INTRODUCTION INTRODUCTION OF CAPITAL BUDGETING: Capital budgeting is an essential part of every companys financial management.

Capital budgeting is a required managerial tool. One duty of a financial manager is to choose investment with satisfactory cash flows and rates of return. Therefore a financial manager must be able to decide whether an investment is worth undertaking and be able to choose intelligently between two or more alternatives. To do this, a sound procedure to evaluate, compare, and select Projects is needed. Capital budgeting is represents a long term investment decision, involves the planning of expenditures for project with life of many year, usually requires a large initial cash outflow with the expectation of future cash inflows, uses present value analysis, emphasizes cash flows rather than income Capital budgeting is the planning process used to determine a firms long-term investment such as new machinery, replacement machinery, new plants, new products and research and development projects. NEED FOR THE STUDY: Capital budgeting decisions are of paramount importance in financial decision-making. Special care should therefore be taken in making these decisions on account of following reasons. Heavy investments. Long term commitment on funds
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 Irreversible decisions Long term impact of profitability Most difficult to make. Wealth maximization of shareholders. Cash forecast. OBJECTIVES OF THE STUDY The objectives of the study are: To understand the need of organizations to identify and invest in high quality capital projects. To prepare a list of the main financial variables required for a project appraisal. To evaluate capital projects using traditional methods of investment appraisal and discounted cash flow methods. To illustrate the important differences, which can arise in evaluating projects when using net present value (NPV) and internal rate of returns (IRR).

SCOPE OF THE STUDY: The scope of the study is that the following areas: How money is acquired and from what sources? How individual capital project alternatives are identified and evaluated? How minimum requirements of acceptability are set? How final project selections are made? How post mortem are conducted?

METHODOLOGY OF THE STUDY DATABASE: This study will be based on both primary and secondary data. The primary data will be collected interact with financial Manager of HAL company and The secondary data will be collected from various books, journals, newspapers, websites, reports and other published sources of company. PERIOD OF STUDY: The present study is made during the IVth semester of the MBA course. i.e., from 17th December 2007 to 10th may 2008.

CAPITAL BUDGETING DECISIONS Capital expenditure decisions are of considerable significance as the future success and growth of the firm depends heavily on them. But they are best with a number of difficulties. The benefits from investment are received in some future period. The future is uncertain. Therefore, an element of risk is involved. Future revenue involves estimation of the size of his market for product and expected share of the firm. These estimates depend on the variety of factors, including price, advertising and promotion, sales effort and so on. The cost incurred and benefits received from a capital budgeting decision occurred in different periods. They are the time value of the money. So a firm must replace worn and obsolete plant and machinery, acquired fixed assets for current and new products and makes strategic investment decisions. This will enable the firm to achieve its objectives of maximizing profits either by the way of increased revenues or cost reduction. The quality of these decisions is improved by capital budgeting. Capital budgeting decisions can be of two types and are as follows: (a) Expanding revenues (b) Reduce costs

INVESTMENT DECISIONS AFFECTING REVENUES Investment decisions are expected to bring in additional revenues there by raising the size of the firms total revenue. That can be the result of the either expansion of present operations or the development of new product lion.
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INVESTMENT DECISIONS REDUSING COST Cost reduction investment decisions are subject to less uncertainty in comparison to the revenue affecting investment decisions. This is so because the firm has a better feel for potential cost savings as it can examine past production and cost data. So it is difficult to precisely estimate the revenue and cost resolution from a new product line.

KINDS OF DECISIONS Accept / reject decision Mutually exclusive project decision Capital rationing decision Accept / reject decision: This is the fundamental decision in capital budgeting. If the project is accepted the firm would invest it, if the proposal were rejected, the firm does not invest in it. In general those entire proposal, which yield a rate of return greater than a certain required rate of return or cost of capital, are accepted and the rest are rejected. Under accept-reject decision, all independent projects that satisfy the minimum investment criterion should be implemented.

Mutually exclusive project decision: Mutually exclusive project decisions are those, which compete with other projects in such a way that the acceptance of one will exclude acceptance of the other projects. The alternatives are mutually exclusive and
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only one may be chosen. Some technique has to be used to determine the best one. The acceptance of the best alternative automatically eliminates the other alternatives. Capital rationing decision: In a situation where the firm has unlimited funds, all independent investments proposal-yielding returns greater than some predetermined level are accepted. However, the situation does not prevail in most of the firms in actual practice. They have fixed capital budget. A large number of investment proposals compete for these limited funds. The firm must therefore ration them. The firm allocates funds to projects in a manner that maxims long term returns. Thus capital rationing refers to a situation in which a firm has more acceptable investment that it can finance. It is concern with the selection of the group of investment proposals out of many investment proposals accepted under accept or reject decisions. The projects are ranked in the descending order rate of return

TECHNIQUES OF CAPITAL BUDGETING Capital budgeting is the process of making investment in capital expenditures. A capital expenditure may be defined as expenditure and the benefits of which are expected to be received over a period of time exceeding one year. The main characteristics of capital expenditure incurred at a point of time and benefits of expenditure incurred at one point of time in future are realized. The following are some examples of capital expenditure. (a) Cost of acquisition of permanent assets i.e. buildings, plant and machineries etc.
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(b) Cost of replacement of old permanent asset. Investment decisions required special attention because of the following reasons: (a) They influence the firms growth path. (b) They affect the risk of the firm. (c) They involve large amount of funds of the firm. (d) They are unchangeable or reversed at high cost. (e) They are most difficult decisions to make. Capital expenditure involves non-flexible long-term commitment of funds. Thus capital expenditure decisions are also called as long-term investment decision-making, capital expenditure decisions, planning capital expenditure and analysis of capital expenditure. DEFINITIONS: Capital budgeting is long term planning for making and financing proposed capital outlays. --Charles T Hangmen. According to GC Philppatos, Capital budgeting concern with allocation of firms scarce financial resources among the available market opportunities. The considerations of investment opportunities involve the comparison of the expected future of the streams of earning from a project, with immediate end subsequent streams of expenditure for it. Capital budgeting decision from day to day is: Capital budgeting decision involves the exchange of the current funds for the benefits future. The future benefits are expected to be realized over a series of years.
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The funds are invested in non-flexible and long-term activities. They have long-term and significant effect on the probability of the concern. They are invariable decisions. INVESTMENT EVALUATION CRITERIA Three steps are involved in the evaluation of an investment. (a) Estimation of cash flows. (b) Estimation of the required rate of return. (c) Application of the decision rule for making the choice. Characteristics: It should consider all cash flows to determine true value of the project. It should help in ranking the various projects according to their true benefits. It should recognize the fact that the bigger cash are preferable than the smaller ones and early cash flows are preferable than later ones. It should help to choose among mutually exclusive projects that project which maximizes the shareholders wealth. It should be a criterion, which is applicable to many conceivable investment projects independent of other. The capital budgeting technique, which has all these characteristics, is the method to be used for the project appraisal purpose. A number of capital budgeting techniques are in use in practice. They may be grouped in two categories that the following chart tries to show:

EXHIBIT-II.1 INVESTMENT CRITERIA

Investment criteria

Discounting criteria

Non-discounting criteria

Net present value

Profitability index

Internal rate of return

Payback period

Accounting rate return of

TRADITIONAL OR NON-DISCOUNTING TECHNIQUES: 1) Payback period: The payback period is one of the most popular and widely recognized traditional methods of evaluating investment proposals. It is defined as the number of years required to recover the original cash outlay invested in a

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project. If the project generates constant annual cash flows, the payback period can be computed by dividing cash outlay by the annual cash inflow.

