Coca Cola - Capital Budgeting

CAPITAL BUDGETING
CHAPTER- I
1.1 INTRODUCTION
The term Capital Budgeting refers to long term planning for proposed capital outlay and their
financing. It includes raising long-term funds and their utilization. It may be defined as a firm’s
formal process of acquisition and investment of capital.
Capital Budgeting May also be defined as “The decision making process by which a firm
evaluates the purchase of major fixed assets. It involves firm’s decision to invest its current funds
for addition, disposition, modification and replacement of fixed assets.
It deals exclusively with investment proposals, which an essentially long term projects
and is concerned with the allocation of firm’s scarce financial resources among the available
market opportunities.
In any growing concern, capital budgeting is more or less a continuous process and it is
carried out by different functional areas of management such as production, marketing,
engineering, financial management etc. All the relevant functional departments play a crucial
role in the capital budgeting decision process of any organization, yet for the time being, only the
financial aspects of capital budgeting decision are considered.
The role of a finance manager in the capital budgeting basically lies in the process of
critically and in-depth analysis and evaluation of various alternative proposals and then to select
one out of these. As already stated, the basic objectives of financial management is to maximize
the wealth of the share holders, therefore the objectives of capital budgeting is to select those
long term investment projects that are expected to make maximum contribution to the wealth of
the shareholders in the long run.
Definitions:
“Capital budgeting is long term planning for making and financing proposed capital
outlays”
T.HORNGREEN
Dr.AER COLLEGE OF MANAGEMENT STUDIES AND RESEARCH Page 1

CAPITAL BUDGETING
“Capital budgeting is concerned with allocation of the firm’s scarce financial resources
among the available market opportunities. The consideration of investment opportunities
involves the comparison of the expected future streams of earnings from a project with
immediate and subsequent streams of expenditures for it”. Antle, R.; Eppen, G
“Capital budgeting is the process by which a company determines whether projects (such
as investing in R&D, opening a new branch, replacing a machine) are worth pursuing. A project
is worth pursuing if it increases the value of the company”.Clark, Ephraim;
“Capital budgeting is the process in which a business determines and evaluates potential
expenses or investments that are large in nature. These expenditures and investments include
projects such as building a new plant or investing in a long-term venture”.
Lawrence J; Forrester, J
“Capital budgeting, or investment appraisal, is the planning process used to determine
whether an organization's long term investments such as new machinery, replacement of
machinery, new plants, new products, and research development projects are worth the funding
of cash through the firm's capitalization structure (debt, equity or retained earnings). It is the
process of allocating resources for major capital, or investment, expenditures.”
1.2 INDUSTRY PROFILE

CAPITAL BUDGETING
Soft drinks trace their history back to the mineral waters found in natural springs. Ancient
societies believed that bathing in natural springs and/or drinking mineral waters could cure many
diseases. Early scientists who studied mineral waters included JābiribnHayyān, Alkindus,
Rhazes, Paracelsus, Robert Boyle, Friedrich Hoffmann, Antoine Laurent Lavoisier, Hermann
Bereave, William Browning, Gabriel F. Venal, Joseph Black, and David MacBride.
The earliest soft drinks were sherbets developed by Arabic chemists and originally served
in the medieval Near East. "Alkaline Substances", "A kind of Saltwort" from which soda is
obtained, probably from Arabic sowed, the name of a variety of saltwort exported from North
Africa to Sicily in the Middle Ages, related to sawed "black," the color of the plant. These were
juiced soft drinks made of crushed fruit, herbs, or flowers. From around 1265, a popular drink
known as Dandelion & Burdock appeared in England, made from fermented dandelion
(Taraxacumofficial) and burdock (Actiumlapper) roots, and is naturally carbonated. The drink
(similar to sarsaparilla) is still available today, but is made with flavorings and carbonated water,
since the safrole in the original recipe was found to be carcinogenic.
The first marketed soft drinks (non-carbonated) in the Western world appeared in the
17th century. They were made from water and lemon juice sweetened with honey. In 1676, the
Compagnie des Limonadiers of Paris was granted a monopoly for the sale of lemonade soft
drinks. Vendors carried tanks of lemonade on their backs and dispensed cups of the soft drink to
thirsty Parisians.
CARBONATED DRINKS:
In late 18th century, scientists made important progress in replicating naturally
carbonated mineral waters. In 1767, EnglishmanJoseph Priestley first discovered a method of
infusing water with carbon dioxide to make carbonated water when he suspended a bowl of
distilled water above a beer vat at a local brewery in Leeds, England. His invention of carbonated
water, (also known as soda water), is the major and defining component of most soft drinks.
Priestley found water thus treated had a pleasant taste, and he offered it to friends as a refreshing
drink. In 1772, Priestley published a paper entitled Impregnating Water with Fixed Air in which
he describes dripping oil of vitriol (or sulfuric acid as it is now called) onto chalk to produce
carbon dioxide gas, and encouraging the gas to dissolve into an agitated bowl of water.

CAPITAL BUDGETING
Another Englishman, John Mervin Nooth, improved Priestley's design and sold his apparatus for
commercial use in pharmacies. Swedish chemist Torbern Bergman invented a generating
apparatus that made carbonated water from chalk by the use of sulfuric acid. Bergman's
apparatus allowed imitation mineral water to be produced in large amounts. Swedish chemist
Jöns Jacob Berzelius started to add flavors (spices, juices and wine) to carbonated water in the
late 18th century.
SODA FOUNTAIN PIONEERS:

Artificial mineral waters, usually called "soda water," and the soda fountain made the biggest
splash in the United States. Beginning in 1806, Yale chemistry professor Benjamin Silliman sold
soda waters in New Haven, Connecticut. He used a Nooth apparatus to produce his waters.
Businessmen in Philadelphia and New York City also began selling soda water in the early
1800s. In the 1830s, John Matthews of New York City and John Lippincott of Philadelphia
began manufacturing soda fountains. Both men were successful and built large factories for
fabricating fountains.
SODA FOUNTAINS VS. BOTTLED SODAS:

The drinking of either natural or artificial mineral water was considered a healthy practice. The
American pharmacists selling mineral waters began to add herbs and chemicals to unflavored
mineral water. They used birch bark (see birch beer), dandelion, sarsaparilla, fruit extracts, and
other substances. Flavorings were also added to improve the taste. Pharmacies with soda
fountains became a popular part of American culture. Many Americans frequented the soda
fountain on a daily basis. Due to problems in the U.S. glass industry, bottled drinks were a small
portion of the market in the 19th century. (They were certainly known in England, though. In
The Tenant of Wildfell Hall, published in 1848, the caddish Huntingdon, recovering from months
of debauchery, wakes at noon and gulps a bottle of soda-water. In America, most soft drinks
were dispensed and consumed at a soda fountain, usually in a drugstore or ice cream parlor. In
the early 20th century, sales of bottled soda increased exponentially. In the second half of the
20th century, canned soft drinks became an important share of the market.

CAPITAL BUDGETING
SOFT DRINK BOTTLING INDUSTRY:

Over 1,500 U.S. patents were filed for a cork, cap, or lid for the carbonated drink bottle tops
during the early days of the bottling industry. Carbonated drink bottles are under great pressure
from the gas. Inventors were trying to find the best way to prevent the carbon dioxide or bubbles
from escaping. In 1892, the "Crown Cork Bottle Seal" was patented by William Painter, a
Baltimore machine shop operator. It was the first very successful method of keeping the bubbles
in the bottle.
AUTOMATIC PRODUCTION OF GLASS BOTTLES:

In 1899, the first patent was issued for a glass-blowing machine for the automatic production of
glass bottles. Earlier glass bottles had all been hand-blown. Four years later, the new bottle-
blowing machine was in operation. It was first operated by the inventor, Michael Owens, an
employee of Libby Glass Company. Within a few years, glass bottle production increased from
1,400 bottles a day to about 58,000 bottles a day.
HOME-PACKS AND VENDING MACHINES:

During the 1920s, the first "Home-Packs" were invented. "Home-Packs" are the familiar six-
pack cartons made from cardboard. Automatic vending machines also began to appear in the
1920s.
PRODUCTION
SOFT DRINK PRODUCTION:
Soft drinks are made either by mixing dry ingredients and/or fresh ingredients (e.g. lemons,
oranges, etc.) with water. Production of soft drinks can be done at factories, or at home.
Soft drinks can be made at home by mixing either a syrup or dry ingredients with carbonated
water. Carbonated water is made using a home carbonation system or by dropping dry ice into
water. Syrups are commercially sold by companies such as Soda-Club.

