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CHAPTER 1 INTRODUCTION

1.1 INTRODUCTION OF THE STUDY Every organization irrespective of its size and mission can be viewed as a financial entity management of an organization. Financial management focuses not only on the improvement of funds but also on their efficient use with the objective of maximizing the owners wealth. The allocation of funds is therefore an important function of financial management. The allocation of funds involves the commitment of funds to assets and activities. There are two types of Investment decision; 1. Management of current assets or Working capital management. 2. Long term investment decision. This is widely known as capital budgeting or capital budgeting. It means as to whether or not money should be invested in long term project. This part is devoted to an in-depth and comparative decision of capital budgeting/capital expenditure management.

1.2 CAPITAL BUDGETING


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

DEFINITION R.M.LYNCH has defined capital Budgeting as Capital Budgeting consists of employment of available capital for the purpose of maximizing the long term profitability of the firm. Capital Budgeting is a many-sided activity. It includes searching for new and more profitable investment proposals, investigating, engineering and marketing considerations to predict the consequences of accepting the investment and making economic analysis to determine the profit potential of each investment proposal.

Its basic features can be summarized as follows; 1. It has the potentiality of making large anticipated profits. 2. It involves a high degree of risk. 3. It involves a relatively long-time period between the initial outlay and the anticipated return. Capital Budgeting consists of planning and the development of available capital for the purpose of maximizing the long-term profitability of the firm. 1.2.2 NEED AND IMPORTANCE OF CAPITAL BUDGETING Capital Budgeting means planning for capital assets. Capital Budgeting decisions are vital to any organization as they include the decision to; 1. Whether or not funds should be invested in long term projects such as setting of an industry, purchase of plant and machinery etc., 2. Analyze the proposal for expansion or creating additional capacity. 3. To decide the replacement of permanent assets such as building and equipments.
4. To make financial analysis of various proposal regarding capital

investments so as to choose the best out of many alternative proposals.

The importance of capital Budgeting can be well understood from the fact that an unsound investment decision may prove to be fatal to the very existence of the concern. The need, significance or importance of capital budgeting arises mainly due to the following. 1. Large Investments Capital budgeting decisions, generally involves large investment of funds. But the funds available with the firm are always limited and the demand for funds exceeds the resources. Hence it is very important for a firm to plan and control its capital expenditure. 2. Long-term commitment of Funds Capital expenditure involves not only large amounts of funds but also funds for long-term or more or less on permanent basis. The longterm commitment of funds increases the financial risk involved in the investment decision. 3. Irreversible Nature The capital expenditure decisions are of irreversible nature. Once the decisions for acquiring a permanent asset is taken, it became very difficult to dispose of these assets without incurring heavy losses. 4. Long-term Effect of profitability The investment decisions taken today not only affects present profit but also the future profitability of the business. A profitable project selection is fatal to the business.

5. Difficulties of investment decisions The long term investment decisions are more difficult to take because, 1. Decision extends to a series of years beyond the current accounting period. 2. Uncertainties of future and 3. Higher degree of risk. 6. National Importance An investment decision through taken by individual concerns is of national importance because it determines employment, economic activities and economic growth. 7. Effect on cost structure By taking a capital expenditure decision, a firm commits itself to a sizeable amount of fixed cost in terms of interest, supervisors salary, insurance, building rent etc. If the investment turns out to be unsuccessful in future or produces less than anticipated profits, the firm will have to bear the burden of fixed cost. 8. Impact on firms competitive strength The capital budgeting decisions affect the capacity and strength of a firm to face competition. It is so because the capital investment decisions affect the future profits and costs of the firm. This will ultimately affect the firms competitive strength.

9. Cost control In capital budgeting there is a regular comparison of budgeted and actual expenditures. Therefore cost control is facilitated through capital budgeting. 10. Wealth Maximization The basic objective of financial management is to maximize the wealth of the shareholders. Capital budgeting helps to achieve this basic objective. Capital budgeting avoids over investments and under investments in fixed assets. In this way capital budgeting protects the interest of the shareholders and of the enterprise. 1.2.3 STEPS IN CAPITAL BUDGETING Capital budgeting is a complex process. it involves decision relating to the investment of current funds for the benefit to be achieved in future which is always uncertain. Capital budgeting is a six step process. The following steps are involved in capital budgeting; 1. Project generation The capital budgeting process begins with generation or identification of investment proposals. This involves a continuous search for investment opportunities which are compatible with firms objectives.

2. Project screening Each proposal is then subject to a preliminary screening process in order to assess whether it is technically feasible, resources required are available, and expected returns are adequate to compensate for the risks involved. 3. Project evaluation After screening of project ideas or investment proposals the next step is to evaluate the profitability of each proposal. This involves two steps; a. Estimation of cost and benefit in terms of cash flows
b. Selecting an appropriate criterion to judge the desirability of

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

Project execution and implementation

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

6. Performance review After the implementation of the project, its progress must be reviewed at periodical intervals. The follow-up or review is made by comparing actual performance with the budget estimates. 1.2.4 OPERATING BUDGET AND CAPITAL BUDGET Most of the large firms prepare two different budgets each year.

1. OPERATING BUDGET Operating budget shows planned operations for the forthcoming period and includes sales, production, production cost, and selling and distribution overhead budgets. Capital budgets deals exclusively with major investment proposals. 2. CAPITAL EXPENDITURE BUDGET Capital Expenditure is a type of functional budget. It is the firms formal plan for the expenditure of money for purchase of fixed assets. The budget is prepared after taking in to account the available production capacities, probable reallocation of existing resources and possible improvements in production techniques. If required, separate budgets can be prepared for each item of capital assets such as a building budget, a plant and machinery budget etc.

1.2.5 OBJECTIVES OF CAPITAL EXPENDITURE BUDGET The objectives of Capital Expenditure Budget are as follows. 1. It determines the capital projects on which work can be started during the budget period after taking in to account their urgency and the expected rate of return on each project. 2. It estimates the expenditure that would have to be incurred on capital projects approved by the management together with the source or sources from which the required funds would be obtained. 3. It restricts the capital expenditure on projects within authorized limits.

CONTROL

OVER

EXPENDITURE

THROUGH

CAPITAL

EXPENDITURE BUDGET The capital expenditure budget primarily ensures that only such projects are taken in hand which are either expected to increase or maintain the rate of return on capital employed. Each proposed project is appraised and only essential project or projects likely to increase the profitability of the organization are included in the budget. In order to control expenditure on each project, the following procedure is adopted. 1. A project sheet is maintained for each project. 2. In order to ensure that the expenditure on different project is properly analyzed.

3. The expenditure incurred on the project is regularly entered on the project sheets from various sources such as invoices of assets purchased, bill for delivery charges etc., 4. The management is periodically informed about expenditure incurred in respect of each project under appropriate heads. 5. In case project cost is expected to increase; a supplementary sanction for the same is obtained. 6. In financial books the total expenditure incurred on all projects is separately recorded. 1.2.6 TACTICAL AND STRATEGIC INVESTMENT DECISION Investment decision can be classified as, i. Tactical Decision A Tactical Decision generally involves a relatively small amount of funds and does not constitute a major departure from the past practices of the company. ii. Strategic Decision A Strategic Investment Decision involves a large sum of money and may also result in a major departure from the past practices of the company. Acceptance of a Strategic Investment Decision involves a significant change in the companys expected profits associated with a high degree of risk.

