A STUDY ON

“CAPITAL BUDGETING ”

With reference to
“PARADEEP PHOSPHATES LTD”
BHUBANESHWAR

A Project Report submitted to JNTU, KAKINADA in partial fulfillment for the

award of the Degree of

MASTER OF BUSINESS ADMINISTRATION (MBA)

Submitted By
GORU.SHYAM KUMAR.

Under the Esteemed Guidance of

Mr. SRIRAM TRIPATHY

MIRACLE SCHOOL OF MANAGEMENT

(AFFILIATED TO JNTU)

MIRACLE CITY
MUNJERU (V)
BHOGAPURAM (M)
VIZIANAGARAM (D.t)
2011-2013

1
 DECLARATION

I hereby declare that this project report “ CAPITAL BUDGETTING” with

reference to “PARADEEP PHOSPHATES Ltd,” has been prepared by me during the
period 06-05-2012 to 10-06-2012 is partial fulfillment of the requirement for the
award of degree of Master of Business Administration of J.N.T.U,KAKINADA.

I also declare that this project is a result of my own effort and that it has
not been submitted to any other university for the Award of Any Degree.

Place: VISAKHAPATNAM (Goru.Shyam Kumar)

Date:

2
 ACKNOWLEDGEMENT
A successful project can never be prepared by single effort or the person
to whom the project is assigned, but it also demand the help and guardianship
of some conversant persons who helps in the undersigned actively or passively
in the completion of successful project .

With great pleasure, I express my deep sense gratitude to the

management of “PARADEEP PHOSPHATES LIMITED”, BHUBANESHWAR for
giving me this very inspirational opportunity to do my observation study in their
reputed company to take this opportunity to express my deep and profound
gratitude to the people concerned who have helped me directly or indirectly in
successful completion of this project.

I convey my sincere thanks to Mr. M K MUKHERJEE Dy. General

Manager, (F &A), PPL who has motivated me with their valuable suggestion
and helped me throughout the project in permitting to perform various tasks in
this esteemed organization.

(GORU .SHYAM KUMAR)

3
 CONTENTS

CHAPTER-1 INTRODUCTION TO THE STUDY 1-11

CHAPTER-2 INDUSTRY PROFILE 12-22

CHAPTER-3 COMPANY PROFILE 23-29

CHAPTER-4 PROJECT PLANNING (CAPITAL BUDGETING) 30-57

CHAPTER-5 FINANCING OF THE PROJECT 58-60

CHAPTER-6 FINANCE AND ACCOUNTS SECTION AT PPL 61-64

CHAPTER-7 DATA ANALYSIS AND INTERPRETATION 65-67

CHAPTER-8 EVALUATION OF CAPITAL BUDGETING 68-79

CHAPTER-9 FINDINGS AND SUGGESTIONS 80

BIBLIOGRAPHY 81

4
 CHAPTER 1
INTRODUCTION

1.1 INTRODUCTION OF THE STUDY

Every organization irrespective of its size and mission can be viewed as a

financial entity management of an organization. Financial management
focuses not only on the improvement of funds but also on their efficient
use with the objective of maximizing the owners‟ wealth. The allocation of
funds is therefore an important function of financial management. The
allocation of funds involves the commitment of funds to assets and
activities.

There are two types of Investment decision:

1. Management of current assets or Working capital management.

2. Long term investment decision.

Long term investment decisions are widely known as capital budgeting or

capital expenditure budgeting. It means as to whether or not money should
be invested in long term project. This part is devoted to an in-depth and
comparative decision of capital budgeting/capital expenditure management.

A project is an activity sufficiently self- contained to permit financial and

commercial analysis. In most cases projects represent expenditure of capital
funds by pre- existing entities which want to expand or improve their
operation.

5
In general a project is an activity in which, we will spend money in
expectation of returns and which logically seems to lead itself to planning.
Financing and implementation as a unit, is a specific activity with a specific
point and a specific ending point intended to accomplish a specific
objective.

To take up a new project, involves a capital investment decision and it is

the top management‟s duty to make a situation and feasibility analysis of
that particular project and means of financing and implementing it
financing is a rapidly expanding field, which focuses not on the credit
status of a company, but on cash flows that will be generated by a specific
project.

Capital budgeting has its origins in the natural resource and infrastructure
sectors. The current demand for infrastructure and capital investments is
being fueled by deregulation in the power, telecommunications, and
transportation sectors, by the globalization of product markets and the
need for manufacturing scale, and by the privatization of government –
owned entities in developed and developing countries.

The capital budgeting decision procedure basically involves the evaluation

of the desirability of an investment proposal. It is obvious that the firm
must have a systematic procedure for making capital budgeting decisions.

The procedure must be consistent with the objective of wealth

maximization. In view of the significance of capital budgeting decisions, the
procedure must consist of step by step analysis.

6
1.2 Importance of investment decisions:-
Capital investments, representing the growing edge of a business, are
deemed to be very important for three inter- related reasons.

1. They influence firm growth in the long term consequences capital

investment decisions have considerable impact on what the firm can do in
future.

2. They affect the risk of the firm; it is difficult to reverse capital

investment decisions because the market for used capital investments is ill
organized and /or most of the capital equipments bought by a firm to meet
its specific requirements.

3. Capital investment decisions involve substantial out lays.

“PARADEEP PHOSPHATES LIMITED” is a growing concern, capital budgeting

is more or less a continuous process and it is carried out by different
functional areas of management such a production, marketing, engineering,
financial management etc. All the relevant functional departments play a
crucial role in the capital budgeting decision process.

1.3 Objectives of the study:-

1. To describe the organizational profile of “PARADEEP PHOSPHATES
Ltd”.
2. To discuss the importance of the management of capital budgeting.
3. Determination of proposal and investments, inflows and out flows.
4. To evaluate the investment proposal by using capital budgeting
techniques.
5. To summarize and to suggest for the better investment proposal.

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1.4 SCOPE OF THE STUDY:-

This study highlights the review of capital budgeting and capital

expenditure management of the company. Capital expenditure decisions
require careful planning and control. Such long term planning and control
of capital expenditure is called Capital Budgeting. The study also helps to
understand how the company estimates the future project cost. The study
also helps to understand the analysis of the alternative proposals and
deciding whether or not to commit funds to a particular investment
proposal whose benefits are to be realized over a period of time longer than
one year. The capital budgeting is based on some tools namely Payback
period, Average Rate of Return, Net Present Value, Profitability Index, and
Internal Rate of Return.

1.5 METHODOLOGY:-

The information for the study is obtained from two sources namely.

1. Primary Sources
2. Secondary Sources

Primary Sources:

It is the information collected directly without any references. It is mainly

through interactions with concerned officers & staff, either individually or

8
collectively; some of the information has been verified or supplemented
with personal observation. These sources include.

a. Thorough interactions with the various department Managers of

“PARADEEP PHOSPHATES LTD”.

b. Guidelines given by the Project Guide, Mr. SRIRAM TRIPATHY,

Dy. Manager, Budget Section, F & A.

Secondary Sources:

This data is from the number of books and records of the company, the
annual reports published by the company and other magazines. The
secondary data is obtained from the following.
a. Collection of required data from annual records, monthly
records, internal Published book or profile of “PARADEEP
PHOSPHATES LTD”.
b. Other books and Journals and magazines

c. Annual Reports of the company

1.6 Limitations:-

Though the project was completed successfully with a few limitations may .
a) Since the procedure and polices of the company will not allow to
disclose confidential financial information, the project has to be
completed with the available data given to us.

b) The period of study that is 6 weeks is not enough to conduct

detailed study of the project.

9
 c) The study is carried basing on the information and documents
provided by the organization and based on the interaction with
the various employees of the respective departments.

1.7 REVIEW OF LITERATURE:-

The concept of Capital Budgeting being a very sensitive area of finance has
outreached the attention of many researchers .A number of studies has been
conducted on the subject. However briefing such studies will highlight the
importance of the present study. It should safeguard to avoid the wrong
choice of the project and investment to be made. It is necessary for the
management to give proper attention to capital budgeting.

The reason for the popularity of Payback period in the order of significance
were stated to be its, simplicity to use and understand, its emphasis on the
early recovery of investment and focus on risk. It was also found that one
third of companies always insisted on the computations of Payback periods
for all projects. For about two-third companies standard Payback period
ranged between three and five years.

The reason for the secondary role of Discounted Cash Flow techniques in
India included difficulty in understanding and using these techniques, due
to lack of qualified professional and unwillingness of top management to
use Discounted Cash Flow techniques.

One large manufacturing and marketing organization mentioned that

conditions of its business were such that Discounted Cash Flow techniques
were not needed. Yet another company stated that replacement projects

10
were very frequent in the company and it was not considered necessary to
use Discounted Cash Flow technique for evaluating such projects.

The present investment appraisal in practice is raising certain questions in

the context.

1. How much importance is assigned to economic analysis of capital

expenditure in practice?
2. What methods are used for analyzing capital expenditure in practice
and what is the reason for underlying these methods?

The answers of the above questions are based on a survey of twenty firms
varying on several dimensions like industry category, size, financial
performance and capital intensity. From these firms, executives,
responsible for capital investment evaluation and capital budget
preparation were interviewed

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 CHAPTER-2
INDUSTRY PROFILE

2.1 Introduction to Fertilizer Industry:

Fertilizer is generally defined as "any material, organic or inorganic, natural

or synthetic, which supplies one or more of the chemical elements required
for the plant growth".

Since the essential physiological attribute of seeds is their ability to convert

a great duel of nutrients into grain. The spread of this variety lead for
greater consumption of fertilizers simultaneously with increasing
demographic pressure on the agricultural productivity has assumed more
importance. This also contributed to the rising demand for fertilizers.

Agriculture the backbone of Indian Economy still holds its relative

importance for more than a billion peoples. The Government of India from
time to time has taken considerable steps for the upliftment of Agriculture
Sector. Here we have analyzed the performance of Fertilizer Industry being
one of the vital parts in agricultural production and Government's policy
initiatives for the same.

Fertilizer in the agricultural process is an important area of concern.

