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A Project report on “CAPITAL BUDGETING, HYDERABAD” MASTER OF BUSINESS ADMINISTRATION By M.ABDULLA Regd No: 10901210024  MASTER OF BUSINESS ADMINISTRATION SREE SAI MBA COLLEGE (AFFILIATED TO RAYALASEEMA UNIVERSITY KURNOOL) NANDIKOTKUR, KURNOOL (Dist). 2010 -2012 1

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A

Project report on

“CAPITAL BUDGETING, HYDERABAD”

MASTER OF BUSINESS ADMINISTRATION

By

M.ABDULLA

Regd No: 10901210024

 

MASTER OF BUSINESS ADMINISTRATION

SREE SAI MBA COLLEGE

(AFFILIATED TO RAYALASEEMA UNIVERSITY KURNOOL)

NANDIKOTKUR, KURNOOL (Dist).

2010 -2012

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DECLARATION

I hereby declare that this project report entitled ‘‘ CAPITAL BUDGETING’’

has been prepared by me during the year 2010 - 2012 in partial fulfilment of the

requirements for the award of degree of MASTER OF BUSINESS ADMINISTRATION of 

RAYALSEEMA UNIVERSITY, KURNOOL.

 

I also declare that this project work is the result of my own efforts and

this has been not submitted to any other University or Institute for the award

of any degree or diploma.

 

Date:(M.ABDULLA)

Place: KURNOOL

 

CERTIFICATE FROM THE GUIDE

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This is to certify that Mr. Y. MANOJ KUMAR  submits the project report

entitled ‘‘CAPITAL BUDGETING, HYDERABAD’’ in fulfilment for the award of the

degree of  MASTER OF BUSINESS ADMINISTRATION of   RAYALASEEMA UNIVERSITY,

KURNOOL, during the year 2010 – 2012, is a record of bonafied work carried out

 by him/her under my guidance and supervision.

 

The results embodied in this project have not been submitted to any

other University or Institute for the award of any degree or diploma.

Mr. DR. R. RAVI KANTH, MBA (Ph.D)

Assistant Professor

Project Guide

Dept. of MBA

Sree Sai MBA College

Nandikotkur

Kurnool (Dist).

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MASTER OF BUSINESS ADMINISTRATION

Sree Sai MBA College

(AFFILIATED TO RAYALASEEMA UNIVERSITY, KURNOOL,)

 Nandikotkur 

KURNOOL - 518360 (A.P).

This is to certify that the project report entitled ‘‘CAPITAL

BUDGETING’’ has been submitted by Mr. M. ABDULLA in partial fulfilment

of the requirements for the award of degree of  MASTER OF BUSINESS

ADMINISTRATION of   RAYALASEEMA UNIVERSITY, KURNOOL, for the academic year 

2010 – 2012.

 

Head of the Department

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ACKNOWLEDGEMENT

All endeavours over a long period can be successful only with the advice and

support of many well-wishers. I take this opportunity to express our gratitude and

appreciation to all of them.

I am also thankful to Mr. G. Anup Kumar, Finance Manager of GENETING

LANCO (INDIA) PVT. LTD, Hyderabad, for his valuable suggestions during the

 project work in their esteemed organization.

I extend my profound gratitude to our principal Dr. R. Ravi Kanth, S.S.PG.C. for 

 providing good working environment.

I express my heart full thanks to Mr. Dr. R. Ravi Kanth,, Assistant Professor of 

MBA Department and my project guide for his valuable guidance and moral support.

At the outset, I sincerely acknowledge my deep sense of gratitude toMr. Dr. R. Ravi Kanth,, Assistant Professor and Incharge of  MBA Department.

We have great pleasure in expressing our thanks to the teaching and non-

teaching staff for helping us in completing this project. We would like to thanks to all

our friends who provided the normal support for this project.

Finally, I express my heartful thanks for all those who are concerned directly and

indirectly in successfully completing my project.

 

M. ABDULLA

CONTENTS

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CHAPTERS

Chapter 1:1.1 Introduction

1.2 Objectives of the Study

1.3 Need for the Study

1.4 Scope of the study

1.5 Research Methodology

Data Collection

1.6 Limitations.

Chapter 2: Industry Profile

Chapter 3: Company Profile

Chapter 4: Theoretical framework 

Chapter 5: Data Analysis and Interpretation

Chapter 6: Findings, Suggestions and Conclusion

Bibliography

Appendix

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CHAPTER – 1

INTRODUCTION

OBJECTIVES OF THE STUDY

NEED FOR THE STUDY

SCOPE OF THE STUDY

RESEARCH METHODOLOGY

LIMITATIONS OF THE STUDY

INTRODUCTION

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Budgeting is an All-Pervasive and Dynamic Process. It ties together Goals,

Plans, Decision making and Employee performance evaluation. It is a versatile

Manager Tool in that it aims to anticipate change in an advantageous way. It allows a

review of operations. In any formal programme of Profit Planning and Control in

 business Budget comes to the forefront. It forms the heart of the planning function and

every enlightened Management deals with long and short ranges Budgets. They

constitute the principle instrument for projecting the future costs and revenues, which

are an essential aspect of management accounting and the foundation of the firm’s

Financial Control. Budgeting undoubtedly offers immanence potentialities for 

efficiently conducting the affairs of the business. Budgeting in common parlance is

understood as planning for expenditure.

 

Budgets were first used extensively in Government, but business has since

developed them to the point where they have become extremely valuable tools of 

Management. In the most Governmental Agencies today Budgets have languished and

are employed primarily to restrict expenditures. In business budget emphasise

Revenues.

 

A Budget could be seen as a statement of intention. A statement of expected

income and expense under certain anticipated operating conditions it is in the nature of 

an estimate, rather framework, of future transactions of a business as a whole.

Due to the importance of this study can done in the “LANCO GROUP”. Which

is located at Hyderabad.

OBJECTIVES  OF  THE  STUDY 

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To study different sources of finance available with the firm far its

operations.

To know the total value of the firm.

To analyze earnings per share under different Capital Budgeting.

To analyze the liquidity and ability of the firm to service charges through

Traditional methods and Time-adjusted methods.

To give guidelines for Capital Budgeting planning.

To analyze the Capital Budgeting in Lanco group.

To determine the quantum of Capital Budgeting used in Lanco group.

To study the impact of liquidity on profitability of the Lanco group.

NEED FOR THE STUDY

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Knowing the relationship between Capital Budgeting and firm value.

To analyze the reason for low stock prices of the company.

Studying relationship between Capital Budgeting and cost of capital. To assess the impact of alternative Capital Budgeting on return on equity.

Capital Budgeting means planning for capital assets. Capital Budgeting

decisions are vital to any organization as they include the decisions as to.

a) Whether or not funds should be invested in long term projects such as setting of 

an industry purchase of plant and machinery etc.

 b) Analyze the proposal for expansion or creating additional capacities.

c) To decide the replacement of permanent assets such as building and

equipment’s.

d) To make financial analysis of various proposals regarding capital investments

so as to choose the best out many alternative proposals.

The importance of capital budgeting can be well understood from the fact the

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.

a) Large investments

 b) Long-term commitment of funds

c) Irreversible Nature

d) Long-term effect on profitability

e) Difficulties of Investment decision

f) National Importance

SCOPE OF THE STUDY

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The scope and period of study is restricted to the following:

The scope of is limited to the operation of Lanco group.

The information has been obtained from the primary and secondary sources and

is limited to Lanco group.

The working result from the last five years.

Decrease of current assets or current liabilities in the budget the contents

of the total evaluation of current assets and current liabilities and their 

 percentage contribution in the total turn over. The yearly increase or decrease

of current assets or current liabilities in the budget of Lanco group is being

reviewed from this one would be in a position to glance the performance of 

current assets and current liabilities of the capital budgeting requirements of 

Lanco Group and emphasizes on the company. This project greatly deals with

key ratios to obtain a clearer picture of different resources available and at thedisposal of the organization which will enable one to give appropriation

suggestion to the company to improve its performance if any.

RESEARCH METHODOLOGY

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Collection of data is a first step in any statistical investigation. It is the basis for 

any analysis and their interpretation, planning for data collection refers to thinking or 

 preparing before doing the actual task of data collection. The technique and sources of 

data are the important consideration in planning the data collection.

The data may be collected from primary & secondary.

Tools used for analysis

The collected data is arranged according to the requirement to meet the

objective of the study by bringing together various components under each cluster per 

example the value of the firm will not be directly given in the Balance sheet in the

identify in accordance with the principles and formulas in accounting in financesimilarly all other elements too. Further this data analyzed with the help of Traditional

methods and Time-adjusted methods.

Data Collection

Data has been gathered through personal interaction with the financial

executives of the Organization.

Secondary Data

Data collected is secondary in nature. It was gathered mainly from the Balance

sheets and Profits & Loss account of the organization. Required data was gathered firm

various reports and other documents and data were analyzed with help of guide. The

secondary data is calculated from the following sources

Annual financial reports of the company.

Brochures and books of the company.

Period of study:

Total four years of data has been considered ending with 2008-2009.

LIMITATIONS OF THE STUDY

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The study is conducted is short period during the limited time. The study may

not be detailed in all aspects.

The study is conducted with the available data from annual reports, internal

reports, etc., of Lanco group and analysis was made accordingly.

Figures whatever appearing is too rounded to the nearest rupee thousands.

The data is secondary in nature being the records and statements, which

experiences its own limitations in preparation.

Capital budgeting techniques suffer from the following limitations

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1. All the techniques of capital budgeting presume that various investment

 proposals under consideration are mutually exclusive which may not practically

 be true in some particular circumstances.

2. The techniques of capital budgeting require estimation of future cash in flows

and out flows. The future is always uncertain and the data collected for future

may not be exact obviously the results based upon wrong data may not be good.

3. There are certain factors like morale of the employees, good will of the firm,

etc., which cannot be currently quantified but which other wise substantially

influence the capital decision.

4. Urgency is another limitation in the evaluation of capital investment decision.

5. Uncertainty and risk pose the biggest limitation to the techniques of capital

 budgeting.

The major problem in completing the project is the time of 8 weeks

which ever less in order to know about the overall objectives of the

study.

More dependency on secondary data.

