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A STUDY ON
“CAPITAL BUDGETING ”
With reference to
“PARADEEP PHOSPHATES LTD”
BHUBANESHWAR
A Project Report
Report submitted
submitted to JNTU,
JNTU, KAKINADA in partial
partial fulfillment
fulfillment for
award of the Degree of
MASTER OF BUSINESS ADMINISTRATION (MBA)

Submitted By
GORU.SHYAM KUMAR.
Under the Esteemed Guidance of

Mr. SRIRAM TRIPATHY
MIRACLE SCHOOL OF MANAGEMENT

(AFFILIATED TO JNTU)
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DECLARATION
I hereby declare that this project report “ CAPITAL BUDGETTING
reference to “PARADEEP PHOSPHATES Ltd,” has been prepared by me during
period 06-05-2012 to 10-06-2012 is partial fulfillment of the requirement for
award of degree of Master of Business Administration

Administration of J.N.T.U,KAKINADA.
J.N.T.U,KAKINADA.
I also declare that this project is a result of my own effort and that it
not been submitted to any other university for the Award of Any Degree.
Place: VISAKHAPATNAM (Goru.Shyam Kumar)
Date:
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ACKNOWLEDGEMENT
A successful project can never be prepared by single effort or the perso
to whom the project is assigned, but it also demand the help and guardiansh
of some conversant persons who helps in the undersigned actively or passive
in the completion of successful project .
With great pleasure, I express my deep sense gratitude to th
management of “PARADEEP PHOSPHATES LIMITED ”, BHUBANESHWAR f
giving me this very inspirational opportunity

opportunity to do my observation study in the
reputed company to take this opportunity to express my deep and profoun
gratitude to the people concerned who have helped me directly or indirectly
successful completion
completion of this project.
I convey my sincere thanks to Mr. M K MUKHERJEE Dy. Gener
Manager,
Manager, (F &A), PPL who has motivated me with their valuable suggestio
and helped me throughout the project in permitting to perform various tasks
this esteemed organization.

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CONTENTS
CHAPTER-1 INTRODUCTION TO THE STUDY
CHAPTER-2 INDUSTRY PROFILE
CHAPTER-3 COMPANY PROFILE
CHAPTER-4 PROJECT PLANNING (CAPITAL BUDGETING)
CHAPTER-5 FINANCING OF THE PROJECT
CHAPTER-6 FINANCE AND ACCOUNTS SECTION AT PPL
CHAPTER-7 DATA ANALYSIS AND INTERPRETATION
CHAPTER-8 EVALUATION OF CAPITAL BUDGETING
CHAPTER-9 FINDINGS AND SUGGESTIONS
BIBLIOGRAPHY 8
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CHAPTER 1
INTRODUCTION
1.1 INTRODUCTION OF THE STUDY
Every organization irrespective of its size and mission can be viewed

financial entity management of an organization. Financial managem
focuses not only on the improvement of funds but also on their effic
use with the objective of maximizing the owners‟ wealth. The allocatio
funds is therefore an important function of financial management.
allocation of funds involves the commitment of funds to assets
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 budgetin

capital expenditure budgeting. It means as to whether or not money sho
be invested in long term project. This part is devoted to an in-depth
comparative decision of capital budgeting/capital expenditure managem
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In general a project is an activity in which, we will spend money

expectation of returns and which logically seems to lead itself to plann
Financing and implementation as a unit, is a specific activity with a spe
point and a specific ending point intended to accomplish a spe
objective.
To take up a new project, involves a capital investment decision and

the top management‟s duty to make a situation and feasibility analysi
that particular project and means of financing and implementin
financing is a rapidly expanding field, which focuses not on the cr
status of a company, but on cash flows that will be generated by a spec
project.
Capital budgeting has its origins in the natural resource and infrastruc
sectors. The current demand for infrastructure and capital investme
being fueled by deregulation in the power, telecommunications,
transportation sectors, by the globalization of product markets and
need for manufacturing scale, and by the privatization of governme
owned entities in developed and developing countries.
The capital budgeting decision procedure basically involves the evalua

of the desirability of an investment proposal. It is obvious that the f
must have a systematic procedure for making capital budgeting decision
The procedure must be consistent with the objective of we

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1.2 Importance of investment decisions:-

Capital investments, representing the growing edge of a business,
deemed to be very important for three inter- related reasons.
1. They influence firm growth in the long term consequences ca

investment decisions have considerable impact on what the firm can d
future.
2. They affect the risk of the firm; it is difficult to reverse cap

investment decisions because the market for used capital investments
organized and /or most of the capital equipments bought by a firm to m
its specific requirements.
3. Capital investment decisions involve substantial out lays.
“PARADEEP PHOSPHATES LIMITED” is a growing concern, capital budge

is more or less a continuous process and it is carried out by diffe
functional areas of management such a production, marketing, engineer
financial management etc. All the relevant functional departments
crucial role in the capital budgeting decision process.
1.3 Objectives of the study:-

1. To describe the organizational profile of “PARADEEP PHOSPHA
Ltd”.
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1.4 SCOPE OF THE STUDY:-
This study highlights the review of capital budgeting and ca

expenditure management of the company. Capital expenditure decis
require careful planning and control. Such long term planning and con
of capital expenditure is called Capital Budgeting. The study also help
understand how the company estimates the future project cost. The st
also helps to understand the analysis of the alternative proposals
deciding whether or not to commit funds to a particular investm
proposal whose benefits are to be realized over a period of time longer t
one year. The capital budgeting is based on some tools namely Payb
period, Average Rate of Return, Net Present Value, Profitability Index,
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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collectively; some of the information has been verified or suppleme

with personal observation. These sources include.
a. Thorough interactions with the various department Managers

“PARADEEP PHOSPHATES LTD”.
b. Guidelines given by the Project Guide, Mr. SRIRAM TRIPAT

Dy. Manager, Budget Section, F & A.
Secondary Sources:
This data is from the number of books and records of the company,
annual reports published by the company and other magazines.
secondary data is obtained from the following.
a. Collection of required data from annual records, mon
records, internal Published book or profile of “PARAD
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 m

