Escolar Documentos
Profissional Documentos
Cultura Documentos
On
Capital Budgeting
Session : 2015-18
I, Ravi Shukla hereby declare that the work described in this project titled “CAPITAL
BUDGETING – SHIKHA KAUSHAL & ASSOCIATES has been carried out entirely
by me to be submitted for the partial fulfillment of B.Com[H] degree from I.P. and
further this to certify that it has not been submitted earlier to any university or
institute for the award of any degree or diploma.
ACKNOWLEDGEMENT
Research is one of the most important parts of the curriculum of any professional
course both as link between theory and actual industrial practices. I therefore consider
myself fortunate to receive this research in an esteemed organization SHIKHA
KAUSHAL & ASSOCIATES.
I would like thank the management of SHIKHA KAUSHAL & ASSOCIATES for the
wholehearted co-operation and guidance extended by them which made my research
project possible.
I am also thankful to all the employees working in the finance department for their
continuous help and advice at different times.
(RAVI SHUKLA)
PREFACE
Without which one can't consider himself as a qualified capable person. To fulfill this
requirement. I have completed my research project in SHIKHA KAUSHAL &
ASSOCIATES which is indeed a prestigious global industry holding leadership in the
various clutch plates. At first every thing seems to be strange and unheard but as the
time pass one understand the concepts and working of the organization and there by
develop the professional relationship.
Initially it is felt as if a classroom study was irrelevant and useless in any concern
working but gradually it is realized that all the basic fundamental concept studies and
are linked in one or other ways but how and what can be done with fundamental
depending upon the intellectual capability of the individual it just a matter of modifying
the theory so as to apply it to a given practical situation.
It presents a sound theoretical exposition along with explanatory notes in a clear and
lucid language. The facts are arranged in logical manners.
TABLE OF CONTENTS
3 REVIEW OF LITERATURE
4 RESEARCH METHODOLOGY
A.OBJECTIVES OF THE STUDY
B.SCOPE OF STUDY
C.RESEARCH DESIGN
1.PROPULATION AND SIZE OF SAMPLE
2.DATA COLLECTION
3.METHOD OF DATA ANALYSIS
D.LIMITATIONS OF THE STUDY
ANNEXURE
=> QUESTIONNAIRE
=> BIBLIOGRAPHY
CHAPTER – 1
INTRODUCTION
OF THE TOPIC
INTRODUCTION
Meaning
Capital budgeting is the technique of making in long term assets. The process in which
business determines whether projects such as building a new plant or investing in a
long-term venture are worth pursuing. The benefits of which will be available over a
period of time longer than one year. Also known as“ investment appraisal”.
Definition
“Capital budgeting involves the planning of expenditure for assets, the return from
which will be realized in future time periods.”
Thus, a capital budgeting may be defined as the firm’s decision to invest its funds in the
long term assets in anticipation of an expected flow of benefits over the lifetime of the
assets. These benefits may be either in the form of increased sales or reduced costs
capital budgeting decision regarding expansion, acquisition, modernization and
replacement of the long term assets.
Features
In capital budgeting decision, funds are invited in long term assets.
These funds are invested in present times in anticipation of future
funds.
Future profiles will occur the firm over a series of years.
Capital budging decisions involve a high degree of risk because future
benefits are not certain.
Importance of Capital Budgeting
The decision of capital budgeting will be felt by firm over a long time and, affects the
future cost structure of the firm
Irreversible decision
Capital budgeting decision are not easily reversible without heavy financial loss to the.
This is because it is very difficult to sell the second hand plant.
Risk
Investment in fixed assets may change the risk complexion of the firm. This is because
different capital. Investment proposals have different degrees of risk. If adoption of an
investment proposal increased average gain, but causes frequent fluctuation in the
profit of firm, the firm will become more risky.
CHAPTER-2
COMPANY
PROFILE
COMPANY PROFILE
Shikha Kaushal & Associates was constituted as Partnership firm in the year 2009 and has
since providing a wide array of Accounting, Auditing, Taxation, Assurance and Business
advisory services to various companies.
Our team of dedicated professionals are committed and skilled to provide high quality
professional services to the clients with the commitment to the highest standards of ethics and
integrity.
The firm conducts Statutory Audit, Tax Audit and Concurrent Audit under Indian
Company Law and other statutes. We also carry out Internal Audit, Management /
Operational Audit, Stock Audit, Revenue Audit, Information Systems Audit, Tax Audit,
Propriety Audit, Legal Compliances Audit and other Risk based Audits.
