Mayur Final Project 2

A STUDY ON CAPITAL BUDGETING
CHAPTER – 1
INTRODUCTION
1.1 Introduction to capital budgeting

Capital budgeting is an essential part of every company’s financial management.
Capital budgeting is a required managerial tool. One duty of financial manager is
to choose investment with satisfactory cash flows with high returns. Therefore a
financial manager must be able to decide whether an investment is worth
undertaking and able to decide and be able to choose intelligently between two or
more alternatives.
Capital budgeting involves the planning and control of capital expenditure. It is the
process of deciding whether or not to commit resources to a particular long term
project whose benefits are to be realized over a period of time.
A capital budgeting decision is defined as the firms decision to invest its current
funds efficiently in the long-term assets in anticipation of an expected flow of
benefits over a series of years. The firm’s investment decisions would generally
include expansion, acquisition, modernization, and replacement of the long-term
assets. They are the assessment of future events, which are difficult to predict. It is
really complex problem to estimate the future cash flow of an investment.
The investment decision of a firm is generally know as Capital Budgeting or Capital

Expenditure Decision. Capital budgeting is also known as “Investment Decision
Making”, “Capital Expenditure Decisions”, “Planning Capital Expenditure” and
“Analysis of Capital Expenditure.
GLOBAL COLLEGE OF MANAGEMENT STUDIES,HOSKOTE Page 1
Capital budgeting is finance terminology for the process of deciding whether or not
to undertake an investment project.
A logical prerequisite to the analysis of investment opportunities is the creation of

investment opportunities. Unlike the field of investments, where the analyst more or
less takes the investment opportunity set as a given, the field of capital budgeting relies
on the work of people in the areas of industrial engineering, research and development,
and management information systems (among others) for the creation of investment
opportunities. As such, it is important to suggest that students keep in mind the
importance of creativity in this area, as well as the importance of analytical
techniques Because a project is financially sound, it must be ethically sound, right?
Well . . . the question of ethical appropriateness is less frequently discussed in the
context of capital budgeting than that of financial appropriateness.
Budgeting requires the company to look ahead and formalize future goals. It is the
planning process used to determine whether an organization’s long term
investments such as new machinery, replacement machinery, new plants, new
products, and research development projects are worth pursuing. It is budget for
major capital, or investment, expenditures.
Capital budgeting techniques based on accounting earnings and accounting rules

are sometimes used - though economists consider this to be improper - such as the
accounting rate of return, and “return on investment”

1.2 CAPITAL BUDGETING
Capital expenditure management or capital budgeting is concerned with planning

and control of capital expenditure. Capital budgeting is defined as the acquisition
of durable productive facilities in the expectations of future gains. To win the
competitive edge, every organization is much construction on the financial aspect
of development. It involves the current outlay of cash in return for an anticipated
flow of future benefits and these benefits are available in the long run. Therefore,
capital budgeting refers to a long- range investment programs and is translated into
annual budget outlay and may relate to National Five Year Plans.
Capital budgeting is a crucial financial decision of a firm. It relates to the selection

of an asset or investment proposal for the lifetime of the project. Capital budgeting
is the allocation of available resources of the organization to the various investment
proposals, as the demand on resources is almost always higher than the availability
of resources.
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. For example: the decision to acquire special equipment may
require a large immediate outlay of funds. It also commits the company to the
maintenance and operations of the equipment for a long period of time.
Organization is frequently faced with capital budgeting decision. Any decisions

that require the use of resources or course of action whose benefits are likely to be
available in future over the lifetime of the project. Capital budgeting is more or less
a continuous process in any growing concern. Some of the decisions may directly
affect the profit of the firms whereas some other decisions may directly affect the

profit by influencing the operating costs. However, in all cases, the decisions have
a long-term impact on the performance of the organization.
Given the importance of capital budgeting, the decision regarding investment,

management faces the challenging task of allocating the limited available resources
in a matter that would maximize the profits or the objectives of the organization.
Financial management, in the modern sense of the term can be broken down in to
four decisions as function of finance, they are:-
 The investment or long-term asset- mix decision.

 Financing or capital – mix decision.
 Dividend or profit allocation.
 Liquidity or short-term asset – mix decision.
1.3 DEFINITION:
Charles T Horngreen has defined as “Capital budgeting is the long term planning
for making and financing proposed capital outlays.”
In other words of Lynch, “Capital budgeting is concerned with planning and

development of available capital for the purpose of maximization the long-term
profitability of the concern.”

1.4 MEANING:
Capital budgeting is the process of making investment decision and capital

expenditure. It also involves a non-flexible, long-term commitment of
funds thus capital expenditure decisions are also called as long-term
Investment decisions
1.5 FEATURES:
 It involves exchange of current funds for the benefits to be
achieved in future.
 Future benefits are expected to be realized over a series of years.
 They generally involve huge funds.
 They are irreversible decisions.
 They have long term and significant effect of probability of the concern.

1.6 GUIDELINES FOR BUDGET DEVELOPMENT
Establish cost guidelines and benchmarks to assist analysts in budget development.
Clarify our understanding of funding constraints and conditions to make it easier to

correctly align project types with funding sources.
By taking a more comprehensive approach to the budget development and
implementation cycle, eliminate low-value tasks and help all participants focus on the
most important issues.
 Improve tools for the budget processes to reduce the burden of
administrative tasks and increase time available for analysis and decision-
making.
Ensure better connections between the operating and capital budgets
 Improve the allotment and monitoring processes to reduce time spent on

non- value added tasks.
 Improve the guidance available for everyone involved in the capital
budget process.
 Make better use of information about facility needs and conditions for
budget development and monitoring.
Streamline the budget bill process.

1.7 IMPORTANCE:
There are the 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.
 By taking capital budgeting decision, a finance manager makes a commitment into future.
He is also committing to the future needs for funds of that project.
 The capital budgeting decisions generally involve large commitment of funds.
 As a result, substantial portion of capital funds is blocked. Thus, relatively, more
attention is required for capital budgeting 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.
 Capital budgeting decisions affect the capacity and strength of a firm to face
competition. A firm may loose competitiveness if the decision to modernize is delayed.
 A timely decision to take over a minor competitor may ultimately result even in the
monopolistic position of the firm. These decisions affect the future position of the firm
to a considerable extent.

1.8 DIFFICULTIES:
Capital budgeting decisions are not easy to take. There are number of factors responsible for this.
The problems in capital budgeting decisions may be as follows:
 Capital budgeting decisions involve long-term commitments. However, there is a lot of

uncertainty in the long-term. Therefore, an element of risk is involved. The uncertainty
may be with reference to cost of the project, future expected returns, future competition,
legal provisions, political situation etc.
 The cost of benefits of a decision may occur at different time period. They are not
logically comparable because of the time value of money.
 The financial manager may face difficulties in measuring the cost and benefits of
projects in quantitative terms. It is very difficult in the extent
 of impact as the sales of other products may also influence by these factors other than
the new products.
1.9 ASSUMPTIONS:
Capital budgeting decisions process is a multi-faceted and analytical process. A number of

assumptions are required to be made and evaluated in the financial aspects.
 The capital budgeting decisions are taken with a primary motive of increasing the profit
of the firm. No other motive influences the decision of the financial manager.
 It is very difficult to estimate the cost and benefits (proposal beyond 2-3 years in future)
which are reasonably accurate and certain.
 It assumes that a proposal will be accepted or rejected on the strength of its merits alone.
The proposal will not be considered in combination with other
 Proposals to consider the maximum utilization of available funds.

1.10 INVESTMENT DECISION:
The major second decision of the firm is Financing Decision. It is mainly concerned with
mobilization of funds. Here, the financial manager is concerned with determining the best
financing mix or capital structure for his firm. The management will decide how much funds
should be raised from outside public and financial institutions.
Investment decisions are expected to bring in additional revenue there by raising the size of
firm’s total revenue. These decisions involved in acquisition of fixed assets.
1.11 SOURCES OF FINANCE:
 Equity Share Capital

 Preference Share Capital
 Debenture Capital
 Long term Loans from Financial Institutions.
 Public Deposits.
 Reserves and Surplus.
1.12 DIVIDEND DECISION:
Dividend refers to that portion of a firm’s net earnings, which are paid out to the shareholders.
Dividend decision had got two alternatives, one is declaring immediately and issuing in the form
of cash/bonus shares to the shareholders, or retailing them with the firm for further investment
proposals. Dividend decision will have impact on the value of the firm and its objective is to
maximize the shareholders wealth.