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c) The study is carried basing on the information and docum

provided by the organization and based on the interaction w
the various employees of the respective departments.
1.7 REVIEW OF LITERATURE:-
The concept of Capital Budgeting being a very sensitive area of finance

outreached the attention of many researchers .A number of studies has b
conducted on the subject. However briefing such studies will highlight
importance of the present study. It should safeguard to avoid the wr
choice of the project and investment to be made. It is necessary for
management to give proper attention to capital budgeting.
The reason for the popularity of Payback period in the order of significa
were stated to be its, simplicity to use and understand, its emphasis on
early recovery of investment and focus on risk. It was also found that
third of companies always insisted on the computations of Payback per
for all projects. For about two-third companies standard Payback pe
ranged between three and five years.
The reason for the secondary role of Discounted Cash Flow technique
India included difficulty in understanding and using these techniques,
to lack of qualified professional and unwillingness of top managemen
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were very frequent in the company and it was not considered necessar
use Discounted Cash Flow technique for evaluating such projects.
The present investment appraisal in practice is raising certain question

the context.
1. How much importance is assigned to economic analysis of ca

expenditure in practice?
2. What methods are used for analyzing capital expenditure in prac
and what is the reason for underlying these methods?
The answers of the above questions are based on a survey of twenty fi

varying on several dimensions like industry category, size, finan
performance and capital intensity. From these firms, executi
responsible for capital investment evaluation and capital bu
preparation were interviewed
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CHAPTER-2
INDUSTRY PROFILE
2.1 Introduction to Fertilizer Industry:
Fertilizer is generally defined as "any material, organic or inorganic, nat

or synthetic, which supplies one or more of the chemical elements requ
for the plant growth".
Since the essential physiological attribute of seeds is their ability to con

a great duel of nutrients into grain. The spread of this variety lead
greater consumption of fertilizers simultaneously with increa
demographic pressure on the agricultural productivity has assumed m
importance. This also contributed to the rising demand for fertilizers.
Agriculture the backbone of Indian Economy still holds its rela

importance for more than a billion peoples. The Government of India f
time to time has taken considerable steps for the upliftment of Agricul
Sector. Here we have analyzed the performance of Fertilizer Industry b
one of the vital parts in agricultural production and Government's po
initiatives for the same.
Fertilizer in the agricultural process is an important area of conc

Fertilizer industry in India has succeeded in meeting the demand o
chemical fertilizers in the recent years. The Fertilizer Industry in I
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established as pedestal fertilizer units to have self sufficiency in

production of food grains. Afterwards, the industry gained impetus in
growth due to green revolution in late sixties, followed by seventies
eighties when fertilizer industry witnessed an incredible boom in
fertilizer production.
Fertilizer consumption of plant nutrients per unit of grossed cropped

in India is still very low average being 91.5 kg/ha. Productivity of food g
crops in the country is also quite low, around 1.6 t/ha, which can certa
be doubled by enhancing per unit average fertilizer use. Fertil
consumption has to increase substantially in order to achieve the food g
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

demand of all chemical fertilizers except for MOP. The industry had a v
humble beginning in 1906, when the first manufacturing unit of Si
Super Phosphate (SSP) was set up in Ranipet near Chennai with an an
capacity of 6000 MT. The Fertilizer & Chemicals Travancore of India
(FACT) at Cochin in Kerala and the Fertilizers Corporation of India (FC
Sindri in Bihar were the first large sized -fertilizer plants set up in
forties and fifties with a view to establish an industrial base to achieve
sufficiency in food grains. Subsequently, green revolution in the late six
gave an impetus to the growth of fertilizer industry in India. The seven
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investments in this industry. Presently public, private and coop. se

share 45, 33 and 22 percent of capacity, respectively, whereas their shar
P2O5 capacity is 26, 64 and 10 per cent respectively. New proposal
government for setting-up fresh capacities in country are mainly f
Public and Cooperative sectors.
The installed capacity as on 30.01.2003 has reached a level of 121.10

MT of nitrogen (inclusive of an installed capacity of 208.42 lakh MT of
after reassessment of capacity) and 53.60 lakh MT of phosphatic nutr
making India the 3rd largest fertilizer producer in the world. The r
build-up of fertilizer production capacity in the country has been achie
as a result of a favorable policy environment facilitating large investm
in the public, co-operative and private sectors.
Presently, there are 57 large sized fertilizer plants in the cou

manufacturing a wide range of nitrogenous, phosphatic and com
fertilizers. Out of these, 29 unit produce urea, 20 units produce DAP
complex fertilizers 13 plants manufacture Ammonium Sulphate
Calcium Ammonium Nitrate (CAN) and other low analysis nitrogen
fertilizers. Besides, there are about 64 medium and small-scale unit
operation producing SSP.
The sector experienced a faster growth rate and presently India is the t
largest fertilizer producer.
2.3 MAJOR SEGMENTS IN FERTILIZERS :

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(K) and sulphur(S). The straight nitrogenous fertilizers produced in

country are urea, ammonium Sulphate, calcium ammonium nitrate (C
and ammonium chloride. The only straight phosphatic fertilizer b
produced in Sector Report: Fertilizer Industry India / Economics the cou
is SSP. The complex fertilizers include DAP, several grades of N
phosphates and NPK complexes. Urea and DAP are the main fertili
produced indigenously.
(a) Chart showing different types of fertilizers

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4.86 million tons, most of it is confined to nitrogen resulting from

commissioning of the expansions, new plants or joint ventures abr
Production of N is expected to increase from 9.7 million tons in 1997-9
25.0 million tons in 2007-08. The Group estimated that the avail
phosphate supply will increase from 2.8 million tons of P2O5 in 199
and reach 7 million tons in 2007-08. The demand for N, P2O5, K2O has
been estimated up to 2006-2007 (terminal year of tenth plan) at 16.35,
and 2.60 million tonnes, respectively.
2.5 Pricing policy:
The fertilizer policy is aimed at increasing consumption to meet the f

and fiber requirement of growing population through setting up requ
production capacities, ensuring that quality fertilizers are made availabl
the farmers throughout the country at uniform and affordable price. It
also recognized that fertilizer use should be profitable to the farmers
which he must get a certain minimum return for the produce. This led to
announcement of procurement prices and minimum support prices
several crops from 1970 onwards. The Marathe Committee was assigned
task of resolving the issue of keeping Farm Gate Prices (FGP) of fertilizer
an affordable level in the face of rising production/import costs.
recommendations in 1977 led to the birth of the Retention Price Sch
(RPS). This scheme was intended to ensure that both the fertilizer produ
as well as the farmers should find it worthwhile to produce and
fertilizers. The policy aimed that each manufacturer is able to get 12% p
tax return on investment on efficient operation regardless of the locat
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2.6 Fertilizer subsidy:
The RPS system helped in achieving the objective of increased indigen

availability and supplying it to farmers on affordable and uniform p
The difference between FARM GATE PRICES and RPS is paid to the indu
as subsidy.
(b) Chart showing subsidy on Fertilizers
Production along with escalation in price of raw material and plant cost,
subsidy amount swelled to huge proportions over the years. In an atte
to reduce the burden of subsidy, the government has increased urea p
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2005. However, the subsidy bill after the decontrol of phosphatic

potassic fertilizer declined and remained below 1990-91 level.
The union budget for 2000-01 raised urea prices by 15 percent; DAP b
percent and that of MOP by 15 percent. This move enabled the Governm
of India (GOI) to prune the subsidy bill to some extent. However, there
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 bee
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 othe
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
2006-07 48.89 8.60 58.85
2007-08 50.94 9.33 61.81

