Guna Capital Budgetting

CAPITAL BUDGETING
INTRODUCTION
The term Capital Budgeting refers to long term planning for

proposed capital outlay and their financing. It includes raising long-term funds and
their utilization. It may be defined as a firm’s formal process of acquisition and
investment of capital.
Capital Budgeting May also be defined as “The decision making

process by which a firm evaluates the purchase of major fixed assets. It involves
firm’s decision to invest its current funds for addition, disposition, modification and
replacement of fixed assets.
It deals exclusively with investment proposals, which an

essentially long term projects and is concerned with the allocation of firm’s scarce
financial resources among the available market opportunities.
Some of the examples of Capital Expenditure are

(i) Cost of acquisition of permanent assets as land and buildings.
(ii) Cost of addition, expansion, improvement or alteration in the fixed assets.
(iii) R&D project cost, etc.,
SSBN DEGREE AND PG COLLEGE Page 1

CAPITAL BUDGETING
Definitions:
“Capital budgeting is long term planning for making and

financing proposed capital outlays”.
T.HORNGREEN
“Capital budgeting is concerned with allocation of the firm’s

scarce financial resources among the available market opportunities. The
consideration of investment opportunities. The consideration of investment
opportunities involves the comparison of the expected future streams of earnings from
a project with immediate and subsequent streams of expenditures for it”.
In any growing concern, capital budgeting is more or less a
continuous process and it is carried out by different functional areas of management
such as production, marketing, engineering, financial management etc. All the
relevant functional departments play a crucial role in the capital budgeting decision
process of any organization, yet for the time being, only the financial aspects of
capital budgeting decision are considered.
The role of a finance manager in the capital budgeting basically

lies in the process of critically and in-depth analysis and evaluation of various
alternative proposals and then to select one out of these. As already stated, the basic
objectives of financial management is to maximize the wealth of the share holders,
therefore the objectives of capital budgeting is to select those long term investment
projects that are expected to make maximum contribution to the wealth of the
shareholders in the long run.

CAPITAL BUDGETING
OBJECTIVES OF THE STUDY
 To study the relevance of capital budgeting in evaluating the project.
 To study the techniques of capital budgeting for decision-making.
 To analyse the present value of rupee invested.
 To understand transaction wise study of the company
 To make suggestions if any for improving the financial positions of the

company.

CAPITAL BUDGETING
NEED FOR THE STUDY
 The project study is undertaken to analyze and understand the Capital

Budgeting process in ANANTHA PVC PIPES PVT LTD, which gives mean
exposure to practical implication of theory knowledge.
 To know about the company’s operations of using various Capital budgeting

techniques.
 To know how the company gets funds from various resources.

CAPITAL BUDGETING
SCOPE OF THE STUDY
Capital budgeting is the method of calculations of inflows of

the project undertaken by the company and investment recovers position of the
company. For, the evaluation of the profitability position use discounting and non-
discounting techniques like IRR, NPV and Pay Back Period. So I choose the concept
for the study on capital budgeting for expansion (or) replacement of the business.

CAPITAL BUDGETING
INDUSTRY PROFILE
Introduction:
Plastic have become synonymous with modern living. It is

undoubtedly a product, which has penetrated extensively into the common man’s life.
No wonder the industry has achieved in terms of supply of raw material expansion
and diversification of processing capabilities and manufacturing of processing
machinery and equipment.
This versatile material with its superior qualities such as light

weight, easy process ability corrosion resistance, energy conservation, no toxicity etc.
many substitute to a large extent many conventional and costly industrial materials
like wood, metal, glass, jute, lather etc., in the future. The manifold applications of
plastics in the field of automobiles, electronics, electrical, packaging and agriculture
give enough evidence of the immense utility of plastics.
At 80 percent of total requirement for raw material and almost all

types of plastic machines required for the industry are indigenously available. The
present investment in all the three segments of the industry namely production of raw
materials, expansion and diversification of processing capacities, manufacturing of
processing machinery and ancillary equipment is Rs.1250 crores and it provides
employment to more than eight lakh people.
On account of their inherent advantage in properties and versatility

in adoption and use, plastics have come to play a vital role in a variety of applications,
the world over. In our country, plastics are used in making essential consumer goods
of daily use for common man such as baskets, shopping bags, water bags, water
bottles, school bags, tiffen boxes, hair combs, tooth brushes, spectacle frames and
fountain pens, they also find applications in field like packaging, automobiles, and
transportation, engineering, electronics, telecommunications, defense, medicine, and
building and construction. Plastics are growing in importance in agriculture and water
management.

CAPITAL BUDGETING
The Govt. of India recognizing the importance of plastics in

agriculture appointed on March 7th, 1981 a National Committee on the use of plastics
in agriculture under the chairmanship of Dr.G.V.K.Rao. This committee has forecast a
tremendous growth of drip irrigation through a net work of plastic pipes and tubes. In
its opinion large scale adoption of irrigation would lead to sports in demand for PVC
pipes, L.D.P.E tubes and polypropylene emitters. The committee made a number of
recommendations for promoting the use of plastics. The implementation of
recommendations would go along away in increasing the consumption of plastics,
which at present is very low. The rigid pipes, flexible pipes and sheeting, which are
being used for agricultural operations to carry out water place to place and also lining
of ponds and reservoirs to reduce seepage and most important in drip irrigation
system.
Export of plastics goods:
Plastics have excellent potentialities. Our country is equipped with

all kind of processing machinery and skilled labor and undoable, and extra to boost
export, finished plastics products will yield rich divided.
Today India exports plastic products to as many as 80 countries all

over the world. The exports, which were stagnant at around rest 60-70 cores per
annum double to 129 craters. The Plastic industry has taken up the challenge of
achieving an export target of Rs.17 cores.
Major export markets for plastic products and linoleum are
Australia, Bangladesh, Canada, Egypt, Hong Kong, Italy, Kuwait, Federal Republic of
Germany, Sri Lanka, Sweden, Taiwan, U.K., U.S.A., and Russia.
With view to boosting the export, the plastics and linoleum’s export
promotion council has urged the government to reduce import duty of plastic raw
material, supply indigenous raw materials at international prices, fix duty, draw backs
on weighted average basis and charge freight rate on plastic products on weights basis
instead of volume basis.

CAPITAL BUDGETING
Prospects:
The Production of various plastics a raw materials in the country is
expected to double by the end of seventh plan, the consumption of commodity plastics
including LDPE, HDPE, PP, PS AND PVC is immense scope for the use of plastics in
agriculture, electronics, automobile, telecommunications and irrigation and thus, the
plastic industry is on the threshold of an explosive growth.
Role of plastics in national economy
Plastics are got perceived as just simple colorful household products
in the mind so common person. A dominant part of the plastics of the percent and
future find their utilization in the areas.
 Agriculture, forestry and water-management.

