A PROJECT REPORT ON A STUDY ON CAPITAL BUDGETING GODREJ&BOYCE MFG. Co. LTD.

Project report submitted in partial fulfillment of the requirements for the Award of the degree of MASTER OF BUSINESS ADMINISTRATION BY R. RAMACHANDRA REDDY (150-08-107)

UNDER THE GUIDENCE OF Miss.B.JEHAN (Associate professor) DEPARTMENT OF BUSINESS MANAGEMANT SUPRABHATH P.G.COLLEGE (AFFILIATED TO OSMANIA UNIVERSITY) (V) RAGHAVAPUR, (M) BIBINAGAR, (DIST) NALGONDA(2008-2010)

SUPRABHATH PG COLLEGE
(APPROVED BY AICTI, AFFILATED TO OSMONIA UNIVERSITY&RECOGNISED BY GOVT.OF AP)

AFTER GHATKESAR, RAGHAVAPUR (V), BIBINAGAR (M), NALGONDA DIST,-508126 PH: 08685-202112, 995142572, 9246349204

___________________________________________ CERTIFICATE
This is to certify that the Project work entitled A STUDY ON CAPITAL BUDGETING Is a bonafide work done by R. RAMCHANDRA REDDY with Roll No 15008107, student of Suprabhath PG College, Raghavapur (V), Bibinagar (M) under my guidance, for the fulfillment of the award of the Master of Business Administration in Omani University. He has completed the Project work as prescribed under Project report rules. Internal Guide Head of Dept.

___________________________________________________________
CORPORATE OFFICE: G-1, VINOOTHANA S MADHUSHALA APARTEMENTS, ADJ.TO WOODLAND OUTLET

OPP.ICICI BANK, HABSIGUDA, HYDERABAD-500007, PH: 040-65357203

DECLARATION

I hereby declare that project report entitled A STUDY ON CAPITAL BUDGETING is submitted by to the department of Business management, Suprabhath P.G. College for management affiliated to Osmania University, Hyderabad in the partial fulfillment of requirements for the award of the degree of MASTER OF BUSINESS ADMINISTRATION. Is the bonafied work done by me us original.

I also declare that this project report is not submitted to any other university or institute either in full or partial for the award of any other degree or diploma.

R. RAMACHANDRA REDDY
H.NO-150-08-107

ACKNOWLEDGEMENT

This dissertation report has been the imprint of many persons who made a significant contribution to its development to the present form. I owe my immense gratitude to my parents, family members and for the support I receive from them.

It is with profound sense of respect that I was to avail this opportunity to reveal my overwhelming gratitude towards my college guide Miss.B.Jehan, principle MIss.E.JALAJA, SUPRABHATH P.G COLLEGE, For her flexible and dynamic attitude in editing this report and bringing it to a shape.I also cannot resist my self-take it as a great opportunity and honor to express my sincere gratitude to all the management and staff of suprabhath PG College. It is with great pleasure and privilege to express my sincere thanks to finance manager Mr.K. RAMA RAJU of GODREJ & BOYCE MFG. CO. LTD. who accorded us an opportunity to take up this project work in the organization. I also cannot resist myself take it as a great opportunity and honor to express my sincere gratitude to all the management and staff of GODREJ & BOYCE MFG.Co. LTD. . Who infused life to my dissertation report by their support.

R. RAMACHANDRA REDDY H.NO-150-08-107

A
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STUDY ON CAPITAL BUDGETING

CONTENTS TITLE CHAPTER-1 INTRODUCTION NEED FOR THE OBJECT DESIGN OF STUDY RESEARCH METHODOLOGY LIMITATIONS OF THE STUDY CHAPTER-2
6

INDUSTRY PROFILE COMPANY PROFILE CHAPTER-3 THEORITICAL FRAMEWORK CHAPTER-4 DATAANALYSIS&INTERPRITATIONS CHAPTER-5 FINDINGS SUGGESTIONS APPENDIX BIBLIOGRAPHY

CHAPTER-I
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DEFINITIONS OF CAPITAL BUDGETING:Capital budgeting is a long term planning for making and financing proposed capital outlays : - T. Horngreen

A budget is an estimate of future needs arranged according to at an orderly basis covering some or all the activities of an enterprise for a definite period of time : - George R. Terry Budget as a financial and/ or quantitative statement prepared to a definite period of time, of the policy to be pursued during that period for the purpose of attaining a given objective : - Icma, London

