INTRODUCTION

FINANCE:
In our present day economy, finance is defined as the provision of money at the time when it is
required. Every enterprise, whether big, medium and small, needs finance to carry on its operations and
to achieve its targets. In fact, finance is so indispensable today that it is rightly said that it is the life blood
of an enterprise. Without adequate finances, no enterprise can possibly accomplish its objectives.
“Business finance can be broadly is defined as the activity concerned with planning, raising,
controlling and administering of the funds used in the business”.

“Business finance is that business activity that concerned with the acquisition and conservation of
capital funds in meeting financial needs and over all objectives of a business enterprise”.

FINANCIAL MANAGEMENT:
From the various definitions of the term business finance given above, it can be concluded that term
business finance mainly involves, raising of funds and their effective utilization keeping in view the
overall objectives of the firm. This requires great caution and wisdom on the part of management. The
management makes use of various financial techniques, devices, etc. for administering the financial
affairs of the firm in the most effective, efficient way. Financial management means the entire gamut of
managerial efforts devoted to the management of finance – both its sources and uses of the enterprise.
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.
 INDUSTRY PROFILE
In the Indian context, the term ‘Vegetable Oils’ is almost synonymous with ‘Edible Oils’
and land is not used as cooking media. However it is important to keep this distinction in mind
not all Vegetable Oils are Edible - Some including caster oil are mostly non-edible and some of
the edible oils like Ground Nut and Coconut are finding increasing industrial applications as in
cosmetic, soap making etc.

By virtue if they’re high nutritive content, Edible oils from a major source of nutrition.
The fatty acids in Edible Oils are required by the body as a vehicle for carrying vitamins; provide
oil cakes, which are by-product of the oil extraction process, are important source of animal
nutrition. These can be processed in to Edible flavors, which are rich in proteins.

Oil seeds occupy an important position as the agriculture map pf and rank second after
food grains as a farm commodity crop. India accounts for a tenth of the world out put of
Vegetable Oils and fats. It is the largest produces of Ground Nut, rapeseed, mustard and sesame,
second in respect of castor seeds, third in coconut, fourth in cotton seed and fifth in line seed.

Our country has a highly developed oil based industry .Providing gainful employment to
nearly 15 million persons besides another half a million engaged in milling and processing units.
It is essential a food-oil industry accounting for four fifths of the total supply of Vegetable Oils.
Soap paints and varnish industries from the bulk of non-food applications.

Inspire of their national importance, production of food grains has been suffering a
negative growth rate all these years. Only during the first plan period, the Targets set for
production were realized after this no impressive achievement was recorded. The main
contributory factors are two fold, first only marginal land, in rain fed areas is being used for their
cultivation resulting inevitable in low productivity, second agriculture in India is still subject to
the vagaries of monsoon which makes for erratic production. It is little wonder therefore that the
annual rate; of growth of oil-seed production for the decade 1965-1976 was a mere 1.2 percent
while that of oil seed productivity, an equally dismal one percent.

Viewed in the global context, India has the dubious distinction of having the highest
acreage under oil seeds and recording the highest output, and yet showing the lowest yield, at
736 kg. India’s yield per hectare is lower than that of Nigeria (1615.38 Kg) U.S.A. (91474.58
Kg), Argentina (1153.49 Kg.) and China (1148.55 kg.) The following table would give picture of
Indian’s placing in the world settings.

For the year 1980-81, target for oil-seed production had been fixed at 11 million tones,
actual production however lagged behind, with; provisional estimates Placed at 10.2 million
tones. Production of live major oil seeds viz. groundnut, rare seed mustard, sesame, line seed and
castor seed and is estimated to be around 90 lakes tones, which is about 13 percent higher than
the previous year’s production. Production estimates of groundnut at 57 lake tones however
show decline of 70,000 tones. At 2 lack tones castor seed production has also registered a
decrease of 30,000 tones. Rapeseed, sesame and line seed have however, registered increase over
the previous year’s production levels.

The central Government therefore took various measures to increase production of oil
seeds. A centrally sponsored scheme for an intensive oil seed development programmed was
operated in 14 states with a coverage target 40.6 lakes hectors under a liberalized pattern of
central, assistance.

However actual coverage was only 36 lakh hectares and the short fall was attributed to
serve Brought conditions in several states during the kharrif season.

Short falls in production persisted in the oil year 1981-82 as well. As a result, domestic
industry could not meet the consumption needs respect of edible oils. The total edible and
supplies from indigenous sources were estimated at about 30 lake tones in 1981-82 (which
however higher than the previous year’s levels of 25 lakes tones). The gap of 10 lake tones had
to be filled only through imports. Consequently, the state-trading corporation was asked to
import a million tones of Edible Oils during the oil year 1981-82. The allotment of imported
Edible Oils was also pruned in a bid to ensure more supplies through fair price shops.

The trend of imports in expected to continue in the year to come despite the best efforts
of the union agriculture ministry to raise oil seed output. The genera-based international trade
center has projected import f 13 million tones of Vegetable Oils in 1985. As for exports, it is
anticipated that India would export 15 Lake Tones of oil equivalent of hand picked-selected
groundnut, other nuts and castor oil by 1985.
 The composition of our exports is expected to under go a change palm oil and products (palm oil
and FBD palm oil) will in further account for an increasing share of Indian exports soybean oil and
rapeseed oil will continue to be imported through their combined share may fall to about one third of the
total imports refined rapeseeds oil could be the cheep oil for the liquid market while soybean oil is
expected to the supplied to the vanaspathi industry. Regarding production of oils, an increase in the
production of solvent extracted oils such as rice bran oil tree oils in lightly to occur the ITC reports says
that the country could make significant investments in view of it’s resource for this oil and the demand for
Edible Oils. The report has also forecast a rise in the de oiling

The power and strength of the company depends on how strong and secure it is on the
food front. In trying to achieve this goal, the oil seed scenario in the country has undergone a
substantial charge during the post few years. The country is moving away from a situation of
scarcity and huge import bills to one of self-sufficiency and possibly even export of vegetable
oils.

India ranks high among the oil seeds producing countries in the world with perhaps the
larges number of commercial varieties of oil seeds such as ground not, rape and mustard, sesame,
karri seed, inversed, soya beans, sunflower seeds, linseed, castor seed, copra, cotton seed and a
number of minor seeds of tree origin oil seeds takes their place, as the second largest agricultural
crop, next only to food grains. The cultivation of oil seeds in India is spread over various states
with a distinct regional pattern covering about 19 to 20 million hectares, which accounts for
about 11 percent of the total land under cultivation in the country. In India where fats of animal
origin such as fish oil are seldom used as cooking media. The term “vegetable oils” is used as a
synonym for “edible oils”. However it needs to be recommended that there are, on the one hand
vegetables oils such as castor, groundnut and coconut oils, which are finding increasing.
Industrial applications such as in cosmetics, soap making etc… edible oils are a major source of
nutrition for the people in the country. Oil cakes that are by-products of the oil extraction process
are an important source of animal nutrition. They can also be processed in to protein rich edible.

India has a highly developed oil based industry employing more than 15millon persons.
However it remains essentially food oil. Industry accounting for a much 83% of the total supply
of vegetable oil in the country . The major non-food users of oil are soap, paint and vanish
industries. Faced with major demand for their conventional products, FMCG majors have been
planning their hopes on branded staple foods to deliver rapid top line extension. Negative growth
in the oils and fats business has been instruments in restraining top line growth for the FMCG.

Products :
Broadly edible oil or fat products can be categorized as fallows.
1. Vegetable refined oil.
2. Hydrogenated oil.
3. Bakery fats.
Expelled ground oil of good quality can be directly consumed. It can also be refined to
have higher purity other oils such as soya has to be refined to make them edible.

Vanaspathi is obtained by hydrogenation of edible oil. It is used as a suitable for ghee by

some segments of sources and also for making sweets, snacks including biscuits, cakes etc.
Consumer’s awareness and penetration:
Among FMCG products, edible oils has one of the highest penetration of 98% in urban as
well as in rural areas penetration of all these cooking medium is very high at 99.8% in urban
areas as well as rural areas.
Vanaspathi penetration averages 17.4% at all India level, significantly higher at 28.8% in
urban areas and 13% in rural areas. It is highest in medium size towns of 0.5-1mm population of
34.3% in metros and towns.
In metros refined edible oil is a relatively popular cooking medium. The per capita
vegetables oil consumption in the country was 7.6 kg p.a in 1997-98, significantly lower than 8.5
kg p .a during 1996-97.