Payback period = Average income / Annual cash flow

Acceptance rule: Payback method is the simplest and easy to understand and easy to calculate. As a ranking method, it gives highest ranking to the project, which has the shortest payback period and lowest among two mutually exclusive projects, the project with shorter payback period. 2) Accounting rate of return (ARR): The accounting rate of return (ARR) is known as average rate of return and also returns on investment (ROI). It is found out by dividing the average after tax profit by the average investment. The average investment would be equal it half of the original investment if it is depreciated constantly. Alternatively, it can be found out dividing the total of the investments boo vales after depreciation by the life of the project.

Accounting rate of return = average income / Average investment. Average investment = (Original investment Scrap value)/2

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Average income = Total income / Number of years.

Acceptance rule: This method will accept all those projects whose ARR is higher than the minimum rate established by the management and reject those projects which have ARR less than the minimum rate. This method would rank a project as number one if it has higher ARR and lowest rank would be assigned to the project with lowest ARR.

DISCOUNTING TECHNIQUES: 1) Net present value (NPV): The net present value (NPV) method is the classic economic method of evaluating the investment proposals. It is a method in which we can convert future cash profits to todays cash profit based on the interest rate by which we can equate todays value of the future profit. The interest rate is nothing but cost of capital or the inflation rate or the rate expected by the investor. If the rate of interest is not given, in India maximum return expected is 10% so find out the NPV at 10% only. If the NPV is positive(+) we will get profits on projects. Accordingly accept / reject decision will be taken.

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Net present value = Summation of present value of cash inflows in each year The summation of present values of the net present value of two mutually exclusive projects X and Y.

Acceptance of project: NPV<0 reject NPV>0 accept NPV=0 May accept 2) Internal rate of return (IRR): The second discounted cash flow or time-adjusted method for apprising capital investment decisions is the internal rate of return (IRR) method. This technique is also known as yield on investment, marginal efficiency of capital, marginal productivity of capital. The internal rate of return is usually the rate of return that a project earns. It is defined as the aggregate present value of cash outflows of a project. IRR = Lower rate of return + present value of Cash at lower rate present value of investment / Different between present values Different between the discount rate chosen. Acceptance of project: Accept if IRR > cost of capital Reject - if IRR < cost of capital 3) Profitability Index (PI):

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Another time adjusted capital budgeting technique is profitability index or benefit cost of ratio. It is similar to the NPV approach. The profitability index approach means the present value of returns per rupee invested, while the NPV is a base on the difference between the present value of future cash in inflows and the present value of cash outlays. A major disadvantage of NPV method is that being an absolute measure, it is not a reliable method to evaluate projects requiring different initial investments. The PI method provides a solution to this kind of problem. It may be defined as the ratio, which is obtained dividing the present value of future cash in flows by present value of cash outlays. PI = Present value cash inflows / Present value of cash outflows

Acceptance of project: If the present value sum of total of the compounded reinvested cash inflows (PVTs) is greater than the present value of the outflows (PVO), the project is accepted if: PVTs > PVO accepted. PVTs < PVO rejected A variation terminal value method (TV) is net terminal value method (NTV) it can be represented as NTV = PVTs PVO. If the NTV is positive, accept the project. If the NTV is negative, reject the project. The NTV method is similar to NPV method. Initially the values are compounded, and in the later they are discounted. Both the methods will give the same results. The same interest rates are used for both the discounting and compounding.
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EVALUATION OF PROJECT CASH FLOWS The role of finance manager is to coordinate the different departments and obtain information from departments, ensure that the forecast are based on set of consistent economic assumptions, keep the exercise focused on the relevant variables and minimize the problems in cash flow fore casting. (a) Times factors for the analysis. (b) Physical life of the plant. (c) Technological life of the plant. Investment planning horizon of the firm. For the capital budgeting cash flows have to be estimated. There are certain ingredients of cash flow streams. Tax effect: It has been already observed that cash flows to be considered for the purpose of capital budgeting are net of taxes. Special consideration needs to be given to tax effects on cash flows if the firms is incurring losses and, therefore paying no taxes. The tax laws permit carrying losses forward to set off against future income. In such cases, therefore, the benefits of tax savings would accrue in future years. Effect on other projects:

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Cash flow effects of the projects under the consideration. For instance if the company is considering the production of new product, which competes with the existing products in the product line, it is likely that as a result of new proposal, the cash flows related to the old product will be affected. Effect on indirect expenses: The indirect expenses/overheads are allocated to the different products on the basis of wages paid, materials used, floor space occupied or some other similar common factor. The question that arises is should such allocation of the overheads be taken into the account in the cash flows? If yes, it should be taken into account. If however the overheads will not change as a result of the investment decision, they are not relevant. Effect of depreciation: Depreciation, although a non-cash item of cost, is deductible expenditure in determining taxable income. Depreciation provisions are prescribed by the companys act for accounting purpose and by the income tax for taxation purposes. The act that prescribes that rate of depreciation for various types of depreciable assets. On written down value (WDV) basis as well as straight-line basis. It also permits companies to charge depreciation on any other basis provided it has the effect of writing off 95% of the original cost of the asset on the expiry of the specified period and has the approval of the government. Depreciation is the charged with a view to simplify computation, not on individual assets. A block of assets defined as group of assets, being

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building, machinery, plant or furniture in respect of which the same rate of depreciation is prescribed. Depreciation is computed at the block-wise rates on the basis of written down value (WDV) method only. Presently, the block-wise for plant and machinery are 25%, 40% and 100%. The depreciation allowance on office buildings, and furniture and fitting is 10%. Where the actual cost of plan and machinery does not exceed Rs.5000 the entire cost is allowed to be written off in the first year of its use. If an asset acquired during a year has been used for a period less than 180days during the year, depreciation on such assets is allowed only a 50% of the computed depreciation according to the relevant rate. Working capital effect: Working capital constitutes another capital ingredient of the cash flow stream, which is directly related to an investment proposal. The term working capital is used here in neatness, i.e. current assets current liabilities (Net Working Capital). If investment is expected to increase sales it is likely that there will be an increase in current assets in the form of account receivable, inventory and cash. But part of these increases in current assets will be offset by an increase in current liabilities in the form of current accounts and notes payable. The difference between these additional current assets and current liabilities will be needed to carryout the investment proposal. Sometimes, it may constitute a significant part of the total investment in the project. The increased working capital forms part of an initial cash outlay.