INTRODUCTION TO CAPITAL BUDGETING:Capital budgeting is the process of making investment decisions in capital expenditures. A capital expenditure may be defined as an expenditure the benefits of
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which are expected to be received over period of time exceeding one year. The main characteristic of a capital expenditure is that the expenditure is incurred at one point of time whereas benefits of the expenditure are realized at different points of time in future. In simple language we may say that a capital expenditure is an expenditure incurred for acquiring or improving or improving the fixed assets, the benefits of which are expected to be received over a number of years in future. This project presents two versions of heuristic algorithm to solve a model of capital budgeting problems in a decentralized multidivisional firm involving no more than two exchanges of information between headquarters and divisions. Head quarters make an allocation of funds to each division based upon its cash demand and its potential growth rate. Each division determines which projects to accept. Then, an additional iteration is performed to define the solution To take up a new project, involves a capital investment decision and it is the top managements duty to make a situation and feasibility analysis of that particular project and means of financing and implementing it financing is a rapidly expanding field, which focuses not on the credit status of a company, but on cash flows that will be generated by a specific project. The capital budgeting decisions procedure basically involves the evaluation of the desirability of an investment proposal. It is obvious that the firm must have a systematic procedure for making capital budgeting decisions. The procedure for making capital budgeting decisions must be consistent with objective of wealth maximization. In view of the significance of capital budgeting decisions, the procedure must consist of step by step analysis of the data to bridging the gap in the organization. The capital program is generally financed by borrowing money usually through the sales of bonds. This differs from the companys expenses budget, which covers dayto-day operating expenditures & is financed by companys taxes and other revenues along with other companies in the industry.

The capital budgeting strategy presents the goals, policy constraints, assumptions the organizations capital needs over the next 10 years. The document also provides the anticipated sources of financing, and the implications of the strategy, including any possible economic, social and environmental effects. After a public hearing and a report by the organization planning commission or board of directors, the final version of the strategy is released with the executive budget in every year.

The strategy presents capital projects in broad categories that reflect organizations agency goals.There are various ways the organization records the progress of capital projects. In general, they measure financial transaction, spending and obligation, rather than what most department come about the status of work on a particular project. Although information is publicly available on annual capital spending by budget line, no information is currently made publicly available that provides detailed project level information on the status of capital projects.

OBJECTIVES OF THE STUDY: To present theoretical framework relating to capital budgeting. To study the financial aspects for future expansion of GODREJ. To discuss the process of project evolution followed by GODREJ. To evaluate the elements consider by GODREJ for expansion project. To summaries and offer suggestions for the better investment proposals in GODREJ.

SCOPE OF THE STUDY:

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Capital investments, representing the growing edge of A Business, are demand to be very important THREE inter-related factors:1. the influence firm growth in the long term consequences investment decision have considerable impact on what the firm can do in future. 2. They affect the risk of the firm; it is difficult to reverse capital investment decisions because the market for used capital investment in ill organized or most of the capital equipments bought by a firm to meet its specific requirements. 3. Capital investment decisions involve substantial outlays.

GODREJ is a growing concern capital budgeting is more or less a continuous process and it is carried out by different functional areas of management such as production marketing, chemical, engineering, financial management etc.. all the relevant functional departments play a crucial role in the capital budgeting decision process.

RESERCH METHODOLOGY:Methodology is systematic processes of collecting information in order to analyzes and verify a phenomenon. The collection of data is two principle sources. They are discussed as I. Primary data II. Secondary data PRIMARY DATA:The primary data needed for the study is gathered through interview with concerned officers and staff, either individually or collectively, sum of the information has been verified or supplemented with personal observation conducting personal interviews with concerned officers of finance department of GODREJ & BOYCE MFG.CO.LTD.. SECONDARY DATA:11

The secondary data needed for the study was collected from published sources such as, pamphlets of annual reports, returns and internal records, reference from text books and journal management. Further data needed for the study was collected from: Collection of required data from annual records of GODREJ. Reference from text books and journals relating to financial management.

LIMITATIONS OF THE STUDY:The following the limitations of the study: Since the procedure and policies of the company will not allow to disclose confidential financial information, the project has to be completed with the available data given to us.
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 The period of study that is 8 weeks is not enough to conduct study of the project. The study is carried basing on the information and documents provided by the organization and based on the interaction with the various employees of the respective departments. There was no scope of gathering current information, as the auditing has not been done by time of project work.

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CHAPTER-II

INDUSTRY PROFILE ABOUT ELECTRONICS INDUSTRY History of Electronics in India The Electronics Industry in India took off around 1965 with an orientation towards space and defense technologies. This was rigidly controlled and initiated by the government. This was followed by developments in consumer electronics mainly with transistor radios, Black & White TV, Calculators and other audio products. Colour Televisions soon followed. In 1982-a significant year in the history of television in India the government allowed thousand of Colour TV sets to be imported into the country to coincide with the broadcast of Asian Games in New
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Delhi. 1985 saw the advent of Computers and Telephone Exchanges, which were succeeded by Digital Exchanges in 1988. The period between 1984 and 1990 was the golden period for electronics during while the industry witnessed continuous and rapid growth. From 1991 onwards, there was first an economic crises triggered by the Gulf War which was followed by political and economic uncertainties within the country. Pressure on the electronics industry remained though growth and developments have continued with digitalization in all sectors and more recently the trend towards convergence of technologies.

After the software boom in mid 1990 Indias focus shifted to software. While the hardware sector was treated with indifference by successive governments. Moreover the steep fall in custom tariffs made the hardware sector suddenly vulnerable to international competition. In 1997 the ITA agreement was signed at the WTO where India committed itself to total elimination of all customs duties on IT hardware by 2005. In the subsequent years, a number of companies turned sick and had to be closed down. At the same time companies like Moser Baer, Same Color, Celetronix etc. have made a mark globally.