1.13 CAPITAL BUDGETING PROCESS
Capital budgeting is process of selecting best long-term investment project. Capital budgeting
is long-term planning for making and financing proposed capital outlaying.
Steps for capital budgeting process as follows:
Identification involved in capital budgeting .
Screening the proposal
Evaluation of various proposals
Fixing the priorities
Final approval and planning the capital

expenditure
▼
Implementing the proposal
Performance review

1.14 Types of Capital Budgeting Decisions
Capital budgeting refers to the total process of generating, evaluating, selecting and following
up on capital expenditure alternatives. The firm allocates or budgets financial resources to new
Investment proposals. Basically, the firm may be confronted with three types of capital
budgeting decisions:
 Accept-Reject Decision.
 Mutually Exclusive Project Decision.
 Capital Rationing Decision.
 Accept-Reject Decision:
This is a fundamental decision in capital budgeting. If the project is accepted, the firm would
invest in it; if the proposal is rejected, the firm does not invest in it. By applying this criterion,
all independent projects are accepted. Independent projects are the projects that do not compete
with one another in such a way that the acceptance of one precludes the possibility of acceptance
of another.
 Mutually Exclusive Project Decision:

Mutually Exclusive Projects 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 alternatives are mutually
exclusive and only one may be chosen. Thus, mutually exclusive projects acquire significance
when more than one proposal is acceptable under the accept-reject decision.

 Capital Rationing Decision:

Capital rationing refers to a situation in which a firm has more acceptable investments than it
can finance. It is concerned with the selection of a group of Investment proposals out of many
investment proposals acceptable under the accept- reject decision. The projects can be ranked
on the basis of a pre-determined criterion such as the rate of return. The projects are ranked in
descending order of the rate of return.
1.15 SELECTION OF PROJECTS
Experience shows that many projects are recommended for inclusion in the capital budget that
despite of the apparent desirability, may not be necessary for the firm or many not produce
additional earnings commensurate with the capital involved. They keep capital outlays within
regional limits; capital budgets control producers should be designed to ensure that more
desirable project get the priority over others. The proposal submitted by the operating divisions
or departments for inclusions or the capital budget can be classified under the following
categories:
 Urgently essential to satisfactory operations.

 Replacement resulting from wear and tear or obsolescence.
 Desirable on an earnings basis and
 Desirable from the stand-point of logical expansion and development

1.16 PRINCIPALS OF CAPITAL INVESTMENT:
Capital budgeting involves the generation of investment proposals; the estimate of cash flows for
the proposals, the evaluation of cash flows; the selection of projects based upon an acceptance
criterion; and finally, the continual revaluation of investment projects after their acceptance.
Depending upon the firm involved investment proposals can emanate from a variety of sources.
For purposes of analysis, projects may be classified in to one of five categories.
 New products or expansion of existing products

 Replacement of equipment or buildings
 Research and development
 Exploration
 Others.
 Most firms screen proposals at multiple levels of authority. For a proposal originating
in the production area, the hierarchy of authority might run from section chiefs to
 Plant managers to
 The vice-president for operations to
 A capital-expenditures committee under the financial manager to
 The president to

1.17 COMPONENTS OF INVESTMENT ANALYSIS
The capital budgeting process requires an estimate of future events to be expressed in a schedule
of cash flows. At any given time, a company may be having a number of alternative ways,
termed as project to invest in funds and the purpose of a capital budgeting procedure to obtain
an indication of a value each might contribute to the company. Before applying any method to
evaluate the relative desirable of a project, it is necessary to analyze the components effecting
the projection of cash flows, both in and out, related to the projects, together with the time
dimension of each flow. The basic components of investment analysis are:
 Amount of net capital investment.

 Operating cash flows.
 Choice of horizon.
1.18 OPERATING CASH FLOWS:
Operating cash flows are not identified with profits or income. It is essential to recognize
difficulties that arise in applying a cash flow analysis to investment proposals. A charge in
income can occur without any corresponding change in cash flow. The cash flow procedure
avoids difficult problems underlying the measurement of corporate income, which usually
accompany the accrued method of accounting.

1.19 ABSOLUTE AND RELATIVE CASH FLOWS:
A distinction should be made between absolute and relative cash flows. When cash flows are
compared with zero cash flows, they are known as absolute cash flows. The cash flows of one
project can be compared directly with that of in other project or difference in cash flows of two
projects can be determined. If this difference itself is positive in a particular period, it can from
another. Such cash flows are known as relative cash flows.
1.20 CASH FLOWS AND UNCERTAINT
Each computation of cash flows is based on certain assumptions on the level of business activity,
nature of production, future availability of improved equipment, cost of factors of production,
future demand and the like.
The growing use of computers applications now enables the financial analyst to take analysis
of various levels of possible cash flows, return on investment and other results of proposed
outlay and obtain an estimate of the odds of each potential outcome. Under the probability
approach, estimates of variety of factors such as market size, selling prices, market growth rate,
share of the market, investment cost, can be varied.

1.21 IDENTIFYING RELEVANT CASH FLOWS:
CASH FLOW VS ACCOUNTING PROFIT:
Capital budgeting is concerned with investment decisions, which yield a return over a period
of time in future. The foremost requirements to evaluate any capital investment proposal are to
estimate the future benefits accruing from the investment proposals. Theoretically, two
alternatives criteria are available to qualify the benefits:
 Accounting profit.
 Cash flows.
The difference in these measures of future profitability is primarily due to the presence of certain
non-cash expenditure in the profit and loss a/c. cash flows are theoretically better measures of
the net economic benefits or costs associated with a proposed project.

1.22 TECHNIQUES OF CAPITAL BUDGETING
Capital budgeting decision process involves estimation of cost and benefits of a proposal,
estimation of required rate of return, and evaluation of different proposals in order to select one.
These cost and benefits are expressed in terms of cash flows arising out of a proposal. Once the
proposal completed we can discussed the various techniques to arrive at the optimal investment
decision.
The method of evaluation of capital expenditure proposal can be classified in to two broad
categories:
 Traditional or Non-Discounting Techniques.

 Discounted Cash Flows or Time Adjusted Techniques.
1.23 DISCOUNTING CASH FLOWS OR TIME ADJUSTE TECHNIQUES:
 Net Present Value Method (NPV).

 Internal Rate of Return Method (IRR).
 Profitability Index or benefit cost ration Method (PI).
1.24 TRADITIONAL AND NON-DISCOUNTING TECHNIQUES:
 Pay Back Period Method.

 Post Pay Back Profitability Method.
 Pay back reciprocal Method.
 Rate of Return Method or Accounting Method (ARR).

The traditional techniques do not discount the cash flows to find out their present worth. There
are two such techniques available to find out. They are:
 Pay Back Period Method:

The pay back sometimes called as payout or pay off period method represents the length of
period of cash proceeds produce by the investment to be equal to the original cash outlay, i.e.
the time required for the project to pay for itself back within a certain period. This method is a
traditional method of evaluation of capital budgeting decisions.
PAY BACK PERIOD = INITIAL INVESTMENT
ANNUAL CASH INFLOWS
It is the ratio of the initial fixed investment over the annual cash inflows for the recovery period
Accept – Reject Criterion:
The pay back method can be used as a decision criterion to accept or reject investment proposal
by the different alternatives. If single investment is being considered, as line annual pay back
period is less than the pre-determined pay back period the project will be accepted, it not it
would be rejected.
Projects are under consideration that they may be ranked regarding to the length of the pay back
period. However, the different proposals are to be ranked in order to priority, and then the
proposal with in shortest payback period will be first in the priority list.

Merits of Pay Back Period:
It is easy to calculate and simple to understand.

It can be used even by a small firm having limited manpower that is not trained in any
other sophisticated techniques.
Due to its short-term approach, this method is particularly suited to a firm which has
shortage of cash or whose liquidity position is not good.
It is the best method in case of evaluation of single project.
Demerits of Pay Back Period:
 It completely ignores all cash flows after the payback period.

 It completely ignores time value of money.
 It ignores the concept of rate of return.
 The payback period also ignores salvage value and total economic life of the project.
 The payback period is not consistent with the maximization of the shareholders wealth.
 It treats each asset individually in isolation with other assets, which is not feasible in
real practice.
 In case the cash flows are unequal, the pay back period can be found by adding up the
cash flow until the total is equal to the initial cash outlay of the project.