1.2.7 RATIONALE OF CAPITAL EXPENDITURE Efficiency is the rationale underlying all capital decisions. A firm has to continuously invest in new plant or machinery for expansion of its operations or replace worn-out machinery for maintaining and improving its efficiency. The overall objective is to maximize the firms profits and thus optimizing the return on investment. This objective can be achieved either by increased revenues or by cost reduction. Thus capital expenditure can be of two types; 1. Expenditure Increasing Revenue 2. Expenditure Reducing Cost 1.2.8 KINDS OF CAPITAL INVESTMENT PROPOSALS A firm may have several investment proposals for its consideration. It may adopt one of them, some of them or all of them depending upon whether they are independent, contingent or dependent or mutually exclusive. 1. INDEPENDENT PROPOSALS These are proposals which do not compete with one another in a way that acceptance of one precludes the possibility of acceptance of another. In case of such proposals the firm may straight away accept or reject a proposals on the basis of minimum return on investment required. All these proposals which give a higher return than a certain desired rate of return are accepted and the rest are rejected.

2. CONTINGENT OR DEPENDENT PROPOSALS These are proposals whose acceptance depends on the acceptance of one or more other proposals. When a contingent investment proposal is made, it should also contain the proposal on which it is dependent in order to have a better perspective of the situation. 3. MUTUALLY EXCLUSIVE PROPOSALS These proposals which compete with each other in a way that the acceptance of one precludes the acceptance of other or others. Two or more mutually exclusive proposals cannot both or all be accepted. Some techniques have to be used for selecting the better or the best one. Once this is done, other alternative automatically gets eliminated. 4. REPLACEMENT PROPOSALS These aim at improving operating efficiency and reducing costs. These are called cost reduction decisions. 5. EXPANSION PROPOSALS This refers to adding capacity to existing product line. 6. DIVERSIFICATION PROPOSALS Diversification means operating in several markets rather than a single market. It may also involve adding new products to the existing products. Diversification decisions require evaluation of proposals to

diversify in to new product lines, new markets etc., for reducing the risk of failure. 7. CAPITAL RATIONING PROPOSALS Capital rationing means distribution of capital in favour of some acceptable proposals. A firm cannot afford to undertake all profitable proposals because it has limited funds to invest. In such a case, these various investment proposals compete for limited funds and the firm has to ration them. Thus the situation where the firm is not able to finance all the profitable investment opportunities due to limited resources is known as capital rationing. 1.2.9 FACTORS AFFECTING CAPITAL INVESTMENT DECISIONS The following are the four important factors which are generally taken in to account while making a capital investment decision. 1. The Amount of Investment In case a firm has unlimited funds for investment it can accept all capital investment proposals which give a rate of return higher than the minimum acceptable or cut-off rate.

2. Minimum Rate of Return on Investment The management expects a minimum rate of return on the capital investment. The minimum rate of return is usually decided on the basis of the cost of capital. 3. Return Expected from the Investment Capital investment decisions are made in anticipation of increased return in the future. It is therefore necessary to estimate the future return or benefits accruing from the investment proposals while evaluating the capital investment proposals. 4. Ranking of the Investment Proposals When a number of projects appear to be acceptable on the basis of their profitability the project will be ranked in the order of their profitability in order to determine the most profitable project. 1.2.10 METHODS OF CAPITAL BUDGETING OR EVALUATION OF INVESTMENT PROPOSALS A business firm has a number of proposals regarding various projects in which it can invest funds. But the funds available with the firm are always limited and it is not possible to invest funds in all the proposals at a time. The most widely accepted techniques used in estimating the cost returns of investment projects can be grouped under two categories;

1. TRADITIONAL METHODS I. II. Payback Period Method Average rate of Return Method

2. DISCOUNTED CASH FLOW METHODS I. II. III. Net Present Value Method Internal rate of Return Method Profitability Index Method

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

METHODS OF COMPUTATION OF PAYBACK PERIOD There are two ways of calculating the payback period. a. When annual cash inflow is constant The formula is find out the payback period if the project generates constant annual cash inflow is;

Original cost of the project Payback period = Annual cash inflow

Annual cash inflow is the annual earning (profit depreciation and after taxes) before b. When annual cash inflow is not constant If the annual cash inflows are unequal the payback period can be found out by adding up the cash inflows until the total is equal to the initial cash outlay of the project. ADVANTAGES OF PAYBACK PERIOD 1. Simple to understand and easy to calculate. 2. It reduces the chances of loss through obsolescence. 3. A firm which has shortage of funds find this method very useful. 4. This method costs less as it requires only very little effort for its Computation.

DISADVANTAGES 1. This method does not take in to consideration the cash inflows beyond the payback period. 2. It does not take in to consideration the time value of money. It considers the same amount received in the second year and third year as equal. 3. It gives over emphasis for liquidity. ACCEPTANCE RULE The following are the Payback [P.B.Rules] Accept Reject May Accept Cut-off rate Cut-off rate is the rate below which a project would not be accepted. If ten percentages the desired rate of return, the cut-off rate is 10%.The cut-off point may also be in terms of period. If the management desires that the investment in the project should be recouped in three years, the period of three years would be taken as the cut-off period. A project incapable of generating necessary cash to pay for the initial investment in the project with in three years will not be accepted. P.B<cut-off rate P.B>cut-off rate P.B<cut-off rate

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

Average Annual Earnings ARR = Average Investment Where; Average Annual Earnings is the total of anticipated annual earnings after depreciation and tax (accounting profit) divided by the number of years. Average Investment means i. If there is no salvage (Scrap value) Total Investment 2 x 100

ii. If there is scrap value Total Investment-Scrap Value + Scrap Value 2 iii. If there is additional working capital Total Investment-Scrap Value + Scrap +Additional Working Capital 2 ADVANTAGES OF AVERAGE RATE OF RETURN (ARR) METHOD 1. It is easy to calculate and simple to understand. 2. Emphasis is placed on the profitability of the project and not on liquidity. 3. The earnings over the entire life of the project is considered for ascertaining the Average Rate of Return. 4. This method makes use of the accounting profit. DISADVANTAGES 1. Like the payback period method this method also ignores the time value of money. The averaging technique gives equal weight to profits occurring at different periods.