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CHAPTER – 2

INDUSTRY PROFILE

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OVERVIEW OF CAPITAL BUDGETING

In 1997 Federal Bank Ltd., a leading private sector bank in Kerala, was evaluating a

loan proposal from Cochin International Airport promoted by Cochin International

Airport Authority. Federal Bank was incorporated in 1931 as Travancore Federal Bank 

Ltd to cater to the banking needs of Travancore province by a small group of local

citizens. In 1949 the board of directors of the bank reconstituted and the bank was

renamed as The Federal Bank Ltd. The operations of the bank were confined to Kerala

till 1972. After 1972, the bank expanded its operations to all the metros. The bank 

 became an authorized dealer in foreign exchange in 1972. Since 1989, the bank has

 been active in Merchant Banking.

The bank's credit portfolio is well distributed over several sectors and sub sectors

within prudential limits. Through careful monitoring of clients and timely initiatives in

dealing with delinquency, the bank is able to contain its NPA (non performing assets) to

low levels.

COCHIN INTERNATIONAL AIRPORT LIMITED

The project is a brainchild of the district collector of Ernakulum, Mr V J Kurian. He

undertook a program to uplift the infrastructure facilities in Cochin. The increase in

number of non-resident Indians travelling from Gulf countries to Kerala necessitated an

airport in Cochin. Although there are two international airports in Kerala to cater to a

growing traffic (8%) the need for another airport was felt. In particular, a large number 

of passengers travel to Kottayam and Pattanamthitta districts close to Cochin. The chief 

 promoter of CIAL is Cochin International Airport Society registered under the

Travancore Cochin literary, scientific and charitable society registration act of 1955.

Other promoters of the venture are Cochin Chamber of Commerce and Industry, Indian

Chamber of Commerce and Industry, (late) Sri Madhavan Nair, Sri C V Jacob and Sri B

Govinda Rao.

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THE CIVIL AVIATION INDUSTRY IN INDIA

The Indian aviation industry can be broadly classified into two main segments - civil

and cargo. Indeed mail and air cargo played a more important role in air carrier 

services than passengers. The Indian aviation sector till recently was highly regulated

 by the government. The government introduced new initiatives like Air taxi in the 80s

to boost tourism. Domestic and international traffic is expected to grow at 12.5 % and 7

% respectively over the next decade. By 2005, Indian airports are likely to handle 60

million international passengers and 300,000 tons of domestic and 1.2 m tons of 

international cargo.

The civil aviation activities can be classified into three areas: operational,

infrastructural and regulatory. On the operational front Indian Airlines and Air India

 provide domestic and international air services. Airports Authority of India formed in

April 1995 by the merger of separate airport authorities that existed till then provides

the infrastructure facility. In 1999 the aviation industry's turnover was Rs 90 billion.

The demand for aviation is seasonal in nature with the demand being high during April-May and again in November-December.

 

AIRPORT INFRASTRUCTURE

There are a total of 449 airports / airstrips in the country. Airports are classified as

domestic and international .The domestic airports (71) like those in Bangalore,

Hyderabad and Ahmadabad have custom and immigration facilities for limited

international operations by national carriers and for foreign tourist and cargo charter 

flights. The international airports in Mumbai, Delhi, Chennai, Calcutta and

Tiruvanathapuram are available for scheduled international operations by Indian and

foreign carriers. The Airports Authority of India was formed after the merger of 

International Airport Authorities of India and the National Airports Authority in 1994-

1995. AAI manages 5 international airports, 87 domestic airports and 28 civil enclaves.

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The current aviation policy allows private sector to build airports. Some airports to be

developed by the private sector are in Hassan (Karnataka), Mumbai, Goa and

Bangalore.

PUBLIC - PRIVATE SECTOR PARTNERSHIPS

Till recently, much of the financing of infrastructure development in many countries

came from government sources, multilateral institutions and export financing agencies.

Quite often, governments in emerging markets lack the financial capacity or credit

worthiness to support the volume of infrastructure projects required to develop their 

economies.

In case of large infrastructure projects it is becoming inevitable for public and private

sector to come together and jointly apply their skills and strengths to develop the

 project more quickly and efficiently. The joint venture between Rail track and British

Rail in U.K to set up a high-speed rail project is an example of such a partnership. Such

 partnerships try to involve the private sector in the process of designing, building,

financing and operating public utilities. The government defines the services required,

makes an arrangement which enables the private sector to be the service provider and

ensures that public services will be delivered at a specified quality at competitive

 prices. A number of public – private financing structures exist. Some of the schemes

which can achieve the objectives are:

Build – Operate - Transfer Model

Build- Transfer- Operate Model Buy – Build – Operate Model

In a BOT model, a private entity gets the mandate to finance, build and operate the

 project (which is otherwise a public sector project) for a specified period of time (say

25 years) at the end of which ownership reverts to the local government. Typically, the

sponsoring organization makes an equity investment of 20 to 30% of the project cost

and the rest is raised from International Banks, Multilateral agencies and domestic

Financial Institutions .The host government generally gives a concession to carry out

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the construction and operation of the project and credit support for project borrowings.

The licence agreement clearly spells out the commercial and financial terms. The BOT

concept has been used in transportation (Ex: roads), Energy (Power projects), Sewage

& water treatment plants and hospitals.

In a BTO model, the private entity transfers the facility to the government soon after the

 project clears the completion test and leases it back for a specified period of time. The

 project company runs the facility and collects revenues during the lease term. At the

end of the lease term the title passes on to the government (or the public sector entity).

In a BBO Model, a private entity buys an existing facility, modernizes it, and operates it

as for– profit, public use facility. In many developing countries where existing facilities

require modernization / expansion, BBO model is ideal. Roads and bridges are

candidates for this model.

Since the Cochin airport project involves a huge outlay, the Government of Kerala was

not keen to set up another airport. Consequently, the airport is being set up on a Build-

Own-Operate basis with equity being contributed by people who benefit from the

 project. As a first step a society was formed. Mr Kurian and his team convinced the

 NRIs in Gulf that an airport in Cochin is desirable and raised (interest free) deposits

from them. The government supported the effort by offering Indira Vikas Patra for 50

% of the amount deposited. A company was formed there after in 1994 with an

authorized capital of Rs 90 cr to construct, own and operate an international airport with

 public participation and the support of Government of Kerala.

The airport is Cochin is expected to boost trade and tourism. The interest free deposits

 provided by people were later converted into shares. Initially Federal bank had provided

a loan that was later replaced by a loan from HUDCO. The state government

contributed Rs 1 cr and Federal Bank contributed Rs 2 cr in equity. Bharat petroleum,

the airport service provider, contributed Rs 25 L in equity.

The project is being set up at a cost of Rs 204.48 cr in two phases, the first phase being

 pre-operative. Further expansion at Rs 89.83 cr has been planned after 5 years. Exhibit

8-1 provides the break up of the project cost.

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Exhibit -1: Project Cost (Rs L)

Phase 1 Phase 2 Total

Land 5500Civil Works 5965 1980

Buildings 4270 6576

Contingency 511.75 427.8

Preliminary

Expenses 1256

Pre-operative

Expenses 2780

Margin money for 

Working capital 165.36

20448.11 8983.80 29431.91

Contingency has been provided at 10 % of project cost to provide for escalation of 

 prices, change in duty structure, and devaluation of currency and so on. CIAL's cost is

lower when compared to other airports at Bangalore and Hyderabad because:

Traffic control and navigational aid systems are being provided by AAI without any

cost to CIAL

The state government is providing roads and other utilities.

The aviation fuel hydrant station is being set up by BPCL without any cost to CIAL

The project is being financed by a mix of debt and equity. Equity is from NRIs and

service providers at the airport apart from a few banks and financial institutions. Term

loan to the extent of 75.5 % of fixed assets has been provided by HUDCO and Federal

Bank. The debt-equity ratio for the project is fixed at 1.5. The Rs 89.83 cr required for 

Phase 2 is being entirely from internal accruals.

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CHAPTER – 3

COMPANY PROFILE

COMPANY PROFILE

The Lanco odyssey began more than two decades ago in civil engineering and the core

sector. The challenges and opportunities in a resurgent India following economic

liberalization saw Lanco reengineer and consolidate itself under a single apex entity,

Lanco Infratech Ltd.

Lanco’s operations have always been marked by creation of synergies, backward and

forward integrations and strategic innovations for competitive edge. Today, Lanco

Infratech, through twenty-two subsidiaries has operations across a synergistic span of 

verticals.

In power generation, Lanco has a presence in thermal, hydro, wind and renewable.

Projects in operation and those underway represent over 8000 MW. The operations in

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 power generation draw deep strengths from its own EPC, entry into O&M and the

capabilities of its Construction wing. Lanco’s presence in power extends to being a

leader in power trading. Multiple synergies are being leveraged for a strategic presence

in transmission and distribution. In wind energy, Lanco’s first line of turbines will roll

out in 2009. Wind project developments are underway in India, Europe and the

Americans.

Lanco’s admired expertise in civil engineering has been displayed across the years in

the execution of dams, railways, roads, industrial structures, residential and commercial

construction, canals and other areas across the length and breadth of India. These

competencies and depth of resources are unfolding a new roadmap in the Indian

infrastructure sector. Lanco is already executing projects in ports, highways, airports

and other areas.

In property development, Lanco has emerged as a trend setter with Lanco Hills, which

has also drawn international attention. Lanco Hills, in the Indian metropolis of 

Hyderabad, is coming up as one of the world’s largest mixed property development

with thirty million square feet of built-up area, including the world’s tallest residential

tower.

Lanco Infratech is built on a tradition and culture of trust within and without. Lanco

draws the best professionals who see growth in an environment underscored by good

corporate governance and the melding of individual aspirations and organizational

goals.

A member of the UN Global Compact, Lanco’s Corporate Social Responsibility begins

at home with facility audits and volunteerism of its people across all CSR initiatives.

Lanco is spearheading CSR interventions and programmes have touched the lives of 

individuals and communities in the vicinity of Lanco facilities and across the country in

areas where assistance is most needed. Demand driven, participatory CSR initiatives

 by Lanco exemplify the larger corporate vision that Lanco Infratech represents….

of Inspiring Growth.

