MAJOR PROJECT REPORT ON

CAPITAL BUDGETING
BACHELOR OF COMMERCE (HONOURS)
to
Guru Gobind Singh Indraprastha University, New Delhi

Under the guidance of: SUBMITTED BY:

Dr.Shikha Gupta Gaurav Sharma

Faculty, LLDIMS B.COM(HONS)

VI-sem
Enrollment Number:02419288821

LINGAYAS LALITA DEVI INSTITUTE OF

MANAGEMENT AND SCIENCES
Mandi Rd, near ChattarpurMetro Station Campus, Mandi Hills,
Mandi, New Delhi, Delhi 110047
 ACKNOWLEDGEMENT

An independent project is a contradiction in terms. Every project involves

contribution of people. This project also bears the imprints of many people and
it is pleasure for me to acknowledge and thank all of them.

I express my sincere gratitude to Dr. PRANAV MISHRA , the worthy director of

Lingaya’s Lalita Devi Institute of Management and Sciences, for providing me
an opportunity of doing this project under his leadership.

I am deeply indebted to Dr. SHIKHA GUPTA who acted as a mentor and

guide, providing knowledge and giving me his valuable time out of his busy
schedule,at every step throughout the project. It is only because of her this
project came into being. I also take the opportunity to express my sincere
gratitude to each and every person, who directly and indirectly helped me
throughout the projectand without anyone of them this project would not have
been possible. This immense learning from this project would be indelible
forever.

GAURAV SHARMA
02419288821
 DECLARATION

I hereby declare that this project, entitled “CAPITAL BUDGETING”

is an authentic work carried out by me. It has not been submitted earlier
for award of any degree or diploma to any institution or university.

Place: New Delhi

Name: GAURAV SHARMA

Date: 23-04-2024

Countersigned

Mentor
Dr Shikha Gupta

Lingaya’s Lalita Devi Institute of Management & Sciences

 CONTENTS

CHAPTER-1 INTRODUCTION TO THE STUDY 5

CHAPTER-2 LITERATURE OF REVIEW 30

CHAPTER-3 RESEARCH METHODOLOGY 32

CHAPTER-4 DATA ANALYSIS AND INTERPRETATION 34

CHAPTER-5 FINDINGS,SUGGESTIONS AND BIBLIOGRAPHY 47

 CHAPTER 1
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 fueled 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 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.

1.3 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. Analyze the proposal for expansion or creating additional capacity.
3. To decide the replacement of permanent assets such as building and
equipments.
 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 sizeable 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 firms 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.
1.4 STEPS IN 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 of investment

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.

1.5 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 in production 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.
1.6 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
analyzed.
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.

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.

1.8 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
1.9 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.

1.10 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

TRADITIONAL METHODS (NON DISCOUNTED CASH FLOW)

A. PAY BACK 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 Accept P.B<cut-off rate

Cut-off rate

Cut-off rate is the rate below which a project would not be accepted. If ten percentage
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.

II. 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.

Average Annual Earnings

ARR = x 100
Average Investment

Where;
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)

Total Investment

ii. If there is scrap value

Total Investment-Scrap Value
 + Scrap Value
2

iii. If there is additional working capital

Total Investment-Scrap Value

+ Scrap +Additional Working Capital
2

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.

1. 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. 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

P1-Q
IRR = L+ xD
P1-P2
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 is 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

Present Value of Cash Inflows

Profitability Index =
Present Value of Cash Outflows

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 outflows 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.

1.11 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 .

1.12 Project Planning:

The planning of a project is a technically pre- determined set of inter related activities
involving the effective use of given material, human, technological and financial
resources over a given period of time. Which in association with other development
projects result in the achievement of certain predetermined objectives such as the
production of specified goods & services?