CAPITAL BUDGETING
INGREDIENT QUALITY:
Of most importance is that the ingredient meets the agreed specification on all major
parameters. This is not only the functional parameter, i.e. the level of the major constituent, but
the level of impurities, the microbiological status and physical parameters such as color, particle
size, etc.
SOFT DRINK PACKAGING:
U.S. containers in 2008. Various sizes from 8-67.6 US fl oz (237 ml -2 l) shown in can,
glass and plastic bottles.
In the United States, soft drinks are sold in 3, 2, 1.5, 1 liter, 500 ml, 8, 12, 20 and 24 U.S.
fluid ounce plastic bottles, 12 U.S. fluid ounce cans, and short eight-ounce cans. Some Coca-
Cola products can be purchased in 8 and 12 U.S. fluid ounce glass bottles. Jones Soda and
Orange Crush are sold in 16 U.S. fluid ounce (1 U.S. pint) glass bottles. Cans are packaged in a
variety of quantities such as six packs, 12 packs and cases of 24, 36 and 360. With the advent of
energy drinks sold in eight-ounce cans in the US, some soft drinks are now sold in similarly
sized cans. It is also common for carbonated soft drinks to be served as fountain drinks in which
carbonation is added to a concentrate immediately prior to serving.
In Europe, soft drinks are typically sold in 2, 1.5, 1 litre, 500 ml plastic or 330 ml glass
bottles; aluminium cans are traditionally sized in 330 ml, although 250 ml slim cans have
become popular since the introduction of canned energy drinks and 355 ml variants of the slim
cans have been introduced by Red Bull more recently. Cans and bottles often come in packs of
six or four. Several countries have standard recyclable packaging with a container deposit,
typically ranging from € 0.15 to 0.25. The bottles are smelted, or cleaned and refilled; cans are
crushed and sold as scrap alluminium.
In Australia, soft drinks are usually sold in 375 ml cans or glass or plastic bottles. Bottles
are usually 390 ml, 600 ml, 1.25 or 2 litres. However, 1.5 litre bottles have more recently been
used by the the Coca-Cola Company. South Australia is the only state to offer a container
recycling scheme, recently having lifted the deposit from 5 cents to 10 cents. This scheme is also
done in the Philippines; people usually buy glass bottles and return them in exchange for a small
amount of money.
In Canada, soft drinks are sold in cans of 236 ml, 355 ml, 473 ml, and bottles of 591 ml,
710 ml, 1 l, 1.89 l, and 2 l. The odd sizes are due to being the metric near-equivalents to 8, 12,

CAPITAL BUDGETING
16, 20, 24 and 64 U.S. fluid ounces. This allows bottlers to use the same-sized containers as in
the U.S. market. This is an example of a wider phenomenon in North America. Brands of more
international soft drinks such as Fanta and Red Bull are more likely to come in round-figure
capacities.
In India, soft drinks are available in 200 ml and 300 ml glass bottles, 250 ml and 330 ml
cans, and 600 ml, 1.25 l, 1.5 l and 2 l plastic bottles.
HEALTH EFFECT:
The consumption of sugar-sweetened soft drinks is associated with obesitytype 2
diabetes, dental cavities, and low nutrient levels. Experimental studies tend to support a causal
role for sugar-sweetened soft drinks in these ailments, [10][11] though this is challenged by other
researchers. "Sugar-sweetened" includes drinks that use High-fructose corn syrup, as well as
those using sucrose.
Many soft drinks contain ingredients that are themselves sources of concern: caffeine is
linked to anxiety and sleep disruption when consumed in excess, and the health effects of high-
fructose corn syrup and artificial sweeteners remain controversial. Sodium benzoate has been
investigated as a possible cause of DNA damage and hyperactivity. Other substances have
negative health effects, but are present in such small quantities that they are unlikely to pose any
substantial health risk. Benzene belongs to this category: the amount of benzene in soft drinks is
small enough that it is unlikely to pose a health risk.
In 1998, the Center for Science in the Public Interest published a report titled Liquid
Candy: How Soft Drinks are Harming Americans' Health. The report examined statistics relating
to the soaring consumption of soft drinks, particularly by children, and the consequent health
ramifications, including tooth decay, nutritional depletion, obesity, type-2 (formerly known as
"adult-onset") diabetes, and heart disease. It also reviewed soft drink marketing and made
various recommendations aimed at reducing soft drink consumption.
There have been a handful of published reports describing individuals with severe
hypokalemia (low potassium levels) related to chronic extreme consumption (4-10 L/day) of
colas.

CAPITAL BUDGETING
NUTRITIONAL VALUE:
Unless fortified, they also contain little to no vitamins, minerals, fiber, protein, or other
essential nutrients. Soft drinks may also displace other healthier choices in people's diets, such as
water, milk, fruit juice, and vegetable juice.
SOFT DRINKS IN INDIA:
Euromonitor International's Soft Drinks in India market report offers a comprehensive
guide to the size and shape of the market at a national level. It provides the latest retail sales data,
allowing you to identify the sectors driving growth. It identifies the leading companies, the
leading brands and offers strategic analysis of key factors influencing the market - be theynew
product developments, packaging innovations, economic/lifestyle influences, distribution or
pricing issues. Forecasts illustrate how the market is set to change.
Buy online to access strategic market analysis and an interactive statistical database of
volume and value market sizes including on-trade and off-trade, company and brand shares,
distribution and pricing data.
SOFT DRINKS WITNESSES’ HEALTHY GROWTH IN INDIA
Soft drinks recorded robust double digit off-trade value growth in 2009, which was
higher than that witnessed in 2008. Bottled water and fruit/vegetable juice continued to grow
strongly as more consumers turned to these products in the search of healthier options.
Carbonates also witnessed good sales growth as the long summer helped to fuel sales. Energy
drinks has witnessed a slowdown in sales growth as its is a premium priced product type and
therefore not considered a necessity. Importantly, more consumers refrained from spending on
non-essential items in the wake of the economic downturn.
MANUFACTURERS DIVERSIFY ON A HEALTH AND WELLNESS PLATFORM
Manufacturers continued to focus on health and wellness products in 2009, introducing
green tea versions of powder concentrates and RTD tea. There were also a number of launches in
terms of new products and flavours in fruit/vegetable juice. The only new product launch in
carbonates was Grappo Fizz by Parle Agro Pvt Ltd. Non-cola carbonates performed very well as
these products are perceived by consumers to be less of a health threat than cola carbonates.
Even in niche categories like energy drinks, sugar-free versions were introduced as
manufacturers try to attract health conscious and diabetic consumers.
COCA-COLA INDIA CONTINUES TO LEAD SOFT DRINKS

CAPITAL BUDGETING
Coca-Cola India Pvt Ltd continued to lead soft drinks in 2009, followed by PepsiCo India
Holdings Pvt Ltd in off-trade value terms. The launch of Nimbooz by 7-Up (PepsiCo India)
helped the company retain its leading position in the terms of off-trade value sales. Coca-Cola
India and PepsiCo India continued to invest in soft drinks in India. However, domestic players
such as Parle Agro, Parle Bisleri Ltd and Dabur India Ltd continued to provide tough
competition to the leading multinationals. One competitive edge that domestic players hold is
that unlike Coca-Cola India and PepsiCo India the bulk of their business does not come from
carbonates, but instead from fruit/vegetable juice and bottled water, which are recording much
more dynamic volume and value growth. Thus, while the leading multinationals retained their
leading positions in off-trade value terms, they continued to record slight off-trade value share
reductions in 2009, while these leading domestic players grew their shares.
MARGINAL SLOWDOWN IN SUPERMARKETS/HYPERMARKETS

The growth in supermarkets/hypermarkets boosted the soft drinks industry over much of
the review period. However, due to the economic downturn, the off-trade volume share of
supermarkets/hypermarkets decreased in 2009. This in turn affected some of the more niche and
premium product types like energy drinks and reconstituted 100% juice which enjoyed high
visibility through this distribution channels. However, this trend is not expected to continue as
the economy recovers since consumers will revert to their previous shopping patterns.
SOFT DRINKS IS EXPECTED TO RECORD HEALTHY SALES GROWTH IN THE

FORECAST PERIOD
Soft drinks are expected to witness a healthy double-digit total volume CAGR growth
over the forecast period. As consumer awareness and understanding of the variety of soft drinks
increases and as manufacturers continue to be innovative, soft drinks is expected to perform well.
Products on the health and wellness platform and niche categories can expect to see good sales
growth in the forecast period.

