SUMMER TRAINING REPORT

On

Capital Budgeting

SHIKHA KAUSHAL & ASSOCIATES

Submitted in partial fulfillment of the requirement of the award of degree in

Bachelor of Commerce [ Hons.]

Session : 2015-18

Under the Supervision of: Submitted By:

Dr. Shikha Gupta Ravi Shukla
[Faculty Guide] B.Com[H] 5 th Sem.
Roll No. 01419288815
 DECLARATION

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

I have a great pleasure in presenting my project of SHIKHA KAUSHAL &

ASSOCIATES COMPANY. Which is an integral part of the curriculum of our
Programmed?

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

CHAPTER NO. PARTICULARS

1 INTRODUCTION OF THE TOPIC

2 INDUSTRY AND COMPANY PROFILE

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

5 DATA ANALYSIS AND INTERPRETATION

6 CONCLUSIONS AND SUGGESTIONS

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

 Such decision affects the profitability of the firm

Capital budgeting decisions affect the long term profitability of a firm because of the
fact that they relate to fixed assets. A correct investment decision can yield profit
otherwise incorrect decision can endanger the survival of the firm.

 Long term periods

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.

Audit & Assurance Services

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.

Direct Tax Consultancy

Corporate Taxation Advisory Services: Advising large Companies / Corporations on

their income tax matters, including foreign taxation matters on Indian corporations.

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.

Services relating to Foreign Collaboration Agreements, NRI's taxation, Double Tax

Avoidance Agreements Reliefs etc.

Liaison with Senior Tax Counsels for obtaining legal opinions, conducting tax litigations
i.e. appeal court references and writ petitions etc.

Employee Tax Management and the Salary Structure Designing Services.

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 Consultancy

Sales Tax/VAT, Service Tax and Excise Consultancy

Indirect Tax Advisory: Advising Companies, Firms and Individuals on Sales Tax/VAT,
Service Tax and Excise Matters.

Indirect Tax Management: Attending to registration, renewals, periodic returns, refund

claims and compliances.

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 services offered include:-

Systems and Internal Control Review: A thorough review of prevailing systems,

procedures and internal controls with the objective of ensuring and enhancing their
operating effectiveness.

Preparation of Accounts Manual: To act as a guideline on Accounting Policies,

Procedures and Systems adopted by a Company, Designing Chart of Accounts etc

Systems Manual: Drafting of systems design specifying procedures to be followed in the

day to day activities in various functional areas such as Sales, Purchase etc. including
stage wise documentation to be prepared.

Operational Audit: An in-depth audit of transactions with the purpose of improving

business operations, performance and profitability.

Management Audit: Appraisal of key Management functions like objectives, planning,

organizing and control.

Organisational Structure: Review of structure, design, job profile and recruitment.

Management Information System: Development and design.

Budgeting and Costing System

Project Appraisal and Feasibility Studies

Business Consulting & Corporate Support 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.

Registration with Government Departments: Provident Fund, Software Technology

Parks of India (STPI); Income Tax, Sales Tax/VAT, Service Tax, Excise & Customs etc.

Banking & Regulatory Compliance: Co-ordinating with bankers; issuance of the

Foreign Inward Remittance Certificates; alerting on investment of surplus funds or
repatriation of funds; Minimizing exchange risk; administering withholding tax on
payments to vendors, employee; Filing of various statutory returns with authorities.

Advising on permitted out-bound investments and assisting in setting up companies

outside India.

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

Foreign Collaboration Agreements, Joint Venture Agreements, other legal agreements,

affidavits, powers of attorney, applications, proposals etc.

Incorporation of companies, private, public, Section 25. Drafting of Memorandum and

Articles of Association of Companies etc. as best suited to the business

Winding Up: Managing winding-up of companies.

Commercial due diligence

Financial structuring, venture capital funding, Private equity structuring, Shareholders

agreements.

Business Process Outsourcing

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.

Entity Holding: Maintaining a Registered Office; Appointing a authorized signatory for

bank accounts and power of attorney for signing documents; storage of accounting
records; Organising Insurance; handling inward & outward mail, providing e-mail ID
ensuring privacy and confidentiality; assistance in locating office, factory or residential
premises and related legal documentation.

