Krishna Sugars

STUDY ON CAPITAL BUDGTING WITH REFERANCE TO THE KRISHNA SAHAKARI
SAKKARE KARKANE NIYAMIT, ATHANI
CHAPTER-I
INTRODUCTION AND RESEARCH DESIGN
1.1 INTRODUCTION
Capital budgeting is the process of making investment decision in capital

expenditures. A capital expenditure may be defined as an expenditure the benefits of
which are expected to be received over period of time exceeding one year. The main
characteristic of a capital expenditure is that the expenditure incurred at one point of
time whereas benefits of the expenditure are realized at different points of time in
future. In sample language we may say that a capital expenditure is an expenditure
incurred for acquiring or improving the fixed assets, the benefits of which are
expected to be received over a number of years in future.
The following are the some of the examples of capital expenditure
➢ Cost of acquisition of permanent assets as land and buildings, plant and

Machinery, good will, etc.
➢ Cost of addition, expansion, improvement or alteration in the fixed asset
➢ Cost of replacement of permanent assets.
➢ Research and development, project cost etc...
Capital expenditure involves non flexible long term commitment of funds. Thus,
capital expenditure decisions are also called as long-term investments decisions.
Capital budgeting involves the planning and controlling of capital expenditure.it is the
process of deciding whether or not to commit resources to a particular long term
projects whose benefits are to be realized over a period of time longer than one year.
Capital budgeting is also known as investment decision making, capital expenditure
decision, planning expenditure and analysis Of capital expenditure.
B.L.D.E.A’s,
A.S.PATIL COLLEGE OF COMMERCE [AUTONOUMUS],VIJAYAPUR PAGE 1
1.2 STATEMENT OF THE PROBLEM
Investments on capital project constitute a major financial budget of a firm.

Therefore it is pivotal that it impacts positively on the firms performance in terms of
profitability, market share, growth and shareholders value. However many
organization make huge capital investment without exacting Positive result on the
firm's operations. This is as a result of lack of proper Appraisal to determine the
relative worth of such investment.
Capital budgeting is the process in which a business determines whether projects such
as building a new plant or investing in a long-term venture are worth pursuing.
Oftentimes, a prospective projects lifetime cash inflows and outflows are assessed in
order to determine whether the returns generated meet a sufficient target Also known
as "investment appraisal".
Ideally, businesses should pursue all projects and opportunities that enhance
shareholder value. However, because the amount of capital available at any given
time for new projects is limited, management needs to use capital budgeting
techniques to determine which projects will yield the most return over an applicable
period of time. Popular methods of capital budgeting include net present value (NPV),
internal rate of return (IRR), discounted cash flow (DCF) and payback period
Therefore the problem confronting the research is to determine the impact of capital
budgeting on organizational performance
1.3 SCOPE OF THE STUDY
This study was made on sugar pricing to know the factors influencing pricing
of sugar which is concerned with tender located in and around the Athani. This study
cannot be generalized to entire market state or country.
Capital budgeting should be take into account all appropriations for expenditures
related to:
• Construction or acquisition of capital facilities, including land purchase,

preparation and easements.
• Acquisition, construction, demolition or replacement of a capital asset.
B.L.D.E.A’s,
• The major repair or renovation of a capital asset which materially extends its
useful life or increases its capacity.
• To analyze the effects of capital budgeting techniques in the company.
• The planning or design of any of the above.
• To understand the practical usage of capital budgeting in the evaluating the

project.
• To offer conclusion derived from the study and give suitable suggestions for
the efficient utilization of capital expenditure.
1.4 NEED OF THE STUDY
• The project study is undertaken to analyze and understand the capital

budgeting process in financial sector which gives mean exposure to practical
implication of theory knowledge.
• To know about the company’s operation of using various capital budgeting

techniques.
• To know how the company gets fund from various sources.
• To make financial analysis of various proposals regarding capital investments

so as tochoose the best out of many proposal.
1.5 OBJECTIVE OF THE STUDY
• To understand various lands of capital budgeting problem faced by the

organization.
• To cute the factors consideration that is in to making a capital investment

decision.
• To understand the various methods of determining the size of capital

investment decision.
• To understand the various method of determining the size of capital budgeting

an devaluating investment proposals.
B.L.D.E.A’s,
• To analyze the strengths and weakness of existing process of capital
budgeting.
• To measure the profitability of the project by considering all cash flows.
• To suggest guidelines to the company for improving is financial position.
1.6 RESEARCH METHODALOGY

It means the science of method or the body of method is independence
because of its scientific free thought. Unless a proper method is followed and project
work or study would not be a success. There for, to arrive notable results ,
methodology should form a significance part of it.
The air is to present a clear idea of the procedure followed in this study. Since
the value of any systematic and scientific research lies in its met, which gives a clear
idea of the form of procedure adopted in conducting it & stating the purpose becomes
the essential part of every study.
1.7 SOURCE OF DATA
• Primary Source
Primary data relating to the sugar pricing have been collected form the
customers of TKSSKN Athani through questionnaire method.
• Secondary Source
Secondary data was collected from previously published reports, journals etc
for the purpose of the study.
B.L.D.E.A’s,
1.8 LIMITATIONS OF THE STUDY
• The period of the study is limited.
• Financial matters are sensitive in nature, the same could not acquire easily.
• It may be due to restrictions imposed by management.
• The study was conducted with the data available and analysis was made
accordingly.
• Since the study is based on the financial data that are obtained from the
company's financial statements, the limitations of financial statements shall be
equally applicable.
• Data is collected for five projects which is limited.
B.L.D.E.A’s,
CHAPTER-Ⅱ
COMPANY PROFILE
2.1 INTRODUCTION
The Krishna Sahakari Sakkare Karkhane Niyamit, Athani is a Co-operative

society registered under Karnataka Co-operative societies Act in 1969.
The Plant is located at Sankonatti Village of Athani in Belgaum district. The

registration number of the company is DSK/REG/01/80-81 dated 10-03-1981. The
industrial license number of the factory is L.I.667 (1988) dated 02/11/1988.
The founder of this organization was Late Shri. A. B. Jakanur Ex. minister of
Karnataka. At present KSSKN has an attractive campus with magnificent buildings
over it. There are totally 17,971 shareholders of KSSKN and it has paid up share
capital of Rs.18.37 Crores. During the year 2006-07, it has earned a net profit of
Rs.2.15 crores. During the same year it has produced 7.09 lakhs Quintals of sugar and
it has crushed 6.01 lakhs Tonnes of cane There are 614 workers in KSSKN. It is
paying salary of Rs. 15, 00,000 per month to its workers. Total Turnover of sugar is
Rs.60.03 crores.
B.L.D.E.A’s,
The organization study of KSSKN Athani included the overall study of different
departments and sections and sub-sections. The departments’ studies include Finance
and Accounts department, Labor Welfare department, Purchase Department,
Marketing and Sales department, Production Department etc. Each department has its
own methods and procedures of Working Capital Management.
By conducting the organizational study it was found that all the departments were
actively working towards the achievement of the goals and objectives of the company.
The management is also efficient in the work, so the company is achieving great
progress year by year.
The research study was conducted on the topic “A study on sugar pricing in KSSKN
Athani For the purpose of Project work a sample of 30 tendered or respondents was
covered. Also while administering Questionnaire care was taken to ensure that the
sample was the representative of the population.
The objective of the study was to know the factors influencing sugar pricing, whether
customers are satisfied with selling/tendering process etc.
By carrying out the study it was found that, the factors like grade of sugar, dust
freeness, transportation cost, Govt. policies and Sugar Release mechanism have
influence on pricing of sugar and also it was found that most of the customers are
satisfied with the selling or tendering process of KSSKN Athani.
This project gave me an insight as to how the industry works and how important this
sector is to the economy. This project gave me a thorough experience of the sugar
industry
B.L.D.E.A’s,
2.2 INDUSTRY PROFILE
2.3 INTRODUCTION TO SUGAR INDUSTRY:

