capital budgeting dr reddy
TRANSCRIPT
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A
Project Report
On
“CAPITAL BUDGETING”
At
DR. REDDY’S LABORATORIES LIMITED
Diert!tion S"#$itte%
In The Partial Fulfillment for the Award of the Degree
In Finance
Submitted By
Under the guidance of
FinanceManager
At Dr. Re%%&’' (TO)III' B!c*"p!++&
CERTI(ICATE
T*i i to certi,& t*!t t*e Project -or entit+e% “CAPITAL BUDGETING” !t
Dr. Re%%&’' (TO / III' B!c*"p!++& ' i ! #on!,ie% 0or o,
"#$itte% in p!rti!+ ,"+,i++$ent o, t*e re1"ire$ent ,or t*e !0!r% o, t*e %e2ree o,
“M!ter Pro2r!$$e In Intern!tion!+ B"ine” ,or t*e !c!%e$ic &e!r
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Mr. T. 3ote*0!r R!o
4Intern!+ Project G"i%e5 4E6tern!+ E6!$in!tion5 4Dep!rt$ent o, M!n!2e$ent
St"%ie5
DECLARATION
I *ere#& %ec+!re t*!t t*e project report tit+e% “CAPITAL BUDGETING” "#$itte% in
p!rti!+ ,"+,i++$ent o, t*e re1"ire$ent ,or t*e Pot Gr!%"!tion o, “M!ter Pro2r!$$e In
Intern!tion!+ B"ine”' ,ro$ ! #on!,i%e 0or c!rrie% o"t #& $e "n%er t*e 2"i%!nce o,
Mr. T. 3ote*0!r R!o' M!n!2in2 Director o, (in!nce' Dr. Re%%&’ L!#or!torie Li$ite%'
(TO / III' B!c*"p!++& 7&%er!#!%.
I !+o %ec+!re t*!t t*i i t*e re"+t o, $& o0n e,,ort !n% i not "#$itte% to !n& ot*er
Uni8erit& ,or t*e !0!r% o, !n& ot*er De2ree' Dip+o$!' (e++o0*ip or pri9e.
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P+!ce:
AC3NO-LEDGEMENT
I take this oortunity to acknowledge! all the eole who rendered their "aluable ad"ice in
bringing the ro#ect to function$
As art of curriculum at college$ The ro#ect enables us to enhance our skills! e%and our
knowledge by alying "arious theories! concets and laws to real life scenario which
would further reare us to face the e%tremely &'ometiti"e 'ororate (orld) in the near
future$
I e%ress my sincere gratitude to the staff of COLLEGE *yderabad$ I secially thank &the
management and staff of Dr$ +eddy,s) for creating out the study and for their guidance and
encouragement that made the ro#ect "ery effecti"e and easy$
I sincerely e%ress my gratitude to Mr. 3ote*0!r R!o' Finance! Manager
Dr$ +eddy,s! for his "aluable guidance and cooeration throughout my ro#ect work$
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I would like to thank Mr. 3ote*0!r R!o' Mr. 3!+&!n 3"$!r !n% Mr. Doi Srini8! !
for guiding and directing me in the rocess of making this ro#ect reort and for all the
suort and encouragement$
I am grateful to our Internal Faculty' faculty in MPIB Deartment for his suort and
assistance in my ro#ect work$
I ha"e tried my le"el best to ut my e%erience and analysis in writing this reort$ I am
grateful to Dr$ +eddy,s as an organi-ation and its "arious emloyees for heling me to learn
and e%lore many fields$
INDE;
I. Intro%"ction P!2e No.
De,inition o, C!pit!+ B"%2etin2
Scope o, t*e t"%&
O#jecti8e o, t*e t"%&
Nee% ,or t*e t"%&
Li$it!tion o, t*e t"%&
Met*o%o+o2&
II. In%"tr& Pro,i+e
7itor& o, t*e P*!r$!ce"tic!+ In%"tr&
M!jor p+!&er o, t*e -or+% P*!r$!ce"tic!+ In%"tr&
T*e In%i!n P*!r$!ce"tic!+ In%"tr&
III. Co$p!n& Pro,i+e
A#o"t t*e Co$p!n&
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Bo!r% o, Director
Str!te2ic B"ine Unit
3e& Mi+etone
Dep!rt$ent
I<. C!pit!+ B"%2etin2
<. (in%in2 !n% S"22etion
<I. Bi#+io2r!p*&
INTRODUCTION
De,inition o, C!pit!+ B"%2etin2
C!pit!+ #"%2etin2 4or in8et$ent !ppr!i!+5 is the lanning rocess used to determine
whether a firm.s long term in"estments such as new machinery! relacement machinery! new
lants! new roducts! and research de"eloment ro#ects are worth ursuing$ It is budget forma#or caital! or in"estment! e%enditures
NEED !n% IMPORTANCE (OR CAPITAL BUDGETING
'aital budgeting means lanning for caital assets$ The imortance of caital budgeting
can be well understood from the fact that an unsound in"estment decision may ro"e fatal to
the "ery e%istence of the concern$ The need! significance or imortance of caital budgeting
arises mainly due to the following/
0$ L!r2e In8et$ent: 'aital budgeting decisions in"ol"es large in"estment of funds but
the funds a"ailable with the firm are always limited and demand for funds far e%ceeds
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the resources$ *ence! it is "ery imortant for the firm to lan and control its caital
e%enditure$
1$ Lon2 / Ter$ Co$$it$ent o, ("n%: It increases the financial risk in"ol"ed in the
in"estment decision$
2$ Irre8eri#+e N!t"re: The caital e%enditure decisions are of irre"ersible in nature .
3nce the decision for ac4uiring a ermanent asset is taken! it becomes "ery difficult to
disose of these assets without incurring hea"y losses$
5$ Lon2 / Ter$ E,,ect on Pro,it!#i+it&: 'aital budgeting decisions ha"e a long 6 term
and significant effect on the rofitability of a concern$ 7ot only are the resent earnings
of the firm affected by the in"estments in caital assets$
8$ Di,,ic"+tie o, In8et$ent Deciion: The long term in"estment decisions are difficult to
be taken because decision e%tends to a series of years beyond the current accounting
eriod$
SCOPE O( T7E STUDY
The study is done on caital budgeting held by 9enerics di"ision of Dr$ +eddy,s
:aboratories :imited$
The scoe of the study includes the Payback eriod method$
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OB=ECTI<ES O( T7E STUDY
Main 3b#ecti"e/ 6
The main 3b#ecti"e of the ro#ect is to understand why Payback eriod is better than other caital budgeting techni4ues from the comany,s oint of "iew$
Sub ; 3b#ecti"es/ 6
To know the in"estment criteria done by Dr$ +eddy,s lab while e"aluating a ro#ect$
a< To study the financial feasibility of the roosal$
b< To find out the benefits that the comany is going to get from the new ro#ects$
c< To critically e"aluate a ro#ect using different tyes of caital budgeting techni4ues$ andto arri"e at the right conclusion$
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d< To understand ad"antages and disad"antages of "arious techni4ues$
e< =stimating of assets > tools re4uired for this new ro#ect$
NEED (OR T7E STUDY
'aital budgeting means lanning for caital assets$ The need of caital budgeting can be
well understood from the fact that an unsound in"estment decision may ro"e fatal to the
"ery e%istence of the concern$ It is used to determine whether Dr$ +eddy,s long term
in"estments such as new machinery! relacement machinery! new lants! new roducts! and
research de"eloment ro#ects are worth ursuing$ It is budget for ma#or caital! or
in"estment! e%enditures$
LIMITATIONS O( T7E STUDY
Since the study co"ers only 9enerics di"ision of Dr$ +eddy,s :aboratories :imited!
it does not reresent the o"erall scenario of the industry$
Few "alues taken are on facts basis$
The ro#ect is constraint to only one roosal$
This is a study conducted within a eriod of 58 days$
During this limited eriod of study! the study may not be a detailed! fully
fledged and utilitarian one in all asects$
The study contains some assumtion based on the demands of the analysisdone by the comany e%ecuti"es$
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INDUSTRY
PRO(ILE
PRO(ILE O( T7E INDUSTRY
7itor& o, t*e p*!r$!ce"tic!+ in%"tr&
The earliest drugstores date back to the middle Ages$ The first known drugstore was
oened by Arabian harmacists in Baghdad in ?88 A$D$! and many more soon began
oerating throughout the medie"al Islamic world and e"entually medie"al =uroe$ By the
0@th century! many of the drug stores in =uroe and 7orth America had e"entually
de"eloed into larger harmaceutical comanies$
Most of today.s ma#or harmaceutical comanies were founded in the late 0@th andearly 1th centuries$ ey disco"eries of the 0@1s and 0@2s! such as insulin and enicillin!
