before machinery is installed in the dairy. 0trict !uality standards are applied before mar"eting the mil" for which well e!uipped laboratory is established. In order to deliver !uality mil" to the consumers insulted truc"s are used to transport mil" from the dairy to various destinations. 1I#ION. irumala .il" -roducts 7-8 +imited is a dream come true to the dynamic young entrepreneurs who have #ointly efforted to convert their s"ills, "nowledge and e&perience in the field of processing and producing mil" and mil" products. =eali'ing the .il" -roduct -otentialities of the inversion trac" of the Dovernment of /ndhra -radesh and Dovernment of India, with self managed financial resources and established the irumala 6airy in the year 199< at )arasaraopet, Duntur 6istrict and oday, the dairy has posd to e!uate erected new plant at Gadivedu in the year 1999.

INC&PTION.

ma#or dairies int eh southern region which has not only captured the mar"et but also has mode : hirumala; an accepted 2rand and preference of the consumers.

5>

MI##ION. irumala .il" -roduct 7-8 +imited is a dream come true to the dynamic young entrepreneurs who have #ointly efforted to convert their s"ills, "nowledge and e&perience in the field of processing and producing mil" products. POLICI&#. =eali'ing the mil" product potentialities of the inversion trac" of the Dovernment of /ndhra -radesh and Dovernment of India, with self managed financial resources and established the irumala 6airy in the year 199<, at )arasaraopet 6istrict, Duntur and erected new plant at Gadivedu in the year 1999. oday, the dairy has posed to e!uate ma#or dairies in the southern region which has not only captured the mar"et but also has mode : I=B./+/; an accepted 2rand and preference of the consumers. II* !I#TOR/ "ND MIL& #TON&# OF COMP"N/. irumala .il" -roduct 7-8 +td., 3andles >.< +a"hs litres of mil" per day in all their pacing stations and main dairy plant. .--+ having good infrastructure and well e!uipped with all latest machinery to process >.< la"hs liter of mil" per day, which is the highest in the state of /ndhra -radesh has developed in a decade.

T"$L&2*E TMPPL !"NDL&# MIL4 IN T!& FOLLO IN% LOC"TION# #*No 1 $ 5 9 Packing Locations Dudur 7.ain plant8 Eellala 4heruvu 2himadolu -alamaner !andling ca(acity (er day 9.0 la"hs litre 1.0 la"hs litre 1.0 la"hs litre 1.< la"hs litre

PROCUR&M&NT OF MIL4..--+ established 5$ chilling centers in /ndhra -radesh and 11 chilling centers in amilnadu and one in Garnata"a procure both buffalo mil". Dood !uality mil" is being procured and chilled with in short time at chilling centers, to retain freshness of mil".

5?

he strength of the

.--+ is to procure >.0 la"h liters of mil" directly from

agents N farmers, by having fully e!uipped machinery and professionally trained staff. .--+ have full control on its systems. 0o that pure !uality of mil" products can be supplied to customers. $utter. Is made from pure cow @ buffalos fat under hygienically processed through continues butter ma"ing machine with a capacity. %,ee. Is made from pure cow @ buffalos butter under supervision 50 years granulation, color and aroma of ghee with a capacity of 8 tones per day. Dhee is pac"ed in a wide range of ?ml to 1< "gs. Milk (o;der. Is made from fresh cow @ buffalo mil", plant is capable of mar"eting all type of mil" powders with a capacity of 1< tones per day. $y 9 (roducts. +i"e 0terili'ed Flavored .il", +assi, Ghava, .il" ca"e, .ysore -a", -anner. #&1&N PRINCIPL&# OF T!& OR%"NI#"TION 3* Contri)ution to society. 1e will conduct our selves at all times in accordance with the basic management ob#ective, faithfully fulfilling our responding as Industrialists to the communities in which we operate. 2* Fairness and !onesty. 1e will be fair and honest in all our business dealings and personal conduct. )o matter now talented and "nowledgeable we may be, without personal integrity, we can neither earn the respect of others nor enhance our own self respect. <* Co-o(eration and Team #(irit. 1e will pool our abilities to accomplish our shared goals. )o matter how talented we are as individuals, without co%operation and team spirit we will be a company in name only. A* Untiring &55ort 5or Im(rovement.

58

1e will strive constantly to improve our ability to contribute to society through our business activites. (nly through this untiring effort can we fulfill our basic management ob#ectives and help to reali'e lasting peace and prosperity. F* Courtesy and !umility. 1e will always be cordial and modest, respecting the rights and deeds of others in order to strengthen healthy social relationships and improve the !uality. D* "da(ta)ility. 1e will continually adopt our thin"ing and behaviour to meet the ever%changing conditions around us, ta"ing care to act in harmony with nature to ensure progress and success in our endeavors. E* %ratitude. 1e will act out of a sense of gratitude for all the benefits we have received, confident that this attitude will be a source of unbounded #oy and utility, enabling us to overcome any obstacles we encounter. !I&R"RC!I"L #TRUCTUR& OF T!& COMP"N/ 2(/=6 (F 6I=A4 (=0 DA)A=/+ ./)/DA=

3B./)=A0(B=A ./)/DA=

FI)/)4A ./)/DA=

./=GA I)D ./)/DA=

-=(6B4 I() ./)/DA=

-=(2+A. 0+(EA

/44(B) 0 0A4 I()

AFA4B IEA ./)/DA

1(=GA0

59

M"NUF"CTURIN% PROC&## OF MIL4 =A4AIEI)D .I+G 7D=/6I)D, 0/.-+I)D, 1AID3I)D, A0 I)D8 -=A3A/ I)D 75<0%900 48 FI+ =/ I()N4+/=IFI4/ I() 4((+I)D /)6 0 =()D 7<0 4 (= 2A+(18 0 /)6/=6IL/ I() -/0 AB=IL/ I() 7>5 4N50 . 0 7(=8 4N1< 0ec8 3(.(DA)IL/ I() 7$<00 -0I8

PRODUCTION PROC&##: Pasteuri:ation. he term pasteuri'ation, applied to mar"et mil" today, refers to the process of heating every practical of mil" to at least >5 0 4 or 19<0 F for 50 minutes ./fter pasteuri'ation, the mil" is immediately cooled to <0 4791 F8 or below . /s it is difficult to e&ercise strict supervision over mil" supplies, it becomes necessary to pasteuri'e mil" so as to ma"e it safe for human consumption. .il" is pasteuri'ed to render it safe for human consumption by destruction of sent percent pathogenic microorganisms and to improve the "eeping !uality of mil" by destruction of almost all% spoiling organisms.

