A

TRAINING REPORT
ON

CAPITAL BUDGETING
AT
PRISM CEMENT

SUBMITTED TO

ACROPOLIS INSTITUTE INDORE

IN
PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE
AWARD OF DEGREE IN M.B.A. OF

DAVV INDORE (M.P.)

Submitted To: Guided By Submitted By:

MR. RAHUL TIWARI MR. TARUN GUPTA SATYAM KHARE
HRD MANAFER MR. AMIT GUPTA MBA (II SEM)

1
 DECLARATION

I hereby declare that the project work, which is being presented in the report, entitled
CAPITAL BUDGETING IN PRISM CEMENT award of the
degree of “Master of Business Administration” of DAVV INDORE in authentication
record of my own work carried out at PRISM CEMENT SATNA.

I have not submitted the matter embodied in this report for the award of any other
degree or diploma program.

SATYAM KHARE
MBA (II SEM)

2
 ACKNOWLEDGEMENT
I wish to express our gratitude to MR. RAHUL TIWATI (HRD MANAFER )MR.
TARUN GUPTA , MR. AMIT GUPTA who gives us knowledge about our project
which helped us in furthering our understanding of project report regarding any
topics.

I also want to thank All Member of finance Department Of Prism for their great
support for successful completion of this project.
Working on this project has been a great experience. I am thankful to all
concerned people who have played active role in the successful completion of this
project.

SATYAM KHARE

3
 INDEX
CHAPTER TOPICS COVERERD PAGE NO.

CHAPTER 1. INTRODUCTION 5

CHAPTER 2. COMPANY PROFILE 15

CHAPTER3 OBJECTIVES 37

CHAPTER 4. ABOUT THE PROJECT 39

CHAPTER 5. RESEARCH METHODOLOGY 58

CHAPTER65. LIMITATION OF THE PROJECT 83

CHAPTER7. CONCLUSION 84

CHAPTER 8. BIBLIOGRAPHY 85

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5
Capital budgeting is the planning of long-term corporate financial

projects relating to investments funded through and affecting the firm's

capital structure. Management must allocate the firm's limited

resources between competing opportunities (projects), which is one of

the main focuses of capital budgeting. Capital budgeting is also

concerned with the setting of criteria about which projects should

receive investment funding to increase the value of the firm, and

whether to finance that investment with equity or debt capital.

Investments should be made on the basis of value-added to the future

of the corporation. Capital budgeting projects may include a wide

variety of different types of investments, including but not limited to,

expansion policies, or mergers and acquisitions. When no such value

can be added through the capital budgeting process and excess cash

surplus exists and is not needed, then management is expected to

pay out some or all of those surplus earnings in the form of cash

dividends or to repurchase the company's stock through a share

buyback program.

Choosing between capital budgeting projects may be based upon

several inter-related criteria. (1) Corporate management seeks to

6
maximize the value of the firm by investing in projects which yield a

positive net present value when valued using an appropriate discount

rate in consideration of risk. (2) These projects must also be financed

appropriately. (3) If no positive NPV projects exist and excess cash

surplus is not needed to the firm, then financial theory suggests that

management should return some or all of the excess cash to

shareholders (i.e., distribution via dividends).

Capital budgeting involves allocating the firm's capital resources

between competing project and investments. Each potential project's

value should be estimated using a discounted cash flow (DCF)

valuation, to find its net present value (NPV). (First applied to

Corporate Finance by Joel Dean in 1951.) This valuation requires

estimating the size and timing of all the incremental cash flows from

the project. (These future cash highest NPV(GE).) The NPV is greatly

affected by the discount rate, so selecting the proper rate—sometimes

called the hurdle rate—is critical to making the right decision. The

hurdle rate is the Minimum acceptable rate of return on an investment.

This should reflect the riskiness of the investment, typically measured

by the volatility of cash flows, and must take into account the financing

mix. Managers may use models such as the CAPM or the APT to

7
estimate a discount rate appropriate for each particular project, and

use the weighted average cost of capital (WACC) to reflect the

financing mix selected. A common practice in choosing a discount rate

for a project is to apply a WACC that applies to the entire firm, but a

higher discount rate may be more appropriate when a project's risk is

higher than the risk of the firm as a whole.

Ideally, businesses should pursue all projects and opportunities that

enhance shareholder value. However, because the amount of capital

available at any given time for new projects is limited, management

needs to use capital budgeting techniques to determine which projects

will yield the most return over an applicable period of time.

Popular methods of capital budgeting include net present value (NPV),

internal rate of return (IRR), discounted cash flow (DCF) and payback

period.

CAPITAL BUDGETING (or investment appraisal) 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 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.

8
One of the primary goals of capital budgeting investments is to increase the

value of the firm to the shareholders.

Many formal methods are used in capital budgeting, including the techniques

such as

 Accounting rate of return

 Payback period

 Net present value

 Profitability index

 Internal rate of return

 Modified internal rate of return

 Equivalent annuity

 Real options valuation

These methods use the incremental cash flows from each potential

investment, or project. 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."

Simplified and hybrid methods are used as well, such as payback period and

discounted payback period.

9
Internal rate of return

Main article: Internal rate of return

The internal rate of return (IRR) is defined as the discount rate that gives a

net present value (NPV) of zero. It is a commonly used measure of

investment efficiency.

The IRR method will result in the same decision as the NPV method for

(non-mutually exclusive) projects in an unconstrained environment, in the

usual cases where a negative cash flow occurs at the start of the project,

followed by all positive cash flows. In most realistic cases, all independent

projects that have an IRR higher than the hurdle rate should be accepted.

Nevertheless, for mutually exclusive projects, the decision rule of taking the

project with the highest IRR - which is often used - may select a project with

a lower NPV.

In some cases, several zero NPV discount rates may exist, so there is no

unique IRR. The IRR exists and is unique if one or more years of net

investment (negative cash flow) are followed by years of net revenues. But if

the signs of the cash flows change more than once, there may be several

IRRs. The IRR equation generally cannot be solved analytically but only via

iterations.

10
One shortcoming of the IRR method is that it is commonly misunderstood to

convey the actual annual profitability of an investment. However, this is not

the case because intermediate cash flows are almost never reinvested at the

project's IRR; and, therefore, the actual rate of return is almost certainly

going to be lower. Accordingly, a measure called Modified Internal Rate of

Return (MIRR) is often used.

Despite a strong academic preference for NPV, surveys indicate that

executives prefer IRR over NPV although they should be used in concert. In a

budget-constrained environment, efficiency measures should be used to

maximize the overall NPV of the firm. Some managers find it intuitively

more appealing to evaluate investments in terms of percentage rates of return

than dollars of NPV.

Equivalent annuity method

Main article: Equivalent annual cost

The equivalent annuity method expresses the NPV as an annualized cash

flow by dividing it by the present value of the annuity factor. It is often used

when assessing only the costs of specific projects that have the same cash

inflows. In this form it is known as the equivalent annual cost (EAC) method

11
and is the cost per year of owning and operating an asset over its entire

lifespan.

It is often used when comparing investment projects of unequal lifespans. For

example if project A has an expected lifetime of 7 years, and project B has an

expected lifetime of 11 years it would be improper to simply compare the net

present values (NPVs) of the two projects, unless the projects could not be

repeated.

The use of the EAC method implies that the project will be replaced by an

identical project.

Alternatively the chain method can be used with the NPV method under the

assumption that the projects will be replaced with the same cash flows each

time. To compare projects of unequal length, say 3 years and 4 years, the

projects are chained together, i.e. four repetitions of the 3 year project are

compare to three repetitions of the 4 year project. The chain method and the

EAC method give mathematically equivalent answers.

The assumption of the same cash flows for each link in the chain is

essentially an assumption of zero inflation, so a real interest rate rather than a

nominal interest rate is commonly used in the calculations.