2. This averaging technique ignores the fluctuations in profits of various years. 3. It makes use of the accounting profits, not cash flows, in evaluating the project. 1. DISCOUNTED CASH FLOW METHODS The payback period method and the Average rate of Return Method do not take in to consideration the time value of money. They give equal weight to the present and the future flow of incomes. The discounted cash flow methods are based on the concept that a rupee earned today is more worth than a rupee earned tomorrow. These methods take in to consideration the profitability and also the time value of money. I. NET PRESENT VALUE (NPV) METHOD The Net Present Value Method (NPV) gives consideration to the time value of money. It views that the cash flows of different years differ in value and they become comparable only when the present equivalent values of these cash flows of different periods are ascertained. For this the net cash inflows of various periods are discounted using the required rate of return, which is a predetermined rate .If the present value of expected cash inflows exceeds the initial cost of the project, the project is accepted. NPV = Present value of cash inflows-Present value of initial investment

STEPS IN NET PRESENT VALUE (NPV) METHOD 1. Determine an appropriate rate of interest to discount cash flows. 2. Compute the present value of total investment outlay (i.e., cash outflow) at the determined discounting rate. 3. Compute the present value of total cash inflows (profit before depreciation and after tax) at the above determined discount rate. 4. Subtract the present value of cash outflow (cost of investment) from the present value of cash inflows to arrive at the net present value. 5.If the net present value is negative i.e., the present value cash outflow is more than the present value of cash inflow the project proposals will be rejected .If net present value is zero or positive the proposal can be accepted. 6. If the projects are ranked the project with the maximum positive net present value should be chosen. ADVANTAGES OF NET PRESENT VALUE METHOD 1. It considers the time value of money. 2. It considers the earnings over the entire life of the project. 3. Helpful in comparing two projects requiring same amount of cash outflows. DISADVANTAGES 1. Not helpful in comparing two projects with different cash outflows. 2. This method may be misleading is in comparing the projects of unequal lives.

II. INTERNAL RATE OF RETURN (IRR) METHOD The Internal Rate of Return for an investment proposal is that discount rate which equates the present value of cash inflows with the present value of cash outflows of the investment. The Internal Rate of Return is compared with a required rate of return. If the Internal Rate of Return of the investment proposal is more than the required rate of return the project is rejected. If more than one project is proposed, the one which gives the highest internal rate must be accepted. It can be calculated by the following formula P1-Q IRR = L+ P1-P2 xD

Where, L = Lower rate of discount P1 = Present value of cash inflows at lower rate of discount P2 = Present value at higher discount rate Q = Initial Investment D = Difference in rate ADVANTAGES OF INTERNAL RATE OF RETURN 1. It considers the time value of money. 2. The earnings over the entire life of project is considered. 3. Effective for comparing projects of different life periods and different timings of cash inflows.

DISADVANTAGES 1. Difficult to calculate. 2. This method presumes that the earnings are reinvested at the rate earned by the investment which is not always true. Accept or Reject Rule Internal Rate of Return is the maximum rate of interest which an organization can afford to pay on the capital invested in a project. A project would qualify to be accepted if Internal Rate of Return exceeds the cut-off rate. While evaluating two or more projects, a project giving a higher Internal Rate of Return would be preferred. This is because higher the rate of return, the more profitable is the investment. III. PROFITABILITY INDEX METHOD

Present Value of Cash Inflows Profitability Index = Present Value of Cash Outflows

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

If the Profitability index is equal to or more than one proposal the proposal will be accepted. If there are more than one investment proposals, the one with the highest profitability index will be preferred. This method is also known as Benefit-Cost ratio because the numerator measures benefits and the denominator measures costs. It is the ratio of the present value of cash inflow at the required rate of return to the initial cash outflow of the investment.

1.3 OBJECTIVES OF THE STUDY


The study consisted of the following objectives. 1. To review the projected cash flow statement. 2. To estimate the future project cost. 3. To review the projected profitability. 4. To review the project using the Evaluation Techniques. 5. To set a basis for future capital budgeting.

1.4 IMPORTANCE OF THE STUDY


Capital budgeting is concerned with heavy expenditure decisions. The benefits or returns from such expenditure are expected to be derived over many years in future. It requires careful planning and exercise. A mistake in capital budgeting can prove fatal to the enterprise. The big size of expenditure involved underlines the importance of capital budgeting. Capital expenditure decisions are vital to any organization as they include the decisions to; a. Analyze the proposal for expansion or creating additional capacity. b. To make financial analysis of various proposals regarding capital investments so as to choose the best out of many alternative proposals. c. To decide about the replacement of capital asset. d. It helps to facilitate the cost control.

1.5 SCOPE OF THE STUDY


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

1.6 LIMITATIONS OF THE STUDY


The study has the following limitations. 1. The analysis was done with the secondary data derived only from published annual reports. 2. This study is confined only to Parisons Roller and Flour Mills Pvt. Ltd. 3. The estimates of profitability of investment proposals are not accurate. 4. Researcher finds it is difficult if the company is not revealing the facts about the future course of action. 5. It is difficult to calculate the cost of capital and to estimate the rate of return.

1.7 REVIEW OF LITERATURE

The concept of Capital Budgeting being a very sensitive area of finance has outreached the attention of many researchers .A number of studies has been conducted on the subject. However briefing such studies will highlight the importance of the present study. It should safeguard to avoid the wrong choice of the project and investment to made. It is necessary for the management to give proper attention to capital budgeting. The reason for the popularity of Payback period in the order of significance were stated to be its, simplicity to use and understand, its emphasis on the early recovery of investment and focus on risk. It was also found that one third of companies always insisted on the computations of Payback periods for all projects. For about two-third companies standard Payback period ranged between three and five years. The reason for the secondary role of Discounted Cash Flow techniques in India included difficulty in understanding and using these techniques, due to lack of qualified professional and unwillingness of top management to use Discounted Cash Flow techniques. One large manufacturing and marketing organization mentioned that conditions of its business were such that Discounted Cash Flow techniques were not needed. Yet another company stated that replacement projects were very frequent in the company and it was not considered

necessary to use Discounted Cash Flow technique for evaluating such projects. The present investment appraisal in practice is raising certain questions in the context. 1. How much importance is assigned to economic analysis of capital expenditure in practice? 2. What methods are used for analyzing capital expenditure in practice and what is the reason for underlying these methods? The answers of the above questions are based on a survey of twenty firms varying on several dimensions like industry category, size, financial performance and capital intensity. From these firms, executives, responsible for capital investment evaluation and capital budget preparation were interviewed.

CHAPTER 2 PROFILE OF THE COMPANY


HISTORY OF PARISONS GROUP The PARISONS GROUP has its corporate office at 6/1183, Cherooty road Calicut. The Group name, which became a household name already, is derived from the name of late Kunchipary, the illustrious scion from a well-known business family in North Kerala. The group was founded by his industrious sons namely. Mr. N.K. Mohammed Ali, Mr. N.K. Asharaf, Mr. N.K .Khalid and Mr. N.K .Haris. Beginning in 1982, it has grown in to a multi-crore Groups with the distinction as the largest producers and marketers of wheat products and edible oils in South India. They have diversified their activities in to Information Technology, Infrastructure Development and Leasing, and lately plantations. The directors are well experienced in processing and trading in food products especially in the field of edible oils and wheat products. They have a proven track record in planning, implementing and running new projects successfully. The Group also has a reputation of taking over sick units and reviving them with in a short span of time. They have a strong team of professional and techno crafts to support them in ventures.