CAPITAL BUDGETING
1.3 COMPANY PROFILE
THE COCA-COLA COMPANY

HISTORY:
The Coca-Cola Company traces its beginning to 1886, when an Atlanta, Georgia pharmacist, Dr.
John Pemberton, began to produce coca-cola syrup for sale in the fountain drink. However, with
the exemption of an independent bottling operation established in 1894 in Viking,Mississippi,the
history of large scale bottling did not begin until 1899 when two Chattanooga businessmen ,
Joseph B. Whitehead and Benjamin F. Thomas ,secured the executive rights to bottle and sell
coca cola for most of the United States from the Coca-cola company.
BUSINESS:
Coca-cola enterprises are in the business of Marketing, Producing and Distributing liquid
non-alcoholic refreshments to customers in their franchise tern tones. In 1994 they distributed
approximately 1.7 billion equivalent cases of the product throughout their territories, which
comprise of 38 states and the District of Columbia in the United States. Their territory also
extended too many foreign countries.
The Coca-cola Enterprise and the Coca-Cola Company are in business partnership. The Coca-
Cola Company develops the product; while as a bottler the Coca-cola Enterprise combines the
product concentrates with other ingredients and packages the beverages in bottles, cans and
fountain containers.
MANAGEMENT PHILOSOPHY:
CORPORATE AREA
The major concept of management philosophy is to remain in the beverage industry and not
diversify into other areas. The management believes in investing in non capital-intensive areas.
In fact, the beverage industry requires little capital, and produces maximum returns. The returns
from the foreign markets are tapped to the most.
FINANCIAL AREA
The corporate objectives are to increase the shareowners value. The management believes
that in increasing the shareholders value it requires consistent growth in financial results
complemented by effective use of the cash flow.

CAPITAL BUDGETING
MARKETING AREA
Here the management is committed to superior market place execution. This is achieved
by decentralized operating structure that places the responsibilities, authority and the
accountability as close to the customer and consumer as possible.
THE BRAND
Coca-cola consistently ranks in the world’s most valuable brands. The brand value is
about $39billion.This is the greatest heritage of the company. As far as the branch management
concerned, we find that Coca-cola ranks itself as the third only after Microsoft and Louis Vinton.
COCA-COLA INDIA
Coca-cola returned to India after 16 years, in 1993.The brand promotion was in between
1994-96.The bottling acquisition occurred in between 1997-99.Its quest for profitability started
from 2000 onwards. In India Coke have its concentrate plants at pune producing 10 brands. Its
company-owned bottling operations are at six operating regions, 29 operating areas with 26
plants, 10 green fields, and 3000 associates. It enjoys a business of over Rs.3000 crores in India.
ANDHRA PRADESH REGION

AP has merged as the single biggest state in terms of overall CSD sales volume as well as
in terms of manufacturing facilities. Up to 18-20 percent of the company’s sales volumes are
from AP.
Coca-Cola now in total consists of five operating locations for CSD brands and KINLEY
packed water at Moula-Ali, Vijayawada, Srikalahasti and Vishakapatnam having a turnover of
over 750 crores with 3 plants, 2 Green fields and 1500 associates. The company also has two
contract packers for its water business.
Thumps-Up now has a leading position in CSD market in AP, with a market share of
nearly 50percent.AllCoca-Cola`s CSD brands put together now accounted for 75 percent of the
overall CSD market.
INDIAN BRANDS:
For the local market in India coke has in addition the following brands:
 COCA-COLA:
It is the world’s favourite drink, the world’s most valuable brand. Coca-Cola has truly
remarkable heritage. From a humble beginning in 1886, it is now the flagship brand of the largest
manufacturer, marketer, and distributor of non-alcoholic beverages in the world.

CAPITAL BUDGETING
 THUMPS-UP:
Thumps-Up is the leading carbonated soft drink and most trusted brand in India.
Originally introduces in 1977, Thumps-Up was acquired by the Coca-Cola company in 1993.
Thumps-Up is known for its strong, Fizzy taste and its confident, mature and uniquely masculine
attitude. This brand clearly seeks to separate the men from the boys.
 LIMCA:
Lime n Lemony Limca, the drink of that can cast a tangy refreshing spell on any one,
anywhere. Born in 1977, Limca has been the original thirst choice, of millions of consumers for
over 3 decades.
 FANTA:
The orange drink of the Coca-Cola Company, lies seen as one of the favourite drinks
since 1940` s.Fanta entered the Indian market in the year.
 SPRITE :
Worldwide sprie is ranked as the No.4 soft drink and is sold in more than 190 countries.
In India Sprite was launched in year 1999 and today it has grown to one of fastest growing soft
drinks, leading the clear line category.
 DIET COKE:
Was launched in1982 to target the market of the light products.
THE NON-CARBONATED MARKET:
1. MINUTE MAID: Offers frozen concentrated fruit juice launched in 1988.
2. MAAZA : Maaza was launched in 1976 here was a drink that offered the same real taste of
fruit juice and was available throughout the year. In 1993 Maaza was acquired by Coca-Cola
India, maaza currently dominated the fruit drink.
3. Nimbu Fresh: Recently launched fruit drink in January.
4. KINLEY: packaged drinking water.

CAPITAL BUDGETING
INDIAN PRODUCT RANGE:
Cola –Cola:
Glass: 200ml.300ml.500ml.1000ml
PET bottle: 500ml, 1.25litres, 2 liters, 2.25 lit, 500ml+100ml
CAN: 330ml
Fountain: various sizes
Thums-Up:
Glass: 200ml.300ml.500ml.1000ml
PET bottle: 500ml, 1.25 liters, 2 liters, 2.25 lit, 500ml+100ml
CAN: 330ml
Sprite:
Glass: 200ml.300ml.
CAN: 330ml
Fanta:
Glass: 200ml.300ml.
CAN: 330ml
Limca:
Glass: 200ml.300ml.
PET bottle: 500ml, 1.25 ltr, 2 liters, 2.25 ltr, 500ml+100ml
CAN: 330ml
Minute Maid Pulpy Orange:
Available in 3 PET packages: 400ml, 1 liter and 1.25 liters

CAPITAL BUDGETING
Maaza:
PET: 250ml, 600ml, 1.2 ltr,
RGB: 200ml, 250 ml
Pocket maaza, 200ml.
Kinley:
PET: 500ml, 1000ml, 2000 ml
Nimbu fresh:
Available in 2 packages: 400ml and 1000ml

CAPITAL BUDGETING
1.4 PRODUCT PROFILE
THE CARBONATED MARKET

INTERNATIONAL BRANDS:
 CLASSIC:The Coca-Cola classic is the flagship of the company’s carbonated
drinks. The product was made public on May 8th 1886.
 DIET COKE:It was launched in 1982 to target the market of the light products.
 CAFFEINE FREE COCA-COLA CLASSIC: It was launched 1983

which aims at customers who want to limit their consumption of caffeine while still
drinking Coca-Cola and enjoying its taste.
 CHERRY COKE: The first cherry flavored Cola were launched in 1985.

