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PROJECT REPORT
ON
CAPITAL BUDGETING
ZUARI CEMENTS HYDERABAD
G RAMALINGESWAR REDDY
MBA
ROLL NUMBER: 129U1E0033
Under The Guidance Of
SSIM
AFFLIATED TO JNTU ANANTAPUR
2012-2014
DECLARATION
I here declare that the project report entitled CAPITAL BUDGETING has
been prepared by me in partial fulfillment of the requirements for the award of
the degree of MASTER OF BUSINESS ADMINISTRATION
I also declare that this project work is a result of my effort and it has not been
submitted to any other university for the award of any degree or diploma.
PLACE:
DATE:
RAMALINGESWAR REDDY
ROLL NUMBER: 129U1E0033.
ACKNOWLEDGMENT
With a profound sense of thankfulness, I acknowledge my indebtedness
to my company guide Mr.G.RAMALINGESWARA REDDY Faculty Guide
Mrs.RASHIDHA BEGAM ., for their valuable guidance, timely suggestions
and constant encouragement. Their insightful criticisms and patience throughout
the duration of this project have been instrumental in allowing this project to be
completed.
My sincere thanks are to the name of Director, Mr.------------- name of
HOD,_________ M.B.A) and all the staff members of Department of
management studies, _______, For their consistent guidance in my project
work.
Their continual support and careful attention to the details involved in
producing a document of this nature are very much appreciated.
RAMALINGESWAR REDDY
ROLL NUMBER: 129U1E0033.
INDEX
Contents
Chapter I
Title
Introduction
Theoretical structure
Chapter II
Company profile
Product profile
Chapter III
Review of literature
Chapter IV
Research Methodology
Need of the study
Objectives of study
Scope of the study
Limitations of the study
Research design &
collection, Hypothesis
testing
Chapter V
Chapter VI
Findings
Suggestions
Conclusion
Bibliography
Page No:
Chapter - 1
Introduction
Definition:
Capital Budgeting is long term planning for making and financing proposed capital outlays.
By T.HORNGREEN
Capital budgeting is concerned with allocation of the firms scarce financial resources
among the available market opportunities. The consideration of investment opportunities
involves the comparison of the expected future streams of earnings from a project with
immediate and subsequent streams of expenditure for it. In any growing concern, capital
budgeting is more or less a continuous process and it is carried out by different functional
areas of management such as production, marketing, engineering, financial management etc.
all the relevant functional departments play a crucial role in the capital budgeting decision are
considered.
The role of a finance manager in the capital budgeting basically lies in the process of
critically and in-depth analysis and evaluation of various alternative proposals and then to
select one out of these. As already stated, the basic objectives of financial management is to
maximize the wealth of the share holders, therefore the objectives of capital budgeting is to
select those long term investment projects that are expected to make maximum contribution
to the wealth of the shareholders in the long run.
Industry profile:
Cement is a key infrastructure industry. It has been decontrolled from price and
distribution on 1st March 1989 and deli censed on 25th July 1991. However, the performance
of the industry and prices of cement are monitored regularly. The constraints faced by the
industry are reviewed in the infrastructure coordination committee meetings held in the
cabinet secretariat under the chairmanship of secretary (coordination). The cabinet committee
on infrastructure also reviews its performance.
Cement industry is one of the major and oldest established manufacturing industries
in the modern sector of Indian economy. It is an indigenous industry in which the company is
well endowed with the necessary raw materials, skilled manpower and equipment &
machinery technology.
Cement is required by firms, bridges, buildings, water supply projects, dams, roads,
hydroelectric power projects, seaports, airports, and irrigation schemes. It is thus a vital
industry which assumes a crucial part in the economic development of the country.
RAW MATERIALS:
The basic raw material for manufacturing cement is limestone. This is available in
plenty in the form of limestone deposits in the nature. Limestone is excavated for mines by
mechanical equipment with the help of stocker & reclaimed the correct.
The raw materials consist of limestone, iron ore & bauxite. The correct proportions
are fed into a grinding mill where they are reduced to a very fine of compressed air. The
power from the storage ribs is fed into rotator kiln; the material is subjected to a temperature
is about 1500c. chemical reaction takes place between the various materials resulting in the
formation of cement compound like Tricalcium silicate (about 24%), die calcium silicate
(about 20%), Tri calcium alumina (about 7 to 10%) and aluminum ferrate (about 10 to 12%).
EXPORTS:
A Part from meeting the entire domestic demand, the industry is also exporting
cement and clinker. The export cement during 2001-02 and 2003-04 was 5.41 million tones
and 6.92 million tones respectively. Export during April-may, 03 was 1.35 million tones.
Major exporters were Gujarat Ambuja Cement ltd. and L&T ltd.
For the development of cement industry Working Group of cement industry was
constituted by the planning commission for the formulation of X five year plan. The working
group has projected creation of additional capacity of 40-62 million tones mainly through
expansion of existing plants. The working group has identified following thrust areas for
improving demand for cement.