The products of Parisons are well accepted in the market in various brand names owing to the quality levels. The Group at present has five roller mills for wheat products with a total capacity of about 600 tones per day and their installed capacity for edible oil refining is 480 tones per day, which is utilized well over 100%.They also have a large trading houses in big bazaar, Calicut. Apart from the corporate office in Calicut the Group also has an office at Cochin to look after its import activities. The plants of the Group have adopted state of technology. As a part of its infrastructure related projects, the group has completed the setting up of 14000 MT tank farms for storage of liquid cargo at the Beypore Port. The Group is a major importer of vegetable oils. Enthused by the success of their projects at Beypore port, the Groups are on the process of setting up of 50000 K L tank farm at Willington Islands at the site allotted by Cochin Port Trust. By setting up of their own facilities for storage at Cochin port, the Group also intends to achieve economy in their existing operations and also to earn additional revenue by leasing out the facilities to others apart from contributing to the growth of Cochin Port. PARISONS ROLLER AND FLOUR MILLS (P) LTD Having established a steady foothold in trading business, they decided to embark on a strategic business expansion mission and set up

the Parisons Roller flour mills(P) Limited, at West hill, Calicut in October 1992.It began operation with an installed capacity of 80 M T per

day. In 1995 this capacity has expanded to 100 M T per day and again in to 120 in the year 1997. A modern state of art facility located at West hill, Calicut producing 3000 T P A of high quality wheat products, this Rs.350 million company markets the famous ultra premium Parisons Liberty brand of wheat products viz, Maida, Sooji and Atta. The company apart from feeding bulk market also markets the products in consumer packs packed in high tech automated packing facility. The turnover of the company for the year ended 31-03-2003 is Rs.8795.91 Lakhs. This plant has an extensive lab to ensure the quality of the products. Apart from the milling unit the company has also successfully acquired a silo storage system and has completed the setting up of 14000 M T tank farms for storage of liquid cargo at the Beypore port. The company has also put in to operation 1200 Kiloliter capacity oil tanker KUNCHIPARY at the Beypore Port which has helped the Group to source a major portion of its imports through the Beypore Port. PRODUCTS OF PARISONS COMPANY A firm markets products to maximize its profits through consumer satisfaction. The products must be capable of satisfying the consumers wants. So Parisons treats the product, as a bundle of utilities. The

Products of the Parisons would satisfy the needs and wants of the consumers.

The various products provided by Parisons Company are, Atta Maida


Sooji

Bran Vanaspathy Bakery shortening Parisons tea Others DIAGRAM SHOWING THE PROPORTION OF EACH PRODUCT IN THE TOTAL PRODUCTS OFFERED

CHART 1

10% 10% 5% 10% 5% 10% 14% 13% 23%

MAIDA BRAN

ATTA VANASPATHY

SOOJI PALMOLIEN OTHERS

BAKERY SHORTENING PARISONS TEA

MARKETING ASPECTS OF PARISONS GROUP PRICING POLICY Price is the most important device that a firm can use to expand its market. If the price is set too high a seller may be thrown out of the market .If it is too low, his income may not cover cost. The company determines the price of its products by taking following matters in to consideration. Price of the competitors products. Price in the international market. Cost of production and distribution Price of different items in the product line. Market trends and the budget of the firm.

TRANSPORTATION The raw materials that are collected or imported from Malaysia and Indonesia are transported through ships to Cochin and Beypore Port. There has no problem in the transportation of raw material. Raw material is imported in bulk quantities. DISTRIBUTION SYSTEM OF THE COMPANY Channels of distribution mean the path or network through which the products are made available to the consumers. The company has good distribution agencies; the company is also engaged in direct distribution.

The companys distribution objective is to make available the right goods to the right place at the least cost. Retailers Retailers are the last link in the chain of distribution. The retailers of wheat products purchase this companys products. The company offers attractive discounts and other concessional benefits to increase its market. Agents The companys one third of business done mainly through their own efficient agents. Agent s are spread out in the different parts of Kerala and also in the states of Karnataka and Tamilnadu.70% of the production of the company are being sold in Kerala and of the balance 25% are being sold in Tamilnadu and 5% are in Karnataka. In Tamilnadu

and Karnataka dealings are done through agents. In Kerala most of the products are sold as consumer packed products mostly as direct marketing. Wholesalers Wholesaler is a trader who purchase goods in bulk quantity from manufacturers and sell them to the retailers. They purchase the goods from manufactures directly but generally do not sell the goods to consumers directly.

EDIBLE OIL MAKING PROCESS The refining of crude vegetable oils can be divided in to two stages.

Degumming and Neutralization

Water Washing

Bleaching

Deodorizing

1. Degumming and Neutralization It is the process for the removal of the gum percent in the Crude Fatty Oil. Neutralization is intended mainly for de-acidifying crude fatty oils or degummed oils. The process is carried out for the chemical reaction of the fatty acid with sodium hydroxide at a temperature of above 60 degree Celsius. It is carried out in centrifugal separators for

maximum recovery of neutral oils. The output of the reaction is alkali salts of fatty acids and glycerin. The caustic oil mixture is centrifuged to remove neutral oils from water-soluble soaps Proteins, color bodies and lipids. 2. Water Washing The neutral oils are further processed by water washing to remove the soaps content in the oil. 3. Bleaching The materials used for bleaching are fullers earth and activated carbon. This is to remove the color segments in the neutralized product. In order to protect the refined oils against oxidization, bleaching is generally conducted under vacuum.

4. Deodorizing The process is steam distillation. This is to remove relatively odoriferous and flavored substances from the relatively non volatile oils. The refined oil is then packed in to containers of different sizes according to market requirements.

CHART 2 ORGANISATIONAL STRUCTURE OF PARISONS GROUP

MANAGING DIRECTOR

DIRECTOR (Technical)

DIRECTOR (Plant) GENERAL MANAGER

DIRECTOR (Marketing)

MARKETING MANAGER MARKETING EXECUTIVES

PRODUCTION MANAGER PRODUCTION STAFF WORKERS

FINANCE MANAGER

PLANT MANAGER PLANT SUPERVISOR

ASSISTANT FINANCE MANAGER

WORKERS

SECRETARY

ACCOUNTING ASSISTANT

CASHIER

CHAPTER 3 RESEARCH METHODOLOGY

3.1 RESEARCH Research in common parlance refers to a search for knowledge. It is an organized enquiry carried out to provide information for solving a particular problem. 3.2 RESEARCH DESIGN A research design is programme which guides the investigator in the process of collecting, analyzing and interpreting the observation. It is needed to facilitate the smooth sailing of the various research operations thereby making research as efficient as possible. This study follows descriptive and analytical research design where in the researcher has to use facts and information already available and analyze there to make a critical evaluation of the material. DESCRIPTIVE RESEARCH These Studies often involving the description of extend of the association between two or more variable, descriptive information also often provides a sound basis for making predictions for the solutions of given problems. The design used in descriptive can employ one or more of them following sources information

i. ii.

Secondary Data Surveys Here, the data collected by for the analysis are secondary data,

which will be more relevant in the analysis of financial policies and performance of the company ACCOUNTING RESEARCH It include a study of the effects on financial statement and financial reporting which result from different choices of accounting methods, it may lead to development of new methods of presenting financial information relevant to the research purposes with economy in procedure. PERIOD OF STUDY Last five years financial performance is considered for the study to estimate the future capital budgeting requirements. NATURE OF ANALYSIS The nature of analysis is based on the Evaluation Techniques 3.3 ANALYTICAL TOOL APPLIED A. DISCOUNTED CASH FLOW METHOD a. Net Present Value. b. Internal Rate of Return. c. Profitability Index.