 POST PAY BACK PROFITABILITY METHOD:

One of the drawbacks of payback period is that it does not taken into account the cash inflows
earned after one payback period and hence the true profitability of the project cannot be
assessed. Hence, an improvement over this method can be made by taking into account the
returns which are receivable beyond the payback period.
POST PAY BACK PROFITABILITY INDEX = POST PAYBACK PROFITS × 100
INVESTMENT
 PAYBACK RECIPROCAL METHOD:

Sometimes, Payback Reciprocal Method is employed estimate the internal rate of return
generated by a project. Payback Reciprocals can be calculated as:
PAYBACK RECIPROCAL = ANNUAL CASH INFLOW
TOTAL INVESTMENT
(This can also be calculated in percentage by multiplying the above by 100.) This method can be
used under the following two conditions:
Equal cash inflows are generated every year.
The project under consideration has a long life which must be at least twice the payback period.

 RATE OF RETURN METHOD:

This method takes into account the earnings expected from the investment over their whole
life. It is known as average rate of return method because under this method the concept of
accounting profit (Net Profits after tax and depreciation) is used rather than cash inflows. The
project with high rate of is selected as compared to the one with lower rate of return.
The return on investment method can be used in several ways as follows:
Average Rate Of Return Or Accounting Rate Of Return (Arr):
Under this method average profit after tax and deprecation is calculated and then it is divided
by the total capital outlay or total investment in the project. In other words it establishes the
relationship between average annual profits to total investment.

 Rate Per Unit Of Investment Method:

This method is small variation of the average rate of return method. In this method the profit
after tax and deprecation is divided by the total investment.
 NET INVESTMENT IN THE PROJECT= TOTAL PROFIT (PADT)× 100
 Return On Average Investment Method:

In this method the return on average investment is calculated. Using of average investment for
the purpose of return on investment is preferred because the original investment is recovered
over the life of the asset on account of deprecation charges.
 Average Return On Average Investment Method:

This is the most appropriate method of rate of return on investment. Under this method, average
profit after deprecation and taxes is divided by the average amount of investment.
AVERAGE RATE ON = AVERGAE ANNUAL AFTER DEPRECATION AND TAXES × 100
Accept Or Reject Criteria:
The actual rate of return is compared with pre-determined or minimum required rate of return
or cut off rate. If the actual average rate of return is higher than the minimum desired average
rate of return, then the proposal is to be accepted otherwise rejected. If more then one alternative
proposal is under consideration, the average rate of return may be arranged in descending order
of magnitude starting with the proposal with the highest average of return.

1.25 MERITS:
 It is very simple to understand and easy to calculate.

 It uses the entire earnings of a project in calculating rate of return and hence gives a true
view of profitability.
1.26 DEMERITS:
 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 does not take into consideration any benefits which can accrue firm from the sale or
abandonment of equipment which is replaced by new investment.
 The above-mentioned methods has to be used along with the discounted cash flow
method
 (i.e., NPV, IRR) in order to take a right decision.

1.27 DISCOUNTING CASH FLOWS OR TIME ADJUSTE TECHNIQUES:
The distinguishing characteristic of the discounted cash flow capital budgeting techniques is
that they have taken into consideration the time value of money while evaluating the cost and
benefits of the projec
1.28 NET PRESENT VALUE (NPV) METHOD:
The NPV method is a modern method of evaluating investment proposals. This method takes
into consideration the time value of money and attempts to calculate the return on investment
by introducing time element.
It may be defined as the summation of the present value of the cash proceeds in each year minus
the summation of the present values of net cash outflows in each year. The NPV of all inflows
and outflows of cash during the entire life of the project is determined separately for each year
by discounting these flows by the firm’s cost of capital.
NPV = CF1 + CF2 + CFN = e = CFt
(1 + K) 1 + (1 + K) 2 ( 1 + K) n = t = 1 (1 + K) T
Where CF = Cash Flow for corresponding year. K = Cost of capital
N = number of years

The Steps To Be Follwed For Adopting The Npv Method
 Determine an appropriate rate of interest that should be selected and a minimum rate of
return are known as cut off rate.
 Compute the present value of cash outflows at the above determined discount rate.
 Compute the present value of cash inflows at the predetermined rate.
 Calculate the NPV of the project by subtracting the present value of cash outflows from
present value of cash inflow.
The present value of rupee 1 due in any number of years can be found by using the
following formula:
1
PRESENT VALUE (PV) =------------------------

( 1+R)n
Where
PV = Present Value
R = Rate of interest or discount rate
N=Numberofyears.

ACCEPT OR REJECT CRITERION:
If NPV is positive the project should be accepted and if NPV is negative the project should be
rejected i.e.
If NPV > Zero (ACCEPT). If NPV < Zero (REJECT).
In case of a number of projects or more than one project select the project with greatest NPV if
there is more than one project giving positive NPV.
MERITS:
 It recognizes the time value of money.

 It is based on the cash flows rather than accounting profits.
 NPV calculations allow for a change in the discount rate. The NPV can be computed by
using time varying discount rates.
 It considers the total benefits arising out of the proposal over its lifetime.
 This method is very useful for selection of mutually exclusive projects.
DEMERITS:
 It is more difficult to understand and operate.

 It is an absolute measure.
 It is not easy to determine an appropriate discount rate.
 This method may not give satisfactory results in case of projects resulting in case of
projects having different effective lives.

1.28 INTERNAL RATE OF RETURN (IRR) METHOD:

IRR is a modern technique of capital budgeting that takes into account the time value of money.
It is also known as time-adjusted rate of return, discounted rate of return or yield method. In
this method, the cash flows of the project are discounted at return as a suitable rate by hit and
trail method, which equates the NPV so calculated to the amount of investment. Under this
method, since the discount rate is discounted internally, it is called as internal rate of return
method.
It is defined as the discount rate, which equates the aggregate present value, i.e., net cash
inflows after tax (CFAT) with the aggregation present value of cash outflow of a project.
C = A1 + A2 + A3 + (1+R) 1 + (1+R) 2 + (1+R) 3
Where
C = Initial cash outlay at time Zero.
A1, A2, A3 Future net cash flows at different periods.
1, 2, 3…. N = number of years.
R= Rate of discount or internal rate of return.

1.29 THE STEPS TO BE FOLLWED FOR ADOPTING THE IRR METHOD:
 Prepare the cash flow table using an arbitrary assumed rate to discount the net cash flow
to the present value.
 Find out the NPV by deducting from the present value of total cash flows calculates in
above the initial cost of investment.
 If the higher discount rate still gives a positive NPV increases the discount rate further
until the NPV becomes negative.
 If the NPV is negative at this higher rate, the IRR must be between the approximately
taken discount rates.
 The actual IRR is determined by interpolation. This can be calculates using the formula:
Where
Ri = Rate of interest which is Lower. Rh = Rate of interest which is Higher. PV = Present

Value.
CF = Cash Flow.
COF = Cash Out Flow.

Accept the proposal if the IRR is higher than or equal to minimum required rate i.e., the discount
or cut off otherwise reject.
If IRR > K (ACCEPT). If IRR < K (REJECT). Where K = Cost of Capital.
In case of alternative proposals, one which higher IRR has to be accepted as long as the IRR is
greater than the discount rate.
MERITS:
 It recognizes the time value of money.

 It is based on the cash flows rather than accounting profits over the life of the project to
calculate its rate of return.
 This method is also compatible with the objective of maximum profitability and also
consideration with the shareholder’s wealth.
DEMERITS:
 It is difficult to understand and operate; it gives misleading and inconsistent results when
the NPV of a project does not decline with discount rates.
 It also fails to indicate a correct choice between mutually exclusive under certain
situations.
 It is based on the assumption that the earnings are reinvested at the IRR for the remaining
life of the project. This is not a justified assumption.

1.30 PROFITABILITY INDEX METHOD (OR) BENEFIT-COST RATIO:

It is also a time – adjusted method of evaluating the investment proposals. Profitability Index
is also called a Benefit- Cost Ratio or Desirability Factor is the relationship between the present
values of cash inflow at the required rate of return to the initial cash outlay of the
investment.The formula to calculate Benefit – Cost Ratio or Profitability Index as follow:
PROFITABILITY INDEX (PI) = PV OF CASH INFLOWS
INTITAL CASH OUTLAY
If PI > 1 (ACCEPT). If PI < 1 (REJECT).
In case of the alternative proposal, the project with higher PI has to be accepted.
MERITS:
 It recognizes time value of money.

 It is relative measure of the projects profitability. (Find out the ratio).
 Takes into consideration the objective of maximum profitability.

DEMERITS:
 It is difficult to understand.
 It is not easy to determine and appropriate discount rate.
 It involves more computation than traditional method.
 It may not give good result while comparing projects with unequal investment funds.
1.31 RISK AND UNCERTAINITY IN CAPITAL BUDGETING:
Capital budgeting entails decisions to commit present funds in long term investment in
anticipation of future returns. The amount of investment and the returns from them cannot be
predicted with certainty due to certain variables like market for the product, technology,
government policies, etc.
The uncertainty associated with the investment and the returns is what makes decision makers
to consider probability distributions in their estimates, hence, making capital budgeting to be
considered under uncertainty and risk.
All the techniques of capital budgeting requires the estimation of future cash inflow and cash
outflow. The cash flow is estimated, based on the following factors:
 Capacity of the project.