The Indian sugar industry is a key driver of rural development, supporting
India's economic growth. The industry is inherently inclusive supporting over 50
million farmers and their families, along with workers and entrepreneurs of almost
500 mills, apart from a host of wholesalers and distributors spread across the country.
The industry is at a cross roads today, where it can leverage opportunities created by
global shifts in sugar trade as well as the emergence of sugarcane as a source of
renewable energy, through ethanol and cogeneration. While some of these
opportunities have been well researched in the past, there was a need to assess the
potential for India and to develop a comprehensive and actionable roadmap that could
enable the Indian industry to take its rightful place as a food and energy producer for
one of the world's leading economies. India is second largest producer of
sugarcane next to Brazil. As per last year data, about 4 million hectares of land is
under sugarcane with an average yield of 70 tones per hectare. India is largest
producer of sugar including traditional sugar sweetener, Khandasari and Gur
equivalent to 26 million tones raw value followed by Brazil in the second place at
18.5 million tones. Even in respect of white crystal sugar, India has ranked Noposition
7 out of last 10 years.
B.L.D.E.A’s,
Traditional Khandasari and Gur are consumed mostly by the rural population in the
early 1930’s nearly 2/3rd of sugarcane production was utilized for production of
alternate sweetener, Gur&Khandasari. With better standard of living and high income,
the sweetener demand has shifted to white sugar. About 1/3rd of sugarcane production
is utilized by the Gur&Khandasari sectors. Being in the small scale sector, these two
sectors are completely free from controls and taxes, which are applicable to the sugar
sector.
2.4 PROFILE OF THE SUGAR INDUSTRY
The advent of modern sugar industry began in 1930 with grant of tariff
protection to the Indian sugar industry. The number of sugar mills increased from 30
in the year 1930-31 to 135 in the year 1935 and the production during the same period
increased from 1.20 lakh tones to 9.34 lakh tones under dynamic leadership of the
private sector. The era of planning for industrial development began in 1950-51 and
government laid down targets of sugar production and consumption licensed and
installed capacity, sugarcane production during each of the five year plan period. The
small size new units licensed by the government were supported with a scheme of
announced on 25th November 1975 known as Sam path committee incentive. It
provides percentage of free sale quota to both new sugar factories and expansion in
existing units. This is to a mushrooming growth of relatively small sized sugar units
in the country.
Under the policy of licensing, government initially permitted small sized new
units of 1250 TCD capacity only and later on increased the minimum economic size
of plant to 2500 TCD similarly the capacity expansion initially allowed up to 3500
TCD only were subsequently raised to ITCD and finally those expansion limits were
withdrawn in 1990.
As a result the industry has grown horizontal Total sugar industries in India
are 506 out of which 67 are public sector companies, 157 are private sector companies
and 282 are co-operative societies. Total sugar industries in Karnataka are 40 out of
which two are public sector companies, 18 are private sector companies, 19 are co-
operative societies and one is joint venture.
B.L.D.E.A’s,
Government enacted the Sugar Development Fund Act & Rules, which
provides for levy of per quintal of sugar known as Sugar Development Fund (SDF).
The SDF is utilized for granting term loans to sugar mills modernization and grants
for research projects in the sugar besides creation of buffer stocks as and when
required to ensuring price stability. Government de-licensed sugar sector in August
1998. It is now open to entrepreneurs to set up mills without license but at distance of
15 kms away from the existing factory. Sugar units free to expand their capacity and
also put up higher capacity new units.ly with an all India per unit average capacity of
500 TCD.
In global economy, the Indian sugar industry has achieved a number of milestones
• Largest Sugar Producer in 7 out of 10 years.
• Second Largest Area under Cane/Cane production.
• Amongst the cost effective industries with its field cost (Sugar cane) being the
second lowest, despite small land-holding and low productivity.
• Fourth efficient processor of sugar despite low capacity of its sugar plants as
compared very large-size plants in other parts of the world.
2.5 GOVERNMENT POLICY

The present policy of decontrol 10% of production by each unit is supplied for
public distribution system I as levy sugar at Govt. notified prices admittedly bellow
20% of the actual cost of production. The levy sugar is I to the public irrespective of
their economic status. The balance 90% is sold in the free market against monthly/
issued by the Government. This policy has been continuing since 1967-68 except for
brief periods of de-control during the years of surplus production and accumulated
sugar stocks. Government announces the Statutory Minimum price (SMP) for
sugarcane every year based on recommendations of the Commission for Agricultural
Cost & Prices (CACP).
B.L.D.E.A’s,
2.6 COMPANY PROFILE

The Krishna Sahakari Sakkare Karkhane Niyamit, Athani is a co-operative
society registered under Karnataka co-operative societies Act in 1969. The industrial
license number of the factory is L.I.667 (1988) dated 02/11/1988. The Krishna
Sahakari Sakkare Karkhane Niyamit, Athani is a co-operative unit. It is situated near
Sankonatti village, at a distance of about 6 Km from Athani town. The factory at
present has an attractive campus with magnificent buildings over it.
Agriculture continues to be an extremely important sector in our country. Cooperative

system, as one of its main pillars providing vital support services, is crucial for the
transformation of agriculture. It is how inspired the founder Late Sri. A B Jakanur, an
agriculturist and a co-operator, to establish this factory during 2000-01 with the
financial support from cane growers of this area and the State Government, with an
initial crushing capacity 2500 TCD and as a stand-alone sugar industry. This factory
had faced a lot of problems all these years in coming out as a viable unit. Though this
factory had emerged in this area with a meager beginning, it had not only provided a
source of income for forming community but also created a sustainable employment
opportunity in this rural area.
After a lot of dispute on location of plant, near Sankonatti village, the

construction work started in year 1990 and comp elected in the year 2000. The
factory was inaugurated by Co-Operative minister of Karnataka State Sri H
Vishwanath on 24/03/2002. The regular production was started from 24/03/2002, and
the first season lasts from 24/03/2002 to 09/04/2002.
The factory started on 24/03/2002 with initial Crushing capacity of 2500 TCD with
total expenditure of Rs.46.95 Crore. And expansion on 2011-12 is with a crushing
capacity on 6000 TCD. The area of operation covered 22 villages from Athani Taluk.
B.L.D.E.A’s,
COMPANY PROFILE
Name of the Company Krishna Sahakari Sakkare Karkhane

Niyamit Athani
Date of incorporation/Registration No.DSK/REG/01/80-81
Date:10-03-1881
Nature of Constitution Co-operative Sector
Factory Code No. 40501
Date Of Commencement of 12-06-2002

Commercial Production of Sugar
Crushing Capacity 5500 TCD
Project Cost 48.86 Corers
Production Production of Sugar and its by Products

Like Molasses and Biogases
Working Period 180-210 Days
Type unit Large scale Agro based manufacturing

unit
Main raw material Sugar cane
Labour employed 610
Area of operation 22 villages
B.L.D.E.A’s,
2.6.1 BOARD OF DIRECTORS
• Shri. P.C. Savadi : Chairman
• Shri. J.A. Patil : Vice Chairman
• Shri. G.M. Tewarmani : Director
• Shri. C.H. Patil : Director
• Shri. S.D Nandeshwar : Director
• Shri. G.M. Jatti : Director
• Shri. V.M. Patil : Director
• Shri. B.C. Hanji : Director
• Shri. R.V. Kulkarni : Director
• Shri. R.A. Pattan: : Director
• Shri. G.M.Patil : Managing Director
M/s Triveni Engineering and Industries Limited New Delhi have supplied the
entire plant and Machinery; Rs. 28.17 Crore long-term loan was borrowed from the
Co-operative Banks. The factory had created financial setbacks due to the lack of
professionalism both in technical and financial managements and not adopted the
range of different bi-product activities and had suffered due to weak governance on
efficiency, effectiveness, adaptability and internal and external accountability in the
management. However this cooperative and rural based industry must succeed if the
poor farmers and the rural unemployed youths have to be prosperous.
2.6.2 AREA OF OPERATION

The area of operation of the society shall be confined to the villages of Athani,
and RaibagTaluka of Belgaum District and Jamakhandi Taluka of Bagalkot District of
Karnataka State.
B.L.D.E.A’s,
2.6.3 OWNERSHIP PATTERN
a) The authorized share capital of the Society shall be RS.24.13 crores divided in to
total 8772 shares of RS.2, 000/-each as under.
• Rs.77080000/-divided in to 12882 shares of the face value of Rs. 2,000/-

each reserved for the grower members called as “A “Class.
• Rs1610000/-divided in to 102 shares each reserved for Co-operative

Institutions called as “B” Class.
• Rs.140850000/- from one Government share issued to Government of

Karnataka called as “C” Class.
• Rs.21467000/- divided in to 4211 shares of face value of Rs.2,000/-each

reserved for non-grower members called as “D” Class.
2.6.4 DEBTS FROM BANKS AND FINANCIAL INSTITUTIONS
S.No
NAME OF THE BANKS AMOUNT
1 Appex Karnataka GOVT Bank Bangalore 6 Crorers
2 Canara Bank Sirshi 5 Crorers
3 Belgaum DDC Bank Belgaum 1 Crorers
South Canara DCC Bank Mangalore 5 Crorers