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2.8 Public Sector Companies in INDIAN Fertilizer Market
There are a number of public sector companies in Indian fertilizer ma

producing complex fertilizers, ammonium sulphate, DAP, calc
ammonium nitrate and urea. At present, there are nine public se
undertakings in the Indian fertilizer market and one cooperative soci
These function under the supervision of the Department of Fertilizer
India. Of the 63 large units producing fertilizers in India, 9 units
dedicated to the production of ammonium sulphate and 38 units prod
urea. There are 79 small and medium scale units dedicated to
production of single super phosphate. The Indian industries produ
fertilizers have to total capacity of 56 lakh MT of phosphatic nutrient
121 lakh MT of nitrogen. Some of the public sector undertakings in
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
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Private Companies in Indian Fertilizer Market
A number of private companies in the Indian fertilizer market are enga

in production of the agro-input. Most of the companies also engag
exporting fertilizers in the global market, earning foreign capital from
business. The country stands at the third position among the lar
producers of the product in the world. India is also ranks among the hig
consumers of fertilizers. The euphoric growth in the business has
facilitated the agricultural industry of India, which is dependent for
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

fertilizers in India are listed below:
1. The Scientific Fertilizer Co Pvt Ltd
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The production of nitrogenous fertilizer in the private sector has b

increasing in the past few years. The private sector had only 13% shar
the production in 1960-61. The private sector has always retained a hi
share in the production of phosphatic fertilizer production
Cooperative Companies Producing Fertilizer in India
1. Indian Farmers Fertilizers Co-operative Ltd.(IFFCO)

2. Krishak Bharati Cooperative Limited KRIBHCO
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CHAPTER-3
COMPANY PROFILE
3.1 PPL - Historical Developments
Paradeep Phosphates Limited (PPL) is a complex fertilizer unit engage

the production of Di-Ammonium Phosphate (DAP)/NPK fertilizers with
plant located in the Port town of Paradeep at a distance of 120 Km‟s f
the State capital, Bhubaneswar in Orissa on the East Cost of India.
With Registered and Corporate Offices at Bhubaneswar, the Company

incorporated as a joint venture between the Government of India and
Republic of Nauru with an investment of Rs. 630 crores on December
1981. Subsequently it became a wholly owned Government of
Enterprise since June 1993 after withdrawal of stake by the Governmen
Nauru.
Later again the Government of India divested 74% of its own stake in fa
of a strategic partner – M/s. Zuari Maroc Phosphates Limited (ZM
effective from 28th February 2002. The ZMPL is a (50:50) joint ventur
Zuari Industries Limited (ZIL), of the K.K Birla Group and the M
Phosphor S.A (A wholly owned subsidiary of the fertilizer giant OC
Morocco). At present ZMPL holds 80.45% of the company‟s shares and
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3.2 Plant Capacities and Product Profile
Plant Advantages
 In-house production of intermediates with capacity

annual production of 6, 60,000 MT of Sulphuric Acid
2,25,000 MT of Phosphoric Acid.
 Captive Power Plant of 32 MW capacity for reliable operati
 Huge –storage facilities
 Captive Berth at Paradeep Port - Capable of handling pan
vessels.
 Sophisticated automatic ship unloaders.
 Facilities to unload directly both solid & liquid cargo f
ship to storage tank/silo.
 Plant Site well connected with own broad gauge rail
siding, road & close to an irrigational canal.
3.3 Product Profile
 Navratna Brand of
Di-Ammonium Phosphate (DAP)
NPKS : 20:20:0:13
NPK : 12:32:16
NPK : 10:26:26
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3.4 Plant Assets
Port Facility
 One sophisticated ship unloader of capacity of 1000 MT/Hr solid ca

Another automatic ship unloader has a capacity of 600 MT/Hr.
handling system also provides for discharging of 500 MT of liquid c
per hour.
 3.1 Km long pipe rack and 3.4 Km long conveyor gallery

transport of liquid and solid cargo directly from the ship to
storage tanks and silos respectively in the plant.
Sulphuric Acid Plant (SAP)
 Two similar SAP streams (1000 MTD each)

 Installed Capacity 6, 60,000 MT/year.
 Date of commercial production 01.06.1992.
Phosphoric Acid Plant (PAP)

 One PAP unit (750 MTD)
 Installed Capacity 2, 25,000 MT/year.
 Three concentrators (2 nos. 150 MTD each & 1 no. 350 MTD)
 Date of commercial production 01.06.1992
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Storage Facilities
 Ammonia - 50,000 MT
 Phosphoric Acid - 60,000 MT
 Sulphuric Acid - 36,000 MT
 Rock Phosphate - 60,000 MT
 Sulphur - 45,000 MT
 Finished Product - 60,000 MT
 Imported Fertilizers - 25,000 MT
Bagging Plant
 Eight Stitching lines for bagging
 Three Platforms for simultaneous loading into wagons
 Additional loading facilities for trucks
 Bulk loading facilities for gypsum
 Platform for dispatch of bagged imported fertilizers & gypsum
Captive Power Plant

 Turbo Generators of 2 x 16 MW capacity
 Use waste steam from SAP for generation of power.
 Oil fired boiler of 110 MT/hr steam generation capacity.
3.5 Environment and Quality

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The ETP is equipped with a 2050 m 3 capacity equalization basin to con

the effluent from all the plants.
3.6 Environment Management
PPL is a zero effluent plant since 2002. PPL has adopted an environme
policy committed to continuous improvement in environmental stand
and protection, prevention of pollution and conservation of resources in
plant and its surrounding areas. It has taken major steps in achievin
environmental objectives with the help of an Effluent Treatment Plant w
is one of the largest in the Indian Fertilizer Industry. Comprehen
revamping of Sulphuric Acid and Phosphoric Acid Plants, separation of
and storm water drains, and construction of storage yards, reuse of sulp
muck and a state-of-the-art Alkali Scrubber in the Sulphuric Acid Plant
additional features .
3.7 Quality Control
The product quality is monitored and controlled through continu

checking of nutrients Nitrogen, P2O5 and K2O round the clock du
production. The analysis is carried out with the use of highly sophisti
and accurate „Technician Auto Analyzer‟ at the Laboratory.
3.8 Our Assets are our people

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multi-tasking ability of every employee through various trai

programmes . The Company has on its role 932 qualified and compe
employees consisting of 509 executives and 423 non-executives. Of th
809 employees have been posted at the Corporate Office & factory site
123 in various marketing offices spread throughout the country. Freque
high production and dispatch records have been set, testifying the dilige
of a motivated employee force with accountability.
3.9 Navratna Krishi Vikas
PPL develops farmers through different methods so that fertil

consumption is increased for fuelling agricultural growth of the Nation.
As a good business sense and a corporate social responsibility, PPL

taken up pilot projects as part of Farm Advisory Services under the n
“NAVRATNA KRISHI VIKAS” in Nawarangpur & Nayagarh districts of Or
and Sarguja & Rajnandgaon districts of Chhattisgarh, to help enhancin
agricultural output of farmers and increasing their farm income thro
ventures like growing Tissue Culture Bananas, Vermi Compost, Mushr
cultivation and helping Self Help Groups in the villages etc. Two m
districts viz. Dhenkanal and Khurda have been taken up starting June 20
These projects are located within our market areas where fertil
consumption has been very low. The State Government machineries h
been associated with such activities and are actively involved in th
projects with a slogan of “Serving Farmers, Saving Farming” . Var
promotional and developmental activities include farmer trai
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For producing DAP and Complex fertilizer of NPK, PPL manufactures

intermediate raw materials. The main units are:
 Sulphuric Acid Plant

 Phosphoric Acid Plant
 Di-Ammonium Phosphate Plant
Supported with
 Bagging Plant with Railway Siding and Platform
 Silo and Storage Tanks for storing different raw materials
products
 Captive Power Plant
 Off-sites & Utilities
 Effluent Treatment Plant
3.10 Plant Township Advantages
PPL has built a modern township for its employees at Paradeep. Highli
of the township are
 Well built quarters in several colonies

