CHAPTER 1 INTRODUCTION

1.1 INDIAN ECONOMY & ITS GROWTH Growing global engagement; merchandise exports of over US$105 bn and imports of US$156 bn. Both growing at over 20% annually. Surging Foreign Exchange Reserves > US$165 bn. FII investments of US$14 Bn and FDI of US$ 8 Bn in 2006-06. 70% of the companies with FDI yielding higher profitability that that of the parent company. Some of the largest infrastructure creation in the world (Golden Quadrilateral -5,400 kms) planned investment of about USD 300 bn during the next 10 years for creation of expressways and roads. Formation of Special Economic Zones (SEZ), more than 300 zones planned during the next 3 years through public-private partnership.

Liberalize and ease domestic consumption and investment- India ranked 41st in competitiveness. Strengthen the contribution from the export markets. Maintain financial and currency stability Controlled modern inflation Cap on fiscal deficit, bill on fiscal responsibility soon. Clearer focus on planned government capital expenditure.

1.1.1 IOCL & ITS ROLE IN INDIAN ECONOMY: IndianOil is Indias largest commercial Organization. It is highest ranked Indian company in the latest Fortune Global 500 listings, ranked at 98th position, this year. The increasing energy requirements together with a slow increase in domestic crude production is leading to higher import bill as the countrys oil imports is more than 75 percent of total oil consumption.

It is estimated that coal import which was negligible in the past is also likely to touch around 30% of the total coal requirement in the next few years. The competition for acquiring energy resources is intensified globally. It is causing a serious concern as the Indian economy will require to intermingle with an ever expanding global fuel market. We are determined to achieve the growth path in an environmentally responsible manner in line with national target to cut the emissions intensity of GDP by 20-25% by 2020 compared to the 2005 level.

Our projected investments of over Rs.47,000 crore in new and additional refining capacity, enhanced pipeline network and marketing touch-points ensure that our nation will always have a secure and reliable energy resource for development. The Corporations 15 MMTPA Paradip Refinery Project on the east coast is also a significant addition to the nations refining infrastructure and opens up significant export opportunities. In the recent years, while the rapid growth in the Indian economy has increased its appetite for petrochemicals, the per capita consumption still continues to be way below the world average. The demand for petrochemicals in the domestic segment in India is very strong and slowly, we are seeing the established markets move to specialty polymers while much of India and China are focusing on commodity polymers.

1.1.2 GROWTH OF THE INDUSTRY: IndianOil Path of Growth 1958-1959 1958 Indian Refineries Ltd. was formed with Mr Feroze Gandhi as Chairman. 1959 Indian Oil Company Ltd. was established on 30th June 1959 with Mr S. Nijalingappa as the first Chairman. 1960-1969 1960 Agreement for supply of SKO and HSD was signed with the then USSR. M.V: "Uzhgorod" carrying the first parcel of 11,390 tonnes of HSD docked at Pir Pau Jetty in Mumbai on 17th August 1960. 1962 Guwahati Refinery was inaugurated by Pt. Jawaharlal Nehru. Construction of Barauni Refinery commenced. 1963 Foundation was laid for Gujarat Refinery Indian Oil Blending Ltd. (a 50:50 Joint Venture between IndianOil and Mobil) was formed. 1964 Indian Oil Corporation Ltd. was born on 1st September, 1964 with the merger of Indian Refineries Ltd. with Indian Oil Company Ltd. Barauni Refinery was commissioned. The first petroleum product pipeline from Guwahati to Siliguri (GSPL) was commissioned. 1965 Gujarat Refinery was inaugurated by Dr.S.Radhakrishnan, the then President of India. Barauni-Kanpur Pipeline (BKPL) and Koyali- Ahmedabad product Pipeline (KAPL) commissioned. Milestones Milestones

 IndianOilPeople maintained the vital supply of Petroleum products to Defence in 1965 War. 1966 The first long-term agreement was signed for harmonious employee relations. 1967 Haldia Baraurii Pipeline (HBPL) was commissioned. Bitumen and Marine Bunker business began. 1968 Techno-economic studies for Haldia-Calcutta, Bombay-Pune and Bombay-Manmad Pipelines submitted to the Government. 1969 IndianOil undertook the marketing of Madras Refinery products. 1970-1979 1970 IndianOil acquired 60% majority shares of IBP. The same was offloaded in favour of the President of India under a Directive in 1972. 1971 Dealership/reservation was extended to war widows, disabled Defence personnel, Freedom Fighters, etc. after 1971 War. 1972 R&D Centre was established at Faridabad. SERVO, the first indigenous lubricant was launched. 1973 Foundation-stone of Mathura Refinery was laid by Mrs Indira Gandhi, the then Prime Minister of India. 1974 Indian Oil Blending Ltd. (IOBL) became the wholly owned subsidiary of IndianOil. Marketing Division attained a new waters hed with a market participation of 64.2%. 1975 Haldia Refinery was commissioned. Milestones

 Multipurpose Distribution Centers were introduced at 132 Retail Outlets pioneering rural convenience. 1976 Private petroleum companies nationalized. Burmah Shell became BPC. 1977 R&D Centre launched Nutan wick stove. 1978 Phase-wise commissioning of Salaya-Mathura Crude Oil Pipeline (SMPL) began. 1979 Barauni Refinery and Bongaigaon Refinery and Petrochemicals Ltd. (BRPL) affected by Assam agitation. 1980-1989 1980 The second Oil Shock was witnessed as a result of Iranian Revolution. Crude Oil price flared to a new high of $32 per barrel. 1981 Digboi Refmery and Assam Oil Company's (AOC) marketing operations were vested in IndianOil. It became Assam Oil Division (AOD) of IndianOil. 1982 Mathura Refinery was commissioned. Mathura-Jalandhar Pipeline (MJPL) was commissioned. 1983 Massive augmentation of LPG storage and distribution facilities were undertaken. Proposal for the 6 MMTPA Refinery at Karnal was submitted at an estimated cost of Rs l,181 Crore. 1984 Taluka Kerosene Depots (TKOs) were commissioned for improved availability of kerosene in rural and hilly areas in addition to Multipurpose Distribution Centres. Foreshore terminal at Kandla Port was commissioned. Integrated Corporate Planning -ten year Perspective Plan and five year LRP initiated.
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Milestones

1985 The new office complex for the Registered Office of the Corporation and Head Office of Marketing Division with a total area of 23,110 square metres was completed. Additional Coking Unit at Barauni Refinery commissioned 1986 A new Foreshore Terminal at Madras commissioned. 1987 Test marketing of 5 kg. LPG cylinders began in 1986-87 in Garo Hills and Kumaon. 1988 DFR of Karnal (Panipat) Refinery was submitted to the Government of India. 1989 Salaya-Mathura Pipeline (SMPL) was suitably modified for handling Bombay High Crude during winter. 1990-1999 1990 Kandla-Bhatinda Pipeline (KBPL) project was approved. The first LPG Bottling Plant of Assam Oil DiVision (AOD) at Silcher was commissioned. 1991 Digboi Refinery Modernisation project was initiated. Bunkering facility at Paradip was completed. 1992 Revamp of Vacuum Distillation Unit at Mathura Refinery was completed. Two of the IndianOil Table Tennis players represented the nation at Barcelona Olympic Games. 1993 New era of Micro-processor based Distributed Digital Control System (DDCS) replacing the pneumatic instrumentations began in Refineries, in phased manner. 1994 India's First Hydrocracker Unit was commissioned at Gujarat Refinery. Milestones

 Vision-2000, the Retail Visual Identity programme was launched to upgrade facilities at Retail Outlets. 1995 1,443 km. long Kandla-Bhatinda Pipeline (KBPL) was commissioned at Sanganer. 1996 1 million metric tonne per annum (MMTPA) new CDU at Haldia Refinery was executed with in-house supervision. The first batch of one year International MBA (iMBA) programme was successfully conducted by Indianoil Institute of Petroleum Management (IIPM). 1997 Commercial production of SERVOIII Titex Grease commenced at the world's first Titex Plant at Vashi, Bombay. Business Development received new thrust. IndianOil entered into LNG business through Petronet LNG -a JV company. 1998 Panipat Refinery was commissioned. Haldia, Barauni Crude Oil Pipeline (HBCPL) was completed. The Administrative Pricing Mechanism (APM) was withdrawn from the Refining Sector effective 1" April 1998. Phase-wise dismantling of APM began. IndianOil Board was reconstituted under the Navaratna concept, with the induction of five part-time non-official independent Directors. 1999 Indian Hydrocarbon Vision -2025" was announced at PETROTECH-99, organised by IndianOil on behalf of the oil Industry. India attained self-sufficiency in Refining. Diesel Hydro-desulphurisation Units commissioned at Gujarat, Panipat, Mathura and Haldia Refineries. Manthan -- the IT re-engineering project was launched.

2000-2005 2000

Milestones

IndianOil crossed the turnover of the magical mark of Rs l ,00,000 Crore -- the first Corporate in India to do so. The IndianOil Foundation -- a non-profit trust -- the first of its kind in Corporate India, was unveiled to protect, preserve and promote the country's heritage. Y2K compatibility achieved. JNPT Terminal was commissioned. The Lube Blending Plant at Asoti and the Once through Hydrocracker Unit at Mathura refinery were commissioned. IndianOil entered into Exploration & Production (E&P) with the award of two exploration blocks to IndianOil and ONGC consortium under NELP-I. 2001 Digboi Refinery completed 100 years of continuous operation. Chennai Petroleum Corporation Ltd. (CPCL) and Bongaigaon Refinery and Petrochemicals Ltd. (BRPL) were acquired. Fluidised Catalytic Cracker Unit at Haldia Refinery was commissioned. Augmentation of Kandla-Bhatinda Pipeline (KBPL) to 8.8 MMTPA completed. Eight Exploration blocks awarded to the IndianOilled consortium under NELP-II. Two Coal Bed Methane (CBM) blocks awarded to the consortium of IndianOil and ONGC under CBM-I. The investment proposal for Integrated PX/PfA project at Panipat was approved. 2002 APM dismantled. Pricing of Petroleum products decontrolled. IBP Co. Ltd. was acquired with management control. Barauni Refinery expansion project completed. New generation auto fuels IOC Premium and Diesel Super introduced. 2003 Lanka IOC Pvt. Ltd. (LIOC) launched in Sri Lanka.