Project planning is spread over a period of time and is not a one shot activity. The
important stages in the life of a project are:

1. It’s Identification
2. It’s initial formulation
3. It’s evaluation (Whether to select or to project)
4. It’s final formulation
5. It’s implementation
6. It’s completion and operation
The time taken for the entire process is the gestation period of the project. The
process of identification of a project begins when we are seriously trying to overcome
certain problems. They may be non- utilization to overcome available funds. Plant
capacity, expansion etc

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 equipments bought by a firm to meet its specific requirements.

3. Capital investment decisions involve substantial out lays.

1.4 OBJECTIVE OF THE STUDY

1. To describe the organisational profile of the “RELIANCE DIGITAL LTD”

2. Determination of proposal and investment ,inflow and outflow.

3. To evaluate the investment proposal by using capital budgeting techniques.

4. 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 company estimates the
future project cost. The study also helps to understand 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.

1.6 Limitations:-

Though the project was completed successfully with a few limitations may .

a) Since the procedure and polices of the company will not allow to disclose
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 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
LITERATURE OF REVIEW

The concept of Capital Budgeting being a very sensitive area of finance has
outreached the attention of many researchers .A number of studies has been
conducted on the subject. However briefing such studies will highlight the
importance of the present study. It should safeguard to avoid the wrong choice
of the project and investment to be made. It is necessary for the management to
give proper attention to capital budgeting.

The reason for the popularity of Payback period in the order of significance were
stated to be its, simplicity to use and understand, its emphasis on the early
recovery of investment and focus on risk. It was also found that one third of
companies always insisted on the computations of Payback periods for all
projects. For about two-third companies standard Payback period ranged
between three and five years.

The reason for the secondary role of Discounted Cash Flow techniques in India
included difficulty in understanding and using these techniques, due to lack of
qualified professional and unwillingness of top management to use
Discounted Cash Flow techniques.

One large manufacturing and marketing organization mentioned that

conditions of its business were such that Discounted Cash Flow techniques
were not needed. Yet another company stated that replacement projects were
very frequent in the company and it was not considered necessary to use
Discounted Cash Flow technique for evaluating such projects.
The present investment appraisal in practice is raising certain questions in the
context.

1. How much importance is assigned to economic analysis of capital

expenditure in practice?
2. What methods are used for analyzing capital expenditure in
practice and what is the reason for underlying these methods?

The answers of the above questions are based on a survey of twenty firms
varying on several dimensions like industry category, size, financial
performance and capital intensity. From these firms, executives, responsible
for capital investment evaluation and capital budget preparation were
interviewed.

This literature review provides a structured overview of the diverse range of

topics and perspectives within the field of capital budgeting, encompassing
theoretical foundations, empirical research, behavioral insights, industry-specific
considerations, technological advancements, and sustainability concerns.
 CHAPTER- 3
RESEARCH METHODOLOGHY

All the guidelines and principles were followed while preparing the methodology
for this research. A thorough literature search was conducted, and after proper
evaluation and analysis, relevant literature was identified and included for the
present review. To accomplish the desired objectives, all the studies related to the
topic were selected. It was assumed that including some publications of the
previous decade would be helpful in reflecting upon the practices and
strategies that were implemented in situations previously like the global economic
recession. A computerized literature search was performed and journal articles
from authentic sources were extracted. The References in the selected articles
were screened to identify any relevant studies. The study is based on secondary
data. Secondary data has been collected from the various sources containing data
related to the performance of GDP and other inflation during the lockdown.
Publicly available datasets were analysed in this study. Secondary data is collected
from management libraries, journals, newspaper, websites and magazines. This
paper describes in detail the estimated loss/ profit of the business organizations
during lockdown. The collected data have been processed on computer. To reach
certain relevant results, the data collected from all resources have been tabulated,
analysed and interpreted with the help of appropriate statistical techniques.
 The information for the study is obtained from source namely.
Secondary Sources

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 .

