Chapter No 1: Introduction

1.1 Selection and Introduction of the topic

Capital budgeting is one of the most important decisions that face the financial manager. Prior
studies spanning the past four decades show financial managers prefer methods such as internal rate
of return or non-discounted payback models over net present value; the model academics consider
superior. Capital budgeting refers to the process we use to make decisions concerning investments in
the long-term assets of the firm. The general idea is that the capital, or long-term funds, raised by the
firms are used to invest in assets that will enable the firm to generate revenues several years into the
future. Often the funds raised to invest in such assets are not unrestricted, or infinitely available; thus
the firm must budget how these funds are invested. The term Capital Budgeting refers to the
longterm planning for proposed capital outlays or expenditure for the purpose of maximizing return
on investments.

The capital expenditure may be:

1) Cost of mechanization, automation and replacement.

2) Cost of acquisition of fixed assets. e.g., land, building and machinery etc. Investment on
research and development.
3) Investment on research and development.
4) Cost of development and expansion of existing and new projects.

According to “I.M. PANDEY” has defined “capital budgeting- is the decision making process by
which a firm evaluates the purchase of major fixed assets including building, machinery and
equipment” According to “Hampton-John”."Capital budgeting is concerned with the firm's formal
process for the acquisition and investment of capital." Capital budgeting uses the concept of present
value to select the projects.

Capital budgeting uses tools such as Pay Back Period, Average Rate of Return Method, Net Present
Value, Internal Rate of Return and Profitability Index to select projects.

Capital budgeting is the process of making investment decision in capital expenditure. A Capital
expenditure may be defined as an expenditure, the benefits of which are expected to be received over
a period of time exceeding one year. The main characteristic of a Capital expenditure is that the
expenditure is incurred at the one point of time whereas benefits of the expenditure are related at
different point of time in future.

Capital budgeting decisions are crucial to a firm's success for several reasons. First, capital
expenditures typically require large outlays of funds. Second, firms must ascertain the best way to
raise and repay these funds. Third, most capital budgeting decisions require a long-term
commitment. Finally, the timing of capital budgeting decisions is important. When large amounts of
funds are raised, firms must pay close attention to the financial markets because the cost of capital is
directly related to the current interest rate.

Capital budgeting decisions regarding long term assets are the part of on-going process of it. Also a
manager must have an idea about what projects to invest which can generate the income or wealth
to the firm's owner and these are judged on the future events, which are not that easy to conclude. It
is hard to assessment the future cash flow of investment.

Capital budgeting helps the organization in planning and controlling the firm's capital expenditure. It
is one of the techniques which decide whether to choose the resources for a particular long term
investment proposals whose return will be realized over a period of time.

Capital budgeting is generally used to know the investment decision regarding the firm. As the firm
thinks about this technique it should define its corporate strategies. It is the technique through which
number of projects can be evaluated known as capital budgeting. It is the process for acquisition and
investment of capital.

Capital budgeting can be planned by analyzing different projects and in different areas like research
& development, engineering, financial institutions and management information system for
investment opportunities. It also involves investment of its current funds for addition, disposition,
modification and replacement of fixed assets. In this process the allocation of Resources for major
capital, expenditure and one of the goals of capital budgeting investment is to maximize the wealth
of the firm's owner.

Ultratech Cement was incorporated in 2000 as Larsen & Toubro. Later it was demerged and
acquired by Grasim and was renamed as Ultra Tech Cement in 2004. Today Ultatech cement a
part of Aditya Birla group, is the country’s largest exporter of cement clinker. UltraTech Cement
Limited has an annual capacity of 52 million tonnes. It manufactures and markets Ordinary
Portland Cement, Portland Blast Furnace Slag Cement and Portland Pozzalana Cement. It also
manufactures ready mix concrete (RMC). All the plants have received ISO 9001 certification.

The company has 11 integrated plants, one white cement plant, one clinkerisation plant in UAE, 15
grinding units 11 in India, 2 in UAE, one in Bahrain and Bangladesh each and five terminals, four
in India and one in Sri Lanka.

The export markets span countries around the Indian Ocean, Africa, Europe and the Middle East.
 Narmada Cement Company Limited was amalgamated with UltraTech in May 2006, while
Samruddhi Cement Limited was amalgamated with UltraTech Cement Limited in July 2010.

UltraTech Cement Middle East Investments Limited, a wholly owned subsidiary of the Company
acquired management control of ETA Star Cement together with its operations in the UAE,
Bahrain and Bangladesh in September, 2010

UltraTech's other subsidiaries are Dakshin Cements, Harish Cements, UltraTech Ceylinco (P) and
UltraTech Cement Middle East Investments.

Products

It manufactures ordinary portland cement commonly used in dry–lean mixes, general–purpose

ready–mixes, and even high strength pre–cast and pre–stressed concrete.

It produces Portland blast furnace that has features like lighter colour, better concrete workability,
easier finishability, higher compressive and flexural strength, improved resistance to aggressive
chemicals and more consistent plastic and hardened consistency.It also manufactures portland
pozzolana cement.

Ultratech cement exports over 2.5 million tonnes per annum which accounts for 30% of country’s
total exports. It exports to countries like Africa, Europe and the Middle East.

1.2 Historical Background of the Problem. Global View (3 Countries Should be

reviewed) and Indian View/Perspective.

Capital budgeting pertaining to fixed /long term assets which by definition refer to assets which are
in operation and yield a return over a period of time, usually exceeding one year. They, therefore
involve a series of outlays of cash resources in return for anticipated flow of future benefits.
Term capital budgeting contains two words, capital, the relatively scarce, non- human resource of
production enterprise, and budgeting thus indicating a detailed. quantified planning which guides
future activities of an enterprise towards the achievement of its profit goals.

Capital' relates to total funds employed in an enterprise as a whole. The capital fund is increased by
an inward flow of cash and decreased by an outward flow of cash and as such it is important for an
enterprise to plan and arrange cash flows properly. The power of the financial planning package lies
in enabling borrowings to be arranged sufficiently in advance to reduce the danger of a liquidity
crisis also to provide substantiating documents for loan negotiations.

Capital budgeting then consist in planning the deployment of available capital for the purpose of
maximizing the long-term profitability (return on investment) of a firm. It refers to the process by
which a firm determines where it should apply its Comparatively limited financial resources. Capital
budgeting may be defined as the decision-making process by which a firm evaluates the purchase of
major fixed assets, including buildings, machinery and equipment. It deals exclusively with major
investment proposals which are essentially long-term projects and is concerned with the allocation of
the firms' scarce financial resources among the available market opportunities.

It is a many-sided activity which includes a search for a new and more profitable investment
proposal and the making of an economic analysis to determine the profit potential of each investment
proposal. The term 'capital expenditure projects is broad enough to include those projects in which
the net assets of a company are acquired by the issue of the capital stock of the acquiring company.
Capital budgeting involve a long-lived assets affects a forms operation over a period of time (years).