Clients extend to virtually all business sectors, and industry segments, ranging from
manufacturing, trading, logistics, pharmaceuticals, information technology, financial
services, banking, exchanges, and e-commerce businesses.
Tax Management Services, including advisory services to minimize and manage the
overall tax liability under the Indian Tax Laws.
Tax Appeals: Drafting and representing before the concerned Tax Authorities for
Assessments, Appeals, Search & Seizure Cases.
Tax Planning: planning pertaining to the determination of advance tax liability, availing
various Tax Exemptions / benefits / Incentives under different provisions of Income Tax
Act and the rules there under.
Liaison with Senior Tax Counsels for obtaining legal opinions, conducting tax litigations
i.e. appeal court references and writ petitions etc.
Filing of the returns of the Income Tax, Wealth Tax, Tax Deducted at Source (TDS), and
various others.
The Tax Consultancy Division comprises of personnel who have had experience of
several years in tax consultancy and management and who have rendered the services
mentioned above to a number of Companies.
Indirect Tax Advisory: Advising Companies, Firms and Individuals on Sales Tax/VAT,
Service Tax and Excise Matters.
Assessments & Appeals: Drafting and representing before Assessing Officers and
appellate authorities. Liaison with senior tax counsel for cases at High Court and for
legal opinions.
Management Consultancy - Operational Consulting, Management Assurance Services
The Firm maintains a dedicated team of accountants headed by senior professionals and
partners for rendering Corporate Support Services. These including the following key
areas of support and consulting:
Budgetary and Management Control: Preparation of Revenue and Capital Budgets,
monthly cash flow statements; periodic "Management Information Statements";
compliance with the corporate policies.
Establishing a branch office, liaison office, project office or other similar outlets in India
by foreign entities; Issues under Companies Act, 1956, Foreign Exchange Management
Act, 1999 (FEMA) and other corporate laws
We are well equipped to carry out the following type of BPO Services:
Book-keeping and Accounting: Verification of invoices and releasing payments;
Preparation of cash / bank vouchers and cheques; running an accounting package,
generation of ledgers and their scrutiny; Preparation of Balance Sheet and Profit &
Loss Account in accordance with Indian GAAP; Co-ordinating with auditors.
Utilities
Rates of Income Tax
Rates of TDS
Filing Fees
Our philosophy is of partnering with our clients and not being a distant service
provider. Since businesses are inherently different, we tailor our services to meet client’s
specific needs and banish the ‘one-size-fits-all’ standardisation.
We recruit, train, motivate and retain highly capable and sharpest talent, who bring
quality in their work and deliver the best solutions.
Serving to the wider business community since more than three decades, we enjoy
unparalleled reputation and respect of our clients, who trust and rely on us
for our expertise and professionalism.
Our philosophy, principles and values are so strongly weaved in our culture fabric that
our beliefs are shared amongst all and which helps us earn our client’s trust and
respect.
Integrity:
Our services are aimed at protecting our client’s interests. By adopting transparent
processes and adhering to highest ethical standards, we ensure client confidentiality and
our own credibility. Whilst collaborating with our clients, we remain absolutely
independent to deliver unbiased opinions.
Passion:
We are passionate for our client’s success. By creating a highly stimulating work
environment, working with utmost dedication and commitment and focusing on
delivery and execution, we perform to not just satisfy but delight our clients.
CHAPTER-3
REVIEW
OF
LITERATURE
REVIEW OF LITERATURE
Definition
“Capital budgeting involves the planning of expenditure for assets, the return from
which will be realized in future time periods.”
Thus, a capital budgeting may be defined as the firm’s decision to invest its funds in the
long term assets in anticipation of an expected flow of benefits over the lifetime of the
assets. These benefits may be either in the form of increased sales or reduced costs
capital budgeting decision regarding expansion, acquisition, modernization and
replacement of the long term assets.
Features
Irreversible decision
Capital budgeting decision are not easily reversible without heavy financial loss to the.
This is because it is very difficult to sell the second hand plant.
2. Time Element: The implications of a Capital Budgeting decision are scattered over
a long period. The cost and benefits of a decision may occur at different point of time.
ASSUMPTIONS IN CAPITAL
BUDGETING:
1. Certainty with respect to cost & Benefits: It is very difficult to estimate the cost
and benefits of a proposal beyond 2-3 years in future.
2. Profit Motive: Another assumption is that the capital budgeting decisions are
taken with a primary motive of increasing the profit of the firm.
The activities can be listed as follows:
Dis-investments i.e., sale of division or business.
Change in methods of sales distribution.
Undertakings an advertisement campaign.
Research & Development programs.
Launching new projects.
Diversification.
Cost reduction.
