Top of Form

PROJECT REPORT
ON
CAPTAL BUDGETING
AT

ODISHA SMALL INDUSTRIES CORPORATION

SUBMITTED TO THE

INSTITUTE OF MANAGEMENT AND INFORMATION TECHNOLOGY

MASTER IN BUSINESS ADMINISTRATION
2018-20
By
Name: PRIYADARSINI MAHAKUD
University Roll No: 1806102059
Registration No: 1806102059
Under the Guidance of

Name of Internal Guide Name of External Guide

MRS. TANVI CHAWDA TAPAN KUMAR DAS

FACULTY MEMBER JOINT MANAGER FINANCE

(FINANCE) OSIC, CUTTACK

No. July 31, 2019

/OSIC/Fin/2019
CERTIFICATE
This is to certify that Priyadarsini Mahakud a MBA(finance), student of Institute of
Management and Information Technology, Cuttack has undergone Internship Training on
Capital Budgeting of OSIC in the Finance Wing of The Odisha Small Scale Industry, Cuttack
for a period from 18.06.2018 to 30.06.2018.
I wish her all success in life.
Tapan Kumar Das
J Manager(Finance)
The Odisha Small Industries Corporations Ltd.
(A Silver Category Government of Odisha Undertaking)
osicltd@gmail.com(An ISO: 9001:2008 certified Govt. Company) Industrial Estate,
Madhupatna, Cuttack-753010, Tel No:2343084, 2343084, Fax: 91-571-2341875/2342561 e-
mail: website: www.osicltd.in
CERTIFICATE OF THE GUIDE

Mentor/Guide Name: Mrs. Tanvi Chawda Designation: Faculty of IMIT, Cuttack.

This is to certify that the project report entitled “CAPITAL BUDGETING” has been
prepared by Priyadrshini Mahakud under my supervision and guidance, for the fulfilment of
master in business administration. Her work is satisfactory.
Date:
Signature of Guide
ACKOWLEDGEMENT
I acknowledge in the indebtness gratitude to my internal guide Mrs. Tanvi Chawda (finance)
for extending her cooperation and help for successful completion of the project.
I would like to express my sincere gratitude to OSIC for his valuable suggestion as well as I
would like to thank Mr. Tapan Kumar Das, OSIC for his advises and guidance in carrying out
this project.
I would also like to thank Smt. Subhashree Nayak, OSIC for giving me an opportunity to
undertake a project in OSIC, Cuttack. I am also thankful to the staff members of finance
department for their immense support and assistance, for giving some time from his busy
schedule to explain me intricacies of the topic and guidance me to complete my project
successfully.
Once again I express my sincere thanks and wholehearted gratitude to all those persons with
whom I was associated during my project & I’m very thankful from the core of my heart to
my parents for their immense support & blessing for which I could able to complete my
project.
Name-Priyadarsini Mahakud
Roll no-1806102059
DECLARATION
I do hereby declare that the project study entitled “CAPITAL BUDGETING” is being
submitted by me to IMIT, Cuttack for partial fulfilment of MASTER IN BUSINESS
ADMINISTRATION. This is based on the study undertaken by me, and the information
presented in this report is true to the best of my knowledge and belief. This report has neither
been submitted nor published anywhere else. This report is a part of my course curriculum
and the main objective of conducting this study is to know about the financial management of
OSIC through a detail study. The information and data used in the report was collected from
published “Annual Report”, financial statement and various articles of the OSIC. This report
shall be used for academic purpose only.
Name-Priyadarsini Mahakud
Regd no-1806102059
TABLE OF CONTENTS

SR
TOPIC PAGE
NO.