Vision Statement

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To empower, enable and enrich partners, businesses and associates

To be a chosen vehicle of growth for all stakeholders and a source of inspiration

to society

Corporate Structure

 

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Founder Chairman

L Rajagopal, a technocrat-turned industrialist, is the Founder Chairman of LANCO

Group. In addition to his entrepreneurial spirit, Rajagopal has a strong sense of social

responsibility. He established LANCO Foundation (formerly LIGHT), a Charitable

Trust, in the year 2000 to reach out to the needy and has been involved in various

 philanthropic activities. After one-and-a-half decades of outstanding contribution to the

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industry, Rajagopal chose to enter public life in 2003. He is a Member of Parliament,

India. His avowed mission is to make a difference in the life of the common man.

Key Executives

Lagadapati Madhusudhan Rao is the Executive Chairman of Lanco Infratech Ltd. He is

also a Trustee in the Lanco Foundation, the CSR arm of Lanco Group.

Madhusudhan Rao obtained his M Tech degree in India and went to do his MS from

Wayne State University in Detroit, USA. Following this he did a stint at the Waggner 

Corporation, obtaining practical training in various aspects of Quality Management.

Returning to India in 1989, Madhusudhan Rao joined the core team which established

the integrated metallurgy complex, Lanco Industries Ltd, at Sri Kalahasthi in the Indian

state of Andhra Pradesh. Becoming the Managing Director of Lanco Industries Ltd in

1992, he further strengthened the industrial complex’s end-to-end integrations. He also

led the expansion of the enterprise, leveraging its long experience and expertise in civil

and industrial engineering and project management.

He became the Chairman of the consolidated new entity, Lanco Infratech Ltd in 2002.

His keen reading of business and technology trends, vast domain knowledge and ability

to build inspired and outstanding professional teams and forge strategic alliances and

 partnerships have been a driving force in achieving the span and scale of the Lanco

conglomerate.

G. Bhaskara Rao is one of the founder members of the Lanco Group of enterprises. He

is currently the Executive Vice-Chairman of Lanco Infratech Ltd and heads the

Construction Division of Lanco Infratech.

Bhaskara Rao holds a Bachelor’s degree in engineering with Production as

specialisation. He also holds an M.E degree in Machine Design from the prestigious

Indian Institute of Science, Bangalore.

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G. Bhaskara Rao is respected for his expertise and achievements in the Construction

industry. His commended experience in project planning and execution continues to

give a firm direction to Lanco’s strategic growth, especially in the Construction and

Infrastructure segments.

L Sridhar comes with a few years of experience at Acon Building Constructions in

Sanjose, the United States. He worked as Joint Managing Director of LANCO Infratech

Ltd, formerly LANCO Constructions Ltd, from 1997 to 2003.

Sridhar is also Director and Promoter of LANCO Kondapalli Power Pvt Ltd, Rithwik 

Energy Systems Ltd, Clarion Power Corporation Ltd, ABAN Power Company Ltd,

LANCO Amarkantak Power Pvt Ltd and LANCO Green Power Pvt Ltd. He has done

his BE (Civil Engineering) from Siddaganga Institute of Engineering in Tumkur,

Karnataka and MS (Construction Management in Civil Engineering) from University of 

Eastern Michigan in the United States.

G. Venkatesh Babu, the Managing Director of Lanco Infratech Ltd, also directly

oversees the group’s Infrastructure initiatives.

A Graduate in commerce from the Madras Christian College, he is a Chartered

Accountant and Cost Accountant. He has over fifteen years of experience in

Commercial Banking, Corporate Advisory, Mergers & Acquisitions, Project Finance

and Equity Capital Markets. Before moving to Lanco, Venkatesh Babu held senior 

 positions in leading Indian and Multinational Organisations

DV Rao, the Joint Managing Director of Lanco Infratech Ltd, has over nineteen years

of experience in Project Implementation, Engineering & Consultancy Services, and

International Marketing.

A Graduate in Mechanical Engineering from the Mysore University, DV Rao has had

rich and varied experience across different sectors. As Joint Managing Director, DV

Rao also heads the Power business vertical of Lanco.

J Suresh Kumar is the Chief Financial Officer of Lanco Infratech Ltd.

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A Graduate in Commerce from DG Ruparel College, Mumbai, Suresh Kumar is a

Chartered Accountant. He did his articleship with CC Chokshi & Co (now Deloitte

Haskins and Sells)

With vast experience in Mergers & Acquisitions, Restructuring Advisory, Strategic

Advisory, Fund Raising Advisory, Business Development and Equity Capital Market,

Suresh Kumar also plays a key role at Lanco in resource mobilisation, Mergers &

Acquisitions and Investor Relations.

Panduranga Rao heads the gas based power projects of Lanco Infratech ltd. In this

capacity he is the Director & CEO of Lanco Kondapalli Power Pvt Ltd and a Director 

of ABAN Power Company Ltd and Udupi Power Corporation Ltd.

A commerce graduate from SV University, Tirupati, India, Panduranga Rao is a

qualified Chartered Accountant and simultaneously completed the Inter of Company

Secretary course. He did his articleship with Brahmayya & Co, Chennai. He has more

than 28 years of rich experience across diverse industries.

K Raja Gopal is the Chief Executive Officer of the Thermal Power Business of Lanco

Infratech Ltd. He is also the Director & CEO of Lanco Anpara Power Pvt Ltd.

Raja Gopal holds an ME degree in Electrical Engineering and MBA in Marketing from

Osmania University, Hyderabad, India. He has over twenty-two years of experience in

Project Development and various functional disciplines of manufacturing and power 

industries. Raja Gopal currently looks after the development, execution, commissioning

and operations of Lanco Amarkantak Thermal Power Station in Chhattisgarh and Lanco

Anpara Thermal Power Station in Uttar Pradesh, India.

Pradeep Lenka is the Chief Executive Officer – Thermal, of Lanco Infratech Ltd. In

addition to this he also plays a key role in strategic planning and technology.

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Predeep Lenka is a Mechanical Engineer with Finance Management Certification

Course from IIM, Bangalore. He has more than 30 years of experience in power 

 projects as Original Equipment Manufacturer and also as Independent Power Project

Developer. He has led the implementation of over 15 power projects based on coal, oil

and gas in public and private sectors.

Pochendar Shenigarapu is the Director & CEO of Lanco Hills Technology Park Pvt

Ltd.

Pochendar Shenigarapu holds a B Tech in Civil Engineering and M Tech in

Environmental Engineering and has over 26 years of experience in the construction of 

residential & commercial space, water supply & sanitation project execution, operation

& maintenance works, turnkey execution of combined cycle power projects and

marketing infrastructure projects.

Prasad holds a Masters Degree with Specialisation in energy & Systems and a

Bachelors Degree in Mechanical Engineering. He is also a certified Project

Management Professional (PMP). He has professional experience in the areas of 

financial services, Information Technology, and Management Consultancy spanning

several countries.

He leads Lanco’s growth plans in wind turbine equipment manufacturing and wind-

 project development activities in global markets.

Sreenivas Veluri is Lanco Infratech Ltd’s Director, Corporate Affairs. A management

Graduate with Marketing as specialisation, Sreenivas Veluri has two decades of 

experience in key positions in the print and electronic media.

Ravi Shankar is a Fellow Member of the Institute of Cost and Works Accountants of 

India and Certified Associate of Indian Institute of bankers, Mumbai. He did his M

Com in Business Administration with specialisation in financial management. He holds

Postgraduate Diplomas in Corporate Laws & Management, Tax Laws from Indian Law

Institute, New Delhi and Postgraduate Diploma in Industrial Relations and Personnel

management from Bhartiya Vidya Bhavan, New Delhi.

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At Lanco, he is responsible for developing strategies to carry out trading, transmission,

distribution and other power-related activities. He is also entrusted with structuring the

 power information systems for Lanco Infratech Ltd.

 

SC Manocha is the Chief Executive Officer – EPC of Lanco Infratech Ltd. He is a

Mechanical Engineer and a Management Graduate. He has several additional

qualifications including project management, financial management, labour laws,

welding engineering, construction and planning of thermal power plants, planning

management and project management from reputed Institutes across India. He has over 

35 years of rich experience in key positions with leading corporate. His expertise

includes pre-project planning, project planning, key negotiations, departmental

clearances, finalising equipment and service providers, financial modelling, business

strategy, marketing intelligence and strategic alliances.

Sanjay Kumar Mittal is the Director & CEO, Hydro of Lanco Infratech Ltd. He is an

Electrical Engineer. He has over 25 years of rich experience in all areas of Hydro

Power Projects having been part of major projects including Teesta, Lachen, Rangit and

 Nathpa Jhakri to name a few.

He holds Mechanical Marine Engineering degree, MBA and PhD in Management from

Andhra University.

He has over three decades of experience in the fields of Maintenance, Production and

Human Resources Development. Before moving to Lanco, he held senior managerial

 positions in Marine, Heavy Engineering, Industrial Development, Fertilizer, Cement

and Poultry sectors.

Investors

Lanco Infratech Limited became a listed entity in November 2006 following

the Initial Public Offering of shares. Of the total outstanding 222.36 million shares

73.58% is held by the founder promoters of the company, 20% is available with the

Public and the balance is held by Employee Stock Option Trust.

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Corporate Governance

At LANCO, our objective is to create value for our stakeholders, including our 

shareholders, clients, employees, and communities. Good corporate governance

standards that promote the principles of integrity, transparency, and accountability will

 protect and likely enhance our stakeholder value. Thus, we believe that good business

 practices, transparency in corporate financial reporting, and the highest levels of 

corporate governance are essential components of our success.

Consistent with this belief, today at LANCO:

Excluding the CEO, all Board members are independent.

Board committees that address auditing, compensation, corporate governance,

and nominating functions are comprised solely of independent directors.

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Committee charters clearly establish the committees' roles and responsibilities.

Corporate Governance Guidelines are regularly reviewed and updated in response to

changing regulations and stakeholder concerns.

Our bylaws have recently been updated to provide for majority voting in

uncontested director elections.

The company will continue to take any steps the Board believes will further 

improve our standards, controls, and accountabilities and, as additional regulations and

recommendations on corporate governance are announced, will continue to make

required changes to our policies.

“LANCO's corporate governance has been, and continues to remain, an

important area of focus for LANCO's senior executives and Board of Directors. We

have a track record of judiciously managing the business and disclosing our 

 performance to investors. We will not only run our operations in accordance with

Government of India regulations but also within the spirit of those regulations.