90

#tandardi:ation. 0tandardi'ation of mil" refers to ad#ustment of the fat and Nor solids not fat percentage of mil" to desired value so as to conform to the legal or other re!uirements. .il" is standardi'ed by the addition of mil" or cream with a higher or lower fat percentage than of mil" to be standardi'ed. 0ometimes the additions of s"immed mil" will do. 6ownward standardi'ation for fat is practiced is many countries. he surplus is transformed into butter or ghee. he prevention of Food /dulteration /ct defines standardi'ed mil" as cow and buffalo mil" in which the mil" fat content is ad#usted to 9.<K or more with the 0)F. /tleast 8.<K high mil" fat content may be ad#usted downward by removing mil" or fat or by adding s"immed andNor reconstituted mil". In the case of low mil" fat content, fat may need to be added to assure the legal minimum. 0tandardi'ed mil" may be mar"eted as such or used for ma"ing certain products. 0tandardi'ation ensures mil" of practically uniform and constant composition and nutritive value to the consumer. he surplus fat can be converted into butter and ghee. 4onse!uentlyP mil" can be supplied at low cost. 0tandardi'ed mil" is easier and digests. R&COM$IN"TION, his refers to the product obtained when butter, oils, s"immed mil" powder, and water are combined in the correct preposition to yield fluid mil". he -revention of Food /dulteration /ct =ules 19?> defines recombined product as the mil" product resulting from the combining of mil" fat and mil" solids not fat in one or more of the various forms with or without water. Bnder the prevention of Food /dulteration /ct =ules 19?>, recombined mil" throughout the century should contain a minimum of 50K fat and 8.<K solids not fat. he Food and /griculture (rgani'ation of the Bnited )ations e&tensively produced recombined mil" under the operation flood scheme in .umbai, Gol"ata, 6elhi, and 4hennai during 19?0%?9, from butter oil and s"immed mil" powder donated under the 1orld Food -rogram -ro#ect.

91

he techni!ue of recombination involves dispersion of mil" powder in water at about 9< 4, addition of mil" fat to ma"e a mi&ture, filtration and clarification of the mi&ture, followed by homogeni'ation and pasteuri'ation at ?< 4 for 1< 0econds. he physical, chemical, and functional properties of raw material and used in such preparation determine the flavor, acceptability, and shelf life of the recombined product. he use of low%heat, on%fat mil" powder with !uic" wetting ability, increased solubility, and improved dispensability results into acceptable mil". he introduction of butter oil without appropriate technology of itUs has caused problem in acceptance of recombined mil". Toning. oned mil" refers to mil" obtained on addition of water and s"immed mil" powder to while mil" .Bnder the -revention of Food /dulteration =ules 19?>, toned mil" should contain a minimum of 5K fat 8.<K solids not fat throughout the country. oned mil" is also called single toned mil" and is prepared by toning mil" with fresh separated mil" reconstituted from spray%dried s"immed mil" powder. 0ometimes, mil" is double%toned in order to provide cheap mil" 7with fat content only 1.<K8 to wea"er sections. oning is a process of reducing fat content i.e. mainly used for providing cheap mil" to the poor. CONT&NT# OF T!& PRODUCTON 1. /t first mil" would be collected from the ruler villages through $. In the factory mil" cans are weighed in units of liters. 5. /fter weighing process the mil" cans will send for laboratory for testing the factor percentage. 9. /fter determination of fat percentage process will ta"e. <. /t first the il" would be pouted to drum tan" and then It will be sent to the chillers for storage of .il". his mil" will again sent to the heaters for the destroying the bacteria and again mild would 0ent to the chillers for storing. his mil" will send to the tan"ers for storing long time. hese tan"ers will attach to the pre%pac" machine. /nd the last stages the mil" will be pac"ed through this machine. transportation.

9$

>. )ow pure mil" will come out. ?. -ac"age will be in three si'es, 0mall +arge O 5 =s ? =s .edium O

O 1< =s

BaC Com(any C*M*D.

.--+ has its main dairy plant at "adivedu with handling and local procurement. .--+ has well maintained laboratories in all their dairies. echnically !ualified staff is loo"ing after testing of mil" and mil" products. Quality assurance programmers are implemented at every stage to ensure !uality of mil" and products.

B)C Marketing Manager.

.ain plant is processing $.< la"hs liter of mil" per day in automatic sachet filling machines to supply and distribution of mil" to 4hennai, insulated pubs. irupathi, )ellore etc., in

BcC Roles.
he main dairy has powder plant of 1< tons capacity per day. he plant has been designed to product 1<000 "gs of mil" power on a $0hoursN day. Avaporation is done in multiple effect falling film evaporators and powder is manufactured with high pressure no''les pray dryer. he water evaporation capacity of the evaporator is 9900"gNhr and spray dryer is designed to ?<5 "gNhr. Fluid dbe dryer is also provided. III* FUNCTION"L "CTI1ITI&#. Marketing. .--+ is having good mar"eting of mil" and mil" products, ar"eting offices at 4hennai, 2angalore @ 3yderabad is having good distribution system. /ll the mar"eting A&ecutives are professionally trained and having good s"ills and e&perience in mar"eting products. o maintain cold chain there are about 5< insulated puff vehicles to trans port mil" to various towns. here is tremendous in crease in sales of mil" card mil" products due to best !uality, there are about 5000 out tets in /-, amilanadu and Garanata"a. he dairy is catering need of 10 la"h customers daily in southern region.

95

FINANCE AND ACCOUNTS SECTION: This section functions under the control of manager (Finance and accounts).The Finance and accounts section maintains all financial administrative and production accounts of the union. it is also said that money makes man lives and money is what money does. Finance of the 0ection, he main function of accounts and finance section is the maintenance of boo"s of accounts. -reparation of financial accounts , Financial statement, -reparation of 2udget for future accounting year. -ay roll accounts for casual laborers. he maintenance of the cash records in connection with ban"ing transaction 7co% operative ban" located in the organi'ation itself8 is also done in this department. /ll matters relating to accounting and financial nature should come through this section. /ccounting year of the company. /pril to march is the accounting year of the company. "uditing. /uditing is a very important re!uisite of a company to chec" the trueness of the accounts. For this purpose the company has both internal audits the annual audit is under ta"en only by auditors. hese audits include all mil" mar"eting offices, procurement team and the whole organi'ation in respect of auditing classification the sale dairy has been in :c; class for the past three years. M"INT&N"NC& OF "CCOUNT# "ND $OO4. 3C D"/ $OO4. /ll cash entries are entered first in day boo". his boo" mainly deals with the various advance provided to wor"ers and the deduct made. 2C %&N&R"L L&D%&R. It is a larger where in the day boo" entries are posted. T,e $ooks maintained in t,is de(artment are. 1. 4ash boo". $. 6ay boo", 5. 0undry debtors boo", 9. 0undry creditors boo",

99

<. =eceipt bill boo", >. 2an" payments voucher boo", ?. Hournal voucher boo", 8. 2an" recogrational statements boo", 9. 6ebit note boo", 10. 4redit note boo", 11. 0alary boo", 1$. -urchase boo", 15. 0ales boo", 19. 4ausal labour management boo", 1<. Amployees welfare register, PURC!"#& #&CTION. /ll purchasing transaction on incoming goods transactions are done through this department. he purchase procedure is initiated by the store "eeper on a re!uest can be communicated orally to the store authority by the plant engineer or by written means 7i.e.8 through indent. he type and channel of purchases are decided by the purchasers and the type of product to be produced will be decided with the help of previous purchases of item and types of terms of be purchased. O$0&CTI1& OF PURC!"#& D&P"RTM&NT . o provide uninterrupted blow of material. o "eep inventory investment and lessees at a ma&imum. o pay reasonable low price of supply. o develop satisfaction sources of supply. o develop good vender relation for security good performance. PURC!"#& #&CTION. -urchase section deals only with spares and consumable items, mil" purchase does not come under the section mil" procurement activities are done by a separate section 7i.e.8 procurements and input section.