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Real options

Real options analysis has become important since the 1970s as option pricing

models have gotten more sophisticated. The discounted cash flow methods

essentially value projects as if they were risky bonds, with the promised cash

flows known. But managers will have many choices of how to increase future

cash inflows, or to decrease future cash outflows. In other words, managers

get to manage the projects - not simply accept or reject them. Real options

analysis try to value the choices - the option value - that the managers will

have in the future and adds these values to the NPV.

Ranked Projects

The real value of capital budgeting is to rank projects. Most organizations

have many projects that could potentially be financially rewarding. Once it

has been determined that a particular project has exceeded its hurdle, then it

should be ranked against peer projects (e.g. - highest Profitability index to

lowest Profitability index). The highest ranking projects should be

implemented until the budgeted capital has been expended.

Funding Sources

Capital budgeting investments and projects must be funded through excess

cash provided through the raising of debt capital, equity capital, or the use of

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retained earnings. Debt capital is borrowed cash, usually in the form of bank

loans, or bonds issued to creditors. Equity capital are investments made by

shareholders, who purchase shares in the company's stock. Retained earnings

are excess cash surplus from the company's present and past earnings.

Need For Capital Budgeting

1. As large sum of money is involved which influences the profitability of

the firm making capital budgeting an important task.

2. Long term investment once made can not be reversed without

significance loss of invested capital. The investment becomes sunk and

mistakes, rather than being readily rectified,must often be borne until

the firm can be withdrawn through depreciation charges or liquidation.

It influences the whole conduct of the business for the years to come.

3. Investment decision are the base on which the profit will be earned and

probably measured through the return on the capital. A proper mix of

capital investment is quite important to ensure adequate rate of return

on investment, calling for the need of capital budgeting.

4. The implication of long term investment decisions are more extensive

than those of short run decisions because of time factor involved,

capital budgeting decisions are subject to the higher degree of risk and

uncertainty than short run decision.

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15
 BOARD OF DIRECTORS

S NO. NAME DESIGNATION

1. Mr. Rajan B Raheja Chairman/chair person

2. Mr. Manoj Chabra Managing/director

3. Mr. Vijay Agrawal Alternate director

4. Mr. Satish B Raheja Director

5. Mr. Akshay Raheja Director

6. Mr. Rajesh G Kapadiya Director

7. Mr. Aziz H Parpiya Director

16
PROFILE: - PRISM CEMENT LTD.
PRISM AT A GLANCE:-

17
Prism cement limited is an ISO 2000 certified professionally managed
company promoted by the Rajan Raheja group. The company operates
one of the largest single kiln cement plants in the country at Satna
(M.P.). The company also has a packing unit at Allahabad(U.P.).
Equipped with machinery and technical support from world leaders,
F.L. Smith & Co. A/S Denmark, Prism has created a niche for itself in
the cement industry.

The company primarily caters to the demand in the northern region,

mainly in states of Utter Pradesh, Bihar, and Madhya Pradesh. The
company’s plan for a five-fold increase in cement capacity from 2
MTPA to 10.0MTPA by 2011 through brownfield and Greenfield
expansion is making steady headway. These expansion will establish
the company’s brand in new markets and a larger customer base.
A team of experienced engineers and a dedicated workforce combined
with a high level of automation and sophisticated control system have
placed the company’s products in the premium segment.

Prism cement has successfully established a high brand preference

among its customers through its excellent quality products and
transparent policies. PRISM has truly taken cement production to
global standards.

18
COMPANY PROFILE:-
With an objective of being an active participant in the dynamics of
future of the nation. March towards total industrialization and energy
conservation, Prism Cement Limited has set up a state-of-art,
energy efficient cement plant near satna, in Madhya Pradesh. Most
advanced machinery and technology imported from M/s FL Smith
Denmark and state-of-art.
Processes lend it a futurist environment.
Company was initially incorporated under the name of KARAN
CEMENT LIMITED in march 1992 under the Indian Companies Act
1956 as a joint venture between RAHEJA GROUP Mumbai, F.L.
Smith & Co.A/s Denmark and industrialization fund for developing
Countries(IFU), Denmark. The name of the company subsequently
changed to PRISM CuEMENT LIMITED. Prism Cement is
manufacturing facility is at village Manakahari, Satna (M.P.),
Registered office is at 305 Laxminivas Apartments, Ameerpet,
Hyderabad, and corporate office is at RAHEJAS Main Avenue V.P.
Road, Mumbai- 400054.

The main raw material for the plant i.e. Limestone is being obtained
from captive limestone mines situated at village Hinauti and Sijahatta.
Prism Cement has obtained clearances from MOEF covering leaser for
mining operation. The company has obtained MPPCB clearances and
site clearances from industries department. Plant is connected to nearby
railhead access of CENTRAL RAILWAY linking of Satna, Rewa
broad gauge line.

And well connected to nearest cities by road.

Prism Cement Limited is ISO: 9000-2001 Company and off-let bagged
few awards such as First Prize for Energy Conservation in Cement
Sector from Government of India Ministry Of Power in 2006 and 2007,
Best 3rd Green plant in India by Centre for Science & Environment
new Delhi in 2004-05. 2nd best energy efficient plant (FLS energy
awards) in M.P. & C.G. by MPCMA, CGCMA in 04-05, best (1 st )
plant in Noise Vibration & Aesthetic Beauty award by IBM Jabalpur,
Environmental Management Award for 2004-2005 from MP
Government National Safety Award 2006 from Ministry of Labour and
Employment Govt. OF India.

19
Company Profile:-

With an objective of being an active participant in the dynamics of future

of the Nations march towards total industrialization and energy
conservation, Prism Cement Ltd. Has set up a state-of-art, energy
efficient Cement Plant near Satna, in Madhya HEPradesh. Most
advanced machinery and technology imported from M/s FL Smith
Denmark and State-of-art.

Processes lend it a futurist environment.

Company was initially incorporated under the name of KARAN

CEMENT LIMITED in March 1992 under the Indian Companies
Act,1956 as a joint venture between RAHEJA GROUP of Mumbai,
F.L. Smith &Co.A/s Denmark and industrialization Fund for

20
 Developing Countries(IFU), Denmark, the name of the Company
subsequently changed to Prism Cement Limited. Prism Cement’s
Manufacturing facility is at village Manakahari, Satna (M.P.),
Registered office is at 305 laxminivas Apartment, Ameerpet,
Hyderabad, and corporate office is at Rahejas main venue, V.P. Road,
Santacruz(W) Mumbai-400054.
The main raw material for the plant i.e. Limestone is being obtained from
captive limestone mines situated at village Hinauti and Sijahatta. Prism
cement has obtained clearances from MOEF covering leases for
mining operation. The company has obtained MPPCB clcarances and
site clearances from industries department. Plant in connect to nearby
railhead access of Central Railway linking of Satna, Rewa broad guage
line.

And well connected to nearest cities by Road.

Prism Cement Limited is ISO: 9000-2001 company and off-let bagged

few awards such as Best 3 rd Green plant in India. By Centre For
Science & Environment New Delhi in 2004-05, 2nd Best energy
efficient plant (FLS Energy Awards) in M.P. & C.G. by MPCMA,
CGPMA IN 04-05, Best (1st ) plant in “Safety Education by Director
General of Mines & Safety, jabalpur and best (1st ) plant in “Noise,
Vibration & Aesthetic Beauty award by IBM” Jabalpur.

2.0 Energy Consumption:

Prism Cement Limited firmly believes in attaining, retaining and

reforming its Energy Conservation initiative time to time. Originally
installed efficient equipments
And system, gives glare to our energy conservation drive.

