capital budget in oriental bank of commerce

8/11/2019 Capital Budget in Oriental Bank of Commerce

1/70

SESSION 2011

Programme : MBA- 4th Sem.

Submitted To : Submitted By :

Mrs. Shipra Pandey Ali Muddin Ahmad

(Faculty Falcon !n"osys# $oll

%o:&')&*'+

ST, /0%T$0

P$0FA/0


2/70

Summer training is a very important part of an MBA (BA) curriculum. It provides an

optimistic iconography for Future eistence through !hich students are a"le to see the real

industrial environment !hich gives an opportunity to relate theory !ith practice.

I undertoo# t!o months training programme at Oriental Bank of Commerce(Bhadra#) and

!or#ed on the pro$ect Capital Budgeting at OBC.%his report is the #no!ledge ac&uired "y

me during this period of training.


3/70

ACKNOWLEDGEMENT

Before I get into the depth of the thing' I !ould li#e to add a fe! heartfelt !ords forthe people !ho at various stages of the pro$ect development helped me "y their valua"le

guidance.

First and foremost I !ould li#e to pay my sincere gratitude !hich I o!e toMrs. HEMA

MIRZI(course coordinator' and !r. "IR#I $%A(pro'ect guide' for their valued help

and guidance !hich they gave me !hen I needed it the most. It !as only due to their sincere help

and efforts that I !as a"le to end up !ith this pro$ect.

I o!e special than#s to !r.I#I AI"' irector of I*S%I%+%, -F

MA*A,M,*% / ,*%0,10,*,+0S2I1 ,34-1M,*%'5 1une and Mr. &RA!EE&

"%MAR &A!A (Branc) Manager* B)adrakfor his valua"le co6operation and guidance in

completing the pro$ect !or#.

4ast "ut not the least7 I !ould li#e to pay our gratitude to my &ARE#+' !ithout their

help and "lessing I cant ta#e a single step in right direction.

student name


4/70

DECLARATION

I 8handra#anta 1anigrahi' a student of I*S%I%+%, -FMA*A,M,*% / ,*%0,10,*,+0S2I1 ,34-1M,*%5' 1une' andsession (9::;6


5/70

I!E,

S.%1. /2APT0$S PA30 %1.1. Int)odu't+on o" t(e su-e't !1/

2. Coman &)ole 1341

Int)odu't+on o" t(e Coman 1!Mana,ement &)ole 15Comet+to)s 20

&)odu't and Se)6+'es 227utu)e o" #an*+n, +n Ind+a 25A'(+e6ements and A8a)ds 40

Coman M+ss+on9 +s+on and alue 414. Resea)'( Met(odolo, 424!

Statement o" t(e )o-lem 4;

O-e't+6e 4/

Samle S+


6/70


7/70

8apital "udgeting is a re&uired managerial tool. -ne duty of a financial manager is to choose

investments !ith satisfactory cash flo!s and rates of return. %herefore' a financial manager must

"e a"le to decide !hether an investment is !orth underta#ing and "e a"le to choose intelligently

"et!een t!o or more alternatives. %o do this' a sound procedure to evaluate' compare' and select

pro$ects is needed. %his procedure is called capital -udgeting.

I. CA&I#A I+ A IMI#E! RE+O%RCE

In the form of either de"t or e&uity' capital is a very limited resource. %here is a limit to the

volume of credit that the "an#ing system can create in the economy. 8ommercial "an#s and

other lending institutions have limited deposits from !hich they can lend money to individuals'

corporations' and governments. In addition' the Federal 0eserve System re&uires each "an# to

maintain part of its deposits as reserves. 2aving limited resources to lend' lending institutions

are selective in etending loans to their customers. But even if a "an# !ere to etend unlimited

loans to a company' the management of that company !ould need to consider the impact that

increasing loans !ould have on the overall cost of financing.

In reality' any firm has limited "orro!ing resources that should "e allocated among the "est

investment alternatives. -ne might argue that a company can issue an almost unlimited amount

of common stoc# to raise capital. Increasing the num"er of shares of company stoc#' ho!ever'

!ill serve only to distri"ute the same amount of e&uity among a greater num"er of shareholders.

In other !ords' as the num"er of shares of a company increases' the company o!nership of the

individual stoc#holder may proportionally decrease.