Further, in order to improve global competitiveness of the Indian cement industry, the
dept. of industrial policy & promotion commissioned a study on the global competitiveness
of the Indian cement industry. The report submitted by the organization has made several
recommendations for making the Indian cement Industry more competitive in the
international market. The recommendations are under consideration.
TECHNOLOGY CHANGE:
Cement industry has made tremendous strides in technological up gradation and
assimilation of latest technology. At present 93% of the total capacity in the industry is
based in modern and environment-friendly dry process technology. There is tremendous
scope for waste heat recovery in cement plants and there by reduction in emission level. One
project for cogeneration of power utilizing waste heat in an Indian cement plant is being
implemented with Japanese assistance under green Aid plan. The induction of advanced
technology as helped the industry immensely to conserve energy and fuel and to save
materials substantially.
India is also production different varieties of cement like ordinary Portland cement
(OPC), Portland Pozzolana cement (PPC), Portland Blast Furnace Slag Cement (PBFS), Oil
Well Cement, Rapid Hardening Portland cement, Sulphate resisting Portland cement, While
cement etc. Production of these varieties of cement conforms to the BIS Specifications. It is
worth mentioning that some cement plants have set up dedicated jetties for promoting bulk
transportation and export.
HISTORY OF CEMENTS:
1.
2.
3.
4.
5.
the powder is heated to 1500 degrees Celsius. This creates a new product, called clinker,
which resembles pellets about the size of marbles.
5. The clinker is combined with small amounts of gypsum and limestone and finely ground
in a finishing mill. The mill is large revolving cylinder containing 250 tones of steel balls
i.e. driven by a 4000ph motor. The finished cement is ground so fine that it can pass
through a sieve that will hold water.
6. The cement manufacturing process consists of many simulations and continuous
operations using some of the largest moving machinery in manufacturing. Over 5000
sensors and 50.
7. Computers allow the entire operations to be controlled by a single operator from a central
control room.
SPECIALIZED CEMENT:
Oil Well Cement: Is made from clinker with special additives to prevent any porosity.
RAPID HARDENING PORTLAND CEMENT:
It is similar to OPC, except, that it is ground much finer, so that casting, the compressible
strength increases rapidly.
Indian cement industry data back to 1914-first unit was setup at Proddatur with
a capacity of 1000 tones.
2.
Currently India is ranked second in the world with an installed capacity of 114.2
million tones.
3.
Current per capita consumption-85 pages. Against world standard of 256 kgs.
4.
5.
6.
Cement sales primarily through a distribution channel. Bulk sales account for <
Companies:59
Plant: 116
1.5 mntpa.
Export to Bangladesh, Nepal, Srilanka, UAE Most use vertical Kiln technology
and Mauritius
Strong marketing network, tie ups with Production cost/ tone- Rs 1,000 to 1,400
customers, contractors
Wide spread distribution network
Sales
channel
primarily
through
the
However, cement consumption per capita in our country at about 99-kg/ capita is one
of the Lowest. The world average is about 267 kg/ capita. While that of china is 450 kg / capita.
Similar in Japan its 631 kg/ capita while in France it is 447 kg / capita.
Production:
1. Excess capacity exists, through some units are sick.
2. 1999-2000 production expended to reach 95 mn tones
3. Exports around 2 mn tones.
4. Cement manufactured through the wet, semi-dry or process.
5. Dry process accounts for 90% of the installed capacity.
6. Wet process popular in the past- better control over mixing of raw materials.
7. Dry process replacing the wet process as it is space saving energy efficient and
economical.
Prices
a. Price fluctuations.
b. Essentially determined by demand.
c. Prices also vary with grades
Delhi
Amount ( Rs.)
Calcutta
Amount ( Rs.)
Chennai
Amount ( Rs.)
Bangalore
Amount ( Rs.)
Aug 1999
137
146
175
170
Sep 1999
137
139
175
161
Oct 1999
136
125
175
161
Nov 1999
136
125
172
140
Dec1999
128
117
160
136
120
140
136
Jan 2000
2. However, industry dominated by 20 companies who account for ever 70% of the
market.
3. Individually no company accounts for over of the market
Manufacturing Process:
Cement is manufactured by using the wet, semi dry and processes. The wet process
was popular in the past as it provided better control over materials mixing process. However,
the dry process has now gained popularity globally because it is space saving, energy
efficient and economical.
Capacity
(TPD)
% of total
Power
KHz/MT
Fuel
Kcal/kg
Dry
282486
93
120-125
750-800
Semi-Dry
13910
115-120
900-1000
Wet
5260
110-115
1300-1600
Total
301656
100
GEOGRAPHICAL DISPERSION
Limestone is the most important material input into cement manufacture. The plant
locations are primarily determined based on the proximity of cement grade limestone
deposits. These limestone deposits have been classified as cluster, some of which overlap
two states.