 Automobile and transportation
 Electronics and telecommunications, buildings, construction and.
 Food processing and packaging
 Power and gas distributor.
Importance of Pipes Industry
We shall look at the basic data about plastics and particularly those
properties, which are so, fuse in practical working with plastics. Plastics are man-
made materials. The oldest raw material for producing plastics is carbonaceous
material obtained from coal tar (benzene, phenol).
Today the majority of raw materials are obtained from petrol

chemical source and they can be economically produced in large quantities.
Plastics have changed our world and day-by-day they are becoming
important. They own their success to whole series of advantage, which they have over
conventional materials such as:

CAPITAL BUDGETING
 Lightweight
 Excellent mould ability
 Attractive colors
 Low energy requirements for convention
 Low labor and cost of manufacture
 Low maintenance & High strength weight ratio
Economic role:
Agriculture is the chief occupation in India. For the developing

countries like India modernization of the agriculture practices assumes pivotal places
in improving the economic status and the process of modernization. Includes, usage of
higher productive plastics supplement to greater extent manufacturing of tools
required for new agricultural practices.
The usage of poly vinyl chloride pipes in agricultural fields, lesser

water seepage, which was predominant in earlier practices, with services of P.V.C
pipes, water can be transported efficiently with lesser from the place of higher
potential to the place of lower water potential.
Presently the revolutionary tried in water management speaks much

about drip irrigation, which is developed in Israel and is practiced by all agricultural
based nations in the world. Drip irrigation greatly P.V.C pipes as core tools of
implementation with the services of this sort, P.V.C pipes one way or the other
strengthening the hands of country’s economy.
A part with the referred P.V.C pipes supplemented with fitting is

used in houses for electrical connection and other domestic purposes. Apart from
these two applications it has got wide applications even in industrial sectors. P.V.C

CAPITAL BUDGETING
pipes with much unique heart, chemical and physical characteristics serve many
industrial purposes.
Even characteristics of weight and low price attract many more

applications. Rigid PVC pipes have been manufactured in India from the 60’s on
imported extrusion lines and there after indigenous plan were few pipes manufactures
up to 1979-83. When many extrusion lines were imported from batten field,
Cincinnati, kraaus-maffi etc. the Govt. allowed the imports of sophisticated and high
output plants, which were not available indigenously.
PVC PIPES IN INDIA
Pipes products have found wide acceptance in India and abroad.

PVC is one of the more versatile plastics. It can be extruded, moulded, calendared and
thermoformed into a multitude of furnished products. The PVC resin can be
formulated to give a wide range of properties ranging from hand, tough materials for
load bearing application lime pipes, windows and doors to flexible materials for
products a due as wire and cable insulation and shooting and flooring.
PVC products cater to both interiors and exteriors. In interiors it

can be used for flooring, profile and cable tray, wall covering modular office systems,
houses and furniture. For exteriors it is used for doors and windows, fencing partitions
and paneling, roofing and rain systems.
The other external applications are in the field of irrigation, portable

water supplies. In the field of irrigation there are several methods to irrigate the fields.
There are minor irrigation projects and major irrigation projects apart from individual
sources like wells, tube wells, bore wells. Major irrigation sector small projects will
have canals and lift irrigation schemes etc., will have canals and lift irrigation
schemes etc., will have pipelines. Cement and GI pipes were the pipes used in

CAPITAL BUDGETING
conventional methods of irrigation. Now-a-days PVC pipes replaced the conventional

pipes and they constituted almost 90% in this respect.
Drip irrigation popular in the agricultural sector especially in the

field of horticulture commercial cropping and green ply houses. The drip irrigation
concept is becoming more popular with its advantages like highly yield, water
conversion, less labour cost, less fertilizer, less past management costs, less power
costs and many more advantages. The demand for this concept is increasing at a place
of 30%-40% per annum.
Agriculture a sunrise industry in the Indian economy is mainly

dependent on the PVC pipes for the seawater sector and pumping to their aqua ponds.
They are using pipelines of four to five kilometers of 10-16 diameters pipes.
The state Govt. of A.P is using rigid PVC pipes for the irrigation
water supplies for the past few years. The state Govt. is producing PVC pipes through
APSIDC (Andhra Pradesh State Irrigation Development Corporation) for its lift
irrigation schemes. The panchayatraj department is producing pipes for public water
supply schemes. These pipes can be used for the main distributors, sub-distributors
and individual connections.

CAPITAL BUDGETING
COMPANY PROFILE
Introduction:
A dynamic entrepreneur Sri S P Y Reddy was established a black

pipes manufacturing company in 1977 and the name of the company is Nandi Pipes
Pvt Ltd at Nandyal, Kurnool district. Anita PVC Pipes Pvt Ltd was incorporated in the
year 2002. The factory is situated at NH-7, Hampapuram village, Raptadu mandal,
and Anantapur district and it was taken over by Nandi Group Company. The company
is managed by team of professionals under the guidance of young, experienced, and
well qualified dynamic managing director Mr. S Sreedhar Reddy.
Origin:
Rayalaseema is economically backward area in Andhra Pradesh,

was rare field region for industries. A dynamic entrepreneur sir S.P.Y.Reddy who is
basically mechanical engineer started a unit at Nandyal, which manufactures black
pipes in 1977. The determination and hard work of Sri S.P.Y.Reddy helped him to
overcome the problems faced by the company in the initial years, and with financial
assistance from local commercial banks. The company could overcome the problems
of the merger and now it is running smoothly.
Later the company started manufacturing of PVC pipes which

terminated the manufacturing of black pipes. This resulted in the formation of a Pvt.
Ltd. company called “SUJALA PIPES PVT.LTD.” with Sri S.P.Y.Reddy as the
Managing Director.
The only major competitors to the company are Sudhakar pipes,

Maharaja Pipes. The only backdrop to it is the competition from local brands. As the

CAPITAL BUDGETING
majority of the customers belong to farmers, they consider the quality. The company
has to make aware of the company’s quality standards to them.
Board of directors:
S.P.Y.Reddy:
Sri S.P.Y.Reddy locally well known industrialist with the base at

Nandyal, Kurnool district who has been successful entrepreneur, he is technically
qualified person with B.E (MEC) from R.E.C (Warangal) and with work experience at
BAARC (Bombay). He has daringly ventured and established industries in and around
Nandyal from 70’s. As years went of he has established most successfully the
following Nandi group of companies:
 Nandi Milk
 Maha Nandi Mineral Water
 Nandi Infosys
 Nandi Online Services
 ANANTHA PVC PIPES PVT LTD.
 Integrated Thermos Plastic Ltd.
 Nandi PVC Projects.
Promoter:
Sri S Sreedhar Reddy, a computer engineer and a student of IIM,
Ahemadabad has been entrusted the management of ANANTHA PVC PIPES PVT
LTD., Hampapuram and great assistance and a great upcoming engineer and
industrialist.
Branches:
 Pondicherry
 Bellary
 Sangli
 Vellore
CAPITAL BUDGETING
 Goa
 Kerala
Coverage:
At present Andhra Pradesh, parts of southern states of Karnataka,

Tamilnadu and Kerala are ambit of Sujala Pipes Pvt Ltd.
The company extended their sales in the below regions are shown below:
1979 Nandyal Region(polyphone pipes)
1984.85 Rayalaseema Region (PVC pipes)
1985.86 Telangana Region
1986.87 Karnataka and Andhra Pradesh
1988.91 Tamilnadu and Karnataka
1991.94 Kerala
Sizes:
Various sizes ranging from ½ to 10 are offered to customers. Even

pipes with different gauges and sizes are manufactured to suit specified conditions.
Packing:
Packing plays less important role into the products like PVC pipes
because the hallow space inside can be utilized. For, the purpose of cubic space
utilization in trucks while transport, organization is adopting the technique like pipes
in pipes.
Payment period:
For monarch brand the company adopts zero credit policy and
goods are not delivered unless cash remittances are made. For monarch and sagar

CAPITAL BUDGETING
brands credit is entitled up to a week. The difference between these brands is due to
brand image.
Technical details about PVC pipes:
Ingredients:
 PVC resin
 D.B.L.S
 T.B.L.S
 L.S
 C.S
 Stearic Acid
 Hydro Carbon
 Calcium Carbonate
Manufacturing process:
The main raw materials are HDPE granules and PP granules. The
manufacturing process for pipes consists of mixing various resins along with the
coloring materials in a mixture and the prepared material is fed to the extruder. In the
extruder, the material is heated to the required politicizing temperature (190deg.
centigrade to 230deg. centigrade) the extruder through the die hard to form the pipe.
The hot pipe coming out of the extruder is cooled in a water bath to retain the final
shape.
The pipe coming out of the extruder is guided through the water
bath suitable transaction system. The temperature of the water is maintained by
circulating through the cooling towards and with the help of a chilling plant.