Utilities
Rates of Income Tax

Rates of Interest on NSC

ROC Fee Structure

Rates of TDS

Filing Fees

Cost Inflation Index

Gold and Silver Rates

Rates of Depreciation Under Income Tax Act

Rates of Depreciation Under Company Act

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

MEANING OF CAPITAL BUDGETING:

An efficient allocation of capital is the most important finance function in

modern times. It involves decisions to commit firm’s funds to long-term assets. Such
decisions are tend to determine the value of company/firm by influencing its growth,
profitability & risk.

Investment decisions are generally known as capital budgeting or capital

expenditure decisions. It is clever decisions to invest current in long term assets
expecting long-term benefits firm’s investment decisions would generally include
expansion, acquisition, modernization and replacement of long-term assets.

Such decisions can be investment decisions, financing decisions or operating

decisions. Investment decisions deal with investment of organization’s resources in Long
tern (fixed) Assets and or Short term (Current) Assets. Decisions pertaining to
investment in Short term Assets fall under “Working Capital Management”. Decisions
pertaining to investment in Long term Assets are classified as “Capital Budgeting”
decisions.

Capital budgeting decisions are related to allocation of investible funds to different

long-term assets. They have long-term implications and affect the future growth and
profitability of the firm.
In evaluating such investment proposals, it is important to carefully consider the
expected benefits of investment against the expenses associated with it. Organizations
are frequently faced with Capital Budgeting decisions. Any decision that requires the
use of resources is a capital budgeting decisions. Capital budgeting is more or less a
continuous process in any growing concern.

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

There are several factors that make capital budgeting decisions among the critical
decisions to be taken by the management. The importance of capital budgeting can be
understood from the following aspects of capital budgeting decisions.

 Such decision affects the profitability of the firm

Capital budgeting decisions affect the long term profitability of a firm because of the
fact that they relate to fixed assets. A correct investment decision can yield profit
otherwise incorrect decision can endanger the survival of the firm.

 Long term periods

Capital Budgeting decisions have long term effects on the risk and return composition
of the firm. These decisions affect the future position of the firm to a considerable
extent. The finance manger is also committing to the future needs for funds of that
project. 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.

 After the Capacity and Strength to Compete: Capital budgeting decisions

affect the capacity and strength of a firm to face competition. A firm may
loose competitiveness if the decision to modernize is delayed.

PROBLEMS & DIFFICULTIES IN CAPITAL BUDGETING:

1. Future uncertainty: Capital Budgeting decisions involve long-term

commitments. There is lot of uncertainty in the long term. The uncertainty may
 be with reference to cost of the project, future expected returns, future
competition, legal provisions, political situation etc.

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.

The cost of a project is incurred immediately. However, the investment is

recovered over a number of years. The future benefits have to be adjusted to
make them comparable with the cost. Longer the time period involved, greater
would be the uncertainty.

3. Difficulty in Quantification of Impact: The finance manger may face difficulties

in measuring the cost and benefits of projects in quantitative terms.

Example: The new product proposed to be launched by a firm may result in

increase or decrease in sales of other products already being sold by the same
firm. It is very difficult to ascertain the extent of impact as the sales of other
products may also be influenced by factors other than the launch of the new
product.

ASSUMPTIONS IN CAPITAL

BUDGETING:

The Capital Budgeting decision process is a multi-faceted and analytical process. A

number of assumptions are required to be made.

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.

FEATURES OF INVESTMENT DECISIONS:

 The exchange of current funds for future benefits.

 The funds are invested in long-term assets.
 The future benefits will occur to the firm over a series of years.

IMPORTANCE OF INVESTMENT DECISIONS:

 They influence the firm’s growth in long run.

 They affect the risk of the firm.
 They involve commitment of large amount of funds.
 They are irreversible, or reversible at substantial loss.
 They are among the most difficult decisions to make.

TYPE OF INVESTMENT DECISIONS:

 Expansion of existing business.

 Expansion of new business.
 Replacement & Modernization.
INVESTMENT EVALUATION CRITERIA:
 Estimation of cash flows.
 Estimation of the required rate of return.
 Application of a decision rule for making the choice.

