A PROJECT REPORT

ON
INVESTMENT ANALYSIS
IN
PHOENIX MOTORS PVT LTD

A PROJECT TO OUSMANIA UNIVERSITY

HYDERABAD

In partial fulfillment for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION
(Finance)

BY
J.SUCHARITHA
H.T.NO.098070157
UNDER THE GUIDENCE OF
Mr. K. VISHWANATH, MBA. PHD,
&
Mr. SRINIVAS MBA.PHD,

qubacollege
(Affiliated to OUSMANIA UNIVERSITY)
THURKAYAMJAL VILLAGE

1
 CERTIFICATE

This is to certify that the project titled “INVESTMENT ANALYSIS”

Submitted in partial fulfillment for the award of master of Business

Administration programmed of Department of Business Management, St

PAULS.COLLEGE OF MANAGEMENT & IT, HYDERABAD was

carried out by Dr.K. Vishwanath under my Guidance. This has not been

submitted to any other University or Institution for the Award of any

Degree Certificate.

Dr.K.Vishwanath

Signature of the Guide.

2
 DECLARATION

I here by declare that, this Project Report titled “ INVESTMENT

ANALYSIS” Submitted by me to the Department Of Business Management,

ST PAULS.COLLEGE OF MANAGEMENT& IT, HYDERABAD. Is a

Bonfire work undertaken by me and is not submitted to any other University or

Institution for the Award of any Degree Certificate or published any time

before.

Signature of the student

3
 ACKNOWLEDGEMENTS

I am grateful to Mr. P.CHANDRA KANTH SHRAMA Sir, HRD C.G.M

AND Mr. M.V.V.SUBBA RAO C.G.M. F&A and P.MOHAN RAO accounts

officer for providing the Opportunity to do the project in your esteemed

organization.

I am also thankful to the Principal Dr.Indira and my guidance

Mr.k.Vishwanath My faculty members who extended their cooperation in

completion of project effectively.

Last but not least, I am expressing my sincere thanks to my parents, who

encouraged and inspired me carrying out this project. I would like to say thanks

to my friends who helped in this regard.

INDEX

4
CHAPTER-1 PAGE. NO.

Abstract
Introduction
Need of than study
Important of Investment Decision
Objective of than study
Research methodology
Limitation

CHAPTER-2

Company profile
Literature review

CHAPTER-3

Investment Analysis in SCCL

CHAPTER-4

Ratio Analysis In and Interpretation

CHAPTER-5

Findings
Conclusion
Suggestions

Bibliography

CHAPTER-1

5
INTRODUCTION

A project is an activity is an activity sufficiently self-contained to permit

financial and commercial analysis in most cases projects represents expenditure

of capital funds by pre-existing entities that want expand or improve their

operation. In general a project is an activity in which logically seems to lead it

self to planning financing and implementations as a unit, is a specific activity

with a specific point and specific ending point to accomplish a specific

objective.

To take up a new project, involves a capital investment decision and it is

the top management‘s duty to make situation and feasibility analysis o that

particular projects and means of implementing it financing is expanding field,

which focuses not on the credit status accompany, but on cash flows that will

be generated by a specific project.

Invest analysis being has its origins in the natural resource and

infrastructure sectors. The current demand for infrastructure and capital

investment is being fueled by deregulation in the power, tale communication,

and transpiration sectors by the privatization o product markets and need for

manufacturing scale, and by the privatization of product markets and need for

manufacturing scale, and by the privatization of government – owned entities

in developed and developing countries. The invest analysis decision procedures

basically involves the evaluation of the desirability on an investment proposals.

It is obvious that the firm mist have a systematic procedure for making

6
investment decisions. In view to the significance of investment decisions, the

procedure of making investment decision. The procedure must be consisting

with the objective of wealth maximization. In view of the significance of

investment decision, the procedure consists of step-by-step analysis.

NEED FOR THE STUDY:

Capital budgeting are the Investment analysis decision of affirm are

generally knows as that capital budgeting, or capital expenditure decision. An

investment analysis decision may be defined as the firm’s decision to invest in

current funds most efficiently in the long-term assets in the anticipation of an

expected flow of benefits over a series of the years. The long-assets are those

that affect the firm’s operations beyond the one-year period. The firm

investment decision would generally include expansion, acquisition

modernization and replacement of the long-term assets. Sale of a division or

business is also an investment decision. Decision like the change of the

methods of sales distribution, or an advertisement campaign or research and

development programmed have long-term implication or the firm’s

expenditures and benefits, and there fore they should also be evaluated an

investment decision.

Important of Investment Decision:

7
 Capital investment, representing the growing edge of a business, is

deemed to be very important for three-related reasons.

1. The influences firm growth in the long-term consequences capital

investment decisions have considerable impact on the firm can do in

future.

2. The affect the risk of the firm; it is difficult to reverse capital investment

is illorganised and/or most of the capital equipment bought by a firm to

meet its specific requirements.

3. Capital investment decision involves substantial out lays.

SCCL is a growing concern, capital budgeting is more or less a continuous

process and it is a carried out by different functional areas of management

such as management, marketing, financial management etc., All the relevant

functional departments play a crucial role in the investment decision process.

Objectives of the Study:

The present theoretical framework relating to the investment decision.

To study the financial aspects for future expansion of Organization.

To discuss the process of the project evaluation followed by a

Organization.

To evaluate the elements consider by Organization for expansion

project.

8
 To summarize and offer suggestion for the better investment proposal.

Research methodology:

Methodology is a systematic procedure of collecting information in

order to analyze and verify a phenomenon. The collection of intimidation had

done by principal sources.

They are follows:

1.Primary data

2.Secondary data

Primary Data:

The primary data needed for the study is gathered through interviews

with concerned officers and staff, either individually or collectively, sum of the

information has been verified or supplemented with personal observation

conducting personal interviews with the concerned officers of finance

department of SCCL.

Secondary Data:

The Secondary data needed for the study was collected from published

sources such as, pamphlets pf annual reports, returns and internal records,

reference from textbooks and journals relating to financial management.

9
Further the data needed for the study was also needed:

A) Collection of required data from annual records of SCCL.

b) Reference from textbooks and journals relating to financial management.

LIMITATIONS:

The following are the limitations of the study

1. Since the procedure and policies of the will not allow disclosing

confidential financial information, the project has to be completed with

available data giving to us.

2. The project period of the study those 8 weeks is not enough to conduct

detailed study of the project.

3. The study is carried basing on the information and documents provided

by the organization with the various employees and based on the

interaction with the various employees of the respective departments.

4. The was no scope of gathering current information, as the auditing has

not been done by the time of the project work.

10
CHAPTER-2

Industry Profile

INDUSTRY PROFILE

BIKES INDUSTRY – AN OVERVIEW

HISTORY OF TWO WHEELERS:

The Britannia Encyclopedia describes a motor cycle as

bicycle or tricycle propelled by an internal-combustion engine (or, less often

by an electric engine). The automobile was the reply to the 19 th century

dream of self propelling the horse-drawn carriage. Similarly the invention of

the motorcycle created the self-propelled bicycle. The first commercial design

11
was three-wheeler built by Edward Butler in Great Britain in1884. This

employed a horizontal singled cylinder gasoline engine mounted between two

steer able front wheels and connected by a drive chain to the rear wheel. The

1900’s swathe conversion on many bicycles or pedal cycles by adding small

centrally mounted spark ignition engines.

There was then felt the need for reliable constructions.

This led to road tests and competition between manufacturers. Tourist Trophy

(TT) races were held on the Isle of Main in 1907 as reliability or endurances

races. Such were the providing ground for many new

ideas from early two-stroke-cycle design to super charged multivalent engine

mounted on aerodynamic carbon fiber reinforced bodywork.

INVENTION OF TWO WHEELERS:

The invention of two-wheeler is much debated issue.

“Who invented the first motorcycle?” may seem like a simple question, but the

answer is quite complicated. Two wheelers owe their decent to the safety

bicycle i.e., bicycle with front and rear wheels of the same size, with a pedal

crank mechanism to drive the rear wheel. Those bicycles in turn, descended

from high wheel bicycle.

