CHAPTER 1

INTRODUCTION
CAPITAL BUDGETING:
An efficient allocation of capital is the most important finance function in
modern times. It involves decisions to commit firm’s funds to long-term
assets. Such decisions are tend to determine the value of company/firm by
influencing its growth, profitability & risk.
Investment decisions are generally known as capital budgeting or
capital expenditure decisions. It is clever decisions to invest current in long
term assets expecting long-term benefits firm’s investment decisions would
generally include expansion, acquisition, modernization and replacement of
long-term assets.
Such decisions can be investment decisions, financing decisions or operating
decisions. Investment decisions deal with investment of organization’s resources in
Long tern (fixed) Assets and / or Short term (Current) Assets. Decisions pertaining to
investment in Short term Assets fall under “Working Capital Management”.
Decisions pertaining to investment in Long term Assets are classified as “Capital
Budgeting” decisions.
Capital budgeting decisions are related to allocation of investible funds to
different long-term assets. They have long-term implications and affect the future
growth and profitability of the firm.
In evaluating such investment proposals, it is important to carefully
consider the expected benefits of investment against the expenses associated
with it.
Organizations are frequently faced with Capital Budgeting decisions.
Any decision that requires the use of resources is a capital budgeting
decisions. Capital budgeting is more or less a continuous process in any
growing concern.

NEED FOR THE STUDY:

 process in cement manufacturing sector, which gives mean exposure

to practical implication of theory knowledge.
 To know about the company’s operation of using various Capital
Budgeting techniques.
  To know how the company gets fun The Project study is undertaken
to analyze and understand the Capital Budgeting ds from various
resources.

OBJECTIVES OF THE STUDY:

 To study the relevance of capital budgeting in evaluating the project

for project finance

 To study the technique of capital budgeting for decision- making.

 To measure the present value of rupee invested.

 To understand an item wise study of the company financial

performance of the company.

 To make suggestion if any for improving the financial position if the

company.
 To understand the practical usage of capital budgeting techniques
 To understand the nature of risk and uncertainty

METHODOLOGY:

To achieve aforesaid objective the following methodology has been

adopted. The information for this report has been collected through the primary
and secondary sources.
Primary sources: It is also called as first handed information; the data is
collected through the observation in the organization and interview with
officials. By asking question with the accounts and other persons in the
financial department. A part from these some information is collected
through the seminars, which were held by NUVOCO VISTAS.

Secondary sources: The secondary data have been collected through the various
books, magazines, broachers & websites.

LIMITATION OF THE STUDY :

  Lack of time is another limiting factor, i.e., the schedule period of 4 weeks
are not sufficient to make the study independently regarding Capital
Budgeting in NUVOCO VISTAS CORP LTD.
 The busy schedule of the officials at NUVOCO VISTAS is another
limiting factor. Due to the busy schedule officials restricted me to
collect the complete information about organization.
 Non-availability of confidential financial data.
 The study is conducted in a short period, which was not detailed in all
aspects.
 All the techniques of capital budgeting are not used in NUVOCO
VISTAS. Therefore it was possible to explain only few methods of
capital budgeting.

CHAPTER 2

INDUSTRY PROFILE:

INTRODUCTION OF CEMENT:

The basic need of human being is food clothing and shelter love and
affection /possession is on never ending process for a human being.
As the time passes on human beings their wants and wishes also
changed from ancient times to modern times and among them the living
pattern and construction works also have been changed from temporary
construction of house to permanent construction and the basic material used
in construction is “Cement”.
Cement the word derived from a Latin word ‘CEMENTTUM’ means
stone chipping such as we used in roman.
Cement the word as per oxford, it is commonly used is any substance
applied for soft stocking things. But cement means is most vital and
important material for modern constructions. It is a material which sets and
hardness when mixed with water. Cement is basically used in construction as
a building agent. In ancient times clay bricks and stones have been used for
construction works.
The Romans were using a binding or a cementing material that would
harden and water. The first systematic effort was made by “SMEATON” who
undertook the execution of a new light house in 1756. He observed that
Production obtained by during lime stone was the best cementing material
for work under water.
The construction in lost centuries was with Lime that was the main
equipment used for construction work. The ancient constructions like
Tajmahal, Qutubminar, Mysore Palace, Red fort, Charminar etc., the evidence
of lime construction.

INDUSTRY SCENARIO:

By staring production in 1914 the story of India cement industry is a

stage of continuous of growth.
India is the fourth largest cement producer after China, Japan and
U.S.A. so far annual production and demand has been growing a pace at
roughly 68 million tons with an installed capacity of 82 millions tons.
In 1914 as the foundation of stable cement Industry was laid as sun
above. It was Indian Cement Company at Porbandar in Gujarat. In 1920, the
cement marketing corporation was formed to promote the sale and
distribution of cement. A significant development was made in 1930 when all
manufacturers mergers together to form the Associated Cement Company
Limited.
Cement Industry is the major Industry it has taken rapid strides for a
modest beginning at Porbandar in 1914 to the 1980’s with over understanding
out of the 60 units, 14 units are in the public sectors remaining units are in
private sector.
Indian endowed with cement grade lime stones (90 Billion tons ) and
coal (190 Billion tons ). The basic raw material required for cement
manufacture and self sufficient in manufacturing cement making
machineries. During nineties it had a particular impressive expansion with a
growth rate of 10%.
The strength and vitality of cement Industry can be gouged by the
interest shown and support given by World Bank, considering the excellent
performance of the industry in utilizing loans and achieving the objectives
and targets. The World Bank is examining the feasibility of providing a third
line of credit for further upgrading Industry in varying areas, which will
make it global.
Therefore, India today totally installed capacity of over 30 million tons,
employing over a 100 thousand people directly and contributing amount of
rupees 8 billion to India’s GDP.

TOTAL PRODUCTION:

The cement industry comprises of 125 large cement plants with an installed
capacity of 148.28 million tons and more than 300 mini cement plants with an
estimated capacity of 11.10 million tons per annum. The Cement Corporation of
India, which is a Central Public Sector Undertaking, has 10 units. There are 10 large
cement plants owned by various state Governments. The total installed capacity in the
country as a whole is 159.38 million tons.
Actual cement production in 2017-18 was 502 million tons as against a
production of 283.50 million tons in 2016-17. Major players in cement
production are Ambuja cement, Aditya cement, J K Cement and L & T
cement.

FUTURE FOCUS:

With the growing infrastructure expenditure and increasing industrial base,

India is set to witness significant growth in its Gross Domestic Product (GDP)
resulting in favourable outcome for cement industry in the coming years. The
cement sector is gearing up for a fast track growth and the next few years will
see the sector zooming past new milestones. The production of cement is
expected to cross 400 million tonnes in the next 10 years, with leading players
focusing on capacity expansions two to three times their present capacity. At
the same time, the demand for cement is increasing at 8-10 percent and, if this
trend continues, players can easily increase their capacities from 21 crore
tonnes (210 million tonnes) to 50-60 crore tonnes (500-600 million tonnes) per
year.

Currently, 55-60 percent of cement produced in India is consumed by the

housing sector. This is expected to change in the next few years when the
emphasis will be on infrastructure developments like roads, bridges, and
railways, which will consume a significant percentage of cement produced in
the country. The consumption of cement in agriculture is negligible today;
but with a greater thrust on agriculture and the suggested ‘second green
revolution’, this sector too will extensively use cement to build warehouses
and other logistics. Thus, the cement sector is expected to witness positive
growth in the coming years, with consumption set to increase at a CAGR of
around 9% during FY 2017-FY 2020.