Consideration of cash flows is to determine true profitability of the project and it is an

unambiguous way of identifying good projects from the pool. Ranking is possible it
should recognize the fact that bigger cash flows are preferable to smaller ones & early
cash flows are referable to later ones I should help to choose among mutually exclusive
projects that which maximizes the shareholders wealth. It should be a criterion which is
applicable to any considerable .

Capital Budgeting Techniques

Traditional Approach Modern Approach

(or) (or)
Non-Discounted Cash Flows Disconnected Cash Flows

Pay Back Period (PB) Net Present Value (NPV)

Accounting Rate of Return (ARR) Internal Rate of Return
Profitability Index (PI)
Discounted Payable Period

NET PRESENT VALUE:

The Net Present value method is a classic economic method of evaluating the
investment proposals. It is one of the methods of discounted cash flow. It recognizes the
importance of time value of money”.
 It correctly postulates that cash flows arising of different time period, differ in
value and are comparable only when their equivalent i.e., present values are found out.

The following steps are involved in the calculation of NPV:

 Cash flows of the investment project should be forecasted based on realistic
assumptions.

 An appropriate rate of interest should be selected to discount the cash flows;

generally this will be the “Cost of capital rate” of the company.
 The present value of inflows and out flows of an investment proposal has to be
computed by discounting them with an appropriate cost of capital rate.

 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.

INTERNAL RATE OF RETURN METHOD

The internal rate of return (IRR) method is another discounted cash flow
technique .This method is based on the principle of present value. It takes into account
of the magnitude & timing of cash flows.
 IRR nothing but the rate of interest that equates the present value of future
periodic net cash flows, with the present value of the capital investment expenditure
required to undertake a project.

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:

Yet another time-adjusted method of evaluating the investment proposals is the

benefit-cost (B/C) ratio of profitability index PI). It is benefit cost ratio. It is ratio of
present value of future net cash inflows at the required rate of return, to the initial cash
outflow of the investment.

Present Value of Cash inflows

PI = -----------------------------------------
Present Value of Cash outflows

Acceptance Rule:

Accept if PI > 1
Reject if PI < 1
May accept if PI = 1

Profitability Index is a relative measure of projects profitability.

PAY BACK PERIOD METHOD:
One of the top concerns of any person or organization investing a large
amount of money would be the time by which the money will come back. The concern
making the investment would want that at least the capital invested is recovered as early
as possible. The pay back period is defined as the period required for the proposal’s
cumulative cash flows to be equal to its cash outflows. In other words, the payback
period is the length of time required to recover the initial cost of the project. The
payback period is usually stated in terms of number of years. It can also be stated as the
period required for a proposal to ‘break even’ on its net investment.

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 PERIOD:

One of the serious objections to pay back method is that it does not discount the cash
flows. Hence discounted payback period has come into existence. The number of periods
taken in recovering the investment outlay on the present value basis is called the
discounted payback period.

Discounted Pay Back rule is better as it does discount the cash flows until the outlay is
recovered.

ACCOUNTING RATE OF RETURN (OR)

AVERAGE RATE OF RETURN (ARR):
It is also known as return on investment (ROI). It is an accounting method, which uses
the accounting information revealed by the financial statements to measure the
profitability of an investment proposal. According to Solomon, ARR on an investment
can be calculated as “ the ratio of accounting net income to the initial investment i.e.” .

Average Net Income

ARR = ---------------------------
Average Investment

Average Income = Average of after tax profit

Average Investment = Half of Original Investment

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

 In a study of the capital budgeting practices of fourteen medium to large size

companies in India, it was found tat almost all companies used by back.
 With pay back and/or other techniques, about 2/3 rd of companies used IRR and
about 2/5th NPV. IRR s found to be second most popular method.
 Pay back gained significance because of is simplicity to use & understand its
emphasis on the early recovery of investment & focus on risk.
 It was found that 1/3rd of companies always insisted on computation of pay back
for all projects, 1/3rd for majority of projects & remaining for some of the
projects.
 Reasons for secondary of DCF techniques in India included difficulty in
understanding & using threes techniques, lack of qualified professionals &
unwillingness of top management to use DCF techniques.