 Quarter is provided to all employees
 A public school managed by DAV Trust
 State-of-the-art Hospital managed by the Sun Hospital Group
 Employee Recreation Club
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CHAPTER-4
CAPITAL BUDGETING
4.1 MEANING
Capital Budgeting is the process of making investment decisions in cap

expenditure. A capital expenditure may be defined as an expenditure
benefit of which are expected to be received over a period of time e xcee
one year.
The main characteristics of a capital expenditure are that the expenditu
incurred at one point of time whereas benefits of the expenditure
realized at different points of time in future. Capital expenditure invo
non-flexible long term commitment of funds. Thus capital expendi
decisions are also called Long-Term Investment Decision. Capital budge
involves the planning and control of capital expenditure.
DEFINITION:
R.M.LYNCH has defined capital Budgeting as “Capital Budge
consists of employment of available capital for the purpose
maximizing the long term profitability of the firm”.
Capital Budgeting is a many-sided activity. It includes searching for new

more profitable investment proposals, investigating, engineering
marketing considerations to predict the consequences of accepting
investment and making economic analysis to determine the profit poten
of each investment proposal.
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Capital Budgeting consists of planning and the development of avail

capital for the purpose of maximizing the long-term profitability of
firm.
4.2 NEED AND IMPORTANCE OF CAPITAL BUDGETING
Capital Budgeting means planning for capital assets. Capital Budge

decisions are vital to any organization as they include the decision to;
1. Whether or not funds should be invested in long t

projects such as setting of an industry, purchase of plant
machinery etc.,
2. Analyze the proposal for expansion or creating additi
capacity.
3. To decide the replacement of permanent assets such
building and equipments.
4. To make financial analysis of various proposal regar
capital investments so as to choose the best out of m
alternative proposals.
The importance of capital Budgeting can be well understood from the

that an unsound investment decision may prove to be fatal to the v
existence of the concern. The need, significance or importance of cap
budgeting arises mainly due to the following.
1. Large Investments
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2. Long-term commitment of Funds

Capital expenditure involves not only large amounts of funds but also f
for long-term or more or less on permanent basis. The long-t
commitment of funds increases the financial risk involved in the investm
decision.
3. Irreversible Nature
The capital expenditure decisions are of irreversible nature. Once
decisions for acquiring a permanent asset is taken, it became very diff
to dispose of these assets without incurring heavy losses.
4. Long-term Effect of profitability

The investment decisions taken today not only affects present profit
also the future profitability of the business. A profitable project selectio
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
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7. Effect on cost structure

By taking a capital expenditure decision, a firm commits itself to a size
amount of fixed cost in terms of interest, supervisors salary, insura
building rent etc. If the investment turns out to be unsuccessful in futur
produces less than anticipated profits, the firm will have to bear the bur
of fixed cost.
8. Impact on firm‟s competitive strength

The capital budgeting decisions affect the capacity and strength of a firm
face competition. It is so because the capital investment decisions affect
future profits and costs of the firm. This will ultimately affect the fi
competitive strength.
9. Cost control
In capital budgeting there is a regular comparison of budgeted and ac
expenditures. Therefore cost control is facilitated through cap
budgeting.
10. Wealth Maximization

The basic objective of financial management is to maximize the wealt
the shareholders. Capital budgeting helps to achieve this basic objec
Capital budgeting avoids over investments and under investments in f
assets. In this way capital budgeting protects the interest of
shareholders and of the enterprise.
4.3 STEPS IN CAPITAL BUDGETING

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1. Project generation
The capital budgeting process begins with generation or identificatio

investment proposals. This involves a continuous search for investm
opportunities which are compatible with firm‟s objectives.
2. Project screening
Each proposal is then subject to a preliminary screening process in orde
assess whether it is technically feasible, resources required are availa
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 i

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
project.
4. Project selection
After evaluation the next step is the selection and the approval of the
proposal. In actual practice all capital budgeting decision are mad
multiple levels and are finally approved by top management.
5. Project execution and implementation

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6. Performance review
After the implementation of the project, its progress must be reviewe

periodical intervals. The follow-up or review is made by comparing ac
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

includes sales, production, production cost, and selling and distribu
overhead budgets. Capital budgets deals exclusively with major investm
proposals.
2. CAPITAL EXPENDITURE BUDGET
Capital Expenditure is a type of functional budget. It is the firm‟s for

plan for the expenditure of money for purchase of fixed assets. The bu
is prepared after taking in to account the available production capaci
probable reallocation of existing resources and possible improvement
production techniques. If required, separate budgets can be prepared
each item of capital assets such as a building budget, a plant and machin
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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 sta
during the budget period after taking in to account t
urgency and the expected rate of return on each project.
2. It estimates the expenditure that would have to be incurred
capital projects approved by the management together with
source or sources from which the required funds would
obtained.
3. It restricts the capital expenditure on projects within author
limits.
CONTROL OVER EXPENDITURE THROUGH CAPITAL EXPENDITURE BUDGET
The capital expenditure budget primarily ensures that only such proj
are taken in hand which are either expected to increase or maintain the
of return on capital employed. Each proposed project is appraised and
essential project or projects likely to increase the profitability of
organization are included in the budget. In order to control expenditur
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 projec
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5. In case project cost is expected to increase; a supplemen

sanction for the same is obtained.
6. In financial books the total expenditure incurred on all projec
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 fu

and does not constitute a major departure from the past practices of
company.
2. Strategic Decision
A Strategic Investment Decision involves a large sum of money and

also result in a major departure from the past practices of the comp
Acceptance of a Strategic Investment Decision involves a significant cha
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 ha

continuously invest in new plant or machinery for expansion of
operations or replace worn-out machinery for maintaining and improvin
efficiency. The overall objective is to maximize the firm‟s profits and
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4.8 KINDS OF CAPITAL INVESTMENT PROPOSALS
A firm may have several investment proposals for its consideration. It

adopt one of them, some of them or all of them depending upon whe
they are independent, contingent or dependent or mutually exclusive.
1. INDEPENDENT PROPOSALS
These are proposals which do not compete with one another in a way
acceptance of one precludes the possibility of acceptance of another
case of such proposals the firm may straight away “accept or rejec
proposals on the basis of minimum return on investment required. All th
proposals which give a higher return than a certain desired rate of re
are accepted and the rest are rejected.
2. CONTINGENT OR DEPENDENT PROPOSALS
These are proposals whose acceptance depends on the acceptance of on