CAPITAL BUDGETING
The Coca-Cola Company offers several other carbonated drinks to target different consumers.
Sprite is the number 7 in the US soft drink market launched in 1961. Fanta is the world third
best-selling soda and the world’s best-selling orange drink with a 31% market share of the
category.
INDIAN BRANDS:
For the local market in India Coke have in addition the following brands.
COCA-COLA:
It is the world’s favorite drink, the world’s most valuable brand. Coca-cola has truly remarkable
heritage. From a humble beginning in 1886, it is now the flagship brand of the largest
manufacturer, marketer, and distributor of non-alcoholic beverages in the world.
THUMS-UP:
Thums-Up are the leading carbonated soft drink and most rusted brand in India. Originally
introduced in 1977, Thums-up was acquired by the Coca-Cola Company in 1993. Thums-up are
known for its strong, Fizzy taste and its confident, mature and uniquely masculine attitude. This
brand clearly seeks to separate the men from the boys.

CAPITAL BUDGETING
LIMCA:
Lime n Lemony Limca, the drink of that can cast a tangy refreshing spell on anyone,
anywhere. Born in 1997, Limca has been the original thirst choice, of millions of consumers for
over 3 decades.
FANTA:
The orange drink of the Coca-Cola Company lies seen as one of the favorite drinks since
1940’s. Fanta entered the Indian market in the year.

CAPITAL BUDGETING
SPRITE:
Worldwide Sprite is ranked as the No.4 soft drink and is sold in more than 190 countries. In
India, Sprite was launched in year 1999 and today it has grown to one of fastest growing soft
drinks, leading the clear lime category.
KINLEY SODA:
THE NON-CARBONATED MARKET:
MINUTE MAID:Offers frozen concentrated fruit juice launched in 1988.

1) Pulpy Orange
Minute Maid Pulpy Orange launched first in Mumbai, Maharashtra in September 2007,
started refreshing the whole of India by April 2010. It is a naturally refreshing juice drink
which offers an unmatched taste experience to consumers with the presence of natural orange
pulp.

CAPITAL BUDGETING
2) Nimbu Fresh
Minute Maid Nimbu Fresh launched first in South of India in January 2010, started refreshing
the whole of India by April 2010.
MAAZA:
Maaza was launched in 1976. Here was a drink that offered the same real taste of fruit juices and
was available throughout the year. In 1993, Maaza was acquired by Coca-Cola India. Maaza
currently dominates the fruit drink.
KINLEY:Packaged drinking water.

CAPITAL BUDGETING
CHAPTER- II
2.1REVIEW OF LITERATURE
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 term (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.
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 examples of Capital Budgeting
decisions.

CAPITAL BUDGETING
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:

The importance of Capital Budgeting can be understood from the fact that an unsound
investment decision may prove to be fatal to the very existence of the organization. The
importance of capital budgeting arises mainly due to the following:
1. Large Investment:
Capital Budgeting decision, generally involves large investment of funds. But the funds
available with the firm are scarce and the demand for funds for exceeds 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 amount of funds but also funds for long-term
or an permanent basis. The long-term commitment of funds increase the financial risk involved
in the investment decision.
3. Irreversible nature:
The capital expenditure decisions are of irreversible nature. Once, the decision for
acquiring a permanent asset is taken, it becomes very difficult to impose of these assets without
incurring heavy losses.
4. Long term effect on profitability:

Capital budgeting decisions has a long term and significant effect on the profitability of a
concern. Not only the present earning of the firm are affected by the investment in capital assets
but also the future growth and profitability of the firm depends up to the investment decision
taken today. Capital budgeting decision has utmost importance to avoid over or under
investment in fixed assets.
5. Difference of investment decision:

The long-term investment decision are difficult to be taken because uncertainties of
future and higher degree of risk.

CAPITAL BUDGETING
6. National Importance:
Investment decision tough taken by individual concern is of national importance because
it determines employment, economic activities and economic growth.
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 manager 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. These assumptions constitute a general set of
condition within which the financial aspects of different proposals are to be evaluated. Some of
these assumptions are:
1. Certainty with Respect to Cost and Benefits: It is very difficult to estimate the cost
and benefits of a proposal beyond 2-3 years in future. However, for a capital budgeting decision,
it is assumed that the estimate of cost and benefits are reasonably accurate and certain.

CAPITAL BUDGETING
2. Profit Motive: Another assumption is that the capital budgeting decisions are taken with a
primary motive of increasing the profit of the firm. No other motive or goal influences the
decision of the finance manager.
3. No Capital Rationing: The Capital Budgeting decision in the present chapter assumes
that there is no scarcity of capital. It assumes that a proposal will be accepted or rejected in the
strength of its merits alone. The proposal will not be considered in combination with other
proposals to the maximum utilization of available funds.
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 affect the risk of the firm.
 They involve commitment of large amount of funds.
 They are irreversible, or reversible at Substantial loss.
 They are among the most difficult decisions to make.

CAPITAL BUDGETING
CAPITAL BUDGETING:
Every capital budgeting decision is a specific decision in the situation, for a given firm
and with given parameters and therefore, almost infinite number of types of forms of capital
budgeting decisions may occur. Even if the same decision being considered by the same firm at
two different points of time, the decision considerations may change as a result of change in any
of the variables. However, the different types of capital budgeting decision undertaken from
time to time by different firms can be classified on a number of dimensions. Some projects
affect other projects of the firm is considering and analyzing. At the other extreme, some
proposals are pre-requisite for other projects. The project may also be classified as revenue
generating or cost reducing projects can be categorized as a follows:
From the point of view of firm’s existence the capital budgeting decision may be taken
by a newly incorporated firm or by an already existing firm.
New Firm: A newly incorporated firm may be required to take different decision such
as selection of a plant to be installed, capacity utilization at initial stages to set up or not
simultaneously the ancillary unity etc.,
Existing Firm:
A firm which already exists may be required to take various decisions from time to time meet the
challenge of competition of changing environment. These decisions may be:
Expansion of Existing Business:

Sometimes, the firm may be interested in Increasing the Installed production capacity so
as to increase the market share in such a case, the finance manager is required to evaluate the
expansion program in terms of marginal costs and marginal benefits.
Diversification:
Sometimes, the firm may be interested to diversify into new product lines, new markets,
production of spares parts etc., in such a case, the finance manager is required to evaluate not
only the marginal cost and benefits, but also the effect of diversification on the existing market

CAPITAL BUDGETING
share and profitability. Both the expansion and diversification decisions may be also be known
as revenue increasing decisions.
Replacements and Modernization Decision:

This is a common type of a capital budgeting decision. All types of plant and
machineries eventually require replacement. If the existing plant is to be replaced because of the
economic life of the plant is over, then the decisions may be known as a replacement decision.
However, if an existing plant is to be replaced because it has become technologically outdated
(Though the economic life may not be over) the decision any be known as a modernization
decision. In case of a replacement decision, the objective is to restore the same or higher
capacity, whereas in case of modernization decision, the objectives are to increase the efficiency
and/or cost reduction. In general, the replacement decision and the modernization decision are
also known as cost reduction decisions.
The capital budgeting may also be classified from the point of view of the decision
situation as follows:
Independent Project Decision:
This is a fundamental decision in Capital Budgeting. It also called as accept / reject
criterion. If the project is accepted, the firm invests in it. In generally all these proposals, which
yield a rate of return greater than a certain required rate of return on cost of capital, are accepted
and the rest are rejected. By applying this criterion, all independent projects with one in such a
way that the acceptance of one precludes the possibility of acceptance of another. Under the
accept–reject decision all independent projects that satisfy the minimum investment criterion
should be implemented.
Mutually Exclusive Projects Decision:

Mutually Exclusive project are those, which compete with other projects in such a way
that the acceptance of one will exclude the acceptance of the other projects. The alternatively are
mutually exclusive and only one may be chosen. Suppose a company is intending to buy a new
machine. There are three competing brands, each with a different initial investment adopting
costs. The three machines represent mutually exclusive alternatives as only one of these can be
selected. It may be noted here that the mutually exclusive projects decisions are not independent
of the accept–reject decisions.