%he argument that capital is a limited resource is true of any form of capital' !hether de"t or

e&uity (short6term or long6term' common stoc#) or retained earnings' accounts paya"le or notes

paya"le' and so on. ,ven the "est6#no!n firm in an industry or a community can increase its


8/70

"orro!ing up to a certain limit. -nce this point has "een reached' the firm !ill either "e denied

more credit or "e charged a higher interest rate' ma#ing "orro!ing a less desira"le !ay to raise

capital.

Faced !ith limited sources of capital' management should carefully decide !hether a

particular pro$ect is economically accepta"le. In the case of more than one pro$ect' management

must identify the pro$ects that !ill contri"ute most to profits and' conse&uently' to the value (or

!ealth) of the firm. %his' in essence' is the "asis of capital "udgeting.

/O% +HO%! REMEMBER

8apital "udgeting is investment decision6ma#ing as to !hether a pro$ect is !orth

underta#ing. 8apital "udgeting is "asically concerned !ith the $ustification of capital

ependitures.

8urrent ependitures are short6term and are completely !ritten off in the same year that

epenses occur. 8apital ependitures are long6term and are amorti@ed over a period of

years are re&uired "y the I0S.


9/70

II. Basic Steps of Capital Budgeting

. Accept the pro$ect if 13 of inflo!s C costs.I00 C 2urdle 0ate andDor

pay"ac# E policy

!efinitions0

Independent versus mutually eclusive pro$ects.

*ormal versus nonnormal pro$ects.

Basic !ata

E1pected et Cas) 2lo3

/ear&ro'ect &ro'ect +

:

/

10

?/0

44

1=

?;0

2=

20

/0

;0

40

20

10

0

10

/ 10 1/ 20 2/

*$>%

Crossover Point = 8.7%

IRRS= 23.6%

IRRL= 18.1%

N&

$?%


13/70

;

3


14/70

;

3

2. WHY THE NPV AND IRR SOMETIMES SELECT DIFFERENT PROJECTS

Ohen comparing t!o pro$ects' the use of the *13 and the I00 methods may give different

results. A pro$ect selected according to the *13 may "e re$ected if the I00 method is used.

Suppose there are t!o alternative pro$ects' P and Q. %he initial investment in each pro$ect is

9'>::. 1ro$ect P !ill provide annual cash flo!s of >:: for the net


15/70

;

3

10-R,8% SI, A* 4IF,

%here are reasons !hy the *13 and the I00 are sometimes in conflict= the si@e and life of the

pro$ect "eing studied are the most common ones. A


16/70

;

3

enerally spea#ing' you can use and rely on "oth the *13 and the I00 if t!o conditions are

met. First' if pro$ects are compared using the *13' a discount rate that fairly reflects the ris#

of each pro$ect should "e chosen. %here is no pro"lem if t!o pro$ects are discounted at t!o

different rates "ecause one pro$ect is ris#ier than the other. 0emem"er that the result of the

*13 is as relia"le as the discount rate that is chosen. If the discount rate is unrealistic' the

decision to accept or re$ect the pro$ect is "aseless and unrelia"le. Second' if the I00 method

is used' the pro$ect must not "e accepted only "ecause its I00 is very high. Management

must as# !hether such an impressive I00 is possi"le to maintain. In other !ords'

management should loo# into past records' and eisting and future "usiness' to see !hether an

opportunity to reinvest cash flo!s at such a high I00 really eists. If the firm is convinced

that such an I00 is realistic' the pro$ect is accepta"le. -ther!ise' the pro$ect must "e

reevaluated "y the *13 method' using a more realistic discount rate.

@O SBOLD REMEM#ER

T(e +nte)nal )ate o" )etu)n $IRR% +s a oula) met(od +n 'a+tal -ud,et+n,. T(e

IRR +s a d+s'ount )ate t(at ma*es t(e )esent 6alue o" est+mated 'as( o8s eual

to t(e +n+t+al +n6estment. Bo8e6e)9 8(en us+n, t(e IRR9 ou s(ould ma*e su)e


17/70

;

3

Modified IRR (MIRR

%he MI00 is similar to the I00' "ut is theoretically superior in that it overcomes t!o

!ea#nesses of the I00. %he MI00 correctly assumes reinvestment at the pro$ects cost of

capital and avoids the pro"lem of multiple I00s. 2o!ever' please note that the MI00 is not

used as !idely as the I00 in practice.