PROCESSES IN CAPITAL BUDGETING

At least five phases of capital expenditure planning & control can be identified:
 Identification (or Organization) of investment opportunities.
 Development of forecasts of benefits and costs.
 Evaluation of the net benefits.
 Authorization for progressing and spending capital expenditure.
 Control of capital projects.

FORECASTING:

Cash flow estimates should be development by operating managers with the

help of finance executives. Risk associated should be properly handled. Estimation of
cash flows requires collection and analysis of all qualitative and quantitative data, both
financial and non-financial in nature. MIS provide such data.

Correct treatment should be given to:

 Additional working capital
  Sale proceeds of existing assets.
 Depreciation
 Financial flows (to be distinguished from operation flows)

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.

Pay Back period is used as “Primary” method & IRR/NPV as “Secondary”

method in India. The following are to be given due importance.

 For evaluation, minimum rate of return or cut-off is necessary.

 Usually if is computed by means of weighted Average cost of Capital (WACC)
 Opportunity cost of capital should be based on risky ness of cash flow of
investment proposals.
 Assessment of risk is an important aspect. Sensitivity Analysis &
Conservative for costs are two important methods used in India.

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.

CONTROL AND MONITORY:

A Capital projects reporting system is required to review and monitor the
performance of investment projects after completion and during their life. Follow up
comparison of the actual performance with original estimates to ensure better
forecasting besides sharpening the techniques for improving future forecasts. As a result
company may re-praise its projects and take necessary action.
DECISION MAKING LEVEL:
For planning and control purpose three levels of Decision making have been identified :

 Operating
 Administrative
 Strategic

OPERATING CAPITAL BUDGETING:

Includes routine minor expenditure, as office equipment handled by lower level
management.

ADMINISTRATIVE CAPITAL BUDGETING:

Falls in between these two levels involves medium size investments such as
business handled by middle level management.

STRATEGIC CAPITAL BUDGETING:

Involves large investment as acquisition of new business or expansion in a new
time of business, handled by top management unique nature.

Long Term Capital Budgeting In Shikha Kaushal & Associates

PRE – INVESTMNET STAGE

In a planned economy, as in India, the identification of public sector projects
needs to be done within the overall framework of national the sect oral planning. All
projects of every sector need to be identified scientifically at the time of plan
formulation. In actual practice, however, it is observed that ‘identification’ stage is the
most neglected stage of the project planning.

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 project appraised which is an essential tool for judicious investment

decisions and project selection is a multi-disciplinary task. But many a times this is
considered doubt, have played an important role in contributing systematic methods for
forecasting the future and evolving appraisal methods to quantify socials costs and
benefits, but they alone can not carry out complete appraisal of an investment proposal.

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.

Net Present Value

Here's another perspective on the meaning of NPV. If we accept a project with a
negative NPV of -$2,422, this is financially equivalent to investing $2,422 today and
receiving nothing in return. Therefore, the total value of the firm would decrease by
$2,422. This, of course, assumes that the various components (cash flow estimates,
discount factor, etc.) used in the computation are correct.

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

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.

Capital budgeting is investment decision-making as to whether a projects forth

undertaking. Capital budgeting is basically concerned with the justification of capital
expenditures .Current expenditures are short-term and are completely written off in the
same year that expenses occur. Capital Budgeting is the process by which the firm
decides which long term investment to make. Capital budgeting projects, i.e., potential
long-term investment, are expected to generate cash flows over several years. The
decision to accept or reject a capital Budgeting project depends on an analysis of the
cash flows generated by the project and its cost,. Popular methods of capital budgeting
include net present value(NPV), internal rate of return(IRR), discounted cash
flow(DCF) and payback period. The following three Capital Budgeting decision rules
will be presented:
 Payback period
 Net Present Value(NPV)
 Internal Rate of Return(IRR)

Capital Budgeting Phases

The phases of the capital budgeting process include:
 Description of the need or opportunity;
 Identification of alternatives;
 Evaluation of the options and the relevant cash flows of each;
 Selection of best alternative; and
 Conducting a post-completion audit of the projects.