In recent years the electronic industry is growing at a brisk pace. It is currently worth $ 10 Billion but according to estimates, has the potential to reach $ 40 billion by 2010. The largest segment is the consumer electronics segment. While is largest export segment is the consumer electronics segment. While is largest export segment is of components.

The electronic industry in India constitutes just 0.7% of the global electronic industry. Hence it is miniscule by international comparison.
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However the demand in the Indian market is growing rapidly and investments are flowing in to augment manufacturing capacity. India however remains a major importer of electronic materials, components and finished equipment amounting to over US$ 11.6 Bn at present. The breakup of production in various segments the industry is shown below:

I n d i a n E l e c tr o n i c I n d u s tr y (2 0 0 6 -0 7 ) T o ta l $ 1 6 . 1 * B i l l i o n
C o ns um er E le c t r o n ic s , $ 4 .6 8 C o m p o nents , $ 2 .15S t r a t e g ic E le c t r o n ic s , $ 1.0 9 C o mm. & B o r a d c a s t in g E q u ip ., $ 2 .3 2 C o m p ut e r s , $2 .12

In d u s t r ia l O r d e r , $ 2 .5 5

India is also an exporter of a vast range of electronic components and products for the following segments:

Display technologies Entertainment electronics Optical Storage devices Passive Components Electromechanical Components Telecom equipment Transmission & Signaling equipment Semiconductor designing

Indian Electronics Industry Exports are given below

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Elections Production (Calendar Year) Item 1. Consumer Electronics 2. Industrial Electronics 3. Computers 4. Communication & Broadcast Eqpt. 5. Strategic Electronics 6. Strategic Electronics Sub-Total 7. Software Electronics 8. Domestic Software Total 76,7590 92,800 113,200 145,300 178,500 233,400 10,600 12,000 15,500 20,500 27,000 34,000 32,150 34,000 36,800 44,000 42,700 55,000 49,800 75,000 54,500 97,000 64,400 135,000 5,650 6,510 7,450 8,700 8,530 8,600 1,750 2,330 2,670 2,850 3,070 4,500 3,520 4,450 4,180 4,800 6,600 5,150 8,680 4,770 10,500 6,300 12,500 9,200 4,480 5,400 5,980 8,300 8,600 10,100 2001 12,300 2002 13,580 2003 14,850 2004 16,500 2005 17,500 2006 19,500

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Electronics Production (Financial Year)

Item

200102

200203 13,800

200304 15,200

200405 16,800

200506 18,000

2006-07

1. Consumer Electronics 2. Industrial Electronics 3. Computers 4. Communication & Electronics 5. Strategic Electronics 6. Components Sub-Total 7. Software for Exports 8. Domestic Software Total

12,700

20,000

4,500

5,550

6,100

8,300

8,800

10,400

3,550 4,500

4,250 4,800

6,800 5,350

8,800 4,800

10,800 7,000

12,800 9,500

1,800

2,500

2,750

3,000

3,200

4,500

5,700 32,750 36,500

6,600 37,500 46,100

7,600 43,800 58,240

8,800 50,500 80,180

8,800 56,600 104,100

8,800 66,000 141,800

10,874

13,400

16,250

21,740

29,600

37,800

80,124

97,000

118,290 152,420 190,300

245,600

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COMPANY PROFILE From 1897-2010, the hundred of years journey has been an eventful one for Godrej. In 1897, it was the vision of a self-reliant India prompted Ardeshir Burjorjee Godrej to give up Law and make a career in the business of Lock-making. From Lockmaking, Godrej moved to Safes And Security Equipments and later to soaps.

In these hundred years the journey started by A.B. Godrej has continued. Today Godrej is a group, which has ventured into many businesses. It has earned a name for itself for the quality of products. The group turnover for 2008-09 is 2500crores. The Godrej group has eight divisions namely:

Godrej soaps Godrej and Boyce Godrej GE Mercury Mfg

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Godrej properties & transelektra Godrej Agrover Godrej Telecom Godrej Pacific Techn

The above divisions involve with the production of refrigerators, washing machines, telephone instruments, personal computers, fax machines, telecom products, prints, monitors, electronic typewriters, store wells, filing cabinets and bookcases. Furniture-Disking systems, seating systems and security equipments like popular safe, strong room doors,fine resistant Record cabinets & filing cabinets. GODREJ SOAPS LTD:
Pioneers in the field of manufacturing quality toilet soaps from vegetable oils; has a wide range of products like Evita, Marvel, Ganga, Shikakkai, Cinthol in toilet soaps, cosmetics and other products. Also manufactures and markets industrial products like Oleochemical, Glycerin & Alpha Olefin sulphonates. GODREJ FOOD LTD: Godrej food deals with the processed food market. Its products are tetra packs (namely Jumpin, tomato puree), edible oils, vanaspati and third party products like Blue diamond Flavored almonds. It has recently launched its mineral water. GFL distribution is done through Godrej Pilsbury

GODREJ PROPERTIES AND INVESTMENTS LTD:

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High quality, superbly planned houses at competitive prices are the hallmarks of GPIL. Established in 1990, it has important projects like the Eden Woods and Regency park at Thane, Godrej Hill at Kalyan & Godrej Sky Garden and Godrej Plaza at Panvel on its agenda. By providing accommodation to middle class families it has lived up to the Godrej principle of service to community.

