You are on page 1of 87

A Project report on




Regd No: 10901210024




2010 -2012


I hereby declare that this project report entitled CAPITAL BUDGETING has been prepared by me during the year 2010 - 2012 in partial fulfilment of the requirements for the award of degree of

I also declare that this project work is the result of my own efforts and this has been not submitted to any other University or Institute for the award of any degree or diploma.




This is to certify that entitled degree of



submits the project report


in fulfilment for the award of the


during the year 2010 2012, is a record of bonafied work carried out

by him/her under my guidance and supervision.

The results embodied in this project have not been submitted to any other University or Institute for the award of any degree or diploma.

Mr. DR. R. RAVI KANTH, MBA (Ph.D) Assistant Professor Project Guide Dept. of MBA Sree Sai MBA College Nandikotkur Kurnool (Dist).


Nandikotkur KURNOOL - 518360 (A.P).

This is to certify that the project report entitled



has been submitted by Mr. M. ABDULLA in partial fulfilment


of the requirements for the award of degree of 2010 2012.


the academic year

Head of the Department

All endeavours over a long period can be successful only with the advice and support of many well-wishers. I take this opportunity to express our gratitude and appreciation to all of them. I am also thankful to
Mr. G. Anup Kumar,

Finance Manager of GENETING

LANCO (INDIA) PVT. LTD, Hyderabad, for his valuable suggestions during the project work in their esteemed organization. I extend my profound gratitude to our principal providing good working environment. I express my heart full thanks to
Mr. Dr. R. Ravi Kanth,, Dr. R. Ravi Kanth,

S.S.PG.C. for

Assistant Professor of

MBA Department and my project guide for his valuable guidance and moral support. At the outset, I sincerely acknowledge my deep sense of gratitude to
Mr. Dr. R. Ravi Kanth,, Assistant Professor and Incharge

of MBA Department.

We have great pleasure in expressing our thanks to the teaching and nonteaching staff for helping us in completing this project. We would like to thanks to all our friends who provided the normal support for this project. Finally, I express my heartful thanks for all those who are concerned directly and indirectly in successfully completing my project.



CHAPTERS Chapter 1: 1.1 Introduction 1.2 Objectives of the Study 1.3 Need for the Study 1.4 Scope of the study 1.5 Research Methodology Data Collection 1.6 Limitations. Chapter 2: Industry Profile Chapter 3: Company Profile Chapter 4: Theoretical framework Chapter 5: Data Analysis and Interpretation Chapter 6: Findings, Suggestions and Conclusion Bibliography Appendix



Budgeting is an All-Pervasive and Dynamic Process. It ties together Goals, Plans, Decision making and Employee performance evaluation. It is a versatile Manager Tool in that it aims to anticipate change in an advantageous way. It allows a review of operations. In any formal programme of Profit Planning and Control in business Budget comes to the forefront. It forms the heart of the planning function and every enlightened Management deals with long and short ranges Budgets. They constitute the principle instrument for projecting the future costs and revenues, which are an essential aspect of management accounting and the foundation of the firms Financial Control. Budgeting undoubtedly offers immanence potentialities for efficiently conducting the affairs of the business. Budgeting in common parlance is understood as planning for expenditure. Budgets were first used extensively in Government, but business has since developed them to the point where they have become extremely valuable tools of Management. In the most Governmental Agencies today Budgets have languished and are employed primarily to restrict expenditures. In business budget emphasise Revenues. A Budget could be seen as a statement of intention. A statement of expected income and expense under certain anticipated operating conditions it is in the nature of an estimate, rather framework, of future transactions of a business as a whole.

Due to the importance of this study can done in the LANCO GROUP. Which is located at Hyderabad.



To study different sources of finance available with the firm far its operations. To know the total value of the firm. To analyze earnings per share under different Capital Budgeting. To analyze the liquidity and ability of the firm to service charges through Traditional methods and Time-adjusted methods. To give guidelines for Capital Budgeting planning. To analyze the Capital Budgeting in Lanco group. To determine the quantum of Capital Budgeting used in Lanco group. To study the impact of liquidity on profitability of the Lanco group.


Knowing the relationship between Capital Budgeting and firm value. To analyze the reason for low stock prices of the company. Studying relationship between Capital Budgeting and cost of capital. To assess the impact of alternative Capital Budgeting on return on equity. Capital Budgeting means planning for capital assets. Capital Budgeting

decisions are vital to any organization as they include the decisions as to. a) Whether or not funds should be invested in long term projects such as setting of an industry purchase of plant and machinery etc. b) Analyze the proposal for expansion or creating additional capacities. c) To decide the replacement of permanent assets such as building and equipments. d) To make financial analysis of various proposals regarding capital investments so as to choose the best out many alternative proposals. The importance of capital budgeting can be well understood from the fact the unsound investment decision may prove to be fatal to the very existence of the concern. The need, significance or importance of capital budgeting arises mainly due to the following. a) Large investments b) Long-term commitment of funds c) Irreversible Nature d) Long-term effect on profitability e) Difficulties of Investment decision f) National Importance



The scope and period of study is restricted to the following: The scope of is limited to the operation of Lanco group. The information has been obtained from the primary and secondary sources and is limited to Lanco group. The working result from the last five years. Decrease of current assets or current liabilities in the budget the contents of the total evaluation of current assets and current liabilities and their percentage contribution in the total turn over. The yearly increase or decrease of current assets or current liabilities in the budget of Lanco group is being reviewed from this one would be in a position to glance the performance of current assets and current liabilities of the capital budgeting requirements of Lanco Group and emphasizes on the company. This project greatly deals with key ratios to obtain a clearer picture of different resources available and at the disposal of the organization which will enable one to give appropriation suggestion to the company to improve its performance if any.



Collection of data is a first step in any statistical investigation. It is the basis for any analysis and their interpretation, planning for data collection refers to thinking or preparing before doing the actual task of data collection. The technique and sources of data are the important consideration in planning the data collection. The data may be collected from primary & secondary.

Tools used for analysis

The collected data is arranged according to the requirement to meet the objective of the study by bringing together various components under each cluster per example the value of the firm will not be directly given in the Balance sheet in the identify in accordance with the principles and formulas in accounting in finance similarly all other elements too. Further this data analyzed with the help of Traditional methods and Time-adjusted methods.

Data Collection
Data has been gathered through personal interaction with the financial executives of the Organization.

Secondary Data
Data collected is secondary in nature. It was gathered mainly from the Balance sheets and Profits & Loss account of the organization. Required data was gathered firm various reports and other documents and data were analyzed with help of guide. The secondary data is calculated from the following sources Annual financial reports of the company. Brochures and books of the company.

Period of study:
Total four years of data has been considered ending with 2008-2009.



The study is conducted is short period during the limited time. The study may not be detailed in all aspects. The study is conducted with the available data from annual reports, internal reports, etc., of Lanco group and analysis was made accordingly. Figures whatever appearing is too rounded to the nearest rupee thousands. The data is secondary in nature being the records and statements, which experiences its own limitations in preparation.

Capital budgeting techniques suffer from the following limitations


1. All the techniques of capital budgeting presume that various investment proposals under consideration are mutually exclusive which may not practically be true in some particular circumstances. 2. The techniques of capital budgeting require estimation of future cash in flows and out flows. The future is always uncertain and the data collected for future may not be exact obviously the results based upon wrong data may not be good. 3. There are certain factors like morale of the employees, good will of the firm, etc., which cannot be currently quantified but which other wise substantially influence the capital decision. 4. Urgency is another limitation in the evaluation of capital investment decision. 5. Uncertainty and risk pose the biggest limitation to the techniques of capital budgeting. The major problem in completing the project is the time of 8 weeks which ever less in order to know about the overall objectives of the study. More dependency on secondary data.





In 1997 Federal Bank Ltd., a leading private sector bank in Kerala, was evaluating a loan proposal from Cochin International Airport promoted by Cochin International Airport Authority. Federal Bank was incorporated in 1931 as Travancore Federal Bank Ltd to cater to the banking needs of Travancore province by a small group of local citizens. In 1949 the board of directors of the bank reconstituted and the bank was renamed as The Federal Bank Ltd. The operations of the bank were confined to Kerala till 1972. After 1972, the bank expanded its operations to all the metros. The bank became an authorized dealer in foreign exchange in 1972. Since 1989, the bank has been active in Merchant Banking. The bank's credit portfolio is well distributed over several sectors and sub sectors within prudential limits. Through careful monitoring of clients and timely initiatives in dealing with delinquency, the bank is able to contain its NPA (non performing assets) to low levels.


The project is a brainchild of the district collector of Ernakulum, Mr V J Kurian. He undertook a program to uplift the infrastructure facilities in Cochin. The increase in number of non-resident Indians travelling from Gulf countries to Kerala necessitated an airport in Cochin. Although there are two international airports in Kerala to cater to a growing traffic (8%) the need for another airport was felt. In particular, a large number of passengers travel to Kottayam and Pattanamthitta districts close to Cochin. The chief promoter of CIAL is Cochin International Airport Society registered under the Travancore Cochin literary, scientific and charitable society registration act of 1955. Other promoters of the venture are Cochin Chamber of Commerce and Industry, Indian Chamber of Commerce and Industry, (late) Sri Madhavan Nair, Sri C V Jacob and Sri B Govinda Rao.