CAPITAL BUDGETING
The required length of the pipe is cut with a planetary saw. The cut
lengths are titled by titling units and get corrected in the pipe rack attached to the
titling frames. Later they are stocked separately. The company has entered into a
technical with its own processing technology.
Channels of distribution:
ANANTHA PVC PIPES PVT LTD. has got zero level and single
level channel of distribution.
MANUFACTURER CONSUMER
MANUFACTURER DEALER CONSUMER
ANANTHA PVC PIPES PVT LTD. has an extensive network of

350 dealers in Andhra Pradesh and who are directly serviced by company sales force
and 620 dealers in South India.
Transportation:
Transportation vehicles of ANANTHA PVC PIPES PVT LTD.

outnumber the fleet of the competitor’s vehicle. This unique strength of the
organization enables the delivery system to be efficient. This event helps the dealers
to reduce inventory levels to the minimum. The dealers are also supplemented with
the benefit of the lower paid up capital in the form of inventory.
ANANTHA PVC PIPES PVT LTD:
ANANTHA PVC PIPES PVT LTD. was incorporated in the year

Feb 2002. The factory is situated at NH-7, Hampapuram village, Raptadu mandal, and

CAPITAL BUDGETING
Anantapur district. It was taken over by Nandi group company, and it is one of the
sister company among the Nandi groups.
Its annual production capacity is 18,000 mts. And it is one of the

leading manufacturers of PVC pipes in south India. This company is equipped with
technical collaboration from Batten field of West Germany. It has made possible few
other small ventures. Pipes are sold under the brand names of MONARCH,
KOHINOOR and KRISHNA.
ANANTHA PVC PIPES with their good quality, trouble free

services, durability and commercial use are a better choice than mild steel, galvanized
steel, cast iron and plastic pipes.
The company is managed by a term of professionals under the

guidance of a young, experienced and well qualified dynamic managing director Mr.
Sreedhar Reddy.
Mission Statement:
The mission statement of ANANTHA PVC PIPES PVT LTD. is as follows:

 To be preferred supply chain partner to out customer.
 To be recognized as the best in the world at we do.
 To create new values in the quality for our customers and employees.
Vision Statement:
The vision statement of ANANTHA PVC PIPES PVT LTD. is as follows:
“Creating new values in quality by working together for you”
Functional departments of the company:
Financial department:

CAPITAL BUDGETING
Through initially the company approached the external source

for financial aid, now the financial status of the company is very sound and is being
run only with self finance excepting for loans taken for hypothecation of machinery
and stock from SBI Nandyal.
The company follows cash and carry policy for monarch brand.
The product is not delivered until the cash is paid and financial department with the
help of marketing department looks after these transactions.
Marketing department:
Marketing Department is headed by the Executive Director.

Marketing Manager is in charge of all operations who reports to the Executive
Director. Marketing Manager and 35 Sales Representatives are under the control of
Executive Director. There are also 20 salesmen who have to report to the sales
representatives above them.
Personal Department:
The Personal department consists the details of the executives

and workers of the organization. The organization is formed with Sri.S.P.Y.Reddy as
the managing Director. Two Marketing managers, financial managers, public relations
officer and quality control officer who all reports to executive director. Other, than
executives there are thousands workers in the organization.
Panel consisting of managing director, executive director and

managers of concerned departments makes the recruitment and selections of persons.
Apart from the attractive salaries company provides health card facilities.
Purchasing department:
The perplexing situation i.e. conformed by the manufactures of
the PVC pipes is scarcity of resin. Though the government of India has taken various

CAPITAL BUDGETING
steps to improve the supply conditions of PVC resin, the Indian manufactures could
meet only 50 percent of demand and remaining 50 percent is met from imports. The
major petrochemical company is Reliance Petrochemical Ltd. The lead time for the
acquisition of raw materials is 4 days.
The following lines highlight the human resources policies and practices:
 Effective utilization of manpower.

 To provide good working condition.
 To promote industrial development.
Application of PVC pipes:
 Agriculture and irrigation schemes.

 Rural and urban water supplies scheme.
 Tube well casing.
 Gas and oil supply lines.
 Industrial effluent disposal.
 Sewerage and drainage scheme.
 Air-condition ducting.
 Building installations.
 Industrial ducting.

CAPITAL BUDGETING
PRODUCT PROFILE
Pipe hollow structure usually cylindrical, for conducting materials.

It is used primarily to convey liquids, gases or solid suspended in a liquid for e.g.
slurry and also used for electric wires. The earliest pipes were probably made of
bamboo. Used by the Chinese to carry water c.5000 BC. The Egyptians made the first
metal pipe of copper c.3000 BC until the cost iron became relatively, Copper or
bronze. Modern materials include cast iron weight iron, steel, copper, brass, bead,
concrete, wood, and glass, plastic. In lying an oil pipeline, 40’ft (12-m) sections of
seamless steel pipe are electrically welded together while held over a trench. Before
being lowered into place the pipe is coated with a protective paint and wrapped with a
substance composed of treated asbestos felt and fiberglass.
Pumping section located 50 to 75 ml (80-120km). A part boosts the
dwindling pressure backup as much as 1500’lb per inch. The piping must be kept
clean either by applying a negative electronic charge to the pipe or by regular use of a
“pig”, or scrubbing ball, inserted at one end and carried along by the current. An oil
pipe line 6 inches (15 cm) to 24 inches (60 cm) in diameter will move it contents at
about 3 to 6 ml (5-10) per hr. Water has moved since ancient times in pipelines called
aqueducts.