CAPITAL BUDGETING
Capital Rationing Decision:

In a situation where the firm has unlimited funds all independent investment proposals
yielding return greater than some pre-determined levels are accepted. However this situation
does not prevail in most of the business firms in actual practice. They have a fixed capital
budgeting.
A large number of investment proposals compete for these limited funds, the firm must
therefore ration them. The firm allocates funds to projects in a Manner that it maximizes long
run returns; this rationing refers to a situation in which a firm ahs more acceptance investment
than it can finance. It is concerned with the selection of group investment proposals acceptable.
Under the accept–reject decision capital rationing employees ranking of the acceptable
investment projects. The project can be ranked on the basis of predetermined criterion such as
the rate of return. The project is ranked in the descending order of the rate of return.
CAPITAL BUDGETING PROCESS:
Capital Budgeting is complex process as it involves decision relating to the Investment of

current funds for the benefit for the benefit to be achieved in future and the future are always
uncertain. However, the following procedure may be adopted in the process of Capital
Budgeting.
IDENTIFICATION OF INVESTMENT PROPOSALS:
The capital budgeting process begins with the identification of investment proposals.
The proposal about potential investment opportunities may originate either from top
management or from any officer of the organization. The departmental head analysis various
proposals in the light of the corporate strategies and submits the suitable proposals to the capital
expenditure planning.
SCREENING PROPOSALS:
The expenditure planning committee screens the various proposals received from
different departments. The committee reviews these proposals from various angles to ensure

CAPITAL BUDGETING
that these are in accordance with the corporate strategies or selection criterion of the firm and
also do not lead departmental imbalances.
FIXING PRIORITIES:
After evaluating various proposals, the unprofitable uneconomical proposal may be
rejected and it may not be possible for the firm to invest immediately in all the acceptable
proposals due to limitation of funds. Therefore, it essential to rank the project / proposals after
considering urgency, risk and profitability involved in there
FINANCIAL APPROVAL AND PREPARATION OF CAPITAL

EXPENDITURE BUDGET:
Proposals meeting the evaluation and other criteria are approved to be included in the
capital expenditure budget. The expenditure budget lays down the amount of estimated
expenditure to be incurred on fixed assets during the budget period.
IMPLEMENTING PROPOSALS:
Preparation of a capital expenditure budget and incorporation of particular Proposals in
the budget doesn’t itself authorize to go ahead with the implementation of the project.
A request for the authority to spend the amount should
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 that almost all companies used by back.
 With pay back and / or other techniques, about 2/3 rd 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.

CAPITAL BUDGETING
 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.
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
preferable to later ones I should help to choose among mutually exclusive projects that which
maximizes the shareholders wealth. K 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
CAPITAL BUDGETING TECHNIQUES CHART:
Capital
Budgeting
Non- Discounted
Discounted cash flow
Cash flow methods
method
Accounting Net Internal

rate of present rate of
Payback return value return Profitability
Period
index

CAPITAL BUDGETING
INTERNAL RATE OF RETURN METHOD:

The internal rate of return (IRR) method is another discounted cash flow technique. The
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
DETERMINATION OF IRR
a) When annual cash flows are equal over the life of the asset.
Factor = Initial Outlay X 100
Annual Cash inflow
b) When the annual cash flows are unequal over the life of the asset:
IRR = LR + PV of cash inflows at lower rate – PV of cash outflow X (HR-LR)
PV of cash inflows at lower rate – PV of cash inflow at higher rate

CAPITAL BUDGETING
ADVANTAGES:
 It takes into account, the time value of money and can be applied in situation with even
and even cash flows.
 It considers the profitability of the projects for its entire economic life.
 The determination of cost of capital is not a pre-requisite for the use of this method.
 It provide for uniform ranking of proposals due to the percentage rate of return.
 This method is also compatible with the objective of maximum profitability.
DISADVANTAGES:
 It is difficult to understand and operate.

 The results of NPV and IRR methods may differ when the projects under evaluation
differ in their size, life and timings of cash flows.
 This method is based on the assumption that the earnings are reinvested at the IRR for the
remaining life of the project, which is not a justified assumption.
PROFITABILITY INDEX:
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.
PI = Present Value of Cash Inflows
Present Value of Cash outflows
Acceptance Rule:
Accept if PI>1
Reject if PI<1
May accept if PI = 1

CAPITAL BUDGETING
Profitability Index is a relative measure of projects profitability.
Profitability Index = PV of cash inflows
PV of cash outflows
Net profitability index= NPV
Initial Outlay
ADVANTAGES:
 Unlike net present value, the profitability index method is used to rank the projects even
when the costs of the projects differ significantly.
 It recognizes the time value of money and is suitable to apply in situation with uniform
cash outflow and uneven cash inflows.
 It takes into account the earnings over the entire life of the project and gives the true view
of the profitable of the investment. Takes into consideration the objectives of maximum
profitability.
DISADVANTAGES:
 More difficult to understand and operate.

 It may not give good results while comparing projects with unequal investment funds.
 It is not easy to determine and appropriate discount rate.
It may not give good results while comparing projects with unequal lives as the projects
having higher NPV but have a longer life spam may not be as desirable as a projects having
somewhat lesser NPV achieved in a much shorter span of life of the asset.

CAPITAL BUDGETING
PAY BACK PERIOD 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 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 payback period is completed as
follows:
Payback = Initial Investment
Annual Cash inflow
In case of unequal cash inflows, the payback period can be computed by calculating the
cumulative cash inflow and checking whether the values are recovered to the original outlay
and taking the remaining amount and apply the formulae i.e.,
PBP = base year + Required CFAT
Next year CFAT

CAPITAL BUDGETING
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 payback period,
and lowest rank to a project with highest payback period.
ADVANTAGES:
 Simple to understand and easy to calculate.

 It saves in cost; it requires lesser time and labor as compared to other methods of
capital budgeting.
 In this method, as a project with a shorter payback period is preferred to the one
having a longer pay back period, it reduces the loss through obsolescence.
 Due to its short-time approach, this method is particularly suited to a firm which
has shortage of cash or whose liquidity position is not good.
DISADVANTAGES:
 It does not take into account the cash inflows earned after the payback period and
hence the true profitability of the project cannot be correctly assessed.
 This method ignores the time value of the money and does not consider the
magnitude and timing of cash inflows.
 It does not take into account the cost of capital, which is very important in making
sound investment decision.
 It is difficult to determine the minimum acceptable payback period, which is
subjective decision.
 It treats each assets individual in isolation with other assets, which is not feasible
in real practice.

CAPITAL BUDGETING
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.,”.
ARR = Average Net Income
Average Investment
Average Income = Average of the 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 lowers ARR.
ADVANTAGES:
 It is very simple to understand and easy to calculate.

CAPITAL BUDGETING
 It uses the entire earnings of a project in calculating rate of return and hence gives
a true view of profitability.
 As this method is based upon accounting profit, it can be readily calculated from
the financial data.
DISADVANTAGES:
 It ignores the time value of money.

 It does not take in to account the cash flows, which are more important
than the accounting profits.
 It ignores the period in which the profit are earned as a 20% rate of return
in 2 ½ years is considered to be better than 18% rate of return in 12 years.
 This method cannot be applied to a situation where investment in project
is to be made in parts.

CAPITAL BUDGETING
CHAPTER- III
3.1 RESEARCH METHODOLOGY
RESEARCH
Research Methodology is a way to find out the result of a given problem on a specific
matter or problem that is also referred as research problem. In Methodology, researcher uses
different criteria for solving/searching the given research problem. Different sources use
different type of methods for solving the problem.
The process used to collect information and data for the purpose of making business
decisions. The methodology may include publication research, interviews, surveys and other
research techniques, and could include both present and historical information.
"In the broadest sense of the word, the definition of research includes any gathering of
data, information and facts for the advancement of knowledge."
-MartynShuttleworth
“Research is a process of steps used to collect and analyze information to increase our
understanding of a topic or issue”. It consists of three steps: Pose a question, collect data to
answer the question, and present an answer to the question”.
- Creswell
Research is a Creative work undertaken on a systematic basis in order to increase the

stock of knowledge, including knowledge of man, culture and society, and the use of this stock
of knowledge to devise new applications.

CAPITAL BUDGETING
3.2 NEED FOR THE STUDY
 The project study is under taken to analyze and understand the Capital Budgeting process
in Hindustan coca cola beverages Pvt Ltd, which gives main exposure to practical
implication of theory knowledge.
 To know about the organization’s operation of using various Capital Budgeting
Techniques.
 To know how the organization gets funds from various sources.

CAPITAL BUDGETING
3.3 OBJECTIVES OF THE STUDY
 To study the technique of capital budgeting for decision-making.