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The additional networking capital will however be returned to the firm at the end of the projects file. Therefore, the recovery of the working capital becomes the part of the cash in flows stream in the terminal year. Determination of relevant cash flows: The data requirements for capital budgeting are cash flows, outflows and inflows. Their competition becomes on the nature of the proposal. Capital proposals can be categorized into: (a) Single proposal. (b) Replacement situations. (c) Mutually exclusive. Single proposal: The cash outflows, comprising cash outlays required to carryout the proposal capital expenditure, while the computation of the inflows after taxes (CFAT). Format: Cash outflows of the new project (beginning of the period at ZERO TIME) Cost of new project + Installation of plant and equipment +/- Working capital requirement xxx xxx xxx

Determination of cash inflows: Single investment proposal (t=n-1) TABLE II.1 Single investment proposal format

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Years Particulars 1 Cash sales revenues (-) Cash operating cost Cash inflows before taxes (CFBT) (-) Depreciation taxable income (-) Tax earnings after taxes (+) Depreciation Cash inflows after tax(CFAT) (+) Salvage value (in Nth year) (+) Recovery of the working capital Replacement situations: In case of replacement of an existing machine by a new one the relevant cash outflows are after tax incremental cash flows. If anew machine is about to replace an existing machine the proceeds so obtained from its sales reduce cash out flows required to purchase the new machine and part of relevant cash outflows. Mutually exclusive: In case of mutually exclusive proposals the selection of one proposal preludes the choice of other. The calculation of the cash flows is on lines of similar to the replacement situations. Element of cash flows streams: To evaluate a project, we must determine the relevant cash flows, which are the incremental after the cash flows associated with the project. The cash flow stream of the conventional project, a project which involves cash outflows followed by cash inflows comprises three basic components: 2 3 N

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(a) Initial investment. (b) Operating cash flows. (c) Terminal cash flows. The initial investment is after tax cash outlay on capital expenditure and networking capital. The operating cash inflows are the after tax cash inflows resulting from the operating of the project during the economic life. The terminal cash inflow is after tax cash flow resulting from the liquidation of the project at the end of its economic life. Time horizon for analysis: This time horizon for cash flow analysis usually established generally the minimum of the following: Physical life of the plant: This refers to the period during which the plant remains in a physically usable condition. This is the number of years the plant would perform the function for which it had been acquired. This depends upon the wear and tear which plant is subjected to. Suppliers of plant may provide the information of the physical life under normal operating conditions. While the concept of the physical life may be useful for determining the depreciation charge, it is not very useful for investment decision-making process. Technological life of the plant:
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New technological developments tend to render the existing plant obsolete. The technological life of the plant refers to the period of the time for which the present plant would not be rendered obsolete by a new plant. It is very difficult to estimate the technological life because any law does not govern the phase of the new development. While it is almost certain that a new development would occur when it would occur is anybodys guess. Yet an estimate of the technological life has to be made. Product market life of the plant: A plant may be physically usable, its technology may not be obsolete, but the market for its products may disappear or shrink and hence its continuance may not be justified. The product life of the plant refers to the period for which the product of the plant enjoys reasonable satisfactory market. Investment horizon of the firm: The time period for which a firm wishes to look ahead for the purposes of investment analysis may be referred to as its investment horizon planning. It naturally tends to vary with the complexity and size of investment. For small investments (installation of lathe) it may be five years. For medium size investments (expansion of the plant capacity) it may be ten years. For large size investment (setting up a new division) it may be fifteen years.

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COMPANY PROFILE Hindustan Aeronautics Limited (HAL) came into existence on 1st October 1964. The Company was formed by the merger of Hindustan Aircraft Limited with Aeronautics India Limited and Aircraft Manufacturing Depot, Kanpur. The Company traces its roots to the pioneering efforts of an industrialist with extraordinary vision, the late Seth Walchand Hirachand, who set up Hindustan Aircraft Limited at Bangalore in association with the erstwhile princely State of Mysore in December 1940. The Government of India became a shareholder in March 1941 and took over the Management in 1942. Today, HAL has 16 Production Units and 9 Research and Design Centers in 7 locations in India. The Company has an impressive product track record - 12 types of aircraft manufactured with in-house R & D and 14 types produced under license. HAL has manufactured 3550 aircraft (which includes 11 types designed indigenously), 3600 engines and overhauled over 8150 aircraft and 27300 engines. HAL has been successful in numerous R & D programs developed for both Defense and Civil Aviation sectors. HAL has made substantial progress in its current projects:
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Dhruv, which is Advanced Light Helicopter (ALH) Tejas - Light Combat Aircraft (LCA) Intermediate Jet Trainer (IJT) Various military and civil upgrades. Dhruv was delivered to the Indian Army, Navy, Air Force

and the Coast Guard in March 2002, in the very first year of its production, a unique achievement. HAL has played a significant role for India's space programs by participating in the manufacture of structures for Satellite Launch Vehicles like

PSLV (Polar Satellite Launch Vehicle) GSLV (Geo Stationary Launch Vehicle) IRS (Indian Remote Satellite) INSAT (Indian National Satellite)

There are three joint venture companies with HAL:

BAeHAL Software Limited Indo-Russian Aviation Limited (IRAL) Snecma HAL Aerospace Pvt Ltd

Apart from these three, other major diversification projects are Industrial Marine Gas Turbine and Airport Services. Several Co-production and Joint Ventures with international participation are under consideration.

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HAL's supplies / services are mainly to Indian Defense Services, Coast Guards and Border Security Forces. Transport Aircraft and Helicopters have also been supplied to Airlines as well as State Governments of India. The Company has also achieved a foothold in export in more than 30 countries, having demonstrated its quality and price competitiveness. HAL has won several International & National Awards for achievements in R&D, Technology, Managerial Performance, Exports, Energy Conservation, Quality and Fulfillment of Social Responsibilities.

HAL was awarded the INTERNATIONAL GOLD MEDAL AWARD for Corporate Achievement in Quality and Efficiency at the International Summit (Global Rating Leaders 2003), London, UK by M/s Global Rating and UK in conjunction with the International Information and Marketing Center (IIMC). HAL was presented the International - ARCH OF EUROPE Award in Gold Category in recognition for its commitment to Quality, Leadership, and Technology and innovation. At the National level, HAL won the "GOLD TROPHY" for excellence in Public Sector Management, instituted by the Standing Conference of Public Enterprises (SCOPE).

The Company scaled new heights in the financial year 2004-2005 with a turnover of Rs. 4534 Crores and export over Rs. 150.05 Crores.