 Depreciation cost.
 Rate of taxation.
 Future demand of the product.
 Expect economic life of the product. Etc.

But due to uncertainties about the futures, the estimates of demand, production, sales, selling
price, etc., cannot be exact. To evaluate and select among projects that will maximize owner’s
wealth, we need to assess the uncertainty associated with project’s cash flows. In evaluating a
capital project, we are concerned with measure of risk.
The uncertainty arises from different sources, depending on the type of investment being
considered, as well as the circumstances and the industry in which it operating. Uncertainty
may due to:
 Economic conditions.
 Market conditions.
 Taxes.
 Interest rates.
 International conditions.
STEPS INVOLVED:
 Identifying the need of the project preparation of project report with respect to as
follows:
 Utilization.
 Efficiency.
 Capacity of the particular project.
 Loss of market.
 Loss of good will.
 Technological requirements.
 Justification based on money earnings.

1.32 FACTORS INFLUENCING CAPITAL EXPENDITURE DECISION:
There are many factors like financial as well as non-financial which influence the capital
expenditure decisions and profitability of the proposal.
They are:
 URGENCY:
Sometimes an investment is to be made due to urgency for survival of the firm or to avoid
heavy loses. In such circumstances, proper evaluation cannot be made through profitability
tests. Examples of such urgency are break down of some plant and machinery, fire accidents
etc.
 DEGREE OF UNCERTAINTY:
Profitability is directly with some lower profitability may be selected due to constraint flow of
income as compared to another project with an irregular and uncertain inflow of income.
Sometimes a project with some lower profitability may be selected due to constant flow of
income as compared to another project with an irregular and uncertain inflow of income.
 INTANGIBLE FACTORS: Sometimes a capital expenditure has to be made due to

certain emotional and intangible factors such as safety and welfare of the workers,
prestigious project, social-welfare, goodwill of the firm etc.,
 AVAILABILITY OF FUNDS: As the capital expenditure generally requires large
funds, the availability of funds is an important factor that influences the capital budgeting
decisions.

CHAPTER-2
RESEARCH DESIGN
2.1 TITLE OF THE STUDY
“A STUDY ON CAPITAL BUDGETING AT THE TOWN CO-OPERATIVE BANK

LTD.,HOSKOTE”
2.2 STATEMENT OF THE PROBLEM
The statement of problem under is on evaluative study on CAPITAL BUDGETING

AT THE TOWN CO-OPERATIVE BANK LTD .,HOSKOTE Analysis of capital budgeting in
the practice and invest Decision of the bank.
2.3 OBJECTIVES OF THE STUDY
 To know the important differences, that can arise in evaluating projects when using Net
Present Value (NPV), Internal Rate of Returns (IRR), Profitability Index(PI).
 To analyze the strengths and weakness of existing Techniques in capital budgeting.
 To evaluate capital projects using traditional methods of investment appraisal and
discounted cash flows methods.
 To make recommendations and to improve further process of capital budgeting
 To measure the profitability of the project by considering all cash flows.

2.4 NEED OF THE STUDY
 The project study is undertaken to analyze and understand the Capital Budgeting process
in The Town C0-operative bank ltd.. Hoskote which gives mean exposure to practical
implication of theory knowledge.
 To know about the banks’s operations of using various capital budgeting techniques.
 The financial department can implement and can get positive results by maintaining
proper financial reports.
 To analyze the proposal for expansion or creating additional capacities
 To make financial analysis of various proposals regarding capital investment so as to
choose the best out of many alternatives proposals.
2.5 SCOPE OF THE STUDY
 “Preparation of capital budgeting is an important tool for efficient and effective

managerial decisions.”
 So in every organization they have to examine the capital budgeting process, therefore
the financial manager must be able to decide whether an investment is worth
undertaking and able to decide and be able to choose intelligently between two or more
alternatives.
 The process by which company’s appraise investment decision, in particular by which
capital resources are allocated to specific projects.
 Capital budgeting requires firms to account for the time value of money and project risk,
using a variety of more or less formal techniques.
 Capital budgeting decisions affect the profitability in terms of interest of the firm.
 They also have a bearing on the competitive position of the enterprise. It’s a
diversification burden
 Capital investment involves cost and the majority of the firms have scarce capital
resources.

 Capital budgeting is a complex process as it involves decisions relating to the investment

of huge resources for the benefit of achievement in future as it is always uncertain.
 Understanding the importance of the capital budgeting
2.6 REVIEW OF LITREATURE:

For the past few decades, financial inclusion has garnered wide attention and has led to lots of
research by Government agencies, academicians. Some of the research work and their findings are
discussed as follows.
In the research paper “financial inclusion case study on Bangalore urban district” by Manjunath
Gundupagi a study is conducted to identify the gaps in demand and supply side of promoting
financial inclusion through micro finance institutions. With about 19% of the State's population
below the defined poverty line, Karnataka has initiated various programs to alleviate poverty both
in rural and urban areas. While these programs have resulted in a marked decline in the number of
the state's poor, incidence of urban poverty is much higher in Karnataka than in India as a whole for
all the years. Financial infrastructure in being developed with the help of Information technology,
like linking the self-help group and banks. The study found that the annual income of the
respondents has increased after taking the loan from micro-finance institutions. Banks has to
increase the refinance support especially to Co-Operative banks and regional rural banks.
In the research paper “A study of the impact of financial inclusion in rural development” by Sharma
Priyanka, a study to examine the relationship of financial inclusion and development This study
proposes models to reduce the gap between the bank and the finance deprived crowd. Publicity to
popularize the concept of financial inclusion, counseling its benefits to poor people, improving the
finance delivery mechanism and the participation of local Government in facilitating financial
inclusion is recommended. Government should have financial inclusion in its priority policy list to
increase financial inclusion and pave way for financial inclusion.

2.7 IMPORTANCE OF THE STUDY
Capital budgeting is of paramount important in financial decision making:

Decisions affect the probability of the firm, as they also have a bearing on the
competitive positions of the enterprises.
A capital expenditure decision has its effect over a long time and inevitable affect’s the
company future cost structure.
The capital investments firm acquires the long-lived assets that generate the firm’s future
cash flows and determine its level of profitability.
Proper capital budgeting analysis is critical to a firm’s successful performance because
capital investments decisions can improve cash flows.
Capital investment involves cost of majority of the firms have scarce capital resources.
Capital decisions are not easily reversible, without much financial loss to the firm.
To make financial analysis of various proposals regarding capital investment so as to
choose the best out of many alternatives proposals
2.8 LIMITATION OF THE STUDY
 The study is conducted in short period. The time period of study has been limited to less
than 45days. The period is small to study the practical investment decision of a company
like Dr. Reddy’s Laboratories ltd.
 It does not consider all the new unapproved schemes.
 The study is conducted with the available data, gathered from annual reports of The
Town Co-operative Bank Ltd., Hoskote
 SThe formula has been used according to the availability of the data.
 All the techniques of capital budgeting presume that various investment proposals under
considerations are mutually exclusive which may not practically be true in some
particular circumstance.
 Uncertainty and risk pose the biggest limitation to the technique of capital budgeting.
 Since the procedures and policies of the company does not allow disclosing of all

financial information and has to be completed with the available data collected with the
maximum effort.
2.9 METHODOLOGY OF THE STUDY
Primary data:-The primary data is collected from The Town Co-operative bank Ltd. Hoskote
with the help of Secondary sources.
This sources containing data that have been collected and compiled for another purpose. The
secondary sources consist of readily available compendia and already compiled statistical
statements and reports whose data may be used by researches for their studies, e.g., census
reports, annual reports and financial statements of companies, Statistical statements, Reports of
Government Departments, Annual Reports on currency and finance and Financial Journals,
newspapers, etc.
Secondary data: - Secondary sources consist of not only published records and reports, but
also unpublished records. The latter category includes various records and registers maintained
by firms and organisations, e.g., accounting and financial records, personnel records, register
of members, minutes of meetings, inventory records, etc.
2.10 DATA ANALYSIS TECHNIQUES:
 Payback period
 Accounting Rate of Return
 Profitability Index
 Net Present Value
 Internal Rate of Return.