Fertilizer industry in India has succeeded in meeting the demand of all
chemical fertilizers in the recent years. The Fertilizer Industry in India
started its first manufacturing unit of Single Super Phosphate (SSP) in
Ranipet near Chennai with a capacity of 6000 MT a year. Then established
the first two large-sized fertilizer plants, one was the Fertilizer & Chemicals
Travancore of India Ltd. (FACT) in Cochin, Kerala, and the another one was
Fertilizers Corporation of India (FCI) in Sindri, Bihar. These two were

12
established as pedestal fertilizer units to have self sufficiency in the
production of food grains. Afterwards, the industry gained impetus in its
growth due to green revolution in late sixties, followed by seventies and
eighties when fertilizer industry witnessed an incredible boom in the
fertilizer production.

Fertilizer consumption of plant nutrients per unit of grossed cropped area

in India is still very low average being 91.5 kg/ha. Productivity of food grain
crops in the country is also quite low, around 1.6 t/ha, which can certainly
be doubled by enhancing per unit average fertilizer use. Fertilizer
consumption has to increase substantially in order to achieve the food grain
requirement of 220 million tons by the year 2002.

2.2 Origin and Development of Fertilizers Industry in INDIA :

The Indian fertilizer industry has succeeded in meeting almost fully the
demand of all chemical fertilizers except for MOP. The industry had a very
humble beginning in 1906, when the first manufacturing unit of Single
Super Phosphate (SSP) was set up in Ranipet near Chennai with an annual
capacity of 6000 MT. The Fertilizer & Chemicals Travancore of India Ltd.
(FACT) at Cochin in Kerala and the Fertilizers Corporation of India (FCI) in
Sindri in Bihar were the first large sized -fertilizer plants set up in the
forties and fifties with a view to establish an industrial base to achieve self-
sufficiency in food grains. Subsequently, green revolution in the late sixties
gave an impetus to the growth of fertilizer industry in India. The seventies
and eighties then witnessed a significant addition to the fertilizer
production capacity.

The Indian fertilizer industry has witnessed a phenomenal growth in the

eighties. However, the growth has tapered off in the nineties and in the
recent past only public and cooperative sectors have made major

13
investments in this industry. Presently public, private and coop. sector
share 45, 33 and 22 percent of capacity, respectively, whereas their share in
P2O5 capacity is 26, 64 and 10 per cent respectively. New proposals to
government for setting-up fresh capacities in country are mainly from
Public and Cooperative sectors.

The installed capacity as on 30.01.2003 has reached a level of 121.10 lakh

MT of nitrogen (inclusive of an installed capacity of 208.42 lakh MT of urea
after reassessment of capacity) and 53.60 lakh MT of phosphatic nutrient,
making India the 3rd largest fertilizer producer in the world. The rapid
build-up of fertilizer production capacity in the country has been achieved
as a result of a favorable policy environment facilitating large investments
in the public, co-operative and private sectors.

Presently, there are 57 large sized fertilizer plants in the country

manufacturing a wide range of nitrogenous, phosphatic and complex
fertilizers. Out of these, 29 unit produce urea, 20 units produce DAP and
complex fertilizers 13 plants manufacture Ammonium Sulphate (AS),
Calcium Ammonium Nitrate (CAN) and other low analysis nitrogenous
fertilizers. Besides, there are about 64 medium and small-scale units in
operation producing SSP.

The sector experienced a faster growth rate and presently India is the third
largest fertilizer producer.

2.3 MAJOR SEGMENTS IN FERTILIZERS:

The Indian fertilizer industry is broadly divided into Nitrogenous,

Phosphatic and Potassic segments. In addition to these, nutrients are
combined to produce several complex fertilizers. To express the nutrient
constitution of fertilizers, the grade of a fertilizer is expressed as a set of
three numbers in the order of percent of Nitrogen (N), Phosphate (P), Potash
14
(K) and sulphur(S). The straight nitrogenous fertilizers produced in the
country are urea, ammonium Sulphate, calcium ammonium nitrate (CAN)
and ammonium chloride. The only straight phosphatic fertilizer being
produced in Sector Report: Fertilizer Industry India / Economics the country
is SSP. The complex fertilizers include DAP, several grades of Nitro
phosphates and NPK complexes. Urea and DAP are the main fertilizers
produced indigenously.

(a) Chart showing different types of fertilizers

2.4 DEMAND AND SUPPLY

The Demand-Supply scenario in fertilizers has been worked out by the

Working Group on Fertilizers for the Ninth Plan (1997-98 to 2001-02) on the
basis of the estimated demand and production projections in terms of N
and P2O5 nutrients (Table-2). The increase in production (supply) will be

15
4.86 million tons, most of it is confined to nitrogen resulting from the
commissioning of the expansions, new plants or joint ventures abroad.
Production of N is expected to increase from 9.7 million tons in 1997-98 to
25.0 million tons in 2007-08. The Group estimated that the available
phosphate supply will increase from 2.8 million tons of P2O5 in 1997-98
and reach 7 million tons in 2007-08. The demand for N, P2O5, K2O has also
been estimated up to 2006-2007 (terminal year of tenth plan) at 16.35, 6.65
and 2.60 million tonnes, respectively.

2.5 Pricing policy:

The fertilizer policy is aimed at increasing consumption to meet the food

and fiber requirement of growing population through setting up required
production capacities, ensuring that quality fertilizers are made available to
the farmers throughout the country at uniform and affordable price. It was
also recognized that fertilizer use should be profitable to the farmers for
which he must get a certain minimum return for the produce. This led to the
announcement of procurement prices and minimum support prices for
several crops from 1970 onwards. The Marathe Committee was assigned the
task of resolving the issue of keeping Farm Gate Prices (FGP) of fertilizers at
an affordable level in the face of rising production/import costs. Its
recommendations in 1977 led to the birth of the Retention Price Scheme
(RPS). This scheme was intended to ensure that both the fertilizer producers
as well as the farmers should find it worthwhile to produce and use
fertilizers. The policy aimed that each manufacturer is able to get 12% post-
tax return on investment on efficient operation regardless of the location,
age, technology and cost of production. In addition, the government agreed
to reimburse the cost of transportation from factory gate to railhead and
also take care of the distribution margin. The RETENTION PRICE SCHEME is
now restricted to urea only.

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2.6 Fertilizer subsidy:

The RPS system helped in achieving the objective of increased indigenous

availability and supplying it to farmers on affordable and uniform price.
The difference between FARM GATE PRICES and RPS is paid to the industry

as subsidy.

(b) Chart showing subsidy on Fertilizers

Production along with escalation in price of raw material and plant cost, the
subsidy amount swelled to huge proportions over the years. In an attempt
to reduce the burden of subsidy, the government has increased urea price
by 10 % w.e.f February 2005. As a result, domestic urea prices have risen
from Rs3320/t (US$ 83/t) to Rs3660/t (US$ 91/t) for bagged deliveries to
farmers. The average subsidy pattern of urea is around US$ 84/t. prior to
decontrol of phosphatic and potassic fertilizers (in the year 1992) subsidy
was available to all domestic and imported fertilizers. The fertilizer subsidy
increased from US$ 418 million in 1999-00 to US$ 2446 million in 2004-
17
2005. However, the subsidy bill after the decontrol of phosphatic and
potassic fertilizer declined and remained below 1990-91 level.

The union budget for 2000-01 raised urea prices by 15 percent; DAP by 7
percent and that of MOP by 15 percent. This move enabled the Government
of India (GOI) to prune the subsidy bill to some extent. However, there was
no increase in urea price in the union budget for 2001-02.

In the long term policy, the subsidy withdrawal in a phased manner has
been proposed. However, modality to phase out the subsidy has not been
clearly mentioned.

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2.7 Import of DAP

DAP is mainly imported from Jordan, Germany, Canada, Rumania, U.K,

Japan, U.S.A, Norway, Saudi Arabia, Philippines, Mexico, U.S.S.R and others.

DAP
YEAR
Production Imports Consumption

1997-98 28.65 20.77 45.18

1998-99 25.95 14.51 40.52

1999-00 19.51 15.69 34.80

2000-01 28.23 8.65 35.86

2001-02 26.47 15.14 34.51

2002-03 27.59 5.34 36.24

2003-04 36.91 14.60 53.76

2004-05 38.68 21.05 58.28

2005-06 38.63 32.68 69.38

2006-07 48.89 8.60 58.85

2007-08 50.94 9.33 61.81

2008-09 57.76 3.44 72.80**

.
( c) Chart showing import of DAP from 1997-2008

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2.8 Public Sector Companies in INDIAN Fertilizer Market

There are a number of public sector companies in Indian fertilizer market

producing complex fertilizers, ammonium sulphate, DAP, calcium
ammonium nitrate and urea. At present, there are nine public sector
undertakings in the Indian fertilizer market and one cooperative society.
These function under the supervision of the Department of Fertilizers of
India. Of the 63 large units producing fertilizers in India, 9 units are
dedicated to the production of ammonium sulphate and 38 units produce
urea. There are 79 small and medium scale units dedicated to the
production of single super phosphate. The Indian industries producing
fertilizers have to total capacity of 56 lakh MT of phosphatic nutrient and
121 lakh MT of nitrogen. Some of the public sector undertakings in this
sector are mentioned below:

1. Fertilizer Corporation of India Limited (FCIL)

2. Hindustan Fertilizer Corporation Limited (HFC)
3. Pyrites, Phosphates & Chemicals Limited (PPCL)
4. Rashtriya Chemicals and Fertilizers Limited (RCF)
5. National Fertilizers Limited (NFL)
6. Projects &Development India Limited (PDIL)
7. The Fertilizers and Chemicals Travancore Limited (FACT)
8. Madras Fertilizers Limited (MFL)
9. FCI Aravali Gypsum & Minerals India Limited, Jodhpur

Some of the other companies engaged in the production of fertilizers are

listed below:
1. Neyveli Lignite Corporation Ltd. (NLC)
2. Hindustan Copper Limited (HCL)
3. Steel Authority of India Limited (SAIL)

20
Private Companies in Indian Fertilizer Market

A number of private companies in the Indian fertilizer market are engaged

in production of the agro-input. Most of the companies also engage in
exporting fertilizers in the global market, earning foreign capital from the
business. The country stands at the third position among the largest
producers of the product in the world. India is also ranks among the highest
consumers of fertilizers. The euphoric growth in the business has also
facilitated the agricultural industry of India, which is dependent for its
optimization on the fertilizer industry.