The report, “Indian Cement Industry Outlook 2020”, portrays the current
scenario and the forecasts for production, consumption, capacity utilization,
and installed capacity for 2020. A detailed regional analysis has been
provided in the study which shows that the Southern region has the
maximum demand, which is expected to increase in near future. Besides this,
share of major players in the production and installed capacity has been
provided in the report. The report also covers various factors driving the
industry.

GOVERNMENT POLICIES:
 Cement was one of the government controlled industries earlier.
Partial decontrol was introduced in 1982 and with 1991 policy
reforms, all controls were withdrawn. Today, Government allows
100% FDI in cement industry. However, due to environment concerns,
the cement industry has to comply to stringent environment rules.

 In 1977, higher prices were allowed for cement produced by new

plants or major expansions of existing plants. In 1979, a three tier price
system was introduced. In 1982, partial control was introduced by the
government. A levy quota of 66.6% for sales to government and small
house builders was imposed on existing units while for new and sick
units a lower quota at 50% was established. Levy cement was fixed
uniformly for OPC and slightly lower for PPC. The balance of 33.4%
could be sold in the free open market to general consumers.

 In 1989, industry was considered to be prepared for free market

competition and all price and distribution controls were withdrawn.
 The cement sector was liberalized and today 100 per cent FDI is
permitted in the cement industry.

 The government also intends to expand the capacity of the railways

and the facilities for handling and storage to ease the transportation of
cement and reduce transportation costs. These measures would lead
to increased construction activity thereby boosting cement demand.

 In Budget 2018-19, Government of India announced setting up of an

Affordable Housing Fund of Rs 25,000 crore (US$ 3.86 billion) under
the National Housing Bank (NHB) which will be utilised for easing
credit to homebuyers. The move is expected to boost the demand of
cement from the housing segment.

MAJOR PLAYERS IN CEMENT INDUSTRY :

1. UltraTech Cement
UltraTech Cement is India’s largest and amongst the World’s top cements
manufacturers. The company has the presence in five countries. The total
operation includes 11 integrated plants, one white cement plant, one
clinkerisation plant, 15 grinding units, two rail and three coastal terminals,
and 101 ready mix concrete (RMC) plants. Additionally, the company is the
largest clinker exporter in India.
Establishment: 1987
Headquarter: Mumbai
2. Shree Cements
Shree Cements is a trusted brand in India, mainly in the northern and eastern
part of the country. Currently, the company has the manufacturing
operations over North and Eastern India across six states. Additionally, the
company is popular as one of the most efficient and environment-friendly
companies in the global cement industry.
Establishment: 1970
Headquarter: Bangur Nagar, Ajmer, Rajasthan
3. Ambuja Cements
Ambuja Cements is one of the most popular brands in western India. The
company was formerly known as Gujarat Ambuja Cement Limited. Basically,
it is a major cement producing company in India. Now, the company is a part
of the global conglomerate Lafarge Holcim. Currently, Ambuja Cement has a
cement capacity of 29.65 million tons with five integrated cement
manufacturing plants and eight cement grinding units across the country.
Establishment: 1983
Headquarter: Mumbai
4. ACC
ACC Limited is India’s one of the largest manufacturers of cement and ready-
mixed concrete. The company has 17 modern cement factories and more than
50 ready mixed concrete plants. ACC has a unique track record of innovative
research, product development, and specialized consultancy services.
Basically, ACC is the first cement company in the country to start Bulk
Cement, especially for large consumers.
Establishment: 1936
Headquarter: Mumbai, Maharashtra
5. Binani Cement
Binani Cement is the flagship company of the Braj Binani Group. Basically,
the company produces ‘Ordinary Portland Cement’ (OPC) and ‘Pozzolana
Portland Cement’ (PPC) under the Binani brand. Additionally, the
company enjoys premium status amongst major Indian cement brands with a
significant market share in northern and western India.
Establishment: 1996
Headquarter: Mumbai
6. Ramco Cements – Supergrade
Ramco Cements was founded as Madras Cement. Company’s’ flagship
product Ramco Grade is the most trusted cement brand in South India. The
company has 5 cement plants, 4 Grinding Plants, 1 Packing Plants, 1 Ready
Mix Concrete Plant and 1Dry Mortar Plant spread across the country.
In addition to that, the company is the fifth largest cement producer in the
country. Company’s product range includes Portland cement, Ready Mix
Concrete, and Dry Mortar products.
Establishment: 1957
Headquarters: Chennai
7. OCL India
Sjt. Jaidayalji Dalmia, an industrialist of the farsighted vision set up a cement
plant at the request of the government of Odisha to manufacture super grade
cement for use in the construction of the Hirakud dam. The company is
popular for producing one of the most prestigious brands “Konark”.
Establishment: 1950
Headquarter: Rajgangpur (Odisha)
8. Birla Corp
Birla Corporation Limited is an Indian-based flagship company of the M P
Birla group of companies. The Cement Division of Birla Corporation Limited
has seven plants. All the cement plants are ISO 9001:2000 Certificate, covering
the entire range of production and marketing. Some of the most popular
cement brands are Samrat, Khajuraho, Chetak, and Birla Premium cement.
Establishment: 1919
Headquarter: Kolkata, West Bengal
9. J. K. Cement
J. K. Cement company is extensively in the manufacturing and distribution of
cement as well as cement based products. The company was founded by Lala
Kamlapat Singhania. The Company is the second largest manufacturer of
white cement and wall putty in India. Actually, the company has the annual
production capacity of 600,000 tons and 700,000 tons respectively in India.
Establishment: 1975
Headquarter: Kanpur
10. India Cement
India Cements Limited was founded by two men, Shri S N N Sankaralinga
Iyer and Sri T S Narayanaswami. This is one of the most popular cement
companies in southern India. From a two plant company having a capacity of
just 1.3 million tons in 1989, the company has robustly grown in the last two
decades. Presently, the company has a total capacity of 15.5 million tons per
annum. It has 7 integrated cement plants in Tamil Nadu, Telangana and
Andhra Pradesh, one in Rajasthan and two grinding units, one each in Tamil
Nadu and Maharashtra.
Establishment: 1946
Headquarters: Chennai, Tamilnadu
Apart from this listed cement companies, there are several cement
manufacturing companies in our country. Most of them operate as medium
or large scale basis. And they are very popular in a particular region. We
hope this list of top 10 cement companies will help you in getting ideas about
the cement industry in India.

ARTICLES RELATING TO NUVOCO VISTAS :

 New Technology in RMC – Structural Lightweight Concrete – Master

Builder – Nov 2018-The primary reason for the rising popularity of
Structural Lightweight Concrete over regular concrete in the construction
sector is the fact that it has strengths comparable to regular concrete, and yet,
is typically 25% to 50% lighter, like aluminium to steel in automotive industry.
It has a density ranging from 1000 - 1800 Kg/m3 and strength ranging from 10
- 40 Mpa. As a result, Structural Lightweight Concrete can be used extensively
in top floors of high rise construction, long span bridges, steel structures,
marine structures, screeds among others.

 Revolutionising the Building Repair Industry With Nuvoco – Master

Builder – July 2018-In light of this, a range of innovative and revolutionary
products for building repair and retrofitting was launched by Nuvoco, under its
line of ready-mix-concrete products (RMX). The Instamix Bag Concrete is, in
fact the very first wet mix concrete to be delivered in bags, which completely
eliminates the need for storage on site. Nuvoco conducted a study of the local
needs and small volume needs to design the product. As a result, not only does
it guarantee quality assurance and sustainable construction to the repair
space, but it also avoids the wastage of any raw material and helps in
achieving better utilisation of manpower, thereby reducing labour
requirements by 30 to 40%.