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became mass6manufactured and distributed$ Swit-erland! 9ermany and Italy had
articularly strong industries! with the U! US! Belgium and the 7etherlands following suit$
'ancer drugs were a feature of the 0@?s$ From 0@?C! India took o"er as the rimary
center of harmaceutical roduction without atent rotection
The harmaceutical industry entered the 0@Cs ressured by economics and a host of
new regulations! both safety and en"ironmental! but also transformed by new D7A
chemistries and new technologies for analysis and comutation$ Drugs for heart disease and
for AIDS were a feature of the 0@Cs! in"ol"ing challenges to regulatory bodies and a faster
aro"al rocess$
Diagram 0/ T*e Core o, P*!r$!ce"tic!+ B"ine
source/ <
T7E INDIAN P7ARMACEUTICAL INDUSTRY
&The Indian harmaceutical industry is a success story ro"iding emloyment for
millions and ensuring that essential drugs at affordable rices are a"ailable to the "ast
oulation of this sub6continent$)
The harmaceutical industry lays a crucial role in building a country,s human
caital$ In India! it is among the to science based industries with a wide range of
caabilities in the comle% field of Drug Technology and Manufacture$
Inter$e%i!te
Dr"2 Dico8er&
>
De8e+op$ent (ini*e% Do!2eAPI
Br!n%e% Generic
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Achie"ements of the industry during the last three decades ha"e been sectacular by
any standards! from a mere rocessing industry it has grown into a sohisticated sector with
ad"anced manufacturing technology! modern e4uiment and stringent 4uality control$
A highly organi-ed sector! t*e In%i!n P*!r$!c& In%"tr& is estimated to be worth
E 5$8 billion! growing at about C to @ ercent annually$ It ranks "ery high in the third world!
in terms of technology! 4uality and range of medicines manufactured$ From simle headache
ills to sohisticated antibiotics and comle% cardiac comounds! almost e"ery tye of
medicine is now made indigenously$
The Indian Pharmaceutical sector is highly fragmented with more than 1!
registered units$ It has e%anded drastically in the last two decades$ The leading 18
harmaceutical comanies control ? of the market with market leader holding nearly ?
of the market share$ It is an e%tremely fragmented market with se"ere rice cometition and
go"ernment rice control$
The &organi-ed) sector of India.s harmaceutical industry consists of 18 to 2
comanies! which account for ? ercent of roducts on the market! with the to 0 firms
reresenting 2 ercent$ *owe"er! the total sector is estimated at nearly 1! businesses!
some of which are e%tremely small aro%imately ?8 ercent of India.s demand for
medicines is met by local manufacturing$
In 1C! India.s to 0 harmaceutical comanies were R!n#!6&! Dr. Re%%&?
L!#or!torie! Cip+!' S"n P*!r$! In%"trie! L"pin L!#! A"ro#in%o P*!r$!!
G+!6oS$it*3+ine P*!r$!' C!%i+! 7e!+t*c!re' A8enti P*!r$! !n% Ipc! L!#or!torie
Indian6owned firms currently account for ? ercent of the domestic market! u from less
than 1 ercent in0@?$ In 1C! nine of the to 0 comanies in India were domestically
owned! comared with #ust four in 0@@5$
+ank 'omany +e"enue 1C
+s in crore<
0 +anba%y :aboratories +s$ 18!0@G$5C
1 Dr$ +eddy,s :aboratories +s$ 5!0G1$182 'ila +s! 2!?G2$?1
5 Sun Pharma Industries +s$ 1!5G2$8@
8 :uin :aboratories +s$ 1$108!81
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G Aurobindo Pharma +s$ 1!C$0@
? 9la%o Smithline Pharma +s$ 0!??2$50
C 'adila *ealthcare +s$ 0!G02$
@ A"entis Pharma +s$ @C2$C
0 Ica :aboratories +s$ @C$55
Source/ htt/HHsecials$rediff$comHmoneyH1CH#unH00sld0$htm
Table 1:
Top @ In%i!n P*!r$!ce"tic!+ Co$p!nie'
India.s otential to further boost its already6leading role in global generics
roduction! as well as an offshore location of choice for multinational drug manufacturers
seeking to curb the increasing costs of their manufacturing! +>D and other suort
ser"ices! resents an oortunity worth an estimated E5C billion in 1C$
India.s USE 2$0 billion harmaceutical industry is growing at the rate of 05 ercent
er year$ It is one of the largest and most ad"anced among the de"eloing countries$ 3"er
1! registered harmaceutical manufacturers e%ist in the country$
In%i!n P*!r$!ce"tic!+ E8o+"tion
P*!e I
E!r+& Ye!r
M!ret *!re %o$in!tion #& ,orei2n co$p!nie
Re+!ti8e !#ence o, or2!ni9e% In%i!n co$p!nie
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O8er)t*e)Co"nter Me%icine
The Indian market for o"er6the6counter medicines 3T's< is worth about E@5
million and is growing 1 ercent a year! or double the rate for rescrition medicines$ the
go"ernment is keen to widen the a"ailability of 3T's to outlets other than harmacies! and
the 3rgani-ation of Pharmaceutical Producers of India 3PPI< has called for them to be sold
in ost offices$
De"eloing an inno"ati"e new drug! from disco"ery to worldwide marketing! now
in"ol"es in"estments of around E0 billion! and the global industry.s rofitability is under
constant attack as costs continue to rise and rices come under ressure$ Pharmaceutical
roduction costs are almost 8 ercent lower in India than in (estern nations! while o"erall
+>D costs are about one6eighth and clinical trial e%enses around one6tenth of (estern
le"els$
&India.s largest6selling drug roducts are antibiotics! but the fastest growing are Diabetes!
cardio"ascular and central ner"ous system treatments)$
The industry.s e%orts were worth more than E2$?8 billion in 186G and they ha"e
been growing at a comound annual rate of 11$? ercent o"er the last few years! according
to the go"ernment.s draft 7ational Pharmaceuticals Policy for 1?! ublished in anuary
1?$ The Policy estimates that! by the year 10! the industry has the otential to achie"e
E11$5 billion in formulations! with bulk drug roduction going u from E0$?@ billion to
E8$G billion/ &India.s rich human caital is belie"ed to be the strongest asset for this
knowledge6led industry$ Jarious studies show that the scientific talent ool of 5 million
Indians is the second6largest =nglish6seaking grou worldwide! after the USA$)
<AT :
In Aril 18! the go"ernment introduced "alue6added ta% for the first time and
abolished all other ta%es deri"ed from sales of goods$ So far! 11 states ha"e imlemented
JAT! which is set at 5 ercent for medicines$ This led to harmaceutical wholesalers and
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retailers cutting their stocks dramatically! which se"erely affected drug manufacturers. sales
for se"eral months$
Opport"nitie
The main oortunities for the Indian harmaceutical industry are in the areas of/
♦ 9enerics including biotechnology generics<
♦ Biotechnology
♦ 3utsource and +>D outsourcing<$
♦ Pricing including contract manufacturing! information technology IT<
COMPANY PRO(ILE
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O<ER<IE- O( DR.REDDY’S LABORATORIES LIMITED
ABOUT T7E COMPANY
Dr$ +eddy,s :aboratories :imited Dr$ +eddy,s< together with its subsidiaries
collecti"ely! the comany< is a leading India6 based harmaceutical comany head 4uarter
in *yderabad! India$ The comany,s rincial areas of oeration are formulations! acti"e
harmaceutical ingredients and intermediates! generics! custom harmaceutical ser"ices!
critical care and biotechnology and drug disco"ery$ The comany,s rincial reached and
de"eloed and manufacturing facilities are located in Andhra Pradesh! India and 'uerna"aca
cuautla! Me%ico with rincial marketing facilities in India! +ussia! United States! United
ingdom! Bra-il! and 9ermany$ The comany,s shares trade on se"eral stock e%changes in
India and! since Aril 00! 10! on the 7KS= and in the US as of March 20! 1?$
Since Dr$ +eddy,s :aboratories incetion in 0@C5! it has chosen to walk the ath of
disco"ery and inno"ation in health science$ Dr$ +eddy,s has been a 4uest to sustain and
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imro"e the 4uality of life and Dr$ +eddy,s had more than three decades of creating safe
harmaceutical solution with the ultimate urose of making the world a healthier lace$ Dr$
+eddy,s cometencies co"er the entire harmaceutical "alue chain ; API and Intermediates!
Finished Dosages Branded and 9eneric< and 7'= research$
Dr$ +eddy,s research centre uses cutting6edge technology and has disco"ered
breakthrough harmaceutical solutions in select theraeutic areas$ In a short san of
oerations! Dr$ +eddy,s ha"e filed for more than ?8 atents$ Dr$ +eddy,s is the first Indian
comany to out6license an 7'= molecule for clinical trials$ To strengthen their research
arm! it has set u a research subsidiary! +eddy US Theraeutics Inc$! in Atlanta! USA
Dr$ +eddy,s e%ort API! branded formulations and generic formulations to
o"er G countries$The comany e%orts API! branded formulations and generic
formulations to o"er G countries$ The inherent strength lies in identifying rele"ant API and
formulations! and selling them at affordable rices across the world$ A few of our API such
as Nor,+o6!cin' Cipro,+o6!cin and Enro,+o6!cin en#oy a large customer base$ The finished
dosages ha"e an en"iable track record$ Some of them such as Nie' O$e9' En!$' St!$+o'
St!$+o Bet!' G!iet& and Cipro+et are among the to brands in India! and many ha"e
become household names in near6regulated countries too$
The generic formulations ha"e also become "ery oular in 4uality6conscious
regulated markets such as the US and =uroe$ All this has been ossible because of our
inno"ati"e and sustained marketing efforts$
“T*e co$p!n& et to pre!% o"r 0in2 ,"rt*er !n% to"c* $ore +i8e !cro t*e
2+o#e.