1 GUIDE CERTIFICATE I

2 ACKOWLEDGEMENT II

3 DECLARATION III

4 TABLE OF CONTENTS IV

CHAPTER-1 INTRODUCTION

 1.1 RATIONAL OF THE STUDY

 1.2 OBJECTIVE OF THE STUDY 1-3

 1.3 EXPECTED CONTRIBUTION OF THE

STUDY

CHAPTER-2 COMPANY PROFILE

 2.1 COMPANY OVERVIEW
 2.2 MISSION 4-6
 2.3 VISION
 2.4 FUNCTION OF OSIC

CHAPTER-3 LITERATURE REVIEW
7-24
WORKING CAPITAL THEORY

CHAPTER-4 RESEARCH METHODOLOGY & DATA ANALYSIS 25-33

CHAPTER-5 FINDINGS AND CONCLUSION OF THE STUDY 34-35

 CHAPTER-6 BIBILOGRAPHY 36

CHAPTER1
INTRODUCTION
1.1 INTRODUCTION OF THE STUDY
Every organization irrespective of its size and mission can be viewed as a financial entity
management of an organization. Financial management focuses not only on the improvement
of funds but also on their efficient use with the objective of maximizing the owners’ wealth.
The allocation of funds is therefore an important function of financial management. The
allocation of funds involves the commitment of funds to assets and activities.
There are two types of Investment decision:
 1. Management of current assets or Working capital management.
 2. Long term investment decision.
Long term investment decisions are widely known as capital budgeting or capital expenditure
budgeting. It means as to whether or not money should be invested in long term project. This
part is devoted to an in-depth and comparative decision of capital budgeting/capital
expenditure management.
A project is an activity sufficiently self-contained to permit financial and commercial
analysis. In most cases projects represent expenditure of capital funds by pre-existing entities
which want to expand or improve their operation.
In general a project is an activity in which, we will spend money in expectation of returns and
which logically seems to lead itself to planning. Financing and implementation as a unit, is a
specific activity with a specific point and a specific ending point intended to accomplish a
specific objective.
To take up a new project, involves a capital investment decision and it is the top
management’s duty to make a situation and feasibility analysis of that particular project and
means of financing and implementing it financing is a rapidly expanding field, which focuses
not on the credit status of a company, but on cash flows that will be generated by a specific
project. Capital budgeting has its origins in the natural resource and infrastructure sectors.
The current demand for infrastructure and capital investments is being fuelled by
deregulation in the power, telecommunications, and transportation sectors, by the
globalization of product markets and the need for manufacturing scale, and by the
privatization of government owned entities in developed and developing countries.
The capital budgeting decision procedure basically involves the evaluation of the desirability
of an investment proposal. It is obvious that the firm must have a systematic procedure for
making capital budgeting decisions.
The procedure must be consistent with the objective of wealth maximization. In view of the
significance of capital budgeting decisions, the procedure must consist of step by step
analysis.
1.2 Importance of investment decisions:-
Capital investments, representing the growing edge of a business, are deemed to be very
important for three inter-related reasons.
 1. They influence firm growth in the long term consequences capital investment decisions
have considerable impact on what the firm can do in future.
 2. They affect the risk of the firm; it is difficult to reverse capital investment decisions
because the market for used capital investments is ill organized and /or most of the capital
equipment’s bought by a firm to meet its specific requirements.
 3. Capital investment decisions involve substantial out lays.
“ODISHA SMALL INDUSTRIES AND CORPORATION” is a growing concern, capital
budgeting is more or less a continuous process and it is carried out by different functional
areas of management such a production, marketing, engineering, financial management etc.
All the relevant functional departments play a crucial role in the capital budgeting decision
process.
1.3 Objectives of the study:-
 1. To describe the organizational profile of “ODISHA SMALL INDUSTRIES AND
CORPORATION LTD.”
 2. To discuss the importance of the management of capital budgeting.
 3. Determination of proposal and investments, inflows and out flows.
 4. To evaluate the investment proposal by using capital budgeting techniques.
 5. To summarize and to suggest for the better investment proposal.
1.4 Scope of the Study:-
This study highlights the review of capital budgeting and capital expenditure management of
the company. Capital expenditure decisions require careful planning and control. Such long
term planning and control of capital expenditure is called Capital Budgeting. The study also
helps to understand how the analysis of the alternative proposals and deciding whether or not
to commit funds to a particular investment proposal whose benefits are to be realized over a
period of time longer than one year. The capital budgeting is based on some tools namely
Payback period, Average Rate of Return, Net Present Value, Profitability Index, and Internal
Rate of Return.
1.5 METHODOLOGY:-
The information for the study is obtained from two sources namely.
 1. Primary Sources
 2. Secondary Sources
1. Primary Sources:
It is the information collected directly without any references. It is mainly through
interactions with concerned officers & staff, either individually or collectively; some of the
information has been verified or supplemented with personal observation. These sources
include.
 a. Through interactions with the various department managers of “ODISHA SMALL
INDUSTRIES AND CORPORATION LTD.”
 b. Guidelines given by the Project Guide, Mr.Khirod chandra Mallick
Dy. Manager, finance division.
2. Secondary Sources:
This data is from the number of books and records of the company, the annual reports
published by the company and other magazines. The secondary data is obtained from the
following.
 a. Collection of required data from annual records, monthly records, internal published
book or profile of “ODISHA SMALL INDUSTRIES AND CORPORATION LTD”.
 b. Other books and journals and magazines.
 c. Annual Reports of the company.
1.6 LIMITATIONS:-
Through the project was completed successfully with a few limitations may.
 a. Since the procedure and policies of the company will not allow disclosing confidential
financial information, the project has to be completed with the available data given to us.
 b. The period of study that is 6 weeks is not enough to conduct detailed study of the
project.
 c. The study is carried is carried basing on the information and documents provided by the
organization and based on the interaction with the various employees of the respective
departments.
CHAPTER-2
COMPANY PROFILE
ABOUT THE COMPANY
The Odisha small Industries Corporation Ltd. (OSIC) was established on 3rd April, 1972 as
wholly owned Corporation of Government of Odisha. The basic objective of the Corporation
is to aid, assist and promote the MSMEs in the state for their sustained growth and
development to gear up the industrialization process in the state. Although there are a number
of other State Corporations looking after various aspects of industrial development, yet this is
the only Corporation in the State exclusively engaged in the development, of the MSMEs
which form the back bone of industrial sector in the state.
The Odisha Small Industries Corporation Ltd. (OSIC) is a government of Odisha’s silver
category profit making PSU with annual turnover of more than 550.00 crore.
OBJECTIVE
The Odisha Small Industries Corporation Limited (OSIC) was incorporated on 3rd April,
1972 with main objective to aid, assist and promote the SSI units of the state. It acts as the
facilitator for the industrial growth of the MSMEs of the State. Starting with a modest
turnover of Rs.1.00 Crore in the year 1972-73, it has reached a turnover of Rs.552.10 crore in
the financial year 2015-16 and earned a net profit of rs.6.90 crore (provisional). It is an ISO-
9001-2008 certified Govt. of Odisha Undertaking. The corporation functions under the
administrative control of MSME Department, Govt. of Odisha.
ADDITIONAL INFORMATION