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EVOLUTION AND GROWTH OF THE COMPANY The companys steady organizational growth over the years with consolidation and enlargement of its operational base by creating sophisticated facilities for manufacture of aircraft / helicopters, aero engines, accessories and avionics is illustrated below. EXHIBIT-III.1

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HAL MISSION " To become a globally competitive aerospace industry while working as an instrument for achieving self-reliance in design, manufacture and maintenance of aerospace defense equipment and diversifying to related
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areas, managing the business on commercial lines in a climate of growing professional competence HAL VALUES CUSTOMER SATISFACTION HAL is dedicated to building a relationship with its customers where it becomes partners in fulfilling their mission. It strives to understand our customers needs and to deliver products and services that fulfill and exceed all their requirements. COMMITMENT TO TOTAL QUALITY It is committed to continuous improvement of all its activities. It will supply products and services that conform to highest standards of design, manufacture, reliability, maintainability and fitness for use as desired by our customers COST AND TIME CONSCIOUSNESS It believes that our success depends on their ability to continually reduce the cost and shorten the delivery period of its products and services. It will achieve this by eliminating waste in all activities and continuously improving all processes in every area of our work. INNOVATION AND CREATIVITY It believes that our success depends on our ability to continually reduce the cost and shorten the delivery period of our products and services. It will achieve this by eliminating waste in all activities and continuously improving all processes in every area of our work. TRUST AND TEAM SPIRIT

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It believes in achieving harmony in work life through mutual trust, transparency, co-operation, and a sense of belonging. It will strive for building empowered teams to work towards achieving organizational goals. RESPECT FOR THE INDIVIDUAL It values its people. it will treat each other with dignity and respect and strive for individual growth and realization of everyone's full potential. INTEGRITY It believes in a commitment to be honest, trustworthy, and fair in all our dealings. It commits to be loyal and devoted to its organization. It will practice self-discipline and own responsibility for its actions. It will comply with all requirements so as to ensure that its organization is always

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EXHIBIT-III.2 BOARD OF DIRECTORS

CHAIRMAN

WHOLE TIME DIRECTORS (7)

PART TIME OFFICIAL DIRECTORS (2)

PART TIME NONOFFICIAL DIRECTORS (6)

MD (MIG COMPLEX) DIRECTOR (PERSONNEL) DIRECTOR (CORP PLG & MKG) MD (ACCYS COMLLEX) DIRECTOR (DESIGN & DEV) DIRECTOR (FINANCE) MD (BANGALOOR COMPLEX)

JOINT SECRETARY (HAL) ADDL.FA (AM) & JS

G P GUPTHA RATAN NAVAL TATA R N BHATTACHARYA M.K.MOITRA S.RAVI VICE ADMIRAL RAMAN PURI (Retd.)

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EXHIBIT-III.3

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TABLE III.1 HAL CUSTOMERS

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International Customers

Domestic Customers

Airbus Industries, France APPH Bolton, UK BAE Systems, UK Chelton, UK Coast Guard, Mauritius Corporate Air, Philippines Cosmic Air, Nepal Dassault Aviation, France Dowty Aerospace Hydraulics, UK EADS, France ELTA, Israel Gorkha Airlines, Nepal Hampson, UK Honeywell International, USA Island Aviation Services, Maldives Israel Aircraft Industries, Israel Messier Dowty Ltd., UK Mistubishi Heavy Industries, Japan MOOG, USA Namibian Air Force, Namibia Peruvian Air Force , Peru Rolls Royce Plc, UK Royal Air Force, Oman Royal Malaysian Air Force, Malaysia Royal Nepal Army, Nepal Royal Thai Air Force, Thailand

Air India Air Sahara Airports Authority of India Bharat Electronics Border Security Force Coal India Defense Research & Development Organization Govt. of Andhra Pradesh Govt. of Jammu & Kashmir Govt. of Karnataka Govt. of Maharashtra Govt. of Rajasthan Govt. of Uttar Pradesh Govt. of West Bengal Indian Air force Indian Airlines Indian Army Indian Coast Guard Indian Navy Indian Space Research Organization Jet Airways Kudremukh Iron ore Company ltd. NALCO Oil & Natural Gas Corporation Ltd. Ordnance Factories Reliance Industries United Breweries

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Smiths Industries, UK Snecma, France Strong field Technologies, UK The Boeing Aircraft Company, USA Tran world Aviation, UAE Vietnam Air Force, Vietnam

FINANCIAL HIGHLIGHTS: Hindustan Aeronautics Limited (HAL) has cruised past the Rs.7,500-crore mark for the first time with a sales turnover of Rs.7,783.61 crores ($1.82 billion) during the Financial Year 2006-07, The Value of Production has also gone up by 55.54% to Rs. 9,201.88 crores, while the

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Profit of the Company (Profit Before Tax) soared to Rs.1,743.60 crores, which is an increase of 54.88% over the previous year's performance. The highlights are given below:

Rupees in Crores Particulars Sales VOP Profit before tax Profit after tax Gross Block 2005-06 5342 5916 1126 771 1694 2006-07 7783 9202 1744 1149 2081 Growth over Previous Year 45.69% 55.54% 54.88% 49.03% 22.85%

Welcome to the Avionics Division, Hyderabad of Hindustan Aeronautic

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Limited. In early sixties, it was strongly felt that our defense services

should be more self reliant in defense related equipment, electronics in particular. This resulted in HAL setting up a full - fledged unit to cater to the aviation electronics (AVIONICS). Thus Avionics Division, Hyderabad was born in the year 1965. To begin with, the Division's dedicated design team took up the task of indigenising, the following critical avionics.

Identification of Friend or Foe UHF Communication set V/UHF Communication System Automatic Direction Finder (ADF) Radio Altimeter

These systems were developed, qualified, flight tested and inducted into the various MiG aircraft manufactured under license in India. Later on, the same equipments were fine tuned to meet the requirement of other aircraft like Kiran, Jaguar, Dornier, AN-32 and Helicopters. Today the Division has spread its wings further to meet the Communication and Navigation requirements of our defiance customers and the Division is fully geared to enter the international market too.
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Products in Current Manufacturing Range

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SI. EQUIPMENTFUNCTION NO. 1.

HIGHLIGHTS SPECIFICATIONS

2.

3. 4. 5. 6. 7. 8.

Power output: > Identification ofMore than 2000350W< (24.5 dbw) IFF 400 Friend or Foe in service PEAK No. of codes available 4096 Automatic replies to appropriate groundModular Additional secure IFF 1410A or airborneConstruction mode interrogators About 1000 Automatic Direction ADF flying in variousAccuracy: 2% Finder aircraft A combined V 100-156 MHz (2240 More than 2000 VUC-201 A /UHF main channels) 225-400 in service communication set MHz (7000 channels) Integrated Radio Communication in INCOMCommunication ECCM Facility AM/FM/Data/ECCM 1210A System Mode Operating Freq.: 225UHF standby COM-150A Fully solid-state 400 MHz 7000 equipment channels, 5 w UHF standbyHybridized COM-1150A 10 Preset Channels equipment Version VHF Operating Freq.: 116COMFully Solid Communication 136 MHz 720 104A/105A state Equipment channels, 4W 2 to 27 MHz Fitted in all HF Single Sideband Channel spacing: 100 military Communication set Hz Transport A/C Sensitivity: 100 dbm Supplied to Range: 5 to 200 Measure speed ofmany state KMPH moving object police Accuracy: 1 KMPH departments A combined V/UHFMore than 150Freq. Range: 100-156 Communication set Operation inMHz various ships
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9.