Consumer habits and practices:

Edible oil is one form or other is consumed is almost every household, and Indian food
habits show a strong preference for fried vegetables and several other fixed snacks. Traditionally
the north and west have been milk surplus regions in the country. This has led to surplus ghee
production in these areas and higher ghee consumption. The lower ends of the society which can
not afford ghee consume vanaspathi.
This had led to different consumer habits southern consumer prefer refined oil cooking
medium as compared to ghee or vanaspathi. Similarly the eastern region, which is milk deficient,
has preference for vegetable oil as cooking medium. There are also regional and cultural
differences in the type of edible oil used for cooking. For instance Kerala uses more of coconut
oil for cooking. Sesame oil is widely used in the north, mustard oil in the north and east while
there is an over whelming preference for groundnut oil is in the west. Most consumers,
especially in the rural areas buy edible oil in loose form .Where as in large metros loose oil is
scarcely available as retailers find it difficult to handle the same. In medium sized towns, loose
as well as branded oil is available.

In the last few years popularity of branded oil has been increasing particularly with the
introduction of low cost poly packs with the government ordering compulsory packaging of
edible oil in the wake of dropsy deaths in the country due to use of adulterated mustard oil, the
wage of branded oils is expected to witness phenomenal growth. India accounts for 9.3% of
world oil seed production. It has the world’s fourth largest edible oil economy. In 1999, India
ranked as the world’s largest importer of edible oils, displacing china. The bulk of edible oil,
India imports under the open general license is RBD pal mole in of Malaysian and Indonesian
origin.

India is one of the worlds leading producer of oil seeds and oil, contributing to 9.3%
world oil seed production. It produces the largest number of commercial varieties of oil seeds
over nearly 28.4 million hectares of land. The major edible oils produced in India are ground nut,
rapeseed, soya, cottonseed, sesame seed, castor seed, sunflower seed, etc. Groundnut was the
most widely consumed and traded edible oil determining edible oil economics, but is now being
displaced by others. India is the world’s second largest production of groundnut, next only to
china.

The govt. has set up a technology mission on oil seeds, to increase production of other
oil seeds and oil and to reduce dependence on imports. The strategy followed was to

 Increase productivity with better inputs and practices

 Increase area under oil seed crop
 Encourage winter oil seed crops.
 This led to a sharp increase in oil seed production driven mainly by rapeseed, sunflower,
castor seed and soya. India is today the world’s third largest producer of rapeseed and cottonseed
and the largest producer of caster seed. India has approximately 300 edible oil refining units, 60-
70% of which are in the small scale unlike the bigger refiners, the smaller one are unable to
important huge quantities of crude either low capacity or Another major problem is the low
capacity utilization. The installed capacity of oil mills is around 36 million tones annually, but
capacity utilization is only 40% solvent extraction plants shows only 33% capacity utilization of
vegetable oil refineries 40% utilization.

The import of refined palm oil was put under OGC (Open general license) in March
1994. Other edible oils were put under OGC in April 1995 when an item is brought under OGC;
it means that the item can be imported without seeking any approval.

Originally there was no discrimination between refined and non-refined edible oil as far
as import duty was concerned. The duty on both was 65% duty was then slashed to 30% for both
then to 20% in 1996 and 15 % in the 1999-2000 budgets.

In most parts of the world, import duty on the oil seeds is lower than that on oils. But in
India, it is higher 40%. That is why no import of oil seeds (or) oil-bearing material has taken
place in India. The industry wants the duty to be lowered from the present 40% to 50%.Edible oil
prices in the Indian market have crashed owe to large imports by multinational trading houses.
The edible oil industry is one sector in India that will see considerable reform in the foreseeable
future.
Major players in refined edible oils in the organizational sector are the ITC Argotic,
Marico Industries, Ahmed mills, Godrej foods. HLL and NDDB. The market is highly
fragmented among various brands. Sun drop refined Sunflower oil brand with around 13l market
share/ ITC Agro techs other edible oil brands include Real Gold mustard oil, Crystal refined oil
and Sudan unrefined mustard oil. Seeker sunflower oil marketed by maraca has an 8.2% share
and scaffold has 7.5% market share other leading edible oil brands include NDDB’s Dharma
rape seed oil. Godrej foods (Godrej cookie sunflower) with 11% market share, HLL’s flora with
2.5% market share (6% in sunflower oil segment) and Postman with around 8% market share.
The vanaspathi HLL’s Dalda is the oldest and largest brand with close to 36% market share. Its
brand extension Dalda manpasand was launched in 1996. In Feb 98, HLL launched another
brand variant Dalda feel light. Other major vanaspathi manufacturers are Wipro, Amrit
Vanaspathi, IVP, Madhusudan industries Rasui and Pioneer Agro.
Import Of Edible Oils:

It has not been done away completely, but whenever import is now made is largely a
measure of precaution than out of any composition from 1988-89. The edible oils import has
been drastically cut down/ In 1996-97, import totaled 3 lakh tones valued at Rs 250 cores during
the next 2 years it is expected around the same level. The present import is significant compared
to the napping to 19.45 lakh tones imported value at Rs 969 cores in 1997-98.

India has signed a memorandum of understanding with Malaysia for an annual import of
two lakh tones of palm oil for two years. Besides the country is to receive 50,000 tones of soya
been oil from the U.S. as a gift for meeting social objectives. Although in the context of
exceptionally large oil seeds production during the current year, there is hardly and need for
import, the country may avail the option to import for building a buffer stock to meet the needs
of public distribution system during the lean period.

Export:
Export of oil mill, oil seed and minor oils and are expected to gather momentum
following the enouncement regarding the full float of rupee on the trade account, according to
the sources in the trade. The present export scenario shows that the trade is in a beyond mood of
achieving a formidable target, with increased export earning in the current year. This basically
enacts from bumper oil seeds output of 215 lakh tones in the offing.
This expectation of a bumper crop, moreover has compelled the union ministry of
commerce to raise the current years export target for the oil seeds from Rs 1250 cores over Rs
1300 cores.
According to the estimates made by the central coordination committee, the exports of oil
mills, oil seeds and minor oils during the current year would be more than 3.3 lakh tones with a
value of Rs 1362 core as against 30 lakhs tones with the value of Rs 1043 cores achieved during
the year 1996-97 the export of oil meals, oil seeds and minor oil during the period April 1996 to
Jan 1998 stood at over 24 lakhs tones valued at more than Rs 1000 cores.
Customer Satisfaction:
Satisfaction is a person’s feeling of pleasure (or) disappointment resulting from
comparing a products perceived performance in relation to his (or) her expectation. As this
definition makes clear satisfaction is a junction of perceived performance and expectations. If the
performance falls short of expectation, the customer is dissatisfied. If the performance matches
the expectations, the customer is satisfied or delighted. Many companies are aiming for high
satisfaction because customers who are just satisfied still find it easy to.
When a better offer comes along those who are highly satisfied are much less ready to
switch. High satisfaction (or) delight creates an emotional affinity with the brand, not just a
rational preference. The request is high customer loyalty.
 COMPANY PROFILE

3F Industries Limited (formerly Foods Fats & Fertilizers Ltd.) was established in 1959
and is well known for its introduction of 'Rice Bran Oil extraction' in India, the first of its kind.
3F IL has state-of-the-art manufacturing facilities located in Tadepalligudem (West Godavari
district), and Krishnapatnam (Nellore District) of Andhra Pradesh. 3F IL is into the
manufacturing & processing of edible oils, margarine, bakery fats, specialty & confectionery
fats.

3FIL is the first Company in India to produce specialty fats namely Shea steering, Sal
steering, Mango Steering etc., which form raw materials in the manufacture of confectionary fats
used in chocolate industry as replacement for cocoa butter. Testimony to company quality is the
continued patronage from large manufacturers of Cocoa Butter Equivalents in Japan, Malaysia,
Italy, Holland, UK & the Scandinavian countries.

Foods, Fats and Fertilizers Ltd, Tadepalligudem are a family owned Organization. It is
well known as “foods, fats”. But the West Godavari farmers call it is a “Tavudu Factory”. This
organization is professionally carrying the business activity by the Goenka family. It is having
branches in Madras, Bombay, Hyderabad, Kakinada, Calcutta and Baroda.