Company Name Odisha Small Industries and Corporations

Products/Services Iron & Steel, Wire Rod, Bitumen

Country/Region India

State Odisha

City Cuttack

Telephone 0671-2341458/ 2342404/ 2344612

Fax 91-671-2341875/ 2342561

URL www.osicltd.in

Email osicltd@gmail.com osicltd@rediffmail.com

ESTABLISHMENT

  Head office is at Cuttack

  Branch offices are at Rasulgarh, Balasore, Sambalpur, Rourkela, Bolangir, Jeypore,

keonjhar, Anugul, Kesinga, Berhampur, Mancheswar, and Baripada.
MANAGEMENT

  Chairman:-Sj. Ramakrushna Dasmohapatra

  Managing Director:-Sj.Prasanna Kumar Jena(IAS)

FUNCTION OF OSIC
OSIC is working with the following:
 i. To provide quality raw material to MSMEs of the State.
 ii. To provide quality building material to MSME sector.
 iii. To assist in marketing the products of the MSME sector.
 iv. To act as syndicate leader of MSMEs as per the IPR of the Govt. of Odisha
 v. To act as a Nodal Agency for subcontract exchange for MSME sector and large
Industries.
VISION
To aid, assist and promote the MSMEs of the state as per Government mandate.
MISSION
 i. To provide quality raw material to MSME sector.
 ii. To provide marketing assistance to MSME sector.
 iii. To market the MSMEs produces by creating common brand name with quality
assurance.
CHAPTER-3
CAPITAL BUDGETING
4.1 MEANING
Capital Budgeting is the process of making investment decisions in capital expenditure. A
capital expenditure may be defined as an expenditure the benefit of which are expected to be
received over a period of time exceeding one year. The main characteristics of a capital
expenditure are that the expenditure is incurred at one point of time whereas benefits of the
expenditure are realized at different points of time in future. Capital expenditure involves
non-flexible long term commitment of funds. Thus capital expenditure decisions are also
called Long-Term Investment Decision. Capital budgeting involves the planning and control
of capital expenditure.
DEFINITION:
R.M.LYNCH has defined capital Budgeting as “Capital Budgeting consists of employment of
available capital for the purpose of maximizing the long term profitability of the firm”.
Capital Budgeting is a many-sided activity. It includes searching for new and more profitable
investment proposals, investigating, engineering and marketing considerations to predict the
consequences of accepting the investment and making economic analysis to determine the
profit potential of each investment proposal.
Its basic features can be summarized as follows;
 1. It has the potentiality of making large anticipated profits.
 2. It involves a high degree of risk.
 3. It involves a relatively long-time period between the initial outlay and the anticipated
return.
Capital Budgeting consists of planning and the development of available capital for the
purpose of maximizing the long-term profitability of the firm.
4.2 NEED AND IMPORTANCE OF CAPITAL BUDGETING
Capital Budgeting means planning for capital assets. Capital Budgeting decisions are vital to
any organization as they include the decision to;
 1.Whether or not funds should be invested in long term projects such as setting of an
industry, purchase of plant and machinery etc.,
 2. Analyse the proposal for expansion or creating additional capacity.
 3. To decide the replacement of permanent assets such as building and equipment’s.
 4. To make financial analysis of various proposal regarding capital investments so as to
choose the best out of many alternative proposals.
The importance of capital Budgeting can be well understood from the fact that an unsound
investment decision may prove to be fatal to the very existence of the concern. The need,
significance or importance of capital budgeting arises mainly due to the following.
1. Large Investments
Capital budgeting decisions, generally involves large investment of funds. But the funds
available with the firm are always limited and the demand for funds exceeds the resources.
Hence it is very important for a firm to plan and control its capital expenditure.
2. Long-term commitment of Funds
Capital expenditure involves not only large amounts of funds but also funds for long-term or
more or less on permanent basis. The 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 decisions for acquiring
a permanent asset is taken, it became very difficult to dispose of these assets without
incurring heavy losses.
4. Long-term Effect of profitability
The investment decisions taken today not only affects present profit but also the future
profitability of the business. A profitable project selection is fatal to the business.
5. Difficulties of investment decisions
The long term investment decisions are more difficult to take because,
 1. Decision extends to a series of years beyond the current accounting period.
 2. Uncertainties of future and
 3. Higher degree of risk.
6. National Importance
An investment decision through taken by individual concerns is of national importance
because it determines employment, economic activities and economic growth.
7. Effect on cost structure
By taking a capital expenditure decision, a firm commits itself to a size able amount of fixed
cost in terms of interest, supervisors salary, insurance, building rent etc. If the investment
turns out to be unsuccessful in future or produces less than anticipated profits, the firm will
have to bear the burden of fixed cost.
8. Impact on firm’s
Competitive strength the capital budgeting decisions affect the capacity and strength of a firm
to face competition. It is so because the capital investment decisions affect the future profits
and costs of the firm. This will ultimately affect the firm’s competitive strength.
9. Cost control
In capital budgeting there is a regular comparison of budgeted and actual expenditures.
Therefore cost control is facilitated through capital budgeting.
10. Wealth Maximization