%here are "asic steps of the MI00=

(


18/70

;

3

MI00S


19/70

;

3

E. &RO2I#ABII#/ I!E, (&I

%he profita-ilit6 inde1' or 1I' method compares the present value of future cash inflo!s !ith

the initial investment on a relative "asis. %herefore' the 1I is the ratio of the present value of

cash flo!s (138F) to the initial investment of the pro$ect.

investmentInitial

PVCFPI =

In this method' a pro$ect !ith a 1I greater than < is accepted' "ut a pro$ect is re$ected

!hen its 1I is less than


20/70

;

3

coastinitial

flo!scashof131I =


21/70

;

3

2. E8%I9AE# A%A A%I#/

Ohat do you do !hen pro$ect lives vary significantlyN An easy and intuitively appealing

approach is to compare the e&uivalent annual annuity5 among all the pro$ects. %he

e&uivalent annuity is the level annual payment across a pro$ects specific life that has a

present value e&ual to that of another cash6flo! stream. 1ro$ects of e&ual si@e "ut different

life can "e ran#ed directly "y their e&uivalent annuity. %his approach is also #no!n as

e&uivalent annual cost' e&uivalent annual cash flo!' or simply e&uivalent annuity approach.

%he e&uivalent annual annuity is solved for "y this e&uation=

,&uivalent Annuity 13(8ash Flo!s) D (present value factor of n6year annuity)


22/70

;

3

I9. &RO:EC# !ECI+IO AA/+I+

A. MA"I$ $O;O


23/70

;

3

demand) and thus permit us to operate more efficiently than "efore !e had the

machineN Oill the machine create other "enefits (e.g.' higher &uality' more

operational flei"ility)N %he #ey economic &uestion as#ed of pro$ect proposals

should "e' 2o! !ill things change (i.e.' "e "etter or !orse) if !e underta#e the

pro$ectN5

. Account for time. %ime is money. Oe prefer to receive cash sooner rather than later.

+se *13 as the techni&ue to summari@e the &uantitative attractiveness of the

pro$ect. Tuite simply' *13 can "e interpreted as the amount "y !hich the mar#et

value of the firms e&uity !ill change as a result of underta#ing the pro$ect.

. Account for ris#. *ot all pro$ects present the same level or ris#. -ne !ants to "e

compensated !ith a higher return for ta#ing more ris#. %he !ay to control for

variations in ris# from pro$ect to pro$ect is to use a discount rate to value a flo! of

cash that is consistent !ith the ris# of that flo!.

#)ese = precepts summari>e a great amount of economic t)eor6 t)at )as stood t)e

test of time. Organi>ations using t)ese precepts make -etter in4estment decisions t)an

organi>ations t)at do not use t)ese precepts.


24/70

;

3

B. #HE &ROCE++ O2 &RO:EC# E9A%A#IO

(+uggestions -6 R. Bruner

?. Carefull6 estimate e1pected future cas) flo3s.

@. +elect a discount rate consistent 3it) t)e risk of t)ose future cas) flo3s.

. Compute a -ase


25/70

;

3

Flei"ility

Tuality

?no!6ho!

4earning

D. !ecide


26/70

;

3

C. CA&I#A RA#IOI$

(+uggestions -6 R. Bruner

,ists !henever enterprises cannot' or choose not to' accept all value6creating investment

pro$ects. 1ossi"le causes=

Ban#s and investors say *-5

Managerial conservatism

Analysis is re&uired. -ne must consider sets of pro$ects' or "undles5' rather than

individual pro$ects. %he goal should "e to identify the value6maimi@ing "undle of

pro$ects.

%he danger is that the capital6rationing constraint heightens the influence of nonfinancial

considerations' such as the follo!ing=

8ompetition among alternative strategies

8orporate politics

Bargaining games and psychology

%he outcome could "e a su"6optimal capital "udget' or' !orse' one that destroys value


27/70

;

3

Some remedies are the follo!ing=

0ela and eliminate the "udget constraint.

Manage the process rather than the outcomes.

evelop a corporate culture committed to value creation.


28/70

;

3


29/70

;

3

I#RO!%C#IO

-riental Ban# of 8ommerce India !as esta"lished in the year : trusted "rands in India.


30/70

;

3

-riental Ban# 8ommerce India maintains relationship !ith more than 9:: leading international

"an#s !orld!ide. -B8 India has 0upee ra!ing Arrangements !ith echange companies in

+A, and < in Singapore.