9<

N"TUR& OF PURC!"#& 4entrali'ed purchase system is follow in this union. here is also a purchases section for purchasing all the materials re!uired for the organi'ation and the various authorities and section under it are with mar"eting officer . -rocurement teams and the village level, primary co%operative societies. he following materials are purchased by this section for the union and its departments.
Your directors have pleasure is submitting they 10 t h annual report and audited accounts for the financial year 2010-2011.

Financial Results
he 4onsolidated Financial =esults for the year ended 51th .arch, 2G33H
summari6ed below CRs. In lacs are

-/= I4B+/=0

,.$",$!"..

,..",.!"."

4B==A) CA/= .. *@B7* !&-!%.,+ !. 5R;:I8 37:;R7 I<87R7*8 .!+%.%& ,. D75R7CI@8I;< +",.#' +. I<87R7*8 !,-.''"" -. 5:R;:I8 37:;R7 8@E #"&.." #. CFRR7<8 D7@R 8@E .,%.'%. : 3 8 -.+& &. 7@RBI7R D7@R* 8@E .".!! '. 5R;:I8 @:87R 8@E +-+.+.". 3R;F1A8 :;R/@RD 3@B@<C7 ..%& '&'.'& .!...!% ,%,&".!+ !!!..&% -!#.%,%.... .,!+.". ,!'.&% #.!&

-=AEI(B0 D7@R

%-#.&! ... 3@B@<C7 C@RRI7D 8; 3@B@<C7 *A778 !!"..!-

9>

.!...!% R&1I& 18 $8 98 <8 OF OP&R"TION.

6uring the year under review the following companies are amalgamated. irumala .il" -roduct -vt.+td. O /malgamated 4ompany irumala 6airy -vt.+td O /malgamating 4ompany -ragathi .il" -roducts -vt.+td O /malgamating 4ompany 2ha"tan#aneya .il" Foods -vt. +td % /malgamating 4ompany /s the share holders are aware of the amalgamation is to carry out the business more economically and profitably by e&panding the activities of the company. he scheme of amalgamation is approved by the 3onorable 3igh 4ourt of /.- as under irumala 6airy -vt +td. For $0 shares 1 share of irumala .il" -roducts 7-8 +td., he share application money with amalgamating shall be transferred to amalgamated company and will treat accordingly.

58 Hana"i =ama 6airy -vt. +td O /malgamating 4ompany

Revie; o5 Financial #tatements.

he company has achieved a turnover of =s.$8<$? la"hs as against $$$0$ la"hs for previous year recording increase of $8.99K over the previous year. /nd the net profit margin was increased to $.15K from 1.90K i.e =s.>08.10 la"hs 511.80 la"hs of previous year.

Production.
he main plant has capacities with e!uipment to manufacture mil" products li"e butter, ghee and mil" powder.

!UM"N R&#OURC&.
he primary functions of the personnel department are responsible for initiating evolving general policies procedure with practiced common with the future ob#ectives of the company. =esponsible for leaving uniform service conditions for all employees.

9?

=esponsible for recruitment and promotion of officers and respect of posting various groups users. PRODUCTION. .--+ has its main dairy plant at Gadiveedu with handing capacity of 9.0 la"hs. +ts. (f mil" per day from various chilling centers and local procurement. Market Milk. .ain plant is processing $.< la"hs liter of mil" per day in automatic sachet filling machines to supply and distribution of mil" to 4hennai, irupathi, )ellore etc, and insulated pubs. here is continuous growth is sales of mil" from <000 lts to $,<0,000. Its with in a .--+ maintaining consistency in !uality and its standards span of one decade.

consumers have much confidence. .--+ having its own supply chain management, which ma"es ease in timely distribution and assured supply, which gains customers satisfaction. /t our palmer unit process and supply of 1.00 la"h liters of mil" and $000 liters of cured to 2angalore city. /t our Eellachervu @ 2himadolu pac"ing stations processing and pac"ing $.00 la"hs liters of mil" to 3yderabad, 1arangal, Ei#ayawada, Aluru, Duntur and =a#ahmundry.

I1* Researc, + Develo(ment. =uality "ssurance.

.--+ has well maintained laboratories in all their dairies. echnically !ualified staff are loo"ing after of mil" and products. Quality assurance programmes are implemented at every stage to ensure !uality of mil" and mil" products. his dairy is am I0( 9001,$000 and an I0( $$000,$00< certified company. he dairy

is following !uality management system and food safety standards. .--+ is having I0I +icense and /gmar" +icense and all other statutory standards as

per re!uirements. here is continuous growth in procurement and sales the capacities of the plant are

also increased to handle the mil" to manufacture mil" products.

98

o meet the demand in mar"et there is also plant to introduce products li"e cup curd,

lussey in retail mar"ets. From time to time consumer are identified and producing the new products to satisfy the customer, continual surveys are conducted to get feedbac" information for analysis.

1* R"TION"LIT/ OF T"$ T!& TOPIC #&L&CT&D IN T!& COMP"N/. :4apital budgeting; decisions are paramount importance in financial decision ma"ing. In the first place, such decisions affect the profitability of a firm. hey also have a bearing on the competitive position of they enterprise mainly because of the fact that they relate of fi&ed assets. he fi&ed assets represent in a services. he true earning assets of the firm. hey enable the firm the generate finished goods that can ultimately be sold from profit. he rather they precede a buffer that allows the if firms to ma"e sales and set end. rue current assets are important the operating. hat with out fi&ed assets to generate finished products that can be converted into current assets it firm involve a relatively small amount of funds therefore, such capital investment decision may results in a ma#or depurative from what the company has been depurative from what the company has been doing in the past capital budget decision determine the future dusty of it company.