B. NON DISCOUNTED CASH FLOW METHOD a. Payback Period. b. Average Rate of Return. DATA COLLECTION The primary data was collected from the various departments like Finance, Marketing, stores, and Production and department. The secondary data was collected from the annual report of the company for the study.

CHAPTER 4 ANALYSIS AND INTERPRETATION OF DATA


4.1 ALLOCATION OF OVERHEADS 1. Electricity and depreciation are taken as variable overhead by Parisons even though first one is semi-fixed and the other one is fixed overhead. 2. Traveling expenses, Motor Vehicle expenses, Printing and Stationery, Interest and Finance charges, General expenses, Distribution charges, Advertisement are taken as fixed overheads by Parisons even though these expenses may vary according to time to time. 3. Telephone charges are taken as fixed overhead by Parisons even though these are semi-fixed overhead.

TABLE 1 ALLOCATION OF OVERHEADS (2003)


Amount(In Rupees) Amount(In Rupees) 15,78,551 4,30,463 3,43,814 24,80,772 25,65,512 13,451 36,81,196 9,23,364 1,60,126 4,71,399 2,41,010 74,88,493 15,21,971 3,43,813 2,76,731 1,07,29,885 19,44,071 56,575 42,670

Particulars 1.Labour Overhead Direct Labour 2.Other Direct Expenses Production Expenses Postage Repairs and Maintenance Electricity Storage Expenses Depreciation 3.Fixed Overhead Salary Traveling Expenses Motor vehicle expenses Printing and Stationery Interest and Financial Charges Insurance Telephone charges Rent, rates and Taxes Distribution Charges Advertisement Charges Audit Fee General Expenses Total

95,15,208

2,42,00,108 3,53,54,709

4.2 STATEMENT OF COST Cost sheet is a document which provides for the assembly of the estimated detailed cost in respect of a cost centre or a cost unit. It is a detailed statement of the elements of cost arranged in a logical order under different heads. It is only a memorandum statement and does not form part of the double entry system. Additional columns can be provided to indicate cost per unit at different stages of production or to enable comparison to be made of the current costs with that of historical costs. ADVANTAGES 1. It indicates the break-up of the total cost by elements, i.e. material, labour, overhead etc., 2. It discloses the total cost and cost per unit of the unit produced. 3. It facilitates comparison. 4. It helps the management in fixing selling prices. 5. It acts as a guide to the management and helps in formulating production policy. 6. It enables to keep control over cost of production.
7. It helps the businessman to submit quotations with reasonable

degree of accuracy against tenders for the supply of rules. 8. It is a simple and useful medium of communication of costs to various levels of management.

TABLE 2 FIXED COST (2003-2007)

Particulars Freehold Land Building-Office Building-Factory Barge Miscellaneous Fixed Asset Plant and Machinery Computer Storage Tank Utilities Vehicles Furniture Total

2003 1,11,49,00 2 35,58969 61,13,571 1,64,32,72 3 10,39,528 3,04,47,43 8 6,00,776 1,10,76,91 1 24,65,277 10,85,629 3,29,733 8,42,99,55 7

2004 1,11,49,00 2 35,58,969 61,13,571 1,64,32,72 3 10,59424 3,04,47,43 8 6,03,178 1,20,84,14 2 28,65,433 1,18,09,70 3 3,69,098 9,64,92,68 1

2005 1,11,49,002 35,58,969 61,13,571 1,64,32,723 10,63434 3,36,92,009 7,23,078 2,93,95,167 31,78,910 1,18,09,703 4,10,703 11,75,27,29 9

2006 1,11,49,002 35,58,969 61,13,571 1,64,32,723 10,80955 3,42,63,639 10,00,273 3,03,29,340 32,43,927 1,35,86,479 4,49,926

2007 1,11,49,002 35,58,969 61,13,571 1,64,32,723 11,08,635 3,49,35,424 11,68,819 3,03,29,340 33,43,074 1,47,95,879 4,71,476

12,12,08,80 4 12,34,06,912

Amount in Rupees

10000000

15000000

20000000

25000000

30000000

35000000

40000000

5000000

0 Freehold Land BuildingOffice BuildingFactory Barge Miscellaneous Fixed Asset Ite ms Plant and Machinery Computer Storage Tank Utilities Vehicles Furniture 2007 2006 2005 2004 2003

FIXED COST (2003-2007)

CHART 3

TABLE 3 DEPRECIATION WORKINGS

2003 Machinery opening Balance

2004

2005

2006

2007

3,04,47,43 8

3,04,47,43 8

3,36,92,01 0

3,43,63,79 3,57,82,639 5

Additional during the year Total Depreciation Clearing Balance

3,04,47,43 8 56,35,936 2,48,11,50 2

32,44,572 3,36,92,01 0 55,37,060 2,81,54,95 0

6,71,785 3,43,63,79 5 54,02,635 2,89,61,16 0

14,18,844

3,57,82,63 3,57,82,639 9 61,16,238 91,26,112

2,96,66,40 2,66,56,527 1

CHART 4
DEPRECIATION WORKINGS
30000000 29500000 Amount in Rupees 29000000 28500000 28000000 27500000 27000000 26500000 26000000 25500000 25000000 2003 2004 2005 Years 2006 2007

TABLE 4 INCOME AND EXPENDITURE (2003-2007)


2003
Income: Sales Interest Lorry Receipts Miscellaneous income Creditors written back Storage tank rent Profit on sale of vehicle Barge income Discount Foreign exchange fluctuation Stock differential 87,95,91,15 7 24,36,120 30,80,388 7,52,406 2,224 6,95,338 99,643 30,860 3,17,569 (-)15,11,227 88,54,94,47 8 51,92,51,73 0 29,52,87,19 0 15,78,551 76,96,538 86,587 24,80,772 2,76,731 21,400 13,451 9,23,364 19,44,071 2,41,010 36,81,196 6,87,627 1,20,624 39,502 50,125 76,269 4,96,362 10,260 4,71,399

2004
81,37,95,53 9 13,99,614 20,12,464 11,58,578 3,99,273 6,062 5,75,406 29,80,535 (-)2,35,473 82,56,91,99 8 29,06,15,71 6 47,17,36,75 4 18,74,110 80,91,549 67,068 18,46,021 3,67,627 18,200 40,786 10,33,918 14,37,224 2,07,268 55,37,060 6,09,300 46,864 1,78,751 36,998 87,261 3,79,657 7,213 41,35,368

2005
68,59,11,77 0 11,76,651 9,27,873 1,14,067 55,48,700 1,23,469 37,296 26,62,876 69,65,02,70 2 25,43,57,83 3 39,09,54,74 7 17,48,261 82,06,202 2,83,678 18,02,762 6,37,679 19,450 49,363 11,75,677 11,45,670 1,98,746 54,02,635 24,828 1,72,965 6,15,323 98,570 35,027 1,16,960 95,381 4,62,567 6,844 40,36,309

2006
50,45,63,87 2 15,42,850 15,37,342 6,37,626 3,72,199 1,71,51,099 61,324 3,31,161 42,326 1,39,877 (-)12,89,454 52,50,90,22 2 23,50,49,02 3 22,73,34,27 3 17,80,566 90,55,874 55,098 11,90,013 6,48,664 24,180 45,729 8,39,647 9,34,656 1,98,920 61,16,238 28,534 7,47,568 4,92,528 1,40,861 33,644 2,00,523 1,57,507 3,35,299 5,326 47,89,132