CAPITAL BUDGETING
REVIEW OF LITERATURE
Introduction
One of the three major decisions made by managers is the

decision to invest in fixed assets. Investments in fixed assets involve large capital
outlays and the consequences of these investments decisions impact a firm’s
operations for a very long time. Therefore a variety of quantitative and analytical
techniques are applied by managers in project selection to enable them to make good
decisions in this area.
2. Literature
It is widely accepted that discounted cash flow methods are the

best way to evaluate capital budgeting proposals. While several decades ago
discounted cash flow methods may not have been widely used (Istvan, 1961) more
recent studies (Kim, Crick and Kim, 1986) suggest that increasingly firms are
adopting discounted cash flow analysis. Much of the empirical research on capital
budgeting practices adopted by corporate managers is based on US data (See for
example Mukherjee and Hingorani, 1999.) A few studies such as those by Payne,
Heath, and Gale (1999), Jog and Srivastava (1995) and Keste et. al (1999), examine
capital budgeting practices followed by firms in different countries such as Canada,
Australia, Hong Kong, Indonesia, Malaysia, Philippines and Singapore. This study
examines managerial behavior and preferences with respect to the capital budgeting
decision using a sample of German firms. Our unique sample and the results of our

CAPITAL BUDGETING
analysis help to fill a gap in finance literature and provide useful information to
managers contemplating German collaborations.
Capital budgeting is the process by which firms determine how

to invest their capital. Included in this process are the decisions to invest in new
projects, reassess the amount of capital already invested in existing projects, allocate
and ration capital across divisions, and acquire other firms. In essence, the capital
budgeting process defines the set and size of a firm’s real assets, which in turn
generate the cash flows that ultimately determine its profitability, value, and viability.
In principle, a firm’s decision to invest in a new project should
be made according to whether the project increases the wealth of the firm’s
shareholders. For example, the Net Present value (NPV) rule specifies an objective
process by which firms can assess the value that new capital investments are expected
to create. As Graham and Harvey (2001) document, this rule has steadily gained in
popularity since Dean (1951) formally introduced it, but its widespread use has not
eliminated the human element in capital budgeting. Because the estimation of a
project’s future cash flows and the rate at which they should be discounted is still a
relatively subjective process, the behavioral traits of managers still affect this process.
Studies of the calibration of subjective probabilities find that
individuals are overconfident in that they tend to overestimate the precision of their
knowledge and information (Fischhoff, Slovic, and Lichtenstein, 1977; Alpert and
Raffia, 1982). In fact, research shows that professionals from many fields exhibit
overconfidence in their judgments, including investment bankers (Stael von Holstein,
1972), engineers (Kidd, 1970), entrepreneurs (Cooper, Woo, and Dunkelberg, 1988),
lawyers (Wagenaar and Keren, 1986), negotiators (Neale and Bazerman,1990), and
managers (Russo and Schoemaker, 1992).
Several factors may explain why managers may also be expected to
be overconfident, especially in a capital budgeting context. First, capital budgeting
decisions can be complex. They often require projecting cash flows for a wide range
of uncertain outcomes.
Second, capital budgeting decisions are not well suited for learning.
As Kahneman and Lovallo (1993, p. 18) note, learning occurs “when closely similar
problems are frequently encountered, especially if the outcomes of decisions are

CAPITAL BUDGETING
quickly known and provide unequivocal feedback.” In most firms, managers

infrequently encounter major investment policy decisions, experience long delays
before learning the outcomes of projects, and usually receive noisy feedback.
Furthermore, managers often have difficulty rejecting the notion that every situation is
new in important ways, allowing them to ignore feedback from past decisions
altogether. Learning from experience is highly unlikely under these circumstances
(Einhorn and Hogarth,1978; Brehmer, 1980).
Third, unsuccessful managers are less likely to retain their jobs and
be promoted. Those who succeed may become overconfident because of a self-
attribution bias. Most people overestimate the degree to which they are responsible
for their own success (Miller and Ross, 1975; Langer and Roth, 1975; Nisbett and
Ross, 1980). This self-attribution bias causes successful managers to become
overconfident (Daniel, Hirshleifer, and Subrahmanyam, 1998; Gervais and Odean,
2001).
Fourth, managers may be more overconfident than the general

population because of a selection bias. Those who are overconfident and optimistic
about their prospects as managers are more likely to apply for these jobs. Moreover,
as Goel and Takor (2008) show, firms may endogenously select and promote on the
basis of overconfidence, as overconfident individuals are more likely to have
generated extremely good outcomes in the past. Finally, as Gervais, Heaton, and
Odean (2009) argue, overconfident managers may simply be easier to motivate than
their rational counterparts and so hiring them is more appealing to firms.
Reviews and Appeals of Capital Budgeting
In the corporate finance capital budgeting survey literature

the capital budgeting process has been described in terms of four stages: (1)
identification, (2) development, (3) selection, and (4) control. The identification stage
comprises the overall process of project idea generation including sources and
submission procedures and the incentives/reward system, if any. The development
stage involves the initial screening process relying primarily upon cash flow
estimation and early screening criteria. The selection stage includes the detailed
CAPITAL BUDGETING
project analysis that results in acceptance or rejection of the project for funding.
Finally, the control stage involves the evaluation of project performance for both
control purposes and continuous improvement for future decisions.
All four stages have common areas of interest including

personnel, procedures, and methods involved, along with the rationale for each. All
four stages are critical to the overall process, but the selection stage is arguably the
most involved since it includes the choices of analytical methods/techniques used,
how the cost of capital is determined, how adjustments for projects risks are assessed
and reflected, and how, if relevant, capital rationing affects project choice. The
selection stage has also been the most investigated by survey researchers, particularly
in the area of selection techniques, resulting in a relative neglect of the other stages.
This in turn has led to appeals to future researchers to consider the other stages in
their survey research efforts
As Gordon and Pinches (1984) View:
Most of the literature on the subject of capital budgeting

has emphasized the selection phase, giving little coverage to the other phases. Instead,
it is usually assumed that a set of well-defined capital investment opportunities, with
all of the informational needs clearly specified suddenly appears on an executive’s
desk and all that is needed is for the manager to choose the project (s) with the highest
expected payoff. However, as most managers quickly learn, this is not the case.
Further, once projects are chosen, the evaluation of an individual project’s subsequent
performance is usually either ignored or often inappropriately handled. Our
contention is that the capital budgeting process must be viewed in its entirety, and the
informational needs to support effective decisions must be built into the firm’s
decision support system

CAPITAL BUDGETING
THEROTICAL FRAME WORK
Introduction
Capital Budgeting May also be defined as “The decision making
process by which a firm evaluates the purchase of major fixed assets. It involves
firm’s decision to invest its current funds for addition, disposition, modification and
replacement of fixed assets.
Features of Capital Budgeting:
 The important features, which distinguish capital budgeting decisions in other

Day-to-day decisions, are
 Capital budgeting decisions involve the exchange of current funds for the
benefits 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 terms are significant effect on the profitability of the
concern.
 They involve huge funds.
 They are irreversible decisions. They are strategic decisions associated with
high degree of risk.

CAPITAL BUDGETING
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 an permanent basis. The long-term commitment of
funds increases the financial risk involved in the investment decision.
3. Irreversible nature:
The Capital expenditure decisions are of irreversible nature.
Once, the decision for acquiring a permanent asset is taken, it becomes very difficult
to dispose of these assets without incurring heavy losses.
4. Long terms effect on profitability:

CAPITAL BUDGETING
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 investments 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 importance to avoid over or under investment in fixed
assets.
5. Difficulties of investment decision:
The long terms investment decisions 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.