b. Other books and Journals and magazines

c. Annual Reports of the company

d. Notes of the company
 CHAPTER-4
DATA ANALYSIS AND INTERPRETATION

TATA CHEMICALS FINANCIAL STATEMENT

6 Production (2017-2018 to 2021-2022)
(In MT)
Particulars 17-18 18-19 19-20 20-21 21-22
Production

DAP 822395 879765 470155 764464 657550

NPK 486415 401580 552085 447995 541352

% Capacity
utilization 182 178 142 168 167

6.1 Sales(2017-2018 to 2021-2022)

(In MT)
Particulars 17-18 18-19 19-20 20-21 21-22
DAP 838586 892212 469694 776715 649407

NPK 479529 423187 545728 458248 519185

6.2 Sales: Traded (2017-2018 to 2021-2022)

(In MT)
Particulars 17-18 18-19 19-20 20-21 21-22
DAP --- --- 46766 112954 159739

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 MOP 142152 80530 129733 110883 117753

6.3 Balance Sheet (2017-2018 to 2021-2022)

(In lacs)
Particulars 17-18 18-19 19-20 20-21 21-22
Sources of Funds:
Auth share capital 100000 100000 100000 100000 100000
Paid up capital 57545 57545 57545 57545 57545
Reserve and surplus --- --- --- 10791 28500
Secured loan 13619 2785 85072 104307 113987

Unsecured loan 76475 75788 42725 8329 ---

Total sources of funds
147639 136118 185342 180972 200032
Application of Funds:
Gross Block(including
CWIP) 73251 75734 77436 79349 83178
Net Block(including
CWIP) 26887 25706 24149 23652 25419
Investments --- --- 82130 605 5
Deferred tax Assets --- --- --- 3369 2037

Current Assets

Inventories 28595 21496 55159 37363 50023

Sundry Debtors 68236 56541 86632 60052 51764
Others 6130 47507 103523 117391 107567

Total 102961 125544 245314 214806 209354

Current Liabilities and

Provisions 48770 73207 170615 61460 36783
Net Current Assets 54191 52337 74699 153346 172571

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Deferred Revenue Exp 131 --- --- --- ---
Accumulated Loss 66430 58075 4364 --- ---
TotalApplication(funds) 147639 136118 185342 180972 200032

6.4 Profit and Loss Statement(2017-2022)

(In Lacs)
Working results 17-18 18-19 19-20 20-21 21-22
Sales 119793 120663 94368 119831 128297
Subsidy 86276 124527 417077 178583 222170
Other Income 652 3487 49530 18153 12597
Total 206721 248677 560975 316927 363064
Cost Of Sales(including prior
period adj but excluding Dep
187719 230047 484485 288612 327032
and Interest)

Gross Margin (19002) (18630) (76490) (28315) (36032)

Depreciation 3402 3817 3347 3048 2470
Profit/(loss) before Int and 15600 14813 73143 25267 33562
Taxes

Interest 4613 6387 5262 7294 9644

Profit/(loss) before taxes 10987 8426 67881 17973 23918
Taxes including FBT 59 70 14170 6187 8278
Debit/(Credit) for deferred --- --- --- (3369) 1332
tax
TaxationExpenses Credited --- --- --- --- (3400)
NET PROFIT/(LOSS) 10928 8356 53711 15155 17708

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 EVALUATION OF PROJECT USING CAPITAL BUDGETING
TECHNIQUES

6.6 STEPS IN THE EVALUATION OF THE PROJECT

STEP1: Capital Budget Estimates:

The first and the foremost step in the evaluation of a project is the budget
estimate of the project. And here the estimate of the project is 300 crores.
This includes:-
1. Extension of Bagging Plant.
2. Conveyor System for extended portion of Bagging plant.
3. Shed for covering extended Bagging Plant.
4. Railway siding modification.
5. Shed for covering extended portion of Bagging plant.

STEP2: Project Finance and Source of Funds:

The second step in the evaluation of the project is to find the funds to
install or to establish a project.

1. Debt/Loan Funds/Long term Loans

2. Internal Generation of funds

In this project we have funding of 75% from a bank at 11% rate of interest
P.a. providing with long term loans and the rest 25% from Internal
generation. With a moratorium of one year and repayment schedule of 5
years.