Corporate governance needs and practices continue to change, and I am proud

that LANCO proactively amends its policies and oversight to keep current with, or 

remain ahead of, such change. We believe that keeping our policies and practices

current and our oversight strong make us a better and more successful company.”

L. Madhusudhan Rao, Chairman

CORPORATE SOCIAL RESPONSIBILITY

Lanco considers CSR as a ‘business vertical’. Lanco Foundation is our  CSR arm.

Lanco Foundation works through coherent and integrated strategies in seven sectors:

Education, Health, Livelihoods, Community Development, Environment, Relief &

Rehabilitation and sports & culture.

Lanco Foundation takes the lead in ensuring that Lanco’s CSR policy, strategies and

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goals are internalised across the organisation and is a fundamental element of the way

we do things in every area of operations.

Lanco Foundation focuses on sustainability and demand driven delivery of 

developmental resources besides influencing public policy based on its learning’s.

Aligned to Millennium Development Goals, Lanco Foundation benchmarks itself and

measures Lanco’s CSR performance against the best of international standards. As a

member of the UN Global Compact we pursue best practices in relation to human

rights, environment, labour and anti-corruption.

OBJECTIVES

To align Lanco in all its activities with Millennium Development Goals and aims and

 purposes of the UN Global Compact.

To internalise the multifaceted responsibilities at individual and organisational levels in

addressing poverty, climate change and social issues.

To improve human development indices through projects and programmes at local,

state and national levels.

To partner with Indian and international organisations and institutions to deliver aid,

assistance and developmental resources effectively.

To translate learning’s into policy advocacy and promote forums and communicationsfor positive social transformation.

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To nature all the elements of our CSR policy as a value system.

MEDIA

Welcome to the Lanco Group Media Information Centre. Here we have high

resolution pictures of our key executives, plants, sites, events and recent press releases

for download. For any further clarification/information please feel free to contact us. 

Lanco Magazine

 

July-September 2008 April-June 2008

Issue 26 Issue 25

 

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CAREERS

 

Lanco believes that people management is a matter of creating, nurturing and sustaining

an environment conducive to optimal use of employee potential. Lanco is home to more

than 3500 committed, talented and ambitious professionals. As one of the preferred

employers in the industry, LANCO attracts and retains the best talents. Lanco has

adopted some of the best people practices and policies from around the world to delight

its people.

Lanco helps its people stay at the fore front of cutting edge technology and skills by

 providing regular exposure to world class training programs in some of the most

reputed academies in the country.

Lanco has openings across a wide range of skills and professions. Come explore the

challenging opportunities at Lanco.

AWARDS

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IKU II

IEEMA award for "Excellence in Fast Track Commissioning of Small Hydro

Projects" February 2009

PRSI Confers Golden Jubilee Award

For the “Most Impressive Public Relations Initiatives” August 2008.

Clarion Power Corporation Ltd

FAPCCI Award for Excellence in Renewable Energy 2007.

Construction World NICMAR Awards2007 for the Second Fastest Growing

Construction Company (Medium Category) in India.

LANCO Institute of General Humanitarian Trust (LIGHT)

TERI Award 2006-07 for Excellence in Corporate Social Responsibility.

PRSI National Award for House Journal (English) - First Prize

PRSI Confers Golden Jubilee Award

For the “Most Impressive Public Relations Initiatives”

LANCO Infratech Limited

Award for Excellence in Bridge Engineering 1999 from the Indian Institute of Bridge

Engineers.

LANCO Kondapalli Power Pvt Ltd

OHSAS 18001:1999 Certification in respect of Environmental Management System by

Lloyd's Register Quality Assure

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CAPTAL BUDGETING AND BUDGETING CONTROL IN

LANCO HYDERABAD

  In LANCO INFRATECH Budgeting process is done in two phases:

1. Long range budgets in the form of Ten-Year plans and broad objectives for 

the next two years.

2. Short range budgets in the form of Yearly- Annual Budgets broken down to

month wise.

The present study is limited to the yearly budgets.

 

In LANCO INFRATECH, Industry Sector, Power Sector, and International

Operation Division of LANCO INFRATECH mainly procure orders. The respective

sector allocates the scope of work and corresponding order value to various

manufacturing divisions. In the unit level commercial department receives orders from

various business sectors

In addition, where the scope of work relates to a particular unit and department

of that unit gets orders from customers.

ORDER BOOK 

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Since the products are tailors made to customer’s requirements, budgeting

mainly depends upon the orders on hand and orders likely to be received, either based

on already quoted or otherwise.

PHYSICAL TURNOVER 

Depending upon the shop load, capacity and the delivery schedule of the customer 

 physical turnover budget is first prepared

Physical turnover budget takes into account the commitments made to customers,

and backlogs if any in previous year. Physical turnover is made product wise, shop wise

month wise for better follow-up and control.

FINANCIAL TURNOVER 

Once the physical turnover is finalized financial turnover is arrived at based on the

sale value allocated by corporate office like physical turn over. Financial turnover is

also arrived shop wise, month wise etc.

MATERIALS BUDGET

Materials Budget is prepared based on physical and financial turnover proposed to

 be executed during budget period.

Based on the physical budget and delivery schedule planned by PPC material

estimate of each product to be executed in the year is worked out. The factors that areconsidered are the latest purchase price, foreign exchange rate fluctuations and the

Prevailing customs duty/ excise duty structure.

In addition to the material required for current year equipment to be dispatched,

MPC has to estimate for the projects of next year first quarter also. Hence, the total

requirement of materials is based on material estimate for production and material

requirement work in progress (WIP).

PRODUCT MANAGER’S BUDGET

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Since the units is having multi products and follows responsibility centre

accounting each product is considered as a profit centre that necessitates a preparation

of budget to the level of net profit of a product.

Budget is made for each product wise following Actual:

a) Physical and Financial Turnover.

 b) Material Budget.

c) Value added Statement

d) Inventory.

Each product will prepare all the above said budgets and finally arrives at the

value added for each product. All these product wise budget are consolidated and

common expenses and allocation, by corporate office are added to find out the

 budgeting profit of the u nit as a whole.

The corporate sector will play an important role in dealing with customers. It will

clearly check the customer’s orders etc. As it is a multi product company it receives

different types of orders and it will make all estimates for the future period.

EXPENSE BUDGET

Expenses budget consists of various elements like Personnel Payment

Depreciation other expenses like Interest, Power & fuel, Excise Duty, Share of Service

Divisions like corporate office, R&D etc.

Detailed working are made to arrive at the various expenses by collecting likely

expenses from various executing departments the requirement of each department in

fully scrutinized by finance department in consultation with the department concerned.

Thus, a total expense under each head of account is arrived and the same is compared

with previous year actually and any major deviation needs to be explained.

CASH FLOW STATEMENT

CASH IN-FLOW

Cash In-flow statement is prepared with the following information

1) Cash is recovered from customer for the following

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a) Advance from the customer for the equipment to be manufactured.

 b) Payments for the supplies already made/being made.

c) Payments against deferred debts.

2) Export benefits from government in respect of deemed exports, company has to

 pay excise duty for the equipment dispatched, where as the customer will not

reimburse such excise duty. Hence, government reimburses such excise duty

already paid.

3) Scrap Sale: - By selling the scrape also there will be a cash inflow.

CASH OUTFLOW

Cash out flow consists of 

(1) Materials: Payments to suppliers either as advance or for supplies made/ being

made.

(2) Personal Payments: Payments made to the employees and workers in the form of 

salaries and wages and other benefits.

(3) Excise Duty: Payments made on the equipment manufactured and dispatched.

(4) Sales Tax: Sales Tax Payments made on the equipment sold.

(5) Other expenses: Payments towards laboratory payments, repairs and maintenance,

computer hire charges, sub-contract payments etc.

(6) Interest: Interest paid to banks etc.

(7) Repayment of Loan.

(8) Capital Expenditure etc.

INVENTORY TURNOVER 

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Inventory budget is prepared to know the inventory turnover with the following

information:

(1) Raw materials

(2) Components

(3) Indirect material

(4) Material in transit

(5) Material with fabrication.

(6) Work in progress.

(7) Scrape and others.

All these are estimated based on order to be executed during the next

financial year. This is prepared product wise also for follow up. Revised estimates for the current year are also made. By preparing this actual inventory in number of days of 

turnover can also be prepared.

SUNDRY DEBTORS

Gross debtors can be prepared with the following information:

(I) Collectable: The amount collectable immediately from the customers is

 prepared.

Contract Management

Electrical Machines

Heat Exchangers

Pumps

Oil Rigs

Switch Gear 

Spares

Erection etc.

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(II) Deferred debts: the debts, which are collectable after a certain period like after 

completion of project work. And this is also prepared product wise. These all

are compared with the past actual current year estimates to know the trend.

BALANCE SHEET

The balance sheet is prepared with the following information:

A) Utilization of funds.

a) Fixed assets: opening balance, additions, and deletions and closing balance and also

depreciation is valued.

B) Working Capital:

a) Current assets: inventories, book debts, cash and bank balances, loans and advances

inter unit balances.

C) current liabilities:

a) Advance from customers, sundry creditors other liabilities, provisions.

To get net working capital B – C

Management Information Report (MIR)

Once the detailed budget is prepared it is sent to corporate office for approval.

On the approval the yearly budget is broken down in to monthly budget for all-

important criteria like turn over operating results, cash flows, inventory debtor’s etc.

Month wise budgets are prepared product wise also. The month wise budget helps the

management to exercise control and take necessary actions to achieve the targets. For 

this purpose, MIRs are prepared periodically - Daily, Weekly, and Monthly etc. These

MIRs highlight the previous year’s actual, current year budget, for the year, for the

month and up to the month and current year actual previous year actual up to

corresponding period. These reports are sent to corporate office and submitted to local

management for follow up. These will be discussed at the highest level of the

management committee meetings. In addition to various results meeting at the unit

level.

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Some of the reports are:

1) Operating Results - Monthly

2) Turnover Detail - Weekly / Monthly

3) Billing Detail - Daily / Weekly / Monthly.

4) Cash Flow Statements

5) a) Inventory - Monthly

 b) Work in Progress and Finished Goods

6) Debtors.