99

he study in I" #TUD/ ON C"PIT"L $UD%&TIN% IN TIRUM"L" MIL4 PRODUCT P1T LTDJ can to "now that they are two side of the pro#ect that the investment side. he separation principle says that the cash flows associated with these sides should be separate while e&tricating the cash inflowing an investment side do not consider it formal charge li"e interest or dividend and fi&ed long term assets by the company. It is suggested to hold the company in the same level. It also reveals that cases blows having ups and downs due to e&pansions of assets simultaneously depreciation. C"PIT"L$UD%&TIN% he field of capital budgeting is both comprehensive and challenging. It is clearly plays a vital role in assigning most business firms to achieve there various goals 7e.g., profitability, growth, stability, ris" reduction, social goals, etc8 it has been closely allied to the economic problem. his is rather broadly defined as the allocation of scarcer resources among competing alternatives. 4apital budgeting may be defined as the planning, evaluation and selection of capital e&penditure proposal as distinguished from operating year, capital e&penditures represent outlay whose principal benefits will be recogni'ed over longer period of time. 6ecision relating to capital e&penditures as opposed to those for operating e&penditures, are generally irreversible and they re!uire careful selection techni!ues and procedures. 4apital budgeting is commonly referred to as fi&ed asset management, when integrated with the financial managers goal of attending proper combination of assets 7 i.e., optimal asset mi&8, fi&ed asset assume a great deal of significance. Fi&ed assets are

<0

also fre!uently termed as the Iearning asset of the firm since they usually generate large returns. 0ince assets are the sources of revenue generation for the firm and fi&ed asset its principal sources, it appears logical that future sales growth is heavily correlated with the e&pansion of capital e&penditures.

D&FINITION. 4apital budgeting is defined as :the firm decision to invest its current funds most effectively in long term activities in anticipation of an e&pected flow of future benefit over a serious of year. 4apital budgeting includes are those e&penditure which are e&pected to produce benefits to the firm over more than one year, and encompasses both tangible and intangible assets. .any companies follow the traditional benefits occurring only the e&penditure on tangible fi&ed assets. :4apital budgeting involves the process of planning e&penditure whose returns are e&pected to e&tend beyond one year;. capital outlay;. -C,arles T*!orngeren F&"TUR&# OF C"PIT"L $UD%&TIN% D&CI#ION. -otentially large anticipated benefits. / relatively high degree of ris". / relatively long time period between the initial outlay and the anticipated returns. N"TUR& OF C"PIT"L $UD%&TIN% D&CI#ION#. he investment decision of a firm are generally "now as the capital budgeting or capital e&penditure decisions. / capital budgeting decision may be defined as the firms decision to invest its current funds most effectively in the long term assets in anticipation eston + $rig,am :4apital budgeting is long term planning for ma"ing and financing proposed

<1

of an e&panded flow of benefits over a series of years. he long term assets are those that affect the firms operational beyond the one year period. Investment decisions generally include e&pansion, ac!uisition moderni'ation and replacement of the long term asset sale of a division or business 7divestment8 is also an investment decision. 6ecision li"e the change in the method of sales distribution or an advertisement campaign or a research and developing program have long term implication for the firms e&penditures and benefits and therefore they should also be evaluated as investment decision. he argument that capital is a limited resource is true of any form of capital, whether debt or e!uity 7short%term or long%term, common stoc"8 or retained earnings, accounts payable or notes payable, and so on. Aven the best "nown firm in an industry or a community can increase its borrowing up to a certain limit. (nce this pint has been reached, the firm will either be denied more credit or be charged a higher interest rate, ma"ing borrowing a less desirable way to raise capital. C"PIT"L $UD%&TIN% PROC&##. 4apital budgeting is a comple& process as it involves decisions relating to the investment of current funds for the benefits to be achieved in future and the future is always uncertain. 3owever, the following procedure may be adapted in the process of capital budgeting. here are five stages in the capital budgeting.
Identification of investment opportunities /ssembling of investments 6ecision ma"ing

-erformance review

Implement action

-reparation of capital budgeting

Identi5ication o5 investment o((ortunities.

he capital budgeting process begins with the identification of potential investment opportunities. ypically, the planning body 7it may be an individual or

<$

committee organi'ed formally or informally8 develops estimates of future sales which identifying re!uired investment in plant and e!uipment. Identification of investment ideas it is helpful to, .onitor e&ternal environment regularly to scout investment opportunities. Formulate a well defined corporate strategy based on through analysis of strengths, wea"nesses, opportunities and threats. 0hare corporate strategy and respective with persons. .otivate employees to ma"e suggestions.

"ssem)ling o5 investments.
Investment proposal identified by the production department and other department are usually submitted in a standardi'ed capital investment proposal form. Denerally, most of the proposal, before they reach the capital budgeting committee or viewed from different angle. It also helps in creating a climate for bringing about co%ordinations of inter related activities.Investment proposals are usually classified into various categories for facilitating decision ma"ing, budgeting and control. =eplacement investments A&pansion investment )ew product investment (bligatory and welfare investment

Decision making.
/ system of rupee gateways usually characteri'ed capital investment decision ma"ing. Bnder this system e&ecutive are vested with the power to pay investment proposals up to certain limits.

Pre(aration o5 ca(ital )udgeting.

-ro#ects involving smaller outlays and which can be decided by e&ecutives at lower levels are often covered by a blan"et appropriation for e&penditures action. -ro#ects involving larger outlays are included in the capital budget after necessary approvals.

<5

2efore under facing such pro#ects an appropriation order is usually re!uired. he purpose of this chec" is mainly to ensure that the funds position of the firm satisfactory at the time of implementation.

Im(lementation action.
ranslating an investment proposal into a concert pro#ect is a comple&, time consuming and ris" fraught tas".

"dequate 5ormulation o5 (ro7ects. he ma#or reasons for delay is insinuate formulation of pro#ects but differently, if necessary home wor" in terms of preliminary comprehensive and detailed formulation of the pro#ect. Use o5 t,e (rinci(al o5 res(onsi)ility accounting. /ssigning specific responsibility to pro#ect managers for completing the pro#ect within the defined time frame and cost limits is helpful for e&peditious e&ecution and cost control. Use o5 net;ork tec,niques. For pro#ect planning and control several networ" techni!ues li"e -A= 7-rogrammed evolution review techni!ues8 and 4-. 74ritical path method8 is available. Per5ormance revie;. -erformance review or post completion is a feed bac" device. It is a means for comparing actual performance with pro#ected performance. It may be conducted, most appropriately. 1hen the operation of the pro#ect have been stabili'ed. It is useful in several ways T T It throws light on how realistic were the assumption underlying the pro#ect. It provided a documented log of e&perience that is highly valuable for decisional

ma"ing.

Com(onents o5 ca(ital )udgeting.

<9

Initial investment outlay.

It includes the cash re!uired to ac!uire the new e!uipment or build the new plant less any net cash proceeds from the disposal of the replaced e!uipment. he initial outlay also includes any additional wor"ing capital related to the new e!uipment. (nly changes that occur at the beginning of the pro#ect are included as part of the initial investment outlay. /ny additional wor"ing capital needed or no longer needed in a future period is accounted for as a cash outflow or cash inflow during the period.