Year-by-year increasing production demand is associated with decreasing

the specific energy consumption. Our thermal energy consumption
(million Kcal /year) during last 3 years is as below

21
PLACE

22
PRISM CEMENT LIMITED OFFICES:

WORKS:-
Village: - Mankahari, Tehsil- Rampur Baghelan,
Dist- Satna (M.P.)
Phone: - (07672) 275301,275302
Fax: - 275303

CENTRAL MARKETING OFFICE:-

16/1/6A, Tagore town Jawaharlal Nehru Road Allahabad-
211002(U.P.)
Phone :- (0532) 2465228, 2465332, 2465360.
Fax :- 2465291

CORPORATE OFFICE:-
“Rahejas” plot no.8E, main Avenue,
Vallabbhai Patel Road
Santacruz(W) Mumbai- 400054.
Phone:- (022) 56754142

REGIONAL OFFICES:-

SATNA: - Rajdeep, Rewa road,

Satna - 485001(M.P.)
Phone :- (07672) 504401/2/3, Fax:- 227514

JABALPUR:- 4 HIG, Residency Road, South Civil Lines,

Jabalpur - 482001
Phone :- (0761) 2620026, Fax :- 2678

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BHOPAL :- 148, Zone- 2, Maharana Pratap Nagar
Bhopal - 462011(M.P.)

LUCKNOW:- 3/113, Vivek Khand, Gomti Nagar,

Lucknow – 226010 (U.P.)
Phone :- (0522) 2396847, Fax:- 2397589

KANPUR: - 567, safipur, Ramadevi, G.T. Road,

Kanpur – 226112(U.P.)
Phone :- (0512) 2404123, Fax:- 2401500

VARANASI :- 204, R.H. Towers, the mall,

Varanasi - 221002(U.P.)
Phone :- (0542) 2503566, Fax:- 2340566

PATNA :- 302C, Abhishek plaza, Exhibition Road,

Patna :- 800001(Bihar)Phone :- (0612) 2238744, Fax:-
2224017

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CEMENT: - A cement can be defined as an inorganic
chemical
powder which possess very adhesive or bonding & cohesive
properties
which makes it possible to bond with other materials in presence
of
water.

Raw material used for manufacturing of cement:- a main

constituents of cement are Calcium, Silicon, Aluminum & Iron
oxide.
Two types of raw materials are used while manufacturing of
cement
(1) Calcareous: here percentage of calcium (lime) is more e.g.
limestone, chalk, shale,& marl available in the sea.
(2) Argillaceous: here percentage of Silica, Alumina, and Iron is
more e.g. certain type of Clay, China Clay etc.

CEMENT TYPES:-
2) PRISM CHAMPION CEMENT:-
Prism champion cement is a finely ground blend of high quality
clinker and carefully selected high quality pozzolonic material
(fly ash) with high fineness and optimum range of chemical
composition.
Careful selection of pozzolona is one of the crucial factor for the
superiority prism champion cement.
The other crucial factors are:-
► Optimum dosage of pozzolona to ensure high level of 28 days
strength.
► Balancing the fineness and the reactivity of pozzolona to
ensure proper hydration character, thus ensuring sustained

25
 strength gain over long period without sacrificing on the early
age strength.
► Low heat of hydration helps in prevention of cracks ensuring
durability of structure.
► Also ensure durability of structure even in adverse
environmental condition.

PRISM CHAMPION CEMENT ………………..Superior

blend of strength and durability.
A synchronized two stage hydration involving clinker and
pozzolonic material results in a denser gel formation ensuring
lower permeability and higher strength as well as low chemical
reactivity, thus ensuring high durability.

PRISM CHAMPION CEMENT, an optimum blend

of……………..
► Strength
►Workability.
►Resistance to chemical attack
►Sustained strength gain
►Durability

APPLICATIONS:-
►Suitable for all types of construction like building, road,
bridges, culverts and cement base products.
►Mass concrete work like Dam, Machine foundation work.
►Concrete work in environment involving chemicals in soil and
water.
►Sewage effluent treatment plant.
►All kinds of marine works, like jetty etc.
►Suitable for all construction in aggressive environment
ensuring higher durability.

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2) ORDINARY PORTLAND CEMENT:-
43 GRADES

FEATURES:-
Achieve more than the specified strength as per the relevant IS
code through proper adjustment in the chemical composition.
High quality lime stone deposit result in:
Higher strength of cement.
Moderate Sulphate resisting properties
Lower level of chloride concentration.

Efficient quality control and high level of control in process

parameters result in reduced free lime, low insoluble residue
and loss on ignition.

APPLICATION:-
Optimally higher strength of cement makes it suitable for :
All general and semi specialized construction works like plain
and reinforced cement concrete works, brick and stone
masonry, plastering and flooring.
Manufacturing of concrete pipes, blocks, titles, and poles.
Suitable for applications like pre-cast, pre stressed and slip from
construction works.
Also suitable for all types of specialized concrete repair works
like gunniting etc.

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53 GRADES:-
FEATURES:-
Higher strength than 43 grade is achieved through further
improvement in the raw meal chemical composition and also
grinding finer than 43 grade cement.
High quality lime stone deposit result in
High strength of cement.
Moderate sulphate resisting properties.
Lower level of chloride concentration.
Efficient quality control and high level of control in process
parameters results in lower free lime, low insoluble residue and
loss on ignition.
Optimally higher fineness results in early strength improvement.
Closed circuit cement grinding system using high efficiency
separator controls the partial size distribution resulting proper
character.
Application:-
High strength of cement makes it suitable for:
Making high grade concrete with proper mix design.

early from work removal due to high , early strength

development results in quicker construction.
Optimally higher fineness gives better cohesiveness, improved
workability resulting denser concrete and superior surface
finish.
Economical usage of cement due to high strength through proper
concrete mix design.
All types of plan and R.C.C semi and specialized construction
work, like bridges, culverts, slip form work, pre-stressed
pipe/poles etc

28
Also suitable for all types of specialized concrete repair work
gunniting
Etc.

SETTING TIME OF CEMENT, REASON,

AFFECT THE SETTING TIME OF
CONCRETE/MORTAR:-
When water is mixed with cement, the paste formed remains
plastic for short time. During this period it is possible to mould
it as per the requirement. As the reaction between water &
cement continuous, the paste loses its plasticity and we can not
mould it. This early period in the hardening of cement depends
upon type of cement, presence of certain type of salts,
chemicals in sand, percentage of water, ambient temperature
etc, in winter, the setting time is slow.
HEAT OF HIDRATION & IT’S
IMPORTANCE:-
A whenever we mix water with cement, chemical reaction
starts & liberate a considerable quality of heat. This liberation
of heat is called the heat of hydration. In case of mass concrete
works like dams, librated heat cannot dissipate outside and it
may lead to cracks in concrete. To overcome this difficulty, it
is essential to use low heat cement, blended cement & follow
up with continuous curing with water.
WITH GYPSUM IS ADDED WHILE
MANUFACTURING OF CEMENT:-

gypsum alters setting of cement. If we do not add gypsum,

cement will set immediately & we can not use it for making
concrete/mortar. Hence to make it workable, gypsum is added.

29
SOUNDNESS OF CEMENT & STATE IT’S
SIGNIFICANCE:-
It is very important that the cement after setting shall not
undergo any appreciable change in volume. If it exhibits large
expansion, it is called unsound cement. This will cause serious
difficulty for the durability of structure when such cement is
used. The unsoundness of cement is due to the presence of
excess lime, high proportion of magnesia content or calcium
sulphate content. Generally cement produced by reputed
cement companies is sound.
RELATION BETWEEN STRENGTH &
COLOUR OF CEMENT:-
colour of cement depends on raw material used while
manufacturing of cement. It may vary from factory to factory.