Capacity
Cluster
State
No of plants
(mn tpa)
Satna
MP
MP
12.18
Ballarpur
11.16
Gulbarga
Karnataka/AP
7.82
Chandrapur
Maharashtra/AP
7.49
Chanderia
Rajasthan/MP
7.45
Nalgonda
AP
5.85
Yerraguntla
AP
5.40
Nalgonda
57.37
Sub total
50
(52.5%)
52.75
Non cluster
63
(47.5%)
Total
120
110.10
PRODUCTION CAPACITY
Cement plant with a capacity of up to 0.3 mntpa are classified as mini cement plants
and are eligible for concessional excise duty. Though the minimum economic size of a
cement plant is 1 mntpa, there are over 300 white and mini cement plants in India a
collective capacity of only 9 mntpa (8% of the total domestic installed capacity). Most of the
new cement plants being set up have a capacity of 1 mntpa or more. The average cost of
setting up a mini cement plant is about Rs 1400 per ton, while for large cement it is about Rs
3500 per ton.
Company
No of plants
Capacity ( cu m/hr)
ACC
13
712
440
L&T
330
Fletcher Challenge
320
HCC
240
Unitech
150
Jog Construction
120
Starmnac
120
Madras Cement
56
Birla Cement
30
Concerns:
Cement industry going through a consolidation phase in the last few years.
Transportation:
1. Transportation costs high-freight accounts for 17% of the selling and distribution
cost.
2. Road preferred for transportation for distances less than 250 kms. However, industry
is heavily dependent on roads are the railway infrastructure is not adequate shortage
of wagons.
Capacity additions:
1. Acquisitions have been the mainstay of the business.
2. Regional imbalance resulting in cross regional movement-limestone availability in
Pockets has led to uneven capacity additions.
3. Capacity additions have slow down.
Industry inputs:
1. Highly capacity intensive industry.
2. Nearly 55-60% of the inputs controlled by the controlled.
3. Facing problems due to power shortage.
4. Coal availability the quality affecting production.
5. Mini plants realization of the revenue lower large plants, survival difficult.
cent of total cement capacity in next four year. To tap is existing potential, leading cement
manufacturers in the country like L & T and ACC have already announced their plans to
expand their RMC capacities is coming years.
Next cost cutting measure appears to be transporting bulk cement. This method is
cement transpiration is preferred by cement manufacturers as it results in lower packaging
costs, hence lower demurrage costs. At present, cement is predominantly sold in 50 kg bags.
But the pattern appears to the changing as cement manufacturers have increasingly started
selling cement in bulk, especially in cities where construction activity as it is peak. Most of
the cement sold in bulk is currently used by the ready mix concrete plants. Cement consumed
in bulk could help save about Rs 110 per tone (Rs 5.50 per 50 kg bag) compared to the use of
conventional bags.
Around the world, almost 80% of the cement transportation is carried out in bulk
form. But in India, only about 1%of total cement is transported in this form. This is because
of the attendant problems like inadequate infrastructure in the form of port facilities and lack
of timely availability of wagons from the railways. Cement packaging costs accounts for
nearly 4 per cent of total costs for a cement manufacturer.
The industry will see more action on the mergers and acquisition front. So far, the
market has seen only two major international players. Lafarge and Cement Francais, in
action. But others, such as CEMEX and the big daddy, Holders Bank are waiting in the
wings. These global players are; looking towards getting a foothold in the Indian market,
offering a higher acquisition price than the international standards. Within the next three to
five years the industry is expected to be dominated by five six big players and less than ten
companies in all, both Indian and foreign.
Company profile:
This cement division project in 1978 and according to the Texaco it has taken the
steps for acquiring the land at YERRAGUNTLA in KADAPA dist. in 1982. Constructing
activity is started and the cement plant is completed in March 1985. Texaco is started
production at clinker by March 1985. Original plant capacity was 5 lakh tones per annum at
first.
The Zuari cement is strategically located at Yerraguntla. The plant location existence
of 6km from Yerraguntla. It is connected to the railway station on by a railway track of 7 km
length and is having on exchange plant inside the factory; plant is connected to the nearest
highway by 0.2 km land private load.
Basically this is belongs to DR.K.K. Birla. In 1994 January 1, this cement unit of
Texaco being handed over to Zuari agro chemical industry. Under working agreement on 7-295. This unit is sold by Texaco to Zuari in 1997 company has conceives expansion project
investing 370 crores and making increasing rated capacity from 5 lakh to 7 lakh. This project
was completed by formally 1999 and in fact from1-4-2000. Company entered in agreement
with joint venture partner with Italy cement with 50% of partnership and working agreement.
The Group has strength of 22,300 employees worldwide.
62 cement plants.
14 Grinding Units.
4 stand alone terminals.
147 aggregate quarries.
575 concrete batching units.
Cutting-edge technology.
All this combine seamlessly to ensure that every bag of cement. That leaves the plants
is of consistent quality, and worthy of bearing the zuari label. World Wife excellence with
ital cement.
Zuari industries ltd has entered into 50:50 joint venture with Ital cement group, the
largest producer and distributor of cement in Europe and one of the leaders in cement
production in the world.