 Retail operations began in Sri Lanka. IndianOil became the first Indian Petroleum Company to begin downstream marketing operations in overseas market. Lanka IOC became an independent oil company in Sri Lanka Gasahol, 5% ethanol blended petrol, was introduced in select states. INDMAX unit at Guwahati Refinery commissioned. IndianOil Technologies Ltd. for marketing intellectual properties of R&D centre was launched. Foundation Stone of Panipat Refinery Expansion and PX/PTA projects laid. Maiden LPG supplies to Port Blair KVSPL (Product) Pipeline commissioned Concept of XTRA, covering Retail Outlets and customer service, launched SERVO became a Super Brand IndianOil named as nodal agency by MoP&NG to undertake research in the areas of production, storage, distribution and utilisation of hydrogen gas as an alternative fuel. The foundation stone of IndianOil's Panipat Refinery expansion (6 to 12 MMTPA) project and PX/PTA plant (553 TMTPA) project laid at Panipat. 2004 IndianOil pays the highest-ever dividend of 20% (for fiscal 2003), amounting to Rs 2453 crore, to shareholders. IndianOil signs MoU with IIM (Ahmedabad) to offer one-year Post Graduate Programmes in Management (Energy) to be conducted at IIPM, Gurgaon. IndianOil signs MoU with Haryana government to set up the Rs 6300 crore Naptha Cracker & Polymer Complex at Panipat. R & D Centre bags the prestigious National Technology Award for successful commercialisation of INDMAX technology for conversion of low value heavy petroleum residues into high value LPG. IndianOIl moves up by two places to the 189th position in the Fortune 'Global 500' ranking based on fiscal 2003 performance. IndianOil's Rs 1248 crore LAB (Linear Alkyl Benzene) plant, the world's largest single train kerosene-to-LAB unit, was commissioned at Gujarat, thus signalling IndianOil's entry into petrochemicals business.
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 IndianOil signs Memorandum of Collaboration (MoC) with Mahindra & Mahindra to roll out the country's first hydrogen vehicle in the next two years. IndianOil's 60 km-long Rs 76 crore Panipat Rewari Product Pipeline commissioned. IndianOil signs MoU with Nepal Oil Corporation Limited to lay a product pipeline between Raxaul (India) and Amlekhganj (Nepal). The year marked IndianOIl's entry into gas business. As co-promoter of Petronet LNG Limited, complete quantity of gas (2.52 MMSCMD) alloted to IndianOil was sold out and commercial supplies commenced April 2004 onwards. IndianOil was voted as the most trusted petrol pump brand in the country in a survey of India's most trusted brands conducted by the Economic Times Brand Equity. LIOC (Lanka IOC), IndianOil's subsidiary, created history on the Colombo stock exchange as the biggest ever equity issue. LIOC's IPO offering 25% stake was oversubscribed 11.6 times on the first day itself. 2005 The year marked IndianOil's big ticket entry into the high stakes business of E&P. The IndianOil and Oil India consortium signed its Exploration and Production Sharing Agreement (EPSA) with the National Oil Corporation of Libya for Block No. 86, in the Sirte basin of Libya. IndianOil's Mathura Refinery was the first refinery in India to attain the capability of producing entire quantity of Euro-III compliant diesel by commissioning the Rs 1046 crore DHDT (Diesel hydrotreating unit). Mathura Refineries also commissioned India's first MS quantity upgradation unit to produce Euro-III compliant petrol. IndianOil becomes the top oil trading compan y amongst national oil companies in the Asia Pacific region for the second consecutive year. IndianOIl signs a Supply Purchase Agreement (SPA) to procure 1.75 MMTPA LNG to be received by the last quarter of 2009 at Petronet LNG Limited Dahej terminal. IndianOIl breached the Rs 150, 000 crore mark in sales turnover by clocking Rs 150, 677 in turnover in fiscal 2004. IndianOil signed a JV agreement with GAIL to enter the city gas distribution projects in Agra and Lucknow.

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 IndianOil allowed by Government of India to charter crude oil ships on its own instead of going through Transchart, the chartering wing of the Ministry of Shipping.

1.1.3 MAJOR PROBLEMS:

The major challenge from the business point of view is the fluctuation of crude oil prices in the global market along with the control of the retail prices by the government in the domestic market. During times of crude oil price fluctuation, like we had in 2008 and 2009, maintaining the cash flow and sustaining projects have been a major challenge. Every year we face similar challenges. 2008-09 was very difficult because oil prices shot up; 2009-10 was also difficult even though we had a bit of inventory to support us. While we were fully compensated for our losses in 2008-09, we had to suffer some losses in 2009-10. Challenges for the future will remain more or less the same until we have an open market in terms of pricing of end products.

1.2 OBJECTIVES OF INDIAN OIL: IOCL has defined its objectives for succeeding in its mission. These objectives are: To serve the national interests in oil and related sectors in accordance and consistent with Government policies. To ensure maintenance of continuous and smooth supplies of petroleum products by way of crude oil refining, transportation and marketing activities and to provide appropriate assistance to consumers to conserve and use petroleum products efficiently. To enhance the country's self-sufficiency in crude oil refining and build expertise in lying of crude oil and petroleum product pipelines. To further enhance marketing infrastructure and reseller network for providing assured service to customers throughout the country. To create a strong research & development base in refinery processes, product formulations, pipeline transportation and alternative fuels with a view to

minimizing/eliminating imports and to have next generation products.

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To optimize utilization of refining capacity and maximize distillate yield and gross refining margin. To maximize utilization of the existing facilities for improving efficiency and increasing productivity. To minimize fuel consumption and hydrocarbon loss in refineries and stock loss in marketing operations to effect energy conservation. To earn a reasonable rate of return on investment. To avail of all viable opportunities, both national and global, arising out of the Government of Indias policy of liberalization and reforms.

1.3 NEED OF THE STUDY: The Project study is undertaken to analyze and understand the Capital Budgeting process in Indian Oil Corporation, which gives mean exposure to practical implication of theory knowledge. To know about the companys operation of using various Capital Budgeting techniques. To know how the company gets funds from various resources. To know about the practical implication of Finance function in any organization as an MBA student. While pursuing this project in IOCL, our main objective was to gain an idea about the workings of Finance Department as a whole. To get an exposure of the actual working environment within a multi-national.

1.4 SCOPE OF STUDY: To make suggestion if any for improving the financial position if the company. To understand the practical usage of capital budgeting techniques To understand the nature of risk and uncertainty The project deals with the capital budgeting as general and how the capital budgeting aids in various important findings and provides useful information for decision making.

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1.5 LIMITATIONS OF STUDY: Past research conducted in this area has been insufficient Non availability of confidential data

1.6 RESEARCH METHODOLOGY: Solving a research problem by using various research methods in a systematic manner is research methodology. It ma y be understood as a science of studying how research is done scientificall y. Researcher not onl y need to know how to develop certain indices or t e s t s , h o w t o c a l c u l a t e t h e m e a n , m o d e , o r s t a n d a r d d e v i a t i o n o r c h i s q u a r e , h o w t o appl y particu lar research techniques, but they also need to know which of these methods or techniques are relevant and which are not, and what would they mean and indicate and why. Researcher also need to understand the assumptions underlying various techniques and they need to know the criteria by which they can decide that certain techniques and procedures will be applicable to certain problems and others will not. All this means that it is necessary for the researcher to design this methodology for his problem as the same may differ from problem to problem. DATA COLLECTION: The study has been conducted using Secondary data alone. Given the nature of the topic, use of Primary data was not warranted. The Secondary data collection methodology is: For Qualitative data, the Company website and interaction with the Company guide was used. For Quantitative data, Company reports and internal records were used. Data Source: (a) Primary Data : 1. The Technical and Engineering Service 2. Maintenance & Inspection 3. Environmental Control
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4. Finance Department 5. FCC Unit (b) Secondary Data : 1. Annual General Reports 2. FCCU Catalogue 3. Plant Records 4. Library and Websites

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CHAPTER 2 INDUSTRIAL PROFILE 2.1 INDUSTRY PROFILE: After the Indian Independence, the Oil Industry in India was a very small one in size and Oil was produced mainly from Assam and the total amount of Oil production was not more than 250,000 tons per year. This small amount of production made the oil experts from different countries predict the future of the oil industry as a dull one and also doubted India's ability to search for new oil reserves. But the Government of India declared the Oil industry in India as the core sector industry under the Industrial Policy Resolution bill in the year 1954, which helped the Oil Industry in India vastly.

Oil exploration and production in India is done by companies like NOC or National Oil Corporation, ONGC or Oil and Natural Gas Corporation and OIL who are actually the oil companies in India that are owned by the government under the Industrial Policy Rule. The National Oil Corporation during the 1970s used to produce and supply more than 70 percent of the domestic need for the petroleum but by the end of this amount dropped to near about 35 percent. This was because the demand on the one hand was increasing at a good rate and the production was declining at a steady rate. Oil Industry in India during the year 2004-2005 fulfilled most of demand through importing oil from multiple oil producing countries. The Oil Industry in India itself produced nearly 35 million metric tons of Oil from the year 2001 to 2005. The Import that is done by the Oil Industry in India comes mostly from the Middle East Asia. The Oil that is produced by the Oil Industry in India provides more than 35 percent of the energy that is primarily consumed by the people of India. This amount is expected to grow further with both economic and overall growth in terms of production as well as percentage. The demand for

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oil is predicted to go higher and higher with every passing decade and is expected to reach an amount of nearly 250 million metric ton by the year 2024. Some of the major companies in the Oil Industry in India are:

Indian Oil Corporation Ltd. Reliance industries Bharat Petroleum Corporation Limited Hindustan Petroleum

2.2 COMPANY PROFILE: IOC (Indian Oil Corporation) was formed in 1964 as the result of merger of Indian Oil Company Ltd. (Estd. 1959) and Indian Refineries Ltd. (Estd. 1958). Indian Oil Corporation Ltd. is currently Indias largest company by sales with a turnover of Rs.2,441,329,600 and profit of Rs.25,994,000 for fiscal 2009. Indian Oil Corporation Ltd. is the highest ranked Indian company in the prestigious Fortune Global 500. It is ranked at 109th position in 2010. It is also the 20th largest petroleum company in the world. Indian Oil and its subsidiaries today accounts for 49% petroleum products market share in India. Indian Oil group has sold 59.29mn tons of petroleum including 1.74mn tons of natural gas in the domestic market and exported 3.33mn tons in the yr 2008-09.

IndianOil is India's flagship national oil company with business interests straddling the entire hydrocarbon value chain from refining, pipeline transportation and marketing of petroleum products to exploration & production of crude oil & gas, marketing of natural gas and petrochemicals. It is the leading Indian corporate in the Fortune 'Global 500' listing, ranked at the

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88rd position in the year 2013. With over 34,233-strong workforce, IndianOil has been helping to meet Indias energy demands for over half a century. With a corporate vision to be the Energy of India, IndianOil closed the year 2011-12 with a sales turnover of Rs. 4,09,957 crore ($ 85,550 million) and profits of Rs. 3,955 crore ($ 825 million). At IndianOil, operations are strategically structured along business verticals - Refineries, Pipelines, Marketing, R&D Centre and Business Development E&P, Petrochemicals and Natural Gas. To achieve the next level of growth, IndianOil is currently forging ahead on a well laid-out road map through vertical integration upstream into oil exploration & production (E&P) and downstream into petrochemicals and diversification into natural gas marketing and alternative energy, besides globalisation of its downstream operations. Having set up subsidiaries in Sri Lanka, Mauritius and the United Arab Emirates (UAE), IndianOil is simultaneously scouting for new business opportunities in the energy markets of Asia and Africa.