GODREJ AGROVERT: A Number Uno in the animal field business in the country for years, the company with its products and innovative marketing has diversified into Eco friendly pesticides, organic growth promoters, Semi organic manure mixture. The company manufactures and exports agricultural products like Strawberry Banana etc. and are in the process of establishing an aqua feed manufacture factory. GODREJ AND KIS LTD: A joint venture between Godrej & Kis of Finance, the company manufactures and markets photo processing equipments and photiboots. GODREJ HI CARE: Worlds largest manufacturer of mosquito repellent mats and Indias largest manufacturers of households. A joint venture with Sar Lee, it enjoys a high market share with brands like GoodKnight, Jet, Hit, and Banish to its credit.

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GODREJ AND BOYCE MENUFACTURING LIMITED OFFICE AUTOMATION DIVISION

The office automation (OA) division is among the 9 divisions of the Godrej & Boyce Mfg Co., Ltd., It was established in the year 1982 and was originally called as Electronic Business Equipment Division (E.B.E). It was rechristened as Office Automation division in the year 1995. Following the strategic restructuring of the division, OA Division currently focuses on the Contract manufacturing and Contract Design of Electro mechanical O.A/IT products or thereof. Godrej O.A. has its Head quarters in Secunderabad where the manufacturing facilities are also located. The R&D team is today based at Vikhroli, Mumbai. OA division employs 180 people. The team comprises of 80 people in management cadre and 105 strong workforces. The company has manufacturing facilities spread over spawling complex at vikhroli, Mumbai, Chennai and Hyderabad. It also has overseas manufacturing facilities at Singapore, Malaysia, Vietnam and Muscat (Oman).

Operation of Godrej & Boyce are handled by the following independent divisions: Prima Type write division Material handling Equipment division
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Office Automation division Toll Room division InfoTech services division Office Equipment division Precision Equipment division Machine Tool division Locks division

To support the functioning of all the divisions there are common services such as corporate finance, corporate HRD, construction department and electronic and electrical services. All the divisions except OA are head quartered at Vikhorli, Mumbai.

Godrej started its foray into office automation with indigenous development of electronic typewriters in 1982. Electronic typewriters were seen as natural extension to its dominant operation in manual typewriters. In 1984 E.B.E Division was formed to spearhead activities in Office Automation and IT area. E.B.E diversified into a range of other products such as Dot matrix printers, motors, CAD/CAM software and networking solutions. In 1993, Godrej E.B.E division was awarded ISO 9001 certificate by RW TUV (Germany). It was the first division in Godrej group and one of the very first in Indian IT/OA industry to receive ISO 9001 certification. Subsequently OA division was recertified in 1996-97.

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Dynamic change has always been the hallmark of E.B.E operations. The division constantly made structural and strategic changes to sharpen its focus on business and to handle environmental challenges. CAD/CAM department was spun off as a separate company, namely geometric software services limited (GSSL) to achieve better business focus in 1994. Similarly in 1995, the marketing group was spum off as a separate company which presently name as Godrej Pacific Technology limited (GPTL) for distribution of IT and OA products.

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CHAPTER-III

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THEARITICAL FRAME WORK A project is an activity sufficiently self-contained to permit financial and commercial analysis. In most cases projects represent expenditure of capital funds by preexisting which want to expand or improve their operation. In general a project is an activity in which, we will spend money in expansion of returns in which logically seems to lead it self planning. Financing and implementations as a unit, is a specific activity with a specific point and a specific ending point intended to a accomplish a specific objective of the study Capital budgeting has its going in the natural recourse and infrastructures sectors. The current demand for infrastructures and capital investments is being fueled by deregulation in the FMCG (Fast Moving Consumer Goods), telecommunication, & transportation sectors, by the globalization of product markets and the needs from manufacturing scale, and by the privatization of government owned entities in developed & developing countries

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NEED OF CAPITAL BUDGETING:The importance of capital budgeting can be well understood from the fact that 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 Large investments Long-term commitment of funds Irreversible nature Long-term effect on profitability Difficulties of investment decisions
National importance.

FEATURES OF CAPITAL BUDGSTING PROCESS: Potentiality large anticipated benefits. A relative high degree of risk. A relative long time period between the initial outlay and anticipated returns.

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OBJECTIVES FOR CAPITAL BUDGETING: It determines the capital projects on which work can be started during the budget period after taking into account their urgency and the expected rate of return on each project. It estimates the expenditure that would have to be incurred on capital projects approved by the management together with the sources from which the required funds would be obtained. It restricts the capital expenditure on projects with in authorized limits.

