CHAPTER 1
INTRODUCTION
1.1 INTRODUCTION OF THE STUDY
Every organization irrespective of its size and mission can be
viewed as a financial entity management of an organization. Financial
management focuses not only on the improvement of funds but also on
their efficient use with the objective of maximizing the owners’ wealth.
The allocation of funds is therefore an important function of financial
management. The allocation of funds involves the commitment of funds
to assets and activities.
There are two types of Investment decision;
1. Management of current assets or Working capital management.
2. Long term investment decision.
This is widely known as capital budgeting or capital budgeting. It
means as to whether or not money should be invested in long term
project. This part is devoted to an in-depth and comparative decision of
capital budgeting/capital expenditure management.
1.2 CAPITAL BUDGETING
1.2.1 MEANING
Capital Budgeting is the process of making investment decisions in
capital expenditure. In other words capital budgeting is the planning of
expenditure or the benefit of which spreads over a number of years. A
capital expenditure may be defined as an expenditure the benefit of which
are expected to be received over a period of time exceeding one year. The
main characteristics of a capital expenditure are that the expenditure is
incurred at one point of time whereas benefits of the expenditure are
realized at different points of time in future. Capital expenditure involves
non-flexible long term commitment of funds. Thus capital expenditure
decisions are also called Long-Term Investment Decision.Capital
budgeting involves the planning and control of capital expenditure.
DEFINITION
R.M.LYNCH has defined capital Budgeting as “Capital Budgeting
consists of employment of available capital for the purpose of
maximizing the long term profitability of the firm”.
Capital Budgeting is a many-sided activity. It includes searching
for new and more profitable investment proposals, investigating,
engineering and marketing considerations to predict the consequences of
accepting the investment and making economic analysis to determine the
profit potential of each investment proposal.
Its basic features can be summarized as follows;
1. It has the potentiality of making large anticipated profits.
2. It involves a high degree of risk.
3. It involves a relatively long-time period between the initial outlay
and the anticipated return.
Capital Budgeting consists of planning and the development of
available capital for the purpose of maximizing the long-term profitability
of the firm.
1.2.2 NEED AND IMPORTANCE OF CAPITAL BUDGETING
Capital Budgeting means planning for capital assets. Capital
Budgeting decisions are vital to any organization as they include the
decision to;
1. Whether or not funds should be invested in long term projects
such as setting of an industry, purchase of plant and machinery
etc.,
2. Analyze the proposal for expansion or creating additional
capacity.
3. To decide the replacement of permanent assets such as building
and equipments.
4. To make financial analysis of various proposal regarding capital
investments so as to choose the best out of many alternative
proposals.
The importance of capital Budgeting can be well understood from
the fact that an unsound investment decision may prove to be fatal to the
very existence of the concern. The need, significance or importance of
capital budgeting arises mainly due to the following.
1. Large Investments
Capital budgeting decisions, generally involves large investment of
funds. But the funds available with the firm are always limited and the
demand for funds exceeds the resources. Hence it is very important for a
firm to plan and control its capital expenditure.
2. Long-term commitment of Funds
Capital expenditure involves not only large amounts of funds but
also funds for long-term or more or less on permanent basis. The long-
term commitment of funds increases the financial risk involved in the
investment decision.
3. Irreversible Nature
The capital expenditure decisions are of irreversible nature. Once
the decisions for acquiring a permanent asset is taken, it became very
difficult to dispose of these assets without incurring heavy losses.
4. Long-term Effect of profitability
The investment decisions taken today not only affects present
profit but also the future profitability of the business. A profitable project
selection is fatal to the business.
5. Difficulties of investment decisions
The long term investment decisions are more difficult to take
because,
1. Decision extends to a series of years beyond the current
accounting period.
2. Uncertainties of future and
3. Higher degree of risk.
6. National Importance
An investment decision through taken by individual concerns is of
national importance because it determines employment, economic
activities and economic growth.
7. Effect on cost structure
By taking a capital expenditure decision, a firm commits itself to a
sizeable amount of fixed cost in terms of interest, supervisors salary,
insurance, building rent etc. If the investment turns out to be unsuccessful
in future or produces less than anticipated profits, the firm will have to
bear the burden of fixed cost.
8. Impact on firms’ competitive strength
The capital budgeting decisions affect the capacity and strength of
a firm to face competition. It is so because the capital investment
decisions affect the future profits and costs of the firm. This will
ultimately affect the firms competitive strength.
9. Cost control
In capital budgeting there is a regular comparison of budgeted and
actual expenditures. Therefore cost control is facilitated through capital
budgeting.
10. Wealth Maximization
The basic objective of financial management is to maximize the
wealth of the shareholders. Capital budgeting helps to achieve this basic
objective. Capital budgeting avoids over investments and under
investments in fixed assets. In this way capital budgeting protects the
interest of the shareholders and of the enterprise.
1.2.3 STEPS IN CAPITAL BUDGETING
Capital budgeting is a complex process. it involves decision
relating to the investment of current funds for the benefit to be achieved
in future which is always uncertain. Capital budgeting is a six step
process. The following steps are involved in capital budgeting;
1. Project generation
The capital budgeting process begins with generation or
identification of investment proposals. This involves a continuous
search for investment opportunities which are compatible with firm’s
objectives.
2. Project screening
Each proposal is then subject to a preliminary screening process in
order to assess whether it is technically feasible, resources required are
available, and expected returns are adequate to compensate for the risks
involved.
3. Project evaluation
After screening of project ideas or investment proposals the next
step is to evaluate the profitability of each proposal. This involves two
steps;
a.Estimation of cost and benefit in terms of cash flows
b. Selecting an appropriate criterion to judge the desirability of the
project.
4. Project selection
After evaluation the next step is the selection and the approval of
the best proposal. In actual practice all capital budgeting decision are
made at multiple levels and are finally approved by top management.
5. Project execution and implementation
After the selection of project funds are allocated for them and a
capital budget is prepared. It is the duties of the top management or
capital budgeting committee to ensure that funds are spend in
accordance with allocation made in the capital budget.
6. Performance review
After the implementation of the project, its progress must be
reviewed at periodical intervals. The follow-up or review is made by
comparing actual performance with the budget estimates.
1.2.4 OPERATING BUDGET AND CAPITAL BUDGET
Most of the large firms prepare two different budgets each year.
1. OPERATING BUDGET
Operating budget shows planned operations for the forthcoming
period and includes sales, production, production cost, and selling and
distribution overhead budgets. Capital budgets deals exclusively with
major investment proposals.
2. CAPITAL EXPENDITURE BUDGET
Capital Expenditure is a type of functional budget. It is the firm’s
formal plan for the expenditure of money for purchase of fixed assets.
The budget is prepared after taking in to account the available production
capacities, probable reallocation of existing resources and possible
improvements in production techniques. If required, separate budgets can
be prepared for each item of capital assets such as a building budget, a
plant and machinery budget etc.
1.2.5 OBJECTIVES OF CAPITAL EXPENDITURE BUDGET
The objectives of Capital Expenditure Budget are as follows.
1. It determines the capital projects on which work can be started
during the budget period after taking in to account their urgency
and the expected rate of return on each project.
2. It estimates the expenditure that would have to be incurred on
capital projects approved by the management together with the
source or sources from which the required funds would be
obtained.
3. It restricts the capital expenditure on projects within authorized
limits.
CONTROL OVER EXPENDITURE THROUGH CAPITAL
EXPENDITURE BUDGET
The capital expenditure budget primarily ensures that only such
projects are taken in hand which are either expected to increase or
maintain the rate of return on capital employed. Each proposed project is
appraised and only essential project or projects likely to increase the
profitability of the organization are included in the budget. In order to
control expenditure on each project, the following procedure is adopted.