Reach and Network IndianOil and its subsidiary (CPCL) account for over 49% petroleum products market share, 31% national refining capacity and 71% downstream sector pipelines capacity in India.

The IndianOil Group of companies owns and operates 10 of India's 22 refineries with a combined refining capacity of 65.7 million metric tonnes per annum (MMTPA, .i.e. 1.30 million barrels per day approx.). IndianOil's cross-country network of crude oil and product pipelines spans 11,163 km with a capacity of 77.258 MMTPA of crude oil and petroleum products and 10 MMSCMD of gas. This network is the largest in the country and meets the vital energy needs of the consumers in an efficient, economical and environment17

friendly manner.

It has a portfolio of powerful and much-loved energy brands that includes Indane LPGas, SERVO lubricants, XtraPremium petrol, XtraMile diesel, PROPEL & petrochemicals, etc. Validating the trust of 66.8 million households, Indane has earned the coveted status of 'Superbrand' in the year 2009.

IndianOil has a keen customer focus and a formidable network of customer touch-points dotting the landscape across urban and rural India. It has 20,575 petrol and diesel stations, including 4,225 Kisan Seva Kendras (KSKs) in the rural markets. With a countrywide network of over 38,000 sales points, backed for supplies by 139 bulk storage terminals and depots, 3,960 SKO/LDO dealers (60% of the industry), 96 aviation fuel stations and 89 LPGas bottling plants, IndianOil services every nook and corner of the country. Indane is present in almost 2764 markets through a network of 5,934 distributors (51.6% of the industry). About 7780 bulk consumer pumps are also in operation for the convenience of large consumers, ensuring products and inventory at their doorstep. IndianOil's ISO-9002 certified Aviation Service commands an enviable 63% market share in aviation fuel business, successfully servicing the demands of domestic and international flag carriers, private airlines and the Indian Defence Services. The Corporation also enjoys a 65% share of the bulk consumer, industrial, agricultural and marine sectors.

With a steady aim of maintaining its position as a market leader and providing the best quality products and services, IndianOil is currently investing Rs. 47,000 crore in a host of projects for augmentation of refining and pipelines capacities, expansion of marketing infrastructure and product quality upgradation.

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Innovation is key

IndianOil has a sprawling world-class R&D Centre that is perhaps Asia's finest. It conducts pioneering work in lubricants formulation, refinery processes, pipeline transportation and alternative fuels, and is also the nodal agency of the Indian hydrocarbon sector for ushering in Hydrogen fuel economy in the country. The Centre holds 212 active patents, with over 100 international patents. Some of the in-house technologies and catalysts developed by IndianOil include the DHDT technology, Light Naptha Isomerization technology, INDMAX technology (for maximizing LPGas yield), Oilivorous S bio-remediation technology(extended to marine applications too), Diesel Hydro DeSulphurisation(DHDS) catalyst, a special Indicat catalyst for Bharat Stage IV compliant Diesel, IndVi catalyst for improved distillate and FCC throughput, and adsorbent based deep sulphurisation process for gasoline and diesel streams.

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CHAPTER 3 LITERATURE REVIEW

1) Agn Keryt (Kaunas University of Technology, Lithuania): Capital budgeting decisions are among the most important decisions made by business entities. Companies have patterns that guide how investment opportunities are identified and how investment decisions are made. During capital budgeting process investments compete for scarce corporate resources and some projects survive the intrinsic selection process while others dont. The most significant deficiency of corporate capital investment studies is their limited focus on project evaluation and risk analysis tools rather than on the entire investment decision-making process. 2) Davina F. Jacobs (IMF Working Paper): A key challenge in government budgeting is to define an appropriate balance between current and capital expenditures. Budgeting for government capital investment also remains not well integrated into the formal budget preparation process in many countries. Her paper aims to provide an overview of past and current budgeting practices for public investment. The study also provides a comparison between the budget practices between low-income countries and developed countries and makes a series of recommendations for how to ensure efficient integration of capital planning and budget management in low-income countries.

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3.1 SUBJECTIVE LITERATURE: Meaning: The process through which different projects are evaluated is known as capital budgeting Capital budgeting is defined as the firms formal process for the acquisition and investment of capital. It involves firms decisions to invest its current funds for addition, disposition, modification and replacement of fixed assets. Capital budgeting is long term planning for making and financing proposed capital outlays- Charles T Horngreen. Capital budgeting consists in planning development of available capital for the purpose of maximising the long term profitability of the concern Lynch The main features of capital budgeting are a. potentially large anticipated benefits b. a relatively high degree of risk c. relatively long time period between the initial outlay and the anticipated return - Oster Young Significance of capital budgeting: The success and failure of business mainly depends on how the available resources are being utilised. Main tool of financial management All types of capital budgeting decisions are exposed to risk and uncertainty. They are irreversible in nature. Capital rationing gives sufficient scope for the financial manager to evaluate different proposals and only viable project must be taken up for investments.

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Capital budgeting offers effective control on cost of capital expenditure projects. It helps the management to avoid over investment and under investments.

Capital budgeting process involves the following: 1. Project generation: Generating the proposals for investment is the first step. The investment proposal may fall into one of the following categories: Proposals to add new product to the product line, proposals to expand production capacity in existing lines proposals to reduce the costs of the output of the existing products without altering the scale of operation. Sales campaining, trade fairs people in the industry, R and D institutes, conferences and seminars will offer wide variety of innovations on capital assets for investment. 2. Project Evaluation: It involves two steps Estimation of benefits and costs: the benefits and costs are measured in terms of cash flows. The estimation of the cash inflows and cash outflows mainly depends on future uncertainities. The risk associated with each project must be carefully analysed and sufficeint provision must be made for covering the different types of risks. Selection of an appropriate criteria to judge the desirability of the project: It must be consistent with the firms objective of maximising its market value. The technique of time value of money may come as a handy tool in evaluation such proposals. 3. Project Selection: No standard administrative procedure can be laid down for approving the investment proposal. The screening and selection procedures are different from firm to firm. 4. Project Evaluation: Once the proposal for capital expenditure is finalised, it is the duty of the finance manager to explore the different alternatives available for acquiring the funds. He has to prepare capital budget. Sufficient care must be taken to reduce the average cost of funds. He has to prepare periodical reports and must seek prior permission from the top management.
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Systematic procedure should be developed to review the performance of projects during their lifetime and after completion. The follow up, comparison of actual performance with original estimates not only ensures better forecasting but also helps in sharpening the techniques for improving future forecasts. Factors influencing capital budgeting Availability of funds Structure of capital Taxation policy Government policy Lending policies of financial institutions Immediate need of the project Earnings Capital return Economical value of the project Working capital Accounting practice Trend of earnings

Methods of capital budgeting Traditional methods Payback period Accounting rate of return method

Discounted cash flow methods

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Net present value method Profitability index method Internal rate of return

Payback period method: It refers to the period in which the project will generate the necessary cash to recover the initial investment. It does not take the effect of time value of money. It emphasizes more on annual cash inflows, economic life of the project and original investment. The selection of the project is based on the earning capacity of a project. It involves simple calcuation, selection or rejection of the project can be made easily, results obtained is more reliable, best method for evaluating high risk projects. Cons It is based on principle of rule of thumb, Does not recognize importance of time value of money, Does not consider profitability of economic life of project, Does not recognize pattern of cash flows, Does not reflect all the relevant dimensions of profitability.

Accounting Rate of Return method: IT considers the earnings of the project of the economic life. This method is based on conventional accounting concepts. The rate of return is expressed as percentage of the earnings of the investment in a particular project. This method has been introduced to overcome the

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disadvantage of pay back period. The profits under this method is calculated as profit after depreciation and tax of the entire life of the project. This method of ARR is not commonly accepted in assessing the profitability of capital expenditure. Because the method does to consider the heavy cash inflow during the project period as the earnings with be averaged. The cash flow advantage derived by adopting different kinds of depreciation is also not considered in this method. Accept or Reject Criterion: Under the method, all project, having Accounting Rate of return higher than the minimum rate establishment by management will be considered and those having ARR less than the pre-determined rate. This method ranks a Project as number one, if it has highest ARR, and lowest rank is assigned to the project with the lowest ARR. Merits It is very simple to understand and use. This method takes into account saving over the entire economic life of the project. Therefore, it provides a better means of comparison of project than the pay back period. This method through the concept of "net earnings" ensures a compensation of expected profitability of the projects and It can readily be calculated by using the accounting data.

Demerits 1. It ignores time value of money. 2. It does not consider the length of life of the projects. 3. It is not consistent with the firm's objective of maximizing the market value of shares. 4. It ignores the fact that the profits earned can be reinvested. -

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Discounted cash flow method Time adjusted technique is an improvement over pay back method and ARR. An investment is essentially out flow of funds aiming at fair percentage of return in future. The presence of time as a factor in investment is fundamental for the purpose of evaluating investment. Time is a crucial factor, because, the real value of money fluctuates over a period of time. A rupee received today has more value than a rupee received tomorrow. In evaluating investment projects it is important to consider the timing of returns on investment. Discounted cash flow technique takes into account both the interest factor and the return after the payback 'period. Discounted cash flow technique involves the following steps: Calculation of cash inflow and out flows over the entire life of the asset. Discounting the cash flows by a discount factor Aggregating the discounted cash inflows and comparing the total so obtained with the discounted out flows. Net present value method It recognises the impact of time value of money. It is considered as the best method of evaluating the capital investment proposal. It is widely used in practice. The cash inflow to be received at different period of time will be discounted at a particular discount rate. The present values of the cash inflow are compared with the original investment. The difference between the two will be used for accept or reject criteria. If the different yields (+) positive value , the proposal is selected for invesment. If the difference shows (-) negative values, it will be rejected. Pros: It recognizes the time value of money. It considers the cash inflow of the entire project.

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It estimates the present value of their cash inflows by using a discount rate equal to the cost of capital.

Cons:

It is consistent with the objective of maximizing the welfare of owners.

It is very difficult to find and understand the concept of cost of capital It may not give reliable answers when dealing with alternative projects under the conditions of unequal lives of project.

Internal Rate of Return It is that rate at which the sum of discounted cash inflows equals the sum of discounted cash outflows. It is the rate at which the net present value of the investment is zero. It is the rate of discount which reduces the NPV of an investment to zero. It is called internal rate because it depends mainly on the outlay and proceeds associated with the project and not on any rate determined outside the investment. Merits of IRR method It consider the time value of money Calculation of casot of capital is not a prerequisite for adopting IRR IRR attempts to find the maximum rate of interest at which funds invested in the project could be repaid out of the cash inflows arising from the project. Cons Computation of IRR is tedious and difficult to understand It is not in conflict with the concept of maximising the welfare of the equity shareholders. It considers cash inflows throughout the life of the project.