Net cas, )ene5its or savings 5rom t,e o(erations. T,is com(onent is calculated as under.
7 he incremental change in operating revenues minus the incremental change in the operating costMincremental net revenue8 minus 7ta&es8 plus or minus 74hanges in the wor"ing capital and other ad#ustments8.

Terminal cas, 5lo;.

It includes the net cash generated from the sale of the assets, ta& effects from the termination of the asset and the release of networ"ing capital.

T,e net (resent value tec,niques.

/lthough there are several methods used in capital budgeting, the net present value techni!ue is more commonly used. Bnder this method a pro#ect with a positive )-E implies that it is worth investing in.

$asic ste(s o5 ca(ital )udgeting.

1. Astimate the cash flows. $. /ssess the ris" ness of the cash flows. 5. 6etermine the appropriate discount rate. 9. Find the -E of the e&pected cash flows.

<<

<. /ccept the pro#ect if -E of inflowsV costs. I==V 3urdle =ate andNor paybac"Wpolicy. Faced with limited sources of capital, management should carefully decide whether a particular pro#ect is economically acceptable. In the case of more than one pro#ect, management must identify the pro#ects that will contribute most to profits and, conse!uently, to the value 7or worth8 of the firm. his, in essence, is the basis of capital budgeting.

Investment decisions- ca(ital )udgeting

4apital budgeting is vital in mar"eting decisions. 6ecisions on investment, which ta"e time to measure, have to be based on the returns which that investment will ma"e. Bnless the pro#ect is for social reasons only, if the investment is unprofitable in the long run, it is unwise to invest in it now. (ften, it would be good to "now the present value of the future investment is, or how long it will ta"e to mature 7give returns8. It could be much more profitable putting the planned investment money in the ban" and earning interest, or investing in an alternative pro#ect. ypical investment decisions include the decision to build another grain silo, cotton gin or cold store or invest in a new distribution depot. /t a lower level, mar"eters may wish to evaluate whether to spend more on advertising or increasing the sales force, although it is difficult to measure the sales to advertising ratio.

C,a(ter o)7ective. T,is c,a(ter is intended to (rovide.

/n understanding of the importance of capital budgeting in mar"eting decision ma"ing. /n e&planation of the different types of investment pro#ect. /n introduction to the economic evaluation of investment proposals. he importance of the concept and calculation of net present value and internal rate of

return in decision ma"ing. he advantages and disadvantages of the paybac" method as a techni!ue for initial

screening of two or more competing pro#ect.

Ca(ital )udgeting versus current e?(enditures.

<>

/ capital investment pro#ect can be distinguished from current e&penditures by two features, a8 0uch pro#ects are relatively large. b8 / significant period of time 7more than one year8 elapses between the investment outlay and the receipt of the benefits. /s a result, most medium si'ed and large organi'ations have developed special procedures and methods for dealing with these decisions. / systematic approach to capital budgeting implies, a8 b8 he formulation of long term goals. he creative search for and identification of new investment opportunities.

c8 4lassification of pro#ects and recognition of economically andNor statistically dependent proposals. d8 e8 f8 he estimation and forecasting of current and future cash flows. / suitable administrative framewor" capable of transferring the re!uired information he controlling of e&penditures and careful monitoring of crucial aspects of pro#ect

to the decision level. e&ecution. g8 / set of decision rules which can differentiate acceptable from unacceptable alternatives is re!uired. he last point 7g8 is crucial and this is the sub#ect of later sections of the chapter.

T,e classi5ication o5 investment (ro7ects. aC $y (ro7ect si:e.

0mall pro#ects may be approved by departmental managers. .ore careful analysis and board of directors approval is needed for large pro#ects of say, half a million dollars or more.

)C $y ty(e o5 )ene5it to t,e 5irm.

/n increase in cash flow. / decrease in ris" /n indirect benefit 7showers for wor"ers, etc8.

cC $y degree o5 de(endence.
.utually e&clusive pro#ects 7can e&ecute pro#ect / or 2, but not both8

<?

4omplementary pro#ects, ta"ing pro#ect / increases the cash flow of pro#ect 2 0ubstitute pro#ects, ta"ing pro#ect / decreases the cash flow of pro#ect 2

dC $y degree o5 statistical de(endence.

-ositive dependence )egative dependence 0tatistical dependence eC $y ty(e o5 cas, 5lo;. 4onventional cash flow, (nly one change in the cash flow sign.

e.g. %NXXXX or XN%%%%, etc )on% 4onventional cash flow, .ore than one change in the cash flow sign.

e.g. XN%NXXX or %NXN%NXXXX, etc T,e economic evaluation o5 investment (ro(osals. he analysis stipulates a decision rule for, I8 II8 /ccepting or =e#ecting

Investment (ro7ects. T,e time value o5 money.

=ecall that the interaction of lenders with borrowers sets an e!uilibrium rate of interest. 2orrowing is only worthwhile if the return on the loan e&ceeds the cost of the borrowed funds. +ending is only worthwhile if the return is at least e!ual to that which can be obtained from alternative opportunities in the same ris" class. T,e interest rate received )y t,e lender is made u( o5. I8 he time value of money, he receipt of money is preferred sooner rather than later. .oney can be used to earn more money. he earlier the money is received, the greater the potential for increasing wealth. hus, to forego the use of money, you must get some compensation. II8 he ris" of the capital sum not being repaid, his uncertainty re!uires a premium as a hedge against the ris"P hence the return must be commensurate with the ris" being underta"en.

<8

III8 Inflation, .oney may lose its purchasing power over time.

he lender must be

compensated for the declining spendingNpurchasing power of money. If the lender receives no compensation, heNshe will be worse off when the loan is repaid than at the time of lending the money.

Future values@com(ound interest.

Future value 7FE8 is the value in dollars at some point in the future of one or more investments. he general formula for computing future value is as follows, FEn M E0 71Xr8n 1here, E0 is the initial sum invested, r is the interest rate, n is the number of periods for which the investment is to receive interest. hus we can compute the future value of what E 0 will accumulate to in n years when it is compounded annually at the same rate of r by using the above formula. 1e can derive the present value 7-E8 by using the formula, FEn M E0 71Xr8n FEn M -E 71Xr8n 2y denoting Eo by -E we obtain,

Rationale 5or t,e 5ormula.

/s you will see from the following e&ercise, given the alternative of earning 10K on his money, an individual 7or firm8 should never offer 7invest8 more than J10.00 to obtain J11.00 with certainty at the end of the year.

Net Present 1alue BNP1C.

he )-E method is used for evaluating the desirability of investments or pro#ects. 1here 4t M the net cash receipt at the end of year t I0 M the initial investment outlay r M the discount rateNthe re!uired minimum rate of return on investment n M the pro#ectNinvestments duration in year

Decision rule.
If )-E is positive7X8, accept the pro#ect

<9

If )-E is negative7%8, re#ect the pro#ect

dC Per(etuities.
-erpetuities in an annuity with an infinite life. It is an e!ual sum of money to be paid in each period forever.

eC T,e internal rate o5 returnBIRRC.