The Net Present value is the difference between the “Present Value of Cash
inflows” and the present value of cash outflows.
Net present value should be found out by subtracting present value of cash
outflows from present value of cash inflows. The project should be accepted if
NPV is positive.
NPV = Present Value of Cash inflow – Present value of the cash outflow
Acceptance Rule:
Accept if NPV > 0
Reject if NPV < 0
May accept if NPV = 0
One with higher NPV is selected.
The concept of internal rate of return is quite simple to understand in the case of
one-period project.
Acceptance Rule:
Accept if r > k
Reject if r < k
May accept if r = k
Where r = rate return
k = opportunity cost of capital
PROFITABILITY INDEX (OR) BENEFIT COST RATIO:
Acceptance Rule:
Accept if PI > 1
Reject if PI < 1
May accept if PI = 1
The payback period is the number of years it takes the firm to recover its original
investment by net returns before depreciation, but after taxes.
If project generates constant annual cash inflows, the pay back period is completed as
follows:
Initial Investment
Pay Back = ------------------------
Annual cash inflow
In case of unequal cash inflows, the payback period can be found out by adding up the
cash inflows until the total is equal to initial cash outlay.
Acceptance Rule:
Accept if calculated value is less than standard fixed by management otherwise
reject it.
If the payback period calculated for a project is less than the maximum payback
period set up by the company it can be accepted.
Discounted Pay Back rule is better as it does discount the cash flows until the outlay is
recovered.
Acceptance Rule:
Accept if calculated rate is higher than minimum rate established by the
management.
It can reject the projects with an ARR lower than the expected rate of return.
This method can also help, the management to rank the proposals on the basis of
ARR.
A highest rank will be given to a project with highest ARR, whereas a lowest
rank to a project with lowest ARR.
CAPITAL BUDGETING METHODS IN PRACTICE
FORECASTING:
EVALUATION:
Group of experts who have no take to grind should be taken in selecting the
methods of evaluation as NPV, IRR, PI, Pay Back, ARR & Discounted Pay Back.
AUTHORIZATION:
Screening and selecting may differ from one company to another. When large
sums are involved usually final approval rests with top management. Delegation of
approval authority may be effected subject to the amount of outlay. Budgetary control
should be rigidly exercised.
Operating
Administrative
Strategic
The five year plans indicate the broad strategy of planning economic growth rate
and other basic objectives to be achieved during the plan period. The macro level
planning exercise undertaken at the beginning of every five year plan indicates broadly
the role of each sector’s physical targets to be achieved and financial outlays, which
could be made available for the development of the sector during the plan period.
The identification of a project in the Five Year Plan is not the sanction of the
project for implementation. It provides only the ‘green signal’ for the preparation of
feasibility report (FR) for appraisal and investment decision. A preliminary scrutiny of
the FR of the project is done in the Ministry and thereafter copies of the feasibility
report are submitted to the appraising agencies, viz., Planning Commission, Bureau of
Public Enterprises and the Plan Finance Division of the Ministry of Finance.
PROJECT APPRAISAL
The appraisal of the project follows the formulation stage. The objective of the
appraisal process is not only to decide whether to accept or reject the investment
proposal, but also to recommend the ways in which the project can be redesigned or
reformulated so as to ensure better technical, financial, commercial and economic
viabilities.
The need for project appraisal and investment decisions based on social
profitability arises mainly because of the basic characteristics of developing countries
limited resources for development and multiple needs – objective of planning being
‘Economic Growth with Social Justice’. The project appraisal is a convenient and
comprehensive fashion to achieve, the laid down objectives of the economic development
plan. The appraisal work presupposes availability of a certain minimum among of
reliable and up to date data in the country, as well as the availability of trained persons
to carry out the appraisal analysis.
As stated earlier the investment decision of public sector projects are required to be
taken within the approved plan frame work. The Project Appraisal Division (PAD) that
prepares the comprehensive appraisal note of projects of Central Plans was therefore
set up in Planning Commission. The Finance Ministry issues expenditure sanction for
all investment proposals within the frame work of annual budget.
Primary Data has been collected through discussions and observation of various people
involved in the business whereas Secondary Data through annual reports of the
company, newspaper, magazines, journals and internet.
In practice, financial managers are rarely presented with zero-NPV projects for at least
two reasons. First, in an abstract sense, zero is just another of the infinite number of
values the NPV can take; as such, the likelihood of obtaining any particular number is
small. Second, (and more pragmatically), in most large firms, capital investment
proposals are submitted to the Finance group from other areas (e.g., the industrial
engineering group) for analysis. Those submitting proposals recognize the ambivalence
associated with zero NPVs and are less likely to send them to the Finance group in the
first place.