KINDS OF CAPITAL BUDGETING:Capital budgeting refers to the total process of generating, evaluating, selecting and following up an capital expenditure alternatives. The firm allocates or budgets financial recourses to new investment proposals. Basically, the firm may be confronted with three types of capital budgeting decisions: The accept or reject decision, The mutually exclusive choice decisions, and The capital rationing decision

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TYPES OF CAPITAL BUDETING DECISIONS:Capital budgeting decisions are of paramount importance in financial decision making. In first place they affect the profitability of the firm. They also have a bearing on the competitive position of the firm because they relate to fixed assets. The fixed assets are true goods than can ultimately be sold for-profit. Generally the capital budgeting of investment decision includes addition, disposition, modification, and replacement of fixed assets.

TYPES OF CAPITAL BUDGETING

EXPANSION OF EXISTING BUSINESS

EXPANSION OF NEW BUSINESS

REPLACEMENT & MODERNIZATION

EXPANSION OF EXISTING BUSINESS:A company may add capacity to its existing product lines to expand existing operations. For example Bharati soap works (GODREJ) may increase its plant capacity to manufacture more detergents soaps & powder. It is an example of related expansion.

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EXPANSION OF NEW BUSINESS:A Firm may expand its activities in a new business expansion of a new business requires investment and new kind of production activating with in the firm. If packing manufacturing company invests in a new plant and machinery to produce ball bearings, which the firm has not manufactured before, this represents expansion of new business or unrelated diversification. Sometimes accompany acquires existing firms to expand its business. REPLACEMENT AND MODERANIZATION:The main objective of modernization and replacement is to improve operating efficiency reduce costs. Cost savings will reflect in the increased profits, but the firms revenue may remain unchanged. Assets become outdated and absolute with technological changes. The firm must decide to replace those with new assets that operate more economically. Replacement decisions help to introduce more efficient and economical assets and therefore, are also called cost-reduction investments. However replacement decisions that involve substantial modernization and technological improvements expand revenues as well as reduce costs. Yet another useful way to classify investments is as follows: Mutually exclusive investments Independent investments
Contingent investments

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DIAGRAMATIC

REPRESENTATION

OF

CAPITAL

BUDGETING:-

1 8 2

Capital budgeting

6 5
31

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1)

IDENTIFICATION OF INVESTMENT PROPOSALS:The capital budgeting process begins with the identification of investment

proposals. The investment proposals may originated from the top management or from any officer of the organization. The department head analyses the various proposals in the light of the corporate strategies and submit the suitable proposal to the capital budgeting committee in case of large organizations concerned with process of long-term investment proposals. 2) SCREEN PROPOSALS:The expenditure planning committee screens the various proposals received from different departments in different angles to ensure that these are in selection criteria of the organization and also do not lead to department imbalances. 3) EVALUTION OF VARIOUS PROPOSALS:The next steps in capital budgeting process in to evaluate the probability of various probability the independent proposals are those which do not complete with one another and the same way be either accepted or rejected on the basic of a minimum return on investment required. 4) FIXING PRIORITIES:After evaluating various proposals, the unprofitable or uneconomic proposals may be rejected straight away. But it may not be possible for the organization to invest immediately in all the acceptable proposals due to limitations of funds. Hence, it is very essential to rank the various proposals and to establish priorities after considering urgency, risk & profitability involved the criteria. 5) FINAL APPROVAL:Proposals meeting the evaluation and other criteria are finally approved to be included in the capital expenditure budget. However proposals involving smaller investment may be decided at the lower levels for expeditious action. The capital expenditure budget lay down the amount of estimated expenditure to be incurred on fixed assets during the budget period.
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6)

IMPLEMENTING PROPOSALS:Preparation of a capital expenditure budgeting & incorporation of a particular proposals in the budget does not itself authorize to go ahead with implementation of the project. A request for authority to spend the amount should be made to be the capital expenditure committee which may like to review the profitability of the project in changed circumstances. In the implementation of the projects networks techniques such as PERT & CPM are applied for project management.

7)

PERFORMANCE REVIEW:In this stage the process of capital budgeting is the evaluation of he performance of the project. The evaluation is made through post completion audit by way of comparison of actual expenditure on the project with the budgeted one, and also by comparing the actual return from the investment with the anticipated return. The unfavorable variances if any should be looked into and the causes the same be identified so that identified so that corrective action may be taken in future.
8)

FEEDBACK:The last step in the capital budgeting process is feedback from employee

involved in the organization. If any consequences are there the process come to 1 st step of the process.

GUIDELINE FOR CAPITAL BUDGETING:There are many guidelines for capital budgeting process either it is longterm or short- term plan. The major points are: Need and objectives of owner Size of market in terms of existing & proposed product lines and anticipated growth of the market share Size of existing plants & plans for new plant sites and plant Economic conditions which may affect the firms operations and
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 Business and financial risk associated with the replacement & existing assets of the purchases of new assets.