 To measure the present value of rupee invested.
 To understand investments wise study of the company financial performance of the
company.
 To understand the practical usage of capital budgeting technique &the nature of risk and
uncertainty.

CAPITAL BUDGETING
3.4 SCOPE OF THE STUDY
Various aspects of capital budgeting such as definition, objectives, importance, process

and methods are included in the study. A brief details pertaining to Hindustan coca cola
beverages pvt ltd with regard to its establishment and financial summary for the years 2009-10 to
2014-15 are covered. Besides the capital budgeting tools employed by Hindustan coca cola
beverages pvt ltd in appraising projects has been examined.
For the purpose of this study, a case study of a A.K.Financed by the corporation has been
analyzed and calculate cash flows, Pay Back Period, Average Rate of Return, Net Present Value,
Internal Rate of Return, Profitability Index.

CAPITAL BUDGETING
3.5 METHODOLOGY OF THE STUDY
To achieve a foresaid 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 apart from these some information is collected through the
seminars, which were held by Hindustan coca cola beverages Pvt.Ltd.
Secondary Sources:
The Secondary Data has been collected through the various books, company financial
statements, magazines, broachers & Websites.

CAPITAL BUDGETING
3.6 LIMITATIONS OF THE STUDY
 The schedule period of 8 weeks is not sufficient to make the study independently
regarding Capital Budgeting in Hindustan coca cola beverages Pvt Ltd.
 The busy schedule of the officials in the Hindustan coca cola beverages Pvt Ltd 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.
 All the techniques of capital budgeting are not used in Hindustan coca cola beverages
Pvt. Ltd. Therefore it was possible to explain only few methods of capital budgeting.

CAPITAL BUDGETING
CHAPTER- IV
DATA ANALYSIS AND INTERPRETATION
TABLE NO: 4.1

SHOWS PAYBACK PERIOD FOR GIVEN PROJECT
( Amount in Lakhs)
YEARS PROFIT AFTER DEPRECIATION CASH INFLOWS
TAX
2012-13 1580.80 1156.89 423.91
2013-14 2591.74 1512.99 1078.75
2014-15 1835.29 1641.84 193.45
2015-16 5793.93 1794.60 3999.33
2016-17 4202.63 1871.61 2331.02
TOTAL 8026.46
In case of unequal cash inflows, the payback period can be computed by calculating the
cumulative cash inflow and checking whether the values are recovered to the original outlay and
taking the remaining amount and apply the formulae i.e.,
PBP (Payback period method) = Base year + Required CFAT

Next year CFAT
= 3 + (2303.22 / 39999.33)
= 3 + 0.5
= 3 years 5 months
GRAPH NO: 4.1

CAPITAL BUDGETING
GRAPH TITLE: PAYBACK PERIOD OF PROJECT
INTERPRETATION:
In the Pay Back method the Investment and the case inflows are fluctuating from year to
year where as in the year 2012 it is 423.91 and in the year 2017 is 2331.02. Cash inflows are in
the order of increasing to decreasing from 2012 and 2017

CAPITAL BUDGETING
TABLE NO: 4.2

SHOWING ARR FOR GIVEN PROJECT
( Amount In Lakhs)
YEARS PROFIT AFTER DEPRECIATION CASH INFLOWS
TAX
2012-13 1580.80 1156.89 423.91
2013-14 2591.74 1512.99 1078.75
2014-15 1835.29 1641.84 193.45
2015-16 5793.93 1794.60 3999.33
2016-17 4202.63 1871.61 2331.02
TOTAL 8026.46
Average Profit
ARR = ---------------------------- * 100
Average Investment
Average Profit = (8026.46/5)
= 1605.29
Average Investment = 3976.4/2
= 1988.2
Average Profit
ARR = -------------------------- * 100
Average Investment
= (1605.29/1988.2)*100

CAPITAL BUDGETING
= 0.81%
GRAPH NO: 4.2

GRAPH TITLE: ARR FOR GIVEN PROJECT
INTERPRETATION:
In the Pay Back method the Investment and the case inflows are fluctuating from year to
year where as in the year 2012 it is 423.91 and in the year 2017 is 2331.02.Cash inflows are in
the order of increasing to decreasing from 2012 and 2017.

CAPITAL BUDGETING
TABLE NO: 4.3

SHOWS NPV FOR GIVEN PROJECT
YEARS CASH INFLOWS PV@14% PRESENT VALUES
2012-13 423.91 0.877 371.76
2013-14 1078.75 0.769 829.55
2014-15 193.45 0.675 130.57
2015-16 3999.33 0.592 2367.60
2016-17 2331.02 0.519 1209.79
TOTAL 4909.27
Net Present Value (NPV) = Present Value of Cash inflow – Present Value of the Cash outflow
= 4909.27 – 3976.4
= 932.87

CAPITAL BUDGETING
GRAPH NO: 4.3

GRAPH SHOWING NPV FOR GIVEN PROJECT
INTERPRETATION:
The Net Present Value is the difference between the “Present Value of Cash Inflows” and
Present Value of Cash Outflows.
In case of calculated NPV is positive or zero, the project should be accepted. If the NPV
is negative, the project is rejected.

CAPITAL BUDGETING
TABLE NO: 4.4
SHOWS IRR FOR GIVEN PROJECT @ 23%
2012-13 423.91 0.813 344.63
2013-14 1078.75 0.660 711.97
2014-15 193.45 0.537 103.88
2015-16 3999.33 0.436 1743.71
2016-17 2331.02 0.355 827.51

CAPITAL BUDGETING
GRAPH NO: 4.4
GRAPH SHOWS IRR FOR GIVEN PROJECT @23%
INTERPRETATION:
The Internal rate of return is the difference between the “cash inflows from the
year 2012-13 it is 423.91 and in the year 2016-17 is 2331.02.

CAPITAL BUDGETING
TABLE: 4.5
SHOWS IRR FOR GIVEN PROJECT @ 14%
(Amount In Lakhs)
2012-13 423.91 0.877 371.76
2013-14 1078.75 0.769 829.55
2014-15 193.45 0.675 130.57
2015-16 3999.33 0.592 2367.60
2016-17 2331.02 0.519 1209.79
TOTAL 4909.27
Source :( Above Table 4.5)

The above mentioned two graphs represent the present values of the cash flows at two
different factors i.e., 14% and 23%.
LR + PV of Cash inflows at lower rate – PV of cash outflow
IRR = --------------------------------------------------------------------------- * (HR-LR)
PV of cash inflows at lower rate – PV of cash inflow at higher rate
14 + 4909.27 – 3976.4 * (23-14)
4909.27 – 3731.7
= 14 + (932.87/1177.57) * (9)
= 14+0.79*(9)
= 14+7.11
= 21.11
= 21
GRAPH NO: 4.5

CAPITAL BUDGETING
GRAPH SHOWS IRR FOR GIVEN PROJECT @ 14%
INTERPRETATION:
In this method the project is accepted when IRR is higher than its cost of capital or cut off
rate, If the project is not accepted when the IRR is less than the cost of capital. The project is
accepted because of the calculation IRR is higher than its cost of capital. So, this project is
accepted.
TABLE: 4.6

CAPITAL BUDGETING
SHOWS PI FOR GIVEN PROJECT
2012-13 423.91 0.877 371.76
2013-14 1078.75 0.769 829.55
2014-15 193.45 0.675 130.57
2015-16 3999.33 0.592 2367.60
2016-17 2331.02 0.519 1209.79
PI = 4909.27
3976.4
= 4909.27/3976.4
= 1.23
GRAPH: 4.6
GRAPH SHOWING PI FOR GIVEN PROJECT

CAPITAL BUDGETING
INTERPRETATION:
A project can be accepted if its PI is greater than one. If PI is less than one it should be
rejected. Profitability index of the project is 1.23 this is greater than one. So, it should be
accepted.
CHAPTER- V
5.1 FINDINGS