2.21 CHAPTER SCHEME:

Chapter – 1
Introduction:
The first chapter gives the detailed introduction on the capital budgeting
Chapter - 2
Research design and Organizational Study :
It contains the research design of the study, review of literature, statement of the problem, objectives
and scope of the study, methodology of the study, data collection methods and chapter scheme are
covered in this chapter.
Chapter - 3
Company profit and Research Methodology:
This chapter contains a profile of the bank, THE TOWN CO-OPERATIVE BANK LTD.,
HOSKOTE. Including its history, nature of the bank in managing the risk between Asset & liability.
Chapter - 4
Analysis and Interpretation of Data:
The chapter provides an analysis of the data collected with interpretation in tune with the objective
and the data will be analyzed and interpreter to graph, tables and diagrams Data Analysis and
Interpretation.
Chapter – 5
Summary: Findings, Suggestions And Conclusions.
In this chapter findings of the study have been summarized and also conclusions over the study have
been drawn and suggestions to the bank will be pointed out

CHAPTER – 3
BANK PROFILE
3.1 Industry profile - Banking
Banking began around 2000BC in Assyria and Babylonia, when farmers and merchants were loaned
food grains for sowing and business. Later in ancient Greece, lenders started accepting deposits and
introduced currency exchange. Archaeological evidences shows evidences of money lending in
ancient India and China.The word bank is derived from the Italian word “Banka” meaning “table”,
which were used as exchange counters. The oldest bank still in existence is Banca Monte deiPaschi
di Siena, headquartered in Siena, Italy, which has been operating continuously since 1472.
3.2 Bank Categories
According to “Banking Companies Act of India”. Bank is defined as “A Bank is a financial

institution which accepts money from the pubic for the purpose of lending and investments”. Bank
offer different types of services to their customers starting from deposits, loans, financial and
investments advice to risk management etc. The Indian banking sector is broadly classified into two
categories, Scheduled Bank and Unscheduled Banks.

3.3 Scheduled Banks
Banks which are listed in the 2nd schedule of the “Reserve Bank of India Act, 1934” are called as
“Scheduled Banks”. Banks includes in Scheduled II,
Have a paid-up capital and reserves not less than Rupees 5 Lakhs.
Should maintain an average daily balance not less than three oer cent of total of the demand and
time liabilities in India of such Bank with the RBI.
A scheduled bank is eligible for loans from the Reserve Bank of India at bank Rate.

3.4 Commercial Banks
Public Sector Banks – In a public-sector bank, the Government holds more than 50% of the shares.
There are 27 public sector banks in India, including 5 State Bank of India (SBI) and its associates.
From April 1, 2017, the SBI merged with its associate banks and will be operating a single entity,
making it a global leader with an asset base of Rupees 37 Trillion.
Private Sector Banks – Here, the majority of the bank’s shares is held by private shareholders In
India, there are two types of private sector banks, those which are started before 1969 and others
started after 1990’s, when Indian Government introduced liberalization policies. Some of the old
private banks are City Union Bank (1904), Dhanalakshmi Bank (1927) and some of the new private
banks are Axis bank (1994), ICICI Bank (1996).
Foreign Banks – In 1990’s due to liberalization policies of Indian Government, RBI allowed foreign
banks to set up branches in India. Prominent among them is Standard Chartered Bank Citibank N.A.,
HSBC Ltd. The foreign banks can operate in India by setting up branch or by setting Wholly Owned
Subsidiary (WOS). Foreign Banks operating as branches, which has commenced banking operation
in India after August 2010 must convert their branches to WOS if required by RBI under Section
44A of the Banking Regulation Act 1949. Also, hereafter only WOS banking is allowed for Foreign
Banks. The initial minimum paid up capital is Rupees 5 Billion for Foreign Banks and should follow
corporate governance.

3.5 Cooperative Banks
Unlike commercial banks, who are driven by profit, co-operative banks work on a “no profit, no
loss” principle. They play a very big in financial inclusion. These banks sarve small industries, rural
agriculture population and provide self-employment. Hence, they play a very prominent role in
Indian economy.
ooperative banks have played a very integral role in the Indian financial inclusion story. The
operative style of Cooperative movement has made both rural and urban communities feel
empowered and secure. Cooperative banks are different from the commercial banks in that they are
based on the principle “for the people, by the people” and their aim is to serve the people rather than
increase their profit. Their banking system is customized to provide easy banking access to people
who were overwhelmed by the commercial banks.
3.6 History
The idea of Hermann Schulze (1808-83) and Friedrich Wilhelm Raiffeisen (1818-88) took the shape
of cooperative bank. During start of 19th century, there was heavy economic turmoil, which forced
people to poverty. Hermann and Friedrich made credit available in small amounts similar to the
micro finance institutions today. It was very popular and spread throughout Europe. Similarly, In
India cooperative banks were setup in the beginning of 20th century, due to the economic depression
by the Cooperative Credit Societies Act, 1904. The act based on the recommendations of Sir
Frederick Nicholson (1899) and Sir Edward Law (1901), whose ideas in turn were based on the
pattern of Raiffeisen and Schulze. The Cooperative Societies Act of 1912, further gave recognition
to the formation of non-credit societies and the central cooperative organizations.

3.7 Company profile
The Town Cooperative Bank Ltd (TCB) is one of the oldest and well established cooperative bank
in Hoskote. It was founded in 11 February 1913 as a modest bank. Now, it has 16,343 shareholders
and the share capital is around Rupees 4 crore. The bank has completed 105 years and the centenary
year was celebrated in 2013 in a grand manner. The Indian Financial System code (IFSC) of this
bank is IBKL0693TCB, and the branch code is 693TCB. Town Cooperative Bank has been
registered under Cooperative Bank Limited Act and the register number is: 258 and RBI license
number is UBD: KA: 1068P. Currently, 23 employees are working in the Hoskote branch.
The bank was awarded “Best co-operative bank” by State Government in the years 1926, 1997,
1998, 2002 and 2004. The Town Cooperative Bank Ltd. has been awarded “Excellent Cooperative
bank” by Sri.KanteeravaNarasimharajaOdeyar in the year 1931, 1932, 1933.

3.8 Vision Statement
To become the most favored bank by providing fast, outstanding, prompt banking services to
customers & people at low cost, ensuring wealthy growth on sound financial base with social
responsibility
3.9Mission Statement
 To adopt modern technology.

 To follow professionalism and standards.
 To be skilled and competitive.
 To work as a team.
 To manage accurate timelines.
 To ensure trustworthy relation with the shareholder.
 To be dynamic, prompt and service oriented towards our customer.
3.10 Quality Policy
 The bank has formulated the following policies for the benefit of providing quality service
to customers
 Bank provides required and significant guiding principle to the locker holders.
 Bank gives standing instructions for the payment of bills, interest, insurance etc.
 Bank will exchange mutilated currency notes as per RBI guidelines.
 Avail nomination facilities to account holders including SB account & current
accountholder.
 The bank observes customers’ days as decided by the board of directors.

3.11 Features of Banks
 No tax deducted at source on the deposits or members.

 No penalty for premature closure of deposits less than Rupees 5lakhs.
 Very attractive interest rates on all deposits, more than nationalized and scheduled banks.
 All deposits are having nomination facilities
 Instant loan up to 85% of deposits will be sanctioned against the security of deposits.
 0.5% concession in interest rate for prompt and regular of loan installation.
 Interest charged only on loan outstanding.
 Free personal accident insurance coverage of Rupees 100000.
 Easy procedure and documentation to avail loan.
 Spacious banking hall and vehicle parking facility.
3.12 Special features & Facilities
 One of the best Urban Co-operative Bank in Karnataka

 Financially Sound & well Managed Bank
 ‘A’ grade Bank under audit Classification
 Deposits are covered under Deposit Insurance and Credit guarantee Corporation as per rules.
 Interest on Term Deposits payable on Monthly & Quarterly basis or on maturity
 Safe Deposit Lockers are available
 NEFT/RTGS and Demand Draft facility
 SMS alert facility
 General & Life Insurance facility
 Issue of E-stamping papers

3.13 Additional Facilities for Share Holders
 Death relief fund up to Rs15000/- paid to family of deceased members.

 Free financial assistance for higher education.
 Up to Rupees 15000/- for MBBS course.
 Up to Rupees 10000/- for other higher study courses.
 Scholarships for the children are of members.
 Up to Rupees 150/- per month.
 Degree Rupees 200/- per month.
 Free financial assistance for medical aid up to Rupees 10000/- for major surgeries
 Free eye checkup and eye surgery for members every year.
 PRATHIBHA PURASKARA to best performing children of the members and many more
welfare schemes to members.
3.14 Composite Banking Services Available
 Various types of Deposits at attractive interest rates

 Various types of Loans at affordable rates of interest
 ATM facility available
3.15 Products and Services Offered
The bank offers the following services,
Deposits - Savings Deposit, Current Deposit, Fixed Deposit, Bhagya Lakshmi Cash Certificate,
SanjeeviniVikasPatra, Cumulative Deposit,Pigmy Deposit are few of the deposit schemes offered
by the Town Cooperative bank.