1. A project sheet is maintained for each project.
2. In order to ensure that the expenditure on different project is properly
analyzed.
3. The expenditure incurred on the project is regularly entered on the
project sheets from various sources such as invoices of assets
purchased, bill for delivery charges etc.,
4. The management is periodically informed about expenditure incurred
in respect of each project under appropriate heads.
5. In case project cost is expected to increase; a supplementary sanction
for the same is obtained.
6. In financial books the total expenditure incurred on all projects is
separately recorded.
1.2.6 TACTICAL AND STRATEGIC INVESTMENT DECISION
Investment decision can be classified as,
i. Tactical Decision
A Tactical Decision generally involves a relatively small amount of
funds and does not constitute a major departure from the past practices of
the company.
ii. Strategic Decision
A Strategic Investment Decision involves a large sum of money
and may also result in a major departure from the past practices of the
company. Acceptance of a Strategic Investment Decision involves a
significant change in the company’s expected profits associated with a
high degree of risk.
1.2.7 RATIONALE OF CAPITAL EXPENDITURE
Efficiency is the rationale underlying all capital decisions. A firm
has to continuously invest in new plant or machinery for expansion of its
operations or replace worn-out machinery for maintaining and improving
its efficiency. The overall objective is to maximize the firm’s profits and
thus optimizing the return on investment. This objective can be achieved
either by increased revenues or by cost reduction. Thus capital
expenditure can be of two types;
1. Expenditure Increasing Revenue
2. Expenditure Reducing Cost
1.2.8 KINDS OF CAPITAL INVESTMENT PROPOSALS
A firm may have several investment proposals for its
consideration. It may adopt one of them, some of them or all of them
depending upon whether they are independent, contingent or dependent
or mutually exclusive.
1. INDEPENDENT PROPOSALS
These are proposals which do not compete with one another in a
way that acceptance of one precludes the possibility of acceptance of
another. In case of such proposals the firm may straight away “accept or
reject” a proposals on the basis of minimum return on investment
required. All these proposals which give a higher return than a certain
desired rate of return are accepted and the rest are rejected.
2. CONTINGENT OR DEPENDENT PROPOSALS
These are proposals whose acceptance depends on the acceptance
of one or more other proposals. When a contingent investment proposal is
made, it should also contain the proposal on which it is dependent in
order to have a better perspective of the situation.
3. MUTUALLY EXCLUSIVE PROPOSALS
These proposals which compete with each other in a way that the
acceptance of one precludes the acceptance of other or others. Two or
more mutually exclusive proposals cannot both or all be accepted. Some
techniques have to be used for selecting the better or the best one. Once
this is done, other alternative automatically gets eliminated.
4. REPLACEMENT PROPOSALS
These aim at improving operating efficiency and reducing costs.
These are called cost reduction decisions.
5. EXPANSION PROPOSALS
This refers to adding capacity to existing product line.
6. DIVERSIFICATION PROPOSALS
Diversification means operating in several markets rather than a
single market. It may also involve adding new products to the existing
products. Diversification decisions require evaluation of proposals to
diversify in to new product lines, new markets etc., for reducing the risk
of failure.
7. CAPITAL RATIONING PROPOSALS
Capital rationing means distribution of capital in favour of some
acceptable proposals. A firm cannot afford to undertake all profitable
proposals because it has limited funds to invest. In such a case, these
various investment proposals compete for limited funds and the firm has
to ration them. Thus the situation where the firm is not able to finance all
the profitable investment opportunities due to limited resources is known
as capital rationing.
1.2.9 FACTORS AFFECTING CAPITAL INVESTMENT
DECISIONS
The following are the four important factors which are generally
taken in to account while making a capital investment decision.
1. The Amount of Investment
In case a firm has unlimited funds for investment it can accept all
capital investment proposals which give a rate of return higher than the
minimum acceptable or cut-off rate.
2. Minimum Rate of Return on Investment
The management expects a minimum rate of return on the capital
investment. The minimum rate of return is usually decided on the basis of
the cost of capital.
3. Return Expected from the Investment
Capital investment decisions are made in anticipation of increased
return in the future. It is therefore necessary to estimate the future return
or benefits accruing from the investment proposals while evaluating the
capital investment proposals.
4. Ranking of the Investment Proposals
When a number of projects appear to be acceptable on the basis of
their profitability the project will be ranked in the order of their
profitability in order to determine the most profitable project.
1.2.10 METHODS OF CAPITAL BUDGETING OR EVALUATION
OF INVESTMENT PROPOSALS
A business firm has a number of proposals regarding various
projects in which it can invest funds. But the funds available with the firm
are always limited and it is not possible to invest funds in all the
proposals at a time. The most widely accepted techniques used in
estimating the cost returns of investment projects can be grouped under
two categories;
1. TRADITIONAL METHODS
I. Payback Period Method
II. Average rate of Return Method
2. DISCOUNTED CASH FLOW METHODS
I. Net Present Value Method
II. Internal rate of Return Method
III. Profitability Index Method
I. PAY BACK PERIOD METHOD
The payback period method is the simplest method of evaluating
investment proposals. Payback period represents the number of years
required to recover the original investment. The payback period is also
called Pay Out or Pay off Period. This period is calculated by dividing the
cost of the project by the annual earnings after tax but before
depreciation. Under this method the project is ranked on the basis of the
length of the payback period. A project with the shortest payback period
will be given the highest rank.
METHODS OF COMPUTATION OF PAYBACK PERIOD
There are two ways of calculating the payback period.
a. When annual cash inflow is constant
The formula is find out the payback period if the project generates
constant annual cash inflow is;
Original cost of the project
Payback period = Annual cash inflow
Annual cash inflow is the annual earning (profit depreciation and
after taxes) before
b. When annual cash inflow is not constant
If the annual cash inflows are unequal the payback period can be
found out by adding up the cash inflows until the total is equal to the
initial cash outlay of the project.
ADVANTAGES OF PAYBACK PERIOD
1. Simple to understand and easy to calculate.
2. It reduces the chances of loss through obsolescence.
3. A firm which has shortage of funds find this method very useful.
4. This method costs less as it requires only very little effort for its
Computation.
DISADVANTAGES
1. This method does not take in to consideration the cash inflows beyond
the payback period.
2. It does not take in to consideration the time value of money. It
considers the same amount received in the second year and third year as
equal.
3. It gives over emphasis for liquidity.
ACCEPTANCE RULE
The following are the Payback [P.B.Rules]
Accept P.B<cut-off rate
Reject P.B>cut-off rate
May Accept P.B<cut-off rate
Cut-off rate
Cut-off rate is the rate below which a project would not be
accepted. If ten percentages the desired rate of return, the cut-off rate is
10%.The cut-off point may also be in terms of period. If the management
desires that the investment in the project should be recouped in three
years, the period of three years would be taken as the cut-off period. A
project incapable of generating necessary cash to pay for the initial
investment in the project with in three years will not be accepted.
II. AVERAGE RATE OF RETURN (ARR) METHOD
This method otherwise called the Rate of Return Method, takes in
to account the earnings expected from the investment over the entire life
time of the asset. The various projects are ranked in order of the rate of
returns. The project with the higher rate of return is accepted. Average
Rate of Return is found out by dividing the average income after
depreciation and taxes, i.e. the accounting profit, by the Average
Investment.
Average Annual Earnings ARR = x 100 Average Investment
Where;
Average Annual Earnings is the total of anticipated annual earnings
after depreciation and tax (accounting profit) divided by the number of
years.