12
 The high-wheelers descende3d from an early type of

push bike with our pedals, propelled by the rider’s feet pushing again the

ground these appeared around 1800, used iron-branded wagon wheels and

were called “bone-crushers”, both for their jarring ride and their tendency to

toss their riders.

Gottlieb Daimler (who later teamed up with Karl Benz

corporation) is created with the building the first motorcycle in 1885.

One wheel in the front and one in the back, although it

had a smaller spring-loaded outrigger wheel on each side. It was constructed

mostly of wood; the wheels were of the iron branded wooden-spooked wagon

type and it definitely had “bone-crusher” chassis.

FURTHER DEVELOPMENTS:

Most of the developments during the early phase

concentrated on three and four-wheeled design since it was complex enough

to get the machines running with our having to worry about them falling over.

The next notable two wheelers was the Miller of 1892, the first successful two-

wheeler though was the Hilder brand and Wolf Muller. Patentsed in Munich

in1894 in the French firm of DeDion-button built and engine that was to make

the mass production and common use of motorcycles possible. The first

13
motorcycle with electric start and a fully modern electric system, the Hendee

special from the Indian motorcycle company astounded the industry in 1931.

Before World War I, IMC was the largest motorcycle manufacturer in the world

producing over 20,000 bikes per year.

INCREASING POPULARITY:

The popularity of the vehicles grew, especially after 1910.

In 1916, the Indian Motorcycle Company introduced the model H racer and

placed it for sale.

During World War I, all branches of the armed forces in

Europe used motorcycle principally for dispatching. After the war, it enjoyed a

sport vogue until the great depression began in 1929. After the World War II.

Led by the manufacturer of a 125cc model, since then, an increasing number

of powerful bikes have blazed the roads.

INDIAN CONTEXT

HISTORICAL INDUSTRY DEVELOPMENTS:

India is the second largest manufacturers and procedure

to two wheelers in the world. It stands next only to Japan and China in terms

of the number of produced and domestic sales respectively. This destination

was achieved due to variety of reasons like respectively policy followed by

personal transport, inefficiency in the public transportation system etc. the

India two wheelers industry made a small manufacturing scooters in the

country. Until 1958, API and Enfield were the sole producers.

14
 The tow-wheelers market was opened to foreign

competition in the mid-80’s. And then the market leaders-Escorts and Enfield-

were caught unaware by the onslaught of the 100cc bikes of the four Indo-

Japanese joint ventures. With the availability of fuel-efficient low power bikes,

demand swelled, resulting in kinetic-then the only producers of four stroke

bikes (100cc category), gaining a top slot.

The first Japanese motorcycle was introduced in early

80s. TVS Suzuki and Hero Honda brought in the first two stroke engine

motorcycle respectively. These two players initially started with assembly of

CKD kits, and later on progressed to indigenous manufacturing.

The industry had a smooth ride in the 50s,60s and 70s

when the government prohibited new entries and strictly controlled capacity

expansion. The industry saw a sudden growth in the 80s. The industry

witnessed a steady of 14% leading to a peak volume of1.9mm vehicles on

1990.

In 1990 the entire automobile industry saw a drastic fall in

demand. This resulted in a decline of 15% in1991 and 8% in1992, resulting in

a production loss of 0.4mm vehicles. Baring Hero Honda, all the major

producers suffered from recessioninFY93 and FY94. Hero Honda showed a

marginal decline in 1992.

CONCLUSION:

15
 The two wheelers market has had a perceptible shift from

a buyer market to a sellers market with a variety of choices, players will have

to compete on various fronts v.i.z. pricing, technology, product design,

productivity after sale services.

Marketing and Distribution. In short terms, market share

of individual manufactures are going to be sensitive to capacity, product

acceptance and pricing and competitive pressure from others manufactures.

As income grow and people feel the need to own a private means of

transport, sales of two-wheelers will rise. Penetration is expected to increase

too approximately to more then 25% by 2005.

The motorcycles segment will continue to lead the

demand for two wheelers in to coming years. Motorcycles sale is expected to

increase by 20% as compared to 1% growth in the scooter market and 3% by

moped sales respectively for the next years.

The four stroke scooters will add new dimensions to the

two wheelers segment in the coming future. The Asian continent is the largest

user of two-wheeler in the world. This is due to poor road infrastructure and

low per capital income, respectively policy on car industry. This is due to

oligopoly between top five players in the segment, compared to thirty

manufactures in the car industry.

Hero Honda Motors Ltd is the one of the leading

companies in the two wheelers industry. At present it is the market leader in

16
the motorcycle segment with around 47% the market share during FY 2000-

01. The company has emerged the most as one of the most successful

players, much ahead of its competitor an account of its superior and reliable

product quality complemented with excellent marketing techniques.

17
 COMPANY PROFILE

BRIEF HISTORY OF HERO HONDA COMPANY

April 1984,a revolution took place in India’s two-wheeler

industry. A four-stroke revolution, that was ushered in when the HERO Group

world’s largest manufacturer of bicycles, joined hands with HONDA Motors

Company of Japan, the world-leader in motorcycles. HERO HONDA became

the first company to introduce new generation 4-stroke technology in India,

with motorcycles that set benchmark for fuel-efficiency and pollution control.

During the 80s, Hero Honda became first company in India to prove that it

18
was possible to drive a vehicle without polluting the roads. The company

introduced new generation motorcycles that set industry benchmarks for fuel

thrift and low emission. A legendary ‘Fill it – Shut it- Forget it’ campaign

captured the imagination of commuters across India, and Hero Honda sold

millions of bikes purely on the commitment of increased mileage.

Over 19 million Hero Honda two wheelers tread India

roads today. These are almost as many as the number of people in Finland,

Ireland and Sweden put together!

Hero Honda has consistently grown at double digits

since inception; and today, every second motorcycle sold in the country is a

Hero Honda. Every 30 seconds, someone in India buys Hero Honda’s top –

selling motorcycle- Splendor. This festive season, the company sold half a

million two wheelers in a single month-a feat unparalleled in global automotive

history.

Hero Honda bikes currently roll out from two globally

benchmarked manufacturing facilities based at Dharuhera and Gurgaon in

Haryana. These plants together are capable of churning out 3.9 million bikes

per year. A third state of the art manufacturing facility at Hardwar in Uttranchal

will soon be commissioned to cope with sustained customer demand.

Hero Honda’s extensive sales and service network now

spans over 3000 customer touch points. These comprise a mix of dealerships,

service and spare points, spare parts stockiest and authorized representatives

of dealers located across different geographies. Hero Honda values its

relationship with customers. It’s unique CRM initiative – Hero Honda Passport

Program, one of the largest programs of this kind in the world, has over 3

19
million members on its roster. The program has not only helped Hero Honda

understand its customers and deliver value at different price points, but has

also created a loyal community of brand ambassadors.

Having reached an unassailable pole position in the India

two wheeler market, Hero Honda is constantly working towards consolidating

it’s its position in the market place. The company believes that changing

demographic profile of India, increasing urbanization and the empowerment of

rural India will add millions of new families to the economic mainstream. This

would provide the growth ballast that would sustain Hero Honda in the years

to come. As Brijmohal Lall Munjal, the Chairman, Hero Honda Motors

succinctly points out, “We pioneered India’s motorcycle industry, and it’s

our responsibility now to take the industry to the next level. We’ll do all

it takes to reach there”.

BOARD OF DIRECTORS

No. Name of the Directors Designation

1 Mr. Brijmohan Lall Munjal Chairman & Whole-time Director
2 Mr. Pawan Munjal Managing Director & CEO
3 Mr. Toshiaki Nakagawa Joint Managing Director
4 Mr. Sumihisa Fukuda Technical Director
5 Mr. Om Prakash Munjal Non-executive Director
6 Mr. Sunil Kant Munjal Non-executive Director
7 Mr. Masahiro Takedagawa Non-executive Director
8 Mr. Satoshi Matsuzawa Non-executive Director

20
 (Alternate Director to Mr. Takashi
Nagai)
Non-executive & Independent
9 Mr. Pradeep Dinodia Director
Non-executive & Independent
10 Gen.(Retd.) Ved Prakash Malik Director
Non-executive & Independent
11 Mr. Analjit Singh Director
Non-executive & Independent
12 Dr. Pritam Singh Director
Non-executive & Independent
13 Ms. Shobhana Bhartia Director
Non-executive & Independent
14 Mr. Sunil Bharti Mittal Director
Non-executive & Independent
15. Mr. Meleveetil Damodaran Director
Non-executive & Independent
16. Mr. Arun Nath Maira Director

INITIATIVES:

An environmentally and socially, Aware company. At Hero

Honda, our goal is not only to sell you a bike, but also to help you every step

of the way in making your world a better place to live in.