=efer students to the tables in any recogni'ed published source. 718 he I== is the discount rate at which the )-E for a pro#ect e!uals 'ero. his means that the present value of the cash inflows for the pro#ect would e!ual the present value of its outflows. 7$8 he I== is the brea" even discount rate. 758 he I== is found by trail and error

Net Present 1alue vs* Internal Rate o5 Return.

Independent vs dependent pro#ects )-E and I== methods are closely related because, I. 2oth are time%ad#ustment measures of profitability. II. heir mathematical formulas are almost identical. 0o, which leads to an optimal decision, I== or )-EY

aC NP1 vs IRR. Inde(endent (ro7ects.

Independent pro#ect, 0electing one pro#ect does not preclude the choosing of the other. 1ith conventional cash flows 7%ZXZX8 no conflict in decision arisesP in this case both )-E and I== lead to the same acceptNre#ect decisions. )-E vs I== independent pro#ects If cash flows are discounted at "1, )-E is positive and I==V "1, accept pro#ect If cash flows are discounted at "$, )-E is negative and I==W "1, re#ect pro#ect .athematical proof, for a pro#ect to be acceptable, the )-E must be positive, i.e.,where = is the I==

#ince t,e numerators Ct are identical and (ositive in )ot, instances.

ImplicitlyNintuitively = must be greater than " 7=V"8.

>0

 If )-EM0 then =MG, the company is indifferent to such a pro#ect. 3ence, I== and )-E lead to the same decision in this case.

)C NP1 vs IRR. De(endent (ro7ects.

)-E clashes with I== where mutually e&clusive pro#ects e&ist. Bp to a discount rate of " 0, pro#ect 2 is superior to pro#ect /, therefore pro#ect 2 is 2eyond the point "0, pro#ect / is superior to pro#ect 2, there pro#ect is preferred to he two methods do not ran" the pro#ects the same. 6ifferences in the scale of investment )-E and I== may give conflicting decisions where pro#ects differ in their scale of

referred to pro#ect 2. pro#ect 2.

investment.

T,e (ay)ack (eriod BP$PC.

he 4I./ defines paybac" as Ithe time it ta"es the cash inflows from a capital investment pro#ect to e!ual the cash outflows, usually e&pressed in years. 1hen deciding between two or more competing pro#ects, the usual decision is to accept the one with the shortest paybac". -aybac" is often used as a :first screening method;. 2y this, we mean that when a capital investment pro#ect is being considered, the first !uestion to as" is, I3ow long will it ta"e to paybac" its costY he company might have a target paybac", and so it would re#ect a capital pro#ect unless its paybac" period was less than a certain number of years.

"dvantages o5 (ay)ack met,od.

-aybac" can be important, long paybac" means capital tied up and high investment ris". he method also has the advantage that it involves a !uic", simple calculation and an easily understood concept.

T,e accounting rate o5 return- B"RRC.

he /== method 7also called the return on capital employed 7=(4A8 or the return on investment 7=(I8 method8 of appraising a capital pro#ect is to estimate the accounting

>1

rate of return that the pro#ect should yield. If it e&ceeds a target rate of return, the pro#ect will be underta"en.

T,e (ay)ack and "RR met,ods in (ractice.

6espite the limitations of the paybac" method, it is the method most widely used in practice. here are a number of reasons for this, It is particularly useful approach for ran"ing pro#ects where a firm faces li!uidity constraints and re!uires fast repayment of investments. It is appropriate in situations where ris"y investments are made in uncertain mar"ets that are sub#ect to fast design and product changes or where future cash flows are particularly difficult to predict. he method is often used in con#unction with )-E or I== methods and act as a first

screening device to identify pro#ects which are worthy of further investigation. It is easily understood by levels of management. It provides an important summary method, how !uic"ly will the initial investment be recoupedY T/P&# OF C"PIT"L $UD%&TIN% D&CI#ION#. 4apital budgeting decisions are of paramount importance in financial decision ma"ing. In first place they affect the profitability of the firm. hey also have a bearing on the competitive position of the firm because they relate to fi&ed assets. he fi&ed assets are true goods than can ultimately be sold for profit. Denerally the capital budgeting of investment decision includes addition, deposition, modification and replacement of fi&ed assets

&8P"N#ION

DI1&R#IFIC"TION

>$

MI#C&LL"N&OU# R&PL"C&M&NT R&#&"RC! "ND PROPO#"L D&1&LOPM&NT

ypes of capital budgeting decisions

&?(ansion. he company may have to e&pand its production capacities on accounts of high demand for its products or inade!uate production capacity. capital e!uipment. Diversi5ication. / company may intend to reduce it ris" by operating in several activities. In such a case capital investment may become necessary for purchases of new machinery and facilities to handle the new product. Re(lacement. U he replacement of fi&ed assets in place of e&isting assets, either being worn out or become out dated on account of new technology. Researc, and Develo(ment. +arge sums of money may have to be spent for research and development, in case those industries where technology is rapidly changing. In such cases large sums of money are needed for research and development activities. 0o these are also included in the proposal so 4apital 2udgeting. his will need additional

>5

Miscellaneous Pro(osals. / company may have to invest money in pro#ects, which do not directly helping achieving profit%oriented goals. For e&ample, installation of pollution control e!uipment may be necessary on account of legal re!uirements. such proposal also. T&C!NI=U&# OF C"PIT"L $UD%&TIN% D&CI#ION#. here are many methods of evaluating profitability of capital investment proposals. he various commonly used methods are as follows. Traditional met,ods or non-discounted Tec,niques. 1. -aybac" -eriod .ethod or -ay out or -ay off .ethod. $. Improvement of traditional /pproach to -ay 2ac" -eriod .ethod. 5. =ate of =eturn .ethod or /ccounting .ethod. Time-ad7usted met,od or discounted Tec,niques. 9. )et present Ealue .ethod. <. Internal =ate of =eturn .ethod. >. -rofitability inde& .ethod.
4apital 2udgeting echni!ues )on% 64F criteria 64F criteria

herefore, funds are re!uired for

-ay 2ac" -eriod 7-2-8

)et -resent value 7)-E8

/ccounting =ate of =eturn7/==8

Internal =ate of return7I==8

-rofitability Inde& 7-I8 >9

T/P&# OF C"PIT"L $UD%&TIN% D&CI#ION#. 4apital budgeting decisions are of paramount importance in financial decision ma"ing. In first place they affect the profitability of the firm. hey also have a bearing on the competitive position of the firm because they relate to fi&ed assets. he fi&ed assets are true goods than can ultimately be sold for profit. Denerally the capital budgeting of investment decision includes addition, deposition, modification and replacement of fi&ed assets. Ty(es o5 Ca(ital $udgeting Decisions. 4ost reduction program Bnderta"ing an advertising campaign =eplacement of assets (btaining new facilities or e&panding e&isting ones .erger analysis =efinancing an outstanding debt issue )ew and e&isting product evaluation )o profit investments7e.g., health and safety8 IMPORT"NC& OF C"PIT"L $UD%&TIN%. 4apital budgeting decisions are among the most crucial and critical decisions and they have significant impact on the future profitability of the firm. / special care should ta"en while ma"ing capital decisions, because it influences all the branches of a company such as production, mar"eting, personnel, etc. the other reasons for "eeping more attention on capital budgeting decisions include the following,