Average Investment means
i. If there is no salvage (Scrap value)
Total Investment
2
ii. If there is scrap value
Total Investment-Scrap Value
+ Scrap Value
2
iii. If there is additional working capital
Total Investment-Scrap Value
+ Scrap +Additional Working Capital
2
ADVANTAGES OF AVERAGE RATE OF RETURN (ARR)
METHOD
1. It is easy to calculate and simple to understand.
2. Emphasis is placed on the profitability of the project and not on
liquidity.
3. The earnings over the entire life of the project is considered for
ascertaining the Average Rate of Return.
4. This method makes use of the accounting profit.
DISADVANTAGES
1. Like the payback period method this method also ignores the time
value of money. The averaging technique gives equal weight to profits
occurring at different periods.
2. This averaging technique ignores the fluctuations in profits of various
years.
3. It makes use of the accounting profits, not cash flows, in evaluating the
project.
1. DISCOUNTED CASH FLOW METHODS
The payback period method and the Average rate of Return
Method do not take in to consideration the time value of money. They
give equal weight to the present and the future flow of incomes. The
discounted cash flow methods are based on the concept that a rupee
earned today is more worth than a rupee earned tomorrow. These
methods take in to consideration the profitability and also the time value
of money.
I. NET PRESENT VALUE (NPV) METHOD
The Net Present Value Method (NPV) gives consideration to the
time value of money. It views that the cash flows of different years differ
in value and they become comparable only when the present equivalent
values of these cash flows of different periods are ascertained. For this
the net cash inflows of various periods are discounted using the required
rate of return, which is a predetermined rate .If the present value of
expected cash inflows exceeds the initial cost of the project, the project is
accepted.
NPV = Present value of cash inflows-Present value of initial investment
STEPS IN NET PRESENT VALUE (NPV) METHOD
1. Determine an appropriate rate of interest to discount cash flows.
2. Compute the present value of total investment outlay (i.e., cash
outflow) at the determined discounting rate.
3. Compute the present value of total cash inflows (profit before
depreciation and after tax) at the above determined discount rate.
4. Subtract the present value of cash outflow (cost of investment) from
the present value of cash inflows to arrive at the net present value.
5.If the net present value is negative i.e., the present value cash outflow is
more than the present value of cash inflow the project proposals will be
rejected .If net present value is zero or positive the proposal can be
accepted.
6. If the projects are ranked the project with the maximum positive net
present value should be chosen.
ADVANTAGES OF NET PRESENT VALUE METHOD
1. It considers the time value of money.
2. It considers the earnings over the entire life of the project.
3. Helpful in comparing two projects requiring same amount of cash
outflows.
DISADVANTAGES
1. Not helpful in comparing two projects with different cash outflows.
2. This method may be misleading is in comparing the projects of
unequal lives.
II. INTERNAL RATE OF RETURN (IRR) METHOD
The Internal Rate of Return for an investment proposal is that
discount rate which equates the present value of cash inflows with the
present value of cash outflows of the investment. The Internal Rate of
Return is compared with a required rate of return. If the Internal Rate of
Return of the investment proposal is more than the required rate of return
the project is rejected. If more than one project is proposed, the one
which gives the highest internal rate must be accepted.
It can be calculated by the following formula
P1-QIRR = L+ x D
P1-P2
Where,
L = Lower rate of discount
P1 = Present value of cash inflows at lower rate of discount
P2 = Present value at higher discount rate
Q = Initial Investment
D = Difference in rate
ADVANTAGES OF INTERNAL RATE OF RETURN
1. It considers the time value of money.
2. The earnings over the entire life of project is considered.
3. Effective for comparing projects of different life periods and different
timings of cash inflows.
DISADVANTAGES
1. Difficult to calculate.
2. This method presumes that the earnings are reinvested at the rate
earned by the investment which is not always true.
Accept or Reject Rule
Internal Rate of Return is the maximum rate of interest which an
organization can afford to pay on the capital invested in a project. A
project would qualify to be accepted if Internal Rate of Return exceeds
the cut-off rate. While evaluating two or more projects, a project giving a
higher Internal Rate of Return would be preferred. This is because higher
the rate of return, the more profitable is the investment.
III. PROFITABILITY INDEX METHOD
Present Value of Cash Inflows
Profitability Index =
Present Value of Cash Outflows
This is also called Benefit-Cost ratio. This is slight modification of
the Net Present Value Method. The present value of cash inflows and
cash outflows are calculated as under the NPV method. The Profitability
Index is the ratio of the present value of future cash inflow to the present
value of the cash outflow, i.e., initial cost of the project.
If the Profitability index is equal to or more than one proposal the
proposal will be accepted. If there are more than one investment
proposals, the one with the highest profitability index will be preferred.
This method is also known as Benefit-Cost ratio because the
numerator measures benefits and the denominator measures costs. ”It is
the ratio of the present value of cash inflow at the required rate of return
to the initial cash outflow of the investment.
1.3 OBJECTIVES OF THE STUDY
The study consisted of the following objectives.
1. To review the projected cash flow statement.
2. To estimate the future project cost.
3. To review the projected profitability.
4. To review the project using the Evaluation Techniques.
5. To set a basis for future capital budgeting.
1.4 IMPORTANCE OF THE STUDY
Capital budgeting is concerned with heavy expenditure decisions.
The benefits or returns from such expenditure are expected to be derived
over many years in future. It requires careful planning and exercise. A
mistake in capital budgeting can prove fatal to the enterprise. The big size
of expenditure involved underlines the importance of capital budgeting.
Capital expenditure decisions are vital to any organization as they include
the decisions to;
a. Analyze the proposal for expansion or creating additional
capacity.
b. To make financial analysis of various proposals regarding
capital investments so as to choose the best out of many
alternative proposals.
c. To decide about the replacement of capital asset.
d. It helps to facilitate the cost control.
1.5 SCOPE OF THE STUDY
This study highlights the review of capital budgeting and capital
expenditure management of the company. Capital expenditure decisions
require careful planning and control. Such long term planning and control
of capital expenditure is called Capital Budgeting. The study also helps to
understand how the company estimates the future project cost. The study
also helps to understand the analysis of the alternative proposals and
deciding whether or not to commit funds to a particular investment
proposal whose benefits are to be realized over a period of time longer
than one year. The capital budgeting is based on some tools namely
Payback period, Average Rate of Return, Net Present Value, Profitability
Index, and Internal Rate of Return.
1.6 LIMITATIONS OF THE STUDY
The study has the following limitations.
1. The analysis was done with the secondary data derived only from
published annual reports.
2. This study is confined only to Parisons Roller and Flour Mills Pvt.
Ltd.
3. The estimates of profitability of investment proposals are not
accurate.
4. Researcher finds it is difficult if the company is not revealing the
facts about the future course of action.
5. It is difficult to calculate the cost of capital and to estimate the rate
of return.
1.7 REVIEW OF LITERATURE
The concept of Capital Budgeting being a very sensitive area of
finance has outreached the attention of many researchers .A number of
studies has been conducted on the subject. However briefing such studies
will highlight the importance of the present study. It should safeguard to
avoid the wrong choice of the project and investment to made. It is
necessary for the management to give proper attention to capital
budgeting.
The reason for the popularity of Payback period in the order of
significance were stated to be its, simplicity to use and understand, its
emphasis on the early recovery of investment and focus on risk. It was
also found that one third of companies always insisted on the
computations of Payback periods for all projects. For about two-third
companies standard Payback period ranged between three and five years.
The reason for the secondary role of Discounted Cash Flow
techniques in India included difficulty in understanding and using these
techniques, due to lack of qualified professional and unwillingness of top
management to use Discounted Cash Flow techniques.