 Nuvoco Completes Hiranandani Hospital Project Despite All Odds –

CECR – June 2018-The project was for Oncology Radiation Chamber Room,
Hiranadani Hospital, and Mumbai. Nuvoco had to retrofit a bunker in the
basement pouring concrete in RCC Wall covered by 1-m thick top RCC slab. It
was a challenging project because they had to pour concrete in the basement
bunker of the operating hospital without disturbing their daily routine. Nuvoco
took up the challenge and ensured that pouring of the concrete was done in a
manner that did not hinder hospital operation even for a day.
 High Performance High Grade Concrete for Extreme Tall Structures –
CECR – March 2018- One of Mumbai’s biggest problems is scarcity of land.
As a solution, builders have opted to build upwards with skyscrapers.
Additionally, HPC is aimed at efficient use of resources and its columns are
much smaller than those made using conventional concrete. This has been
useful in reducing cost of construction, environmental impact and achieving
increased floor space. Nuvoco’s Construction Development and Innovation
Centre (CDIC), which specialises in search and development activities to
develop innovative solutions that are specific to the unique requirements of the
Indian construction industry took on this challenge and conducted a
significant amount of R & D beginning from raw material characterisation
within economical ranges, design mixed methodology, which was beyond IS
Codes and came up with a desired solution as per the client expectations.

 Nuvoco Vistas' new ad campaign: 'Good' cement to build 'good' homes-

Nuvoco Vistas Corp Ltd (formerly Lafarge India Limited), which is among the
leading players in eastern, central and north India, has gone off the beaten
track to focus on “goodness” in its new ad campaign. The campaign, “Acche
ghar ki pehchaan”, comprises two television commercials.

 Nirma eyes Rs 4,000 crore IPO for cement arm- The parent Nirma group is
planning an IPO of its cement arm Nuvoco Vistas Ltd (formerly called Lafarge
India) which houses the Lafarge assets. They are looking at raising Rs 4000
crores via the proposed listing and preliminary discussions have been held
with i-bankers like Kotak, Axis, and ICICI Securities amongst others," said one
of the three sources cited above.

 TO SAVE ₹100 crore IN CEMENT PRODUCTION COST: Nuvoco Vistas

Corp (formerly Lafarge India) plans to invest ₹1,000 crore to set up captive
power plants and waste heat recovery plants at its three factories in
Chhattisgarh, Jharkhand and Rajasthan. The company expects to save
annually ₹100 crore with commissioning of these projects over the next two-
three years. “Currently, all the three plants are dependent on grid for the
power supply. Depending on the coal prices at the time of completion of these
projects, we will be saving ₹2 per unit by tapping into captive power supply.
ORGANISATIONAL STRUCTURE:

CHAPTER 3

COMPANY PROFILE

COMPANY PROFILE:
Nuvoco Vistas Corp. Ltd. was formerly known as Lafarge India Pvt. Ltd.
and changed its name to Nuvoco Vistas Corp. Ltd. in April 2017. The
company was founded in 1999 and is headquartered in Mumbai, India.
Nuvoco Vistas Corp. Ltd. has been a part of the Indian construction
landscape since 1999; through its cement business. It currently has six cement
and close to sixty five ready mix concrete plants in India. It has an established
presence across all major cities and towns in India. The operations across two
business divisions are,
  Cements
 Ready Mix Concrete (RMX) & Aggregates
 Value added Products

● Nuvoco cements are among the foremost in the industry. Concreto,

Duraguard Microfiber, PSC, Infracem are some of the most premium
products available today.

● Ready-mix concrete is trusted alike by large developers, small contractors,

builders, architects, government agencies, and individual house builders who
are building their first dream home. There are three reasons why ours is the
most preferred ready-mix concrete in India: Consistent quality of concrete
produced in automated batching plants; under stringent quality conditions.
Some of them are Instamix, Agile & Robuste.

● Value Added Products include - construction chemicals to save from

seepage, peeling and cracks, - wall fill solutions for architectural freedom,
and - cover blocks for strong, lightweight and stable frameworks. Namely,
Prowall, Cover Blocks, Zero M Speedex, etc.

BOARD OF DIRECTORS :
DESIGNATION NAME
CHAIRMAN Hiren Patel

DIRECTORS Berjis Desai, Kaushik Patel, Suketu Shah

MD Jayakumar Krishnaswamy

Manufacturing units of Nuvoco Vistas Cement Plant:

 Arasmeta Cement Plant, Chhattisgarh

 Bhiwani Cement Plant, Haryana
 Chittor Cement Plant, Chittorgarh,Rajasthan
 Jojobera Cement Plant, Jamshedpur
 Mejia Cement Plant, West Bengal
 Sonadih Cement Plant, Chhattisgarh

VISION:
Building a Safer, Smarter and Sustainable World.

MISSION:
We are a reliable construction materials organisation. A organisation that
contributes to the Nation building by providing innovative and Best-in-Class
products and services from home building to infrastructure.

CORE VALUES:

 INTEGRITY: Absolutely non negotiable value.

 INNOVATION: Identifying novel ideas that creates value.
 CARE: Care for everyone and in everything we create. Committed to
safety.
 COLLABORATION: Fundamentally believing in synergies and leveraging
collective strength.
 OPERATIONAL EXCELLENCE: Speed, agility, competence, development.
Being the best in everything we do.

ORIGIN AND HISTORY:

Lafarge was founded in 1833 by Joseph-Auguste Pavin de Lafarge in Le Teil

(Ardèche), to exploit the limestone quarry in Mont Saint-Victor between Le
Teil and Viviers. In 1864 Lafarge signed its first international contract for the
delivery of 110,000 tonnes of lime to the Suez Canal construction project. In
1999, Lafarge entered the Indian market through its cement business,with the
acquisition of Tata Steel's cement activity. This acquisition was followed by
the purchase of the Raymond Cement facility in 2001. In 2001, Lafarge, then
the world's second largest cement manufacturer, acquired Blue Circle
Industries (BCI), which at the time was the world's sixth largest cement
manufacturer, to become the world leader in cement manufacturing. On 15
May 2008 Lafarge acquired Larsen & Toubro Ready Mix-Concrete (RMC)
business in India for $349 million. In April 2013 Lafarge adopted a new brand
baseline "Building better cities". It reflects the Group’s ambition to contribute
to the improvement of cities by developing innovative construction products,
solutions and systems. Lafarge’s contribution to better cities addresses some
key challenges of urbanization.
 Milestone:
1999:
 Our predecessor company was incorporated as a 100% subsidiary of
Lafarge SA
France
 Initial operations launched in eastern India
 Acquisition of Tata Steel’s Cement Business

2001-2006:
 Acquisition of Raymond Ltd’s Cement division in 2001
 Launch of Concreto Cement in 2002
 PPC1 mill commissioned at Jojobera Cement Plant
 PPC2 mill transferred to Jojobera from Arasmeta Cement Plant

2007-2011:
 Plant up-gradation and VRM installation at Jojobera Cement Plant
 Mejia Cement Plant is commissioned
 Sonadih Cement Plant Line 2 added
 Acquisition of L&T’s ready-mix concrete business
 Commenced supplies of ready-mix concrete for the iconic World One
building in Mumbai, 2010
 Delivered ready-mix concrete to the famous Akshardham Temple in
Kolkata, 2011

2013-2014:
 Cement business expansion in North India
 Infracem launched for the institutional segment
 Our standard Slag Cement relaunched as PSC with strength like steel,
lightest
colour and attractive finish
 Duraguard Microfiber Cement launched – 1st ever Fiber Cement for
enhanced strength,
smoother surface finish and minimum surface cracks
 Bagged the contract to supply Agile-self consolidating concrete to the
iconic Nazrul Tirtha in Kolkata, 2013
 Associated as a ready-mix concrete supplier to the Jaipur Metro Railway
project in 2014
2015:
 Sonadih Railway Line Commissioning – enabling operational efficiency
and improved market
connectivity
 Won the Noida Metro Railway project as a preferred concrete supplier

2016:
 East Grinding Unit, Clinker de-bottlenecking, enhancing production
capabilities
 Following divestment from Lafarge Holcim, we became a part of Nirma
Limited

2017:
 Nuvoco Vistas Corp. Ltd., the new name of the company, was
registered. We continue to sell products under the brand names
Concreto/ Duraguard/ PSC/ Infracem Cement, ZeroM Water-Proofing
Compound, Artiste, Agile, Steelibre, Polibre, Instante, Robuste, Xlite,
Lente, Regletherme, Fluide, Easyfille and Instamix for a period of time.
 Nuvoco bagged the contract to supply concrete to the prestigious
Mumbai Metro Railway project.