The Indian aviation industry can be broadly classified into two main segments - civil and cargo. Indeed mail and air cargo played a more important role in air carrier services than passengers. The Indian aviation sector till recently was highly regulated by the government. The government introduced new initiatives like Air taxi in the 80s to boost tourism. Domestic and international traffic is expected to grow at 12.5 % and 7 % respectively over the next decade. By 2005, Indian airports are likely to handle 60 million international passengers and 300,000 tons of domestic and 1.2 m tons of international cargo. The civil aviation activities can be classified into three areas: operational, infrastructural and regulatory. On the operational front Indian Airlines and Air India provide domestic and international air services. Airports Authority of India formed in April 1995 by the merger of separate airport authorities that existed till then provides the infrastructure facility. In 1999 the aviation industry's turnover was Rs 90 billion. The demand for aviation is seasonal in nature with the demand being high during AprilMay and again in November-December.

There are a total of 449 airports / airstrips in the country. Airports are classified as domestic and international .The domestic airports (71) like those in Bangalore, Hyderabad and Ahmadabad have custom and immigration facilities for limited international operations by national carriers and for foreign tourist and cargo charter flights. The international airports in Mumbai, Delhi, Chennai, Calcutta and Tiruvanathapuram are available for scheduled international operations by Indian and foreign carriers. The Airports Authority of India was formed after the merger of International Airport Authorities of India and the National Airports Authority in 19941995. AAI manages 5 international airports, 87 domestic airports and 28 civil enclaves.


The current aviation policy allows private sector to build airports. Some airports to be developed by the private sector are in Hassan (Karnataka), Mumbai, Goa and Bangalore.


Till recently, much of the financing of infrastructure development in many countries came from government sources, multilateral institutions and export financing agencies. Quite often, governments in emerging markets lack the financial capacity or credit worthiness to support the volume of infrastructure projects required to develop their economies. In case of large infrastructure projects it is becoming inevitable for public and private sector to come together and jointly apply their skills and strengths to develop the project more quickly and efficiently. The joint venture between Rail track and British Rail in U.K to set up a high-speed rail project is an example of such a partnership. Such partnerships try to involve the private sector in the process of designing, building, financing and operating public utilities. The government defines the services required, makes an arrangement which enables the private sector to be the service provider and ensures that public services will be delivered at a specified quality at competitive prices. A number of public private financing structures exist. Some of the schemes which can achieve the objectives are:

Build Operate - Transfer Model Build- Transfer- Operate Model Buy Build Operate Model

In a BOT model, a private entity gets the mandate to finance, build and operate the project (which is otherwise a public sector project) for a specified period of time (say 25 years) at the end of which ownership reverts to the local government. Typically, the sponsoring organization makes an equity investment of 20 to 30% of the project cost and the rest is raised from International Banks, Multilateral agencies and domestic Financial Institutions .The host government generally gives a concession to carry out 18

the construction and operation of the project and credit support for project borrowings. The licence agreement clearly spells out the commercial and financial terms. The BOT concept has been used in transportation (Ex: roads), Energy (Power projects), Sewage & water treatment plants and hospitals. In a BTO model, the private entity transfers the facility to the government soon after the project clears the completion test and leases it back for a specified period of time. The project company runs the facility and collects revenues during the lease term. At the end of the lease term the title passes on to the government (or the public sector entity). In a BBO Model, a private entity buys an existing facility, modernizes it, and operates it as for profit, public use facility. In many developing countries where existing facilities require modernization / expansion, BBO model is ideal. Roads and bridges are candidates for this model. Since the Cochin airport project involves a huge outlay, the Government of Kerala was not keen to set up another airport. Consequently, the airport is being set up on a BuildOwn-Operate basis with equity being contributed by people who benefit from the project. As a first step a society was formed. Mr Kurian and his team convinced the NRIs in Gulf that an airport in Cochin is desirable and raised (interest free) deposits from them. The government supported the effort by offering Indira Vikas Patra for 50 % of the amount deposited. A company was formed there after in 1994 with an authorized capital of Rs 90 cr to construct, own and operate an international airport with public participation and the support of Government of Kerala. The airport is Cochin is expected to boost trade and tourism. The interest free deposits provided by people were later converted into shares. Initially Federal bank had provided a loan that was later replaced by a loan from HUDCO. The state government contributed Rs 1 cr and Federal Bank contributed Rs 2 cr in equity. Bharat petroleum, the airport service provider, contributed Rs 25 L in equity. The project is being set up at a cost of Rs 204.48 cr in two phases, the first phase being pre-operative. Further expansion at Rs 89.83 cr has been planned after 5 years. Exhibit 8-1 provides the break up of the project cost. 19

Exhibit -1: Project Cost (Rs L) Phase 1 Land Civil Works Buildings Contingency Preliminary Expenses Pre-operative Expenses Margin money for Working capital 5500 5965 4270 511.75 1256 2780 Phase 2 Total

1980 6576 427.8

165.36 20448.11 8983.80 29431.91

Contingency has been provided at 10 % of project cost to provide for escalation of prices, change in duty structure, and devaluation of currency and so on. CIAL's cost is lower when compared to other airports at Bangalore and Hyderabad because:

Traffic control and navigational aid systems are being provided by AAI without any cost to CIAL The state government is providing roads and other utilities. The aviation fuel hydrant station is being set up by BPCL without any cost to CIAL

The project is being financed by a mix of debt and equity. Equity is from NRIs and service providers at the airport apart from a few banks and financial institutions. Term loan to the extent of 75.5 % of fixed assets has been provided by HUDCO and Federal Bank. The debt-equity ratio for the project is fixed at 1.5. The Rs 89.83 cr required for Phase 2 is being entirely from internal accruals.



The Lanco odyssey began more than two decades ago in civil engineering and the core sector. The challenges and opportunities in a resurgent India following economic liberalization saw Lanco reengineer and consolidate itself under a single apex entity, Lanco Infratech Ltd. Lancos operations have always been marked by creation of synergies, backward and forward integrations and strategic innovations for competitive edge. Today, Lanco Infratech, through twenty-two subsidiaries has operations across a synergistic span of verticals. In power generation, Lanco has a presence in thermal, hydro, wind and renewable. Projects in operation and those underway represent over 8000 MW. The operations in


power generation draw deep strengths from its own EPC, entry into O&M and the capabilities of its Construction wing. Lancos presence in power extends to being a leader in power trading. Multiple synergies are being leveraged for a strategic presence in transmission and distribution. In wind energy, Lancos first line of turbines will roll out in 2009. Wind project developments are underway in India, Europe and the Americans. Lancos admired expertise in civil engineering has been displayed across the years in the execution of dams, railways, roads, industrial structures, residential and commercial construction, canals and other areas across the length and breadth of India. These competencies and depth of resources are unfolding a new roadmap in the Indian infrastructure sector. Lanco is already executing projects in ports, highways, airports and other areas. In property development, Lanco has emerged as a trend setter with Lanco Hills, which has also drawn international attention. Lanco Hills, in the Indian metropolis of Hyderabad, is coming up as one of the worlds largest mixed property development with thirty million square feet of built-up area, including the worlds tallest residential tower. Lanco Infratech is built on a tradition and culture of trust within and without. Lanco draws the best professionals who see growth in an environment underscored by good corporate governance and the melding of individual aspirations and organizational goals. A member of the UN Global Compact, Lancos Corporate Social Responsibility begins at home with facility audits and volunteerism of its people across all CSR initiatives. Lanco is spearheading CSR interventions and programmes have touched the lives of individuals and communities in the vicinity of Lanco facilities and across the country in areas where assistance is most needed. Demand driven, participatory CSR initiatives by Lanco exemplify the larger corporate vision that Lanco Infratech represents. of Inspiring Growth.

Vision Statement

To empower, enable and enrich partners, businesses and associates To be a chosen vehicle of growth for all stakeholders and a source of inspiration to society

Corporate Structure


Founder Chairman
L Rajagopal, a technocrat-turned industrialist, is the Founder Chairman of LANCO Group. In addition to his entrepreneurial spirit, Rajagopal has a strong sense of social responsibility. He established LANCO Foundation (formerly LIGHT), a Charitable Trust, in the year 2000 to reach out to the needy and has been involved in various philanthropic activities. After one-and-a-half decades of outstanding contribution to the


industry, Rajagopal chose to enter public life in 2003. He is a Member of Parliament, India. His avowed mission is to make a difference in the life of the common man.

Key Executives
Lagadapati Madhusudhan Rao is the Executive Chairman of Lanco Infratech Ltd. He is also a Trustee in the Lanco Foundation, the CSR arm of Lanco Group. Madhusudhan Rao obtained his M Tech degree in India and went to do his MS from Wayne State University in Detroit, USA. Following this he did a stint at the Waggner Corporation, obtaining practical training in various aspects of Quality Management. Returning to India in 1989, Madhusudhan Rao joined the core team which established the integrated metallurgy complex, Lanco Industries Ltd, at Sri Kalahasthi in the Indian state of Andhra Pradesh. Becoming the Managing Director of Lanco Industries Ltd in 1992, he further strengthened the industrial complexs end-to-end integrations. He also led the expansion of the enterprise, leveraging its long experience and expertise in civil and industrial engineering and project management. He became the Chairman of the consolidated new entity, Lanco Infratech Ltd in 2002. His keen reading of business and technology trends, vast domain knowledge and ability to build inspired and outstanding professional teams and forge strategic alliances and partnerships have been a driving force in achieving the span and scale of the Lanco conglomerate. G. Bhaskara Rao is one of the founder members of the Lanco Group of enterprises. He is currently the Executive Vice-Chairman of Lanco Infratech Ltd and heads the Construction Division of Lanco Infratech. Bhaskara Rao holds a Bachelors degree in engineering with Production as specialisation. He also holds an M.E degree in Machine Design from the prestigious Indian Institute of Science, Bangalore.