Global View

1. Sweden
The Swedish Government maintains separate current and capital budgets. The system reveals changes
in the Government's net asset position, with allowance for accrued depreciation and writeoffs of
nonremunerative investments. A change in the net asset position is equal to the difference between
revenue and expenditure on current account, which is considered the budgetary surplus or deficit
proper Only "revenue-producing" or "profitable" investments are considered as assets; general road
construction expenditure, for example, is classified as a current, rather than capital, transaction.

In the early 1930's the policy of the Government was to budget for an annual balance between
currentaccount receipts and expenditures. Borrowing was permissible only for financing an enterprise
which through its operations would return revenue sufficient to meet interest and amortization charges
on the borrowed funds. In the 1937 budget reform the policy of annually balancing the current budget
was modified to that of balancing the current budget over the business cycle, thus permitting borrowing
to cover a current deficit during depression and budgeting for a current surplus during a boom period.
However, since 1944-45, major attention has shifted to consideration of the impact on the economy of
the financial transactions of the Government as a whole, i.e., on current and capital budgets combined.
The new principle has not so far brought about changes in the budg etary structure although
supplementary statements on general government financial developments have been compiled and
pub- lished in annual reports of the Business Cycle Institute.

2. Netherlands
The "Memorandum on the Condition of the Netherlands State's Finances," published annually in
separate Dutch and English edi- tions, brings together in summary form the various budget documents
of Netherlands Government departments which are presented to Parliament in separate bills. The
summary is often referred to as the state budget. The memorandum also provides reclassifications of
budgetary data for various types of economic analyses such as an adaptation of Government accounts
to the principles of national income accounting and a statement of cash income and outgo .

3. Union of South Africa

The Constitution of the Union of South Africa provides for the establishment of two Government
funds: the consolidated revenue fund and the railways and harbors fund. The revenues of the rail-
ways and harbors fund are derived from the administration of rail- ways (including the South African
Airways) and harbors; all other Union Government revenues are credited to the consolidated revenue
fund. The finance accounts of the funds are maintained on a com- pletely separate basis; financial
statements of budget estimates and transactions are published in separate documents. The budget
esti- mates for the railways and harbors fund are presented to Parliament with a covering speech of
the Minister of Transport while those of the consolidated revenue fund are presented with a covering
speech by the Minister of Finance.

The Government has also instituted the Public Debt Commissioners which receive trust moneys
(e.g., social security funds) for investment and management." The Commissioners administer the
"general sink- ing fund," created in 1926 for the purpose of extinguishing the "non- productive debt
of the Union, including the cost of public works and buildings." The sinking fund receives from the
revenue account of the consolidated revenue fund a fixed annual appropriation plus compound
interest on accumulated appropriations. As originally set, the annual contributions to the sinking
fund were sufficient to refeem the then existing nonproductive debt in 40 years. Future unproduc-
tive debt, it was thought, could be met from the proceeds of certain mining lenses, appropriated
annually to the loan account of the consolidated revenue fund, which were deemed " more than suffi-
cient to cover the outlay on ordinary capital expenditure." This expectation was not realized because
of the increase of unproductive debt due to World War II; however, the eventual liquidation of
unproductive debt continues to be an objective of Governments policy. India
The capital budget of the Government of India was first introduced with the budget for 1946-47.
According to the accompanying speech

of the Finance Minister, this capital budget was intended as a first

step toward the ultimate development of a national investment

budget to be presented each year along with the annual budget

The Finance Department was considering the

⚫ planning of investment, both public and private, with a view is spring the fullest and most
advantagedus utlization of the economic ensures of the

country in the interests of planned capital development

Further, according to the Finance Minister's spooch- Even if it were no other purpose, it will at least
permit of a proper presentation of our transactions of capital nature and focus attention on the
productive and deadweighs indebtedness of the Government, and on the expenditure of lean mobeys
an productive and unproductive schemes.

The so-called capital budget was thereupon added to the "Explans-

tory Memorandum on the Budget for 1946-47" and it has continued

to be published annually as a separate section of the memorandum.

1.3 Brief profile of the study area, definition/s of related aspects, characteristics,
different concepts pertaining to the problem, advantages and disadvantages,
functions, methods and types of the study area etc can be incorporated by the
learner.

What is capital budgeting

Ans: Capital Budgeting refers to the planning process which is used for decision making of the long
term investment that whether the projects are fruitful for the business and will provide the required
returns in the future years or not and it is important because capital expenditure requires a huge amount
of funds so before doing such expenditure in the capital, the companies need to assure themselves that
the spending will bring profits in the business.
Capital Budgeting is a decision-making process where a company plans and determines any long-term
Capex whose returns in terms of cash flows are expected to be received beyond a year. Investment
decisions
may include any of the below:

Expansion
Acquisition
Replacement
New Product
R&D
Major Advertisement Campaign
Welfare investment
The capital budgeting decision making remains in understanding whether the projects and investment
areas are worth the funding of cash through the capitalization structure of the company debt, equity,
retained earnings – or not

How to Take Capital Budgeting Decisions?

There are five major techniques used for capital budgeting decision analysis to select the viable
investment are as below: #1 – Payback Period

Payback period is the number of years it takes to recover the investment’s initial cost – the cash
outflow –. The shorter the payback period, the better it is. Features:

• Provides a crude measure of liquidity

• Provides some information on the risk of the investment
• Simple to calculate #2-Discounted Payback Period

Features:

• It considers the time value of money

• Considers the risk involved in the project cash flows by using the cost of capital #3-

Net Present Value Method

NPV is the sum of the present values of all the expected cash flows in case a project is undertaken.
NPV = CF0 + CF1/(1+k)1+ . . . + CFn/(1+k)n where,

• CF0 = Initial Investment

• CFn = AfterTax Cash Flow
• K = Required rate of return
The required rate of return is usually the Weighted average cost of capital (WACC) – which includes
the rate of both debt and equity as the total capital Features:

• It considers the time value of money

• Considers all the cash flows of the project
• Considers the risk involved in the project cash flows by using the cost of capital
• Indicates whether the investment will increase the projects or the company’s value

#4- Internal Rate of Return (IRR)

IRR is the discount rate when the present value of the expected incremental cash inflows equals the
project’s initial cost.
i.e. when PV(Inflows) = PV(Outflows)

Features:

• It considers the time value of money

• Considers all the cash flows of the project
• Considers the risk involved in the project cash flows by using the cost of capital

• Indicates whether the investment will increase the project’s or the company’s value

#5- Profitability Index

Profitability Index is the Present Value of a Project’s future cash flows divided by the initial cash
outlay.

PI = PV of Future Cash Flow / CF0 Where,

CF0 is the initial investment

This ratio is also known as Profit Investment Ratio (PIR) or Value Investment Ratio (VIR).

Features:

• It considers the time value of money

• Considers all the cash flows of the project
• Considers the risk involved in the project cash flows by using the cost of capital
Indicates whether the investment will increase the project’s or the company’s value
• Useful in ranking and selecting projects when capital is rationed

Examples

Example #1

A company is considering two projects to select anyone. The projected cash flows are as follows.
WACC for the company is 10 %.

Solution:

Using the more common capital budgeting decision tools, let us calculate and see which project
should be selected over the other.