Ital cementi operates in 19 countries including Canada, France, Italy, Morocco, USA
and Bulgaria. Italic cements global industrial network includes more than 50 cement plants,
500 concrete batching units 150 quarries.
Zuari joint with Ital cement gives Sri Vishnu cement a global technological advantage
which reflects in finesses of every grain of Sri Vishnu cement.
1. Zuari cement was started in 1994 to operate the cement plant of Texaco Ltd.
Subsequently, Texacos cement business was taken over by the company in 1995.
2. Zuari cements manufacturing facility at yerraguntla in Andhra Pradesh is one of the
largest in south India and places Zuari cement among the top 5 manufacturers in the
south.
3. In 2000, Ital cement group the second largest producer and distributor of cement in
Europe and fifth largest cement producer in the world enter into a joint venture with
Zuari cement and Zuari cement Limited was formed.
COMPETITORS:
1. CORAMANDAL CEMENT
2. MAHA CEMENT
3. NAGARJUNA CEMENT
4. LANCO CEMENT
5. ULTRATECH CEMENT
6. PENNA CEMENT, etc.
PRODUCTION:
Cement production during the period has also increased from about 72.23
Million tons about 90 million tons in 2005-2006 excluding the contribution of mini cement
plants.
RAW MATERIALS:
The actual requirements of raw material at 100% capacity utilization would be;
1. 12.5 million tons of limestone per annum.
2. 70000 tons of Gypsum per annum.
3. 39000 tons of Bauxite per annum.
4. 20000 tons of Iron ore per annum.
1. The limestone is major component required for the plant is net from the mines located
adjacent to the proposed site.
2. Gypsum is procured from fertilizer factories at Madras and Cochin.
3. Iron is soured partly from mini steel plants located at Tirupathi and partially from Bellary.
4. Bauxite is procured from Goa, Karnataka and Maharashtra.
POWER:
Maximum estimated power demand is 45 M.V. The company has an existing contract
50 M.V demands APSEB, the plant presents has D.G sets with an aggregate general capacity
of 12.6 M.V.
WATER:
Water is required for seeds of consumption make for plant and machinery for general
need in plant. Company has a pumping station and underground bore wells near Hanuman
Gutta village at Penna River to tap the undergrounds water in riverbed.
TRANSPORT:
The factory is when connected to different part of the country through rail and road
facilities is near to Yerraguntla railway station and has a railway lint to the factory with an
extern point within the factory premises 605 of the cement is dispatched by rail gal is
received through rail. The plant is connected to the nearest state highway to Bangalore,
Hyderabad and Chennai.
MANPOWER:
Existing plant has a total of 500 employees. After and addition of employees may be
required.
QUARRY:
It is situated adjacent to the factory. It constituted limestone, one of the major
materials for cement industry. The quarry has a mining base area of 1027.56 acres.
S.No
Description
Massive
(MT)
Flagged
Total (MT)
grade limestonestone(MT)
108442
9.894
118.36
29530
2540
32.07
Workable reserves
79912
7354
86.266
Chambal fertilizers and chemicals ltd (CFCL) promoted by Zuari industries ltd.,
has set up a large gas based area manufacturing plant at Gadapan about 35 km from Keta,
a major industrial town of Rajasthan state in India.
CFCLs plant is a state-of-the-are-high-tech complex built at a cost of Rs.12.67
billions. Spread over an area of 1105 acres (or 447 hectares 4.47 sq.kms), containing the
manufacturing units offsite facilities including captive power plant, railways siding and
amenities like residential complex, club, school, etc in a pleasant and green surroundings
snamprogetti of Italy and Haldor topsoe of Denmark provided the technical know-how and
Engineering and other services for Ammonia and urea plant while off-site facilities were built
mainly by Tokyo engineering India ltd.
The enterprise value of the unit has been pegged at Rs. 740 crores. The creation of
this joint venture company is a new step in the international of the Ital cement group in Asia.
It is a new opportunity for the group, to further increase its presence in the emerging
countries by entering the promising Indian market, the third largest in the world. In
combination with a very important partner says a release issued by laggard who advised ital
cement on the deal.
Here are 6 of the many reasons why Zuari 53 grade and 43 grades cement
edges out its competitors.
1.
2.
3.
Better soundness.
4.
5.
6.
Greater fineness
Products
Zuari Cement manufactures and distributes its own main product lines of cement .We aim to
optimize production across all of our markets, providing a complete solution for customer's
needs at the lowest possible cost, an approach we call strategic integration of activities.
Cement is made from a mixture of 80 percent limestone and 20 percent clay. These are
crushed and ground to provide the "raw meal, a pale, flour-like powder. Heated to around
1450 C (2642 F) in rotating kilns, the meal undergoes complex chemical changes and is
transformed into clinker. Fine-grinding the clinker together with a small quantity of gypsum
produces cement. Adding other constituents at this stage produces cements for specialized
uses.
