Académique Documents
Professionnel Documents
Culture Documents
CAPITAL BUDGETING
Capital budgeting is the process of making investment decision in
capital expenditure. The capital expenditure is the benefits of which are
expected to be received over period of time exceeding one year, like cost
of acquisition of permanent
machinery etc.
Capital expenditure involves non flexible long term commitment of
funds. Capital budgeting involves the planning and control of capital
expenditure. It is the process of deciding whether or not to commit
resource to a particular long term project whose benefits are to be realized
over a period of business firm.
According to T.J.HORNGREN defines capital budgeting is the
long term planning for making and proposed capital outlays.
PROCESS OF CAPITAL BUDGETING
Capital budgeting is a complex process. The capital budgeting
process involves generation of investment proposals, estimation of cash
flows for the proposals, evaluation of cash flows, selection of projects
based on acceptance criterion, finally the continual revolution of
investment after their acceptance. The steps involved in capital budgeting
are as follows:
Project generation.
Project evaluation.
Project selection.
Project execution.
PROJECT GENERATION
In the project generation, the company has to identify the proposals
to the under taken depending upon its future plans of activity. After
identification of the proposal, they can be grouped according to the
following categories. There are
Replacement of equipment.
Expansion.
Diversification.
Research and development.
REPLACEMENT OF EQUIPMENT
In this case, the exiting out-dated equipment and machinery may be
replaced by purchasing new and modern equipment.
EXPANSION
The company can go for increasing additional capacity in the
existing product line by purchasing additional equipment.
DIVERSIFICATION
2
METHODOLOGY
Methodology is a systematic procedure if collecting information in
order to analyze and verify a phenomenon. The methodology designed
for my project entitled capital budgeting of Sree Akkamamba Textiles
limited was based on two sources namely.
Primary sources
Secondary sources
PRIMARY SOURCES
It is the information collected directly without any references. It is
mainly through interactions with concerned officers & staff, either
individually or collectively some of the information has been verified or
supplemented with personal observation. These sources include
Through interactions with the various department managers of
SAP.
Guidelines given by the project guide, Sri A.MURTHY,
Asst.Manager (staff), budget section, labour officer.
SECONDARY SOURCES
This data is from the number of books and records of the company,
the annual reports published by the company and other magazines. The
secondary data is obtained from the following.
Collection of required data from annual records, monthly records,
monthly records, internal.
Published book or profile of Sree Akkamamba Textiles Limited.
Other books and journals and magazines.
Annual reports of the company.
LIMITATIONS OF THE STUDY
INDUSTRY PROFILE
PROFILE OF TEXTILE INDUSTRY IN INDIA
Cotton textile industry is one of the oldest and largest during the
last 3 decades. The textile industry still occupies a key position in the
economy of the country industries in India. Which has made rapid strides
during the century of its existence? At the end of March 2001 there were
1846 mills in the country (1565 spinning mills and 281 composite mills).
At present the industry provides direct employment to provide
direct employment to nearly 18 lakhs workers. It also provide indirect
employment to many millions like the cotton growers, processors,
handlooms and power looms weavers who alone are estimated five
million and innumerable cloth dealers and shop keepers. The industry
contributes in ever increasing measure to the central and state government
by way of taxes and duties.
Being one of the oldest industries it has history of over 150 years.
It occupies a unique position in the world export, where India has a 24%
share in the global cotton yarn market. It has an influence on agriculture
because of its requirements of machinery, dyes and chemicals and
synthetic fibers. Thus the industry has playing important role both in
economic prosperity of the country and in the supply of essential
commodities for the entire population.
The cotton textile industry consists of 3 distinct categories in the
organized sectors. There are
Spinning mills.
Coarse and medium composite mills.
Fine and super fine composite mills.
Spinning mills are generally small size in size, coarse and medium
composite mills are not able to adjust their cost in the face or rising prices
of raw materials and increases in wages consequently many of them
became uneconomic units and ran into difficulties. Fine and super fine
10
composite mills use foreign cotton. They are not subject to stock
restriction and can therefore carry on stable production program.
India has been a manufacturing nation and exports of the fine
cotton fabrics to all the nations of the civilized world.