NPV For Project A –

The NPV For Project A = $1.27

NPV For Project B-

NPV For Project B = $1.30

Internal Rate of Return For Project A-

The Internal Rate of Return For Project A = 14.5%

Internal Rate of Return For Project B-

Internal Rate of Return For Project B = 13.1%

The net present value for both the projects is very close, and therefore taking a decision here is very
difficult.

Therefore, we pick the next method to calculate the rate of return from the investments if done in
each of the two projects. It now provides an insight that Project A would yield better returns (14.5%)
than the 2nd project, which is generating good but lesser than Project A.

Hence, Project A gets selected over Project B.

Example #2

In selecting a project based on the Payback period, we need to check for the inflows each year and
which year the inflows cover the outflow.

There are two methods to calculate the payback period based on the cash inflows – which can be
even or different.
Payback Period for Project A-

10 years, the inflow remains the same as $100 mn always

Project A depicts a constant cash flow; hence the payback period, in this case, is calculated as Initial
Investment / Net Cash Inflow. Therefore, for project A to meet the initial investment, it would take
approximately ten years.

Payback Period for Project B-

Adding the inflows, the investment of $1000 mn is covered in 4 years

On the other hand, Project B has uneven cash flows. In this case, if you add up the yearly inflows,
you can easily identify in which year the investment and returns would close. So, the initial
investment requirement for project B is met in the 4 th year.

In comparison, Project A is taking more time to generate any benefits for the entire business, and
therefore project B should be selected over project A.

ADVANTAGES AND DISADVANTAGES OF CAPITAL BUDGETING

ADVANTAGES

1. Evaluates Investment Plan

Capital budgeting is a key tool used by management for the evaluation of investment projects. It assists
in taking decisions regarding long term investments by properly analysing investment opportunities.
Using the capital budgeting techniques-risk, return and investment amount of each project is examined.

2. Identify Risk :

It enables in identifying the risk associated with investment plans. Capital budgeting examines the
project from different aspects to find out all possible losses and risks. It studies how these risks affect
the return and growth of the business which are helpful in making an appropriate decision.

3. Chooses Investment Wisely :

Capital budgeting plays an effective role in selecting a profitable investment project for the business.
It is the one that decides whether a particular project is beneficial to take or not. This technique
considers cash flows of investment proposal during its entire life for finding out its profitability.
Companies are able to choose investment wisely by analysing different factors in a competitive market
using capital budgeting techniques.

4. Avoid Over And Under Investment :

Managers use capital budgeting techniques to determine the appropriate investment amount for the
business. The right amount of investment is a must for every business for earning better returns and
avoiding losses. Capital budgeting analyses the firm capability and objectives for determining the right
investment accordingly.

5. Maximize Shareholder’s Wealth :

Capital budgeting assists in maximizing the overall value of shareholders. It is a tool that enables
companies to deploy their funds in the most effective way possible thereby earning huge profits.
Companies are able to select investments with higher returns and lower costs which eventually raise
the shareholder’s wealth.

6. Control Project Expenditure :

Capital budgeting focuses on minimizing the expenditure of investment projects. While examining the
investment proposals, it ensures that the project has an adequate amount of inflows for meeting out its
expenses and provides an anticipated return. The selection of effective investment projects helps
companies in controlling their expenditure and earning better profits.

DISADVANTAGES

1. Irreversible Decision

The major limitation with capital budgeting is that the decisions taken through this process are
longterm and irreversible in nature. Decisions have an impact on the long term durability of the
company and require the utmost care while taking them. Any wrong capital budgeting decision would
have an adverse effect on profitability and continuity of business.

2. Rely On Assumptions And Estimations

Capital budgeting techniques rely on different assumptions and estimations for analysing investment
projects. Annual cash flow and life of project estimated is not always true and may increase or decrease
than the anticipated values. Decisions taken on the basis of these untrue estimations may lead
businesses to losses. 3. Higher Risk
Capital budgeting decisions are riskier in nature as it involves a large amount of capital expenditure.
These decisions require the utmost care as it affects the success or failure of every business. Any wrong
decisions regarding allotment of funds may lead the business to substantial losses or eventually cause
a complete shutdown.

4. Uncertainty

This process is dependent upon futuristic data which is uncertain for analysing the investment
proposals. Capital budgeting anticipates the future cash inflows and outflows of the project for
determining its profitability. The future is always uncertain and data may prove untrue which leads to
wrong decisions.

5. Ignores Non-Financial Aspects

Capital budgeting technique considers only financial aspects and ignores all non-financial aspects
while analysing the investment plans. Non-financial factors have an efficient role in the success and
profitability of the project. The real profitability of the project cannot be determined by ignoring these
factors.
1.4 Selection and Relevance of the problem with the stream or
course (BMS,BAF,BBI) selected by the student.
Capital Budgeting is the process of making financial decisions regarding investing in long-term
assets for a business.

• As an Accounting & Finance student, capital Budgeting will help me to learn the decision
making with respect to capital assets. These decision making skills will help in generating more
revenue for the business in the near future.

• A favorable capital budgeting decision can help the business to increase its revenue and also
reduce the cost.

• It will Helps in determining whether the capital asset is profitable or not.

• As a result of this it will helps to make investment decision and financing decision

• It helps to determine whether the expected return meets a set benchmark

 Chapter No 2: Literature Review

2.1 Introduction to review of literature

A literature review is a description and analysis of literature relevant to a particular field or topic. It
gives an overview of what has been said , who the key writers are, what are the prevailing theories
and hypothesis , what questions are being asked , and what methods and methodologies are
appropriate and useful. As such, it is not in itself primary research, rather, it reports on findings of
others.
A literature review uses as its data base reports of primary or original scholarship and does not report
new primary scholarship itself. The primary reports used in the literature may be empirical,
theoretical, critical or analytic or, methodological in nature. Second a literature review seeks to
describe , summarize, evaluate, clarify and or integrate the content of primary reports. (H. M.
Cooper, 1988)
A literature review is an evaluative report of information found in the literature related to selected
area of studies. The review describes, summarizes , evaluates, and clarifies this literature, its gives a
theoretical base for the research and helps to determine the nature of research.(Queensland University,
1999)
Literature review also evaluates and shows relationships between different materials, so that key
themes can emerge. Even e descriptive review , however, should not just list and paraphrase, but
should also add comment and bring out themes and trends.

2.2 5 reviews, articles, research paper should be reviewed and mentioned in the
following format: Name, year of publication, title of the study

1. Anuradha Yadav (28th June 2017)

Topic: Capital budgeting techniques of small enterprises in Delhi

Objectives: The main objective of the study was to investigate capital budgeting procedures and
practices of small-scale entrepreneurs in Delhi. The following are the specific objectives of the study:
-

1. To evaluate the status of the capital budgeting procures and practices of small-scale entrepreneurs
in Delhi.

2. To evaluate the extent to which employees can follow financial procedures

3. To find out the challenges that employees face when implementing these processes and practices

4. To identify possible solutions to solve these challenges.

Key findings:
Survey design was selected for the study. Survey design was appropriate for this study because it
enabled the researcher to collect information concerning the current situation of small scale
entrepreneurs as regards Capital Budgeting Procedures and practices. Primary data as well as
secondary data were used. Primary data were obtained using a self-designed questionnaire from the
employees of small-scale entrepreneurs. The questionnaire focused on the capital budgeting process,
evaluating how to it has been followed. The secondary data were got from financial reports of
smallscale entrepreneurs. Out of twenty small scale entrepreneurs’ firms, only fifteen of them
responded. Data was analyzed using computer software and presented in this paper. We designed a
comprehensive survey questionnaire to collect the responses of the business firm. The questionnaire
was designed to probe into the seven main areas detailed in Section I. The responses were then
tabulated for the purpose of analysis and drawing conclusions. A questionnaire was used to obtain
information regarding the capital budgeting practices of the targeted small-scale entrepreneurs. The
survey, complete with reply paid postage, consisted of 12 close ended questions and 6 open ended
questions. The survey sought to include small scale entrepreneurs as well as a small proportion of
medium sized companies.

Conclusion:
According to the findings, the following conclusion emerging from objectives of this study was made:
-The initial stages of capital budgeting process are being followed in small scale firms, but minimal
implementation follows. This is supported by: - proportion of participants who showed that modern
appraisal techniques of capital budgeting are not highly applied, which is seen from the proportion of
participants using each of the techniques. The results indicate that even though the Payback period is
still ever present in the evaluation of capital investments for small companies, it is encouraging to find
that more sophisticated techniques like the NPV and IRR are being utilized to aid them in the capital
budgeting process. It is recommended that small companies continue to focus on utilizing such
sophisticated techniques that maximizes the wealth of owners instead of succumbing to the financial
pressure put on them by financial institutions. Project evaluation is actually an integral part of the
complete manufacturing strategy. Every investment or project should be followed up to determine that
effectiveness of the decisions made in earlier stages of the capital budgeting process. It is further
confirmed that project evaluation is not critical to those surveyed when many them indicated that they
did not perform post audits on capital investment.
 2. Dorota Kuchta (March 1997)

Topic: Fuzzy capital budgeting

Objectives: Fuzzy equivalents of all the classical capital budgeting (investment choice)
methods are generalised or proposed. These equivalents can be used to evaluate and compare
projects in which the cash owes, duration time and required rate of return (cost of capital) are
given imprecisely, in the form of a fuzzy number.

Key Findings: The aim of this paper is to propose a practical tool of incorporating
uncertainty into capital budgeting (investment decisions) in its simplest form – when we want
to be able to decide for a single investment decision whether to reject it or to accept it (or, when
there are alternative projects, which one to choose). There are a variety of methods used in
capital budgeting a survey of which we give in Section 2. However, the classical forms of these
methods do not consider the uncertainty which may be inherent in the information used in
them. This information includes: future cash in- and out owes, the required rate of return of the
investment or cost of capital, the duration of the project. There exist several ways of
incorporating uncertainty in the capital budgeting decision making. Some of them are based
on intuitive Modification of the data used in the classical methods (like the “risk adjustment”,
which consists in increasing the present cost of capital by a constant in later stages of projects
being analysed), some replace the deterministic data with their random equivalents. The
intuitive methods are widely used in practice, but they have the disadvantage of depending too
much on the intuition of the decision maker. The probabilistic approach does propose
formalised approaches, but, as it is pointed out in, there are other problems connected with it.
The probability theory is much less flexible than the fuzzy sets theory: it requires the fulfilment
of several assumptions about probabilistic distributions and operations on them, and these
assumptions are seldom fulfilled for the distributions used in capital budgeting.

Conclusion: In this paper we have proposed or generalised fuzzy equivalents for all the
methods of evaluating and comparing investment projects which are usually presented in the
literature and used in practice (in case where there is no capital rationing). These fuzzy equivalents
allow to evaluate projects whose cash owes and/or duration are not known precisely, but given in the
form of fuzzy numbers. All the computations can be carried out by means of a financial calculator,
spreadsheet, or any other software with standard financial/mathematical functions. For each project
we obtain then a set of closed intervals, constituting its fuzzy evaluation. Each of these intervals may
correspond for example to the estimation of the parameters of the project given by one specific
expert. In an actual comparison between various projects, methods of comparing fuzzy numbers or
intervals would have to be used. These methods are widely discus

3. Richard Pike(Jan 1996)

Topic: A LONGITUDINAL SURVEY ON CAPITAL BUDGETING PRACTICES

Objectives: Capital budgeting surveys have in recent years become commonplace. For
the most part they are state-of-the-art surveys, seeking to portray the current position rather
than to study relationships between investment practices and organisational variables such as
firm size, capital intensity, environmental uncertainty, and performance.' Every survey has
some merit, telling us something of the practices at the date of survey for those responding
firms. The problem arises when attempting to generalise such findings to a wider population
and to identify discernible capital budgeting trends by means of comparison with earlier
empirical studies.

Key Findings:

A recent article in this journal by Sangster (1993) compared the findings from his recent
capital budgeting survey with those of earlier studies (principally. Pike, 1982; McIntyre and
Colthurst, 1985, and Mills and Herbert, 1987). While the results are of interest, Sangster
recognises its limitations and concludes that 'until one of the studies is repeated using similar
survey populations, questions and analysis methods, conclusions cannot be drawn regarding
 changing attitudes and practices of companies out with the size covered in the current study.'^
This paper reports the findings of a longitudinal capital budgeting study based on (on the same
firms at approximately five yearly intervals. Such a study meets Sangster's (1993) call for
survey replications over time using similar populations, questions, and analysis methods. One
further stipulation should be added: nonresponse bias within such surveys should be
minimised by ensuring consistently high response rates.

Conclusion: This paper has sought to present the findings from a longitudinal study
based on surveys conducted at approximately five-year intervals between 1975 and 1992. In
so doing it answers the call by Sangster (1993) fora time series study based on replicated
surveys at regular intervals 'using similar survey populations, questions and analysis' to
enable more valid conclusions to be drawn from observed changes in practice. In addition,
the high response rates for all three postal surveys (in excess of 70 per cent) suggest that
researchers and reviewers need not accept the oft-cited argument that low response rates are
inevitable in postal surveys, thus making the value of such work questionable. This paper has
sought to remind readers of the pervasiveness of the problem of bias in capital budgeting
surveys and to caution against drawing trends based on survey comparison conducted by
different authors obtaining varied response rates.

4. Jeremy C. Stein (March 1996)

Topic: RATIONAL CAPITAL BUDGETING IN AN IRRATIONAL WORLD

Objectives: This paper addresses the following basic capital budgeting
question:
Suppose that cross sectional differences in stock returns can be predicted based on variables
other than beta (e.g., book-to-market), and that this predictability reflects market irrationality
rather than compensation for fundamental risk. In this setting, how should companies
determine hurdle rates? I show how factors such as managerial tune horizons and financial
constraints affect the optimal hurdle rate. Under some circumstances, beta can be useful as a
capital budgeting tool, even if it is of no use in predicting stock returns.

Key findings: consider a simple two-period capital budgeting model that is standard
in most respects. At time 0, the firm in question is initially all equity financed. It already has
physical assets in place that will produce a single net cashflow of F at time 1. From the
perspective of time 0, F is a random variable that is normally distributed. The firm also can
invest $1 more at time 0 in identical assets--i.e., if it chooses to invest, its physical assets
will yield a total of 2F at time I. The decision of whether to invest is the only one facing the
firm at time 0. If it does invest, the investment will be financed with riskless debt that is
fairly priced in the marketplace. There is no possibility of issuing or repurchasing shares.
(As will become clear in Section III, allowing the firm to transact in the equity market at
time 0 may in some circumstances alter the results.) There are also no taxes.
 Conclusion: This defines of beta as a capital budgeting tool rests on three key premises.
First, one must be willing to assume that the cross-sectional patterns in stock returns that have
been documented in recent research--such as the tendency of high book-tomarket stocks to
earn higher returns--reflect pricing errors, rather than compensation for fundamental sources
of risk. Second, the firm in question must have long horizons and be relatively unconstrained
by its current capital structure. And finally, it must be the case that even though there are
pricing errors, a beta estimated from stock returns is a satisfactory proxy for the fundamental
riskiness of the firm's cashflows. This paper was intended as a first cut at the problem of
capital budgeting in an inefficient market, and as such, it leaves many important questions
unanswered. There are at least three broad areas where further research might be useful. First,
there are the pragmatic risk measurement issues raised in Section IV, namely: Just how well
do stock return betas actually reflect the fundamental riskiness of underlying firm cashflows?
Are stock return betas more informative about fundamental risk for some classes of companies
than for others? Does lengthening the horizon over which returns are computed help matters?
Here it would clearly be desirable to update and build on some of the work done in the 1970's.
Second, as discussed in Section V, there is potentially quite a bit more that can be done in
terms of refining and extending the basic conceptual framework. And finally, as seen in
Section VI, the theory developed here gives rise to some new empirical implications, having
to do with cross-sectional differences in the intensity of the relationship between stock prices
and corporate investment.

5. THOMASE. KIDA, KIMBERLY K. MORENO, JAMES F.

SMITH(Feb 2001)

Topic: The Influence of Affect on Managers’ Capital-Budgeting Decisions

Objectives: In this paper, we propose that affective reactions are integral to accounting
decision contexts like capital budgeting, and that researchers must jointly consider affect and
cognition to better understand accounting decision makers’ behaviour. We argue that
interpersonal relationships are characteristic of many capital-budgeting contexts, and that
these relationships can lead to emotional affective reactions. For example, reactions such as
frustration and anger may result if a manager is treated unfairly by another individual involved
in a capital project. Drawing on relevant work in neurobiology and psychology, we then
predict that these affective reactions can influence managers’ capital-budgeting decisions. We
report on four experimental scenarios that demonstrate the impact of affective reactions on
capital-budgeting decisions. Consistent with our predictions, the results indicate that managers
consider both financial data and affective reactions when evaluating the utility of an
investment alternative. Our results suggest that researchers should consider both affect and
cognition to more fully understand decision making in accounting contexts.
Key Findings:
Seventy-seven MBA and undergraduate business students participated in this post-analysis.
The subjects were divided into four groups, with each group responding to one of the four
decision scenarios. After making their investment choice, the subjects were presented with
the eight additional items along with the six emotional questions that were asked of our main
experimental participants (i.e., the managers). The subjects were asked to indicate the extent
to which the factors may have influenced their decision by rating each item on a seven-point
scale with endpoints labelled “strong influence” and “no influence”. Since some of the items
were not evident in all the decision scenarios, the subjects could also respond by choosing
“not evident or not experienced”.
The results from our main experiment indicated that, while the affect subjects were
significantly more frustrated and angrier than the control subjects in all four scenarios, the
frustration ratings were significantly higher than the anger ratings in three of the four
scenarios. That is, frustration appeared to be the dominant affect across these decision
scenarios. Therefore, Table 2 contains descriptive statistics and the results of comparisons
between the frustration ratings and the ratings of the additional variables for each of the four
decision scenarios. The results indicate that the frustration affect was rated as high or higher
than any of the other eight additional variables across all four decision scenarios. As can be
seen in Table 2, frustration was rated significantly higher than any of the other additional
variables in the first and second scenarios. Similarly, frustration was rated significantly higher
 than such variables as cultural expectations, social norms, and ethical reasons in the third
scenario. Given the close association between the affect and trigger events, it is not surprising
that there were no significant differences between the affect and three variables related to the
trigger event in the third scenario (i.e., the target person was a liar and untrustworthy, and the
data were unreliable). Importantly, however, these additional variables were not rated as high
as frustration in the other three scenarios. Similar results were found in scenario 4. These
results indicate that, of the eight additional factors studied, no one other variable had as great
an influence on decision behaviour as affect across all four decision scenarios, providing
additional support for the impact of effect on decision behaviour.

Conclusion: We propose that affective reactions can have an impact on managers’

capital budgeting decisions. Specifically, our experimental results show that managers tended
to reject decision alternatives that elicited negative emotional responses, even though these
alternatives had higher expected values in a financial sense. While this behaviour may appear
to be less than optimal, these findings indicate that managers consider both financial
information and affective reactions when evaluating the utility of a decision alternative. In
fact, managers may believe that it is appropriate to consider affective reactions when
evaluating an alternative’s utility. This behaviour is consistent with the notion that basic
approach/avoidance tendencies to pleasure/pain are essential to the development of
appropriate decision making (Strack and Neumann 1996). Therefore, the managers’ avoidance
of alternatives that elicit negative affective responses potentially fits into a model of decision
making where the utility of affect is an important component of an individual’s overall utility
assessment. In effect, negative affect may be looked on as an emotional cost that managers
attempt to avoid when making financial decisions. Note that whether resulting decisions are
perceived to be better or worse depends on one’s view as to whether such affective costs
should be incorporated into decision processes. Whichever the case may be, the results of this
study indicate that a consideration of the interplay between affect and cognition in judgement
and choice is necessary to understand accounting decision making more fully

2.3 Research gap.

Following are the research gaps in the study done by the researcher:

• The survey does not indicate why managers continue using less advanced capital budgeting
decision techniques.

• The choice of population may bias results to large firms.

• A detailed study of different stages of capital budgeting have been ignored.

Chapter No 3: Research Methodology

A research methodology encompasses the way in which you tend to carry

out your research. This includes how you plan to tackle things like
application bada, statistical analysis, participant observations, and mon

His short, you are explaining how you will take your ides which in turn will
produce valid and reliable results that are in accordance with the aims and
objectives of your research. This is true whether your paper plans to make
use of qualitative methods or quantitative methods
3.1 OBJECTIVE OF STUDY
• This study will help in knowing the concept to measure the performance of the project.

• This study will help to make an estimate of capital expenditure and to see that the total cash
outlay is within the financial resources of the company or not.

• It helps to compare periodically actual expenditure with the budgeted ones so as to avoid any
excess expenditure.

• Helps to ensure whether the capital expenditure is properly utilized or not.

• It also helps to prevent over expansion.

3.2 HYPOTHESIS

MEANING

The word hypothesis is derived from the Greek word ‘hypo’ (under) and
“thenas” (to Place) and suggest that when the hypothesis is placed under the
evidence as a foundation, they tend to support one another. It provides a
proposed explanation which may be Confirmed or refuted by testing.
Hypothesis literally means a supposition or a guess put Forward for account
of certain facts and used as a basis of further investigation by which it May
be provided or disproved. In research methods, a hypothesis is a preposition
which the researcher wants to verify. Hypothesis is certainly useful but not
always necessary. At Times, the researcher is interested in and analysing
the data indicating the main Characteristic.

A hypothesis expecting the one which he may suggest during his study. In
the case of problem-oriented research, it is necessary to formulate a
Hypothesis. In this type of research, hypothesis is concerned with the cases
of a certain Phenomenon or a relationship between two or more variables.
Most of the Ramesses and social issues represent problems. When a
researcher observes known facts and takes up a Problem for analysis, he has
to start from stew here and this point of start is the Hypothesis. As soon as
the problem is identified, one has to proceed to formulate tentative
Solutions. These proposed solutions form the hypothesis. A hypothesis is a
suggested Answer to the problem. It can be changed during the
investigation if the facts discovered during enquiry demand it. Hypothesis
is highly useful although it may not be always Necessary. A hypothesis is a
proposition that a researcher desires to verify. As far as Possible, the
researcher must format hypothesis in problem-oriented research.

3.3 DEFINITIONS

• "Hypothesis is a preposition which can be put to test to determine

validity? -Goode and Hatt
• "A hypothesis is a statement capable of being tested and thereby
verified or Rejected." -Rummel and Balline.
• "The guesses a scientist make as to the possible answers to his
problems are the Hypothesis which either solve the problem or guide
them in further investigation-Werkmeister.

3.4 TYPES OF HYPOTHESES

• DESCRIPTIVE HYPOTHESIS

Descriptive hypothesis are proportions that typically indicate the size, form,
rate, Distribution of some variable or state of existence. The variable may
be an individual, Organisation, institution, situation, event or an object. For
example, the current Unemployment rate in Maharashtra exceeds 22% of
the workforce - is a proposition about the size of unemployed group.
Similarity and example about the form of unemployment Could be
unemployed youth in Maharashtra below the age of 25 do not even have
education Up to class 10th. The researchers can verify this proposition as
hypothesis. At times, the Researcher poses the problem in the form of
question rather than as hypothesis.
• RELATIONAL HYPOTHESIS

Relational Hypothesis indicate statement that define relationship how

variables. The relationship may be positive or negative or canal for example
educated families Favour professional education for their children. In this
proposition relationship is a positive Connotation between the variables.
Similarly, families with higher incomes go for multiple Car ownership.
This is once again a positive relationship between the variables. It is also
Possible to establish case-effect relations for example, rude salesmanship
drives Customers away. This is a negative correlation because of
objectionable behaviour and loss of business

• CASUAL HYPOTHESIS

Casual hypothesis indicate existence of or change in one variable tending to

some kind of Effect on another variable. The first variable is known as
independent variable and the Second dependent variable. Only a causal
relationship is established for example, the Present rush for management
education is towards achieving secured future. Casual Hypothesis are also
known as explanatory hypothesis

• COMMON SENSE HYPOTHESIS

Common sense hypothesis works at the lowest level. They indicate

existence of certain Empirical uniformities and verify common sense
propositions for example, career minded Employees do not prove durable
on the job or women employees are better stress busters. They are not
considered useful hypothesis as the information is already known to others.
This does not reduce the importance of common-sense hypothesis because
what everyone Knows may not be the truth. In the word of Goode and Hatt
“what everybody knows is not Known until it has been tested.”

• COMPLEX HYPOTHESIS

Complex hypothesis creates tools and problems for research in complex

areas of business. They work at higher level of abstraction. These
hypotheses try to test the existence of Logically derived relationships
between empirical uniformities. They are also called ideal Types. Complex
hypothesis is a difficult study for example, distribution of population or
Migration of labourers.
• ANALYTICAL HYPOTHESIS

Se hypothesis is concerned with the relation of analytic variables. Such

hypothesis takes Place at level of abstraction. Analytic variables require the
formulation of relationship Between changes in one property and changes
in another. Abstractions the highest level. Before this there are empirical
uniformities, which indicate simple difference and ideal Types which
indicate specific coincidence of observations for example, high mortality
rate Among children is high in Asian countries as compared to western
countries. This is an Empirical study.

• STATISTICAL HYPOTHESIS

These hypotheses are derived from a sample and relate to statistical

population Ordinarily Representative samples are selected and they are
quantitatively measured for example, Workers hailing from cold climate are
more efficient when compared with workers from Hot climate.

• NULL HYPOTHESIS
When hypothesis are stated negatively, they are called mull hypothesis. The
purpose of this Hypothesis is to avoid personal bias of the researcher in
collection of data. Null hypothesis is used to gather additional support for
the known hypothesis for example; there is no Significant difference
between the preferences shown towards the banking facilities by the
Business class of customers and the salaried class of customers. There are
many occasions When null hypothesis is with the main objective of
rejection. The null Hypothesis is symbolised as H1. Assuming there are two
sets of people X and Y and they Are compared for their efficiency. Further,
if we assume that both sets of persons are same On their efficiency then this
assumption is called null hypothesis.

• WORKING HYPOTHESIS

It is quite likely that a researcher is not specific when he starts his research
assignment. He May start with working hypothesis. As the research
progresses, he may change hypothesis And be more exact and accurate.
Such accurate hypothesis will enable him to conduct the Research activity
more professionally for example, a researcher may proceed with the
Hypothesis that in the light of concesion employment opportunities have
reduced But as be progresses in his research, he finds out India is only
remotely affected by global Recession. Hence, he atters his hypothesis

3.5 SCOPE / SIGNIFICANCE OF THE STUDY

• To make financial analysis of various proposals regarding capital investment so as to choose
the best out of many alternatives proposals.

• Helps to analyze whether the funds should be invested in long term projects such as purchase
of plant and machinery etc .

• To study the impacts of different capital budgeting techniques used by the companies.
 • To analyze different sources of risks.

• Whether the funds should be invested in long term assets of the company or purchase of plant
and machinery.

3.6 4 LIMITATIONS OF THE STUDY

• Limited span of time is a major limitation for this project.

• Period of study is restricted to five years only.

• The present study cannot be used for inter firm comparison.

• The techniques of capital budgeting require estimation of cash inflow and outflow which
was very difficult to find.

• It was also impossible to study day to day transaction in cash management.

• All the data which is taken from the Google was not questionable
3.7 IMPORTANCE OF STUDY

Capital budgeting is important because it creates accountability and

measurability. Any business that seeks to invest its resources in a project
without understanding the risks and returns involved would be held as
irresponsible by its owners or shareholders.

3.8 METHOD OF DATA COLLECTION

• PRIMARY DATA
Meaning : Primary data is the data that is collected for the first time through personal experiences or
evidence, particularly for research. It is also described as raw data or first-hand information. The mode
of assembling the information is costly, as the analysis is done by an agency or an external
organization, and needs human resources and investment. The investigator supervises and controls the
data collection process directly.
Method of primary data collection: annual report the company is being taken , capital analysis can
provide insight into companies' relative financial health and future prospects. It can yield data about
profitability, liquidity, earnings, extended viability, and more. The results of such comparisons can
mean more powerful decision-making when it comes to selecting companies in which to invest.