2007
168,57,45,561 42,13,397 7,35,248 3,98,494 210,00,000 60,139 4,98,505 39,288 57,17,135 38,49,591 172,22,57,358 27,26,64,628 136,15,13,097 20,95,314 84,11,163 1,73,167 9,74,379 8,18,171 22,618 1,05,689 3,02,599 18,78,523 1,73,905 91,26,112 25,443 9,05,793 3,37,726 1,94,297 47,603 67,125 2,19,443 4,67,366 5,438 47,24,776 1,68,412 38,250 1,23,808

Total
Expenditure: Raw materials consumed Goods purchased Wages Power, fuel and water Consumables Repairs&maintenance(P&M ) Laboratory expenses Pest and Rodent Storage expenses Salaries and Allowances Advertisement charges Printing and Stationery Depreciation Port expenses Barge expenses Postage and Telephone charges Traveling expenses Directors Others ESI PF Staff welfare Medical expenses Motor vehicle expenses Insurance Donation and Charities Tax and License fee

15,21,971 26,200 1,76,518 Selling &Distribution expenses Interest and financial charge Audit fees 1,32,38,589 74,88,493 56,575 85,79,43,10 5

1,53,503 20,200 1,53,503 1,29,41,369 67,70,458 56,844 80,84,50,59 0

1,80,210 6,550 1,80,210 93,97,076 89,12,246 58,830 69,03,82,59 3

94,772 11,650 3,75,058 2,17,47,367 1,23,74,101 1,15,21,207 72,000 51,46,52,59 1 2,09,39,775 1,38,89,198 96,173 170,13,17,583

Total Profit Before depreciation and Tax Depreciation Profit After Depreciation Before Tax Tax Profit After Depreciation and Tax Add: Depreciation Profit After Tax

2,75,51,373 36,81,196 2,38,70,177 47,74,035 1,90,96,142 36,81,196 2,27,77,338

1,72,41,408 55,37,060 1,17,04,348 23,40,870 93,63,478 55,37,060 1,49,00,538

61,20,109 54,02,635 7,17,474 1,43,495 5,73,979 54,02,635 59,76,614

1,04,37,631 61,16,238 43,21,393 8,64,279 34,57,114 61,16,238 95,73,352

91,26,112 1,18,13,663 23,62,733 94,50,930 91,26,112 1,85,77,042

CHART 5
INCOME AND EXPENDITURE
1800000000 1600000000 1400000000 Amount in Rupees 1200000000 1000000000 800000000 600000000 400000000 200000000 0 2003 2004 2005 Years 2006 2007 Incom e Expenditure

TABLE 5 CASH FLOW STATEMENT


2003 SOURCE OF FUNDS: Profit Before Interest and Tax Depreciation for the year Equity share capital Term Loan from Financial Institution Total (A) APPLICATION OF FUNDS: Interest payment Repayment of Term Loan Increase in Fixed Asset Increase in Current Asset Total (B) Net surplus/deficit (A-B) 2,75,51,37 3 36,81,196 3,00,00,000 1,50,00,00 0 8,59,83,952 4,05,59,31 1 8,67,91,88 0 67,70,458 99,68,598 4,27,59,728 74,88,493 1,49,62,69 8 33,40,870 72,13,396 59,82,25 2 3,17,74,31 3 6,00,00,801 4,68,40,67 5 7,87,61,619 81,77,378 3,94,27,755 4,16,86,93 0 37,18,62 4 67,51,991 2,52,92,78 7 44,22,246 55,88,484 3,86,85,505 99,12,246 95,55,050 57,04,458 1,83,66,01 1,67,34,243 8 4,05,59,30 9 13,87,62,42 0 8,20,82,05 3 3,00,00,00 0 1,72,41,408 55,37,060 61,20,109 54,02,635 1,04,37,63 2,09,39,775 1 91,26,112 61,16,238 3,00,00,000 3,00,00,00 0 1,80,47,373 3,04,44,29 1 7,81,13,260 7,69,98,16 0 62,78,206 2004 2005 2006 2007

3,52,41,37 8 5,50,17,56 7

3,53,11,23 0

CHART 6
CASH FLOW STATEMENT

80000000 70000000 Amount in Rupees 60000000 50000000 40000000 30000000 20000000 10000000 0 2003 2004 2005 Years 2006 2007

TABLE 6 BALANCESHEET
2003 LIABILITIES: Share capital Reserves and Surplus Deferred tax liability Secured loans Unsecured loans Total ASSETS: Fixed assets (Net) Current assets(Net) Loans and Advances Investments 10,09,41,68 9 16,03,72,98 7 17,16,84,98 4 17,13,09,89 6 6,73,78,649 7,50,78,915 1,33,58,774 1,25,04,000 Total 10,09,41,68 9 16,03,72,98 7 17,16,84,98 17,13,09,89 4 6 8,00,93,837 6,77,75,150 1,25,04,000 7,86,71,591 8,05,09,393 1,25,04,000 7,30,83,107 8,57,22,789 1,25,04,000 16,44,28,060 8,45,45,411 1,25,04,000 1,50,00,000 4,79,00,602 26,83,617 3,03,57,47 0 50,00,00 0 3,00,00,000 5,50,08,033 34,02,256 6,69,62,69 8 50,00,00 0 3,00,00,000 5,47,48,030 36,06,847 7,83,30,10 7 50,00,00 0 3,00,00,000 5,61,37,315 37,28,688 7,38,13,90 2 76,29,99 1 16,44,28,060 3,00,00,000 6,37,65,342 33,84,231 5,89,94,445 82,84,042 2004 2005 2006 2007

TABLE 7 CAPITAL INVESTMENT


MACHINERY (2003) ADDITIONS (2004) (2005) (2006) (2007) TOTAL 3,04,47,438 ------32,44,572 6,71,785 14,18,844 Rs. 3,57,82,639

CHART 7
CAPITAL INVESTMENT
35000000 30000000 Amount in Rupees 25000000 20000000 15000000 10000000 5000000 0 2003 2004 2005 Years 2006 2007

REVIEW OF CAPITAL BUDGET DECISION FOR PARISONS


1. Investment cost 2. Life of the project 4. Tax Rate 5. Discount Factor - Rs.3,57,82,639 - 5years - 20% - 10%

3. Depreciation is charged on Diminishing Balance Method

TABLE 8 CASH FLOW


Year
2003 2004 2005 2006 2007

CFBDT
2,75,51,37 3 1,72,41,40 8 61,20,109 1,04,37,63 1 2,09,39,77 5

Depreciation CFADBT
36,81,196 55,37,060 54,02,635 61,16,238 91,26,112 2,38,70,177 1,17,04,348 7,17,474 43,21,393 1,18,13,663

Taxes
47,74,03 5 23,40,87 0 1,43,495 8,64,279 23,62,73 3

CFATD
1,90,96,14 2 93,63,478 5,73,979 34,57,114 94,50,930

CFATBD
2,27,77,338 1,49,00,538 59,76,614 95,73,352 1,85,77,042

INTERPRETATION First step is to determine the after-tax cash inflows which will result from using the investment .To do so; we are required to compute net profits (CFBT-Depreciation) on which the company is to pay taxes. The tax rate is 20%.Then the amount of depreciation is to be added back to the amount of cash flows after taxes (CFAT) as depreciation does not involve any cash outflow.