BOARD OF DIRECTORS
DIRECTORS
EXECUTIVES
: Director-Marketing
; K. Srivasthava
Director-Technical
: P. Sheoran
Vice President
: S. Suresh
COMPANY SECRETARY
L.R Neelakanta
BANKERS
AUDITORS
FACTORY
Literature review:
FEATURE OF CAPITAL BUDGETING:
The important features, which distinguish capital budgeting decision in other day-to
day decision, are Capital budgeting decision involves the exchange of current funds for the
benefit to be achieved in future. The future benefits are expected and are to be realized over a
series of years. The funds are invested in non-flexible long-term funds.They have a long term
and significant effect on the profitability of the concern. They involve huge funds.They are
irreversible decisions. They are strategic decision associated with high degree of risk.
IMPORTANCE OF CAPITAL BUDGETING:
The importance of capital budgeting can be understood from the fact that an unsound
investment decision may prove to be fatal to the very existence of the organization.
The importance of capital budgeting arises mainly due to the following:
1. LARGE INVESTMENT:
Capital budgeting decision, generally involves large investment of funds. But the funds
available with the firm are scarce and the demand for funds for exceeds resources. Hence, it
is very important for a firm to plan and control its capital expenditure.
3. IRREVERSIBLE NATURE:
The capital expenditure decisions are of irreversible nature. Once, the decision for acquiring a
permanent asset is taken, it becomes very difficult to impose of these assets without incurring
heavy losses.
The capital budgeting may also be classified from the point of view of the decision
situation as follows:
(i)Independent project Decision:
This is a fundamental decision in Capital Budgeting. It also called as accept /reject criterion.
If the project is accepted, the firm invests in it. In general all these proposals, which yield a
rate of return greater than a certain required rate of return on cost of capital, are accepted and
the rest are rejected. By applying this criterion all independent projects with one in such a
way that the acceptance of one precludes the possibility of acceptance of another. Under the
accept-reject decision all independent projects that satisfy the minimum investment criterion
should be implemented.
(ii) Mutually Exclusive Projects Decision:
Mutually Exclusive project are those, which compete with other projects in such a way that
the acceptance of one will exclude the acceptance of the other projects. The alternatively are
mutually exclusive and only one may be chosen. Suppose a company is intending to buy
anew machine. There are three competing brands, each with a different initial investment
adopting costs. The three machines represent mutually exclusive alternatives as only one of
these can be selected. It may be noted here that the mutually exclusive projects decisions are
not independent of the accept-reject decisions.
proposals.
The proposal about potential investment opportunities may originate either from top
management or from any officer of the organization. The departmental head analysis various
proposals in the light of the corporate strategies and submits the suitable proposals to the
capital expenditure planning.
Screening proposals:
The expenditure planning committee screens the various proposals received from different
departments. The committee reviews these proposals from various angles to ensure that these
are in accordance with the corporate strategies or selection criterion of the firm and also do
not lead departmental imbalances.
Evaluation of Various proposals:
The next step in the capital budgeting process is to various proposals. The method, which
may be used for this purpose are Payback period method, Rate of return method, N.P.V and
I.R.R etc.
Fixing priorities:
After evaluating various proposals, the unprofitable uneconomical proposal may be rejected
and it may not be possible for the firm to invest immediately in all the acceptable proposals
due to limitation of funds. Therefore, it is essential to rank the project/proposals after
considering urgency, risk and profitability involved in there.
FINAL APPROVAL AND PREPARATION OF CAPITAL EXPENDITURE
BUDGET:
Proposals meeting the evaluation and other criteria are approved to be included in the capital
expenditure budget. The expenditure budget lays down the amount of estimated expenditure
to be incurred on fixed assets during the budget period.
Implementing proposals:
Preparation of a capital expenditure budget and incorporation of a particular Proposal in the
budget doesnt itself authorize to go ahead with the implementation of the project.
A request for the authority to spend the amount should be made to the capital Expenditure
committee, which reviews the profitability of the project in the changed circumstances.
Responsibilities should be assigned while implementing the project in order to avoid
unnecessary delays and cost overruns. Network technique likes PERT and CPM can be
applied to control and monitor the implementation of the projects.
Performance Review:
The last stage in the process of capital budgeting is the evaluation of the performance of the
project. The evaluation is made by comparing actual and budget expenditures and also by
comparing actual anticipated returns
Traditional Methods
1.N.P.V
2.I.R.R
3. P.I.
Traditional methods:
Payback period method (P.B.P)
Accounting Rate of Return Method (A.R.R)
Time adjusted or discounted technique:
(I) Net Present Value method (N.P.V)
(II) Internal Rate of Return method (I.R.R)
(III) Profitability Index method (P.I)
ADVANTAGES:
o Simple to understand and easy to calculate.
o It saves in cost; it requires lesser time and labor as compared to other methods
of capital budgeting.
o In this method, as a project with a shorter payback period is preferred to the
one having a longer pay back period, it reduces the loss through
obsolescence.
o Due to its short- time approach, this method is particularly suited to a firm
which has shortage of cash or whose liquidity position is not good.