MANAGEMENT INFORMATION REPORT

Mirno Mir description agency responsible frequency

1.1 Physical turnover planning & development weekly

1.2 Turnover & billing commercial co-ordination

(cc)

weekly

2.0 Financial turnover summary

-do-

weekly

2.1 Order book receipt -do- weekly

4.1 Order book outstanding physical

and financial

-do- weekly

6.1 Operating results finance budget monthly

6.2 Miscellaneous expenses budget monthly

6.3 Miscellaneous income budget monthly

8.01 Debtors outstanding at the start

 billing, collection, bal bars

commercial co-ordination monthly

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8.02 Age wise analysis of the above -do- monthly

8.03 Advances out standing receipts

adjusted & balance

 

-do-

monthly

8.04 Deferred debts -do- monthly

13.0 Foreign currency wise

commitments and cash out flows

material budgeting and

control

monthly

13.1 Inventory report material budgeting and

control

monthly

13.11 Finished goods more than one

year old

material budgeting and

control

monthly

13.12 Wipe more than one year old material budgeting and

control

monthly

13.3 Sating steel receipts physical material budgeting andcontrol

monthly

13.31 Sating steel inventory material budgeting and

control

monthly

13.5 Inventory planning for material budgeting and

control

monthly

Imp 1 Listing pos placed during the

month more than rupees five lakhs

material budgeting and

control

monthly

mir20

.

1 machine utilisation report for machines costing more than

rupees five lakhs

finance monthly

cf1 Daily cash collection report commercial co-ordination daily

cf2 Weekly net billing -do- weekly

cf3-a Details of customer collection

through regional operation

division (rod) & its allocation to

units

collection agency weekly

cf3-b Details of customer collection

through bank and its allocation

collection agency weekly

cf3-c Details of credit sent from bank to

corporate office centralised cash

credit (ccc) account

unit cash management weekly

cf3-d Weekly statement of bank debit to

ccc a/c

unit cash management weekly

cf3-e Statement of bank transfer of 

more than 50,00,000 on a single

day

each unit cash manager exception

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cf4 Actual cash inflow & outflow each unit cash manager weekly

cf5 Outstanding nonfund based units.

letter of credit bank guarantee

each unit cash manager monthly

cf6 Management committee on billing

collection & outstanding one lineinformation

commercial word monitory

cell

monthly

cf Details of billing collection & o/c

verification statutory of bills o/s

commercial coordinate

finance monitoring

monthly

cf8-a Statutory collection and

verification for bills o/s up to 31.

3 of each year 

finance monitoring monthly

8-b Statutory collection and

verification

finance monitoring monthly

cf9 Details of liquidation of old &withheld o/s

commercial coordination monthly

cf10 Details of pre-shipment & post

shipment credit

cash manager monthly

cf11 Cash flow forecast (weekly) cash manager monthly

cf12 Statement of bills pending & lc

 bills pending

cash manager weekly

cf13 Statement of bills o/s discounted

under idbi / icici schemes.

cash manager monthly

 

CHAPTER – 4

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THEORETICAL

FRAMEWORK 

INTRODUCTION

The term Capital Budgeting refers to long term planning for proposal capital

outlay and their financial. It includes raising long term funds and their utilization. It

may be defined as a firm’s formal process of acquisition and investment of capital.

Capital Budgeting may also be defined as “It involves firm’s decision to invest

its current funds for addition, modification and replacement of fixed assets”.

Its deals exclusively with investment proposals, which are essentially long term

 projects and are concerned with the allocation of firm’s scarce financial resources

among the available market opportunities.

Some of the examples of capital expenditure are

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I. Cost of acquisition of permanent assets as land and buildings.

II. Cost of additions, expansion, and improvement as alteration in the fixed

assets.

III. R&D projects cost, etc.,

Definition:

It is “The process of investment of firm’s current funds most efficiently in long

term assets with a view to earn profits over a series of fears.

“Capital Budgeting is long term planning for financing proposed capital outlays.

“Capital budgeting is concerned with allocation of the firm’s scare financial

resources among the available market opportunities”.

The consideration of investment opportunities involves the comparison of the expected

future steams of earning from a project with immediate and subsequent of expenditure

for it.

In any grouping concern, capital budgeting is more as less a continuous process and it is

carried out by different functional areas of management such as production, marketing

engineering, financial management etc all the relevant functional departments play a

crucial role in the capital budgeting decision are considered.

In role of a finance manager in the capital budgeting basically lies in the process of 

critically and in depth analysis and evaluation of various alternatives proposals and then

to select one out of these. As already stated, the basic objective of financial

management is to maximize the wealth of the share holders, therefore the objectives to

capital budgeting is to select those long term investment projects the are expected to

make maximum contribution to the wealth of the share holders in the long run.

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FEATURES OF CAPTAL BUDGETING

The important features, which distinguish capital budgeting decision in other 

day to day decisions, are

Capital budgeting decision involves the exchange of current funds for the

 benefits to be achieved in future.

The future benefits are expected and are to be realized over a series of year.

The funds are invested in non-flexible long term funds.

They have a long term and significant effect on the profitability of the concern.

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They involve huge funds they are irreversible decisions. They are strategic

decision associated with high degree of risk.

IMPORTANCE OF CAPITAL BUDGETING

The importance of capital budgeting can be understood from the facts that an

unsound investment decision may prove to be fatal to the very existence of the

organization.

The importance of capital budgeting arises mainly due to the following.

1. Large investment

Capital budgeting decision, generally involves large investment of funds. But

the funds available with the firms are scare and the demand for funds for 

exceeds resources. Hence, it is very important for a firm to plan and controls its

capital expenditure.

2. Long term commitment of funds

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Capital expenditure involves not only large amount of funds but also funds for 

long term or a permanent basis. The long term commitment of funds increase

the financial risk involved in the investment decision.

3. Irreversible nature

The capital expenditure decisions are of irreversible nature. Once, the decision

for difficult to impose of these asset without incurring heavy losses.

  4. Long term effect on profitability

Capital budgeting decisions ha a long term and significant effect on the

 profitability of a concern. Not only the present earning of the firm are affected

 by the investment in capital assets but also the future growth and investment

decision taken today. Capital budgeting decision has almost has importance to

avoid over or under investment in fixed assets.

5. Difference of investment decisionThe long term investment decision are difficult to be taken because uncertainties

of future and higher degree of risk.

6. Importance

Investment decision through taken individual concern is of national importance

 because it determines important, economic activities and economic growth.

KINDS OF CAPITAL BUDGETING

Every capital budgeting decision is a specific and with given parameters and

there fare, almost infinite number of types or forms of capital budgeting decision may

occur. Ever if the same decision being considered by the same firm at two different

 point of time, the decision considerations may change as a result of change in any of the

variable. However, the different type of capital budgeting under taken from time to

time by different firms can be classified on a number of dimension. Some projects

affect other projects of the firms is considering and analyzing. At the other extreme,

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some proposals are prerequisite for other projects. The projects may also be classified

as revenue generating or cost reducing projects can be categorized as follow:

From the point of view of the firm’s existence:

The capital budgeting decision may be taken by a newly incorporated firm or by

an already existing firm.

New firm:

A newly incorporated firm may be required to take different decision such as

selection of a plant to be installed, capacity utilization at initial stage, to set up or not

simultaneously the ancillary unit etc.

a) Existing firm:

A firm which already exists may be required to take various decisions from time

to time meet the challenge of competition or changing Environment. These

decisions may be

i) Replacement and Modernization decision

This is a common type of a machineries eventually required replacement. If the

existing plant to be replaced because of the economic life of the plant is over, then the

decision. However, if an existing plant to be replaced because of the economic life of 

the plant is over, then the decisions. However, if an existing plant to be replaced

 because it has become technologically out dated (through the economic life may not be

over) the decision any be know as a modernization decision. In case of a replacement

decision, the objective is to restore the same as higher capacity where as in case of 

modernization decision, the objectives is to increase the efficiency and/or cost

reductions. In general, the replacement decision and the modernization are also known

as cost reduction decisions.

ii) Expansion

Some times, the firms may be interested in increasing the installed production

capacity so as to increase the market share. In such a case, the finance manager is

required to evaluate the expansion program in term of marginal costs and marginal

 benefits.

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iii) Diversification

Some times, the firm may be interested to diversity into new product lines, new

markets production of spares part etc. in such a case, the finance manager is required to

evaluate the only the marginal cost and benefits, but also the effect of diversification on

the existing market share and profitability. Both the expansion and diversification

decisions may be also known as revenue increasing decisions.

II. From the point of view of Decision situation

The capital budgeting may also be classified from the point of view of the

decision situation as follows:

i) Dependent project decision

This is a fundamental decision in capital budgeting. It is also called as accept

reject criterion. If the project is accepted, the firms invest in it. In general all these

 proposals, which field at rate of return grater than certain required rate of return on cost

of capital are accepted and the rest are rejected. By applying this criterion all

independent projects with one in such a way that the acceptance of one precludes the

 possibility of the acceptance of another. Under the accept reject decision all

independent projects that satisfy the minimum investment criterion should be

improvement.

ii) Mutually Exclusive project decision

Mutually exclusive project are those, which complete with other projects in

such a way that the acceptance of one will exclude the acceptance of the other projects.

The alternatively are mutually exclusive and only one may be chosen. Suppose a

company is intending to buy each with a different initial investment adopting costs.

The three machines represent mutually exclusive alternatives ads only one of these can

 be selected. It may be rated hear that the mutually exclusive project decisions are not

independent of the accept reject decisions.

iii) Capital rationing decision

In a situation where the firm has unlimited funds all independent investment

 proposals yielding return greater than some pre determined levels are accepted.

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However this situation does not prevail in most of the business firms in actual practice.

They have a fixed capital budget.

A large number of investment proposals complete for these limited funds, the

firm must therefore ration them. The firm allocates funds to project in a manner that it

maximizes long run returns, this rationing refers to a situation in which a firm has more

acceptance investment than it can finance. It is concerned with the accept – reject

decision capital rationing employees ranking of the acceptable investment projects.

The project can be ranked on the basis of a predetermined criterion such as the

rate of return. The project is ranked in the descending order of the rate of return.