G. Bhaskara Rao is respected for his expertise and achievements in the Construction industry. His commended experience in project planning and execution continues to give a firm direction to Lancos strategic growth, especially in the Construction and Infrastructure segments. L Sridhar comes with a few years of experience at Acon Building Constructions in Sanjose, the United States. He worked as Joint Managing Director of LANCO Infratech Ltd, formerly LANCO Constructions Ltd, from 1997 to 2003. Sridhar is also Director and Promoter of LANCO Kondapalli Power Pvt Ltd, Rithwik Energy Systems Ltd, Clarion Power Corporation Ltd, ABAN Power Company Ltd, LANCO Amarkantak Power Pvt Ltd and LANCO Green Power Pvt Ltd. He has done his BE (Civil Engineering) from Siddaganga Institute of Engineering in Tumkur, Karnataka and MS (Construction Management in Civil Engineering) from University of Eastern Michigan in the United States. G. Venkatesh Babu, the Managing Director of Lanco Infratech Ltd, also directly oversees the groups Infrastructure initiatives. A Graduate in commerce from the Madras Christian College, he is a Chartered Accountant and Cost Accountant. He has over fifteen years of experience in Commercial Banking, Corporate Advisory, Mergers & Acquisitions, Project Finance and Equity Capital Markets. Before moving to Lanco, Venkatesh Babu held senior positions in leading Indian and Multinational Organisations DV Rao, the Joint Managing Director of Lanco Infratech Ltd, has over nineteen years of experience in Project Implementation, Engineering & Consultancy Services, and International Marketing. A Graduate in Mechanical Engineering from the Mysore University, DV Rao has had rich and varied experience across different sectors. As Joint Managing Director, DV Rao also heads the Power business vertical of Lanco. J Suresh Kumar is the Chief Financial Officer of Lanco Infratech Ltd. 26

A Graduate in Commerce from DG Ruparel College, Mumbai, Suresh Kumar is a Chartered Accountant. He did his articleship with CC Chokshi & Co (now Deloitte Haskins and Sells) With vast experience in Mergers & Acquisitions, Restructuring Advisory, Strategic Advisory, Fund Raising Advisory, Business Development and Equity Capital Market, Suresh Kumar also plays a key role at Lanco in resource mobilisation, Mergers & Acquisitions and Investor Relations.

Panduranga Rao heads the gas based power projects of Lanco Infratech ltd. In this capacity he is the Director & CEO of Lanco Kondapalli Power Pvt Ltd and a Director of ABAN Power Company Ltd and Udupi Power Corporation Ltd. A commerce graduate from SV University, Tirupati, India, Panduranga Rao is a qualified Chartered Accountant and simultaneously completed the Inter of Company Secretary course. He did his articleship with Brahmayya & Co, Chennai. He has more than 28 years of rich experience across diverse industries. K Raja Gopal is the Chief Executive Officer of the Thermal Power Business of Lanco Infratech Ltd. He is also the Director & CEO of Lanco Anpara Power Pvt Ltd. Raja Gopal holds an ME degree in Electrical Engineering and MBA in Marketing from Osmania University, Hyderabad, India. He has over twenty-two years of experience in Project Development and various functional disciplines of manufacturing and power industries. Raja Gopal currently looks after the development, execution, commissioning and operations of Lanco Amarkantak Thermal Power Station in Chhattisgarh and Lanco Anpara Thermal Power Station in Uttar Pradesh, India. Pradeep Lenka is the Chief Executive Officer Thermal, of Lanco Infratech Ltd. In addition to this he also plays a key role in strategic planning and technology.


Predeep Lenka is a Mechanical Engineer with Finance Management Certification Course from IIM, Bangalore. He has more than 30 years of experience in power projects as Original Equipment Manufacturer and also as Independent Power Project Developer. He has led the implementation of over 15 power projects based on coal, oil and gas in public and private sectors. Pochendar Shenigarapu is the Director & CEO of Lanco Hills Technology Park Pvt Ltd. Pochendar Shenigarapu holds a B Tech in Civil Engineering and M Tech in Environmental Engineering and has over 26 years of experience in the construction of residential & commercial space, water supply & sanitation project execution, operation & maintenance works, turnkey execution of combined cycle power projects and marketing infrastructure projects. Prasad holds a Masters Degree with Specialisation in energy & Systems and a Bachelors Degree in Mechanical Engineering. He is also a certified Project Management Professional (PMP). He has professional experience in the areas of financial services, Information Technology, and Management Consultancy spanning several countries. He leads Lancos growth plans in wind turbine equipment manufacturing and windproject development activities in global markets. Sreenivas Veluri is Lanco Infratech Ltds Director, Corporate Affairs. A management Graduate with Marketing as specialisation, Sreenivas Veluri has two decades of experience in key positions in the print and electronic media. Ravi Shankar is a Fellow Member of the Institute of Cost and Works Accountants of India and Certified Associate of Indian Institute of bankers, Mumbai. He did his M Com in Business Administration with specialisation in financial management. He holds Postgraduate Diplomas in Corporate Laws & Management, Tax Laws from Indian Law Institute, New Delhi and Postgraduate Diploma in Industrial Relations and Personnel management from Bhartiya Vidya Bhavan, New Delhi. 28

At Lanco, he is responsible for developing strategies to carry out trading, transmission, distribution and other power-related activities. He is also entrusted with structuring the power information systems for Lanco Infratech Ltd. SC Manocha is the Chief Executive Officer EPC of Lanco Infratech Ltd. He is a Mechanical Engineer and a Management Graduate. He has several additional qualifications including project management, financial management, labour laws, welding engineering, construction and planning of thermal power plants, planning management and project management from reputed Institutes across India. He has over 35 years of rich experience in key positions with leading corporate. His expertise includes pre-project planning, project planning, key negotiations, departmental clearances, finalising equipment and service providers, financial modelling, business strategy, marketing intelligence and strategic alliances. Sanjay Kumar Mittal is the Director & CEO, Hydro of Lanco Infratech Ltd. He is an Electrical Engineer. He has over 25 years of rich experience in all areas of Hydro Power Projects having been part of major projects including Teesta, Lachen, Rangit and Nathpa Jhakri to name a few. He holds Mechanical Marine Engineering degree, MBA and PhD in Management from Andhra University. He has over three decades of experience in the fields of Maintenance, Production and Human Resources Development. Before moving to Lanco, he held senior managerial positions in Marine, Heavy Engineering, Industrial Development, Fertilizer, Cement and Poultry sectors.

Lanco Infratech Limited became a listed entity in November 2006 following the Initial Public Offering of shares. Of the total outstanding 222.36 million shares 73.58% is held by the founder promoters of the company, 20% is available with the Public and the balance is held by Employee Stock Option Trust.


Corporate Governance
At LANCO, our objective is to create value for our stakeholders, including our shareholders, clients, employees, and communities. Good corporate governance standards that promote the principles of integrity, transparency, and accountability will protect and likely enhance our stakeholder value. Thus, we believe that good business practices, transparency in corporate financial reporting, and the highest levels of corporate governance are essential components of our success. Consistent with this belief, today at LANCO: Excluding the CEO, all Board members are independent. Board committees that address auditing, compensation, corporate governance, and nominating functions are comprised solely of independent directors.


Committee charters clearly establish the committees' roles and responsibilities. Corporate Governance Guidelines are regularly reviewed and updated in response to changing regulations and stakeholder concerns. Our bylaws have recently been updated to provide for majority voting in uncontested director elections. The company will continue to take any steps the Board believes will further improve our standards, controls, and accountabilities and, as additional regulations and recommendations on corporate governance are announced, will continue to make required changes to our policies. LANCO's corporate governance has been, and continues to remain, an important area of focus for LANCO's senior executives and Board of Directors. We have a track record of judiciously managing the business and disclosing our performance to investors. We will not only run our operations in accordance with Government of India regulations but also within the spirit of those regulations. Corporate governance needs and practices continue to change, and I am proud that LANCO proactively amends its policies and oversight to keep current with, or remain ahead of, such change. We believe that keeping our policies and practices current and our oversight strong make us a better and more successful company. L. Madhusudhan Rao, Chairman


Lanco considers CSR as a business vertical. Lanco Foundation is our CSR arm. Lanco Foundation works through coherent and integrated strategies in seven sectors: Education, Health, Livelihoods, Community Development, Environment, Relief & Rehabilitation and sports & culture. Lanco Foundation takes the lead in ensuring that Lancos CSR policy, strategies and 31

goals are internalised across the organisation and is a fundamental element of the way we do things in every area of operations. Lanco Foundation focuses on sustainability and demand driven delivery of developmental resources besides influencing public policy based on its learnings. Aligned to Millennium Development Goals, Lanco Foundation benchmarks itself and measures Lancos CSR performance against the best of international standards. As a member of the UN Global Compact we pursue best practices in relation to human rights, environment, labour and anti-corruption.

