SUMMER TRAINING REPORT

On

A STUDY ON CAPITAL BUDGETING

WITH REFERENCE TO NEW PROJECTS OF
CORIZO

Submitted for the partial fulfillment for the award of the Degree in
Master of Business Administration (MBA)

J.C. Bose University of Science & Technology, YMCA

Session: 2021-2023

Submitted To: Submitted By:

Dr. Arti Gupta Prince Kumar Virmani
J.C. BOSE University MBA 3rd Sem.
Roll No. 21001703044
 ACKNOWLEDGEMENT

Training is one of the most important parts of the curriculum of any professional course both
as link between theory and actual industrial practices. I therefore consider myself fortunate to
receive this report on esteemed organization Corizo.

I would like thank the management of Corizo for the wholehearted co-operation and guidance
extended by them which made my training report possible.

I am also thankful to Dr. Arti Gupta of J.C. BOSE.U.S.T, Faridabad for supporting me in
preparing training report.

(Prince Kumar Virmani)

 DECLARATION

I, Prince Kumar Virmani is a student of the J.C.B.U.S.T, Faridabad hereby declare that the
Training Report entitled “A Study on Capital Budgeting with reference to new projects of
corizo ” is an original work and same has not been submitted to any other institute for the
award of any other degree. The suggestions given by the faculty were duly incorporated.

[Prince Kumar Virmani]

CERTIFICATE
This is to certify that the project titled “A Study on Capital Budgeting with Reference to New
Projects of Corizo” for partial fulfillment of the MBA program (faculty of management
studies, J.C. BOSE UNIVERSITY OF SCIENCE AND TECHNOLOGY), embodies the
original work done by me. It has been conducted during Summer Internship Program from 5 th
June to 5th July 2022. I have not checked plagiarism of this report.

Signature of the student

Name: Prince Kumar Virmani
Roll no. 21001703044

Signature of the Faculty Guide

Name: Dr. Arti Gupta
Designation. Assistant Professor
 TABLE OF CONTENTS

CHAPTER PARTICULARS
NO.

1 INTRODUCTION

2 COMPANY PROFILE

3 REVIEW OF LITERATURE

4 RESEARCH METHODOLOGY
A. OBJECTIVES OF THE STUDY
B. SCOPE OF STUDY
C. RESEARCH DESIGN
1.PROPULATION AND SIZE OF SAMPLE
2.DATA COLLECTION
3.METHOD OF DATA ANALYSIS
D.LIMITATIONS OF THE STUDY

5 DATA ANALYSIS AND INTERPRETATION

6 CONCLUSIONS AND SUGGESTIONS

ANNEXURE
A. QUESTIONNAIRE
B. BIBLIOGRAPHY
 CHAPTER – 1

INTRODUCTION
 INTRODUCTION

Meaning
Capital budgeting is the technique of making in long term assets. The process in which
business determines whether projects such as building a new plant or investing in a long-term
venture are worth pursuing. The benefits of which will be available over a period of time longer
than one year. Also known as “investment appraisal”.

Definition
“Capital budgeting involves the planning of expenditure for assets, the return from which will
be realized in future time periods.”

Thus, a capital budgeting may be defined as the firm’s decision to invest its funds in the long
term assets in anticipation of an expected flow of benefits over the lifetime of the assets. These
benefits may be either in the form of increased sales or reduced costs capital budgeting decision
regarding expansion, acquisition, modernization and replacement of the long term assets.
Features
➢ In capital budgeting decision, funds are invited in long term assets.
➢ These funds are invested in present times in anticipation of future funds.
➢ Future profiles will occur the firm over a series of years.
➢ Capital budging decisions involve a high degree of risk because future
benefits are not certain.

Importance of Capital Budgeting

➢ Such decision affects the profitability of the firm
Capital budgeting decisions affect the long term profitability of a firm because of the fact that
they relate to fixed assets. A correct investment decision can yield profit otherwise incorrect
decision can endanger the survival of the firm.

➢ Long term periods

The decision of capital budgeting will be felt by firm over a long time and, affects the future
cost structure of the firm

➢ Irreversible decision

Capital budgeting decision are not easily reversible without heavy financial loss to the. This
is because it is very difficult to sell the second hand plant.

➢ Risk

Investment in fixed assets may change the risk complexion of the firm. This is because
different capital. Investment proposals have different degrees of risk. If adoption of an
investment proposal increased average gain, but causes frequent fluctuation in the profit of
firm, the firm will become more risky.
CHAPTER-2

COMPANY
PROFILE
 COMPANY PROFILE

Corizo is an education tech platform that helps students with internships,

professional training programs, career guidance, and mentorship. Our aim is to
bridge the gap between formal education and the ever -changing requirements of
the industry. We at Corizo bring together the studen ts aiming for successful
careers, knowledge and experience accumulated over the years by our industry
experts to create a holistic learning platform. Our platform helps students discover
programs, and get trained in their fields of interest with the latest market
requirements.

Our Mission
At Corizo, we believe everyone should have the opportunity to create progress through
technology and develop the skills of tomorrow. With assessments, learning paths and courses
authored by industry experts, our platform helps individuals benchmark expertise across
roles. Our mission is to train the world’s workforce in the careers of the future. We partner
with leading technology companies to learn how technology is transforming industries, and
teach the critical tech skills that companies are looking for in their workforce.

We are constantly working towards creating a name and a brand that is synonymous with
success. Success for the platform. Success for our clients.

Partnerships & Collaborations

Programs:
Web Development:
In this program, you’ll be shown the ropes on what it takes to a successful web developer.
Obviously, you’ll also get hands on experience with coding. We’ll teach you to use and
implement the fundamental building blocks of the web to ensure you are skilled enough to
develop your own website at a moment's notice.