Company logo:
 Foods, Fats and Fertilizers Ltd, Tadepalligudem are a family owned Organization. It is
well known as “foods, fats”. But the West Godavari farmers call it is a “Tavudu Factory”. This
organization is professionally carrying the business activity by the Goenka family. It is having
branches in Madras, Bombay, Hyderabad, Kakinada, Calcutta and Baroda.
The registered office of Foods, Fats and Fertilizers:
P.B.NO-15
Tanuku road
Tadepalligudem-534101
West Godavari district
Andhra Pradesh.
Foods, Fats and Fertilizers Ltd, Tadepalligudem, West Godavari district was conceived in 1959,
born in 1960 and was on its fact by 1962. Today foods, fats and fertilizers Ltd has matured into a
conglomeration of 20 industrial units spread over 40 acres constantly buzzing with activity and
providing employment to over 630 persons.
Mission:
“Safety and quality are the wings of our success”.
Vision:
To be the number one edible oils and specialty Fats Company in the country targeting to
reach 1000 cores people by 2008.
Philosophy Of The Company:
The philosophy of the organization FFF is “serving the society through the industry”.
Objectives Of FFF Ltd:
The main objectives of the organization are:
1) To serve the society through the success in the oil out put.
2) The objective towards the organization include –
 Concern
 Commitment
 Integrity
 Quality
Foods, Fats and Fertilizers have completed 40 years of existence where it has seen lots of
ups and downs. As the company has incorporated its name as Foods, Fats and Fertilizers Ltd, it
has given 3F as the brand name to all the products it produces. The wheel of the fortune has
turned a full circle for Mr. B.K. Goenka, the architect of Foods, Fats and Fertilizers Ltd. Born
and Bred in Burma the Goenka family established and respected in industry and trade. They had
a flouring textile business and a large rice mill.
The rice bran from Mr. Goenka’s mill was avidly sought as animal feed and his observant
eyes used to notice thin deposit of oil in the wrapping papers used for sampling could this oil be
extracted? What would be its quality? These questions had to wait because in 1942 the Japanese
invaded Burma and Mr. Goenka had to abandon his business and return to India.
Being an optimist, he transformed the adversity into opportunity by this got and
determination. After brief spell in his native land in Rajasthan, his restless enterprising zeal
brought, Mr. Goenka to madras in 1943 where he is with his brothers, started export of handloom
fabrics.
In due course he established a large textile business. In 1959 Mr. Goenka read in a article
by Dr. Raghunath Prasad of central and visited Burma with him to study the relevant
technologies though he found that east German technology better, he was not fully satisfied and
asked his brother Ms G.S. Goenka who was in Japan to study in detail about the Japanese
process and another brother Mr. S.N. Goenka in Europe, to study the process of Hugo of
Germany and Dr. Smith of Belgium mean while he concerned searching for an ideal location to
set up his industry in India.
Technology was selected and Tadepalligudem, the rice bowl of A.P. was finalized as the
location for the proposed extraction plant, the first in India to process rice bran. This group
associates modesty garments and golden needle apparels in garments and fabrics and Sanyak
Udyog in plastic products constantly strengthen their group activities.
A New Era Begins:
In collaboration with M/S Yoshino seisakusho company Ltd, a renowned engineering
house in Japan we lathered in a unique technology for refining high FFA. Rice bran oil to induce
large production of rice bran oil by providing diversified outlets and better realization to the
solvent extraction plants to achieve the potential production of 0.6 million tones from the present
0.25 million tones and almost nothing in 1960.

PRODUCTION:
Various Plants In fff Ltd:
Solvent Extraction:
(Lurgi, West Germany)
Installed and commissioned in 1962 with production capacity 2400 tones pa. This plant
process exclusively for rice bran. Rice bran is tempered and palletized by the use of hexane; the
oil in the bran is extracted.
The de oiled bran thus obtained is packed for export. According to the quality of the oil is
extracted is used for edible and non-edible purposes.
Solvent Extraction Plant II:
(Desment, Belgium, India)
Installed and commission in 1972 production capacity 36000 tones PA process. In thus
plant is similar to plant-I however this plant is equipped with preparatory.
Solvent- Extraction Plant III:
Installed and commissioned in 1983 production capacity in 45,000 tones pa.
(Fabricated and installed by engineering division of foods, fats and fertilizers Ltd). This plant is
also versatile to process various seeds oiled cakes and kernels. It is designed, fabricated by foods,
fats and fertilizers Ltd, engineering division short coming of the other plant. Its uniqueness is the
incorporation of minimize the Hexane loss and facility for low temperature extraction.
Refinery:
Installed and commissioned in 1965 production capacity 4500 tones pa. our refinery is
equipped with both batch and continuous neutralizes. Refining process consists of benumbing,
caustic neutralization, Bleaching and deodorization. Deorderdarised oil is passed through
polishing filters and sent to packing section.

Solvent Extraction Plant (IV):

It was installed and commissioned in 1985 with a production capacity of 45000 tons per
annum. These four extraction plants provide variability of operation in oil seeds and oil cakes
and at the same time has advantages in marketing. The plants have facilities to process a wide
varieties of oil seeds, oil cakes like rice bran, soybean, sunflower, ground nut, rape seed, sesame,
mango sale, Niger etc., Due to non-availability of sufficient bran and export-import
policies of Indian government, forced the company to stop two solvent plants.
Fat splitting plant:
Installed and commissioned in 1967 into a production capacity of 4500 tones pa. Oil
consists of fatty acids and glycerin. It can be separated from the oil by high pressure splitting
under high pressure and temperature, reaction taxes place, slitting the oil into crude fatty acid

and sweet water which is the dilute from the glycerin is obtained.

Glycerin plant:
UNIT NO: 1 installed and commissioned in 1967 with a production capacity of 300 tons
per annum. Sweet water obtains from the fat splitting plant is set to multi effect vacuum
evaporators, where it is evaporated into crude glycerin. The crude glycerin is further
concentrated, deodorized and bleached to yield refined glycerin.
Hydrogenation Plant:
UNIT NO: 1 commissioned in 1979, UNIT NO 2 in 1982 into a production capacity of
6000 tons per annum. Rice bran oil bounds in unsaturated fatty acids to render this oil suitable
for making good quality soaps it has to be hydrogenated for increasing its melting point.
Hydrogenated plants consists of cell house, compressor room and hydrogenation auto claves.
This oil is hydrogenated under high temperature and pressure using a catalyst. To obtain better
products for premium soaps this hydrogenated rice bran oil is split and distilled to give hardened
distilled fatty acid.
Physical Refinery:
Installed in 1986, into production capacity of 9000 tons per annum. This is fabricated by
the engineering division of foods, fats and fertilizers Ltd. The conventional process of refining
consists of specifying the free fatty acid in the oil by the use of an alga. In physical refining the
free fatty acid is directly distilled out under high vacuum and temperature.

Waste Oil Recovery Plant:

Installed and commissioned in 1986. In this plant waste oil from present bleaching earth
and spent nickel catalyst is recovered.

Vanaspathi Shortening:
Production of Vanaspathi shortening high quality bakery fats, margarine from refined
oils fractionation. This division produces high quality olives and steering from various edible fats
for use in manufacture of chocolate confectionery and cosmetics leading manufacturers this

yields of activity all over the world are their consumers.