The basic objective of financial management is to maximize the wealth of the shareholders.
Capital budgeting helps to achieve this basic objective. Capital budgeting avoids over
investments and under investments in fixed assets. In this way capital budgeting protects the
interest of the shareholders and of the enterprise.
4.3 STEPSIN CAPITAL BUDGETING
Capital budgeting is a complex process. It involves decision relating to the investment of
current funds for the benefit to be achieved in future which is always uncertain. Capital
budgeting is a six step process. The following steps are involved in capital budgeting;
1. Project generation
The capital budgeting process begins with generation or identification ofi nvestment
proposals. This involves a continuous search for investment opportunities which are
compatible with firm’s objectives.
2. Project screening
Each proposal is then subject to a preliminary screening process in order to assess whether it
is technically feasible, resources required are available, and expected returns are adequate to
compensate for the risks involved.
3. Project evaluation
After screening of project ideas or investment proposals the next step is to evaluate the
profitability of each proposal. This involves two steps;
 a. Estimation of cost and benefit in terms of cash flows
 b. Selecting an appropriate criterion to judge the desirability of the project.
4. Project selection
After evaluation the next step is the selection and the approval of the best proposal. In actual
practice all capital budgeting decision are made at multiple levels and are finally approved by
top management.
5. Project execution and implementation
After the selection of project funds are allocated for them and a capital budget is prepared. It
is the duties of the top management or capital budgeting committee to ensure that funds are
spend in accordance with allocation made in the capital budget.
6. Performance review
After the implementation of the project, its progress must be reviewed at periodical intervals.
The follow-up or review is made by comparing actual performance with the budget estimates.
4.4 OPERATING BUDGET AND CAPITAL BUDGET
Most of the large firms prepare two different budgets each year.
1. OPERATING BUDGET
Operating budget shows planned operations for the forthcoming period and includes sales,
production, production cost, and selling and distribution overhead budgets. Capital budgets
deals exclusively with major investment proposals.
2. CAPITAL EXPENDITURE BUDGET
Capital Expenditure is a type of functional budget. It is the firm’s formal Plan for the
expenditure of money for purchase of fixed assets. The budget is prepared after taking in to
account the available production capacities, probable reallocation of existing resources and
possible improvements introduction techniques. If required, separate budgets can be prepared
for each item of capital assets such as a building budget, a plant and machinery budget etc.
4.5 OBJECTIVES OF CAPITAL EXPENDITURE BUDGET
The objectives of Capital Expenditure Budget are as follows.
 1. It determines the capital projects on which work can be started during the budget period
after taking in to account their urgency and the expected rate of return on each project.
 2. It estimates the expenditure that would have to be incurred on capital projects approved
by the management together with the source or sources from which the required funds would
be obtained.
 3. It restricts the capital expenditure on projects within authorized limits.
CONTROL OVER EXPENDITURE THROUGH CAPITAL EXPENDITURE BUDGET
The capital expenditure budget primarily ensures that only such projects are taken in hand
which are either expected to increase or maintain the rate of return on capital employed. Each
proposed project is appraised and only essential project or projects likely to increase the
profitability of the organization are included in the budget. In order to control expenditure on
each project, the following procedure is adopted.
 1. A project sheet is maintained for each project.
 2. In order to ensure that the expenditure on different project is properly analysed.
 3. The expenditure incurred on the project is regularly entered on the project sheets from
various sources such as invoices of assets purchased, bill for delivery charges etc.
 4. The management is periodically informed about expenditure incurred in respect of each
project under appropriate heads.
 5. In case project cost is expected to increase; a supplementary sanction for the same is
obtained.
 6. In financial books the total expenditure incurred on all projects is separately recorded.
4.6 TACTICAL AND STRATEGIC INVESTMENT DECISION
Investment decision can be classified as,
1. Tactical Decision
A Tactical Decision generally involves a relatively small amount of funds and does not
constitute a major departure from the past practices of the company.
2. Strategic Decision
A Strategic Investment Decision involves a large sum of money and may also result in a
major departure from the past practices of the company. Acceptance of a Strategic Investment
Decision involves a significant change in the company’s expected profits associated with a
high degree of risk.
4.7 RATIONALE OF CAPITAL EXPENDITURE
Efficiency is the rationale underlying all capital decisions. A firm has to continuously invest
in new plant or machinery for expansion of its operations or replace worn-out machinery for
maintaining and improving its efficiency. The overall objective is to maximize the firm’s
profits and thus optimizing the return on investment. This objective can be achieved either by
increased revenues or by cost reduction. Thus capital expenditure can be of two types;
 1. Expenditure Increasing Revenue
 2. Expenditure Reducing Cost
4.8 KINDS OF CAPITAL INVESTMENT PROPOSALS
A firm may have several investment proposals for its consideration. It may adopt one of