Dr$ +eddy,s is ha"ing si% manufacturing facilities Formulations Technical
3erations Plants< across India$
Bo+!r!$ 47&%er!#!%5 ) (TOI
B!c*"p!++& 47&%er!#!%5 / (TO II !n% (TO III
Y!n!$ 4 Ne!r 3!in!%!5 / (TO I<
B!%%i 47i$!c*!+ Pr!%e*5 / (TO <I
<i*!*!p!tn!$ 4An%*r! Pr!%e*5 / (TO <II
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BUSINESS DI<ISIONS O( DR REDDY’S LABORATORIES
Dr +eddy.s is a global harmaceutical owerhouse committed to rotecting and
imro"ing health and well6being$
T*e Dr. Re%%&’ Str!te2ic B"ine Unit. 4SBU5:
For management uroses! the 9rou is organi-ed on a worldwide basis into fi"e
strategic business units SBUs<! which are the reortable segments/
(or$"+!tion 4inc+"%in2 Critic!+ c!re !n% Biotec*no+o2&5F
Acti8e P*!r$!ce"tic!+ In2re%ient !n% Inter$e%i!te 4API5F
GenericF Dr"2 Dico8er& !n%
C"to$ P*!r$!ce"tic!+ Ser8ice 4CPS5.
BOARD AND MANAGEMENT
-*o+e)Ti$e Director
• Dr. Anji Re%%&
'hairman
• G < Pr!!%
=%ecuti"e Jice 'hairman and 'hief =%ecuti"e 3fficer
• S!ti* Re%%&
Managing Director > 'hief 3erating 3fficer
In%epen%ent > Non -*o+e Ti$e Director
Dr$ 3mkar 9oswami
+a"i Bhoothalingam
Dr$ Bruce :A 'arter
Anuam Puri
Ms$alana Moraria
$P$ Moreau$
T*e preent C(O o, Dr. Re%%&’ i Mr. U$!n2 Bo*r!
A"%itor
BS+ > 'o$ audited the financial statements of 1C ; 1@ reared under the Indian9AAP$
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The 'omany had also aointed PM9 as indeendent auditors for the urose of issuingoinion on the financial statements reared under the US 9AAP$
INERNATIONAL MAR3ET AREAS O( DR. REDDY’S LABORATORIES
AlbaniaBelarus 'ambodia
'ayman islands 'hina Dmr
9hana 9uyana *aiti
Ira4 amaica a-akhstan
enya yrgy-stan Malaysia
Mauritius Myanmar 3man
+omania +ussia Singaore
Sri :anka St$itts St$lucia
Sudan Tan-ania Trinidad
Uganda Ukraine U-bekistan
Jene-uela Jietnam Kemen
S7ARE CAPTIAL :
+s in Thousands<
PARTICULARS ) )H H) )
=4uity 5?@C1? 80005 @G5G@1 00?GGG8
Debt6long Term 8?G 5?0C8 505G5 210G5
Total Share 'aital 5C52 @?10@@ 02?@1@G 05@C1G@
2004 2005 2006 20070
200000
400000
600000
800000
1000000
1200000
Equity
Debt
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Gr!p* @:
So"rce
CURRENT (INANCIAL POSITION O( DR.REDDY’S LAB
S*!re*o+%in2 P!ttern on M!& J' J
Pro$oter 7o+%in2: No. O, S*!re K o, S*!re
Indi"idual *olding 5!5C@!5C5
1$GG
'omanies2@!@?C!21C 12$?2
S"# Tot!+55!5G?!C01
Indian FinancialInstitutions
11!815!8GC 02$2?
Banks 201!?5G $0@
Mutual Funds 0!?G5!1@2 G$2@
S"# Tot!+22!G0!G? 0@$@8
(orei2n 7o+%in2:
Foreign Institutional
In"estors
2C!@C8!@G5 12$05
7+Is2!@?!521 0$C5
AD+s H Foreign 7ational 15!@2!0@2 05$?C
S"# Tot!+GG!@CG!8C@ 2@$?G
Indian Public >
'ororates
12!501!?G@ 02$@
Tot!+0GC!5GC!??? 0$
T!#+e :
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So"rce
0< 1C 6 1@! the comany launched 00G new generic roducts! filed 00 new generic roduct
registrations and filed 88 DMFs globally$
1< The Board of Directors of the 'omany ha"e recommended a final di"idend of +s$
G$18 018< er e4uity share of +s$ 8H6 face "alue! sub#ect to the aro"al of
shareholders at the ensuing Annual 9eneral Meeting$
2< +e"enues in India increase to +s$ C$8 billion E0G? million< in FK@ from +s$C$0billions
E08C million<! reresenting a growth of 8$
5< 2G new roducts launched during the year$
8< 7ew roducts launched in the last 2G months contribute 05 to total re"enues in FK@
Dr. Re%%&’
E6tr!cte% ,ro$ t*e A"%ite% Inco$e St!te$ent ,or t*e &e!r en%e% M!rc* @'
J
(Y J (Y
P!rtic"+!r 45 4R.5 K 45 4R.5 4K5Gro0t*
KRe8en"e @'H HJ'@ @ J 'H @ J
'ost of re"enues G5C 21!@50 5? 5C5 15!8@C 5@ 25
Gro pro,it @ H' JJ ' @
Oper!tin2 E6pene
Selling! 9eneral >Administrati"e =%ensesa<
502 10!1 2 220 0G!C28 25 18
+esearch > De"eloment=%enses! net
?@ 5!2? G G@ 2!822 ? 05
(rite down of intangible assets G1 2!0G? 8 8@ 2!00 G 8
(rite down of goodwill 102 0!C8G 0G 1 @ 6
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3ther income<He%enses! net 8 182 C< 51< 0< 6
Tot!+ Oper!tin2 E6pene J' 'H H @
Re"+t ,ro$ oper!tin2
!cti8itie
4H5 4'5 45 H '@ )
Finance Incomeb< @< 5C1< 0< 20< 4@'H@5 2< ?<
Finance e%ensesc< 22 0!GGC 1 10 0!C 1 85
(in!nce e6pene' net @'@H 4@5 4@5 4@5 )
Share of rofitH loss< of e4uityaccounted in"estees
15 1 0!0
Pro,it #e,ore inco$e t!6 4J5 4'JJ5 4H5 8G 1!CG5 G 6
Income ta% e%ense 12< 0!0?2< 1< 0@ @?1 1 6
Pro,it ,or t*e perio% 4@5 4'@H5 45 2!C2G )
Attri#"t!#+e to:
=4uity holders of the comany 01< 8!0GC< ?< ?G 2!C5G C 6
Minority interest < 0< < 6
Pro,it ,or t*e perio% 4@5 4'@H5 45 'H )
(eighted a"erage no$ ofshares oHs
0G@ 0G@
Di+"te% EPS 4.H5 4.5 . .
=%change rate . .
Note
:
a< Includes amorti-ation charges of +s$ 0!82 million in FK@ and +s$0!8CC million in FKC
b< Includes fore% gain of +s$ ?2@ million in FKC
c< Includes fore% loss of +s$ G25 million in FK@$
(In millions)3e& B!+!nce S*eet Ite$
P!rtic"+!r A on @t M!r J A on @t M!r
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45 4R.5 45 4R.5
'ash and cash e4ui"alents 00 8!G2 05G ?!510
In"estments current > non6current< 0 82 @2 5!?82
Trade and other recei"ables 1C1 05!2GC 025 G!C12
In"entories 1G 02!11G 10@ 00!022Proerty! lant and e4uiment 50 1!CC0 22 0G!?G8
:oans and borrowings current > non6current< 2C? 0@!?0 2C 0@!281
Trade accounts ayable 00C 8!@C? 0? 8!51?