Conceptually, a zero-NPV project earns exactly its required return. Assuming that risk
has been adequately accounted for, investing in a zero-NPV project is equivalent to
purchasing a financial asset in an efficient market. In this sense, one would be
indifferent between the capital expenditure project and the financial asset investment.
Further, since firm value is completely unaffected by the investment, there is no reason
for shareholders to prefer either one.
However, several real-world considerations make comparisons such as the one above
difficult. For example, adjusting for risk in capital budgeting projects can be
problematic. And, some investment projects may be associated with benefits that are
difficult to quantify, but exist, nonetheless. (Consider, for example, an investment with a
low or zero NPV but which enhances a firm's image as a good corporate citizen.)
Additionally, the secondary market for most physical assets is substantially less efficient
than the secondary market for financial assets. While, in theory, one could adjust for
differences in liquidity, the adjustment is, again, problematic. Finally, some would argue
that, all else equal, some investors prefer larger firms to smaller; if true, investing in any
project with a nonnegative NPV may be desirable.
Internal rate of return (IRR) is the rate that makes the present value of the future cash
flows equal to the initial cost or investment. In other words, it is the discount rate that
gives a project a $0 NPV.
IRR rule-the investment is acceptable if its IRR exceeds the required return.
Assume: To comply with the Air Quality Control Act of 1989, a company must install
three smoke stack scrubber units to its ventilation stacks at an installed cost of $355,000
per unit. An estimated $100,000 per unit could be saved each year over the five-year life
of the ventilation stacks. The cost of capital is 14% for the firm. The analysis of the
investment results in a NPV of -$11,692.
Despite the financial assessment dictating rejection of the investment, public policy
might suggest acceptance of the project. By fiat, certain types of pollution controls are
required. But should the firm exceed the minimum legal limits and be responsible for
the environment, even if this responsibility leads to a wealth reduction for the firm? Is
environmental damage merely a cost of doing business? Could investment in a healthier
working environment result in lower long-term costs in the form of lower future health
costs? If so, might this decision result in an increase in shareholder wealth? Notice that
if the answer to this second question is yes, it suggests that our original analysis omitted
some side benefits to the project.
ADVANTAGES
People seem to prefer talking about rates of return to dollars of value.
NPV requires a market discount rate; IRR relies only on the project
cash flows.
DISADVANTAGES
Non-conventional cash flows- Multiple rates of return-if cash flows
alternate back and forth between positive and negative (in and out),
more than one IRR is possible. NPV rule still works just fine. Also, if
the cash flows are of loan type, meaning money in at first and cash out
later, the IRR is really a borrowing rate and lower is better. The IRR
is sometimes called the IBR (internal borrowing rate) in this case.
Mutually exclusive investment decisions-if taking one project means
another is not taken, the projects are mutually exclusive. The IRR can
provide conflicting rankings when mutual exclusive projects are
analyzed.
Comparison of the NPV and IRR Methods
NPV Profiles
Net present value profile is a graph of an investment's NPV at various discount rates.
The graph illustrates the NPV changes as the cost of capital changes. The IRR is not a
function of the cost of capital.
Risk
Investment in fixed assets may change the risk complexion of the firm. This is because
different capital. Investment proposals have different degrees of risk. If adoption of an
investment proposal increased average gain, but causes frequent fluctuation in the
profit of firm, the firm will become more risky.
Merits
Demerits
NPV Example
Assume you have the following information on project X:
The initial cost is $600 million. It has been decided that the project should be
accepted if the payback period is 3 years or less. Using the payback rule, should
this project be undertaken?
1 $200.00 $200.00
2 220.00
3 225.00
4 210.00
Example: Calculating the payback period: the projected cash flows a proposed
investment are listed below. The initial cost is $500. What is the payback period for
investment?
1 $100.00 $100.00
2 200.00
3 500.00
IRR and NPV rules lead to identical decision when the following conditions are
Satisfied.
Conventional Cash Flows: the first cash flow ( the initial investment )is
Negative and all the remaining cash flows are positive.
Project is independent: A project is independent if the decision to accept or
reject the project does not affect the decision to accept or reject any other
project.
When one or both of these conditions are not met, problems with using the IRR
rule can result.
Internal rate of return (IRR)
Meaning
Evaluating
IRR = lower discount rat + NPV at lower discount rate / NPV at lower
Discount rate – NPV at higher discount rate * difference in discount
rate
Merits
It takes into consideration the time value of money.
It is consistent with the overall objective of maximizing the
shareholder wealth.