4
5 Maratha Urban Co-operative Bank Belgaum 2 Crorers
6 Shiddeshwar Co-operative Vijaypur 2 Crorers
7 BelladBagevadi Urban Co-operative Bank Bagevadi 2 Crorers
8 SMS Urban Co-operative Bank Athani 1.20 Crorers
9 Chokkodi Urban Co-operative Bank Chikkodi 1.50 Crorers
10 Sadalga Urban Co-operative Bank Sadalga 1.50 Crorers
B.L.D.E.A’s,
WORKING HOURS
Sugar manufacturing process is continues process it needs employees to take
care of the operations 24 hours. So company its workers in 3 different shifts and also
provide weekly off on routine basis.
Shift Hours Tea/Lunth Timing
Shift 1 4.00 am To 12.00 pm 6.00 am To 7.00 am

Shift 2 12.00 pm To 8.00 pm 1.30 pm To 2.00 pm
Shift 3 8.00 pm To 4.00 am 9.30 pm To 10.00 pm
MAN POWER
No of workers
Permanent workers 176
Seasonal workers 334
Daily basis worker 216
-------------------
Total 726
Company is paying salary of Rs5055000per month in season and Rs3500000 per

month in half season to its workers.
2.6.5 COMPETITORS
• UGAR SUGARS LIMITED
• HIRA SUGARS
• RENUKA SUGARS
• DATT SUGARS (MAHARASHTRA)
• PANCHAGANGA SUGARS (MAHARASHTRA)
• ATHANI FARMER’S SUGAR FACTORY
• DKSSK CHIKKODI
B.L.D.E.A’s,
2.6.6 INFRASTRUCTURE FACILITIES
• Near to raw materials.
• Good transportation facilities.
• Nearer to river place. (Krishna River)
• Good networking.
• Proper accommodation for its employees. Safety conditions in premise of the
factory.
• Medical facilities for employees and their family.
• Drinking water and restrooms for the employees.
• First aid appliances for workers who meet with accident while working.
• Ambulance facility for emergencies.
• Welfare of ESI Act and Provident Fund Act.
• Canteen facilities for employees during the working hours.
• Sanction of leave whenever necessary.
• Good Parking facilities for vehicles.
• accommodation for its employees.
2.6.7 VISION & MISSION OF THE ORGANIZATION

“To continue to remain the best performer among sugar manufacturing companies in
India & to provide more value to the shareholders by means of efficient capacity
utilization of its sugar, power and distillery based facilities.”
VISSION
The vision statement of The Krishna Co-operative Sugar Factory Limited is
“We are dedicated to deliver overall value to our customers by delivering high quality
products, exceptional financial performance to our share holders& complete
satisfaction to cane growers, employees & stakeholders”
MISSION
At KSSKN, Athani, they believe in growth through quality, innovation and Research
and Development in Agriculture. Their mission is to reduce the overheads and
increase the profitability by maximum utility of raw material by way of producing
various products.
B.L.D.E.A’s,
• To encourage agro-based co-operative industry.
• To develop co-operative movement in rural sector.
• To encourage the farmers to grow sugarcane for production of sugar and its
by-products.
2.6.8 SWOT ANALYSIS
STRENGTHS:
• Employees were highly satisfied with the opportunities and challenging tasks
given to them,
• The respondents were dissatisfied with the Training & Development facility.
• The majority of the respondents were highly satisfied with the financial
incentives like allowances, bonus, etc provided by the company.
• Employees were highly satisfied with the working condition, promotion
procedure & job security provided by the company.
• Modern equipment and machinery
• Healthy management labour relations
• Superior product qualits
• Skilled and efficient staff and labour force
• Strong network from all aspects- location, transports, and infrastructure
• Well-structured distribution channel.
WEAKNESSES:
• Most of the employees were dissatisfied that their suggestions, views etc were
not valued.
• Many of the employees are dissatisfied with the matching of the salary with
responsibility, corrective actions are needed.
• The training and development facilities are not upto the mark.
• Lower compensation for employees compared to other organization.
• High cost of production due less capacity
• No control on minimizing the losses during the process.
• The company has to focus more on sales, marketing.
• Factory is not an ISO certified.
B.L.D.E.A’s,
• Research and development department have not existed.
• Less control on minimizing the losses in process
• Improper planning of investment for future growth.
• The sugar release mechanism is controlled by government of India.
• Absent of motivational incentives.
OPPORTUNITIES:
• The company can see the opportunities in diversification projects like:
• Electricity generation
• Ethanol i.e. substitutes for petrol
• Liquor.
• Fertilizers
• Borrowing of low cost funds.
• As Global sugar consumption is steadily on the rise and company can
exploreexport opportunities.
• Increasing demand for sugar.
CHALLENGES:
• Most of the employees were dissatisfied with the morale of the people with
whom they worked.
• The heavy competition from other competitors to get the raw materials as well
as to sell the products.
• Frequent government intervention in the company policies
• Large number of sugar factories within the same area.
• No price stabilility
• Environmental norms by government which puts finncial pressure
• Due to uncertain rainfall procurement of raw material is being affected
• The main raw material (i.e. sugarcane) may not sufficiently be available in
future in the given market.
• Environmental pollution controls add up to the cost.
B.L.D.E.A’s,
2.6.9 OBJECTIVES OF THE KRISHNA SUGAR CO-OPERATIVE
SUGAR FACTORY LTD, ATHANI.
• To give the good market to the farmers who supply the sugar cane to their
factory.
• To keep the good relations with the customers and farmers and maximize
their satisfaction.
• Maximum utilization of man power and production capacity and proper

utilization of raw material for good recovery.
• To promote the economic and betterment among the members through

self-help and mutual aid in accordance with the co-operative principles
specified in the first schedule of the Act.
• To encourage self help, thrift and co-operation amongst member.
• To acquire lands either by way of purchase or otherwise for cultivation of

sugar cane and other crops and for erection of buildings, Godowans, Staff
quarters, administrative blocks etc., and for installation of machinery.
• To manufacture sugar jiggery and their by-products out of sugar-cane

grown and supplied by members of the society and other and to sell the
same to the best advantage.
• To undertake such other activities as are identical and conductive to the

development of the society.
• To acquire and install machinery for the utilization of the by-products and
buy raw material and self finished product in the course of utilizing and
marketing the by-products
B.L.D.E.A’s,
2.6.10 ACHIEVEMENTS/AWARDS
STAI, SISSTA & DSTA in their recent 10th annual convention at Chennai
held on 11-08-2007 have honored this sugar factory with the most prestigious award
as the “THE BEST EFFICIENCY & PERFORMANCE SUGAR FACTORY” in the
country for the year 2006-07.
Hon’ble Union Minister gave the award for agricultural, food & Civil
Supplies, in presence of Hon’ble Chief Minister of Tamilnadu.
The TKCSFL Athani has also bagged First place for Best Cane Development
Award, SISSTA
B.L.D.E.A’s,
CHAPTER-Ⅲ
CONCEPTUAL FRAMEWORK
3.1 INTRODUCTION OF CAPITAL BUDGETING
The capital budgeting decision are related to the allocated of inevitable funds to
different long term assets. Broadly speaking, the capital budgeting decision denotes a
decision situation where the lump sum funds are invested in the initial stages of a
project and the returns are expected over along period. Though there is no hard and
fast role to define the long term yet period, involving more than a year may be taken
as a long period for investment decision. The capital budgeting decision involves. The
entire process of decision making relating to acquisition of long term assets, whose
returns are expected to arise over a period beyond one year, planning control of
capital expenditure is a major decision area any organization.
Sometime capital budgeting decision may be by land, building or plants; or to

undertake a programmed on research and development of a product, to diversify into a
new product line; a promotional campaign etc. some decision may directly affect the
profit of the firm e.g. launching a new product, where some other decision may affect
the profit by reducing the e.g.: replacing machine by a more efficient one.
3.2 MEANING AND DEFINITION OF CAPITAL BUDGETING
Meaning:
Capital budgeting is the series of long planning decisions by individual economic

units as to how much and where researches will obtained and expended for use,
particularly in the production of future goods and services.
Definition:
According to Chales.T.Horngren “Capital Budgeting is a long term planning for

making and financial proposed capital outlay”.
B.L.D.E.A’s,
According to Gitam.L.G “Capital budgeting as refers to the total process of the
generating, evaluating, selecting and following up on capital expenditure
alternatives”. According to Hampton john j. has defined capital budgeting as “a firms
formal planning process for the acquisition and investment of capital”. Capital
budgeting it is the process of evaluating selecting long –term Investment that is
consists with the goal of shareholder (owner) wealth maximizations.
3.3 SCOPE:
Capital budgeting : The process by which companies appraise investment
decisions, in particular by which capital resources are allocated to specific projects
capital budget requires firms to accounts for the time value and project risk, a variety
of more or less formal techniques.
3.4 NEEDS OF CAPITAL BUDGETING
Indirect forecast of sales:
The investment in fixed assets is related to future sales of the firm during the
life time of the assets purchased. It shows the possibility of expending the
production facilities to cove additional sales shown in the sales budget.
• Comparative study of alternative projects:
Capital budgeting make a comparative study of the alternative projects for the
replacement of assets which are wearing out or are in danger of becoming
obsolete so as to make the best possible investment in the replacement of
assets.
• Time of assets :
Acquisition: proper capital budgeting leads to proper timing of assets-

acquisition and improvement in quality of assets purchased. It is due to nature
odd demand and supply of capital goods.
B.L.D.E.A’s,
• Cash forecast :
Capital investment require substantial funds which can only be arranged by

making determined efforts to ensure their availability at the right time. Thus it
facilitates cash forecast.
• Worth- Maximization of shareholders:
The impact of long term capital investment decisions is far reaching. It

protects the interests of the shareholders and of the enterprise because it avoids
over- investment and under investment in fixed assets.
3.5 OBJECTIVES OR PURPOSE OF CAPITAL BUDGETING