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Both NPV and IRR assume that the cash inflows can be reinvested at the discounting rate in the new projects. However, reinvestment of funds at the cut off rate is more

appropriate than at the IRR. IT may give results inconsistent with NPV method. This is especially true in case of mutually exclusive project. Step 1:Calculation of cash outflow Cost of project/asset Transportation/installation charges Working capital Cash outflow xxxx xxxx xxxx xxxx

Step 2: Calculation of cash inflow Sales Less: Cash expenses PBDT Less: Depreciation PBT less: Tax PAT Add: Depreciation Cash inflow p.a xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx

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Note: Depreciation = St.Line method PBDT Tax is Cash inflow ( if the tax amount is given) PATBD = Cash inflow Cash inflow- Scrap and working capital must be added.

Step 3: Apply the different techniques Payback period= No. of years + Amt to recover/ total cash of next years. ARR = Average Profits after tax/ Net investment x 100 NPV= PV of cash inflows PV of cash outflows Profitability index = PV of cash inflows/ PV of cash outflows IRR : Pay back factor: Cash outflow/ Avg cash inflow p.a. Find IRR range PV of Cash inflows for IRR range and then calculate IRR

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3.2 RESEARCH LITERATURE: 1. Econ. J. of Hokkaido Univ. Vol. 39 (2010), pp. 39 - 50 Capital Budgeting Management Practices in Japan A Focus on the Use of Capital Budgeting Methods* Tomonari Shinoda Capital budgeting is one of the most important factors in the process of corporate decision making. Data from numerous previous studies show that managers prefer the simple payback period method (non-discounted payback model) over the net present value method (discounted cash flow model), which academics consider as superior. In particular, almost all investigative research in Japan has shown that the managers of Japanese firms tend to prefer a non-discounted cash flow model, such as a simple payback period method. This interesting gap between business practice and academic theory has long been a puzzle to the academic community. From October, 2008, to January, 2009, I conducted a survey in the form of a questionnaire sent to 225 people in charge of capital budgeting at firms listed on the Tokyo Stock Exchange, with a focus on capital budgeting practices. This paper presents the results of the questionnaire survey and evaluates the capital budgeting practices in Japanese firms. The results show that Japanese firms manage their decision-making by a combination of payback period method and net present value method. While most financial managers utilize multiple tools in the capital budgeting process, these results reflect a better alignment of views between academia and business. 1. Introduction: Corporate capital budgeting decision models are used by corporate managers in the process of critically important decision-making about capital budgeting. There are a variety of capital budgeting methods: the net present value (NPV) method, the internal rate of return (IRR) method, the simple payback period (SPP) method, the discounted payback period (DPP) method, the accounting rate of return (ARR) method, such as ROI, and the real option (RO) method1). Almost all academic articles and textbooks recommend that managers should use the most appropriate and exact methods to ensure the highest return for the least risk in order for their firm to maximize shareholder value. Academic literature, in particular that devoted to finance theory,
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has therefore indicated that discounted cash flow models, such as NPV, are desirable for decision-making concerned with capital investment because an increase of NPV is connected directly with increased corporate value. While managers have, over the long term, used various capital budgeting models, the use of such models has not always been in agreement with finance theory. In particular, the payback period method is said to be theoretically irrelevant and mistaken because the simple payback period (SPP) method ignores the time value of money and cash flows beyond the cutoff date: the cutoff is usually arbitrary. Even if we use the discounted payback period (DPP) method, which was modified in order to eliminate the limitations imposed by ignoring the time value of money, we cannot resolve the difficulty of ignoring cash flows beyond the cutoff date2). Even so, some previous surveys in Japan have indicated that Japanese managers have most frequently used SPP and have rarely used NPV or IRR. This study re-examines the capital budgeting decision-making methods used by managers of listed companies on the Tokyo Stock Exchange in Japan. The purpose of this study is to discover how Japanese firms currently use capital budgeting methods: it shows that Japanese management still prefers the payback period method as a capital budgeting tool. At the same time, however, the number of Japanese companies using NPV and IRR has gradually increased. In Japan, the payback period method is used more widely than the NPV and IRR methods, and other capital budgeting tools. It is of interest that there is a lack of agreement between Japanese capital budget practices and finance theory. This paper also discusses the correspondence relationship between the types of investments and capital budgeting methods. That is, this research focuses on whether managers of Japanese firms, when making decisions about different types of investment plans, have changed their thinking about assessing the importance of the several capital budgeting methods.

2. Review of Previous Research Here, I describe American business situation with regard to the use of capital budgeting techniques and compare it with current practices in Japan. I offer first a representative overview and two recent surveys in United States: Graham and Harvey (2001) and Ryan and Ryan (2002). I then present some previous studies carried out in Japan3).

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2.1 United States Several studies conducted in America have shown how businesses use capital budget methods and how large corporations determine the cost of capital used in capital budgeting decisions. On the basis of recent investigations in United States, Graham and Harvey (2001) and Ryan and Ryan (2002), for example, have shown that corporate managers and academics are not always in agreement with regard to their choice of theoretical method. In 1999, Graham and Harvey (2001) sent questionnaires to the chief financial officers (CFOs) of 4,400 American companies, and 392 usable responses were received. Using the responses, they examined the financing practices of American companies. Table 1 offers a summary of the results that Graham and Harvey (2001)

obtained. Respondents to their survey were asked to rate each factor on a scale of 0 (never) to 4 (always) and they reported the overall mean as well as the proportion of respondents that answered 3 (almost always) or 4 (always). According to the data gathered by this survey, almost all respondents selected NPV and IRR as their most frequently used capital budgeting methods: 74.9% of CFOs always or almost always used NPV (rating of 3.08), while 75.7% always or almost always used IRR (rating of 3.09). In other words, IRR is the most appreciated method, while NPV and IRR are more popular than SPP, DPP, or ARR. Ryan and Ryan (2002) is a comprehensive article that surveys numerous previous studies of capital budgeting; it also reports recent results of fact-finding onthe capital budgeting of businesses in America. The survey was conducted by questionnaire: questionnaires were sent to the CFOs of the Fortune 1000 corporations and 205 usable responses were received. Table 2 offers a summary of the results of the survey of Ryan and Ryan (2002). They asked how

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frequently CFOs use each of the budgeting methods on a five-point scale: always, often, sometimes, rarely, and never.

In Table 2, it can be seen that 85.1% of the respondents frequently (always and often combined) use NPV. If we include the sometimes category, the cumulative use of NPV climbs to 96% of the firms. 76.7% of the respondents frequently (always and often combined) use IRR. If we include the sometimes category, the usage rates increase to 92.1% of all respondents. The results show that NPV and IRR are preferred over all other capital budgeting methods. At the start of the 1960s, Miller (1960) and Istvan (1961), for example, showed that firms did not often use the discounted cash flow models: around that time 15~30% of firms in U.S.A. used DCF models4). From the 1980s, however, the use of NPV and IRR rapidly expanded5). In recent years, NPV and IRR have become the most frequently used capital budgeting methods, as the results of both Graham and Harvey (2001) and Ryan and Ryan (2002) show. This is an observable shift because in the 2000s there has been a notable alignment of financial theory and practice of firms in United States. According to both these surveys, with the exceptions of NPV and IRR, SPP is the most frequently used capital budgeting technique. Because DPP is an improved method of SPP, it is reasonable to expect that managers will avoid using SPP and DPP in parallel. If this expectation is reasonable, quite a number of managers of US firms attach importance to the payback period itself. More specifically, the sum of usage frequencies of SPP and DPP provides the proportion of firms that are interested in the payback period itself. Given this perspective, it would be safe to say that this proportion is clearly high: according to the survey of Graham and Harvey
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(2001) 86.19% (= 56.74 + 29.45) of managers are interested in the payback period; according to the survey of Ryan and Ryan (2002) this value had risen to 90.2%. In this regard, payback period methods (SPP and DPP) are more frequently used by managers in U.S.A. than NPV or IRR. This is surprising because some widely used financial textbooks (e.g., Brealey and Myers (since 1981)) have for many decades warned of the disadvantages of using the payback criterion. It is a surprising and noteworthy gap between academic theory and practice. These results contrast with the situation regarding the lack of use of ARR because ARR is not theoretically regarded as an excellent tool for the evaluation of corporate value. Many earlier studies from the 1970s to the 1990s showed that IRR has been used more frequently by US firms managers than NPV. For example, a survey by Gitman and Forrester (1977) of 103 large companies showed that only 9.8% of firms used NPV while 53.6% reported IRR as their primary method. Kim, Crick, and Kim (1986) surveyed Fortune 1000 firms and received 367 responses. Of these firms, 64% used IRR and 45% used NPV as a primary or secondary method. Although NPV and IRR are similar and will lead to the same conclusion to the extent that the same hurdle rates are used, the critical difference is that IRR is a ratio while NPV is a total amount of value added. Therefore, although IRR is an easy method to use for the purpose of performance accounting, managers who tend to maximize IRR may actually reduce corporate value and increase IRR by terminating projects with positive-NPV but low-level IRR. Although the topic of overemphasis of IRR had been discussed because of the problems described above, the recent surveys of both Graham and Harvey (2001) and Ryan and Ryan (2002) have shown that IRR and NPV are used at almost the same frequency. Since the publication of texts in the finance academic field on real options (RO), such as those of Trigeorgis (1993, 1996), the RO method has attracted attention. RO is generally used by managers who face situations that involve strategic options in the future and who must consequently conduct strategic decision-making under uncertain conditions. Since RO applies option pricing models (put option and call option valuation techniques) to capital budgeting decisions, it is a very sophisticated and advanced technique in financial theory; when put into practice, however, it seems to involve unavoidable difficulties. The survey of Ryan and Ryan (2002) confirmed the low frequency of the use of RO. In Ryan and Ryan (2002): only 1.6% of the respondents (always and sometimes combined)

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used RO. On the basis of this result, we can conclude that RO was an unpopular method in the early 2000s in United States. According to Block (2007), however, the percentage of US firms using RO was somewhat higher than that indicated by Ryan and Ryan (2002)6. In Blocks survey, 14.3% of the respondents were reported to use RO in the capital budgeting process (40 users and 239 nonusers). This result demonstrates an upward tendency in the recent use of RO in the U.S.A. RO may thus be undergoing a process of diffusion.

2.2 Japan In Japan, several researchers have recently undertaken surveys of capital budgeting methods and this research has revealed how large firms in Japan use such methods. The results of some previous representative surveys in Japan are first discussed in more detail below. Tsumagari and Matsumoto (1972) sent questionnaires to 777 firms (727 firms that were listed on the Tokyo Stock Exchange and 50 major firms with offices in Japan but with foreign capital) and received 307 responses. This survey found that 50.5% used SPP, 32.8% used ARR, 8.9% used NPV, and 7.9% used IRR. On the basis of responses from 159 firms among 629 manufacturing firms that were contacted, Kato (1989) showed that 83.6% used SPP, 35.2% used ARR, 15.7% used IRR, and 14.5% used NPV. Takahashi et al. (2003) sent questionnaires to 1,514 firms that were listed in the first section of the Tokyo Stock Exchange and received valid responses from 192 firms (102 manufacturing firms and 90 firms in the service industry). This survey showed that, of the 102 usable responses from manufacturing firms involving yes or no with multiple answers allowed, 45.19% used SPP, 11.85% used NPV, 18.52% used ARR, and 8.15% used IRR. Although the studies of Tsumagari and Matsumoto (1972), Kato (1989), and Takahashi et al. (2003) were undertaken using yes/no style questions, Yamamoto (1998) used a method where typical questions could be answered by using a Likert Scale with a five-point scale: Always Almost Always Often Rarely - Never. Because the approach that was adopted by Yamamoto (1998) was similar to the approach used by Graham and Harvey (2001) and Ryan and Ryan (2002), Yamamotos (1998) results can be compared to those of both Graham and Harvey (2001) and Ryan and Ryan (2002). Yamamoto
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(1998) sent questionnaires to 718 firms in manufacturing that were listed in the first section of the Tokyo Stock Exchange and received 201 valid responses. Table 3 shows the results of this survey.