more other proposals. When a contingent investment proposal is mad
should also contain the proposal on which it is dependent in order to ha
better perspective of the situation.
3. MUTUALLY EXCLUSIVE PROPOSALS
These proposals which compete with each other in a way that

acceptance of one precludes the acceptance of other or others. Two or m
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4. REPLACEMENT PROPOSALS
These aim at improving operating efficiency and reducing costs. These

called cost reduction decisions.
5. EXPANSION PROPOSALS
This refers to adding capacity to existing product line.
6. DIVERSIFICATION PROPOSALS
Diversification means operating in several markets rather than a si

market. It may also involve adding new products to the existing produ
Diversification decisions require evaluation of proposals to diversify i
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 accept

proposals. A firm cannot afford to undertake all profitable propo
because it has limited funds to invest. In such a case, these var
investment proposals compete for limited funds and the firm has to ra
them. Thus the situation where the firm is not able to finance all
profitable investment opportunities due to limited resources is known
capital rationing.
4.9 FACTORS AFFECTING CAPITAL INVESTMENT DECISIONS
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1. The Amount of Investment

In case a firm has unlimited funds for investment it can accept all cap
investment proposals which give a rate of return higher than the minim
acceptable or cut-off rate.
2. Minimum Rate of Return on Investment
The management expects a minimum rate of return on the cap

investment. The minimum rate of return is usually decided on the basi
the cost of capital.
3. Return Expected from the Investment
Capital investment decisions are made in anticipation of increased retur

the future. It is therefore necessary to estimate the future return or ben
accruing from the investment proposals while evaluating the cap
investment proposals.
4. Ranking of the Investment Proposals
When a number of projects appear to be acceptable on the basis of t

profitability the project will be ranked in the order of their profitabilit
order to determine the most profitable project.
4.10 METHODS OF CAPITAL BUDGETING OR EVALUATI

OF INVESTMENT PROPOSALS
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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 evalua

investment proposals. Payback period represents the number of y
required to recover the original investment. The payback period is
called Pay Out or Pay off Period. This period is calculated by dividing
cost of the project by the annual earnings after tax but before depreciat
Under this method the project is ranked on the basis of the length of
payback period. A project with the shortest payback period will be given
highest rank.
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 cons
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b. When annual cash inflow is not constant

If the annual cash inflows are unequal the payback period can be found
by adding up the cash inflows until the total is equal to the initial c
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 met
very useful.
4. This method costs less as it requires only very l
effort for its Computation.
DISADVANTAGES
1. This method does not take in to consideration the c
inflows beyond the payback period.
2. It does not take in to consideration the time valu
money. It considers the same amount received in
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
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investment in the project should be recouped in three years, the perio

three years would be taken as the cut-off period. A project incapabl
generating necessary cash to pay for the initial investment in the pro
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 acc
the earnings expected from the investment over the entire life time of
asset. The various projects are ranked in order of the rate of returns.
project with the higher rate of return is accepted. Average Rate of Retur
found out by dividing the average income after depreciation and taxes,
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 a
depreciation and tax (accounting profit) divided by the number of years.
Average Investment means
i. If there is no salvage (Scrap value)

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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 no
liquidity.
3. The earnings over the entire life of the project is considered
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 t
value of money. The averaging technique gives equal weigh
profits occurring at different periods.
2. This averaging technique ignores the fluctuations in profit
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1. DISCOUNTED CASH FLOW METHODS
The payback period method and the Average rate of Return Method do
take in to consideration the time value of money. They give equal weigh
the present and the future flow of incomes. The discounted cash
methods are based on the concept that a rupee earned today is more w
than a rupee earned tomorrow. These methods take in to consideration
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 valu
money. It views that the cash flows of different years differ in value
they become comparable only when the present equivalent values of t
cash flows of different periods are ascertained. For this the net cash infl
of various periods are discounted using the required rate of return, whic
a predetermined rate .If the present value of expected cash inflows exce
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 flow

2. Compute the present value of total investment outlay (i.e., c
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4. Subtract the present value of cash outflow (cost of investm

from the present value of cash inflows to arrive at the net pre
value.
5. If the net present value is negative i.e., the present value
outflow is more than the present value of cash inflow the pro
proposals will be rejected .If net present value is zero or posi
the proposal can be accepted.
6. If the projects are ranked the project with the maximum pos
net present value should be chosen.
ADVANTAGES OF NET PRESENT VALUE METHOD
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
outflows.
DISADVANTAGES OF NET PRESENT VALUE METHOD
1. Not helpful in comparing two projects with different cash outflo

2. This method may be misleading is in comparing the project
unequal lives.
II. INTERNAL RATE OF RETURN (IRR) METHOD
The Internal Rate of Return for an investment proposal is that discount

which equates the present value of cash inflows with the present valu
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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.
3. Effective for comparing projects of different life periods
different timings in timings of cash inflows.
DISADVANTAGES
1. Difficult to calculate.
2. This method presumes that the earnings are reinvested at the
earned by the investment which is not always true.
Accept or Reject Rule

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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

Present Value Method. The present value of cash inflows and cash outfl
are calculated as under the NPV method. The Profitability Index is the r
of the present value of future cash inflow to the present value of the c
outflow, i.e., initial cost of the project.
If the Profitability index is equal to or more than one proposal the prop
will be accepted. If there are more than one investment proposals, the
with the highest profitability index will be preferred.
This method is also known as Benefit-Cost ratio because the numer

measures benefits and the denominator measures costs. ”It is the rati
the present value of cash inflow at the required rate of return to the in
cash outflow of the investment.
4.11 Cost Effective Analysis
In the cost effectiveness analysis the project selection or technolog

choice, only the costs of two or more alternative choices are consid
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4.12 Project Planning:
The planning of a project is a technically predetermined set of i

related activities involving the effective use of given material, hum
technological and financial resources over a given period of time. Whic
association with other development projects result in the achievemen
certain predetermined objectives such as the production of specified go
& services?
Project planning is spread over a period of time and is not a one s

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

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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 fu

cash inflow and cash outflows. The cash flows are estimated abased on
following factors.
 Expected economic life of the project.
 Salvage value of the asset at the end of the economic life.
 Capacity of the product.