Delivery Mode

Self Paced Learning and Live virtual classroom Rittvik (Technische Universität , Germany)

Android Development

This program provides you hands-on experience and exposure to developing mobile
applications for Android devices. Starting with fundamentals, this course builds strong
background about Android architecture and internals. Subsequently, it delves into advanced
use cases (handling of multimedia, connectivity, social media and so on) of Android which
would equip you to build a working application on your own.

Delivery Mode

Self Paced Learning and Live virtual classroom

Data Science
From mathematics to machine learning, Data Science is a vast field. In this program you'll be
taught to use all the tools required and identify trends, patterns and gain insights from raw data
as required in the industry. You will leave this program having learnt how to validate and
support big business decisions with facts and figures.

Delivery Mode
Self Paced Learning and Live virtual classroom
Machine Learning
Algorithms, NLP, Predictive Modelling, Data Analysis. Machine Learning is a domain with
endless possibilities. You will leave this program with all the tools and knowledge to develop
programs and algorithms to suit whatever your needs may be.

Delivery Mode
Self Paced Learning and Live virtual classroom.

Cyber Security
Learn how to plan and execute security measures to shield an organization's infrastructure, data
and network devices from external threats and data leaks. You will leave this program having
learnt how to prevent, identify and respond to cyber threats and data breaches.

Delivery Mode
Self Paced Learning and Live virtual classroom

Artificial Intelligence
This Specialization covers Artificial intelligence. AI refers to the simulation of human
intelligence in machines that are programmed to think like humans and mimic their actions.
The term may also be applied to any machine that exhibits traits associated with a human mind
such as learning and problem- solving.

Cloud Computing
This Introduction to Cloud Computing on Amazon AWS program takes you from the AWS
basics to being a competent AWS cloud practitioner. You'll learn general cloud computing
concepts and AWS from fundamentals right through to advanced concepts. You'll also build
hands-on skills using many of the core Amazon Web Services (AWS) services. This program
is meant for anyone looking to build a solid understanding of cloud computing and strengthen
their fundamentals in the domain. There are no prerequisites for taking this program. No prior
experience in cloud computing is required.
Auto Cad
This program covers the essential core topics for working with the AutoCAD software. The
teaching strategy is to start with a few basic tools that enable the student to create and edit a
simple drawing, and then continue to develop those tools. It deals with the designing of
softwares that are used for creating digital designs of structures. It involves the study of the
technicalities, applications, and other aspects of computer-aided design to create drawings and
models for engineers, designers, and architects.

Digital Marketing
Digital marketing is an extensive topic; with over 20 hours of training, quizzes and practical
steps you can follow - this is one of the most comprehensive digital marketing courses
available. We'll cover SEO, YouTube Marketing, Facebook Marketing, Google ad Words,
Google Analytics, Email Marketing and more!

Finance
Finance is a term that expresses two related activities: the study of how money is managed and
the actual process of obtaining needed funds. In this program you will learn oversight, study
and creation of money, credit, banking, assets, investments and liabilities that make up financial
systems as required in the industry.

Human Resource
Unleash the power of HR skills with this Human Resource Management program. Here you
will understand the functions of HRM, such as Performance Management, Employee
Engagement, Compensation Management, etc. You will learn about the evolution of HRM over
a period of time. You will expand your knowledge of Manpower Planning and Job Analysis in
the program, which are a significant part of Human Resource Management. Further, you will
become familiar with the processes of recruitment and selection, compensation and benefits,
training and development, performance management, and employee engagement
Data Science in Advance Program
The Corizo program gradually transforms learners with no programming or no data analytics
background into confident data science professional who can contribute effectively to data
lifecycle activities such as data preparation, data analysis, data visualization, data modelling &
statistical analysis, applying ML models, using NLP for text analysis, Deep Learning and data-
based storytelling. The Corizo program is designed to build the technical, engineering and
professional competencies required to confidently join Data Science Practice Teams. On
successful completion of all challenges, assessments and projects, learner will have the
required skills and confidence to start his/her career in Data Science and gain experience to
grow up as Data Analyst or Jr. Data Scientist.

MERN Stack Development

MERN is used extensively in mobile and web application development. As a result, numerous
companies need developers with a working knowledge of this system. Begin learning the
MERN stack today on Corizo. Expert professionals lead MERN stack program that can help
you understand this dynamic integrated system, whatever your skill level. The main emphasis
of MERN Stack is to equip the students with knowledge of JavaScript. With the new
technologies getting speed in the stack, it helps out in maintaining a clear picture of the MERN
Stack Developer.
 CHAPTER-3

REVIEW
OF
LITERATURE
 REVIEW OF LITERATURE

MEANING OF CAPITAL BUDGETING:

An efficient allocation of capital is the most important finance function in modern times. It
involves decisions to commit firm’s funds to long-term assets. Such decisions are tend to
determine the value of company/firm by influencing its growth, profitability & risk.

Investment decisions are generally known as capital budgeting or capital expenditure decisions.
It is clever decisions to invest current in long term assets expecting long-term benefits firm’s
investment decisions would generally include expansion, acquisition, modernization and
replacement of long-term assets.

Such decisions can be investment decisions, financing decisions or operating decisions.

Investment decisions deal with investment of organization’s resources in Long tern (fixed)
Assets and or Short term (Current) Assets. Decisions pertaining to investment in Short term
Assets fall under “Working Capital Management”. Decisions pertaining to investment in Long
term Assets are classified as “Capital Budgeting” decisions.

Capital budgeting decisions are related to allocation of investible funds to different long-term
assets. They have long-term implications and affect the future growth and profitability of the
firm.

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

benefits of investment against the expenses associated with it. Organizations are frequently
faced with Capital Budgeting decisions. Any decision that requires the use of resources is a
capital budgeting decisions. Capital budgeting is more or less a continuous process in any
growing concern.
 ➢ Definition

“Capital budgeting involves the planning of expenditure for assets, the return from which will
be realized in future time periods.”

