CHAPTER 1

INTRODUCTION

1.1 INTRODUCTION OF THE STUDY

Every organization irrespective of its size and mission can be viewed as a financial entity
management of an organization. Financial management focuses not only on the improvement of
funds but also on their efficient use with the objective of maximizing the owners’ wealth. The
allocation of funds is therefore an important function of financial management. The allocation of
funds involves the commitment of funds to assets and activities.

There are two types of Investment decision:

1. Management of current assets or Working capital management.

2. Long term investment decision.

Long term investment decisions are widely known as capital budgeting or capital expenditure
budgeting. It means as to whether or not money should be invested in long term project. This part
is devoted to an in-depth and comparative decision of capital budgeting/capital expenditure
management.

A project is an activity sufficiently self- contained to permit financial and commercial analysis. In
most cases projects represent expenditure of capital funds by pre- existing entities which want to
expand or improve their operation.

In general a project is an activity in which, we will spend money in expectation of returns and
which logically seems to lead itself to planning. Financing and implementation as a unit, is a
specific activity with a specific point and a specific ending point intended to accomplish a specific
objective.

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To take up a new project, involves a capital investment decision and it is the top management’s
duty to make a situation and feasibility analysis of that particular project and means of financing
and implementing it financing is a rapidly expanding field, which focuses not on the credit status
of a company, but on cash flows that will be generated by a specific project.

Capital budgeting has its origins in the natural resource and infrastructure sectors. The current
demand for infrastructure and capital investments is being fueled by deregulation in the power,
telecommunications, and transportation sectors, by the globalization of product markets and the
need for manufacturing scale, and by the privatization of government –owned entities in developed
and developing countries.

The capital budgeting decision procedure basically involves the evaluation of the desirability of
an investment proposal. It is obvious that the firm must have a systematic procedure for making
capital budgeting decisions.

The procedure must be consistent with the objective of wealth maximization. In view of the
significance of capital budgeting decisions, the procedure must consist of step by step analysis.

1.2 Importance of investment decisions:-

Capital investments, representing the growing edge of a business, are deemed to be very important
for three inter- related reasons.

1. They influence firm growth in the long term consequences capital investment decisions have
considerable impact on what the firm can do in future.

2. They affect the risk of the firm; it is difficult to reverse capital investment decisions because the
market for used capital investments is ill organized and /or most of the capital equipments bought
by a firm to meet its specific requirements.

3. Capital investment decisions involve substantial out lays.

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“PARADEEP PHOSPHATES LIMITED” is a growing concern, capital budgeting is more or less
a continuous process and it is carried out by different functional areas of management such a
production, marketing, engineering, financial management etc. All the relevant functional
departments play a crucial role in the capital budgeting decision process.

1.3 Objectives of the study:-

1. To describe the organizational profile of “PARADEEP PHOSPHATES Ltd”.
2. To discuss the importance of the management of capital budgeting.
3. Determination of proposal and investments, inflows and out flows.
4. To evaluate the investment proposal by using capital budgeting techniques.
5. To summarize and to suggest for the better investment proposal.

1.4 SCOPE OF THE STUDY:-

This study highlights the review of capital budgeting and capital expenditure management of the
company. Capital expenditure decisions require careful planning and control. Such long term
planning and control of capital expenditure is called Capital Budgeting. The study also helps to
understand how the company estimates the future project cost. The study also helps to understand
the analysis of the alternative proposals and deciding whether or not to commit funds to a particular
investment proposal whose benefits are to be realized over a period of time longer than one year.
The capital budgeting is based on some tools namely Payback period, Average Rate of Return, Net
Present Value, Profitability Index, and Internal Rate of Return.

1.5 METHODOLOGY:-

The information for the study is obtained from two sources namely.

1. Primary Sources
2. Secondary Sources

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Primary Sources:

It is the information collected directly without any references. It is mainly through interactions
with concerned officers & staff, either individually or collectively; some of the information has
been verified or supplemented with personal observation. These sources include.

a. Thorough interactions with the various department Managers of “PARADEEP

PHOSPHATES LTD”.

b. Guidelines given by the Project Guide, Mr. SRIRAM TRIPATHY, Dy. Manager,
Budget Section, F & A.

Secondary Sources:

This data is from the number of books and records of the company, the annual reports published
by the company and other magazines. The secondary data is obtained from the following.
a. Collection of required data from annual records, monthly records, internal
Published book or profile of “PARADEEP PHOSPHATES LTD”.
b. Other books and Journals and magazines
c. Annual Reports of the company

1.6 Limitations:-

Though the project was completed successfully with a few limitations may .
a) Since the procedure and polices of the company will not allow to disclose
confidential financial information, the project has to be completed with the
available data given to us.

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 b) The period of study that is 6 weeks is not enough to conduct detailed study of the
project.

c) The study is carried basing on the information and documents provided by the
organization and based on the interaction with the various employees of the
respective departments.

1.7 REVIEW OF LITERATURE:-

The concept of Capital Budgeting being a very sensitive area of finance has outreached the
attention of many researchers .A number of studies has been conducted on the subject. However
briefing such studies will highlight the importance of the present study. It should safeguard to
avoid the wrong choice of the project and investment to be made. It is necessary for the
management to give proper attention to capital budgeting.

The reason for the popularity of Payback period in the order of significance were stated to be its,
simplicity to use and understand, its emphasis on the early recovery of investment and focus on
risk. It was also found that one third of companies always insisted on the computations of Payback
periods for all projects. For about two-third companies standard Payback period ranged between
three and five years.

The reason for the secondary role of Discounted Cash Flow techniques in India included difficulty
in understanding and using these techniques, due to lack of qualified professional and
unwillingness of top management to use Discounted Cash Flow techniques.

One large manufacturing and marketing organization mentioned that conditions of its business
were such that Discounted Cash Flow techniques were not needed. Yet another company stated
that replacement projects were very frequent in the company and it was not considered necessary
to use Discounted Cash Flow technique for evaluating such projects.

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The present investment appraisal in practice is raising certain questions in the context.

1. How much importance is assigned to economic analysis of capital expenditure in practice?

2. What methods are used for analyzing capital expenditure in practice and what is the reason
for underlying these methods?

The answers of the above questions are based on a survey of twenty firms varying on several
dimensions like industry category, size, financial performance and capital intensity. From these
firms, executives, responsible for capital investment evaluation and capital budget preparation
were interviewed

CHAPTER-2

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 INDUSTRY PROFILE

2.1 Introduction to Fertilizer Industry:

Fertilizer is generally defined as "any material, organic or inorganic, natural or synthetic, which
supplies one or more of the chemical elements required for the plant growth".

Since the essential physiological attribute of seeds is their ability to convert a great duel of nutrients
into grain. The spread of this variety lead for greater consumption of fertilizers simultaneously
with increasing demographic pressure on the agricultural productivity has assumed more
importance. This also contributed to the rising demand for fertilizers.

Agriculture the backbone of Indian Economy still holds its relative importance for more than a
billion peoples. The Government of India from time to time has taken considerable steps for the
upliftment of Agriculture Sector. Here we have analyzed the performance of Fertilizer Industry
being one of the vital parts in agricultural production and Government's policy initiatives for the
same.

Fertilizer in the agricultural process is an important area of concern. Fertilizer industry in India has
succeeded in meeting the demand of all chemical fertilizers in the recent years. The Fertilizer
Industry in India started its first manufacturing unit of Single Super Phosphate (SSP) in Ranipet
near Chennai with a capacity of 6000 MT a year. Then established the first two large-sized
fertilizer plants, one was the Fertilizer & Chemicals Travancore of India Ltd. (FACT) in Cochin,
Kerala, and the another one was Fertilizers Corporation of India (FCI) in Sindri, Bihar. These two
were established as pedestal fertilizer units to have self sufficiency in the production of food grains.
Afterwards, the industry gained impetus in its growth due to green revolution in late sixties,
followed by seventies and eighties when fertilizer industry witnessed an incredible boom in the
fertilizer production.

Fertilizer consumption of plant nutrients per unit of grossed cropped area in India is still very low
average being 91.5 kg/ha. Productivity of food grain crops in the country is also quite low, around

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1.6 t/ha, which can certainly be doubled by enhancing per unit average fertilizer use. Fertilizer
consumption has to increase substantially in order to achieve the food grain requirement of 220
million tons by the year 2002.