The first mill in India was setup by C. N. DAVAR in 1854 with an
Englishmen as his partner. It was Davars mills which laid the
foundations for strong and growing textiles industry in Bombay and soon
after in other regions of India. The Bombay mills owner association is the
first mill formed association in India in the year 1875.
INDIAN TEXTILE INDUSTRY
Cotton textile
Man made
Organized Sector
Silk
Woolen
Jute
Decentralized Sector
Hand looms
Power looms
(Cloth)
Spinning Mills
Composite Mills
(Yarn)
THE INDUSTRY
Indian textile industry can be divided into several segments, some
of which can be listed as below.
Cotton textiles.
Silk textiles.
11
Woolen textiles.
Readymade garments.
Hand-crafted textiles.
Jute and coir.
India textile industry is one of the leading in the world.
Year
1950-51
1960-61
1970-71
1980-81
1990-91
2000-01
hectares
56.48
76.78
76.05
78.24
74.39
85.76
170 KGs
30.62
56.41
47.63
78.60
117.00
140.00
12
92
124
106
170
267
278
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
87.30
76.67
76.30
87.86
86.77
91.44
94.39
93.73
158.00
136.00
179.00
243.00
244.00
280.00
315.00
290.00
308
302
399
470
478
521
567
526
TEXTILE
INDUSTRY
IN
INDIA
SCENARIO
The organized cotton textile industry is one of our oldest and most
family established major industries at the end of March 1994 there were
1,775 mills in the country (906 spindles and 269 composite mills) with 28
millions spindles and 1.6 lakhs labor. There were 132 closed mills by the
end of March 1994.
In India textile industry is predominant cotton based 70 percent of
the fabric production of cotton, carries from the year depending upon
rainfall and weather conditions and price fluctuations in raw cotton effect
the industry production of yarn in almost entirely in the organized sector
13
and over the year. It has showing a steadily rising trend as for example
from 1600 million kgs in 1993-94 to nearly 28,000 million meters in
1993-94.
PERSPECTIVE OF INDIAN TEXTILE INDUSTRY
Textile industry is the largest industry of modern India. It
contributes about 4 percent of GDP, 20 percent of total output, and
together with carpets in handicrafts it has a share of 38 percent in total
value of escorts. The first cotton mill in India was setup in Calcutta 1818.
However, Indian textile industry plays a pivotal role through its
contribution of about 14 percent to industrial production, 4 percent to
GDP and 16.63 percent to export earnings. Its share in global textiles and
apparel is 3.9 percent and 3 percent respectively. It provides direct
employment to over 35 million people. Textile sector is the second largest
provider of employment after agriculture.
The close linkage of the industry to agriculture and the ancient
culture and tradition of the country make the Indian textiles sector unique
in comparison with the textiles industry of other countries. This industry
is growing by 9% -10% and the pace would be increase to 16 percent in
the coming years. This also provides the industry with the capacity to
produce a variety of products suitable to different market segments, both
within and outside the country. Ahmadabad had 19 percent of mills are
providing employment to 113.6 percent of the workers outside the
Bombay city. Some mills located in shaper, Baroda and other centers in
Maharashtra.
14
Cotton
production during the current year, despite the losses suffered by growers
lost year and month India continuing to perform poorly on the production
front due to post attract and water logging in fields.
Cotton further trading was revived after 32 years with the
trading company commencing on Dec 5th, but problems of poor turnover
during the first few days is worrying East Indian Cotton Association
(EICA), which is running the exchange. As stated earlier cotton textile
industry provides employment too many people with the introduction of
NIFT (National Institute of fashion Technology). It got very big contracts
for the quality products due to this it provides employment to all the
handloom weavers for the several of the clothing garments.
INDIAN TEXTILE INDUSTRY FACTS
15
jute.
Widely prevalent social customs.
Variety of distinct local culture.
Constructive geographic and climatic conditions.
Large domestic market and very low import content.
Flexible textile manufacturing systems.
16
WTO.
Imports of cheap textiles from other Asian neighbors.
Use of outdated manufacturing technology.
Poor supply chain management.
Huge unorganized and decentralized sector.