To align Lanco in all its activities with Millennium Development Goals and aims and purposes of the UN Global Compact. To internalise the multifaceted responsibilities at individual and organisational levels in addressing poverty, climate change and social issues. To improve human development indices through projects and programmes at local, state and national levels. To partner with Indian and international organisations and institutions to deliver aid, assistance and developmental resources effectively. To translate learnings into policy advocacy and promote forums and communications for positive social transformation. 32

To nature all the elements of our CSR policy as a value system.

Welcome to the Lanco Group Media Information Centre. Here we have high resolution pictures of our key executives, plants, sites, events and recent press releases for download. For any further clarification/information please feel free to contact us. Lanco Magazine

July-September 2008 Issue 26

April-June 2008 Issue 25


Lanco believes that people management is a matter of creating, nurturing and sustaining an environment conducive to optimal use of employee potential. Lanco is home to more than 3500 committed, talented and ambitious professionals. As one of the preferred employers in the industry, LANCO attracts and retains the best talents. Lanco has adopted some of the best people practices and policies from around the world to delight its people. Lanco helps its people stay at the fore front of cutting edge technology and skills by providing regular exposure to world class training programs in some of the most reputed academies in the country. Lanco has openings across a wide range of skills and professions. Come explore the challenging opportunities at Lanco.



IKU II IEEMA award for "Excellence in Fast Track Commissioning of Small Hydro Projects" February 2009 PRSI Confers Golden Jubilee Award For the Most Impressive Public Relations Initiatives August 2008. Clarion Power Corporation Ltd FAPCCI Award for Excellence in Renewable Energy 2007. Construction World NICMAR Awards2007 for the Second Fastest Growing Construction Company (Medium Category) in India. LANCO Institute of General Humanitarian Trust (LIGHT) TERI Award 2006-07 for Excellence in Corporate Social Responsibility. PRSI National Award for House Journal (English) - First Prize PRSI Confers Golden Jubilee Award For the Most Impressive Public Relations Initiatives LANCO Infratech Limited Award for Excellence in Bridge Engineering 1999 from the Indian Institute of Bridge Engineers. LANCO Kondapalli Power Pvt Ltd OHSAS 18001:1999 Certification in respect of Environmental Management System by Lloyd's Register Quality Assure



In LANCO INFRATECH Budgeting process is done in two phases:

Long range budgets in the form of Ten-Year plans and broad objectives for the next two years.

2. Short range budgets in the form of Yearly- Annual Budgets broken down to month wise. The present study is limited to the yearly budgets.

In LANCO INFRATECH, Industry Sector, Power Sector, and International Operation Division of LANCO INFRATECH mainly procure orders. The respective sector allocates the scope of work and corresponding order value to various manufacturing divisions. In the unit level commercial department receives orders from various business sectors In addition, where the scope of work relates to a particular unit and department of that unit gets orders from customers.


Since the products are tailors made to customers requirements, budgeting mainly depends upon the orders on hand and orders likely to be received, either based on already quoted or otherwise.

Depending upon the shop load, capacity and the delivery schedule of the customer physical turnover budget is first prepared Physical turnover budget takes into account the commitments made to customers, and backlogs if any in previous year. Physical turnover is made product wise, shop wise month wise for better follow-up and control.

Once the physical turnover is finalized financial turnover is arrived at based on the sale value allocated by corporate office like physical turn over. Financial turnover is also arrived shop wise, month wise etc.

Materials Budget is prepared based on physical and financial turnover proposed to be executed during budget period. Based on the physical budget and delivery schedule planned by PPC material estimate of each product to be executed in the year is worked out. The factors that are considered are the latest purchase price, foreign exchange rate fluctuations and the Prevailing customs duty/ excise duty structure. In addition to the material required for current year equipment to be dispatched, MPC has to estimate for the projects of next year first quarter also. Hence, the total requirement of materials is based on material estimate for production and material requirement work in progress (WIP).



Since the units is having multi products and follows responsibility centre accounting each product is considered as a profit centre that necessitates a preparation of budget to the level of net profit of a product. Budget is made for each product wise following Actual: a) b) c) d) Physical and Financial Turnover. Material Budget. Value added Statement Inventory.

Each product will prepare all the above said budgets and finally arrives at the value added for each product. All these product wise budget are consolidated and common expenses and allocation, by corporate office are added to find out the budgeting profit of the u nit as a whole. The corporate sector will play an important role in dealing with customers. It will clearly check the customers orders etc. As it is a multi product company it receives different types of orders and it will make all estimates for the future period.

Expenses budget consists of various elements like Personnel Payment Depreciation other expenses like Interest, Power & fuel, Excise Duty, Share of Service Divisions like corporate office, R&D etc. Detailed working are made to arrive at the various expenses by collecting likely expenses from various executing departments the requirement of each department in fully scrutinized by finance department in consultation with the department concerned. Thus, a total expense under each head of account is arrived and the same is compared with previous year actually and any major deviation needs to be explained.


Cash In-flow statement is prepared with the following information 1) Cash is recovered from customer for the following


a) Advance from the customer for the equipment to be manufactured. b) Payments for the supplies already made/being made. c) Payments against deferred debts. 2) Export benefits from government in respect of deemed exports, company has to pay excise duty for the equipment dispatched, where as the customer will not reimburse such excise duty. Hence, government reimburses such excise duty already paid. 3) Scrap Sale: - By selling the scrape also there will be a cash inflow.

Cash out flow consists of (1) Materials: Payments to suppliers either as advance or for supplies made/ being made. (2) Personal Payments: Payments made to the employees and workers in the form of salaries and wages and other benefits. (3) Excise Duty: Payments made on the equipment manufactured and dispatched. (4) Sales Tax: Sales Tax Payments made on the equipment sold. (5) Other expenses: Payments towards laboratory payments, repairs and maintenance, computer hire charges, sub-contract payments etc. (6) Interest: Interest paid to banks etc. (7) Repayment of Loan. (8) Capital Expenditure etc.



Inventory budget is prepared to know the inventory turnover with the following information: (1) Raw materials (2) Components (3) Indirect material (4) Material in transit (5) Material with fabrication. (6) Work in progress. (7) Scrape and others. All these are estimated based on order to be executed during the next financial year. This is prepared product wise also for follow up. Revised estimates for the current year are also made. By preparing this actual inventory in number of days of turnover can also be prepared.

Gross debtors can be prepared with the following information: (I) Collectable: The amount collectable immediately from the customers is prepared. Contract Management Electrical Machines Heat Exchangers Pumps Oil Rigs Switch Gear Spares Erection etc.



Deferred debts: the debts, which are collectable after a certain period like after completion of project work. And this is also prepared product wise. These all are compared with the past actual current year estimates to know the trend.

The balance sheet is prepared with the following information: A) Utilization of funds. a) Fixed assets: opening balance, additions, and deletions and closing balance and also depreciation is valued. B) Working Capital: a) Current assets: inventories, book debts, cash and bank balances, loans and advances inter unit balances. C) current liabilities: a) Advance from customers, sundry creditors other liabilities, provisions. To get net working capital B C

Management Information Report (MIR)

Once the detailed budget is prepared it is sent to corporate office for approval. On the approval the yearly budget is broken down in to monthly budget for allimportant criteria like turn over operating results, cash flows, inventory debtors etc. Month wise budgets are prepared product wise also. The month wise budget helps the management to exercise control and take necessary actions to achieve the targets. For this purpose, MIRs are prepared periodically - Daily, Weekly, and Monthly etc. These MIRs highlight the previous years actual, current year budget, for the year, for the month and up to the month and current year actual previous year actual up to corresponding period. These reports are sent to corporate office and submitted to local management for follow up. These will be discussed at the highest level of the management committee meetings. In addition to various results meeting at the unit level.


Some of the reports are: 1) Operating Results - Monthly 2) Turnover Detail 3) Billing Detail - Weekly / Monthly - Daily / Weekly / Monthly.

4) Cash Flow Statements 5) a) Inventory - Monthly

b) Work in Progress and Finished Goods 6) Debtors.