Thus, a capital budgeting may be defined as the firm’s decision to invest its funds in the long
term assets in anticipation of an expected flow of benefits over the lifetime of the assets. These
benefits may be either in the form of increased sales or reduced costs capital budgeting decision
regarding expansion, acquisition, modernization and replacement of the long term assets.

➢ Features

➢ In capital budgeting decision, funds are invited in long term assets.

➢ These funds are invested in present times in anticipation of future funds.
➢ Future profiles will occur the firm over a series of years.
➢ Capital budging decisions involve a high degree of risk because future
benefits are not certain.

➢ Importance of Capital Budgeting

There are several factors that make capital budgeting decisions among the critical decisions to
be taken by the management. The importance of capital budgeting can be understood from the
following aspects of capital budgeting decisions.

➢ Such decision affects the profitability of the firm

Capital budgeting decisions affect the long term profitability of a firm because of the fact that
they relate to fixed assets. A correct investment decision can yield profit otherwise incorrect
decision can endanger the survival of the firm.

➢ Long term periods

Capital Budgeting decisions have long term effects on the risk and return composition of the
firm. These decisions affect the future position of the firm to a considerable extent. The finance
manger is also committing to the future needs for funds of that project. The decision of capital
budgeting will be felt by firm over a long time and, affects the future cost structure of the
firm.

➢ Irreversible decision
Capital budgeting decision are not easily reversible without heavy financial loss to the. This
is because it is very difficult to sell the second hand plant.

➢ After the Capacity and Strength to Compete: Capital budgeting decisions affect
the capacity and strength of a firm to face competition. A firm may loose
competitiveness if the decision to modernize is delayed.

PROBLEMS & DIFFICULTIES IN CAPITAL BUDGETING:

1. Future uncertainty: Capital Budgeting decisions involve long-term commitments.

There is lot of uncertainty in the long term. The uncertainty may be with reference to
cost of the project, future expected returns, future competition, legal provisions,
political situation etc.

2. Time Element: The implications of a Capital Budgeting decision are scattered over a
long period. The cost and benefits of a decision may occur at different point of time.

The cost of a project is incurred immediately. However, the investment is recovered

over a number of years. The future benefits have to be adjusted to make them
comparable with the cost. Longer the time period involved, greater would be the
uncertainty.

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

measuring the cost and benefits of projects in quantitative terms.
 Example: The new product proposed to be launched by a firm may result in increase
or decrease in sales of other products already being sold by the same firm. It is very
difficult to ascertain the extent of impact as the sales of other products may also be
influenced by factors other than the launch of the new product.

ASSUMPTIONS IN CAPITAL

BUDGETING:

The Capital Budgeting decision process is a multi-faceted and analytical process. A number of
assumptions are required to be made.

1. Certainty with respect to cost & Benefits: It is very difficult to estimate the cost and
benefits of a proposal beyond 2-3 years in future.

2. Profit Motive: Another assumption is that the capital budgeting decisions are taken
with a primary motive of increasing the profit of the firm.

The activities can be listed as follows:

❖ Dis-investments i.e., sale of division or business.
❖ Change in methods of sales distribution.
❖ Undertakings an advertisement campaign.
❖ Research & Development programs.
❖ Launching new projects.
❖ Diversification.
❖ Cost reduction.

FEATURES OF INVESTMENT DECISIONS:

 ❖ The exchange of current funds for future benefits.
❖ The funds are invested in long-term assets.
❖ The future benefits will occur to the firm over a series of years.

IMPORTANCE OF INVESTMENT DECISIONS:

❖ They influence the firm’s growth in long run.

❖ They affect the risk of the firm.
❖ They involve commitment of large amount of funds.
❖ They are irreversible, or reversible at substantial loss.
❖ They are among the most difficult decisions to make.

TYPE OF INVESTMENT DECISIONS:

❖ Expansion of existing business.

❖ Expansion of new business.
❖ Replacement & Modernization.

INVESTMENT EVALUATION CRITERIA:

❖ Estimation of cash flows.

❖ Estimation of the required rate of return.
❖ Application of a decision rule for making the choice.

Consideration of cash flows is to determine true profitability of the project and it is an

unambiguous way of identifying good projects from the pool. Ranking is possible it should
recognize the fact that bigger cash flows are preferable to smaller ones & early cash flows are
referable to later ones I should help to choose among mutually exclusive projects that which
maximizes the shareholders wealth. It should be a criterion which is applicable to any
considerable .

Capital Budgeting Techniques

 Traditional Approach Modern Approach
(or) (or)
Non-Discounted Cash Flows Disconnected Cash Flows

Pay Back Period (PB) Net Present Value (NPV)

Accounting Rate of Return (ARR) Internal Rate of Return
Profitability Index (PI)
Discounted Payable Period

NET PRESENT VALUE:

The Net Present value method is a classic economic method of evaluating the investment
proposals. It is one of the methods of discounted cash flow. It recognizes the importance of
time value of money”.

It correctly postulates that cash flows arising of different time period, differ in value and are
comparable only when their equivalent i.e., present values are found out.

The following steps are involved in the calculation of NPV:

 Cash flows of the investment project should be forecasted based on realistic
assumptions.

 An appropriate rate of interest should be selected to discount the cash flows; Generally
this will be the “Cost of capital rate” of the company.
 The present value of inflows and out flows of an investment proposal has to be
computed by discounting them with an appropriate cost of capital rate.
  The Net Present value is the difference between the “Present Value of Cash inflows”
and the present value of cash outflows.

 Net present value should be found out by subtracting present value of cash outflows
from present value of cash inflows. The project should be accepted if NPV is positive.