High production cost with respect to other Asian competitors.
few
expansions
17
25
20
15
10
5
0
Target
19.73
15.565
15.16
16.31
15.05
13.72
Achievement
19.62*
17.80
17.80
13.16
12.41
10.76
20
22
COMPANY PROFILE
The Company SREE AKKAMAMBA TEXTILES LIMITED was
established in the year 1954. It is located in Venkatarayapuram, Tanuku
mandal, West Godavari district, Andhra Pradesh. The company went into
commercial production during the year 1956. Its initial capital is 73.64
lakhs with a capacity of 8,000 spindles. In the year 1958 it was increased
from 8,000 spindles to 17,200 spindles. Again it was increased in 1966
from 17,200 to 26,400 spindles. At present 86,304 spindles. The company
manufacturers yarn in both cone and hank forms. The present man power
is around 800 consisting of permanent workmen, Office staff, Managerial
staff and Trainees.
The reasons for selecting the location are many. As there were
very few at that time in Andhra Pradesh, the promoters thought of
establishing this firm. Abundant manpower and to facilitate employment
to the rural
CATEGORY
Managerial and supervisory
Office staff
Skilled and unskilled workers
Trainee staff
Trainee workmen
24
NO. OF EMPLOYEES
11
45
524
13
191
6.
25
809
OTHER PARTICULARS
1
2
3
4
5
6
7
86,304
Rs.1,73,64,000
Rs.18,00,69,000
Rs.81,38,44,343
10%
Rs.24,96,114
to Rs.8,10,47,505
to Rs.5,59,97,149
9
10
25
Rs.29,52,148
4.00%
Managing Director
Sri.P.Narendranath Chowdary
Director
Sri.M.Narendranath
Director
Sri.J.Murali Mohan
Director
Sri.N.V.Soma Raju
Director
Sri.J.Suresh(w.e.f.28/7/2008)
Director
Bankers
Andhra bank
State bank of Hyderabad
State bank of India
Auditors
M/S Brahmayya &co,
Charted Accountants
VIJAYAWADA
Cost Auditors
M/S Narasimha Murthy&co,
HYDERABAD
Registered Office & Mills
Venkatarayapuram
TANUKU-534215
West Godavari District
Andhra Pradesh.
26
PRODUCTS MANUFACTURED
The mill produces quality cotton yarn and blended spun yarn. Both
the power looms and handlooms are well received in the Indian market as
well as in the International markets. To meet high quality yarn
requirement, the company is producing combed yarn also. It is supplying
75% of the yarn in the CONE form to power looms of Mumbai and other
places and 25% of the yarn in the in the HANK form to weavers
handlooms in our state. The yarn is well received in the market for the
manufacturing of the saris, dhoti sand other fabrics
The company was imported technology. It imports its technology
from LMW-Lakshmi machinery work, Coimbatore. This is a famous
manufacturing company of textile machinery works. We cannot say that
this company a total pollution free. As it is a textile industry, there will be
some sound pollution from it. The company is awarded in the years 198283 and1983-84 by the Chief Minister of Andhra Pradesh for the best
productivity and industrial relations. It exports quality yarn to NEPAL
and BANGLADESH.
MANUFACTURING PROCESS
A. Mixing
The raw material i.e. cotton bales are opened and made into stakes
and kept for conditioning at mixing room.
B. Blow Room
Here the cotton which are received in bakes is opened up
mechanically the fibers for, different bales is bladed at the stage. In
essence the process consists of the opening and beat in the compressed
27
28
F. Spinning
This is conventional spinning process and still the best for medium
and fine counts. The drawn silver is fed to a speed frame. Then to an
inter and finally to the ring frame the moving pass through gear driven
drafting rolls. The yarn guide and through a rotator draft the spindles. The
speed of the feed drafts the relative rpm of the feed. The draft the relative
rpm of the spindles and traveler determine twist and count of the yarn.
G. Winding
The fobbing form the ring frame are small in size and too low a
quality of yarn to facilitate continuous running of subsequent machines,
hence this yarn is would into larger packages conical or cylindrical. This
winding speeds and tensions applied the yarn breaks at weak spots and it
is them reprieved or knotted on the machine. The wound yarn is often raw
into smaller pins for use as weft in shuttle weaving looms.