them, some of them or all of them depending upon whether they are independent, contingent
or dependent or mutually exclusive.
1. INDEPENDENT PROPOSALS
These are proposals which do not compete with one another in a way that acceptance of one
precludes the possibility of acceptance of another. In case of such proposals the firm may
straight away “accept or reject” a proposals on the basis of minimum return on investment
required. All these proposals which give a higher return than a certain desired rate of return
are accepted and the rest are rejected.
2. CONTINGENT OR DEPENDENT PROPOSALS
These are proposals whose acceptance depends on the acceptance of one or more other
proposals. When a contingent investment proposal is made, it should also contain the
proposal on which it is dependent in order to have a better perspective of the situation.
3. MUTUALLY EXCLUSIVE PROPOSALS
These proposals which compete with each other in a way that the acceptance of one precludes
the acceptance of other or others. Two or more mutually exclusive proposals cannot both or
all be accepted. Some techniques have to be used for selecting the better or the best one.
Once this is done, other alternative automatically gets eliminated.
4. REPLACEMENT PROPOSALS
These aim at improving operating efficiency and reducing costs. These are called cost
reduction decisions.
5. EXPANSION PROPOSALS
This refers to adding capacity to existing product line.
6. DIVERSIFICATION PROPOSALS
Diversification means operating in several markets rather than a single market. It may also
involve adding new products to the existing products. Diversification decisions require
evaluation of proposals to diversify in to new product lines, new markets etc., for reducing
the risk of failure.
7. CAPITAL RATIONING PROPOSALS
Capital rationing means distribution of capital in favour of some acceptable proposals. A firm
cannot afford to undertake all profitable proposals because it has limited funds to invest. In
such a case, these various investment proposals compete for limited funds and the firm has to
ration them. Thus the situation where the firm is not able to finance all the profitable
investment opportunities due to limited resources is known as capital rationing.
4.9 FACTORS AFFECTING CAPITAL INVESTMENT DECISIONS
The following are the four important factors which are generally taken in to account while
making a capital investment decision.
1. The Amount of Investment
In case a firm has unlimited funds for investment it can accept all capital investment
proposals which give a rate of return higher than the minimum acceptable or cut-off rate.
2. Minimum Rate of Return on Investment
The management expects a minimum rate of return on the capital investment. The minimum
rate of return is usually decided on the basis of the cost of capital.
3. Return Expected from the Investment
Capital investment decisions are made in anticipation of increased return in the future. It is
therefore necessary to estimate the future return or benefits accruing from the investment
proposals while evaluating the capital investment proposals.
4. Ranking of the Investment Proposals
When a number of projects appear to be acceptable on the basis of their profitability the
project will be ranked in the order of their profitability in order to determine the most
profitable project.
4.10 METHODS OF CAPITAL BUDGETING OR EVALUATION OF INVESTMENT
PROPOSALS
A business firm has a number of proposals regarding various projects in which it can invest
funds. But the funds available with the firm are always limited and it is not possible to invest
funds in all the proposals at a time. The most widely accepted techniques used in estimating
the cost returns of investment projects can be grouped under two categories;
1. TRADITIONAL METHODS (NON DISCOUNTED CASH FLOW)
 a. Payback Period Method
 b. Average rate of Return Method
2. MODERN METHODS (DISCOUNTED CASH FLOW)
 a. Net Present Value Method
 b. Internal rate of Return Method
 c. Profitability Index Method
1. TRADITIONAL METHODS (NON DISCOUNTED CASH FLOW)
A. PAYBACK PERIOD METHOD
The payback period method is the simplest method of evaluating investment proposals.
Payback period represents the number of years required to recover the original investment.
The payback period is also called Pay Out or Pay off Period. This period is calculated by
dividing the cost of the project by the annual earnings after tax but before depreciation. Under
this method the project is ranked on the basis of the length of the payback period. A project
with the shortest payback period will be given the highest rank.
METHODS OF COMPUTATION OF PAYBACK PERIOD
There are two ways of calculating the payback period.
 a. When annual cash inflow is constant
The formula is find out the payback period if the project generates constant annual cash
inflow is;
Original cost of the project
Payback period =
Annual cash inflow
Annual cash inflow is the annual earning (profit depreciation and after taxes) before
 b. When annual cash inflow is not constant
If the annual cash inflows are unequal the payback period can be found out by adding up the
cash inflows until the total is equal to the initial cash outlay of the project.
ADVANTAGES OF PAYBACK PERIOD
 1. Simple to understand and easy to calculate.
 2. It reduces the chances of loss through obsolescence.
 3. A firm which has shortage of funds find this method very useful.
 4. This method costs less as it requires only very little effort for its Computation.
DISADVANTAGES
 1. This method does not take in to consideration the cash inflows beyond the payback
period.
 2. It does not take in to consideration the time value of money. It considers the same
amount received in the second year and third year as equal.
 3. It gives over emphasis for liquidity.
ACCEPTANCE RULE
The following are the Payback [P.B.Rules]