Total =4uity C1? 51!58 @20 5?!28
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Finance Asia Achie"ement Awards 1G
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CAPITAL BUDGETING
In modern times! the efficient allocation of caital resources is a most crucial function of
financial management$ This function in"ol"es organi-ation,s decision to in"est its resources
in long6term assets like land! building facilities! e4uiment! "ehicles! etc$ The future
de"eloment of a firm hinges on the caital in"estment ro#ects! the relacement of e%isting
caital assets! andHor the decision to abandon re"iously acceted undertakings which turns
out to be less attracti"e to the organi-ation than was originally thought! and di"erting the
resources to the contemlation of new ideas and lanning$ For new ro#ects such as
in"estment decisions of a firm fall within the definition of caital budgeting or caital
e%enditure decisions$
'aital budgeting refers to long6term lanning for roosed caital outlays and their
financing$ Thus! it includes both rising of long6term funds as well as their utili-ation$ It may!
thus! be defined the &firm,s formal rocess for ac4uisition and in"estment of caital)$ To be
more recise! caital budgeting decision may be defined as &the firms, decision to in"est its
current find more efficiently in long6term acti"ities in anticiation of an e%ected flow of
future benefit o"er a series of years$) The long6term acti"ities are those acti"ities which
affect firms oeration beyond the one year eriod$ 'aital budgeting is a many sided
acti"ity$ It contains searching for new and more rofitable in"estment roosals!
in"estigating! engineering and marketing considerations to redict the conse4uences of
acceting the in"estment and making economic analysis to determine the rofit otential of
in"estment roosal$
T*e #!ic ,e!t"re o, c!pit!+ #"%2etin2 %eciion !re:
0$ 'urrent funds are e%changed for future benefits$
1$ There is an in"estment in long term acti"ities$
2$ The future benefits will occur to the firm o"er series of years
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C!pit!+ #"%2etin2 4or in8et$ent !ppr!i!+5 is the lanning rocess used to determine
whether a firm.s long term in"estments such as new machinery! relacement machinery! new
lants! new roducts! and research de"eloment ro#ects are worth ursuing$ It is budget for
ma#or caital! or in"estment! e%enditures$
C!pit!+ #"%2etin2 proce
The caital budget rocess is usually a multi6ste rocess! including/
I%enti,ic!tion o, potenti!+ in8et$ent opport"nitie
Ae$#+in2 o, propoe% in8et$ent
In8entor& o, C!pit!+ AetF
De8e+opin2 ! C!pit!+ In8et$ent P+!n 4CIP5F
De8e+opin2 ! M"+ti)Ye!r CIPF
De8e+opin2 t*e (in!ncin2 P+!nF !n%'
I$p+e$entin2 t*e C!pit!+ B"%2et.
T&pe O, C!pit!+ B"%2etin2 Project:
Indeendent Pro#ects 6 Pro#ects unrelated to each other where a decision to accet
one ro#ect will not affect the decision to accet another Mutually =%clusi"e Pro#ects 6 The decision to choose only one ro#ect from the
many being considered$
T&pe O, C!pit!+ B"%2etin2 Deciion:
'aital Budgeting Decision for =%ansion uroses or
For relacement of e%isting assets$
I$port!nce o, C!pit!+ B"%2etin2:
Proer decision on caital budget will increase a firm,s "alue as well as
shareholders, wealth
'aital budgeting is critical to a firm as it hels the firm to stay cometiti"e as it is
e%anding its business like roosing to urchase e4uiments to roduce
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additional or new roducts! renting or owning remises for oening new branches!
etc$
G"i%e+ine In C!pit!+ B"%2etin2 An!+&i
As caital budgeting in"ol"es substantial initial outlay and years at least more
than one year< to rea the benefits! it is critically imortant to understand some of
the cardinal rinciles or rules or guidelines when erforming this caital
budgeting e%ercise$
Aend below in brief ertaining to/
GUIDELINESPRINCIPLES ON T7E CAPITAL BUDGETING ANALYSIS
G"i%e+ine No@/
Use 'ash Flows And 7ot Accounting Profit$ Kou need to ad#ust accounting rofit
to arri"e at the rele"ant cash flows .
G"i%e+ine No :
Focus on Incremental 'ash flows$ Simly it means that you should comare the
total cash flows of the comany with and without the ro#ect$ After determining
the incremental cash flows! you need to consider the ta% imlication on these
cash flows "i- focus only on &after6ta% incremental cash flows) in the caital
budgeting analysis$
G"i%e+ine No.:
'onsider any synergistic effect on the ro#ect$ For e%amle! when this new
roduct! the firm is going to introduce! will the sales of the e%isting roducts also
increase6 are they comlementary to each other$ In financial terms! therefore we
need to consider the sales of the new roducts lus the increase in sales of the
e%isting roducts$
G"i%e+ine No.:
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'onsider the oosite of rule no 2 re/ the e%isting sales might reduce with the
introduction of the new roducts$ Factored the loss of re"enue from such e%isting
roducts into the caital budgeting analysis$
G"i%e+ine No.:
Ignore sunk costs and consider only those costs which are rele"ant to the
ro#ects$
G"i%e+ine No.H:
Incororate any 7=T additional working caital re4uirements into the caital
budgeting analysis for e%amle the need to ha"e additional in"entories! accounts
recei"ables and or cash increase in current assets< minus additional financing
from accounts ayable! bank borrowings current liabilities< .
G"i%e+ine No.:
=%cludes Interest Payments as this is already reflected in the discount rate this
rate imlicitly accounts for the cost of raising the financing<$
APPRAISAL CRITERIA
A number of criteria ha"e been e"ol"ed for e"aluating the financial desirability of a
ro#ect$ The imortant in"estment criteria! classified into two broad categoriesLnon6
discounting criteria and discounting criteriaLare shown in e%hibit subse4uent sections
describe and e"aluate these criteria in some detail/
These criteria can be classifies as follows/
="aluation 'riteria
7on6 Discounting 'riteria Discounting 'riteria
Payback Accounting +ate Profitability Internal 7et Present AnnualPeriod of +eturn Inde% +ate of Jalue 'aital A++< PI< +eturn 7PJ< 'harge
I++<
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Co$p!rin2 Met*o% o, <!+"!tion "n%er <!rio" Scen!rio
Met*o% In%epen%entProject
M"t"!++& E6c+"i8eProject
C!pit!+R!tionin2
Sc!+e Di,,erence
I++ Accetable 7ot Accetable 7ot Accetable 7ot Accetable
MI++ Accetable 7ot Accetable 7ot Accetable 7ot Accetable
7PJ Accetable Accetable Accetable Accetable
Payback 7ot Accetable 7ot Accetable 7ot Accetable 7ot Accetable
Discounted 7ot Accetable 7ot Accetable 7ot Accetable 7ot Accetable
Many formal methods are used in caital budgeting! including the techni4ues such as
Dico"ntin2 Criteri!
Net Preent <!+"e
Pro,it!#i+it& In%e6 or Bene,it Cot R!tio
Intern!+ R!te o, Ret"rn
Mo%i,ie% Intern!+ R!te o, Ret"rn
E1"i8!+ent Ann"it& or Ann"!+ C!pit!+ C*!r2e
These methods use the incremental cash flows from each otential in"estment! or ro#ect$
Techni4ues based on accounting earnings and accounting rules are sometimes used 6 though
economists consider this to be imroer 6 such as the accounting rate of return! and return
on in"estment$
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Non)Dico"ntin2 Criteri!
Simlified and hybrid methods are used as well! such as
P!&#!c Perio%
Dico"nte% P!&#!c Perio%
A8er!2e r!te o, Ret"rn
Dico"ntin2 Criteri!