2.2 Origin and Development of Fertilizers Industry in INDIA :

The Indian fertilizer industry has succeeded in meeting almost fully the demand of all chemical
fertilizers except for MOP. The industry had a very humble beginning in 1906, when the first
manufacturing unit of Single Super Phosphate (SSP) was set up in Ranipet near Chennai with an
annual capacity of 6000 MT. The Fertilizer & Chemicals Travancore of India Ltd. (FACT) at
Cochin in Kerala and the Fertilizers Corporation of India (FCI) in Sindri in Bihar were the first
large sized -fertilizer plants set up in the forties and fifties with a view to establish an industrial
base to achieve self-sufficiency in food grains. Subsequently, green revolution in the late sixties
gave an impetus to the growth of fertilizer industry in India. The seventies and eighties then
witnessed a significant addition to the fertilizer production capacity.

The Indian fertilizer industry has witnessed a phenomenal growth in the eighties. However, the
growth has tapered off in the nineties and in the recent past only public and cooperative sectors
have made major investments in this industry. Presently public, private and coop. sector share 45,
33 and 22 percent of capacity, respectively, whereas their share in P2O5 capacity is 26, 64 and 10
per cent respectively. New proposals to government for setting-up fresh capacities in country are
mainly from Public and Cooperative sectors.

The installed capacity as on 30.01.2003 has reached a level of 121.10 lakh MT of nitrogen
(inclusive of an installed capacity of 208.42 lakh MT of urea after reassessment of capacity) and
53.60 lakh MT of phosphatic nutrient, making India the 3rd largest fertilizer producer in the world.
The rapid build-up of fertilizer production capacity in the country has been achieved as a result of
a favorable policy environment facilitating large investments in the public, co-operative and
private sectors.

Presently, there are 57 large sized fertilizer plants in the country manufacturing a wide range of
nitrogenous, phosphatic and complex fertilizers. Out of these, 29 unit produce urea, 20 units

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produce DAP and complex fertilizers 13 plants manufacture Ammonium Sulphate (AS), Calcium
Ammonium Nitrate (CAN) and other low analysis nitrogenous fertilizers. Besides, there are about
64 medium and small-scale units in operation producing SSP.

The sector experienced a faster growth rate and presently India is the third largest fertilizer
producer.

2.3 MAJOR SEGMENTS IN FERTILIZERS:

The Indian fertilizer industry is broadly divided into Nitrogenous, Phosphatic and Potassic
segments. In addition to these, nutrients are combined to produce several complex fertilizers. To
express the nutrient constitution of fertilizers, the grade of a fertilizer is expressed as a set of three
numbers in the order of percent of Nitrogen (N), Phosphate (P), Potash (K) and sulphur(S). The
straight nitrogenous fertilizers produced in the country are urea, ammonium Sulphate, calcium
ammonium nitrate (CAN) and ammonium chloride. The only straight phosphatic fertilizer being
produced in Sector Report: Fertilizer Industry India / Economics the country is SSP. The complex
fertilizers include DAP, several grades of Nitro phosphates and NPK complexes. Urea and DAP
are the main fertilizers produced indigenously.

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 (a) Chart showing different types of fertilizers

2.4 DEMAND AND SUPPLY

The Demand-Supply scenario in fertilizers has been worked out by the Working Group on
Fertilizers for the Ninth Plan (1997-98 to 2001-02) on the basis of the estimated demand and
production projections in terms of N and P2O5 nutrients (Table-2). The increase in production
(supply) will be 4.86 million tons, most of it is confined to nitrogen resulting from the
commissioning of the expansions, new plants or joint ventures abroad. Production of N is expected
to increase from 9.7 million tons in 1997-98 to 25.0 million tons in 2007-08. The Group estimated
that the available phosphate supply will increase from 2.8 million tons of P2O5 in 1997-98 and
reach 7 million tons in 2007-08. The demand for N, P2O5, K2O has also been estimated up to
2017-2007 (terminal year of tenth plan) at 16.35, 6.65 and 2.60 million tonnes, respectively.

2.5 Pricing policy:

The fertilizer policy is aimed at increasing consumption to meet the food and fiber requirement of
growing population through setting up required production capacities, ensuring that quality

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fertilizers are made available to the farmers throughout the country at uniform and affordable price.
It was also recognized that fertilizer use should be profitable to the farmers for which he must get
a certain minimum return for the produce. This led to the announcement of procurement prices
and minimum support prices for several crops from 1970 onwards. The Marathe Committee was
assigned the task of resolving the issue of keeping Farm Gate Prices (FGP) of fertilizers at an
affordable level in the face of rising production/import costs. Its recommendations in 1977 led to
the birth of the Retention Price Scheme (RPS). This scheme was intended to ensure that both the
fertilizer producers as well as the farmers should find it worthwhile to produce and use fertilizers.
The policy aimed that each manufacturer is able to get 12% post-tax return on investment on
efficient operation regardless of the location, age, technology and cost of production. In addition,
the government agreed to reimburse the cost of transportation from factory gate to railhead and
also take care of the distribution margin. The RETENTION PRICE SCHEME is now restricted to
urea only.

2.6 Fertilizer subsidy:

The RPS system helped in achieving the objective of increased indigenous availability and
supplying it to farmers on affordable and uniform price. The difference between FARM GATE
PRICES and RPS is paid to the industry as subsidy.

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 (b) Chart showing subsidy on Fertilizers

Production along with escalation in price of raw material and plant cost, the subsidy amount
swelled to huge proportions over the years. In an attempt to reduce the burden of subsidy, the
government has increased urea price by 10 % w.e.f February 2005. As a result, domestic urea
prices have risen from Rs3320/t (US$ 83/t) to Rs3660/t (US$ 91/t) for bagged deliveries to farmers.
The average subsidy pattern of urea is around US$ 84/t. prior to decontrol of phosphatic and
potassic fertilizers (in the year 1992) subsidy was available to all domestic and imported fertilizers.
The fertilizer subsidy increased from US$ 418 million in 1999-00 to US$ 2446 million in 2004-
2005. However, the subsidy bill after the decontrol of phosphatic and potassic fertilizer declined
and remained below 1990-91 level.

The union budget for 2000-01 raised urea prices by 15 percent; DAP by 7 percent and that of MOP
by 15 percent. This move enabled the Government of India (GOI) to prune the subsidy bill to some
extent. However, there was no increase in urea price in the union budget for 2001-02.

In the long term policy, the subsidy withdrawal in a phased manner has been proposed. However,
modality to phase out the subsidy has not been clearly mentioned.

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2.7 Import of DAP

DAP is mainly imported from Jordan, Germany, Canada, Rumania, U.K, Japan, U.S.A, Norway,
Saudi Arabia, Philippines, Mexico, U.S.S.R and others.

DAP
YEAR
Production Imports Consumption

1997-98 28.65 20.77 45.18

1998-99 25.95 14.51 40.52

1999-00 19.51 15.69 34.80

2000-01 28.23 8.65 35.86

2001-02 26.47 15.14 34.51

2002-03 27.59 5.34 36.24

2003-04 36.91 14.60 53.76

2004-05 38.68 21.05 58.28

2005-06 38.63 32.68 69.38

2017-07 48.89 8.60 58.85

2007-08 50.94 9.33 61.81

2008-09 57.76 3.44 72.80**

.
( c) Chart showing import of DAP from 1997-2008

2.8 Public Sector Companies in INDIAN Fertilizer Market

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There are a number of public sector companies in Indian fertilizer market producing complex
fertilizers, ammonium sulphate, DAP, calcium ammonium nitrate and urea. At present, there are
nine public sector undertakings in the Indian fertilizer market and one cooperative society. These
function under the supervision of the Department of Fertilizers of India. Of the 63 large units
producing fertilizers in India, 9 units are dedicated to the production of ammonium sulphate and
38 units produce urea. There are 79 small and medium scale units dedicated to the production of
single super phosphate. The Indian industries producing fertilizers have to total capacity of 56 lakh
MT of phosphatic nutrient and 121 lakh MT of nitrogen. Some of the public sector undertakings
in this sector are mentioned below:

1. Fertilizer Corporation of India Limited (FCIL)

2. Hindustan Fertilizer Corporation Limited (HFC)
3. Pyrites, Phosphates & Chemicals Limited (PPCL)
4. Rashtriya Chemicals and Fertilizers Limited (RCF)
5. National Fertilizers Limited (NFL)
6. Projects &Development India Limited (PDIL)
7. The Fertilizers and Chemicals Travancore Limited (FACT)
8. Madras Fertilizers Limited (MFL)
9. FCI Aravali Gypsum & Minerals India Limited, Jodhpur

Some of the other companies engaged in the production of fertilizers are listed below:
1. Neyveli Lignite Corporation Ltd. (NLC)
2. Hindustan Copper Limited (HCL)
3. Steel Authority of India Limited (SAIL)

Private Companies in Indian Fertilizer Market

A number of private companies in the Indian fertilizer market are engaged in production of the
agro-input. Most of the companies also engage in exporting fertilizers in the global market, earning
foreign capital from the business. The country stands at the third position among the largest

14
producers of the product in the world. India is also ranks among the highest consumers of
fertilizers. The euphoric growth in the business has also facilitated the agricultural industry of
India, which is dependent for its optimization on the fertilizer industry.