OBJECTIVES:
 Do it RIGHT the First Time.
 FOCUS on SAFETY, QUALITY, COST, DELIVERY.
 Develop a culture based on TRUST, TRANSPARENCY, RESPECT,
TEAM WORK, and EXECUTION FOCUSED.
 EMPOWER people to take decisions at the lowest possible level.
 Build a culture of CONTINUOUS IMPROVEMENT and CUSTOMER
SERVICE minded.
 Be a GOOD CITIZEN.
 Meet our COMMITMENTS, deliver what we promise and have fun
while meeting our goals.
 Develop NUVOCO to be recognised as the BEST BUILDING
MATERIALS COMPANY IN INDIA.
SWOT ANALSIS OF NUVOCO VISTAS:
A study undertaken by an organisation to identify its internal strength and
weakness as well as its external opportunities and threats. It is a framework
used to evaluate a company’s competitive position and to develop strategic
planning. SWOT analysis internal and external factors as well as current and
future potential. It is an acronym which stands for:

INTERNAL FACTORS EXTERNAL FACTORS

STRENGTH WEAKNESS

OPPORTUNITIES THREATS

AWARDS AND ACHEIVEMENTS:

 Nuvoco won the ‘Best in Class Continuous Improvement Award’
during the 7th Manufacturing Supply Chain (MSC) Awards 2018
recently organised by Future Supply Chain (FSC) and KamiKaze
Media group in Mumbai. The award was given to Jojobera Cement
Plant (JCP) for demonstrating continuous improvement in
manufacturing through cost reductions in Specific Power
Consumption (SPC) and Specific Heat Consumption (SHC), increase
in productivity by using cementitious additions, and plant logistics
like augmenting road dispatch in the last few years.

 Novoco recently bagged the 5th CSR Impact Awards 2017-18 in the
Women Empowerment category. Nuvoco’s Project Samridhi won the
 award for bringing about economic empowerment of women in the
community by engaging them in sustainable source of livelihood.

 The Chief Financial Officer of Nuvoco Vistas Corp. Ltd., Mr. Maneesh
Agrawal, was conferred with the 'CFO100 2019 Roll of Honour'
by CFO India. Nuvoco is one of the country's leading building
materials and Mr. Agrawal earned the accolade for spearheading the
company's initiatives in cost control and management.

 Mumbai, India, January 24, 2018- Nuvoco Vistas Corp. Ltd. (formerly
Lafarge India Limited), one of the leading manufacturers and retailers
of construction materials in the country, has been awarded for being
amongst the top 50 companies in India’s first People Capital Index
(PCI) list.

FUTURE PLANS:

REVENUE:

 Build capacity and grow aggressively ahead of the market to reach

revenue of Rs. 10,000 Cr. By FY22 and Rs. 15,000 Cr. By FY25.
 Establish 80 plants by FY22 and 100 by FY25.
 Establish Sales and Distribution network (50% increase in dealers) in all
East and North states to grow ahead in market.

PROFITABILITY:

 Deliver Profitable Margin of 22% by FY22 and 25% by FY25.

 To reduce distribution cost by Rs. 100 per tonne in FY20 over FY19.
 Set up Pricing Acceleration Programme to improve prices by 3%Y-o-Y
from FY19 actuals.

PROCESS:

 Focus on Processes and Systems to Improve Productivity in Fixed and

SGA Costs by 1% Y-o-Y by FY22.
  Establish Nuvoco Operating System (LEAP-O) in the Operations
functions and Nuvoco Sales System (LEAP-S) in Sales functions by
FY21.
 Carry out Business Process Redesign exercise to simplify end-to-end
processes by june 2020 to reduce Fixed and SGA costs by 1% Y-o-Y.

CULTURE:

 Nurture People and drive a Performance Centric Culture that is in the

Quartile of Employee Engagement Survey.
 Improve Sustainability Metrics in Energy Waste and Water with a
savings of 5% Y-o-Y(baseline FY19).
 To build Brand Equity of Nuvoco measured by Nielsen score ( Target -5+
score by FY22).
 Nurture meritorious young employees to become future leaders of
Nuvoco through a transparent Talent Management Programme (15% of
<40 HI-PO).

FINANCIAL PROFILE:

1. Production:
The NUVOCO VISTAS products are characterised by reliability, strength,
and innovation. With a focus on research, technology, and technical
innovations, the company has been able to move with time, manufacturing
only the very competent products in building and construction. Below are
some of its products:
 Grey cement
 Ready Mix Concreto
 Portland Pozzolana Cement (PPC)
 Portland Slag Cement (PSC)

PRODUCT MIX:
Definition: The Product Mix also called as Product Assortment, refers to the
complete range of products that is offered for sale by the company. In other
words, the number of product lines that a company has for its customers is
called as product mix.

RAW MATERIALS USED BY NUVOCO VISTAS:

→ Portland Pozzolana cement:

 Clinker

 Fly ash

 Gypsum

→ Portland Slag Cement/ Concreto:

 Clinker

 Slag

 Gypsum

Portland cement clinker is a dark grey nodular material made by heating

ground limestone and clay at a temperature of about 1400 °C - 1500 °C. The
nodules are ground up to a fine powder to produce cement, with a small
amount of gypsum added to control the setting properties.

Chemically known as “calcium sulfate dihydrate,” gypsum contains calcium,

sulfur bound to oxygen, and water. Gypsum is an abundant mineral and
takes forms including alabaster—a material used in decoration and
construction.
Fly ash or flue ash, also known as pulverised fuel ash , is a coal combustion
product that is composed of the particulates (fine particles of burned fuel)
that are driven out of coal-fired boilers together with the flue gases..

Slag is the glass-like by-product left over after a desired metal has been
separated (i.e., smelted) from its raw ore. Slag is usually a mixture of
metal oxides and silicon dioxide.

SOURCES OF RAW MATERIALS:

 CLINKER comes from the integrated unit (IU) of NUVOCO VISTAS
( as Nuvoco Vistas Jamshedpur is a GRINDING UNIT (GU) ) which is
situated in BILASPUR, CHATTISGARH. Arasmeta Cement Plant and
Sonadih Cement Plant are the factories which provides clinker for
Jojobera Cement Plant Jamshedpur.
 FLY ASH is provided by TATA POWERS Jamshedpur.
 SLAG is provided by the TATA STEEL Jamshedpur.
 GYPSUM is exported from outsider vendors from THAILAND and
various gypsum manufacturing countries.