Loans and Advances - Savings Deposit, Current Deposit, Fixed Deposit, Bhagya Lakshmi Cash
Certificate, SanjeeviniVikasPatra, Cumulative Deposit, Pigmy Deposit, Salary Secured Loan, Vehicle
Loan, Cash Credit Loan, Surety Loan, Loan On SanjeeviniVikasPatra, Loan On Cumulative Deposit,
Staff Fesitval Advance, Loans on Gold Ornaments
Funds transfer through RTGS/ NEFT–In Real Time Gross Settlement transfer of money or
securities takes place from one bank to another on a "real time" and on a "gross" basis. These are
mostly used in transferring high value amount immediately. In National Electronic Funds Transfer
amounts are transferred in half-hourly batches with 23 settlements occurring between 8:00 AM
and 7:00 PM on week days. Both RTGS and NEFT help in transferring money between any accounts
belonging to any bank branches all over the country.
IFSC Code Facility - Indian Financial System Code is an alphanumeric code used to uniquely
identify each bank in India. This helps in fund transfer between different banks.
Lockers Facility - Issue of DDs–Demand Draft is a prepaid financial instrument, in which the bank
which draws the DD takes the responsibility to pay the specified party the sum mentioned when
the DD is produced.
E-Stamping Facility– It is the new way of paying stamp duties to Government for various services
like registration of land, buildings, etc.
Sale of Insurance policy – Town cooperative bank sells the following insurance:IFFCO-TOKIO
General Insurance, LIC Micro Insurance, Urban Yashaswini Health Insurance, Insurance on Deposits
held with the bank.

3.16 Interest Rates on Deposits (05 October 2017)
Period General Citizen Senior Citizen

07 – 29 Days 4.0 % 4%
30 – 45 Days 4.5 % 4.5 %
46 – 90 Days 6% 6%
91 – 179 Days 6.5 % 6.5 %
180 – 364 Days 7% 7.5 %
1 year (365 Days) 8% 8.5%
Above 1 year & Below 2years 7.25 % 7.75 %
Above 2years Period 7% 7.50 %
3.17 Board of Directors
Mr.P.Krishnappa President
Mr.N.Balachandra, Vice President
Mr.C.Naveen, Director
Mrs. B. Venkatalakshmi, Director
Mr. A. Afsar, Director
Mr. B, Nagaraj, Director
Mr. K. Kiran Kumar, Director
Mr.H.B. Mohankumar, Director
Mr. H, B. Nagaraj, Director
Mr.T.N. Rajshekar, Director
Mrs.Zintazunis, Director
Mr.M. Amaresh, Director
Mr.M. Chandrashekar, Director

3.18 Areas of Operation
The Town Cooperative bank is operating at SahakaraBhavana, K R Road, Hoskote, Bangalore –

562114. The bank’s headquarters is also located in the same building. The building is spacious and
well located in one of the main roads of Hoskote town, in proximity of Hoskote bus stand making
it convenient for the small business owners and household customers to access the bank.
3.19 Bank Branches
 Sir M.V.Extension Branch, Hoskote

 Market Road Branch, Hoskote
 Sheegehalli Branch, at Sriram Arcade, Opp: Nitesh Flushing Meadows, B’lore-560067
 Chintamani Branch, Chintamani
3.20 Competitors
The town of Hoskote has many banks to its credit, starting from Nationalized public banks to private
banks. Few are listed below,
 State Bank of India

 Canara Bank
 UCO Bank
 Vijaya Bank
 KarurVysya Bank
 HDFC Bank
 Bank of Baroda
 Corporation Bank
 Karnataka Bank

3.21 Background Study
Introduction to Financial Inclusion
Financial Inclusion is very important as it enables inclusive and sustainable growth of all people
irrespective of their economic state or status in community. It helps in reducing the economic gap
between rural and urban India. It paves way for vulnerable people to be included into the organized
financial system of the country and free them from the hassles of the unorganized financial system
like money lenders. The objective of Financial Inclusion is to extend financial services to the large
hitherto un-served population of the country and empower them to unlock their growth potential.
Financial Inclusion in India
According to World Bank data, only 35% of Indians have an account with a formal financial
institution. This is 42% in the case of men and 27% for women. Only 8% have debit cards and 2%
credit cards. According to the government’s 2011 Census, 58.7% households utilize formal

3.22 Introduction to Loans
In financial world, a loan is the act of lending money from one individual, organization or entity,
financial institutions, Governments to another individual, organization or entity, financial
institutions, Governments. This includes a promise to repay the money along with interest and other
service charges after a period. It can be authorized with a promissory note which outlines, the
principal amount of money borrowed, the interest rate the lender is charging, and date of repayment.
Loans make way to grow the overall money supply in an economy by opening competition and
expanding business operations. Without loans, most of the business would not have started and the
economy would have slumped. Businesses also need loan for expanding, venturing into new fields
etc. The interest, service fees and penalties from loans are a primary source of revenue for many
financial institutions such as banks.

Banks offer different kinds of borrowing facilities to their customers.The credit facilities offered
may be classified based on securities, maturity, and method of re-payment, origin, and purpose. The
bank advances can be classified as follows:
 Secured or Unsecured Loans

 Cash Credit
 Overdrafts
 Demand Loans
 Term Loans
Loans- In case of loans, banker advances a lump sum for a certain period on agreed rate of interest.
The entire amount is paid either cash or by credit in his account, which he can draw at any time.
The interest is charged for the full amount sanctioned whether he withdraws the money from his
account or not. The loan can be secured or unsecured.
In a secured loan, an asset of some kind is pledged for the same amount or higher amount than the
loan sanctioned so even if the loan is not repaid the bank can secure its money by selling the asset.
This is the most common form of loan.
In unsecured loan,there is no collateral and the bank loans the amount based on the credit worthiness
of the customer. As credit rating agencies came into picture, these forms of personal loans have
become popular. Usually the amount sanctioned as unsecured loans in very less compared to secured
loans.
Cash Credit System - A Cash credit is an arrangement by which the customer can borrow money
at up to a limit agreed upon during the opening of the account by the bank. This is a permanent
arrangement and the customer need not draw the sanctioned amount once, but draw the amount as

required and he pays the interest for the amount withdrawn by him only.Most of the small business
owners use this system as they sometimes cannot predict the loan needed exactly but predict it to a
range.
Overdraft - Overdraft is an arrangement between a banker & his customer by which the latter can
withdraw over and above his credit balance in the current account up to prior agreed limit. This is
only a temporary accommodation usually granted against securities.
Term Loans -Term loans are loans disbursed for a period ranging from 1 month in case of credit
cards to an extended period of years. Based on the time duration the loan can be short term (in
months), midterm (1 – 5 years) to long term (5 years and more). The borrower has to pay an interest
amount during each moth till the principal is paid in full.
3.23 Introduction to Deposits
Deposits are the backbone and important source of funds for the banks. The money collected as
deposits is used by banks to fund the different loans there by earning interest which is used to repay
the depositors along with an interest fee. There is no use in money kept at home as they have no
security and are idle rather than earning a deposit. So, the public must ensure that they deposit with
banks and the banks must attract customers. Without depositors, there is no banks and no economic
growth. Deposits are mainly of two types,
Time Deposit – Here the deposits are held by the bank for a fixed period of time and are returned to
the depositors on the maturity date along with the interest. Most of the time deposits earn more
interest than demand deposits. There is a special type of fixed deposit called recurring deposit where
the interest earned in the first year is added to the principal and used for calculating the interest for
second year and so on. Recurring deposits are more profitable. Most of the banks don’t charge any
service amount for time deposits.

CHAPTER -4
DATA ANALYSIS AND INTERPRETATION
4.1 DATA ANALYSIS
Analysis of data is a process of inspecting, cleaning, transforming, and modelling data with the goal of
discovering useful information, suggesting conclusions, and supporting decision making .Data analysis has
multiple and approaches, encompassing diverse techniques under a variety of names, in different business,
science, and social science, domains.
Data analysis and interpretation is the process of assigning meaning to the collected information and
determining the conclusions, significance and implication of findings. The steps involved in data analysis are
a function of type of information collected however, returning to the purpose of the assessments and the
assessment questions will provide a structure for the organization of the data and a focus for the analysis.
4.2 DATA INTERPRETATION:
Analysis and interpretation is the process of identifying strength and weakness this process include both
the analysis and interpretation of a firm by properly established relationship between two items. The
procedure involved in the integration of data analysis and interpretation.
Classification of data.
Tabulation of data.
Analysis and Interpretation of data.