Besides its will to provide a high-quality service to all of its

customers, Hero Honda takes a stand as a socially responsible enterprise

respectful of its environment and respectful of the important issues.

Hero Honda has been strongly committed not only to

environmental conservation programmes but also expresses the increasingly

21
inseparable balance between the economic concerns and the environmental

and social issues faced by a business.

In this age of jet speed where time has become an important

and valuable aspect the customer is sensitive about it. Today companies are

strongly working for the reduction at time that is taken to serve customer

.Automobile industry too forced to pace to pays with changing environment.

Many international companies have come and established joint ventures, own

ventures to cater the industry needs.

HERO HONDA
“DESH KI DHADKAN”

Making Headlines:

1. Largest Two-wheeler Company in India.

2. Over 6-million satisfied customers.

3. Celebrating 18-years of joint venture with HONDA motor company Ltd.,

Japan.

4. Retail of over one-million motorcycles in current financial year under

project OM.

22
PRODUCTS:

1. PLEASURE
2. CBZ XTREME
3. PASSION /PASSION PLUS
4. KARIZMA
5. GLAMOUR
6. CD-DAWN
7. ACHIEVER
8. HUNK

23
 Details of Products (as on oct.08)

BIKES ENGINE ` PRICE

Passion 97.2 CC Rs. 43,300

24
CBZ 149.2 cc Rs. 60,430

Splendor 97.2 cc Rs.41, 700

Karizma 225 cc Rs.83, 000

25
 Achiever 149.1 Rs.57,029

FROM THE CHAIRMAN’S DESK

LEADING WITH A DREAM:

We had a dream. The dream of making motorcycles that would

touch and transform the lives of our customers by giving them a mode of

transport that was fuel-efficient, comfortable and environment friendly. One

that would enhance their efficiency at work, enable them to share moments of

joys with their families and add up to a better quality of life.

26
 In a scenario where the customers had a few choices out vision

was to offer bikes with the highest quality at a reasonable price, to meet our

customer’s expectations, and to exceed them.

Behind the success of Hero Honda, is the saga of team-work.

We would like to acknowledge the role played by our JV partners, Honda

Motor Company, Japan, and all our business associates, shareholders and

employees.

In the new millennium, we stand committed to innovation, to

change, to achieving breakthroughs… to moving forward in the new century,

while retaining the values that have been like a beacon in this journey thus far.

PROMINENT AWARDS TO THE COMPANY

Year Awards & Recognitions

2008 NDTV Profit Business Leadership Award 2008 - Hero Honda Wins the Coveted

"NDTV Profit Business Leadership Award 2008"

TopGear Design Awards 2008 - Hunk Bike of the Year Award
NDTV Profit Car India & Bike India Awards - NDTV “Viewers’ Choice Award” to

Hunk in Bike category

India Times Mindscape and Savile Row ( A Forbes Group Venture ) Loyalty

Awards - “Customer and Brand Loyalty Award” in Automobile (two-wheeler) sector

27
 Asian Retail Congress Award for Retail Excellence (Strategies and Solutions of

business innovation and transformation) - Best Customer Loyalty Program in

Automobile category
NDTV Profit Car India & Bike India Awards - Bike Manufacturer of the year

Overdrive Magazine - Bike Manufacturer of the year

TNS Voice of the Customer Awards:
 No.1 executive motorcycle Splendor NXG

 No.1 standard motorcycle CD Deluxe

 No. premium motorcycle CBZ Xtreme

2007 The NDTV Profit Car India & Bike India Awards 2007 in the following category:
 Overall "Bike of the Year" - CBZ X-treme

 "Bike of the Year" - CBZ X-treme (up to 150 cc category)

 "Bike Technology of the Year" - Glamout PGM FI

"Auto Tech of the Year" - Glamout PGM FI by Overdrive Magazine.

"Bike of the Year" - CBZ X-treme by Overdrive Magazine.

Ranked CBZ X-treme "Bike of the Year" - by B S Motoring Magazine

“Most Trusted Company” , by TNS Voice of the Customer Awards 2006.

CD Deluxe rated as "No 1 standard motorcycle" by TNS Voice of the Customer

Awards 2006.
2006 Adjudged 7th Top Indian Company by Wallstreet Journal Asia (Top Indian Two

Wheeler Company)

One of the 8 Indian companies to enter the Forbes top 200 list of world’s most

reputed companies.

28
 No. 1 in automobile industry by TNS Corporate Social Responsibility Award.

Best in its class awards for each category by TNS Total Customer Satisfaction

Awards 2006:
 Splendor Plus (Executive)

 CD Deluxe (Entry)

 Pleasure (Gearless Scooters)

Splendor & Passion - Top two models in two wheeler category by ET Brand Equity

Survey 2006.

Adjudged 7th Top Indian Company by Wallstreet Journal Asia (Top Indian Two

Wheeler Company).

Top Indian company in the Automobile - Two Wheeler sector by Dun & Bradstreet -

American Express Corporate Awards 2006.

Hero Honda Splendor rated as India's most preferred two-wheeler brand at the

Awaaz Consumer Awards 2006.

Certificate of Export Excellence for outstanding export performance during 2003-04 for two-

wheeler & three- wheelers - Complete (Non SSI) by Engineering Export Promotion Council.

The NDTV Profit Car India & Bike India Awards 2006 in the following category:
 Bike Maker of the Year

 Bike of the Year - Achiever

 Bike of the Year - Achiever (up to 150 cc category)

 Bike of the Year - Glamour (up to 125 cc category)

 NDTV Viewers' Choice Award to Glamour in the bike category

2005 Awaaz Consumer Awards 2005 - India's most preferred two-wheeler brand by CNBC

29
 in the 'Automobiles' category.

ICWAI National Award for Excellence (Second) in Cost Management 2004 in the

private sector category by ICWAI.

10th Motilal Oswal Wealth Creator Award for as the most consistent wealth creator for

the period 1991-2005.

2004 Winner of the Review 200 - Asia's Leading Companies Award (3rd Rank amongst the

top 10 Indian companies).

GVC Level 1 (Highest Rating) by CRISIL for corporate Governance.

Adjudged as the Best Value Creator - Large Size Companies 2003-04 by The Outlook

Money.

Corporate Excellence Award 2004 by Indian Institute of Materials Management.

Adjudged as the Organization with Innovative HR Practices by HT Power Jobs for HR

Excellence.

ICSI National Award for Excellence in Corporate Governance 2004 by The Institute of

Company Secretaries of India.

2003 Winner of the Review 200 - Asia 's Leading Companies Award (3rd Rank amongst the

top 10 Indian companies).

Most Respected Company in Automobile Sector by Business World.

Bike Maker of the Year by Overdrive Magazine.

2002 Bike Maker of the Year by Overdrive Magazine.

Winner of the Review 200 - Asia’s Leading Companies Award (4th Rank amongst the

top 10 Indian companies).

30
 Company of the Year of ET Awards for Corporate Excellence.

Ranked 4th in 'Overall Best Managed Company' category, ranked 3rd in 'Best

Financial Management' and 'Best Operational Efficiency' category, ranked 6th in

'Overall Best Investor Relations' category, by Asiamoney.

Highest Wealth Creating Company of the Year Award by the Money.

GVC Level 1 (Highest Rating) by CRISIL for Corporate Governance.

2001 Bike Maker of the Year by Overdrive Magazine.

Winner of the Review 200 - Asia’s Leading Companies Award (9th Rank amongst the

top 10 Indian Companies).

Winner of Three Leaves Award for showing Corporate Environment Responsibility in

the Automobile Sector by Centre for Science & Environment.

1999 National Productivity Award for the Best Productivity Award in the category of

Automobile & Tractor presented by Vice President of India.

1995 The Analyst Award 1995 presented to Hero Honda Motors Ltd. on being ranked 9th

amongst the most investor rewarding companies in India.

1995 National Award for outstanding contribution to the Development of Indian Small Scale

Industry (NSIC Award - Presented by President of India).

1991 Economic Times-Harvard Business School Award for Corporate Performance to Hero

Honda Motors Ltd.

KEY MILESTONES OF HERO HONDA

Year Event
1983 Joint Collaboration Agreement with Honda Motor Co. Ltd. Japan signed

31
 Shareholders Agreement signed
1984 Hero Honda Motors Ltd. incorporated
1985 First motorcycle "CD 100" rolled out
1987 100,000th motorcycle produced
1989 New motorcycle model - "Sleek" introduced
1991 New motorcycle model - "CD 100 SS" introduced

500,000th motorcycle produced

1992 Raman Munjal Vidya Mandir inaugurated - A School in the memory of

founder Managing Director, Mr. Raman Kant Munjal

1994 New motorcycle model - "Splendor" introduced

1,000,000th motorcycle produced

1997 New motorcycle model - "Street" introduced

Hero Honda's 2nd manufacturing plant at Gurgaon inaugurated

1998 2,000,000th motorcycle produced
1999 New motorcycle model - "CBZ" introduced

Environment Management System of Dharuhera Plant certified with ISO-

14001 by DNV Holland

Raman Munjal Memorial Hospital inaugurated - A Hospital in the memory

of founder Managing Director, Mr. Raman Kant Munjal

2000 4,000,000th motorcycle produced

Environment Management System of Gurgaon Plant certified ISO-14001

by DNV Holland

Splendor declared 'World No. 1' - largest selling single two-wheeler model

"Hero Honda Passport Programme" - CRM Programme launched

2001 New motorcycle model - "Passion" introduced

One million production in one single year

New motorcycle model - "Joy" introduced

32
 5,000,000th motorcycle produced
2002 New motorcycle model - "Dawn" introduced

New motorcycle model - "Ambition" introduced

Appointed Virender Sehwag, Mohammad Kaif, Yuvraj Singh, Harbhajan

Singh and Zaheer Khan as Brand Ambassadors

2003 Becomes the first Indian Company to cross the cumulative 7 million sales

mark

Splendor has emerged as the World's largest selling model for the third

calendar year in a row (2000, 2001, 2002)

New motorcycle model - "CD Dawn" introduced

New motorcycle model - "Splendor +" introduced

New motorcycle model - "Passion Plus" introduced

New motorcycle model - "Karizma" introduced

2004 New motorcycle model - "Ambition 135" introduced

Hero Honda became the World No. 1 Company for the third consecutive

year.

Crossed sales of over 2 million units in a single year, a global record.

Splendor - World's largest selling motorcycle crossed the 5 million mark

New motorcycle model - "CBZ*" introduced

Joint Technical Agreement renewed

Total sales crossed a record of 10 million motorcycles

2005 Hero Honda is the World No. 1 for the 4th year in a row

New motorcycle model - "Super Splendor" introduced

New motorcycle model - "CD Deluxe" introduced

New motorcycle model - "Glamour" introduced

New motorcycle model - "Achiever" introduced

33
 First Scooter model from Hero Honda - "Pleasure" introduced
2006 Hero Honda is the World No. 1 for the 5th year in a row

VENKATESHWARA MOTORS

Venkateshwara motors was established as hero Honda

franchisee on 15th June 1985. The dealership was registered as a partnership

firm with Mr. B. Rajeshwar Rao B.E(MECH), M.E(industrial engineering) as

the C.E.O .the first hero Honda motorcycle was delivered from showroom on

27th November 1985. To date they have delivered 32676 Hero Honda

motorcycles. They were appointed as dealers for Majestic Auto Ltd. And

delivered the first moped during May 1986, Majestic Auto Ltd.was renamed as

hero motors in June 1989 and commenced sales of hero.

The company is a partnership concern with a chief executive

officer at the helm of functional hierarchy. A general manager who has

collective responsibility of sales, service and spares assists him. The service

section is headed by a works manager and a service advisor reports to the

top management as a line functionary, the duty of service advisor are to

ensure customer care, feedback from customer in satisfaction levels.

34
Implementing corrective steps after analyzing the feedback decisions from top

management.

Venkateshwara motors located at Narayanguda providing

services to the customers. It has been well trained and efficient for the

customer satisfaction.

Members of Venkateshwara motors:

General manager: P.J.Dhamodar

Service manager: P.Venkaiah

Key features:

 Courtesy and friendliness of service personnel is good .

 Service personnel explain you the work done in your vehicle.

 Service personnel ability is good in understand the problem.

 Service personnel capable of fixing up the problems at the first

instance.

 They deliver the vehicle at the promise time.

 Quality of water wash is good.

 Quality of work performed is good.

 Customer lounge facilities are good.

Schemes:

What is the Hero Honda pass port program?

35
 The hero Honda passport is a ‘customer relationship program’

instituted specially for you. Upon enrolling for the program you obtain a hero

Honda passport, which entails you to a host of benefits, privileges and

exclusive rewards. Hats more you also become eligible for the hero Honda

winner of the month draw, which could win you a hero Honda splendor, or a

cash prize of Rs.40, 000.

Who is eligible for the hero Honda passport?

Any hero Honda motorcycle owner or user is eligible for the

hero Honda passport. However it is the actual user of the motorcycle who

derives maximum benefits from it.

How to apply for the hero Honda passport?

To obtain the hero Honda passport, you also have to fill up the

hero Honda application section of the profile form. The profile form is available

at all hero Honda authorized dealerships in addition, you will have to pay the

requisite enrolment fee, and attach two passport sized photographs with the

form. Your personalized hero Honda passport will be processed and delivered

to you by your dealer, within 4 weeks of applying.

How to use the hero Honda passport?

Each time you visit an authorized hero Honda dealership /

service center for service, repairs, accessories or spares, carry your hero

Honda passport with you.

36
 You can accumulate points against the purchase of spares,

accessories ands service, at hero Honda authorized dealership/service

centers, on your hero Honda passport.

Every rupee spent is equivalent to one point. Bonus points

will be given on free services, referrals and loyalty visits. You must ask your

dealer to stamp the points earned by you, on your hero Honda passport.

Once you start accumulating points, you become eligible for benefits and

privileges, which can be availed from time to time.

Benefits of owning a hero Honda passport

Some of the immediate are:

 One year free accident insurance cover worth Rs.1 lakh

 Exclusive rewards and surprise gifts from hero Honda motors limited.

Preventive maintenance contract at nominal cost

 Five free services without labour charges

 Oil replacement free on each servicing

 Free washing facility

 No labour charges for any parts replacement for one year.

5% discount on spare parts.

37
CHAPTER-3

INTRODUCTION

As efficient allocation of capital is the most important finance function

in the modern times. It involves decisions to commit the firm’s funds to long--

term assets. Capital budgeting for investment decisions is of considerable its

value by influencing its growth, evaluation of capital budgeting decisions.

Name of investment decisions:

The investment decisions of a firm are generally known as the capital

budgeting, or capital expenditure decisions. A capital budgeting decision may

be defined as the firm’s decision to invest its current funds most effectively in

38
the long-term assets in anticipation of an expended flow of benefits over a

series of years. The log –term assets are those that affect the firm are

operational beyond the one- year period.

Investment decisions generally include expansion, acquisition

modernization and replacement of the long—term assets. Sale of a division or

business (divestment) is also an investment decision. Decision like the change

in the methods of sales distribution, or an advertisement campaign or a research

and development programmer have long—term implications for the firm’s

expenditures and benefit, and therefore, they should also be evaluated as

investment decisions.

THE FOLLOWING ARE THE FEATURE OF INVESTMENT

DECISIONS:

The exchange of current funds for future benefits.

The funds are invested in long—term assets.

The feature befits will occur to firm over a series of years.

OBJECTIVES OF INVESTMENT DECISIONS:

Understand the nature and importance of investment decision.

Explain the methods of calculating net present value (NPV) and

internal rate of return (RR).