CAPITAL BUDGETING
FACTORS INFLUENCING CAPITAL EXPENDITURE DECISIONS:

There are many, factors financial as well as non financial which
influence the capital expenditure decisions and the profitability of the proposal yet,
there are many other factors which have to be taken into consideration while taking a
capital expenditure decision. They are:
1. URGENCY: sometimes, an investment is to be made due to urgency for the
survival of the firm or to avoid heavy losses. In such circumstances, proper
evaluation cannot be made through profitability tests. Examples of such urgency
are breakdown of some plant and machinery, fire accidents etc.
2. DEGREE OF UNCERTAINITY: profitability is directly related to risk, higher

the profits, greater is the risk or uncertainty Sometimes, a project with some lower
profitability may be selected due to constant flow of income as compared to
another project with an irregular and uncertain inflow of income.
3. INTANGIBLE FACTORS: sometimes, a capital expenditure has to be made due

to certain emotional and intangible factors such as safety and welfare of the
workers, prestigious project, social welfare, goodwill of the firm etc.
4. AVAILABILITY OF FUNDS: as the capital expenditure generally requires the

provisions of law is solely influenced by this factor and although the project may
not be profitable, yet the investment has to be made.
5. AVAILABILITY OF FUNDS: as the capital expenditure generally requires large

funds the availability of funds is an important factor that influences the capital
budgeting decisions. A project howsoever profitable may not be taken for want of

CAPITAL BUDGETING
funds and a project with lesser profitability may sometimes be preferred due to
lesser pay back period for want of liquidity.
6. FUTURE EARNINGS: a project may not be profitable as compared to another

today, but it may promise better future earnings. In such cases, it may be preferred
to increase future earnings
RISK AND UNCERTAINITY IN CAPTIAL BUDGETING:
All the techniques of Capital Budgeting require the estimation

of future cash inflow and cash outflow. The cash flows are estimated, based on the
following factors.
 Expected economic life of the project

 Salvage value of the asset at the end of the economic life
 Capacity of the project
 Selling price of the product
 Production cost
 Depreciation rate
 Rate of taxation
 Future demand of the product, etc.,
But, due to uncertainties about the future, the estimates of

demand, production, sales, costs, selling price, etc cannot be exact. For example a
product may become obsolete much earlier than anticipated due to unexpected
technological developments all these elements of uncertainties have to be taken into
account in the form of forcible risk while taking a decision on investment proposals. It
is perhaps the most difficult task while making an investment decision. But some
allowances for the element of risk has to be provided.
CAPITAL EXPENDITURE CONTROL:

CAPITAL BUDGETING
Capital expenditure involves non-flexible long term commitment

of funds. The success of an enterprise in the long run depends upon the effectiveness
with which the management makes capital expenditure decisions. Capital expenditure
decisions are very important as their impact is more or less permanent on the well
being and economic health of the enterprise. Because, of its large scale mechanization
and automation and importance of capital expenditure for increase in the profitability
of a concern. It has become essential to maintain an effective system of capital
expenditure control.
OBJECTIVES OF CONTROL OF CAPITAL EXPENDITURE:
 To make an estimate of capital expenditure and to see that the total cash outlay
is within the financial resources of the enterprise.
 To ensure timely cash inflows for the projects so that non availability of cash
may not be a problem in the implementation of the problem.
 To ensure that all capital expenditure is properly sanctioned.
 To properly co-ordinate the projects of various departments.
 To measure the performance of the project.
 To ensure that sufficient amount of capital expenditure is incurred to keep
pace with the rapid technological development.
 To prevent over expansion.
LONG TERM SOURCES OF FINANCE

It is natural phenomenon that the firm is always in deficit of funds. There
are two methods of raising funds.
1) Long term sources

2) Short term sources.
Capital budgeting decisions involve long term funds. The different long term
sources of finance generally followed by companies are:
1) Shares
2) Debentures
3) Term Loans.
SHARES:

CAPITAL BUDGETING
Shares include ordinary or common shares and preference shares.

Ordinary or common shares are the source of permanent capital since they do not
have a maturity date. The holders of ordinary shares are share holders or stock holders
are the legal owners of the company.
Preference share is considered to be hybrid security as it has many features
of both ordinary shares and debentures. Preference shares may be issued with or
without maturity date. The holders of preference shares get dividend at a fixed rate
and have preference over ordinary share holders.
DEBENTURES:
Debentures are a long term promissory note for raising loan capital.
The debenture trust deed defines the legal relationship between the issuing company
and the debenture trustee who represent the debenture holders.
TERM LOANS:
Term loans for more than a year maturity. It is generally available

for a period of 10 years. Interest on term loans is tax deductable. They are obtained
from banks and specially created financial institutions like IFCI, ICICI IDBI etc. the
purpose of term loans is mostly to finance the company’s capital expenditure. They
are generally obtained for financing large expansion, modernization or diversification
projects. Hence, this method of financing is also called pro0ject financing. This is the
most widely used source of financing.
LEASE FINANCING:
A lease is an agreement for the use of an asset for a specified rental.

The owner of the asset is called the lesser and the user the lessee. Two important
categories of lease are 1) Operating leases
2) Financial leases
Operating leases are short term cancelable leases where the risk of
obsolescence is born by the lesser.

CAPITAL BUDGETING
Financial leases are long tern non-cancellable leases where any risk
in the use of asset is borne by the lessee and he enjoys the return too.
BUYING OR PROCURING:
Buying or procurement involves purchasing an asset permanently

in the form of cash or credit.
LEASING (VS) BUYING:
Leasing equipment has the tax advantage of depreciation which

can mutually benefit both the lesser and lessee. Other advantages of leasing include
convenience and flexibility as well as specialized services to the lessee. Lease proves
handy to those firms to those firms which cannot obtain loan capital from normal
sources.
The pros and cons of leasing and buying are to be examined

thoroughly before deciding the method of procurement i.e., leasing or buying.
CAPITAL BUDGETING PROCESS:
Capital budgeting is a complex process as it involves decisions

relating to the investment of current funds for the benefit to be achieved in future and
the future is 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 the various proposals in the light of the corporate
strategies and submits the suitable proposals to the capital expenditure planning.

CAPITAL BUDGETING
Screening Proposals:
The expenditure planning committee screens the various

proposals received from different departments. The committee views 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 methods, which may be used for this purpose such as, payback period
method, Rate of return method, N.P.V and I.R.R etc.
Priorities:
After evaluating various proposals, the unprofitable

uneconomical proposal may be rejected but 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 projects/proposals after considering urgency, risk and profitability
involved there in.
FINAL APPROVAL AND PREPERATION OF CAPITAL EXPENDITURE
BUDGET:
Proposals meeting the evaluation and other criteria are finally

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 authority to spend the amount should be made to the capital

CAPITAL BUDGETING
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 techniques like 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
budgeted 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.
KINDS OF CAPITAL BUDGETING DECISIONS
The overall objectives of capital budgeting are to

maximize the profitability of a firm or the return on investment. These objectives can
be achieved either by increasing revenues or by reducing costs. This, capital
budgeting decisions can be broadly classified into two categories.
1. Increase revenue.
2. Reduce costs.
The first category of capital budgeting decisions is expected to

increase revenue of the firm through expansion of the production capacity or size of
the firm by reducing a new product line. The second category increases the earning of
the firm by reducing costs and includes decisions relating to replacement of obsolete,
outmoded or worn out assets. In such cases, a firm has to decide whether to continue
the same asset or replace it. The firm takes such a decision by evaluating the benefit
from replacement of the asset in the form or reduction in operating costs and the cost\
cash needed for replacement of the asset. Both categories of above decision involve
investments in fixed assets but the basic difference between the two decisions are in
the fact that increasing revenue investment decisions are subject to more uncertainty
as compared to cost reducing investments decisions.