NPV = Present Value of Cash inflow – Present value of the cash outflow

Acceptance Rule:
Accept if NPV > 0
Reject if NPV < 0
May accept if NPV = 0
One with higher NPV is selected.

INTERNAL RATE OF RETURN METHOD

The internal rate of return (IRR) method is another discounted cash flow technique .This
method is based on the principle of present value. It takes into account of the magnitude &
timing of cash flows.

IRR nothing but the rate of interest that equates the present value of future periodic net cash
flows, with the present value of the capital investment expenditure required to undertake a
project.

The concept of internal rate of return is quite simple to understand in the case of one-period
project.

Acceptance Rule:
Accept if r > k
Reject if r < k
May accept if r = k
Where r = rate return
 k = opportunity cost of capital

PROFITABILITY INDEX (OR) BENEFIT COST RATIO:

Yet another time-adjusted method of evaluating the investment proposals is the benefit-cost
(B/C) ratio of profitability index PI). It is benefit cost ratio. It is ratio of present value of future
net cash inflows at the required rate of return, to the initial cash outflow of the investment.

Present Value of Cash inflows

PI = -----------------------------------------
Present Value of Cash outflows

Acceptance Rule:
Accept if PI > 1
Reject if PI < 1
May accept if PI = 1

Profitability Index is a relative measure of projects profitability.

PAY BACK PERIOD METHOD:

One of the top concerns of any person or organization investing a large amount of money
would be the time by which the money will come back. The concern making the investment
would want that at least the capital invested is recovered as early as possible. The pay back
period is defined as the period required for the proposal’s cumulative cash flows to be equal to
its cash outflows. In other words, the payback period is the length of time required to recover
the initial cost of the project. The payback period is usually stated in terms of number of years.
It can also be stated as the period required for a proposal to ‘break even’ on its net investment.

The payback period is the number of years it takes the firm to recover its original investment
by net returns before depreciation, but after taxes.

If project generates constant annual cash inflows, the pay back period is completed as follows:
 Initial Investment
Pay Back = ------------------------
Annual cash inflow

In case of unequal cash inflows, the payback period can be found out by adding up the cash
inflows until the total is equal to initial cash outlay.

Acceptance Rule:
 Accept if calculated value is less than standard fixed by management otherwise reject
it.
 If the payback period calculated for a project is less than the maximum payback period
set up by the company it can be accepted.

DISCOUNTED PAY BACK PERIOD:

One of the serious objections to pay back method is that it does not discount the cash flows.
Hence discounted payback period has come into existence. The number of periods taken in
recovering the investment outlay on the present value basis is called the discounted payback
period.

Discounted Pay Back rule is better as it does discount the cash flows until the outlay is
recovered.

ACCOUNTING RATE OF RETURN (OR)

AVERAGE RATE OF RETURN (ARR):

It is also known as return on investment (ROI). It is an accounting method, which uses the
accounting information revealed by the financial statements to measure the profitability of an
investment proposal. According to Solomon, ARR on an investment can be calculated as “ the
ratio of accounting net income to the initial investment i.e.” .

Average Net Income

ARR = ---------------------------
Average Investment

Average Income = Average of after tax profit

Average Investment = Half of Original Investment

Acceptance Rule:
 Accept if calculated rate is higher than minimum rate established by the management.
 It can reject the projects with an ARR lower than the expected rate of return.
 This method can also help, the management to rank the proposals on the basis of ARR.
 A highest rank will be given to a project with highest ARR, whereas a lowest rank to a
project with lowest ARR.

CAPITAL BUDGETING METHODS IN PRACTICE

 In a study of the capital budgeting practices of fourteen medium to large size companies
in India, it was found tat almost all companies used by back.
 With pay back and/or other techniques, about 2/3rd of companies used IRR and about
2/5th NPV. IRR s found to be second most popular method.
 Pay back gained significance because of is simplicity to use & understand its emphasis
on the early recovery of investment & focus on risk.
 It was found that 1/3rd of companies always insisted on computation of pay back for all
projects, 1/3rd for majority of projects & remaining for some of the projects.
 Reasons for secondary of DCF techniques in India included difficulty in understanding
& using threes techniques, lack of qualified professionals & unwillingness of top
management to use DCF techniques.

PROCESSES IN CAPITAL BUDGETING

 At least five phases of capital expenditure planning & control can be identified:
 Identification (or Organization) of investment opportunities.
 Development of forecasts of benefits and costs.
 Evaluation of the net benefits.
 Authorization for progressing and spending capital expenditure.
 Control of capital projects.

FORECASTING:

Cash flow estimates should be development by operating managers with the help of finance
executives. Risk associated should be properly handled. Estimation of cash flows requires
collection and analysis of all qualitative and quantitative data, both financial and non-financial
in nature. MIS provide such data.

Correct treatment should be given to:

 Additional working capital
 Sale proceeds of existing assets.
 Depreciation
 Financial flows (to be distinguished from operation flows)

EVALUATION:
Group of experts who have no take to grind should be taken in selecting the methods of
evaluation as NPV, IRR, PI, Pay Back, ARR & Discounted Pay Back.

Pay Back period is used as “Primary” method & IRR/NPV as “Secondary” method in
India. The following are to be given due importance.

 For evaluation, minimum rate of return or cut-off is necessary.

 Usually if is computed by means of weighted Average cost of Capital (WACC)
 Opportunity cost of capital should be based on risky ness of cash flow of investment
proposals.
 Assessment of risk is an important aspect. Sensitivity Analysis & Conservative for
costs are two important methods used in India.
AUTHORIZATION:
Screening and selecting may differ from one company to another. When large sums are
involved usually final approval rests with top management. Delegation of approval authority
may be effected subject to the amount of outlay. Budgetary control should be rigidly exercised.