Demerits
NPV(k)
IRR
K1 Discount rate K2
NPV(k2)0
NPV
$1 363.64
B
$954.55 A
0 k0 20% 21%
Discount rate
Figure .2 NPV vs. IRR: Dependent projects
NPV
$3,409.00
$1,230.50
RESEARCH
METHODOLOGY
RESEARCH METHODOLOGY
When we talk of research methodology, we not only talk of the research methods but
also the comparison of the logic behind the methods, we used in this context of our
research study and explain why we are using a particular method or technique and why
using the other. Research methodology is a way to systematically solve the research
problem. It may be understood as a science of studying how research is done
systematically. In this, we study the various steps that are generally adopted by
researcher in studying his research problem along with the logic behind them.
“The present study is based upon the case study method of research to investigate
procedures at micro level”.
As the study is analyzing probing in nature, thus, entirely based on the secondary data
gathered through the annual reports of the industry. Therefore it provides a historical
perspective of decisions.
RESEACH DESIGN
Research design involves defining the research problem, determining how to collect the
data and from whom, establishing the way the data will be analyzed estimating costs
and the preparation of the research approach. For this study, descriptive research was
selected.
: SAMPLE DESIGN
The method used for sample technique is convenient sampling method.
SIZE OF SAMPLE:
I collected the data from 50 employees.
2. DATA COLLECTION:
. The data are collected from both primary and secondary sources.
Primary Data
Primary data collected through face to face interview, observation, and by participation
in the selecting process.
Secondary Data
The secondary data is collected from website, magazine, memorandum, journals, books
and some other relevant sources.
Both primary data and secondary will be used to generate this report. Primary data
sources are scheduled, survey, informal discussion with professionals. Secondary data
sources are the data used previously for the analysis and the results are undertaken for
next process.
DATA ANALYSIS
AND
INTERPRETATION
DATA ANALYSIS
The term analysis means the computation of certain measures or indices along with
searching for patterns of relationship that exists among data group. Merely collection
of data cannot be the aim of any research activity but with the help of collected data a
researcher tries to draw the conclusions made generalization, establishes relationship
between two or more variable, test the hypothesis. Under the processes of analysis of
data some statistical methods are used to make data meaningful and self explanatory.
The process of analysis of data made the data to speak about themselves. By analysis,
mean the determination of certain indices or measures along with searching for pattern
of relationship that exists among the data group.
INTERPRETATION
Interpretation means drawing inferences from the collected facts after the analytical
study. According to C. William Emory, interpretation has two major aspects namely
establishing continuity in research through linking the results of a given study with
those of another and the establishment of some relationship with the collected data.
Interpretation is the device through which the factors that seem to explain what has
been observed by researcher in the course of the study can be better understood.
Interpretation provides a theoretical conception which can serve as a guide for further
research.
1 Capital budgeting decision affects the profitability of the firm.
Lengthy Process
Interpretation: Capital budgeting decisions are very lengthy process is viewed by 45%
respondents.
6. Involve high risk
Easy to change
Simple process
CONCLUSIONS
AND
SUGGESTIONS
CONCLUSIONS
The conclusion of the whole report is the capital budgeting is very important part of
firm. Through capital budgeting, we find the budget of the firm. We find that how much
the firm invest in a particular assets, how we maintain the budget of firm.
Thus, in short it can be said that budgeting decision are the beneficial part of the firm.
It maintains the finance an to help in developing the firm.
SUGGESTIONS
Q:1 Do you think capital budgeting decisions affect the Profitability of the firm for the
long time period?
Ans. Yes No don’t know
Q :2 “Capital budgeting decision are the long term decision, “Do you think such
decision are taken by any organization?
Ans. Yes No don’t know
Q :4 “In capital budgeting decision, future benefits are not certain.” Are you satisfied of
this statement?
Ans. Yes No don’t know
Q :7 Do you think capital budgeting decision are the most difficult decision which is to
be taken by the firm?
Ans. Yes No don’t know
Q:8 Do you think once capital budgeting decision are taken, it is easy to change?
Ans. Yes No don’t know
Q :9 Do you think the procedures of capital budgeting decision should be simple or easy
to predict?
Ans. Yes No don’t know
Q:10 Do you think capital budgeting decisions require large amount of funds?
Ans. Yes No don’t know
BIBLIOGRAPHY
Books
Goel R., Financial Management, A vichal Publishing company,
Edition 2nd, 2011.
Eugene F. Brigham, Fundamental Management, South Esteem,
Edition 2nd, 1998.
Websites
www.shikhakaushalassociates.com