1. To allocated the available funds among the competing capital project in order
to maximize the total profitability.
2. To evaluate the various capital projects and establish priorities.
3. To establish proper co- ordination among various capital expenditure projects.
4. To maintain effective control on cost of capital expenditure projects.
5. To minimize probable losses and wastage that may arise from faulty
investment of capital on wrong type of fixed assets.
6. To provide the basis for planning the long term financial requirements and the
sources of meeting them.
3.6 IMPORTANCE OF CAPITAL BUDGETING

The capital budgeting plays an important role. It provides the following benefits :
➢ Capital budgeting it is helpful for taking proper decision or capital

expenditure.
➢ If facilitates proper adjustment of production facilities with the sales budget.
➢ The influence the firm’s growth in long run.
B.L.D.E.A’s,
➢ They affect the risk of the firm.
➢ They involve commitment of large amount of funds.
➢ It provides the basic for long term financial planning.
3.7 TYPES OF INVESTMENT DECISIONS

There are many ways to classify investments. One classification is as follows.
• ON THE BASIS OF EXPANSION
• Expansion of existing business:

A company may add capacity to its existing product lines to expand existing
operations. For e.g. a fertilizer company may increase its plant capacity to
manufacture more area.
• Establishment of new business:

It requires investment in new products and a new kind of production activity within
the firm. if a package manufacturing company invests in a new plant and machinery
to produce ball bearings, which the firm has not manufactured before, this represents
expansion of new business or diversification.
• Replacement and modernization:

The main objective of replacement and modernization is to improve operating
efficiently and reduce costs. Cost savings will reflect in the increased profits, but the
firm’s revenue may remain unchanged. If a cement company changes from semi-
automatic drying equipment to fully automatic drying equipment, it is an example of
modernization and replacement.
ON THE BASIS OF DEPENDENCY
• Mutually exclusive investment:

Mutually exclusive investments serve the same purpose and complete with
earn other. If one investment is undertake will have to be excluded. A
company may, for example, either use a more labor-intensive, semi-automatic
B.L.D.E.A’s,
machine, or employ; a more capital-intensive, highly automatic machine
precludes the acceptance of highly automatic machine.
• Independent investment:
Independent investments serve different purposes and do not camper with each
other. For e.g. a heavy engineering company may consider expansion of its
plant capacity to manufacture additional executors and addition of new
production facilities to manufacture a new product light commercial vehicle.
• Contingent investment:
Contingent investment is depended projects; the choice of one investment
necessitates undertaking one or more investment. For e.g if a company decides
to build a factory in remote backward area. If many have in houses, rounds,
hospitals, school, etc.
3.8 INVESTMENT EVALUATION OF AN INVESTMENT

CRITERIA
These steps are involved in the evaluation of an investment.
➢ Estimation of cash flows.
➢ Estimation of the required rate of return.
➢ Application of a decision rate for making the choice.
3.9 VALUATION OF TECHNIQUES
The methods of apprising capital expenditure proposals can be classified in to two

broad categories.
• Traditional.
• Time adjusted.
The latter are more popularly known as discounted cash flow (DCF) techniques as
they take the time factor into account.
• Average rate of return method and

B.L.D.E.A’s,
• Payback period method
The Second category includes :
• Net present value method
• Internal rate of return
• Profitability index
TRADITIONAL TECHNIQUES
The most commonly used evaluation techniques are
• AVERAGE RATE OF RETURN OR ACCOUNTING RATE

OF RETURN
The average rate of return (ARR) method of evaluation proposed capital
expenditure is also known as the accounting rate of return method. it is based

on accounting information there from cash flows. There are a number of
alternative methods for calculating the ARR. The most common usage of the
average rate return (ARR) expresses it as follows.
𝑨𝒗𝒆𝒓𝒂𝒈𝒆𝒂𝒏𝒏𝒖𝒂𝒍𝒑𝒓𝒐𝒇𝒊𝒕𝒂𝒇𝒕𝒆𝒓𝒕𝒂𝒙𝒆𝒔
ARR = 𝑨𝒗𝒆𝒓𝒂𝒈𝒆𝒊𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕𝒐𝒗𝒆𝒓𝒍𝒊𝒇𝒆𝒐𝒇𝒕𝒉𝒆𝒑𝒓𝒐𝒋𝒆𝒄𝒕
The average profit after taxes are determined by adding up the after tax
profits expected for each year of the projects life and dividing the result by the
number of years. In the case equal to any year’s profits.
• Return on investment method overcomes the deficiencies of payback

period method in the sense that it considers the earnings of a project over
its entire economic life. The return on investment is estimated i.e. earnings
or profits estimated from an investment proposal during its economic life,
after providing for depreciation and taxes. It means net profit from
estimation is as per the accounting principles.
B.L.D.E.A’s,
• The rate of return is compared with cut off rate as determined by the
management. Cut off rate is the minimum rate of return on investment. It
should be generated from a profit, which is generally the firm’s cost of
capital. The comparison helps management to rank the various projects
and select the most profitable one. If return on investment proposal is less
than cut off rate, it is rejected and accepted if it is equal or more than the
cut off rate, in case of mutually exclusive alternative projects the projects
with higher rate of return are selected.
PAYBACK PERIOD
The payback period/method are exact amount of time requirement for a firm to
recover its initial investment in a calculated from cash inflows.
The payback method (PB) is a traditional method of capital budgeting. It is the

simplest and perhaps the most widely employed quantitative method of apprising
capital expenditure decisions. This method answers the question. How many years
will it take for the cash benefits to pay the original cost of an investment, normally
disregarding salvage value? Thus, the payback method (PB) measures the number
of years required for the CFAT to pay back the original outlay required in an
investment proposal.
There are two ways of calculating the payback period. The first method can be
applied when the cash flow streams in the nature of annuity for earn of the project’s
life that is, CFAT are uniform in such a situation, and the initial cost of the investment
is divided by the constant annual cash flow.
𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕
Payback period= 𝑪𝒐𝒏𝒔𝒕𝒖𝒏𝒕𝒂𝒏𝒏𝒖𝒂𝒍𝒄𝒂𝒔𝒉𝒇𝒍𝒐𝒘
𝑳𝒆𝒔𝒔𝒚𝒆𝒂𝒓+𝒊𝒏𝒕𝒊𝒂𝒍𝒊𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕−𝒄𝒖𝒎𝒖𝒍𝒂𝒕𝒊𝒗𝒆𝒐𝒇𝒍𝒆𝒔𝒔𝒚𝒆𝒂𝒓
Payback period= 𝒄𝒂𝒔𝒉𝒇𝒍𝒐𝒘𝒐𝒇𝒉𝒊𝒈𝒉𝒚𝒆𝒂𝒓
The second method is used when a project’s cash flows are not uniforn (mixed
stream) but vary from year to year. In such a situation, PB is calculated by the process
of cumulating cash flows till the when cumulative cash flows till the time when
cumulative cash become equal to the original investment outlay.
B.L.D.E.A’s,
Table:3.1
Annual Annual
Cumulative Cumulative
Year CFAT of CFAT of
CFAT of A CFAT of B
mach A mach B
1 Rs- 14000 Rs- 14000 Rs- 22000 Rs- 22000
2 Rs- 16000 Rs- 30000 Rs- 20000 Rs- 42000
3 Rs- 18000 Rs- 48000 Rs- 18000 Rs- 60000
4 Rs- 20000 Rs- 68000 Rs- 16000 Rs- 76000
5 Rs- 25000 Rs- 93000 Rs- 17000 Rs- 93000
The initial investment of Rs-56125 on machinery A Will be recovered