Identifying Capital Budgeting Needs

The first step is to identify the need or opportunity. This is usually done at the mid-
management level and is the result of a shared vision of company goals and strategies
coupled with a “where the rubber meets the road” perspective of local”
clients needs, tastes and behavior. They see a need or opportunity and communicate it
to senior management, usually in the form of proposals which both include
identification of the need or opportunity, and potential solution and/ or
recommendations. Senior management then evaluates the merit of each proposed
opportunity and makes a determination of whether or not to look into it further.

While project need identification is usually a de-centralized function, capital initiation

and location decisions tend to remain a highly centralized undertaking.
The reason for this revolves around the need for capital rationing, especially when funds
are limited and upper-management wishes to maximize its returns/benefits from any
capital projects undertaken. The information needed to make this determination usually
comes from both internal and external sources, and is based on both financial and non-
financial considerations. Interestingly enough, the factors examined in this process can
be both firm-specific and market-based in nature. It is that this point that companies
should be seeking qualified financial guidance since the consequences of both a poor
decision and of the implementation of a good decision can be far-reaching.

Risk Analysis in Capital Budgeting Decisions

Conceptually, a capital budgeting decision is simplicity itself. The analyst determines
the upfront cost of a project, as well as the periodic future ash flows resulting from the
project. Those cash flows are then used to calculate it the net present value(NPV) of the
project- using the firm’s weighted-average cost-of- capital(WACC) as a discount
rate –or the internal rate of return(IRR) for the object. If the NPV is positive, or if the
IRR exceeds the WACC, the firm undertakes the project; otherwise it doesn’t.

The difficulty in making capital budgeting decisions arises as a consequences of the

difficulty in determining the upfront costs, the periodic cash flows, even the proper
WACC. All of these quantities must be estimated, and all he ensuing stimates will
contain some degree of uncertainty; the process in inherently risky.
 Saving and costs.
 The life of the project is long time.

Merits

 It takes time value of money.

 Final life of the project is taken into consideration.

Demerits

 It is difficult to understand and implement.

 It is difficult in fixing the required rate of return.

NPV Example
Assume you have the following information on project X:

Initial outlay-$1,100 Required return=10%

 Annual cash revenues and expenses are as follows:
Year Revenues Expenses
1 $1,000 $500
2 2,000 1,000

Draw a time line and computer the NPV of project X

Example:
Consider the previous investment project analyzed with the NPV rule.

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?

Year Cash Flow Accumulated Cash Flow

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?

Year Cash flow Accumulated Cash Flow

1 $100.00 $100.00

2 200.00

3 500.00

Comparison of IRR and NPV

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

It is also Known as time adjustment rate of return. It is based on internal

facts of a proposal. It is determined entirely by the cash inflow and cash
outflows of the project irr is usually the rate of return that a project
earns.

In other words, it is the rate which npv of the project is zero.

Evaluating

If IRR exceeds the rate of return, the project would be accepted. If it is

less than expected rate of return, project will be rejected.

The formula of calculating of IRR is

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

 It involves tedious calculation.

 It becomes difficult to accept or reject the proposal.
IRR illustrated
Initial outlay = -$200

Year Cash Flow

1 50
2 100
3 150

Find the IRR such that NPV = 0

0 = -200 + 50 + 100 + 150

(1+IRR)1 (1+IRR)2 (1+IRR)3

200 = 50 + 100 + 150

(1+IRR)1 (1+IRR)2 (1+IRR)3

A capital Budgeting decision rule should satisfy the flowing criteria.

 Must consider all of the project’s cash flows.

 Must consider the time value of money
 Must always lead to correct decision when choosing among
mutually Exclusive Projects.
 NPV

NPV(k)

IRR

K1 Discount rate K2
NPV(k2)0

Figure .1 NPV vs. IRR independent projects

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

0 20% 21% 30%

Discount rate
 CHAPTER- 4

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.

OBJECTIVES OF THE STUDY:

1. To know about affect of capital budgeting decision on profitability of firm.
2. To know about process of capital budgeting are long they or not.
3. To know about various types of capital budgeting decision.
4. To know about difficulty level of capital budgeting decision.