DISADVANTAGES:
o It does not take into account the cash inflows earned after the pay back period
and hence the true profitability of the project cannot be correctly assessed.
o This method ignores the time value of the money and does not consider the
magnitude and timing of cash inflows.
o It does not take into account the cost of capital, which is very important in
making sound investment decision.
o It is difficult to determine the minimum acceptable pay back period, which is
subjective decision.
o It treats each assets individual in isolation with other assets, which is not
feasible in real practice.
ADVANTAGES:
o It is very simple to understand and easy to calculate.
o It uses the entire earnings of a project in calculating rate of return and hence
gives a true view of profitability.
o As this method is based upon accounting profit, it can be readily calculated
from the financial data.
DISADVANTAGES:
o It ignores the time value of money.
o It does not take in to account the cash flows, which are more important than
the accounting profits.
o It ignores the period in which the profit are earned as a 20% rate of return in 2
years is considered to be better than 18%rate of return in 12 years.
o This method cannot be applied to a situation where investment in project is to
be made in parts.
ADVANTAGES:
o It recognizes the time value of money and is suitable to apply in a situation
with uniform cash outflows and uneven cash inflows.
o It takes in to account the earnings over the entire life of the project and gives
the true view if the profitability of the investment
o Takes in to consideration the objective of maximum profitability.
DISADVANTAGES:
o More difficult to understand and operate.
o It may not give good results while comparing projects with unequal
investment of funds.
o It is not easy to determine an appropriate discount rate.
INTERNAL RATE OF RETURN METHOD
The internal rate of return method is also a modern technique of capital budgeting that
takes in to account the time value of money. It is also known as time- adjusted rate of return
or trial and error yield method. Under this method the cash flows of a project are discounted
at a suitable rate by hit and trial method, which equates the net present value so calculated to
the amount of the investment. The internal rate of return can be defined as that rate of
discount at which the present value of cash inflows is equal to the present value of cash
outflow.
Decision Rule:
Accept the proposal having the higher rate of return and vice versa.
If IRR>K, accept project. K=cost of capital. If IRR<K, reject project.
DETERMINATION OF IRR
a) When annual cash flows are equal over the life of the asset.
Initial Outlay
FACTOR =
-------------------------------- x 100
Annual Cash inflow
b) When the annual cash flows are unequal over the life of the asset:
PV of cash inflows at lower rate PV of cash out flows
IRR =LR+ -------------------------------------------------------------------------
(hr-lr)
ADVANTAGES:
o It takes into account, the time value of money and can be applied in situation with
even and even cash flows.
o It considers the profitability of the projects for its entire economic life.
o The determination of cost of capital is not a pre-requisite for the use of this method.
o It provide for uniform ranking of proposals due to the percentage rate of return.
o This method is also compatible with the objective of maximum profitability.
DISADVANTAGES:
o It is difficult to understand and operate.
o The results of NPV and IRR methods my differ when the projects under evaluation
differ in their size, life and timings of cash flows.
o This method is based on the assumption that the earnings are reinvested at the IRR for
the remaining life of the project, which is not a justified assumption.
ADVANTAGES:
o Unlike net present value, the profitability index method is used to rank the
projects even when the costs of the projects differ significantly.
o It recognizes the time value of money and is suitable to apply in a situation
with uniform cash outflow and uneven cash inflows.
o It takes into account the earnings over the entire life of the project and gives
the true view of the profitability of the investment. Takes into consideration
the objectives of maximum profitability.
The first two elements reflect the "modern, traditional" balancing theory of capital structure.
The third and fourth build on agency theory and imperfect information and emphasize the
individual incentives of decision makers. The fifth element recognizes that the very act of
issuing a security can convey new information to investors when there is imperfect
information. While newer theories provide a rich array of insights into aspects of financial
policy beyond how much debt the firm should undertake, the downside is that at present there
is no overarching synthesis of these theories. As a result, practical application requires careful
identification of how these particular theories are relevant to the business, the markets, and
the situations at hand.
The note is organized as follows: In Section One he present some relevant statistics
regarding the non traded firms in the U. S. and in Colombia. In Section Two he mention the
importance of the emerging markets mostly composed of non-trading firms and the relevance
of popular approaches to the estimation of cost of equity capital. In Section Three he
distinguish between total and systematic risk and present methods to estimate the cost of
equity capital with systematic risk and total risk. When using Accounting Risk Models
(ARM) he used data from a well known firm in the Colombian stock market .In section Four
he presented some concluding remarks.
risk through the alleviation of countercyclical deadweight costs. Using measures of implied
cost of capital constructed from analyst forecasts, she found that
diversified firms have on average a lower cost of capital than stand-alone firms. In addition,
diversified firms with less correlated segment cashflows have a lower cost of capital ,
consistent with a coinsurance effect. Holding the magnitude of cash flows constant, our
estimates imply an average value gain of approximately 6% when moving from the highest to
the lowest cash flow correlation quintile.