><

 +ong term implications, Investment of large funds, Irreversible decisions, .ost difficult to ma"e, =ising of fund

P"/ $"C4 P&RIOD BP$PC .- BRs in lak,sKC he pay bac" period 7-28 is one of the most popular and widely recogni'ed traditional methods of evaluating investment proposals. -ay bac" is the number of years re!uired to recover the original cash outlay invested in a pro#ect. If the pro#ect generates constant annual cash inflows, the pay bac" period can be computed by dividing cash outlay by the annual cash in flow. -ay 2ac" -eriod M
Initial Investment

Annual 7ash Inflow

40
7

: :

Initial Investment Annual 7ash in flow

>>

In case of une!ual cash inflows, the pay bac" period can be found out by adding up the cash inflows until the total is e!ual to the initial cash outlay.
$A* "A)+ $&RI',

CA/=

I)4(.A 7-/ 8 7=0 8 1$<?55>5.?$

+/G30

6A-=A4I/ I()
A;+ /A09+ B

7A+9

I-

>/58

7313/ATI@4

7A+9

I-

A;+ /A09+ B

>/58+ A;+ /A09+B

1 $ 5 9 <

1>089>05.00 19?015?>.88 5908999<.?1

$8>>$9>>.?$ 5$$?9?90.>0 >18$5<>$.58 8?589950.90 1<19>$$19.00

$8>>$9>>.?$ >095??0?.5$ 1$$?>1$>9.?0 $1019<?00.>0 5>1>0?919.>0

1$<?55>5.?$ $$?55<>>.>?

9?01<5>?.90 905>90>5.00 98?8>95$.00 <$>?<$8$.00

Initial outlay M $<99<<80>.9< 7la"hs8

&ayback period H 'I "%'J%%E(K.J%-"#(#'%,((.K( #%#'K""#'.(( ''E#(#(K.3% H ' I ''E#(#(K.3%

1<19>$$19.00 M M 9 X 0.$9> 9.5years

>?

Criteria 5or evaluation:

The pay back period computed for a proCect is less than the pay back period set by management of the company it would be accepted. A proCect actual pay back period is more than the determined period by the management it will be reCected.

6ecision,
The standard payback period is set by TI;31A/A 1I/0 &;5:37T+ &;I@AT4 /T: for considering the e)pansion proCect is si) years where as actual payback period is ' .,years. 9ence we accept the &roCect.

"1&R"%& R"T& OF R&TURN B"RRC BORC"CCOUNTIN% R"T& OF R&TURN B"RRC. as in lak,s

80e accounting rate of return C@RR also known as t0e return on investment CR;I uses accounting information, as revealed by financial statements, to measure t0e profitability of an investment. 80e @ccounting rate of return is t0e ratio of t0e average after fax profit divided by t0e average investment. 80e average investment would be e?ual to 0alf of t0e original

"CCOUNTIN% R"T& OF R&TURN

>8

/&"R

&$T

T"8"TION
%$##$!%,&& %"% &&&.&& '%%#%(&.&& "!(%(''.&& "$('#!&#.&&

C"#!INFLO #
'"&!&'(.!$ '$"$"#".!$ %$'!&!#.#! ""$$&"!(.(& #)'&&$$#.&&

1$<1$<!""#".!$
$ " % )

1$<1$<!""#".!$ $$?$$?"")##.#! 9?09?0 )"#!.(& 98?98?'#("$.&&

@verage profit $)(#(%$!.$&

$('%! "#.&

< /verage investment M $<99<<80>.9< $ L M

H

M 1$?9??905.98

$<9>99$?.$0
#",',,J(.'E

F 100

0.10 & #((

#(.((

>9

Criteria 5or evaluation: /ccording to this method /== is lower than minimum rate of return set by the management are accepted. he pro#ect is having dissatisfactory /== so the management has to re#ect the pro#ect. -2-V0-2-% Re-ected -2-W0-2-% Accepted
$"$ . Indifferent

Decision. he standard /verage =ate of =eturn set by I=B./+/ .I+G -=(6B4 0 -=IE/ A + 6 management is $1K. he actual /== is $0.00K is lower than the standard /== set by the managementP hence we re#ect the pro#ect because the rate of return of the pro#ect is lower than the standard.

?0

Net Present 1alue: - ;s in lakhs

he )-E present value 7)-E8 method is the classic economic method of evaluating the investment proposals. If is a 64F techni!ue that e&plicitly recogniges the time value at different time periods differ in value and are comparable only when their e!uipment present values% are found out.

<5) G C $ C"

C.
71 + k)
C ; r

C!

C,

H IIIII..H

( +k)$

( Hk

C.Hk

n <5)G
iLG 1here ) - E M )et present value B3MkC i

Ci % C"

?1

4fi G Cas0 flows occurring at time

k G 80e discount rate n G life of t0e proJect in years C" G Cas0 out lay

,-T ./-S-,T 0123-

CA/=

A/

6A-

4/03 I)F+(10

64F 71$K8 0.895

&.!(! &.! $

-=A0A) E/+BA

1$<?55>5.?$ 0
$)!""#".! $ $$!"")##.# !

1>089>05.0
(!& "! #.'' "(&'((( ).!

$8>>$9>>.?$
"$$!%!%&. #& # '$")#$. "'

$ "
4

$))(#&$(.$' $)!$$(#'. $#

990185?>.% <<<?>998.0< 8<8?90?<.59

9?01<5>?.90 0 98?8>95$.00 0

905>905>.0 <$>?<$8$.0

8?589950.90 1<19>$$19.00

0.>5> 0.<>?

,.0

$"#!($(%!."% 4 $)%())'&# ()

?$

' #$')(.#

Criteria 5or evaluation: In case of calculated )-E is positive or 'ero, the pro#ect should be accepted. If the calculated )-E is negative, the pro#ect is re#ected. Decision. he )et -resent Ealue of I=B./+/ .I+G ./53D6TS ./701T- 2TD is
negative.

INT&RN"L R"T& OF R&TURN.