MANAGEMENT INFORMATION REPORT Mirno 1.1 1.2 2.0 2.1 4.1 6.1 6.2 6.3 8.01 Mir description Physical turnover Turnover & billing Financial turnover summary -doOrder book receipt Order book outstanding physical and financial Operating results Miscellaneous expenses Miscellaneous income -do-dofinance budget budget budget weekly weekly monthly monthly monthly monthly agency responsible planning & development commercial (cc) frequency weekly

co-ordination weekly weekly

Debtors outstanding at the start commercial co-ordination billing, collection, bal bars


8.02 8.03 8.04 13.0 13.1 13.11 13.12 13.3 13.31 13.5 Imp 1

Age wise analysis of the above Advances out standing receipts adjusted & balance Deferred debts Foreign currency wise material commitments and cash out flows control Inventory report material control

-do-do-dobudgeting budgeting budgeting budgeting budgeting budgeting budgeting budgeting

monthly monthly monthly and monthly and monthly and monthly and monthly and monthly and monthly and monthly and monthly

Finished goods more than one material year old control Wipe more than one year old Sating steel receipts physical Sating steel inventory Inventory planning for material control material control material control material control

Listing pos placed during the material month more than rupees five lakhs control 1 machine utilisation report for finance machines costing more than rupees five lakhs Daily cash collection report Weekly net billing


mir20 . cf1 cf2 cf3-a

commercial co-ordination -do-

daily weekly weekly

Details of customer collection collection agency through regional operation division (rod) & its allocation to units Details of customer collection collection agency through bank and its allocation Details of credit sent from bank to unit cash management corporate office centralised cash credit (ccc) account Weekly statement of bank debit to unit cash management ccc a/c Statement of bank transfer of each unit cash manager more than 50,00,000 on a single day

cf3-b cf3-c

weekly weekly

cf3-d cf3-e

weekly exception


cf4 cf5 cf6

Actual cash inflow & outflow

each unit cash manager

weekly monthly

Outstanding nonfund based units. each unit cash manager letter of credit bank guarantee

Management committee on billing commercial word monitory monthly collection & outstanding one line cell information Details of billing collection & o/c commercial coordinate monthly verification statutory of bills o/s finance monitoring Statutory collection and finance monitoring verification for bills o/s up to 31. 3 of each year Statutory verification collection and finance monitoring monthly

cf cf8-a

8-b cf9 cf10 cf11 cf12 cf13

monthly monthly monthly monthly weekly monthly

Details of liquidation of old & commercial coordination withheld o/s Details of pre-shipment & post cash manager shipment credit Cash flow forecast (weekly) cash manager Statement of bills pending & lc cash manager bills pending Statement of bills o/s discounted cash manager under idbi / icici schemes.



The term Capital Budgeting refers to long term planning for proposal capital outlay and their financial. It includes raising long term funds and their utilization. It may be defined as a firms formal process of acquisition and investment of capital. Capital Budgeting may also be defined as It involves firms decision to invest its current funds for addition, modification and replacement of fixed assets. Its deals exclusively with investment proposals, which are essentially long term projects and are concerned with the allocation of firms scarce financial resources among the available market opportunities. Some of the examples of capital expenditure are


I. II.

Cost of acquisition of permanent assets as land and buildings. Cost of additions, expansion, and improvement as alteration in the fixed assets.


R&D projects cost, etc.,

It is The process of investment of firms current funds most efficiently in long term assets with a view to earn profits over a series of fears. Capital Budgeting is long term planning for financing proposed capital outlays. Capital budgeting is concerned with allocation of the firms scare financial resources among the available market opportunities. The consideration of investment opportunities involves the comparison of the expected future steams of earning from a project with immediate and subsequent of expenditure for it. In any grouping concern, capital budgeting is more as less a continuous process and it is carried out by different functional areas of management such as production, marketing engineering, financial management etc all the relevant functional departments play a crucial role in the capital budgeting decision are considered. In role of a finance manager in the capital budgeting basically lies in the process of critically and in depth analysis and evaluation of various alternatives proposals and then to select one out of these. As already stated, the basic objective of financial management is to maximize the wealth of the share holders, therefore the objectives to capital budgeting is to select those long term investment projects the are expected to make maximum contribution to the wealth of the share holders in the long run.



The important features, which distinguish capital budgeting decision in other day to day decisions, are Capital budgeting decision involves the exchange of current funds for the benefits to be achieved in future. The future benefits are expected and are to be realized over a series of year. The funds are invested in non-flexible long term funds. They have a long term and significant effect on the profitability of the concern.


They involve huge funds they are irreversible decisions. They are strategic decision associated with high degree of risk.


The importance of capital budgeting can be understood from the facts that an unsound investment decision may prove to be fatal to the very existence of the organization. The importance of capital budgeting arises mainly due to the following.

1. Large investment
Capital budgeting decision, generally involves large investment of funds. But the funds available with the firms are scare and the demand for funds for exceeds resources. Hence, it is very important for a firm to plan and controls its capital expenditure.

2. Long term commitment of funds


Capital expenditure involves not only large amount of funds but also funds for long term or a permanent basis. The long term commitment of funds increase the financial risk involved in the investment decision.

3. Irreversible nature
The capital expenditure decisions are of irreversible nature. Once, the decision for difficult to impose of these asset without incurring heavy losses.

4. Long term effect on profitability

Capital budgeting decisions ha a long term and significant effect on the profitability of a concern. Not only the present earning of the firm are affected by the investment in capital assets but also the future growth and investment decision taken today. Capital budgeting decision has almost has importance to avoid over or under investment in fixed assets.


Difference of investment decision

The long term investment decision are difficult to be taken because uncertainties of future and higher degree of risk.

6. Importance
Investment decision through taken individual concern is of national importance because it determines important, economic activities and economic growth.


Every capital budgeting decision is a specific and with given parameters and there fare, almost infinite number of types or forms of capital budgeting decision may occur. Ever if the same decision being considered by the same firm at two different point of time, the decision considerations may change as a result of change in any of the variable. However, the different type of capital budgeting under taken from time to time by different firms can be classified on a number of dimension. Some projects affect other projects of the firms is considering and analyzing. At the other extreme,


some proposals are prerequisite for other projects. The projects may also be classified as revenue generating or cost reducing projects can be categorized as follow: From the point of view of the firms existence: The capital budgeting decision may be taken by a newly incorporated firm or by an already existing firm.

New firm:
A newly incorporated firm may be required to take different decision such as selection of a plant to be installed, capacity utilization at initial stage, to set up or not simultaneously the ancillary unit etc. a) Existing firm: A firm which already exists may be required to take various decisions from time to time meet the challenge of competition or changing Environment. These decisions may be

i) Replacement and Modernization decision

This is a common type of a machineries eventually required replacement. If the existing plant to be replaced because of the economic life of the plant is over, then the decision. However, if an existing plant to be replaced because of the economic life of the plant is over, then the decisions. However, if an existing plant to be replaced because it has become technologically out dated (through the economic life may not be over) the decision any be know as a modernization decision. In case of a replacement decision, the objective is to restore the same as higher capacity where as in case of modernization decision, the objectives is to increase the efficiency and/or cost reductions. In general, the replacement decision and the modernization are also known as cost reduction decisions.

ii) Expansion
Some times, the firms may be interested in increasing the installed production capacity so as to increase the market share. In such a case, the finance manager is required to evaluate the expansion program in term of marginal costs and marginal benefits.


iii) Diversification
Some times, the firm may be interested to diversity into new product lines, new markets production of spares part etc. in such a case, the finance manager is required to evaluate the only the marginal cost and benefits, but also the effect of diversification on the existing market share and profitability. Both the expansion and diversification decisions may be also known as revenue increasing decisions.

II. From the point of view of Decision situation

The capital budgeting may also be classified from the point of view of the decision situation as follows:

i) Dependent project decision

This is a fundamental decision in capital budgeting. It is also called as accept reject criterion. If the project is accepted, the firms invest in it. In general all these proposals, which field at rate of return grater than certain required rate of return on cost of capital are accepted and the rest are rejected. possibility of the acceptance of another. improvement. By applying this criterion all independent projects with one in such a way that the acceptance of one precludes the Under the accept reject decision all independent projects that satisfy the minimum investment criterion should be

ii) Mutually Exclusive project decision

Mutually exclusive project are those, which complete with other projects in such a way that the acceptance of one will exclude the acceptance of the other projects. The alternatively are mutually exclusive and only one may be chosen. Suppose a company is intending to buy each with a different initial investment adopting costs. The three machines represent mutually exclusive alternatives ads only one of these can be selected. It may be rated hear that the mutually exclusive project decisions are not independent of the accept reject decisions.

iii) Capital rationing decision

In a situation where the firm has unlimited funds all independent investment proposals yielding return greater than some pre determined levels are accepted. 51

However this situation does not prevail in most of the business firms in actual practice. They have a fixed capital budget. A large number of investment proposals complete for these limited funds, the firm must therefore ration them. The firm allocates funds to project in a manner that it maximizes long run returns, this rationing refers to a situation in which a firm has more acceptance investment than it can finance. It is concerned with the accept reject decision capital rationing employees ranking of the acceptable investment projects. The project can be ranked on the basis of a predetermined criterion such as the rate of return. The project is ranked in the descending order of the rate of return.

Problems and Difficulties in Capital Budgeting:

The problems in capital budgeting decision may be as follows:

a) Future uncertainty
Capital budgeting decision involves long term commitments. However there is lot of uncertainty in the long term uncertainty may be with reference to cost of the project, future expected returns, future competition, legal provision, political situation etc.

b) Time Element
The implication of a capital budgeting decision are scattered over long period. The cost and benefit of a decision may occur at different point of time. The cost of project is incurred immediately. However the investment is recovered over number of fears. The future benefit has to be adjusted to make them comparable with the cost. Long the time period involved, greater would be the uncertainty.

c) Difficulty in Qualification of impact

The finance manager may face difficulties in measuring the cost and benefits of projects in quantitative term. For example, the new product proposed to be launched by


a firm may result in increase or decrease in sale of other products already being sold by the firm. It is very difficult to ascertain the extent of impact very difficulty to ascertain the extent of impact as the sales of the other than the launch of the new products.