Turnkey Engineering:
In collaboration with yashino-seisakush co. Ltd. Japan who has done pioneering work in
developing process and technical know how far refining high fat rice bran oil. The engineering
division has installed and commissioned five plants into a total project cost of Rs 1.70 millions in
south India. India is the second largest producers of rice and has large potentials for crude rice
bran oil to be processed and turned into a cooking medium to satisfy their requirements of an
immense Indian market.
INTERNATIONAL TRADING:
Besides the export of the manufactured products, with large ware houses for dry cargo,
bulk storage installation for liquid infrastructures at their command and the rich international
trading experience of over 40 years. They have set up high standards and achieved substantial
growth is international trading of commodities like rice, industrial fats, maize, tapioca, HPS
ground nuts, kernels, oils and chemicals, new products like natural foods, cob’s, oleoresin and
high quality waxes are proposed to be added to their export baskets.
Through R&D new products and value addition to the existing products is being done in a
continuous basis for enriching the international trading both quality and volume.
TANDUL:-
Refined Rice Bran Oil
A multipurpose-cooking medium judged as the safest cooking oil in the world. Contains
tocopherol and orizanol that reduce cholestrol . It is expensively used in Japan an evidence for
the Japanese larger living.
Packing 15kg/1litre flex pouch.
SUN DELITE:-
Refined Sunflower Oil
Imported from Argentina and refined in the most modern refinery contains high puff. It
lowers cholesterol... General purpose cooking oil .
Packing, 15Kg tin/15litre tin/5litre jar/1litre flex pouch.
SURABHI:-
Vanaspati
An economical vegetable fat for small-scale bakeries . Multi utility fat widely used all
over the country. Packing, 15Kg bag-in-bix/ 15Kg tin/ 15Kg jar.
BAKER’S PET:-
Bakery shortening
Multipurpose bakery shortening creamy white and bland in taste . A blend of specially
formulated and textured hydrogenated fats to provide excellent plasticity . The largest selling
brand in south India for manufacturing cakes beads biscuits filling cream cookies also used for
shallow and deep-frying. Packing; 15Kg bag-in-box/ 15Kg tin/ 15Kg jar.
FFF:-
Vanaspati
100% granulated vegetable fat. A favorite of south Indian housewives for cooking and deep-
frying . A must for all festival cooking and sweet preparations . Packing, 15Kg tin/15 liter
tin/1lite flex pouch/500,200 and 100 ml flex pouch.
MELLO:-
Margarine
Margarine made from the choicest of refined oils for bakery industries recommended by the
best bakers in the country for cake cream pastry biscuits icing and cookies. Ideal because it is
not colored and not flavored .
Packing;15Kg bags-in-box.
BISCREME:-
Aerated bakery shortening
Uniform dispersion of nitrogen gas in the fat produces a superior bakery shortening [contains
10% v/wt nitrogen] specially used for filling cream and icing. Best for premium biscuits and
cookies .
PALM DELITE:-
Imported E&D palmolein
Refined bleached and deodorized palm olefins imported from Malaysia, Economical oil
supplied allover the country directly from our ports on the east and west.
Packing, 15Kg tin/1 liter flex pouch/500 ml flex pouch.
BAKERS DELITE:-
Puff pastry fat, an in house development to produce a smooth fat designed of ruse in puff
pastry products. A specialty fat, which gives a flaky, puff with a good life . Packing; 15Kg
bag-in-box.
GOLDEN SPREAD:-
Margarine for puffs
Specially formulated product for puffs . There is already a great demand for this margarine
for its superior quality.
Packing; 15Kg bag-in-box.
BAHAAR:-
Mango bar
Papas made from mango pulp favorite mouth tingle for the young and the old.
Packing; 20gms sachet.
FFF:-
Glycerin
Refined glycerin made from sweet water obtained in fat splitting.
Grades available---industrial white-IW
Chemically pure-CP
Indian pharmacopeia-IP
Packing; 250kg plastic drums.
TRIFFA:-
Fatty acids/static acids
Standard and hardened quality distilled fatty acids made from rice bran palm coconut
sunflower rapeseed Soya and linseed oil. Custom made formulations available on order. Raw
material for cosmetic premium soap lubricants chemical industries rubber and PVC
formulations .Packing, 110Kg in plastic carboys for liquids 50Kg woven hope lined bags for
hardened quality in flake form.
OTHERS:-
Crude palm, oil-bulk
Refined palms oil-bulk; contract farming by farmers. We provide imported seedlings after
acclimatizing know how for growing is provided to the farmers. Specialty fats;
Refined kokum fat [gardenia]
Sal steadiness [shore Robusta]
Produced from forest sources . An important no timber forest produces.
Mango steadiness [magnifier India]
Shea steering .
Cosmetic ingredients --- mango olefins
Shea olefins .
Refined rice bran oil wax
Used in various industries like paper coating candles water proofing floor shoe and furniture
polish cosmetics carbon paper printing inks fruit and vegetable coatings and pharmaceuticals.
Rice barn oil wax may substitute wax like carnauba.
 Exporters of
Indian rice [non-basmati]
De oiled rice barn
De oiled salted meal- pellets non-dusty.
Importers of
Palm oil and its fractions .
Crude sunflower oil
Crude soybean oil
Have sea-worthy barges for unloading from ships who Anchored near shallow water ports.
Presence in all minor ports in India . West coast Kochi and Mangalore east coast gopalpur
Kakinada and nagapattinam
Turnkey project – Supplier for double solvent refining of high FFA oils up to 20% such as
Rice bran oil solvent extracted high FFA oils. The refined oil obtained is of excellent quality as
per food standards.
Garment Exporters:-
We export woven garments to United States of America, United Kingdom Canada
Germany Japan Chile France and Australia.
Our customer span ranges from chain stores mail order boutiques and wholesalers order sizes
vary from 1000 to 1,00,000 units.

Granite Exporters:-
We initially started exporting rough blocks and have expanded by exporting cut-to-size
slabs and random slabs. Later we shifted towards manufacturing of finished products like
monument artifact items and fireplaces.

Administration and organizational structure Board of directors:

 Sri B.K.Goenka (Chairman and M.D.)
 G.S.Goenka (whole time Director)
 S.B.Goneka (whole time Director)
 Bharat Kumar Goenka (whole time Director)
  O.P.Goneka
 Sita Ram Goenka.
 Sushi Goenka

Organizational Structure:
The General Manager is the main administrating and controlling and head of the FFF ltd.
On behalf of the board of directors under him there will be one Deputy (Finance and
Administration) five heads of the Departments representing the 3F ltd.

Man Power Position:

To continue the day by day operations the company has adopted a systematic manpower
poison.

1) Managerial Staff:

The managerial staff consists of 75 members and they belong to all departments of the
organization.

2)Staff:
Staff consists of 100 members. It includes clerical and non-clerical staff.

3) Technical Staff:
The technical staff consists of 245 members. It includes plant engineers, plant supervisor,

plant operators etc.

4) Bata:
Bata otherwise known as piece rated workers, they are 92 in number.
5) Trainers:
Trainers consist of 98 members. Trainers are those persons who take training from the
organization.

6) Act Apprentices:
An act apprentice consists of 20 members. Industrial training colleges send
some students to the organization to pursue trainings in different branches.

Marketing:
 The FFF ltd has a strong marketing network spread in all the country where it is existed.
Various dealers and consignment agents are been appointed every year to increase the network
and have a strong command over the market. The company has also increased the size of the
basket of the products that are offered to the industrial customers by adding various new
products.

Awards:
The company received the “SEA RICE BRAN OIL” award in 2001-2002 from the
solvent, extraction association of India.
Projects:
2000-2001, a terminal at Gopalpur in Orissa was commissioned and started marketing imported
oils in the linter lands of orissa.2001-2002 palm, solvent, refining and purification of plant. 2002-
2003, Balancing of equipment has been by adding a cooling tower to various plants.2003-2004,
Complete Deodorization plant III has been commissioned with installed capacity of 18000 TPA
in order to improve the productivity.
Employee involvement & process improvement:
The imagination and creativity of employees have always been key success factors for the
company. Employees of FFF have always been at the forefront in contributing ideas for process
improvements.
Safety & Health:
Safety and health of employees has always been the prime concern in the plant and all
efforts have been made to leverage upon the safety initiatives to maximize employee morale and
satisfaction.
 NEED FOR THE STUDY

 The Project study is undertaken to analyze and understand the Capital Budgeting process in

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 funds from various resources.

 To meet over head expenses.

 To hold finished and spare parts etc.

 To pay selling & distribution expenses.

 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 and financial performance of the company.

 To make suggestion if any for improving the financial position of the company.

 To understand the practical usage of capital budgeting techniques

 To understand the nature of risk and uncertainty

 LIMITATIONS OF THE STUDY
 Lack of time is another limiting factor, i.e., the schedule period of 8 weeks are not sufficient to make the

study independently regarding Capital Budgeting in 3F company.

 The busy schedule of the officials in the 3F company 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. Therefore it was possible to explain only few

methods of capital budgeting.