32
STEP3: Phasing of Capital Expenditure:
The third step in the evaluation of the project is the phasing of the
expenses or expenditure on the project. And here the phasing of the project
expenditure is as below:

Step4: Repayment Schedule of the Long Term Loan (LTL):

The fourth step in the evaluation of the project is preparing the repayment
schedule of the Long Term Loan (LTL). And here the project repayment
schedule is.
REPAYMENT SCHEDULE OF LONG-TERM LOAN
11% (Rs in Crores)

Interest Year wise Year wise

Opening Closing '@11% Principal Interest
Balance Addition Total Repayment Balance p.a Year repayment repayment
1-Oct-12 75 75 75
1-Jan-13 75 100 175 175 2.06
1-Apr-13 175 125 300 300 4.81 2012-13 0 6.88
1-Jul-13 300 300 300 8.25
1-Oct-13 300 300 300 8.25
1-Jan-14 300 300 3.75 296.25 8.25
1-Apr-14 296.25 296.25 8.75 287.5 8.15 2013-14 12.5 32.90
1-Jul-14 287.5 287.5 15.00 272.5 7.91
1-Oct-14 272.5 272.5 15.00 257.5 7.49
1-Jan-15 257.5 257.5 15.00 242.5 7.08
1-Apr-15 242.5 242.5 15.00 227.5 6.67 2014-15 60.00 29.15
1-Jul-15 227.5 227.5 15.00 212.5 6.26
1-Oct-15 212.5 212.5 15.00 197.5 5.84
1-Jan-16 197.5 197.5 15.00 182.5 5.43
1-Apr-16 182.5 182.5 15.00 167.5 5.02 2019-20 60.00 22.55
1-Jul-16 167.5 167.5 15.00 152.5 4.61
1-Oct-16 152.5 152.5 15.00 137.5 4.19
1-Jan-17 137.5 137.5 15.00 122.5 3.78
1-Apr-17 122.5 122.5 15.00 107.5 3.37 2020-21 60.00 15.95
1-Jul-17 107.5 107.5 15.00 92.5 2.96
1-Oct-17 92.5 92.5 15.00 77.5 2.54
1-Jan-18 77.5 77.5 15.00 62.5 2.13
1-Apr-18 62.5 62.5 15.00 47.5 1.72 2021-22 60.00 9.35
1-Jul-18 47.5 47.5 15.00 32.5 1.31
1-Oct-18 32.5 32.5 15.00 17.5 0.89
1-Jan-19 17.5 17.5 11.25 6.25 0.48
1-Apr-19 6.25 6.25 6.25 0 0.17 2022-23 47.50 2.85
119.63

33
 (Rs in
REPAYMENT OF LONG TERM LOAN(LTL) crores)
2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23
Interest Repaid 6.88 32.90 29.15 22.55 15.95 9.35 2.85
Principal Repaid 0 12.5 60.00 60.00 60.00 60.00 47.50
Total 6.88 45.40 89.15 82.55 75.95 69.35 50.35

STEP5: PREPARING THE PROFITABILITY STATEMENT OF THE

PROJECT:
The fifth step in the evaluation of the project is preparing the profitability
statement of the project and the profitability statement of the project here
is.

In terms of cost
Cost Elements of Asset p.a
Interest on Loan 11% Tax 32.445%
Depreciation as Per
Insurance 2% IT Act 15%
Salary and Wages 3%
Contract Labour 2%
Repairs and Maintenance 3%
Chemicals 5%
Packing cost 0.50%
Power, Fuel and Water 5%
Depreciation 5.25%

(Rs in
PROFITABILITY STATEMENT OF THE PROJECT Crores)
2019-20 2020-21 2021-22 2022-23 2019-20
Incremental Sales 1534.50 1534.50 1534.50 1534.50 1534.50

TOTAL REVENUE("A") 1534.50 1534.50 1534.50 1534.50 1534.50

EXPENDITURE
Raw Materials 1227.60 1227.60 1227.60 1227.60 1227.60
Interest On Loan 13.75 22.55 15.95 9.35 2.85