Accept P.B<cut-off rate

Reject P.B>cut-off rate

May
P.B<cut-off rate
Accept

Cut-off rate
Cut-off rate is the rate below which a project would not be accepted. If ten percentages is the
desired rate of return, the cut-off rate is 10%.The cut-off point may also be in terms of period.
If the management desires that the investment in the project should be recouped in three
years, the period of three years would be taken as the cut-off period. A project incapable of
generating necessary cash to pay for the initial investment in the project with-in three years
will not be accepted.
B. AVERAGE RATE OF RETURN (ARR) METHOD
This method otherwise called the Rate of Return Method, takes in to account the earnings
expected from the investment over the entire life time of the asset. The various projects are
ranked in order of the rate of returns. The project with the higher rate of return is accepted.
Average Rate of Return is found out by dividing the average income after depreciation and
taxes, i.e. the accounting profit, by the Average Investment.
ARR =
Where;

x100
Average Annual Earnings is the total of anticipated annual earnings after depreciation and tax
(accounting profit) divided by the number of years.
Average Investment means
 i. If there is no salvage (Scrap value) 
 ii. If there is scrap value 
 iii. If there is additional working capital
ADVANTAGES OF AVERAGE RATE OF RETURN(ARR) METHOD
 1. It is easy to calculate and simple to understand.
 2. Emphasis is placed on the profitability of the project and not on liquidity.
 3. The earnings over the entire life of the project is considered for
 4. Ascertaining the Average Rate of Return.
 5. This method makes use of the accounting profit.
DISADVANTAGES
 1. Like the payback period method this method also ignores the time value of money. The
averaging technique gives equal weight to profits occurring at different periods.
 2. This averaging technique ignores the fluctuations in profits of various years.
 3. It makes use of the accounting profits, not cash flows, in evaluating the project.
2. DISCOUNTED CASH FLOW METHODS
The payback period method and the Average rate of Return Method do not take in to
consideration the time value of money. They give equal weight to the present and the future
flow of incomes. The discounted cash flow methods are based on the concept that a rupee
earned today is more worth than a rupee earned tomorrow. These methods take in to
consideration the profitability and also the time value of money.
I. NET PRESENT VALUE (NPV) METHOD
The Net Present Value Method (NPV) gives consideration to the time value of money. It
views that the cash flows of different years differ in value and they become comparable only
when the present equivalent values of these cash flows of different periods are ascertained.
For this the net cash inflows of various periods are discounted using the required rate of
return, which is a predetermined rate .If the present value of expected cash inflows exceeds
the initial cost of the project, the project is accepted.
NPV= Present value of cash inflows – Present value of initial investment
STEPS IN NET PRESENT VALUE (NPV) METHOD
 1. Determine an appropriate rate of interest to discount cash flows.
 2. Compute the present value of total investment outlay (i.e., cash outflow) at the
determined discounting rate.
 3. Compute the present value of total cash inflows (profit before depreciation and after
tax) at the above determined discount rate.
 4. Subtract the present value of cash outflow (cost of investment) from the present value
of cash inflows to arrive at the net present value.
 5. If the net present value is negative i.e., the present value cash outflow is more than the
present value of cash inflow the project proposals will be rejected .If net present value is zero
or positive the proposal can be accepted.
 6. If the projects are ranked the project with the maximum positive net present value
should be chosen.
ADVANTAGES OF NET PRESENT VALUE METHOD
 1. It considers the time value of money.
 2. It considers the earnings over the entire life of the project.3.
 3. Helpful in comparing two projects requiring same amount of cash outflows.
DISADVANTAGES OF NET PRESENT VALUE METHOD
 1. Not helpful in comparing two projects with different cash outflows.
 2. This method may be misleading is in comparing the projects of unequal lives.
II. INTERNAL RATE OF RETURN (IRR) METHOD
The Internal Rate of Return for an investment proposal is that discount rate which equates the
present value of cash inflows with the present value of cash outflows of the investment. The
Internal Rate of Return is compared with a required rate of return. If the Internal Rate of
Return of the investment proposal is more than the required rate of return the project is
rejected. If more than one project is proposed, the one which gives the highest internal rate
must be accepted.
It can be calculated by the following formula

Where, L = Lower rate of discount P1 = Present value of cash inflows at lower rate of discount P2 = Present value at higher discount rate Q = Initial
Investment D = Difference in rate

ADVANTAGES OF INTERNAL RATE OF RETURN

 1. It considers the time value of money.
 2. The earnings over the entire life of project are considered.
 3. Effective for comparing projects of different life periods and different timings in
timings of cash inflows.
DISADVANTAGES
 1. Difficult to calculate.
 2. This method presumes that the earnings are reinvested at the rate earned by the
investment which is not always true.
Accept or Reject Rule
Internal Rate of Return is the maximum rate of interest which an organization can afford to
pay on the capital invested in a project. A project would qualify to be accepted if Internal
Rate of Return exceeds the cut-off rate. While evaluating two or more projects, a project
giving a higher Internal Rate of Return would be preferred. This is because higher the rate of
return, the more profitable is the investment.
III. PROFITABILITY INDEX METHOD

This is also called Benefit-Cost ratio. This is slight modification of the Net Present Value
Method. The present value of cash inflows and cash out flows are calculated as under the
NPV method. The Profitability Index is the ratio of the present value of future cash inflow to
the present value of the cash outflow, i.e., initial cost of the project.
If the Profitability index is equal to or more than one proposal the proposal will be accepted.
If there are more than one investment proposals, the one with the highest profitability index
will be preferred. This method is also known as Benefit-Cost ratio because the numerator
measures benefits and the denominator measures costs. ”It is the ratio of the present value of
cash inflow at the required rate of return to the initial cash outflow of the investment.
4.11 Cost Effective Analysis
In the cost effectiveness analysis the project selection or technological choice, only the costs
of two or more alternative choices are considered treating the benefits as identical. This
approach is used when the acquisition of how to minimize the costs for undertaking an
activity at a given discount rates in case the benefits and operating costs are given, one can
minimize the capital cost to obtain given discount.
4.12 RISK AND UNCERTAINITY IN CAPITAL BUDGETING
All the techniques of capital budgeting requires the estimation of future cash inflow and cash
outflows. The cash flows are estimated abased on the following factors.
 1. Expected economic life of the project.
 2. Salvage value of the asset at the end of the economic life.
 3. Capacity of the product.
 4. Selling price of the product.
 5. Production cost.
 6. Depreciation.
 7. Rate of Taxation
 8. Future demand of the product,
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 take into account in the form of forcible risk while making an
investment decision. But some allowances for the element of risk have to be proved.
4.13 FACTORS INFLUENCING CAPITAL EXPENDITURE DESCISIONS:
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 decisions.
They are
1. URGENCY
Sometime 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 each urgency are breakdown of some plant and machinery fire accidents
etc.
2. DEGREE OF UNCERTAINTY
Profitability is directly related to risk, higher the profits, greater is the risker uncertainty.
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 projects, social welfare,
goodwill of the firm etc.
4.15 CAPITAL EXPENDITURE CONTROL
Capital expenditure involves no-flexible long-term commitments of funds. The success of an
enterprise in the long run depends up on the effectiveness with which the management makes
capital expenditure decision. Capital expenditure decisions are very important as their impact
is more or less permanent on the wellbeing and economic health of the enterprise. Because of
this 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.
4.16 OBJECTIVES 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 no availability of cash may not be
problem in the implementation of the problem.
  To ensure that all capital expenditure is properly sanctioned.

  To properly coordinate the projects of various departments.

  To fix priorities among various projects and ensure their follow-up.

  To compare periodically actual expenditure with the budgeted ones so as to avoid any
excess expenditure.

  To measure the performance of the project.

  To ensure that sufficient amount of capital expenditure is incurred to keep pace with
rapid technological development.

  To prevent over expansion.