CAPITAL BUDGETING
 The standard Pay Back Period of the HINDUSTAN COCA COLA BEVERAGES PVT
LTD Industries for considering the projects is 5 years but the actual Pay Back Period is
3.5 years.
 The standard ARR of HINDUSTAN COCA COLA BEVERAGES PVT LTD
management is higher. The actual ARR is 0.81% it is higher than the standard ARR set
by the management.
 The Net Present value of the project having the positive value.
 The project is accepted when IRR is higher than its cost of capital or cut of rate. If the
project is not accepted when the IRR is less than the cost of capital. The project is
accepted because of the calculation of IRR is higher than its cost of capital.
 A project can be accepted if its PI is greater than one. If PI is less than one it should be
rejected. Profitability index of the project is 1.23, this is greater than one. So, it should
be accepted.
5.2 SUGGESTIONS

CAPITAL BUDGETING
1. ARR is higher than minimum rate of return established by the management

are accepted.
2. It rejected project have less ARR than the minimum rate set by the
management.
3. The standard ARR is by HINDUSTAN COCA COLA BEVERAGES PVT
LTD management is higher.
4. The actual ARR is 0.81% it is higher than the standard ARR set by the
management.
5. Hence this project is accepted.
5.3 CONCLUSION

CAPITAL BUDGETING
An organization may face a situation where various investment proposals are identified,
but it has to select one or some of the proposals either for shortage of funds or for some other
reasons, with the capital budget techniques the problem can resolved and made the best
proposals with clear analysis.
Capital budget management is not a simple process in this sector, the raised proposals are
solved with techniques of capital budgeting. This made the investors to think about the
proposals by this analysis; they were out of the dilemma and towards the best investment.
It can be summarized that most of the schemes selected for the analysis have shown
better performance.
ANNEXURE

CAPITAL BUDGETING
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST DEC, 2012-2013
Rs in lakhs
Particulars 2012 2013
Income
Sale of manufactured goods 1,20,946.74 137,728.95
Less : Excise Duty 12,218.19 20,207.11
1,08,728.55 117,521.84
Sale of traded goods -
Other Income 796.30 1,807.18
1,09,524.85 1,19,329.02
Expenditure
Cost of goods sold 40,613.42 46,374.89
Personnel cost 4,427.88 4,030.09
Other expenses 29,052.66 29,017.00
Depreciation 5,488.32 5,377.68
Amortization of goodwill 1,799.20 1,799.20
Interest and other finance cost 424.13 534.19
81,805.61 87,135.02
Profit before tax 27,719.24 32,195.97
Provision for tax 11,520.00 12,879.48
- Current tax - -
- MAT credit of earlier years - -
- fringe benefit tax 16.45 60.00
- deferred tax charge (781.16) 518.20
Profit for the year 16,963.95 19,772.72

Debit balance in Profit and Loss account brought
forward 35,921.21 (16,148.49)
Balance in Profit & Loss account carried forward 52,885.16 (35,921.21)
st
BALANCE SHEET AS ON 31 MAR, 2012-2013
Rs.in lakhs

CAPITAL BUDGETING

1. Sources of Funds :
Share Capital 42,796.14 42,796.14
Reserve & Surplus 57,823.14 38,050.42
100,619.28 80846.56
Loans Funds :
Secured Loans / Funds 10,342.31 4,168.45
Unsecured Funds 14,605.93 12,286.48
Deferred tax liability 5,141.16 5,659.63
15,704.14 22,114.29
Total 1,30,708.68 1,02,960.85
2. Application of Funds :
Fixed Assets
Gross Block 91,539.87 89,683.71
(-) Dep. 36,353.10 29,850,93
Net Block 55,186.77 59,832.78
Capital work in progress 71,347.95 320,247.06
126,534.72 80,079.84
Investments 5,100.00 10,051.06
Current assets, loans & advances :
Inventories 6,071.35 3971.01
Sundry Debtors 2,640.09 2531.00
Cash & Bank Balances 4,773.47 12012.16
Loans & Advances 10,803.09 8821.93
24,288.00 27336.1
Current Liabilities & Provisions :
Current Liabilities 22,479.86 13132.52
Provisions 2,734.18 1373.63
25,214.04 14506.18
Net Current Assets 926.04 12,829.95
Profit and Loss Account ----------- ----------
Total 1,30,708.68 1,02,960.85
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MAR, 2013-2014
Rs in lakhs

CAPITAL BUDGETING
Income
Sales (Gross) 47,306.18 40,166.84
Less : Excise Duty 7,616.56 7,284.19
Sales (Net) 39,689.62 32,882.65
Other Income 457.41 412.55
40,147.03 33,295.20
Expenditure
Purchase of finished goods for resale 3,288.27 1,574.49
Manufacturing and other expenses 29,552.25 28,359.17
Interest and other finance charges 2,234.88 2,333.38
(Increase)/Decrease in stocks of work-in-process

a and finished goods 86.54
37,690.57 35,192.63
Profit / (Loss) for the year 2,456.46 (1,897.43)
Povision for Tax
Current Tax -- --
Fringe Benefit Tax 65.00 --
Profit / (Loss) for the year 2,265.11 (2,104.92)
Debit balance brought forward from previous year (16,609.18) (14,504.26)
Debit balance carried to balance sheet 14,344.07 16,609.18
BALANCE SHEET AS ON 31ST MAR, 2013-2014

Rs in lakhs
Share Capital 42,796.14 42,796.14

CAPITAL BUDGETING
Reserve & Surplus 21,901.93 21,901.93

64,698.07 64,698.07
Loans Funds :
25,198.68 27,198.44
Total 89,896.69 91,896.51
2 . Application of Funds :
Fixed Assets
Goss Block 54,205.96 53,550.07
(-) Dep. 22,537.12 19,787.74
Net Block 31,668.84 33,762.33
Capital work in progress 289.62 140.42
31,958.46 33,902.75
Investments 36,723.60 36,557.57
Inventories 3,114.57 2,503.20
Sundry Debtors 934.79 2,467.39
Cash & Bank Balances 1,383.35 1,290.71
Loans & Advances 5,284.23 1,906.20
10,725.94 8,167.50
Current Liabilities 3,758.62 3,38169
Provisions 289.62 127.90
3,922.48 3,509.59
Net Current Assets 6,803.46 4,657.91
Miscellaneous Expenditure 67.10 169.10
Profit and Loss Account 14,344.07 16,609.18
Total 89,896.69 91,896.51
ST
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 MAR, 2014-2015
Rs. in lakhs
Income
Sale of manufactured goods 1,16,900.24 47,905.48

CAPITAL BUDGETING
Less : Excise Duty 17,521.32 6,388.76
99,378.92 41,516.72
Sale of traded goods - 2,404.44
Other Income 1,832.29 432.61
1,01,211.21 44,353.77
Expenditure
Personnel cost 3,604.81 1,777.200
Other expenses 25,119.28 9,234.53
Amortisation of goodwill 1,7,99.20 --
72,851.03 30,908.95
Provision for tax 6,542.84 982.00
- Current tax (982.00) -
- MAT credit of earlier years (713.59) -
- deferred tax charge 5,339.36 -

Debit balance in Profit and Loss account
b brought forward (1,909.25) (14,344.07)
Balance in Profit & Loss account carried forward 16,148.49 (1,909.25)
BALANCE SHEET AS ON 31st MAR, 2014-2015

Rs in lakhs


CAPITAL BUDGETING
Share Capital 42,796.14 42,796.14

Reserve & Surplus 38,050.42 21,901.93
80846.56 64,698.07
Loans Funds :
Deferred tax liability 5,659.63 ---------
22,114.29 15,704.14
Total 1,02,960.85 80402.21
Fixed Assets
Gross Block 89,683.71 53,811.03
(-) Dep. 29,850,93 24,043.25
Net Block 59,832.78 29,767.78
80,079.84 33,221.38
Investments 10,051.06 42,083.62
Inventories 3971.01 2889.51
Sundry Debtors 2531.00 1866.11
Cash & Bank Balances 12012.16 1576.48
Loans & Advances 8821.93 3442.81
27336.1 9774.91
Current Liabilities 131132.52 6020.09
14506.18 6586.95
Profit and Loss Account ----------- 1,909.25
Total 1,02,960.85 80402.21
ST
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 MAR, 2015-2016
Rs in lakhs
Income
Sale of manufactured goods 137,728.95 1,16,900.24