H. Packing
Cones are packed in form of bound and hanks are packed in the
form of bales.
MARKETING DEPARTMENT
The company has department at Mumbai, Chennai, Varanasi and
Calcutta. 75% of the products are sold at deports and rest of the products
are sold at local markets for weaving purpose. The cotton yarn, viscose
and polyester yarn market has been expanding, opening venues in both
domestic and international circles for market. The major buyers of the
companys products are weavers and power looms.
29
competitors
like
Satyanarayana
spinning
mills
limited
30
12:00
Mid
2 shift
3rd shift
8:00A.M
8:00A.M-4:00P.M
4:00P.M-12:00Mid
30 minutes interval
30 minutes interval
General shift
Night
7:30A.M-5:00P.M
nd
SHIFT ROTATION
31
No. of Leaves
15 EL
03 CL
Availability
No Limit
Only Three Chances
15 EL
12 CL
30 EL
12 CL
HOLIDAY ADMINISTRATION
As per the terms of agreement there are 09 paid holidays in a
calendar year. A general notice shall be displayed on the notice board
32
before one day of the paid holiday. After 3 rd shift the factory shall be
closed (12:00mid night). Again the workman resumes with 1 st shift of the
paid holiday.
QUALITY POLICY
We are committed to achieve continual improvement and enhance
customer satisfaction through
Leadership with technological up gradation.
Complying with applicable statuary and regular requirements.
Manufacture and supply of consistent quality combed cotton and
blended yarn complying with customer requirements.
Inoculation of total quality culture at all levels.
Location
: Venkatarayapuram, Tanuku,
Started on date
: September, 1, 1956.
Starting size
: 8000 spindles.
: 90000.
Mill area
: 21 acres.
Affliatory firm
: Andhra Sugars.
Total Employees
: 825.
Shifts
: 3 shifts.
Production capacity
Power Consumption
: 44000 units.
Water Consumption
: 50000gallons.
Capacity Utilization
: 95.72%
Cone Yarn
: 76%
Hank Yarn
: 24%
Turn over
SALES CENTERS
Cone yarn
Hank yarn
35
Project generation.
Project evaluation.
Project selection.
Project execution.
PROJECT GENERATION
In the project generation, the company has to identify the proposals
to the under taken depending upon its future plans of activity. After
36
Replacement of equipment.
Expansion.
Diversification.
Research and development.
REPLACEMENT OF EQUIPMENT
In this case, the exiting out-dated equipment and machinery may be
replaced by purchasing new and modern equipment.
EXPANSION
The company can go for increasing additional capacity in the
existing product line by purchasing additional equipment.
DIVERSIFICATION
The company can diversify its product lines by way of producing
various products and entering into different markets. For this purpose, it
has to acquire the fixed assets to enable producing new products.
RESEARCH AND DEVELOPMENT
The company can go for installation of research and development
wing by incurring heavy expenditure, with a view to innovate new
methods of production, new products etc.
PROJECT EVALUATION
The process of project evaluation involves two steps. There are
Estimations of benefits & calculations.
Selection.
37
38
INITIAL INVESTMENT
It includes the cash required to acquire the new equipment or build
the new plant less any net cash proceeds from the disposal of the replaced
equipment. The initial outlay also includes any additional working capital
related to the new equipment. Only changes that occur at the beginning of
the project are included as part of the initial investment outlay. Any
additional working capital needed or no longer needed in a future period
its accounted for as a cash outflow or cash inflow during that period.
NET CASH BENEFITS OR SAVINGS FROM THE OPERATION
The incremental change in operating revenues minus the
incremental change in operating cost = incremental net revenue minus
(taxes) plus or minus (changes in the working capital and other
agreements).
TERMINAL CASH FLOW
It includes the net cash generated from the sale of the assets, tax
effects from the termination of the asset and the release of net working
capital.
40
41
MODERN
APPROACH
OR
DISCOUNTED
APPROACH
43
CASH
FLOW
Internal rate of return is considered cash flows over the entry life of
the period.
The Internal rate of return suggest the maximum rate of return and
gives fairly good idea regarding the profitability of the period.