39
 Show the implicated of net present value (NPV) and internal rate

of return (IRR) describe the Non-DCF evaluation criteria.

Payback and accounting rate of return (ARR)

Institute the competition of the discounted payback.

Compare and contract NPV and IRR and emphasize the

superiority of NPV rule.

Process of Investment Decisions:

Capital Budgeting is a complex process which may be divided into the

following phases.

Figure of INVESTMENT ANALYSIS process

DENTIFICATION ASSEMBLING PREPARATION

DECISION

OF INVESTMENT IMPLEMENTATION
OF OF CAPATIAL
MAKING
PERFORMANCE
OPPORTUNITIES INVESTMENT
40 BUDGET
REVIEW
Identification of investment opportunities:

The capital budgeting beings with the identification of potential

investment opportunities. Typically, the planning body (it may be an individual

or committee organized formally or informally) develops estimates o future

sales, which serves as the basis for setting production targets. This information,

in turn, is helpful in identifying required investment in plant and equipment

Identification of investment ideas it is helpful to:

Monitor external environment regularly to scout investment

opportunities.

Formulate a well-defined corporate strategy based on through analysis

of strengths, weakens, opportunities, and threats.

Share corporate strategy and respective with persons.

Motivate employees to make suggestions.

2. Assembling of investment proposals:

Investment proposals identified by the production department and other

departments are usually submitted in a standardized capital investment

proposal form. Generally, most of the proposals, before they reach the capital

budgeting committee or some body, which assembles them, are rated through

41
several persons. The proposal is viewed from different angles. It also helps in

creating a climate for brining about co-ordination of inters related activities.

Investment, proposals are usually classified into various categories for

facilitating decision-making, budgeting, and control.

Replacement investments.

11. Expansion investment

111. New product investment

1V. Obligatory and welfare investments.

3.DECISION MAKING

A system of rupee gateways usually characterizes capital investment

decision-making. Under this system executive are vested with the power to

okay investment proposal up t certain limits.

4.PREPARATION OF CAPITAL BUDGET:

Projects involving smaller out lays and which can be decided by

executed at lower levels crofter covered by a blanket appropriation for

expenditure action. Projects involving larger out lays are included in the capital

budget after necessary approvals. Before under facing such projects an

appropriation order is usually required. The purpose of this check is mainly to

ensure that the funds position of the firm satisfactory at the time of

implementation.

42
5.IMPLEMENTATION:

Translating an investment proposal into a concrete project is a

complex, time consuming, and risk – fraught task.

Adequate formulation of projects:

The major reasons for delay is insinuate formulation of projects

put differently, if necessary homework in terms preliminary comprehensive and

detailed formulation of the project.

Use of the principle of responsibility accounting:

Assigning specific responsibility to project managers for completing the

project within the defined time – frame and cost limits is helpful for

expenditure and cost control.

Use of network techniques:

For project planning and control several network techniques like

PERT (programmed evaluation review techniques) and CPM (critical path

method) are available.

6.Performance Review:

43
 Performance review, or post – completion audit, is a feed back device. It

is a means for comparing actual performance with projected performance. It

may be conducted, most appropriately. When operations of the project have

stabilized.

It is useful several ways:

1.It throws light on how realistic were the assumptions underlying the

project.

11.It provided a documented log of experience that is highly valuable for

decisional making.

Importance of Investment Decisions:

Investment decisions require special attention because of the following

reasons.

 They influence the firm’s growth in the term.

 They affect the risk of the firm

 They involve commitment of large amount of funds.

 They are irreversible, or reversible at substantial loss.

 They are among the most difficult decisions to make.

Types of investment decisions:

There many ways to classify investments one classification is as follows

44
 1.Expansion of existing business.

2.Expansion of new business

3.Replacemetn and modernization

Expansion And Diversification:

A company may add capacity to its existing product lines to expand

existing operations. For example, the SCCL may increase its plant capacity to

manufactures more liquid steel. It is an example or related diversification.

A firm mat expand is activities in a new business expansion of a new

business requires investment in new products and new kind of production

activating with in the firm. If packing manufacturing company invests in anew

plant and machinery to produce ball bearings or unrelated diversification.

Sometimes a company acquires existing firms to expand its business.

Replacement and Modernization:

The main objective of modernization and replacement is to improve

operating efficiently reduce costs. Cost savings will reflect in the increased

profits, but the firm’s revenue may remain unchanged. Assets become outdated

and absolute with technological changes. The firm must decide to replace those

assets with new assets that operate more assets and therefore, are also called

cost- reduction investments.

45
 How ever replacement decisions that involve substantial modernization

and technological improvements expand revenues as well as reduce costs. Yet

another useful way to classify investment is as follows.

 Mutually exclusive investments

 Independent investments

 Contingent investments

MUTUALLY EXCLUSIVE INVESTMENTS:

Mutually exclusive investments serve the same purpose and compete

with each other. If one investment understands others will to be excluded.

Accompany may, for example, either use a more intensive, semi-automatic

machine, or employ a more capital intensive, highly automatic machine for

production.

Independent investment:

Independent investments serve different purposes and do not compete

with each other. For example, a heavy engineering company may have be

considering expansion of its plant capacity to manufacture additional

excavators of new production facilities to manufacture a new product.

Contingent investment:

Contingent investment are dependent projects; the choice of one

investment necessitates understanding one or more other investments for

example, if a company decides to build a factory in a remote, backward area, it

46
may have to invest in houses, roads hospitals, schools, etc. and the total

expenditure will be treated as one single investment.

Investment evaluation criteria:

Three steps are involved in the evaluation of investment.

Estimation of cash flows

Estimation of the required rate of return (the opportunity cost capital)

An application of a decision rule for making the choice.

Evaluation criteria:

A number of investment criteria (or capital budgeting techniques) are

infusing in practice. They may be grouped in the following two categories.

NATURE OF INVESTMENT DECISIONS (CAPITAL BUDGETING)

Investment analysis decisions have the following features:

It involves exchanges of current funds for future benefits.

They benefit future periods.

They have the effect of increasing the capacity, efficiency, span of the

regarding future benefits.

Funds are invested term-term activities.

TECHNIQUES OF INVESTMENT ANALYSIS:

47
 1.Traditional techniques or non-discounted cash flow techniques he

traditional techniques are further subdivided into two, such as

A. Payback period and

B. Accounting rate of return or average rate of returns (ARR)

A. PAY BACK PERIOD: -

Pay back periods one of the most popular and widely recognized

technique of evaluating investment proposal pay back period may be defined as

that period required, to recover the original cash outflow invested in a project.

In other words it is the minimum require number of years to recover the

original cash exactly invested in a project. The cash flow after taxes is used to

compute payback period.

Payback period can be calculated in two ways 1) using formula 11)

using cumulative cash flow methods. The first methods can be applied when

the cash flow steam of each year is equal. Annuity in all the years or project

life, i.e., unitary cash flow for all the years. In this situation the following

formula is used to calculated payback period.

Payback period = Original Investment ÷ Constant Annual

Cash flow after taxes.

OR

Initial Investment (Cash outlay)

Initial investment (Cash outlay)

48
 Payback period = -----------------------------------------

Annual cash inflow

This second methods is applied when, the cash flow after taxes are

unique or not uniform over the project life period. In this situation, pay back

period is calculated through the process of cumulative cash flow, cumulative

process goes up to the period where cumulative cash flow equal to the actual.

Cash flows put it simple:

Payback period = year before full recovery + (un recovered amount of

investment cash flows during the years)

Accept – Reject Rule:

Acceptance or rejection of the project is based on the comparison of calculated

PBP with the

Maximum or standard payback period. Put it simple:

Accept: cal PBP < Standard PBP

Reject: cal PBP> Standard PBP

Considered: Cal = Standard PBP

Advantages Payback Period: -

The merits of payback period are

It is very simple and easy to understand.

49
 Cost investment in calculating payback period is very less as compared

to sophisticated methods.

Limitations of payback period:

Payback period methods setters from certain limitation such as

It is cash flows after payback period

It is not an appropriate method of measuring the profitability of an

investment, as it does not consider all cash in flows yielded by the movement.

It does not taken into consideration time value of money.