Private Companies Producing Fertilizers In INDIA

1. Paradeep Phosphates Ltd
2. Khaitan Chemicals and Fertilizers Limited
3. Mangalore Chemicals
4. Nagarjuna Fertilizers
5. Zuari Chambal
6. BEC Fertilizers
7. Gujarat State Fertilizers &Chemicals Limited
8. DSCL

Some of the other private companies engaged in the production of fertilizers in India are listed
below:
1. The Scientific Fertilizer Co Pvt Ltd
2. Coromandel Fertilizers
3. Deepak Fertilizers and Petrochemicals Corporation Limited
4. Aries AgroVet
5. Devidayal Agro Chemicals

The production of nitrogenous fertilizer in the private sector has been increasing in the past few
years. The private sector had only 13% share in the production in 1960-61. The private sector has
always retained a higher share in the production of phosphatic fertilizer production

Cooperative Companies Producing Fertilizer in India

CHAPTER-4
CAPITAL BUDGETING

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4.1 MEANING

Capital Budgeting is the process of making investment decisions in capital expenditure. A capital
expenditure may be defined as an expenditure the benefit of which are expected to be received
over a period of time exceeding one year.
The main characteristics of a capital expenditure are that the expenditure is incurred at one point
of time whereas benefits of the expenditure are realized at different points of time in future. Capital
expenditure involves non-flexible long term commitment of funds. Thus capital expenditure
decisions are also called Long-Term Investment Decision. Capital budgeting involves the planning
and control of capital expenditure.

DEFINITION:
R.M.LYNCH has defined capital Budgeting as “Capital Budgeting consists of
employment of available capital for the purpose of maximizing the long term profitability of
the firm”.

Capital Budgeting is a many-sided activity. It includes searching for new and more profitable
investment proposals, investigating, engineering and marketing considerations to predict the
consequences of accepting the investment and making economic analysis to determine the profit
potential of each investment proposal.
Its basic features can be summarized as follows;
1. It has the potentiality of making large anticipated profits.
2. It involves a high degree of risk.
3. It involves a relatively long-time period between the initial
outlay and the anticipated return.
Capital Budgeting consists of planning and the development of available capital for the purpose of
maximizing the long-term profitability of the firm.

4.2 NEED AND IMPORTANCE OF CAPITAL BUDGETING

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Capital Budgeting means planning for capital assets. Capital Budgeting decisions are vital to any
organization as they include the decision to;

1. Whether or not funds should be invested in long term projects such as setting of
an industry, purchase of plant and machinery etc.,
2. Analyze the proposal for expansion or creating additional capacity.
3. To decide the replacement of permanent assets such as building and equipments.
4. To make financial analysis of various proposal regarding capital investments so
as to choose the best out of many alternative proposals.

The importance of capital Budgeting can be well understood from the fact that an unsound
investment decision may prove to be fatal to the very existence of the concern. The need,
significance or importance of capital budgeting arises mainly due to the following.

1. Large Investments

Capital budgeting decisions, generally involves large investment of funds. But the funds available
with the firm are always limited and the demand for funds exceeds the resources. Hence it is very
important for a firm to plan and control its capital expenditure.

2. Long-term commitment of Funds

Capital expenditure involves not only large amounts of funds but also funds for long-term or more
or less on permanent basis. The long-term commitment of funds increases the financial risk
involved in the investment decision.

3. Irreversible Nature
The capital expenditure decisions are of irreversible nature. Once the decisions for acquiring a
permanent asset is taken, it became very difficult to dispose of these assets without incurring heavy
losses.

4. Long-term Effect of profitability

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The investment decisions taken today not only affects present profit but also the future profitability
of the business. A profitable project selection is fatal to the business.

5. Difficulties of investment decisions

The long term investment decisions are more difficult to take because,
1. Decision extends to a series of years beyond the current
accounting period.
2. Uncertainties of future and
3. Higher degree of risk.

6. National Importance
An investment decision through taken by individual concerns is of national importance because it
determines employment, economic activities and economic growth.

7. Effect on cost structure

By taking a capital expenditure decision, a firm commits itself to a sizeable amount of fixed cost
in terms of interest, supervisors salary, insurance, building rent etc. If the investment turns out to
be unsuccessful in future or produces less than anticipated profits, the firm will have to bear the
burden of fixed cost.

8. Impact on firm’s competitive strength

The capital budgeting decisions affect the capacity and strength of a firm to face competition. It is
so because the capital investment decisions affect the future profits and costs of the firm. This will
ultimately affect the firms competitive strength.

9. Cost control
In capital budgeting there is a regular comparison of budgeted and actual expenditures. Therefore
cost control is facilitated through capital budgeting.

10. Wealth Maximization

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The basic objective of financial management is to maximize the wealth of the shareholders. Capital
budgeting helps to achieve this basic objective. Capital budgeting avoids over investments and
under investments in fixed assets. In this way capital budgeting protects the interest of the
shareholders and of the enterprise.

4.3 STEPS IN CAPITAL BUDGETING

Capital budgeting is a complex process. It involves decision relating to the investment of current
funds for the benefit to be achieved in future which is always uncertain. Capital budgeting is a six
step process. The following steps are involved in capital budgeting;
1. Project generation

The capital budgeting process begins with generation or identification of investment proposals.
This involves a continuous search for investment opportunities which are compatible with firm’s
objectives.

2. Project screening
Each proposal is then subject to a preliminary screening process in order to assess whether it is
technically feasible, resources required are available, and expected returns are adequate to
compensate for the risks involved.

3. Project evaluation

After screening of project ideas or investment proposals the next step is to evaluate the profitability
of each proposal. This involves two steps;
a. Estimation of cost and benefit in terms of cash flows
b. Selecting an appropriate criterion to judge the desirability of the
project.

4. Project selection

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After evaluation the next step is the selection and the approval of the best proposal. In actual
practice all capital budgeting decision are made at multiple levels and are finally approved by top
management.

5. Project execution and implementation

After the selection of project funds are allocated for them and a capital budget is prepared. It is the
duties of the top management or capital budgeting committee to ensure that funds are spend in
accordance with allocation made in the capital budget.
6. Performance review

After the implementation of the project, its progress must be reviewed at periodical intervals. The
follow-up or review is made by comparing actual performance with the budget estimates.

4.4 OPERATING BUDGET AND CAPITAL BUDGET

Most of the large firms prepare two different budgets each year.

1. OPERATING BUDGET

Operating budget shows planned operations for the forthcoming period and includes sales,
production, production cost, and selling and distribution overhead budgets. Capital budgets deals
exclusively with major investment proposals.

2. CAPITAL EXPENDITURE BUDGET

Capital Expenditure is a type of functional budget. It is the firm’s formal plan for the expenditure
of money for purchase of fixed assets. The budget is prepared after taking in to account the
available production capacities, probable reallocation of existing resources and possible
improvements in production techniques. If required, separate budgets can be prepared for each
item of capital assets such as a building budget, a plant and machinery budget etc.

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4.5 OBJECTIVES OF CAPITAL EXPENDITURE BUDGET

The objectives of Capital Expenditure Budget are as follows.

1. It determines the capital projects on which work can be started during the budget
period after taking in to account their urgency and the expected rate of return on
each project.
2. It estimates the expenditure that would have to be incurred on capital projects
approved by the management together with the source or sources from which the
required funds would be obtained.
3. It restricts the capital expenditure on projects within authorized limits.

CONTROL OVER EXPENDITURE THROUGH CAPITAL EXPENDITURE BUDGET

The capital expenditure budget primarily ensures that only such projects are taken in hand which
are either expected to increase or maintain the rate of return on capital employed. Each proposed
project is appraised and only essential project or projects likely to increase the profitability of the
organization are included in the budget. In order to control expenditure on each project, the
following procedure is adopted.

1. A project sheet is maintained for each project.

2. In order to ensure that the expenditure on different project is properly analyzed.
3. The expenditure incurred on the project is regularly entered on the project sheets from
various sources such as invoices of assets purchased, bill for delivery charges etc.,
4. The management is periodically informed about expenditure incurred in respect of each
project under appropriate heads.
5. In case project cost is expected to increase; a supplementary sanction for the same is
obtained.

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 6. In financial books the total expenditure incurred on all projects is separately recorded.

4.6 TACTICAL AND STRATEGIC INVESTMENT DECISION

Investment decision can be classified as,

1. Tactical Decision

A Tactical Decision generally involves a relatively small amount of funds and does not constitute
a major departure from the past practices of the company.

2. Strategic Decision

A Strategic Investment Decision involves a large sum of money and may also result in a major
departure from the past practices of the company. Acceptance of a Strategic Investment Decision
involves a significant change in the company’s expected profits associated with a high degree of
risk.

4.7 RATIONALE OF CAPITAL EXPENDITURE

Efficiency is the rationale underlying all capital decisions. A firm has to continuously invest in
new plant or machinery for expansion of its operations or replace worn-out machinery for
maintaining and improving its efficiency. The overall objective is to maximize the firm’s profits
and thus optimizing the return on investment. This objective can be achieved either by increased
revenues or by cost reduction. Thus capital expenditure can be of two types;

1. Expenditure Increasing Revenue

2. Expenditure Reducing Cost
4.8 KINDS OF CAPITAL INVESTMENT PROPOSALS

A firm may have several investment proposals for its consideration. It may adopt one of them,
some of them or all of them depending upon whether they are independent, contingent or
dependent or mutually exclusive.

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1. INDEPENDENT PROPOSALS

These are proposals which do not compete with one another in a way that acceptance of one
precludes the possibility of acceptance of another. In case of such proposals the firm may straight
away “accept or reject” a proposals on the basis of minimum return on investment required. All
these proposals which give a higher return than a certain desired rate of return are accepted and
the rest are rejected.

2. CONTINGENT OR DEPENDENT PROPOSALS

These are proposals whose acceptance depends on the acceptance of one or more other proposals.
When a contingent investment proposal is made, it should also contain the proposal on which it is
dependent in order to have a better perspective of the situation.

3. MUTUALLY EXCLUSIVE PROPOSALS

These proposals which compete with each other in a way that the acceptance of one precludes the
acceptance of other or others. Two or more mutually exclusive proposals cannot both or all be
accepted. Some techniques have to be used for selecting the better or the best one. Once this is
done, other alternative automatically gets eliminated.

4. REPLACEMENT PROPOSALS

These aim at improving operating efficiency and reducing costs. These are called cost reduction
decisions.

5. EXPANSION PROPOSALS

This refers to adding capacity to existing product line.

6. DIVERSIFICATION PROPOSALS

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Diversification means operating in several markets rather than a single market. It may also involve
adding new products to the existing products. Diversification decisions require evaluation of
proposals to diversify in to new product lines, new markets etc., for reducing the risk of failure.

7. CAPITAL RATIONING PROPOSALS

Capital rationing means distribution of capital in favor of some acceptable proposals. A firm
cannot afford to undertake all profitable proposals because it has limited funds to invest. In such a
case, these various investment proposals compete for limited funds and the firm has to ration them.
Thus the situation where the firm is not able to finance all the profitable investment opportunities
due to limited resources is known as capital rationing.
4.9 FACTORS AFFECTING CAPITAL INVESTMENT DECISIONS

The following are the four important factors which are generally taken in to account while making
a capital investment decision.

1. The Amount of Investment

In case a firm has unlimited funds for investment it can accept all capital investment proposals
which give a rate of return higher than the minimum acceptable or cut-off rate.

2. Minimum Rate of Return on Investment

The management expects a minimum rate of return on the capital investment. The minimum rate
of return is usually decided on the basis of the cost of capital.

3. Return Expected from the Investment

Capital investment decisions are made in anticipation of increased return in the future. It is
therefore necessary to estimate the future return or benefits accruing from the investment proposals
while evaluating the capital investment proposals.

24
4. Ranking of the Investment Proposals

When a number of projects appear to be acceptable on the basis of their profitability the project
will be ranked in the order of their profitability in order to determine the most profitable project.

4.10 METHODS OF CAPITAL BUDGETING OR EVALUATION OF

INVESTMENT PROPOSALS

A business firm has a number of proposals regarding various projects in which it can invest funds.
But the funds available with the firm are always limited and it is not possible to invest funds in all
the proposals at a time. The most widely accepted techniques used in estimating the cost returns
of investment projects can be grouped under two categories;
1. TRADITIONAL METHODS (NON DISCOUNTED CASH FLOW)
a. Payback Period Method
b. Average rate of Return Method

2. MODERN METHODS (DISCOUNTED CASH FLOW)

a. Net Present Value Method
b. Internal rate of Return Method
c. Profitability Index Method

TRADITIONAL METHODS (NON DISCOUNTED CASH FLOW)

A. PAY BACK PERIOD METHOD

The payback period method is the simplest method of evaluating investment proposals. Payback
period represents the number of years required to recover the original investment. The payback
period is also called Pay Out or Pay off Period. This period is calculated by dividing the cost of
the project by the annual earnings after tax but before depreciation. Under this method the project
is ranked on the basis of the length of the payback period. A project with the shortest payback
period will be given the highest rank.

25
METHODS OF COMPUTATION OF PAYBACK PERIOD

There are two ways of calculating the payback period.

a. When annual cash inflow is constant
The formula is find out the payback period if the project generates constant annual cash inflow is;
Original cost of the project
Payback period = Annual cash inflow

Annual cash inflow is the annual earning (profit depreciation and after taxes) before

b. When annual cash inflow is not constant

If the annual cash inflows are unequal the payback period can be found out by adding up the cash
inflows until the total is equal to the initial cash outlay of the project.

ADVANTAGES OF PAYBACK PERIOD

1. Simple to understand and easy to calculate.
2. It reduces the chances of loss through obsolescence.
3. A firm which has shortage of funds find this method very useful.
4. This method costs less as it requires only very little effort for its
Computation.

DISADVANTAGES
1. This method does not take in to consideration the cash inflows beyond the
payback period.
2. It does not take in to consideration the time value of money. It considers
the same amount received in the second year and third year as equal.
3. It gives over emphasis for liquidity.

ACCEPTANCE RULE
The following are the Payback [P.B.Rules]
Accept P.B<cut-off rate
Reject P.B>cut-off rate
May Accept P.B<cut-off rate

26
Cut-off rate

Cut-off rate is the rate below which a project would not be accepted. If ten percentage is the desired
rate of return, the cut-off rate is 10%.The cut-off point may also be in terms of period. If the
management desires that the investment in the project should be recouped in three years, the period
of three years would be taken as the cut-off period. A project incapable of generating necessary
cash to pay for the initial investment in the project with-in three years will not be accepted.

II. AVERAGE RATE OF RETURN (ARR) METHOD

This method otherwise called the Rate of Return Method, takes in to account the earnings expected
from the investment over the entire life time of the asset. The various projects are ranked in order
of the rate of returns. The project with the higher rate of return is accepted. Average Rate of Return
is found out by dividing the average income after depreciation and taxes, i.e. the accounting profit,
by the Average Investment.

Average Annual Earnings

ARR = x 100
Average Investment

Where;
Average Annual Earnings is the total of anticipated annual earnings after depreciation and tax
(accounting profit) divided by the number of years.

Average Investment means

i. If there is no salvage (Scrap value)

Total Investment

27
ii. If there is scrap value
Total Investment-Scrap Value
+ Scrap Value
2

iii. If there is additional working capital

Total Investment-Scrap Value

+ Scrap +Additional Working Capital
2

ADVANTAGES OF AVERAGE RATE OF RETURN (ARR) METHOD

1. It is easy to calculate and simple to understand.

2. Emphasis is placed on the profitability of the project and not on liquidity.
3. The earnings over the entire life of the project is considered for
4. ascertaining the Average Rate of Return.
5. This method makes use of the accounting profit.

DISADVANTAGES

1. Like the payback period method this method also ignores the time value of money. The
averaging technique gives equal weight to profits occurring at different periods.
2. This averaging technique ignores the fluctuations in profits of various years.
3. It makes use of the accounting profits, not cash flows, in evaluating the project.

1. DISCOUNTED CASH FLOW METHODS

The payback period method and the Average rate of Return Method do not take in to consideration
the time value of money. They give equal weight to the present and the future flow of incomes.

28
The discounted cash flow methods are based on the concept that a rupee earned today is more
worth than a rupee earned tomorrow. These methods take in to consideration the profitability and
also the time value of money.

I. NET PRESENT VALUE (NPV) METHOD

The Net Present Value Method (NPV) gives consideration to the time value of money. It views
that the cash flows of different years differ in value and they become comparable only when the
present equivalent values of these cash flows of different periods are ascertained. For this the net
cash inflows of various periods are discounted using the required rate of return, which is a
predetermined rate .If the present value of expected cash inflows exceeds the initial cost of the
project, the project is accepted.
NPV = Present value of cash inflows-Present value of initial investment

STEPS IN NET PRESENT VALUE (NPV) METHOD

1. Determine an appropriate rate of interest to discount cash flows.

2. Compute the present value of total investment outlay (i.e., cash outflow) at the
determined discounting rate.
3. Compute the present value of total cash inflows (profit before depreciation and after
tax) at the above determined discount rate.
4. Subtract the present value of cash outflow (cost of investment) from the present value
of cash inflows to arrive at the net present value.
5. If the net present value is negative i.e., the present value cash outflow is more than the
present value of cash inflow the project proposals will be rejected .If net present value
is zero or positive the proposal can be accepted.
6. If the projects are ranked the project with the maximum positive net present value
should be chosen.

ADVANTAGES OF NET PRESENT VALUE METHOD

29
 1. It considers the time value of money.
2. It considers the earnings over the entire life of the project.
3. Helpful in comparing two projects requiring same amount of cash outflows.

DISADVANTAGES OF NET PRESENT VALUE METHOD

1. Not helpful in comparing two projects with different cash outflows.

2. This method may be misleading is in comparing the projects of unequal lives.

II. INTERNAL RATE OF RETURN (IRR) METHOD

The Internal Rate of Return for an investment proposal is that discount rate which equates the
present value of cash inflows with the present value of cash outflows of the investment. The
Internal Rate of Return is compared with a required rate of return. If the Internal Rate of Return of
the investment proposal is more than the required rate of return the project is rejected. If more than
one project is proposed, the one which gives the highest internal rate must be accepted.
It can be calculated by the following formula

P1-Q
IRR = L+ xD
P1-P2
Where,
L = Lower rate of discount
P1 = Present value of cash inflows at lower rate of discount
P2 = Present value at higher discount rate
Q = Initial Investment
D = Difference in rate

ADVANTAGES OF INTERNAL RATE OF RETURN

1. It considers the time value of money.

2. The earnings over the entire life of project is considered.

30
 3. Effective for comparing projects of different life periods and different timings in
timings of cash inflows.

DISADVANTAGES

1. Difficult to calculate.
2. This method presumes that the earnings are reinvested at the rate earned by the
investment which is not always true.

Accept or Reject Rule

Internal Rate of Return is the maximum rate of interest which an organization can afford to pay on
the capital invested in a project. A project would qualify to be accepted if Internal Rate of Return
exceeds the cut-off rate. While evaluating two or more projects, a project giving a higher Internal
Rate of Return would be preferred. This is because higher the rate of return, the more profitable is
the investment.
III. PROFITABILITY INDEX METHOD

Present Value of Cash Inflows

Profitability Index =
Present Value of Cash Outflows

This is also called Benefit-Cost ratio. This is slight modification of the Net Present Value Method.
The present value of cash inflows and cash outflows are calculated as under the NPV method. The
Profitability Index is the ratio of the present value of future cash inflow to the present value of the
cash outflow, i.e., initial cost of the project.

If the Profitability index is equal to or more than one proposal the proposal will be accepted. If
there are more than one investment proposals, the one with the highest profitability index will be
preferred.

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This method is also known as Benefit-Cost ratio because the numerator measures benefits and the
denominator measures costs. ”It is the ratio of the present value of cash inflow at the required rate
of return to the initial cash outflow of the investment.

4.11 Cost Effective Analysis

In the cost effectiveness analysis the project selection or technological choice, only the costs of
two or more alternative choices are considered treating the benefits as identical. This approach is
used when the acquisition of how to minimize the costs for undertaking an activity at a given
discount rates in case the benefits and operating costs are given, one can minimize the capital cost
to obtain given discount.

4.12 Project Planning:

The planning of a project is a technically pre- determined set of inter related activities involving
the effective use of given material, human, technological and financial resources over a given
period of time. Which in association with other development projects result in the achievement of
certain predetermined objectives such as the production of specified goods & services?

Project planning is spread over a period of time and is not a one shot activity. The important stages
in the life of a project are:

1. It’s Identification
2. It’s initial formulation
3. It’s evaluation (Whether to select or to project)
4. It’s final formulation
5. It’s implementation
6. It’s completion and operation

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The time taken for the entire process is the gestation period of the project. The process of
identification of a project begins when we are seriously trying to overcome certain problems. They
may be non- utilization to overcome available funds. Plant capacity, expansion etc

Contents of the project report:

1. Market and marketing

2. Site of the project
3. Project engineering dealing with technical aspects of the project.
4. Location and layout of the project building
5. Building
6. Production capacity.
7. Work Schedule

Details of the cost of the Project:-

1. Cost of land
2. Cost of Building
3. Cost of plant and machinery
4. Engineering know how fee
5. Expenses on training Erection supervision
6. Miscellaneous fixed assets
7. Preliminary expenses
8. Pre-operative expenses
9. Provision for contingencies
4.13 RISK AND UNCERTAINITY IN CAPITAL BUDGETING

All the techniques of capital budgeting requires the estimation of future cash inflow and cash
outflows. The cash flows are estimated abased on the following factors.

• Expected economic life of the project.

33
 • Salvage value of the asset at the end of the economic life.

• Capacity of the product.

• Selling price of the product.

• Production cost.

• Depreciation.

• Rate of Taxation

• Future demand of the product, etc.

But due to uncertainties about the future the estimates of demand, production, sales costs, selling
price, etc cannot be exact, for example a product may become obsolete much earlier than
anticipated due to un expected technological developments all these elements of uncertainties have
to be take into account in the form of forcible risk while making an investment decision. But some
allowances for the element of risk have to be proved.

4.14 FACTORS INFLUENCING CAPITAL EXPENDITURE

DESCISIONS:

There are many factors financial as well as non financial which influence the capital expenditure
decisions and the profitability of the proposal yet, there are many other factors which have to be
taken into consideration while taking a capital expenditure decisions. They are

1. URGENCY
Sometime an investment is to be made due to urgency for the survival of the firm or to avoid heavy
losses. In such circumstances, proper evaluation cannot be made though profitability tests.
Examples of each urgency are breakdown of some plant and machinery fire accidents etc.

2. DEGREE OF UNCERTAINTY

34
Profitability is directly related to risk, higher the profits, greater is the risk or uncertainty.

INTANGIBLE FACTORS

Sometimes, a capital expenditure has to be made due to certain emotional and intangible factors
such as safety and welfare of the workers, prestigious projects, social welfare, goodwill of the firm
etc.

1. AVAILABILITY OF FUNDS

As the capital expenditure generally requires the previsions of laws solely influence by this factor
and although the project may not be profitable. Yet the investment has to be made.

2. FUTURE EARNINGS

A project may not be profitable as competed to another today, but it may be profited to increase
future earnings.

Sometimes project with some lower profitability may be selected due to constant flow of income
as compared to another project with an irregular and uncertain inflow of income.

4.15 CAPITAL EXPENDITURE CONTROL

Capital expenditure involves no-flexible long-term commitments of funds. The success of an

enterprise in the long run depends up on the effectiveness with which the management makes
capital expenditure decision. Capital expenditure decisions are very important as their impact is
more or less permanent on the well being and economic health of the enterprise. Because of this
large scale mechanization and automation and importance of capital expenditure for increase in
the profitability of a concern. It has become essential to maintain an effective system of capital
expenditure control.
4.16 OBJECTIVES CONTROL OF CAPITAL EXPENDITURE

35
 • To make an estimate of capital expenditure and to see that the total cash outlay is
within the financial resources of the enterprise
• To ensure timely cash inflows for the projects so that no availability of cash may
not be problem in the implementation of the problem.
• To ensure that all capital expenditure is properly sanctioned.
• To properly coordinate the projects of various departments
• To fix priorities among various projects and ensure their follow-up.
• To compare periodically actual expenditure with the budgeted ones so as to avoid
any excess expenditure.
• To measure the performance of the project.
• To ensure that sufficient amount of capital expenditure is incurred to keep pace
with rapid technological development.
• To prevent over expansion.

4.17 STEPS INVOLVED IN CONTROL OF CAPITAL EXPENDITURE

• Preparation of capital expenditure budget.

• Proper authorization of capital expenditure.

• Recording and control of expenditure.

• Evaluation of performance.

LEASE FINANCING

Lease finance is an agreement for the use of an asset for a specified rental. The owner of the asset
is called the lesser and the user the lesser
1) Operating leases

36
 2) Financial leases

Operating leases are short-term no-cancel able leases where the risk of obsolescence in borne by
the lesser
Financial leases are long-term non-cancelable leases where any risk in the use of asset is borne by
the lessee and he enjoys the return too.
• Preliminary budget estimates for the year following the budget year.

GENERAL GUIDELINES:-

The capital funds budget is to be prepared under six major heads.

1) Continuing schemes

2) New schemes

3) Modernization and rationalization

4) Township

5) Science and technology

6) EDP schemes

CONTINUING SCHEMES

These schemes include all such schemes which are under implementation of which funds prevision
has been made in the current year /prevision is required in the budget year.

NEW SCHEMES

This scheme includes all such schemes, which are proposed to be initiated in the budget year and
for which under provisions is required in the budget year. Normally, such schemes are included in
the five-year plan of the company approved by the planning commission.

MODERNIZATION AND RATIONALIZATION (M&R)

37
This includes item of plant and machinery etc for which funds required in the budget year and the
following year. All item included in M&R should result in cost reduction/quality
improvement/rebottle necking/replacement/productivity, improvement and welfare. The M&R
items are to be submitted in the following main characteristics accompanied with full justification
on the agenda of facilities increased output and production, quality requirements bottlenecks.

1. Replacement / modernization.
2. Balancing facilities (essentially to increase production).
3. Operational requirements including material handling
4. Quality/testing facilities.
5. Welfare
6. Minor works.

These requirements should be protested term wise. A separate proposal is required for M&R items
costing more than Rs. 10, 00,000.

TOWNSHIP
• Township budget is divided into two parts.

• Continuing township schemes

• New townships schemes.

Funds required under each schemes should be backed up with full data on number on quarter/scope
of work to be completed against the funds requirements phasing of budgeted funds for current
year, budget year and following year etc, should be given similar information on number of
quarter/scope of work already completed, expenditure incurred till last year, satisfaction level it is
to be added in the above back up information for each scheme.

SCIENCE AND TECHNOLOGY

• This budget can be divided into two categories

• Continuing schemes.

38
 • New schemes to be taken up in the budget year.

The schemes should fall in any of the above cartages giving details on physical and financial
progress etc.

EDP SCHEMES

All funds requirements for computer are information system should be grouped under EDP
schemes and projects accordingly.

BUYING OR PROCURING

Buying or procurement involves purchasing an asset permanently in the form of cash or credit.

LEASING VS BUYING

Leasing equipment has the tax advantage of depreciation, which can mutually benefit the lesser
and lessee, other advantage of leasing, include convenience and flexibility as well as specialized
services to the lessee. Lease privies handy to those linens, which cannot obtain loan capital form
normal sources.

The pros and cons of leasing and buying are to be examined thoroughly before deciding the method
of procurement i.e. leasing or buying.

CHAPTER-5
FINANCING OF PROJECT

Project financing is considered right from the time of the conception of the project. The proposal
of the project progress working capital, so, in general a project is considered as a ‘mini firm’ is a
part and parcel of the organization.

39
5.1 Sources of Finance:

➢ Loan Financing
➢ Security Financing
➢ Internal Financing

Loan Financing:
(a). Short- Term Loans & Credits

Short – Term Loans & Credits are raised by a firm for meeting its working capital requirements.
These are generally for a short period not exceeding the accounting period i.e., one – year.

Types of Short Term Loans & Credits:

1. Trade Credit.
2. Installment Credit.
3. Advances.
4. Commercial papers
5. Commercial banks
6. Cash Credits
7. Over Drafts
8. Public Deposits.
(b). Term Loans:

Term loans are given by the financial institutions and banks, which form the primary source of
long term debt for both private as well as the Government organizations. Term loans are generally
employed to finance the acquisition of fixed assets that are generally repayable in less than 10
years. In addition to short- term loans, company will raise medium term and long term loans.

5.2 Security Financing:

40
Corporate Securities can be classified into two categories.
(a) Ownership Securities or capital stock.
(b) Creditor ship Securities or debt Capital.

(a) Ownership Securities or capital Stock:

Types of Ownership Securities or Capital Stock:

i) Equity Capital:

Equity Capital is also known as owner’s capital in a firm. The holders of these shares are the real
owners of the company. They have a control over the working of the company. Different ways to
raise the equity capital.
o Initial public offering.
o Seasoned offering
o Rights issue.
o Private placement
o Preferential allotment.

ii) Preference Capital:

These shares have certain preferences as compared to other type of shares.

1. Payment of Divided
2. Repayment of the capital at the time of liquidation of the
company.

b) Types of Creditor ship Securities:

Debentures:

41
Debentures are an alternative to the term loans and are instruments for raising the debt finance.
Debenture holders are the creditors of a company and the company and the company have the
obligations to pay the interest and principal at specified times. Debentures provide more flexibility,
with respect to maturity, interest rate, security and repayment Debentures may be fixed rate of
interest or floating rate or may be zero rates. Debentures & Ownership Securities help the
management of the company to reduce the cost of capital.

5.3 Internal Financing:

A new company can raise finance only through external sources such as shares, debentures, loans
and public deposits. For existing company they need to raise funds through internal source. Such
as retained earnings depreciation as a source of funds. Some other innovative source of finance
 Venture Capital
 Seed Capital
 Bridge Finance
 Lease Financing
 Euro- Issues

CHAPTER-6
INTRODUCTION TO FINANCE AND ACCOUNTS DEPARTMENT

Finance is the lifeblood of the business .According to Howard and Upton “Finance is that
administrative area or set of administrative function in organizations which relate with the
arrangements of cash and credit so that the organization may have the means to carry out of its
objective as possible.”

42
6.1 Functions Of Finance and Accounting Department

Finance & Accounts Department of BHUBANESHWAR Unit is controlled by Head Of the

Department i.e. C.F.O. His main function is to co-ordinate all activities related to Finance &
Accounts and report to Head Office’s Finance & Accounts Department / Finance Director as well
Unit Head. Finance & Accounts Department function various type of activities as per the
Guidelines issued by Head Office, Purchase Procedure, Service Rules, Powers of officer etc. At
present to carry out all the related activities, following four sectional heads are reporting to him
for work connected to their Sections. All the four sectional heads independently report to
Departmental Head. However, in case, Departmental Head happens on tour or on leave, the next
senior sectional head takes the charge of the department and remaining here sectional head will
report to him for all the work connected to their Sections.

6.2 FINANCE DEPARTMENT COMPRISES OF

1. Pay roll section

2. Raw materials
3. Fixed assets & insurance
4. Works bill section
5. Purchase bill section
6. Books & budgets

43
 7. Financial concurrence

PAY ROLL SECTION

Pay roll section takes care of all the financial issues of employees in co-ordination with
Administrative & Personnel Department. Its functions includes management of salaries, TA/DA,
loans & advances, misc payment related to employees, Perk/There allowance payments etc. Here
records of each employee are maintained regarding basic pay, leave encashment, medical, salary,
increments, promotion based perks, etc.

RAW MATERIALS

Different types of Raw Materials that are required at PPL, PARADEEP Unit are as follows :
1. Sulphuric Acid
2. Phosphoric Acid
3. Ammonia
4. Potash
5. MAP
6. Urea
7. Filler
Raw Material section in F & A department does the accounting of above mentioned raw-material
which includes receipt of raw- material are purchased, monthly consumption as per the production
department and payment to the suppliers.

MISCELLANEOUS ACCOUNTS

The miscellaneous jobs can be broadly divided into following categories:

1. Passing of bills of miscellaneous nature;

2. Accounting of cash imprested and advances for expenses;
3. Miscellaneous recoveries from outside agencies.

44
Miscellaneous bills includes rates contracts for service contract for air conditioner, water coolers,
weighing machines, franking machines, knitting of chairs, etc. Others miscellaneous bills includes
telephone rentals, STD calls, local calls, teleprinters , fax, service bills, advertisement bills,
electricity bills, printing and block making bills, bills of travel agents, bills of canteen purchases,
etc. Annual Contracts and Hiring of taxi, motors, etc. is also included in this.

WORKS BILLS

Work bills section is entrusted with the task of checking and authentication of APF received from
various departments such as Civil, Plant, and Township etc. They have to keep record and maintain
account. They have to verify with respect to measurements, Tax provisions like TDS and other
deductions like EMD, Security and penalty etc.

PURCHASE BILLS

In purchase bill, treatment is given to the bills on purchase of machinery and tools and spares etc.
for accounting requirements and book keeping as well as record maintenance and tax deductions
and authentication of AFP on purchase of Goods and Services.

FINANCIAL CONCURRENCE

Financial concurrence deals with crosschecking and green signaling the requisition for purchases
made by various indent departments of the unit. They check for the availability of budget and
ascertain its necessity and critically for regular and smooth operations of the plants and activities
of various departments.