HFSSB

10. SPEEDET

ANALYSIS OF THE PROJECTS This project deals with the analysis of certain running projects of HAL. The analysis is carried out based on the method of risk analysis discussed in earlier chapter. Since H.A.L is a organization under the ministry of the Defense which is engaged in the production of different Defense products to be supplied to its various customers viz. Indian air force, Indian army, Indian navy etc. The project names that are bean analyzed in further chapters have been codified for data security. Accordingly four running projects of H.A.L. have been selected for analysis and are coded as PROJECT 1, PROJECT 2, PROJECT 3, and PROJECT 4. Brief description of the project is discussed below.

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PROJECT-1 This project is for supply of Eqot. For a Helicopter and its total investment is about Rs.1038 lakhs. CASH FLOW AFTER TAX FOR PROJECT- 1

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TABLE IV.1

Qt Year y 1 2

Sale Value 3

Total Cost 4

Gross Total Net Tax Earnings Dep Earnings 31% 5=3-4 6 38.9 2 51.9 77.8 5 98.6 103. 8 103. 8 103. 8 103. 8 103. 8 103. 8 103. 8 103. 8 7=5-6 8

PAT 9=7-8

Add. Dep. 10 38.9 2 51.9 77.8 5 98.6 103. 8 103. 8 103. 8 103. 8 103. 8 103. 8 103. 8 44.1 3

CFAT 11=9+10

1 2 3 4 5 6 7 8 9 10 11 12 Tota l

3 5 15 25 25 30 30 35 35 35 35 25 30 0

265.5 441.75 1325.2 5 2208.7 5 2208.7 5 2650.5 2650.5 3092.2 5 3092.2 5 3092.2 5 3092.2 5 2385.4 5

238.55 397.58 1192.7 3 1987.8 8 2017.6 9 2047.9 6 2078.6 8 2810.8 6 2853.0 2 2895.8 2 2939.2 6 2266.1 8

26.5 44.17 132.52 220.87 191.06 602.54 571.82 281.39 239.23 196.43 152.99 119.27

-12.42 -7.73 54.67 122.27 87.26 498.74 468.02 177.59 135.43 92.63 49.19 75.14

-3.85 -2.4 16.95 37.9 27.05 154.6 1 145.0 9 55.05 41.98 28.72 15.25 23.29

-8.57 -5.33 37.72 84.37 60.21 344.13 322.93 122.54 93.45 63.91 33.94 51.85 1201.1 5

30.35 46.57 115.57 182.97 164.01 447.93 426.73 226.39 197.25 167.71 137.74 95.98 2239.15

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PROJECT -2 This project is recording system with a capital investment is a bout Rs.92.54 lakhs. CASH FLOW AFTER TAX FOR PROJECT 2 TABLE IV.2 Tota Gross l Earnings Dep 5=3-4 3.71 14.86 18.57 16.06 30.95 26.77 30.95 55.71 6 3.67 4.62 6.94 6.94 6.94 6.94 6.94 6.94

Year 1 1 2 3 4 5 6 7 8

Qt y 2 3 12 15 15 25 25 25

Sale Value 3 37.14 148.5 6 185.7 185.7 309.5 309.5 309.5 557.1

Total Cost 4 33.43 133.7 167.1 3 169.6 4 278.5 5 282.7 3 278.5 5 501.3 9

Net Tax Earnings 31% 7=5-6 0.04 10.24 11.63 9.12 24.01 19.83 24.01 48.77 8 0.01 3.17 3.61 2.83 7.44 6.15 7.44 15.1 2

PAT 9=7-8 0.03 7.07 8.02 6.29 16.57 13.68 16.57 33.65 101.8 8

Add. Dep. CFAT 10 3.67 4.62 6.94 6.94 6.94 6.94 6.94 6.94 11=9+10 3.7 11.69 14.96 13.23 23.51 20.62 23.51 40.59 151.81

45 16 TOTAL 5

41

PROJECT- 3 This project is Adv. Computer system with a capital investment about Rs.220.00 lakhs. CASH FLOW AFTER TAX FOR PROJECT- 3 TABLE IV.3

42

Year

Qt y

Sale Value

Total Cost

Tota Gross l Earnings Dep

Net Tax Earnings 31%

PAT

Add. Dep. CFAT

5=3-4

7=5-6

9=7-8

10

11=9+10

1 2 3

8 25 27

566.56 1770.5 1912.1 4

509.9 1593.4 5 1720.9 3

56.66 177.05 191.21

0.85 0.85 0.85

55.81 176.2 190.36

17.3 54.6 2 59.0 1

TOTAL 60

38.51 121.5 8 131.3 5 291.4 4

0.85 0.85 0.85

39.36 122.43 132.2 293.99

PROJECT 4 This project is Radar Eqpt. With a capital investment is about Rs.160 lakhs.

43

CASH FLOW AFTER TAX FOR PROJECT 4 TABLE IV.4 Tota Gross l Earnings Dep 5=3-4 6

Year 1

Qt y 2

Sale Value 3

Total Cost 4 5379.9 1 4215.1 9 4320.5 7 4406.9 8

Net Tax Earnings 31% 7=5-6 8 44.1 4 61.3 3 28.6 7 1.88

PAT 9=7-8

Add. Dep. CFAT 10 11=9+10

1 2 3 4

5 4 4 4

5546.3 4437.0 4 4437.0 4 4437.0 4

166.39 221.85 116.47 30.06

24 24 24 24

142.39 197.85 92.47 6.06

98.25 136.5 2 63.8 4.18 302.7 5

24 24 24 24

122.25 160.52 87.8 28.18 398.75

TOTAL 17

44

CALCULATION OF PAYBACK PERIOD Payback period can be computed by dividing cash outlay by the annual cash flow.

Payback period =Lower year + Original cost of product AACIF of lower year / AACIF of upper year AACIF of lower year In the case of unequal cash flow, the payback period can be found out by adding of the cash inflows until the total is equal to the initial cash outlay. Acceptance rule: Payback method is the simplest and easy to understand and easy to calculate. Companies used the payback period to accept or reject or it is used as a method of ranking the project. As a ranking method, it gives highest ranking to the project, which has the shortest payback period and lowest ranking to the project with highest payback period. If the firm has to choose among two mutually exclusive projects, the project with shorter payback period is selected.

45

TABLE IV.5 THE PAYBACK PERIOD OF PROJECT-1 (Rs in lakhs ) Cumulative cash inflows 30.35 76.92 192.49 375.46 539.47 987.4 1414.13 1640.47 1837.72 2005.43 2143.17 2239.15

Year 1 2 3 4 5 6 7 8 9 10 11 12

Annual cash inflows 30.35 46.57 115.57 182.97 164.01 447.93 426.73 226.39 197.25 167.71 137.74 95.98

Investment is Rs 1038 lakhs.

Payback period =Lower year + Original cost of product AACIF of lower year / AACIF of upper year AACIF of lower year

46

Payback period= 6+(1038-984.40)/(1414.13-987.40) = 6.1 years.