Rs in lak,s

he internal rate of return 7I==8 method is another discounted cash flow techni!ue which ta"es account of the magnitude and thing of cash flows, other terms used to describe the I== method are yield on an investment, marginal efficiency of capital, rate of return over cost, time% ad#usted rate of internal return and soon.
i=0 I== G C.Hk Ci
i

*)H/C
C.Hk
n

n 1here 4fi M 4ash flows occurring at different point of time

?5

" M he discount rate n M life of the pro#ect in years 40 G Cas0 out lay
*) K /C G *alvage value and /orking Capital at t0e end of t0e n years.

7or8 I== 1here + ! / 2 , +ower discount rate at which )-E is positive

: Aig0er discount rate at w0ic0 <5) is negative G B @ C@$3 H CA$B

, )-E at lower discount rate, + , )-E at higher discount rate,

INT&RN"L R"T& OF R&TURN CA/= A/ 6A4/03 I) F+(10

# #"%,33K3.," #K(EJK(3:(( "EKK"JKK.,"

64F 71$K8
(.EJ3

-=A0A) E/+BA
"%%JK("J."E

"

#"%,33K3.,"

#J,(#3,K.EE

3"",','(.K(

(.,J,

"%,""JKE."K

"",33%KK.K, 3 ' ',(#%3K,.J(

3J(EJJJ%.,#

K#E"3%K" 3E

(.,#"

''(#E3,K.'#

'(3KJ(3K.((

E,3E''3(.J(

(.K3K

%%%,K'JE.(%

98?8>95$.00

<$>?<$8$.00

1<19>$$19.0

0.<>?

8<8?90?<.59

?9

IRR

#" I

"3K,J"J',.3'-"%'J%%E(K.J%

) A#"-#'B

!,#%'!'+%.,+$!!!"!&"%+.."
M M M
H

1$ X

%181>$8<9.>1

x $!

.+%#+&%,.!+
1$ X 7%1.$5 & %$8 1$ X
#'.'K ".'K

Criteria 5or evaluation. In this method the pro#ect is accepted when I== is higher than its cost of capital or cut out rate. If the pro#ect is not accepted when the I== is less than cost of capital. 6ecision, he pro#ect is accepted because of the calculation I== is higher than its cost of capital. he cost of capital fi&ed by management is 10KP the actual is more than its standard. 3ence, the pro#ect is accepted.

?<

PROFIT"$ILIT/ IND&8.
Det anot0er time$ adJusted met0od of evaluating t0e investment proposals is t0e benefit$ costC32C. ratio or profitability index C5I 5rofitability Index is t0e ratio of t0e present valued ofcas0 inflows, at t0e re?uired rate of return, to t0e initial cas0 out flow of t0e investment.

.0 of cash inflow
.7 =

7nitial 6ash outlay

1here -E, -resent Ealue PROFIT"$ILIT/ IND&8

/&"R 3 2 < A F

&"T 32FE<<D<*E2 32FE<<D<*E2 22E<<FDD*DE AEG3F<DE*OG ONENDO<2*GG

D&PR&CI"TION 3DGNODG<*GG 3OEG3<ED*NN <OGNOOOF*E3 AG<DOG<D*GG F2DEF2N2*GG

C"#! IN FLO lak,sC 2NDD2O<<D*E2 <22EAEAG*DG D3N2<FD2*<N NE<NAA<G*OG 3F3AD223A*GG

BR#

?>

L
*

<GED<EGNN*OF
$)%())'&#.() .$

Criteria 5or evaluation.

@ proJect can be accepted if its 5rofitability Index is greater t0an one. If t0e 5I is less t0an one we s0ould reJect t0e proJect.

-.IV 1M /ccepted -.I W 1M =e#ected -.I M 1M Indifferent Decision. -rofitability inde& of proposed e&pansion pro#ect is found our 1.$1 this is more than the cash outflow. 3ence we accept the pro#ect.

??

FINDIN%#
1. From the analysis it was observed that the paybac" period is 9.5 years but standard pay

bac" period by I=B./+/ .I+G -=(B64 0 -=IE/ A + 6 is > years. he actual paybac" period is lower than the standard set by the company management because of high yield from the investment as well as higher cash inflows during the initial years of capital investment period
$.

he study results reveals that /verage rate of return is fi&ed by the

I=B./+/ he actual

.I+G -=(B64 0 -=IE/ A + 6 $1K. 2ut the actual /== is $0.00K. /== is lower than

I=B./+/ .I+G -=(B64 0 -=IE/ A + 6. 2ecause the

capital investment re!uired is very low investment re!uired is very low investment, by I=B./+ .I+G -=(6B4 0 -E + 6.
5. It was observed that the acceptance rule of net present value during the period of study

a pro#ect is accepted if the )et -resent Ealue is positive. %181>$8<9.>1 7la"hs8 for a capital e&penditure of $<99<<80>.9<.

he pro#ect )-E is

9. It was observed that the pro#ect investment yields an internal rate of return of 1$K. For

the period of study, which is more than the itSs 4ost of capital of 19K
<. It was observed that the profitability inde& of the proposed e&pansion pro#ect is more

than one. 6ue to thee positive )-E. han the pro#ect can be accepted. 1hile -.I is 1.$1 lines that is for every (ne rupee invested is the pro#ect yields 1.$1 rupees
#. he study needs found that at proposal the company using the paybac" perid

techni!ue for evaluating its capital as budgeting proposal

?8

#U%%&#TION(
#. From the study it has been suggested that the company has to maintain the -ay bac"

period as though it is prevailing at present ten the actual -2- is less than the standard -2-. 0o the pro#ect is to be accepted.
". From the analysis it has been suggested that the company has it maintained the

/verage rate of return as it is in the present situation. /s the actual /== is less than the standard /== so the pro#ect is to be accepted.
3. It has been suggested that the company has to maintained positive )-E value. /s

the )-E is positive the pro#ect is to be accepted.

'. It has been suggested that the company has to maintained the I== as it is the present

situation while calculating the I== the cost of capital is ta"en in to consideration on the bases of weighted average cost of capital.
%. It has been suggested that the company has to maintain the -I as it is in the present

situation. /s the -I is more than 1 due to the -ositive the pro#ect can be accepted.
K. It has been recommended to adopt the 64F based 426

for the proposal of

evaluating its capital investment proposals alternatives.

,.

he calculated paybac" period is 9.50 years. 2ut standard paybac" period was >

years by I=B./+/ .I+G -=(B64 0 -=IE/ A + 6 management.

?9

$I$ILIO%R"P!/
R&F&R&NC&. FI)/)4I/+ ./)/DA.A) , /6E/)4A6 /44(B) I)D, 0OURN"L#. /))B/+ =A-(= (F .-6+ $010%11 .-6+-B2+I03A6 H(B=)/+0 /)6 ./D/LI)A0 3A ./)/DA.A) /44(B) 0 H(B=)/+0 &$#IT&#. www.tmpdl .com www.indiandairies.com www.financial management.com www.financinganswers.com
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80