One large manufacturing and marketing organization mentioned
that conditions of its business were such that Discounted Cash Flow
techniques were not needed. Yet another company stated that replacement
projects were very frequent in the company and it was not considered
necessary to use Discounted Cash Flow technique for evaluating such
projects.
The present investment appraisal in practice is raising certain
questions in the context.
1. How much importance is assigned to economic analysis of capital
expenditure in practice?
2. What methods are used for analyzing capital expenditure in practice
and what is the reason for underlying these methods?
The answers of the above questions are based on a survey of
twenty firms varying on several dimensions like industry category, size,
financial performance and capital intensity. From these firms, executives,
responsible for capital investment evaluation and capital budget
preparation were interviewed.
CHAPTER 2
PROFILE OF THE COMPANY
HISTORY OF PARISONS GROUP
The PARISONS GROUP has its corporate office at 6/1183,
Cherooty road Calicut. The Group name, which became a household
name already, is derived from the name of late Kunchipary, the illustrious
scion from a well-known business family in North Kerala. The group was
founded by his industrious sons namely. Mr. N.K. Mohammed Ali, Mr.
N.K. Asharaf, Mr. N.K .Khalid and Mr. N.K .Haris.
Beginning in 1982, it has grown in to a multi-crore Groups with the
distinction as the largest producers and marketers of wheat products and
edible oils in South India. They have diversified their activities in to
Information Technology, Infrastructure Development and Leasing, and
lately plantations.
The directors are well experienced in processing and trading in
food products especially in the field of edible oils and wheat products.
They have a proven track record in planning, implementing and running
new projects successfully. The Group also has a reputation of taking over
sick units and reviving them with in a short span of time. They have a
strong team of professional and techno crafts to support them in ventures.
The products of Parisons are well accepted in the market in various
brand names owing to the quality levels. The Group at present has five
roller mills for wheat products with a total capacity of about 600 tones
per day and their installed capacity for edible oil refining is 480 tones per
day, which is utilized well over 100%.They also have a large trading
houses in big bazaar, Calicut. Apart from the corporate office in Calicut
the Group also has an office at Cochin to look after its import activities.
The plants of the Group have adopted state of technology. As a part
of its infrastructure related projects, the group has completed the setting
up of 14000 MT tank farms for storage of liquid cargo at the Beypore
Port.
The Group is a major importer of vegetable oils. Enthused by the
success of their projects at Beypore port, the Groups are on the process of
setting up of 50000 K L tank farm at Willington Islands at the site
allotted by Cochin Port Trust. By setting up of their own facilities for
storage at Cochin port, the Group also intends to achieve economy in
their existing operations and also to earn additional revenue by leasing
out the facilities to others apart from contributing to the growth of Cochin
Port.
PARISONS ROLLER AND FLOUR MILLS (P) LTD
Having established a steady foothold in trading business, they
decided to embark on a strategic business expansion mission and set up
the Parisons Roller flour mills(P) Limited, at West hill, Calicut in
October 1992.It began operation with an installed capacity of 80 M T per
day. In 1995 this capacity has expanded to 100 M T per day and again in
to 120 in the year 1997.
A modern state of art facility located at West hill, Calicut
producing 3000 T P A of high quality wheat products, this Rs.350 million
company markets the famous ultra premium ‘Parisons Liberty’ brand of
wheat products viz, Maida, Sooji and Atta. The company apart from
feeding bulk market also markets the products in consumer packs packed
in high tech automated packing facility. The turnover of the company for
the year ended 31-03-2003 is Rs.8795.91 Lakhs. This plant has an
extensive lab to ensure the quality of the products.
Apart from the milling unit the company has also successfully
acquired a silo storage system and has completed the setting up of 14000
M T tank farms for storage of liquid cargo at the Beypore port. The
company has also put in to operation 1200 Kiloliter capacity oil tanker
“KUNCHIPARY” at the Beypore Port which has helped the Group to
source a major portion of its imports through the Beypore Port.
PRODUCTS OF PARISONS COMPANY
A firm markets products to maximize its profits through consumer
satisfaction. The products must be capable of satisfying the consumer’s
wants. So Parisons treats the product, as a bundle of utilities. The
Products of the Parisons would satisfy the needs and wants of the
consumers.
The various products provided by Parisons Company are,
Atta
Maida
Sooji
Bran
Vanaspathy
Bakery shortening
Parisons tea
Others
DIAGRAM SHOWING THE PROPORTION OF EACH PRODUCT
IN THE TOTAL PRODUCTS OFFERED
CHART 1
.
23%
5%
10%
13%14%
10%
5%
10%
10%
MAIDA ATTA SOOJI
BRAN VANASPATHY PALMOLIEN
BAKERY SHORTENING PARISONS TEA OTHERS
MARKETING ASPECTS OF PARISONS GROUP
PRICING POLICY
Price is the most important device that a firm can use to expand its
market. If the price is set too high a seller may be thrown out of the
market .If it is too low, his income may not cover cost.
The company determines the price of its products by taking
following matters in to consideration.
Price of the competitors products.
Price in the international market.
Cost of production and distribution
Price of different items in the product line.
Market trends and the budget of the firm.
TRANSPORTATION
The raw materials that are collected or imported from Malaysia and
Indonesia are transported through ships to Cochin and Beypore Port.
There has no problem in the transportation of raw material. Raw material
is imported in bulk quantities.
DISTRIBUTION SYSTEM OF THE COMPANY
Channels of distribution mean the path or network through which
the products are made available to the consumers. The company has good
distribution agencies; the company is also engaged in direct distribution.
The company’s distribution objective is to make available the right
goods to the right place at the least cost.
Retailers
Retailers are the last link in the chain of distribution. The retailers
of wheat products purchase this company’s products. The company offers
attractive discounts and other concessional benefits to increase its market.
Agents
The company’s one third of business done mainly through their
own efficient agents. Agent s are spread out in the different parts of
Kerala and also in the states of Karnataka and Tamilnadu.70% of the
production of the company are being sold in Kerala and of the balance
25% are being sold in Tamilnadu and 5% are in Karnataka. In Tamilnadu
and Karnataka dealings are done through agents. In Kerala most of the
products are sold as consumer packed products mostly as direct
marketing.
Wholesalers
Wholesaler is a trader who purchase goods in bulk quantity from
manufacturers and sell them to the retailers. They purchase the goods
from manufactures directly but generally do not sell the goods to
consumers directly.
EDIBLE OIL MAKING PROCESS
The refining of crude vegetable oils can be divided in to two
stages.
Degumming and Neutralization
Water Washing
Bleaching
Deodorizing
1. Degumming and Neutralization
It is the process for the removal of the gum percent in the Crude
Fatty Oil. Neutralization is intended mainly for de-acidifying crude fatty
oils or degummed oils. The process is carried out for the chemical
reaction of the fatty acid with sodium hydroxide at a temperature of
above 60 degree Celsius. It is carried out in centrifugal separators for
maximum recovery of neutral oils. The output of the reaction is alkali
salts of fatty acids and glycerin. The caustic oil mixture is centrifuged to
remove neutral oils from water-soluble soaps Proteins, color bodies and
lipids.
2. Water Washing
The neutral oils are further processed by water washing to
remove the soaps content in the oil.
3. Bleaching
The materials used for bleaching are fullers’ earth and activated
carbon. This is to remove the color segments in the neutralized product.
In order to protect the refined oils against oxidization, bleaching is
generally conducted under vacuum.
4. Deodorizing
The process is steam distillation. This is to remove relatively
odoriferous and flavored substances from the relatively non volatile oils.
The refined oil is then packed in to containers of different sizes according
to market requirements.