Sources of primary data collection

1. Annual report of the company

2. Official website of the company

• SECONDARY DATA

Meaning: Secondary data is a second-hand data that is already collected and recorded by some
researchers for their purpose, and not for the current research problem. It is accessible in the form of
data collected from different sources such as government publications, censuses, internal records of
the organization, books, journal articles, websites and reports, etc. This method of gathering data is
affordable, readily available, and saves cost and time. However, the one disadvantage is that the
information assembled is for some other purpose and may not meet the present research purpose or
may not be accurate.

Sources of secondary data: Secondary data may be collected from many sources like

1. including other researchers using the internet.

2. Books

3. Money control website

4. Wikipedia

5. Investopedia
Chapter 4: Data Analysis and Interpretation

38
4.1 Data Analysis
Data analysis is a process of inspecting, cleansing, transforming, and modelling.
Data with the goal of discovering useful information, informing conclusions, and
supporting decision-making. Data analysis has multiple facets and approaches,
encompassing diverse techniques under a variety of names and is used in different
business, science, and social science domains. In today's business world, data
analysis plays a role in making decisions more scientific and helping businesses
achieve effective operation.
The process of evaluating data using analytical and logical reasoning to examine
each component of the data provided. This form of analysis is just one of the many
steps that must be completed when conducting a research experiment. Data from
various sources is gathered, reviewed and then analysed in form some sort of
finding or conclusion. There are a variety of specific data analysis method, some of
which include data mining, text analytics, business intelligence.

4.2 Financial analysis

Years Total sales Total assets Fixed assets Net Profit

2017-2018 5515.43 4437.49 3120.00 1007.1

2018-2019 6385.50 5743.73 4365.38 977.02

2019-2020 7042.82 6213.17 4716.99 1093.24

2020-2021 13205.64 14810.64 10890.33 1404.23

2021-2022 18270.69 16667.95 12166.13 2446.19

39
 Traditional methods of capital budgeting

I) Payback period method

II) Average rate of return method

I) Payback period method;

 Payback period method is a traditional method of
evaluation of capital budgeting decision. The term
payback or pay out or payoff refers to the period in which
the project will generate the necessary cash and recoup
the initial investment or the cash out flows.
 To calculate the pay period, the cumulative cash flows
will be calculated and by using interpolation the exact
period may be calculated.

The Kesoram Cements limited has Rs. 7683.708 lacks of initial

investment and the annual cash flows for the years 2016 to
2020. Then the payback period is calculated as follows
Rs. In Crores

NO. Year Cash inflow Cumulative

Cash Inflow
1 2017-2018 1244.84 1244.84
2 2018-2019 1300.02 2544.86
3 2019-2020 1481.32 4026.18
4 2020-2021 2169.96 6196.14
5 2021-2022 3348.75 9544.89

PBP=Actual (Base) year + Difference in cash Flows/Next year cash flows

PBP= 2+1481.32/6196.14 =2.239 year

40
Payback period (PBP)= 2.239 year.

Accept/Reject Criterion:
PBP can be used as a criterion to accept or reject an investment
proposal. A proposal whose actual payback period is more than
what is pre-determined by the management.

PBP thus, is useful for the management to accept the investment

decision on the Heritage (India) Limited and also to assist the
management to know that the initial investment is recovered in
1.1884 years.

II) Average rate of return method:

It is another traditional method of capital budgeting
evaluation. According to this method the capital
investment proposals are judged based on their relative
profitability. The capital employed and related
incomes are determined according to the commonly
accepted accounting principles and practices over the
certain life of project and the average yield is
calculated. Such a rate is called the accounting rate of
return or the average return or ARR.

It may be calculated according to anyone of the following methods:

i) Annual average net earnings/ Original investment * 100
ii) Annual average net earnings/ average investment * 100
iii) Increase in expected future annual net earnings/ Initial increase in
required investment * 100
The term average annual net earnings are the average of the earnings
after depreciation and tax. Over the whole of the economic life of the
project order and these giving on ARR above the required rate may
be accepted.

41
The amount of average investment can be calculated according to any
of the following methods:
a) Original investment/ 2
b) Original investment+ scrap value/ 2
c) Original investment + scrap value + net additional+ scrap value
working capital/ 2

Cash flows of the Ultratech cements limited are shown in cash

flow statement ARR capital is calculated as follows

Statement showing calculation of ARR

Years Earnings after TAX (EAT)

2017-2018 1244.84
2018-2019 1300.02
2019-2020 1481.32
2020-2021 2169.96
2021-2022 3348.75
Total 9544.89

APR = Average annual EATS/ Average investment * 100

Average annual EATS = Total amount/No. years

=9544.89/5

Average investments =1908.97

ARR = 9544.89/1908.97 * 100 = 50.02%

Average rate of return= 50.02%

Accept-Reject Criterion:
Method allows Ultratech cements Limited to fix a minimum rate of
return. Any project expected to give a return below it will be straight
away rejected. The average rate of return is as good as 50.02% of
Ultratech cements Limited depicts the prospects of management
efficiency.

42
Modern methods of capital budgeting :
I) Net present value method
II) Internal rate of return method
III) Portability Index

I) Net present value method

Net present value method or NPV is one of the
discounted cash flows methods. The method is one of
the best of evaluating the capital investment proposals.
Under this method cash inflows and outflows
associated with each project are first calculated.

Role of Discounting Factors:

The cash inflows and out flows are converted to the
present values using discounting factor which is the
actuary discount factor of Regulated display tool kit
project of Kesoram cements limited is 10%.

The rate of return is considered as cut off rate or

required rate or rate generally determined on the basis
of cost of capital to allow for the risk element involved
in the project.

Steps for calculation of NPV:

1) Calculation of each cash flows after taxes of three
years, which is arrived at by deducting depreciation,
interest and tax from earning before tax and interest
(EBIT). This residue is profit after tax to arrive at
cash flow after tax.

43
2) This cash flow after tax are multiplied with the
values obtained from the Table (the present value
annuity table against the 8% actuary discount Rate i.e.
in the case of project.
3) NPV is derived by deducting the sum of present
values from the initial Investment.
4) Initial investments are the sum of cash flows of
three years shown in Capital expenditure table

Let us assume the discount rate be 10%:

44
 Years CFAT’S PVIF@10% PV’S

2017-2018 1244.84 0.909 1131.55

2018-2019 1300.02 0.826 1073.81

2019-2020 1481.32 0.751 1112.47

2020-2021 2169.96 0.683 1482.08

2021-2022 3348.75 0.620 2076.22

TOTAL 6876.13

LESS: Initial- 2687.87

Investment
NPV 4188.26

45
 Accept-Reject Criterion:
The accept -reject decision of NPV is very simple. If the
NPV is positive then the project should be accepted and
if NPV is negative then the project should be rejected.
i.e., If NPV > 0 (ACCEPT)
and NPV < 0 (REJECT)

Hence in the case of Ultratech cements Limited project

it is visible that the positive NPV shows the
acceptance and importance of the project.