CONTROL AND MONITORY:

A Capital projects reporting system is required to review and monitor the performance of
investment projects after completion and during their life. Follow up comparison of the actual
performance with original estimates to ensure better forecasting besides sharpening the
techniques for improving future forecasts. As a result company may re-praise its projects and
take necessary action.

DECISION MAKING LEVEL:

For planning and control purpose three levels of Decision making have been identified :

 Operating
 Administrative
 Strategic

OPERATING CAPITAL BUDGETING:

Includes routine minor expenditure, as office equipment handled by lower level management.

ADMINISTRATIVE CAPITAL BUDGETING:

Falls in between these two levels involves medium size investments such as business handled
by middle level management.

STRATEGIC CAPITAL BUDGETING:

Involves large investment as acquisition of new business or expansion in a new time of
business, handled by top management unique nature.
Long Term Capital Budgeting In Corizo

PRE – INVESTMNET STAGE

In a planned economy, as in India, the identification of public sector projects needs to be done
within the overall framework of national the sect oral planning. All projects of every sector
need to be identified scientifically at the time of plan formulation. In actual practice, however,
it is observed that ‘identification’ stage is the most neglected stage of the project planning.

The five year plans indicate the broad strategy of planning economic growth rate and other
basic objectives to be achieved during the plan period. The macro level planning exercise
undertaken at the beginning of every five year plan indicates broadly the role of each sector’s
physical targets to be achieved and financial outlays, which could be made available for the
development of the sector during the plan period.

The identification of a project in the Five Year Plan is not the sanction of the project for
implementation. It provides only the ‘green signal’ for the preparation of feasibility report
(FR0 for appraisal and investment decision. A preliminary scrutiny of the FR of the project is
done in the Ministry and thereafter copies of the feasibility report are submitted to the
appraising agencies, viz., Planning Commission, Bureau of Public Enterprises and the Plan
Finance Division of the Ministry of Finance.

PROJECT APPRAISAL
The appraisal of the project follows the formulation stage. The objective of the appraisal
process is not only to decide whether to accept or reject the investment proposal, but also to
recommend the ways in which the project can be redesigned or reformulated so as to ensure
better technical, financial, commercial and economic viabilities.

The project appraised which is an essential tool for judicious investment decisions and project
selection is a multi-disciplinary task. But many a times this is considered doubt, have played
an important role in contributing systematic methods for forecasting the future and evolving
appraisal methods to quantify socials costs and benefits, but they alone can not carry out
complete appraisal of an investment proposal.

The need for project appraisal and investment decisions based on social profitability arises
mainly because of the basic characteristics of developing countries limited resources for
development and multiple needs – objective of planning being ‘Economic Growth with Social
Justice’. The project appraisal is a convenient and comprehensive fashion to achieve, the laid
down objectives of the economic development plan. The appraisal work presupposes
availability of a certain minimum among of reliable and up to date data in the country, as well
as the availability of trained persons to carry out the appraisal analysis.

As stated earlier the investment decision of public sector projects are required to be taken
within the approved plan frame work. The Project Appraisal Division (PAD) that prepares the
comprehensive appraisal note of projects of Central Plans was therefore set up in Planning
Commission. The Finance Ministry issues expenditure sanction for all investment proposals
within the frame work of annual budget.

Primary Data has been collected through discussions and observation of various people
involved in the business whereas Secondary Data through annual reports of the company,
newspaper, magazines, journals and internet.

Net Present Value

Here's another perspective on the meaning of NPV. If we accept a project with a negative NPV
of -$2,422, this is financially equivalent to investing $2,422 today and receiving nothing in
return. Therefore, the total value of the firm would decrease by $2,422. This, of course, assumes
that the various components (cash flow estimates, discount factor, etc.) used in the computation
are correct.

In practice, financial managers are rarely presented with zero-NPV projects for at least two
reasons. First, in an abstract sense, zero is just another of the infinite number of values the NPV
can take; as such, the likelihood of obtaining any particular number is small. Second, (and more
pragmatically), in most large firms, capital investment proposals are submitted to the Finance
group from other areas (e.g., the industrial engineering group) for analysis. Those submitting
proposals recognize the ambivalence associated with zero NPVs and are less likely to send
them to the Finance group in the first place.

Conceptually, a zero-NPV project earns exactly its required return. Assuming that risk has been
adequately accounted for, investing in a zero-NPV project is equivalent to purchasing a
financial asset in an efficient market. In this sense, one would be indifferent between the capital
expenditure project and the financial asset investment. Further, since firm value is completely
unaffected by the investment, there is no reason for shareholders to prefer either one.

However, several real-world considerations make comparisons such as the one above difficult.
For example, adjusting for risk in capital budgeting projects can be problematic. And, some
investment projects may be associated with benefits that are difficult to quantify, but exist,
nonetheless. (Consider, for example, an investment with a low or zero NPV but which enhances
a firm's image as a good corporate citizen.) Additionally, the secondary market for most
physical assets is substantially less efficient than the secondary market for financial assets.
While, in theory, one could adjust for differences in liquidity, the adjustment is, again,
problematic. Finally, some would argue that, all else equal, some investors prefer larger firms
to smaller; if true, investing in any project with a nonnegative NPV may be desirable.

Internal Rate of Return

Internal rate of return (IRR) is the rate that makes the present value of the future cash flows
equal to the initial cost or investment. In other words, it is the discount rate that gives a project
a $0 NPV.

IRR rule-the investment is acceptable if its IRR exceeds the required return.

Assume: To comply with the Air Quality Control Act of 1989, a company must install three
smoke stack scrubber units to its ventilation stacks at an installed cost of $355,000 per unit. An
estimated $100,000 per unit could be saved each year over the five-year life of the ventilation
stacks. The cost of capital is 14% for the firm. The analysis of the investment results in a NPV
of -$11,692.