CAPITAL BUDGETING
Further, in view of the investment proposal under consideration, capital

budgeting decisions may be classified as:
1. Accept Reject Decision:
Accept reject decisions relate independent projects do not

compute with one another. Such decisions are generally taken on the basis of
minimum return on investment. All those proposals which yield a rate of return
higher than the minimum required rate of return of capital are accepted and the rest
rejected. If the proposal is accepted the firm makes investment in it, and the rest are
rejected. If the proposal is accepted the firm makes investment in it, and if it is
rejected the firm does not invest in the same.
2. Mutually Exclusive Project Decision:
Such decisions relate to proposals which compete with one

another in such a way that acceptance of one automatically excludes the acceptance of
the other. Thus one of the proposals is selected at the cost of the other. For ex: A
company has the option of buying a machine. Or a second hand machine, or taking on
old machine hire or selecting a machine out of more than one brand available in the
market. In such a cases the company can select one best alternative out of the various
options by adopting some suitable technique or method of capital budgeting. Once the
alternative is selected the others. Are automatically rejected.
Capital Rationing Decision:
A firm may have several profitable investment proposals but

only limited funds and, thus, the firm has to rate them. The firm selects the
combination of proposals that will yield the greatest profitability by ranking them in
descending order of their profitability.

CAPITAL BUDGETING
METHODS OR TECHNIQUES OF CAPITAL BUDGETING:
There are many methods for evaluating the profitability of

investment proposals. The various commonly used methods are
Traditional methods:
(I) Payback period method (P.B.P)

CAPITAL BUDGETING
(II) Accounting Rate of return method (A.R.R)
Time adjusted or discounting techniques:
(I) Net Present value method (N.P.V)
(II) Internal rate of return method (I.R.R)
(III) Profitability index method (P.I)

1. PAY-BACK PERIOD METHOD:
The pay back sometimes 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 the 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.
 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-term approach, this method is particularly suited to a firm
which has shortage of cash or whose liquidity position is not good.

CAPITAL BUDGETING
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 decisions.
2. 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 used in several ways, as
Average Rate of Return Method:
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 dep. & tax)

Average rate of return = x 100
Net Investment
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.

CAPITAL BUDGETING
 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.
 This method cannot be applied to a situation where investment in project is

to be made in parts.
3. NET PRESENT VALUE METHOD:
The NPV 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 outflows at the above-determined discount rate.
3. Compute the present value of cash inflows at the predetermined rate.
4. Calculate the NPV of the project by subtracting the present value of cash outflows
From, present value of cash inflows.
Decision rule
Accept the project if the NPV of the project is 0 or +ve 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.

CAPITAL BUDGETING
 It takes in to account the earnings over the entire life of the project and
gives the true view of 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.
4. PROFITABILITY INDEX METHOD 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. Thus
PV of cash inflows
Profitability index =
Initial Investment or cash outflows
Net profitability index = Profitability index - 1
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 applied in a situation
with uniform cash outflows and uneven cash inflows.
 It takes into an 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 objective of maximum profitability.
DISADVANTAGES:

CAPITAL BUDGETING
 More difficult to understand and operate.

 It may not give good results while comparing projects with Unequal
investment funds.
 It is not easy to determine and appropriate discount rate.
 It may not give good results while comparing projects with unequal lives as
the project having higher NPV but have a longer life span may not be as
desirable as a project having some what lesser NPV achieved in a much
shorter span of life of the asset.
5. 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 outflows”.
Decision Rule:
Accept the proposal having the higher rate of return and vice versa.
If IRR>K, accept project.
K = cost of capital.
If IRR<K, reject project.
DETERMINANTION OF IRR
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:

CAPITAL BUDGETING
PV of cash inflows at lower rate - PV of cash outflows

IRR = LR + x (Hr-Lr)
PV of cash inflows at lower rate-PV of cash inflows at higher rate
The steps are involved here are
1. Prepare the cash flow table using assumed discount rate to discount the net
cash Flows to the present value.
2. Find out the NPV, & if the NPV is positive, apply higher rate of discount.
3. If the higher discount rate still gives a positive NPV, increase the discount rate
further. Until, the NPV becomes zero.
If the NPV is negative, at a higher rate, NPV lies between these two rates.
ADVANTAGES:
 It takes into account, the time value of money and can be applied in situations
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 provides for uniform ranking of various 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 NPV and IRR methods may 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
IRR for the remaining life of the project, which is not a justified assumption.

CAPITAL BUDGETING
RESEARCH METHODOLOGY
SOURCES OF DATA:
To achieve a fore said objective the following methodology has
been adopted. The information for this report has been collected through the primary
and secondary sources.
Primary sources:
It is also called as first handed information the data is collected

through the observation in the organization and interviews with officials. By asking,
questions with the accounts and other persons in the financial department. A part
from these some information is collected through the seminars, which were held by
ANANTHA PVC PIPES PVT LTD.
Secondary sources:
These secondary data is existing data which is collected data

which is collected by others that is sources are financial journals, annual reports of the
ANANTHA PVC PIPES PVT LTD.,

CAPITAL BUDGETING
Research Design:
Research design - Analytical

Analytical tools- - Capital Budgeting, analysing the capital
budgeting,techniques
Traditional and Modern methods
Data Sources - Secondary data has been collected from
Company records, annual reports
Period of study - 2006 to 2010
LIMITATIONS OF THE STUDY
 Lack of awareness of ANANTHA PVC PIPES PVT. LTD.
 Lack of time is another limiting factor the schedule period 6 weeks are not
sufficient to make the study independently regarding Capital budgeting in
ANANTHA PVC PIPES PVT LTD
 The busy schedule of the officials in the ANANTHA PVC PIPES PVT LTD is
another limiting factor. Due to the busy schedule of officials restricted me to
collect the complete information about organization.
 Non-availability of confidential financial data.
 The study is conducted in a short period, which was not detailed in all aspects.

CAPITAL BUDGETING
DATA ANALYSIS AND INTERPRETATION
INVESTMENT EVALUATION CRITERIA
Three steps are involved in the evaluation of an investment:
 Estimation of Cash Flows.

 Estimation of the required rate of return.
 Application of a decision rule for making the choice.
The investment decision rules may be referred to as capital

budgeting techniques or investment criteria. A sound appraisal technique should be
used to measure the economic worth of the investment project. The essential property
of a sound technique is that it should maximize the shareholder’s wealth.
“Here, in the data analysis the financial Manager to suggest their

information to taking the initial investment from the year 2007. Because, the
company registered in the year before, the 2006 on that year the company is a
proprietary company”.
A number of capital budgeting techniques are used in practice. They may be grouped
as follows:
 Payback period
 Average rate of return (ARR)
CAPITAL BUDGETING
 Net Present Value (NPV)

 Profitability Index
 Internal Rate of Return
All these methods of capital budgeting techniques are explained in detail below
Initial Investment 2,00,00,000 Rs. Tax percentage 25% (such as 10%)

and the depreciation the company will be provided in the Balance Sheet. these are all
the based to calculate the Profit after Tax and cash flows.
PAY BACK PERIOD:
The payback period is one of the most popular and widely

recognized traditional methods of evaluating investment proposals. It is defined as
the number of years required in a project. If the project generates constant annual
cash inflows, the payback period can be computed by the following formulae:
Initial Investment
Pay Back period =
Annual Cash Flows
In case of unequal cash inflows, the payback period can be computed

by calculating the cumulative cash inflow and checking whether the values are
recovered to the original outlay and taking the remaining amount and apply the
formulae i.e.,
Required CFAT
PBP = base year +
Next year
ACCEPTANCE RULE:
1. Many firms use the payback period as acceptance for reject criterion as
well as a method of ranking projects.