CHAPTER-2
 METHODOLOGY OF THE STUDY
Methodology is an intensive and purposeful search for knowledge and for the understanding of social and
physical phenomenon. It is the method for the discovery of true values in a scientific way. There are two
sources of data,

Primary Sources and

Secondary Sources
Primary Data
The data which is collected at first hand for the purpose of the study is known as primary data.

Primary data which is collected through interaction with the assistant financial manager of 3F
company.

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. Apart from these some information is collected through the seminars, which were
held by 3F company.

Secondary Data

The data which is corrected by some one previously is called secondary Data. It is already available in
the form of internal records of the company and other publications.

Secondary sources

The secondary data have been collected through the various books, magazines, broachers &
websites
CHAPTER-3
 REVIEW OF LITERATURE
CAPITAL BUDGTING:
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.

IMPORTANCE OF CAPITAL BUDGETING:

 There are several factors that make capital budgeting decisions among the critical
decisions to be taken by the management. The importance of capital budgeting can be
understood from the following aspects of capital budgeting decisions.

1. Long Term Implications: Capital Budgeting decisions have long term effects on the risk
and return composition of the firm. These decisions affect the future position of the firm
to a considerable extent. The finance manger is also committing to the future needs for
funds of that project.
2. Substantial Commitments: The capital budgeting decisions generally involve large
commitment of funds. As a result, substantial portion of capital funds is blocked.
3. Irreversible Decisions: Most of the capital budgeting decisions are irreversible
decisions. Once taken the firm may not be in a position to revert back unless it is ready to
absorb heavy losses which may result due to abandoning a project midway.

4. After the Capacity and Strength to Compete: Capital budgeting decisions affect the
capacity and strength of a firm to face competition. A firm may lose competitiveness if
the decision to modernize is delayed.
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.

ASSUMPTIONS IN CAPITAL BUDGETING:

The Capital Budgeting decision process is a multi-faceted and analytical process. A number of
assumptions are required to be made.

1. Certainty with respect to cost & Benefits: It is very difficult to estimate the cost and
benefits of a proposal beyond 2-3 years in future.

2. Profit Motive : Another assumption is that the capital budgeting decisions are taken with
a primary motive of increasing the profit of the firm.

The activities can be listed as follows:

 Dis-investments i.e., sale of division or business.

 Change in methods of sales distribution.
 Undertakings an advertisement campaign.
 Research & Development programs.
 Launching new projects.
 Diversification.
 Cost reduction.

FEATURES OF INVESTMENT DECISIONS:

 The exchange of current funds for future benefits.
 The funds are invested in long-term assets.
 The future benefits will occur to the firm over a series of years.

IMPORTANT OF INVESTMENT DECISIONS:

 They influence the firm’s growth in long run.
  They effect 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.
TYPE OF INVESTMENT DECISIONS:

 Expansion of existing business.

 Expansion of new business.
 Replacement & Modernization.
INVESTMENT EVALUATION CRITERIA:

 Estimation of cash flows.

 Estimation of the required rate of return.
 Application of a decision rule for making the choice.
Consideration of cash flows is to determine true profitability of the project and it is an
unambiguous way of identifying good projects from the pool. Ranking is possible it should
recognize the fact that bigger cash flows are preferable to smaller ones & early cash flows are
referable to later ones I should help to choose among mutually exclusive projects that which
maximizes the shareholders wealth. It should be a criterion which is applicable to any
considerable investment project independent of other. There are number of techniques that are in
use in practice. The chart of techniques can be outlined as follows:
Capital Budgeting Techniques:

Traditional Approach Modern Approach

(or) (or)

Non-Discounted Cash Flows Disconnected Cash Flows

Pay Back Period (PB) Net Present Value (NPV)

 Accounting Rate of Return(ARR) Internal Rate of Return
Profitability Index (PI)

Discounted Payable Period

NET PRESENT VALUE :

The Net Present value method is a classic economic method of evaluating the investment
proposals. It is one of the methods of discounted cash flow. It recognizes the importance of time
value of money”.
It correctly postulates that cash flows arising of different time period, differ in value and
are comparable only when their equivalent i.e., present values are found out.

The following steps are involved in the calculation of NPV:

 Cash flows of the investment project should be forecasted based on realistic assumptions.
 An appropriate rate of interest should be selected to discount the cash flows, generally this will be
the “ Cost of capital rate” of the company.
 The present value of inflows and out flows of an investment proposal, has to be computed by
discounting them with an appropriate cost of capital rate.
 The Net Present value is the difference between the “Present Value of Cash inflows” and the
present value of cash outflows.
 Net present value should be found out by subtracting present value of cash outflows from present
value of cash inflows. The project should be accepted if NPV is positive.

NPV = Present Value of Cash inflow – Present value of the cash outflow

Acceptance Rule:

Accept if NPV > 0

Reject if NPV < 0

May accept if NPV = 0

One with higher NPV is selected.

INTERNAL RATE OF RETURN METHOD:

The internal rate of return (IRR) method is another discounted cash flow technique .This
method is based on the principle of present value. It takes into account of the magnitude &
timing of cash flows.
IRR nothing but the rate of interest that equates the present value of future periodic net
cash flows, with the present value of the capital investment expenditure required to undertake a
project.
The concept of internal rate of return is quite simple to understand in the case of one-
period project.
Acceptance Rule:
Accept if r > k
Reject if r < k
May accept if r = k
where r = rate return
k = opportunity cost of capital

PROFITABILITY INDEX (OR) BENEFIT COST RATIO:

Yet another time-adjusted method of evaluating the investment proposals is the benefit-
cost (B/C) ratio of profitability index PI). It is benefit cost ratio. It is ratio of present value of
future net cash inflows at the required rate of return, to the initial cash outflow of the investment.
Present Value of Cash inflows

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

Present Value of Cash outflows

Acceptance Rule :
Accept if PI > 1
Reject if PI < 1
May accept if PI = 1
Profitability Index is a relative measure of projects profitability.

PAY BACK PERIODE METHOD:

 One of the top concerns of any person or organization investing a large amount of
money would be the time by which the money will come back. The concern making the
investment would want that at least the capital invested is recovered as early as possible. The pay
back period is defined as the period required for the proposal’s cumulative cash flows to be equal
to its cash outflows. In other words, the payback period is the length of time required to recover
the initial cost of the project. The payback period is usually stated in terms of number of years. It
can also be stated as the period required for a proposal to ‘break even’ on its net investment.
The payback period is the number of years it takes the firm to recover its original
investment by net returns before depreciation, but after taxes.
If project generates constant annual cash inflows, the pay back period is completed as
follows:
Initial Investment

Pay Back = ------------------------

Annual cash inflow

In case of unequal cash inflows, the payback period can be found out by adding up the
cash inflows until the total is equal to initial cash outlay.

Acceptance Rule:

 Accept if calculated value is less than standard fixed by management otherwise reject it.
 If the payback period calculated for a project is less than the maximum payback period set up by
the company it can be accepted.
 As a ranking method it gives highest rank to a project which has lowest pay back period, and
lowest rank to a project with highest pay back period.

DISCOUNTED PAY BACK PERIOD:

One of the serious objections to pay back method is that it does not discount the
cash flows. Hence discounted pay back period has come into existence. The number of periods
taken in recovering the investment outlay on the present value basis is called the discounted pay
back period.
 Discounted Pay Back rule is better as it does discount the cash flows until the outlay is
recovered.
ACCOUNTING RATE OF RETURN (OR)
AVERAGE RATE OF RETURN (ARR) :
It is also known as return on investment (ROI). It is an accounting method, which uses the
accounting information revealed by the financial statements to measure the profitability of an
investment proposal. According to Solomon, ARR on an investment can be calculated as “ the
ratio of accounting net income to the initial investment i.e.” .
Average Net Income

ARR = ---------------------------

Average Investment
Average Income = Average of after tax profit
Average Investment = Half of Original Investment
Acceptance Rule:
 Accept if calculated rate is higher than minimum rate established by the management.
 It can reject the projects with an ARR lower than the expected rate of return.
 This method can also help, the management to rank the proposals on the basis of ARR.
 A highest rank will be given to a project with highest ARR, whereas a lowest rank to a
project with lowest ARR.

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 by 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.

PROCESS
CAPITAL BUDGETING PROCESS:

Atleast five phases of capital expenditure planning & control can be identified:

 Identification ( or Organization ) of investment opportunities.