Despite the financial assessment dictating rejection of the investment, public policy might
suggest acceptance of the project. By fiat, certain types of pollution controls are required. But
should the firm exceed the minimum legal limits and be responsible for the environment, even
if this responsibility leads to a wealth reduction for the firm? Is environmental damage merely
a cost of doing business? Could investment in a healthier working environment result in lower
long-term costs in the form of lower future health costs? If so, might this decision result in an
increase in shareholder wealth? Notice that if the answer to this second question is yes, it
suggests that our original analysis omitted some side benefits to the project.

ADVANTAGES
• People seem to prefer talking about rates of return to dollars of value.
• NPV requires a market discount rate; IRR relies only on the project cash
flows.

DISADVANTAGES
• Non-conventional cash flows- Multiple rates of return-if cash flows
alternate back and forth between positive and negative (in and out), more
than one IRR is possible. NPV rule still works just fine. Also, if the cash
flows are of loan type, meaning money in at first and cash out later, the IRR
is really a borrowing rate and lower is better. The IRR is sometimes called
the IBR (internal borrowing rate) in this case.
• Mutually exclusive investment decisions-if taking one project means
another is not taken, the projects are mutually exclusive. The IRR can
provide conflicting rankings when mutual exclusive projects are analyzed.
Comparison of the NPV and IRR Methods

NPV Profiles
Net present value profile is a graph of an investment's NPV at various discount rates. The
graph illustrates the NPV changes as the cost of capital changes. The IRR is not a function of
the cost of capital.

➢ Risk
Investment in fixed assets may change the risk complexion of the firm. This is because
different capital. Investment proposals have different degrees of risk. If adoption of an
investment proposal increased average gain, but causes frequent fluctuation in the profit of
firm, the firm will become more risky.

Capital budgeting is investment decision-making as to whether a projects forth undertaking.

Capital budgeting is basically concerned with the justification of capital expenditures .Current
expenditures are short-term and are completely written off in the same year that expenses occur.
Capital Budgeting is the process by which the firm decides which long-term investment to
make. Capital budgeting projects, i.e., potential long-term investment, are expected to generate
cash flows over several years. The decision to accept or reject a capital Budgeting project
depends on an analysis of the cash flows generated by the project and its cost, Popular methods
of capital budgeting include net present value (NPV), internal rate of return (IRR), discounted
cash flow (DCF) and payback period. The following three Capital Budgeting decision rules
will be presented:
• Payback period
• Net Present Value (NPV)
• Internal Rate of Return (IRR)

Capital Budgeting Phases

The phases of the capital budgeting process include:
• Description of the need or opportunity;
• Identification of alternatives;
• Evaluation of the options and the relevant cash flows of each;
• Selection of best alternative; and
• Conducting a post-completion audit of the projects.

Identifying Capital Budgeting Needs

The first step is to identify the need or opportunity. This is usually done at the mid-
management level and is the result of a shared vision of company goals and strategies coupled
with a “where the rubber meets the road” perspective of local”
clients needs, tastes and behavior. They see a need or opportunity and communicate it to senior
management, usually in the form of proposals which both include identification of the need
or opportunity, and potential solution and/ or recommendations. Senior management then
evaluates the merit of each proposed opportunity and makes a determination of whether or not
to look into it further.

While project need identification is usually a de-centralized function, capital initiation and
location decisions tend to remain a highly centralized undertaking.
The reason for this revolves around the need for capital rationing, especially when funds are
limited and upper-management wishes to maximize its returns/benefits from any capital
projects undertaken. The information needed to make this determination usually comes from
both internal and external sources, and is based on both financial and non-financial
considerations. Interestingly enough, the factors examined in this process can be both firm-
specific and market-based in nature. It is that this point that companies should be seeking
qualified financial guidance since the consequences of both a poor decision and of the
implementation of a good decision can be far-reaching.

Risk Analysis in Capital Budgeting Decisions

Conceptually, a capital budgeting decision is simplicity itself. The analyst determines the
upfront cost of a project, as well as the periodic future ash flows resulting from the project.
Those cash flows are then used to calculate it the net present value (NPV) of the project- using
the firm’s weighted-average cost-of- capital (WACC) as a discount rate –or the internal
rate of return (IRR) for the object. If the NPV is positive, or if the IRR exceeds the WACC, the
firm undertakes the project; otherwise it doesn’t.

The difficulty in making capital budgeting decisions arises as a consequences of the difficulty
in determining the upfront costs, the periodic cash flows, even the proper WACC. All of these
quantities must be estimated, and all he ensuing estimates will contain some degree of
uncertainty; the process in inherently risky.

Merits

➢ It takes time value of money.

➢ Final life of the project is taken into consideration.

Demerits

➢ It is difficult to understand and implement.

➢ It is difficult in fixing the required rate of return.
NPV Example
Assume you have the following information on project X:

Initial outlay-$1,100 Required return=10%

Annual cash revenues and expenses are as follows:

Year Revenues Expenses
1 $1,000 $500
2 2,000 1,000

Draw a time line and computer the NPV of project X

Example:
Consider the previous investment project analyzed with the NPV rule.

The initial cost is $600 million. It has been decided that the project should be
accepted if the payback period is 3 years or less. Using the payback rule, should
this project be undertaken?

Year Cash Flow Accumulated Cash Flow

1 $200.00 $200.00

2 220.00
3 225.00

4 210.00
Example: Calculating the payback period: the projected cash flows a proposed investment
are listed below. The initial cost is $500. What is the payback period for investment?

Year Cash flow Accumulated Cash Flow

1 $100.00 $100.00

2 200.00

3 500.00

Comparison of IRR and NPV

IRR and NPV rules lead to identical decision when the following conditions are Satisfied.