Private Companies Producing Fertilizers In INDIA

1. Paradeep Phosphates Ltd
2. Khaitan Chemicals and Fertilizers Limited
3. Mangalore Chemicals
4. Nagarjuna Fertilizers
5. Zuari Chambal
6. BEC Fertilizers
7. Gujarat State Fertilizers &Chemicals Limited
8. DSCL

Some of the other private companies engaged in the production of

fertilizers in India are listed below:
1. The Scientific Fertilizer Co Pvt Ltd
2. Coromandel Fertilizers
3. Deepak Fertilizers and Petrochemicals Corporation Limited
4. Aries AgroVet
5. Devidayal Agro Chemicals

21
The production of nitrogenous fertilizer in the private sector has been
increasing in the past few years. The private sector had only 13% share in
the production in 1960-61. The private sector has always retained a higher
share in the production of phosphatic fertilizer production

Cooperative Companies Producing Fertilizer in India

1. Indian Farmers Fertilizers Co-operative Ltd.(IFFCO)

2. Krishak Bharati Cooperative Limited KRIBHCO

22
 CHAPTER-3
COMPANY PROFILE

3.1 PPL - Historical Developments

Paradeep Phosphates Limited (PPL) is a complex fertilizer unit engaged in

the production of Di-Ammonium Phosphate (DAP)/NPK fertilizers with its
plant located in the Port town of Paradeep at a distance of 120 Km‟s from
the State capital, Bhubaneswar in Orissa on the East Cost of India.

With Registered and Corporate Offices at Bhubaneswar, the Company was

incorporated as a joint venture between the Government of India and the
Republic of Nauru with an investment of Rs. 630 crores on December 24,
1981. Subsequently it became a wholly owned Government of India
Enterprise since June 1993 after withdrawal of stake by the Government of
Nauru.

Later again the Government of India divested 74% of its own stake in favor
of a strategic partner – M/s. Zuari Maroc Phosphates Limited (ZMPL)
effective from 28th February 2002. The ZMPL is a (50:50) joint venture of
Zuari Industries Limited (ZIL), of the K.K Birla Group and the Maroc
Phosphor S.A (A wholly owned subsidiary of the fertilizer giant OCP of
Morocco). At present ZMPL holds 80.45% of the company‟s shares and rest
with the Government of India.

23
3.2 Plant Capacities and Product Profile

Plant Advantages

 In-house production of intermediates with capacity for

annual production of 6, 60,000 MT of Sulphuric Acid and
2,25,000 MT of Phosphoric Acid.
 Captive Power Plant of 32 MW capacity for reliable operation.
 Huge –storage facilities
 Captive Berth at Paradeep Port - Capable of handling panama
vessels.
 Sophisticated automatic ship unloaders.
 Facilities to unload directly both solid & liquid cargo from
ship to storage tank/silo.
 Plant Site well connected with own broad gauge railway
siding, road & close to an irrigational canal.

3.3 Product Profile

 Navratna Brand of
Di-Ammonium Phosphate (DAP)
NPKS : 20:20:0:13
NPK : 12:32:16
NPK : 10:26:26
NPKS : 15:15:15:9

 Sulphuric Acid
Ammonia
Gypsum in Bulk and Bags

24
3.4 Plant Assets

Port Facility

 One sophisticated ship unloader of capacity of 1000 MT/Hr solid cargo.

Another automatic ship unloader has a capacity of 600 MT/Hr. The
handling system also provides for discharging of 500 MT of liquid cargo
per hour.

 3.1 Km long pipe rack and 3.4 Km long conveyor gallery for
transport of liquid and solid cargo directly from the ship to the
storage tanks and silos respectively in the plant.

Sulphuric Acid Plant (SAP)

 Two similar SAP streams (1000 MTD each)

 Installed Capacity 6, 60,000 MT/year.
 Date of commercial production 01.06.1992.

Phosphoric Acid Plant (PAP)

 One PAP unit (750 MTD)
 Installed Capacity 2, 25,000 MT/year.
 Three concentrators (2 nos. 150 MTD each & 1 no. 350 MTD)
 Date of commercial production 01.06.1992

Di-Ammonium Phosphate Plant (DAP)

 Four trains (600 MTD each)
 All trains capable of producing DAP/NP & NPK fertilizers.
 Total Installed Capacity 7, 20,000 MT/year.
 Date of commercial production 01.08.1986

25
Storage Facilities
 Ammonia
 Phosphoric Acid
 Sulphuric Acid
 Rock Phosphate
 Sulphur
 Finished Product
 Imported Fertilizers
- 50,000 MT
- 60,000 MT
- 36,000 MT
- 60,000 MT
- 45,000 MT
- 60,000 MT
- 25,000 MT

Bagging Plant
 Eight Stitching lines for bagging
 Three Platforms for simultaneous loading into wagons
 Additional loading facilities for trucks
 Bulk loading facilities for gypsum
 Platform for dispatch of bagged imported fertilizers & gypsum

Captive Power Plant

 Turbo Generators of 2 x 16 MW capacity
 Use waste steam from SAP for generation of power.
 Oil fired boiler of 110 MT/hr steam generation capacity.

3.5 Environment and Quality

Effluent Treatment Plant (ETP)

The effluent treatment plant at PPL Plant site is one of the largest of its kind
in India with a capacity to handle approximately 200 m3/hr of effluent.

26
The ETP is equipped with a 2050 m3 capacity equalization basin to contain
the effluent from all the plants.

3.6 Environment Management

PPL is a zero effluent plant since 2002. PPL has adopted an environmental
policy committed to continuous improvement in environmental standards
and protection, prevention of pollution and conservation of resources in the
plant and its surrounding areas. It has taken major steps in achieving its
environmental objectives with the help of an Effluent Treatment Plant which
is one of the largest in the Indian Fertilizer Industry. Comprehensive
revamping of Sulphuric Acid and Phosphoric Acid Plants, separation of acid
and storm water drains, and construction of storage yards, reuse of sulphur
muck and a state-of-the-art Alkali Scrubber in the Sulphuric Acid Plant are
additional features .

3.7 Quality Control

The product quality is monitored and controlled through continuous

checking of nutrients Nitrogen, P2O5 and K2O round the clock during
production. The analysis is carried out with the use of highly sophisticated
and accurate „Technician Auto Analyzer‟ at the Laboratory.

3.8 Our Assets are our people

An employee friendly outlook is always the strength of the organization.

Right from the beginning, the management introduced a system of open
communication and dialogue with the employees. Good works done by
employees and useful suggestions from them are being rewarded through
an award scheme. The focus of the organization is always to enhance the

27
multi-tasking ability of every employee through various training
programmes . The Company has on its role 932 qualified and competent
employees consisting of 509 executives and 423 non-executives. Of these,
809 employees have been posted at the Corporate Office & factory site and
123 in various marketing offices spread throughout the country. Frequently
high production and dispatch records have been set, testifying the diligence
of a motivated employee force with accountability.

3.9 Navratna Krishi Vikas

PPL develops farmers through different methods so that fertilizer

consumption is increased for fuelling agricultural growth of the Nation.

As a good business sense and a corporate social responsibility, PPL has

taken up pilot projects as part of Farm Advisory Services under the name
“NAVRATNA KRISHI VIKAS” in Nawarangpur & Nayagarh districts of Orissa
and Sarguja & Rajnandgaon districts of Chhattisgarh, to help enhancing of
agricultural output of farmers and increasing their farm income through
ventures like growing Tissue Culture Bananas, Vermi Compost, Mushroom
cultivation and helping Self Help Groups in the villages etc. Two more
districts viz. Dhenkanal and Khurda have been taken up starting June 2008

These projects are located within our market areas where fertilizer
consumption has been very low. The State Government machineries have
been associated with such activities and are actively involved in these
projects with a slogan of “Serving Farmers, Saving Farming”. Various
promotional and developmental activities include farmer training
programmes, demonstration of usage of hybrid seeds and balanced
nutrition, soil testing campaigns, crop diversification, dealers and retailers
training programmes. For soil testing PPL has both a mobile testing unit and
laboratory facilities in the plant.

28
For producing DAP and Complex fertilizer of NPK, PPL manufactures its
intermediate raw materials. The main units are:

 Sulphuric Acid Plant

 Phosphoric Acid Plant
 Di-Ammonium Phosphate Plant

Supported with
 Bagging Plant with Railway Siding and Platform
 Silo and Storage Tanks for storing different raw materials and
products
 Captive Power Plant
 Off-sites & Utilities
 Effluent Treatment Plant

3.10 Plant Township Advantages

PPL has built a modern township for its employees at Paradeep. Highlights
of the township are

 Well built quarters in several colonies

 Quarter is provided to all employees
 A public school managed by DAV Trust
 State-of-the-art Hospital managed by the Sun Hospital Group
 Employee Recreation Club
 Ladies Club
 PPL Employees Consumer Co-operative Store Limited
 Paradeep Phosphates Employees Co-operative Credit & Thrift
Society Limited
 Navratna Park
 Temple for religious activities

29
 CHAPTER-4
CAPITAL BUDGETING

4.1 MEANING

Capital Budgeting is the process of making investment decisions in capital

expenditure. A capital expenditure may be defined as an expenditure the
benefit of which are expected to be received over a period of time exceeding
one year.
The main characteristics of a capital expenditure are that the expenditure is
incurred at one point of time whereas benefits of the expenditure are
realized at different points of time in future. Capital expenditure involves
non-flexible long term commitment of funds. Thus capital expenditure
decisions are also called Long-Term Investment Decision. Capital budgeting
involves the planning and control of capital expenditure.

DEFINITION:
R.M.LYNCH has defined capital Budgeting as “Capital Budgeting
consists of employment of available capital for the purpose of
maximizing the long term profitability of the firm”.