The Project study is undertaken to analyze and understand the Capital Budgeting
process
in ZUARI , which gives exposure to practical implications of theory knowledge.
To summaries merits and demerits of the investment criteria viz.. NPV, IRR,
PAYBACK and ARR.
Lack of time is a limiting factor, i.e., the schedule period of 6 weeks are not sufficient
to make the study on Capital Budgeting in ZUARI CEMENTS.
The busy schedule of the officials in the ZUARI CEMENTS is another limiting
factor.
The study is conducted in a short period, which was not detailed in all aspects.
Research Methodology:
DATA SOURCES & METHODOLOGY:
The required data on implementation of capital budgeting techniques is collected with the
help of primary and secondary data.
PRIMARY DATA:
The information collected directly without any reference is primary data. In the study it is
mainly through conversation with concerned officers or staff members either individually or
collectively. The data includes:
1. .Interaction with the planning and development department.
2. Interaction with the finance department.
SECONDARY DATA:
The secondary data is collected from the published annual reports, manuals, magazines of
company.
The collected data has been classified, tabulated, summarized and analyzed in a systematic
manner. For the data analysis various capital budgeting techniques have been applied such as
NPV, PB, IRR Analysis for the period of the study.
The proposed research is a case method of study for the examining the procedure and
effective implementation of capital budgeting techniques in the company has been selected.
PAYBACK PERIOD:
Payback period method is a traditional method of capital budgeting. It is the simple and
widely used quantitative method of investment evaluation. Payback period is also termed as
payout or payoff period method, with the help of payback period method firm can evaluate
the number of years to recoup the initial investment from cash flow after tax.
The formula to calculate payback period is:
Schemes
Outlay
1.
5,48,92,00,000
2.
11,03,69,00,00
3.
Stage-III( 1 x 50000MT)
1229.38(Millions)
5,48,92,00,000
ZUARI INVESTMENTS
TABLE-1
Year
2009-10
2010-11
2011-12
2012-13
2013-14
Cash
inflows(P.V.)
Cash Out Flows (Initial)
19210
33000
11130
70000
65420
40000
19233
80000
61323
60000
498896
525000
graph represents
The
abov
e
TABLE-2
ZUARI NET PRESENT VALUE:
Year Cash Inflows
Rs. 1.129.384.000
0,892
Rs. 1.007.410.528
Rs. 1.310.895.000
0,797
Rs. 1.043.986.315
Rs. 1.761.879.000
0,711
Rs. 1.252.695.969
Rs. 1.732.086.000
0,635
Rs. 1.109.874.610
Rs. 2.193.061.000
0,567
Rs. 1.243.465.587
Rs. 5.647.433.010
Rs. 5.489.200.000
Rs. 158.233.010
GRAPH 1:
2500000
2000000
Year
1500000
Cash Inflows
1000000
500000
0
1
Interpretation:
The Net Present Value is the difference between the Present value of cash inflows and
Present value of cash outflows.
TABLE-3
PAY BACK PERIOD:
ZUARI Investments (In
Cash
Lakhs)
inflows(P.V.)
Cash Out Flows (Initial)
25,000.00
2900
33000
12,000.00
1100
70000
90,000.00
1600
40000
30,000.00
1200
80000
50,000.00
1800
60000
207,000.00
8,600.00
283,000.00
Year
2013-09
2009-10
2010-11
2011-12
2012-13
Total:
Initial Investments
Pay Back Period
25000
=
---------
5 Years
8600
GRAPH 3:
300,000.00
250,000.00
200,000.00
150,000.00
Cash inflows(P.V.)
100,000.00
50,000.00
0.00
2008-09 2009-10 2010-11 2011-12 2012-13 Total:
Interpretation:
a)
In the Pay Back method the Investment and the case inflows are fluctuating from
year to year where as in the year 1999-00 it is 40000 and in the year 2009-10 is
50000.
b)
Cash inflows are in the order of increasing to decreasing from 1999-00 and 200910.
TABLE-4
Year
(Thousands)
2013-09
2009-10
2010-11
2011-12
2012-13
Total
4,500,000.00
4,000,000.00
3,500,000.00
3,000,000.00
2,500,000.00
2,000,000.00
1,500,000.00
1,000,000.00
500,000.00
0.00
260,000.00
600,000.00
100,000.00
250,000.00
520,000.00
3,280,000.00
64000
78000
25000
18000
22000
430000
200000
300000
600000
800000
750000
4360000
Interpretations:
a)
From 2006-2007 the net block and gross fixed assets is 328916.
b)
Whereas the Net Block and gross fixed asset is been increased in the year 2009-10.
TABLE:-5
FY YEAR
2013-09
229055
2009-10
258117
2010-11
286453
2011-12
315400
2012-13
355502
TOTAL
1444527
1600000
1400000
1200000
1000000
800000
600000
400000
200000
0
1444527
229055
258117
286453
315400
355502
Interpretations:
a)
Net worth and net assets has been increasing from year to year from 2005-06 it is
229055 and compare to 2009-10 it has been increased to 440302.
b)
By observing the chat we can say the net worth and net assets have been increasing
from 2005-06 to 2009-2010.