CURING OF CONCRETE:-
Curing is the name given to procedures used for promoting the
hydration of cement. Curing enables concrete/cement mortar to
become stronger & more durable. It is generally done for
minimum 7 days or until concrete reaches 70% of its specified
strength. Commencements of curing depend on ambient
temperature. Higher the ambient temperature, start curing
earlier.
DESHUTTRING PERIOD IS SAME OR NOT
FOR THE SUMMER & WINTER SEASON:-
No deshttering period relates to maturity of concrete. It is
depend on amb. Temperature forms shall not struck until the
concrete has reached strength at least twice the stress of which
the concrete may be subjected at the time of removal of from
work.
HI-TECH MINING OF LIMESTONE:-

30
 The raw materials which go into the production of cement,
primarily limestone and clay, are extracted from the quarry by
blasting. They are then crushed and transported to the plant,
where they are stored and homogenized through stacker and
reclaimer.

RAW MATERIAL GRINDING AND

BURNING:-
Very fine grinding provides a fine powder known as raw meal,
which is then preheated and entered in the kiln reaches 18000
degree C to 14500 degree C, before being quenched by air
blasts. The burning process produces very reactive quality of
clinker for the production of all type of cement.
CEMENT GRINDING & PACKING:-
Clinker and gypsum are finely ground together to obtain an
“Ordinary Portland cement”. Secondary constituents are also
added to make blended cement. Finally the finished products
are stored in large silos from where they are dispatched in bulk
or in bags to where they will be used.

CEMENT COMPOSITION:-
 Cement is mainly composed of calcium, silica, alumina, and
iron, during the different stages of cement manufacturing the
calcium from the limestone combines with silica, alumina or
iron. Calcium combines with silica to from tri-calcium and di-
calcium silicate, calcium combines with aluminato from tri-
calcium alumina and it combines with iron-alumina to from
tetra-calcium alumina ferrate. This forms the clinker and
gypsum is add to the clinker to improve its setting properties.
 P.P.C. contains 75% clinker, 20% fly ash, and 5% gypsum.
 O.P.C. contains 95% clinker and 5% gypsum.

GRADE OF CEMENT:-

31
The grade of cement shows the compressive strength of the
cement. It is measured in MP (Mega Pascal) or kg/square cm. it
is of following types:-
33 grade:-it means the compressive strength of the cement is
330 kg/square cm.
43 grade:-it means the compressive strength of the cement is
430 kg/square cm.

53 grade:- it means the compressive strength of the cement is

530 kg/square cm.

MARKET SEGMENTATION:-
Market segmentation is the process of dividing a market into
distinct groups with distinct needs, characteristics, or behavior
who might require separate products or marketing mix. Now a
day’s market are not homogenous. It is not practically possible
for a company to connect with all the customers in large,
broad, or diverse markets. Consumers vary on dimensions like
needs, requirements, choices, preferences etc, and they can
often be grouped according to one or more characteristics.
A company needs to identify which market segments it can serve
effectively; such decisions require a keen understanding of
consumer behavior and careful strategic thinking. The biggest
mistakes by the marketers sometimes is that they pursue the
same market segment as many other companies and overlook
some potentially more lucrative market segments.
The starting point for the discussion of segmentation is mass
marketing. In the process of mass marketing , the sellers
produce only one kind of product for all the buyers, they are
engaged in the process of mass production, mass distribution,
and mass promotion of one product only.

Market segmentation basically consists of the following topics:-

1. Consumer market segmentation.

32
2. Business market segmentation.
3. International market segmentation.
4. Requirements of segmentation.

CONSUMER MARKET SEGMENTATION:-

It includes the segmentation of the consumer markets by the
company. It includes the following steps:-
Geographical segmentation:-
In the process of geographical segmentation the marketing mixes
are customized geographically. In the process the market is
divided on the basis of country, region, neighborhood, city or
metro size, density, climate etc

Demography segmentation:-
This is the most popular segmentation process because we know
that demographics are closely related to needs, wants, and
usage rates of the consumers toward a particular product. In
this the market is divided on the basis of nationality, age,
gender, family size, and life cycle, income, occupation,
education, religion, race, etc, of the customers in the market. It
takes care of each and every aspect of the market and
customers.

PSYCHOLOGICAL SEGMENTATION:-
This type of segmentation is a lifestyle, social class i.e. the
society , and personality based segmentation. In this the
marketer tries to understand the psychology of the customers
and whether it will suit their product or not.

BEHAVIORAL SEGMENTATION:-
This segmentation is typically done first and foremost. In this the
marketer studies the occasions, benefits, user rates, loyalty
status, readiness stage, and attitude of the customer towards

33
 their product. They try to the viability of their product in that
particular market.

EVALUATING MARKET SEGMENTATION:-

After completion of the segmentation of the market the second
step that comes is the evaluation of the segmented market. This
process includes the followings:-
1. SEGMENT SIZE AND GROWTH:-
In this the market segment size and all the possible growth
opportunities of that particular market segment are studied in
order to check its effectiveness in the future and ensure its
success.
2.LEVEL OF COMPETITION:-
in this step the level of competition that the company will face in
the business in that market are studied and the possibilities of
success of the company are evaluated.
3.SUBSITUTE PRODUCTS
In this the different substitutes for the product available in the
market are checked and possibilities of the success of the
company’s product are evaluated. The specialties of the
substitute products are checked and compared with company’s
own product.
4.POWER OF BUYERS:-
in this step the buying power of the customer in the particular
market segment are evaluated which defines the success of the
product.
5.COMPANY OBJECTIVE AND RESOURCES:-
This is one of the most important aspects that a company
evaluates after it completes the market segmentation step. In
this it evaluates the various objectives of the company and all
of its resources. In this the company tries to find out whether it

34
 will be able to meet achieve its objective or not by utilizing its
resources.

MARKET SEGMENTATION BY PRISM CEMENT:-

In the process of market segmentation Prism Cement follows all
the above discussed steps and processes like geographical
segmentation, operating variables, customer approaches,
customers preferences and needs etc. Along with all of this the
company also takes care of the financial view in doing the
market segmentation. It basically uses the below given market
segmentation in addition of the above discussed ones:-

GEOGRAPHICAL SEGMENTATION:-
In this the company targets the states as its potential market.
Then , it divides the states into districts are divided into regions
like east, west, north, and south.

Then they divide the market based on the following:-

 Capacity of their production.
 Sales forecasting.
 Area and region wise monthly allocation.
 Market potential of the company and its products.
 Its market share in the region.
 Demand in the market.
 Its past records and performances.
 Overall performance of the company.

35
FINANCIAL VIEW FOR ADVERTISING
SEGMENTATION:-
Company involves this especially in doing the advertising
segmentation. This refers to the segmentation of the
advertisement of the company in which they decides the place
from where they will advertise their product. This is done
because company needs more and effective advertisement for
improvement in selling.

The company decides the budget for advertisement of cement for

a particular location based on the calculation of overall cost. In
this the company finds the point from where they can advertise
the cement at the cheapest cost and easily, saving lots of time
and money.

The company also includes the PCR (packed cement realisation)

method here. PCR is bench marketing for pricing by the
company where they fix the price of cement.

36
OBJECTIVE

37
• To ensure the selection of the possible profitable capital project

• To ensure the effective control of capital expenditure in order to

achieve by forecasting the long-term financial requirements.

• To make estimation of capital expenditure during the budget period

and to see that the benefits and costs may be measured in terms of

cash flow.

• Determining the required quantum takes place as per authorization

and sanctions.

• To facilitate co-ordination of inter-departmental project funds

among the competing capital projects.

• To ensure maximization of profit by allocating the available

investible.

38
ABOUT THE PROJECT

39
 OVERVIEW OF FINANCE DEPARTMENT

Overview
As I was working in finance department in Prism cement Ltd. So it is important to give
brief overview of what are the function and working of a finance department in
cement industry. Mainly in the manufacturing industry all department are closely
integrated with finance department and its important to discuss its functioning related
to various department.