Capital Budgeting is a many-sided activity. It includes searching for new and

more profitable investment proposals, investigating, engineering and
marketing considerations to predict the consequences of accepting the
investment and making economic analysis to determine the profit potential
of each investment proposal.
Its basic features can be summarized as follows;
1. It has the potentiality of making large anticipated profits.
2. It involves a high degree of risk.
3. It involves a relatively long-time period between the initial
outlay and the anticipated return.

30
Capital Budgeting consists of planning and the development of available
capital for the purpose of maximizing the long-term profitability of the
firm.

4.2 NEED AND IMPORTANCE OF CAPITAL BUDGETING

Capital Budgeting means planning for capital assets. Capital Budgeting

decisions are vital to any organization as they include the decision to;

1. Whether or not funds should be invested in long term

projects such as setting of an industry, purchase of plant and
machinery etc.,
2. Analyze the proposal for expansion or creating additional
capacity.
3. To decide the replacement of permanent assets such as
building and equipments.
4. To make financial analysis of various proposal regarding
capital investments so as to choose the best out of many
alternative proposals.

The importance of capital Budgeting can be well understood from the fact
that an unsound investment decision may prove to be fatal to the very
existence of the concern. The need, significance or importance of capital
budgeting arises mainly due to the following.

1. Large Investments

Capital budgeting decisions, generally involves large investment of funds.

But the funds available with the firm are always limited and the demand for
funds exceeds the resources. Hence it is very important for a firm to plan
and control its capital expenditure.

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2. Long-term commitment of Funds
Capital expenditure involves not only large amounts of funds but also funds
for long-term or more or less on permanent basis. The long-term
commitment of funds increases the financial risk involved in the investment
decision.

3. Irreversible Nature
The capital expenditure decisions are of irreversible nature. Once the
decisions for acquiring a permanent asset is taken, it became very difficult
to dispose of these assets without incurring heavy losses.

4. Long-term Effect of profitability

The investment decisions taken today not only affects present profit but
also the future profitability of the business. A profitable project selection is
fatal to the business.

5. Difficulties of investment decisions

The long term investment decisions are more difficult to take because,
1. Decision extends to a series of years beyond the current
accounting period.
2. Uncertainties of future and
3. Higher degree of risk.

6. National Importance
An investment decision through taken by individual concerns is of national
importance because it determines employment, economic activities and
economic growth.

32
7. Effect on cost structure
By taking a capital expenditure decision, a firm commits itself to a sizeable
amount of fixed cost in terms of interest, supervisors salary, insurance,
building rent etc. If the investment turns out to be unsuccessful in future or
produces less than anticipated profits, the firm will have to bear the burden
of fixed cost.

8. Impact on firm‟s competitive strength

The capital budgeting decisions affect the capacity and strength of a firm to
face competition. It is so because the capital investment decisions affect the
future profits and costs of the firm. This will ultimately affect the firms
competitive strength.

9. Cost control
In capital budgeting there is a regular comparison of budgeted and actual
expenditures. Therefore cost control is facilitated through capital
budgeting.

10. Wealth Maximization

The basic objective of financial management is to maximize the wealth of
the shareholders. Capital budgeting helps to achieve this basic objective.
Capital budgeting avoids over investments and under investments in fixed
assets. In this way capital budgeting protects the interest of the
shareholders and of the enterprise.

4.3 STEPS IN CAPITAL BUDGETING

Capital budgeting is a complex process. It involves decision relating to the

investment of current funds for the benefit to be achieved in future which is
always uncertain. Capital budgeting is a six step process. The following
steps are involved in capital budgeting;

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1. Project generation

The capital budgeting process begins with generation or identification of

investment proposals. This involves a continuous search for investment
opportunities which are compatible with firm‟s objectives.

2. Project screening
Each proposal is then subject to a preliminary screening process in order to
assess whether it is technically feasible, resources required are available,
and expected returns are adequate to compensate for the risks involved.

3. Project evaluation

After screening of project ideas or investment proposals the next step is to

evaluate the profitability of each proposal. This involves two steps;
a. Estimation of cost and benefit in terms of cash flows
b. Selecting an appropriate criterion to judge the desirability of the
project.

4. Project selection

After evaluation the next step is the selection and the approval of the best
proposal. In actual practice all capital budgeting decision are made at
multiple levels and are finally approved by top management.

5. Project execution and implementation

After the selection of project funds are allocated for them and a capital
budget is prepared. It is the duties of the top management or capital
budgeting committee to ensure that funds are spend in accordance with
allocation made in the capital budget.

34
6. Performance review

After the implementation of the project, its progress must be reviewed at

periodical intervals. The follow-up or review is made by comparing actual
performance with the budget estimates.

4.4 OPERATING BUDGET AND CAPITAL BUDGET

Most of the large firms prepare two different budgets each year.

1. OPERATING BUDGET

Operating budget shows planned operations for the forthcoming period and
includes sales, production, production cost, and selling and distribution
overhead budgets. Capital budgets deals exclusively with major investment
proposals.

2. CAPITAL EXPENDITURE BUDGET

Capital Expenditure is a type of functional budget. It is the firm‟s formal

plan for the expenditure of money for purchase of fixed assets. The budget
is prepared after taking in to account the available production capacities,
probable reallocation of existing resources and possible improvements in
production techniques. If required, separate budgets can be prepared for
each item of capital assets such as a building budget, a plant and machinery
budget etc.

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4.5 OBJECTIVES OF CAPITAL EXPENDITURE BUDGET

The objectives of Capital Expenditure Budget are as follows.

1. It determines the capital projects on which work can be started
during the budget period after taking in to account their
urgency and the expected rate of return on each project.
2. It estimates the expenditure that would have to be incurred on
capital projects approved by the management together with the
source or sources from which the required funds would be
obtained.
3. It restricts the capital expenditure on projects within authorized
limits.

CONTROL OVER EXPENDITURE THROUGH CAPITAL EXPENDITURE BUDGET

The capital expenditure budget primarily ensures that only such projects
are taken in hand which are either expected to increase or maintain the rate
of return on capital employed. Each proposed project is appraised and only
essential project or projects likely to increase the profitability of the
organization are included in the budget. In order to control expenditure on
each project, the following procedure is adopted.

1. A project sheet is maintained for each project.

2. In order to ensure that the expenditure on different project is
properly analyzed.
3. The expenditure incurred on the project is regularly entered on the
project sheets from various sources such as invoices of assets
purchased, bill for delivery charges etc.,
4. The management is periodically informed about expenditure
incurred in respect of each project under appropriate heads.

36
 5. In case project cost is expected to increase; a supplementary
sanction for the same is obtained.
6. In financial books the total expenditure incurred on all projects is
separately recorded.

4.6 TACTICAL AND STRATEGIC INVESTMENT DECISION

Investment decision can be classified as,

1. Tactical Decision

A Tactical Decision generally involves a relatively small amount of funds

and does not constitute a major departure from the past practices of the
company.

2. Strategic Decision

A Strategic Investment Decision involves a large sum of money and may

also result in a major departure from the past practices of the company.
Acceptance of a Strategic Investment Decision involves a significant change
in the company‟s expected profits associated with a high degree of risk.

4.7 RATIONALE OF CAPITAL EXPENDITURE

Efficiency is the rationale underlying all capital decisions. A firm has to

continuously invest in new plant or machinery for expansion of its
operations or replace worn-out machinery for maintaining and improving its
efficiency. The overall objective is to maximize the firm‟s profits and thus
optimizing the return on investment. This objective can be achieved either
by increased revenues or by cost reduction. Thus capital expenditure can be
of two types;

1. Expenditure Increasing Revenue

2. Expenditure Reducing Cost

37
4.8 KINDS OF CAPITAL INVESTMENT PROPOSALS

A firm may have several investment proposals for its consideration. It may
adopt one of them, some of them or all of them depending upon whether
they are independent, contingent or dependent or mutually exclusive.

1. INDEPENDENT PROPOSALS

These are proposals which do not compete with one another in a way that
acceptance of one precludes the possibility of acceptance of another. In
case of such proposals the firm may straight away “accept or reject” a
proposals on the basis of minimum return on investment required. All these
proposals which give a higher return than a certain desired rate of return
are accepted and the rest are rejected.

2. CONTINGENT OR DEPENDENT PROPOSALS

These are proposals whose acceptance depends on the acceptance of one or

more other proposals. When a contingent investment proposal is made, it
should also contain the proposal on which it is dependent in order to have a
better perspective of the situation.

3. MUTUALLY EXCLUSIVE PROPOSALS

These proposals which compete with each other in a way that the
acceptance of one precludes the acceptance of other or others. Two or more
mutually exclusive proposals cannot both or all be accepted. Some
techniques have to be used for selecting the better or the best one. Once
this is done, other alternative automatically gets eliminated.

38
4. REPLACEMENT PROPOSALS

These aim at improving operating efficiency and reducing costs. These are
called cost reduction decisions.

5. EXPANSION PROPOSALS

This refers to adding capacity to existing product line.

6. DIVERSIFICATION PROPOSALS

Diversification means operating in several markets rather than a single

market. It may also involve adding new products to the existing products.
Diversification decisions require evaluation of proposals to diversify in to
new product lines, new markets etc., for reducing the risk of failure.

7. CAPITAL RATIONING PROPOSALS

Capital rationing means distribution of capital in favor of some acceptable

proposals. A firm cannot afford to undertake all profitable proposals
because it has limited funds to invest. In such a case, these various
investment proposals compete for limited funds and the firm has to ration
them. Thus the situation where the firm is not able to finance all the
profitable investment opportunities due to limited resources is known as
capital rationing.
4.9 FACTORS AFFECTING CAPITAL INVESTMENT DECISIONS

The following are the four important factors which are generally taken in to
account while making a capital investment decision.

39
1. The Amount of Investment
In case a firm has unlimited funds for investment it can accept all capital
investment proposals which give a rate of return higher than the minimum
acceptable or cut-off rate.