Internal rate of return is also the computable with forms objective
of maximizing owners welfare.
DISADVANTAGES
Difficulty to calculate and understand.
Internal rate of return may not give unique answers in all
situations.
Internal rate of return may yield result in consistence with the net
present value method.
PROFITABILITY INDEX (PI) METHOD
Profitability index is another method of important method for
discounted cash flow technique for evaluating investment proposal. It is
also known as discounted cash flow ratio. It similarly the NPV method it
is the ratio of the present rate of return to the initial cash outflow of the
investment proposal.
Profitability index method measures the present value of future
cash per rupee where as the net present value based on the difference
between present values of cash inflows and present value of cash
outflows. NPV method is not reliable to evaluate projects requiring
unequal initial investment.
Profitability index is the ratio, which is derived by present value of
cash inflows by present value of cash outflows.
ACCEPT OR REJECT CRITERIA
47
Nature of Idea
Level
48
Cost reduction
------
Replacement
Plant Level
Process/Product Development
Expansion
Top Managment
Diversification
In India, it is insignificant
New Product
Manager
Replacing an old
Machine ( or)
Improving the
Factory Level
Production techniques.
FORECASTING:
Cash flow estimates should be development by operating managers
with the help of finance executives. Risk associated should be properly
handled. Estimation of cash flows requires collection and analysis of all
qualitative and quantitative data, both financial and non-financial in
nature. MIS provide such data.
Depreciation
Financial flows (to be distinguished from operation flows)
EVALUATION:
importance.
For evaluation, minimum rate of return or cut-off is necessary.
Usually it is computed by means of weighted Average cost of
Capital (WACC)
Opportunity cost of capital should be based on risky ness of cash
flow of investment proposals.
Assessment of risk is an important aspect. Sensitivity Analysis &
Conservative for costs are two important methods used in India.
AUTHORIZATION:
Screening and selecting may differ from one company to another.
When large sums are involved usually final approval rests with top
management. Delegation of approval authority may be effected subject to
the amount of outlay. Budgetary control should be rigidly exercised.
its
projects
and
take
necessary
action.
Expenditure to date
Stage and physical completion
Approved total cost
Revised total cost
51
the plan period. The macro level planning exercise undertaken at the
beginning of every five year plan indicates broadly the role of each
sectors physical targets to be achieved and financial outlays, which could
be made available for the development of the sector during the plan
period.
(v) inter-industry
PROJECT FORMULATION :
(i)
(ii)
(iii)
financially viable,
commercial analysis to determine soundness of the product
specifications, marketing plans and organization structure and
54
(iv)
PROJECT APPRAISAL:
55
56
capital and compute the criterion of merit and judge whether the project is
good or bad.
The payback period sometimes called as payout or payoff
methods. Represents the period in based on the principle that every
capital expenditure pays itself back within certain period out of the
additional earnings generated from the capital assets thus it measures the
period of time for the original cost of project, to recovered from the
additional earnings of the project itself under this methods various
investment are ranked according to the length of their payback period in
such a manner that the investment with a shorter payback period.
of Income
the
Depreciation Cash
(profit
flow Cumulative
(income+
cash inflows
depreciation
2010-11
2012-13
2013-14
2014-15
)
75452619
54244697
57051996
40747340
75452619
129697316
186749312
227496652
91471024
318967676
52758112 22694507
23743109 30501588
2105818 54946178
54160105
13412765
2015-16
38410601 53060423
PAYBACK PERIOD =
YEAR
BEFORE
FULL
RECOVERY
(UNRECOVERED
=1.19years
2012-13
2013-14
2014-15
2015-16
INTERPRETATION
It is assumed that the profit earning of the project will start from
2009-10. Taken consideration of incremental adjusted cash flow based on
base years, for calculation of PAYBACK PERIOD.
59
of (profit
the
Cash
Depreciation
after tax)
flow
(income+
Cumulative
depreciation)
cash inflows
operation
2010-11
52758112
22694507
75452619
75452619
2012-13
23743109
30501588
54244697
129697316
2013-14
2105818
54946178
57051996
186749312
60
2014-15
-13412765
54160105
40747340
227496652
2015-16
38410601
53060423
91471024
318967676
X 100
AVERAGE INVESTMENT
Average annual profit
Average investment
318967676/5
63793535.2
original investment/2
100000000/2
50000000.