Assumption in Capital budgeting

The Capital budgeting decision process is a multi-faceted and analytical process. A number of assumptions are required to be made. The assumptions constitute a general set of condition with in which the financial aspects of different proposals are to be evaluated. Some of these assumptions are

1. Certainty with respect to cost and benefits

It is very difficult to estimate the cost and benefit of a proposal beyond 2-3 years in future. However, for a Capital budgeting decision, it is assumed that the estimate of cost and benefits are reasonably accurate and certain.

2. Profit motive
Another assumption is that the capital budgeting decisions are taking with a primary motive of increasing the profit of the firm. No other motive or goal influences the decision of the finance manager.

3. No capital Rationing
The capital budgeting decision in the present chapter assume that is no scarcity of capital. It assumes that a proposals will be accepted or rejected in the strength of its merits alone. The proposals will not be considered in combination with other proposals to the maximum utilization of available funds.

Capital budgeting process

Capital budgeting is complex process as it involves decision relating to the investment of current funds for the benefits for the benefits to be achieved in future and


the future are always uncertain. However, the following procedure may be adopted in the process of capital budgeting.

i) Identification of investment proposals

The capital budgeting process begins with the identification of investment proposals. The proposals about potential investment opportunities may originate either from top management or from any officer of the organization. The departmental head analysis various proposals in the light of the corporate strategies and submit proposals to the capital expenditure planning.

ii) Screening proposals

The expenditure planning Committee screens the various proposals received form different departments. The committee reviews these proposals from various angles to ensure that these are in accordance with the corporate strategies or selection criterion of the firm and also do not lead departmental imbalances.

iii) Evaluation of various proposals

The next step in the capital budgeting process is to various proposals. The method which may be used for this purpose such as payback period method, Rate of return method, N.P.V and I.R.R. etc.

iv) Fixing priorities

After evaluating various proposals, the unprofitable uneconomical proposals may be rejected and it may not be possible for the firm to invest immediately in all the acceptable proposals due to limitation of funds. Therefore, it essential to rank the project/proposals after considering urgency risk and profitability involved in there.

Final Approval and Preparation of Capital Expenditure Budget


Proposals meeting the evaluation and other criterion are approver to be including in the capital expenditure budget. The expenditure budget lays down the amount o9f estimated to be incurred of fixed assets during the budget period.

Implementing proposals
Preparation of a capital expenditure budget and incorporated of a particular proposal in the budget doesnt authorize to go a head with the implementation of the project. A request for the authority to spend the amount should be mode to be capital expenditure committee, which reviews the profitability of the project in the changed circumstances. Responsibilities should be assigned while implementing the project in orders avoid unnecessary delays and cost over runs. Net work techniques like PERT and CPM can be applied to control and monitor the implementation of the project.

Performance Review
The lost stage in the process of capital budgeting is the evaluation of the performance of the project the evaluation is made by comparing actual and budget expenditures and also by comparing actual anticipated returns. correctives action may be taken in future. The unfavourable variances, if any should be looked in to and the causes of the same be identified so that

Methods for Techniques of Capital Budgeting

There are many methods for the evaluating the profitability of investment proposals the various comm0odity used methods are

Techniques of capital budgeting

Traditional Method 1. Pay back period

Modern Method 1. N.P.V


2. Accounting Rate of Return

2. I.R.R 3. P.I

Traditional Methods
1. Pay back period method (P.B.P) 2. Accounting Rate of return method (A.R.R)

Modern or Discounting techniques

1. Net present value method (N.P.V) 2. Internal Rate of Return method (I.R.R) 3. Profitability index method (P.I)

1. Pay back period method (PBP)

The number of years required to recover the initial out lay of the investment is called payback. Cash out lay PBP = --------------------------------------Annual net cash inflows This formula can be applicable when the cash in flows are even are equal for a given period of time.

Acceptance rule Accept if PB < Standard payback Reject if PB > Standard payback Merits 1. East to understand and compute and inexpensive to use Demerits 1. Ignores the time value of money


2. Emphasizes liquidity 3. East and crude way to cope with Risk 4. Uses cash flows information

2. Ignores cash flows occurring after the payback period 3. Net Measure of profitability 4. No objective way to determine the standard payback 5. No relation with the wealth Maximization principle

Discount pay back

The number of year required in recovering the cash out lay on the present value basis is the discounted payable period. payback method. Except using discounted the demerits of

2. Accounting rate of return (A.R.R)

An Average rate of return found by dividing the average net operating profit by the average investment. The Accounting rate of return is also known as called Average rate of return it is a superior method then payback period method. This method uses certain accounting information. In the problem the minimum required rate (or) cost of capital will be given by using the data given the problem we have to calculate A.R.R This calculated A.R.R is compared with the minimum required rate. Average income Average rate of return = -------------------------------------- X 100 Average investment Acceptance rule Average if ARR > minimum rate Reject if ARR < minimum rate Average Income Original X (or) half the original investment Merits Demerits


1. Uses accounting date with which Executives are familiar 2. Easy to understand and calculate 3. Gives more weightage

1. Ignores the time value of money 2. Does not use cash flows 3. No objective way to determine the minimum acceptable rate of return

Discounted cash flow techniques

For evaluating the projects, most of the organizations are preparing to use discounted cash flow techniques. The techniques are very qualitative because they have strong theoretical base while calculating the cash in flows generated by the projects for different years, their future value is discounted. According to a given discount value is considered for calculating and decision making.

Types They are three of discounted cash flow techniques are in practice. They are i) ii) iii) Net present value method (N.P.V) Profitability index Internal rate of return (P.I) (I.R.R)

i) Net present value method (N.P.V)

This is the most widely and company used method to evaluate the projects under this method the given cash in flows are discounted according to the given discounted factor value either the rupee realization value is given it is multiplied with the cash in flows. In that respect to year. Later these values are to be added to arrive the value of total of net present value of cash in flows. The difference between P.V of cash flows and P.V of cash out flows in equal to NPV the firms opportunity cost of capital being the discount rate. Net present value Acceptance rule Accept if NPC > 0 Reject if NPV < 0 (i.e., NPV is Positive) (i.e., NPV is Negative) = P.V. Cash in flows P.V. Cash out flows

Project may be accepted if NPV = 0. 58

Merits 1. Considered all cash flows 2. True measure of profitability

Demerits 1. Requires estimates of cash flows which is a tedious task? 2. Requires competition of the opportunity cost of capital which poses practical difficulties

3. Based on the concept of the time 4. Satisfies the value additively principle (i.e., NPV & two or more projects can be added) 5. Consistent with the share holders wealth Maximization principal.

3. Sensitive to discount rates value of money

ii) Profitability Index (P.I)

Another important technique under discounted cash flow techniques is profitability index method per taking decision by using this method. By taking decision by using this method required the net values of both P.V. of cash in flows and P.V. of cash out flows. It is an expansion to N.P.V method. The nature of data used in both the methods is same, the only differences is in the made of uses of such data. The ratio is the present value of the cash flows to be initial out lay is Profitability Index or benefit cost ratio. P.I = P.V. of cash in flows P.V. of cost out flows. Acceptance rule Accept if PI > 1.0 Reject if PI < 1.0 Project may be accepted if PI = 1.0 Merits 1. Considers all cash flows 2. Recognizes the time value of money Demerits 1. Requires estimates of the cash flows which is a tedious task 2. At times falls indicate correct choice between mutually 59

exclusive projective 3. Relative measure of profitability 4. Generally consistent with wealth Maximization principle

iii) Internal rate of return (I.R.R)

The Internal rate of return method is another discounted cash flow techniques, which takes account of the magnitude and timing of cash flows. Another terms used to describe the I.R.R method are field on an investment marginal efficiency of capital rate of return over cost, time adjusted rate of Internal return and so on. The concept of internal rate of a one period project. The discounts rate which equates the present value of an investments cash in flows and out flows is its internal rate of return. Cash in flows investment Positive value I.R.R = Lower rate + --------------------------------------Difference value Cash in flows cash in flows Higher value lower value ---------------------------X Difference in discount

Investment Factor identification = --------------------------------------Average cash in flows Merits 1. Considers all cash flows 2. True measure of Profitability Demerits 1. Requires estimates of the cash flows which is a tedious task 2. Does not hold the value additivity


principle (i.e., IRR & of two or more projects do not add) 3. Based on the concept of the time value of money 4. Generally consistent with wealth Maximization principle 5. Relatively difficult to compute 3. At times fails to indicate correct choice between mutually exclusive projects 4. At times fields multiple rates

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 that all companies, except one, used payback with payback and/or other techniques about two-thirds of companies used IRR and about two-fifths NPV, IRR was found to the second most popular method. The reasons for the popularity of payback in order of significance were stated to be its simplicity to use and understand its emphasis on the early recovery of investment and focus on risk. It was also found that one-third of companies always insisted on the computation of payback for all projects, one-third for majority of projects and remaining for some of the projects for about two thirds of companies standard payback ranged between 3 and 5 years. Reasons for the secondary role of DCF techniques in India included difficulty in understanding and using these techniques lack of qualified professionals and unwillingness of top management to use DCF techniques. One large manufacturing and marketing organization mentioned that conditions of its business were such that discounted cash flow techniques were not needed. Yet,


another company stated that replacement projects were very frequent in the company and it was not considered necessary to use discounted cash flow technique for evaluating such projects.