Problems and Difficulties in Capital Budgeting:

The problems in capital budgeting decision may be as follows:

a) Future uncertainty

Capital budgeting decision involves long term commitments. However there is

lot of uncertainty in the long term uncertainty may be with reference to cost of the

 project, future expected returns, future competition, legal provision, political situation

etc.

b) Time Element

The implication of a capital budgeting decision are scattered over long period.

The cost and benefit of a decision may occur at different point of time. The cost of 

 project is incurred immediately. However the investment is recovered over number of 

fears. The future benefit has to be adjusted to make them comparable with the cost.

Long the time period involved, greater would be the uncertainty.

c) Difficulty in Qualification of impact

The finance manager may face difficulties in measuring the cost and benefits of 

 projects in quantitative term. For example, the new product proposed to be launched by

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a firm may result in increase or decrease in sale of other products already being sold by

the firm. It is very difficult to ascertain the extent of impact very difficulty to ascertain

the extent of impact as the sales of the other than the launch of the new products.

Assumption in Capital budgeting

The Capital budgeting decision process is a multi-faceted and analytical

 process. A number of assumptions are required to be made. The assumptions constitute

a general set of condition with in which the financial aspects of different proposals are

to be evaluated. Some of these assumptions are

1. Certainty with respect to cost and benefits

It is very difficult to estimate the cost and benefit of a proposal beyond 2-3

years in future. However, for a Capital budgeting decision, it is assumed that the

estimate of cost and benefits are reasonably accurate and certain.

2. Profit motive

Another assumption is that the capital budgeting decisions are taking with a

 primary motive of increasing the profit of the firm. No other motive or goal influences

the decision of the finance manager.

3. No capital Rationing

The capital budgeting decision in the present chapter assume that is no scarcity

of capital. It assumes that a proposals will be accepted or rejected in the strength of its

merits alone. The proposals will not be considered in combination with other proposals

to the maximum utilization of available funds.

Capital budgeting process

Capital budgeting is complex process as it involves decision relating to the

investment of current funds for the benefits for the benefits to be achieved in future and

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the future are always uncertain. However, the following procedure may be adopted in

the process of capital budgeting.

i) Identification of investment proposals

The capital budgeting process begins with the identification of investment

 proposals. The proposals about potential investment opportunities may originate either 

from top management or from any officer of the organization. The departmental head

analysis various proposals in the light of the corporate strategies and submit proposals

to the capital expenditure planning.

ii) Screening proposals

The expenditure planning Committee screens the various proposals received

form different departments. The committee reviews these proposals from various

angles to ensure that these are in accordance with the corporate strategies or selection

criterion of the firm and also do not lead departmental imbalances.

iii) Evaluation of various proposals

The next step in the capital budgeting process is to various proposals. The

method which may be used for this purpose such as payback period method, Rate of 

return method, N.P.V and I.R.R. etc.

iv) Fixing priorities

After evaluating various proposals, the unprofitable uneconomical proposals

may be rejected and it may not be possible for the firm to invest immediately in all the

acceptable proposals due to limitation of funds. Therefore, it essential to rank the

 project/proposals after considering urgency risk and profitability involved in there.

Final Approval and Preparation of Capital Expenditure Budget

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Proposals meeting the evaluation and other criterion are approver to be

including in the capital expenditure budget. The expenditure budget lays down the

amount o9f estimated to be incurred of fixed assets during the budget period.

Implementing proposals

Preparation of a capital expenditure budget and incorporated of a particular 

 proposal in the budget doesn’t authorize to go a head with the implementation of the

 project.

A request for the authority to spend the amount should be mode to be capital

expenditure committee, which reviews the profitability of the project in the changed

circumstances. Responsibilities should be assigned while implementing the project in

orders avoid unnecessary delays and cost over runs. Net work techniques like PERT

and CPM can be applied to control and monitor the implementation of the project.

Performance Review

The lost stage in the process of capital budgeting is the evaluation of the

 performance of the project the evaluation is made by comparing actual and budgetexpenditures and also by comparing actual anticipated returns. The unfavourable

variances, if any should be looked in to and the causes of the same be identified so that

correctives action may be taken in future.

Methods for Techniques of Capital Budgeting

There are many methods for the evaluating the profitability of investment

 proposals the various comm0odity used methods are

Techniques of capital budgeting

 

Traditional Method Modern Method

1. Pay back period 1. N.P.V

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2. Accounting Rate of Return 2. I.R.R  

3. P.I

Traditional Methods

1. Pay back period method (P.B.P)

2. Accounting Rate of return method (A.R.R)

Modern or Discounting techniques

1. Net present value method (N.P.V)

2. Internal Rate of Return method (I.R.R)

3. Profitability index method (P.I)

1. Pay back period method (PBP)

The number of years required to recover the initial out lay of the investment is

called payback.

Cash out lay

PBP = ---------------------------------------

Annual net cash inflows

This formula can be applicable when the cash in flows are even are equal for a

given period of time.

Acceptance rule

Accept if PB < Standard payback 

Reject if PB > Standard payback 

  Merits Demerits

1. East to understand and compute 1. Ignores the time value of money

and inexpensive to use

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2. Emphasizes liquidity 2. Ignores cash flows occurring after 

the payback period

3. East and crude way to cope with Risk 3. Net Measure of profitability

4. Uses cash flows information 4. No objective way to determine

the standard payback 

5. No relation with the wealth

Maximization principle

Discount pay back 

The number of year required in recovering the cash out lay on the present value

 basis is the discounted payable period. Except using discounted the demerits of 

 payback method.

2. Accounting rate of return (A.R.R)

An Average rate of return found by dividing the average net operating profit by

the average investment. The Accounting rate of return is also known as called Average

rate of return it is a superior method then payback period method. This method uses

certain accounting information. In the problem the minimum required rate (or) cost of 

capital will be given by using the data given the problem we have to calculate A.R.R 

This calculated A.R.R is compared with the minimum required rate.

Average income

Average rate of return = -------------------------------------- X 100

Average investment

Acceptance rule

Average if ARR > minimum rate

Reject if ARR < minimum rate

Average Income

Original X ½ (or) half the original investment

Merits Demerits

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1. Uses accounting date with which 1. Ignores the time value of money

Executives are familiar 

2. Easy to understand and calculate 2. Does not use cash flows

3. Gives more weightage 3. No objective way to determine the

minimum acceptable rate of 

return

Discounted cash flow techniques

For evaluating the projects, most of the organizations are preparing to use

discounted cash flow techniques. The techniques are very qualitative because they have

strong theoretical base while calculating the cash in flows generated by the projects for 

different years, their future value is discounted. According to a given discount value is

considered for calculating and decision making.

Types

They are three of discounted cash flow techniques are in practice. They are

i) Net present value method (N.P.V)

ii) Profitability index (P.I)

iii) Internal rate of return (I.R.R)

i) Net present value method (N.P.V)

This is the most widely and company used method to evaluate the projects

under this method the given cash in flows are discounted according to the given

discounted factor value either the rupee realization value is given it is multiplied with

the cash in flows. In that respect to year. Later these values are to be added to arrive

the value of total of net present value of cash in flows.

The difference between P.V of cash flows and P.V of cash out flows in equal to

 NPV the firm’s opportunity cost of capital being the discount rate.

 Net present value = P.V. Cash in flows - P.V. Cash out flows

Acceptance rule

Accept if NPC > 0 (i.e., NPV is Positive)

Reject if NPV < 0 (i.e., NPV is Negative)

Project may be accepted if NPV = 0.

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Merits Demerits

1. Considered all cash flows 1. Requires estimates of cash flows

which is a tedious task?

2. True measure of profitability 2. Requires competition of the

opportunity cost of capital which

 poses practical difficulties

3. Based on the concept of the time 3. Sensitive to discount rates value

of money

4. Satisfies the value additively principle

(i.e., NPV & two or more projects

can be added)

5. Consistent with the share holder’s wealth

Maximization principal.

ii) Profitability Index (P.I)

Another important technique under discounted cash flow techniques is

 profitability index method per taking decision by using this method. By taking decision

 by using this method required the net values of both P.V. of cash in flows and P.V. of 

cash out flows. It is an expansion to N.P.V method. The nature of data used in both the

methods is same, the only differences is in the made of uses of such data.

The ratio is the present value of the cash flows to be initial out lay is

Profitability Index or benefit cost ratio.

P.I = P.V. of cash in flows ÷ P.V. of cost out flows.

Acceptance rule

Accept if PI > 1.0

Reject if PI < 1.0

Project may be accepted if PI = 1.0

Merits Demerits

1. Considers all cash flows 1. Requires estimates of the cash

flows which is a tedious task 

2. Recognizes the time value of money 2. At times falls indicate correct

choice between mutually

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exclusive projective

3. Relative measure of profitability

4. Generally consistent with wealth

Maximization principle

iii) Internal rate of return (I.R.R)

The Internal rate of return method is another discounted cash flow techniques,

which takes account of the magnitude and timing of cash flows. Another terms used to

describe the I.R.R method are field on an investment marginal efficiency of capital rate

of return over cost, time adjusted rate of Internal return and so on. The concept of 

internal rate of a one period project.

The discounts rate which equates the present value of an investment’s cash in

flows and out flows is its internal rate of return.

  Cash in flows – investment

Positive value

I.R.R = Lower rate + --------------------------------------- X Difference in discount

Difference value

Cash in flows cash in flows

Higher value lower value

----------------------------

OR 

  Investment

Factor identification = ---------------------------------------

Average cash in flows

Merits Demerits

1. Considers all cash flows 1. Requires estimates of the cash

flows which is a tedious task 

2. True measure of Profitability 2. Does not hold the value additivity

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principle (i.e., IRR & of two or 

more projects do not add)

3. Based on the concept of the time value 3. At times fails to indicate correct

of money choice between mutually

exclusive projects

4. Generally consistent with wealth 4. At times fields multiple rates

Maximization principle

5. Relatively difficult to compute

Capital Budgeting Methods in Practice

In a study of the Capital Budgeting practices of fourteen medium to large size

companies in India. It was found that all companies, except one, used payback 

with payback and/or other techniques about two-thirds of companies used IRR 

and about two-fifths NPV, IRR was found to the second most popular method.

The reasons for the popularity of payback in 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

computation of payback for all projects, one-third for majority of projects and

remaining for some of the projects for about two thirds of companies standard

 payback ranged between 3 and 5 years.