4.17 STEPS INVOLVED IN CONTROL OF CAPITAL EXPENDITURE

  Preparation of capital expenditure budget.

  Proper authorization of capital expenditure.

  Recording and control of expenditure.

  Evaluation of performance.
CHAPTER-4
RESEARCH METHODOLOGY & DATA ANALYSIS
BUDGET: 2019-20
The main objectives of OSIC are to aid, assist and promote the MSMEs to gear up the
industrialisation process in the state of Odisha. Keeping these objectives in view, the
corporation has been extending support services to the MSMEs in providing quality raw
materials, marketing their finished products and also executing construction work of different
Govt. Departments, Rural electrification work etc. The annual turnover of OSIC has gone up
to Rs. 580.72crore in the year 2018-19 in comparison to Rs.520.18crore during the year
2017-18. After decontrol of Iron & steel and impact of globalisation & privatization, the
corporation had to face the challenge of competition with private business houses and in spite
of all adversity, the corporation has been able to withstand the threat. More over the working
capital constraints increase in salary and other administrative overheads stood as barrier for
the corporation to achieve the desired growth. But strategies has been planned out overcome
the problem and keeping all these aspects in vies, the corporation has prepared the annual
budget for the year 2019-20 and rededicated once again in its endeavour to contribute to the
industrial development in the state of Odisha.
The corporation has projected an annual turnover of Rs.650.37 crore during the year 2019-20
with an estimated profit of Rs.7.10 crore as against the turnover of Rs.580.72 crore and profit
of Rs.6.59 crore in the financial year 2018-19. The corporation has given more thrust on sale
of TISCON bar and packed Bitumen apart from increase in sale of raw materials through
commercial division.
The corporation has also made strategies to improve the product marketing activities by
bagging more orders from DRDAs, R.E. Works and other activities like brand marketing of
ODI-FOOD & ODI-TECH, and pharmaceutical materials. Target of Rs.143.60 crore is
worked out for the year 2019-20 as against achievement of Rs.125.00 crore in the financial
year 2018-19. Also the corporation has been entrusted with construction of Jara Nivas at
Cuttack along with other construction work of various Govt. departments.
In hand while the corporation has made strategies to improve the business activities, on the
other hand, through austerity measures the corporation has planned to reduce the expenditure
towards its overhead expenditure.
In a nutshell, the corporation has planned to achieve the business turnover and profit in the
year 2019-20 and to empower the micro, small medium enterprises (MSME) sector with a
view to the process of economic growth and employment generation of the state.
BUDGET (2019-20) AT A GLANCE
(Rs. In Lakh) Qty. in MT

SI Particulars
Budget 2018-19
N
ESTIMATED FOR 2018-19

O. Budget for 2019-20

Qty. Value Qty. Value Qty. Value

A
COMMERCIAL DIVISION

Direct sales of raw materials:

i. Iron & 500.00 215.00 313.76 151.30 500.0 241.53

Steel 0 0 0

TISCON 85000. 43370. 76445. 39295. 85000 43172.

ii.
Bar 00 40 907 07 .00 88

Bitumen 20000. 6474.6 12268. 4212.0 14000 4662.7

iii.
00 0 411 7 .00 1

10550
Sub 50060. 89028. 43658. 99500 . 48077.
Total(A) 
- 00 078 44 00 12
0.00
 MARKETING DIVISION

B i. MSME 2400.0 1604.4 2800.0

product 0 6 0

ii. MEDICA L 0.00 0.00 40.00

iii. Others(R. 17250. 10890. 11500.

E Work) 00 06 00

iv. EXPORT 50.00 0.00 0.00

v. Brand marketing 50.00 5.61 20.00

19750. 1200.1 14360.

Sub-Total(B) 00 3 00

Consortium marketing

C
Pharmace utical
i. 0.00 0.00 0.00
materials

Sub-Total(C) 0.00 0.00 0.00

Coal 0.00 0.00 0.00

D
Sub-Total(D) 0.00 0.00 0.00

CONSTRUCTION

i. Sub- 5000.0 1913.1 2600.0

E
contract 0 0 0

5000.0 1913.1 2600.0

Sub-Total(E) 0 0 0

GRAND 10550 74810. 89028 58071. 9950 65037.

 TOTAL . 0

0.00 000 078 670 .00 119

BALANCE SHEET AS ON 31ST MARCH, 2018

Notes Figures as at the end of Figures as at the end of

Particulars
No. current reporting period previous reporting period

I.EQUITY AND LIABILITIES

 (1) Shareholder’s fund

a. Share capital 5 231,133,100 260,613,100

b. Reserve and surplus 6 331,797,436 220,716’342

c. Money received against

- -
share warrenties

(2)Share application
7 - -
money pending allotment

(3) Non-current liabilities 8

a. Long term borrowings 11,934,556 11,934,556

b. Deferred Tax
1,364,085 1,652,358
liabilities(Net)