• Conventional Cash Flows: the first cash flow (the initial investment) is
Negative and all the remaining cash flows are positive.
• Project is independent: A project is independent if the decision to accept or
reject the project does not affect the decision to accept or reject any other
project.

When one or both of these conditions are not met, problems with using the IRR
rule can result.
 Internal rate of return (IRR)

Meaning

It is also Known as time adjustment rate of return. It is based on internal

facts of a proposal. It is determined entirely by the cash inflow and cash
outflows of the project irr is usually the rate of return that a project
earns.

In other words, it is the rate which NPV of the project is zero.

Evaluating

If IRR exceeds the rate of return, the project would be accepted. If it is

less than expected rate of return, project will be rejected.

The formula of calculating of IRR is

IRR = lower discount rat + NPV at lower discount rate / NPV at lower
Discount rate – NPV at higher discount rate * difference in discount rate

Merits
➢ It takes into consideration the time value of money.
➢ It is consistent with the overall objective of maximizing the
shareholder wealth.

Demerits

➢ It involves tedious calculation.

➢ It becomes difficult to accept or reject the proposal.
 IRR illustrated
Initial outlay = -$200

Year Cash Flow

1 50
2 100
3 150

Find the IRR such that NPV = 0

0 = -200 + 50 + 100 + 150

(1+IRR)1 (1+IRR)2 (1+IRR)3

200 = 50 + 100 + 150

(1+IRR)1 (1+IRR)2 (1+IRR)3

A capital Budgeting decision rule should satisfy the flowing criteria.

➢ Must consider all of the project’s cash flows.
➢ Must consider the time value of money
➢ Must always lead to correct decision when choosing among mutually Exclusive
Projects.
 NPV

NPV(k)

IRR

K1 Discount rate K2
NPV(k2)0

Figure .1 NPV vs. IRR independent projects

NPV

$1 363.64

B
$954.55 A

0 k0 20% 21%
Discount rate
 Figure .2 NPV vs. IRR: Dependent projects

NPV

$3,409.00

$1,230.50

0 20% 21% 30%

Discount rate
 CHAPTER- 4

RESEARCH
METHODOLOGY
RESEARCH METHODOLOGY

When we talk of research methodology, we not only talk of the research methods but also the
comparison of the logic behind the methods, we used in this context of our research study and
explain why we are using a particular method or technique and why using the other. Research
methodology is a way to systematically solve the research problem. It may be understood as a
science of studying how research is done systematically. In this, we study the various steps
that are generally adopted by researcher in studying his research problem along with the logic
behind them.
“The present study is based upon the case study method of research to investigate procedures
at micro level”.
As the study is analyzing probing in nature, thus, entirely based on the secondary data gathered
through the annual reports of the industry. Therefore it provides a historical perspective of
decisions.

OBJECTIVES OF THE STUDY:

1. To know about affect of capital budgeting decision on profitability of firm.
2. To know about process of capital budgeting are long or not.
3. TO know about various types of capital budgeting decision.
4. To know about difficulty level of capital budgeting decision.

SCOPE THE STUDY:

❖ The data of study of project collected of investor or capital structure may not applicable
in all the situations.
❖ The study of capital structure analysis of company financial position may be affected
or not.
❖ The calculations and methods adopted in my study may be carried an appropriately.
❖ Due to time constant of 45 days, the data of the study may on way net present overall
view of the capital structure.
❖ It is dipped to judge the results-valve due to the change market valves of the firm.
RESEACH DESIGN
Research design involves defining the research problem, determining how to collect the data
and from whom, establishing the way the data will be analyzed estimating costs and the
preparation of the research approach. For this study, descriptive research was selected.

TYPE OF RESEARCH DESIGN

1. Historical Research Design

2. Case and Field Research Design
3. Descriptive or Survey design
4. Exploratory Research design

I used descriptive research design in this study

1. POPULATION AND SIZE OF SAMPLE

: SAMPLE DESIGN
The method used for sample technique is convenient sampling method.

SIZE OF SAMPLE:
I collected the data from 50 employees.

2. DATA COLLECTION:

. The data are collected from both primary and secondary sources.
Primary Data
Primary data collected through face to face interview, observation, and by participation in the
selecting process.
Secondary Data
The secondary data is collected from website, magazine, memorandum, journals, books and
some other relevant sources.
Both primary data and secondary will be used to generate this report. Primary data sources are
scheduled, survey, informal discussion with professionals. Secondary data sources are the data
used previously for the analysis and the results are undertaken for next process.

3. METHOD OF DATA ANALYSIS

I used various data and graphs in this study

LIMITATIONS OF THE STUDY:

• The respondents were limited and cannot be treated as the whole population.
• The respondents may be biased.
• Time was the major constraint.
• The accuracy of indications given by the respondents may not be consider adequate.
• This data does not cover the whole budgeting impact.
 CHAPTER –5

DATA ANALYSIS
AND
INTERPRETATION
DATA ANALYSIS
The term analysis means the computation of certain measures or indices along with searching
for patterns of relationship that exists among data group. Merely collection of data cannot be
the aim of any research activity but with the help of collected data a researcher tries to draw
the conclusions made generalization, establishes relationship between two or more variable,
test the hypothesis. Under the processes of analysis of data some statistical methods are used
to make data meaningful and self-explanatory. The process of analysis of data made the data
to speak about themselves. By analysis, mean the determination of certain indices or measures
along with searching for pattern of relationship that exists among the data group.

INTERPRETATION
Interpretation means drawing inferences from the collected facts after the analytical study.
According to C. William Emory, interpretation has two major aspects namely establishing
continuity in research through linking the results of a given study with those of another and the
establishment of some relationship with the collected data. Interpretation is the device through
which the factors that seem to explain what has been observed by researcher in the course of
the study can be better understood. Interpretation provides a theoretical conception which can
serve as a guide for further research.
1. Capital budgeting decision affects the profitability of the firm.