CAPITAL BUDGETING
2. If the payback period calculated for a project is less than the maximum
or standard payback period set by management, it would be accepted,
if not, it would be rejected.
3. As a ranking method, it gives highest ranking to the project, which has
the shortest payback period and lowest ranking to the project, which
has highest payback period.

CAPITAL BUDGETING
Initial Investment is Rs.2, 00, 00,000.

SHOWING THE CALCULATIONS OF PAYBACK PERIOD
(In Rupees)
Profit after tax Depreciation Cash flow after Cumulative
Year tax cash flows
2011-12 374540 2432956 2807496 2807496
2012-13 3049546 2167152 5216698 8024195
2013-14 4380048 2437146 6817194 14841389
2014-15 5300374 3102096 8402470 23243860
2015-16 7567635 5611603 13179238 36423098
Base Year = 3rd Year; Required CFAT = 51, 58,610.07;
Next Year CFAT = 2, 32, 43,860.28
2, 00, 00,000-1, 48, 41,389.93

Payback Period = 3 +
2, 32, 43,860.28
= 3 + 0.2219 = 3.2219 years (0.2219 X 365 days)
= 3 years 2 months 20days.

CAPITAL BUDGETING
SHOWING THE CALCULATIONS OF PAYBACK PERIOD
Inference:
From the point of Pay Back Period the project can be accepted,
because to get the initial investment of Rs. 2, 00, 00,000, it is taking a time of 3 years
2months 20 days.

CAPITAL BUDGETING
Average Rate of Return (ARR):
The Average Rate of Return (ARR) is also known as Accounting

Rate of Return using accounting information, as revealed by financial statements, to
measure the profitability of an investment. The accounting rate of return is found out
by dividing the average after tax profit by the average investment. The average
investment would be equal to half of the original investment, if it is depreciated
constantly. The Accounting rate of return can be calculated by the following formula
i.e.
Profit after Tax
A.R.R. = X 100
Book Value of the Investment
SHOWING CALCULATION OF AVERAGE RATE OF RETURN
( in Rupees)
Year Profit before tax Tax25% (include Profit after tax

10%surcharge
2011-12 483278 108737 374540
2012-13 3934898 885352 3049546
2013-14 5651675 1271626 4380048
2014-15 6839192 1538818 5300374
2015-16 9829346 2261711 7567635
Calculation of A.R.R:
Total Net Profit after Tax
Average Net Profit after Tax =
Number of years
2,06,72,143
= = 41,34,428.6
Initial Investment
Book Value of Investment =
2

CAPITAL BUDGETING
2,00,00,000
= = 1,00,00,000
2
41,34,428.6
Average Rate of Return = X 100
1, 00, 00,000
= 41.34%
. +.
Inferences:
From the point of ARR method, project should be accepted, the initial
investment we can get with in less time.
Net Present Value (NPV):
The Net present value (NPV) method is the classic economic

method of evaluating the investment proposals. It is one of the discounted cash flow
techniques explicitly recognizing the time value of money. It correctly postulates that
cash flows arising at different time periods differ in value and the comparable only
when their equivalents present values are found out.
Acceptance Rule:
 Accept if NPV >0

 Reject if NPV <0
 In differences if NPV = 0

CAPITAL BUDGETING
Cash flow 0 cash flow 1 cash flow n cash flow t
NPV= ---------------+ ------------- +……. + ---------------- = - C0
SHOWING CALCULATION OF NET PRESENT VALUE

(In Rupees)
PROFIT CASH FLOW PRESENT VALUE

YEARS AFTER TAX DEPRICIATION AFTER TAX NPV @5% CASH FLOW

CAPITAL BUDGETING
2011-12 374540.91 2432956 2807496.91 0.9523809523 2673806

2012-13 3049546.32 2167152 5216698.32 0.9070294784 4731699
2013-14 4380048.12 2437146 6817194.12 0.8638375985 5889075
2014-15 5300374.35 3102096 8402470.35 0.8227024747 6912768
2015-16 7567635 5611603 13179238 0.783526165 10326277
Total 30533625
Calculations of Net Present Value:
Net Present Value = Present Value Cash Inflows - Initial Investment or cash outflows
= 3,05,33,625 - 2, 00, 00,000
= 1,05,33,625 Rs.
Inferences:
As NPV is positive, the project is accepted.

CAPITAL BUDGETING
Profitability Index:
It is also called as Benefit Cost Ratio. It is also a time-adjusted
method of evaluating the investing proposals. It is the relationship between present
value of cash inflows and the present value of cash outflows. Thus
Present Value of cash inflows

Profitability Index =
Initial Investment of or cash out flows
SHOWING CALCULATION OF PROBILITTY INDEX (InRupees)
Present
Profit after Cash flow Value Cash
Years Tax Depreciation After Tax NPV @5% flow
2011-12 374540.91 2432956 2807496.91 0.9523809523 2673806.58
2012-13 3049546.32 2167152 5216698.32 0.9070294784 4731699.15
2013-14 4380048.12 2437146 6817194.12 0.8638375985 5889075.77
2014-15 5300374.35 3102096 8402470.35 0.8227024747 6912768.69
2015-16 7567635 5611603 13179238 0.783526165 10326277
Total 30533625

CAPITAL BUDGETING
Present
2011-12 374540.91 2432956 2807496.91 0.9523809523 2673806.58
2012-13 3049546.32 2167152 5216698.32 0.9070294784 4731699.15
2013-14 4380048.12 2437146 6817194.12 0.8638375985 5889075.77
2014-15 5300374.35 3102096 8402470.35 0.8227024747 6912768.69
2015-16 7567635 5611603 13179238 0.783526165 10326277
Total 30533625
Present
2011-12 374540.91 2432956 2807496.91 0.9523809523 2673806.58
2012-13 3049546.32 2167152 5216698.32 0.9070294784 4731699.15
2013-14 4380048.12 2437146 6817194.12 0.8638375985 5889075.77
2014-15 5300374.35 3102096 8402470.35 0.8227024747 6912768.69
2015-16 7567635 5611603 13179238 0.783526165 10326277
Total 30533625
Years Profit after Depreciation Cash flow NPV @5% Present

Tax After Tax Value Cash

CAPITAL BUDGETING
flow
2011-12 374540.91 2432956 2807496.91 0.9523809523 2673806.58
2012-13 3049546.32 2167152 5216698.32 0.9070294784 4731699.15
2013-14 4380048.12 2437146 6817194.12 0.8638375985 5889075.77
2014-15 5300374.35 3102096 8402470.35 0.8227024747 6912768.69
2015-16 7567635 5611603 13179238 0.783526165 10326277
Total 30533625
from the above table calculated values are
Present value of cash inflow = 3,05,33,625
Initial Investment cash outflow = 2, 00, 00,000
3,05,33,625
Profitability Index =
2, 00, 00,000
= 1.5266
Net Profitability Index = PI -1
=1.5266 – 1
=0.5266

CAPITAL BUDGETING
Inferences:
As the profitability Index is >1, the project should be accepted
Internal Rate of Return:
The internal rate of return (IRR) method is another discounted cash

flow technique, which makes account of the magnitude and timing of cash flows.
Others terms used to describe the IRR Method are yield on investment, marginal
efficiency of capital, rate of return over cost, time adjusted rate of internal return and
so on. The concept of internal rate of return is quite simple to understand in the case
of one-period projects. The IRR is calculated by interpolating the two rates with the
help of the following formula:
PV of cash inflows at lower rate - PV of cash outflows