c. Other long term

335,039,100 310,921,347
liabilities

 d. Long term
provisions 9 61,564,001 62,076,576
 (4) Current liabilities

a. Short-term borrowings 10 307,134,162 175,335,903

b. Trade payables 11 1397,768,911 1,128,059,117

c. other current liabilities 12 685,525,871 681,680,193

d. Short-term provision 13 166,554,603 113,296,830

Total Equity & Liabilities 14 3529,815,825 2,966,286,830

II. ASSETS
15
 1)(Non-current Assets

a. Gross Block 69,442,996 66,800,594

b. Depreciation 52,401,683 50,864,041

c. Net Block 17,041,358 15,936,553

(2)Capital work-in-Progress 16

a. Non-current investments 5,788,365 5,942,365

b. Deferred tax assets(Net) - -

c. Long term loans and advances 17 312,471,651 285,728,584

d. Others non-current assets 18 198,131,220 209,707,429

(3) Current Assets

a. Current investment 19 - -

b. Inventories 20 126,170,150 96,512,083

c. Trade receivables 21 856,241,918 511,319,764

d. Cash and Cash Equivalents 22 1,112,004,508 1062,797,506

e. short term loans and advances 23 901,966,655 778,342,506

f. Other current assets 24 - -

TOTAL ASSETS 3,529,815,825 2,966,286,321

PROFIT & LOSS STATEMENT FOR THE YEAR ENDING 31ST MARCH 2018

Figures as at the end Figures as at the end

NOTES
SR. NO. PARTICULARS of current reporting of previous reporting
NO.
period period
I Revenue from operations 26 6,494,159,567 6,127,748,603

II Other Income 27 136,436,901 87,976,477

III Total Revenue 6,630,596,468 6,215,725,080

Expenses:
IV
Cost of Material
28 1,104,726,147 1,210,780,174
Consumed

Purchase of Stock 29 5,148,372,033 4,715,307,036

Changes in Inventories of
30 (29,658,076) (24,340,968)
finished goods, Work-in -

progress and stock in trade Employee benefit

31 104,067,351 95,422,999
expenses

Financial costs 32 19,125,140 5,440,578

Depreciation and
33 2,462,752 1,624,097
amortization

Other expenses 34 118,194,191 74,347,078

Total expenses(IV) 6,467,289,547 6,078,580,994

Profit before exceptional

V and extra ordinary items (III-IV) 163,306,921 137,144,086
and tax

Past year adjustment

VI 35 91,986 260,215
account

Profit before extraordinary

VII items and tax, 163,214,935 136,883,870
(V-VI)

VIII Extra-ordinary items - -

Profit before tax, (VII-

IX 163,214,935 136,883,870
VIII)
 Tax expenses

X 1. Current year income tax - -

2. Deferred tax 53,257,773 44,604,549

3. Dividend distribution
288,273 183,406
tax

Profit(loss) from the

XI (IX-X) 110,245,434 92,462,727
period from continuing

operations

Profit/(loss) from the

XII - -
discontinuing operations

Tax expenses of
XIII - -
discontinuing operations

Profit/(loss) from
XIV - -
discontinuing operations

(XII-XIII)
XV - -
Proposed dividend

110,245,43
XVI Profit/(loss) for the period (XI+XIV) 92,462,727
4

Earning per equity share

XVI
 1. Basic 97.38 81.67
I
 2. Diluted

ANALYSIS OF AVERAGE RATE OF RETURN(ARR) AND PAYBACK PERIOD

Calculation of Average Rate of Return
Average Annual Earnings
ARR=
×100
Average Investment
 Profit After
Year Initial Investment Average Rate of Return
Tax

2011 33324997 72368453 0.46

2012 35241131 175080399 0.20

2013 153526969 180236203 0.68

2014 79500394 46246000 1.72

2015 46222467 46246000 1.00

Calculation of Payback Period

Original Cost of the Project
Payback period=
Annual Cash Inflows

Year Initial Investments Annual Cash Inflow Payback Period

2011 72368453 33324997 2.17

2012 175080399 35241131 4.97

2013 180236203 123526969 1.46

2014 4624600 79500394 0.58

2015 4624600 46222467 1.00

Interpretation:
If the payback period is shorter, then the company recovers its investment in cash very
sooner. Depending on the evaluation of projects by the company's criteria the cash payback is
said good or poor. From the above it is inferred that the company have its highest pay back
on 2012 with 4.97 or 5 years.
The current year (2015) Pay Back Period is found to be 1 year [20-23]. This shows that the
company recovers its investment in 1 year.
Accounting Rate of Return (ARR)
ARR method uses accounting information as reveals by financial statements, to measure the
profitability of the investment proposals. It is also known as the return on investment.
Sometimes it is called as the Average rate of return. (ARR)
CHAPTER-5
FINDINGS AND CONCLUSION OF THE STUDY
FINDINGS
 1. The current year (2015) Pay Back Period is found to be 1 year. This shows that the
company recovers its investment in 1 year.
 2. Profitability Index being lesser than 1 indicates that for every one rupee investment
there will be a loss of 0.579 and hence the proposal is rejected.
 3. The current year (2015) Profit after Tax is decreased to 4.622 when compared to the
previous year (2014) with 7.950.
 4. The Standard Deviation for Profit after Tax is 3.425679518 and Variance for PAT is
11.73528016.
 5. In the year 2015 the Investment has been decreased to 4.625.
 6. The standard deviation of Investment is 6.089. The Variance is 37.071
 7. Revenue is high in 2015 with 23.716 when compared to the previous year 2014 with
21.965.
 8. The Standard Deviation for Revenue is 14.25665841. The Variance is 203.252309
CONCLUSION
The planning process which is used to determine whether the long term investments of an
organization such as replacement machinery, products that are new, new plants and research
development projects are worth seeking is the Investment appraisal or capital budgeting.
CHAPTER-6
BIBILOGRAPHY
The project report on “CAPITAL BUDGETING” is done from refer several books and web
sites, which are follows:-
BOOKS
Financial Management------Sashi K. Gupta, R K Sharma, Neeti Gupta , Kalyani Publisher,
Chapter-8
Websites
www.Google.com
www.osicltd.in
Annual Report
OSIC Annual Report 2014-2015
OSIC Annual Report 2015-2016
OSIC Annual Report 2016-2017