CHART 2
ORGANISATIONAL STRUCTURE OF PARISONS
GROUP
DIRECTOR(Technical)
MANAGING DIRECTOR
DIRECTOR(Plant)
DIRECTOR(Marketing)
GENERAL MANAGER
MARKETINGMANAGER
PRODUCTIONMANAGER
FINANCEMANAGER
PLANTMANAGER
MARKETINGEXECUTIVES
PRODUCTIONSTAFF
PLANTSUPERVISOR
WORKERSASSISTANT
FINANCEMANAGER
WORKERS
SECRETARY ACCOUNTINGASSISTANT
CASHIER
CHAPTER 3
RESEARCH METHODOLOGY
3.1 RESEARCH
Research in common parlance refers to a search for knowledge. It is
an organized enquiry carried out to provide information for solving a
particular problem.
3.2 RESEARCH DESIGN
A research design is programme which guides the investigator in
the process of collecting, analyzing and interpreting the observation. It is
needed to facilitate the smooth sailing of the various research operations
thereby making research as efficient as possible.
This study follows descriptive and analytical research design where
in the researcher has to use facts and information already available and
analyze there to make a critical evaluation of the material.
DESCRIPTIVE RESEARCH
These Studies often involving the description of extend of the
association between two or more variable, descriptive information also
often provides a sound basis for making predictions for the solutions of
given problems. The design used in descriptive can employ one or more
of them following sources information
i. Secondary Data
ii. Surveys
Here, the data collected by for the analysis are secondary data,
which will be more relevant in the analysis of financial policies and
performance of the company
ACCOUNTING RESEARCH
It include a study of the effects on financial statement and financial
reporting which result from different choices of accounting methods, it
may lead to development of new methods of presenting financial
information relevant to the research purposes with economy in procedure.
PERIOD OF STUDY
Last five years financial performance is considered for the study to
estimate the future capital budgeting requirements.
NATURE OF ANALYSIS
The nature of analysis is based on the “Evaluation Techniques”
3.3 ANALYTICAL TOOL APPLIED
A. DISCOUNTED CASH FLOW METHOD
a. Net Present Value.
b. Internal Rate of Return.
c. Profitability Index.
B. NON DISCOUNTED CASH FLOW METHOD
a. Payback Period.
b. Average Rate of Return.
DATA COLLECTION
The primary data was collected from the various departments like
Finance, Marketing, stores, and Production and department.
The secondary data was collected from the annual report of the
company for the study.
CHAPTER 4
ANALYSIS AND INTERPRETATION OF DATA
4.1 ALLOCATION OF OVERHEADS
1. Electricity and depreciation are taken as variable overhead by Parisons
even though first one is semi-fixed and the other one is fixed overhead.
2. Traveling expenses, Motor Vehicle expenses, Printing and Stationery,
Interest and Finance charges, General expenses, Distribution charges,
Advertisement are taken as fixed overheads by Parisons even though
these expenses may vary according to time to time.
3. Telephone charges are taken as fixed overhead by Parisons even
though these are semi-fixed overhead.
TABLE 1
ALLOCATION OF OVERHEADS (2003)
ParticularsAmount(In
Rupees)Amount(In Rupees)
1.Labour Overhead Direct Labour 15,78,5512.Other Direct Expenses Production Expenses 4,30,463 Postage 3,43,814 Repairs and Maintenance 24,80,772 Electricity 25,65,512 Storage Expenses 13,451 Depreciation 36,81,196 95,15,2083.Fixed Overhead Salary 9,23,364 Traveling Expenses 1,60,126 Motor vehicle expenses 4,71,399 Printing and Stationery 2,41,010 Interest and Financial Charges 74,88,493 Insurance 15,21,971 Telephone charges 3,43,813
Rent, rates and Taxes 2,76,731 Distribution Charges 1,07,29,885 Advertisement Charges 19,44,071 Audit Fee 56,575 General Expenses 42,670 2,42,00,108
Total 3,53,54,709
4.2 STATEMENT OF COST
Cost sheet is a document which provides for the assembly of
the estimated detailed cost in respect of a cost centre or a cost unit. It is a
detailed statement of the elements of cost arranged in a logical order
under different heads. It is only a memorandum statement and does not
form part of the double entry system. Additional columns can be provided
to indicate cost per unit at different stages of production or to enable
comparison to be made of the current costs with that of historical costs.
ADVANTAGES
1. It indicates the break-up of the total cost by elements, i.e. material,
labour, overhead etc.,
2. It discloses the total cost and cost per unit of the unit produced.
3. It facilitates comparison.
4. It helps the management in fixing selling prices.
5. It acts as a guide to the management and helps in formulating
production policy.
6. It enables to keep control over cost of production.
7. It helps the businessman to submit quotations with reasonable
degree of accuracy against tenders for the supply of rules.
8. It is a simple and useful medium of communication of costs to
various levels of management.
TABLE 2
FIXED COST (2003-2007)
Particulars 2003 2004 2005 2006 2007
Freehold Land 1,11,49,002 1,11,49,002 1,11,49,002 1,11,49,002 1,11,49,002
Building-Office 35,58969 35,58,969 35,58,969 35,58,969 35,58,969
Building-Factory 61,13,571 61,13,571 61,13,571 61,13,571 61,13,571
Barge 1,64,32,723 1,64,32,723 1,64,32,723 1,64,32,723 1,64,32,723
Miscellaneous Fixed Asset 10,39,528 10,59424 10,63434 10,80955 11,08,635
Plant and Machinery 3,04,47,438 3,04,47,438 3,36,92,009 3,42,63,639 3,49,35,424
Computer 6,00,776 6,03,178 7,23,078 10,00,273 11,68,819
Storage Tank 1,10,76,911 1,20,84,142 2,93,95,167 3,03,29,340 3,03,29,340
Utilities 24,65,277 28,65,433 31,78,910 32,43,927 33,43,074
Vehicles 10,85,629 1,18,09,703 1,18,09,703 1,35,86,479 1,47,95,879
Furniture 3,29,733 3,69,098 4,10,703 4,49,926 4,71,476
Total 8,42,99,557 9,64,92,681 11,75,27,299 12,12,08,804 12,34,06,912
FIXED COST (2003-2007)
0
5000000
10000000
15000000
20000000
25000000
30000000
35000000
40000000
Fre
eh
old
La
nd
Bu
ildin
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Off
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Bu
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Fa
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Ba
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Mis
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ou
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Pla
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Co
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Sto
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an
k
Util
itie
s
Ve
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les
Fu
rnitu
re
Items
Am
ou
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in R
up
ee
s
2003
2004
2005
2006
2007
CHART 3
TABLE 3
DEPRECIATION WORKINGS
2003 2004 2005 2006 2007
Machinery opening Balance
3,04,47,438 3,04,47,438 3,36,92,010 3,43,63,795 3,57,82,639
Additional during the
year- 32,44,572 6,71,785 14,18,844 -