COMMITTEE IN CAPITAL BUDGETING:-

CHIEF EXECUTI VE

BUDGET OFFICER

BUDGET COMMITTEE

PRODUCTION MANAGER

SALES MANAGER

FINANCE MANAGER

ACCOUNTS MANAGER

PERSONNEL MANAGER

RESEARCH & DEVELOPMEN T MANAGER

CAPITAL COMMITMENT PLAN:The progress of projects included in the capital budget, a capital commitment plan is issued three times a year. The commitment plan lays out the anticipated implementation schedule for there current fiscal and the next three years. The first commitment plan is published within 90days of the adoption of the capital budget. Updated commitment plans are issued in January & April along with the companys budget proposals.
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The commitment plan translates the appropriations approved under the adopted capital budget into schedule for implementing individual projects. The fact that funds are appropriated for a project in the capital budget does not necessarily mean that work will start or be completed that fiscal year. He choice of priorities and timing of projects is decided by office management & budget in consultation with the agencies along with considerations of how much the managing director thinks the organization can afford to append on capital projects overall. The capital commitment plan lays out the anticipated implemented schedule for capital projects and is one source of information on how far along projects are although not a consistent or always useful one. The adopted commitment plan is usually published in September, & then updated in January & april. In the capital budgeting for every two adjacent years there will be gap. The gap between authorized commitments and the target is presented in capital commitment plan as diminishing over the course of the year plan, in practice many of the unattained commitments will be rolled over into the next years plan, so that the current year gap will remain large. The gap has grown in recent year exceeding in last two executive capital plans.

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SIMILARITIES BETWEEN CAPITAL BUDGETING & SECURITY VALUTION:Once a potential capital budgeting project has been identified, its evaluation involves the same steps that are used in security analysis: First, the cost of the project must be determined. This is similar to finding the price that must be paid for stock or bond.
Next, management estimates the expected cash flows from the project, including

the salvage value of the asset at the end of its expected life. This is similar to estimating the future dividend or interest payment stream on a stock or bond, along with the stocks expected sales price or the bonds maturity value.
Third, the riskiness of the projected cash flows must be estimated. This requires

information about the probability distribution of the cash flows.

Given the projects riskiness, management determines the cost of capital at which

the cash flows should be discounted.

Next, the expected cash flows are inflows are put on a present value basis to

obtain an estimate of the assets value. This is equivalent to finding the process value of stocks expected future dividends.
Finally, the present value of expected cash inflows is compared with the required

outlay. If the PV of the cash flows exceeds the cost, the project should be accepted. Otherwise, it should be rejected.

DIFFICULTIES OF CAPITAL BUDGETING:While capital expenditure decision are extremely important, they also pose difficulties which stem from three principal sources: Identifying & measuring the costs & benefits of a capital expenditure proposal tends to be difficult

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 There is great deal of uncertainty for capital expenditure decision which involves cost & benefits that extend far into the future It is impossible to product exactly what will happen in the future
The time period creates some problems in estimating discount rates & establishing

equivalences.

LIMITATIONS OF CAPITAL BUDGETING: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 inflows and outflows. The future is always uncertain and the data collected for future may not be exact. Obliviously the results based upon wrong data may not be good. 3) There are certain factors like morale of the employees, goodwill of the firm, etc., which cannot be correctly quantified but which other wise substantially influence the capital decision. 4) Urgency is another limitation in the evaluation of capital investment decisions. 5) Uncertainty and risk pose the biggest limitation to the techniques of capital budgeting. COST EFFECTIVE ANALYSIS:In the cost effectiveness analysis the project selection or technological choice, only costs of two or more alternatives choices are considering treating the benefits as identical. This approach is used when the acquisition of how to minimize the costs for undertaking an activity at a given discount rates in case the benefits and operating costs are given, one can minimize the capital cost to obtain given discount.

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PROJECT PLANNING:The planning of a project is a technically pre-determined set of inter related activities involving the effective use of given material, human, technological and financial resources over a given period of time. Which in association with other development projects result in the achievement of certain predetermined objectives such as the production of specified goods and services. Project planning is spread over a period of time and is not a one shot activity. The important stages in the life of a project are:
Its identification Its initial formulation

Its evaluation Its final formulation Its implementation Its completion and operation The time taken for the entire process is the gestation period of the project. The process of identification of a project begins when we are seriously trying to over come certain problems. They may be non-utilization to overcome available funds. Plant capacity, expansion etc,. CONTENTS OF THE PROJECT REPORT: Raw material Market and marketing Site of project Project engineering dealing with technical aspects of the project Location and layout of the project building Building Production capacity Work schedule
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CRITERIA FOR CAPITAL BUDGETING:Potentially, there is a wide array of criteria for selecting projects. Some shareholders may want the firm to select projects that will show immediate surges in cash flow, others may want to emphasize long-term growth with little importance on shortterm performance viewed in this way, it would be quite difficult to satisfy the differing interests of all the shareholders. Fortunately, there is a solution.

METHODS FOR EVALUTION:Capital budgeting techniques

Non-DCF criteria

DCF criteria

Pay back period (PBP)

Accounting rate of return (A.R.R)

Net present value (NPV)

Internal rate of return (IRR)

Profitability index (P.I)

41

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

Pay back period =

Initial investment Co Annual cash inflows C

Co = Initial investment

C = Annual cash inflows In the case of un equal cash inflows, the pay back period can be found out by adding up the cash inflow until the total is equal to the initial cash outlay.