@. Net Preent <!+"e
=ach otential ro#ect.s "alue should be estimated using a discounted cash flow D'F<
"aluation! to find its net resent "alue 7PJ<$ First alied to 'ororate Finance by oel
Dean in 0@80<$ This "aluation re4uires estimating the si-e and timing of all of the
incremental cash flows from the ro#ect$ These future cash flows are then discounted to
determine their resent "alue$ These resent "alues are then summed! to get the 7PJ$ See
also Time "alue of money$ The 7PJ decision rule is to accet all ositi"e 7PJ ro#ects in
an unconstrained en"ironment! or if ro#ects are mutually e%clusi"e! accet the one with the
highest 7PJ 9=<$
The 7PJ is greatly affected by the discount rate! so selecting the roer rate 6 sometimes
called the hurdle rate 6 is critical to making the right decision$ The hurdle rate is the
minimum accetable return on an in"estment$ It should reflect the riskiness of the
in"estment! tyically measured by the "olatility of cash flows! and must take into account
the financing mi%$ Managers may use models such as the 'APM or the APT to estimate a
discount rate aroriate for each articular ro#ect! and use the weighted a"erage cost of
caital (A''< to reflect the financing mi% selected$ A common ractice in choosing a
discount rate for a ro#ect is to aly a (A'' that alies to the entire firm! but a higher
discount rate may be more aroriate when a ro#ect.s risk is higher than the risk of the
firm as a whole$ The formula is as follows/
PJ N 0
0Or<n
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(here PJ N Present Jalue
r N rate of interest H discount rate
n N number of years
Deciion R"+e
A. C!pit!+ R!tionin2 it"!tion
• Select ro#ects whose 7PJ is ositi"e or e4ui"alent to -ero$
• Arrange in the descending order of 7PJs$
• Select Pro#ects starting from the list till the caital budget allows$
B. No c!pit!+ R!tionin2 Sit"!tion
• Select e"ery ro#ect whose 7PJ N
C. M"t"!++& E6c+"i8e Project
• Select the one with a higher 7PJ$
E6!$p+e
Assuming that the cost of caital is G for a ro#ect in"ol"ing a lumsum cash outflow of
+s$C!1 and cash inflow of +s$1! er annum for 8 years! the 7et Present Jalue
calculations are as follows/
a< Present "alue of cash outflows +s$C1 b< Present "alue of cash inflows
Present "alue of an annuity of +s$0 at G for 8 yearsN5$101
Present "alue of +s$1 annuity for 8 years N 5$101 Q 1 N +s$C515
c< 7et resent "alue N resent "alue of cash inflows 6 resent "alue of cash
outflows N C515 6C1 N +s$115
Since the net resent "alue of the ro#ect is ositi"e +s$115<! the ro#ect is acceted$
. Pro,it!#i+it& In%e6
Profitability inde% identifies the relationshi of in"estment to ayoff of a roosed ro#ect$
The ratio is calculated as follows/
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Pro,it!#i+it& In%e6 Q P< o, ("t"re C!* (+o0 P< o, Initi!+ In8et$ent
Profitability Inde% is also known as Pro,it In8et$ent R!tio! abbre"iated to P$I$ and <!+"e
In8et$ent R!tio J$I$+$<$ Profitability inde% is a good tool for ranking ro#ects because it
allows you to clearly identify the amount of "alue created er unit of in"estment$
A ratio of 0 is logically the lowest accetable measure on the inde%$ Any "alue lower than
one would indicate that the ro#ect.s PJ is less than the initial in"estment$ As "alues on the
rofitability inde% increase! so does the financial attracti"eness of the roosed ro#ect$
R"+e for selection or re#ection of a ro#ect/
• If PI 0 then accet the ro#ect
• If PI R 0 then re#ect the ro#ect
Deciion R"+e
A. C!pit!+ R!tionin2 Sit"!tion
• Select all ro#ects whose rofitability inde% is greater than or e4ual to 0$
• +ank them in descending order of their rofitability indices$
• Select ro#ects starting from the to of the list till the caital budget
B. No C!pit!+ R!tionin2 Sit"!tion
• Select e"ery ro#ect whose PI N 0$
C. M"t"!++& E6c+"i8e Project
• Select the ro#ect with higher PI$
E6!$p+e
• A new machine costs +s$C!1 and generates cash inflow after ta%<er annum of
+s$1! during its life of 8 years$ :et us assume that the cost of caital for the
comany is G$
• The resent "alue of the cash inflows at G discount rate is 1 Q 5$101 N C515$
The resent "alue of outflow is C!1$ The rofitability inde% is C515HC1< N0$1?$
• The rofitability inde% of 0$1? leads to an accetance decision of the
ro#ect! since it is greater than 0$
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. Intern!+ R!te o, Ret"rn
The intern!+ r!te o, ret"rn I++< is defined as the discount rate that gi"es a net resent
"alue 7PJ< of -ero$ It is a commonly used measure of in"estment efficiency$
The I++ method will result in the same decision as the 7PJ method for non6mutually
e%clusi"e< ro#ects in an unconstrained en"ironment! in the usual cases where a negati"e
cash flow occurs at the start of the ro#ect! followed by all ositi"e cash flows$ In most
realistic cases! all indeendent ro#ects that ha"e an I++ higher than the hurdle rate should
be acceted$ 7e"ertheless! for mutually e%clusi"e ro#ects! the decision rule of taking the
ro#ect with the highest I++ 6 which is often used 6 may select a ro#ect with a lower 7PJ$
3ne shortcoming of the I++ method is that it is commonly misunderstood to con"ey the
actual annual rofitability of an in"estment$ *owe"er! this is not the case because
intermediate cash flows are almost ne"er rein"ested at the ro#ect.s I++ and! therefore! the
actual rate of return is almost certainly going to be lower$ Accordingly! a measure called
Modified Internal +ate of +eturn MI++< is often used$
Deciion R"+e
A. C!pit!+ R!tionin2 Sit"!tion
• Select those ro#ects whose I++ r< N k! where k is the cost of caital$
• Arrange all the ro#ects in the descending order of their Internal +ate of +eturn$
• Select ro#ects from the to till the caital budget allows$
B. No C!pit!+ R!tionin2 Sit"!tion
• Accet e"ery ro#ect whose I++ r< N k! where k is the cost of caital$
C. M"t"!++& E6c+"i8e Project
• Select the one with higher I++$
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E6!$p+e
• In the resent case this is C1 di"ided by 1 N 5$0
The interest factor 5$0 for a 8 year ro#ect corresonds to a discount rate of ?$ So the I++
of the ro#ect is ?$ An interest factor of 5$0 indicates that the resent "alue of one +uee
annuity for 8 years at ? is e4ui"alent to 5 ruees and ten aise $
• The resent "alue of +s$1! annuity is 5$0 Q 1 N C1
• The resent "alue of cash inflows N +s$C1 and the resent "alue of cash outflow N
+s$C1$
• At ? the resent "alue of cash inflows is e4ui"ale to the resent "alue of cash
outflows$
• *ence ? is the I++ of the ro#ect$
. Mo%i,ie% Intern!+ R!te o, Ret"rn
MI++ is the discount rate that makes the future "alue of the ro#ect e4ual to its initial cost$
MI++ re4uires a rein"estment rate$
There are 2 basic stes of the MI++/
0< =stimate all cash flows as in I++$
1< 'alculate the future "alue of all cash inflows at the last year of the ro#ect,s life$
2< Determine the discount rate that causes the future "alue of all cash inflowsdetermined in ste 1! to be e4ual to the firm,s in"estment at time -ero$ This discount
rate is known as the MI++$
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Deciion r"+e
Take the ro#ect if MI++ is larger than the re4uired rate$
Di!%8!nt!2e
MI++ cannot rank mutually e%clusi"e ro#ects$
. E1"i8!+ent Ann"it& Met*o%
The e4ui"alent annuity method e%resses the 7PJ as an annuali-ed cash flow by di"iding it
by the resent "alue of the annuity factor$ It is often used when assessing only the costs of
secific ro#ects that ha"e the same cash inflows$ In this form it is known as the e4ui"alent
annual cost =A'< method and is the cost er year of owning and oerating an asset o"er its
entire lifesan$
It is often used when comaring in"estment ro#ects of une4ual lifesan$ For e%amle if
ro#ect A has an e%ected lifetime of ? years! and ro#ect B has an e%ected lifetime of 00
years it would be imroer to simly comare the net resent "alues 7PJs< of the two
ro#ects! unless the ro#ects could not be reeated$
The use of the =A' method imlies that the ro#ect will be relaced by an identical ro#ect$
Re!+ Option
+eal otions analysis has become imortant since the 0@?s as otion ricing models ha"e
gotten more sohisticated$ The discounted cash flow methods essentially "alue ro#ects as if
they were risky bonds! with the romised cash flows known$ But managers will ha"e many
choices of how to increase future cash inflows! or to decrease future cash outflows$ In other
words! managers get to manage the ro#ects 6 not simly accet or re#ect them$ +eal otions
analyses try to "alue the choices 6 the otion "alue 6 that the managers will ha"e in the
future and adds these "alues to the 7PJ$
R!ne% Project
The real "alue of caital budgeting is to rank ro#ects$ Most organi-ations ha"e many
ro#ects that could otentially be financially rewarding$ 3nce it has been determined that a
articular ro#ect has e%ceeded its hurdle! then it should be ranked against eer ro#ects e$g$
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6 highest Profitability inde% to lowest Profitability inde%<$ The highest ranking ro#ects
should be imlemented until the budgeted caital has been e%ended$
Non)Dico"ntin2 Criteri!
@. P!&#!c Perio%
Payback eriod is the time duration re4uired to recou the in"estment committed to a
ro#ect$ Business enterrises following ayback eriod use stiulated ayback eriod!which acts as a standard for screening the ro#ect$ 3f Technology Madras
Co$p"t!tion o, P!&#!c Perio%
(hen the cash inflows are uniform the formula for ayback eriod is
'ash 3utlay of the Pro#ect or 3riginal 'ost of the Asset
Annual 'ash Inflow
• (hen the cash inflows are une"en! the cumulati"e cash inflows are to be arri"ed at
and then the ayback eriod has to be calculated through interolation$
• *ere ayback eriod is the time when cumulati"e cash inflows are e4ual to the
outflows$ i$e$!