Total 3,04,47,438 3,36,92,010 3,43,63,795 3,57,82,639 3,57,82,639
Depreciation 56,35,936 55,37,060 54,02,635 61,16,238 91,26,112
Clearing Balance
2,48,11,502 2,81,54,950 2,89,61,160 2,96,66,401 2,66,56,527
25000000
25500000
26000000
26500000
27000000
27500000
28000000
28500000
29000000
29500000
30000000
Am
ou
nt
in R
up
ees
2003 2004 2005 2006 2007
Years
DEPRECIATION WORKINGS
CHART 4
TABLE 4
INCOME AND EXPENDITURE (2003-2007)
Income:SalesInterest
Lorry ReceiptsMiscellaneous incomeCreditors written backStorage tank rentProfit on sale of vehicleBarge incomeDiscountForeign exchange fluctuationStock differential
Total
Expenditure:Raw materials consumedGoods purchasedWagesPower, fuel and waterConsumablesRepairs&maintenance(P&M)Laboratory expensesPest and RodentStorage expensesSalaries and AllowancesAdvertisement chargesPrinting and StationeryDepreciationPort expensesBarge expensesPostage and Telephone chargesTraveling expensesDirectorsOthersESIPFStaff welfareMedical expensesMotor vehicle expensesInsuranceDonation and CharitiesTax and License fee
2003
87,95,91,15724,36,12030,80,3887,52,406
2,224 -6,95,338
99,64330,860
3,17,569(-)15,11,227
88,54,94,478
51,92,51,73029,52,87,190
15,78,55176,96,538
86,58724,80,7722,76,731
21,40013,451
9,23,36419,44,0712,41,010
36,81,196 -
-
6,87,627
1,20,62439,50250,12576,269
4,96,36210,260
4,71,39915,21,971
26,2001,76,518
2004
81,37,95,53913,99,61420,12,46411,58,5783,99,273
6,0625,75,406
- -
29,80,535(-)2,35,473
82,56,91,998
29,06,15,71647,17,36,754
18,74,11080,91,549
67,06818,46,0213,67,627
18,20040,786
10,33,91814,37,2242,07,268
55,37,060--
6,09,300
46,8641,78,751
36,99887,261
3,79,6577,213
41,35,3681,53,503
20,2001,53,503
2005
68,59,11,77011,76,6519,27,8731,14,067 -
55,48,700 -1,23,469
37,296 -
26,62,876
69,65,02,702
25,43,57,83339,09,54,747
17,48,26182,06,2022,83,678
18,02,7626,37,679
19,45049,363
11,75,67711,45,6701,98,746
54,02,63524,828
1,72,965
6,15,323
98,57035,027
1,16,96095,381
4,62,5676,844
40,36,3091,80,210
6,5501,80,210
2006
50,45,63,87215,42,85015,37,3426,37,6263,72,199
1,71,51,09961,324
3,31,16142,326
1,39,877(-)12,89,454
52,50,90,222
23,50,49,02322,73,34,273
17,80,56690,55,874
55,09811,90,0136,48,664
24,18045,729
8,39,6479,34,6561,98,920
61,16,23828,534
7,47,568
4,92,528
1,40,86133,644
2,00,5231,57,5073,35,299
5,32647,89,132
94,77211,650
3,75,058
2007
168,57,45,56142,13,3977,35,2483,98,494
-210,00,000
60,1394,98,505
39,28857,17,13538,49,591
172,22,57,358
27,26,64,628136,15,13,097
20,95,31484,11,1631,73,1679,74,3798,18,171
22,6181,05,6893,02,599
18,78,5231,73,905
91,26,11225,443
9,05,793
3,37,726
1,94,29747,60367,125
2,19,4434,67,366
5,43847,24,7761,68,412
38,2501,23,808
Selling &Distribution expensesInterest and financial chargeAudit fees
Total
Profit Before depreciation and TaxDepreciationProfit After Depreciation Before TaxTaxProfit After Depreciation and TaxAdd: Depreciation
Profit After Tax
1,32,38,589
74,88,49356,575
85,79,43,105
2,75,51,373
36,81,196
2,38,70,17747,74,035
1,90,96,14236,81,196
2,27,77,338
1,29,41,369
67,70,45856,844
80,84,50,590
1,72,41,408
55,37,060
1,17,04,34823,40,870
93,63,47855,37,060
1,49,00,538
93,97,076
89,12,24658,830
69,03,82,593
61,20,109
54,02,635
7,17,4741,43,495
5,73,97954,02,635
59,76,614
1,23,74,101
1,15,21,20772,000
51,46,52,591
1,04,37,631
61,16,238
43,21,3938,64,279
34,57,11461,16,238
95,73,352
2,17,47,367
1,38,89,19896,173
170,13,17,583
2,09,39,775
91,26,112
1,18,13,66323,62,733
94,50,93091,26,112
1,85,77,042
0
200000000
400000000
600000000
800000000
1000000000
1200000000
1400000000
1600000000
1800000000
Am
ou
nt
in R
up
ee
s
2003 2004 2005 2006 2007
Years
INCOME AND EXPENDITURE
Income
Expenditure
CHART 5
TABLE 5
CASH FLOW STATEMENT
SOURCE OF FUNDS:
Profit Before Interest and TaxDepreciation for the yearEquity share capitalTerm Loan from Financial Institution
Total (A)
APPLICATION OF FUNDS:
Interest paymentRepayment of Term LoanIncrease in Fixed AssetIncrease in Current Asset
Total (B)
Net surplus/deficit(A-B)
2003
2,75,51,373
36,81,196
1,50,00,000
4,05,59,311
8,67,91,880
74,88,493
1,49,62,698
33,40,870
59,82,252
3,17,74,313
5,50,17,567
2004
1,72,41,408
55,37,060
3,00,00,000
8,59,83,952
13,87,62,420
67,70,458
4,27,59,728
37,18,624
67,51,991
6,00,00,801
7,87,61,619
2005
61,20,109
54,02,635
3,00,00,000
4,05,59,309
8,20,82,053
99,12,246
2,52,92,787
44,22,246
72,13,396
4,68,40,675
3,52,41,378
2006
1,04,37,631
61,16,238
3,00,00,000
3,04,44,291
7,69,98,160
95,55,050
1,83,66,018
55,88,484
81,77,378
4,16,86,930
3,53,11,230
2007
2,09,39,775
91,26,112
3,00,00,000
1,80,47,373
7,81,13,260
62,78,206
99,68,598
57,04,458
1,67,34,243
3,86,85,505
3,94,27,755
CHART 6
0
10000000
20000000
30000000
40000000
50000000
60000000
70000000
80000000
Am
ou
nt
in R
up
ee
s
2003 2004 2005 2006 2007
Years
CASH FLOW STATEMENT
TABLE 6
BALANCESHEET
LIABILITIES:
Share capitalReserves and SurplusDeferred tax liabilitySecured loansUnsecured loans
Total
ASSETS:
Fixed assets (Net)Current assets(Net)Loans and AdvancesInvestments
Total
2003
1,50,00,000
4,79,00,602
26,83,617 3,03,57,470
50,00,000
10,09,41,689
7,50,78,915
1,33,58,774
1,25,04,000
10,09,41,689
2004
3,00,00,000
5,50,08,033
34,02,256 6,69,62,698
50,00,000
16,03,72,987
8,00,93,837
6,77,75,150
1,25,04,000
16,03,72,987
2005
3,00,00,000
5,47,48,030
36,06,847 7,83,30,107
50,00,000
17,16,84,984
7,86,71,591
8,05,09,393
1,25,04,000
17,16,84,984
2006
3,00,00,000
5,61,37,315
37,28,688 7,38,13,902
76,29,991
17,13,09,896
7,30,83,107
8,57,22,789
1,25,04,000
17,13,09,896
2007
3,00,00,000
6,37,65,342
33,84,231 5,89,94,445
82,84,042
16,44,28,060
6,73,78,649
8,45,45,411
1,25,04,000
16,44,28,060
TABLE 7
CAPITAL INVESTMENT
MACHINERY (2003) 3,04,47,438
ADDITIONS (2004) -------
” (2005) 32,44,572
” (2006) 6,71,785
” (2007) 14,18,844
TOTAL Rs. 3,57,82,639
CHART 7
0
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10000000
15000000
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30000000
35000000
Am
ou
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n R
up
ees
2003 2004 2005 2006 2007
Years
CAPITAL INVESTMENT
REVIEW OF CAPITAL BUDGET DECISION FOR
PARISONS
1. Investment cost - Rs.3,57,82,639
2. Life of the project - 5years
3. Depreciation is charged on Diminishing Balance Method
4. Tax Rate - 20%
5. Discount Factor - 10%
TABLE 8
CASH FLOW
Year
2003
2004
2005
2006
2007
CFBDT
2,75,51,373
1,72,41,408
61,20,109
1,04,37,631
2,09,39,775
Depreciation
36,81,196
55,37,060
54,02,635
61,16,238
91,26,112
CFADBT
2,38,70,177
1,17,04,348
7,17,474
43,21,393
1,18,13,663
Taxes
47,74,035
23,40,870
1,43,495
8,64,279
23,62,733
CFATD
1,90,96,142
93,63,478
5,73,979
34,57,114
94,50,930
CFATBD
2,27,77,338
1,49,00,538
59,76,614
95,73,352
1,85,77,042
INTERPRETATION
First step is to determine the after-tax cash inflows which will result
from using the investment .To do so; we are required to compute net profits
(CFBT-Depreciation) on which the company is to pay taxes.