between years 3 and 4. The payback period will be fraction more than 3 years. The
sum of 48000 will be recovered by end of the 4th year CFAT Rs 20000. The payback
period for machine A is 3.406.
Similarly, for machine B the payback period would be 2nd year and a fraction
of a year. As Rs-42000 is recovered by the end of the 2nd year, the balance of Rs-
14125 needs to be recovered in the 3rd year. In the 3rd year CFAT is Rs -18000. The
payback fraction is 0.785 (Rs-14125/Rs-18000). Thus the PB period for machine B is
2.875 years.
Accept-reject criterion:
The payback period can be used as a decision criterion to accept or reject

investment proposals. One application of this technique is to compare the actual
payback with predetermined payback that is the payback set of by the management in
terms of the maximum period during which the initial investment must be recovered.
B.L.D.E.A’s,
If the actual payback period is less than the predetermined payback, the project would
be accepted, if no, it would be rejected. Alternatively, the can be used as a ranking
method. When mutually exclusive projects are under consideration, they may be
ranked accounting to the length of the payback. period thus, the project having the
shortest payback may be assigned rank one, followed in that ordered so that the
project with the longest payback would be ranked last. Obviously, projects with
shorter payback period will be selected.
Evaluation:
The payback method has certain merits. It is easy to calculate and simple to
understand. Moreover , the payback method is an improvement over the average rate
of return approach. Its superiority arises due to the fact that it is based on cash flow
analysis.
The payback approach, however, suffers from serious limitations. Its major short
coming is as follows.
It completely ignores all cash inflows after the payback period. This can be very
misleading in capital budgeting evaluations. Following is an example where in it
reveals alternative project with same payback period.
Table:3.2
Particular Project X Project Y
Total cost of the project cash flow (CFAT) Rs- 15000 Rs-15000
1 5000 4000
2 6000 5000
3 4000 6000
4 0 6000
5 0 3000
6 0 3000
Payback 0 3
B.L.D.E.A’s,
• In fact, the projects differ widely in respect of cash flows generated after the
payback period. The cash flow for projects X stops at the third year, while that
of Y continues up to the sixth year, obviously the firm would prefer project Y
because it makes available to the firm cash flow of Rs-12000 in years 4
through 6, whereas project X does not yield any cash inflow after the third
year. Under the payback method, however both projects would be given equal
ranking, which is apparently incorrect. Its failure lies in the fact that it does not
consider the total benefits accruing from the project.
• Another deficiency of the payback method is that does not measuring correctly
even the cash flows expected to be received within the payback period as it
does not differentiate between projects in terms of the timing or the magnitude
of cash flows. IT considers only the recovery period as a whole. This happens
because it does not discount the future cash flows but rather treats a rupee
received in the third year as valuable as a rupee received in the first year.
• Another failure of the payback method is that it does not take into
consideration the entire life of the project during which cash flows are
generated. As a result the project with large inflow in the later part of their
lives may be rejected in favor of less profitable projects which happen to
generate a larger proportion of their cash inflows in the earlier part of lives
The above weakness notwithstanding the payback period method can be gainfully
employed under certain conditions.
• Where the long term outlook, say in excess of 3 year is extremely hazy, the
payback method may be useful.
• Likewise this method may be very appropriate for the suffering from a
liquidity crisis. A firm with limited liquid assets and no ability assets and no
ability to raise additional funds, will nevertheless wish to undertake capital
projects in the hope of easing the crisis might use payback as a selection
criterion because it emphasizes quick recovery of firm’s original outlay.
B.L.D.E.A’s,
• Payback period method may also be beneficial in taking capital budgeting
decision for firms which lay more emphasis on short-run earning performance
rather than its long term growth. In brief, the payback period is a measure of
liquidity of investments rather than their profitability.
• Finally the payback period is useful apart from measuring liquidity, in making
calculation in certain situations. For instance the IRR can compute easily by
payback period. The payback method is a good approximation of IRR which
otherwise requires a trial approach.
• It is used as a quick method of approximation in screening proposals.
• This method makes it clear that no profits arise till the payback period is over.
This helps companies in deciding when they should start paying dividends.
• This method reduces the investment short term projects.
TIME ADJUSTED TECHNIQUES
Discounted cash flow/Time adjustment techniques
The distinguished characteristics of the discounted cash flow capital budgeting

technique is that they into consideration the time value of money while evaluating the
cost and benefits of a project. In between firm or another, all these methods require
cash flows to be discounted at a certain rate of popularity called cost of capital. Cost
of capital is the minimum discount rate that must be earned on a projects that leaves
are discounted to their present values only on the ground that a rupee received at a
future date is worth less than a rupee received today.
Merits
• It makes into account all the benefits and costs occurring during the
earnings for profits, for an entire economic life of the projects.
• It takes into account the time factor while evaluating the profitability of a
received at a future date is less than its present value.
B.L.D.E.A’s,
• They provide for uncertainty and risk as they recognize the time factor
while evaluating the profitability of investment proposals.
• They are more scientific and dependable.
Demerits
• They are complicated as they involve a good amount of calculations.
• They do not correspond to the accounting concepts while recording cost

and reserves.
• They are not suitable for ranking projects regarding different capital outlay
Net present value:
Net present value is found by subtracting projects initial investment from

the present value of its cash inflows discounted at the firm’s cost of
capital.
The cash inflow in different years are discounted (reduced) to their present value by
applying the appropriate discount factor or rate and the gross or total present value of
cash flow are compared with present value of outflows (cost of project) and the net
present value or the excess present value of the project and the difference between
total present value of cash inflow and present value outflow is ascertained and on this
basis the various investments proposals are ranked.
𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔
Cash Flow 𝒑𝒓𝒐𝒇𝒊𝒕𝒔𝒐𝒇𝒂𝒏𝒊𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕𝒂𝒇𝒕𝒆𝒓𝒕𝒂𝒙𝒆𝒔𝒃𝒖𝒕𝒃𝒆𝒇𝒐𝒓𝒆𝒅𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏
The present value of outflow= initial cost of investment and the comment of project at
various points of time
B.L.D.E.A’s,
Decision rule
After ranking various investments proposals on basis on net present value, projects
with negative net present value (net present value of cash inflows less than their
original costs) are rejected and projects with positive NPV are considered acceptable.
In case of mutually exclusive alternative projects, projects with higher net present
value are selected. Net present value method is suitable for evaluating projects where
cash flow are uneven.
Merits
• The most significant advantage is that it explicitly recognizes the time

value of money, e.g. total cash flow pertaining to two machines are
equal but the net present value are different because of differences of
cash streams. The need for recognizing the total value of money is thus
satisfied.
• It also fulfills the second attribute of a sound method of appraisal. In

that it considers the total benefits arising out of proposal over its
lifetime.
• It is particularly useful for selection of mutually exclusive projects.
• This method of asset selection is instrumental for achieving the

objective of financial management, which is instrument, which is the
maximization of the shareholder’s wealth in brief the present value
method is a theoretically correct technique in the selection of
investment proposals.
Demerits
• It is difficult to calculate as well as to understand and use, in

comparison with payback method or average return method.
B.L.D.E.A’s,
• The second and more serious problem associated with present value
method is that it involves calculations of required rate of return to
discount the cash flows. The discount rate is most important element
used in the calculation of the present value because different discount
rates will give different present values. The relative desirability of a
proposal will change with change of discount rate. The e importance of
the discount rate is thus obvious. But the calculation of required rate of
return pursuits serious problem.
• Another shortcoming is that is an absolute measure. This method will

accept the project, which has higher present value. But it is likely that
this project may also involve a larger initial outlay.
• The present value method may also give satisfactory results in case of
two projects having different effective lives. The project with a shorter
economic life is preferable, other things equal. it may be that, a project
which has a higher present value may also have a larger economic life,
so that the funds will remain invested for longer period while the
alternative proposal may have shorter life but smaller present value. In
such situations the present value method may not reflect the true worth
of alternative proposals
Internal rate of return
The internal rate of return is discount rate that equates the present values
of cash inflows the initial investment associated with a project thereby
causing NPO=0.
The technique also known as yield on investment, marginal efficiency value of

capital, marginal productivity of capital, rate of return, time adjusted rate of return and
so on. Like net present value, internal rate of return method also considers the time
value of money for discounting the cash streams. The basis of the discount factor
however, is different in both cases. In the net present value method, the discount rate
is the required rate of return and being a predetermined rate, usually cost of capital
and its determinants are external to the proposal under consideration.
B.L.D.E.A’s,
The internal rate of return, on the other hand, is based on facts which are internal to
the proposal. In other words, while arriving at the required rate of return for finding
out of the present value of cash flow, inflows and outflows are not consider. But the
IRR depends on the initial outlay and cash proceeds of projects, which is being
evaluated for acceptance are rejection. It is there for appropriately referred to as
internal rate of returns. The IRR is usually, the rate of returns that a project earns. It is
depend as the discount rate, which equates the aggregate present value of net cash
flows (CFAT) which the aggregate present value of cash outflows of a project. In
other words, it is that rate which gives the net present value zero. IRR is the rate at
which the total of discounted cash inflows equals the total of discounted cash out
flows (the initial cash of investment). It is used where the cost of investment and its
annual cash flows are known but the rate of return or discounted rate is not known
and he is required to be calculated.
Accept /Reject decision
The used of IRR as a criterion to accept capital investment decision involves a

comparison of actual IRR with required rate of returns also known as cut of rate or
hurdle rate. The project should qualify to be accepted if the internal rate of returns
exceeds the cut of rate. If the internal rate of return and the required rate of return are
equal, the firm is indifferent as to accepts or reject the project.
Evaluation of IRR
• In addition, the IRR is to understand. Business executes and non- technical

people understand the concept of IRR much more readily then they understand
the investment proposal in a better way if it is said that the total IRR of
machine B is 21% and cost of capital is 10% instead of saying that the NPV of
machine is Rs. 15,396.
• It self provides a rate of return which is indicative of profitability of proposal.