Functions and Responsibilities

Functions and responsibilities of the finance and accounts wings include the following.
1. Determine the financial resources required to meet the corporation operating and
capital expenditure program.
2. Forecast how much of there of these required would be met by internal
generation of funds by the corporation and will have to be obtained outside the
corporation.
3. Develop the best plan to obtain the external funds needed.
4. Establish and maintain the system of financial control governing the allocation
and use of funds.
5. Analysis of financial result of all the operation reports the fact to management
and make recommendation concerning future operations.
6. Carryout special studies with a view to reduce cost improve efficiency and
profitability.

The above are dealt with in detail here under.

40
Feasibility Study and Project Report

In regards capital expenditure relater to new project or expansion feasibility studies

and details project report are to be prepared by the management and the financial
wing to ensure should examine these reasonable profits. The financial resources for
meeting the expenditure would be available.

Budgeting

Long term operating cornering period of 10 years indicating the likely profit loss
earned during period.

Preparation of long term capital expenditure budget covering a period of about 5-10
years and advice the management in regards to the timing of the incurrence of capital
expenditure.
Capital expenditure budget in regards to the capital expenditure that is expected to
be incurred during the year. The preparation of the arrival-operating budget.

The budget returns that flow out of the comprehensive budgetary system in
operating.

Cash Flow Statement:

Baled on the long term budget the financial wing would prepare a cash flow
statement indicating the inflow and outflow statement indicating the inflow and outflow
of cash during the period similarly it will also prepare a detailed monthly cash flow
statement for the year based on the annual budgets.

41
Working Capital
It will also make an assessment of the total working capital and working capital
requirement for the fiscal year and advice the management regarding the sources of
financing the working capital requirement.

Purchase:
Finance wing will be associated on a matter relating to purchase of equipments,
machinery etc. it would also lay down suitable procedure for purchase to ensure that
adequate control is exercised over such purchase and that there is no un-economic
purchase.

Pricing Policies:
It will also advice the chief executive on pricing policies taken by the organization in
regards to the selling price of power inter department issues charging of material to
job contract.

Service Condition:
It would advice the management on all the service matter having financial implication
such as scale of pay dearness allowance, bonus, gratuity etc.

Accounting Matter
General finance and accounts being is in charge of allows, budgets and internal audit of
the corporation. It shall maintain adequate records of assets n liabilities and
transaction of the corporation see the adequate internal audits there of the correct
and regular made and recommended and enforced duly approved method and
procedure where by the business of the corporation with the maximum safety
efficiency and economy.
It shall examine all proposal disbursement from the corporation’s fund and approve in
the advance payment required take made in accordance with the prescribed
administrative and accounting requirement and procedures.

42
 Stores Account:

Finance and account wings are responsible for the maintenance of adequate system of
stores accounts. It would assists the management in determining the minimum,
maximum and ordering levels of various items and also be responsible for the
introduction and for operation of the ABC method of control with a view to reduce.
The inventory holding is the optimum level.

It will also be responsible to ensure that the verification of stocks of various items of
stores is carried out by ensuring.

1. That physical stack of selected items is verified everyday.

2. That each item of stock is verified at least once a year.
3. That the surprise element in regard to stock verification is maintained.
4. Internal audit: it will be organized on effective internal audit department
and will process the report submitted by the internal audit and place the same before
the chief executive.
5. Annual accounts and audit: it will ensure that the annual accounts are
prepared in time according to provision of law. It will attend to all matters relating to
the statutory audit and the audit by the controller and audit general.
6. Tax matters: it will be responsible for attending to all tax matters relating to
the corporation.

43
Special Studies

It may take up from time to time special studies particularly with reference to
economics in administration and other overhead expenditure and such other areas,
which have a bearing on the profitability of the corporation. It may also take up for
study the administrative, accounting and other procedures prescribed with a view to.

1. Eliminate unnecessary movement of paper and

2. Reduce clerical work.

Reporting

The following reports are taking submitted to the management

1. Resource employed.
2. Summary of the cash flow for the quarter.
3. Forecast of the cash flow for the next quarter.
4. Capital expenditure incurred during the quarter compared with sanctioned amount,
Budget estimate etc.
5. Any other report prescribed by the undertaking relating financial matters.

Head Office Finance & Accounts wing.

1. Establishment
2. Bills & banking
3. Management information systems & financial Concurrence.
4. Assets accounts.
5. Book keeping and compilations.
6. Budget and finance.

44
 OVERVIEW OF CAPITAL BUDGETING

Meaning of Capital Budgeting

Cash budget is an estimate of cash received and disbursements
during a future period of time . it proceeds various other
budgets like material budget and research and development
budget. The cash budget is an analysis of flow of cash in a business
over a future , short or long period of time it is a forecast of cash in a
business over a future , short or long period of time . it is a forecast
of expected cash in take and outlay.
The cash receipt from various sources are anticipated . the estimated
cash collection for sales .debts bill receivables ,interest, dividend and
other incomes and sales of investment and other assets will we taken
in to account .the amount to be spent on purchase of materials ,
payment to creditors and meeting various and other revenue and
capital expenditure needs should be considered . cash forecast will
include all possible sources from which cash will we received and
the cannel in which payment are to be made to be that a
consolidated cash position is determined .
The cash budget should be co-ordinate with other activities of the
business . the functional budget may be adjusted according to the
cash budget . the available funds should be fruitfully used and the
concerns should not suffer for want of funds.
Stages of cash budgets
1. Cash planning

45
2. Control of the cash received
3. Centro of the cash payment
4. Surplus cash investment

METHODS OF ACCELERATING CASH INFLOW

1-PROMPT PAYMENT BY CUSTOMERS-
In order to accelerate case in flow the collection from customer should
be prompt. This will be possible by prompt billing .The customer
should be promptly informed about the amount payable and the time
which it should be paid.
2-QUIC CONVERSION OF PAYMENT IN TO CASH-
Cash inflows can accelerated by improving the cash collecting process
once the customer writes a cheque favour of the concern collection
can be quickened by its early collection.there is a time gap between
the cheque sent by the customer and amount collected against it .This
is due to many factors.1-Mailing time i.e the time taken by post office
for transferring cheque from customer to the firm.2-time taken in
processing .3-collection time
3-DECENTRALIZED COLLETIONS-
a big firm operating overating over wide geographical area can
accelecting collection by using the system of decentalised collections
.
A number of collecting centres are open in different areas instead of
collecting receipt at one place.
4- lock box systems –
lock box systems is another techniques of reducing miling processing
and collecting time . under this systems the firm selects some
collections time. Under this system the firm select some collecting
centre’s at different places. Improve internal control and reduce its
cost the possibility of fraud
Method of showing cash outflow
A company can keep cash by effectively contolling disbursements. The
objectives of controlling cash out flow is to slow down the
payments as far as possible. Following methods can be used to delay
disbursements.
1-paying in lat date
2-payments through drafts

46
 3- adjusting payroll funds
4- centralization of payments
1-Paying on last date- the disbursements can be delayed on making
payments on the last due date only.
2-Payments through drafts-.a company can delay payments by issuing
drafts to the suppliers instead of giving cheques.
3-Adjusting payroll funds. Some economy can be exercised on payroll
funds also . it can be done by reducing the frequency of payments .
4-Centralization of payments. The payment should be centralized and
payments should be made through drafts or cheque . when cheque
are issued from the main office then it will take time for the cheque
to be clreard through post . the benefits of cheque collecting time is
availed

47
 Illustration 1.
A company is expecting to have Rs. 32000 cash in hand and its required you to
prepare cash budgets for three months the following is supplied to you.
MONTH SALESRS. PURCHASES WAGES EXPENCES

FEBRUARY 70000 44000 6000 5000

MARCH 80000 56000 9000 6000

APRIL 96000 60000 9000 7000

MAY 100000 68000 11000 9000

JUNE 120000 62000 14000 9000

Other information
a-Period of credit allowed by suppliers is two months
b-25% of sales is for cash and the period of credit allowed
to customers for credit sales is one month
c-Delay in payment of wages and expenses one month
d-Income tax Rs. 28000 is to be paid in the June 2008

CASH BUDGETS

48
FOR THE MONTH FROM APRIL TO JUNE

RECEIPT

OPENING 32000 57000 82000

BALANCE.