 Development of forecasts of benefits and costs.
 Evaluation of the net benefits.
 Authorization for progressing and spending capital expenditure.
 Control of capital projects.

INVESTMENT IDEAS:
Investment opportunities have to be identified or created investment proposals arise at
different levels within a firm.
 Nature of Idea Level

Cost reduction ------

Replacement Plant Level

Process/Product Development ( 50% in India cover this level)

Expansion Top management

Diversification In India, it is insignificant

New Product Marketing Dept., ( or) Plant Manager

Replacing an old

Machine ( or)

Improving the Factory Level.

Production techniques.

Investment proposals should be generated to employ the firm’s funds fully well & efficiently.

FORECASTING :
Cash flow estimates should be development by operating managers with the help of
finance executives. Risk associated should be properly handled. Estimation of cash flows
requires collection and analysis of all qualitative and quantitative data, both financial and non-
financial in nature. MIS provide such data.
Correct treatment should be given to :

 Additional working capital

 Sale proceeds of existing assets.
 Depreciation
 Financial flows (to be distinguished from operation flows)
EVALUATION :
 Group of experts who have no ace to grind should be taken in selecting the methods of
evaluation as NPV, IRR, PI, Pay Back, ARR & Discounted Pay Back.

Pay Back period is used as “Primary” method & IRR/NPV as “Secondary” method in
India. The following are to be given due importance.

 For evaluation, minimum rate of return or cut-off is necessary.

 Usually if is computed by means of weighted Average cost of Capital (WACC)
 Opportunity cost of capital should be based on risky ness of cash flow of investment
proposals.
 Assessment of risk is an important aspect. Sensitivity Analysis & Conservative for
costs are two important methods used in India.
AUTHORIZATION:
Screening and selecting may differ from one company to another. When large sums are
involved usually final approval rests with top management. Delegation of approval authority
may be effected subject to the amount of outlay. Budgetary control should be rigidly exercised.
CONTROL AND MONITORY:
A Capital projects reporting system is required to review and monitor the performance of
investment projects after completion and during their life. Follow up comparison of the actual
performance with original estimates to ensure better forecasting besides sharpening the
techniques for improving future forecasts. As a result company may re-praise its projects and
take necessary action.
Indian Companies use regular project reports for controlling capital expenditure reports may be
quarterly, half-yearly, monthly, bi-monthly continuous reporting..

 Expenditure to date
 Stage and physical completion
 Approved total cost
 Revised total cost

DECISION MAKING LEVEL:

For planning and control purpose three levels of Decision making have been identified :
 Operating
  Administrative
 Strategic
OPERATING CAPITAL BUDGETING: Includes routine minor expenditure, as office
equipment handled by lower level management.
ADMINISTRATIVE CAPITAL BUDGETING: Falls in between these two
levels involves medium size investments such as business handled by middle level management.

STRATEGIC CAPITAL BUDGETING:

Involves large investment as acquisition of new business or expansion in a new time of
business, handled by top management unique nature.

Long Term Capital Budgeting In 3F

PRE – INVESTMNET STAGE:
In a planned economy, as in India, the identification of public sector projects needs to be
done within the overall framework of national the sect oral planning. All projects of every
sector need to be identified scientifically at the time of plan formulation. In actual practice,
however, it is observed that ‘identification’ stage is the most neglected stage of the project
planning.

The five year plans indicate the broad strategy of planning economic growth rate and
other basic objectives to be achieved during the plan period. The macro level planning exercise
undertaken at the beginning of every five year plan indicates broadly the role of each sector’s
physical targets to be achieved and financial outlays, which could be made available for the
development of the sector during the plan period.

The identification of a project in the Five Year Plan is not the sanction of the project for
implementation. It provides only the ‘green signal’ for the preparation of feasibility report (FR0
for appraisal and investment decision. A preliminary scrutiny of the FR of the project is done in
the Ministry and thereafter copies of the feasibility report are submitted to the appraising
agencies, viz., Planning Commission, Bureau of Public Enterprises and the Plan Finance
Division of the Ministry of Finance.
 Thus the organizational responsibility for identifying these projects rests with the
concerned administrative ministry, in consultation with its public enterprises.

The essential steps for project identification and preparation relates to studying (I) imports (ii)
substitutes (iii) available and raw material (iv) available technology and skills (v) inter-industry
relationship (vi) existing industry (vii) development plans (viii) old projects etc.
It may be mentioned that in actual practice, these steps are hardly scientifically studied
and followed by the administrative ministry public sector undertaking at the time of project
identification. The public sector projects many a time come spontaneously on the basis of ideas
and possibilities of demand or availability of some raw materials and not an outcome of
scientific investigation and systematic search for feasible projects.

PROJECT FORMULATION :
The second stage of “Project Cycle” viz. Project Formulation, is a pre-investment
exercise to determine whether to invest, where to invest, when to invest and how much to invest.
The project/feasibility reports are meant to provide required information for assessing technical,
financial, commercial, organization and economic viability of the project planning in India,
mainly because of relatively late realization of its importance. As a result, the investment
decisions for large projects in the past were taken on half-baked and ill-conceived projects and
time-over runs and cost-over runs of public sector projects have become a regular feature rather
than exception.
In early seventies along with the setting up of the Public Investment Board (PIB)
the Government created a new project Appraisal Division in the Planning Commission. This
Division prepared and circulated “Guidelines for preparing Feasibility Reports of Industrial
Projects” in 1974.

This guidelines, unlike earlier manual, indicates all the information and data
required to be presented and analyzed in the feasibility report, so as to enable the appraisal
agency to carry out (i) technical analysis – to determine whether the specification of technical
parameters are realistic, (ii) financial analysis – to determine whether the proposal is financially
viable, (iii) commercial analysis – to determine soundness of the product specifications,
marketing plans and organization structure and (iv) economic analysis, to determine whether a
project is worthwhile from the point of view of nation and economy as a whole.
 The guidelines describes in details, the information required to be given and analysed on
the following issues : (a) general information of the sector, (b) objective of the proposal, (c)
alternative ways, if any of attaining the objectives and better suitability of the proposed project,
(d) project description – gestation period, costs, technology proposed, anticipated life of the
project etc., (e) demand analysis, total demand / requirements of the country, including
anticipated imports and exports and share of the proposed project, (f) capital costs and norms
assumed, activity wise and year wise, (g) operating costs and norms, (h) revenue and benefits
estimation etc.

PROJECT APPRAISAL :

The appraisal of the project follows the formulation stage. The objective of the appraisal
process is not only to decide whether to accept or reject the investment proposal, but also to
recommend the ways in which the project can be redesigned or reformulated so as to ensure
better technical, financial, commercial and economic viabilities.

The project appraised which is an essential tool for judicious investment decisions and
project selection is a multi-disciplinary task. But many a times this is considered doubt, have
played an important role in contributing systematic methods for forecasting the future and
evolving appraisal methods to quantify socials costs and benefits, but they alone can not carry
out complete appraisal of an investment proposal.

The need for project appraisal and investment decisions based on social profitability
arises mainly because of the basic characteristics of developing countries limited resources for
development and multiple needs – objective of planning being ‘Economic Growth with Social
Justice’. The project appraisal is a convenient and comprehensive fashion to achieve, the laid
down objectives of the economic development plan. The appraisal work presupposes availability
of a certain minimum among of reliable and up to date data in the country, as well as the
availability of trained persons to carry out the appraisal analysis.

As stated earlier the investment decision of public sector projects are required to be taken within
the approved plan frame work. The Project Appraisal Division (PAD) that prepares the
comprehensive appraisal note of projects of Central Plans was therefore set up in Planning
Commission. The Finance Ministry issues expenditure sanction for all investment proposals
within the frame work of annual budget. The plan Finance Division and the Bureau of Public
Enterprises of the Finance Ministry are also required to examine and give comments on the
investment proposals of public.

CHAPTER-4
 DATA ANALYSIS AND INTERPRETATION

IMPORTANCE OF INVESTMENT DECISION:

1. Investment decision requires special attention because of the following reasons.

2. They influence the firm’s growth in the long term.
3. They effect the risk of the firm.
4. They involve commitment of large amount of funds.
5. They are irreversible, or reversible at substantial loss.
6. They are among the most difficult decisions to make.