42

(b) Accounting Rate of Return (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 to profitability of an investment. The accounting rate of return is the ratio of the average after fax profit divided by the average investment. The average investment would be equal to half of the original investment if it were depreciated constantly. A R R = Average investment
Average Income 100

DCF Criteria (a) Net Present value (NPV) The NPV present value (NPV) method is the classic method of evaluating the investment proposals. If is a DCF technique that explicitly recognizes the time value at different time periods differ in value and comparable only when their equipment present values are found out.

N.P.V =

C1 C2 C3 + Cn + + + ......... C0 2 3 (1 + k) (1 + k) (1 + k) (1 + k) n
n

NPV =

(1 + k )
i =0

C1

Co

Where NPV = Net present value

C fi = Cash flows occurring at time

k = the discount rate

43

n = life of the project in years

C0 = Cash outlay

(b) Internal Rate of Return (IRR) The internal rate of return (IRR) method is another discounted cash flow 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 soon.

NPV =

(1 + k )
i =0

Cfi

SV + WC (1 + k ) n

Where
Cfi = Cash flows occurring at different point of time

k = the discount rate n = life of the project in year

C 0 = Cash out lay

SV & WC = Salvage value and working capital at the end of the n years. IRR = L + Where L = Lower discount rate at which NPV is positive H = Higher discount rate at which NPV is negative A = NPV at lower discount rate, L
A ( H L) (a b )

44

B = NPV at higher discount rate, H (C) Profitability index (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 of the investment. PI = Intial Cash outlay
PV of Cash inflow

Where PV = Present Value

CRITERIAN TABLE:In the evaluation process or capital budgeting techniques there will be a criteria to accept or reject the project. The criteria will be expressed as:

Criterian/Method Pay Back Period (PBP) Accounting Rate Return (ARR)

Accept <Target Period of > Target Rate >0

Reject >Target Period < Target Rate < 0 <Cost Of Capital <1
45

Indifferent =Target period =Target rate =0 =cost of capital =1

Net Present Value (NPV)

Internal Rate of Return >Cost Of Capital (IRR) Profitability index (PI) >1

46

CHAPTER-IV

ANALYSIS AND INTERPRETATION OF THE DATA NON DCF CRITERIA: (a) PAY BACK PERIOD(PBP):-

47

YEAR

DEPRECIATION (IN LAKHS)

CASH IN FLOW (PAT) (IN LAKHS)

CASH IN FLOW (IN LAKHS)

CUMULATIVE CAST IN FLOWS (IN LAKHS)

2,51,097.00

1,95,495.77

4,46,592.77

4,46,592.77

4,25,631.45

4,52,573.55

8,78,205.00

13,24,797.77

3,95,759.00

4,79,243.99

8,75,002.99

21,99,800.76

6,30,452.00

6,91,447.49

13,21,899.49

35,21,700.25

11,59,018.65

14,90,610.19

26,49,628.84

61,71,329.09

26,78,239.00

36,51,973.57

63,00,212.57

1,25,01,541.66

22,29,146.77

45,42,353.73

67,71,500.50

1,19,73,042.16

34,68,048.86

57,05,880.37

91,73,329.23

2,84,46,971.39

Initial outlay = 46, 08,886 Pay back period = 4 +14 ,90 ,610 .19 = 4+0.729
48
10 ,87 ,185 .75

= 4.73 Moths 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. Decision:The standard payback period is set by GODREJ for considering the expansion project is six years, where as actual payback period is 4.73 months. Hence we accept the project.

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(b) YEAR

AVERAGE RATE OF RETURN (ARR):INCOME DEPRECIATION CASH IN FLOWS

1,95,495.77

2,51,097.00

(-) 55,601.23

4,52,573.55

4,25,631.45

26,942.1

4,79,243.99

3,95,759.00

83,484.99

6,91,447.49

6,30,452.00

60,995.49

14,90,610.19

11,59,018.65

3 31,591.54

36,51,973.57

26,78,239.00

9,73,734.57

45,42,353.73

22,29,146.77

23,13,206.96

57,05,880.37

34,68,048.86

22,37,831.51

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ARR = Average Investment

Average profit

100

Average profit =

59,75,185. 93 8

= 7, 46,898.24 Average investment =

46,08,886 2

= 23, 04,443 ARR =

7,46,898.2 4 100 23,04,443

= 0.3241 100 = 32.41 ROI =

Average profit 100 Initial investment
7,46,898.2 4 100 46,08,886

= 0.16205 100 = 16.21 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. Decision:51

The standard ARR set by GODREJ management is 25%. The actual ARR is 32.23% is higher than the standard ARR set by the management, hence we accept the project. DCF CRITERIA: (a) Net Present Value:-

YEAR 1 2 3 4 5 6 7 8

CASH INFLOWS 4,46,592.77 8,78,205.00 8,75,002.99 13,21,899.49 26,49,628.84 63,00,212.57 67,71,500.50 91,73,329.23

DCF (15%) 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 Total

PRESENT VALUE(CDCF) 3,88,535.71 6,63,922.98 5,75,751.97 7,56,126.85 13,16,865.53 27,34,651.83 25,46,084.19 29,99,874.86 1,19,81,813.92

NPV = 1,19,81,813.92 - 46,08,886 = 73,72,927.92 Criteria for evaluation:In case of calculated NPV is positive or zero, the project should be accepted. If the calculated NPV is negative, the project is rejected. Decision:52

The project is accepted due to calculate NPV is positive.