There is no rationale basis for setting minimum pay back period

It is not consistent with the objective of maximizing shareholder’s wealth.

Share value does not depend on payback periods of investment projects

B. Accounting rates of return or average rate or returns

(ARR)

Accounting rate of returns methods uses accounting information as

received by financial statements to measure the profitability of the investment

proposal. It is also know as the return on investment (ROI). Some times it is

know as average rate of return (ARR). Average annual earning after

depreciation and taxes are used to calculated (ARR). It is measured in terms of

percentages. ARR can be calculated in two ways.

50
 1.Weather it is clearly mentioned as accounting rat of returning it

accounting rate of returns is given in the problem, return on original investment

methods should be used to calculated accounting rate of return.

Average annual (AT or PAT)

Accounting rate of return (ARR) = --------------------------------------------X100

Original investment (OI)

I) Whenever it is clearly mentioned as average rate of returns if average rate of

returns is given in the illustration, return on average investment method should

be used to calculate average rate of return.

Average annual EAT

Average rate of Return (ARR) = ------------------------------------------X100

Average investment (AT)

ii) If ARR is given in the problem. Only one of the above methods can be used

to calculate ARR (preferably return on average investment methods).

Accept—Reject rule:

Acceptance or rejection of the project is based on the comparison of

calculated ARR with the predetermined rate or cut of value.

Accept: cal ARR> predetermined ARR or cut of rate.

51
 Reject: cal ARR< predetermined ARR or cut off rate.

Considered: called ARR=predetermined ARR or cut off rate.

Advantages of ARR methods:

The ARR method has some merits

1.The most significant merit of ARR is, it very simple to understand and easy to

calculated.

2.Information can easily be drawn from accounting records.

3.It takes into accounts all profits of the project life period.

4.Cost involvement in calculating payback of the project life very less in

compassion to the sophisticated methods, since it saves analysis time.

LIMITATION OF ARR METHODS

ARR methods Sutters from serious demerits.

It ignores the concept of to be reinvested.

It does not allow profits to be reinvested.

It ignores the concept of time value of money.

It does not differentiate between the sizes of the investment required for

each project.

52
 It does not take into consideration any benefits, which can accurse to the

firm form, the sale of equipment, in abundance, which is replaced by the

investment.

If feels that 10 percent rate of return for 10 years is more beneficial than

eight percent rate of return for 25 years.

It is incompatible with the objective of wealth maximization to the equity

shareholders.

It uses arbitrary cut off as yardstick or standard for acceptance or

rejection.

Modern Techniques or Discounted cash flow (DCF)

Technique:

Modern /discounted cash flow techniques take into consideration almost

all the deficiencies of the traditional methods and consider all benefits and cost

accounting during the project’s entire life period. Modern techniques can be

again subdivided into three viz.

A) Net present value (NPV)

B) Internal rate of returns (IRR) or trail and error

C) Profitability indexes (PI) or discounted Benefits cost ratio (DBCR

A) NET PRESENT VALUE METHOD (NPV)

53
 The net present value method is one the discounted cash flow methods.

It is also know as discounted benefits cost ration methods. NPV can be defined

as present value of benefits minus present value of costs. It is the proves of

calculating present value of cash flows using cost of capital as and appropriate

rate of discount and subtracts value of cash out flows from the present value of

cash flow and finds the net present value, which may be positive or higher then

the present value of cash out flows and vice versa.

Steps involved in computation of NPV are:

Forecasting of cash in flows of the investment project based on realistic

assumption. Computation of cost of capital, which is used as discounting

factors for conversion of future cash inflows into present values.

Calculation of cash flow cost of capital as discounting rate/factor.

Finding out net present value by subtracting present value of cachet flower

present value of cash flows.

Accept—Reject rule:

An acceptance or reject rule of the project is described based on than

NPV.

Accept: NPV>Zero

Reject: NPV<Zero

Consider: NPV= Zero

54
 Advantage of NPV methods:

It takes into account the time value of money.

It uses are cash inflows occurring over the entire life period of the project

including scrap value of the project.

It is particularly useful for the selection of mutually exclusive projects.

It takes into consideration the change discounts rate.

It is consistent with the objective of maximization of shareholder’s wealth.

LIMITATION’S OF NPV METHODS:

Net present value is the most acceptable method in comparison with

traditional method. Never the less, it has certain limitations also.

It is difficult to understand when compared with PBP and ARR.

Calculation of required rate or discounting factor or cost of capital is

difficult, with involves a lengthy and time-consuming process and presents

illustrations. At the same time calculation cost of capita is based on different

methods.

In case of project involving different cashoutlys NPV method may not give

dependable results.

It does not give satisfactory results when comparing two projects with

different life period. Generally a project having a shorter economies life would

be preferable, other things being equal.

B) INTERNAL RATE OF RETURNS (IRR):

55
 This method advocated by jock dears, takes into accounts the magnitude

and timing of cash flows.

IRR is that rate at which the sums of discounted cash inflow DCF equal

the sum of discounted cash out flow. It is the rate at which the net present value

of the investment is zero .it is called internal rate of turn because it depends

mainly on the out lay and proceeds associated with the project and not on any

rate determined outside the investment. This method is also known by

following names.

Marginal efficiency of capital

Rate of return over cost.

Time adjusted rate of return.

Yield on investment.

Internal rate of return may be defined as those discounting factors at

which the present value of cash inflows equal to the present value of cash

outflows. It takes into account the magnitude and timing of cash flows. In case

of NPV methods, the discount rate is the required rate of return and that is

predetermined usually by cost of capital. Which determines based on external

point of views, where as IRR is based on facts, which is internal to the

proposal. It is the belt available in finance, yet at time quite a misleading

measure of investment worth.

Computation of IRR is based on the cash flow after taxes. IRR is

mathematically represented as ‘r’.It can be found by trial and error methods. In

56
this method the evaluation select any discount rate to capital is taken as first

trial. If calculated present value of the cash inflow is higher then the present

value cash inflows than evaluator has to try at higher rate on the other hand if

the present value of cash flows is lower than the present value of cash out

flows than evaluator has to try lower discounting factors. This process will be

repeated till the present value of cash inflows equal to the present value of cash

out flows. Generally IRR may lie between two discounting factors; in that case

analysis has to use interpolation formula for IRR. The formula is as follows:

LDPV - OI
IRR = LDF % + D F --- -------------------
LDPV-HDPV

Where, LDF = Discount factors of low tail.

DDF= Difference between low discounting factors & high discounting
factors.
LDPV= PV of cash inflows at low discounting factors trial.
HDPV= PV of cash inflows at high discounting factors trial.
OI= Original Investment.

(OR)
C-O
IRR = A+ --------- X (B-A)
C-D

57
Where,
A= Discounted factors of low trial.

B= discounted factors of high trial.

C= present value of cash inflow in the low trial.

D= present value of cash inflow in the high trial.

O= original or initial out lye.

ACCEPT—REJECT RULE:

Acceptance or reject rule of the project decides based upon the

Calculated IRR& cost of capital (K0).

Accept: IRR< Cost of capital (K0)

Reject: IRR > Cost of capital (K0)

Consider: IRR= cost of capital (K0)

O = original or initial out lye.

58
ACCEPT—REJECT RULE:

Acceptance or reject rule of the project decides based upon the

Calculated IRR& cost of capital (K0).

Accept: IRR< Cost of capital (K0)

Reject: IRR > Cost of capital (K)

Consider: IRR= cost of capital (K0)

CHAPTER-4

Merits of IRR:

IRR Attempts to find the maximum rate of interest at which funds

invested in the projects could be repaid out of the cash inflows arising

from that project.

It considers cash thought out life of the project.

It is consistent cash thought out the life of the project.

It is consistent with the objective of share hold, wealth maximization.

Demerits of IRR:

Calculating of IRR is quite tedious and it is difficult to understand.

It implies that profits can be reinvested at internal rate of return, which is

not logical.

It produces multiple rate of return, which can be confusing.

It may not give trustful results in case of unequal project life UN equal cash

out flows, and difference in the timing of cash flows.

59
Cost of capital-concept:

The term cost of capital is a concept having many different meanings.

The three viewpoints, regarding the cost of capital is given below.