Reasons for the secondary role of DCF techniques in India included difficulty in

understanding and using these techniques lack of qualified professionals and

unwillingness of top management to use DCF techniques. One large

manufacturing and marketing organization mentioned that conditions of its

 business were such that discounted cash flow techniques were not needed. Yet,

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another company stated that replacement projects were very frequent in the

company and it was not considered necessary to use discounted cash flow

technique for evaluating such projects.

CHAPTER – 5

DATA ANALYSIS AND

INTERPRETATION

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ANALYSIS ON CAPITAL BUDGETING

Evaluation of investment proposal

At each point of time 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.Hence, it is very essential to select from amongst the various competing proposals,

those which give the highest benefits. The crux of the capital budgeting is the

allocation of available non-economic, which influence he capital budgeting decisions.

The crucial factor that influences the capital budgeting decision is the profitability of 

the prospective investment. Yet the risk involved in the proposal cannot be ignored

 because profitability and risk are directly related, i.e. higher profitability, the risk and

vice-versa.

There are many evaluating profitability of capital investment proposals. The

various commonly used methods are as follows:

A. Traditional methods

1. Pay-back period method

2. Average Rate of Return method

B. Time-adjusted methods

1. Net present value method

2. Profitability Index method

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3. Internal Rate of Return method

NON-DCF CRITERIA

Pay back period Method (PB)

The pay back period (PB) is one of the most popular and widely recognized

traditional methods of evaluation investment proposals. Pay back is the number of 

years required to recover the original cash outlay invested in a project.

If the project generates constant annual cash inflows, the pay back period can be

computed by dividing cash outlay buy the annual cash inflow.

` Cash outlay of the project OR Original cost of the Asset

Pay back period = ------------------------------------------------------------------------------

Annual cash inflows

Co = Initial investment

C = Annual cash inflows

In case of unequal cash inflows, the pay back period can be found out by adding

up the cash inflows until the total is equal to the initial cash outlay.

Years Cost of the Asset Annual cash inflows Pay back period

2005-06 146017 6871 21.25

2006-07 165358 19847 8.33

2007-08 177623 12623 14.07

2008-09 195471 16926 11.54

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Pay back period

0

50000

100000

150000

200000

250000

  2  0  0  5 -  0

  2  0  0  6 -  0

  2  0  0   7 -  0

  2  0  0  8 -  0

 Years

    R   u   p   e Cost of the

 Asset

 Annual cash

inflows

Pay back

period

Criteria for evaluation

The pay back period computed for a project is less than the pay back period set

 by management of the company, it would be accepted. A project actual pay back 

 period is more than the determined period by the management, it will be rejected.

INTERPRETATION OF PAY BACK PERIOD

The cost of asset for the year 2005-06 is 146017 and the actual annual cash

inflows is 6871, the cost of asset for the year 2006-07 is 165358 and the actual cash

inflows is 19847, the cost of asset for the year 2007-08 is177623 and the actual cash

inflows is 12623, and the cost of asset for the years 2008-09 is 195471 and the actual

cash inflows is 16926 after analysing the values by interpreting the pay back period, the

annual pay back period values were fluctuating year by year. Which are having the

values 21.25, 8.33, 14.07, 11.54 respectively.

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Accounting Rate of Return method (ARR)The accounting rate of return (ARR) also known as the return on investment

(ROI) uses accounting information, as revealed by financial statements, to measure the

 profitability of an investment. The Accounting rate of return is the ratio of the average

after tax profit divided by the average investment would be equal to half of the original

investment if it were depreciated constantly.

Average income

A R R = ------------------------------------ X 100

Average investment

Years Total profit Net investment A R R  

2005-06 14479 28937 50.03%

2006-07 19374 21435 90.38%

2007-08 9879 18493 53.41%

2008-09 15339 38733 39.60%

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Criteria for evaluation

According to this method ARR is higher than minimum rate of return

established by the management are accepted. It reject the project have less ARR than

the minimum rate set by the management.

INTERPRETATION OF ACCOUNTING RATE OF

RETURN

The Total profit for the year 2005-06 is 14479 and the actual Net investment is

28937, the Total profit for the year 2006-07 is 19374 and the actual Net investment is

21435, the Total profit for the year 2007-08 is 9879 and the actual Net investment is

18493, and the Total profit for the years 2008-09 is 15339 and the actual Net

investment is 38733 after analysing the values by interpreting the Accounting rate of 

return, the accounting rate of return values were increasing for next year and diminishes

for next further years. Which are having the values 50.03%, 90.38%, 53.41%, 39.60%

respectively.

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Accounting Rate of Return

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

2005-06 2006-07 2007-08 2008-09

 Years

      R    u    p    e    e    s Total profit

Net investment

 A R R

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The ARR standard set by the management is 32%. The values after interpreting in ARR 

method is more than the values of percentage. Hence we accept the project, which is

having higher ARR.

DCF CRITERIANet Present Value Method (NPV)

The Net Present Value (NPV) method is the classic economic method of 

evaluating the investing proposals. If is a DCF technique that explicitly recognizes the

time value at different time periods differ in value and are comparable only when their 

equipment present values are found out.

C1 C2 C3 Cn

 N.P.V = ---------- + --------- + --------- + ------- + ---------- - Co

(1 + K) (1 + K)2 (1 + K)3 (1 + K)ⁿ

 n   C1

 NPV= ∑ --------- - Co

i=0 (1 + K)1

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Where

 NPV = Net Present Value

Cf = Cash flows occurring at timeK = Discount rate

n = life of the project in years

Years Cash inflows DCF (10%) Present value

2005-06 6871 0.909 6245.74

2006-07 19847 0.826 16393.62

2007-08 12623 0.751 9479.87

2008-09 16926 0.683

Total

11560.46

44679.69

Net Present Value

0

5000

10000

15000

20000

25000

  2  0  0  5 -

  2  0  0  6 -

  2  0  0   7 -

  2  0  0  8 -

 Years

    R   u   p   e Cash inflows

DCF (10%)

Present value

 NPV = Cash outflows – Cash inflows

 NPV = 44679.69 – 56267

= - 11587.31

Criteria for evaluation

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In case of calculated NPV is positive or Zero, the project should be accepted. If the

calculated NPV is negative, the project is rejected

INTERPRETATION OF NET PRESENT VALUEThe Cash inflows for the year 2005-06 is 6871 and the DCF(10%) is 0.909,

after multiplying both the cash inflows with DCF the present value is 6245.74, the Cash

inflows for the year 2006-07 is 19847 and the DCF is 0.826 after multiplying, the

 present value is 16393.62, the Cash inflows for the year 2007-08 is 12623 and the DCF

is 0.751 after multiplying, the present value is 9479.87, and the cash inflows for the

years 2008-09 is 16926 and the DCF is 0.683 after multiplying, the present value is

11560.46. After analysing the values by interpreting the Net present value, the NetPresent value is Negative. Hence project is rejected due to calculated NPV is Negative.

Profitability Index Method (PI)

Yet another time-adjusted method of evaluating the investment proposals is the

 benefit-cost (B/C) ratio or Profitability Index (PI) Profitability Index is the ratio of the present valued of cash inflows, at the required rate of return, to the initial cash out flow

of the investment.

PV of Cash inflow

PI = ----------------------------------------

Initial Cash outflow

Where PV = Present Value

Years Cash inflow Cash outflow Profitability index

2005-06 137700 144571 0.95

2006-07 162323 142476 1.13

2007-08 146832 134209 1.09

2008-09 162802 145876 1.11

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Profitability Index

0

50000

100000

150000

200000

  2  0  0  5 -  0

  2  0  0  6 -  0

  2  0  0   7 -  0

  2  0  0  8 -  0

 Years

    R   u   p   e Cash inflow

Cash outflow

Profitability

index

Criteria for evaluation

A project can be accepted if its PI is greater than 1. If the PI is less than 1 we

should reject the project.

INTERPRETATION OF NET PRESENT VALUE

The Cash inflows for the year 2005-06 is 137700 and the actual Cash outflows

is 144571, the Cash inflows for the year 2006-07 is 162323 and the actual Cash

outflows is 142476, the Cash inflows for the year 2007-08 is146832 and the actual Cash

outflows is 134209, and the Cash inflows for the years 2008-09 is 162802 and the

actual Cash outflows is 145876 after analysing the values by interpreting the

Profitability Index, the value of 2005-06 is <1 i.e. 0.95, so the project is rejected, and

the further year values were >1 i.e. 1.13, 1.09, 1.11 respectively. Which is having

higher PI, Those projects will be accepted.

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Internal Rate of Return (IRR)

The Internal rate of return (IRR) method is another discounted cash flows

technique which takes account of the magnitude and thing of cash flows, other terms

used to describe the IRR method are yield on an investment, marginal efficiency of 

capital, rate of return over cost, time-adjusted rate of internal return and so on.

PBP - PVFHR 

IRR = HR - -------------------------------------------------- X R 

PVFLR - PVFHR 

PVFLR  - PBP

IRR = HR - -------------------------------------------------- X R 

PVFLR - PVFHR 

HR LR PBP PVFLR  PVFHR  Return

17% 16% 146017 478060 467108 29.31%

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17% 16% 146017 478060 467108 46.31%

INTERPRETATION OF INTERNAL RATE OF RETURN

From the above calculations we can infer that the IRR for the factors were

29.31% and 46.31%.

The project has to be ranked according to highest IRR. Hence the project 2 is to

 be rank first as it is having the highest IRR & the second rank is given to project 1. The

second project is accepted, having higher IRR and the first project will be rejected,

which is having low IRR.

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Internal Rate of Return

0

100000

200000

300000

400000

500000

600000

PBP PVFLR PVFHR Return

Factor 

      R    u    p    e    e    s

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CHAPTER – 6

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FINDINGS,

SUGGESTIONS ANDCONCLUSION

FINDINGS

Budgeting in LANCO is mainly a performance based i.e., based on the

 performance, where as zero-based budgeting is ideal for the company like

LANCO.

There should be a proper budgeting control system.

To reduce the cash crunch it is necessary for LANCO to revamp the existing

credit and budgeting policies.

ABC Analysis of inventing control should be adopted in LANCO.

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A thorough review of operation on frequent intervals is required. These reviews

should be made with the request of changing environment.