2. Minimum Rate of Return on Investment

The management expects a minimum rate of return on the capital

investment. The minimum rate of return is usually decided on the basis of
the cost of capital.

3. Return Expected from the Investment

Capital investment decisions are made in anticipation of increased return in

the future. It is therefore necessary to estimate the future return or benefits
accruing from the investment proposals while evaluating the capital
investment proposals.

4. Ranking of the Investment Proposals

When a number of projects appear to be acceptable on the basis of their

profitability the project will be ranked in the order of their profitability in
order to determine the most profitable project.

4.10 METHODS OF CAPITAL BUDGETING OR EVALUATION

OF INVESTMENT PROPOSALS

A business firm has a number of proposals regarding various projects in

which it can invest funds. But the funds available with the firm are always
limited and it is not possible to invest funds in all the proposals at a time.
The most widely accepted techniques used in estimating the cost returns of
investment projects can be grouped under two categories;

40
1. TRADITIONAL METHODS (NON DISCOUNTED CASH FLOW)
a. Payback Period Method
b. Average rate of Return Method

2. MODERN METHODS (DISCOUNTED CASH FLOW)

a. Net Present Value Method
b. Internal rate of Return Method
c. Profitability Index Method

TRADITIONAL METHODS (NON DISCOUNTED CASH FLOW)

A. PAY BACK PERIOD METHOD

The payback period method is the simplest method of evaluating

investment proposals. Payback period represents the number of years
required to recover the original investment. The payback period is also
called Pay Out or Pay off Period. This period is calculated by dividing the
cost of the project by the annual earnings after tax but before depreciation.
Under this method the project is ranked on the basis of the length of the
payback period. A project with the shortest payback period will be given the
highest rank.
METHODS OF COMPUTATION OF PAYBACK PERIOD

There are two ways of calculating the payback period.

a. When annual cash inflow is constant
The formula is find out the payback period if the project generates constant
annual cash inflow is;
Original cost of the project
Payback period = Annual cash inflow

Annual cash inflow is the annual earning (profit depreciation and after
taxes) before
41
b. When annual cash inflow is not constant
If the annual cash inflows are unequal the payback period can be found out
by adding up the cash inflows until the total is equal to the initial cash
outlay of the project.

ADVANTAGES OF PAYBACK PERIOD

1. Simple to understand and easy to calculate.
2. It reduces the chances of loss through obsolescence.
3. A firm which has shortage of funds find this method
very useful.
4. This method costs less as it requires only very little
effort for its Computation.

DISADVANTAGES
1. This method does not take in to consideration the cash
inflows beyond the payback period.
2. It does not take in to consideration the time value of
money. It considers the same amount received in the
second year and third year as equal.
3. It gives over emphasis for liquidity.

ACCEPTANCE RULE
The following are the Payback [P.B.Rules]
Accept P.B<cut-off rate
Reject P.B>cut-off rate
May Accept P.B<cut-off rate

Cut-off rate

Cut-off rate is the rate below which a project would not be accepted. If ten
percentage is the desired rate of return, the cut-off rate is 10%.The cut-off
point may also be in terms of period. If the management desires that the

42
investment in the project should be recouped in three years, the period of
three years would be taken as the cut-off period. A project incapable of
generating necessary cash to pay for the initial investment in the project
with-in three years will not be accepted.

II. AVERAGE RATE OF RETURN (ARR) METHOD

This method otherwise called the Rate of Return Method, takes in to account
the earnings expected from the investment over the entire life time of the
asset. The various projects are ranked in order of the rate of returns. The
project with the higher rate of return is accepted. Average Rate of Return is
found out by dividing the average income after depreciation and taxes, i.e.
the accounting profit, by the Average Investment.

Average Annual Earnings

ARR = x 100
Average Investment

Where;
Average Annual Earnings is the total of anticipated annual earnings after
depreciation and tax (accounting profit) divided by the number of years.

Average Investment means

i. If there is no salvage (Scrap value)

Total Investment

43
ii. If there is scrap value
Total Investment-Scrap Value
+ Scrap Value
2

iii. If there is additional working capital

Total Investment-Scrap Value

+ Scrap +Additional Working Capital
2

ADVANTAGES OF AVERAGE RATE OF RETURN (ARR) METHOD

1. It is easy to calculate and simple to understand.

2. Emphasis is placed on the profitability of the project and not on
liquidity.
3. The earnings over the entire life of the project is considered for
4. ascertaining the Average Rate of Return.
5. This method makes use of the accounting profit.

DISADVANTAGES

1. Like the payback period method this method also ignores the time
value of money. The averaging technique gives equal weight to
profits occurring at different periods.
2. This averaging technique ignores the fluctuations in profits of
various years.
3. It makes use of the accounting profits, not cash flows, in
evaluating the project.

44
1. DISCOUNTED CASH FLOW METHODS

The payback period method and the Average rate of Return Method do not
take in to consideration the time value of money. They give equal weight to
the present and the future flow of incomes. The discounted cash flow
methods are based on the concept that a rupee earned today is more worth
than a rupee earned tomorrow. These methods take in to consideration the
profitability and also the time value of money.

I. NET PRESENT VALUE (NPV) METHOD

The Net Present Value Method (NPV) gives consideration to the time value of
money. It views that the cash flows of different years differ in value and
they become comparable only when the present equivalent values of these
cash flows of different periods are ascertained. For this the net cash inflows
of various periods are discounted using the required rate of return, which is
a predetermined rate .If the present value of expected cash inflows exceeds
the initial cost of the project, the project is accepted.
NPV = Present value of cash inflows-Present value of initial
investment

STEPS IN NET PRESENT VALUE (NPV) METHOD

1. Determine an appropriate rate of interest to discount cash flows.

2. Compute the present value of total investment outlay (i.e., cash
outflow) at the determined discounting rate.
3. Compute the present value of total cash inflows (profit before
depreciation and after tax) at the above determined discount rate.

45
 4. Subtract the present value of cash outflow (cost of investment)
from the present value of cash inflows to arrive at the net present
value.
5. If the net present value is negative i.e., the present value cash
outflow is more than the present value of cash inflow the project
proposals will be rejected .If net present value is zero or positive
the proposal can be accepted.
6. If the projects are ranked the project with the maximum positive
net present value should be chosen.

ADVANTAGES OF NET PRESENT VALUE METHOD

1. It considers the time value of money.

2. It considers the earnings over the entire life of the project.
3. Helpful in comparing two projects requiring same amount of cash
outflows.

DISADVANTAGES OF NET PRESENT VALUE METHOD

1. Not helpful in comparing two projects with different cash outflows.

2. This method may be misleading is in comparing the projects of
unequal lives.

II. INTERNAL RATE OF RETURN (IRR) METHOD

The Internal Rate of Return for an investment proposal is that discount rate
which equates the present value of cash inflows with the present value of
cash outflows of the investment. The Internal Rate of Return is compared
with a required rate of return. If the Internal Rate of Return of the
investment proposal is more than the required rate of return the project is
rejected. If more than one project is proposed, the one which gives the
highest internal rate must be accepted.

46
It can be calculated by the following formula

P1-Q
IRR = L+ xD
P1-P2
Where,
L = Lower rate of discount
P1 = Present value of cash inflows at lower rate of discount
P2 = Present value at higher discount rate
Q = Initial Investment
D = Difference in rate

ADVANTAGES OF INTERNAL RATE OF RETURN

1. It considers the time value of money.

2. The earnings over the entire life of project is considered.
3. Effective for comparing projects of different life periods and
different timings in timings of cash inflows.

DISADVANTAGES

1. Difficult to calculate.
2. This method presumes that the earnings are reinvested at the rate
earned by the investment which is not always true.

Accept or Reject Rule

Internal Rate of Return is the maximum rate of interest which an

organization can afford to pay on the capital invested in a project. A project
would qualify to be accepted if Internal Rate of Return exceeds the cut-off
rate. While evaluating two or more projects, a project giving a higher
Internal Rate of Return would be preferred. This is because higher the rate
of return, the more profitable is the investment.

47
III. PROFITABILITY INDEX METHOD

Present Value of Cash Inflows

Profitability Index =
Present Value of Cash Outflows

This is also called Benefit-Cost ratio. This is slight modification of the Net
Present Value Method. The present value of cash inflows and cash outflows
are calculated as under the NPV method. The Profitability Index is the ratio
of the present value of future cash inflow to the present value of the cash
outflow, i.e., initial cost of the project.

If the Profitability index is equal to or more than one proposal the proposal
will be accepted. If there are more than one investment proposals, the one
with the highest profitability index will be preferred.

This method is also known as Benefit-Cost ratio because the numerator

measures benefits and the denominator measures costs. ”It is the ratio of
the present value of cash inflow at the required rate of return to the initial
cash outflow of the investment.

4.11 Cost Effective Analysis

In the cost effectiveness analysis the project selection or technological

choice, only the costs of two or more alternative choices are considered
treating the benefits as identical. This approach is used when the
acquisition of how to minimize the costs for undertaking an activity at a
given discount rates in case the benefits and operating costs are given, one
can minimize the capital cost to obtain given discount.

48
4.12 Project Planning:

The planning of a project is a technically pre- determined set of inter

related activities involving the effective use of given material, human,
technological and financial resources over a given period of time. Which in
association with other development projects result in the achievement of
certain predetermined objectives such as the production of specified goods
& services?

Project planning is spread over a period of time and is not a one shot
activity. The important stages in the life of a project are:

1. It‟s Identification
2. It‟s initial formulation
3. It‟s evaluation (Whether to select or to project)
4. It‟s final formulation
5. It‟s implementation
6. It‟s completion and operation

The time taken for the entire process is the gestation period of the project.
The process of identification of a project begins when we are seriously
trying to overcome certain problems. They may be non- utilization to
overcome available funds. Plant capacity, expansion etc

Contents of the project report:

1. Market and marketing

2. Site of the project
3. Project engineering dealing with technical aspects of the
project.
4. Location and layout of the project building

49
 5. Building
6. Production capacity.
7. Work Schedule

Details of the cost of the Project:-

1. Cost of land
2. Cost of Building
3. Cost of plant and machinery
4. Engineering know how fee
5. Expenses on training Erection supervision
6. Miscellaneous fixed assets
7. Preliminary expenses
8. Pre-operative expenses
9. Provision for contingencies
4.13 RISK AND UNCERTAINITY IN CAPITAL BUDGETING

All the techniques of capital budgeting requires the estimation of future

cash inflow and cash outflows. The cash flows are estimated abased on the
following factors.