INVESTMENT EVALUATION CRITERIA:

1. Three steps are involved in the evaluation of investment.

2. Estimation of cash flows.
3. Estimation of the required rate returns (the opportunity cost of capital) application of
a decision rule for making the choice.

EVALUTION OF INVESTMENT PROPOSAL:

At each of time a business firm has a number of proposals regarding various objects
in which it can invest funds. But the funds available with the firm are ways limited and it is not
possible to invest: Rinds in all he proposals at a time.

Hence, it is very essential to select amongst the various competing Proposals,

those which given highest benefits. Te crux of the capital budgeting is the location of
available non-economic, which influence the capital budgeting .decisions. The crucial factor that
influences. the capital budgeting decision is the profitability of the prospective investment. Yet the
disk involved in the proposal in not be ignored because -profitability and risk are directly related,
i.e., higher. Ratability, the risk and vice-versa.

They are many evaluating profitability of capital investment proposals. The various
commonly used methods are as follows:

Non DCF criteria

a) Payback period

The payback period on of the most popular and widely recognized tradition
methods of evolution investment proposals. Payback period is the number of years required to
require the original cash outlay invested in a project.
In the project generates constant annual cash flows, the payback period can be
computed by dividing cash outlay by the annual cash inflows.
Initial investment
Initial Investment
Pay back = ------------------------

Annual cash Inflows

In the vase of unequal cash flows the payback period can be found out by adding up the cash
inflow until the total is equal to the initial cash outlay.

b) Accounting rate of returns (ARR):

The accounting rate of returns also known as the return on investment (ROI) uses
accounting information, as reveled by financial statements, to measure to profitability of an
investment the accounting rate of returns is the ratio of the average of tax profits divided by the
average investment.
Average earning (after tax)
ARR = ------------------------------------ x 100
Average investment
DFC criteria
a) Net present value (NPV): The net present value is the classical method of evaluating
the investment proposals. If is a DCF technique that explicitly recognizes the time value
 at different time periods differ in the value and comparable only when their equipment
present values – around out.
NPV= Total present value –project cost
(b) 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 uses to describe the IRR
method are yield on an investment, marginal efficiently of capital, rate of return over cost, time –
adjusted rate of internal return and soon.

NPV at LR
IRR= LR+ --------------- x Different rate
Different NPV

LR= lower discount rate

NPV at LR = Net present value at lower rate

Different NPV = 2 Rates net present value difference

Different rate = 2 rates different

(C)PROFITABILITY INDEX (PI)

At another time – adjusted method of evaluating investment proposals is benefit –cost
(b/c) ratio of profitability index is the ratio of the present value cash inflows, the required rate of
return to the initial cash out of the investment
present value
PI = -------------------
Project value
CRITERION TABLE:
In the evolution process or capital budgeting techniques there will be a criteria to accept or
reject the criteria will be access of
Criteria/Method Accepts Reject

Payback period (PBV) >Target period < target period

 Accounting rate of return >Target time < target time
(ARR)

Net present value (NPV) >0 <0

Internal rate return (IRR) >cost of capital <cost of capital

Profitability index (PI) >1 <1

CALCULATION OF PAY BACK PERIOD

Year Income (PAT) Depreciation Cash in flow Cumulative cash

RS inflow RS

2011-12
1,21,45,984 3,99,19,638 5,20,65,622 5,20,65,622

2012-13
2,78,99,787 2,99,39,728 5,78,39,515 10,99,05,137

2013-14
2,10,44,578 2,24,54,796 4,34,99,374 15,34,04,511

2014-15
4,20,96,494 1,68,41,097 5,89,37,591 21,23,42,102

2015-16
9,51,66,792 1,26,30,823 10,77,97,615 32,01,39,717

Initial outlay (project cost) = 15,96,78,550

 I.0-L.V
Pay back period = L+ --------------------------------
N.H.V-L.V

L = LOWER YEAR

IO = INITIAL OUTLAY

LV = LOWER YEAR VALUE

NHV = NEXT HIGHER YEAR VALUE

= 3 + 159678550-153404511
-------------------------------
212342102 - 153404511

= 3 + 0.11

= 3.11 years

CRITERIA FOR EVALUATION

The pay back period computed is a project less than the pay back period set by the
management of the company, if would be accepted. A project actual pay back period more
than the determined by the management it will be rejected.
Criteria/Method Accept Reject

Payback period (PBP) >Target period <Target period

Interpretation:
The payback period is set by 3F for considering expansion project is 6 years, whereas actual
payback period is 3.11 years. Hence we accept the project
 A) Calculation of ARR:

Year Profit after tax

2014-15 1,21,45,984

2015-16 2,78,99,787

2016-17 2,10,44,578

2017-18 4,20,96,494

2018-19 9,51,66,792

Average investment = Avg net profit after tax

----------------------------- x 100
Avg investment

Total profits
Avg net profit = ------------------------
 No of years

= 19,83,35,635
----------------------
5
= 39,670,727

Avg investment = investment

------------------
2
= 15,96,78,550
------------------

= 7,98,39,275

39670727
ARR = --------------- x 100
79839275
= 49.6 % or 50 %

According to this method ARR is higher than minimum rate of return established by the
management are accepted. If reject the project have less ARR than the minimum rate set by the
management.

Criteria / Method Accept Reject

Accounting rate of return  Target rate < Target rate

(ARR)

Interpretation:

The card ARR set by 3F management by 20% the actual ARR is 50 % is higher than the standard
ARR set by the management hence we accept the project.

(B) Calculation of NPV:

 Year CIF DCF (25%) Present Value

2014-15 5,20,65,622 0.8 4,16,52,498

2015-16 5,78,39,515 0.64 3,70,17,290

2016-17 4,34,99,374 0.512 2,22,71,679

2017-18 5,89,37,591 0.41 2,41,64,412

2018-19 10,77,97,615 0.328 3,53,57,618

TOTAL= 16,04,63,497

NPV = Total Present Value – Project value

Project value = 15,96,78,550

= 16,04,63,497 - 15,96,78,550

NPV = 7,84,947

Criteria for evaluation:

In case of calculated NPV is positive or zero, the project should be accepted. If the calculated
NPV is negative the project is rejected.

Criteria / Method Accept Reject

Net present Value (NPV)  0 <0

Interpretation:

NPV proposed explanation project is found our 784947 is the positive value. Hence we accept
the project.

(C) Calculation of IRR:

Year CIF DCF(25%) Present value Cash

Flows

2014-15 52065622 0.8 41652498

2015-16 57839515 0.64 37017290

2016-17 43499374 0.512 22271679

2017-18 58937591 0.410 24164412

2018-19 107797615 0.328 35357618

Total = 160463497

Project cost = 159678550

Net present value= 784947

 YEAR CIF DF@26% PV

2014-15 52065622 0.794 41340104

2015-16 57839515 0.630 36438894

2016-17 43499374 0.500 21749687

2017-18 58937591 0.397 23398224

2018-19 107797615 0.315 33956249

Total value = 156883158

Project cost= 159678550

Net present value= -2795392

IRR = NPV at LR — Initial outlay

LR+ --------------------------------- x different rate
PVLDR - PVHDR
Where

LR = Lower Rate
NPV at LR = net Present at Lower rate
PVHDR = Present value at higher discount rate
PVLDR = present value at lower discount rate
160463497—159678550
= 25 + ---------------------------------- x 26-25
160463497—156883158
 784947
= 25 + ------------- x 1

3580339

= 25 + 0.219

= 25.219%

Criteria for evaluation:

In the method the project is accepted when IRR is higher than its cost of capital or cut out rate. If
the project is not accepted when IRR is less than cost of capital.

Criteria / Method Accept Reject

Internal rate of return (IRR)  Cost of capital < cost of capital

Interpretation:

The project is accepted because of the calculation IRR is higher than its cost of capital. The cost
of capital fixed by management is 9% the actual is more than its standard. Hence the project is
accepted.

(D) Calculation of profitability index:

Year CIF

2014-15 52065622
 2015-16 57839515

2016-17 43499374

2017-18 58937591

2018-19 107797615

Total = 160463497

present value cash inflows

PI = -------------------------------------
Project cost

Present value = 160463497

Project value = 159678550

160463497
PI = --------------------
159678550

= 1.0049

Criteria for evaluation:

A project can be accepted if its PI index is greater than one. If PI is less than one we should
reject the project.