34
Insurance 7.10 7.10 7.10 7.10 7.10
Salary and Wages 10.66 10.66 10.66 10.66 10.66
Contract labor 7.10 7.10 7.10 7.10 7.10
Repairs and maintenance 10.66 10.66 10.66 10.66 10.66
Chemicals 17.76 17.76 17.76 17.76 17.76
Packaging Cost 1.78 1.78 1.78 1.78 1.78
Power, Fuel and Water 17.76 17.76 17.76 17.76 17.76

TOTAL EXPENDITURE ("B") 1314.16 1322.96 1316.36 1309.76 1303.26

PROFITS BEFORE DEPRECIATION

AND TAX "C"(C=A-B) 220.34 211.54 218.14 224.74 231.24

Less: DEPRECIATION "D" 18.65 18.65 18.65 18.65 18.65

PROFIT BEFORE TAX "E"(E=C-D) 201.69 192.89 199.49 206.09 212.59

Less: TAX(AS PER IT ACT) 60.77 58.34 60.16 61.98 63.77

PROFIT AFTER TAX 140.93 134.55 139.33 144.11 148.82

Computation of tax:
COMPUTATION OF TAX
2019-20 2020-21 2021-22 2022-23 2019-20
Profit Before Tax(PBT) 201.69 192.89 199.49 206.09 212.59

Add:Depreciation(As Per
Companies Act) 18.65 18.65 18.65 18.65 18.65
TOTAL 220.34 211.54 218.14 224.74 231.24

Less:Depreciation (as Per IT Act) 33.05 31.73 32.72 33.71 34.69

Profit After Depreciation 187.29 179.81 185.42 191.03 196.55

TAX 60.77 58.34 60.16 61.98 63.77

STEP6: Valuation of the Asset:

The sixth step in the evaluation of the project is the valuation of the project
at different times or at different periods at different years to come in the
future.

VALUATION OF THE ASSET (Rs In Crores)

2019-20 2020-21 2021-22 2022-23 2019-20 2021-22 2022-23
Opening Balance 0.00 301.90 256.61 218.12 185.40 157.59 133.95
Addition 355.17 0.00 0.00 0.00 0.00 0.00 0.00

35
Total 355.17 301.90 256.61 218.12 185.40 157.59 133.95

Less:Deletion 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total 355.17 301.90 256.61 218.12 185.40 157.59 133.95
Less:Depreciation 53.28 45.28 38.49 32.72 27.81 23.64 43.46

ClOSING BALANCE 301.90 256.61 218.12 185.40 157.59 133.95 90.49

STEP7: Preparation of Cash Flow Statement:

The seventh step in the evaluation of the project is the preparation of the
Cash Flow Statement. And we need the cash flows to find out the Payback
Period and the Internal Rate of Return of the project

(Rs in Crores)
2019- 2020- 2021- 2022- 2019-
20 21 22 23 20
Cash Out Flow
Capital Expenditure on the
Project 76.88 167.90 110

Cash In Flow
Incremental Profit After Tax 140.93 134.55 139.33 144.11 148.82

Step8: To Find the Viability of the Project by Using Different

Techniques Of Capital Budgeting:

Here in PPL the Techniques of capital budgeting used are :

1. Pay-Back Period Method

2. Internal Rate Of Return

1. Evaluation of the Project Using Pay Back Period Method:

It was estimated that the cash in-flows will start from 2015-2016

36
 Cost of the Project- 355.18 Cr

Year 2022-23 201 2017- 2022-23 2019-20

Amount 140.93 134.55 139.33 144.11 148.82

Calculation Of Pay Back Period:

S.no Year Cash Inflows Cumulative

Inflows
1 2019-20 140.93 140.93

2 2020-21 134.55 275.48

3 2021-22 139.33 414.81

4 2022-23 144.11 558.92

(a) Cash Outlay : 355.18 Cr

(b) Payback Period : INITIAL INVESTMENT

ANNUAL CASH FLOW
79.70
= 2 +
414.81

= 2.2 years

37
Pay Back Period:

It is assumed that the profit earning of the project will start from 2021-22

We should increase this period with same exception as there may be any
additional factor and other cause so rounding of 2.2 to 3 years will be right,
so that it will give more assistance to the calculation.