Table 3 shows that 81.0% of the respondents frequently (always and almost always combined) used SPP. If we include the often category, the cumulative use of NPV climbs to about 90% of the firms. 25.3% of the respondents frequently (always and almost always combined) used IRR and 18.8% frequently used NPV. If we include the often category, 36.4% used IRR and 30.4% used NPV. The results show that NPV and IRR are not very well-regarded in comparison with other simple methods such as SPP or ARR. Some key points can be identified from these earlier Japanese studies. First, the most wellliked method for Japanese firms was SPP, which remained consistent and unchanged until the early 2000s. Second, the usage of NPV and IRR did not expand much in Japan from the 1970s to the early 2000s. Third, before the early 2000s, Japanese companies used ARR less frequently than the payback period method. In the next chapter, the author will show the results of the latest Japanese survey, which was completed in early 2009, and he will discuss the results in comparison with the several previous studies in the U.S.A. and Japan noted above.

3. Sample Selection for this Survey To determine the practical and actual conditions relevant to capital budgeting in Japan, the author conducted a survey by questionnaire from October, 2008, to January, 2009. A questionnaire form was mailed to each of the managers of 2,224 firms listed on the Tokyo Stock Exchange who act as coordinators of capital budgeting processes. As a result, 225 usable

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responses were received, which is comparable to the rates in other similar surveys in Japan and U.S.A. The interpretation of survey data has, of course, some limitations7. Since the questionnaire form in this survey was mailed to managers who are in charge of capital budgeting, the responses were just the opinion of one individual. The data may not represent the overall opinion in the firm. To overcome this limitation as much as possible, a request that someone who is well acquainted with the capital budgeting process should complete the form was clearly stated on the questionnaire. There is one more limitation when using the adopted mailing method: since there are bound to be many non-responders, it is impossible to avoid the non-response bias. Consequently, to moderate this problem, I have undertaken to discuss the results of this survey in comparison with several surveys in foreign countries and in Japan which suffered from similar limitations.

4. Results 4.1 Frequency of Use of Capital Budgeting Methods in Japan Table 4 shows the results of this survey on the frequency of use of capital budgeting methods. This survey asked how frequently firms use each of the specified budgeting methods on a five-point scale: always, often, sometimes, rarely, and never. Table 4 reveals that 30.5% of the respondents frequently (always and often combined) used NPV. If we include the sometimes category, the cumulative use of NPV climbs to 50.5% of the firms. In respect to the use of NPV, by comparison of the frequency of use between the results of this survey completed in 2009 in Japan and the results of both Graham and Harvey (2001) or Ryan and Ryan (2002), Japanese firms have in the recent past used NPV at a relatively low frequency.

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Nevertheless, this survey dose show an increase in the frequency of use of NPV in Japan compared with the results of past surveys, such as Yamamoto (1998): although the results are not directly comparable, we can observe an increase of about 12% over the past decade compared with the result of Yamamoto (1998). In addition, Table 4 shows that 24.5% of the respondents frequently (always and sometimes combined) used IRR. This is a noticeably low frequenc y of use of IRR when compared with the results of both Graham and Harvey (2001) and Ryan and Ryan (2002). There are no significant differences in the frequency of use of IRR between the result of Table 4 and the previous survey in Japan by Yamamoto (1998). This paper discusses the three types of payback period: SPP, DPP and PPP. The first method is the simple payback period method (SPP). It does not consider the time value of money. The second method is the discounted payback period method (DPP). As Rappaport (1965) pointed out, it is well known that DPP is modified in order to consider the time value of money. The third method is the premium payback period method (PPP). PPP was proposed by Kazusa (2003). While PPP has a function similar to DPP in considering the time value of money, the calculational procedure between DPP and PPP is somewhat different. For DPP, the payback periods needed to recover initial investment given accumulated amounts of the present value of cash inflows are calculated. Thus, in DPP, the time value of money is considered under the aspect of cash inflow. On the other hand, PPP calculates payback periods needed to recover the amount of both initial investment and interest cost given accumulated amounts of cash inflows. That is, in PPP, the time value of money is considered under the aspect of cash outflow (initial investment plus interest cost). The reason why PPP is used in Japan is that many Japanese firms
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are supported by major banks and financing of investment is financed by debt loan from banks. Consequently, PPP is based on the concept of calculating the period required to recover the total amount of principal and interest. These three types of payback period method tend not to be used in combination at the same time because all of them focus on estimating the payback period. The results in Table 4 show that 50.2% of the respondents frequently (always and sometimes combined) use SPP. SPP is the most common method in Japan. Additionally, 20.4% of firms frequently use DPP and 5.9% of firms frequently use PPP. Since total of about 76.5% of firms frequently use at least one of the three types of payback period method, we can see that Japanese firms appreciate the payback period methods. Payback period methods are frequently used not just in Japan, however, but also in the U.S.A. Moreover, Table 4 indicates that 30.3% of firms frequently use ARR. There has been a decrease in the frequency of use of ARR in Japan compared with that recorded in the past survey by Yamamoto (1998). Although the results are not directly comparable, there has been a decrease of about 13% over the past decade. This recent trend of less use of ARR in Japan is similar to the trend in U.S.A. It should also be added that this survey confirmed the low frequency of use of the real options method (RO). In Table 4, it can be seen that only 0.5% of the respondents frequently (always and often combined) use RO. This is considerably lower than the result (1.6%) reported by Ryan and Ryan (2002). Clearly, on a practical level, the more sophisticated method of RO is uncommon in Japan, perhaps because it is still unfamiliar.

4.2 Types of Investments and Capital Budgeting Methods Although we sometimes oversimplify the nature of investment itself, there are actually various types of investment. Little has previously been reported about the correspondence relationship between the type of investment and the capital budgeting technique.

Findings: In this survey, investments are classified into eight types: (1) new equipment investment, (2) extensive equipment investment, (3) replacement equipment investment, (4) investment in new products and services, (5) R&D, (6) investment in information system, (7) investment in foreign business, and (8) M&A. On the basis of this classification, the author asked managers of
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Japanese firms to consider which capital budgeting methods are the most important when they are considering each of the eight types of investment.

As Figure 1 clearly shows, when firms undertake decision-making on investments of types (1) new equipment investment, (2) extensive equipment investment, and (3) replacement equipment investment, the payback period is appreciated by managers: about 60% of managers who undertake decision-making on equipment investment think that one of the three types of payback period method is extremely important. However, when managers consider investment for (5) R&D and (6) investment in information system, the importance of payback period methods is slightly enhanced: in particular, managers who deal with decision-making on investment in an information system consider the payback period to be very useful. On the other hand, when managers make decisions on both (7) investment in foreign business and, in particular, (8) M&A, managers tend to think that NPV is more important: 37% of the managers who face decisionmaking on M&A regard NPV as the most important method. The above findings lead us to note the following important points. First, managers in Japanese firms consider payback periods to be of value when they make a decision related to simple investment plans, for example, investment in equipment. Second, when managers of Japanese firms examine the propriety of R&D investments and investment in information system, they consider payback periods asthe most important criterion. These results may indicate that when Japanese firms intend to invest in ways in which their investment can be recovered in a short period of time, such as investment in information system, then they consider payback
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periods. Third, managers attach importance to NPV in cases where they examine whether extremely strategic and long-range investment plans, such as M&A or investment in foreign business, are suitable and profitable. Because managers cannot evaluate long-range investment performance using payback period methods, it seems reasonable to suppose that Japanese firms apply NPV to the valuation of strategic investment plans. In addition, we note that ARR is regarded as a somewhat important method when managers consider investment in new products and services. It may be that ARR is applied to investments that are directly involved in the operating cycle.

5. Conclusion and Implications The results of this survey and the above discussion clearly show that the difference in ways of thinking between academics and managers of firms listed on the Tokyo Stock Exchange in Japan is shrinking and that their opinions are growing closer to agreement: in Japan in the past decade the frequency of use of NPV has clearly increased. On the other hand, firms in Japan remain heavily dependent on payback period methods. This situation in Japan is similar to that in the U.S.A. Many firms in both Japan and U.S.A combine discounted cash flow methods with non-discounted cash flow methods. This point has not yet been deeply investigated, and it needs further consideration. In the preceding chapter, we saw that managers of Japanese firms may be able to use capital budgeting techniques effectively, depending on the subject and situation. In other words, although managers think of payback periods as important standards when they consider simple and short-range investment plans, for example, equipment investment or investment in information system, managers may also use NPV when they consider strategic and long-term investment plans, for example, M&A, and when the evaluation of investment performance is required. Globally, almost all firms have faced complex problems in recent years: these problems include the need for high-quality and high-value products, the short life cycle of products, the need for quick recovery of investment, and the need for speedy decision-making. In such a situation, the significance of payback period methods as well as theoretical sophisticated methods, such as NPV and RO, makes sense. It is not that rigorous academic theory is not important or is not useful, but that, in a practical sense, a multifaceted approach to the issue of
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capital budgeting methods is necessary in order to achieve effective decision-making on investment plans. It will be interesting to see how firms across the globe use capital budgeting methods and how in the future firms figure out ways to raise the efficiency of decision-making.

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2. Capital Budgeting in Corporate Sector A Case Study M. Kannadhasan1 - Dr. R. Nandagopal2 1. Faculty Member, Bharathidasan Institute of Management (BIM), Trichy,

kannadhasan_m@bim.edu 2. Director, PSG Institute of Management, Coimbatore, e-mail: director@psgim.ac.in Abstract In todays ever changing world, the only thing that does not change is change itself. Change can trigger any corporate growth which can be measured in terms of increase in investments or sales. A progressive business firm continually needs to expand its fixed assets and other resources to be competitive in the race. Investment in fixed assets is an important indicator of corporate growth. The success of the corporate growth in the long run depends upon the effectiveness with which the management makes capital expenditure decisions. In the dynamic business environment, making capital budgeting decisions are among the most important and multifaceted of all management decisions as it represents major commitments of companys resources and have serious consequences on the profitability and financial stability. How far the corporate attains financial stability and profitability over a period of time, while making capital budgeting needs evaluation and is a million dollar issue. In view of this, this study has made an attempt to analyse the efficiency of the corporate sectors capital budgeting through their financial statements.