4.3 TABLE SHOWING PAY BACK PERIOD
The payback period measures the length of time it takes a bank to recover in cash its initial investment. This
concept can also be explained as the length of time it takes the project to generate cash equial the investment
pay of the bank.
Year 2015 2016 2017 2018 2019

Total sales 1606310970 1952574983 2062496269 2177381956 2371633523
Less:costs 1555885007 1815614157 1961324252 128327364 85615818
EBDT 50425963 136960826 101172018 128327364 85615818
Less: - 967090 - 10393113 12541810
Depreciation
or other
exceptional
items
EBT 50425963 135993136 101172018 117934251 73074008
Less: Tax 17100966 100752605 (22354952) 38433857 26851541
PAT(Annual 33324997 35241131 123526969 79500394 46222467
cash flow)
Initial investment
Pay back period = Cashflow per period

Pay Back Period Analysis
Year Initial Investment Annual cash flow Payback period
2015 72368453 33324997 2.17

2016 175080399 35241131 4.97
2017 180236203 123526969 1.46
2018 46246000 79500394 0.58
2019 46246000 46222467 1.00
INTERPRETATION
The shorter the payback period, the sooner the Bank recovers its cash investment. Whether a
cash payback period is good or poor depends on the bank criteria for evaluating projects. From the
above it is inferred that the company have its highest pay back on 2016 with 4.97 or 5 years.
The current year(2019)PBP is found to be 1 year. This shows that the bank recovers its investment
in 1 year.

4.3: GRAPH OF PAYBACK PERIOD
Payback period
6
4.97
5
3
Payback period
2.17
2
1.46
1
1 0.58
0
1 2 3 4 5

4.4 TABLE SHOWING AVERAGE RATE OF RETURN(ARR)
ARR method uses accounting information as reveals by financial statements, to measure the
profitability of investment proposals. It is also known as the return on investment. some times it is
called as Average rate of Return(ARR)
PAT
Average Rate of Return(ARR)=............................................................X100
Original Investment
YEAR Average rate

PAT INITIAL of return
INVESTMENT
2015 33324997 72368453 0.46
2016 35241131 175080399 0.20
2017 123526969 180236203 0.68
2018 79500394 46246000 1.72
2019 46222467 46246000 1.00
INTERFENCE:-
The chart shows that, in the year 2016 the Bank had lower expected rate of return than the
minimum rate so that the investment on the particular project can be reduced. In the year2018 the
project has higher rate of return than the minimum rate. Higher rate of return indicates that
investment made in the particular year has higher cash inflow in the future. The Average rate of
return for the year 2019 is reduced 1 year.

4.4. GRAPH OF AVERAGE RATE RETURN (ARR)
1.72
1.8
1.6
1.4
1.2 1
1
Series1
0.8 0.68
0.6 0.46
0.4 0.2
0.2
0
1 2 3 4 5

4.5 TABLE SHOWING NET PRESENT VALUE(NPV)

Considering the time value of money is important when evaluating projects with different
costs,different cash flows, different service lives. Discounted cash flow techniques, such as the
net present value method, consider the timing and amount of cash flows.
Formula
Present value= Cash flows*present value of Re. 1@10% discount using table
Net present value=Present value of cash inflows-present value of initial investment.
Decision Rule:
Accept: NPV>ZERO
Reject: NPV:<ZERO
Year PAT Discounting PV of Net cash flow PV Of initial

present value investment
table(pv@10%)
2015 33324997 0.909 30292422.27 65782923.78
2016 35241131 0.826 29109174.21 144616409.6
2017 123526969 0.751 92768753.72 135357388.5
2018 79500394 0683 54298769.1 31586018
2019 46222467 0.621 28704152.01 28718766
TOTAL 235173271.3 406061505.8
Calculation:-
Present value of all cash flows 23,51,73,271.3
Less: Present value of initial investment 40,60,61,505.8
Net present value (17,08,88,234.5)

INTERPRETATION
Above table clearly indicates that the Net present value for five years from2015to2019
is(17,08,88,234.5)
4.5 PROFITABILITY INDEX
Profitability index, also known as profit investment ratio and value investment ratio, is the ratio of
payoff to investment of a proposed project. it is a useful tool for ranking projects because it allows
you quantify the amount of value crated per unit of investment.
PV of future cash flows
Profitability index= initial investmen
 If PI> 1 Then accept the project

 If PI<1 Then reject the project

PAT Discounting Present value Present value

Year (Rs. In Crore) present value of Net Cash of initial
Table(present Flows investment
value of
Re.1@10%)
2015 33324997 0.909 30292422.27 65782923.78
2016 35241131 0.826 29109174.21 144616409.6
2017 123526969 0.751 92768753.72 135357388.5
2018 79500394 0.683 54298769.1 31586018
2019 46222467 0.621 28704152.01 28718766
TOTAL= 235173271.3 406061505.8
PROFITABILITY INDEX=PV OF CASH FLOWS ÷INITIAL INVESTMENT
PI= 235173271.3÷406061505.8
PI=0.579
DECISION RULE:
Accept:PI>1
Reject:PI<1
INTERFENCE:
PI is lesser than 1 so Reject the proposal
It indicates that for every one rupee investment there will be 0.579

4.6 TABLE SHOWING INTERNAL RATE OF RETURN
Cash In Discounted Present Discounted Present
Years Flow value of/-At Value of value of/- value of

Values Rs. 27% of Cash In At 30% cost cash in
capital Flows Rs. of capital flows Rs.
In millions
2015 405.56 0.488 197.91 0.455 184.52
2016 393091 0.384 151.26 0.350 137.87
2017 325.02 0.302 98.16 0.269 87.43
2018 321.29 0.249 80.00 0.207 66.50
2019 8243.08 0.198 163.67 0.159 131.02
Net present value of cash
inflows 1190.58 1098.58
1190.58-1135
I.R.R=27%..................................................X(30
1190.58-1135=27%+0.60(3)=27+1.8%=28.8%
INTERPRETATION
Based on acceptance rule internal rate of return method we will accept the Project. The project is
acceptance the IRR is more than the 10% for this project.

C0-RELATION ANALYSIS
Year REVENUE 𝑥2 EBIT(Y) 𝑌2 XY

2019 23.716 562.4487 0.856 0.732736 20.3009
2018 21.965 482.4612 1.283 1.646089 28.1811
2017 20.625 425.3906 1.012 1.024144 20.8725
2016 19.526 381.2647 1.37 1.8769 26.75062
2015 16.063 258.02 0.504 0.504 8.095752
∑= 101.895 2109.585 5.025 5.533885 8.095752
CORRELATION 0.449147

7
XY
6 2109.585
0
5 258.02
2015 EBIT(Y)
4 381.2647
2016
3 425.3906 REVENUE
2017
2 482.4612 Year
2018
1 562.4487
2019
0 500 1000 1500 2000 2500
INFERNCE:-
There is high degree of correlation between revenue and EBIT as the correlation value
0.449147 is more than 0.05. It measures the closeness of relationship between Revenue and EBIT
and they both have a positive correlation

4.8 MEAN
1.CALCULATION MEAN FOR EXPENSES
YEAR EXPENSES(X)
2015 1555885007
2016 1815614877
2017 1961324252
2018 2068196415
2019 2286017710
∑X= 9687038261
9687038261
=………………………………………………………..=1937407652

4.9 CALCULATION OF STANDARD DEVIATION
YEAR EXPENSES(X) (X-1937407652) 𝑋2

2015 1.555885007 -0.381522645 0.145559529
2016 1.815614877 -0.121792775 0.01483348
2017 1.961324252 0.023916600 0.000572004
2018 2.2868196415 0.130788763 0.017105701
2019 2.286017710 0.348610058 0.121528973
∑X= 9.687038261 0.299599686
0.299599686 Varience=0.074899921or74,89,921
=………………………………………………………. SD=0.2736785OR 27,36,785
5-1

4.9 CHART
EXPENSES(X)
2.286819642
1.555885007 1.961324252
100%
9.687038261
90% 1.815614877 2.28601771
80%
70%
60%
50% EXPENSES(X)
40%
30%
20%
10%
0%
2015 2016 2017 2018 2019 ∑X=
INTERFENCE
From above calculation,
The average Expenses for 5 years are found to be 1937407652
The varience for expenses is found to be 0.074899921
The standard deviation is found to be 0.2736785

CHAPTER NO-5
SUMMARY FINDINGS, SUGGESTIONS AND
CONCLUTIONS
5.1 FINDINGS
1. The current year(2019)PBP is found to be 1 year. This shows that the Bank recovers its
investment in 1year.
2. The Average rate of return for the year 2019 is reduced 1 year the Net present value for 5 year
from 2015to2019 is(17,08.88,234.5). A negative NPV indicates that the project will probably
be unprofitable and therefore should be adjusted,if not abandoned altoghter.
3. PI is lesser than 1 so Reject the proposal. It indicates that for every one rupee investment there
will be 0.579 loss
4. The Current year(2019) PAT is decreased to 4.622 when compared to the previous year(2018)
with 7.950
5. The standard deviation for PAT is 3..425679518 and variance for PAT is 11.73528016
6. In The year 2019 investment has decreased to 4.625
7. The standard deviation investment is 6.089 The variance is 37.071
8. Based on acceptance rule internal rate of return method we will accept the project. is 10%.
9. The average Expenses for 5 years are found to be 1,93,74,07,652
10. This is the higher level of capital Investing.