Evaluation of investment proposal
At each point of time a business firm has a number of proposals regarding various projects in which it can invest funds. But the funds available with the firm are always limited and it is not possible to invest funds in all the proposals at a time. Hence, it is very essential to select from amongst the various competing proposals, those which give the highest benefits. The crux of the capital budgeting is the allocation of available non-economic, which influence he capital budgeting decisions. The crucial factor that influences the capital budgeting decision is the profitability of the prospective investment. Yet the risk involved in the proposal cannot be ignored because profitability and risk are directly related, i.e. higher profitability, the risk and vice-versa. There are many evaluating profitability of capital investment proposals. The various commonly used methods are as follows: A. Traditional methods 1. Pay-back period method 2. Average Rate of Return method B. Time-adjusted methods 1. Net present value method 2. Profitability Index method


3. Internal Rate of Return method

NON-DCF CRITERIA Pay back period Method (PB)

The pay back period (PB) is one of the most popular and widely recognized traditional methods of evaluation investment proposals. Pay back is the number of years required to recover the original cash outlay invested in a project. If the project generates constant annual cash inflows, the pay back period can be computed by dividing cash outlay buy the annual cash inflow.

Cash outlay of the project OR Original cost of the Asset

Pay back period = -----------------------------------------------------------------------------Annual cash inflows Co = Initial investment C = Annual cash inflows In case of unequal cash inflows, the pay back period can be found out by adding up the cash inflows until the total is equal to the initial cash outlay. Years 2005-06 2006-07 2007-08 2008-09 Cost of the Asset 146017 165358 177623 195471 Annual cash inflows 6871 19847 12623 16926 Pay back period 21.25 8.33 14.07 11.54


P back p ay eriod
200 500 Rupees 200 000 100 500 100 000 500 00 0
6 7 8 0 6 -0 0 8 -0 0 5 -0 0 7 -0 9

C st o th o f e A t sse A n a ca n u l sh in w flo s P y b ck a a p rio e d

2 0

2 0

2 0

Y ears

Criteria for evaluation The pay back period computed for a project is less than the pay back period set by management of the company, it would be accepted. A project actual pay back period is more than the determined period by the management, it will be rejected.


The cost of asset for the year 2005-06 is 146017 and the actual annual cash inflows is 6871, the cost of asset for the year 2006-07 is 165358 and the actual cash inflows is 19847, the cost of asset for the year 2007-08 is177623 and the actual cash inflows is 12623, and the cost of asset for the years 2008-09 is 195471 and the actual cash inflows is 16926 after analysing the values by interpreting the pay back period, the annual pay back period values were fluctuating year by year. Which are having the values 21.25, 8.33, 14.07, 11.54 respectively.


2 0

Accounting Rate of Return method (ARR)

The accounting rate of return (ARR) also known as the return on investment (ROI) uses accounting information, as revealed by financial statements, to measure the profitability of an investment. The Accounting rate of return is the ratio of the average after tax profit divided by the average investment would be equal to half of the original investment if it were depreciated constantly. Average income A R R = ------------------------------------ X 100 Average investment Years 2005-06 2006-07 2007-08 2008-09 Total profit 14479 19374 9879 15339 Net investment 28937 21435 18493 38733 ARR 50.03% 90.38% 53.41% 39.60%


Accounting Rate of Return

45000 40000 35000 30000 25000 20000 15000 10000 5000 0 2005-06 2006-07 2007-08 2008-09 Years

Total profit Net investment ARR

Criteria for evaluation According to this method ARR is higher than minimum rate of return established by the management are accepted. It reject the project have less ARR than the minimum rate set by the management.



The Total profit for the year 2005-06 is 14479 and the actual Net investment is 28937, the Total profit for the year 2006-07 is 19374 and the actual Net investment is 21435, the Total profit for the year 2007-08 is 9879 and the actual Net investment is 18493, and the Total profit for the years 2008-09 is 15339 and the actual Net investment is 38733 after analysing the values by interpreting the Accounting rate of return, the accounting rate of return values were increasing for next year and diminishes for next further years. Which are having the values 50.03%, 90.38%, 53.41%, 39.60% respectively.


The ARR standard set by the management is 32%. The values after interpreting in ARR method is more than the values of percentage. Hence we accept the project, which is having higher ARR.

DCF CRITERIA Net Present Value Method (NPV)

The Net Present Value (NPV) method is the classic economic method of evaluating the investing proposals. If is a DCF technique that explicitly recognizes the time value at different time periods differ in value and are comparable only when their equipment present values are found out. C1 N.P.V = C2 C3 Cn - Co (1 + K) ---------- + --------- + --------- + ------- + ---------(1 + K) (1 + K)2 (1 + K)3


C1 --------- - Co (1 + K)1



Where NPV = Net Present Value

Cf = Cash flows occurring at time

K = Discount rate n = life of the project in years Years 2005-06 2006-07 2007-08 2008-09 Cash inflows 6871 19847 12623 16926 DCF (10%) 0.909 0.826 0.751 0.683 Total Present value 6245.74 16393.62 9479.87 11560.46 44679.69

N t P e e t V lu e r sn a e
Rupees 200 50 200 00 100 50 100 00 50 00
6 7 8 0 5 -0 0 6 -0 0 7 -0 0 8 -0 9

C s in w a h flo s D F(1 % C 0 ) Pe e t v lu rsn a e

2 0

2 0

2 0

Y as er

NPV = Cash outflows Cash inflows NPV = 44679.69 56267 = - 11587.31 Criteria for evaluation


2 0

In case of calculated NPV is positive or Zero, the project should be accepted. If the calculated NPV is negative, the project is rejected


The Cash inflows for the year 2005-06 is 6871 and the DCF(10%) is 0.909, after multiplying both the cash inflows with DCF the present value is 6245.74, the Cash inflows for the year 2006-07 is 19847 and the DCF is 0.826 after multiplying, the present value is 16393.62, the Cash inflows for the year 2007-08 is 12623 and the DCF is 0.751 after multiplying, the present value is 9479.87, and the cash inflows for the years 2008-09 is 16926 and the DCF is 0.683 after multiplying, the present value is 11560.46. After analysing the values by interpreting the Net present value, the Net Present value is Negative. Hence project is rejected due to calculated NPV is Negative.

Profitability Index Method (PI)

Yet another time-adjusted method of evaluating the investment proposals is the benefit-cost (B/C) ratio or Profitability Index (PI) Profitability Index is the ratio of the present valued of cash inflows, at the required rate of return, to the initial cash out flow of the investment. PV of Cash inflow PI = ---------------------------------------Initial Cash outflow Where PV = Present Value Years 2005-06 2006-07 2007-08 2008-09 Cash inflow 137700 162323 146832 162802 Cash outflow 144571 142476 134209 145876 Profitability index 0.95 1.13 1.09 1.11


Profitability Index
200000 Rupees 150000 100000 50000 0
0 50 06 -0 0 70 08 -0 6 8 7 9

C ash inflow C ash outflow Profitability index

2 0

2 0

Y ears

Criteria for evaluation

A project can be accepted if its PI is greater than 1. If the PI is less than 1 we should reject the project.


The Cash inflows for the year 2005-06 is 137700 and the actual Cash outflows is 144571, the Cash inflows for the year 2006-07 is 162323 and the actual Cash outflows is 142476, the Cash inflows for the year 2007-08 is146832 and the actual Cash outflows is 134209, and the Cash inflows for the years 2008-09 is 162802 and the actual Cash outflows is 145876 after analysing the values by interpreting the Profitability Index, the value of 2005-06 is <1 i.e. 0.95, so the project is rejected, and the further year values were >1 i.e. 1.13, 1.09, 1.11 respectively. Which is having higher PI, Those projects will be accepted.


2 0


Internal Rate of Return (IRR)

The Internal rate of return (IRR) method is another discounted cash flows technique which takes account of the magnitude and thing of cash flows, other terms used to describe the IRR method are yield on an investment, marginal efficiency of capital, rate of return over cost, time-adjusted rate of internal return and so on. PBP PVFHR X

IRR = HR - -------------------------------------------------PVFLR




IRR = HR - -------------------------------------------------PVFLR


HR 17%

LR 16%

PBP 146017

PVFLR 478060

PVFHR 467108

Return 29.31%








Internal Rate of Return

600000 500000 Rupees 400000 300000 200000 100000 0 PBP PVFLR Factor PVFHR Return


From the above calculations we can infer that the IRR for the factors were 29.31% and 46.31%. The project has to be ranked according to highest IRR. Hence the project 2 is to be rank first as it is having the highest IRR & the second rank is given to project 1. The second project is accepted, having higher IRR and the first project will be rejected, which is having low IRR.





Budgeting in LANCO is mainly a performance based i.e., based on the
performance, where as zero-based budgeting is ideal for the company like LANCO.

There should be a proper budgeting control system. To reduce the cash crunch it is necessary for LANCO to revamp the existing
credit and budgeting policies.

ABC Analysis of inventing control should be adopted in LANCO.