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 Future demand of the product, etc.
But due to uncertainties about the future the estimates of dema

production, sales costs, selling price, etc cannot be exact, for examp
product may become obsolete much earlier than anticipated due to
expected technological developments all these elements of uncertain
have to be take into account in the form of forcible risk while making
investment decision. But some allowances for the element of risk have t
proved.
4.14 FACTORS INFLUENCING CAPITAL EXPENDITURE

DESCISIONS:
There are many factors financial as well as non financial which influe
the capital expenditure decisions and the profitability of the proposal
there are many other factors which have to be taken into considera
while taking a capital expenditure decisions. They are
1. URGENCY
Sometime an investment is to be made due to urgency for the surviva
the firm or to avoid heavy losses. In such circumstances, proper evalua
cannot be made though profitability tests. Examples of each urgency
breakdown of some plant and machinery fire accidents etc.
2. DEGREE OF UNCERTAINTY
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INTANGIBLE FACTORS
Sometimes, a capital expenditure has to be made due to certain emoti

and intangible factors such as safety and welfare of the workers, prestig
projects, social welfare, goodwill of the firm etc.
1. AVAILABILITY OF FUNDS
As the capital expenditure generally requires the previsions of laws so

influence by this factor and although the project may not be profitable.
the investment has to be made.
2. FUTURE EARNINGS
A project may not be profitable as competed to another today, but it ma

profited to increase future earnings.
Sometimes project with some lower profitability may be selected du

constant flow of income as compared to another project with an irreg
and uncertain inflow of income.
4.15 CAPITAL EXPENDITURE CONTROL
Capital expenditure involves no-flexible long-term commitments of fu

The success of an enterprise in the long run depends up on
effectiveness with which the management makes capital expendi
decision. Capital expenditure decisions are very important as their impa
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4.16 OBJECTIVES CONTROL OF CAPITAL EXPENDITURE
 To make an estimate of capital expenditure and to see that

total cash outlay is within the financial resources of
enterprise
 To ensure timely cash inflows for the projects so that
availability of cash may not be problem in the implementa
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 fol
up.
 To compare periodically actual expenditure with the budg
ones so as to avoid any excess expenditure.
 To measure the performance of the project.
 To ensure that sufficient amount of capital expenditur
incurred to keep pace with rapid technological development.
 To prevent over expansion.
4.17 STEPS INVOLVED IN CONTROL OF CAPITAL EXPENDITU
 Preparation of capital expenditure budget.
 Proper authorization of capital expenditure.
 Recording and control of expenditure.

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LEASE FINANCING
Lease finance is an agreement for the use of an asset for a specified ren
The owner of the asset is called the lesser and the user the lesser
1) Operating leases
2) Financial leases
Operating leases are short-term no-cancel able leases where the risk
obsolescence in borne by the lesser
Financial leases are long-term non-cancelable leases where any risk in
use of asset is borne by the lessee and he enjoys the return too.
 Preliminary budget estimates for the year following the budget yea
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
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NEW SCHEMES
This scheme includes all such schemes, which are proposed to be initia
in the budget year and for which under provisions is required in the bu
year. Normally, such schemes are included in the five-year plan of
company approved by the planning commission.
MODERNIZATION AND RATIONALIZATION (M&R)
This includes item of plant and machinery etc for which funds require
the budget year and the following year. All item included in M&R sho
result in cost reduction/quality improvement/rebo
necking/replacement/productivity, improvement and welfare. The
items are to be submitted in the following main characteristics accompa
with full justification on the agenda of facilities increased output
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 propos

required for M&R items costing more than Rs. 10, 00,000.
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Funds required under each schemes should be backed up with full dat
number on quarter/scope of work to be completed against the fu
requirements phasing of budgeted funds for current year, budget year
following year etc, should be given similar information on numbe
quarter/scope of work already completed, expenditure incurred till
year, satisfaction level it is to be added in the above back up informa
for each scheme.
SCIENCE AND TECHNOLOGY
 This budget can be divided into two categories
 Continuing schemes.
 New schemes to be taken up in the budget year.
The schemes should fall in any of the above cartages giving details
physical and financial progress etc.
EDP SCHEMES
All funds requirements for computer are information system should

grouped under EDP schemes and projects accordingly.
BUYING OR PROCURING
Buying or procurement involves purchasing an asset permanently in

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LEASING VS BUYING
Leasing equipment has the tax advantage of depreciation, which

mutually benefit the lesser and lessee, other advantage of leasing, incl
convenience and flexibility as well as specialized services to the les
Lease privies handy to those linens, which cannot obtain loan capital f
normal sources.
The pros and cons of leasing and buying are to be examined thorou
before deciding the method of procurement i.e. leasing or buying.
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CHAPTER-5
FINANCING OF PROJECT
Project financing is considered right from the time of the conception of

project. The proposal of the project progress working capital, so, in gen
a project is considered as a „mini firm‟ is a part and parcel of
organization.
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 wor
capital requirements. These are generally for a short period not excee
the accounting period i.e., one – year.
Types of Short Term Loans & Credits:

1. Trade Credit.
2. Installment Credit.
3. Advances.
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(b). Term Loans:
Term loans are given by the financial institutions and banks, which form
primary source of long term debt for both private as well as the Governm
organizations. Term loans are generally employed to finance the acquisi
of fixed assets that are generally repayable in less than 10 years. In addi
to short- term loans, company will raise medium term and long term loa
5.2 Security Financing:
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 holder

these shares are the real owners of the company. They have a control o
the working of the company. Different ways to raise the equity capital.
o Initial public offering.
o Seasoned offering
Rights issue.
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ii) Preference Capital:
These shares have certain preferences as compared to other type of shar

1. Payment of Divided
2. Repayment of the capital at the time of liquidation of t
company.
b) Types of Creditor ship Securities:
Debentures:
Debentures are an alternative to the term loans and are instruments

raising the debt finance. Debenture holders are the creditors of a comp
and the company and the company have the obligations to pay the inte
and principal at specified times. Debentures provide more flexibility,
respect to maturity, interest rate, security and repayment Debentures
be fixed rate of interest or floating rate or may be zero rates. Debentur
Ownership Securities help the management of the company to reduce
cost of capital.
5.3 Internal Financing:
A new company can raise finance only through external sources suc
shares, debentures, loans and public deposits. For existing company
need to raise funds through internal source. Such as retained earn
depreciation as a source of funds. Some other innovative source of finan
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CHAPTER-6
INTRODUCTION TO FINANCE AND ACCOUNTS DEPARTMEN
Finance is the lifeblood of the business .According to Howard and Up

“Finance is that administrative area or set of administrative functio
organizations which relate with the arrangements of cash and credit so
the organization may have the means to carry out of its objective
possible.”
6.1 Functions Of Finance and Accounting Department
Finance & Accounts Department of BHUBANESHWAR Unit is controlled