Introduction In todays ever changing world, the only thing that does not change is change itself. Successful companies are always looking at ways in which they can change and develop. Change can trigger corporate growth and Growth is essential for sustaining the viability, dynamism and value enhancing capability of a company, which lead to higher profits and better the shareholders value. To achieve the desired growth, the firm has to be competitive in all functional areas especially in financial management which is the back bone of any business. Primarily growth can be measured in terms of change in investments or sales. A progressive business firm continually needs to expand its fixed assets and other resources to be competitive in the race. Investment in fixed assets is an important indicator of corporate growth.
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The success of the corporate in the long run depends upon the effectiveness with which the management makes capital expenditure decisions. The finance manager should ensure that he has explored and identified potentially lucrative investment opportunities and proposals and select the best one based on the opportunities identified. In the dynamic business environment, making capital budgeting decisions are among the most important and multifaceted of all management decisions as it represents major commitments of companys resources and have serious consequences on the profitability and financial stability. Evaluation need to be done for the extent of financial stability achieved by the firms capital budgeting decisions over a period of time. In view of this, this study has made an attempt to know the efficiency of the corporate sectors capital budgeting decisions.

Rationale of the Study The success of any business depends on the adjustments and adaptations it makes in its operations to match the external competitive environment. Swift reaction to the changing business environment is ensured only when the organization is effective in decision making in all its operational areas. This is a good sign for the growth-oriented companies. Growth oriented companies need to invest sizable proportion of its capital in the fixed assets constantly. Rate of investments in the corporate sector depends on the internal growth decisions relating to various decisions viz. replacement, expansion, modernization, introduction of new product lines and also capability of raising resources for financing growth. Thus, Capital budgeting decision is a major corporate decision because it typically affects the firms business performance for a long period of time. While making capital budgeting decisions, the company needs to foresee the impact on its future performance. In view of this, this research provides comprehensive analysis of the efficiency of the corporate sectors capital budgeting decisions which got reflected in their financial statements.

Review of Literature Over the years, Research on Capital budgeting is well documented in many countries. Some examples of these are in USA (Klammer, 1972, Gitman and Forrester, 1977, Cooper et. Al, 1990, Graham and Harvey 2001& 02, Ryan & Ryan, 2002 Stanley Block, 2005), the UK (Jog & Srivastava, 1995), Asia-Pacific Region (Wong, Farragher, and Leung, 1987, Kester & Chong,
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1998, Kester et.al, 1999,) China & Dutch (Niels Hermes et. Al, 2005,), South Africa (Hall, 2000,), Cyprus (Lazariids, 2004), and India (Prasanna Chandra, 1975, Porwal, 1976, Pandey, 1989, Rao Cherukuri, 1996, Manoj Anand, 2002,Sarkar 2004, Lokanandha Reddy Irala,2006, Tamilmani, 2004 & 2007). The research studies so far are mostly concerned with the capital budgeting practices in corporate sector with specific focus on appraisal methods, income measurement, determination of discount rate and risk analysis. Almost all the studies used primary data as the basis and the analysis was sketchy. Though there have been many studies published in journals relating to capital budgeting decision in the corporate world, but no study has been specifically done on capital budgeting based on secondary data which could be dealt in this study.

Scope of The Study This study is confined to one limited company with eight years study period from 1998-99 to 2005-06 with special reference to commercial vehicle industry. The study is based on financial data obtained from the published annual reports. The technique used for the analysis is historical funds flow analysis which has also its own limitations.

Objectives of The Study This study has the following objectives: 1. To know the fixed investment and financing trend of the company 2. To assess the growth rate in the fixed investment pattern of the company 3. To trace out the influencing factors on fixed investment and financing trend of the company.

Hypotheses of The Study Having identified the objectives of this study, the following hypotheses have been formulated and tested during the period of study: 1. Correlation between fixed investments and the selected internal factors (sales, profits, depreciation) is not significant. 2. Correlation between internal factors (sales, profits, depreciation) of this company is not significant

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Research Methodology The research design of this study is descriptive in nature. This study is based on secondary data which was obtained from financial statements published by this company from 1998-99 to 200506 through their website and this study was also used the directors reports pertaining to fixed investment decisions made during the study period. The data collected are analysed with the help of different accounting and statistical tools. The analysed data are presented in the form of funds flow statement, fixed investment analysis statement, fixed investment growth statement, and statement of correlation.

Results & Discussions The sample company is the leader of the commercial vehicle industry over the past five decades. As regards to its size, the company belongs to the large size category with a net tangible fixed assets valuing is 10599.75 million (2005-06). The subscribed capital of the company remained unchanged till 2004-05, at Rs. 1189 millions and with a Rs. 33 million increase in 2005-06. But investments in fixed assets have undergone several changes during this period. The manner in which the fixed investments have changed and the sources of financing are discussed in this part.

1. Fixed investment Analysis Statement: During the study period, the purpose of investments of this company is for capacity expansion/up-gradation and R&D. We observe that out of 8 years, investments have been financed by internal sources for 5 years. Besides the internal sources, this company have also raised funds from external sources to finance their additional fixed investments during 1998-99, 2000- 01, and 2004-05. The second major source of finance is long-term debts from term lending institution and banks.

2. Trends in Fixed Investment: In order to discover the fixed investment trend of this company, the rate of increase in fixed assets during the year has been computed. In the process of classification, these rates are classified into two categories by taking normal business practices into consideration and the findings of empirical analysis.

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A.Regular/routine Investments: Company invests less than 15 per cent of investments as regular/routine investments for maintenance and replacements.

B.Growth / expansion oriented Investments: Company invests more than 15 percent consider as growth and expansion.

Conclusions The incremental investments in fixed investments show an increasing trend during the study period with an average of Rs. 1468.45 millions and standard deviations of Rs. 519.76. However the investments are not uniform throughout the study period. In this study, we found that the coefficient of correlation between incremental fixed assets and sales to be positive and significant. Similarly, the coefficient of correlation between fixed investments and profit have the moderate relationship and statistically significant. However, the relationship between the fixed investments and depreciation have the poor relationship and statistically insignificant. As regards, the sources of funds towards the fixed investments for this company are internal sources. In order to maintain the market position with its products, every company must produce product as good as, or better than its competitors. This leads to fixed investments decisions which can be classified into two: routine and expansion. Every company has to make routine investments continuously whereas growth investments are made intermittently. The basic challenging task of fixed investment decisions lies in the search for lucrative opportunities and to derive the benefits in the uncertainty environment in quantitative terms. From the empirical analysis, this companys fixed investments decisions are wise and shows better fund management.

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3. Capital budgeting decisions: evidence from India Document Information: Title: Capital budgeting decisions: evidence from India

Author(s): Shveta Singh, (Department of Management Studies, Indian Institute of Technology Delhi, New Delhi, India), P.K. Jain, (Department of Management Studies, Indian Institute of Technology Delhi, New Delhi, India), Surendra S. Yadav, (Department of Management Studies, Indian Institute of Technology Delhi, New Delhi, India) Citation: Shveta Singh, P.K. Jain, Surendra S. Yadav, (2012) "Capital budgeting decisions: evidence from India", Journal of Advances in Management Research, Vol. 9 Iss: 1, pp.96 112 Keywords: Capital budgeting, Discounted cash flow, Financing pattern, India, Real options Article type: DOI:

Research paper

10.1108/09727981211225671 (Permanent URL)

Publisher: Emerald Group Publishing Limited Abstract: Purpose The purpose of this paper is to understand current practices in capital budgeting (including real options) in Indian companies and provide a normative framework (guidelines) for practitioners (based on our findings and literature reviewed). Methodology A questionnaire survey was administered to 166 non-financial companies of the BSE 200 index. Secondary data were also collated from 20012011.

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Findings Trends towards sophisticated techniques and sound capital budgeting decisions have continued in India. All sample respondent firms used discounted cash flow (DCF) techniques in conjunction with non-DCF techniques. Internal rate of return (IRR), used by more than three quarters of the sample companies, is favored over net present value (NPV), used by half of the sample companies. Real options are used by half of the sample companies. Permanent (long-term) capital has been used to finance fixed assets (net) and working capital (net). Research limitations/implications The limitations of the study are that it is country specific and a detailed sectoral analysis of the constituent sectors of the sample companies could have perhaps provided deeper insight into the subject. Practical implications The findings of this research, decades of teaching experience of the authors and the literature reviewed have been utilized to evaluate current practices and suggest possible improvements in decision making (through a normative framework). Originality/value The findings show that there still remains a theory-practice gap in the usage of IRR over NPV. The usage of permanent (long-term) capital to fund fixed assets (net) and permanent working capital requirements, although sound, could be an indication of surplus funds which could be used to repay long-term debt or finance more asset building.

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4. Improved capital budgeting decision making: evidence from Canada

Document Information: Title: Improved capital budgeting decision making: evidence from Canada

Author(s): Karim Bennouna, (Kubota Canada, Ontario, Canada), Geoffrey G. Meredith, (Graduate College of Management, Southern Cross University, Tweed Heads, Australia), Teresa Marchant, (Graduate College of Management, Southern Cross University, Tweed Heads, Australia) Citation: Karim Bennouna, Geoffrey G. Meredith, Teresa Marchant, (2010) "Improved capital budgeting decision making: evidence from Canada", Management Decision, Vol. 48 Iss: 2, pp.225 - 247 Keywords: Canada, Capital budgeting, Decision making, Discounted cash flow, Investments Article type: DOI:

Research paper

10.1108/00251741011022590 (Permanent URL)

Publisher: Emerald Group Publishing Limited Abstract: Purpose The purpose of this article is to evaluate current techniques in capital budget decision making in Canada, including real options, and to integrate the results with similar previous studies. Methodology A mail survey was conducted, which included 88 large firms in Canada.

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Findings Trends towards sophisticated techniques have continued; however, even in large firms, 17 percent did not use discounted cash flow (DCF). Of those which did, the majority favoured net present value (NPV) and internal rate of return (IRR). Overall between one in ten to one in three were not correctly applying certain aspects of DCF. Only 8 percent used real options. Research limitations/implications One limitation is that the survey does not indicate why managers continue using less advanced capital budgeting decision techniques. A second is that choice of population may bias results to large firms in Canada. Practical implications The main area for management focus is real options. Other areas for improvement are administrative procedures, using the weighted average cost of capital (WACC), adjusting the WACC for different projects or divisions, employing target or market values for weights, and not including interest expenses in project cash flows. A small proportion of managers also need to start using DCF. Originality/value The evaluation shows there still remains a theory-practice gap in the detailed elements of DCF capital budgeting decision techniques, and in real options. Further, it is valuable to take stock of a concept that has been developed over a number of years. What this paper offers is a fine-grained analysis of investment decision making, a synthesis and integration of several studies on DCF where new comparisons are made, advice to managers and thus opportunities to improve investment decision making.