Orders received should be dispatched at proper time.

Job sequencing should be pre-determined and should follow up the sequential

 process, until the end of the job. Thus, the lead-time can be reduced.

There should be a proper communication between various departments and

responsibility centers.

There should be well-organized manpower planning, especially with regard to

 production.

The out-standing number of days of turnover should be reduced to nearly 120-

100 days; this will help to ease the burden of borrowed working capital.

SUGGESTIONS

Budgeting in LANCO INFRATECH is mainly a performance based i.e., based on the

 performance, where as zero-based budgeting is ideal for the company like LANCO

INFRATECH.

1) There should be effective coordination between the different departments like

Production sales, Purchase, Finance, Marketing etc., this will enhance the efficiency

of the organization.

2) There should be a proper budgeting control system.

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3) To reduce the cash crunch it is necessary for LANCO INFRATECH to revamp the

existing credit & budgeting policies.

4) ABC analysis of inventing control should be adopted in LANCO INFRATECH.

5) A thorough review of operations on frequent intervals is required. These reviews

should be made with the request to changing environment.

6) Orders received should be dispatched at proper time.

7) Job sequencing should be pre-determined & should follow up the sequential

 process, until the end of the job. Thus the lead-time can be reduced.

8) There should be proper communication between various departments and

responsibility centers.

9) There should be well-organized manpower planning, especially with regard to

 production.

10) Education about the importance of budgeting should be communicated to all

concerned authorities, involved directly or indirectly to work according, for the

growth of the company.

11) The outstanding number of days of turnover should be reduced to nearly 120 – 100

days. This will help to ease the burden of borrowed working capital.

12) Miscellaneous expenses have to be reduced. Mainly the collaboration charges. Tie

up with Indian collaborations or brining in effective foreign technology will help

reduce the expenses. Bringing the computers to the home place can reduce

computer hire charges.

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CONCLUSION

On critically examining the budgeting and budgetary control practices in LANCO it has

 been observed that there is an adequate system of budget estimation and budget control.

It was also found that one-third of companies always insisted on the computation of 

 payback for all projects, one-third for majority of projects and remaining for some of 

the projects for about two thirds of companies standard payback ranged between 3 and

5 years.

Mechanism commensurate with the size of the company. Budgets are prepared

involving almost all the departments’ functions. And they are scrutinized in minute

details by various agencies, both at unit and corporate levels. The board of directors

approves budgets, which is ultimate body for the policy making of the company.

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Like wise the actual are compared with budget/targets periodically and reviewed

thoroughly and at various levels to embers and the targets are achieved both in physical

and financial terms. To enthuse the employs to achieve the targets in physical terms

also there is a system of awarding employees annually in the form of “plant

 performance payment”, in addition to statutory bonus, which is based on profit in

financial terms.

Reasons for the secondary role of DCF techniques in India included difficulty in

understanding and using these techniques lack of qualified professionals and

unwillingness of top management to use DCF 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 were very frequent in the company and it was not considered

necessary to use discounted cash flow technique for evaluating such projects.

The review of actual with budget monthly at the highest level of management known as

Management Committee, consisting of all the heads of units/regions etc., directors

indicate the support given by management. This, Budgeting and Budgetary Control

mechanism in LANCO GROUP are felt as excellent.

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BIBLIOGRAPHY

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BIBLIOGRAPHY

FINANCIAL MANAGEMENT R.K.SHARMA &

S.K.GUPTA

 

FINANCIAL MANAGEMENT I.M. PANDEY

 

COST AND MANAGEMENT

ACCOUNTING JAYANTA MITRA

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APPENDIX

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LANCO BALANCE SHEET

LANCO PROFIT AND LOSS ACCOUNT

LANCO PROFIT AND LOSS ACCOUNT Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05

Income:Operating income 1,574.55 541.67 151.46 167.56 114.58

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BALANCE SHEET Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05

Sources of funds

Owner's fund

Equity share capital 219.79 219.79 30.77 7.69 7.69

Share application money - - - - -

Preference share capital - - - - -

Reserves & surplus 1,373.31 1,159.47 56.75 70.06 60.19

Loan funds

Secured loans 227.88 124.51 32.71 13.20 20.75

Unsecured loans 324.98 35.00 20.00 53.17 59.08

Total 2,145.97 1,538.78 140.23 144.12 147.72

Uses of funds

Fixed assets

Gross block 202.30 90.86 20.84 19.61 34.67

Less : revaluation reserve - - - - -

Less : accumulated depreciation 23.48 12.17 8.53 6.65 8.38

Net block 178.82 78.70 12.31 12.96 26.28

Capital work-in-progress 81.42 1.90 - - -

Investments 1,653.55 1,342.65 126.28 62.25 82.40

Net current assets

Current assets, loans & advances 2,603.92 952.47 192.42 96.45 67.77Less : current liabilities & provisions 2,371.73 836.94 190.79 27.53 28.74

Total net current assets 232.18 115.53 1.63 68.92 39.03

Miscellaneous expenses not written - - - - -

Total 2,145.97 1,538.78 140.23 144.12 147.72

Notes:

Book value of unquoted investments 1,654.33 1,342.65 123.80 59.15 79.96

Market value of quoted investments 1.08 0.48 9.09 7.90 -

Contingent liabilities 4,055.68 4,762.61 638.96 734.89 914.19

Number of equity shares outstanding (Lacs) 2223.62 2223.62 307.69 76.92 76.92

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Expenses 

Material consumed - - - 7.29 -8.94

Manufacturing expenses 1,147.73 398.31 125.85 143.07 104.98

Personnel expenses 61.43 13.91 1.91 4.05 2.34

Selling expenses 4.44 5.01 0.05 1.01 2.07

 Administrative expenses 46.63 10.32 2.40 2.22 2.30

Expenses capitalized - - - - -

Cost of sales 1,260.24 427.55 130.21 157.65 102.74

Operating profit 314.31 114.12 21.26 9.92 11.85

Other recurring income 27.60 11.73 1.28 8.70 3.73

 Adjusted PBDIT 341.91 125.85 22.53 18.62 15.57

Financial expenses 34.47 21.17 3.63 4.29 5.76

Depreciation 11.62 3.69 1.89 2.13 2.30

Other write offs - - - - -

 Adjusted PBT 295.82 100.98 17.02 12.20 7.50

Tax charges 96.91 27.77 3.34 -0.70 1.69

 Adjusted PAT 198.91 73.21 13.68 12.90 5.81

Non recurring items 0.43 -0.04 -0.02 -2.76 -1.59

Other non cash adjustments 0.83 -0.12 -3.90 -0.27 -0.07

Reported net profit 200.18 73.06 9.76 9.87 4.16

Earnings before appropriation 320.51 120.34 51.57 41.81 31.94

Equity dividend - - - - -

Preference dividend - - - - -

Dividend tax - - - - -

Retained earnings 320.51 120.34 51.57 41.81 31.94

CASH FLOWS

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CASH FLOW Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05

Profit before tax 297.08 100.95 13.10 9.44 5.91

Net cash flow-operating activity 682.84 279.24 44.98 0.57 -11.26

Net cash used in investing activity -747.09 -1,551.90 -62.81 36.29 -29.95

Net cash used in fin. activity 372.74 1,305.81 16.30 -17.56 35.84

Net inc/dec in cash and equivalent 308.50 33.15 -1.54 19.31 -5.37

Cash and equivalent begin of year 63.10 29.95 31.48 12.18 17.55

Cash and equivalent end of year 371.60 63.10 29.95 31.48 12.18

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ANNUAL RESULTS IN BRIEF

  ANNUAL RESULTS IN DETAILS Mar ' 09 Mar ' 08 Mar ' 07

Other income 29.08 11.73 1.28

Stock adjustment -48.02 - -

Raw material 1,181.96 - -

Power and fuel - - -

Employee expenses 61.43 11.74 1.62

Excise - - -

 Admin and selling expenses - 17.53 2.76

Research and development expenses - - -

Expenses capitalized - - -

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  ANNUAL RESULTS IN BRIEF Mar ' 09 Mar ' 08 Mar ' 07

Sales 1,574.55 541.67 151.46

Operating profit 314.09 114.08 21.24

Interest 34.47 21.17 3.63

Gross profit 308.70 104.64 18.89

EPS (Rs) 9.11 3.32 4.44

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Other expenses 65.08 398.31 125.85

Provisions made - - -

Depreciation 11.62 3.69 1.89

Taxation 96.91 27.89 3.34

Net profit / loss 200.18 73.06 13.66

Extra ordinary item - - -

Prior year adjustments - - -3.90

Equity capital 219.79 219.79 30.77

Equity dividend rate - - -

 Agg.of non-prom. shares (Lacs) 585.22 555.90 8.00

 Agg.of non prom. To Holding (%) 26.32 25.00 2.60

OPM (%) 19.95 21.06 14.02

GPM (%) 19.25 18.91 12.36

NPM (%) 12.48 13.20 8.94

SHARE HOLDING

Share holding pattern as on : 31/12/2009 30/09/2009 30/06/2009

Face value 10.00 10.00 10.00

No. Of Shares% HoldingNo. Of Shares% HoldingNo. Of Shares% Holding

Promoter's holding

Indian Promoters 48565284 21.84 48565284 21.84 48565284 21.84

Foreign Promoters 108582202 48.83 108582202 48.83 108649193 48.86

Sub total 157147486 70.67 157147486 70.67 157214477 70.70

Non promoter's holding

Institutional investorsBanks Fin. Inst. and Insurance 6285348 2.83 5958622 2.68 4724316 2.12

FII's 26059309 11.72 22922840 10.31 28435523 12.79

Sub total 35222822 15.84 33121220 14.90 36102315 16.24

Other investors

Private Corporate Bodies 1627617 0.73 3232913 1.45 2155239 0.97

NRI's/OCB's/Foreign Others 2726519 1.23 2735778 1.23 2804547 1.26

Directors/Employees 6457914 2.90 6457914 2.90 6457914 2.90

Others 11621828 5.23 12430677 5.59 11570878 5.20

Sub total 22433878 10.09 24857282 11.18 22988578 10.34General public 7557719 3.40 7235917 3.25 6056535 2.72

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Grand total 222361905 100.00 222361905 100.00 222361905 100.00