Interpretation: In this project the initial investment is Rs1038 lakhs are recovered in 6th year of 1st month. TABLE IV.6 THE PAYBACK PERIOD OF PROJECT-2 (Rs in lakhs) Year 1 2 3 4 5 6 7 8 Annual cash inflows 3.7 11.69 14.96 13.23 23.51 20.62 23.51 40.59 Cumulative cash inflows 3.7 15.39 30.35 43.58 67.09 87.71 111.23 151.81

Investment is Rs 92.54 lakhs.

Payback period =Lower year + Original cost of product AACIF of lower year / AACIF of upper year AACIF of lower year

47

Payback period = 6+ (92.54-87.71) / (111.23-87.71) = 6.2 years.

Interpretation: In this project the initial investment is Rs 92.54 lakhs are recovered in the 6th year of 2nd month. TABLE IV.7 THE PAYBACK PERIOD OF PROJECT-3 (Rs in lakhs) Year 1 2 3 . Investment is Rs 220.00 lakhs. Annual cash inflows 39.36 122.43 132.2 Cumulative cash inflows 39.36 161.79 293.99

Payback period =Lower year + Original cost of product AACIF of lower year / AACIF of upper year AACIF of lower year

48

Payback period = 2 + (220 161.79) / (293.99 161.79) = 2 + (58.21 / 132.2) =2 + 0.44 = 2.4 years

Interpretation: In this project the initial investment is Rs 220.00lakhs are recovered in the 2nd year of 4th Month

TABLE IV.8 THE PAYBACK PERIOD OF PROJECT-4 (Rs in lakhs) Annual cash inflows 122.25 160.52 87.8 28.18

Year 1 2 3 4

Cumulative cash inflows 122.25 287.77 370.57 398.75

Investment is Rs 160 lakhs.

49

Payback period =Lower year + Original cost of product AACIF of lower year / AACIF of upper year AACIF of lower year

Payback period = 1+ (160-122.25) / (287.77-122.25) = 1.2years.

Interpretation: In this project the initial investment is Rs 160.00 lakhs are recovered in the 1st year of 2nd month.

FIGURE IV.1

50

PAYBACK PERIOD OF DIFFERENT PROJ ECTS 7 6 5 4 YEARS 3 2.4 2 1.2 1 0 1 2 3 4 PROJ ECTS 6.1 6.2

1 2 3 4

51

CALCULATION OF ACCOUTING RATE OF RETURN The accounting rate of return thus is an Average Rate of Return, which can be determined by the following equation.

Accounting rate of return = average income / Average investment. Average investment = (Original investment Scrap value)/2 Average income = Total income / Number of years.

Acceptance rule: This method will accept all those projects whose ARR is higher than the minimum rate established by the management and reject those projects which have ARR less than the minimum rate. This method would rank a project as number one if it has higher ARR and lowest rank would be assigned to the project with lowest ARR. However, in HAL capital investment in different projects is less since the company has already established necessary infrastructure facilities. The expected rate of return expected by the management from the entire project is 10%. Except for certain exceptional projects such as TOT projects where the probability values based on nature and Transfer of Technology. Based on this the ARR

52

of HAL is always likely to be higher. The ARR of four projects under analysis is as below:

TABLE IV.9 THE ARR OF PROJECT-1 (Rs in lakhs) Year 1 2 3 4 5 6 7 8 9 10 11 12 Total NPAT -8.57 -5.33 37.72 84.37 60.21 344.1 322.9 122.5 93.45 63.91 33.94 51.85 1201.2

Accounting rate of return = average income / Average investment. Average investment = (Original investment Scrap value)/2 Average income = Total income / Number of years.
53

Investment is Rs1038 lakhs Average investment = 1038/2=519. Average income =1201.15/12 =100.10 ARR= (100.10/519) 100 =19.28% TABLE IV.10 THE ARR OF PROJECT-2

Year 1 2 3 4 5 6 7 8 Total

(Rs in lakhs) NPAT 0.03 7.07 8.02 6.29 16.57 13.68 16.57 33.65 101.9

54

Accounting rate of return = average income / Average investment. Average investment = (Original investment Scrap value)/2 Average income = Total income / Number of years.

Investment is Rs.92.54 lakhs. Average investment = 92.54/2 = 46.27 Average income = 101.88/8 = 12.73 ARR = (12.73/46.27) 100 = 27.51 ARR = 27.51%

TABLE IV.11 THE ARR OF PROJECT-3

(Rs in lakhs) Year 1 2 3 Total NPAT 38.51 121.6 131.4 291.4

55

Accounting rate of return = average income / Average investment. Average investment = (Original investment Scrap value)/2 Average income = Total income / Number of years.

Investment is Rs220.00 lakhs. Average investment = 220/2 = 110 Average income = 291.44/3 = 97.14 ARR = (97.14/110) 100 ARR = 88% TABLE IV.12 THE ARR OF PROJECT-4 (Rs in lakhs) Year 1 2 3 4 NPAT 98.25 136.5 63.8 4.18

56

Total

302.8

Accounting rate of return = average income / Average investment. Average investment = (Original investment Scrap value)/2 Average income = Total income / Number of years.

Investment is Rs.160 lakhs. Average investment = 160/2 = 80 Average income = 302.75/4 = 75.68 ARR = (75.68/80) 100 =94.6%

57

FIGURE IV.2

ARR OF DIFFERENT PROJ ECTS

100 90 80 70 60
ARR@%

94.6 88

50 40 30 20 10 0 1 2
PROJ ECTS

27.51 19.28

1 2 3 4

58

CALCULATION OF NET PRESENT VALUE OF HAL:

The following steps are involved in the calculation of NPV. Incase of NPV is positive accept the project, if the NPV is negative reject the project. NPV > 0 ACCEPT NPV < 0 REJECT NPV = 0 MAY ACCEPT NPV is the true measure of an investments profitability. The NPV method, therefore, provides the most investment rule. First, it recognizes the time value of money. A rupee received today is worth more than a rupee received tomorrow. It uses all cash flows occurring over the entire of the project in calculating its worth. The NPV relies on the time value of the estimated cash flows and the discount rate rather than any arbitrary assumptions or subjective considerations. The NPV method can be selected between mutually exclusive projects; the one with higher NPV should be selected. Using the NPV method, projects would be ranked in order of net present values; that is, first rank will be given to the project with the highest positive net present value and soon

59

TABLE IV.13 NET PRESENT VALUE OF THE PROJECT-1 (Rs in lakhs) Year 1 1 2 3 4 5 6 7 8 9 10 11 12 Total Cash flow 2 30.35 46.57 115.57 182.97 164.01 447.93 426.73 226.39 197.25 167.71 137.74 95.98 P.V.factor@10% 3 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 0.35 0.319 Cash flows of P.V 4(2*3) 27.58 38.46 86.79 124.96 101.85 252.63 218.91 105.7 83.63 64.73 48.2 30.61 1184.05

Total CF of PV = 1184.05 (-) Investment = 1038.00 NPV = 146.05

60

Interpretation: NPV of project-1 is positive (+) i.e. Rs 146.05 lakhs, so project is acceptable for HAL.