BOOKS & BUDGETS

45
Books and budget deal with revenue budget compilation, monitoring and control, reconciliation of
inter unit accounts, maintenance of books of accounts and submission of monthly / quarterly /
annual reports, COP processing and attending internal / statutory / tax auditors.

CHAPTER-7
DATA ANALYSIS AND INTERPRETATION

7.1 Production (2017-2018 to 2019-2020)

(In MT)

46
 Particulars 06-07 07-08 08-09 09-10 10-11
Production
DAP 822395 879765 470155 764464 657550
NPK 486415 401580 552085 447995 541352

% Capacity
utilization 182 178 142 168 167

7.1 Sales: Manufactured Fertilizers(2017-2018 to 2019-2020)

(In MT)
Particulars 06-07 07-08 08-09 09-10 10-11
DAP 838586 892212 469694 776715 649407
NPK 479529 423187 545728 458248 519185

7.2 Sales: Traded Fertilizers (2017-2018 to 2019-2020)

(In MT)
Particulars 06-07 07-08 08-09 09-10 10-11
DAP --- --- 46766 112954 159739

MOP 142152 80530 129733 110883 117753

7.3 Balance Sheet (2017-2018 to 2019-2020)

(In lacs)
Particulars 06-07 07-08 08-09 09-10 10-11
Sources of Funds:
Auth share capital 100000 100000 100000 100000 100000

47
Paid up capital 57545 57545 57545 57545 57545
Reserve and surplus --- --- --- 10791 28500
Secured loan 13619 2785 85072 104307 113987
Unsecured loan 76475 75788 42725 8329 ---
Total sources of funds
147639 136118 185342 180972 200032
Application of Funds:
Gross Block(including
CWIP) 73251 75734 77436 79349 83178
Net Block(including CWIP)
26887 25706 24149 23652 25419
Investments --- --- 82130 605 5
Deferred tax Assets --- --- --- 3369 2037

Current Assets
Inventories 28595 21496 55159 37363 50023
Sundry Debtors 68236 56541 86632 60052 51764
Others 6130 47507 103523 117391 107567

Total 102961 125544 245314 214806 209354

Current Liabilities and
Provisions 48770 73207 170615 61460 36783
Net Current Assets 54191 52337 74699 153346 172571
Deferred Revenue Exp 131 --- --- --- ---
Accumulated Loss 66430 58075 4364 --- ---
TotalApplication(funds) 147639 136118 185342 180972 200032

7.4 Profit and Loss Statement(2017-2020)

(In Lacs)
Working results 06-07 07-08 08-09 09-10 10-11

48
Sales 119793 120663 94368 119831 128297
Subsidy 86276 124527 417077 178583 222170
Other Income 652 3487 49530 18153 12597
Total 206721 248677 560975 316927 363064
Cost Of Sales(including prior period
adj but excluding Dep and Interest)
187719 230047 484485 288612 327032
Gross Margin (19002) (18630) (76490) (28315) (36032)
Depreciation 3402 3817 3347 3048 2470
Profit/(loss) before Int and Taxes 15600 14813 73143 25267 33562

Interest 4613 6387 5262 7294 9644

Profit/(loss) before taxes 10987 8426 67881 17973 23918
Taxes including FBT 59 70 14170 6187 8278
Debit/(Credit) for deferred tax --- --- --- (3369) 1332
TaxationExpenses Credited --- --- --- --- (3400)
NET PROFIT/(LOSS) 10928 8356 53711 15155 17708

49
 CHAPTER-8
EVALUATION OF PROJECT USING CAPITAL BUDGETING
TECHNIQUES

8.1 PROJECT EVALUATION

Name of the Project: Baggaging plant with handling system .

Project Estimate: Ventured into the market and got a quote for 300 Cr.

Project Cost: 300 Cr

Assumption: The Company has currently a dispatch mechanism which is mechanized for
dispatching or bagging 3,300 MT/day. The company plans to increase its production level to 16,
00,000 MT/annum. So, the dispatch system should be increased to an additional 1,550 Mt/day so
that the total dispatching to be done per day goes up to 4,850Mt/day. So, as to ensure the smooth
functioning of the dispatching system and this can be done by setting up a new baggaging plant…
Present Capacity-3,330MT/day
New Capacity - 4,850MT/day
Difference or excess production - (4850-3300)MT/day=1,550MT/day

8.2 STEPS IN THE EVALUATION OF THE PROJECT

STEP1: Capital Budget Estimates:

The first and the foremost step in the evaluation of a project is the budget estimate of the project.
And here the estimate of the project is 300 crores.
This includes:-
1. Extension of Bagging Plant.
2. Conveyor System for extended portion of Bagging plant.
3. Shed for covering extended Bagging Plant.
4. Railway siding modification.
5. Shed for covering extended portion of Bagging plant.

50
STEP2: Project Finance and Source of Funds:

The second step in the evaluation of the project is to find the funds to install or to establish a
project.

1. Debt/Loan Funds/Long term Loans

2. Internal Generation of funds

In this project we have funding of 75% from a bank at 11% rate of interest P.a. providing with
long term loans and the rest 25% from Internal generation. With a moratorium of one year and
repayment schedule of 5 years.

STEP3: Phasing of Capital Expenditure:

The third step in the evaluation of the project is the phasing of the expenses or expenditure on the
project. And here the phasing of the project expenditure is as below:

Step4: Repayment Schedule of the Long Term Loan (LTL):

The fourth step in the evaluation of the project is preparing the repayment schedule of the Long
Term Loan (LTL). And here the project repayment schedule is.

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 REPAYMENT SCHEDULE OF LONG-TERM LOAN
11% (Rs in Crores)

Interest Year wise Year wise

Opening Closing '@11% Principal Interest
Balance Addition Total Repayment Balance p.a Year repayment repayment
1-Oct-12 75 75 75
1-Jan-13 75 100 175 175 2.06
1-Apr-13 175 125 300 300 4.81 2012-13 0 6.88
1-Jul-13 300 300 300 8.25
1-Oct-13 300 300 300 8.25
1-Jan-14 300 300 3.75 296.25 8.25
1-Apr-14 296.25 296.25 8.75 287.5 8.15 2013-14 12.5 32.90
1-Jul-14 287.5 287.5 15.00 272.5 7.91
1-Oct-14 272.5 272.5 15.00 257.5 7.49
1-Jan-15 257.5 257.5 15.00 242.5 7.08
1-Apr-15 242.5 242.5 15.00 227.5 6.67 2014-15 60.00 29.15
1-Jul-15 227.5 227.5 15.00 212.5 6.26
1-Oct-15 212.5 212.5 15.00 197.5 5.84
1-Jan-16 197.5 197.5 15.00 182.5 5.43
1-Apr-16 182.5 182.5 15.00 167.5 5.02 2015-16 60.00 22.55
1-Jul-16 167.5 167.5 15.00 152.5 4.61
1-Oct-16 152.5 152.5 15.00 137.5 4.19
1-Jan-17 137.5 137.5 15.00 122.5 3.78
1-Apr-17 122.5 122.5 15.00 107.5 3.37 2016-17 60.00 15.95
1-Jul-17 107.5 107.5 15.00 92.5 2.96
1-Oct-17 92.5 92.5 15.00 77.5 2.54
1-Jan-18 77.5 77.5 15.00 62.5 2.13
1-Apr-18 62.5 62.5 15.00 47.5 1.72 2017-18 60.00 9.35
1-Jul-18 47.5 47.5 15.00 32.5 1.31
1-Oct-18 32.5 32.5 15.00 17.5 0.89
1-Jan-19 17.5 17.5 11.25 6.25 0.48
1-Apr-19 6.25 6.25 6.25 0 0.17 2018-19 47.50 2.85
119.63

52
 (Rs in
REPAYMENT OF LONG TERM LOAN(LTL) crores)
2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19
Interest Repaid 6.88 32.90 29.15 22.55 15.95 9.35 2.85
Principal Repaid 0 12.5 60.00 60.00 60.00 60.00 47.50
Total 6.88 45.40 89.15 82.55 75.95 69.35 50.35

STEP5: PREPARING THE PROFITABILITY STATEMENT OF THE

PROJECT:
The fifth step in the evaluation of the project is preparing the profitability statement of the project
and the profitability statement of the project here is.