Suggestion: Any project which has a pay-back period of 3 to 5 years is

considered as a good project…

And here we have got a pay-back period of 2.2 years. So, the project can be
considered

2. Evaluation of the Project Using Internal Rate of Return Method:

It was estimated that the cash in-flows will start from 2022-23
Cost of the Project- 355.18 Cr

Year 2019-20 2020-21 2021-22 2022-23

Amount 140.93 134.55 139.33 144.11

Internal Rate of Return:

Discount rate taken as 24% (in crores)

Present
Values of
Sl. No Years Cash Inflows DCF (24%) Inflows
1 2019-20 140.93 .806 113.58

2 2020-21 134.55 .660 88.80

3 2021-22 139.33 .524 73.00

38
 4 2022-23 144.11 .422 60.81
Total Present Values of Inflows 386.93

Discount rate taken as 26% (in crores)

Present
Values of
Sl. No Years Cash Inflows DCF (26%) Inflows
1 2019-20 140.93 .787 110.91

2 2020-21 134.55 .620 83.421

3 2021-22 139.33 .488 68.00

4 2022-23 144.11 .384 55.34

Total Present Values of Inflows 366.412

Discount rate taken as 28% (in crores)

Present
Values of
Sl. No Years Cash Inflows DCF (28%) Inflows
1 2019-20 140.93 .781 110.06

2 2020-21 134.55 .600 80.73

3 2021-22 139.33 .465 64.78

4 2022-23 144.11 .361 52.02

Total Present Values of Inflows 349.11

Calculation of Internal Rate of Return

39
 IRR = L+ A - Cash out lay X (H – L)

A-B

= 26+ 355.18 - 349.123 X (28-26)

(355.18-349.123) + (366.412- X 2
355.18)

= 26 + 6.07 X 2

6.07+11.232
= 26 + 0.350 X 2

= 26.70

Internal Rate of Return (IRR):

In this calculation, is done on the basis of trail and errors. By taking various
percentage of (DCF).So that an appropriate percentage of Internal Rate of
Return can be judge out.

Calculated figure is 26.70%, so we can take it as 30% because at market

Uncertainity.

Suggestion:

Any project which has an Internal Rate of Return Between 16% to 20% is
considered as a good project…

And here for this project the Internal Rate of Return is 26.70%. So, the
project can be considered.

40
 CHAPTER-5
FINDINGS AND SUGGESTIONS

5.1 FINDINGS:

1 It was found that the payback Period of the project is 2 year and 2
months.
2 The Payback Period shows that the initial investment can be recovered
within a short period of time.
3 The investment is ideal because normally an investment should be
recoverable within 5 years.
4. The Internal Rate of Return shows 26.70 % This also ensures a
profitable investment.

5.2 SUGGESTIONS:

1. The company may fix the time period for the capital asset for
replacement.
2. The company may effectively use the available resources for attaining
maximum profit.
3. The company has to analyze the proposal for expansion or creating
additional capacity.
4. The company may plan and control its capital expenditure.
5. The company has to ensure that the funds must be invested in long
term project or not.
6. The company may evaluate the estimation of cost and benefit in terms
of cash flows.

41
BIBLIOGRAPHY:

Financial Management - I. M. Pandey

Financial Management - Prasanna Chandra

Financial Management - M. Y. Khan & Jain

Financial Management - Shashi.K.Gupta, R.K.Sharma and

Neeti gupta

TATA CHEMICALS profile & Annual Reports

Web Sites:

URL: http://www.TATACHEMICALS.com
URL: http://www.google.com

URL: http://www.Wikipedia.com

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