RECEIPT

FROM CASH 24000 25000 30000

SALES25%

CASH 60000 72000 75000

DEBTORS.75

TOTAL A 116000 154000 187000

PAYMENTS

CREDITORS

49
 FOR 44000 56000 60000

PURCHAASE

WAGES 9000 9000 11000

EXP. 6000 7000 9000

INCOME TAX. 28000

TOTAL B 59000 72000 108000

CLOSING BAL. 57000 82000 79000

TECHNIQUES OF CAPITAL BUDGETING

50
Capital budgeting process
1) Identification of potential investment opportunities

It is helpful to:-

 Monitor external environment regularly to scout investment opportunities.

 Formulate a well defined corporate strategies based on a through analysis of

Strengths, Weakness, opportunities and threats.

 Share corporate strategy and perspectives with person who are involved in the
process of capital budgeting.

 Motivate employees to make suggestions.

Assembling of investment proposals

Investment proposals are usually classified into various categories for

facilitating decision making, budgeting and control.

An illustrative in given below

 Replacement investments
 Expansion investments
 New product investments
 Obligatory and welfare investments

2) Decision making

51
 A system of rupee gateways usually characterizes capital investment
decision making. Under this system, executives are vested with the power to okay
investment proposals unto certain limits.

3) Preparation of capital budget & appropriations

 Projects involving smaller outlays and which can be decided by executive’s action.
Projects involving larger outlays are included in the capital budget after necessary
approvals. Before undertaking such projects an appropriation order is usually
required. The purpose of this check is mainly to ensure that the funds position of the
firm is satisfactory at the time of implementation. Further, it provides an opportunity to
review the project at the time of implementation.

4) Implementation

consuming, and risk –fraught task. Delays in implementation, which are common, can
lead to substantial cost-overruns. For expeditious implementation at a reasonable
cost, the following are helpful.

 Adequate formulation of projects

 Use of the principle of responsibility accounting
 Use of network techniques

5) Performance review

 Performance review, or post- completion audit, is a feedback device. It is a

means for comparing actual performance with projected performance. It may be
conducted, most appropriately, when the operations of the project have stabilized. It
is useful in several ways:
 It throws light on how realistic were the assumptions underlying the project;
 It provides a documented log experience that is highly valuable for decision
making ;
 It induces a desired caution among project sponsors.

Project classification

52
 The following categories are found in most classifications.

 Mandatory investments:-This is expenditures required to comply with statutory

requirements. Examples of such investments are pollution control equipment, medical
dispensary, fire fighting equipment, crèche in factory premises, and so on. These are
mainly on finding the most cost-effective way of fulfilling a given statutory need.

 Replacement projects:-Firms routinely invest in equipments meant to replace

obsolete and inefficient equipments, even though they may be in a serviceable
condition. The objective of such investments is to reduce costs (of labor, raw
material, and power), increase yield, and improve quality. Replacement projects can
be evaluated in a fairly straightforward manner, though at times the analysis may be
quite detailed.

 Expansion projects:-These investments are meant to increase capacity and/or

widen the distribution network. Such investments call for an explicit forecast of
growth. Since this can be risky and complex, expansion projects normally warrant
more careful analysis than replacement projects. Decision relating to such projects is
taken by the top management.

 Diversification projects:-These investments are aimed at producing new

products or services or entering into entirely new geographical areas. Often
diversification projects entail substantial risks, involve large outlays, and require
considerable managerial effort and attention. Given their strategic importance, such
projects call for a very thorough evaluation, both quantitative and qualitative. Further,
they require a significant involvement of the board of directors.

 Research and development:-Traditionally, R&D projects absorbed a very small

proportion of capital budget in most Indian companies. Things, however, are
changing. Companies are now allocating more funds to R&D projects, more so in
knowledge-intensive industries. R&D projects are characterized by numerous
uncertainties and typically involve sequential decision-making. Hence the standard
DCF analysis is not applicable to them. Such projects are decided on the basis of
managerial judgment. Firms which rely more on quantitative methods use decision
tree analysis and option analysis to evaluate R&D projects.

Investment criteria

53
54
Mode of Measuring Cost of Capital
In making investment decisions, cost of different types of capital is measured and compared. The
source, which is the cheapest is chosen and capital raised.

Now the problem is how to measure the cost of different sources of capital. In fact, there is no
exact procedure for measuring the cost of capital. It is based largely on forecasts and is subject to
various margins of error. While computing the cost of capital care should be taken about such
factors as the needs of t company, the conditions under which it is raising its capital, corporate
policy constraints and level of expectation. In fact, a company raises funds from different
sources, and therefore, composite cost of capital can be determined after specific cost of each
type of fund has been obtained. It is therefore, necessary to determine the specific cost of ea
source in order to determine the minimum obligation of a company, i.e., composite cost of
raising capital.

In order to determine the composite cost of capital, the specific costs of different sources of
raising funds are calculated in the following manner:-

(1) Cost of Debt. In measuring cos of capital, the cost of debt should be considered first. In
calculating cost of debt, contractual cost as well as imputed cost should be considered.
Generally, the cost of debt (Debentures and long-term debts) is defined in terms of the required
rate of return that the debt-investment must yield to protect the share holders' interest. Hence cost
of debt is the contractual interest rate adjusted further for the tax-liability of the firm. As per
Formula:-

                           Kd = (1 – T) R.

Here:                  Kd = Cost of debt capital

                          T = Marginal tax rate applicable to the company.

                          R = Contractual interest rate.

Suppose, a company issues 9 % debentures. Its marginal tax rate is 50 %. The effective cost of
these debentures will be as follows :-

                              K = (1- 50) X 9

or                          K = .50 X 9 = 4.50 %

As because of the tax deductibility of interest, it is customary to compute the cost of borrowed
funds as an after tax-rate of interest.

When more debt finance is used, the cost of debt is likely to increase above the actual rate of
interest on account of two accounts- (a) The contractual rate of interest will rise; and (b) hidden
cost of borrowing will also be taken into account. In this way, real cost of debt will be higher, if
company relies more and more on debt finance. If it were not so, the management would always
finance by this source of capital.

55
(2) Cost of Preference Shares. Preference shares are the fixed cost bearing securities. The rate
of dividend is fixed well in advance at the time of their issue. So, the cost of capital of preference
shares is equal to the ratio of annual dividend income per shares to the net proceed. The ratio is
called current dividend yield. The formula for calculating the cost of preference share is:-

                                     R
                        Kp =  -----
                                    P

Here:             Kp = Cost of preferred capital

                     R = Rate of preferred dividend.

                     P = Net Proceeds.

For example, suppose a company issues 95 preference shares of Rs. 100 each at a premium of
Rs. 5 per share. The issue expenses per share comes to Rs. 3 . The cost of preference capital shall
be calculated as under :-

                                9                 9

                Kp = ------------- or ------- = 8.82 %
                         100 + 5 – 3    102

The cost of preference share capital is not be adjusted for taxes, because dividend on preference
capital is paid after taxes as it is not tax deductible. Thus, the cost of preference capital is
substantially greater than the cost of debt.