5.2 SUGGESTIONS
1.The shorter payback period, the sooner the Bank recovers its cash investment
2.A Negative NPV indicates that the project will probably be unprofitable and therefore should be
adjusted ,if not abandoned altogether.
3. NPV enables a management to consider the time value of money it will invest. This concept holds
that the value of money it will invest. This concept holds that the value of money increases with
time because it can always earn interest in savings account. Therefore, any other investment of that
money must be weighed against how the funds would perform if simply deposited and saved.
4.The PAT trend is decreasing so the company should take necessary steps to increase the profit of
the company by decreasing the expenses and debtors.
5.higher rate if return will take away interest.

5.3 CONCLUSION
 Capital budgeting or investment appraisal is the planning process used to determine

whether an organization’s long term investments such a new machinery, replacement new
plants new product, research development projects are worth pursuing net income.
 The overall project contains all of the above the bank position in the performance of
evaluation and full capital budget in the Bank. It also contains the full knowledge about the
cash position
 Remember to keep the records have been created.
 It is a long time period project.
 When making the capital bud jetting decision the financial meager effectively analyzed the
long term investment program.

5.4 BIBLIOGRAPHY
Name of the books Authors Name

Financial Management I.M. Pandey (9th Edition)
Management Accounting M.Y. Khan, P.K.

Jain (2ndEdition)
Financial Management Prasanna Chandra
Financial Management
& Evgene. F. Brighan
Investment Analysis
Financial Management Dr. S.N. Maheshwari
Capital Budgeting Annual reports of magazine
5.5 Websites:
www.google.com
www.drreddys.com
www.studyfinance.com
www.wikipedia.org/wiki/capital_budgeting
www.eximfm.com/training/capital budgeting.doc
http://educ.jmu.edu/~drakepp/principles/modules6/cbrisk.pdf

5.6 ANNEXURE
Profit & Loss Account for the Year Ending 31 march 2019
Expenditure Amount Income Amount

Interest 74,527,108.99 Interest & Discount 150,361,783.69
Commission Exchange Commission exchange &
and 3,348,180.00 Brokerage 2,172,099.79
Brokerage
Salaries 17,045,547.00 Subsidies & Donations
Rent and Tax (Bank Rent) 1,335,244.00 Rent 249,424.00
Electricity & other Trading Profit (Bank)
Establishment
Travelling allowance 21,445.00 Trading Profit (Others)
Postage & Communication 164,907.00 Other Income 468,577.00
Printing & Stationary 487,096.00
Legal Expenses
Insurance 1,194,227.00
Other Expenses 11,917,035.71
Depreciation & Other
Maintenance 3,558,913.00
Director & other Expenses 120,900.00
Taxes & Provisions 14,474,491.00
Loss on Sale & Investment
Profit 25,056,789.78
Total 153,251,884.48 Total 153,251,884.48
Balance Sheet as on 31-03-2019

PARTICULARS Balance as on Balance as on 18-

31-03-2019 07-2019
LIABILITIES
Authorized Share Capital 66,978,975.00 70,048,475.00
Reserve Fund 210,936,131.42 210,481,681.42
Deposits 12,96,933,397.11 13,81,009,534.79
Borrowing
Other Liability 109,109,030.75 171,150,990.84
Profit Account 25,056,789.78 36,601,893.08
Total Liabilities 17,09,014,324.06 18,69,292,575.13
ASSETS
Cash In Hand 15,949,732.00 14939674.00
Bank Balances 68,708,760.24 68,851,221.58

Investment 418,528,697.97 477,939,248.97
Loans and Advances 10,85,464,284.00 11,37,180,457.00
Fixed Assets 25,238,410.00 27,073,967.00

Other Assets 95,124,439.85 143,308,006.58
Loss 00 00
Total Assets 17,09,014,324.06 18,69,292,575.13000

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A STUDY ON CAPITAL BUDGETING

1.1 Introduction to capital budgeting

The investment decision of a firm is generally know as Capital Budgeting or Capital

A logical prerequisite to the analysis of investment opportunities is the creation of

Capital budgeting techniques based on accounting earnings and accounting rules

GLOBAL COLLEGE OF MANAGEMENT STUDIES,HOSKOTE Page 2

1.2 CAPITAL BUDGETING

Capital expenditure management or capital budgeting is concerned with planning

Capital budgeting is a crucial financial decision of a firm. It relates to the selection

Capital budgeting decisions are related to allocation of investible funds to different

Organization is frequently faced with capital budgeting decision. Any decisions

GLOBAL COLLEGE OF MANAGEMENT STUDIES,HOSKOTE Page 3

Given the importance of capital budgeting, the decision regarding investment,

 The investment or long-term asset- mix decision.

In other words of Lynch, “Capital budgeting is concerned with planning and

GLOBAL COLLEGE OF MANAGEMENT STUDIES,HOSKOTE Page 4

Capital budgeting is the process of making investment decision and capital

 They generally involve huge funds.

 They are irreversible decisions.

GLOBAL COLLEGE OF MANAGEMENT STUDIES,HOSKOTE Page 5

1.6 GUIDELINES FOR BUDGET DEVELOPMENT

Establish cost guidelines and benchmarks to assist analysts in budget development.

Clarify our understanding of funding constraints and conditions to make it easier to

 Improve the allotment and monitoring processes to reduce time spent on

GLOBAL COLLEGE OF MANAGEMENT STUDIES,HOSKOTE Page 6

GLOBAL COLLEGE OF MANAGEMENT STUDIES,HOSKOTE Page 7

 Capital budgeting decisions involve long-term commitments. However, there is a lot of

Capital budgeting decisions process is a multi-faceted and analytical process. A number of

GLOBAL COLLEGE OF MANAGEMENT STUDIES,HOSKOTE Page 8

1.10 INVESTMENT DECISION:

1.11 SOURCES OF FINANCE:

 Equity Share Capital

1.12 DIVIDEND DECISION:

GLOBAL COLLEGE OF MANAGEMENT STUDIES,HOSKOTE Page 9

1.13 CAPITAL BUDGETING PROCESS

Steps for capital budgeting process as follows:

Identification involved in capital budgeting .

Screening the proposal

Evaluation of various proposals

Fixing the priorities

Final approval and planning the capital

GLOBAL COLLEGE OF MANAGEMENT STUDIES,HOSKOTE Page 10

1.14 Types of Capital Budgeting Decisions

 Mutually Exclusive Project Decision:

GLOBAL COLLEGE OF MANAGEMENT STUDIES,HOSKOTE Page 11

 Capital Rationing Decision:

1.15 SELECTION OF PROJECTS

 Urgently essential to satisfactory operations.

GLOBAL COLLEGE OF MANAGEMENT STUDIES,HOSKOTE Page 12

1.16 PRINCIPALS OF CAPITAL INVESTMENT:

 New products or expansion of existing products

GLOBAL COLLEGE OF MANAGEMENT STUDIES,HOSKOTE Page 13

1.17 COMPONENTS OF INVESTMENT ANALYSIS

 Amount of net capital investment.

1.18 OPERATING CASH FLOWS:

GLOBAL COLLEGE OF MANAGEMENT STUDIES,HOSKOTE Page 14

1.19 ABSOLUTE AND RELATIVE CASH FLOWS:

1.20 CASH FLOWS AND UNCERTAINT

GLOBAL COLLEGE OF MANAGEMENT STUDIES,HOSKOTE Page 15

1.21 IDENTIFYING RELEVANT CASH FLOWS:

CASH FLOW VS ACCOUNTING PROFIT:

GLOBAL COLLEGE OF MANAGEMENT STUDIES,HOSKOTE Page 16

1.22 TECHNIQUES OF CAPITAL BUDGETING