Criteria / method Accept Reject

Profitability index (PI) >1 <1

Interpretation:

Profitability index proposed explanation project is found our 1.0049 this is more than the PI.
Hence we accept the project.

CHAPTER-5
 FINDINGS

It is observed that the payback period has given time for their company is 6 years and but
the present payback period is 3.11 years for the company.

 It is observed that the required rate of ARR (Accounting Rate Of Return) is 20%

and the present ARR of the company is 50%.

 It is observed that the required rate of IRR ( Internal Rate Of Return) is 9% and

the present IRR of the company is 25.22%.

 It is observed that the NPV (Net Present Value) is 7,84,947 it is positive value.

 It is observed that the PI(Profitability Index) is 1 and the present PI of the

company is 1.0049.

 It is observed that the company should not use the risk adjusted techniques.
 SUGGESTIONS

 The present payback period is in satisfactory level therefore I strongly suggest to the

management to keep maintain this level.

 The ARR is satisfactory level so I suggested to management should need to continue this

level.

 It is recommended that the IRR is taken from the 26% and 25% and the project is ahead

that the optimum level of the Internal Rate is 25%, So it is better position of the IRR in

3F.

 It is advised that the NPV position is better in the organization, and the value of NPV is

reasonable for the cost of capital.

 The Profitability index (PI) is satisfactory level so I suggested to management should

need to continue this level.

  I suggested to management better decision can be obtained if risk adjusted methods like

decision tree analysis and sensitivity analysis are used by the management.

BIBILIOGRAPHY

Financial Management -- I.M. Pandey

Management Accountancy -- Khan & Jain

Financial Management -- S.N. Maheshwari

Advanced Accountancy -- S.P. Jain & K.V. Narayana

Financial Management -- Prasanna Chandra

Management Accountancy -- Sharma & Shashi K. Gupta

 Balance sheet as at 31st march 2015

As at 31-03-2014 As at 31-03-2015
Equity and liabilities:
Share holders’ funds:
Share capital 4,42,57,840 2,36,36,840
Reserves and surplus 1,77,25,067 4,25,09,624
2,65,32,773 1,88,72,784
Non current liabilities:
Long term borrowings 15,31,94,961 14,61,13,287
Deferred tax liabilities 10,87,17,961 15,88,100
16,40,66,757 15,77,01,387
Current liabilities:
Short term borrowings 5,04,32,760 7,94,96,518
Trade payables 1,84,92,695 3,34,41,968
Other current liabilities 1,32,75,066 1,04,31,164
Short term provisions 9,48,572 14,25,096
8,31,49,093 12,47,94,746
TOTAL 27,37,48,623 26,36,23,349
Assets:
Non current assets:
Fixed assets 17,48,25,348 16,48,69,629
Long term loans and advances 36,24,057 38,82,624
17,84,49,405 16,87,52,253
Current assets
Inventories 3,97,84,281 3,15,07,937
Trade receivables 4,89,40,208 5,58,03,607
Cash and cash equivalents 18,86,735 38,22,389
Short term loans and advances 46,87,994 37,37,163
Total 9,52,99,218 9,48,71,096
27,37,48,623 26,36,23,349

Balance sheet as at 31st march 2016

As at 31-03-2015 As at 31-03-2016
Equity and liabilities:
Share holders’ funds:
Share capital 2,36,36,840 2,52,86,840
Reserves and surplus 4,25,09,624 4,16,50,678
1,88,72,784 1,63,63,838
Non current liabilities:
Long term borrowings 14,61,13,287 17,33,65,142
Deferred tax liabilities 15,88,100 1,18,22,430
15,77,01,387 18,51,87,572
Current liabilities:
Short term borrowings 7,94,96,518 8,35,02,080
Trade payables 3,34,41,968 3,09,85,086
Other current liabilities 1,04,31,164 2,71,85,614
Short term provisions 14,25,096 19,83,974
12,47,94,746 14,36,56,754
TOTAL 26,36,23,349 31,24,80,488
Assets:
Non current assets:
Fixed assets 16,48,69,629 15,99,14,014
Long term loans and advances 38,82,624 43,24,124
16,87,52,253 16,42,38,138
Current assets
Inventories 3,15,07,937 3,67,08,044
Trade receivables 5,58,03,607 10,60,30,230
Cash and cash equivalents 38,22,389 12,44,074
Short term loans and advances 37,37,163 42,60,002
Total 9,48,71,096 14,82,42,350
26,36,23,349 31,24,80,488

Balance sheet as at 31st march 2017

As at 31-03-2016 As at 31-03-2017
Equity and liabilities:
Share holders’ funds:
Share capital 2,52,86,840 4,81,15,310
Reserves and surplus 4,16,50,678 3,99,93,899
1,63,63,838 81,21,411
Non current liabilities:
Long term borrowings 17,33,65,142 14,73,07,842
Deferred tax liabilities 1,18,22,430 1,17,22,775
18,51,87,572 15,90,30,617
Current liabilities:
Short term borrowings 8,35,02,080 8,81,45,995
Trade payables 3,09,85,086 4,73,94,679
Other current liabilities 2,71,85,614 4,01,71,110
Short term provision 19,83,974 20,60,595
14,36,56,754 17,77,72,379
TOTAL 31,24,80,488 34,49,24,407
Assets:
Non current assets:
Fixed assets 15,99,14,014 15,80,94,225
Long term loans and advances 43,24,124 52,63,994
16,42,38,138 16,33,58,219
Current assets
Inventories 3,67,08,044 5,69,99,236
Trade receivables 10,60,30,230 11,70,82,611
Cash and cash equivalents 12,44,074 32,24,135
Short term loans and advances 42,60,002 41,60,206
Total 14,82,42,350 18,15,66,188
31,24,80,488 34,49,24,407

Balance sheet as at 31st march 2018

As at 31-03-2017 As at 31-03-2018
Equity and liabilities:
Share holders’ funds:
Share capital 4,81,15,310 24,81,15,310
Reserves and surplus 3,99,93,899 1,54,10,479
81,21,411 3,27,04,831
Non current liabilities:
Long term borrowings 14,73,07,842 19,89,93,150
Deferred tax liabilities 1,17,22,775 1,18,03,722
15,90,30,617 21,07,96,872
Current liabilities:
Short term borrowings 8,81,45,995 10,05,09,094
Trade payables 4,73,94,679 4,53,72,339
Other current liabilities 4,01,71,110 1,08,36,734
Short term provision 20,60,595 21,19,782
17,77,72,379 15,88,37,949
TOTAL 34,49,24,407 10,28,39,652
Assets:
Non current assets:
Fixed assets 15,80,94,225 17,98,53,692
Long term loans and advances 52,63,994 53,10,105
16,33,58,219 18,51,63,797
Current assets
Inventories 5,69,99,236 6,16,17,952
Trade receivables 11,70,82,611 14,68,07,389
Cash and cash equivalents 32,24,135 31,96,475
Short term loans and advances 41,60,206 55,54,039
Total 18,15,66,188 21,71,75,855
34,49,24,407 40,23,39,652

Balance sheet as at 31st march 2019

As at 31-03-2018 As at 31-03-2019
Equity and liabilities:
Share holders’ funds:
Share capital 24,81,15,310 6,81,15,310
Reserves and surplus 1,54,10,479 2,42,95,462
3,27,04,831 4,38,19,848
Non current liabilities:
Long term borrowings 19,89,93,150 15,63,69,534
Deferred tax liabilities 1,18,03,722 1,11,62,000
21,07,96,872 16,75,31,534
Current liabilities:
Short term borrowings 10,05,09,094 13,45,53,510
Trade payables 4,53,72,339 5,48,10,420
Other current liabilities 1,08,36,734 1,24,73,856
Short term provisions 21,19,782 25,96,187
15,88,37,949 20,44,33,973
TOTAL 10,28,39,652 41,57,85,355
Assets:
Non current assets:
Fixed assets 17,98,53,692 19,15,55,420
Long term loans and advances 53,10,105 43,67,992
18,51,63,797 19,59,23,412
Current assets
Inventories 6,16,17,952 7,40,93,342
Trade receivables 14,68,07,389 13,83,17,550
Cash and cash equivalents 31,96,475 43,40,734
Short term loans and advances 55,54,039 31,10,317
Total 21,71,75,855 21,98,61,943
40,23,39,652 41,57,85,355