X 100
Original investment
= 63793535.2/100000000 X 100
= 63.793%.
INTERPRETATION
It is more calculation taking total profit and taking average of it. It
show the return on an average as what an average income of the firm on
long run basis with certain assumption 63.793% for any firm at long run
is good but there must be some decrease as future is not certain.
Income (profit
operation
after tax)
Depreciation
Present
Cash
flow
value
(income+
factor@
depreciation)
Present value
of cash inflow
55%
2010-11
52758112
22694507
0.645
75452619
48666939
2012-13
23743109
30501588
0.416
54244697
22565794
2013-14
2105818
54946178
0.268
57051996
15289935
62
2014-15
-13412765
54160105
0.173
40747340
7049290
2015-16
38410601
53060423
0.111
91471024
10153284
2012-13
2013-14
2014-15
2015-16
INTERPRETATION
It is the factor of Re.1 calculation at the end of the year. It will be
value of Re.1 at the end of the year which is interest rate, coat of capital
and market state which is called as discounted rate to get an approximate
decision. It should be taken in every calculation of project so that an
approximate. Decision can be taken. As it is more reliable the simple cash
inflows (profits).
NPV is greater than the zero. Hence the expansion of project has
accepted. That means: NPV>ZERO.
INTERNAL RATE OF RETURN
Internal rate of return can be defined as that rate which equates
the present value of cash inflows with the present value of cash outflows
of an investment proposal. It is the rate at which the net present value of
invest mental proposal is zero.
of Present
the
value
operation factor@
Cash
of
(income+
cash value
inflow
55%
2010-11
2012-13
2013-14
2014-15
2015-16
0.645
0.416
0.218
0.173
0.111
factor@
flow Present
0.634
0.401
0.255
0.160
0.102
64
of
depreciation) cash
57.81%
48666939
22565794
15289935
7049290
10153284
value
inflow
75452619
54244697
57051996
40747340
91471024
47836960
21752123
14548258
6519574
9330044
0.7
0.6
0.5
0.4
0.3
0.2
Tax value
factor@57.81%
0.1
0
INTERPRETATION
In this calculation, is done on the basis of trail and errors. Thus
why taking various percentages of present value factors. Hence an
appropriate percentage of internal rates of return can be judge out.
Calculated figure is 57.78%, so we can take it as 57.81%cause at market
uncertainty. The internal rate of return is having less difference hence the
expansion of project has accepted. That means IRR = 13041.
66
PROFITABILITY INDEX
(profit
after
tax)
Present
Cash
value
(income+
factor@
depreciation)
cash inflow
55%
2010-11
2012-13
2013-14
2014-15
2015-16
52758112
23743109
2105818
-13412765
38410601
22694507
30501588
54946178
54160105
53060423
67
0.645
0.416
0.268
0.173
0.111
75452619
54244697
57051996
40747340
91471024
48666939
22565794
15289935
7049290
10153284
2012-13
2013-14
2014-15
2015-16
68
FINDINGS
It is observed that the project completion cost is estimated to be
Rs.10CRs.
It is found that the payback period of the project in SAT is 2 years
and 7 months.
It is observed that by calculating average rate of return the average
income of the company is 63.79%. & it was a satisfactory position.
SUGGESTIONS
69
BIBLIOGRAPHY
70
NAME OF THE
AUTHOR
FINANCIAL MANAGEMENT
I.M.PANDEY
PUBLISHER
VIKAS PUBLISHING
HOUSE PVT.,LTD.,
FINANCIAL MANAGEMENT
TATA MC GRAWHILL
FINANCIAL MANAGEMENT
S.N.MAHESWARI
OTHER SOURCES
ANNUAL REPORTS OF SREE AKKAMAMBA TEXTILES
LIMITED.
INFORMATION
BROCHURE
OF
SREE
TEXTILES LIMITED.
WEBSITE
www.sreeakkamambatextiles.com
71
AKKAMAMBA