II) Internal rate of return method: (IRR)

The internal rate of return method is also a modem

technique of capital budgeting that takes into account
the time value of money. It is also known as TIME
ADGUSTED RATE OF RETURN", "DISCOUNTED
CASH FLOW", -DISCOUNTED RATE OF
RETURN", "YIELD METHOD" and "TRAIL AND
ERROR YIELD METHOD",

IRR is the rate the sum of discounted cash inflows

equals the sum of discounted cash outflows. It equals
the present value of cash inflow to present value of
cash outflows.

In this method discount rate is not known, but the cash

inflows and cash out flows are known. It is the rate of

46
 return, which equates the present value of cash inflows
to out flows or it, is the rate of return, which renders
NPV TO ZERO.

Steps Involved:
1) Calculation of NPV with given discount rate
2) Calculation of NPV with assumed discount rate
3) Select the higher NPV of both
4) Let R be the higher discount rate
5) Let RI be the difference of discount rates
6) Calculation of difference of P Vs (Always higher
NPV-lower NPV)

IRR = R+ Higher NPV/Difference of PVs. * R

7) Decision making (Accepting Rejecting the proposal)

Statement of showing calculation and NPV under IRR

method
Years Annual Discount Discount
CFAT’s Rate-88% Rate-
89%
PVF PV PVF
2017-2018 1244.84 0.531 661.01 0.529
2018-2019 1300.02 0.2921 379.73 0.2799
2019-2020 1481.02 0.157 223.90 0.1481
2020-2021 2169.96 0.0858 186.18 0.0842
2021-2022 3348.75 0.0461 154.37 0.0414

47
From the above calculations can be observed that
PV of net cash flows at 88% is 1602.19 Cr
PV of net cash flows at 89% is 1548.98 Cr

DECISION:
Since the initial investment RS.2687.87 Cr is lies between 75% and 80% the
company can determine the IRR as 76.51%
Hence IRR = 76.51%

Accept-Reject Criterion:
IRR is the maximum rate of interest, which an organization can
afford to pay capital, invested in, is accepted if IRR exceeds the
cut-off rates and rejected if it is below the cut-off rate

The cut-off rate of ultra tech Limited is 10%, which is less than the
TRR 1e 16.51% hence the acceptance of ultra tech Limited is quiet
a good investment decision taken by management.
III) Profitability Index: (BCR OR PI)
Profitability index method is also known as time
adjusted method of evaluating the investment
proposals. Profitability also called as benefit cost ratio
(BIC) in relationship between present value of cash
inflows and the present value of cash out flows. Thus
Profitability Index = Present value of cash inflows/Present
value of cash outflows
(OR)
Profitability Index= Present value of cash inflows/ Initial
cash outlay

48
 Calculations of BCR:
STEP: Calculations of cash flows after taxes
STEP2 Calculations of Present values of cash inflows @
10%
STEP3 Application of the formula.
Statement for calculating of benefit cost ratio
YEARS CFATs PVIF @10% PVs

2017-2018 1244.84 0.909 1131.55

2018-2019 1300.02 0.826 1073.81

2019-2020 1481.32 0.751 1112.47

2020-2021 2169.96 0.683 1482.08

2021-2022 3348.75 0.620 2076.22

Total 6876.13

Profitability index = Present value of cash inflows/ Initial

investment
=6876.13/2687.87
=2.55 Hence PI = 3

49
Accept-Reject Criterion:
There is a slight difference between present value index method
and profitability index method. Under profitability index method
the present value of cash inflows and cash outflows are taken as
accept-reject decision.
I.e., the accept reject criterion is:
If Profitability Index > 1 (ACCEPT)
Profitability Index < 1 (REJECT)

50
 Chapter 5: Conclusion & Findings

5.1 Findings:
 The capital budgeting decision for Ultratech cements limited is governed by a manual
issued by the planning Commission It contains the following important provisions in
the regard (1) It suggest the use of various project evaluation techniques, such as
return on investment (ROD payback period, discounted cash flow (DCF) Evaluation
and Review Technique (PERT) Critical path method (CPM), and strengths,
weaknesses, opportunities, and Threats (SWOT) Analysis.
 The total assets of Ultratech cements limited recorded consistent fluctuations from
1.24 (2018-2019) to 1.87 (2021-2022). The lowest recorded as 114 (2020-2021) This
decline is an account of lower growth rates sales in those years.
 The fixed assets of Ultratech cements limited showing a fluctuating trend and
increased from 2.57 times (2018-2019) to 3.65 times (2021-2022) These fluctuations
any be due to fixed assets investment.
 The fixed assets show the fluctuating trends form 0.76 (2018-2019) to (2021-2022) as
1 15 and the funds were required then continuously declined.
 The fixed assets ratio of Ultratech cements limited as shown continuously increasing
from 0.58 (2017-2018) to 0.97 (2021-2022) as Their fluctuations observed.

5.2 Suggestions:

51
 As large sum of money is involved which influences the profitability of the firm
making capital budgeting an important task.

 Long term investment once made cannot be reversed without significance loss of
invested capital. The investment becomes sunk and mistakes, rather than being
readily rectified, must often be born until the firm can be withdrawn through
depreciation charges or liquidation. It influences the whole conduct of the business
for the years to come.

 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.

 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.

5.3 Conclusion:
 The budgeting exercise in KESORAM also covers the long term capital budgets,
including annual planning and provides long term plan for application of internal
resources and debt servicing translated in to the corporate plan.

 The scope of capital budgeting also includes expenditure on plant betterment, and
renovation, balancing equipment, capital additions and commissioning expenses on
trial runs generating units.

 To establish a close link between physical progress and monitory outlay and to
provide the basis for plan allocation and budgetary support by the government.

 The manual recommends the computation of NPV at a cost of capital/ discount rate
specified from time to time.

 A single discount rate should not be used for all the capacity budgeting projects.

 The analysis of relevant facts and quantifications of anticipated results and benefits,
risk factors if any, must be clearly brought out.

52
 Inducting at least three non-official directors the mechanism of the Search Committee
should restructure the Boards of these PSUs.

 Feasibility report of the project is prepared on the cost estimates and the cost of
generation.

5.4 Bibliography:

Books:

-Financial Management - Prasanna Chandra

-Management Accounting- R.K.Sharma & Shashi K.Gupta

-Management Accounting- S.N.Maheshwary

-Financial Management- Khan and Jain

-Research Methodology- K.R.Kothari

Web Sites:

 https://www.google.com

 https://www.ultratech.co.in

 https://www.googlefinance.com

 https://www.investopedia.com

 https://www.zenwealth.com

 https://www.cliffnotes.com

 https://www.capitalbudgetingtechniques.com/

53
ABBREVIATION
PI Profitability Index

CB Capital budgeting

CF’s Cash flows

CCF’S Cumulative cash flows

EAT Earnings after tax

EBIT Earning before investment

and tax
CFAT Cash flows after tax

PV’S Present values of cash

flows
PVIF Present values of inflows

PBP Payback period

ARR Average rate of return

NPV Net present value

IRR Internal rate of return

B/C Benefit cost ration

54