SCOPE THE STUDY:

 The data of study of project collected of investor or capital structure may not
applicable in all the situations.
 The study of capital structure analysis of company financial position may be
affected or not.
 The calculations and methods adopted in my study may be carried an
appropriately.
 Due to time constant of 45 days, the data of the study may on way net present
overall view of the capital structure.
  It is dipped to judge the results-valve due to the change market valves of the
firm.

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.

TYPE OF RESEARCH DESIGN

1. Historical Research Design

2. Case and Field Research Design
3. Descriptive or Survey design
4. Exploratory Research design

I used descriptive research design in this study

1. POPULATION AND SIZE OF SAMPLE

: 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.

METHOD OF DATA ANALYSIS

I used various data and graphs in this study

LIMITATIONS OF THE STUDY:

 The respondents were limited and cannot be treated as the whole population.
 The respondents may be biased.
 Time was the major constraint.
 The accuracy of indications given by the respondents may not be consider
adequate.
 This data does not cover the whole budgeting impact.
 CHAPTER –5

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.

Categories Total no. of respondents

Yes 50
No 25
Others 25

Profitability of the firm

Interpretation: The responses of the respondents are 50% the decisions affect the
profitability of the firm.

2 Decision are taken by any organization.

Categories Total no. of respondents

Yes 45
No 30
Others 25

Decisions taken by organization

Interpretation: The response of the respondents is 45% in favor of decision taken by
organization.

3 Funds are invested in the long term asset.

Categories Total no. of respondents

Yes 70
No 20
Others 10

Funds invested in long term assets

Interpretation: The 70% respondents are response in invested in the Long term assets
which are beneficial of the company.

4 Future profits are not certain.

Categories Total no. of respondents

Yes 40
No 50
Others 10

Profits are not certain

Interpretation: Future profits are not certain is considered by 40% from the point of
view of the respondents.

5 The process of decision are lengthy.

Categories Total no. of respondents

Yes 45
No 40
Others 15

Lengthy Process
Interpretation: Capital budgeting decisions are very lengthy process is viewed by 45%
respondents.
6. Involve high risk

Categories Total no. of respondents

Yes 30
No 30
Others 40

Involve high risk

Interpretation: The responses of the respondents is 30% in favor of

involvement of risk in capital budgeting decision.
7. Capital budgeting decision is a difficult decision

Categories Total no. of respondents

Yes 55
No 30
Others 15

Interpretation: 15% respondents are in favor of the difficulty in capital budgeting.

8. Capital budgeting decision is easy to change

Categories Total no. of respondents

Yes 60
No 35
Others 05

Easy to change

Interpretation: The responses of the respondents are 60% considered that

capital budgeting decisions are easy to change.
9. Process should be simple and easy to predict

Categories total no. of respondents

Yes 20
No 70
Others 10

Simple process

Interpretation: Only 20% respondents are responses that procedures of

capital budgeting decision should be simple and 70% are said that its procedures are
not very easy.
10. Require large amount of funds

Categories Total no. of respondents

Yes 25
No 35
Others 40

Large amount of funds

Interpretation: Only 25% respondents are responses that requirement of

funds are large in the company.
 CHAPTER-6

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.

Emerging as a dynamic organization, focusing on strategic, seizing opportunities for

generating and building upon past success. My view about compensation &benefits is
that it is better descriptive statements of and ineffective behaviors’ varying from least to
most effective. So, a rater must indicate which behaviors on each scale best describes an
employee’s performance, But there are some key areas which should be taken into
consideration.

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

 Carefully estimate expected future cash flows.

 Select a discount rate consistent with the risk of those future cash
flows.
 Compute a “base-case” NPV.
 Identify risks and uncertainties. Run a sensitivity analysis.
 Exists whenever enterprises cannot, or choose not to, accept all value-
creating investment projects.
 Relax and eliminate the budget constraint.
 Manage the process rather than the outcomes.
 Develop a corporate culture committed to value creation.
ANNEXURE
 QUESTIONNAIRE

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 :3 Do you thing organization’s funds are invested in long term assets?

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 :5 Do you think capital budgeting decisions are the lengthy procedures?

Ans. Yes No don’t know

Q :6 Do you think capital budgeting decision involve a high degree of risk?

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