IRR = LR+ (Hr - Lr)
PV of cash inflows at lower rate-PV of cash inflows at higher rate
Where,
Lr = Rate of interest that is lower of the two rates at which PV of Cash

inflows have been Calculated.
Hr= Rate of interest that is higher of the two rates at which PV of Cash
inflows have been Calculated.
ACCEPTANCE RULE
The accept project rule, using the IRR method, is to accept the project
if its internal rate of return is higher than the opportunity cost of capital (r>k) note that
k is also known as the required rate of return or cut-off rate. The project shall be
rejected if its internal rate of return is lower than the opportunity cost of capital. Thus
the IRR acceptance rules are:
 Accept if r>k
 Reject if r<k
 May accept if r=k
SHOWING THE CALCULATIONS OF INTERNAL RATE OF RETURN
(In Rupees)

CAPITAL BUDGETING
PRESENT P
PROFIT DEPRI- CASH FLOW VALUE CASH V
YEARS AFTER TAX CIATION AFTER TAX NPV @10% FLOW NPV @20% F
2011-12 374540.91 2432956 2807496.91 0.9090909 2552269 0.8333333333 2
2012-13 3049546.38 2167152 5216698.32 0.8264462 4311320 0.694444444 3
2013-14 4380048.64 2437146 6817194.12 0.7513447 5121858 0.578703703 3
2014-15 5300374.35 3102096 8402470.35 0.6830134 5739000 0.4842253085 4
2015-16 7567635 5611603 13179238 0.6209213 8183270 0.40187757 5
total 25907717 Total 1
Net Present Value of cash flow of LOWER RATE (LR) = 2,59,07,717
Net Present Value of cash flow of HIGHER RATE (HR) = 1,92,55,978

Therefore,
Present value @ L R – Initial Investment
IRR = LR+ x Rate Difference
Present value @ L R – Present value @ H R
59,07,717
= 10% + x 10
66,51,739
= 10% + 0.889 x 10
= 18.89%

CAPITAL BUDGETING
Inferences:
Therefore, IRR lies at 18.89%. It is a point where outflow = inflow
And IRR>K, Therefore it is accepted.

CAPITAL BUDGETING
FINDINGS
 The company had taken longer period i.e., payback period is 3 years 2 months
20 days to recover its initial investment.
 The average rate of return is not good i.e., ARR =32.76% as it was just to
compensate the marginal profits.
 The net present value of ANANTHA PVC PIPES PVT. Ltd is satisfactory as
NPV = 2, 07,350.19.
 The internal rate of return i.e., IRR= 5.390% is fairly good.

 The profitability index is fairly good is it was gradually increasing in each
year as shown graphically.
 The unit cost and other expenditures are eligible to claim from the potential
buyer as approved by the Regulatory Commission

CAPITAL BUDGETING
SUGGESTIONS
 Company should go for the improvement in the technology to improve
efficiency.
 The Company can go for different projects as it has huge reserves and surplus,
to expand its operations.
 The Company is beneficial enough to expand its business by utilizing reserves
and surplus.
 The firm has to decrease the cost of production per unit.
 For society with lower income levels or below poverty line Company should
go for subscribed rates and for industries it should increases its rate marginally
to cover the losses.
 In order to diversify its operations it has to invest in more products so that
NPV will be fairly high.

CAPITAL BUDGETING
CONCLUSION
Under the light of inferences drawn from the analysis the company
has to concentrate on Pay Back Period and NPV for acceptance of the project. The
discounting methods are most preferable as the rate of returns is depending on the
present values. All the techniques which was used for the project resulted positively
expect on Pay Back Period. Finally it is concluded that firm can generate huge profits
by investing in more projects diversifying its operations.

CAPITAL BUDGETING
BIBLOGRAPHY
1. M. PANDEY: Financial Management: vikas publishing house pvt ltd, 9th edition.
2. PRASANNA CHANDRA: Financial Management: Tata McGraw-Hill, 7th edition.
3. I.M. PANDEY: Financial Management: Tata McGraw-Hill, 4th edition.
4.R.K.SHARMA : Finanacial Management :kalayani publishers 2017.
WEBSITES
www.google.co.in
www.nandi pipes.com

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CAPITAL BUDGETING

The term Capital Budgeting refers to long term planning for

Capital Budgeting May also be defined as “The decision making

It deals exclusively with investment proposals, which an

Some of the examples of Capital Expenditure are

SSBN DEGREE AND PG COLLEGE Page 1

“Capital budgeting is long term planning for making and

“Capital budgeting is concerned with allocation of the firm’s

The role of a finance manager in the capital budgeting basically

SSBN DEGREE AND PG COLLEGE Page 2

OBJECTIVES OF THE STUDY

 To study the relevance of capital budgeting in evaluating the project.

 To study the techniques of capital budgeting for decision-making.

 To analyse the present value of rupee invested.

 To understand transaction wise study of the company

 To make suggestions if any for improving the financial positions of the

SSBN DEGREE AND PG COLLEGE Page 3

NEED FOR THE STUDY

 The project study is undertaken to analyze and understand the Capital

 To know about the company’s operations of using various Capital budgeting

 To know how the company gets funds from various resources.

SSBN DEGREE AND PG COLLEGE Page 4

SCOPE OF THE STUDY

Capital budgeting is the method of calculations of inflows of

SSBN DEGREE AND PG COLLEGE Page 5

Plastic have become synonymous with modern living. It is

This versatile material with its superior qualities such as light

At 80 percent of total requirement for raw material and almost all

On account of their inherent advantage in properties and versatility

SSBN DEGREE AND PG COLLEGE Page 6

The Govt. of India recognizing the importance of plastics in

Export of plastics goods:

Plastics have excellent potentialities. Our country is equipped with

Today India exports plastic products to as many as 80 countries all

SSBN DEGREE AND PG COLLEGE Page 7

Role of plastics in national economy

Plastics are got perceived as just simple colorful household products

future find their utilization in the areas.

 Agriculture, forestry and water-management.

Today the majority of raw materials are obtained from petrol

SSBN DEGREE AND PG COLLEGE Page 8

Agriculture is the chief occupation in India. For the developing

The usage of poly vinyl chloride pipes in agricultural fields, lesser

Presently the revolutionary tried in water management speaks much

A part with the referred P.V.C pipes supplemented with fitting is

SSBN DEGREE AND PG COLLEGE Page 9

Even characteristics of weight and low price attract many more

PVC PIPES IN INDIA

Pipes products have found wide acceptance in India and abroad.

PVC products cater to both interiors and exteriors. In interiors it

The other external applications are in the field of irrigation, portable

SSBN DEGREE AND PG COLLEGE Page 10

conventional methods of irrigation. Now-a-days PVC pipes replaced the conventional

Drip irrigation popular in the agricultural sector especially in the

Agriculture a sunrise industry in the Indian economy is mainly

SSBN DEGREE AND PG COLLEGE Page 11

A dynamic entrepreneur Sri S P Y Reddy was established a black

Rayalaseema is economically backward area in Andhra Pradesh,

Later the company started manufacturing of PVC pipes which

The only major competitors to the company are Sudhakar pipes,

SSBN DEGREE AND PG COLLEGE Page 12

Sri S.P.Y.Reddy locally well known industrialist with the base at

At present Andhra Pradesh, parts of southern states of Karnataka,

Various sizes ranging from ½ to 10 are offered to customers. Even