CAPITAL BUDGETING
Less : Excise Duty 20,207.11 17,521.32
117,521.84 99,378.92
Sale of traded goods -
Other Income 1,807.18 1,832.29
1,19,329.02 1,01,211.21
Expenditure
Other expenses 29,017.00 25,119.28
Amortization of goodwill 1,7,99.20 1,799.20
87,133.05 72,851.03
Provision for tax 12,881.45 6,542.84
- Current tax - (982.00)
- MAT credit of earlier years - (713.59)
- deferred tax charge 518.20 5,339.36

Debit balance in Profit and Loss
account brought forward (16,148.49) (1,909.25)
Balance in Profit & Loss account carried forward (35,921.21) (16,148.49)
BALANCE SHEET AS ON 31st DEC, 2015-2016

Rs in lakhs

CAPITAL BUDGETING
Share Capital 42,796.14 42,796.14

Reserve & Surplus 76,849.97 74,787.09
119,646.11 117,583.23
Loans Funds :
Deferred tax liability 7,360.00 4,360.00
Total 188,042.95 181,385.48
Fixed Assets
Gross Block 193,075.65 94,463.86
(-) Dep. 53,870.09 43,632.78
Net Block 139,205.56 50,831.08
184,064.90 152,121.74
Investments 6850.27 16,764.09
Inventories 9061.61 4,378.43
Cash & Bank Balances 4550.46 21,081.89
Loans & Advances 11,510.12 7,482.89
29,245.94 36,866.00
Current Liabilities 29522.36 19,445.18
Provisions 2,595.80 4,921.17
32,118.16 24,366.35
Net Current Assets (2,872.22) 12,499.65
Total 188,042.95 181,385.48
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST DEC, 2016-2017
Rs in lakhs

CAPITAL BUDGETING
Income
Sale of manufactured goods 116,737.13 1,20,946.74

Less : Excise Duty 15,059.29 12,218.19
101,677.84 1,08,728.55
Sale of traded goods - -
Other Income 1,955.93 796.30

103,633.77 1,09,524.85
Expenditure
Other expenses 34,007.69 29,052.66
Amortization of goodwill 1,799.20 1,799.20
Interest and other finance cost 3,439.37 424.13

98,570.89 81,805.61
Provision for tax
- Current tax 1,031.00 11,520.00
- MAT credit of earlier years - -
- fringe benefit tax 3,000.00 16.45
- deferred tax charge (1,031.00) (781.16)

Debit balance in Profit and Loss account brought
forward 52,885.16 35,921.21
Balance in Profit & Loss account carried forward 54,948.04 52,885.16
BALANCE SHEET AS ON 31ST MAR, 2016-2017

Rs in lakhs

CAPITAL BUDGETING
Share Capital 42,796.14 42,796.14

Reserve & Surplus 21,901.93 21,901.93
64,698.07 64,698.07
Loans Funds :
25,198.68 27,198.44
Total 89,896.69 91,896.51
2 . Application of Funds :
Fixed Assets
Goss Block 54,205.96 53,550.07
(-) Dep. 22,537.12 19,787.74
Net Block 31,668.84 33,762.33
Capital work in progress 289.62 140.42
31,958.46 33,902.75
Investments 36,723.60 36,557.57
Inventories 3,114.57 2,503.20
Cash & Bank Balances 1,383.35 1,290.71
Loans & Advances 5,284.23 1,906.20
10,725.94 8,167.50
Current Liabilities 3,758.62 3,38169
3,922.48 3,509.59
Miscellaneous Expenditure 67.10 169.10
Profit and Loss Account 14,344.07 16,609.18
Total 89,896.69 91,896.51
BIBLIOGRAPHY
FINANCIAL MANAGEMENT : I.M.PANDEY

CAPITAL BUDGETING
FINANCIAL MANAGEMENT : PRASANNA CHANDRA
ADVANCED MANAGEMENT : R.K.SHARMA
ANNUAL REPORTS OF HINDUSTAN COCA-COLA BEVERAGES PVT LTD 2010-2014
WEBSITE
 www.cocacolabeveragespvt.ltd.,com
 www.wikipedia.com

Coca Cola - Capital Budgeting

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CAPITAL BUDGETING

Dr.AER COLLEGE OF MANAGEMENT STUDIES AND RESEARCH Page 1

1.2 INDUSTRY PROFILE

Dr.AER COLLEGE OF MANAGEMENT STUDIES AND RESEARCH Page 3

SODA FOUNTAIN PIONEERS:

SODA FOUNTAINS VS. BOTTLED SODAS:

Dr.AER COLLEGE OF MANAGEMENT STUDIES AND RESEARCH Page 4

SOFT DRINK BOTTLING INDUSTRY:

AUTOMATIC PRODUCTION OF GLASS BOTTLES:

HOME-PACKS AND VENDING MACHINES:

Dr.AER COLLEGE OF MANAGEMENT STUDIES AND RESEARCH Page 5

Dr.AER COLLEGE OF MANAGEMENT STUDIES AND RESEARCH Page 6

Dr.AER COLLEGE OF MANAGEMENT STUDIES AND RESEARCH Page 7

Dr.AER COLLEGE OF MANAGEMENT STUDIES AND RESEARCH Page 8

MARGINAL SLOWDOWN IN SUPERMARKETS/HYPERMARKETS

SOFT DRINKS IS EXPECTED TO RECORD HEALTHY SALES GROWTH IN THE

Dr.AER COLLEGE OF MANAGEMENT STUDIES AND RESEARCH Page 9

1.3 COMPANY PROFILE

THE COCA-COLA COMPANY

Dr.AER COLLEGE OF MANAGEMENT STUDIES AND RESEARCH Page 10

ANDHRA PRADESH REGION

Dr.AER COLLEGE OF MANAGEMENT STUDIES AND RESEARCH Page 11

Was launched in1982 to target the market of the light products.

THE NON-CARBONATED MARKET:

1. MINUTE MAID: Offers frozen concentrated fruit juice launched in 1988.

3. Nimbu Fresh: Recently launched fruit drink in January.

4. KINLEY: packaged drinking water.

Dr.AER COLLEGE OF MANAGEMENT STUDIES AND RESEARCH Page 12

INDIAN PRODUCT RANGE:

Fountain: various sizes

Fountain: various sizes

Minute Maid Pulpy Orange:

Available in 3 PET packages: 400ml, 1 liter and 1.25 liters

Dr.AER COLLEGE OF MANAGEMENT STUDIES AND RESEARCH Page 13

Dr.AER COLLEGE OF MANAGEMENT STUDIES AND RESEARCH Page 14

1.4 PRODUCT PROFILE

THE CARBONATED MARKET

 CAFFEINE FREE COCA-COLA CLASSIC: It was launched 1983

Dr.AER COLLEGE OF MANAGEMENT STUDIES AND RESEARCH Page 15

Dr.AER COLLEGE OF MANAGEMENT STUDIES AND RESEARCH Page 16

Dr.AER COLLEGE OF MANAGEMENT STUDIES AND RESEARCH Page 17

THE NON-CARBONATED MARKET:

MINUTE MAID:Offers frozen concentrated fruit juice launched in 1988.

Dr.AER COLLEGE OF MANAGEMENT STUDIES AND RESEARCH Page 18

KINLEY:Packaged drinking water.

Dr.AER COLLEGE OF MANAGEMENT STUDIES AND RESEARCH Page 19

Investment decisions are generally known as capital budgeting or capital expenditure

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

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

Dr.AER COLLEGE OF MANAGEMENT STUDIES AND RESEARCH Page 20

IMPORTANCE OF CAPITAL BUDGETING:

2. Long term commitment of funds:

4. Long term effect on profitability:

5. Difference of investment decision:

Dr.AER COLLEGE OF MANAGEMENT STUDIES AND RESEARCH Page 21

PROBLEMS & DIFFICULTIES IN CAPITAL BUDGETING:

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

Example:The new product proposed to be launched by a firm may result in increase or

ASSUMPTIONS IN CAPITAL BUDGETING:

Dr.AER COLLEGE OF MANAGEMENT STUDIES AND RESEARCH Page 22

The activities can be listed as follows:

FEATURES OF INVESTMENT DECISIONS: