Date:-03 July,2014

TO WHOM SOEVER IT MAY CONCERN

This is to certify that Mr. POLLISETTY RAJESHstudent of MBA (Finance),

Rajiv Gandhi Degree & P.G. College, Rajahmundry, East Godavari District.

Has undertaken project work on “ CAPITAL BUDGETING” in our Organisation during the

period on 06th May 2014 to 21st June, 2014.

For Regards

Mr. L. Narayana Murthy

Manager

Regd office:- Ramakrishna buildings, No-239, Anna Sanlai, Chennai-600006 Tel: +91-44-2835441

Corporate office:- Chagallu village, West Godavari district, pincode-534342, ph no: +918813-271424

Fax:- +91-8813-271442 E-mail:- elr_nryn@jeysuco.com

1
 Date:-28 April,2014

To

The Principal

Rajiv Gandhi Degree & P.G. college

Rajahmundry, East Godavari District.

Sir,

This has reference to your letter dated 29th April 2014 requesting us to permit Mr.
Pollisetty Rajesh for doing project work in our organization.

We wish to inform you that the above student is hereby permitted to undertake a
project work in the area of “Finance“ for a period of about 6 weeks. i.e.; from 06 May, 2014
to 21st June,2014.

For Regards

Mr. L. Narayana Murthy

Manager

Regd office:- Ramakrishna buildings, No-239, Anna Sanlai, Chennai-600006 Tel: +91-44-2835441

Corporate office:- Chagallu village, West Godavari district, pincode-534342, ph no: +918813-271424

Fax:- +91-8813-271442 E-mail:- elr_nryn@jeysuco.com

INTRODUCTION

Finance is the study of funds and management. Its general areas are business finance,
personal finance, and public finance. It also deals with the concepts of time, money, risk, and
the interrelation between the given factors. It is basically focused on how the money is spent
and budgeted. It is one of the most important aspects in handling business. Finance addresses
the methods wherein business entities used their financial resources on a certain period of
time. It is the application of a set of techniques used by organizations in managing their
financial affairs. The income and expenditure are emphasized in finance and its differences
can easily be indicated.

Nowadays, loans have been packaged for resale. This means that the debt has been
bought by an investor from the bank. These bonds are sold to investors by financial
corporations who have exceeded beyond their expenditures. The investor can now collect all
the interests and be sold again through a secondary market. Banks serve as facilitators to
companies in the provision of credit and mutual funds. Investments are managed carefully
under a financial risk management to control gambling chances of these financial assets.
Financial instruments are also used to secure these assets on securities exchanges such as
stock exchanges and bonds. A bank provokes the activities of both borrowers and lenders.
Lenders pay deposits to banks on which it pays the interest rates. The central banks are the
last resorts that handle the monetary funds. These banks affect the interest rates being
charged such as an increase in the money supply will result to a decrease in the interest rates.

Financial capital is a monetary resource allows businesses to purchase items that will
create goods for production and other services. The budget is the documentation of the entire
entrepreneurship. The outline includes the objectives of the business, the target sets, resulting
costs, required investment, planned sales, growth, financing source, and financial results. It
can be directed on long term or on a short term basis. The capital budget is mainly concerned
with the proposed fixed asset requirements. The financing of the expenditure is also indicated
in the capital budget. A detailed plan of all the sources and cash usage is emphasized in the
cash budget. It has six main sections such as the beginning cash balance, cash collections,
cash disbursements, cash excess, cash deficiencies, financing, the ending cash balance, and
the management of current assets. A credit comes in various forms such as of open accounts,
installment sales, credit cards, and supplier credits. The advantages of a credit trade are

3
gaining loyalty and goodwill amongst costumers, drawing in more customers than cash
trades, stimulates agricultural and industrial production, and increases rates. But there are
also disadvantages to credit trades as well such as risks of bad debt, high administration
expenses, necessitates more working capital, risks of bankruptcy declaration, and leading to
purchasing nonessential items. An effective credit control may lead to increase in sales,
increase in profits, reduces bad debts, builds costumer loyalty, and increases company
capitalization. The information on creditworthiness is acquired through credit agencies, bank
references, credit agencies, chambers of commerce, and credit application forms. Taking
legal actions is one part of the many duties of the credit department.

A personal finance is related to how much money is needed by an individual. It is

concerned on financial resources and its usage. Tax policies and family assets will certainly
affect personal decisions. It will also identify the credit score of the lender and the actual
financial standing. Planning for a secured financial future within the environments economic
stability is one primary concern of the personal finance as well. There are various factors that
affect decisions in handling personal finance which are financing durable goods, paying for
education, monthly bills, secured loans, minimal debt obligations, and health insurance, and
retirement plans. Meanwhile, a corporate finance holds a task in providing financial resources
for certain organizations and balances risks and profitability. It is referred as SME finance for
small enterprises. Managerial finance maximizes a companys wealth and it also values the
stocks. Bonds are long-term funds created by ownership equity and long-term credits. Short-
term funding comes from a line of credit given by banks as a working capital.

Studying finance will lead you in wiser decisions

making on your financial funds. It can help you identify risks
and benefits if you are planning to put up your own business.
Finance discipline requires you certain abilities and trainings
which can be developed over a period of time. Finally, it will
give you optimum control over your financial assets which will
certainly help you in attaining a financially secured life.

CAPITAL BUDGETING:

CAPITAL BUDJETTING is a long term investment made by the organization in different

projects and it helps the firm in evaluating the projects under taken by different techniques.
 According to Weston and Brigham “CAPITAL BUDJETTING involves the entire
process of planning expenditures whose returns are expected to extend beyond one year.

The CAPITAL BUDJETTING decisions include replacement, expansion, diversification

research and development and miscellaneous proposals.

FEATURE OF CAPITAL BUDGETING:

The important features, which distinguish capital budgeting decision in other day-today
decision, are Capital budgeting decision involves the exchange of current funds for the
benefit to be achieved in future. The futures benefits are expected and are to be realized over
a series of years. The funds are invested in non-flexible long-term funds. They have a long
term and significant effect on the profitability of the concern. They involve huge funds. They
are Internal Rate of Return method eversible decisions. They are strategic decision associated
with high degree of risk.

IMPORTANCE OF CAPITAL BUDGETING:

The importance of capital budgeting can be understood from the fact that an unsound
investment decision may prove to be fatal to the very existence of the organization.

The importance of capital budgeting arises mainly due to the following:

1). Large investment:

Capital budgeting decision, generally involves large investment of funds. But the funds
available with the firm are scarce and the demand for funds for exceeds 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 amount of funds but also funds for long-term
or a permanent basis. The long-term commitment of funds increases the financial risk
involved in the investment decision.

3). Internal Rate Of Return method eversible nature:

5
 The capital expenditure decisions are of Internal Rate Of Return method eversible nature.
Once, the decision for acquiring a permanent asset is taken, it becomes very difficult to
impose of these assets without incurring heavy losses.

4). Long term effect on profitability:

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

5). Difference of investment decision:

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

6). Notional Importance:

Investment decision though taken by individual concern is of national importance because

it determines employment, economic activities and economic growth.

A BOUT K.C.P

Sugar Industry is one of the major industries in the world supplying important products and
providing employment to milling of farmers, workers technicians and traders. No doubts,
both from the view point of capital invested and labor employed, sugar industry occupies a
very prominent place in Indian Industry next to textiles. Its importance in Indian economy
cannot be under emphasized. It is the largest agro processing industry in Indian with a 1.76
percent weight age in the annual industrial production. The sugar factories located all over
the country work to as the nuclei for the development of rural areas by mobilizing rural
resources,. Generating employment developing transport and communication facilities. The
Industry caters to over the 7.5% or rural population of India. Every year over Rs.l0,000 crore
is paid out as sugarcane price to farmers.
 The Industry provides the most effective instrument for carrying progressive trends
into the country side. It is among the largest taxpayers to the Central and Stage exchequers of
around Rs 1600 crore. It has the potential to earn the nation Rs. 2000 crores of foreign
exchange annually. It is a matter of pride the India is the largest producer of sugar in the
world the 11th year in succession.

Another factor responsible for high level of working capital is that the repair and
maintenance of work undertaken in the off seasons. But the rate of interests in short term
loans varies with the credit rating of factories as assessed by the banks. Generally the credit
rating of the most of the sugar mills is not high, so, the interest charged by the banks is
almost equal to 20%. This creates heavy burden and lead to financial crisis.

The profitability analysis of Reserve Bank of India in respect of a few selected

companies reveals that the sugar industry makes on an average only 90% on Total Capital
Employed.
The present study is undertaken with the aspiration that it would be useful in
maintaining various components of working capital and efficiency of “Working Capital
Management of K.C.P. Sugar & Ind Cor Ltd”.

MEANING:
Capital budgeting decision refers to assets that are in operations and yield a return
over a period of time, usually exceeding one year. It is a long-term investment decision
involving huge capital expenditures.

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 budgeting process involves planning, availability and controlling, allocation

and expenditure of long-term investment funds.

The following are some of the examples of capital expenditure:

1. Cost of acquisition of permanent assets such as land and building plant and
machinery, goodwill etc.

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 2. Cost of addition, expansion, improvement or alteration in the fixed assets.
3. Cost of replacement of permanent assets.
4. Research & Development Projects costs, etc.

DEFINITIONS

Charles T. Horn green has defined Capital Budgeting as “Capital Budgeting is long-
term planning for making and financing proposed capital outlays.”

In the words of Lynch, “Capital Budgeting is concerned with planning and

development of available capital for the purpose of maximizing the long-terms
profitability of the concern.”

OBJECTIVES OF THE STUDY

 To study about Capital Budgeting in KCP Sugars

 To determine the working capital position in the organization by interpreting various
ratios like working Capital Turnover ratio, Creditors Turnover ratio, Debtors Turnover
ratios & Liquidity ratios.

 To Study the Liquidity solvency and capability position of K.C.P Sugars Ltd.
  To offer Suggestions for the improvement of financial position of K.C.P.Sugars Ltd.,

NEED FOR THE STUDY

In a perfect world there would be no necessity for current assets and current liabilities
because there would be no uncertainty, no transaction costs, information search costs,
scheduling costs, or production and technology constraints. However the world in which we
live is not perfect.

So organization may be faced with an uncertainty regarding availability of sufficient

quantity of critical inputs in future at reasonable price. This may necessitate the holding of

9
critical inputs in future at reasonable price. This may necessitate the holding of Inventory i.e.,
current assets.

To ensure that each of the current assets is efficiently managed to ensure the overall
liquidity of the unity and at the same time not keeping too high a level of any one of them
working capital management is a must.

Capital Budgeting management ensures smooth working of the unit without any
production held ups due to the paucity of funds.

Thus as working capital is the life blood and nerve center of a business. It is managed
in order to attain a smooth running of the business.

SCOPE OF THE STUDY

The present study is undertaken with an intention that it would be helpful in assessing
the Capital Budgeting position in the organization and to make recommendations for the
improvement of the Capital Budgeting requirements of KCP Ltd.

The Study also highlights the present scenario of the Sugar Industry in the global
market as a whole and the contribution of KCP Sugar Ltd in the Indian Market & State
Market in Particular.
 The Study includes various aspects regarding the future plans and
diversification activities of KCP Sugars Ltd; in Directors Report.

Thus a good deal of ground is covered in the study, including the trends of various
components of working Capital, so as to find the effect of each component on Capital
Budgeting decision.

METHODOLOGY OF STUDY

Methodology describes the method of achieving the objectives through

collection of the collection of the data. The data collected can be either Primary or
secondary.

The above information is carried on with the co-operation of the management

of K.C.P sugars & I.C.L who permitted me to carry on the study to provide with the
requisite data

PRIMARY DATA:

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 Primary data will be through regular interaction with officials of K.C.P sugar & I.C.L
Ratio relationship will be established basing on the theoretical literature available from the
“Finance” text books.

SECONDARY DATA:

 Annual reports of the company from 2005-06 to 2009-10

 Financial statement of the company
 Collecting the relevant information for standard text books and financial
magazines.
 Required information collected through internet.

LIMITAIONS OF THE STUDY

The topic for the study is very exhaustive and covers several crucial aspects of
financial management for which the availabilities of the time is very much limited.

Under the pretext of confidentiality the organization has not disclosed the total
information.

The study is made by secondary data collection and the calculations of various ratios
depend on the information in the annual reports of the company.
 Through this study of the Capital Budgeting position in K.C.P.Sugar & I.C. Ltd., the
sources of funds have affected a lot due to major fluctuation in the Capital Budgeting
decision.

1) The analysis made on the basis of secondary data

2) The availability of data is only pertaining to four years is one of the constraints.

3) As there is more dependency is secondary data realistic conclusion may not be

possible to be made.

4) Even though there are no if indicates for analyzing the financial performance the
study includes about liquidity position.

5) There may be approximations.

INDUSTRY PROFILE

Indian is considered to the country of origin of sugarcane, symbolically referred to as "Sweet

Grass" Sugarcane existed in ancient India. North-eastern India is regarded as the center of the
origin and from where Sugarcane was believed to have been carried to China and other places
by early travelers and nomads, some time between 1800B.C. and 1700B.C. Later, it spread to
Philippines, Java and other places including Caribbean Islands by explorers. The Sugar
Industry in India has a long history. Reference to sugar is found even in early medic
literature. The story goes that Sugarcane was one of the luxuries provided by Vishwamitra to
Trishanku in the special Heaven created for him. In 600AD the Chinese emperor, Tsai Hong
sent agents to higher on record of the technical commission, investigating the manufacturing
processing to a foreign country. Alexander the great emperor and his soldiers took back along

13
with the Sugarcane, Which they called the 'Honey Read'. There are also many other reasons
for believing that India was the original home of sugarcane.

It has been established beyond doubt that for the first time the Sugarcane was
cultivated in Bengal and the credit of becoming the first to manufacture sugar goes to the
state of Bihar.

The name of his product of sugarcane in early days was "Shirker". During those days
and for a long time thereafter, India had the monopoly of producing “Shirkers" and supplying
kit to different parts of the world. Therefore, it is not surprising that the world "Shirkers" is
found in many languages of the world.

Even during the ancient periods, India used to export sugar to different parts of the
world. It exported sugar to Geneva, Venice and many other parts of Europe. It was also
exported to several countries in Africa and Asia. The Indian Sugar was exported through
caravan routs of Chiba and Bolan in Northwest India to Europe etc.

But by the Middle of the 15th century, the Turks captured Constantinople and, by their
policy of heavy extortion from traders, almost stopped the supply of Sugarcane through this
route. The second Jolt Which proved perhaps more fatal and which led to the rise of serious
competitor to India sugar was the Navel blocked of France by Great Briton Which forced
Napoleon t order the scientists of his country to find out some alternative, sources to produce
sugar, The blockage had completely stopped the entry of Indian sugar to France. Napoleon's
efforts resulted in the production of sugar from the sugar beets.

Although the modem process of manufacturing sugar began for the first time in
Europe as early as in 1853, it came to Indian as late as in about 1903. When the first sugar
factory having vacuum pan process and modern milling method was commissioned in Bihar
Morhowrah in 1904. Indigenous sugarcane has been extensively grown in Indian from
ancient times. There was, however, a revolution

In the method in the method of cane cultivation during the lost decade of the 19th
century. It was only in 1912 that India established her first Sugarcane breeding station of
Coimbatore.
 In the early part of century, there were a few sugar mills in the country, mostly in
Utter Pradesh and Bihar where sugarcane was being grown traditionally. The production of
sugar was not sufficient to meat the demand of the domestic consumption and so sugar was
being imported from Java and other countries. The Indian sugar factories were unable to meat
the competition of imported Javanese sugar, which had commanding the Indian market. The
government of India then granted protection to the indigenous sugar industry under the sugar
industry Protection Act passed in 1932. This Act was followed by another legislation
enabling the provincial Governments to enforce the minimum price to be paid by sugar
factories to can growers in respect by sugar factories to cane growers in respect of cane
supplied by them as per Sugarcane Act of 1934. These two legislation gave significant
impetus and encouragement to entrepreneurs to set up new sugar factories in various parts of
the country.

After independence, with the introduction the five-year plan for the national
development, the sugar industry too received considerable amount of support. The
development and regulation of the sugar industry was brought under the control of the
Government India from May 1952.

The Sugar industry in India made a rapid development after protection was granted to
this industry in 1932. Accordingly, the import of sugar was almost stopped after 1936-38".
The sugar Industry was granted this protection till 1950. Since independence there has been
and over all tread of sugar in India. Like other agro-industries, this industry has been subject
to wide and some times violent fluctuations. The main reason is that the raw material of this
industry i.e.

Sugarcane comes from agricultural sector, which is highly insatiable in India. Some
times, it suffers from drought, floods and heavy rains. Other factors like Government
policies, Prices, market conditions etc., are also responsible for the fluctuations in production
in this country.

As against a mere 29 sugar mills in 1930-31, this number has gone up to 408 in 1994-
95 with 222 in the co-operative sector, 75 in the Public Sector and the rest in the Private
Sector. The total production of sugar during 1991-92 seasons was 132.73 lakh tones with
76.83 lakh tones in the co-operative sector 11.35 lakh tones in the public sector and 44.59

15
lakh tones in private sector. In 1994-95 the total sugar production has increased to 146.43
lakh tones. The industry has surpassed the targets set for it in the various plan periods and
160 lakh tones per annum has been targeted for the year 2000. In the year 2001 production of
sugar has been increased to 184 lakh tones.

Sugar industry in India was initially concentrated in the sub-tropical states of Utter
Pradesh and Bihar, but since the second Five year plan, it spread to the Deccan area and the
Southern states. About 35 millions farmers constituting 7% of the total rural population
portion of the cane crop and provide the farmer with resources to meet his commitments.
Each sugar factory deals with thousand of cane growers.

STATE- WISE SPREAD OF SUGAR INDUSTRY IN INDIA

Sugarcane is grown widely in India In 17 out of 25 states and 2 Union Territories

grown sugarcane. Nine states account for 96% of the production and 94% of the total area.
These states are: Uttar Pradesh, Maharashtra, Karnataka, Tamilnadu, Andhra Pradesh, Bihar,
Haryana, Gujarat and Punjab. Uttar Pradesh ranks first in area and in production during 1990-
91, U.P. accounted for 50% of area and 43% of production of sugarcane in India.
Maharashtra which occupies second place has about 1/3 of the area and its production of
Sugarcane is almost half that of the production of U.P; Maharashtra exceeds U.P in terms of
recovery of Sugar.

Gujarat, which has only 1.15 lack hectares under Sugarcane cultivation, has the
highest percentage of sugar recovery (11.65). Tamilnadu, which has produced 352.36 lakh
tones of Sugarcane, has a mere 8.68% of sugar recovery. This clearly shows that recovery of
sugar is based on the fertility of the soil of India fixed the target for production at 15.50 MT
and the target for installed capacity at 16.00 MT.

The number of factories in the plan periods has also increased rapidly. They increased
from 139 in 1959-60 to 408 in 1994-95 with 237in the co-operative sector 75 in the public
sector and the rest in the private sector. The sugar production has also been gradually
increased in view of the rising demand for sugar in the country. At present, there are 422
installed sugar factories in the country with an annual sugar production capacity of 11.1
million tones and about a 100 new sugar factories are under various stages of construction.
The sugar industry is the most advanced processing industry in the agricultural sector in
India, located in rural massed and serve as the nerve center for rural development.

SUGAR INDUSTRY IN ANDHRA PRADESH

Sugarcane is on the important commercial crops in Andhra Pradesh, greatly

contributing to the agricultural prosperity of the state. Andhra Pradesh is situated in the
tropical Zone considered highly suitable for the production of good sugarcane. The average
rainfall in the state form June to September in a year is 602mm. Sugarcane is an Internal Rate
Of Return methodigated crop throughout the state frequency of Internal Rate Of Return
methodigation varying widely with facilities available. Sugarcane cultivation in the State was
known for centuries in the Coastal belt. The rank of Andhra Pradesh in sugarcane acreage and
production is finished between 5th and 7th and between 4th and 5th respectively, at the national
level.

In the past, white sugar was obtained by refining polymer jugglery by the Guru
refinery at Samarklakot. Direct manufacture of Sugar started in the year 1934 at Boboli
followed by factories at Thummapala and Etikoppaka in 1935, Vuyyuru in 1936 and Bodhan
in 1938. At present in Andhra Pradesh, the total number of sugar factories is 35. These have
been established in various viz., Co-operative, public and private sector. Recently, the
Government of Andhra Pradesh gave permission to establish 13 more Sugar factories
throughout the state under the private sector. There are 18 factories in the co-operative sector,
8 in the public Sector and 10 in the private sector with a crushing capacity expect in the year
1989-90. There are about 120 licensed Khandasari units in the state and these units crush
about 16,797 tones per day. The normal crushing season is spread over a period of 130 days.
Out of the total production of sugar 40% is levy sugar and the remaining 60% is for free sale
by the Sugar factories. Different varieties of Sugarcane seed are introduced for higher yield
and recovery of Sugar, year after year.

ENERGENCE OF CO-OPERATIVE SUGAR FACTORIES:

While in all in other sectors in the country co-operative has either failed or made negligible
progress. The successes achieved by the co-operative sugar mills have two positive
advantages in their favor. First of all, they get the maximum supply of sugarcane as all most

17
all the sugarcane farmers are members of the co-operative sugar mills. Secondly, profits of
the co-operative are distributed among the farmers instead of going into the hands of a few
sugar barons. All the sugar factories were setup in the privet sector till 1950. The factories
that came up subsequently were mostly in the co-operative sugar factories accounted for only
15% of the total sugar production in the country, they claimed 60.6& in 1992-93.

The sugar and allied by-product using industries, particularly, in the cooperative
sector have contributed significantly to the increase in employment opportunities and
development off the infrastructure like educational institutions, medical facilities and
recreational facilities for the entire community at large. The Government has now issued
licenses for establishment of more factories in cooperative sector.

In the context of new economic policy, based on market responses the Government is
planning to provide more freedom to the cooperative sector. This will go a long way in
achieving a vibrant economic structure. Co-operative sugar factories are certain to play in
even more important role.

THE SUGAR POLICY OF THE GO VERNMENT OF INDIA:

The union Government announces every year a uniform sugarcane price (statutory
Minimum Price) on the basis of the Recommendation of the commissions Agricultural Cost
and Price (CACP). The Government announced the SMP, which is linked to the sugar
recovery of 8.5% fixed as minimum level to be achieved by the sugar units. The actual price
paid to Sugarcane a farmer is than fixed on the basis of the state advised price (SAP)
announced by the State Government which are usually higher than the SMP. The SMP and
the SAP guide the sugarcane prices in the market.

Under the dual pricing system levy sugar and free sale sugar priced differently. The
levy price which is defined by the Essential Commodities Act is equal to or lowers than the
cost of production. The cost of production is determined by the Bureau of industrial costs and
prices. Levy prices are fixed by the Government of India on the advice of the BICP.

At present, the quota is fixed at a ratio of 40:60 for levy and free sugar which means
that 40% of the production will be procured from the sugar factories at a fixed levy price and
factory will be free 0 sell 60% at the free market price. The sugar factories are expected to
earn sufficient profits by selling the free sale quota at the market price and to compensate the
loss that they have incurred on the levy quota. However, the Ventral Government indirectly
controls the free sale sugar prices through sugar releases each month. The price of sugar in
the market has always been a sensitive political issue. Whenever sugar is in short supply, the
Government of India imposed conditions on sugar units to protect the interests of the
common man. Profitability in the sugar industry is dependent on the sugarcane price paid by
the companies and sugar prices under the state imposed dual pricing system.

The government's sugar policy was announced in November 1991, retained the
minimum economic capacity of 2500 tones of cane crushed per day for issued of fresh
licenses. The Government has no intention of nationalizing the sugar factories. Priority would
be given to proposals for new units form the co-operatives and the public sector. The
Government has permitted the existing mills to raise their capacity.

EXPORT OF SUGAR:

India first started exporting of sugar form the year 1957, since 1970-71 the quantity
that was exported steadily rise from 18,000 tones to 9.5 Lakh tones. Whenever there has been
a higher sugar production, efforts were made by the industry to get more export quota
sanctioned from the International sugar organization.

The Government policy is to encourage exports from agro-based industries and the
time has come to fix a minimum export quota for sugar every year, so that permanent buyer -
seller relations could be established and also better prices realized. Industry sources feel that,
at least a minimum quota of one million tones for the export of sugar could be released in the
beginning of every season, so that export commitment would be entered into at an
appropriate time.

According to food industry sources, at present the two major buyers in the
International market are Pakistan which needs 3 lakh tones and Bangladesh which needs 1
lakh tone. As India now can not fulfill its contracts Thailand and Brazil will grab the
opportunity. As the industry made contracts based on the Government's decision, India has
become a laughing stock among the International community because of its apathetic attitude
towards exports.

19
 In August, 1995 the Government permitted the export of 5 lakh tones of sugar. And of
theses 5,00,000 tones were exported in August with 1.5 lakh tones and 3 lakh tones being
exported in September and October, respectively. As the country still has a huge stock pile of
disposable sugar, the Government decided to create a buffer stock of 5 lakh tones and permit
further exports of 5 lakh tones in January, 1996. Meanwhile, sugar industry continues to face
a serious liquidity crisis because of this delay.
Majority of the sugar factories in India are not willing to export the sugar as the price
of sugar is very low in the world market. If there are little prospects for any price increase in
the world market, the major producers are keen to sell more in view of a foreign exchange
constraint, and the exports will become more profitable. The convertibility of the Indian
rupee will ensure higher benefits to the exporters.

Problems of the sugar Industry:

Sugar industry is controlled by the Government like all the industries in the country.
The central Government regulates all the activities of the sugar industry from the purchase of
raw material, to the sale of finished products. The importance of sugar industry in the
national economic cannot be over emphasized, as on its prosperity depends on the livelihood
of millions of cane growers, workers in the factories and other working in the ancillary
industry. It therefore requires careful nursing, but unfortunately it is subjected to great
vicissitudes of prosperity and depression.

This industry has a large number of problems-inadequate supplies of cane, under

utilization of capacity low recovery, old and obsolete machinery, transport difficulties and the
pricing policy of the Government. The low level of productivity is crippling the industry.
Secondly the output of cane is influenced to a greater extent by the Government's main raw
material is dependent upon the prices of competitive food crops on the one hand and the
prices of sugarcane fixed by the Government on the other.

Since the sucrose content of sugarcane begins to deteriorate soon after the stalks have
been cut, it is essential that a unit be located in close proximity to the sources of raw material.
Then, there is a vast gap between the technology developed by the Research Institutions and
the cane growers. Another problem regarding cane supply to the factories is diversion. The
sugar factories and Guru and Khandasari units are competitors for sugarcane supply.
According to D.C.A Agate, "Guru and Khandasari producers have a leeway over the sugar
factories in the matter of procuring sugarcane diverted from sugar factories owing to absence
of controls over them and also fiscal advantages they enjoy"

Next problem facing the industry is that of transport, in our country the transport
system is not up to the requirements, which affect the recovery from sugarcane Utilization of
by products. By the fuller utilization of by-products the sugar industry can hope to reduce the
cost of production.

SUGAR INDUSTRIES IN ANDHARA PRADESH

In Andhra Pradesh there are 34 industries of which 16 are under the cooperative
sector, 8 are Under Government management and another 9 are under private sector.
Khandasari Mills, the counter part of sugar mills have been estimated at a number of 120.

The mill at Bodhan in Nizamabad district is the biggest in Asia. Average cane yield.
Per acre in India is 20 tones and in Andhra Pradesh. It is 30 tones. The crushing capacity of
all mills in Andhra Pradesh is 57 lakh tones. Private Mills could utilize 70% of the crushing
capacity. Where as the other mills could just manage.

21
 PRIVATE SECTOR IN SUGAR FACTORIES:

SL.NO INDUSTRY PLACE DISTRICT

K.C.P Sugar and Industries Corporation

1. Limited., Vuyyuru Krishna

K.C.P Sugar and Industries Corporation

2. Laxmipuram Krishna
Limited.,

3. Tanuku West Godavari

The Andhra Sugars Ltd.,

4. The Jeypore Sugars Company Ltd., Chagallu East Godavari

5. Sri Saravarya Sugar Mills Limited Chiller East Godavari

6. Deccan Sugar Samalkot East Godavari

7. The Kirlampudi Mills Pitha-Puram East Godavari

8. The Andhra Sugars Ltd Taddayahai West Godavari

 PUBLIC SECTORS IN FACTORIES

SL.NO INDUSTRY PLACE DISTRICT

1. The Nizam Sugars Mirayalaguda Nalgonda

2. NGS Gayathri Sugars Ltd Sadasiva Nagar Nizamabad

3. Sree Kialas Chemicals Peeru-Voncha Khammam

4. Ganapathi Sugar Industries Ltd Ranga Reddy Medak

5. Sree Vani Sugars and Industries Ltd Mudipadu Chittor

6. The Nizam Sugars Ltd Didgi Medak

Kairatabad
7. The Nizam Sugars Ltd Ranga Reddy
(Hyderabad)

8. Empee Sugars Ltd and Chemicals Ltd Naidupeta Nellore

23
 CO-OPERATIVE SECTORS IN SUGAR FACTORIES

SL.N
INDUSTRY PLACE DISTRICT
O
Amudala
1. The Amudala –Valasa Co-Operative Sugars Ltd., Srikakulam
Valasa

2. The Chittor Co-Operative Sugars Ltd., Chittor Chittor

3. The Chodavaram Co-operative Sugars Ltd., Govada Visakhapatnam

The Etikoppoka Co-operative Agricultural

4. Eliloppaka Visakhapatnam
industrial Society Ltd.,

5. The Kovuur Co-Operative Sugars Factory Ltd., Kovuuru Nellore

6. The Nagarjuna Co-Operative Sugars Ltd Gurazala Guntur

7. The Nandyal Co-Opertive Sugars Ltd Nandyala Kurnool

8. The N.V.R. Co-Opertive Sugars Ltd Vemuru Guntur

9. The Palair Co-Operative Sugars Ltd Amniagdem Khammam

10. Sri A.S.M. Co-Operative Sugars Ltd Pullapalli West Godavari

Hanuman
11. The Deccan Sugars Ltd Krishna
Junction
12. Sri Venkateswara Sugar Factory Ranugunta Chittor

13. Sri Vijaya Rama Ganapathi Sugars Karukonda Vizianagaram

14. The Thandava Co-Operative Sugars Ltd Tuni East Godavari

15. West Godavari Co-Operative Sugars Ltd Ghimdole West Godavari

16. The Jaikisan Co-Operative Sugars Ltd Hazuragac Karim Nagar

17. The Palkol Co-Operative Sugars Ltd Palakol West Godavari

Talks are also on with bulk sugar consumers like Hindustan Lever and some other
pharmacy and confectionery companies to enroll them as members of the exchange the
sources said.

According to the sources, the trading platform made available by the sugar India is
expected to integrate both spot and futures trade in sugar.

ISI CERTIFICTION FOR SUGAR SOON:

The Bureau of Indian standards is extending its certification to the sugar industry. The
organization is also harmonizing its standards for sugar with the codes standards.

According to an official, bureau of Indian Standards Certification would give the

sugar industry and advantage in International Market.

Like the normal ISI mark, the certification would be issued for one year and if the
mills performance was found satisfactory, the certification would be renewed for two more
years.

The Certification will only be granted on consumer and bulk packs and not on loose.
Sugar. The officials will visit sugar mills to check their technology, infrastructure
manufacturing process, testing methods, quality control, processing capacity, staff and
Waste management, in and around the mills.

For improving exports, the industry will have to meet stringent International
standards. The bureau of Indian Standards has launched an awareness program to educate the
Sugar Industry about the advantage of its certification.

25
COMPANY PROFILE

A PROFILE OF KCP SUGAR AND INDUSTRIES CORPORATIOLTD

The K.C.P Limited was incorporated under the Indian companies’ act 1913, on the 3rd
day July, 1941 and shows that the company is limited. The K.C.P.Ltd. is a company
established with limited liability in accordance with subject to the provisions of the Indian
companies Act, 1913. As amended firm time to time. The sugar factory has been located at
Lakshmipuram in Krishna District, Andhra Pradesh and is about 80 Km from Vijayawada is
the nearest railway Junction. Machilipatnam is the District Head Quarters and is about 40
Kms from Lakshmipuram. The head office of the factory is located at Madras and its branch
office Vijayawada.

OBJECTIVE OF THE K.C.P:

The objective of Company is:
To produce the Sugar by double sulphutation at the sugar unit in Lakshmipuram.
To produce Ethanol, denatured spirit in the distally.
To manufacture the machinery required for the sugar factories, cement and chemical
industries at the central workshop, Tiruvottiyur, Madras.

To produce cement at Rama Krishna Cement, Machala, Guntur District, and Andhra Pradesh.
To create employment opportunities for the local people.To help the nation in growing the
agriculture product.

In the early thirties, Lakshmipuram was like any other Indian Village, Show and we added to
the conventional ways of agriculture raising mostly, the single crop of paddy. The face of
Lakshmipuram today is vastly different. The K.C.P Sugar factory disburses in a season About
Rs.6000 lakh to the cane growers, located within radios of 40Km. The letters K.C.P are taken
as just lucky letters and do not signify anything more, "property through productivity" is the
model and guiding factor of the company.

PROGRAMME OF EXPANSION:
 K.C.P has taken up the steps for technology up gradation for improvement of
productivity and quality of the sugar factory at Lakshmipuram.By 1941-42 m the cane area
was 1,800 Acres with a production 39.250 tones of cane. The higher realizations per acre
from Sugarcane crop greatly motivated the extension of acreage under Sugarcane and by
1951 the area had increased to 7.240 acres. The above tables shows that the sugar factory that
commenced its first expansion in 1951 from 800 TCD to 1200 TCD. Utilized almost the
entire quantity of sugarcane. There was a second expansion of 1800 tones in 1952. And this
was further raised to 2500 TCD in 1956, all within a span of six years. The sugarcane area
increased to over 11,000 acres and the factory utilized 3.23 lakh tones of cane in 1956-57.
The cultivators readily increased the area under Sugarcane crop with every successive
expansion, since the per acre income is better than alternative crop.

In 1969-70, the sugar factory went through another substantial expansion to 3.750
tones of cane crushing capacity per day to utilize 4.975 lakh tones of cane per season. From
then on by various improvements of plant and machinery, the factory has been rapidly
increasing its annual crushing capacity.

27
 YEAR Crushing Capacity per Day

1941 800 TCD

1951 1200 TCD

1956 2500 TCD

1969 3750 TCD

1997 6000 TCD

2003 7200 TCD

2008 8500 TCD

2009 9250TSD

2013 10500 TCD

SOURCE: Engineering department, The K.C.P Sugar Ltd., Lakshmipuram

 OPERATION OF THE K.C.P SUGAR FACTORY

The year wise operations of the factory are given in the following table form 2000-01
to 2009-10.

Season Cane Crushed in Mts Sugar Bagged in Qtls Recovery %

2000-2001 1,85,586 1,75,071 9.36

2001-2002 82,658 68,658 9.40

2002-2003 2,27,826 2,09,638 9.07

2003-2004 3,13,619 3,14,879 10.05

2004-2005 3,72,153 4,13,580 11.10

2005-2006 4,35,534 4,61,679 10.63

2006-2007 4,53,307 4,67,905 10.32

2010-2011 2,74,193 2,68,948 9.80

2011-2012 2,27,826 2,09,638 9.07

2012-2013 2,15,752 2,08,523 9.10

Source: Annual Report of the K.C.P Sugar Ltd, 2000 to 2010.

29
 This table reveals that there are fluctuations in the sugarcane crushing from year to
year. The major reason is that, it is an agricultural product; climate conditions drastically
affect the yield.

The recovery percentage of sugar is stable during this period. The production trend of
sugar is extremely Internal Rate Of Return methodegular. Thus, the performance in terms of
area, cane crushed, and recovery percentage has shown a steady improvement.

TRANSPORTATION OF SUGAR CANE:

Previously, the sugar cane used to be transported mainly by carts, but now due to a larger
area of nearly 60 miles radius, most of the cane is being transported by Lorries and tractors.
The communication channels are mainly between Vijayawada and Machilipatnam. These
factory cruse 8000 tones of cane per day. Total and under sugarcane cultivation is 34,000
areas and this is divided into 11 zones.

The factory used 34,000 tones of cane in the year 1941.212 lakh tones in 1952 and at
present (1994-95) 10 lakh tone of cane per season. Sugar cane is supplied from nearly 171
villages within the radius of 50 kmsm of the factory that all most of the total percent of sugar
cane supply to the factory comes from 74 villages which are situated between 11 to 20 Kms.
This indicates that the factory has a dependable source of supply at the relatively close range.

The following table shows that the progresses in cultivation of sugarcane are in factory zone.
The following table also shows the zone wise number of cane village and cane area
particulars.

The following table show that the progress in cultivation of sugarcane area in factory zone.
The following table also shows that zone wise number of cane villages and cane area
particulars.
 Cane Area
Zone No. of Cane Villages
( Acres)
I 23 3184.65

II 25 3838.63

III 7 3013.64

IV 5 3062.87

V 9 3404.90

VI 10 2820.45

VII 17 3910.12

VIII 17 2920.32

IX 11 3008.33

X 9 3472.48

XI 38 3308.84

TOTAL 171 35985.23

Source:Office Records, Cane Development Council, Lakshmipuram

DIVRSIFICATION ACTIVITIES:

31
The KCP Ltd has stared diversification for the first time in 1945, by putting a Distillery for
production of Industrial Alcohol using the Molasses. The Distillery one of the biggest and
most modern units in Andhra Pradesh with 10 million bulk liters capacity per annum.

Sri. V. Rama Krishna's greatest services to the nation as an Industrialist was the
establishment of Heavy Engineering complex at Tiruvottiyur, Madras for fabrication of
complete plans for sugar, cement, fertilizers, chemicals et, in 195. This is among the most
versatile and well integrated of workshops in Asia

DISTILLERY;

The KCP Limited diversified its industry for the first time in the year 1945 by parting up a
distillery a Lakshmipuram for the production of industrial alcohol designed to make a
profitable use of molasses a by - product of sugar factory, Which was then considered to be a
waste product and its disposal was a big problem to the sugar factories. The distillery
capacity was expanded from time to time along with the expansion of the sugar factory. This
was done to enable the utilization of the entire molasses of the sugar factory. This was done
become the basic raw material for the production.

This is one of the leading and modern distilleries in the state with 10 million B.L capacities
per annum, with an annual average alcohol yield of 275. B.L's per tone of molasses as against
all India average of 223. B.L's per tone. The contribution this distillery to the state exchequer
is considerable. But, during the recent season the price per liter of attract fell to an
abnormally low level. This is one of the reasons that the factory was unable was to pay the
sugar cane are in the state facing the same problem.

WORKSHOP AT LAKSHMIPURAM:

The workshop was established at Lakshmipuram to meet the needs of local repairs,
maintenance and replacement of a few spare parts. With the expansion of the factory and the
distillery the workshop was also expanded. It manufactures most of the machinery required
for sugar, cement and mineral processing machinery. The factory provided facilities for in -
plant training of students studying in technical institutions. There is a proposal to have further
diversifications of the workshop on the northern side of 'puller Canal' for which plans are
under finalization.

RESEARCH AND DEVELOPMENT:

To maintain the quality and competitiveness in technology an in house Research and

Development was started by KCP early in 1970. This is manned by qualified and experienced
Engineers and Technologists. Recently a few projects like 'Corp-Weather Relationship in
Cane'. “Application of computer technology in the cane development and procurement
procedures in can cultivation" has been taken up under Research and Development.

FINANCIAL PROFILE:

The achievements of the Company can be judged from its financial performance. The
company with an equity capital of 7 lakh in 1943 has grown today to have its share capital of
Rs. 8547 lakh. The profit of the company to the exchequer by way of Central and State excise
duties collected on Sugar, Cement, alcohol machinery etc. The company's return shareholder
is also remarkable. Dividends are maintained at a level of 15% for the past ten years.

The capital of the company stood at Rs. 1146 Lakh and Reserves stood at Rs. 3304 lakh in
the year 1990-91. In the year 1994-95 the capital increased to Rs. 2578 lakh and Reserves to
Rs. 5969 lakh. In 1990-91 net profit of the company was Rs. 498 lakh which fell to an
abnormally low figure of Rs. 210 Lakh in 1991-92 and again those to the great height of Rs.
3369 lakh in 1994-95. The growth of the company is marked from the year 1992-93. In 1992-
93. In 1994-95 the Board of Directors of the company announced the payment of divided on
equity shares at 25% and the founder's centenary bounds dividend of 10%.It implies that the
sugar industry is essential for the smooth running of Indian economy.

The following table shows the financial position of the K.C.P Sugars Ltd., from 2000-2001 to
2009-2010.

33
 PROFIT PROFIT
SHARE RESERVES DIVIDENDS
YEAR BEFORE AFTER
CAPITAL & SURPLUS ON EQUITY
TAX TAX

2000-2001 1133.85 6772.84 1668.16 1368.16 25.00

2001-2002 1133.85 5384.93 536.16 340.16 25.00

2002-2003 1133.85 4962.81 577.63 422.13 25.00

2003-2004 1133.85 6554.82 1023.43 1911.79 25.00

2004-2005 1133.85 9012.44 6498.84 4065.21 25.00

2005-2006 1133.85 12784.18 93912.56 5711.04 25.00

2006-2007 1133.85 14475.97 3647.49 2355.05 50.00

2010-2011 1133.85 14342.19 761.44 710.97 50.00

2011-2012 1133.85 14546.49 2544.49 2544.49 70.00

2012-2013 1133.85 15925.95 3430.94 2374.37 75.00

Source: Office Records, Accounts Department, K.C.P Sugars Ltd., Lakshmipuram.

The above table shows that the capital of the company stood at Ts. 1289.30 lakh and reserves
stood at Rs. 3631.39 lakh in the year 1995-96.

In 2001-2002 net profit of the company is Rs. Lakh. The growth of the company marketed
from the year 1996-97 the Board of Directors of the company announced the payment of
dividend on equity shares at 25% and the founder’s centenary bonus dividend of 10%.
The Factory pays different taxes like excise duty, purchase tax and income tax. The tax
amount is more or less 20% of total sales of the firm. This implies that the firm helps in
national development. Excise duty is the primary sources of the Indian Government. It
implies that the sugar industry is essential for the smooth running of Indian Economy.

EXPORTS:

Lakshmipuram sugar factory has earned a very prominent place in the export of sugar
from 1959 onwards. Raw sugar and white sugar are being exported every year around 10-
50% of its total production and thus, helping the country to earn precious foreign exchange.
Sugar was being exported every year by the KCP till 1984. But from 1985 onwards there was
no sugar export from the Lakshmipuram sugar factory due to non-profitability. At present,
the sugar is being sold on the tender basis at different places only with the country.

ORGANIZATIONAL STRUCTURE OF THE K.C.P ORGANIZATION: SOME:

THEORETICAL ISSUES

An organization is something which affects everyone especially in the industrialized,

urbanized society of today. We are all members of not only one, but several organizations:
W.H. White identified “a new breed of executives working for large organizations and whose
livers are dominated by them". The word 'organization' can be used in many ways and it is
delayed as to form into a whole with inter-dependent parts.
“Organizationis the form of every human association for the attainment of a common purpose
"..... MONEY AND RETURN

35
The Oxford English Dictionary defines the word ' to organize' as ' to frame and put into
working order'. Organization is the relation of efforts and capacities of individuals and groups
engaged upon a common task in such a way as to secure the desired objective with the least
friction and the most satisfaction for whom, he task is done and those engaged in the
enterprise. Organization exists to achieve some goals and they usually are either unattainable
by individuals working done or, it attainable individually, they can be achieved more
efficiently through group effort. This concept explains general agreement with mission of the
organization. Organizations whether big or small private or public are the only instruments
available for individuals to over come the biological and psychological limitations.
Individuals create various types of strategies to fulfill their needs and to achieve their goals.

ORGANIZATIONAL STRUCTURE OF THE K.C.P SUGAR FACTORY IN DETAIL:

Keeping the above organizational perspectives in view, it may be stated that organization of
the K.C.P Ltd., is via media between the closed and open systems, in the sense that
organizational goal of K.C.P Sugar Factory is one of the largest manufacturers of sugar in
India. If was established in 1941 and it celebrated the Golden Jubilee Celebrations in 1991.

THE GENERAL BODY:

The General Body, which stands at the apex of the organizational structure of the K.C.P
Sugar factory, consists of all the share holders. The share holders are those who are duly
registered from time to as holders of shares of any class in the company. Majority of the share
holders in the K.C.P are sugarcane growers. The producer -members are very important
because they supply sugarcane the main raw material to the factory. They enjoy maximum
possible benefits from the factory since the factory vitally affects their financial condition.
The number of shares held reflects the shareholders economic position.

The General Body Meeting is held every year at the Registered Office of the
Company in Madras. The shareholders elect 10 of the 12 Directors on the Board. All the
members are entitled to vote in the Annual General Body meeting. Votes can be giving either
personally or by proxy. Every member shall have one vote for every equity share
THE BOARD OF DIRECTORS:

The management of the K.C.P Sugar factory is vested in the Board of Directors. There are 12
directors on the board utile otherwise determined by the company in the General Body
Meeting. The company may by ordinary resolution from time to increase or reduce the
number of Directors. Among the 12 Directors 10 Directors are elected by the share holders of
the company. The remaining 2 Directors are nominated by outside agencies namely industrial
Finance Corporation of India
(IFCI) and Industrial Development Bank of India (IDBI) The Board of Directors of the
company shall have no power to remove from office the nominee directors.
The directors may elect on the their members as the Chairman of the Board of Directors and
the Directors and be Director so elected as Chairman shall hold office for a period of 5 years
subject to the pleasure of the Board and Subject to his continuing as a Director and he shall
preside over all the meetings of the Board and the General meetings during his tenure of
office.

THE MANAGING DIRECTOR:

The company is at present managed by a Managing Director under the over all supervision
and control of the Board of Directors. The Managing Director is a shared employee except in
special circumstances when the chairman or any other director may be asked by the Board of
temporarily discharge the functions of MD., usually on an honorary basis. The M.D is
selected by Board of Directors. He is appointed on a renewable contract for a period of 5
years. He draws the highest salary among the employee of the K.C.P Director of the
company, and also the chairman of the Board whose term of the office expired on 02-04-95
was repainted by the Board of Directors for a further period of 5 years.

FACTORY DIVISION:

The factory division is headed by the Plant Manager who looks after the performance and
efficiency of the unit. He sends periodical reports to the Chairman and Managing Director of
the K.C.P Limited. The factory division has 22 departments. Each department is headed by a
senior. Executive who reports directly to the P.M. This classification of departments is based
37
on functional specialization. Division of work is the main basis of existing hierarchical
pattern of the factory. The different departments of the unit perform different functions as
detailed below.

THE DEPARTMENTS

The work of factory is divided into the following important departments such as
Manufacturing, Engineering, Agriculture, Accounts, General Office Civil Works, Stores,
Medical and Sanitation, Transport, Security etc. Each deportment has specified tasks which
are performed under the guidance and supervision of its head. Following the
recommendations of the Central Wage Board for the sugar industry all the employees in the
K.C.P are classified into Ex-board Categories, Managerial Supervision, Skilled Clerks and
Semi Skilled categories. However proportions depend on the nature of work. In each
department, the orders pass from the senior to the junior levels and reports of compliance
with the orders are submitted by the subordinate to the superior.

1. AGRICULTURAL DEPARTMENT:

The Cane Manager is the head of the agricultural department who is assisted by the Deputy
Manager (Agriculture). There are 11 zones in the factory division. Senior Cane Development
Officers looks after these zones. There are 11 Cane Development Officers (Agricultural
Graduates) Who works under his guidance and supervision. Each C.D.O is responsible for
supervising the plantation and growth of sugarcane transporting the sugarcane in his zone
issuing permits. A group of field men help each C.D.O. They are in closer touch with the
sugarcane growers and collect the necessary information about plantation and growth of the
cane on each plot in their palmistry. Next in the hierarchy are Agricultural Masteries that help
field’s men in their work during the crushing season to maintain the harvesting records of
each plot.

2. PERSONNEL DEPARTMENT:

In any company, whether public or private the personnel department plays an important role.
This department commonly deals with recruitment training and promotional systems. The
objectives of personnel management are to attract and retain devotion to duty and service
mindedness. Personnel Manager of the K.C.P Ltd., Lakshmipuram is in charge of personnel
matters of recruitment, training, appraisal, maintenance of discipline and wage
administration. The personnel Manager assist the Plant Manager (in the area of
establishment), Time-officer and Security. He takes care of the requirement of manpower
according to the seasons after receiving the instructions of the Plant Manager.

3.ENGINEERING DEPARTMENT:
The Engineering department headed by the Chief Engineer is responsible for efficient
running and maintenance of the plant and machinery. Shift Engineers, Sectional Supervisors,
Mechanics, Fitters and a large number of semi-Skilled and unskilled workers are employed in
the department.

4. MANUFACTURING DEPARTMENT:
The manufacturing department headed by the Chief Chemist is responsible for the actual
production of Sugar. It has to produce the sugar with a specified quality and with minimum
possible loss in the process. Shift Chemists, Lab Chemists and other operators, Skilled, Semi-
Skilled and unskilled workers are involved in this work.

5. ACCOUNTING DEPARTMENT:
The Accounts department maintains accounts of all kinds. It is headed by the Manager
(Finance), provides the management with all accounting as well as statistical data for use in
the process of planning. Capital and revenue budget are prepared annually by the accounts
department. Control over the expenditure against budget release is exercised by this
department. This department recommends financial concurrence for all material purchase and
disposals materials before they are approved by the competent authority. All proposals for
capital expenditure received from different departments are scrutinized by the Accounts
Department and put up to the management supervises the internal audit of the factory. It
audits the accounts of the unit and sends the reports to the Head office.

6. CIVIL DEPARTMENT:

The Civil works department, under the Civil Engineer looks after the Construction and
Maintenance of Buildings in the factory the residential colony and Roads used for

39
transporting sugarcane. This department supervises some other sections such as Sanitation
and Water supply, light railway track maintenance etc.

7. MECHANICAL DEPARTMENT:
Them Mechanical Department is one of the important department on the technical side. It is
headed by the Chief Engineer. This department is responsible for the smooth functioning of
the factory. It also takes the necessary steps to minimize the work snag due to mechanical
break down during the crushing season.

8. THE STAFF:
Manpower is an important aspect of management and administration. Hence it is proposed to
discus the manpower planning in various departments in this unit since 1986. The personnel
department of the Lakshmipuram sugar factory undertakes the responsibility of recruiting
manpower for all the departments is to assess the manpower of factory division. This
department headed by Personnel Manager who is assisted by other managerial staff including
Labor Welfare Officer and subordinate staff prepares the manpower proposals. These
proposals clearly specify the quality of manpower requirement as every enterprise is heavily
dependent upon the skills motivation and performance of the manpower.

9. EMPLOYEES COLONY:
There are residential quarters of various types for the employees of the factory. All
employees are entitled to residential facilities which correspond to their employment status
emoluments and seniority of service in the factory. There are officer's quarters near the
factory. All the officers of the factory live in these quarters.

Apart from the officer's colony and employee's colony which is named as 'Lakshmana Nagar'
is located about 2km away from the factory. It is a colony well-planned on modern lines with
all the amenities of life.

10. MEDICAL AND EDUCATIONAL FACILITIES:

There is dispensary within the premises of the sugar factory. One Medical Officer and one
lady doctor attend to the sick. Medicines are prescribed for the employees and their family
 Members and the cost of the medicines is reimbursed. Free medical treatment is given
to all the workers and their families.

The KCP Limited is running a school for the education of the employee's children up to 10 th
standard within the premises of the "Lakshmana Nagar" the school is well equipped with
buildings, laboratories, playgrounds and with qualified staff.

11. OTHER FACILITIES:

There is a fully equipped auditorium which is used for holding meetings, staging plays and
other cultural programmers. For the recreation of employees there are "Ramakrishna
ManilasSaveMandarin" and DorganManilaMandela". Every need of the employee is taken
care of by the company. The KCP sugar factory has provided a well maintained canteen to
cater to cater to the needs of its employees are taking loans on reasonable rate of interest.

THE DEVELOPMENT PROGRAMMES K.C.P SUGAR FACTORY:

Rural development has been recognized as an important strategy for expanding the
process of development in developing countries. Because of the predominance agricultural
nature of these countries, the process of rural development is inextricably linked with the
agricultural development. Rapid growth of population, poor level of nutrition, failure of
industry to absorb unemployed or under employed segment of rural population and
realization that a prior condition for any development is an accelerated development of the
agricultural sector have contributed to this recognition. Agriculture therefore, tends to receive
the most attention in any programmed of rural development in the developing countries
including India. Agriculture contributes to the national development in India in different
directions. It contributes to the growth of political and economic democracy provides
productive employment and makes a provision of food and fiber for a growing population. It
provides a terrible basis for industrial development and hastens the process of
industrialization.

AGRICULTURAL DEVELOPMENT:

41
This forms the main rural development activity of the factory and annually amount Rs.2.5 to
3 core is being spear. An intensive and extensive integrated cane development was vigorously
implemented during the past few decades which resulted not only in the increase of cane
population but also in the Sugar Recovery and the Sugar production, benefiting both the
growers and the factory. Various constraints in the cultivation of sugarcane have been
identified and overcome by providing the inputs, on time for effective transfer of appropriate
technology for the farmers in the fields.

The company is having a view to provide farm education and research facility to the cane
growers in sugar factory are prevailed with the help of the Andhra Pradesh Agricultural
University to set up a comprehensive sugarcane research center at Lakshmipuram. The
company donated 10.76 acres valued at Rs. 25 lakh for the office and the laboratory. Useful
research findings have emerged form the Research Station and applied to the farmer's fields.

The bore well scheme operated by the company provides free transport of rigs from the
factory to the fields and back. Free technical supervision is also arranged by the company.
More than 7,000 bore wells have been sunk so far which facilitate summer Internal Rate Of
Return methodigation for about 95% of the wet land area.

The company organizes every year, Kisan-Mela Where high yielding varieties of various
crops are exhibited and improved methods of cultivation are discussed with the express in the
respective fields. Apart from these training programmers are arranged annually for over 1,000
farmers to enable them to know the latest in cane development and farming techniques.

The operating cycle of the firm begins with acquisition of raw materials and ends
with the collection of receivables. It may be divided into four stages.

 Raw material and stores stage

 Work in progress stage
 Finished goods inventory stage
 Debtors collection stage
KEY PERSONNEL LIST OF THE KCP S & IC LTD:

CHAIRMAN ---- V INOD R.SETHI

MANAGING DIRECTOR ---- SMT. IRMGARD V.M. RAO

EXECUTIVE DIRECTOR ---- SMT. KIRAN RAO.

GENERAL MANAGER (FINANCE) ---- SRI R.GANESAN

GENERAL MANAGER ---- SRI VENKATESWARARAO.G

SR. DY.G.M.(FINANCE) ---- SRI C.K. VASANTHA RAO

DY.G.M. (ADMN) ---- SRI K.KRISHNA

DY. G.M. (PROCESS) ---- SRI K. SRI HARI BABU

DY.G.M. (CANE) ---- SRI V.V. PUNNA RAO

DY. G.M. (ENGG) ---- SRI N.D. PRASAD

MANAGER (ELECTRICAL) ---- SRI. M.VARATHARAJAN

MANAGER (SYSTEMS) --- SRI M.B.V. PRASADAREDDY

43
THEROTICALFRAMEWORKON CAPITAL BUDGETING

CAPITAL BUDJETTING is a long term investment made by the organization in different

projects and it helps the firm in evaluating the projects under taken by different techniques.

According to Weston and Brigham “CAPITAL BUDJETTING involves the entire

process of planning expenditures whose returns are expected to extend beyond one year.

The CAPITAL BUDJETTING decisions include replacement, expansion, diversification

research and development and miscellaneous proposals.

FEATURE OF CAPITAL BUDGETING:

The important features, which distinguish capital budgeting decision in other day-today
decision, are Capital budgeting decision involves the exchange of current funds for the
benefit to be achieved in future. The futures benefits are expected and are to be realized over
a series of years. The funds are invested in non-flexible long-term funds. They have a long
term and significant effect on the profitability of the concern. They involve huge funds. They
are Internal Rate Of Return methodeversible decisions. They are strategic decision associated
with high degree of risk.

IMPORTANCE OF CAPITAL BUDGETING:

The importance of capital budgeting can be understood from the fact that an unsound
investment decision may prove to be fatal to the very existence of the organization.

The importance of capital budgeting arises mainly due to the following:

1. Large investment:

Capital budgeting decision, generally involves large investment of funds. But the funds
available with the firm are scarce and the demand for funds for exceeds 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 amount of funds but also funds for long-term
or a permanent basis. The long-term commitment of funds increases the financial risk
involved in the investment decision.

3. Internal Rate Of Return methodeversible nature:

The capital expenditure decisions are of Internal Rate Of Return methodeversible nature.
Once, the decision for acquiring a permanent asset is taken, it becomes very difficult to
impose of these assets without incurring heavy losses.

4. Long term effect on profitability:

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

5. Difference of investment decision:

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

6. Notional Importance:

Investment decision though taken by individual concern is of national importance because

it determines employment, economic activities and economic growth.

KINDS OF CAPITAL BUDGETING:

Every capital budgeting decision is a specific decision in the situation, for a given firm
and with given parameters and therefore, almost infinite number of types or forms of capital
budgeting decision may occur. Some projects affect other projects of the firm is considering
and analyzing. The project may also be classified as revenue generating or cost reducing
projects can be categorized as follows:

45
 1. From the point of view of firm’s existence:

The capital budgeting decision may be taken by a newly incorporated firm or by an already
existing firm.

NewFirm: A newly incorporated firm may be required to take different decision such as
selection of a plant to be installed, capacity utilization at initial stages, to set up or not
simultaneously the ancillary unity etc.

Existing Firm: A firm which already exists may be required to take various decisions from
time to time meet the challenge of competition or changing environment.

These decisions may be:

Replacements and Modernization Decision:

This is a common type of a capital budgeting decision. All types of plant and machineries
eventually require replacement. If the existing plant is to be replaced because of the economic
life of the plant is over, then the decisions may be known as a replacementdecision. However,
if an existing plant is to be replaced because it has become technologically outdated (though
the economic life may not be over) the decision any be known as a modernizationdecision. In
case of a replacement decision, the objective is to restore the same or higher capacity,
whereas in case of modernization decision, the objectives are to increase the efficiency and/or
cost reduction. In general, the replacement decision and the modernization decision are also
known as cost reductiondecisions.

(i) Expansion:

Sometimes, the firm may be interested in increasing the Installed production capacity so
as to increase the market share. In such a case, the finance manager is required to evaluate the
expansion program in terms of marginal costs and marginal benefits.

(ii)Diversification:
 Sometimes, the firm may be interested to diversify into new product lines, new markets;
production of spares parts etc. in such a case, the finance manager is required to evaluate not
only the marginal cost and benefits, but also the effect of diversification on the existing
market share and profitability. Both the expansion and diversification decisions may be also
be known as revenue increasing decisions.

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

(i) Independent project Decision:

This is a fundamental decision in Capital Budgeting. It also called as accept /reject

criterion. If the project is accepted, the firm invests in it. In general all these proposals,
which yield a rate of return greater than a certain required rate of return on cost of capital,
are accepted and the rest are rejected. By applying this criterion all independent projects with
one in such a way that the acceptance of one precludes the possibility of acceptance of
another. Under the accept-reject decision all independent projects that satisfy the minimum
investment criterion should be implemented.

(ii) Mutually Exclusive Projects Decision:

Mutually Exclusive project are those, which compete with other projects in such a way that
the acceptance of one will exclude the acceptance of the other projects. The alternatively are
mutually exclusive and only one may be chosen. Suppose a company is intending to buy a
new machine. There are three competing brands, each with a different initial investment
adopting costs. The three machines represent mutually exclusive alternatives as only one of
these can be selected. It may be noted here that the mutually exclusive projects decisions are
not independent of the accept-reject decisions.

(iii) Capital Rationing Decision:

In a situation where the firm has unlimited funds all independent investment proposals
yielding return greater than some pre-determined levels are accepted. However this situation
does not prevail in most of the business firms in actual practice. They have a fixed capital
budget.

47
 A large number of investment proposals compete for these limited funds, the firm must
therefore ration them. The firm allocates funds to projects in a manner that it maximizes long
run returns; this rationing refers to a situation in which a firm has more acceptance
investment than it can finance. It is concerned with the selection of a group of investment
proposals acceptable.

Under the accept-reject decision capital rationing employees ranking of the acceptable
investment projects. The project can be ranked on the basis of a predetermined criterion such
as the rate of return. The project is ranked in the descending order of the rate of return.

PROBLEMS AND DIFFICULTIES IN CAPITAL BUDGETING:

The problems in Capital budgeting decision may be as follows:

Future uncertainty:

Capital budgeting decision involves long-term commitments. However there is lot of

uncertainty in the long term. Uncertainty may be with reference to cost of the project, future
expected returns, future competition, legal provisions, political situation etc.

Time Element:

The implication of a Capital Budgeting decision are scattered over a long period. The
cost and benefit of a decision may occur at different points of time. The cost of project is
incurred immediately. However the investment is recovered over a number of years. The
future benefits have to be adjusted to make them comparable with the cost. Longer the time
period involved, greater would be the uncertainty.

Difficulty in quantification of impact:

The finance manager may face difficulties in measuring the cost and benefits of projects
in quantitative terms. For example, the new products proposed to be launched by a firm may
result in increase or decrease in sales of other products already being sold by the same firm. It
is very difficult to ascertain the extent of impact as the sales of other products may also be
influenced by factor other than the launch of the new products.

ASSUMPTION IN CAPITAL BUDGETING:

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

1. Certainty With Respect To Cost and Benefits:

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

2.Profit Motive:

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

3. No Capital Rationing:

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

CAPITAL BUDGETING PROCESS:

Capital budgeting is complex process as it involves decision relating to the Investment of

current funds for the benefit for the benefit to be achieved in Future and the future are always
uncertain. However, the following procedure may be adopted in the process of Capital
Budgeting.

Identification of investment proposals:

The capital budgeting process begins with the identification of investment Proposals. The
proposal about potential investment opportunities may originate either from top management
or from any officer of the organization. The departmental head analysis various proposals in

49
the light of the corporate strategies and submits the suitable proposals to the capital
expenditure planning.

Screening proposals:

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

Evaluation of Various proposals:

The next step in the capital budgeting process is to various proposals. The method,
whichmay be used for this purpose such as, payback period method, rate of return method,
NET PRESENT VALUE METHOD and INTERNAL RATE OF RETURN METHOD etc.

Fixing priorities:

After evaluating various proposals, the unprofitable uneconomical proposal may be

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

FINAL APPROVAL AND PREPARATION OF CAPITAL EXPENDITURE BUDGET

Proposals meeting the evaluation and other criteria are approved to be included in the
capital expenditure budget. The expenditure budget lays down the amount of estimated
expenditure to be incurred on fixed assets during the budget period.

Implementing proposals:

Preparation of a capital expenditure budget and incorporation of a particular Proposal in

the budget doesn’t itself authorize to go ahead with the implementation of the project. A
request for the authority to spend the amount should be made to the capital Expenditure
committee, which reviews the profitability of the project in the changed circumstances.
Responsibilities should be assigned while implementing the project in order to avoid
unnecessary delays and cost overruns. Network technique likes PERT and CPM can be
applied to control and monitor the implementation of the projects.

Performance Review:

The last stage in the process of capital budgeting is the evaluation of the performance of
the project. The evaluation is made by comparing actual and budget expenditures and also by
comparing actual anticipated returns.

The unfavorable variances, if any should be looked in to and the causes of the same be
identified so that corrective action may be taken in future.

METHODS OR TECHNIQUES OF CAPITAL BUDGETING:

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

TECHNIQUES OF CAPITAL BUDGETING

Traditional Methods Time Adjusted Methods

1. Pay Back Period 1.NET PRESENT VALUE METHOD

2. Accounting Rate of Return 2. Internal Rate of Return method

3. PROFITABILITY INDEX METHOD

Traditional methods:

Payback period method (P.B.P. M)

Accounting Rate of Return Method (A.R. R.)

Time adjusted or discounted technique:

(I) Net Present Value method (N.P.V.M)

(II) Internal Rate of Return method (I. R.R.M)

51
(III) Profitability Index method (P. I.M)

PAY BACK PERIOD METHOD:

The pay back come times called as payout or pay off period method represents the period
in which total investment in permanent assets pay back itself. This method is based on the
principle that every capital expenditure pays itself back within a certain period out of the
additional earnings generated from the capital assets.

Decision rule:

A project is accepted if its payback period is less than period specific decision rule.

A project is accepted if its payback period is less than the period specified by the
management and vice-versa.

Initial Cash Outflow

Pay Back Period = ----------------------------

Annual Cash Inflows

ADVANTAGES:

 Simple to understand and easy to calculate.

 It saves in cost; it requires lesser time and lab our as compared to other methods of
capital budgeting.
 In this method, as a project with a shorter payback period is preferred to the one
having a longer pay back period, it reduces the loss through obsolescence.
 Due to its short- time approach, this method is particularly suited to a firm which has
shortage of cash or whose liquidity position is not good.
DISADVANTAGES:

 It does not take into account the cash inflows earned after the payback period and
hence the true profitability of the project cannot be correctly assessed.
 This method ignores the time value of the money and does not consider the magnitude
and timing of cash inflows.
 It does not take into account the cost of capital, which is very important in making
sound investment decision.
 It is difficult to determine the minimum acceptable payback period, which is
subjective decision.
 It treats each assets individual in isolation with other assets, which is not feasible in
real practice.

ACCOUNTING RATE OF RETURN METHOD:

This method takes into account the earnings from the investment over the whole life. It is
known as average rate of return method because under this method the concept of accounting
profit (NP after tax and depreciation) is used rather than cash inflows. According to this
method, various projects are ranked in order of the rate of earnings or rate of return.

Decision rule:

The project with higher rate of return is selected and vice-versa.

The return on investment method can be in several ways, as

Under this method average profit after tax and depreciation is calculated and then it is divided
by the total capital out lay.

Average Annual profits

(After depreciation. & tax)
Average rate of return = ------------------------------------------ x 100
Average Investment

53
ADVANTAGES:

 It is very simple to understand and easy to calculate.

 It uses the entire earnings of a project in calculating rate of return and hence gives a
true view of profitability.
 As this method is based upon accounting profit, it can be readily calculated from the
financial data.

DISADVANTAGES:

 It ignores the time value of money.

 It does not take in to account the cash flows, which are more important than the
accounting profits.
 It ignores the period in which the profit are earned as a 20% rate of return in 2 ½ years
is considered to be better than 18%rate of return in 12 years.
 This method cannot be applied to a situation where investment in project is to be
made in parts.

NET PRESENT VALUE METHOD:

The NET PRESENT VALUE method is a modern method of evaluating investment

proposals. This method takes in to consideration the time value of money and attempts to
calculate the return on investments by introducing time element. The net present values of all
inflows and outflows of cash during the entire life of the project is determined separately for
each year by discounting these flows with firms cost of capital or predetermined rate. The
steps in this method are

1. Determine an appropriate rate of interest known as cut off rate.

2. Compute the present value of cash inflows at the above –determined discount rate.
3. Compute the present value of cash inflows at the predetermined rate.
4. Calculate the NET PRESENT VALUE of the project by subtracting the present value
of cash outflows.

Decision rule:
 Accept the project if the NET PRESENT VALUE of the projects 0 or positive that is
present value of cash inflows should be equal to or greater than the present value of cash
outflows.

ADVANTAGES:

 It recognizes the time value of money and is suitable to apply in a situation with
uniform cash outflows and uneven cash inflows.
 It takes in to account the earnings over the entire life of the project and gives the true
view if the profitability of the investment.
 Takes in to consideration the objective of maximum profitability.