The tax rate is 20%.Then the amount of depreciation is to be added
back to the amount of cash flows after taxes (CFAT) as depreciation does
not involve any cash outflow.
CHART 8
0
5000000
10000000
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20000000
25000000
Am
ou
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s
2003 2004 2005 2006 2007
Years
CASH FLOW
TABLE 9
1. PAYBACK PERIOD
To determine the number of years to recover the initial cash out
flow of Rs.3,57,82,639 crores we are constructing the following
cumulative cash flow tables.
INTERPRETATION
From the table it is clear that the recovery of the investment
between the first and second years. Therefore the Payback in 1year plus a
fraction of the 2nd years.
1,30,05,301Payback Period =
1,49,00,538
Payback Period = 1 year and 9 months.
YEAR CFATBD CUMULATIVE
CFATBD
2003 2,27,77,338 2,27,77,338
2004 1,49,00,538 3,76,77,876
2005 59,76,614 4,36,54,490
2006 95,73,352 5,32,27,842
2007 1,85,77,042 7,18,04,884
II. AVERAGE RATE OF RETURN
Average Annual Earnings ARR = x 100 Average investment
83,88,329 = x 100
1,78,91,320
ARR = 46.88%
Average Annual 1,90,96,142+ 93,63,478+ 5,73,979+ 34,57,114+ 94,50,930Earnings = 5
4,19,41,643 =
5
= Rs.83,88,329
3,57,82,639 Average Investment =
2
= Rs.1,78,91,320
INTERPRETATION
The Average Rate of Return of the project indicates
46.88%.Therefore the project earns a good profit in a short period of
time.
TABLE 10
III. NET PRESENT VALUE (NPV)
The below table contains the relevant calculations to determine
NPV Table in the Appendix (Present Value of Re.1) has been used to
determine the PV factor.
Year CFATBD Discount factor
at 10%
Present Value of
Cash Inflows
2003 2,27,77,338 0.909 2,07,04,600
2004 1,49,00,538 0.826 1,23,07,844
2005 59,76,614 0.751 44,88,437
2006 95,73,352 0.683 65,38,599
2007 1,85,77,042 0.621 1,15,36,343
5,55,75,823
Net Present Value = Present Value of Cash Inflows- Present Value of
cash outflows
= 4,81,43,364 – 3,57,82,639
N.P.V. = Rs.1,97,93,184
INTERPRETATION
The NPV of the project is Rs.1,97,93,184.The projects present
value of cash inflow (Rs.5,55,75,823) is greater than that of the present
value of cash outflows (Rs.3,57,82,639).Thus, it generates a positive Net
Present Value. So the NPV of Rs.1,97,93,184 adds to the wealth of the
owners.
TABLE 11
IV. PROFITABILITY INDEX METHOD
Year CFATBD PV factor at
10%
Present Value
of Cash Inflows
2003 2,27,77,338 0.909 2,07,04,600
2004 1,49,00,538 0.826 1,23,07,844
2005 59,76,614 0.751 44,88,437
2006 95,73,352 0.683 65,38,599
2007 1,85,77,042 0.621 1,15,36,343
5,55,75,823
Present value of Cash inflows Profitability index = Present Value of Cash outflows
5,55,75,823 =
3,57,82,639
= 1.55
INTERPRETATION
The profitability Index of the project is 1.55.Therefore it is
constant with the shareholders value maximization principle. It increases
the shareholders wealth.
TABLE 12
V. INTERNAL RATE OF RETURN
Year CFATBD PV factor
at 32%
Discounted
Cash inflow
PV factor
at 33%
Discounted
Cash
Inflow2003 2,27,77,338 0.757 1,72,42,445 0.752 1,71,28,558
2004 1,49,00,538 0.573 85,38,008 0.565 84,18,804
2005 59,76,614 0.434 25,93,850 0.425 25,40,061
2006 95,73,352 0.330 31,59,206 0.320 30,63,473
2007 1,85,77,042 0.250 46,44,260 0.240 44,58,490
3,61,77,769 3,56,09,386
P1-QIRR = L+ x D
P1-P2
3,61,77,769 - 3,57,82,639 = 32+ x 1 3,61,77,769 – 3,56,09,386
3,95,130 = 32+ x 1
5,68,383
= 32+ 0.69
IRR = 32.69%
P1-Q IRR = Lower Rate + x D
P1-P2
D = Difference between the percentages
P1= Present Value of Cash Inflow at highest percentage
Q = Present Value of Cash Outflow
P2= Present Value of cash Inflow at lowest percentage
INTERPRETATION
The IRR is 32.69%. Here the IRR is less than that of the
opportunity cost of the capital at 33% and therefore the shareholders
wealth will not be enhanced. It will enhance only when the IRR is greater
than the opportunity cost of capital.
CHAPTER 5
FINDINGS
1 It was found that the payback Period of the project is 1 year and 9
months.
2 The Payback Period shows that the initial investment can be
recovered with in a short period of time.
3 The investment is ideal because normally an investment should be
recoverable with in 5 years.
4. Average Rate of Return indicates 46.88%.Therefore the project earns
a good profit in short span of period.
5. Net Present Value of the project was Rs.1,97,93,184. This indicates
high profitability because it was >1.
6. The Profitability Index of the project is also >1 i.e., 1.55.Thus it is
constant with the shareholders value maximization principle.
7. The Internal Rate of Return shows 32.69% .These are also ensures a
profitable investment.
8. The Internal Rate of Return is less than the opportunity cost of
capital. Therefore the shareholders wealth will not be enhanced. It
will enhance only when the IRR is greater than the opportunity cost
of capital.
9. a. Discounted Methods
i. Net Present Value = Rs.1,97,93,184
ii. Profitability Index = 1.55
iii. Internal Rate of Return = 32.69%
b. Non Discounted Methods
i. Payback Period = 1 year and 9 months
ii. Average Rate of Return = 46.88%
CHAPTER 6
SUGGESTIONS
1. The company may fix the time period for the capital asset for
replacement.
2. Net Present Value method is more suitable for the company for
making investment decision.
3. In future the company may follow the capital budget method before
making investment decisions.
4. The company may effectively use the available resources for
attaining maximum profit.
5. The company has to analyze the proposal for expansion or creating
additional capacity.
6. The company may plan and control its capital expenditure.
7. The company has to ensure that the funds are invested in long term
project or not.
8. The company may evaluate the estimation of cost and benefit in
terms of cash flows.
CHAPTER 7
CONCLUSION
The study reveals the capital budgeting or capital expenditure
management of Parisons Roller and Flour Mills Pvt.Ltd. The present
financial position of the company is good, because the company recovers
the initial investment with in a short period of time. The Profitability
Index and Internal Rate of Return show a profitable investment.