A thorough review of operation on frequent intervals is required. These reviews

should be made with the request of changing environment. Orders received should be dispatched at proper time. Job sequencing should be pre-determined and should follow up the sequential process, until the end of the job. Thus, the lead-time can be reduced. There should be a proper communication between various departments and responsibility centers. There should be well-organized manpower planning, especially with regard to production.

The out-standing number of days of turnover should be reduced to nearly 120100 days; this will help to ease the burden of borrowed working capital.

Budgeting in LANCO INFRATECH is mainly a performance based i.e., based on the performance, where as zero-based budgeting is ideal for the company like LANCO INFRATECH. 1) There should be effective coordination between the different departments like Production sales, Purchase, Finance, Marketing etc., this will enhance the efficiency of the organization. 2) There should be a proper budgeting control system.



To reduce the cash crunch it is necessary for LANCO INFRATECH to revamp the existing credit & budgeting policies.


ABC analysis of inventing control should be adopted in LANCO INFRATECH.

5) A thorough review of operations on frequent intervals is required. These reviews should be made with the request to changing environment. 6) Orders received should be dispatched at proper time. 7) Job sequencing should be pre-determined & should follow up the sequential process, until the end of the job. Thus the lead-time can be reduced. 8) There should be proper communication between various departments and responsibility centers. 9) There should be well-organized manpower planning, especially with regard to production.

10) Education about the importance of budgeting should be communicated to all concerned authorities, involved directly or indirectly to work according, for the growth of the company. 11) The outstanding number of days of turnover should be reduced to nearly 120 100 days. This will help to ease the burden of borrowed working capital. 12) Miscellaneous expenses have to be reduced. Mainly the collaboration charges. Tie up with Indian collaborations or brining in effective foreign technology will help reduce the expenses. computer hire charges. Bringing the computers to the home place can reduce


On critically examining the budgeting and budgetary control practices in LANCO it has been observed that there is an adequate system of budget estimation and budget control. It was also found that one-third of companies always insisted on the computation of payback for all projects, one-third for majority of projects and remaining for some of the projects for about two thirds of companies standard payback ranged between 3 and 5 years. Mechanism commensurate with the size of the company. Budgets are prepared involving almost all the departments functions. And they are scrutinized in minute details by various agencies, both at unit and corporate levels. The board of directors approves budgets, which is ultimate body for the policy making of the company.


Like wise the actual are compared with budget/targets periodically and reviewed thoroughly and at various levels to embers and the targets are achieved both in physical and financial terms. To enthuse the employs to achieve the targets in physical terms also there is a system of awarding employees annually in the form of plant performance payment, in addition to statutory bonus, which is based on profit in financial terms. Reasons for the secondary role of DCF techniques in India included difficulty in understanding and using these techniques lack of qualified professionals and unwillingness of top management to use DCF techniques. One large manufacturing and marketing organization mentioned that conditions of its business were such that discounted cash flow techniques were not needed. Yet, another company stated that replacement projects were very frequent in the company and it was not considered necessary to use discounted cash flow technique for evaluating such projects.

The review of actual with budget monthly at the highest level of management known as Management Committee, consisting of all the heads of units/regions etc., directors indicate the support given by management. This, Budgeting and Budgetary Control mechanism in LANCO GROUP are felt as excellent.












BALANCE SHEET Sources of funds Owner's fund Equity share capital Share application money Preference share capital Reserves & surplus Loan funds Secured loans Unsecured loans Total Uses of funds Fixed assets Gross block Less : revaluation reserve Less : accumulated depreciation Net block Capital work-in-progress Investments Net current assets Current assets, loans & advances Less : current liabilities & provisions Total net current assets Miscellaneous expenses not written Total Notes: Book value of unquoted investments Market value of quoted investments Contingent liabilities Number of equity shares outstanding (Lacs) 1,654.33 1.08 4,055.68 2223.62 1,342.65 0.48 4,762.61 2223.62 123.80 9.09 638.96 307.69 59.15 7.90 734.89 76.92 79.96 914.19 76.92 2,603.92 2,371.73 232.18 2,145.97 952.47 836.94 115.53 1,538.78 192.42 190.79 1.63 140.23 96.45 27.53 68.92 144.12 67.77 28.74 39.03 147.72 202.30 23.48 178.82 81.42 1,653.55 90.86 12.17 78.70 1.90 1,342.65 20.84 8.53 12.31 126.28 19.61 6.65 12.96 62.25 34.67 8.38 26.28 82.40 227.88 324.98 2,145.97 124.51 35.00 1,538.78 32.71 20.00 140.23 13.20 53.17 144.12 20.75 59.08 147.72 219.79 1,373.31 219.79 1,159.47 30.77 56.75 7.69 70.06 7.69 60.19 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05


LANCO PROFIT AND LOSS ACCOUNT Income: Operating income Mar ' 09 1,574.55 Mar ' 08 541.67 Mar ' 07 151.46 Mar ' 06 167.56 Mar ' 05 114.58


Expenses Material consumed Manufacturing expenses Personnel expenses Selling expenses Administrative expenses Expenses capitalized Cost of sales Operating profit Other recurring income Adjusted PBDIT Financial expenses Depreciation Other write offs Adjusted PBT Tax charges Adjusted PAT Non recurring items Other non cash adjustments Reported net profit Earnings before appropriation Equity dividend Preference dividend Dividend tax Retained earnings

1,147.73 61.43 4.44 46.63 1,260.24 314.31 27.60 341.91 34.47 11.62 295.82 96.91 198.91 0.43 0.83 200.18 320.51 320.51

398.31 13.91 5.01 10.32 427.55 114.12 11.73 125.85 21.17 3.69 100.98 27.77 73.21 -0.04 -0.12 73.06 120.34 120.34

125.85 1.91 0.05 2.40 130.21 21.26 1.28 22.53 3.63 1.89 17.02 3.34 13.68 -0.02 -3.90 9.76 51.57 51.57

7.29 143.07 4.05 1.01 2.22 157.65 9.92 8.70 18.62 4.29 2.13 12.20 -0.70 12.90 -2.76 -0.27 9.87 41.81 41.81

-8.94 104.98 2.34 2.07 2.30 102.74 11.85 3.73 15.57 5.76 2.30 7.50 1.69 5.81 -1.59 -0.07 4.16 31.94 31.94

CASH FLOW Profit before tax Net cash flow-operating activity Net cash used in investing activity Net cash used in fin. activity Net inc/dec in cash and equivalent Cash and equivalent begin of year Cash and equivalent end of year Mar ' 09 297.08 682.84 -747.09 372.74 308.50 63.10 371.60 Mar ' 08 100.95 279.24 -1,551.90 1,305.81 33.15 29.95 63.10 Mar ' 07 13.10 44.98 -62.81 16.30 -1.54 31.48 29.95 Mar ' 06 9.44 0.57 36.29 -17.56 19.31 12.18 31.48 Mar ' 05 5.91 -11.26 -29.95 35.84 -5.37 17.55 12.18



Other income Sales Stock adjustment Operating profit Raw material Interest Power and fuel Gross profit Employee expenses EPS (Rs) Excise


Mar ' 09 Mar ' 09 29.08 1,574.55 -48.02 314.09 1,181.96 34.47 308.70 61.43 9.11 -

Mar ' 08 Mar ' 08 11.73 541.67 114.08 21.17 104.64 11.74 3.32 17.53 -

Mar ' 07 Mar ' 07 1.28 151.46 21.24 3.63 18.89 1.62 4.442.76 -

Admin and selling expenses Research and development expenses Expenses capitalized


Other expenses Provisions made Depreciation Taxation Net profit / loss Extra ordinary item Prior year adjustments Equity capital Equity dividend rate Agg.of non-prom. shares (Lacs) Agg.of non prom. To Holding (%) OPM (%) GPM (%) NPM (%)

65.08 11.62 96.91 200.18 219.79 585.22 26.32 19.95 19.25 12.48

398.31 3.69 27.89 73.06 219.79 555.90 25.00 21.06 18.91 13.20

125.85 1.89 3.34 13.66 -3.90 30.77 8.00 2.60 14.02 12.36 8.94

Share holding pattern as on : Face value 31/12/2009 10.00 Promoter's holding Indian Promoters Foreign Promoters Sub total 48565284 108582202 157147486 21.84 48.83 70.67 48565284 108582202 157147486 21.84 48.83 70.67 48565284 108649193 157214477 21.84 48.86 70.70 30/09/2009 10.00 30/06/2009 10.00

No. Of Shares% HoldingNo. Of Shares% HoldingNo. Of Shares% Holding

Non promoter's holding Institutional investors Banks Fin. Inst. and Insurance FII's Sub total Private Corporate Bodies NRI's/OCB's/Foreign Others Directors/Employees Others Sub total General public 6285348 26059309 35222822 1627617 2726519 6457914 11621828 22433878 7557719 2.83 11.72 15.84 0.73 1.23 2.90 5.23 10.09 3.40 5958622 22922840 33121220 3232913 2735778 6457914 12430677 24857282 7235917 2.68 10.31 14.90 1.45 1.23 2.90 5.59 11.18 3.25 4724316 28435523 36102315 2155239 2804547 6457914 11570878 22988578 6056535 2.12 12.79 16.24 0.97 1.26 2.90 5.20 10.34 2.72

Other investors


Grand total