DISADVANTAGES:

 More difficult to understand and operate.

 It may not give good results while comparing projects with unequal investment of
funds.
 It is not easy to determine an appropriate discount rate.

INTERNAL RATE OF RETURN METHOD:

The internal rate of return method is also a modern technique of capital budgeting that
takes in to account the time value of money. It is also known as time- adjusted rate of return
or trial and error yield method. Under this method the cash flows of a project are discounted
at a suitable rate by hit and trial method, which equates the net present value so calculated to
the amount of the investment. The internal rate of return can be defined as “that rate of
discount at which the present value of cash inflows is equal to the present value of cash
outflow.

Decision Rule:

Accept the proposal having the higher rate of return and vice versa. If INTERNAL RATE OF
RETURN METHOD>K, accept project. K=cost of capital. If INTERNAL RATE OF
RETURN METHOD<K, reject project.

55
DETERMINATION OF INTERNAL RATE OF RETURN METHOD

a) When annual cash flows are equal over the life of the asset.

Initial Outlay
FACTOR = -------------------------------- x 100
Annual Cash inflow

b) When the annual cash flows are unequal over the life of the asset:

INTERNAL RATE OF RETURN METHOD

PV of cash inflows at lower rate – PV of cash out flows

= L.R+ --------------------------------------------------------------------------------------------
PV of cash inflows at lower rate - PV of cash inflows at higher rate

The steps are involved here are:

1. Prepare the cash flows table using assumed discount rate to discount the net cash
flows to the present value.
2. Find out the NPV, & if the NET PRESENT VALUE is positive, apply higher rate of
discount.
3. If the higher discount rate still gives a positive NET PRESENT VALUE increases the
discount rate further. Until the NET PRESENT VALUE becomes zero.
4. If the NET PRESENT VALUE is negative, at a higher rate, NET PRESENT VALUE
lies between these two rates.

ADVANTAGES:

 It takes into account, the time value of money and can be applied in situation with
even and even cash flows.

 It considers the profitability of the projects for its entire economic life.

 The determination of cost of capital is not a pre-requisite for the use of this method.
  It provide for uniform ranking of proposals due to the percentage rate of return.

 This method is also compatible with the objective of maximum profitability.

DISADVANTAGES:

 It is difficult to understand and operate.

 The results of NET PRESENT VALUE andINTERNAL RATE OF RETURN

METHOD methods my differ when the projects under evaluation differ in their size,
life and timings of cash flows.

 This method is based on the assumption that the earnings are reinvested at the
INTERNAL RATE OF RETURN METHOD for the remaining life of the project,
which is not a justified assumption.

PROFITABILITY INDEXMETHOD OR BENEFIT COST RATIO METHOD:

It is also a time-adjusted method of evaluating the investment proposals. PI also called

benefit cost ratio or desirability factor is the relationship between present value of cash
inflows and the present values of cash outflows.

PV of cash inflows
Profitability index = -----------------------------
PV of cash outflows

NPV
Net profitability index = --------------------
Initial Outlay
ADVANTAGES:

 Unlike net present value, the profitability index method is used to rank the projects
even when the costs of the projects differ significantly.

 It recognizes the time value of money and is suitable to apply in a situation with
uniform cash outflow and uneven cash inflows.

57
  It takes into account the earnings over the entire life of the project and gives the true
view of the profitability of the investment. Takes into consideration the objectives of
maximum profitability.

DISADVANTAGES:

 More difficult to understand and operate.

 It may not give good results while comparing projects with unequal investment funds.

PAYBACK PERIOD:

Generally this payback period is used to know in how many years we will recover
the investment. This payback period ignores the both time & profitability. It does not bother
about the profitability on the initial investment.

If the annual cash flows are uniform then

DATA ANLYSIS AND INTERPRETATION

Option-1

CALCULATION OF PAYBACK PERIOD:

Year Profit After Depreciation in Annual Cash Cumulative Annual

s Tax(PAT) in Lakes lakes flows in lakes Cash flows in lakes
2006 710.97 1059.37 1770.34 1770.34

2007 1132.88 1085.35 2218.23 3988.57

2010 4065.21 619.97 4685.18 8673.75

2011 5711.05 743.45 6454.5 15128.25

2012 6355.05 1001.49 7356.54 22485.04

In the above table the annual cash flows are not uniform, and then we can take the
cumulative annual cash flows and calculate the payback period.

Here the Initial Investment = 13,220.20 lakes

PAY BACK PERIOD = 3 + 13220.20 – 8673.75

6454.5

PAY BACK PERIOD = 3 + 4546.45

6454.5

59
PAY BACK PERIOD = 3+0.70

PAY BACK PERIOD = 3.7 YEARS

INTERPRETATION:

The Initial Investment of K.C.P. sugar & industries corporation Ltd. company is Rs.
13220.20 lakes will recover within 3 years 7 months of time span so the company recovery
capital within the times pan.

Accounting Rate of Return :

ARR means Average Rate of Return or Accounting rate of return. ARR is usually taken
the earnings expected from the investment throughout the whole life of the period.

ARR=Average Annual Profits/Average investment ×100.

Average Annual profit=Sum of annual profits/no. of years.

Average investment=Initial Investment/2.

CALCULATION OF ARR:

Profit After Tax(PAT) in Depreciation in Annual Cash flows in

Years
Lakes lakes lakes

2006 710.97 1059.37 1770.34

2007 1132.88 1085.35 2218.23

2010 4065.21 619.97 4685.18

2011 5711.05 743.45 6454.5

2012 6355.05 1001.49 7356.54

Annual profit = PAT +Depreciation.

We are calculating the ARR for the above table by Using the below formula.

ARR=Average Annual Profits/Average investment ×100.

Average Annual profit=Sum of annual profits/no. of years.

Average investment=Initial Investment/2.

Average Annual profit = Sum of annual profits/no. of years

= 1770.34+2218.23+4685.18+6454.5+7356.54/5

= 22484.79/5
= 4496.96

Average investment = Initial Investment/2.

= 13220.20 /2

= 6610.1

ARR = Average Annual Profits/Average investment ×100

= 4496.96/6610.1×100.

= 0.6803 ×100.

61
 = 68.03%.

INTERPRETATION:

The objective of this analysis of ARR is to measure the profitability of the investing
proposals.

The above table represents the average rate of return on the investment of K.C.P. sugar &
industries corporation Ltd.

ARR is usually taken the earnings expected from the investment throughout the whole life of
the period. So Finally Average Rate of Return is 68.03% for the K.C.P. sugar & industries
corporation Ltd.

NET PRESENT VALUE:

NET PRESENT VALUE means net present value. The net present value method is also
known as discounted cost benefit ratio. Under this method a required discounting factor is
assumed and determines the present value of cash flows.

PROFITABILITY INDEX:
 Profitability Index is also called as Benefit cost ratio. It is similar to the net present value
method. In net Present value method, we determine NET PRESENT VALUE by using the
present value of cash inflows and outflows. The only difference between NET PRESENT
VALUE and PI is In NET PRESENT VALUE method; we are calculating the difference
between the inflows and outflows. Where as in PI method we determine PI by division of
present value of cash inflows and initial investment.

In this method a required discounting factor is assumed and determines the present value
of cash inflows.

If NET PRESENT VALUE is positive then the project is accepted otherwise the project is
rejected.

If NPV>0 then the project is accepted.

If NPV< 0then the project is rejected.

If PI>1 then the project is accepted.

If PI<1 then the project is rejected.

Option-2

CALCULATION OF NET PRESENTVALUE&PI:

Cash Discounting Factor @ Present value of cash

Years
Inflows(Lakes) 10% inflows

2006 1770.34 0.909 1609.23

63
 2010 2218.23 0.826 1832.25

2011 4685.18 0.751 3518.57

2012 6454.5 0.683 4408.42

2013 7356.54 0.621 4568.41

Total 15936.88

NPV=Net present value

NPV=Present value of cash inflows-initial cash outlay

Initial cash out lay= initial investment

NPV=Present value of cash inflows-initial cash outlay

= 15936.88-13220.20

= 2716.68

PI= Present value of cash inflows/ initial cash outlay

= 15936.88/13220.20

=1.21

Finally NPV=2716.68; PI=1.21

 5000
4500
4000
3500
3000 years
2500
2000
present value
1500
of cash inflow
1000
500
0
1 2 3 4 5

INTERPRETATION:

The above table represents the NET PRESENT VALUE and PI of 5 years.

In NET PRESENT VALUE and PI methods, the present values of cash flows are
determined. Under these methods present values of cash flows are determined by using the
Discounting factor.

In NET PRESENT VALUE and PI methods, we assume the discounting factor as

10% and determine the present values of cash flows.

By multiplying the cash flows with discounting factor then we get the present value of
cash flows.

In this project, the NET PRESENT VALUE is 2716.68.

Here NPV>0

So this project is good for the firm.

In this project, the Pi is 1.21.

Here PI>1, So this project is good for the firm.

CALCULATION OF INTERNAL RATEOF RETURNS (INTERNAL RATE OF

RETURN METHOD):

65
 Present value @ Total present Present value @ Total present
Years Cash flows
20% values 21% values

2009 1770.34 0.833 1474.69 0.826 1462.30

2010 2218.23 0.694 1539.45 0.683 1515.05

2011 4685.18 0.578 2708.03 0.564 2642.44

2012 6454.5 0.482 311.6 0.466 3007.79

2013 7356.54 0.401 2949.97 0.385 2832.26

Total present values 11777.741 11459.84

FAIT PAYBABCK = 2.94

INTERNAL RATE OF RETURN METHOD =10+X

= 10+4.53

=14.53%
 3500

3000

2500

2000
years
total precent value 20%
1500
total present values 21%

1000

500

0
1 2 3 4 5

INTERPRETATION:

The Initial Investment of K.C.P. sugar & industries corporation Ltd. company is Rs.
13220.20 lakes. Difference in calculated present values and required net cash outlay is
1442.46 and Difference in calculated present is 317.9 now finally the INTERNAL RATE OF
RETURN METHOD value is 14.53%.

As we have assumed the cost of capital as 10 %( Discount factor), at INTERNAL

RATE OF RETURN METHOD NPV=0, PI=1. In the given case the company is carrying
minimum expected return.

67
FINDINGS

 The inventory has varied year to year. It is maximum in the year 2003 and minimum
in the year 2004. This is proportional to the demand in the market for the products of
that company.

 There is an increasing trend in the cash & bank balances. This acceptable and shows
the positive trend as the costs raise year to

 Year. The increase in cash and bank is essential to meet the increased costs of
overhead. The slope of the trend equation is also +vie

 The decreases in the current assets show that the slope of the trend Esq. is negative. It
is appreciated only when the current liabilities are also decreasing with respect to
current assets.

 The slope of the trend equation is positive stating that the loans and advances are
increasing year by year. There is down fall in 2004 and sharp raise in the year 2005.
These types of fluctuations are not desirable.

 The slope of the trend equation is positive, indicating that the C.L are increasing year
by year. But the CA are decreasing year by year. This is contradict as per the quick
ratio is considered. The ideal value should be one which means the CA & CL should
be equal But, the situations show that they are inversely related and the quick ratio is
approaching the value zero.

 The slope of the equation is -via, stating that, the CA is reducing year by year.
SUGGESTIONS

 The basis objective of a company is to maximize shareholders wealth. This is possible

only when the company earns sufficient profits. The amount of such profits depends
largely upon the magnitude of sales. There is always time gap between the sale of
goods and receipt of cash. The level of any firm depends upon its efficient
management of working capital.