The cost of capital enters the calculation later on.
• It is consistent with the overall objective of maximizing shareholders wealth.
B.L.D.E.A’s,
Accounting to IRR, the acceptance/ reject is based on a comparison of IRR with
required rate of return is the minimum rate which investors expect on their
investment. in other words, if actual IRR of an investment proposal is equal to the rate
of expected by the investors, the share prices will remain uncharged. Rate; there for,
share prices will tend to rise. This will naturally lead to maximization of shareholders
wealth.
Another type of project for which a bases IRR calculation is in effective is a project
with a mixture of multiple positive and negative cashflows.
For example, consider a project for which marketers must reinvent the style every
couple of the years to stay current in a fickle, trendy niche market. If the project has
cash flows of Rs -50,000 in year one ( initial capital outlay), returns of Rs- 115,000 in
year to and costs of Rs -66,000 in year three because the marketing department
needed to revise the look of the project, a single IRR can’t be used. Recall that IRR is
the discount rate that makes a project break even. If market conditions change over
the years, this project can have two or more IRRs, a seen below.
1,15000 66,000
0 = −50.000 + −
(1 + 𝐼𝑅𝑅 (1 + 𝐼𝑅𝑅)2
IRR = 0.1
1,15000 66,000
0 = −50.000 + −
(1 + 𝐼𝑅𝑅 (1 + 𝐼𝑅𝑅)2
IRR= 0.2
The IRR suffers from serious limitation
• It involves complicated computation problems.

• It produces multiple rates, which can be confusing. Situation arises in the
case of non-conventional projects.
• In evaluating mutually exclusive proposals, the project with highest IRR
would be picked up in exclusion of all others.
B.L.D.E.A’s,
under IRR it is assumed that all intermediate cash flows are reinvested at the IRR.
It is rather ridiculous to think the same firm has the ability reinvest the cash flows at
different rates. The reinvestment rate assumption under the IRR is there for very
unrealistic.
Profitability index (PI)
Profitability index measures the present value of returns per rupee invested.
It is similar to NPV approach. The profitability index approach ma=easures

the present value of returns per rupee invested, while the net present value is based on
the difference between the present value of future cash inflows and the present value
of cash outflows.
A measures short coming of the NPV method is that, being an absolute

measure; it is not a reliable method to evaluate projects requiring different initial
investments. The profitability index method provides a solution to this kind of
problem. It is, in other words a relative measure. It may be defined as the ratio, which
is obtained dividing the present value of future cash inflows by the present value of
cash out flows.
Evaluation
Like the other discounted cash flows techniques, the profitability index
satisfies all most all the requirement of a sound investment criterion. It considers all
elements of capital budgeting, such as the time value of money totality of benefits and
so on. Although based on NPV, it is a better evaluation technique then NPV in a
situation of capital rationing.
INTRODUCTION TO INVESTMENT DECISION AT KSL
CAPITAL BUDGETING AND INVESTMENT DECISION AT KSL:
Expansion program :2500 TCD (tons crushing per day ) sugar factory with
15MW co-generation plant, near kemalapur village Tq : Raibag DST : Belagavi
B.L.D.E.A’s,
PROJECT BACKGROUND
The KSL has decided to set another new unit (sugar plant along with co-
generation).
• The installed capacity for the proposed plan will be 2500TCD; it can crush up to
4000 MT.
• The proposed to site in located in the heart of the irrigated land.
• The co-generation plant is configured keeping in view that the sugar factory
operations and also to meet stream and power requirement.
• The total average sugarcane crushing is estimated 5to 6lakhs MT every year.
PROJECT FINANCE AND IMPLEMENTATION:
MEANS OF FINANCE AMOUNT (IN THOUNDS)
KSL equity 66600
Term loans 133200
Total 199800
• The total project cost includes land, civil works, main plant equipment,
auxiliary plant; miscellaneous works preliminary and preoperative
expenses, contingencies, margin money for working capital, interest
during construction, financing and other costs.
• The financial analysis is based on the present sugar price.
• The provision for contingency is given at 5% of civil and structural

works and other costs.
B.L.D.E.A’s,
NEED FOR THE PROJECT
At the present there is only one sugar factory in the vicinity of the proposed to site
and there is a great potential of growing cane due to irrigation of facilities of
Krishna River. This area is in developing stage with the irrigation facilities.
In the present situation the sugarcane grown by the farmer is being diverted to the
neighbor state maharastra. In view of all above, the management of Krishna
Sugars Ltd. Has decided to bring a new proposed sugar factory.
OVERVIEW OF THE PROJECT

• Eco –friendly power project with burgesses as primary fuel.
• The promoters having technical and financial capabilities to implement the

project.
• Selection of plant equipment is based on the performance and performance

guarantees from the manufacturer and suppliers.
• Employment generation of skilled manpower in rural area.
B.L.D.E.A’s,
CHAPTER-Ⅳ
DATA ANALYSIS & INTERPRETATION
4.1 CALCULATION OF CAPITAL BUDGETING TECHNIQUES

IN KSL
Project cost: 19, 98,00,000
Cost of capital:10%
Life of project: 5 years
4.2 PAYBACK PERIOD:
TABLE 4.1 (Amount in thousands)
Particular 2015-16 2016-17 2017-18 2018-19 2019-20
EBIT 1,57,502 84,825 90,459 1,23,694 1,96,759
LESS: interest (51,010) (61,987) (68,212) (79,360) (39,166)
PBT 1,06,492 22,838 22,247 44,334 1,57,593
LESS :
(32,906) (7,057) (6,874) (13,635) (48,992)
Tax@30.90%
ADD:
12,029 10,547 11,824 12,734 12,557
depreciation
CFAT 85,615 26,328 27,197 43,369 1,21,454
Cumulative cash
85,615 1,11,943 1,39,140 1,82,509 3,03,963
inflow
B.L.D.E.A’s,
𝑰𝒏𝒊𝒕𝒊𝒂𝒍𝒊𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 − 𝒄𝒖𝒎𝒖𝒍𝒂𝒕𝒊𝒗𝒆𝑪𝑰𝑭𝟒𝒕𝒉𝒚𝒆𝒂𝒓
𝐏𝐚𝐲𝐛𝐚𝐜𝐤𝐩𝐞𝐫𝐢𝐨 = 𝐥𝐞𝐬𝐬𝐲𝐞𝐚𝐫 +
𝑪𝒂𝒔𝒉𝒇𝒍𝒐𝒘𝒐𝒇𝟓𝒕𝒉𝒚𝒆𝒂𝒓
19,98,00,000−18,25,09,000
=4+ 12,14,54000
1,72,91,000
=4+ 12,14,54000
=4+0.142
=4.142
(4year 2 month)
140000
121454
120000
100000
85615
80000
CFAT
60000
43369
40000
26328 27197
20000
0
2015-16 2016-17 2017-18 2018-19 2019-20
INTERPRETATION
Payback period life of the projects is 5 years. But as per the calculation the payback
period work to be 4 year and 2 month estimated period by the company.
In case of KSL, payback period is less, so project is viable. Hence the project proposal
is accepted.
B.L.D.E.A’s,
4.3 DISCOUNT PAYBACK PERIOD:

TABLE4.2
(Amount in thousands)
Particular 2015-16 2016-17 2017-18 2018-19 2019-20
Cash inflow 85,615 26,328 27,197 43,369 1,21,454
Discount factor at
0.909 0.826 0.751 0.683 0.621
10%
Discounted cash
77,824 21,747 20,425 29,621 75,423
inflow
Cumulative
discounted cash 77,824 99,571 1,19,996 1,49,617 2,25,040
inflow
𝒊𝒏𝒊𝒕𝒊𝒂𝒍𝒊𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕−𝑷𝑽𝑶𝑭𝑪𝑭𝒐𝒇𝟒𝒕𝒉𝒚𝒆𝒂𝒓
Discounted payback period=less year
𝑪𝒂𝒔𝒉𝒇𝒍𝒐𝒘𝒐𝒇𝒉𝒊𝒈𝒉𝒆𝒓𝒚𝒆𝒂𝒓
Where,
PV=present value
19,98,00,000−14,96,17,000 5,01,83000
CF = cash flow = 4 + = 4 + 27,54,23,000
7,54,23000
= 4+0.66
= 4.66
B.L.D.E.A’s,
(4year 8 month)
DCI
90000
77824 75423
80000
70000
60000
50000
40000 DCI
29621
30000
21747 20425
20000
10000
0
2015-16 2016-17 2017-18 2018-19 2019-20
INTERPRETATION
The discounted payback period life of the project is 5 years, but as per
calculation the discounted payback period workout to be 4 years, and 8 months. This
is the lesser than the estimated period by the company.
As the discounted payback period is less. So the project is viable. Hence the
project proposal is accepted.
B.L.D.E.A’s,
4.4 NET PRESENT VALUE
Table 4.3 (Amount in thousands)
Cumulative
Discounting Discounted
Year Cash flow Discounted
factor@10% cash inflow
cash inflow
2015-16 86,615 0.909 77,824 77,824
2016-17 26,328 0.826 21,747 99,571
2017-18 27,197 0.751 20,425 1,19,996
2018-19 43,369 0.683 29,621 1,49,617
2019-20 1,21,454 0.621 75,423 2,25,040
Net present value= ∑ 𝑝𝑟𝑒𝑠𝑒𝑛𝑡𝑣𝑎𝑙𝑢𝑒𝑜𝑓𝑐𝑎𝑠ℎ𝑓𝑙𝑜𝑤 − 𝑖𝑛𝑖𝑡𝑖𝑎𝑙𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

= 22,50,40,000- 19,98,00,000
=2,52,40,000
B.L.D.E.A’s,
DCI
90000
77824 75423
80000
70000
60000
50000
40000 DCI
29621
30000
21747 20425
20000
10000
0
2015-16 2016-17 2017-18 2018-19 2019-20
INTERPRETATION
The discount cash flow technique the present value of cash inflow is
compared with present value of cash outflow.
Here the present value of cash flow i.e.22,50,40,000 is higher than the
present value of cash outflow i.e.19,98,00,000. So the net present value project is
accepted.
4.5 PROFITABILITY INDEX:
1) PROFITABILITY INDEX:
𝑵𝒆𝒕𝒑𝒓𝒆𝒔𝒆𝒏𝒕𝒗𝒂𝒍𝒖𝒆𝒄𝒂𝒔𝒉𝒊𝒏𝒇𝒍𝒐𝒘
𝐏𝐫𝐨𝐟𝐢𝐭𝐚𝐛𝐢𝐥𝐢𝐭𝐲𝐢𝐧𝐝𝐞𝐱 = 𝑵𝒆𝒕𝒑𝒓𝒆𝒔𝒆𝒏𝒕𝒗𝒂𝒍𝒖𝒆𝒄𝒂𝒔𝒉𝒐𝒖𝒕𝒇𝒍𝒐𝒘
22,50,40,000
=
19,98,00,000
= 1.126 times
B.L.D.E.A’s,
INTERPRETATION
The discount cash flow technique under profitability index, a project will be
qualified for acceptance if it is prodigality index exceeds 1.
In case of KSL, the project under the consideration is havin profitability

index i.e.1.126 times is greater than the (profitability index >1) 1. So the project is
accepted or undertaken.
4.6 INTERNAL RATE OF RETURN:

Table 4.4 (Amount in thousands)
Cumulative
Discount rate Discounted
Year Cash flows Discounted
@ 21% cash inflow
cash flow
2015-16 85,615 0.826 70,718 70,718
2016-17 26,328 0.683 17,982 88,700
2017-18 27,197 0.564 15,339 1,04,039
2018-19 43,369 0.466 20,210 1,24,249
2019-20 1,21,454 0.385 46,759 1,71,009
Present value at lower rate − initial investment

IRR = 𝐋𝐨𝐰𝐞𝐫𝐫𝐚𝐭𝐞 + 𝐗𝐡𝐢𝐠𝐡𝐞𝐫𝐫𝐚𝐭𝐞
present value at lower rate − present value at higher rate
− 𝐥𝐨𝐰𝐞𝐫𝐫𝐚𝐭𝐞
=10 + 5.13
=15.13%
(IRR=internal rate of return is 15.13%)
B.L.D.E.A’s,
DCI
80000
70000
60000
50000
70718
40000
DCI
30000
20000
20210 46759
17982 15339
10000
0
2015-16 2016-17 2017-18 2018-19 2019-20
INTERPRETATION
The discount cash flow technique, the internal rate of return considers comparison of
the internal rate of return with the required rate of return. The project would qualified
to be accepted if the IRR (r) exceeds the cost of capital rate (k) (r>k).
In the case of the KSL, internal rate of return 15% this greater than the cost of capital
@ 10%. So under such circumstances the proposal can be accepted.
4.7 PROFIT AND LOSS ACCOUNT OF LAST

F0URYEARS
SCHEDU AS ON 31-03- AS ON 31-03 AS ON 31- AS ON 31-
INCOME
LE 2016 2017 03 2018 03 2019
Sale of production
175,97,65,000. 85,91,99,000. 1862878000. 1717920000.
• Sugar
00 00 00 00
13,55,56,000.0 10,82,13,000. 306440000.0 474090000.0
• Molasses
0 00 0 0
• Other 2.01 158501000.0
76,46,000.00 70,96,000.00 30070000.00
income 0
190,29,67,000. 974508000.0 2199388000. 2350511000.
Total – A
00 0 00 00
B.L.D.E.A’s,
EXPENDITURE
138,54,39,000. 68,15,80,000. 1036308000. 1430165000.
Cane purchased
00 00 00 00
2,72,75,000.0 414730000.0 572352033.0
Cane purchased tax 4,22,73,000.00
0 0 0
Cane procurement 2.02
&development 6,000.00 8000.00 10000.00 20000.00
expenses
Manufacturing 2.03 12,70,79,000.0 10,45,65,000.
8618000.00 14025000.00
expenses 0 00
Administrative 2.04 21,13,49,000.0 10,10,42,000.
9725000.00 8374000.00
expenses 0 00
Selling and 2.05
distribution 7,13,000.00 2,18,000.00 20577000.00 24645000.00
expenses
176,68,59,000. 91,46,88,000. 1489968000. 2049581033.
Total – B
00 00 00 00
Profit before
13,61,08,000.0 5,98,20,000.0 709420000.0 300929967.0
depreciation and
0 0 0 0
taxes (A-B)
3,05,16,000.0 136209000.0 152094000.0
Less : depreciation 3,19,38,000.00
0 0 0
Operating profit 10,41,70,000.0 2,93,04,000.0 285635967.0
57321000.00
after taxes 0 0 0
Net profit (+) for 10,41,70,000.0 2,93,04,000.0 573211000.0 285635967.0
the year 0 0 0 0
Profit/ loss brought
1,47,05,000.0 637745469.4
forward from 4,40,09,000.00 12010862.44
0 7
previous year
Balance profit
14,81,79,000.0 4,40,09,000.0 585221862.4 9233814364.
carried to balance
0 0 4 47
sheet
(Source: annual report of Krishna sugar Co-operative Ltd, Athani for the period
of 2016-17 to 2018-19)
B.L.D.E.A’s,
4.8 BALANCE SHEET OF LAST FIVE YEARS