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5. Perspectives on capital budgeting in the South African motor manufacturing industry

Document Information: Title: Perspectives on capital budgeting in the South African motor manufacturing industry Author(s): Suzette Viviers, (Department of Business Management, University of Stellenbosch, Matieland, South Africa), Howard Cohen, (Department of Business Management, Nelson Mandela Metropolitan University, Port Elizabeth, South Africa) Citation: Suzette Viviers, Howard Cohen, (2011) "Perspectives on capital budgeting in the South African motor manufacturing industry", Meditari Accountancy Research, Vol. 19 Iss: 1/2, pp.75 - 93 Keywords: Capital budgeting, Corporate finances, Discounted payback period, Environmental considerations, Internal rate of return, Manufacturing industries, Motor

manufacturing industry, Net present value, South Africa Article type: DOI:

Research paper

10.1108/10222521111178646 (Permanent URL)

Publisher: Emerald Group Publishing Limited Abstract: Purpose Capital budgeting is a key issue in corporate finance and over time major theoretical developments have been incorporated into the appraisal processes of capital intensive companies. The purpose of this paper is to investigate the capital budgeting practices of a sample of motor manufacturing companies in South Africa and compare the empirical findings to the existing literature in order to establish
52

whether the theoretical aspects are still widely practiced. Methodology Semi-structured personal interviews were conducted with

respondents at eight motor manufacturers in the Eastern Cape and Gauteng provinces of South Africa. Findings The net present value (NPV) and internal rate of return criteria are the two most popular appraisals methods used in practice. Most respondents used multiple criteria before making substantial capital investments. These findings conform to contemporary capital budgeting theory. Practical implications Financial managers should first calculate the discounted payback period of a project before embarking on a more detailed analysis. Once all the data are available, NPV should be used as the primary means of evaluating investments, as this criterion gives the best indication of how much shareholder value the project will add. It is further recommended that more attention be given to green considerations in the capital budgeting process. Originality/value The paper evaluates the applicability of existing literature on capital budgeting to the practice thereof in a capital intensive industry in South Africa. No similar study has been done previously.

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CHAPTER 4 & 5

DATA ANALYSIS AND INFERENCES

4.1 Data analysis: Balance Sheet of Indian Oil Corporation Mar '12 12 mths Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities 2,427.95 2,427.95 0.00 0.00 55,448.75 0.00 57,876.70 13,045.97 57,277.96 70,323.93 128,200.63 2,427.95 2,427.95 0.00 0.00 52,904.37 0.00 55,332.32 20,379.65 32,354.22 52,733.87 108,066.19 Mar '11 12 mths 2,427.95 2,427.95 0.00 0.00 48,124.88 0.00 50,552.83 18,292.45 26,273.80 44,566.25 95,119.08 Mar '10 12 mths ------------------- in Rs. Cr. ------------------Mar '11 12 mths Mar '10 12 mths

Mar '12 12 mths Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors 99,455.46 39,336.13 60,119.33 13,434.77 18,678.46 56,829.20 15,502.87

92,696.69 34,509.29 58,187.40 12,620.44 19,544.76 49,284.52 8,869.65

71,780.60 30,199.53 41,581.07 21,268.63 22,370.25 36,404.08 5,799.28

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Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets Contingent Liabilities Book Value (Rs)

307.01 72,639.08 44,988.11 0.00 117,627.19 0.00 66,510.58 15,148.54 81,659.12 35,968.07 0.00 128,200.63 28,085.59 238.38

643.92 58,798.09 25,454.49 650.50 84,903.08 0.00 60,441.18 6,763.46 67,204.64 17,698.44 15.15 108,066.19 31,505.33 227.90

916.56 43,119.92 17,453.01 398.55 60,971.48 0.00 40,818.96 10,271.56 51,090.52 9,880.96 18.17 95,119.08 25,715.07 208.21

Profit & Loss account of Indian Oil Corporation Mar '12 12 mths Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure 463,285.27 24,455.59 438,829.68 -4,509.80 2,852.13 437,172.01

------------------- in Rs. Cr. ------------------Mar '11 12 mths Mar '10 12 mths

357,275.89 26,141.04 331,134.85 3,554.94 4,972.93 339,662.72

291,272.84 21,834.76 269,438.08 3,189.68 5,044.25 277,672.01

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Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses

394,385.52 3,801.74 4,980.06 1,465.94 4,321.11 14,283.79 0.00 423,238.16 Mar '12 12 mths

299,806.97 1,880.24 6,429.58 1,638.36 13,378.79 1,249.03 -945.24 323,437.73 Mar '11 12 mths 12,670.05 16,224.99 2,702.14 13,522.85 4,546.67 132.04 8,844.14 -41.93 8,802.21 1,297.71 7,445.48 23,630.76 0.00 2,306.55 358.70

240,712.77 369.45 5,723.96 1,385.83 11,386.06 733.59 -1,121.28 259,190.38 Mar '10 12 mths 15,291.95 18,481.63 1,572.35 16,909.28 3,227.14 133.98 13,548.16 -36.52 13,511.64 3,097.87 10,220.55 18,477.61 0.00 3,156.34 508.83

Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs)

18,443.65 13,933.85 5,590.54 8,343.31 4,867.79 0.00 3,475.52 278.76 3,754.28 -200.34 3,954.62 28,852.64 0.00 1,213.98 194.43

24,279.52 16.29 50.00 238.38

24,279.52 30.67 95.00 227.90

24,279.52 42.10 130.00 208.21

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Cash Flow of Indian Oil Corporation

------------------- in Rs. Cr. ------------------Mar '13 12 mths Mar '12 12 mths 3754.31 -2762.38 -12246.29 14021.93 -986.74 1294.42 307.68 Mar '11 12 mths 9095.86 5681.20 -7217.99 1516.11 -20.68 1315.11 1294.43

Net Profit Before Tax Net Cash From Operating Activities Net Cash (used in)/from Investing Activities Net Cash (used in)/from Financing Activities Net (decrease)/increase In Cash and Cash Equivalents Opening Cash & Cash Equivalents Closing Cash & Cash Equivalents

5647.80 11584.48 -8338.29 -3049.91 196.28 307.01 503.29

Key Financial Ratios of Indian Oil Corporation Mar '12 Investment Valuation Ratios Face Value Dividend Per Share Operating Profit Per Share (Rs) Net Operating Profit Per Share (Rs) Free Reserves Per Share (Rs) Bonus in Equity Capital Profitability Ratios Operating Profit Margin(%) Profit Before Interest And Tax Margin(%) Gross Profit Margin(%) Cash Profit Margin(%) 4.20 3.07 3.09 3.67
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Mar '11

Mar '10

10.00 5.00 75.96 1,807.41 -93.91

10.00 9.50 51.94 1,363.84 210.91 93.91

10.00 13.00 62.19 1,109.73 191.63 93.91

3.80 2.41 2.43 3.53

5.60 4.35 4.40 5.04

Adjusted Cash Margin(%) Net Profit Margin(%) Adjusted Net Profit Margin(%) Return On Capital Employed(%) Return On Net Worth(%) Adjusted Return on Net Worth(%) Return on Assets Excluding Revaluations Return on Assets Including Revaluations Return on Long Term Funds(%) Liquidity And Solvency Ratios Current Ratio Quick Ratio Debt Equity Ratio Long Term Debt Equity Ratio Debt Coverage Ratios Interest Cover Total Debt to Owners Fund Financial Charges Coverage Ratio Financial Charges Coverage Ratio Post Tax Management Efficiency Ratios Inventory Turnover Ratio Debtors Turnover Ratio Investments Turnover Ratio Fixed Assets Turnover Ratio Total Assets Turnover Ratio Asset Turnover Ratio Average Raw Material Holding Average Finished Goods Held Number of Days In Working Capital Profit & Loss Account Ratios

3.67 0.89 0.89 13.08 6.83 19.66 238.38 238.38 22.45

3.53 2.22 2.22 10.32 13.45 12.93 227.83 227.83 14.56

5.04 3.74 3.74 15.83 20.22 20.55 208.14 208.14 21.20

0.83 0.74 1.22 0.29

0.80 0.51 0.95 0.38

0.76 0.45 0.88 0.40

3.00 1.22 3.87 2.58

4.18 0.95 5.86 5.49

9.86 0.88 11.71 9.64

8.15 36.01 8.15 4.49 3.47 3.71 --29.51

7.56 45.15 7.56 3.61 3.09 3.26 56.27 23.96 19.24

8.37 45.91 8.37 3.78 2.85 2.93 45.53 24.77 13.20

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Material Cost Composition Imported Composition of Raw Materials Consumed Selling Distribution Cost Composition Expenses as Composition of Total Sales Cash Flow Indicator Ratios Dividend Payout Ratio Net Profit Dividend Payout Ratio Cash Profit Earning Retention Ratio Cash Earning Retention Ratio Adjusted Cash Flow Times

89.87 86.13 0.98 4.51

90.53 83.62 3.69 5.12

89.33 76.69 3.89 5.10

35.61 15.96 87.63 91.34 4.33 Mar '12

35.79 21.98 62.77 77.49 4.46 Mar '11 30.67 227.90

35.86 26.98 64.72 73.35 3.24 Mar '10 42.10 208.21

Earnings Per Share Book Value

16.29 238.38

Income statement of IOCL:

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Market Share: The Shareholding Pattern page of Indian Oil Corporation Ltd. presents the Promoter's holding, FII's holding, DII's Holding, and Share holding by general public etc. Shareholding Pattern - Indian Oil Corporation Ltd. Holder's Name Promoters OtherCompanies FinancialInstitutions GeneralPublic Others ForeignInstitutions NBanksMutualFunds ForeignCollaborators ForeignNRI ForeignIndustries No of Shares 1916155710 225074251 93346832 68106819 58955545 47437393 15259847 2700000 915629 456 % Share Holding 78.92% 9.27% 3.84% 2.81% 2.43% 1.95% 0.63% 0.11% 0.04% 0%

Gross Profit: Definition: Gross Profit is the difference between the sale prices and the cost of buying or producing the goods. It is calculated as Gross Profit = Revenue - Cost of Goods Sold Gross Profit is the numerator in the calculation of Gross Margin: Gross margin = Gross Profit / Revenue
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= (Revenue - Cost of Goods Sold) / Revenue

A positive Gross Profit is only the first step for a company to make a net profit. The gross profit needs to be big enough to also cover related labor, equipment, rental, marketing/advertising, research and development and a lot of other costs in selling the products. IndianOil Posts Rs. 2,488 Crore Profit for Q3 (Gross Turnover up by 26.8% to Rs. 1,04,064 crore in Q3) Indian Oil Corporation Ltd. (IndianOil) has registered a profit of Rs. 2,488 crore for the third quarter of the current financial year ended December 2011 as compared to a profit of Rs. 1,635 crore for the corresponding quarter of the previous year. The profit for the current quarter could be achieved mainly due to Government compensation of Rs. 8,237 crore for the previous quarters, approved and accounted for in this quarter. The unaudited financial results of the Corporation were taken on record at the meeting of the Board of Directors here today. The Gross Turnover for the third quarter of the current financial year ended December 2011 rose by 26.8% to Rs. 1,04,064 crore from Rs. 82,097 crore during the same period last year. For the nine-month period, IndianOils turnover went up by 26.8% to Rs. 2,97,690 crore. The loss for the period April-December 2011 was Rs. 8,716 crore as compared to the profit of Rs. 3,540 crore during the corresponding period of the previous financial year. Mr. RS Butola, Chairman, IndianOil, said, "IndianOil sold 19.287 million tonnes of products, including exports, during the third quarter of 2011-12. Our quarterly refining throughput was 14.166 million tonnes and the throughput of the Corporations countrywide pipelines network was 18.160 million tonnes. The gross refining margins during the third quarter were US$ 4.31 per bbl."