(3) cost of Equity Shares. The calculation of equity capital cost is not an easy job and raises a
host of problems. Its purpose is to enable the management to make decisions in the best interest
of the equity holders. Generally the cost of equity capital indicated the minimum rate which must
be earned on projects before their acceptance an the raising of equity funds to finance those
projects. several models have been proposed. Most not-able among them are the models of Ezra
Solomon, Myren J. Gordon, James E. Walter, and the team of Modigliani and Miller.

Here are four approaches for estimating cost of equity capital.

(A) D/P Ratio or Dividend /Price Ratio. The approach is based on the thinking that what the
investors expect when they put in their savings in the company. It means that the investor arrives
at the market price for a share by capitalizing the expected dividend at a normal rate of return.
Through this approach is simple, but it suffers from two serious weaknesses- (a) It ignores the
earnings on company's retained earnings which increases the rate of dividend in equity shares
and (b) it ignores the fact that price rise of shares may be due to the retained earnings also and
not on account of only high rate of dividend.

(B) Earnings Price (E/P) Ratio Approach. The E/P ratio assumes tat shareholders capitalize a
stream of uncharged earnings by the capitalisation rate of earnings/price ratio in order to evaluate
their holdings. The advocates of this approach, however, differ on the earnings figure and market
price. Some use the current earnings and current market price for determining the capitalisation
rate while others recommend average earnings and average market price over some period in the

56
past. This approach also has three main limitations:- (i) all earnings are not distributed among the
shareholders in the form of dividend, (ii) earnings per share cannot be assumed to be constant as
this approach emphasizes, and (iii) share price does not remain constant because investments in
retained earnings result in increase in market price of share.

(C) Dividend/Price + Growth Rate of Earning (D/P + g) Approach. This approach

emphasizes what the investor actually receives, i.e., dividend + the rate of growth (g) in
dividend. The growth rate in dividend is assumed to be equal to the growth rate in earnings per
share. In other words, if the earnings per share increased at a rate of 5 %, of the dividend per
share and market price per share should also be increased at a rate of 5 %. This approach is
considered to be the best conceptual measure of the cost of new capital that ensures the optimum
capital budgeting decisions. It is claimed that it will give an accurate estimate of return which the
shareholders will actually realize only if the future prise-earnings ratio and the current price-
earnings ratio are the same and the dividend and the earnings grow at the same rate. It may be
noted that removal of these assumptions will affect the validity of the approach. The main
difficulty in this approach is to determine the rate of growth of price appreciation expected by a
shareholders when he is willing to pay a certain price for a current dividend.

(D) Realized Yield Approach. In case where future dividend and the sale price are uncertain, it
is very difficult to estimate the rate of return on investment. In order to remove this difficulty, it
is suggested the cost of capital. Under this approach, the Realized yield is discounted at the
present value factor and then compared with the value of investment. For example, suppose an
investor purchased one share of ABC Ltd. at Rs. 240/- on January 1, 1970 and after holding it for
5 years, sold the share at Rs. 300. During this period of five years, he received a dividend of Rs.
14, Rs. 14, Rs. 14.50 and Rs. 14.50. respectively. His rate of return on discounted case flow, as
computed below comes to nearly 10 %.

57
RESEARCH METHODOLOGY

58
RESEARCH METHODOLOGY

Research methodology is the systematic method of discovering new

facts or verifying old fact, their sequences, interrelationship, casual

explanation & the natural laws that govern them.

METHOD OF COLLECTION:-

Secondary data are those which have already been collected by some

one else & which have been already pass through the statistical process.

I used two types of primary data collection method.

Secondary data, is data collected by someone other than the

user. Common sources of secondary data for social science
include censuses, organizational records and data collected
through qualitative methodologies or qualitative research.

Secondary data analysis saves time that would otherwise be

spent collecting data and, particularly in the case of quantitative
data, provides larger and higher-quality databases that would be
unfeasible for any individual researcher to collect on their own. In
addition, analysts of social and economic change consider
secondary data essential, since it is impossible to conduct a new
survey that can adequately capture past change and/or
developments.

59
A clear benefit of using secondary data is that much of the
background work needed has been already been carried out, for
example: literature reviews, case studies might have been carried
out, published texts and statistic could have been already used
elsewhere, media promotion and personal contacts have also
been utilized.

This wealth of background work means that secondary data

generally have a pre-established degree of validity and reliability
which need not be re-examined by the researcher who is re-using
such data.

Furthermore, secondary data can also be helpful in the research

design of subsequent primary research and can provide a
baseline with which the collected primary data results can be
compared to. Therefore, it is always wise to begin any research
activity with a review of the secondary data.

60
Net present value (NPV)

 Net present value of an investment/project is the difference between present

value of cash inflows and cash outflows.

 Net Present Value = Present value of net cash inflow - total net initial investment.

 The present values of cash flows are obtained at a discount rate equivalent to the
cost of capital.

Accept- Reject Rule

 Accept the project:-

 NPV > Zero

 Reject the project:-

 NPV < Zero

 If,

 NPV= Zero, then

The firm is indifferent whether to accept or reject the project

61
Advantages

 NPV method takes into account the time value of money.

 The whole stream of cash flows is considered.

 The NPV can be seen as the addition to the wealth of shareholders.

 The NPV uses the discounted cash flows.

Limitations

 It involves difficult calculations.

 This method necessitates forecasting cash flows and the discount rate which may be
quite difficult in practice.

 The ranking of projects depends on the discount rate.

62
 Profitability Index (PI)

 Profitability ratio is otherwise referred to as Benefit/Cost ratio. This is an

extension of the Net Present Value Method.

 This is a relative valuation index and hence is comparable across different types
of projects requiring different quantum of initial investments.

 Profitability index (PI) is the ratio of present value of cash inflows to the present
value of cash outflows. The present values of cash flows are obtained at a discount
rate equivalent to the cost of capital.

Accept- Reject Rule

 Accept the project:-

 PI > 1

 Reject the project:-

 PI < 1

 If,

 PI = 1, then

The firm is indifferent whether to accept or reject the project.

63
Advantages

 It is a better project evaluation technique than NPV.

 It also uses the concept of time value of money.

Limitations

 It fails as a guide in resolving capital rationing where projects are indivisible.

 This approach cannot be used indiscriminately.

64
Internal rate of Return (IRR)
 A project's internal rate of return (IRR) is the discount rate that makes the net
present value (NPV) of the project equal to zero.

 Because it only considers the expected cash flows related to the investment, it
does not depend on rates that can be earned on alternative investments.

Accept- Reject Rule

 Accept the project:-

 IRR > Cutoff rate

 Reject the project:-

 PI < Cutoff rate

 If,

 PI = Cutoff rate, then

The firm is indifferent whether to accept or reject the project.

Advantages
 This method makes use of the concept of time value of money.

 All the cash flows in the project are considered.

 IRR can be determined by comparing it with the cost of capital.

 IRR technique helps in achieving the objective of minimization of shareholders wealth

65
Limitation

 The calculation process is tedious if there are more than one cash outflows.

 The IRR approach creates a peculiar situation if we compare two projects with
different inflow/outflow patterns.

 It is assumed that under this method all the future cash inflows of a proposal are
reinvested at a rate equal to the IRR, which is ridiculous to imagine.

Accounting rate of return(ARR)

 The accounting of return of an investment measures the average annual net
income of the project (incremental income) as a percentage of the investment.

 It is based on accounting information rather than cash flows.

Formula for ARR

AVERAGE ANNUAL NET INCOME

ARR = ------------------------------------ ×100

AVERAGE INVESTMENT

AVERAGE INVESTMENT = NET WORKING CAPITAL+

SALVAGE VALUE +

½ (INITIAL COST OF THE PROJECT – SALVAGE VALUE)

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Accept- Reject Rule
 Accept the project:-

 ARR > Desired ARR

 Reject the project:-

 ARR < Desired ARR

 If,

 ARR = Desired ARR, then

The firm is indifferent whether to accept or reject the project.