PRODUCTION PROCESS:
STEP 1:
In the very first step clinker and gypsum are grinded in ROLLER PRESS
( Mill 1), these raw materials are grinded to the required fineness where both
the raw materials turn into a powder substance. In this process the two
rollers as shown in the diagram pressurizes the materials which converts the
raw materials into powder substance.
Next step:
In this step the powder which is formed while grinding the clinker and
gypsum in the above process is transferred into the BALL MILL ( MILL 2)
where fly ash is mixed with the powder. Both the materials are blended
nicely which results in the formation of PPC ( PORTLAND POZZOLANA
CEMENT).

 A ball mill is a type of grinder used to grind and blend as shown in the
below diagram.

After the completion of this process, the final product which comes out is
known as PPC. This mixture is stored in a SILO which is further processed
for packaging.

STEP-2:
IN THIS STEP PSC IS PREPARED (PORTLAND SLAG CEMENT). In this step
Clinker and Gypsum are grinder in roller press which is also know as VRM ( Vertical
Rolling Mill). Here in this step clinker and gypsum are grinded till the required
fineness in order to prepare PSC which is contained in a SILO after the process has
been completed.

 Vertical roller mill. Vertical roller mill is a type of grinder used to

grind materials into extremely fine powder for use in mineral dressing
processes, paints, pyrotechnics, cements and ceramics. It is an energy
efficient alternative for a ballmill.

 The output of VRM is further transferred in a SILO. A SILO is used for storing
bulk materials. Its function is to hold and discharge cement. Its maximum
capacity is up to 200 to 800 tons.

Next step:
In this step SLAG is grinded in the roller press or VRM. After the grinding
process the outup is transferred into a different silo. In above step both the
function of grinding clinker, gypsum and slag is being processed in the
ROLLER PRESS or VRM one after the other.

Next step:
BLENDING PROCESS: In this process the output of 2nd step which is stored
in different silo’s are transferred in a blending mill. Here both the powder
substance (i.e., output of grinded clinker and gypsum which is stored in the
1st silo and grinded slag from the 2nd silo) are mixed together in the blending
machine. The outcome of this mixture results in the final product of PSC.

STEP-3:
PACKAGING PROCESS:
After grinding the cement to the required fineness, it will be stored in the
packing house silo.

Silo-1: Silo-2

PPC PSC
 As and when the lorries or wagons are placed for loading, the cement from
the silos will be withdrawn to the electronic rotary packer where in there will
be nozzles to insert the spout of the paper bag or HDPE bag, and the cement
will be filled and as soon as the weight becomes 50kg, the bags will be closed
and the packed cement bag will be dropped in a belt conveyor which will be
going upto the loading point of the lorry or wagon and loadmen will be
pulling the bags and put in the lorry or wagon in a stacking manner in such a
way they can count. As shown in the picture below.
 CHAPTER 4

CONCEPTUAL FRAME-WORK
CAPITAL BUDGEING:

An efficient allocation of capital is the most important finance function

in modern times. It involves decisions to commit firm’s funds to long-term
assets. Such decisions are tend to determine the value of company/firm by
influencing its growth, profitability & risk.
Investment decisions are generally known as capital budgeting or
capital expenditure decisions. It is clever decisions to invest current in long
term assets expecting long-term benefits firm’s investment decisions would
generally include expansion, acquisition, modernization and replacement of
long-term assets.
Such decisions can be investment decisions, financing decisions or
operating decisions. Investment decisions deal with investment of
organization’s resources in Long tern (fixed) Assets and / or Short term
(Current) Assets. Decisions pertaining to investment in Short term Assets fall
under “Working Capital Management”. Decisions pertaining to investment
in Long term Assets are classified as “Capital Budgeting” decisions.
Capital budgeting decisions are related to allocation of investible funds to
different long-term assets. They have long-term implications and affect the
future growth and profitability of the firm.

In evaluating such investment proposals, it is important to carefully consider

the expected benefits of investment against the expenses associated with
it.Organizations are frequently faced with Capital Budgeting decisions. Any
decision that requires the use of resources is a capital budgeting decisions.
Capital budgeting is more or less a continuous process in any growing
concern.

For Example: Purchase of Land is an example of Capital Budgeting decision.

Similarly replacement of outdated equipment with modern machines,
purchase of a brand or business, computerization and networking the
organization, investment in research and development of a product launch
of a major promotional campaign etc are all example of Capital Budgeting
decisions.

However, in all cases, the decisions have a long-term impact on the

performance of the organization. Even a single wrong decision may in
danger the existence of the firm as a profitable entity.

NEED AND IMPORTANCE OF CAPITAL BUDGETING :

Capital Budgeting means planning for capital assets. Capital Budgeting

decisions are vital to any organization as they include the decision to;

1. Whether or not funds should be invested in long term projects such as

setting of an industry, purchase of plant and machinery etc.,

2. Analyze the proposal for expansion or creating additional capacity.

3. To decide the replacement of permanent assets such as building and

equipments.

4. To make financial analysis of various proposal regarding capital

investments so as to choose the best out of many alternative proposals.

The importance of capital Budgeting can be well understood from the fact
that an unsound investment decision may prove to be fatal to the very
existence of the concern. The need, significance or importance of capital
budgeting arises mainly due to the following.

1. Large Investments :
Capital budgeting decisions, generally involves large investment of funds.
But the funds available with the firm are always limited and the demand for
funds exceeds the resources. Hence it is very important for a firm to plan and
control its capital expenditure

2. Long-term commitment of Funds:

Capital expenditure involves not only large amounts of funds but also funds
for long-term or more or less on permanent basis. The long-term commitment
of funds increases the financial risk involved in the investment decision.

3. Irreversible Nature :
The capital expenditure decisions are of irreversible nature. Once the
decisions for acquiring a permanent asset is taken, it became very difficult to
dispose of these assets without incurring heavy losses.

4. Long-term Effect of profitability :

The investment decisions taken today not only affects present profit but also
the future profitability of the business. A profitable project selection is fatal to
the business.

5. Difficulties of investment decisions :

The long term investment decisions are more difficult to take because,
1. Decision extends to a series of years beyond the current accounting period.

2. Uncertainties of future.

3. High degree of risk.

6. National Importance :
An investment decision through taken by individual concerns is of national
importance because it determines employment, economic activities and
economic growth.

7. Effect on cost structure :

By taking a capital expenditure decision, a firm commits itself to a sizeable
amount of fixed cost in terms of interest, supervisors salary, insurance,
building rent etc. If the investment turns out to be unsuccessful in future or
produces less than anticipated profits, the firm will have to bear the burden
of fixed cost.

8. Impact on firm‟s competitive strength :

The capital budgeting decisions affect the capacity and strength of a firm to
face competition. It is so because the capital investment decisions affect the
future profits and costs of the firm. This will ultimately affect the firms
competitive strength.

9. Cost control :
In capital budgeting there is a regular comparison of budgeted and actual
expenditures. Therefore cost control is facilitated through capital budgeting.

10. Wealth Maximization :

The basic objective of financial management is to maximize the wealth of the
shareholders. Capital budgeting helps to achieve this basic objective. Capital
budgeting avoids over investments and under investments in fixed assets. In
this way capital budgeting protects the interest of the shareholders and of the
enterprise.

PROBLEMS & DIFFICULTIES IN CAPITAL

BUDGETING:
1.Future uncertainty: Capital Budgeting decisions involve long-term
commitments. There is lot of uncertainty in the long term. The
uncertainty may be with reference to cost of the project, future
expected returns, future competition, legal provisions, political
situation etc.

2.Time Element: The implications of a Capital Budgeting decision are

scattered over a long period. The cost and benefits of a decision may occur at
different point of time. The cost of a project is incurred immediately.
However, the investment is recovered over a number of years. The future
benefits have to be adjusted to make them comparable with the cost. Longer
the time period involved, greater would be the uncertainty.