MAA$EME# &RO2IE

%ame esignation

Sh.T.. Prabhu C(a+)man and Mana,+n, d+)e'to)

Sh. 2 $atnaara 2egde EFe'ut+6e D+)e'to)

Sh. S./ Sinha EFe'ut+6e D+)e'to)

5 5i7ay Sai $eddy D+)e'to)

$ S Maharishi D+)e'to)

, 8 8haitan D+)e'to)

8 B $ %aidu D+)e'to)

Sumita a9ra D+)e'to)

Sh. S.8 %e9ley D+)e'to)

5i7ay agirdar D+)e'to)

T 5alliappan D+)e'to)

/ 8 Sabhar9al D+)e'to)


31/70

;

3


32/70

;

3

+CHE!%E! COMMERCIA BA"+ I I!IA (Competitors

%he commercial "an#ing structure in India consists of=

Scheduled 8ommercial Ban#s in India

+nscheduled Ban#s in India

Scheduled Ban#s in India constitute those "an#s !hich have "een included in the Second

Schedule of 0eserve Ban# of India (0BI) Act' )' private sector "an#s (9)' co6

operative "an#s and regional rural "an#s.

UScheduled "an#s in IndiaU means the State Ban# of India constituted under the State Ban# of

India Act' > (9 of >)' a su"sidiary "an# as defined in the State Ban# of India (Su"sidiary

Ban#s) Act' J (; of J)' a corresponding ne! "an# constituted under section of the

Ban#ing 8ompanies (Ac&uisition and %ransfer of +nderta#ings) Act' of


33/70

;

3

Ban# of Baroda

Ban# of India

Ban# of Maharashtra

8anara Ban#

8entral Ban# of India

8orporation Ban#

ena Ban#

Indian -verseas Ban#

Indian Ban#

-riental Ban# of 8ommerce

1un$a" *ational Ban#

1un$a" and Sind Ban#

Syndicate Ban#

+nion Ban# of India

+nited Ban# of India

+8- Ban#

3i$aya Ban#

#)e follo3ing are t)e +c)eduled Banks in India (&ri4ate +ector0

I* 3ysya Ban# 4td

Ais Ban# 4td

Indusind Ban# 4td

I8I8I Ban# 4td

South Indian Ban#

2F8 Ban# 4td

8enturion Ban# 4td

Ban# of 1un$a" 4td


34/70

;

3

IBI Ban# 4td

Q,S BA*?

#)e follo3ing are t)e +c)eduled 2oreign Banks in India0

American ,press Ban# 4td.

A* ridlays Ban# 1lc.

Ban# of America *% / SA

Ban# of %o#yo 4td.

Ban&uc *ationale de 1aris

Barclays Ban# 1lc

8iti Ban# *.8.

eutsche Ban# A..

2ong#ong and Shanghai Ban#ing 8orporation

Standard 8hartered Ban#.

%he 8hase Manhattan Ban# 4td.

resdner Ban# A.

&RO!%C#+ A! +ER9ICE+

Sa;ing Accounts

Ho3 to Open an Account

!o3nloador o"tain Account Opening 2orm from the nearest "ranch' fill it upproperly and deposit the same !ith the "ranch of your choice along !ith the

follo!ing =6

?. Furnish proof of 0esidence (In the form of a copy of 0ation 8ardD 1assportD
https://www.obcindia.co.in/obcnew/site/Download.aspxhttps://www.obcindia.co.in/obcnew/site/Download.aspxhttps://www.obcindia.co.in/obcnew/site/Download.aspxhttps://www.obcindia.co.in/obcnew/site/Download.aspx


35/70

;

3

riving 4icenseD ,lectricity BillD %elephone BillD Identity 8ard issued "y any

reputed institution. -0II*A4S "e sho!n only at the time of scrutiny of

papers)D Business address.

@. Furnish 9 photographs of all the prospective account holder(s).

.. Introduction a"out you from a person #no!n to the "an# prefera"ly "y an

Account 2older of the Branch' !hose account has run satisfactorily at least for

the past si months.


36/70

;

3

=. Furnish 1A* or declaration of 2orm o. DFDD?as the case may "e. %he

minimum "alance !ill "e=6

#6pesIn Rural ;

+emi %r-an

-ranc)es

In %r-an ; Metropolitan

-ranc)es

Oithout 8he&ue Boo# Facility 0s. ::

Oith 8he&ue Boo# Facility 0s. >:: 0s. : 0s. 9>:

Current Account G

2o9 to 1pen an Account

capital budget in oriental bank of commerce

Documents