 To ensure higher profitability, liquidity and sound structural health of organization it

is essential to use the sources of funds and cash effectively.

 During the year 2003-2004 the total income of the company was 14,947.76
Lakes and also they paid a higher tax rate of 20.34%.

 There has been major fluctuation in the working capital that will affect thecurrent
assets and liabilities and sources of funds have affected a lot. So thefirm has to find
ways to increase the sources of funds.

 There has been no issued of share capital during the years, which may affectthe
expansion of the company. So the company has to go for the issuing ofshares.The
relationship between the employees and management must besatisfactory as there
have not been any strikes occurred during the years onaccount of negotiations.

 The company should finance some parts of its currents assets with short-term funds. It
should not depend on long-term funds as they involve higher interest payments.

 Over all the company has favorable working capital position. However it has to
maintain optimum working capital position.

CONCLUSION
69
To ensure that each of the current asset is efficiently managed to ensure that overall liquidity
of the unity and at the same time not keeping too high a level of any one of them working
capital management is a must.

Working capital attains a proper balance between the amount of current assets and the current
liabilities in such liabilities in such a way that the firm is always able to meet its short term
obligations.

Working capital management ensures smooth working of the unit without any production
held ups due to the paucity of funds.

Thus as working capital is the lifeblood and nerve center of a business. It is managed in
orders to attain a smooth running of the business.

During the years under the review working capital fluctuated as the year 1999-2000 the
working capital increased to 16.87 cores. But the following year’s working capital showed
downward trend year by up to 2003-2004.

During the years under the review that overall Financial Position of KCP Sugars Ltd is good.

BIBLIOGRAPHY
 s.no Name of the book Author Published

1. FINANCIAL I.M. Vikas

MANAGEMENT PANDEY publishing
house private
limited 1997.
2. FINANCIAL PRASANNA Tata Mc Graw
MANAGEMENT CHANDRA Hill, NEW
Delhi 1998.

3. FINANCIAL M.Y. KHAN, Tata Mc Graw

MANAGEMENT & Hill, NEW
P.K JAIN Delhi 2007.
4. FINANCIAL SARMA & Kalyani
MANAGEMENT AND GUPTA publishers.
POLICY

ANNUAL REPORTS OF K.C.P SUGARS & I.C.L LAKSHMIPURAM:

 Annual Report 2005-06

 Annual Report 2006-07
 Annual Report 2007-08
 Annual Report 2008-2009
 Annual Report 2009-2010

Websites:WWW.KCP sugar.com

WWW.Wikipedia.com

ANNUEXTURE

1. BALANCE SHEET AS ON 31ST MARCH 2006

As at 31st as at 31st

71
 Schedule March 2006 March 2005
SOURCES OF FUNDS
Shareholder’s funds
Share capital A 11,33,85,050 11,33,85,050
Reserves and surplus B 1,27,84,18,716 90,12,44,947
1,39,18,03,766 1,01,46,29,997
Loan funds
Secured loans C 28,15,50,102 29,64,92,947
Unsecured loans D 21,96,22,000 24,46,95,000
50,11,72,102 54,11,87,947
Deferred tax liability
Deferred tax liability 25,03,97,136 20,99,52,818
Less:- Deferred tax Assets 3,81,11,364 7,31,87,934
21,22,85,772 13,67,64,884
TOTAL 2,10,52,61,640 1,69,25,82,828
APPLICATION OF FUNDS
Fixed assets
Gross block E 1,85,31,65,250 1,32,20,20,234
Less: Depreciation 50,19,41,957 44,14,75,638
Net block 1,35,12,23,923 88,05,44,596
Capital working progress 4,58,43,001 16,43,32,340
1,39,70,66,294 1,04,48,76,936
Investments 1,63,63,918 1,44,30,960
Current assets, loan and advances
Inventories G 1,35,93,30,982 1,43,18,24,825
Sundry debtors H 10,80,11,642 11,21,33,122
Cash and bank balance I 6,81,47,393 5,02,62,789
Other current assets J 15,13,709 10,21,849
Loans and advances K 46,65,45,285 38,99,83,272
200,35,49,011 1,98,52,25,857
Less: current liabilities 131,17,17,583 1,35,19,50,925
Current liabilities
Provisions
Net current assets 69,18,31,428 63,32,74,932
TOTAL 2,10,52,61,640 1,69,25,82,828

2. BALANCE SHEET AS ON 31ST MARCH 2007

As at 31st as at 31st
Schedule March 2007 March 2006

73
SOURCES OF FUNDS
Shareholder’s funds
Share capital 11,33,85,050 11,33,85,050
A
Reserves and surplus 1,44,75,96,744 1,27,84,18,716
B
1,56,09,81,794 1,39,18,03,766
Loan funds
Secured loans 19,36,77,300 28,15,50,102
C
Unsecured loans 17,99,22,000 21,96,22,000
D
37,35,99,300 50,11,72,102
Deferred tax liability
Deferred tax liability 29,58,16,139 25,03,97,136
Less:- Deferred tax Assets 3,85,87,149 3,81,11,364
25,72,28,990 21,22,85,772
TOTAL 2,19,18,10,084 2,10,52,61,640
APPLICATION OF FUNDS
Fixed assets
Gross block 2,07,88,63,416 1,85,31,65,250
E
Less: Depreciation 59,75,83,948 50,19,41,957
Net block 1,48,12,79,468 1,35,12,23,923
Capital working progress 7,28,45,659 4,58,43,001
1,55,41,25,127 1,39,70,66,294
Investments 12,65,92,017 1,63,63,918
Current assets, loan and advances
Inventories 1,32,75,07,945 1,35,93,30,982
G
Sundry debtors 11,45,09,441 10,80,11,642
H
Cash and bank balance 17,67,30,095 6,81,47,393
 I
Other current assets 28,08,246 15,13,709
J
Loans and advances 14,02,58,734 46,65,45,285
K
1,76,18,14,461 200,35,49,011
Less: current liabilities 131,17,17,583
L
Current liabilities 1,16,87,78,350
Provisions 8,19,43,171
Net current assets 51,10,92,940 69,18,31,428
TOTAL 2,19,18,10,084 2,10,52,61,640

3. BALANCE SHEET AS ON 31ST MARCH 2008

As at 31st as at 31st
Schedule March 2008 March 2007
SOURCES OF FUNDS
Shareholder’s funds

75
Share capital A 11,33,85,050 11,33,85,050
Reserves and surplus B 1,43,42,19,392 1,44,75,96,744
1,54,76,04,442 1,56,09,81,794
Loan funds
Secured loans C 43,88,86,979 19,36,77,300
Unsecured loans D 18,40,00,000 17,99,22,000
62,28,86,979 37,35,99,300
Deferred tax liability
Deferred tax liability 30,13,40,523 29,58,16,139
Less:- Deferred tax Assets 4,74,62,323 3,85,87,149
25,38,78,200 25,72,28,990
TOTAL 2,42,43,69,621 2,19,18,10,084
APPLICATION OF FUNDS
Fixed assets
Gross block E 2,16,25,26,621 2,07,88,63,416
Less: Depreciation 70,11,93,785 59,75,83,948
Net block 1,46,13,32,836 1,48,12,79,468
Capital working progress 1,44,95,594 7,28,45,659
1,47,58,28,430 1,55,41,25,127
Investments 5,36,53,134 12,65,92,017
Current assets, loan and advances
Inventories G 1,26,77,78,839 1,32,75,07,945
Sundry debtors H 6,09,19,428 11,45,09,441
Cash and bank balance I 20,84,05,389 17,67,30,095
Other current assets J 23,12,881 28,08,246
Loans and advances K 20,23,86,069 14,02,58,734
1,74,18,02,606 1,76,18,14,461
Less: current liabilities
Current liabilities 73,47,84,951 1,16,87,78,350
Provisions 11,21,29,598 8,19,43,171
Net current assets 84,69,14,599 51,10,92,940
TOTAL 2,42,43,69,621 2,19,18,10,084
4. BALANCE SHEET AS ON 31ST MARCH 2009
As at 31st as at 31st
Schedule March 2009 March 2008
SOURCES OF FUNDS
Shareholder’s funds
Share capital A 11,33,85,050 11,33,85,050

77
Reserves and surplus B 1,45,46,89,267 1,43,42,19,329
1,56,80,34,317 1,54,76,04,442
Loan funds
Secured loans C 27,46,77,379 43,88,86,979
Unsecured loans D 23,97,59,000 18,40,00,000
51,44,36,379 62,28,86,979
Deferred tax liability
Deferred tax liability 28,78,93,073 30,13,40,523
Less:- Deferred tax Assets 34,18,50,93 4,74,62,323
25,37,07,980 25,38,78,200
TOTAL 233,61,78,676 242,43,69,621
APPLICATION OF FUNDS
Fixed assets
Gross block E 217,85,03,874 2,16,25,26,621
Less: Depreciation 79,66,49,926 70,11,93,785
Net block 138,18,53,948 146,13,32,836
Capital working progress 1,40,65,017 1,44,95,59,4
139,59,18,965 147,58,28,430

Investments F 5,38,45,587 5,36,53,134

Current assets, loan and advances

Inventories G 128,45,84,247 126,77,78,839
Sundry debtors H 3,62,65,260 6,09,19,4285
Cash and bank balance I 57,86,88,27 20,84,05,389
Other current assets J 18,15,538 23,12,881
Loans and advances K 21,44,20,338 20,23,86,069
159,49,54,210 1,74,18,02,606
Less: current liabilities
Current liabilities 59,53,89,436 73,47,84,951
Provisions 11,31,50,650 11,21,29,598
Net current assets 70,85,40,086 84,69,14,549
TOTAL 233,61,78,676 242,43,67,621

5. BALANCE SHEET AS ON 31ST MARCH 2010

As at 31st as at 31st
Schedule March 2009 March 2010
SOURCES OF FUNDS
Shareholder’s funds

79
Share capital A 11,33,85,050 11,33,85,050
Reserves and surplus B 1,45,46,89,267 159,25,95,072
1,56,80,34,317 170,59,80,122
Loan funds
Secured loans C 27,46,77,379 15,08,00,583
Unsecured loans D 23,97,59,000 27,30,75,000
51,44,36,379 42,38,75,583

Deferred tax liability

Deferred tax liability 28,78,93,073 27,33,87,498
Less:- Deferred tax Assets 34,18,50,93 3,55,22,337
25,37,07,980 23,78,65,161
TOTAL 233,61,78,676 236,77,20,866
APPLICATION OF FUNDS
Fixed assets
Gross block E 217,85,03,874 224,42,54,858
Less: Depreciation 79,66,49,926 89,19,10,077
Net block 138,18,53,948 135,23,44,781
Capital working progress 1,40,65,017 1,74,77,285
139,59,18,965 136,98,22,066
Investments F 5,38,45,587 18,95,93,192

Current assets, loan and advances

Inventories G 128,45,84,247 110,98,19,602
Sundry debtors H 3,62,65,260 5,05,57,726
Cash and bank balance I 57,86,88,27 5,35,11,251
Other current assets J 18,15,538 52,89,046
Loans and advances K 21,44,20,338 30,25,24,386
159,49,54,210 152,11,01,505
Less: current liabilities
Current liabilities 59,53,89,436 57,67,90,672
Provisions 11,31,50,650 13,66,05,225
Net current assets 70,85,40,086 80,83,05,608
TOTAL 233,61,78,676 236,77,20,866

81