3.Difficulty in Quantification of Impact: The finance manger may face

difficulties in measuring the cost and benefits of projects in quantitative
terms.
Example: The new product proposed to be launched by a firm may result in
increase or decrease in sales of other products already being sold by the same
firm. It is very difficult to ascertain the extent of impact as the sales of other
 products may also be influenced by factors other than the launch of the new
product.

CAPITAL BUDGETING METHODS IN PRACTICE:

 In a study of the capital budgeting practices of fourteen medium to

large size companies in India, it was found tat almost all companies
used pay back.

 With pay back and/or other techniques, about 2/3rd of companies used IRR and
about 2/5th NPV. IRR s found to be second most popular method.

 Pay back gained significance because of is simplicity to use &

understand, its emphasis on the early recovery of investment & focus
on risk.

 It was found that 1/3rd of companies always insisted on computation of

pay back for all projects, 1/3rd for majority of projects & remaining for
some of the projects.

 Reasons for secondary of DCF techniques in India included difficulty in

understanding & using threes techniques, lack of qualified
professionals & unwillingness of top management to use DCF
techniques.

 One large manufacturing and marketing organization mentioned that

conditions of its business were such that DCF techniques were not
needed.

 Yet another company stated that replacement projects were very

frequent in the company, and it was not considered necessary to use
DCF techniques for evaluating such projects. techniques in India
included difficulty in understanding & using threes techniques, lack of
qualified professionals & unwillingness of top management to use DCF
techniques.

STEPS IN CAPITAL BUDGETING :

 1 2
PROJECT PROJECT
GENERATION SCREENING

6 3
PROJECT PROJECT
REVIEW EVALUATION

5 4
PROJECT PROJECT
EXECUTION SELECTION

Capital budgeting is a complex process. It involves decision relating to the

investment of current funds for the benefit to be achieved in future which is
always uncertain. Capital budgeting is a six step process. The following steps
are involved in capital budgeting;

1. Project generation :
The capital budgeting process begins with generation or identification of
investment proposals. This involves a continuous search for investment
opportunities which are compatible with firm‟s objectives.

2. Project screening :
Each proposal is then subject to a preliminary screening process in order to
assess whether it is technically feasible, resources required are available, and
expected returns are adequate to compensate for the risks involved.

3. Project evaluation :
After screening of project ideas or investment proposals the next step is to
evaluate the profitability of each proposal. This involves two steps;
 Estimation of cost and benefit in terms of cash flows

 Selecting an appropriate criterion to judge the desirability of the

project.

4. Project selection :
After evaluation the next step is the selection and the approval of the best
proposal. In actual practice all capital budgeting decision are made at
multiple levels and are finally approved by top management.

5. Project execution and implementation :

After the selection of project funds are allocated for them and a capital
budget is prepared. It is the duties of the top management or capital
budgeting committee to ensure that funds are spend in accordance with
allocation made in the capital budget.

6. Performance review :
After the implementation of the project, its progress must be reviewed at
periodical intervals. The follow-up or review is made by comparing actual
performance with the budget estimates.

→OPERATING BUDGET AND CAPITAL BUDGET :

Most of the large firms prepare two different budgets each year.
1. OPERATING BUDGET :
Operating budget shows planned operations for the forthcoming period and
includes sales, production, production cost, and selling and distribution
overhead budgets. Capital budgets deals exclusively with major investment
proposals.

2. CAPITAL EXPENDITURE BUDGET :

Capital Expenditure is a type of functional budget. It is the firm‟s formal
plan for the expenditure of money for purchase of fixed assets. The budget is
prepared after taking in to account the available production capacities,
probable reallocation of existing resources and possible improvements in
production techniques. If required, separate budgets can be prepared for each
item of capital assets such as a building budget, a plant and machinery
budget etc.

OBJECTIVES OF CAPITAL EXPENDITURE BUDGET:

The objectives of Capital Expenditure Budget are as follows.
1. It determines the capital projects on which work can be started during the
budget period after taking in to account their urgency and the expected rate
of return on each project.
2. It estimates the expenditure that would have to be incurred on capital
projects approved by the management together with the source or sources
from which the required funds would be obtained.

3. It restricts the capital expenditure on projects within authorized limits.

CONTROL OVER EXPENDITURE THROUGH CAPITAL

EXPENDITURE BUDGET :
The capital expenditure budget primarily ensures that only such projects are
taken in hand which are either expected to increase or maintain the rate of
return on capital employed. Each proposed project is appraised and only
essential project or projects likely to increase the profitability of the
organization are included in the budget. In order to control expenditure on
each project, the following procedure is adopted.
1. A project sheet is maintained for each project.

2. In order to ensure that the expenditure on different project is properly

analyzed.

3. The expenditure incurred on the project is regularly entered on the project

sheets from various sources such as invoices of assets purchased, bill for
delivery charges etc.,

4. The management is periodically informed about expenditure incurred in

respect of each project under appropriate heads .

5. In case project cost is expected to increase; a supplementary sanction for

the same is obtained.

6. In financial books the total expenditure incurred on all projects is

separately recorded.

TACTICAL AND STRATEGIC INVESTMENT

DECISION :

Investment decision can be classified as,

1. Tactical Decision :
A Tactical Decision generally involves a relatively small amount of funds and
does not constitute a major departure from the past practices of the company.
2. Strategic Decision :
A Strategic Investment Decision involves a large sum of money and may also
result in a major departure from the past practices of the company.
Acceptance of a Strategic Investment Decision involves a significant change
in the company‟s expected profits associated with a high degree of risk.

RATIONALE OF CAPITAL EXPENDITURE:

Efficiency is the rationale underlying all capital decisions. A firm has to

continuously invest in new plant or machinery for expansion of its operations
or replace worn-out machinery for maintaining and improving its efficiency.
The overall objective is to maximize the firm‟s profits and thus optimizing
the return on investment. This objective can be achieved either by increased
revenues or by cost reduction. Thus capital expenditure can be of two types;
1. Expenditure Increasing Revenue
2. Expenditure Reducing Cost

KINDS OF CAPITAL INVESTMENT PROPOSALS :

A firm may have several investment proposals for its consideration. It may
adopt one of them, some of them or all of them depending upon whether
they are independent, contingent or dependent or mutually exclusive.

Kinds of
capital
investme
nt
proposal

1. INDEPENDENT PROPOSALS :
These are proposals which do not compete with one another in a way that
acceptance of one precludes the possibility of acceptance of another. In case
of such proposals the firm may straight away “accept or reject” a proposals
Indepen Depende Mutually Replace Expansio Diversifi Capital
on the basis
dent
of
nt
minimum
exclusive
return
ment
on investment
n
required.
cation
All these proposals
rationing
which
proposalgive a higherproposal
proposal return than a certain
proposal desired
proposal rate of
proposal return are accepted
proposal
and the rest are rejected.

2. CONTINGENT OR DEPENDENT PROPOSALS :

These are proposals whose acceptance depends on the acceptance of one or
more other proposals. When a contingent investment proposal is made, it
should also contain the proposal on which it is dependent in order to have a
better perspective of the situation.

3. MUTUALLY EXCLUSIVE PROPOSALS :

These proposals which compete with each other in a way that the acceptance
of one precludes the acceptance of other or others. Two or more mutually
exclusive proposals cannot both or all be accepted. Some techniques have to
be used for selecting the better or the best one. Once this is done, other
alternative automatically gets eliminated.

4. REPLACEMENT PROPOSALS :
These aim at improving operating efficiency and reducing costs. These are
called cost reduction decisions.