CHART 8
CASH FLOW

25000000

20000000 Amount in Rupees

15000000

10000000

5000000

0 2003 2004 2005 Years 2006 2007

TABLE 9 1. PAYBACK PERIOD


To determine the number of years to recover the initial cash out flow of Rs.3,57,82,639 crores we are constructing the following cumulative cash flow tables. YEAR 2003 2004 2005 2006 2007 CFATBD 2,27,77,338 1,49,00,538 59,76,614 95,73,352 1,85,77,042 CUMULATIVE CFATBD 2,27,77,338 3,76,77,876 4,36,54,490 5,32,27,842 7,18,04,884

INTERPRETATION From the table it is clear that the recovery of the investment between the first and second years. Therefore the Payback in 1year plus a fraction of the 2nd years.

1,30,05,301 Payback Period = 1,49,00,538 Payback Period = 1 year and 9 months.

II. AVERAGE RATE OF RETURN


Average Annual Earnings ARR = Average investment 83,88,329 = 1,78,91,320 ARR = 46.88% Average Annual Earnings
1,90,96,142+ 93,63,478+ 5,73,979+ 34,57,114+ 94,50,930

x 100

x 100

= 5 4,19,41,643 = 5 = Rs.83,88,329 3,57,82,639

Average Investment = 2 = Rs.1,78,91,320

INTERPRETATION The Average Rate of Return of the project indicates 46.88%.Therefore the project earns a good profit in a short period of time.

TABLE 10 III. NET PRESENT VALUE (NPV)


The below table contains the relevant calculations to determine NPV Table in the Appendix (Present Value of Re.1) has been used to determine the PV factor. Year CFATBD Discount factor at 10% 2003 2004 2005 2006 2007 2,27,77,338 1,49,00,538 59,76,614 95,73,352 1,85,77,042 0.909 0.826 0.751 0.683 0.621 Present Value of Cash Inflows 2,07,04,600 1,23,07,844 44,88,437 65,38,599 1,15,36,343 5,55,75,823

Net Present Value = Present Value of Cash Inflows- Present Value of cash outflows = 4,81,43,364 3,57,82,639 N.P.V. = Rs.1,97,93,184

INTERPRETATION The NPV of the project is Rs.1,97,93,184.The projects present value of cash inflow (Rs.5,55,75,823) is greater than that of the present value of cash outflows (Rs.3,57,82,639).Thus, it generates a positive Net Present Value. So the NPV of Rs.1,97,93,184 adds to the wealth of the owners.

TABLE 11 IV. PROFITABILITY INDEX METHOD


Year 2003 2004 2005 2006 2007 CFATBD 2,27,77,338 1,49,00,538 59,76,614 95,73,352 1,85,77,042 PV factor at 10% 0.909 0.826 0.751 0.683 0.621 Present Value of Cash Inflows 2,07,04,600 1,23,07,844 44,88,437 65,38,599 1,15,36,343 5,55,75,823

Present value of Cash inflows Profitability index = Present Value of Cash outflows 5,55,75,823 = 3,57,82,639 = 1.55

INTERPRETATION The profitability Index of the project is 1.55.Therefore it is constant with the shareholders value maximization principle. It increases the shareholders wealth.

TABLE 12 V. INTERNAL RATE OF RETURN


Year CFATBD PV factor at 32%
2003 2004 2005 2006 2007 2,27,77,338 1,49,00,538 59,76,614 95,73,352 1,85,77,042 0.757 0.573 0.434 0.330 0.250

Discounted Cash inflow


1,72,42,445 85,38,008 25,93,850 31,59,206 46,44,260 3,61,77,769

PV factor at 33%
0.752 0.565 0.425 0.320 0.240

Discounted Cash Inflow


1,71,28,558 84,18,804 25,40,061 30,63,473 44,58,490 3,56,09,386

P1-Q IRR = L+ P1-P2 3,61,77,769 - 3,57,82,639 = 32+ 3,61,77,769 3,56,09,386 x1 xD

3,95,130 = 32+ 5,68,383 = 32+ 0.69 IRR = 32.69% x1

P1-Q IRR = Lower Rate + P1-P2 D = Difference between the percentages P1= Present Value of Cash Inflow at highest percentage Q = Present Value of Cash Outflow P2= Present Value of cash Inflow at lowest percentage INTERPRETATION The IRR is 32.69%. Here the IRR is less than that of the opportunity cost of the capital at 33% and therefore the shareholders wealth will not be enhanced. It will enhance only when the IRR is greater than the opportunity cost of capital. xD

CHAPTER 5 FINDINGS
1 2 3 4. 5. 6. 7. 8. It was found that the payback Period of the project is 1 year and 9 months. The Payback Period shows that the initial investment can be recovered with in a short period of time. The investment is ideal because normally an investment should be recoverable with in 5 years. Average Rate of Return indicates 46.88%.Therefore the project earns a good profit in short span of period. Net Present Value of the project was Rs.1,97,93,184. This indicates high profitability because it was >1. The Profitability Index of the project is also >1 i.e., 1.55.Thus it is constant with the shareholders value maximization principle. The Internal Rate of Return shows 32.69% .These are also ensures a profitable investment. The Internal Rate of Return is less than the opportunity cost of capital. Therefore the shareholders wealth will not be enhanced. It will enhance only when the IRR is greater than the opportunity cost of capital.

9.

a. Discounted Methods i. Net Present Value ii. Profitability Index = Rs.1,97,93,184 = 1.55

iii. Internal Rate of Return = 32.69% b. Non Discounted Methods i. Payback Period = 1 year and 9 months

ii. Average Rate of Return = 46.88%

CHAPTER 6 SUGGESTIONS
1. 2. 3. 4. 5. 6. 7. 8. The company may fix the time period for the capital asset for replacement. Net Present Value method is more suitable for the company for making investment decision. In future the company may follow the capital budget method before making investment decisions. The company may effectively use the available resources for attaining maximum profit. The company has to analyze the proposal for expansion or creating additional capacity. The company may plan and control its capital expenditure. The company has to ensure that the funds are invested in long term project or not. The company may evaluate the estimation of cost and benefit in terms of cash flows.

CHAPTER 7 CONCLUSION
The study reveals the capital budgeting or capital expenditure management of Parisons Roller and Flour Mills Pvt.Ltd. The present financial position of the company is good, because the company recovers the initial investment with in a short period of time. The Profitability Index and Internal Rate of Return show a profitable investment. The company has to analyze the alternative proposals and also make decisions as to whether or not money should be invested in long term projects. Investment decisions are extremely important for the company because a wrong managerial decision with regard to capital expenditure may affect the future earnings, production, and investment opportunities of the company. Further research with regards to this company is possible only when the company decides to invest in machineries and they should understand the importance of Capital Budgeting.