 Expected economic life of the project.

 Salvage value of the asset at the end of the economic life.

 Capacity of the product.

 Selling price of the product.

 Production cost.

 Depreciation.

 Rate of Taxation

50
  Future demand of the product, etc.

But due to uncertainties about the future the estimates of demand,

production, sales costs, selling price, etc cannot be exact, for example a
product may become obsolete much earlier than anticipated due to un
expected technological developments all these elements of uncertainties
have to be take into account in the form of forcible risk while making an
investment decision. But some allowances for the element of risk have to be
proved.

4.14 FACTORS INFLUENCING CAPITAL EXPENDITURE

DESCISIONS:

There are many factors financial as well as non financial which influence
the capital expenditure decisions and the profitability of the proposal yet,
there are many other factors which have to be taken into consideration
while taking a capital expenditure decisions. They are

1. URGENCY
Sometime an investment is to be made due to urgency for the survival of
the firm or to avoid heavy losses. In such circumstances, proper evaluation
cannot be made though profitability tests. Examples of each urgency are
breakdown of some plant and machinery fire accidents etc.

2. DEGREE OF UNCERTAINTY

Profitability is directly related to risk, higher the profits, greater is the risk
or uncertainty.

51
INTANGIBLE FACTORS

Sometimes, a capital expenditure has to be made due to certain emotional

and intangible factors such as safety and welfare of the workers, prestigious
projects, social welfare, goodwill of the firm etc.

1. AVAILABILITY OF FUNDS

As the capital expenditure generally requires the previsions of laws solely

influence by this factor and although the project may not be profitable. Yet
the investment has to be made.

2. FUTURE EARNINGS

A project may not be profitable as competed to another today, but it may be

profited to increase future earnings.

Sometimes project with some lower profitability may be selected due to

constant flow of income as compared to another project with an irregular
and uncertain inflow of income.

4.15 CAPITAL EXPENDITURE CONTROL

Capital expenditure involves no-flexible long-term commitments of funds.

The success of an enterprise in the long run depends up on the
effectiveness with which the management makes capital expenditure
decision. Capital expenditure decisions are very important as their impact is
more or less permanent on the well being and economic health of the
enterprise. Because of this large scale mechanization and automation and
importance of capital expenditure for increase in the profitability of a
concern. It has become essential to maintain an effective system of capital
expenditure control.

52
4.16 OBJECTIVES CONTROL OF CAPITAL EXPENDITURE

 To make an estimate of capital expenditure and to see that the

total cash outlay is within the financial resources of the
enterprise
 To ensure timely cash inflows for the projects so that no
availability of cash may not be problem in the implementation
of the problem.
 To ensure that all capital expenditure is properly sanctioned.
 To properly coordinate the projects of various departments
 To fix priorities among various projects and ensure their follow-
up.
 To compare periodically actual expenditure with the budgeted
ones so as to avoid any excess expenditure.
 To measure the performance of the project.
 To ensure that sufficient amount of capital expenditure is
incurred to keep pace with rapid technological development.
 To prevent over expansion.

4.17 STEPS INVOLVED IN CONTROL OF CAPITAL EXPENDITURE

 Preparation of capital expenditure budget.

 Proper authorization of capital expenditure.

 Recording and control of expenditure.

 Evaluation of performance.

53
LEASE FINANCING

Lease finance is an agreement for the use of an asset for a specified rental.
The owner of the asset is called the lesser and the user the lesser
1) Operating leases

2) Financial leases

Operating leases are short-term no-cancel able leases where the risk of
obsolescence in borne by the lesser
Financial leases are long-term non-cancelable leases where any risk in the
use of asset is borne by the lessee and he enjoys the return too.
 Preliminary budget estimates for the year following the budget year.

GENERAL GUIDELINES:-

The capital funds budget is to be prepared under six major heads.

1) Continuing schemes

2) New schemes

3) Modernization and rationalization

4) Township

5) Science and technology

6) EDP schemes

CONTINUING SCHEMES

These schemes include all such schemes which are under implementation of
which funds prevision has been made in the current year /prevision is
required in the budget year.

54
NEW SCHEMES

This scheme includes all such schemes, which are proposed to be initiated
in the budget year and for which under provisions is required in the budget
year. Normally, such schemes are included in the five-year plan of the
company approved by the planning commission.

MODERNIZATION AND RATIONALIZATION (M&R)

This includes item of plant and machinery etc for which funds required in
the budget year and the following year. All item included in M&R should
result in cost reduction/quality improvement/rebottle
necking/replacement/productivity, improvement and welfare. The M&R
items are to be submitted in the following main characteristics accompanied
with full justification on the agenda of facilities increased output and
production, quality requirements bottlenecks.

1. Replacement / modernization.
2. Balancing facilities (essentially to increase production).
3. Operational requirements including material handling
4. Quality/testing facilities.
5. Welfare
6. Minor works.

These requirements should be protested term wise. A separate proposal is

required for M&R items costing more than Rs. 10, 00,000.

TOWNSHIP
 Township budget is divided into two parts.

 Continuing township schemes

 New townships schemes.

55
Funds required under each schemes should be backed up with full data on
number on quarter/scope of work to be completed against the funds
requirements phasing of budgeted funds for current year, budget year and
following year etc, should be given similar information on number of
quarter/scope of work already completed, expenditure incurred till last
year, satisfaction level it is to be added in the above back up information
for each scheme.

SCIENCE AND TECHNOLOGY

 This budget can be divided into two categories

 Continuing schemes.

 New schemes to be taken up in the budget year.

The schemes should fall in any of the above cartages giving details on
physical and financial progress etc.

EDP SCHEMES

All funds requirements for computer are information system should be

grouped under EDP schemes and projects accordingly.

BUYING OR PROCURING

Buying or procurement involves purchasing an asset permanently in the

form of cash or credit.

56
LEASING VS BUYING

Leasing equipment has the tax advantage of depreciation, which can

mutually benefit the lesser and lessee, other advantage of leasing, include
convenience and flexibility as well as specialized services to the lessee.
Lease privies handy to those linens, which cannot obtain loan capital form
normal sources.

The pros and cons of leasing and buying are to be examined thoroughly
before deciding the method of procurement i.e. leasing or buying.

57
 CHAPTER-5
FINANCING OF PROJECT

Project financing is considered right from the time of the conception of the
project. The proposal of the project progress working capital, so, in general
a project is considered as a „mini firm‟ is a part and parcel of the
organization.

5.1 Sources of Finance:

 Loan Financing
 Security Financing
 Internal Financing

Loan Financing:
(a). Short- Term Loans & Credits

Short – Term Loans & Credits are raised by a firm for meeting its working
capital requirements. These are generally for a short period not exceeding
the accounting period i.e., one – year.

Types of Short Term Loans & Credits:

1. Trade Credit.
2. Installment Credit.
3. Advances.
4. Commercial papers
5. Commercial banks
6. Cash Credits
7. Over Drafts
8. Public Deposits.
58
(b). Term Loans:

Term loans are given by the financial institutions and banks, which form the
primary source of long term debt for both private as well as the Government
organizations. Term loans are generally employed to finance the acquisition
of fixed assets that are generally repayable in less than 10 years. In addition
to short- term loans, company will raise medium term and long term loans.

5.2 Security Financing:

Corporate Securities can be classified into two categories.

(a) Ownership Securities or capital stock.
(b) Creditor ship Securities or debt Capital.

(a) Ownership Securities or capital Stock:

Types of Ownership Securities or Capital Stock:

i) Equity Capital:

Equity Capital is also known as owner‟s capital in a firm. The holders of

these shares are the real owners of the company. They have a control over
the working of the company. Different ways to raise the equity capital.
o Initial public offering.
o Seasoned offering
o Rights issue.
o Private placement
o Preferential allotment.

59
ii) Preference Capital:

These shares have certain preferences as compared to other type of shares.

1. Payment of Divided
2. Repayment of the capital at the time of liquidation of the
company.

b) Types of Creditor ship Securities:

Debentures:

Debentures are an alternative to the term loans and are instruments for
raising the debt finance. Debenture holders are the creditors of a company
and the company and the company have the obligations to pay the interest
and principal at specified times. Debentures provide more flexibility, with
respect to maturity, interest rate, security and repayment Debentures may
be fixed rate of interest or floating rate or may be zero rates. Debentures &
Ownership Securities help the management of the company to reduce the
cost of capital.

5.3 Internal Financing:

A new company can raise finance only through external sources such as
shares, debentures, loans and public deposits. For existing company they
need to raise funds through internal source. Such as retained earnings
depreciation as a source of funds. Some other innovative source of finance
 Venture Capital
 Seed Capital
 Bridge Finance
 Lease Financing
 Euro- Issues

60
 CHAPTER-6
INTRODUCTION TO FINANCE AND ACCOUNTS DEPARTMENT

Finance is the lifeblood of the business .According to Howard and Upton

“Finance is that administrative area or set of administrative function in
organizations which relate with the arrangements of cash and credit so that
the organization may have the means to carry out of its objective as
possible.”

6.1 Functions Of Finance and Accounting Department

Finance & Accounts Department of BHUBANESHWAR Unit is controlled by

Head Of the Department i.e. C.F.O. His main function is to co-ordinate all
activities related to Finance & Accounts and report to Head Office‟s Finance
& Accounts Department / Finance Director as well Unit Head. Finance &
Accounts Department function various type of activities as per the
Guidelines issued by Head Office, Purchase Procedure, Service Rules, Powers
of officer etc. At present to carry out all the related activities, following four
sectional heads are reporting to him for work connected to their Sections.
All the four sectional heads independently report to Departmental Head.
However, in case, Departmental Head happens on tour or on leave, the next
senior sectional head takes the charge of the department and remaining
here sectional head will report to him for all the work connected to their
Sections.