Head Of the Department i.e. C.F.O. His main function is to co-ordinate
activities related to Finance & Accounts and report to Head Office‟s Fina
& Accounts Department / Finance Director as well Unit Head. Financ
Accounts Department function various type of activities as per
Guidelines issued by Head Office, Purchase Procedure, Service Rules, Pow
of officer etc. At present to carry out all the related activities, following
sectional heads are reporting to him for work connected to their Secti
All the four sectional heads independently report to Departmental H
However, in case, Departmental Head happens on tour or on leave, the
senior sectional head takes the charge of the department and remai
here sectional head will report to him for all the work connected to t
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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
7. Financial concurrence
PAY ROLL SECTION
Pay roll section takes care of all the financial issues of employees in
ordination with Administrative & Personnel Department. Its funct
includes management of salaries, TA/DA, loans & advances, misc paym
related to employees, Perk/There allowance payments etc. Here record
each employee are maintained regarding basic pay, leave encashm
medical, salary, increments, promotion based perks, etc.
RAW MATERIALS
Different types of Raw Materials that are required at PPL, PARADEEP Unit
as follows :
1. Sulphuric Acid
2. Phosphoric Acid
3. Ammonia
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Raw Material section in F & A department does the accounting of ab

mentioned raw-material which includes receipt of raw- material
purchased, monthly consumption as per the production department
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.
Miscellaneous bills includes rates contracts for service contract for

conditioner, water coolers, weighing machines, franking machines, knit
of chairs, etc. Others miscellaneous bills includes telephone rentals,
calls, local calls, teleprinters , fax, service bills, advertisement b
electricity bills, printing and block making bills, bills of travel agents,
of canteen purchases, etc. Annual Contracts and Hiring of taxi, motors,
is also included in this.
WORKS BILLS
Work bills section is entrusted with the task of checking and authentica
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PURCHASE BILLS
In purchase bill, treatment is given to the bills on purchase of machin

and tools and spares etc. for accounting requirements and book keepin
well as record maintenance and tax deductions and authentication of AF
purchase of Goods and Services.
FINANCIAL CONCURRENCE
Financial concurrence deals with crosschecking and green signaling

requisition for purchases made by various indent departments of the u
They check for the availability of budget and ascertain its necessity
critically for regular and smooth operations of the plants and activitie
various departments.
BOOKS & BUDGETS
Books and budget deal with revenue budget compilation, monitoring

control, reconciliation of inter unit accounts, maintenance of book
accounts and submission of monthly / quarterly / annual reports,
processing and attending internal / statutory / tax auditors.
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CHAPTER-7
DATA ANALYSIS AND INTERPRETATION
7.1 Production (2006-2007 to 2010-2011)

(In M
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(2006-2007 to 2010-2011

(In M
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 (2006-2007 to 2010-2011)

(In M
Particulars 06-07 07-08 08-09 09-10 10-11
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7.3 Balance Sheet (2006-2007 to 2010-2011)

(In lac
Particulars 06-07 07-08 08-09 09-10 10-11
Sources of Funds:
Auth share capital 100000 100000 100000 100000 10000
Paid up capital 57545 57545 57545 57545 5754
Reserve and surplus --- --- --- 10791 2850
Secured loan 13619 2785 85072 104307 11398
Unsecured loan 76475 75788 42725 8329 ---

Total sources of funds
147639 136118 185342 180972 20003
Application of Funds:
Gross Block(including
CWIP) 73251 75734 77436 79349 8317
Net Block(including
CWIP) 26887 25706 24149 23652 2541
Investments --- --- 82130 605 5
Deferred tax Assets --- --- --- 3369 2037
Current Assets
Inventories 28595 21496 55159 37363 5002

Sundry Debtors 68236 56541 86632 60052 5176
Others 6130 47507 103523 117391 10756
Total 102961 125544 245314 214806 20935
Current Liabilities and

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7.4 Profit and Loss Statement(2006-2011)
(In Lac
Working results 06-07 07-08 08-09 09-10 10-11
Sales 119793 120663 94368 119831 12829
Subsidy 86276 124527 417077 178583 22217
Other Income 652 3487 49530 18153 1259
Total 206721 248677 560975 316927 36306
Cost Of Sales(including prior
period adj but excluding Dep
187719 230047 484485 288612 32703
and Interest)
Gross Margin (19002) (18630) (76490) (28315) (3603

Depreciation 3402 3817 3347 3048 2470
Profit/(loss) before Int and 15600 14813 73143 25267 3356
Taxes
Interest 4613 6387 5262 7294 9644

Profit/(loss) before taxes 10987 8426 67881 17973 2391
Taxes including FBT 59 70 14170 6187 82
Debit/(Credit) for deferred --- --- --- (3369) 1332
tax
TaxationExpenses Credited --- --- --- --- (3400
NET PROFIT/(LOSS) 10928 8356 53711 15155 1770
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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 whic

mechanized for dispatching or bagging 3,300 MT/day. The company p
to increase its production level to 16, 00,000 MT/annum. So, the disp
system should be increased to an additional 1,550 Mt/day so that the t
dispatching to be done per day goes up to 4,850Mt/day. So, as to en
the smooth functioning of the dispatching system and this can be don
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 bud
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4. Railway siding modification.

5. Shed for covering extended portion of Bagging plant.
STEP2: Project Finance and Source of Funds :
The second step in the evaluation of the project is to find the fund
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 inte
P.a. providing with long term loans and the rest 25% from Inte
generation. With a moratorium of one year and repayment schedule
years.
STEP3: Phasing of Capital Expenditure:

The third step in the evaluation of the project is the phasing of
expenses or expenditure on the project. And here the phasing of the pro
expenditure is as below:
PHASING OF CAPITAL EXPENDITURE (Rs in crore

2012-13 2013-14 2014-15 Total
Bank Loan 50.00 100.00 75.00 225.
Interest On LTL 6.88 32.90 15.40
Internal Generation 20.00 35.00 20.00 75.
Total value Of the project 76.88 167.90 110.40 355
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Step4: Repayment Schedule of the Long Term Loan (LTL):
The fourth step in the evaluation of the project is preparing the repaym
schedule of the Long Term Loan (LTL). And here the project repaym
schedule is.
REPAYMENT SCHEDULE OF LONG-TERM LOAN
11% (Rs in Crores
Interest Year wise

Opening Closing '@11% Principal
Balance Addition Total Repayment Balance p.a Year 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
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
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
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
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
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
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REPAYMENT OF LONG TERM LOAN(LTL)

2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
Interest Repaid 6.88 32.90 29.15 22.55 15.95 9.35
Principal Repaid 0 12.5 60.00 60.00 60.00 60.00
Total 6.88 45.40 89.15 82.55 75.95 69.35
STEP5: PREPARING THE PROFITABILITY STATEMENT OF THE

PROJECT:
The fifth step in the evaluation of the project is preparing the profitab
statement of the project and the profitability statement of the project
is.
In terms of cost
Cost Elements of Asset p.a
Interest on Loan 11% Tax
Depreciation as Per
Insurance 2% IT Act
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%
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PROFITABILITY STATEMENT OF THE PROJECT

2015-16 2016-17 2017-18 2018-19
Incremental Sales 1534.50 1534.50 1534.50 1534.50
TOTAL REVENUE("A") 1534.50 1534.50 1534.50 1534.50
EXPENDITURE
Raw Materials 1227.60 1227.60 1227.60 1227.60
Interest On Loan 13.75 22.55 15.95 9.35
Insurance 7.10 7.10 7.10 7.10
Salary and Wages 10.66 10.66 10.66 10.66
Contract labor 7.10 7.10 7.10 7.10
Repairs and maintenance 10.66 10.66 10.66 10.66
Chemicals 17.76 17.76 17.76 17.76
Packaging Cost 1.78 1.78 1.78 1.78
Power, Fuel and Water 17.76 17.76 17.76 17.76
TOTAL EXPENDITURE ("B") 1314.16 1322.96 1316.36 1309.76
PROFITS BEFORE DEPRECIATION