TABLE IV.14 NET PRESENT VALUE OF THE PROJECT-2 (Rs in lakhs) Year 1 1 2 3 4 5 6 7 8 Total Cash flow 2 3.7 11.69 14.96 13.23 23.51 20.62 23.51 40.59 P.V.factor@10% 3 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 Cash flows of P.V 4 (2*3) 3.36 9.65 11.23 9.03 14.59 11.62 12.06 18.95 90.49

Total CV of PV = 90.49 (-) Investment = 92.54 NPV = -2.05

61

Interpretation: NPV of project-2 is Negative (-) i.e. Rs 2.05 lakhs, so project is reject for HAL.

TABLE IV.15 NET PRESENT VALUE OF THE PROJECT-3 (Rs in lakhs) Year 1 2 3 4 Cash flow 39.36 122.43 132.2 Total P.V.factor@10% 0.909 0.826 0.751 Cash flows of P.V 35.77 101.12 99.28 236.17

Total CF of PV = 236.17 (-) Investment = 220.00 NPV = 16.17

62

Interpretation: NPV of project-3 is positive (+) i.e. Rs 16.17 lakhs, so project is acceptable for HAL.

TABLE IV.16 NET PRESENT VALUE OF THE PROJECT-4 (Rs in lakhs) Year 1 2 3 4 5 Cash flow 122.25 160.52 87.8 28.18 Total P.V.factor@10% 0.909 0.826 0.751 0.683 Cash flows of P.V 111.12 132.58 65.93 19.24 328.87

Total CV of PV = 328.87

63

(-) Investment = 160.00 NPV = 168.87

Interpretation: NPV of project-4 is positive (+) i.e. Rs 168.87 lakhs, so project is acceptable for HAL.

64

FIGURE IV.3

NPV OF DIFFERENT PROJ ECTS

180 160 146.05 140 120 100 RUPEES IN LAKHS 80 60 40 20 0 -20 1 2 PROJ ECTS 3 -2.05 16.17

168.87

1 2 3 4

65

CALCULATION OF PROFITABILITY INDEX (PI) The profitability index method provides a solution to this kind of problem; it may be defined as the ratio, which is obtained dividing the present value of future cash flows by the present values of cash outlays.

PI = PV of cash inflows / initial cash outlay

ACCEPTANCE OF THE PROJECT: Using the B/C ratio or the PI, a project will accept if its PI exceeds one. When the PI = 1, when the PI is greater than, equal to or less than 1, the net present value is greater than or equal to or less than zero. In other wards, the NPV will be positive when the PI is greater than one; NPV is negative when the PI is less the one. Therefore NPV and PI approaches give the same results regarding the investment proposals.

66

TABLE IV.17 PROFITABILITY INDEX OF PROJECT-1: (Rs in lakhs) Year 1 1 2 3 4 5 6 7 8 9 10 11 12 Total Cash flow 2 30.35 46.57 115.57 182.97 164.01 447.93 426.73 226.39 197.25 167.71 137.74 95.98 P.V.factor@10% 3 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 0.35 0.319 Cash flows of P.V 4(2*3) 27.58 38.46 86.79 124.96 101.85 252.63 218.91 105.7 83.63 64.73 48.2 30.61 1184.05

PV of cash inflows (-) Investment NPV

= 1184.05 =1038.00 =146.05

67

PI = PV of cash inflows / initial cash outlay PI = 1184.05/1038 = 1.14 Interpretation: The profitability index value is 1.14, which is more than the value 0, and also the NPV is positive hence the project is viable to HAL. TABLE IV.18 PROFITABILITY INDEX OF PROJECT-2:

(Rs in lakhs) Year 1 1 2 3 4 5 6 7 8 Total Cash flow 2 3.7 11.69 14.96 13.23 23.51 20.62 23.51 40.59 P.V.factor@10% 3 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 Cash flows of P.V 4 (2*3) 3.36 9.65 11.23 9.03 14.59 11.62 12.06 18.95 90.49

Total CV of PV = 90.49 (-) Investment = 92.54 NPV = -2.05

68

PI = PV of cash inflows / initial cash outlay

PI = 90.49/92.54 = 0.97 Interpretation: The profitability index value is 0.97, which is more than the value 0, and also the NPV is negative hence the project is not viable to HAL. TABLE IV.19 PROFITABILITY INDEX OF PROJECT-3:

(Rs in lakhs) Year 1 2 3 4 Cash flow 39.36 122.43 132.2 Total P.V.factor@10% 0.909 0.826 0.751 Cash flows of P.V 35.77 101.12 99.28 236.17

Total CF of PV = 236.17 (-) Investment = 220.00 NPV = 16.17

69

PI = PV of cash inflows / initial cash outlay

PI = 236.17/220= 1.07 Interpretation: The profitability index value is 1.07, which is more than the value 0, and also the NPV is positive hence the project is viable to HAL.

TABLE IV.20 PROFITABILITY INDEX OF PROJECT-4: (Rs in lakhs) Year 1 2 3 4 5 Cash flow 122.25 160.52 87.8 28.18 Total P.V.factor@10% 0.909 0.826 0.751 0.683 Cash flows of P.V 111.12 132.58 65.93 19.24 328.87

Total CV of PV = 328.87 (-) Investment = 160.00 NPV = 168.87

70

PI = PV of cash inflows / initial cash outlay

PI = 328.87/160 =2.05

Interpretation: The profitability index value is 2.05, which is more than the value 0, and also the NPV is positive hence the project is viable to HAL.

71

FIGURE IV.4

PROFITABILITY INDEX OF DIFFERENT PROJ ECTS

2.5

2.05 2

1.5 VALUES 1 1.14 0.97 1 1.07 2 3 4

0.5

0 1 2 PROJ ECTS 3 4

72

INTERNAL RATE OF RETURN (IRR): The second discounted cash flow or time-adjusted method for apprising capital investment decisions is the internal rate of return (IRR) method. This technique is also known as yield on investment, marginal efficiency of capital, marginal productivity of capital. The internal rate of return is usually the rate of return that a project earns. It is defined as the aggregate present value of cash outflows of a project. IRR = Lower rate of return + present value of Cash at lower rate present value of investment / Different between present values Different between the discount rate chosen. (OR) IRR = r (PBP DFR) / (DFRL DFRH) Where PBP = Pay back period DFR = Discount factor for interest Rate r DFRL = Discount factor for Lower interest Rate r DFRH = Discount factor for Higher interest Rate r Acceptance of project: Accept if IRR > cost of capital Reject - if IRR < cost of capital

73

CALCULATION OF IRR OF PROJECT 1 Pay Back Period = 6.1 years Present value of annuity for PBP lies between 12% and 13% 12% ---------------------------- 6.1944 13% ---------------------------- 5.9176 IRR = 13 (6.1-5.917) / (6.194-5.917) IRR = 12.3% Interpretation: The minimum expected rate of return of HAL is 10%. Since the IRR of ject-1 i.e 12.3% is grater than expected rate of return, it is observed that project is viable to HAL.