Sours of
Schedu As on31-03- As on31-3- As on31-3- As on31-3- As on31-3-
Funds
le 2015 2016 2017 2018 2019
1.Share
holders fund
a. Share 1.01 18,39,86,851. 18,39,84,98 18,32,81,00 24,09,58,84 241307000.
capital 00 1.00 0.00 7.00 00
b. Reserve 1.02 41,26,58,305. 56,90,45,49 48,38,51,60 53,59,80,24 477827667.
&surplus 56 3.61 4.29 2.85 52
59,66,45,15.5 75,30,30,47 66,71,32,60 776939089.
Total-A
6 4.61 4.29 85
2.Laod fund
a. Secured 1.03 557,77,97,80 43,01,58,77 22,46,92,70 207648164. 207648164.
loan 5.00 8.00 7.00 00 00
b. 1.04
12,38,71,630. 16,99,13,05 19,56,30,46 2553972184 2348969947
Unsecured
00 7.00 8.00 .89 .74
loan
70,16,69,435. 60,00,71,83 49,03,2,175. 2761620348
Total-B
00 5.00 00 .89
3.Current 1.05
20,73,14,228. 29,68,90,19 63,85,76,35 164877070. 1008727480
liabilities
84 6.92 6.83 00 .00
&provision
20,73,14,228. 29,68,90,19 63,85,76,35 164877070.
Total-C
84 6.92 6.83 00
4.P&l a/c 12010862.4 637745469. 545466927.
(Profit). 4 47 82
Total(A+B+ 150,56,28,81 164,99,92,5 1738042998 4341181978 4829947187
C) 9.84 06.5 .56 .21 .08
APPLICATI
ON OF
FUNDS
5.Fixed asset 1.06
a)Land & 15,95,45,004. 16,27,69,23 15,62,41,46 460036486. 460036486.
building 60 9.60 9.20 40 40
b)Plant & 36,30,91,404. 38,79,62,38 41,60,85,41 1799781701 2191248380
machinery 95 0.95 4.95 .37 .37
Total- D 52,26,36,409. 55,07,31,62 57,23,26,88 2259818187 2651284866
B.L.D.E.A’s,
55 0.55 4.15 .77 .77
1.07 1,31,00,807.2 1,56,06,707. 1,56,06,807. 14913915.2
6.Investment 132012.20
0 20 15 0
1,31,00,807.2 1,56,06,707. 1,56,06,807. 13209712.2 14913915.2
Total- E
0 20 15 0 0
7.Current 1.08
assets and
loans &
advances
71,70,25,951. 86,61,06,75 900490213. 1717579596 1728075976
a)Stock
90 9.90 18 .00 .00
b)Sundry 1,21,27,005.7 3,14,79,478. 79,75,753.0 99505842.2 203173355.
debtors 5 89 2 2 13
c)Cash & 1,85,33,117.1 1,43,29,660. 3,43,12,573. 138672934.
6211263.25
bank 7 54 94 42
d)Loans & 6,37,09,205.8 10,69,26,02 16,70,38,29 52309408.5 164768012.
advances 6 5.69 8.03 3 66
e)Other 4,92,75,701.4 5,02,57,046. 4,02,92,469. 60086297.0 61519798.0
assets 2 42 09 7 7
86,06,70,982. 106,90,98,9 30,32,61,10 2068154078 2163748405
Total –F
10 71.4 2.87 .24 .11
8.Misc exp 1.09 ___ ___ ___
Total-G ___ ___ ___
9.P&l a/c 10,92,20,621. 1,45,55,207. 463546341.
(LOSS) 11 34 95
10,92,20,621. 1,45,55,207. 463546341.
TOTAL-H
11 34 95
TOTAL
150,56,28,81 164,99,92,5 1738042998 4341181978 4829947187
(D+E+F+G+
9.96 06.5 .56 .21 .08
H)
(Source: annual report of Krishna sugar Co-operative Ltd. Athani for the period
of 2015-16 to 2018-19)
B.L.D.E.A’s,
CHAPTER-Ⅴ
FINDING, SUGGESTION&CONCLUSIONS
5.1 FINDINGS
• The payback period-life of the assets is 5 year; but as per calculation the
payback period is workout to be 4 year and 2 months. This is lesser then the
estimated period by the industry.
• The discounted payback- life of the project is 5 year, but as per the calculation
the discounted payback period is workout to be 4 years and 8 months. This is
the lesser than the estimated period by the industry or company.
• The present value of cash flow i.e., Rs 22,50, 40,000 is higher than the present
value of cash outflow (Investment) i.e. Rs 19,98,00,000. The differential
amount is net present value i.e. Rs 2,52,40,000.
• The discounted cash flow technique- the project is consideration is having

profitability index i.e. Rs 1.126 times is greater than 1.
• The calculation of internal rate of return is 15.13 % this is more than the cost
of capital i.e.10%
• The factory has adopted capital budgeting system since 5 year
5.2 SUGGESTIONS
• Payback period should reduced.The present payback period is 4 years and 2
months. But management should attempt to achieve lesser paybacki.e.3 years
or3.5 years. This is more useful from the point of industry.
• Profitability index must be improved The present profitability is 1.126 times

which is slightly higher than the normal 1So management must put in extra
efforts which smart work to increase net present inflow and while net present
outflow should be reduced.
B.L.D.E.A’s,
• Inflow of fund is enhanced. Industry management should make more attempts
to increase inflow of fund. Though the present inflow is satisfactory. Still
industry should adopt new policy and prepare its budget carefully.
• The firm diverse its available funds some other product plan, it is suitable for
acceptance so that by diversifying the amount firm may earn highest rate of
return.
• Crucial techniques of capital budgeting be adopted.
5.3 CONCLUSION
The capital budgeting decisions taken by the company are favorable; it should
not only use payback period method and internal rate of return method for
evaluating the capital projects. It should try to use some of the other of capital
budgeting such as NPV (NET PRESENT VALUE) and profitability index
method also.
From the analysis, I can conclude that the industry’s capital budgeting
decision is also favorable.
B.L.D.E.A’s,
BIBLIOGRAPHY
REFERANCE
• I M Pandey, financial management, vikas New Delhi. Capital
budgeting chapter.
• Khan and Jain, Financial Management, TMH, New Delhi. Capital

budgeting chapter.
• The institute of charted accountant of the internal rate of return and

present value factor and discounting factor.
WEB SITE:
❖ www.en.wikipedea
❖ www.sugarindustry.com
❖ www.sugaronline.com
❖ krisnasugar@gmail.com
B.L.D.E.A’s,

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STUDY ON CAPITAL BUDGTING WITH REFERANCE TO THE KRISHNA SAHAKARI

SAKKARE KARKANE NIYAMIT, ATHANI

INTRODUCTION AND RESEARCH DESIGN

Capital budgeting is the process of making investment decision in capital

The following are the some of the examples of capital expenditure

➢ Cost of acquisition of permanent assets as land and buildings, plant and

➢ Cost of addition, expansion, improvement or alteration in the fixed asset

➢ Cost of replacement of permanent assets.

➢ Research and development, project cost etc...

Investments on capital project constitute a major financial budget of a firm.

1.3 SCOPE OF THE STUDY

• Construction or acquisition of capital facilities, including land purchase,

• Acquisition, construction, demolition or replacement of a capital asset.

• To analyze the effects of capital budgeting techniques in the company.

• The planning or design of any of the above.

• To understand the practical usage of capital budgeting in the evaluating the

1.4 NEED OF THE STUDY

• The project study is undertaken to analyze and understand the capital

• To know about the company’s operation of using various capital budgeting

• To know how the company gets fund from various sources.

• To make financial analysis of various proposals regarding capital investments

1.5 OBJECTIVE OF THE STUDY

• To understand various lands of capital budgeting problem faced by the

• To cute the factors consideration that is in to making a capital investment

• To understand the various methods of determining the size of capital

• To understand the various method of determining the size of capital budgeting

• To measure the profitability of the project by considering all cash flows.

• To suggest guidelines to the company for improving is financial position.

1.6 RESEARCH METHODALOGY

1.7 SOURCE OF DATA

• The period of the study is limited.

• It may be due to restrictions imposed by management.

• Data is collected for five projects which is limited.

The Krishna Sahakari Sakkare Karkhane Niyamit, Athani is a Co-operative

The Plant is located at Sankonatti Village of Athani in Belgaum district. The

2.3 INTRODUCTION TO SUGAR INDUSTRY:

2.4 PROFILE OF THE SUGAR INDUSTRY

• Largest Sugar Producer in 7 out of 10 years.

• Second Largest Area under Cane/Cane production.

2.5 GOVERNMENT POLICY

2.6 COMPANY PROFILE

Agriculture continues to be an extremely important sector in our country. Cooperative

After a lot of dispute on location of plant, near Sankonatti village, the

Name of the Company Krishna Sahakari Sakkare Karkhane

Factory Code No. 40501

Date Of Commencement of 12-06-2002

Project Cost 48.86 Corers

Production Production of Sugar and its by Products

Type unit Large scale Agro based manufacturing

Labour employed 610

Area of operation 22 villages

• Shri. P.C. Savadi : Chairman

• Shri. J.A. Patil : Vice Chairman

• Shri. G.M. Tewarmani : Director

• Shri. C.H. Patil : Director

• Shri. S.D Nandeshwar : Director

• Shri. G.M. Jatti : Director