61
6.2 FINANCE DEPARTMENT COMPRISES OF

1. Pay roll section

2. Raw materials
3. Fixed assets & insurance
4. Works bill section
5. Purchase bill section
6. Books & budgets
7. Financial concurrence

PAY ROLL SECTION

Pay roll section takes care of all the financial issues of employees in co-
ordination with Administrative & Personnel Department. Its functions
includes management of salaries, TA/DA, loans & advances, misc payment
related to employees, Perk/There allowance payments etc. Here records of
each employee are maintained regarding basic pay, leave encashment,
medical, salary, increments, promotion based perks, etc.

RAW MATERIALS

Different types of Raw Materials that are required at PPL, PARADEEP Unit are
as follows :
1. Sulphuric Acid
2. Phosphoric Acid
3. Ammonia
4. Potash
5. MAP
6. Urea
7. Filler

62
Raw Material section in F & A department does the accounting of above
mentioned raw-material which includes receipt of raw- material are
purchased, monthly consumption as per the production department and
payment to the suppliers.

MISCELLANEOUS ACCOUNTS

The miscellaneous jobs can be broadly divided into following categories:

1. Passing of bills of miscellaneous nature;

2. Accounting of cash imprested and advances for expenses;
3. Miscellaneous recoveries from outside agencies.

Miscellaneous bills includes rates contracts for service contract for air
conditioner, water coolers, weighing machines, franking machines, knitting
of chairs, etc. Others miscellaneous bills includes telephone rentals, STD
calls, local calls, teleprinters , fax, service bills, advertisement bills,
electricity bills, printing and block making bills, bills of travel agents, bills
of canteen purchases, etc. Annual Contracts and Hiring of taxi, motors, etc.
is also included in this.

WORKS BILLS

Work bills section is entrusted with the task of checking and authentication
of APF received from various departments such as Civil, Plant, and
Township etc. They have to keep record and maintain account. They have to
verify with respect to measurements, Tax provisions like TDS and other
deductions like EMD, Security and penalty etc.

63
PURCHASE BILLS

In purchase bill, treatment is given to the bills on purchase of machinery

and tools and spares etc. for accounting requirements and book keeping as
well as record maintenance and tax deductions and authentication of AFP on
purchase of Goods and Services.

FINANCIAL CONCURRENCE

Financial concurrence deals with crosschecking and green signaling the

requisition for purchases made by various indent departments of the unit.
They check for the availability of budget and ascertain its necessity and
critically for regular and smooth operations of the plants and activities of
various departments.

BOOKS & BUDGETS

Books and budget deal with revenue budget compilation, monitoring and
control, reconciliation of inter unit accounts, maintenance of books of
accounts and submission of monthly / quarterly / annual reports, COP
processing and attending internal / statutory / tax auditors.

64
 CHAPTER-7
DATA ANALYSIS AND INTERPRETATION

7.1 Production (2006-2007 to 2010-2011)

(In MT)
Particulars 06-07 07-08 08-09 09-10 10-11
Production

DAP 822395 879765 470155 764464 657550

NPK 486415 401580 552085 447995 541352

% Capacity
utilization 182 178 142 168 167

7.1 Sales: Manufactured Fertilizers(2006-2007 to 2010-2011)

(In MT)
Particulars 06-07 07-08 08-09 09-10 10-11
DAP 838586 892212 469694 776715 649407

NPK 479529 423187 545728 458248 519185

7.2 Sales: Traded Fertilizers (2006-2007 to 2010-2011)

(In MT)
Particulars 06-07 07-08 08-09 09-10 10-11
DAP --- --- 46766 112954 159739

MOP 142152 80530 129733 110883 117753

65
7.3 Balance Sheet (2006-2007 to 2010-2011)
(In lacs)
Particulars 06-07 07-08 08-09 09-10 10-11
Sources of Funds:
Auth share capital 100000 100000 100000 100000 100000
Paid up capital 57545 57545 57545 57545 57545
Reserve and surplus --- --- --- 10791 28500
Secured loan 13619 2785 85072 104307 113987

Unsecured loan 76475 75788 42725 8329 ---

Total sources of funds
147639 136118 185342 180972 200032
Application of Funds:
Gross Block(including
CWIP) 73251 75734 77436 79349 83178
Net Block(including
CWIP) 26887 25706 24149 23652 25419
Investments --- --- 82130 605 5
Deferred tax Assets --- --- --- 3369 2037

Current Assets

Inventories 28595 21496 55159 37363 50023

Sundry Debtors 68236 56541 86632 60052 51764
Others 6130 47507 103523 117391 107567

Total 102961 125544 245314 214806 209354

Current Liabilities and

Provisions 48770 73207 170615 61460 36783
Net Current Assets 54191 52337 74699 153346 172571
Deferred Revenue Exp 131 --- --- --- ---
Accumulated Loss 66430 58075 4364 --- ---
TotalApplication(funds) 147639 136118 185342 180972 200032

66
7.4 Profit and Loss Statement(2006-2011)

(In Lacs)
Working results 06-07 07-08 08-09 09-10 10-11
Sales 119793 120663 94368 119831 128297
Subsidy 86276 124527 417077 178583 222170
Other Income 652 3487 49530 18153 12597
Total 206721 248677 560975 316927 363064
Cost Of Sales(including prior
period adj but excluding Dep
187719 230047 484485 288612 327032
and Interest)

Gross Margin (19002) (18630) (76490) (28315) (36032)

Depreciation 3402 3817 3347 3048 2470
Profit/(loss) before Int and 15600 14813 73143 25267 33562
Taxes

Interest 4613 6387 5262 7294 9644

Profit/(loss) before taxes 10987 8426 67881 17973 23918
Taxes including FBT 59 70 14170 6187 8278
Debit/(Credit) for deferred --- --- --- (3369) 1332
tax
TaxationExpenses Credited --- --- --- --- (3400)
NET PROFIT/(LOSS) 10928 8356 53711 15155 17708

67
 CHAPTER-8
EVALUATION OF PROJECT USING CAPITAL BUDGETING
TECHNIQUES

8.1 PROJECT EVALUATION

Name of the Project: Baggaging plant with handling system .

Project Estimate: Ventured into the market and got a quote for 300 Cr.

Project Cost: 300 Cr

Assumption: The Company has currently a dispatch mechanism which is

mechanized for dispatching or bagging 3,300 MT/day. The company plans
to increase its production level to 16, 00,000 MT/annum. So, the dispatch
system should be increased to an additional 1,550 Mt/day so that the total
dispatching to be done per day goes up to 4,850Mt/day. So, as to ensure
the smooth functioning of the dispatching system and this can be done by
setting up a new baggaging plant…
Present Capacity-3,330MT/day
New Capacity - 4,850MT/day
Difference or excess production - (4850-3300)MT/day=1,550MT/day

8.2 STEPS IN THE EVALUATION OF THE PROJECT

STEP1: Capital Budget Estimates:

The first and the foremost step in the evaluation of a project is the budget
estimate of the project. And here the estimate of the project is 300 crores.
This includes:-
1. Extension of Bagging Plant.
2. Conveyor System for extended portion of Bagging plant.
3. Shed for covering extended Bagging Plant.

68
 4. Railway siding modification.
5. Shed for covering extended portion of Bagging plant.

STEP2: Project Finance and Source of Funds:

The second step in the evaluation of the project is to find the funds to
install or to establish a project.

1. Debt/Loan Funds/Long term Loans

2. Internal Generation of funds

In this project we have funding of 75% from a bank at 11% rate of interest
P.a. providing with long term loans and the rest 25% from Internal
generation. With a moratorium of one year and repayment schedule of 5
years.

STEP3: Phasing of Capital Expenditure:

The third step in the evaluation of the project is the phasing of the
expenses or expenditure on the project. And here the phasing of the project
expenditure is as below:

PHASING OF CAPITAL EXPENDITURE (Rs in crores)

2012-13 2013-14 2014-15 Total
Bank Loan 50.00 100.00 75.00 225.00
Interest On LTL 6.88 32.90 15.40 55.17
Internal Generation 20.00 35.00 20.00 75.00
Total value Of the project 76.88 167.90 110.40 355.17

69
Step4: Repayment Schedule of the Long Term Loan (LTL):

The fourth step in the evaluation of the project is preparing the repayment
schedule of the Long Term Loan (LTL). And here the project repayment
schedule is.
REPAYMENT SCHEDULE OF LONG-TERM LOAN
11% (Rs in Crores)

Interest Year wise Year wise

Opening Closing '@11% Principal Interest
Balance Addition Total Repayment Balance p.a Year repayment repayment
1-Oct-12 75 75 75
1-Jan-13 75 100 175 175 2.06
1-Apr-13 175 125 300 300 4.81 2012-13 0 6.88
1-Jul-13 300 300 300 8.25
1-Oct-13 300 300 300 8.25
1-Jan-14 300 300 3.75 296.25 8.25
1-Apr-14 296.25 296.25 8.75 287.5 8.15 2013-14 12.5 32.90
1-Jul-14 287.5 287.5 15.00 272.5 7.91
1-Oct-14 272.5 272.5 15.00 257.5 7.49
1-Jan-15 257.5 257.5 15.00 242.5 7.08
1-Apr-15 242.5 242.5 15.00 227.5 6.67 2014-15 60.00 29.15
1-Jul-15 227.5 227.5 15.00 212.5 6.26
1-Oct-15 212.5 212.5 15.00 197.5 5.84
1-Jan-16 197.5 197.5 15.00 182.5 5.43
1-Apr-16 182.5 182.5 15.00 167.5 5.02 2015-16 60.00 22.55
1-Jul-16 167.5 167.5 15.00 152.5 4.61
1-Oct-16 152.5 152.5 15.00 137.5 4.19
1-Jan-17 137.5 137.5 15.00 122.5 3.78
1-Apr-17 122.5 122.5 15.00 107.5 3.37 2016-17 60.00 15.95
1-Jul-17 107.5 107.5 15.00 92.5 2.96
1-Oct-17 92.5 92.5 15.00 77.5 2.54
1-Jan-18 77.5 77.5 15.00 62.5 2.13
1-Apr-18 62.5 62.5 15.00 47.5 1.72 2017-18 60.00 9.35
1-Jul-18 47.5 47.5 15.00 32.5 1.31
1-Oct-18 32.5 32.5 15.00 17.5 0.89
1-Jan-19 17.5 17.5 11.25 6.25 0.48
1-Apr-19 6.25 6.25 6.25 0 0.17 2018-19 47.50 2.85
119.63

70
 (Rs in
REPAYMENT OF LONG TERM LOAN(LTL) crores)
2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19
Interest Repaid 6.88 32.90 29.15 22.55 15.95 9.35 2.85
Principal Repaid 0 12.5 60.00 60.00 60.00 60.00 47.50
Total 6.88 45.40 89.15 82.55 75.95 69.35 50.35

STEP5: PREPARING THE PROFITABILITY STATEMENT OF THE

PROJECT:
The fifth step in the evaluation of the project is preparing the profitability
statement of the project and the profitability statement of the project here
is.