AND TAX "C"(C=A-B) 220.34 211.54 218.14 224.74
Less: DEPRECIATION "D" 18.65 18.65 18.65 18.65
PROFIT BEFORE TAX "E"(E=C-D) 201.69 192.89 199.49 206.09
Less: TAX(AS PER IT ACT) 60.77 58.34 60.16 61.98
PROFIT AFTER TAX 140.93 134.55 139.33 144.11
Computation of tax:
COMPUTATION OF TAX
2015-16 2016-17 2017-18 2018-19
Profit Before Tax(PBT) 201.69 192.89 199.49 206.09
Add:Depreciation(As Per
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STEP6:
STEP6: Valuation of the Asset:
The sixth step in the evaluation of the project is the valuation of the pro
at different times or at different periods at different years to come in
future.
VALUATION OF THE ASSET (Rs In Crore

2015-16 2016-17 2017-18 2018-19 2019-20 2021-22
Opening Balance 0.00 301.90 256.61 218.12 185.40 157.59
Addition 355.17 0.00 0.00 0.00 0.00 0.00
Total 355.17 301.90 256.61 218.12 185.40 157.59
Less:Deletion 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
Less:Depreciation 53.28 45.28 38.49 32.72 27.81 23.64
ClOSING BALANCE 301.90 256.61 218.12 185.40 157.59 133.95
STEP7: Preparation of Cash Flow Statement:
The seventh step in the evaluation of the project is the preparation of

Cash Flow Statement. And we need the cash flows to find out the Payb
Period and the Internal Rate of Return of the project
CASH FLOW STATEMENT (Rs

2012- 2013- 2014- 2015- 2016- 2017- 2018-
13 14 15 16 17 18 19
Cash Out Flow
Capital Expenditure on the
Project 76.88 167.90 110.40
Cash In Flow
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Step8: To Find the Viability of the Project by Using Differ

Techniques Of Capital Budgeting:
Here in PPL the Techniques of capital budgeting used are :
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

in -flows will start from 2015-2016
Cost of the Project- 355.18 Cr
Year 2015-16 2016-17 2017-18 2018-19 2019-2
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

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(a) Cash Outlay : 355.18 Cr
(b) Payback Period : INITIAL INVESTMENT

ANNUAL CASH
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 20
2016.
We should increase this period with same exception as there may be

additional factor and other cause so rounding of 2.2 to 3 years will be ri
so that it will give more assistance to the calculation.
Suggestion: Any project which has a pay-back period of 3 to 5 year

considered as a good project…
And here we have got a pay-back period of 2.2 years. So, the project ca
considered
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2. Evaluation of the Project Using Internal Rate of Return Meth
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 2019-2
Amount 140.93 134.55 139.33 144.11 148.82
Internal Rate of Return:

Discount rate taken as 24% (in cro
Present
Values o
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
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Present
Values o
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
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Present
Values o
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
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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 var
percentage of (DCF).So that an appropriate percentage of Internal Rat
Return can be judge out.
Calculated figure is 26.70%, so we can take it as 30% because at market

Uncertainity.
Suggestion:
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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

months.
2 The Payback Period shows that the initial investment can be recov
within a short period of time.
3 The investment is ideal because normally an investment should
recoverable within 5 years.
4. The Internal Rate of Return shows 26.70 % This also ensure
profitable investment.
9.2 SUGGESTIONS:
1. The company may fix the time period for the capital asset
replacement.
2. The company may effectively use the available resources for attai
maximum profit.
3. The company has to analyze the proposal for expansion or crea
additional capacity.
4. The company may plan and control its capital expenditure.

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Documents  Career & Money

MASTER OF BUSINESS ADMINISTRATION (MBA)

Under the Esteemed Guidance of

MIRACLE SCHOOL OF MANAGEMENT

I hereby declare that this project report “ CAPITAL BUDGETTING

reference to “PARADEEP PHOSPHATES Ltd,” has been prepared by me during

period 06-05-2012 to 10-06-2012 is partial fulfillment of the requirement for

award of degree of Master of Business Administration

Place: VISAKHAPATNAM (Goru.Shyam Kumar)

A successful project can never be prepared by single effort or the perso

of some conversant persons who helps in the undersigned actively or passive

in the completion of successful project .

With great pleasure, I express my deep sense gratitude to th

management of “PARADEEP PHOSPHATES LIMITED ”, BHUBANESHWAR f

giving me this very inspirational opportunity

reputed company to take this opportunity to express my deep and profoun

gratitude to the people concerned who have helped me directly or indirectly

I convey my sincere thanks to Mr. M K MUKHERJEE Dy. Gener

and helped me throughout the project in permitting to perform various tasks

this esteemed organization.

CHAPTER-1 INTRODUCTION TO THE STUDY

CHAPTER-2 INDUSTRY PROFILE

CHAPTER-3 COMPANY PROFILE

CHAPTER-4 PROJECT PLANNING (CAPITAL BUDGETING)

CHAPTER-5 FINANCING OF THE PROJECT

CHAPTER-6 FINANCE AND ACCOUNTS SECTION AT PPL

CHAPTER-7 DATA ANALYSIS AND INTERPRETATION

CHAPTER-8 EVALUATION OF CAPITAL BUDGETING

CHAPTER-9 FINDINGS AND SUGGESTIONS

1.1 INTRODUCTION OF THE STUDY

Every organization irrespective of its size and mission can be viewed

There are two types of Investment decision:

1. Management of current assets or Working capital management.

Long term investment decisions are widely known as capital budgetin

In general a project is an activity in which, we will spend money

To take up a new project, involves a capital investment decision and

The capital budgeting decision procedure basically involves the evalua

The procedure must be consistent with the objective of we

1.2 Importance of investment decisions:-

1. They influence firm growth in the long term consequences ca

2. They affect the risk of the firm; it is difficult to reverse cap

3. Capital investment decisions involve substantial out lays.

“PARADEEP PHOSPHATES LIMITED” is a growing concern, capital budge

1.3 Objectives of the study:-

1.4 SCOPE OF THE STUDY:-

This study highlights the review of capital budgeting and ca

collectively; some of the information has been verified or suppleme

a. Thorough interactions with the various department Managers

b. Guidelines given by the Project Guide, Mr. SRIRAM TRIPAT

c. Annual Reports of the company

Though the project was completed successfully with a few limitations m

c) The study is carried basing on the information and docum

1.7 REVIEW OF LITERATURE:-

The concept of Capital Budgeting being a very sensitive area of finance

The present investment appraisal in practice is raising certain question

1. How much importance is assigned to economic analysis of ca

The answers of the above questions are based on a survey of twenty fi

2.1 Introduction to Fertilizer Industry:

Fertilizer is generally defined as "any material, organic or inorganic, nat

Since the essential physiological attribute of seeds is their ability to con

Agriculture the backbone of Indian Economy still holds its rela