In terms of cost of
Cost Elements Asset p.a
Interest on Loan 11% Tax 32.445%
Depreciation as Per
Insurance 2% IT Act 15%
Salary and Wages 3%
Contract Labour 2%
Repairs and Maintenance 3%
Chemicals 5%
Packing cost 0.50%
Power, Fuel and Water 5%
Depreciation 5.25%

53
 (Rs in
PROFITABILITY STATEMENT OF THE PROJECT Crores)
2015-16 2016-17 2017-18 2018-19 2019-20
Incremental Sales 1534.50 1534.50 1534.50 1534.50 1534.50

TOTAL REVENUE("A") 1534.50 1534.50 1534.50 1534.50 1534.50

EXPENDITURE
Raw Materials 1227.60 1227.60 1227.60 1227.60 1227.60
Interest On Loan 13.75 22.55 15.95 9.35 2.85
Insurance 7.10 7.10 7.10 7.10 7.10
Salary and Wages 10.66 10.66 10.66 10.66 10.66
Contract labor 7.10 7.10 7.10 7.10 7.10
Repairs and maintenance 10.66 10.66 10.66 10.66 10.66
Chemicals 17.76 17.76 17.76 17.76 17.76
Packaging Cost 1.78 1.78 1.78 1.78 1.78
Power, Fuel and Water 17.76 17.76 17.76 17.76 17.76

TOTAL EXPENDITURE ("B") 1314.16 1322.96 1316.36 1309.76 1303.26

PROFITS BEFORE DEPRECIATION

AND TAX "C"(C=A-B) 220.34 211.54 218.14 224.74 231.24

Less: DEPRECIATION "D" 18.65 18.65 18.65 18.65 18.65

PROFIT BEFORE TAX "E"(E=C-D) 201.69 192.89 199.49 206.09 212.59

Less: TAX(AS PER IT ACT) 60.77 58.34 60.16 61.98 63.77

PROFIT AFTER TAX 140.93 134.55 139.33 144.11 148.82

Computation of tax:
COMPUTATION OF TAX
2015-16 2016-17 2017-18 2018-19 2019-20
Profit Before Tax(PBT) 201.69 192.89 199.49 206.09 212.59

Add:Depreciation(As Per Companies

Act) 18.65 18.65 18.65 18.65 18.65
TOTAL 220.34 211.54 218.14 224.74 231.24

Less:Depreciation (as Per IT Act) 33.05 31.73 32.72 33.71 34.69

Profit After Depreciation 187.29 179.81 185.42 191.03 196.55

TAX 60.77 58.34 60.16 61.98 63.77

54
STEP6: Valuation of the Asset:

The sixth step in the evaluation of the project is the valuation of the project at different times or at
different periods at different years to come in the future.

VALUATION OF THE ASSET (Rs In Crores)

2015-16 2016-17 2017-18 2018-19 2019-20 2021-22 2022-23
Opening Balance 0.00 301.90 256.61 218.12 185.40 157.59 133.95
Addition 355.17 0.00 0.00 0.00 0.00 0.00 0.00
Total 355.17 301.90 256.61 218.12 185.40 157.59 133.95

Less:Deletion 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total 355.17 301.90 256.61 218.12 185.40 157.59 133.95
Less:Depreciation 53.28 45.28 38.49 32.72 27.81 23.64 43.46

ClOSING BALANCE 301.90 256.61 218.12 185.40 157.59 133.95 90.49

STEP7: Preparation of Cash Flow Statement:

The seventh step in the evaluation of the project is the preparation of the Cash Flow Statement.
And we need the cash flows to find out the Payback Period and the Internal Rate of Return of the
project

CASH FLOW STATEMENT (Rs in Crores)

2012- 2013- 2014- 2015- 2016- 2017- 2018- 2019-
13 14 15 16 17 18 19 20
Cash Out Flow
Capital Expenditure on the Project 76.88 167.90 110.40

Cash In Flow
Incremental Profit After Tax 140.93 134.55 139.33 144.11 148.82

Step8: To Find the Viability of the Project by Using Different Techniques Of Capital
Budgeting:

Here in PPL the Techniques of capital budgeting used are :

55
 1. Pay-Back Period Method
2. Internal Rate Of Return

1. Evaluation of the Project Using Pay Back Period Method:

It was estimated that the cash in-flows will start from 2015-2016

Cost of the Project- 355.18 Cr

Year 2015-16 2016-17 2017-18 2018-19 2019-20

Amount 140.93 134.55 139.33 144.11 148.82

Calculation Of Pay Back Period:

S.no Year Cash Inflows Cumulative Inflows

1 2015-16 140.93 140.93

2 2016-17 134.55 275.48

3 2017-18 139.33 414.81

4 2018-19 144.11 558.92

5 2019-20 148.82 707.74

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(a) Cash Outlay : 355.18 Cr

(b) Payback Period : INITIAL INVESTMENT

ANNUAL CASH FLOW
79.70
= 2 +
414.81

= 2.2 years

Pay Back Period:

It is assumed that the profit earning of the project will start from 2015-2016.

We should increase this period with same exception as there may be any additional factor and
other cause so rounding of 2.2 to 3 years will be right, so that it will give more assistance to the
calculation.

Suggestion: Any project which has a pay-back period of 3 to 5 years is considered as a good
project…

And here we have got a pay-back period of 2.2 years. So, the project can be considered

2. Evaluation of the Project Using Internal Rate of Return Method:

It was estimated that the cash in-flows will start from 2015-2016
Cost of the Project- 355.18 Cr

Year 2015-16 2016-17 2017-18 2018-19 2019-20

Amount 140.93 134.55 139.33 144.11 148.82

57
Internal Rate of Return:
Discount rate taken as 24% (in crores)

Present Values of
Sl. No Years Cash Inflows DCF (24%) Inflows
1 2015-16 140.93 .806 113.58

2 2016-17 134.55 .660 88.80

3 2017-18 139.33 .524 73.00

4 2018-19 144.11 .422 60.81

5 2019-20 148.82 .341 50.74

6
7
8
9
10
11
12
13
14
15
Total Present Values of Inflows 386.93

58
Discount rate taken as 26% (in crores)

Present Values of
Sl. No Years Cash Inflows DCF (26%) Inflows
1 2015-16 140.93 .787 110.91

2 2016-17 134.55 .620 83.421

3 2017-18 139.33 .488 68.00

4 2018-19 144.11 .384 55.34

5 2019-20 148.82 .302 50.74

6
7
8
9
10
11
12
13
14
15
Total Present Values of Inflows 366.412

59
Discount rate taken as 28% (in crores)

Present Values of
Sl. No Years Cash Inflows DCF (28%) Inflows
1 2015-16 140.93 .781 110.06

2 2016-17 134.55 .600 80.73

3 2017-18 139.33 .465 64.78

4 2018-19 144.11 .361 52.02

5 2019-20 148.82 .279 41.52

6
7
8
9
10
11
12
13
14
15
Total Present Values of Inflows 349.11

60
Calculation of Internal Rate of Return

IRR = L+ A - Cash out lay X (H – L)

A-B

= 26+ 355.18 - 349.123 X (28-26)

(355.18-349.123) + (366.412- X 2
355.18)

= 26 + 6.07 X 2

6.07+11.232

= 26 + 0.350 X 2

= 26.70

Internal Rate of Return (IRR):

In this calculation, is done on the basis of trail and errors. By taking various percentage of
(DCF).So that an appropriate percentage of Internal Rate of Return can be judge out.

Calculated figure is 26.70%, so we can take it as 30% because at market

Uncertainity.

Suggestion:

Any project which has an Internal Rate of Return Between 16% to 20% is considered as a good
project…

And here for this project the Internal Rate of Return is 26.70%. So, the project can be
considered.

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 CHAPTER-9
FINDINGS AND SUGGESTIONS

9.1 FINDINGS:

1 It was found that the payback Period of the project is 2 year and 2 months.
2 The Payback Period shows that the initial investment can be recovered within a short period
of time.
3 The investment is ideal because normally an investment should be recoverable within 5
years.
4. The Internal Rate of Return shows 26.70 % This also ensures a profitable investment.

9.2 SUGGESTIONS:

1. The company may fix the time period for the capital asset for replacement.
2. The company may effectively use the available resources for attaining maximum profit.
3. The company has to analyze the proposal for expansion or creating additional capacity.
4. The company may plan and control its capital expenditure.
5. The company has to ensure that the funds must be invested in long term project or not.
6. The company may evaluate the estimation of cost and benefit in terms of cash flows.

62
BIBLIOGRAPHY:

Financial Management - I. M. Pandey

Financial Management - Prasanna Chandra

Financial Management - M. Y. Khan & Jain

Financial Management - Shashi.K.Gupta, R.K.Sharma and

Neeti gupta

PPL profile & Annual Reports

Web Sites:

URL: http://www.Paradeepphosphates.com
URL: http://www.google.com

URL: http://www.Wikipedia.com

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