CALCULATION OF IRR OF PROJECT 2 Pay Back Period = 6.2 years Present value of annuity for PBP lies between 6% and 7% 6% ------------------------- 6.2098 7% ------------------------- 5.9713 IRR = 7 (6.2 5.9713) / (6.2098 5.9713)
74

IRR = 6% Interpretation: The expected rate of return of HAL is 10%. Since the IRR of project-2 i.e. 6% is less than expected rate of return, so it is observed that project is not viable to HAL.

CALCULATION OF IRR OF PROJECT 3 Pay Back Period = 2.4 years Present value of annuity for PBP lies between 12% and 13% 12% ------------------------- 2.402 13% ------------------------- 2.361 IRR = 13 (2.4 2.361) / (2.402 2.361) IRR = 11.88%

Interpretation: The minimum expected rate of return of HAL is 10%. Since the IRR of ject-3 i.e 11.88% is grater than expected rate of return, it is observed that project is viable to HAL.

CALCULATION OF IRR OF PROJECT 4 Invest of Project-3 is Rs.160 Lakhs. NPV= 0

75

(Cash inflow - Investment) = 0 The IRR is the value of r, which satisfies the following equation. 160 = 122.25 + 160.52 + 87.80 + 28.18 (1+r) (1+r) 2 (1+r) 3 (1+r) 4

The calculation of r involves a process of trail and error. We try different values of r till we find that the RHS of the above equation is equal to Rs.160Lakhs. Let us, to began with, try r=62%. This makes the RHS equal to: 39.36 + (1+0.62) 122.43 + (1+0.62) 2 132.20 = 161.37 (1+0.62) 3

The value is slightly Higher than our target valueRs.160lakhs. So we increase the value of r from 62% to 63%. 39.36 + (1+0.63) 122.43 + (1+0.63) 2 132.20 = 159.68 (1+0.63) 3

Since this value is now less than 160, we conclude that value of rlies between 62% to 63%. From most of the purposes this indication sufficient. If a move-refined estimate of r is needed, use the following procedure. (1) Determine the NPV of Two closest rates of return. (NPV/62%) 1.37 (NPV/63%) 0.32 (2) Find sum of the absolute values of the NPV obtained in step 1: 1.37 + 0.32 = 1.69
76

(3) Calculate the ratio of the NPV of the smaller discount rate identified in step 1: to the sum obtained in step2: 0.32/1.69 = 0.18 (4) Add the number obtained in step3: to the smaller discount rate: 62+0.18 = 62.18% Interpretation: The minimum expected rate of return of HAL is 10%. Since the IRR of ject-4 i.e 62.18% is grater than expected rate of return, it is observed that project is viable to HAL.

FIGURE IV.5

77

IRR OF DIFFERENT PROJECTS 70 60 50 40 IRR (%) 30 20 10 0 1 2 3 4

62.18

12.3 6 1 2

11.88

3
PROJECTS

FINDINGS / CONCLUSIONS

78

The study concerned with the capital budgeting with reference to HAL the data is collected, organized, analyzed and interpreted. HAL has a good organization culture, excellent working environment and a very precious asset that is highly dedicated, hardworking, and well-qualified efficient and knowledgeable workforce. The following findings are obtained from the analysis of data: 1. The project is for supply of Eqot. For a helicopter and its total investment is Rs.1038 lakhs.

The non-discounted pay back period is 6.1 years. The investment will recover in 6years and 1 month.

The ARR is 19.28% more than the required rate of return. Therefore, accept the project on ARR basis. NPV is positive (+) i.e.Rs146.05 lakhs, so accept the project. The profitability index is 1.14 times > 1. The IRR is 12.3% more than the required rate of return 2. The project is recording system with a capital investment is about Rs 92.54 lakhs.

The non-discounted pay back period is 6.2 years. The investment will recover in 6years and 2 month.

The ARR is 27.51% more than the required rate of return. Therefore, accept the project on ARR basis.

NPV is negative (-) i.e. 2.05 lakhs, so reject the project on NPV basis.

79

 The profitability index is 0.97 times <1. So reject the project on PI basis. The IRR is 6% less than the required rate of return. So reject project on IRR basis. 3. The project is adv. Based computer system with a capital investment is about Rs.8.12lakhs.

The non-discounted pay back period is 2.4 years. The investment will recover in 2 year and 4th month only.

The ARR is 88% more than the required rate of return. Therefore, accept the project on ARR basis. NPV is positive (+) i.e.Rs16.17 lakhs, so accept the project. The profitability index is 1.07 times > 1. The IRR is 11.88% more than the required rate of return. 4. The project is Radar Eqpt. With a capital investment is about Rs.160lakhs.

The non-discounted pay back period is 1.2 years. The investment will recover in 1year and 2 month.

The ARR is 94.6% more than the required rate of return. Therefore, accept the project on ARR basis. NPV is positive (+) i.e.Rs168.87 lakhs, so accept the project. The profitability index is 2.05 times > 1. The IRR is 62.18% more than the required rate of return

80

TABLE V.1

ACCEPT / REJECT THE NEW SCHEMES:

Project 1 2 3 4

ARR A A A A

PBP A A A A

NPV A R A A

IRR A R A A

PI A R A A

Accept/Reject Accept Reject Accept Accept

81

TABLE V.2

COMPARATIVE ANALYSIS OF ALL THE 4 PROJECTS:

Project 1 2 3

ARR (%) 19.28 27.51 88

NPV (Rs in PBP (Yrs) lakhs) IRR (%) 6.1 6.2 2.4 146.05 -2.05 16.17 12.3 6 11.88

PI (Times) 1.14 0.97 1.07

82

94.6

1.2

168.87

62.8

2.05

The ARR of all the projects is more than the companies minimum required rate of return. All projects are recovering the investment in their project duration.
Except the 2nd project, all of them are having positive NPV.

Except the 2nd project, the IRR of all the projects is more than the

companies minimum required rate of return.

The above projects profitability is more than 1 but again the 2nd

project fails and earns a profit of Rs.0.97 at per rupee of investment. RECOMMENDATIONS / SUGGESTIONS 1. The advanced computer system project is high quality project. Its profitable in all contexts PBP, ARR, NPV, IRR, PI are positive, accept the project. 2. The recording system is not a profitability project; it is generating losses at present. Therefore, Reject it.

83

3. The project of supply of Eqot. for a Helicopter is having a PBP of 6.1yrs, NPV, IRR, ARR & PI are indicating a positive sign. Therefore accept the project. 4. The project of Radar Eqpt is having a PBP of 1.2yrs, NPV, IRR; ARR & PI are indicating a positive sign. Therefore accept the project.

BIBLIOGRAPHY: BOOKS:

84

1) A Murthy, S Gurusamy, Management Accounting, Vijay

Nicole, 2006. 2) I M Pandey, Financial Management, 9/e, Vikas publishing, 2004. 3) M Y Khan and P K Jain,Financial Management,Tata Mc Graw-Hill, New Delhi- 2003. 4) S.N.Maheswari, Financial Management, Vikas Publishers, New Delhi-2003.
5) V K Bhalla, Financial Management and Policies, Anmol

Publications Pvt.Ltd. WEB-SITES:

1) www.hal-india.com 2) www.wikipedia.com 3) www.google.com

New Delhi.

85