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5.1 FINDINGS

The proposed project for providing facilities for production of MTBE at FCC unit in Mathura Refinery is found feasible in Financial, Technical Analysis. The decision to accept or reject a capital Budgeting project depends on an analysis of the cash flows generated by the project and cost of the project as well as the tools of capital Budgeting are considered for measuring financial feasibility of project: from the Financial analysis the following points can be concluded to accept this project. The Project cost is 4500 lakhs and Sales realization from the difference of input and output of MTBE is calculated to be 2041 lakhs. The Payback Period is 4.1 years means the amount of time that it takes for a to recovery its initial cost here calculated at 4.1 years. From the estimated cash flow of the project the Internal Rate of Return (IRR) is 17 % which represents that the project is feasible to accept. The Net Present value of the project is calculated at $890. 48 From the technical analysis and studying the market demand scenario the project is found viable to accept. As shown in financial analysis the sales realization is considered as operating income and the operating cost is also calculated at 602 lakhs.

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CHAPTER 6

SUMMERY AND CONCLUSIONS

6.1 ADVANTAGES OF STUDY Multiple budgeting methods: An advantage of capital budgeting is that several budgeting techniques are available to suit the varying needs of businesses. For example, the "net present value" capital-budgeting technique measures an investment's profitability. This method considers cash flows and analyzes the risk of future cash flows. The "internal rate of return" capitalbudgeting method helps a firm analyze which investments or projects will yield the highest internal rate of return. A firm is free to choose from the capital-budgeting techniques that will provide the most complete and accurate information about a particular investment. Risk Assessment: Capital budgeting is a unique decision-making and risk-assessment tool. It gives businesses the opportunity to review potential investments and projects individually and objectively. Capital budgeting allows businesses to compare the value of a particular investment to the company's business plan and goals. It also offers the opportunity to determine if the investment or project makes sense financially for the firm. Capital budgeting helps businesses understand the anatomy of an investment, which in turn helps the firm understand the risks involved. Predict Potential Return: Many capital-budgeting methods allow a firm to predict the future value of an investment by considering its current value. Capital budgeting also allows a firm to determine how long it will take an investment to mature. Some investment dollars could earn more in interest in a bank rather than in a particular investment vehicle. Through capital budgeting, a firm is better equipped to predict which investment tool will provide the best return. Long-Term Planning: Capital budgeting is advantageous because it allows a firm to make longterm investment decisions. Investment projects vary in size. Projects also have different benefits to the business such as in increase in cash flow or a decrease in risk. A firm typically cannot utilize current expenditures to evaluate a capital-investment project because the project is often too large and requires a significant amount of time to realize a return. Capital budgeting helps a
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firm create long-term goals, analyze several investment opportunities and forecast the results of the long-term project. 6.2 LIMITATIONS OF THE STUDY Capital budgeting limitations are as follows:1) It has long term implementations which can't be used in short term and it is used as operations of the business. A wrong decision in the early stages can affect the long-term survival of the company. The operating cost gets increased when the investment of fixed assets is more than required. 2) Inadequate investment makes it difficult for the company to increase its budget and the capital. 3) Capital budgeting involves large number of funds so the decision has to be taken carefully. 4) Decisions in capital budgeting are not modifiable as it is hard to locate the market for capital goods. 5) The estimation can be in respect of cash outflow and the revenues/saving and costs attached which are with projects. 6.3 CONCLUSION: The incremental investments in fixed investments show an increasing trend during the study period with an average of Rs. 1468.45 millions and standard deviations of Rs. 519.76. However the investments are not uniform throughout the study period. In this study, we found that the coefficient of correlation between incremental fixed assets and sales to be positive and significant. Similarly, the coefficient of correlation between fixed investments and profit have the moderate relationship and statistically significant. However, the relationship between the fixed investments and depreciation have the poor relationship and statistically insignificant. As regards, the sources of funds towards the fixed investments for this company are internal sources. In order to maintain the market position with its products, every company must produce product as good as, or better than its competitors. This leads to fixed investments decisions which can be classified into two: routine and expansion. Every company has to make routine investments continuously whereas growth investments are made intermittently.
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The basic challenging task of fixed investment decisions lies in the search for lucrative opportunities and to derive the benefits in the uncertainty environment in quantitative terms. From the empirical analysis, this companys fixed investments decisions are wise and shows better fund management.

6.4 IMPORTANCE OF THE STUDY: Capital budgeting is also vital to a business because it creates a structured step by step process that enables a company to: 1. Develop and formulate long-term strategic goals the ability to set long-term goals is essential to the growth and prosperity of any business. The ability to appraise/value investment projects via capital budgeting creates a framework for businesses to plan out future long-term direction. 2. Seek out new investment projects knowing how to evaluate investment projects gives a business the model to seek and evaluate new projects, an important function for all businesses as they seek to compete and profit in their industry. 3. Estimate and forecast future cash flows future cash flows are what create value for businesses overtime. Capital budgeting enables executives to take a potential project and estimate its future cash flows, which then helps determine if such a project should be accepted. 4. Facilitate the transfer of information from the time that a project starts off as an idea to the time it is accepted or rejected, numerous decisions have to be made at various levels of authority. The capital budgeting process facilitates the transfer of information to the appropriate decision makers within a company. 5. Monitoring and Control of Expenditures by definition a budget carefully identifies the necessary expenditures and R&D required for an investment project. Since a good project can turn bad if expenditures aren't carefully controlled or monitored, this step is a crucial benefit of the capital budgeting process.
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6. Creation of Decision when a capital budgeting process is in place, a company is then able to create a set of decision rules that can categorize which projects are acceptable and which projects are unacceptable. The result is a more efficiently run business that is better equipped to quickly ascertain whether or not to proceed further with a project or shut it down early in the process, thereby saving a company both time and money. 6.5 REFERENCES: 1. Chandra, Prasanna, (1975) Capital Expenditure Analysis in Practice, Indian Management, July, pp10-13. 2. George W. Kester, Rosita P. Chang, Eriinda S. Echanis, Shaiahuddin Haikal, Mansor Md. Isa, Michael T. Skuiiy, Kai-Chong Tsui, and Chi-Jeng Wang (1999), Capital Budgeting Practices in the Asia- Pacific Region: Australia, Hong Kong, Indonesia, Malaysia, Philippines, and Singapore Financial Practice & Education, Spring/Summer, Vol.9, Issue 1, pp 25-33. 3. Graham, John R. and Harvey, Campbell R. (2001), The Theory and Practice of Corporate Finance: Evidence from the Field, Journal of Financial Economics, Volume 60, Issue 2-3, May/June, pp.187-243. 4. Graham, John R. and Harvey, Campbell R. (2002), How Do CFOs make Capital Budgeting and Capital Structure Decisions?, Journal of Applied Corporate Finance. Volume15, No.1, Spring. Pp. 8-23. 5. Ioannis T Lazariids (2004), Capital Budgeting Practices: A Survey in the Firms in Cyprus, Journal of Small Business Management, 42 (4), pp. 427-433. 6. Kester, George W & Tsui Kai Chong (1998), Capital Budgeting Practices of Listed Firms in Singapore, Singapore Management Review, January, Vol.20, issue 1, pp 9-23. 7. Klammer T P (1972), Empirical Evidence of the Adoption of sophisticated Capital Budgeting Techniques, Journal of Business, pp337-357. 8. Laurence G. Gitman and John R. Forrester Jr.(1977), A survey of Capital Budgeting Techniques Used by Major U.S. Firms, Financial Management, Fall, Vol.6, pp66-71. 9. Lokanandha Reddy Irala (2006), Financial Management Practices in India, fortune Journal of International Management, Vol.3, No.2, July-December, pp83-92. 10. Manoj Anand (2002), Corporate Finance Practices in India: A Survey, Vikalpa, Vol.27, No.4, October December, pp29-56.
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11. Niels Hermes, Peter Smid and Lu Yao (2005), Capital Budgeting Practices: A Comparative Study of the Netherlands and China, working paper series, SOM Research Report, 06E02, Groningen, University of Groningen, November, available at: http://som.rug.nl. 12. Pandey I M (1989), Capital Budgeting Practices of Indian companies, MDI Management Journal, Vol.2, No.1, pp1-15. 13. Porwal L S (1976), Capital Budgeting in India, New Delhi: S Chand & Co. 14. Rao, Cherukuri U (1996), Capital Budgeting Practices: A comparative Study of India and select south East Asian Countries, ASCI Journal of Mangement, Vol.25, pp 30-46. 15. Ryan, P.A. and Ryan, G.P. (2002). Capital Budgeting Practices of the Fortune 1000: How Have Things Changed? Journal Of Business and Management. Fall 2002, vol.8, No. 4. pp. 355364. 16. Stanley Block (2005), Are there differences in capital budgeting procedures between industries? an empirical study, The Engineering Economist, March, Vol. 50, issue 1, pp 55-67 17. Subhas Chandra Sarkar (2004), Capital Budgeting decisions in times of inflation: an alternative approach, The Journal of Accounting and Finance, Aprial September, Vol.18, No.2, pp33-38. 18. Tamilmani B (2004), A study on Capital Budgeting Practices in Cooperative Spinning Mills in Tamil Nadu, Ph.D Thesis, The Gandhigram Rurual Institute Deemed University, Gandhigram. 19. Tamilmani B (2007), Formulation, Appraisal, Implementation and Evaluation of Capital Budgeting and its performance in Cooperative Spinning Mill: an analytical study, The Journal of Accounting & Finance, October 2006-March 2007, Vol.21, No.1, pp81-94 20. Vijay M Jog & Ashwani K Srivastava (1995), Capital Budgeting Practices in Corporate Canada, Financial Practice & Education, Fall/Winter, Vol.5, Issue 2, pp 37-43. 21. William D Cooper, Robber G Morgan, Alonzo Redman, and Margart Smith (1990), Capital Budgeting Models: Theory Vs Practice, Business Forum, Vol.26, Nos.1& 2, pp 15-19 22. Wong, Kie-Ann, Edward J. Farragher and Rupert K.C. Leung (1987), Capital Investment Practices: A Survey of Large Corporations in Malaysia, Singapore and Hong Kong, AsiaPacific Journal of Management, 4, 2, pp. 112-123.

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