The company has to analyze the alternative proposals and also
make decisions as to whether or not money should be invested in long
term projects. Investment decisions are extremely important for the
company because a wrong managerial decision with regard to capital
expenditure may affect the future earnings, production, and investment
opportunities of the company.
Further research with regards to this company is possible only
when the company decides to invest in machineries and they should
understand the importance of Capital Budgeting.
PARISONS ROLLER AND FLOUR MILLS PVT. LTD, CALICUT
BALANCE SHEET AS AT 31St MARCH 2003
LIABILITIES: AMOUNT
Share Capital 1,50,00,000
Reserves and Surplus 4,79,00,602
Deferred tax liability 26,83,617
Secured Loans 3,03,57,470
Unsecured Loans 50,00,000
10,09,41,689
ASSETS:
Fixed Assets (Net) 7,50,78,915
Current Assets (Net)
Loans and Advances1,33,58,774
Investments 1,25,04,000
10,09,41,689
PARISONS ROLLER AND FLOUR MILLS PVT. LTD, CALICUT
BALANCE SHEET AS AT 31St MARCH 2004
LIABILITIES: AMOUNT
Share Capital 3,00,00,000
Reserves and Surplus 5,50,08,033
Deferred tax liability 34,02,256
Secured Loans 6,69,62,698
Unsecured Loans 50,00,000
16,03,72,987
ASSETS:
Fixed Assets (Net) 8,00,93,837
Current Assets (Net)
Loans and Advances6,77,75,150
Investments 1,25,04,000
16,03,72,987
PARISONS ROLLER AND FLOUR MILLS PVT. LTD, CALICUT
BALANCE SHEET AS AT 31St MARCH 2005
LIABILITIES: AMOUNT
Share Capital 3,00,00,000
Reserves and Surplus 5,47,48,030
Deferred tax liability 36,06,847
Secured Loans 7,83,30.107
Unsecured Loans 50,00,000
17,16,84,984
ASSETS:
Fixed Assets (Net) 7,86,71,591
Current Assets (Net)
Loans and Advances8.05,09,393
Investments 1,25,04,000
17,16,84,984
PARISONS ROLLER AND FLOUR MILLS PVT. LTD, CALICUT
BALANCE SHEET AS AT 31St MARCH 2006
LIABILITIES: AMOUNT
Share Capital 3,00,00,000
Reserves and Surplus 5,61,37,315
Deferred tax liability 37,28,688
Secured Loans 7,38,13,902
Unsecured Loans 76,29,991
17,13,09,896
ASSETS:
Fixed Assets (Net) 7,30,83,107
Current Assets (Net)
Loans and Advances8,57,22,789
Investments 1,25,04,000
17,13,09,896
PARISONS ROLLER AND FLOUR MILLS PVT. LTD, CALICUT
BALANCE SHEET AS AT 31St MARCH 2007
LIABILITIES: AMOUNT
Share Capital 3,00,00,000
Reserves and Surplus 6,37,65,342
Deferred tax liability 33,84,231
Secured Loans 5,89,94,445
Unsecured Loans 82,84,042
16,44,28,060
ASSETS:
Fixed Assets (Net) 6,73,78,649
Current Assets (Net)
Loans and Advances8,45,45,411
Investments 1,25,04,000
16,44,28,060
PARISONS ROLLER AND FLOUR MILLS PVT.LTD, CALICUT
PROFIT AND LOSS ACCOUNT
Income:SalesInterest
Lorry ReceiptsMiscellaneous incomeCreditors written backStorage tank rentProfit on sale of vehicleBarge incomeDiscountForeign exchange fluctuationStock differential
Total
Expenditure:Raw materials consumedGoods purchasedWagesPower, fuel and waterConsumablesRepairs&maintenance(P&M)Laboratory expensesPest and RodentStorage expensesSalaries and AllowancesAdvertisement chargesPrinting and StationeryDepreciationPort expensesBarge expensesPostage and Telephone chargesTraveling expensesDirectorsOthersESIPFStaff welfareMedical expensesMotor vehicle expensesInsuranceDonation and CharitiesTax and License fee
Selling &Distribution
2003
87,95,91,15724,36,12030,80,3887,52,406
2,224 -6,95,338
99,64330,860
3,17,569(-)15,11,227
88,54,94,478
51,92,51,73029,52,87,190
15,78,55176,96,538
86,58724,80,7722,76,731
21,40013,451
9,23,36419,44,0712,41,010
36,81,196 -
-
6,87,627
1,20,62439,50250,12576,269
4,96,36210,260
4,71,399 15,21,971 26,200
1,76,518
1,32,38,589
2004
81,37,95,53913,99,61420,12,46411,58,5783,99,273
6,0625,75,406
- -
29,80,535(-)2,35,473
82,56,91,998
29,06,15,71647,17,36,754
18,74,11080,91,549
67,06818,46,0213,67,627
18,20040,786
10,33,91814,37,2242,07,268
55,37,060--
6,09,300
46,8641,78,751
36,99887,261
3,79,6577,213
41,35,3681,53,503
20,2001,53,503
1,29,41,369
2005
68,59,11,77011,76,6519,27,8731,14,067 -
55,48,700 -1,23,469
37,296 -
26,62,876
69,65,02,702
25,43,57,83339,09,54,747
17,48,26182,06,2022,83,678
18,02,7626,37,679
19,45049,363
11,75,67711,45,6701,98,746
54,02,63524,828
1,72,965
6,15,323
98,57035,027
1,16,96095,381
4,62,5676,844
40,36,3091,80,210
6,5501,80,210
93,97,076
2006
50,45,63,87215,42,85015,37,3426,37,6263,72,199
1,71,51,09961,324
3,31,16142,326
1,39,877(-)12,89,454
52,50,90,222
23,50,49,02322,73,34,273
17,80,56690,55,874
55,09811,90,0136,48,664
24,18045,729
8,39,6479,34,6561,98,920
61,16,23828,534
7,47,568
4,92,528
1,40,86133,644
2,00,5231,57,5073,35,299
5,32647,89,132
94,77211,650
3,75,058
1,23,74,101
2007
168,57,45,56142,13,3977,35,2483,98,494
-210,00,000
60,1394,98,505
39,28857,17,13538,49,591
172,22,57,358
27,26,64,628136,15,13,097
20,95,31484,11,1631,73,1679,74,3798,18,171
22,6181,05,6893,02,599
18,78,5231,73,905
91,26,11225,443
9,05,793
3,37,726
1,94,29747,60367,125
2,19,4434,67,366
5,43847,24,7761,68,412
38,2501,23,808
2,17,47,367
expensesInterest and financial chargeAudit fees
Total
Profit Before depreciation and TaxDepreciationProfit After Depreciation Before TaxTaxProfit After Depreciation and TaxAdd: Depreciation
Profit After Tax
74,88,49356,575
85,79,43,105
2,75,51,373
36,81,196
2,38,70,17747,74,035
1,90,96,14236,81,196
2,27,77,338
67,70,45856,844
80,84,50,590
1,72,41,408
55,37,060
1,17,04,34823,40,870
93,63,47855,37,060
1,49,00,538
89,12,24658,830
69,03,82,593
61,20,109
54,02,635
7,17,4741,43,495
5,73,97954,02,635
59,76,614
1,15,21,20772,000
51,46,52,591
1,04,37,631
61,16,238
43,21,3938,64,279
34,57,11461,16,238
95,73,352
1,38,89,19896,173
170,13,17,583
2,09,39,775
91,26,112
1,18,13,66323,62,733
94,50,93091,26,112
1,85,77,042