TABLE-6
FY YEAR
2013-09
284738
2009-10
323083
2010-11
328916
2011-12
386106
2012-13
400381
TOTAL
1723224
1723224
1800000
1600000
1400000
1200000
1000000
800000
600000
400000
284738
323083
328916
386106
400381
200000
0
2008-09 2009-10 2010-11 2011-12 2012-13
TOTAL
Interpretations:
a)
Net worth and net assets has been increasing from year to year from 2005-06 it is
229055 and compare to 2009-10 it has been increased to 440302.
b)
By observing the chat we can say the net worth and net assets have been increasing
from 2005-06 to 2009-2010.
TABLE 7 :
FY YEAR
2008-09
34245
2009-10
37338
2010-11
35396
2011-12
36085
2012-13
52609
TOTAL
195673
52609
34245
37338
35396
36085
2008-09
2009-10
2010-11
2011-12
2012-13
TOTAL
Interpretations:
a) The chart shows the increase value after the deduction of tax in the year 2009-10.
b) The Profit is changing from year to year in the year 2004-05 it is 34245 where as
increasing value in the year 2004-2005 and decreased, in the year 2009-10 the value is
increased.
Mar '13
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
Application Of Funds
Gross Block
Less: Accum. Depreciation
Net Block
Capital Work in Progress
Investments
Inventories
Sundry Debtors
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)
Mar '12
Mar '11
Mar '10
Mar '09
489.52
489.52
0
0
29,954.58
0
30,444.10
1,286.00
129.2
1,415.20
31,859.30
489.52
489.52
0
0
24,883.69
0
25,373.21
0
123.43
123.43
25,496.64
489.52
489.52
0
0
19,664.32
0
20,153.84
0
102.14
102.14
20,255.98
489.52
489.52
0
0
15,427.84
0
15,917.36
0
127.75
127.75
16,045.11
489.52
489.52
0
0
12,449.29
0
12,938.81
0
149.37
149.37
13,088.18
10,585.56
6,127.07
4,458.49
1,171.59
429.17
11,763.82
29,234.49
7,732.05
48,730.36
15,338.84
0
64,069.20
0
29,327.02
8,942.13
38,269.15
25,800.05
0
31,859.30
3,441.04
124.38
9,542.79
5,245.98
4,296.81
1,347.61
461.67
13,444.50
26,336.13
6,671.98
46,452.61
14,217.32
0
60,669.93
0
33,638.01
7,641.37
41,279.38
19,390.55
0
25,496.64
6,500.34
103.67
7,917.62
4,516.70
3,400.92
1,733.76
439.17
10,852.05
20,103.50
9,630.15
40,585.70
13,100.74
0
53,686.44
0
31,407.77
7,596.54
39,004.31
14,682.13
0
20,255.98
5,129.50
411.71
6,579.70
4,164.74
2,414.96
1,550.49
79.84
9,235.46
20,688.75
865.08
30,789.29
4,801.24
8,925.00
44,515.53
0
28,097.73
4,417.98
32,515.71
11,999.82
0
16,045.11
2,538.13
325.16
5,224.43
3,754.47
1,469.96
1,212.70
52.34
7,837.02
15,975.50
1,950.51
25,763.03
4,616.67
8,364.16
38,743.86
0
23,415.10
4,975.58
28,390.68
10,353.18
0
13,088.18
2,546.25
264.32
Conclusions :
Every organization has pre-determined set of objective and goals, but reaching those
objectives and goals only by proper planning and executing of the plans economically.
Within a Short span of its existence, the corporation has commissioned 19502 MW as on
31st March, 2000 with an operating capacity of 19.9%. ZUARI today generate 24.9% of
nations Best Cement is presently executing 12 Cement manufacturing Projects with a
total approved capacity of 29,935 MT as on 31st March 2014
Bibliography:
References:
1. According to Robert S. Harris, Susan Chaplin skys (2008) article on capital structure theory:
A current perspective, Darden case no. UVA-F-1165.
2. According to Matti J. Suominen Petri Jylhas(2010) article on speculative capital & currency
trader.
3. According to Robert F.Bruners (2008) article on Nike inc: cost of capital, Darden case no.
VVA-F-1353.
4. According to Ignacio Velez- Parejas (2010) article on cost of capital for non trading firms.
5. According to Harry De Angelo, Linda De Angelo, Toni m. whites (2008) article on capital
structure dynamics and transitory debt
6. According to Rebecca N. Hann Maria Ognevas (2009) article on corporate diversification and
cost of capital.
7. According to Byoun, Sokus (2008) article on financial flexibility and capital structure
decision.
PRASANNA CHANDRA
6th EDITION
FINANCIAL MANAGEMENT
I.M.PANDEY
FINANCIAL MANAGEMENT
FINANCIAL MANAGEMENT
F.M.VANHORNE
Web Site
S.no
Web sites
01
www.zuaricements.com