In,+o0 Q O"t,+o0
P!&#!c Reciproc!+ R!te
• The ayback eriod is stated in terms of years$ This can be stated in terms of
ercentage also$ This is the ayback recirocal rate$
• +ecirocal of ayback eriod N 0Hayback eriod % 0
A. C!pit!+ R!tionin2 Sit"!tion
• Select the ro#ects which ha"e ayback eriods lower than or e4ui"alent to the
stiulated ayback eriod$
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• Arrange these selected ro#ects in increasing order of their resecti"e ayback
eriods$
• Select those ro#ects from the to of the list till the caital budget is e%hausted$
Deciion R"+e
M"t"!++& E6c+"i8e Project
In the case of two mutually e%clusi"e ro#ects! the one with a lower ayback eriod is
acceted! when the resecti"e ayback eriods are less than or e4ui"alent to the stiulated
ayback eriod$
Deter$in!tion o, Stip"+!te% P!&#!c Perio%
• Stiulated ayback eriod! broadly! deends on the nature of the businessHindustry
with resect to the roduct! technology used and seed at which technological
changes occur! rate of roduct obsolescence etc$
• Stiulated ayback eriod is! thus! determined by the management.s caacity to
e"aluate the en"ironment "ia6a6"ia the enterrise.s roducts! markets and distribution
channels and identify the ideal6business design and secify the time target$
A%8!nt!2e o, P!&#!c Perio%
• It is easy to understand and aly$ The concet of reco"ery is familiar to e"ery
decision6maker$
• It is cost effecti"e$ It can be used e"en by a small firms ha"ing limited manower
that is not trained in any other sohisticated techni4ues$
• The ayback eriod measures the direct relationshi between annual cash inflows
from a roosal and the net in"estment re4uired$
• The ayback eriod also deals with risk$ The ro#ect with shorter ayback eriod
will be usually less risky
• Business enterrises facing uncertainty 6 both of roduct and technology 6 will
benefit by the use of ayback eriod method since the stress in this techni4ue is on
early reco"ery of in"estment$ So enterrises facing technological obsolescence and
roduct obsolescence 6 as in electronicsHcomuter industry 6 refer ayback eriod
method$
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• :i4uidity re4uirement re4uires earlier cash flows$ *ence! enterrises ha"ing high
li4uidity re4uirement refer this tool since it in"ol"es minimal waiting time for
reco"ery of cash outflows as the emhasis is on early recoument of in"estment$
Di!%8!nt!2e o, P!&#!c Perio%
The time "alue of money is ignored$
But this drawback can be set right by using the discounted ayback eriod method$
The discounted ayback eriod method looks at reco"ery of initial in"estment after
considering the time "alue of inflows$
It ignores the cash inflows recei"ed beyond the ayback eriod$ In its emhasis on
early reco"ery! it often re#ects ro#ects offering higher total cash inflow$
In"estment decision is essentially concerned with a comarison of rate of return
romised by a ro#ect with the cost of ac4uiring funds re4uired by that ro#ect$
Payback eriod is essentially a time concet it does not consider the rate of return$
E6!$p+e
There are two ro#ects ro#ect a and b< a"ailable for a 'omany! with a life of G
years each and re4uiring a caital outlay of rs$@!H6 each and additional working
caital of rs$0H6 each$The cash inflows comrise of rofit after ta% O Dereciation O Interest Ta%
ad#usted< for fi"e years and sal"age "alue of +s$8H6 for each ro#ect lus working
caital released in the Gth year$ This comany has rescribed a hurdle ayback
eriod of 2 years$ (hich of the two ro#ects should be selectedV
E6!$p+e ) D!t!
Pro#ect A'umulati"e'ash Inflowsof Pro#ect A
Pro#ect B'umulati"e'ash Inflowsof Pro#ect B
Kear 0 2!2!
1!1!
Kear 1 2!8G!8
1!85!8
Kear 2 2!80!
1!8?!
Kear 5 0!8 00! 1!8 @!8
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Kear 8 0!802!
2!01!8
Kear G 2!0G!
8!80C!
PaybackPeriod
2 years 5 years > 1months
E6!$p+e
W Payback eriod for Pro#ect A N 2 years cumulati"e cash inflows N outflows<
W Payback eriod for Pro#ect B N 5 years O 8H2 N 5 years and 1 months$
7ote/ Interolation techni4ue is used here to identify the e%act eriod at which cumulati"ecash inflows will be e4ual to outflows$ The amount re4uired to e4uate is +s$8! while the
returns from the 8th year is 2!$ *ence the addition time duration re4uired to comute the
ayback eriod is 8H2< % 01 which is 1 months$ The interolation techni4ue is used
based on the assumtion that cash inflows accrue uniformly throughout the year$<
T*e in8et$ent %eciion 0i++ #e to c*ooe Project A 0it* ! p!&#!c perio% o, &e!r
!n% reject Project B 0it* ! p!&#!c perio% o, &e!r !n% $ont*.
. Dico"nte% P!&#!c Perio%
In in"estment decisions! the number of years it takes for an in"estment to reco"er its initial
cost after accounting for inflation! interest! and other matters affected by the time "alue of
money! in order to be worthwhile to the in"estor $ It differs slightly from the ayback eriod
rule! which only accounts for cash flows resulting from an in"estment and does not take
into account the time "alue of money$ =ach in"estor determines hisHher own discounted
ayback eriod rule and! as such! it is a highly sub#ecti"e rule$ In general! howe"er! short6
term in"estors use a short number of years L or e"en months L for their discounted ayback eriod rules! while long6term in"estors measure their rules in years or e"en
decades$
. Acco"ntin2 R!te o, Ret"rn
Accounting rate of return is the rate arri"ed at by e%ressing the a"erage annual net rofit
after ta%< as gi"en in the income statement as a ercentage of the total in"estment or
a"erage in"estment$ The accounting rate of return is based on accounting rofits$
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Accounting rofits are different from the cash flows from a ro#ect and hence! in many
instances! accounting rate of return might not be used as a ro#ect e"aluation decision$
Accounting rate of return does find a lace in business decision making when the returns
e%ected are accounting rofits and not merely the cash flows$
Co$p"t!tion o, Acco"ntin2 R!te o, Ret"rn
The accounting rate of return using total in"estment$
or
Sometimes a"erage rate of return is calculated by using the following
formula/
N 7et Profit After Ta%
A"erage In"estment
(here a"erage in"estment N total in"estment di"ided by 1
Deciion R"+e
A. C!pit!+ R!tionin2 Sit"!tion
0 W Select the ro#ects whose rates of return are higher than the cut6off rate$
1 W Arrange them in the declining order of their rate of return$
2 W Select ro#ects starting from the to of the list till the caital a"ailable is e%hausted$
B. No C!pit!+ R!tionin2 Sit"!tion
Select all ro#ects whose rate of return are higher than the cut6off rate$
C. M"t"!++& E6c+"i8e Project
Select the one that offers highest rate of return$
Acco"ntin2 R!te o, Ret"rn / A%8!nt!2e
• It Is =asy To 'alculate$
• The Percentage +eturn Is More Familiar To The =%ecuti"es$
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Acco"ntin2 R!te o, Ret"rn / Di!%8!nt!2e
• The definition of cash inflows is erroneous it takes into account rofit after ta% only$
It! therefore! fails to resent the true return$• Definition of in"estment is ambiguous and fluctuating$ The decision could be biased
towards a secific ro#ect! could use a"erage in"estment to double the rate of return
and thereby multily the chances of its accetances$
• Time "alue of money is not considered here$
E6!$p+e
There are two ro#ects Pro#ect A and B< a"ailable for a business enterrise! with a
life of G years each and re4uiring a caital outlay of +s$@!H6 each and additional
working caital of +s$0H each$ The cash inflows comrise of rofit after ta% O
dereciation O interest Ta% ad#usted< for fi"e years and sal"age "alue of +s$8H6 for
each ro#ect at year G lus working caital released also in the Gth year$
Net Pro,it A,ter T!6
Ye!r Project A Project B
0 0!8C 1C
1 1!C 0!C
2 1!C 0!C
5 C 0!C
8 C 1!8C
G C 0!CC
Total 7et Profit After Ta% 8!@C ?!@C
A"erage Annual 7et Profit 8!@CHG N @@G$G ?!@CHG N 022
Taking into account the working caital released in the Gth year and sal"age "alue of the
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in"estment! the total in"estment will be 0!6 0!8< +s$C8 and the a"erage in"estment
will be C8H1< +s$518 for each ro#ect$
The rate of return calculations are/
7et rofit after ta% as a ercentage of total in"estment
Pro#ect APro#ect B
022 Q 0 N 08$G
C8
The in"estment decision will be to select Pro#ect B since its rate of return is higher than that
of Pro#ect A if they are mutually e%clusi"e$ If they are indeendent ro#ects both can be
acceted if the minimum re4uired rate of return is 00$? or less$
Di,,ic"+tie in C!pit!+ B"%2etin2
!5 Gener!+ %i,,ic"+tie:
=nsuring that forecasts are consistent across deartments<
• =liminating reducing< conflicts of interest
• +educing forecast bias/ the roortion of roosed ro#ects that ha"e a ositi"e 7PJ
is indeendent of the estimated oortunity cost of caital$
• Bottom6u and to6down lanning is necessary$
• 'ontrol ro#ects in rogress! Post6audit afterwards
• Try hard to measure incremental cash flows66when you can
• ="aluate erformance/ actual "ersus ro#ected actual "ersus absolute standard of the
true cost of caital
#5 Me!"re$ent pro#+e$:
(hile calculating the NP<' IRR' PAY BAC3 PERIOD' AND PRO(ITABILITY
INDE;' we ha"e to be "ery much careful with the calculations "alues throw it is a "erydifficult #ob to remember many "alues at a time but we ha"e to be care full because it willeffect on the total outut of ro#ect in decision making$
Ri !n% Uncert!int&:
Different caital in"estment roosals ha"e different degrees of risk and uncertainly there isa slight difference between risk and uncertainty risk in"ol"es situations in which the
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robabilities of a articular e"ent occurring are known where as in uncertainty these robabilities are unknown$
In many cases these two terms are used inter changeably$ +isk in caital in"estments may be due to the general economic conditions cometition! technological de"eloments!consumer references etc$
3ne to these reasons the re"enues costs and economic life of a articular in"estment are notcertain$ (hile e"aluating caital in"estment roosals a roer ad#ustment should therefore
be made for risk and uncertainty
0
An!+&i o, ! Ne0 Project 0it* t*e *e+p o, C!pit!+ B"%2etin2 Proce.