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Example:-the following details relate to the two machine A &
B.

PARTICULARS MACHINE A MACHINE B

COST Rs 56,125 Rs 56,125

ANNUAL ESTIMATED INCOME

AFTER DEPRECIATION & I.TAX

YEAR 1 3,375 11,375

2 5,375 9,375

3 7,375 7,375

4 9,375 5,375

5 11,375 3,375

36,875 36,875

ESTIMATED LIFE (YEARS) 5 5

ESTIMATED SALVAGE VALUE 3,000 3,000

Solution:-
• AVERAGE INCOME OF MACHINE A & B = (36,875/5)

= Rs 7,375

• AVERAGE INVESTMENT = 3,000 +1/2(56,125 -3,000)

= Rs 29,562.50

                                                                      Average income

Accounting Rate of Return   (ARR) =       ______________
                                                                   Average investment

• ARR FOR (A & B) = ( 7,375 / 29562.50 )

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 = 24.95%

                       Average annual profits over the life of the project

ARR=          ____________________________________________

                                                  Original Investment

Advantages

 ARR Technique uses readily available data that is routinely generated for
financial reports.

 This method used to evaluate performance on the operating results of an

investment and management performance.

 It considers all net incomes over the entire life of the project and provides a
measure of the investment’s profitability

Limitations

 It ignores the time value of money and considers the value of all cash flows to be
equal.

 This method uses net income rather than cash flows.

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Payback Period

 The length of the time required to recover the cost of investment.

 It is calculated as :-

Cost of project

Payback period =

Annual cash flows

 All other things being equal, the better investment is the one with the shorter payback
period.

Accept- Reject Rule

 Accept the project:-

 Actual PB > Predetermined PB

 Reject the project:-

 Actual PB < Predetermined PB

 If,

 Actual PB = Predetermined PB, then

The firm is indifferent whether to accept or reject the project.

Advantages

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 It is easy to compute and to understand.

 The payback period focuses on quick payoffs.

 It minimizes the risk of the projects.

Limitations

 It ignores the time value of money.

 It fails to consider an investment’s total profitability.

 It may cause organization to place too much emphasis on short payback periods.

. Discounted payback period rule

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 This is an investment decision rule in which cash flows are discounted at an
interest rate and then one determines how long it takes for the sum of the discounted
cash flows to equal the initial investment.

 For projects with long payback periods, discounted payback periods are more
accurate at determining the real payback, but for shorter projects, a non-discounted
payback period is normally a good enough indicator.

Accept- Reject Rule

 Accept the project:-

 Actual DPB > Predetermined DPB

 Reject the project:-

 Actual DPB < Predetermined DPB

 If,

 Actual DPB = Predetermined DPB, then

The firm is indifferent whether to accept or reject the project.

Advantages

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 Considers the time value of money.

 Considers the riskiness of the project's cash flows (through the cost of capital)

Limitations

 No concrete decision criteria that indicate whether the investment increases the firm's
value.

 Requires an estimate of the cost of capital in order to calculate the payback.

 Ignores cash flows beyond the discounted payback period.

Example:-

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• Two machines A & B costing each Rs.1, 00,000. Earning after taxation
are expected as follows :-

Cash Flows

Year Machine A Machine B

1. 30,000 10,000

2. 40,000 30,000

3. 50,000 40,000

4. 30,000 60,000

5. 20,000 40,000

Calculate by:-
 Payback period method.
 Discounted Payback method.
 NPV (Net present value )
 PI (profitability index )

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1. Payback Period:-

PBP of Machine A = 30,000 / 50,000

= 0.6 + 2

= 2.6 yrs

PBP of Machine B = 20,000 / 60,000

= 0.33 + 3

= 3.33 yrs

PBP of machine A is shorter than PBP of machine B, so machine A should be selected.

2. Discounted Payback:-

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• Dis. Payback of Project A – In First 3 years inflow will be - 97860

The remaining cash is – 2140

Then Dis. PV = 3 + 2140/20490

= 3 + 0.104 = 3.104 Yr.

• Dis. Payback of Project B – In First 3 years

Inflow will be – 63810

The remaining cash is – 36190

Then Dis. PV = 3 + 36190/40980

= 3 + 0.883 = 3.883 Yr.

3. Net Present Value:-

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Year MACHINE - A INFLOW TIME FACTOR NPV

1. 30,000 0.909 27270

2. 40,000 0.826 33040

3. 50,000 0.751 37550

4. 30,000 0.683 20,490

5. 20,000 0.621 12,420

1, 37,770

NPV = 1, 00,000 – 1, 37,770

= 37,770

Net Present Value:-

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YEAR MACHINE B INFLOW TIME FACTOR NPV

1. 10,000 0.909 9,090

2. 30,000 0.826 24,780
3. 40,000 0.751 30,040
4. 60,000 0.683 40,980
5. 40,000 0.621 24,840

1, 29,730

NPV = 1, 00,000 – 1, 29, 73

= 29,730

4. Profitability Index:-

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 Present value of cash inflow

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

Present value of cash outflow

PI of Machine A = 1, 30,770 / 1, 00,000

= 1.307

PI of Machine B = 1, 29,730 / 1, 00,000

= 1.297

PI of Machine A is greater than PI of Machine B, so Machine A should be

selected.

STAGES OF CAPITAL BUDGETING ANALYSIS

79
 Decision Analysis for Knowledge building.

 Option pricing to establish Position.

 Discounted Cash Flows for making Investment Decisions. (DCF)

Y Decision
100%T Analysis
I
N
80%
I
A
T
R Option
60%
E Pricing
C
N
40%
U
F
O
L
E
20%
V DCF
E
L

0%
5000$ 10000$
INVESTMENT AMOUNT

TIME VALUE OF MONEY

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 The value of a unit of money is different in different time periods. The present
worth of a rupee received after some time will be less than a rupee received today.

 Since a rupee received today has more value, rational investors would prefer
current receipt to future receipt.

 It is also called as time preference for money.

NPV v/s IRR

 The NPV & IRR methods would in certain situation give the same accept-reject
decision.

• Similarities

• Difference

Similarities

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 It gives consistent results in terms of acceptance or rejection of investment proposals
in certain situation.

 It involves two methods which gives concurrent accept-reject decision.

1. Conventional Investment Projects.

2. Independent Projects.

Differences

 In the case of independent conventional investment the NPV & IRR methods will give
concurrent results.

 In this method NPV accepts one proposal & IRR favors another.

Limitations

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There were some limitations due to which some of the factors were not been
resolved perfectly.

1) AVAILABILITY OF DATA
As an outsider getting confidential data is not possible so
the data which has been used here for research has taken either from web
resources or the approximate figures have been used.

2) RELEVANCY OF THE PROJECT

The data has been taken from web resources are of whole
BCL Satna, so the relevancy of the data may not be there.

3) AUTHENTICITY OF DATA
Some data and facts have been, considered final just from
the word of mouth, so the relevancy of the data may not be there.

4) Particular training officer is not provided to us.

Conclusion

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After completing of the project on “Capital Budgeting of Prism Corporation limited”. I
have come to conclusion that the company is in the good position around their plant.
Company’s marketing department play a great role in the success of any business
enterprise. If a company’s Supply Chain Management is smoothly functioning the
company can minimize the cost of production and maximize the profit. There are a lot
of benefits for the company through these two department and some of them are as
under:-

1. Excess of production can be controlled.

2. Cost of production can be minimizing.

3. Raw material required can be brought and right amount and time.

4. Transportation expense can be controlled.

5. Delivery of product in right quality & time saving & satisfy the customer.

6. Profit of the company can be maximized.

7. Goodwill of the company can be improved.

Bibliography

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Reference Sites:-

 Website – www.google.com
 Internal Data Provided by the Company
 www.prismcementlimited.com

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