5. EXPANSION PROPOSALS :
This refers to adding capacity to existing product line.

6. DIVERSIFICATION PROPOSALS :
Diversification means operating in several markets rather than a single
market. It may also involve adding new products to the existing products.
Diversification decisions require evaluation of proposals to diversify in to
new product lines, new markets etc., for reducing the risk of failure.

7. CAPITAL RATIONING PROPOSALS :

Capital rationing means distribution of capital in favor of some acceptable
proposals. A firm cannot afford to undertake all profitable proposals because
it has limited funds to invest. In such a case, these various investment
proposals compete for limited funds and the firm has to ration them. Thus
the situation where the firm is not able to finance all the profitable investment
opportunities due to limited resources is known as capital rationing.

FACTORS AFFECTING CAPITAL INVESTMENT DECISIONS

The following are the four important factors which are generally taken in to
account while making a capital investment decision:
 THE AMOUNT
OF
INVESTMENT

RANKING OF Factors MINIMUM

THE affecting capital RATE OF
INVESTMENT investment RETURN ON
PROPOSAL decision INVESTMENT

RETURN
EXPECTED
FROM
INVESTMENT

1. The Amount of Investment :

In case a firm has unlimited funds for investment it can accept all capital
investment proposals which give a rate of return higher than the minimum
acceptable or cut-off rate.

2. Minimum Rate of Return on Investment :

The management expects a minimum rate of return on the capital investment.
The minimum rate of return is usually decided on the basis of the cost of
capital.

3. Return Expected from the Investment :

Capital investment decisions are made in anticipation of increased return in
the future. It is therefore necessary to estimate the future return or benefits
accruing from the investment proposals while evaluating the capital
investment proposals.

4. Ranking of the Investment Proposals :

When a number of projects appear to be acceptable on the basis of their
profitability the project will be ranked in the order of their profitability in
order to determine the most profitable project.

TECHNIQUE OF SELECTING CAPITAL BUDGETING

PROPOSALS

Payback Method

Internal
Average
Net Present
Rate Point
of
Profitability
Cut-off Worth
Return
Index
A business firm has a number of proposals regarding various projects in
which it can invest funds. But the funds available with the firm are always
limited and it is not possible to invest funds in all the proposals at a time. The
most widely accepted techniques used in estimating the cost returns of
investment projects can be grouped under two categories:

1. TRADITIONAL METHODS (NON DISCOUNTED CASH FLOW)

a. Payback Period Method

b. Average rate of Return Method

2. MODERN METHODS (DISCOUNTED CASH FLOW)

a. Net Present Value Method

b. Internal rate of Return Method

c. Profitability Index Method

TRADITIONAL METHODS (NON DISCOUNTED CASH FLOW)

A. PAY BACK PERIOD METHOD :

The payback period method is the simplest method of evaluating investment
proposals. Payback period represents the number of years required to recover
the original investment. The payback period is also called Pay Out or Pay off
Period. This period is calculated by dividing the cost of the project by the
annual earnings after tax but before depreciation. Under this method the
project is ranked on the basis of the length of the payback period. A project
with the shortest payback period will be given the highest rank.
METHODS OF COMPUTATION OF PAYBACK PERIOD :
There are two ways of calculating the payback period.
a. When annual cash inflow is constant :
The formula is find out the payback period if the project generates constant
annual cash inflow is;
ORIGINAL COST OF THE PRODUCT
PAYBACK OERIOD= ANNUAL INFLOW

Annual cash inflow is the annual earning (profit depreciation and after taxes)
before

b. When annual cash inflow is not constant :

If the annual cash inflows are unequal the payback period can be found out
by adding up the cash inflows until the total is equal to the initial cash outlay
of the project.

ADVANTAGES OF PAYBACK PERIOD :

1. Simple to understand and easy to calculate.

2. It reduces the chances of loss through obsolescence.

3. A firm which has shortage of funds find this method very useful.

4. This method costs less as it requires only very little effort for its
Computation.

DISADVANTAGES :
1. This method does not take in to consideration the cash inflows beyond the
payback period.

2. It does not take in to consideration the time value of money. It considers

the same amount received in the second year and third year as equal.

3. It gives over emphasis for liquidity.

ACCEPTANCE RULE :
The following are the Payback [P.B.Rules]

Accept P.B<cut-off rate

Reject P.B>cut-off rate
May Accept P.B<cut-off rate
Cut-off rate :
Cut-off rate is the rate below which a project would not be accepted. If ten
percentage is the desired rate of return, the cut-off rate is 10%.The cut-off
point may also be in terms of period. If the management desires that the
investment in the project should be recouped in three years, the period of
three years would be taken as the cut-off period. A project incapable of
generating necessary cash to pay for the initial investment in the project with-
in three years will not be accepted.

II. AVERAGE RATE OF RETURN (ARR) METHOD :

This method otherwise called the Rate of Return Method, takes in to account
the earnings expected from the investment over the entire life time of the
asset. The various projects are ranked in order of the rate of returns. The
project with the higher rate of return is accepted. Average Rate of Return is
found out by dividing the average income after depreciation and taxes, i.e.
the accounting profit, by the Average Investment.

AVERAGE ANNUAL EARNING

ARR= X 100
` AVERAGE INVESTMENT

Where;
Average Annual Earnings is the total of anticipated annual earnings after
depreciation and tax (accounting profit) divided by the number of years.
TOTAL CFAT
AVERAGE ANNUAL EARNING=
NO. OF YEARS
Whereas:
CFAT means cash inflow after tax.

Average Investment means :

i. If there is no salvage (Scrap value) :

TOTAL INVESTMENT
AVERAGE INVESTMENT= 2

ii. If there is scrap value:

 TOTAL INVESTMENT-SCRAP VALUE
+ SCRAP VALUE
2

iii. If there is additional working capital:

TOTAL INVESTMENT-SCRAP VALUE

2 + SCRAP + ADDITIONAL WC

ADVANTAGES OF AVERAGE RATE OF RETURN (ARR) METHOD

1. It is easy to calculate and simple to understand.

2. Emphasis is placed on the profitability of the project and not on liquidity.

3. The earnings over the entire life of the project is considered for

4. ascertaining the Average Rate of Return.

5. This method makes use of the accounting profit.

DISADVANTAGES
1. Like the payback period method this method also ignores the time value of
money. The averaging technique gives equal weight to profits occurring at
different periods.

2. This averaging technique ignores the fluctuations in profits of various

years.

3. It makes use of the accounting profits, not cash flows, in evaluating the
project.

1. DISCOUNTED CASH FLOW METHODS

The payback period method and the Average rate of Return Method do not
take in to consideration the time value of money. They give equal weight to
the present and the future flow of incomes. The discounted cash flow
methods are based on the concept that a rupee earned today is more worth
than a rupee earned tomorrow. These methods take in to consideration the
profitability and also the time value of money. `

I. NET PRESENT VALUE (NPV) METHOD :

The Net Present Value Method (NPV) gives consideration to the time value of
money. It views that the cash flows of different years differ in value and they
become comparable only when the present equivalent values of these cash
flows of different periods are ascertained. For this the net cash inflows of
various periods are discounted using the required rate of return, which is a
predetermined rate .If the present value of expected cash inflows exceeds the
initial cost of the project, the project is accepted.

NPV = Present value of cash inflows-Present value of initial investment

STEPS IN NET PRESENT VALUE (NPV) METHOD:

1. Determine an appropriate rate of interest to discount cash flows.

2. Compute the present value of total investment outlay (i.e., cash outflow) at
the determined discounting rate.

3. Compute the present value of total cash inflows (profit before depreciation
and after tax) at the above determined discount rate.

4. Subtract the present value of cash outflow (cost of investment) from the
present value of cash inflows to arrive at the net present value.