Proosed caital/ H.@ millions
Di"ided in 1 hases
P*!e @ is roosed from J and is assumed to be caitali-ed on @@ and
P*!e is roosed from @ and is assumed to be caitali-ed on @$
6 about R. . millions slited in 1 years for the p*!e @ . million er year 5.
6 about R. . millions in the p*!e .
(ith an e%ected rate of return of 05 starting after 1 years$
Production lant is at Baddi *imachal Pradesh<
The ro#ect is about the roducing 1 roducts
6 Jials and6 Syringes$
The caital is di"ided between both the roduct
) R..@ millions in "ials and) R$ millions in syringes$
=%ecting annual a"erage roduction is/ 0C!! from FK 00 to FK 0?<$
Sales and "olumes are taken as er the BF+3( strategic lan$
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Xuotations from 9land! for the following roducts/ Indian manufacturing charges<
:i4uid Jial Yoledronic Acid< $0.75
:yo Jial Amifostin< $1.00
PFS =no%aarin 7a< $0.50
+oyalties will be ignored in case of de"eloment of the roduct$
The cost includes the urchase of assets for the roduction urose and the dereciation is
on the straight line method$
Freight cost taken at 8 g er ack of 0 "ials at +s 1Her kg to US weight$ S9>A costs taken in P>: as 1 on sales$
=ffecti"e Ta% rate is considered at C$C$
First let us see if the roduct is gi"en on contract then what is the cost that Dr$ +eddy,s is
going to incur/
Contr!ct M!n",!ct"rin2 +s$ Per Unit<
T&pe o, <i!+ E1"i8!+ent InjectionUSD
CCCC 4In R5
(rei2*
t
Ro&!+t&
4R5
7on:yohilised
Yoledronic Acid ; :i4 $?8 2$ 0$ 6
:yohilised Amifostin ; :yo 0$ 5$ 0$ 6
PrefilledSyringes
=no%aarin 7a $8 1$ 0$ 6
'' N 'on"ersion 'ost
Total cost incurred would be/ R. @
And if the roduct is manufactured at Dr$ +eddy,s! then what is the cost the organi-ation isgoing to incur/
Eti$!te% in Ne0 Project +s$ er Unit<
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T&pe o, <i!+E1"i8!+ent
Injection
CC Depreci!tion (rei2*t Tot!+
CC
S!8in2
7on :yohilisedYoledronic Acid ;
:i4
8$0C 6 0$ 08$0C 15$C1
:yohilised Amifostin ; :yo 8$0C 6 0$ 08$0C 25$C1
Prefilled Syringes =no%aarin 7a8$0C 6 0$ 08$0C 05$C1
'ost incurred would be/ R. .
From the abo"e table! we can obser"e that if Dr$ +eddy,s go for manufacturing the roduct
then they ha"e a total sa"ings of R..H.
So its beneficial for the comany to go for manufacturing the roduct$
Liquid Lypo Pfs0
10
20
30
40
50
60
Type of Vial LL Location Equivalent Injection USD CC CC (In Rs) Frie!t Royalty (Rs) Equivalent Injection
"rices
For manufacturing the roduct the following assets are re4uired/
Project Cot o, Non C&to Inject!#+e > Pre,i++e% S&rin2e
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4R. In L!*5
Decription A$o"nt 4P* @5 A$o"nt 4P* 5 C+! o, Aet
'i"il 0!001 0 Buildings
Partitions 8 6 Buildings
*JA' 5 6 Plant > Mach=4uiments 1!50 G85 Plant > Mach
Mechanical 1 6 Plant > Mach
=lectrical 1? 6 =lectrical =4ui
Utility 018 2 Plant > Mach
Jalidation ? 0 Plant > Mach
Instruments 6 X' 0 :ab =4ui
+e"enue 0 6 Buildings
+e"enue ; X' 1 6 :ab =4ui
'onsultant Fees 08 Buildings
'ontingency 18 2 Plant > Mach
Tot!+ '
Depreci!tion o, Non C&to Inject!#+e
Dereciation is calculated on Straight :ine Method+s$ In Millions<
Phase 0 Phase 1
C+!
Po+ic&
4Li,e in
Ye!r5
Li,e A$o"nt
Dep
per
&e!r
A$o"ntDep per
&e!r
Buildings1 to 8 28
0CG$15 8$21 0$
$1@
Plant > Mach2 to 08 @
258$8 2C$2@ ?1$5
C$5
=lectrical=4ui 8 to 08 0
1?$ 1$? 6 6
:ab =4ui8 to 08 0
01$ 0$1 6 6
Tot!+
. .H@ .
.
Total Dereciation for the assets as er their hases/
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Ye!r (Y
J
(Y
@
(Y
@@
(Y @ (Y
@
(Y
@
(Y
@
(Y @H (Y
@
Tot!+
De$ in Kear Phase 0<5?$G0
5?$G0 5?$G0
5?$G0
5?$G0
5?$G0 5?$G0
222$1?
De$ in Kear Phase1<
C$22 C$22 C$22 C$22 C$22 50$G8
Total De$ in Mln+s<
6 6 5?$G0
5?$G0 88$@5
88$@5
88$@5
88$@5 88$@5
2?5$@1
Con8erion Cot !t M!n",!ct"re i ! ,o++o0:
The Actual Total cost of the roduct i$e! The 'ost Sheet<
Actual Material ; Imorted $?
Actual Material ; India 0$82
Actual Packing ; Imorted 1$58
Actual Packing ; India 2$8?
Actual Inut Ta%es $22
Actual :anded cost $1
Actual Subcontractor $
Actual Material C$08
Actual Direct Dereciation $@5Actual Direct Manower $8@
Actual =TF $C
Actual *JA' $02
Actual Maintenance $C8
Actual 3ther Direct $1C
Actual 3ther Utility $05
Actual Power $C
Actual Xuantity $01
Actual Steams $
Actual 3"erhead 2$10
Actual Total 'ost 00$2G
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Non C&to Inject!#+e Project / CC Projection
M!npo0er Cot Co$p"t!tion
7o$ 3f eole 0 8 er shift Q 1 Shifts
A"erage salary erhead 18!
Payroll 'ost $a$ 18!!
Production 0C!!A"erage annual roduction from fy 00 to fy0?
Manower cost erunit 0$2@
S"$$!r& o, Con8erion Cot
Cot Co$ponent (Y
@@
(Y
@
(Y
@
(Y
@
(Y
@
(Y
@H
(Y
@Manower 'ost 0$2@ 0$8 0$G1 0$?8 0$C@ 1$5 1$1
Utility cost 0$8G 0$G5 0$?1 0$C0 0$@ 0$@@ 1$@
Dereciation 1$21 1$21 1$21 1$21 1$21 1$21 1$21
3thers 6 6 6 6 6 6 6
X'HXA 5$1 1$?2 0$08 $@8 $?1 $?0 $G@
Con8erion Cot 4per <i!+5 J.H .@J H.@ H. H. .H .