Categories Total no. of respondents

Yes 50
No 25
Others 25

25%

YES
NO
50%
OTHERS

25%

Fig. – 4 Profitability of the firm

Interpretation: The responses of the respondents are 50% the decisions affect the profitability
of the firm.
2. Decision are taken by any organization.

Categories Total no. of respondents

Yes 45
No 30
Others 25

25%
45%
YES
NO
OTHERS
30%

Fig. – 5 Decisions taken by organization

Interpretation: The response of the respondents is 45% in favor of decision taken by

organization.
3. Funds are invested in the long-term asset.

Categories Total no. of respondents

Yes 70
No 20
Others 10

10%

20%
YES
NO
OTHERS

70%

Fig. -6 Funds invested in long term assets

Interpretation: The 70% respondents are response in invested in the Long term assets which
are beneficial of the company.
4. Future profits are not certain.

Categories Total no. of respondents

Yes 40
No 50
Others 10

10%
40%
YES
NO
OTHERS

50%

Fig. -7 Profits are not certain

Interpretation: Future profits are not certain is considered by 40% from the point of view of
the respondents.
5. The process of decision are lengthy.

Categories Total no. of respondents

Yes 45
No 40
Others 15

15%

YES
45%
NO
OTHERS

40%

Fig. -8 Lengthy process

Interpretation: Capital budgeting decisions are very lengthy process is viewed by 45%
respondents.
6 .Involve high risk

Categories Total no. of respondents

Yes 30
No 30
Others 40

30%
40%
YES
NO
OTHERS

30%

Fig. -9 Involve high risk

Interpretation: The responses of the respondents is 30% in favor of involvement

of risk in capital budgeting decision.
7. Capital budgeting decision is a difficult decision

Categories Total no. of respondents

Yes 55
No 30
Others 15

Fig. -10 Difficult decisions

15%

YES
NO
OTHERS
30% 55%

Interpretation: 15% respondents are in favor of the difficulty in capital budgeting.

8. Capital budgeting decision is easy to change

Categories Total no. of respondents

Yes 60
No 35
Others 05

70
60
50
40
30
20
10
0
YES NO OTHERS

Fig. -11 Easy to change

Interpretation: The responses of the respondents are 60% considered that capital
budgeting decisions are easy to change.
9. Process should be simple and easy to predict

Categories total no. of respondents

Yes 20
No 70
Others 10

80

60

40

20

0
YES NO OTHERS

Fig -12 Simple process

Interpretation: Only 20% respondents are responses that procedures of capital

budgeting decision should be simple and 70% are said that its procedures are not very easy.
10. Require large amount of funds

Categories Total no. of respondents

Yes 25
No 35
Others 40

40

30

20

10

0
YES NO OTHERS

Fig. -13 Large amount of funds

Interpretation: Only 25% respondents are responses that requirement of funds

are large in the company.
 CHAPTER-6

CONCLUSIONS
AND
SUGGESTIONS
 CONCLUSIONS

The conclusion of the whole report is the capital budgeting is very important part of firm.
Through capital budgeting, we find the budget of the firm. We find that how much the firm
invest in a particular assets, how we maintain the budget of firm.

Emerging as a dynamic organization, focusing on strategic, seizing opportunities for generating

and building upon past success. My view about compensation &benefits is that it is better
descriptive statements of and ineffective behaviors’ varying from least to most effective. So, a
rater must indicate which behaviors on each scale best describes an employee’s performance,
But there are some key areas which should be taken into consideration.

Thus, in short it can be said that budgeting decision are the beneficial part of the firm. It
maintains the finance an to help in developing the firm.

SUGGESTIONS
❖ Carefully estimate expected future cash flows.
❖ Select a discount rate consistent with the risk of those future cash
flows.
❖ Compute a “base-case” NPV.
❖ Identify risks and uncertainties. Run a sensitivity analysis.
❖ Exists whenever enterprises cannot, or choose not to, accept all value-
creating investment projects.
❖ Relax and eliminate the budget constraint.
❖ Manage the process rather than the outcomes.
❖ Develop a corporate culture committed to value creation.
ANNEXURE

QUESTIONNAIRE
Q:1 Do you think capital budgeting decisions affect the Profitability of the firm for the long
time period?
Ans. Yes No don’t know

Q :2 “Capital budgeting decision are the long-term decision, “Do you think such decision are
taken by any organization?
Ans. Yes No don’t know

Q :3 Do you thing organization’s funds are invested in long term assets?

Ans. Yes No don’t know

Q :4 “In capital budgeting decision, future benefits are not certain.” Are you satisfied of this
statement?
Ans. Yes No don’t know

Q :5 Do you think capital budgeting decisions are the lengthy procedures?

Ans. Yes No don’t know

Q :6 Do you think capital budgeting decision involve a high degree of risk?

Ans. Yes No don’t know

Q :7 Do you think capital budgeting decision are the most difficult decision which is to be
taken by the firm?
Ans. Yes No don’t know

Q:8 Do you think once capital budgeting decision are taken, it is easy to change?
Ans. Yes No don’t know

Q :9 Do you think the procedures of capital budgeting decision should be simple or easy to
predict?
Ans. Yes No don’t know
Q:10 Do you think capital budgeting decisions require large amount of funds?
Ans. Yes No don’t know

BIBLIOGRAPHY

Books
 ➢ Goel R., Financial Management, A Vichal Publishing company, Edition
2nd, 2011.
➢ Eugene F. Brigham, Fundamental Management, South Esteem, Edition
2nd, 1998.

Websites

➢ www.corizo.com
➢ www.trainingfirm.com