1.From investor view point:

Investors may define it as “the measurement of the sacrifice made by

him in capital formation. For example, Mr. on investors invested in companies

is a equality share, amount Rs.1, 00,000/- invested of investing in a bank at the

rate of 7% interest. Here he had sacrificed 7% interest for not having invested

in the bank.

1.Firms point:

It is the minimum required rate returns needed to justify the used of

capital. For example confirm raised Rs. 50 Lakhs though the issue of 10%

debentures for justifying this issue, a minimum rate of returns it has to earn is

10 percent.

Capital expenditure point:

The cost of capital is the minimum required rate of return. The hurdle or

target rate of the cut-off rate or any discounting rate used to value cash flows.

For example: A is planning to invest in a project, that requires Rs.20

Lakhs as initial investment and provides cash flows for a period of 5 years. So

60
 for the conversion of future 5 years cash flows into present value cost of capital

needed.

Cost of capital represented the rate of return that the firm must pay to

the fund supplies. Who have protected the capital? In other words, cost of

capital is the weighted average cost of various sources of finance used by the

firm. The sources are equity, performance long-term debt and short-term debt.

NON-DCF CRITERIA

A)PAY BACK PERIOD:

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

recognized traditional methods of evaluating investment proposals. Pay back is

the number of years required to recover the original cash out lay invested in

project.

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

be computed by dividing cash in flow.

INITIAL INVESTMENT Co

PAY BACK PERIOD = ------------------------------------

ANNUAL CASH IN FLOW C

61
Co: Initial investment

C: Annual cash in flow

In case of UN equal cash inflows, the pay back period can be found out

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

(B) ACCOUNTING RATE OF RETURN (ARR)

The accounting rate of return ARR known as the return on investment

ROI uses accounting information, as revealed by financial statements, to

measure the profitability of an investment. The accounting rate of return is the

ratio of average after tax profit divided by the average investment. The average

investment would be equal to half of the original investment if its were

depreciated constantly.

AVERAGE INCOME

ARR = -------------------------------------- X100

AVERAGE INVESTMENT

62
DCF CRITERIA:

(A) NET PRESENT VALUE (NPV)

The NPV present value NPV method is the classic economic method

of evaluating the investment proposals. If is a DCF technique that explicitly

recognizes the time value at different time periods differ in value and are

compare only when there equipment present values—are found out.

Ci C2 C3 Co

NPV = --------- + ------------ + ------------ + ----------------- + ------------- -- Co

(I+K) (I+K) 2 (I+K) 3 (I+K) n

n Ci

NPV =
∑ -------------

i=o (I+K)i

63
WHERE,

NPV =Net present value

Cfi = cash flows occurring

K = the discount rate

N =life of the project in years

Co = cash out lay

INTERNAL RATE OF RETURN (IRR)

The internal rate of return IRR method is another discounted cash flow

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

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

efficiency of capital, rate of return over cost, time- adjusted rate of internal

return and soon.

n Cfi SV +WC

NPV= ∑ -------- + ---------------

i=o (I+K)i (1+knn

64
WHERE,

Cfi = cash flows occurring at different point of time

K = the discount rate

N = life of the project in years

C n = cash out lay

SV& WC = Salvage value and working capital at the end of the year.

(OR)

IRR = L ---------- + (H-I)

(A-B)

65
WHERE

L= Lower discount rate at which NPV is positive

H= higher discount rate at which NPV is negative

A= NPV at lower discount rate, L

B= NPV at higher discount rate,H

B)PROFITABILITY INDEX (PI)

Yet another time –adjusted method of evaluating the investment

proposals is the benefit cost (B/C) ratio or profitability index (PI) profitability

index is the ratio of the present valued of cash inflows at the required rate of

return, to the initial cash out flow of the investments.

PV OF CASH INFLOW

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

INTIAL CASH OUTLAY

Where PV: present value

COST EFFECTIVE ANALYSIS:

In the cost effectiveness analysis the project selection or technological

choice, only the costs of two or more alternative choice are considered treating

66
the benefits as identical. This approach is used when the acquisition of how to

minimize the costs for undertaking an activity at a given discount rates in case

the benefits and operating costs are given, one case minimize the capital cost to

obtain given discount.

PROJECT PLANNING:

The planning of a project is a technically pre-determined set of inter

related activities involving the effective use of give material, human

technological and financial resources over a given period of time. Which in

association with other development projects result in the achievement of certain

predetermined objectives such as the production of specified goods& services?

Project planning is spared over a period of time and is not a one shot activity.

The important stages in the life of a project are:

 It’s identification

 It’s initial formulation

 It’s final formulation

 It’s evaluation (whether to select or to project)

 It’ implementation

 It’s completion and operation

The time taken for the entire process is the gestation period of the

project. The period of the project. The process of identification of a project

begins when we are seriously trying to over come certain problems. They may

be non-utilization to overcome available funds. Plant capacity, expansion etc.,

67
CONTENTS OF THE PROJECT REPORT:

1.Raw material

2Market and marketing

3Sit of the project

4Project engineering dealing with technical aspects of the project

5Location and layout of the project building

6Building

7.Production capacity

8.Work schedule

DETAILS OF THE COST OF THE PROJECT:

1Cost of land

2Cost of building

3.Cost of plant and machinery

4.Engineering know how fee

5.Expenses on training erection supervision

6.Miscellaneous fixed assets

7.Preliminary expenses

8.Provision for contingencies

9.Preoperative expenses

68
Financial Viability Analysis General:

The capital outlay of the project is Rs193.22 crores with OB removal by

hiring of HEMM. The financial viability of the project as worked out taking

into account the latest capital and the prevailing debt equity ration of 3.68:1.

DEPRECAION:

The capital head wise depreciation in la summary. The deprecation is

calculated on a straight line basis considering the normal useful life of each and

every item separately and allowing 5% scrap value in the of plant & machinery

and vehicles. The depreciation cost per tonne of coal works out to Rs.126.96 as

against the depreciation cost of Rs.66.89 considered in original FR. The annual

depreciation cost on an average works out to Rs. 2539.20 lakhs.

PROFITABILITY ANALYSIS:

The financial viability of the project is evaluated both at 100% and 85%

capacity utilization under two variants, viz., and SCCL debt-equity ration of

3.68: 1and national debit equity ration of 1:1is given below:

69
SL.N PARTICUL SCCL DE RATIO OF NATIONAL DE

O ARS 3.68:1 RATIOOF 1:1

Performance 100% 85% 100% 85%

level
1 Production 20 17 20 17

2 Cost of 447.83 380.66 421.31 358.1

production
3 Avg. sale 395.17 335.89 395.17 335.89

realizations
4 Profit & Loss -52.66 -44.77 -26.14 22.22

(Rs)

Financial IRR:

Based on the year-wise flow of capital cost, replacement and operating

cost together with sales realization, the internal ration of return is worked out at

rated capacity and at 85% of rated capacity.

SI.No. Particulars As per March-2007

1 Performance level 100 85

2 Financial IRR (%) 3.918 3.32

Sensitivity Analysis:

It is financially the project loses heavily at 12% discount rate. As the

table 15.2 indicates. The project is vulnerable for escalation in costs. The

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project yields a return of 6.42% with the total cost escalation by 10% over base

case.

Total cost (Rs.Per)

0
Particulars Financial Economic figure
in the
Base case 499.26 428.70

(4.02) (9.17)
1. With a 10% increase in fixed cost 523.51 428.70

(2.67) (8.04)
2. With a 10% increase in variable 522.39 449.22

cost (2.07) (7.44)

3. With a 10% increase total cost 549.18 467.61

(0.63) (6.42)
brackets are IRR

Break-even production:

The break-even production is shown that the project is at no profit, no

loss at 24.40 L Ts production per annum.

Risk factor analysis:

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1.While stimulating the extractable reserves care ha been to reduce the quantity

So that only clean coal is extracted.

2. Is provided to divert the nalah’s along the periphery of the blocks. Adequate

protection in the form of bund will be made against the diverted nalah’s.

Adequate pumping arrangements are provided. Also regular monitoring will be

done during rainy season.