CC 4per <i!+5 e6c+ %ep .@ . .J .@ . . .J
Manower 'ost ; C increment year o"er year
Utility 'ost ; 8 inflation year o"er year
Cot o, ,rei2*t per <i!+
(eight er "ial
Fill :i4uid (eight 08 9ramsBottle weight 1 9rams
Shiers weight 08 9rams
Total weight er "ial 8 9rams
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'ost er kg by air to US 1 +s$ Per kg
Freight cost er "ial 0 +s$ Per bottle
Co$p"t!tion o, t*e project:
A 'omarison of 'aital Budgeting Techni4ues +s$ in Millions<
<i!+ (!ci+it& ) P!&#!c perio% co$p"t!tion
Outflow Inflow Tax
Year Outflow
LiquidVials
LypoVials P! !"#
et Inlow
%& '0(
%is)ounted In flow
&u*%is)ntd In
flow
1 +,0.-7
/+,0.-7
1.00 /+,0.-7
/+,0.-7
+ +,0.-7
/+,0.-7
1.00 /+,0.-7
/5+0.7
- 1.00 /5+0.7
1-.22 +.5 11.75 152.03 1.00 152.03 /-,+.,5
5 57.0 12-.+ 7.50 15.3- 13., 1.00 13., /+1-.13
, ++5.0, 12.35 +,.3 +70.35 1.00 +70.35 57.7,
7 +52.+7 +.1+ --.+5 -15.,5 1.00 -15.,5 -7-.1
2 -37.0+ ,,.,0 5-.- 517.05 1.00 517.05 230.5
3 1,.23 70.7+ +2.0- 515., 1.00 515., 140,.03
10 -7.-, 7.+ +3.-5 50.35 1.00 50.35 1437.0
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P!&#!c Perio% i &e!r $ont*
Pre (i++e% S&rin2e (!ci+it& ) P!&#!c perio% co$p"t!tion
Kear 3utflow+s$ Mn
In flow+s$ Mn on 7on:yo
In flow+s$ Mn on
:yo
In
flow+s$
Mn onPFS
7et InFlow
D'FZ
DiscntdIn flow
'umDiscntdIn flow
18$ 18$< 0$ 18$< 18$<
0 18$ 6 18$< 0$ 18$< 8$<
1 6 6 0$ 6 8$<
2 0$ 0$ 0$ 0$ 5@$<
5 18$ @$1 08$C< 0$ 08$C< G5$C<
80$
5 0$5 0$ 0$5 28$15G
052$G? 052$G? 0$ 052$G? 0?C$@0
?10@$5
1 10@$51 0$ 10@$51 2@C$22
C11C$C
C 11C$CC 0$ 11C$CC G1?$10
@ 12C$8C 12C$8C 0$ 12C$8C CG8$?@
P!&#!c i Ye!r Mont*
Tot!+ Project ) P!&#!c perio% co$p"t!tion
Outflow Inflow Tax
Year Proe)t&ost
LiquidVials
LypoVials
P! !"# et Inlow
%& '0(
%is)ntdIn flow
&u*%is)ntd In
flow
1 +25.-7
/+25.-7
1.00 /+25.-7
/+25.-7
+ +25.-7
/+25.-7
1.00 /+25.-7
/570.7
-
1.00
/570.7
1-.22 +.5 1.00 11.75 153.03 1.00 153.03 /11.,55
2+.0 12-.+ 7.50 3.+0 15.3- 1--.,, 1.00 1--.,, /+77.33,
++5.0, 12.35 100.0 +,.3 -70.32 1.00 -70.32 3-.007
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+52.+7 +.1+ 1-.,7 --.+5 53.-+ 1.00 53.-+ 55+.-1
2
-37.0+ ,,.,0 +13.+ 5-.- 7-,.7 1.00 7-,.7 14+22.723
1,.23 70.7+ ++2.22 +2.0- 7.51 1.00 7.51 +40--.-010
-7.-, 7.+ +-2.52 +3.-5 773.5 1.00 773.5 +421+.2-
P!&#!c perio%:
The C!* O"t,+o0 is the ro#ect cost i$e$! the in"estment done by the comany$
C!+c"+!tion o, In,+o0:
The comany has made a market research and has gi"en the estimated "olumes for the
roduct from US! =U and +o( +est 3f (orld<$
And then has multilied it with the sa"ings of each roduct to get the inflows$
For e%amle/
Jolumes of US li4uid "ials< / 8$C
Sa"ings for li4uid "ials / 15$C1
'ash inflow for li4uid "ials/ 052$CC
CC S!8in2 ) Tot!+ Project ) NP< co$p"t!tion
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3utflow
Inflows Ta%
Kear
Pro#ect'ost
:i4uidJials
:yoJials
PFS S=Y 7etInflows
D'FZ05
DiscountedInflow
0
1C8$2? 6 6 6 6 1C8$2?< 0$ 1C8$2?<
1
1C8$2? 6 6 6 6 1C8$2?< $CC 18$21<
2 6 6 6 6 6 6 $?? 6
5 6 052$CC 1$58 0$ 00$?8 08@$@ $G? 0?$2C
8 C1$5 0C2$51 ?$8 @$1 08$@2 022$GG $8@ ?@$05
G
6 118$G 0C$@8 0$5 1G$@5 2?$@C $81 0@1$GC?
6 18C$1? 15$01 052$G? 22$18 58@$21 $5G 1@$1G
C 6 2@?$1 GG$G 10@$51 82$52 ?2G$5? $5 1@5$21
@ 6 50G$C@ ?$?1 11C$CC 1C$2 ?55$80 $28 1G0$
0
6 52?$2G ?5$15 12C$8C 1@$28 ??@$85 $20 12@$?0
NP< o, t*e CC S!8in2 @J.H
CC S!8in2 ) Tot!+ Project ) IRR co$p"t!tion
3utflow Inflows Ta%
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Kear Pro#ect'ost
:i4uidJials
:yoJials PFS S=Y
7et InFlow D'F
Discntd Inflow
0 1C8$2? 6 6 6 6 1C8$2?<
0$ 1C8$2?<
1 1C8$2? 6 6 6 6 1C8$2?<
$?8 102$0@<
2 6 6 6 6 6 6 $8G 6
5 6 052$CC 1$58 0$ 00$?8 08@$@ $51 GG$22
8 C1$5 0C2$51 ?$8 @$1 08$@2 022$GG $20 50$G5
G 6 118$G 0C$@8 0$5 1G$@5 2?$@C $12 CG$22
? 6 18C$1? 15$01 052$G? 22$18 58@$21 $0? ?@$C8
C 6 2@?$1 GG$G 10@$51 82$52 ?2G$5? $02 @8$G8
@ 6 50G$C@ ?$?1 11C$CC 1C$2 ?55$80 $0 ?1$15
0 6 52?$2G ?5$15 12C$8C 1@$28 ??@$85 $? 8G$80
7PJ of '' sa"ings
I++ of '' sa"ings 25
Proce%"re ,o++o0e% #& Dr. Re%%&’ 0*i+e e+ectin2 ! Project:
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(hen a new roosal comes to Dr$ +eddy,s then it goes through se"eral imortant decisions
before selecting the roosal$
:et,s us assume that a roosal has come to Dr$ +eddy,s
0$ First the roosal goes to the Business De"eloment team$1$ Business De"eloment team with the hel of market research team! does the necessary
market sur"ey about the ro#ect such as
• *ow many alternati"e roducts are already in the marketV
• About the roduct and its rices$
• About its demand$
• About its cometitors$
which they disclose it in their annual reort$3nce the ro#ect is e"aluated then they decide from their organi-ation,s oint of "iew$
• In"estment re4uired in the ro#ect$
• Time of the roosal
2$ Then they reare a strategic reort with all the details such as rofits! cost! etc$! based
on it they decide whether to manufacture the roduct or get it don,t on the contract basis$5$ If the roduct is to be manufactured then the manufacturing team decides the cost of
materials re4uired! machines! ower! buildings! etc$! which hel them to arri"e at the
ro#ect cost$8$ 7ow the ro#ect comes to the finance deartment! where ayback eriod! ta%es!
dereciation! etc$! is found out with the coordination with IPD3 Integrated Product
De"eloment 3erations< team$G$ 9enerally 1 years ayback eriod is considered ideal at Dr$ +eddy,s because as these are
fast mo"ing roducts and chances are there that may be your cometitors may go a ste
ahead in roducing the roduct$?$ 7ow after all the figures and facts are found out! the roosal goes to Managing
Director$ Presentation is made to him with all the details which shows the ros and cons
of the roosal$$C$ Then suggestions are gi"en by the management! budget is decided and a final decision is
taken by the management whether to consider the roosal or re#ect it$
CONCLUSION > SUGGESTIONS
Decision and re"iew of ro#ect
'omany is getting its ayback after 5 years aro%imately 5$22 years< Pro#ect can be aro"ed such that comany can get back its rofit with in a limited eriod$
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'omany is getting its &Discounted Pay Back) within 8$?8 years e"en after
discounting cost of caital$
7PJ 7et Present Jalue< of the comany is ositi"e &0@5$G8) so ro#ect the ro#ect
can be aro"ed$
PI Profitability Inde%< is good because comany is making money$ *ence! the
ro#ect can be aro"ed$
I++ Internal +ate of +eturn< is more than the cost of caital &25 so aro"e the
ro#ect$
DeciionMet*o%
Re"+t Appro8e -*&
Payback 5$22years
Kes (ell! cause we get our money back
DiscountedPayback
8$?8years
KesBecause we get our money back! e"en after discounting our cost of caital$
7PJ 0@5$G8 KesBecause 7PJ is ositi"e re#ect the ro#ect if 7PJis negati"e<
Profitability
Inde%
0$1@C Kes 'ause we make money
I++ 25 Kes Because the I++ is more than the cost of caital
Dr$ +eddy,s takes Payback eriod method only into consideration because they want their returns at the earliest as Pharmacy industry is a fasting mo"ing industry with lot of inno"ati"e ideas year after year$
Bi#+io2r!p*&
The information re4uired for successful comletion of the ro#ect has been collected
through rimary and secondary sources .
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Pri$!r& So"rce D!t!
The data has been gathered through interactions with the "arious officials and emloyees
working in the di"ision$ Some imortant information has been gathered through coule of
instructed inter"iews$
Secon%!r& So"rce D!t!
+eferred te%t books for collecting the information regarding the theoretical asects of the
toic$
(in!nci!+ M!n!2e$ent ) I .M P!n%e&
M!n!2e$ent Acco"ntin2 / R. P. Tri8e%i
Ann"!+ Report o, Dr. Re%%&’ / )
Annual reorts! maga-ines ublished by the comany are used for collecting the re4uired
information$ ="en hel is taken from internet$
000.%rre%%&.co$
*ttp:$one&.re%i,,.co$
*ttp:000.p*!r$!ce"tic!+)%r"2)$!n",!ct"rer.co$p*!r$!ce"tic!+)in%"tr&
*ttp:en.0iipe%i!.or2