In terms of cost
Cost Elements of Asset p.a
Interest on Loan 11% Tax 32.445%
Depreciation as Per
Insurance 2% IT Act 15%
Salary and Wages 3%
Contract Labour 2%
Repairs and Maintenance 3%
Chemicals 5%
Packing cost 0.50%
Power, Fuel and Water 5%
Depreciation 5.25%

71
 (Rs in
PROFITABILITY STATEMENT OF THE PROJECT Crores)
2015-16 2016-17 2017-18 2018-19 2019-20
Incremental Sales 1534.50 1534.50 1534.50 1534.50 1534.50

TOTAL REVENUE("A") 1534.50 1534.50 1534.50 1534.50 1534.50

EXPENDITURE
Raw Materials 1227.60 1227.60 1227.60 1227.60 1227.60
Interest On Loan 13.75 22.55 15.95 9.35 2.85
Insurance 7.10 7.10 7.10 7.10 7.10
Salary and Wages 10.66 10.66 10.66 10.66 10.66
Contract labor 7.10 7.10 7.10 7.10 7.10
Repairs and maintenance 10.66 10.66 10.66 10.66 10.66
Chemicals 17.76 17.76 17.76 17.76 17.76
Packaging Cost 1.78 1.78 1.78 1.78 1.78
Power, Fuel and Water 17.76 17.76 17.76 17.76 17.76

TOTAL EXPENDITURE ("B") 1314.16 1322.96 1316.36 1309.76 1303.26

PROFITS BEFORE DEPRECIATION

AND TAX "C"(C=A-B) 220.34 211.54 218.14 224.74 231.24

Less: DEPRECIATION "D" 18.65 18.65 18.65 18.65 18.65

PROFIT BEFORE TAX "E"(E=C-D) 201.69 192.89 199.49 206.09 212.59

Less: TAX(AS PER IT ACT) 60.77 58.34 60.16 61.98 63.77

PROFIT AFTER TAX 140.93 134.55 139.33 144.11 148.82

Computation of tax:
COMPUTATION OF TAX
2015-16 2016-17 2017-18 2018-19 2019-20
Profit Before Tax(PBT) 201.69 192.89 199.49 206.09 212.59

Add:Depreciation(As Per
Companies Act) 18.65 18.65 18.65 18.65 18.65
TOTAL 220.34 211.54 218.14 224.74 231.24

Less:Depreciation (as Per IT Act) 33.05 31.73 32.72 33.71 34.69

Profit After Depreciation 187.29 179.81 185.42 191.03 196.55

TAX 60.77 58.34 60.16 61.98 63.77

72
STEP6: Valuation of the Asset:

The sixth step in the evaluation of the project is the valuation of the project
at different times or at different periods at different years to come in the
future.

VALUATION OF THE ASSET (Rs In Crores)

2015-16 2016-17 2017-18 2018-19 2019-20 2021-22 2022-23
Opening Balance 0.00 301.90 256.61 218.12 185.40 157.59 133.95
Addition 355.17 0.00 0.00 0.00 0.00 0.00 0.00
Total 355.17 301.90 256.61 218.12 185.40 157.59 133.95

Less:Deletion 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total 355.17 301.90 256.61 218.12 185.40 157.59 133.95
Less:Depreciation 53.28 45.28 38.49 32.72 27.81 23.64 43.46

ClOSING BALANCE 301.90 256.61 218.12 185.40 157.59 133.95 90.49

STEP7: Preparation of Cash Flow Statement:

The seventh step in the evaluation of the project is the preparation of the
Cash Flow Statement. And we need the cash flows to find out the Payback
Period and the Internal Rate of Return of the project

CASH FLOW STATEMENT (Rs in Crores)

2012- 2013- 2014- 2015- 2016- 2017- 2018- 2019-
13 14 15 16 17 18 19 20
Cash Out Flow
Capital Expenditure on the
Project 76.88 167.90 110.40

Cash In Flow
Incremental Profit After Tax 140.93 134.55 139.33 144.11 148.82

73
Step8: To Find the Viability of the Project by Using Different
Techniques Of Capital Budgeting:

Here in PPL the Techniques of capital budgeting used are :

1. Pay-Back Period Method

2. Internal Rate Of Return

1. Evaluation of the Project Using Pay Back Period Method:

It was estimated that the cash in-flows will start from 2015-2016

Cost of the Project- 355.18 Cr

Year 2015-16 2016-17 2017-18 2018-19 2019-20

Amount 140.93 134.55 139.33 144.11 148.82

Calculation Of Pay Back Period:

S.no Year Cash Inflows Cumulative

Inflows
1 2015-16 140.93 140.93

2 2016-17 134.55 275.48

3 2017-18 139.33 414.81

4 2018-19 144.11 558.92

5 2019-20 148.82 707.74

74
(a) Cash Outlay : 355.18 Cr

(b) Payback Period : INITIAL INVESTMENT

ANNUAL CASH FLOW
79.70
= 2 +
414.81

= 2.2 years

Pay Back Period:

It is assumed that the profit earning of the project will start from 2015-
2016.

We should increase this period with same exception as there may be any
additional factor and other cause so rounding of 2.2 to 3 years will be right,
so that it will give more assistance to the calculation.

Suggestion: Any project which has a pay-back period of 3 to 5 years is

considered as a good project…

And here we have got a pay-back period of 2.2 years. So, the project can be
considered

75
2. Evaluation of the Project Using Internal Rate of Return Method:

It was estimated that the cash in-flows will start from 2015-2016
Cost of the Project- 355.18 Cr

Year 2015-16 2016-17 2017-18 2018-19 2019-20

Amount 140.93 134.55 139.33 144.11 148.82

Internal Rate of Return:

Discount rate taken as 24% (in crores)

Present
Values of
Sl. No Years Cash Inflows DCF (24%) Inflows
1 2015-16 140.93 .806 113.58

2 2016-17 134.55 .660 88.80

3 2017-18 139.33 .524 73.00

4 2018-19 144.11 .422 60.81

5 2019-20 148.82 .341 50.74

6
7
8
9
10
11
12
13
14
15
Total Present Values of Inflows 386.93

76
Discount rate taken as 26% (in crores)

Present
Values of
Sl. No Years Cash Inflows DCF (26%) Inflows
1 2015-16 140.93 .787 110.91

2 2016-17 134.55 .620 83.421

3 2017-18 139.33 .488 68.00

4 2018-19 144.11 .384 55.34

5 2019-20 148.82 .302 50.74

6
7
8
9
10
11
12
13
14
15
Total Present Values of Inflows 366.412

77
Discount rate taken as 28% (in crores)

Present
Values of
Sl. No Years Cash Inflows DCF (28%) Inflows
1 2015-16 140.93 .781 110.06

2 2016-17 134.55 .600 80.73

3 2017-18 139.33 .465 64.78

4 2018-19 144.11 .361 52.02

5 2019-20 148.82 .279 41.52

6
7
8
9
10
11
12
13
14
15
Total Present Values of Inflows 349.11

78
Calculation of Internal Rate of Return

IRR = L+ A - Cash out lay X (H – L)

A-B

= 26+
355.18 - 349.123 X (28-26)

(355.18-349.123) + (366.412- X 2
355.18)

= 26 + 6.07 X 2

6.07+11.232

= 26 + 0.350 X 2

= 26.70

Internal Rate of Return (IRR):

In this calculation, is done on the basis of trail and errors. By taking various
percentage of (DCF).So that an appropriate percentage of Internal Rate of
Return can be judge out.

Calculated figure is 26.70%, so we can take it as 30% because at market

Uncertainity.

Suggestion:

Any project which has an Internal Rate of Return Between 16% to 20% is
considered as a good project…

And here for this project the Internal Rate of Return is 26.70%. So, the
project can be considered.

79
 CHAPTER-9
FINDINGS AND SUGGESTIONS

9.1 FINDINGS:

1 It was found that the payback Period of the project is 2 year and 2
months.
2 The Payback Period shows that the initial investment can be recovered
within a short period of time.
3 The investment is ideal because normally an investment should be
recoverable within 5 years.
4. The Internal Rate of Return shows 26.70 % This also ensures a
profitable investment.

9.2 SUGGESTIONS:

1. The company may fix the time period for the capital asset for
replacement.
2. The company may effectively use the available resources for attaining
maximum profit.
3. The company has to analyze the proposal for expansion or creating
additional capacity.
4. The company may plan and control its capital expenditure.
5. The company has to ensure that the funds must be invested in long
term project or not.
6. The company may evaluate the estimation of cost and benefit in terms
of cash flows.

80
BIBLIOGRAPHY:

Financial Management - I. M. Pandey

Financial Management - Prasanna Chandra

Financial Management - M. Y. Khan & Jain

Financial Management - Shashi.K.Gupta, R.K.Sharma and

Neeti gupta

PPL profile & Annual Reports

Web Sites:

URL: http://www.Paradeepphosphates.com
URL: http://www.google.com

URL: http://www.Wikipedia.com

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