Statement showing financial variability:

The working relating to financial viability has also been updated taking

the various norms and costs prevailing in the third quarter. The summary of the

total viability analysis in comparison with original given bellow:

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No Particulars FR As per UCE

1 Debt equity ratio 2.32:1 3.68:1 1:1

2 Performance level 100% 85% 100% 85% 100% 85%

3 Cost of production 287.89 324.24 499.32 421.32 421.31 468.13

4 Avg. sales realization Rs./T 312.20 312.20 395.17 395.17 395.17 395.17

5 Profit & loss Rs./T +24.31 -12.14 -52.66 -104.15 -26.14 -72.96

6 IRR on Equity (%) 29.96 24.61 -5.33 -8.70 -2.84 -6.69

7 Financial IRR (%) +3.46 0.19 +3.91 1.24

8 NPV (Rs. In lasts) -10363 -12344 -9362 -11208

The above table indicates that the project yields project yields negative IRR

on Equity at both SCCL debt equity ration and 1:1 debt equity ratio.

Statement shown the details of production, sales relation and

Overburden removal at 100% performance level.

GKOCP Base Date: June –2007

Year Coal Sales Rs. In Crores OB ORR Coal

M.Cum. Rs In

Crores

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 1 0.500 34.700 7.569 34.029
2 1.000 69.400 1.0336 54.708

3 1.000 69.400 8.795 35.336

4 1.000 69.400 8.600 35.193

5 1.500 104.100 9.821 43.095

6 1.500 104.100 8.372 40.387

7 1.500 104.100 8.204 40.790

8 1.500 104.100 8.826 48.440

9 1.500 104.100 10.696 58.810

10 1.500 104.100 13.252 75.981

11 1.500 104.100 13.136 75.804

12 1.500 104.100 13.456 80.822

13 1.500 104.100 12.234 71.780

14 1.500 104.100 9.270 45.607

15 0.948 65.791 1.853 8.690

Total 19.452 1349.97 144.873 749.47

OBR COST RUPEES IN CRORES

74
 160
140

120
100 YEARS

80
OBR COST RUPEES IN
60 CRORES
40

20

0
1 2 3 4 5 6 7 8

Interpretation:

From the above table represented the OBR can change in year wise.

From the first year slightly increased and decreased but the last year OBR can

be decreased why because the sales were increased. So finally when sales were

increased then OBR can be decreased.

Statement showing the calculating of financial IRR at 100% performance level at Debt equity ratio of 3.68:1

GKOCP ANNEXURE NO. XXXI

Year Output Capital cash Out flows Total inflow Cash Total Net cash

Million Out flow Operating cost For sales inflow for inflow flow

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 tones outflow sales

PS-1 81 81 -81
PS-11 343 343 -343
1 2499 2499 -2499
2 3322 3322 -3322
3 3.500 6863 6863 -6863
4 7.000 59447 2162 8109 2675 2675 -5434
5 10.000 11425 3491 14916 3822 3822 -11094
6 10.000 9624 4215 11136 3822 3822 -7317
7 16.000 1300 4407 5707 6115 6115 408
8 20.000 991 5087 6078 7644 7644 1566
9 20.000 384 5131 5515 7944 7944 2429
10 30.000 1554 5198 6752 11916 11916 5164
11 30.000 1142 5198 6340 11916 11916 5576
12 30.000 1207 5198 6405 11916 11916 5511
13 30.000 823 5198 6021 11916 11916 5895
14 30.000 1637 5198 6835 11916 11916 5081
15 30.000 2399 5198 7597 11916 11916 4319
16 22.500 3047 5182 8229 8937 8937 708
17 20.000 5758 5177 10935 7944 7944 -2991
18 20.000 3485 5177 8662 7944 7944 -718
19 20.000 1544 5177 6721 7944 7944 1223
20 20.000 1244 5177 6421 7944 7944 1523
21 20.000 1317 5177 6494 7944 7944 1450
22 20000 635 5177 5812 7944 7944 2132
23 20.000 1461 517 6642 7944 7944 1302
24 20.000 617 5177 5794 7944 7944 2150
25 20.000 961 5177 6138 7944 7944 1806
Sidle value -10672 -10672 -10672
TOTAL 469.00 58242 107456 165698 183952 183952 18254
Financial IRR = 3.46% NPV at 12% = -10363

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Interpretation:

From the above table represented the IRR at 100% and performance

level at debt equity ratio of 3:68:1 in this table we find the when the output is

increased in million tones the cash inflow was also increased at the same time

the net cash inflow will be increased.

CHAPTER-5

FINDINGS

1.Original feasibility report was prepared and the present updating is made with

reference to the cost prevailing in the last quarter. The time lag between the two

periods is about 4.5 years.

2.The building in cost index now considered is 600 in a place of 400 adopted

original f FR

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3.The land cost of HEMM and another ancillary machinery is updated based on

4.the budgetary prices obtained from BEML for major HEMM and CMPDIL

latest prickliest for the balance plant & machinery.

5.The ruling debt equity ratio of 3.68:1 is adopted in the place of 2.32:1.

The interest on loan capital is worked out on average principle in the in present

up dating as against peak interest ruled follow in the original FR.

6.The revise-selling price including transportation charge of Rs. 395.17/T is

adopted in the place of old selling price of Rs. 312.20/t.

7.As a result of above changes the capital cost of the project has gone

uptoRs.403.67 cores from Rs.193.22

8.The cost per tone of coal as increased by Rs.287.89/T to Rs.447.83.T at 100%

performance and from Rs.324.34/T to Rs.499.32/T at 85% performance levels.

CONCLUSION

As a company’s debt equity ratio is varying from year to year, the

viability of the project is determined in 1:1 national debt equity ratio to

compare the project economies with other SCCL and as well as CIL

projects and take the investment decision. In 1:1 debt equity ratio the

project is viability as project yield financial IRR of 3.91% the project was

78
 forwarded for appraisal and sanctioned by government of India for Rs

403.67 crores. At the present debt equity ratio of SCCL is 3.68:1 is adverse

compare to the 2.32:1, the interest burden is high there by projecting yield

only 3.46% IRR which less than the designated IRR. In spite of this project

is required to be executed in view of other economic consideration such as;

 Gap between the supply and demand of coal especially in southern reason.

 Faster rate of recovery of by open cast technology.

 Economic viability of the project based on the border pricing method etc.

SUGGESTION

 From the above conclusion drawn the following suggestion are proposed

79
 Company should meet its credit obligations regularly more amount should

be paid towards loan installment to reduce debt component.

 Government of India should give budgetary support to as to generate

internal sources as avoided delay in sanction of new projects.

 A revision/ revival in the estimated cost should be minimized.

 Revision of selling price of coal / tones is essential and when the cost inputs

are increased other wise the project will incur losses when are executed.

 While making an estimated of the projects was portion of the revenue

expenditure to be spent should be clearly mentioned and should not be

fluctuate.

 Delay in commencing projects should be minimize

BIBLOGRAPHY

TEXT BOOK

1“I.M Pandey”, “Investment Analysis”, (8th Edition), Vikas

publishers 2006”. Page no. 121-124.

2“ D Prasanna Chandra” , “ Financial Management”, (5 th Edition).

“Tata McGraw HILL, Publication company Ltd New Delhi, page no:

234--235.

80
 3.“M Y KHAN” Financial Services, (4 th edition), McGraw HILL

publication company Ltd, New Delhi, Page no; 45

4. “M Y KHAN”, Management Accounting and Financial Analysis

(2nd edition), TaTa McGraw HILL, Publication, company Ltd,new

Delhi pageno:67-68.

“Sandra Rowe”, Fixed control, (1st Edition), TATA McGraw HILL

Publication Company Ltd,New Delhi, Page no: 456-458.

5.“JHON STEEMERS” Supply chain “ Investment Analysis “, The

Dryden Press 1993 pages no 25-28.

6.“ RK Sharma & Shashi K. Guptha Management accounting (4 th

edition) Vikas publishes page no: 40-45.

7.“SP Jain & K L Narayana Financial Accounting (5 th edition) Mc

Graw Hill Publication Company. Page no: 50-59.

WEBSITES

Www. pearsoned.co.in/charlesthorngren

Www. Tatamcgrawhill.com

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