5. If the net present value is negative i.e., the present value cash outflow is
more than the present value of cash inflow the project proposals will be
rejected .If net present value is zero or positive the proposal can be accepted.

6. If the projects are ranked the project with the maximum positive net
present value should be chosen.

ADVANTAGES OF NET PRESENT VALUE METHOD :

1. It considers the time value of money.

2. It considers the earnings over the entire life of the project.

3. Helpful in comparing two projects requiring same amount of cash

outflows.

DISADVANTAGES OF NET PRESENT VALUE METHOD :

1. Not helpful in comparing two projects with different cash outflows.

2. This method may be misleading is in comparing the projects of unequal
lives.

II. INTERNAL RATE OF RETURN (IRR) METHOD :

The Internal Rate of Return for an investment proposal is that discount rate
which equates the present value of cash inflows with the present value of
cash outflows of the investment. The Internal Rate of Return is compared
with a required rate of return. If the Internal Rate of Return of the investment
proposal is more than the required rate of return the project is rejected. If
more than one project is proposed, the one which gives the highest internal
rate must be accepted.
It can be calculated by the following formula:

PVLDF - CoF
IRR= LDF%X DF%-
PVLDF - PVHDF

Whereas:
LDF= Lower Denominator Factor
DF%= Difference between the lowest and the highest denominator factor
PVLDF= Present value of the lower denominator factor
CoF= Initial investment
PVHDF= Present value of the highest denominator factor.

ADVANTAGES OF INTERNAL RATE OF RETURN:

1. It considers the time value of money.

2. The earnings over the entire life of project is considered.

3. Effective for comparing projects of different life periods and different

timings in timings of cash inflows.

DISADVANTAGES :
1. Difficult to calculate.

2. This method presumes that the earnings are reinvested at the rate earned
by the investment which is not always true.

Accept or Reject Rule:

Internal Rate of Return is the maximum rate of interest which an organization
can afford to pay on the capital invested in a project. A project would qualify
to be accepted if Internal Rate of Return exceeds the cut-off rate. While
evaluating two or more projects, a project giving a higher Internal Rate of
Return would be preferred. This is because higher the rate of return, the more
profitable is the investment.

III. PROFITABILITY INDEX METHOD:

PRESENT VALUE OF CASH INFLOW
PROFITABILITY INDEX= PRESENT VALUE OF CASH OUTFLOWS

This is also called Benefit-Cost ratio. This is slight modification of the Net
Present Value Method. The present value of cash inflows and cash outflows
are calculated as under the NPV method. The Profitability Index is the ratio
of the present value of future cash inflow to the present value of the cash
outflow, i.e., initial cost of the project.
If the Profitability index is equal to or more than one proposal the proposal
will be accepted. If there are more than one investment proposals, the one
with the highest profitability index will be preferred.
This method is also known as Benefit-Cost ratio because the numerator
measures benefits and the denominator measures costs. ”It is the ratio of the
present value of cash inflow at the required rate of return to the initial cash
outflow of the investment.

Cost Effective Analysis :

In the cost effectiveness analysis the project selection or technological choice,
only the costs of two or more alternative choices are considered treating 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 can 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 given 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 spread over a period of time and is not a one shot activity.
The important stages in the life of a project are:
1. Its Identification

2. Its initial formulation

3. Its evaluation (Whether to select or to project)

4. Its final formulation

5. Its implementation

6. Its completion and operation

The time taken for the entire process is the gestation period of the project. The
process of identification of a project begins when we are seriously trying to
overcome certain problems. They may be non- utilization to overcome
available funds. Plant capacity, expansion etc .

Contents of the project report:

1. Market and marketing

2. Site of the project

3. Project engineering dealing with technical aspects of the project.

4. Location and layout of the project building

5. Building

6. Production capacity.

7. Work Schedule

Details of the cost of the Project:-

1. Cost of land

2. Cost 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. Pre-operative expenses

9. Provision for contingencies

RISK AND UNCERTAINITY IN CAPITAL BUDGETING:

All the techniques of capital budgeting requires the estimation of future cash
inflow and cash outflows. The cash flows are estimated abased on the
following factors.
 Expected economic life of the project.

 Salvage value of the asset at the end of the economic life.

 Capacity of the product.

 Selling price of the product.

 Production cost.

 Depreciation.

 Rate of Taxation

 Future demand of the product, etc.

But due to uncertainties about the future the estimates of demand,

production, sales costs, selling price, etc cannot be exact, for example a
product may become obsolete much earlier than anticipated due to un
expected technological developments all these elements of uncertainties have
to be take into account in the form of forcible risk while making an
investment decision. But some allowances for the element of risk have to be
proved.
OBJECTIVES CONTROL OF CAPITAL EXPENDITURE :

 To make an estimate of capital expenditure and to see that the total cash
outlay is within the financial resources of the enterprise

 To ensure timely cash inflows for the projects so that no availability of cash
may not be problem in the implementation of the problem.

 To ensure that all capital expenditure is properly sanctioned.

 To properly coordinate the projects of various departments

 To fix priorities among various projects and ensure their follow-up.

 To compare periodically actual expenditure with the budgeted ones so as

to avoid any excess expenditure.

 To measure the performance of the project.

 To ensure that sufficient amount of capital expenditure is incurred to keep

pace with rapid technological development.

 To prevent over expansion.

STEPS INVOLVED IN CONTROL OF CAPITAL

EXPENDITURE :

 Preparation of capital expenditure budget.

 Proper authorization of capital expenditure.

 Recording and control of expenditure.

 Evaluation of performance.

GENERAL GUIDELINES:-

The capital funds budget is to be prepared under six major heads.

1) Continuing schemes

2) New schemes

3) Modernization and rationalization

4) Township

5) Science and technology

6) EDP schemes

CONTINUING SCHEMES :
These schemes include all such schemes which are under implementation of
which funds prevision has been made in the current year /prevision is
required in the budget year.

NEW SCHEMES :
This scheme includes all such schemes, which are proposed to be initiated in
the budget year and for which under provisions is required in the budget
year. Normally, such schemes are included in the five-year plan of the
company approved by the planning commission.

MODERNIZATION AND RATIONALIZATION (M&R) :

This includes item of plant and machinery etc for which funds required in the
budget year and the following year. All item included in M&R should result
in cost reduction/quality improvement/rebottle
necking/replacement/productivity, improvement and welfare. The M&R
items are to be submitted in the following main characteristics accompanied
with full justification on the agenda of facilities increased output and
production, quality requirements bottlenecks.
1. Replacement / modernization.

2. Balancing facilities (essentially to increase production).

3. Operational requirements including material handling

4. Quality/testing facilities.

5. Welfare
6. Minor works.

These requirements should be protested term wise. A separate proposal is

required for M&R items costing more than Rs. 10, 00,000.

TOWNSHIP :
 Township budget is divided into two parts.

 Continuing township schemes

 New townships schemes.

Funds required under each schemes should be backed up with full data on
number on quarter/scope of work to be completed against the funds
requirements phasing of budgeted funds for current year, budget year and
following year etc, should be given similar information on number of
quarter/scope of work already completed, expenditure incurred till last year,
satisfaction level it is to be added in the above back up information for each
scheme.

SCIENCE AND TECHNOLOGY :

 This budget can be divided into two categories

 Continuing schemes.

 New schemes to be taken up in the budget year.

The schemes should fall in any of the above cartages giving details on
physical and financial progress etc.

EDP SCHEMES :
All funds requirements for computer are information system should be
grouped under EDP schemes and projects accordingly.

BUYING OR PROCURING:
Buying or procurement involves purchasing an asset permanently in the
form of cash or credit.