PARISONS ROLLER AND FLOUR MILLS PVT. LTD, CALICUT


BALANCE SHEET AS AT 31St MARCH 2003

LIABILITIES: Share Capital Reserves and Surplus Deferred tax liability Secured Loans Unsecured Loans

AMOUNT 1,50,00,000 4,79,00,602 26,83,617 3,03,57,470 50,00,000 10,09,41,689

ASSETS: Fixed Assets (Net) Current Assets (Net) Loans and Advances Investments 7,50,78,915

1,33,58,774

1,25,04,000 10,09,41,689

PARISONS ROLLER AND FLOUR MILLS PVT. LTD, CALICUT


BALANCE SHEET AS AT 31St MARCH 2004

LIABILITIES: Share Capital Reserves and Surplus Deferred tax liability Secured Loans Unsecured Loans

AMOUNT 3,00,00,000 5,50,08,033 34,02,256 6,69,62,698 50,00,000 16,03,72,987

ASSETS: Fixed Assets (Net) Current Assets (Net) Loans and Advances Investments 8,00,93,837

6,77,75,150

1,25,04,000 16,03,72,987

PARISONS ROLLER AND FLOUR MILLS PVT. LTD, CALICUT


BALANCE SHEET AS AT 31St MARCH 2005

LIABILITIES: Share Capital Reserves and Surplus Deferred tax liability Secured Loans Unsecured Loans

AMOUNT 3,00,00,000 5,47,48,030 36,06,847 7,83,30.107 50,00,000 17,16,84,984

ASSETS: Fixed Assets (Net) Current Assets (Net) Loans and Advances Investments 7,86,71,591

8.05,09,393

1,25,04,000 17,16,84,984

PARISONS ROLLER AND FLOUR MILLS PVT. LTD, CALICUT


BALANCE SHEET AS AT 31St MARCH 2006

LIABILITIES: Share Capital Reserves and Surplus Deferred tax liability Secured Loans Unsecured Loans

AMOUNT 3,00,00,000 5,61,37,315 37,28,688 7,38,13,902 76,29,991 17,13,09,896

ASSETS: Fixed Assets (Net) Current Assets (Net) Loans and Advances Investments 7,30,83,107

8,57,22,789

1,25,04,000 17,13,09,896

PARISONS ROLLER AND FLOUR MILLS PVT. LTD, CALICUT


BALANCE SHEET AS AT 31St MARCH 2007

LIABILITIES: Share Capital Reserves and Surplus Deferred tax liability Secured Loans Unsecured Loans

AMOUNT 3,00,00,000 6,37,65,342 33,84,231 5,89,94,445 82,84,042 16,44,28,060

ASSETS: Fixed Assets (Net) Current Assets (Net) Loans and Advances Investments 6,73,78,649

8,45,45,411

1,25,04,000 16,44,28,060

PARISONS ROLLER AND FLOUR MILLS PVT.LTD, CALICUT PROFIT AND LOSS ACCOUNT
2003
Income: Sales Interest Lorry Receipts Miscellaneous income Creditors written back Storage tank rent Profit on sale of vehicle Barge income Discount Foreign exchange fluctuation Stock differential 87,95,91,15 7 24,36,120 30,80,388 7,52,406 2,224 6,95,338 99,643 30,860 3,17,569 (-)15,11,227 88,54,94,47 8 51,92,51,73 0 29,52,87,19 0 15,78,551 76,96,538 86,587 24,80,772 2,76,731 21,400 13,451 9,23,364 19,44,071 2,41,010 36,81,196 6,87,627 1,20,624 39,502

2004
81,37,95,53 9 13,99,614 20,12,464 11,58,578 3,99,273 6,062 5,75,406 29,80,535 (-)2,35,473 82,56,91,99 8 29,06,15,71 6 47,17,36,75 4 18,74,110 80,91,549 67,068 18,46,021 3,67,627 18,200 40,786 10,33,918 14,37,224 2,07,268 55,37,060 6,09,300 46,864 1,78,751

2005
68,59,11,77 0 11,76,651 9,27,873 1,14,067 55,48,700 1,23,469 37,296 26,62,876 69,65,02,70 2 25,43,57,83 3 39,09,54,74 7 17,48,261 82,06,202 2,83,678 18,02,762 6,37,679 19,450 49,363 11,75,677 11,45,670 1,98,746 54,02,635 24,828 1,72,965 6,15,323 98,570 35,027

2006
50,45,63,87 2 15,42,850 15,37,342 6,37,626 3,72,199 1,71,51,099 61,324 3,31,161 42,326 1,39,877 (-)12,89,454 52,50,90,22 2 23,50,49,02 3 22,73,34,27 3 17,80,566 90,55,874 55,098 11,90,013 6,48,664 24,180 45,729 8,39,647 9,34,656 1,98,920 61,16,238 28,534 7,47,568 4,92,528 1,40,861 33,644

2007
168,57,45,561 42,13,397 7,35,248 3,98,494 210,00,000 60,139 4,98,505 39,288 57,17,135 38,49,591 172,22,57,358 27,26,64,628 136,15,13,097 20,95,314 84,11,163 1,73,167 9,74,379 8,18,171 22,618 1,05,689 3,02,599 18,78,523 1,73,905 91,26,112 25,443 9,05,793 3,37,726 1,94,297 47,603 67,125 2,19,443 4,67,366 5,438

Total
Expenditure: Raw materials consumed Goods purchased Wages Power, fuel and water Consumables Repairs&maintenance(P&M ) Laboratory expenses Pest and Rodent Storage expenses Salaries and Allowances Advertisement charges Printing and Stationery Depreciation Port expenses Barge expenses Postage and Telephone charges Traveling expenses Directors Others ESI PF Staff welfare

Medical expenses Motor vehicle expenses Insurance Donation and Charities Tax and License fee Selling &Distribution expenses Interest and financial charge Audit fees

50,125 76,269 4,96,362 10,260 4,71,399 15,21,97 1 26,20 0 1,76,518

36,998 87,261 3,79,657 7,213 41,35,368 1,53,503 20,200 1,53,503 1,29,41,369

1,16,960 95,381 4,62,567 6,844 40,36,309 1,80,210 6,550 1,80,210 93,97,076 89,12,246 58,830 69,03,82,59 3

2,00,523 1,57,507 3,35,299 5,326 47,89,132 94,772 11,650 3,75,058 1,23,74,101 1,15,21,207 72,000 51,46,52,59 1

47,24,776 1,68,412 38,250 1,23,808 2,17,47,367 1,38,89,198 96,173 170,13,17,583

1,32,38,589 74,88,493 56,575 85,79,43,10 5 67,70,458 56,844 80,84,50,59 0

Total Profit Before depreciation and Tax Depreciation Profit After Depreciation Before Tax Tax Profit After Depreciation and Tax Add: Depreciation

2,09,39,775 1,72,41,408 61,20,109 54,02,635 7,17,474 1,43,495 5,73,979 54,02,635 1,04,37,631 61,16,238 43,21,393 8,64,279 34,57,114 61,16,238 1,85,77,042 1,49,00,538 59,76,614 95,73,352 91,26,112 1,18,13,663 23,62,733 94,50,930 91,26,112

2,75,51,373 55,37,060 36,81,196 2,38,70,177 47,74,035 1,90,96,142 36,81,196 1,17,04,348 23,40,870 93,63,478 55,37,060

Profit After Tax


2,27,77,338

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