(b)

INTERNAL RATE OF RETURN:-

YEAR

CASH INFLOWS

DCF (14%)

PRESENT VALUE

53

4,46,592.77

0.877

3,91,661.86

8,78,205.00

0.769

6,75,339.65

8,75,002.99

0.675

5,90,627.02

13,21,899.49

0.592

7,82,564.85

26,49,628.84

0.519

13,75,157.37

63,00,212.57

0.423

26,77,679.92

67,71,500.50

0.400

27,08,600.20

91,73,329.23

0.351

32,20,049.16

Total

1,24,21,680.03

IRR

= 14 + 1,24,21,68 0.03 - 1,13,86,50 4.01 (16 14 ) = 14 + 10,35,176. 02 2 = 14+15.09 = 29.09

78,12,794. 03

1,24,21,68 0.03 - 46,08,886

Criteria for evaluation:54

In this method the project is accepted when IRR is higher than its cost of capital or cut out rate. If the project is not accepted when the IRR is less than cost of capital. Decision:The project is accepted because of the calculation IRR is higher than its cost of capital. The cost of capital fixed by management is 20%, the actual is more than its standard. Hence, the project is accepted.

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(c)

PROFITABILITY INDEX:YEAR 1 2 3 4 5 6 7 8 CASH IN FLOW (IN LAKHS) 4,46,592.77 8,78,205.00 8,75,002.99 13,21,899.49 26,49,628.84 63,00,212.57 67,71,500.50 91,73,329.23

PI =

2,84,46,97 1.39 46,08,886

= 6.17

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Criteria for evaluation:A project can be accepted if its PI index is greater than one. If the PI is less than one we should reject the project. Decision: Profitability index of proposed expansion project is found our 6.57, this is more than PI

CHAPT ER-V

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FINDINGS The calculated payback period is 4years and 7months. But standard payback period was six years by GODREJ management.

The ARR is fixed by GODREJ is 25%. The actual ARR is 32.23% and its return on investment is 16.21%.

The NPV is actually getting 73,72,927.92 is positive.

The IRR is worked for project is 29.09% but the expected IRR is 20% less than the actual IRR.

The PI is getting actual for the expansion project is six times more than the investment.
58

59

SUGGESTIONS: It has been suggested that the GODREJ management that the payback period is fixed for expansion project is 6 years. But the actual is less than the standard. It is advisable to fix payback period is less than standard pay back period. It is suggesting to GODREJ management that is better to fix ROI is more than the standard ROI. So it is advisable to maintain same consideration of project in the future also. The NPV of the project is positive; it is advisable to suggest selecting the same type of the projects. The expected cost of capital for the company is 20% where as the actual IRR is worked for the proposal is 29.09%, which is below the accepted level. It is safer to accept proposal it is 6 times more than its investment. So it is advisable to select the same type of project sin the future also.

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APPENDIX

61

SALES BUDGET (In lakhs) 2007-2008 DETAILS QUALITY VALUE (IN LACS) Office ETWS (domestic) OfficeETWS (export) Portable (domestic) Portable (export) DMPS (domestic) Design& Development total 7837.381 10000.00 952.381 1215.155 32841 1904.762 5800 41902 2430.311 5800 71455 3572.762 5000 91170 4558.534 5000 4241 318.095 7500 5411 405.861 7500 996 219.047 22000 1270 279.484 22000 3482 870.476 25000 4443 RATE 20008-2009 QUALITY VALUE (IN LACS) 1110.651 25000 RATE

MANUFACTERING OVERHEADS BUDGET:

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DETAILS power&full Depreciation Tolling Rates &taxes Insurance Repairs to buildings Repairs to machinery Royalty Bank charges Conveyance Printing Communication Tour expenses-domestic Professional expenses Research and development

2007-2008 306933 200000 196040 111564 226139 360535 156773 250000 189208 368416 152673 305347 494555 126139 458902 19146

2008-2009

200000 114950 116299 129707 30535 153273 25000 194950 367846 157863 34268 519882 122613 454890

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MASTER BUDGET: (In lakhs)

Details Sales Domestic sales Export sales

2007-2008

2008-2009

3135009 4702513

4000000 6000000

Less: Raw material consumed Margin after material cost Less Operating cost
64

5486266 2351256

7000000 3000000

Employee cost Manufacturing cost Administration and marketing cost Total expenses Gross contribution Less Interest Common overheads Net operating profits

549802 613069

510770 707659

229901 1302772 996237

220194 1438613 1561387

153267 76633 766336

191586 76637 1293164

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BIBILLOGRAPHY

66

FUNDAMENTALS OF FINANCIAL MANAGEMENT _ EUGENE.F.BRIGHAM JOEL.F.HOUSTON FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT BOOKS OF THE GODREJ WEB SITES: WWW.GOOGLE.COM www.godrej.com www.moneycontrol.com _ _ I.M PANDEY PRASANNA CHANRDRA M.Y.KHAN & JAIN

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