CHAPTER-1

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 INTRODUCTION

Capital budgeting is the process of marking investment decision in capital

expenditure. The capital expenditure is the benefits of which are expected to be
received over period of time exceeding one year, like cost of acquisition of permanent
assets as land and buildings, plant and machinery etc.

Capital expenditure, involves nonflexible long term commitment of funds.

Capital budgeting involves the planning and control of capital expenditure.

It is the process of deciding whether or not to commit resource to a

particular long term project whose benefits are to be realized over a period of time
longer than one year.

Capital budgeting refers to planning to the development of available capital

for the purpose of maximizing long term profitability of a business firm.

Financial management is one of the important functions in the area of

management. The aim of every firm is to maximize the wealth of the shareholders
and reputation of the company. There exist no inseparable relationship between the
financial functions and other mangers to achieve its goals and objectives, which are
related to the company’s investment and financial decisions.

The analysis of the past information help us to forecast the future accurately
since statements Provide valuable and genuine information concerning the past
.Hence financial analysis will help us to analyze the present and fix future goals.

The financial decision making authority vests in the hands of management should
be particularly interested in knowing financial strength& weakness of the firm.
capital budgeting is the important tool in the hands of management to detect the
efficiency of the investment, which the firm is going to invest on the new project .

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There are so many techniques to measure the efficiency of the project. They are as
follows:

TRADITIONAL METHODS:

A. Payback period.

B. Accounting Rate Return. (ARR)

DISCOUNTED CASH FLOW METHODS:

A. Net Present Value (NPV)

B. Profitability index (PI)

C. Internal Rate of Returns.(IRR)

CONCEPT OF CAPITAL BUDGETING

The term ‘CAPITAL BUDGETING’ refers to long-term planning for

proposed capital outlay and their financing. They have long-term implications and
affect the future growth and profitability of the firm.

Thus, it includes both raising of long-term funds as well as their utilization;

it may thus be defined as “The firm’s formal process for the acquisition and
investment of capital.”It is the decisions making process by which the firms evaluated
the purchase of major fixed assets. It involves firm’s decision to invest its current
funds for addition, disposition, modification and replacement of long-term or fixed
assets. However, it should be noted that investment in current assets necessitated on
account of investment in fixed assets is also to be taken as a capital budgeting
decision.

The deals exclusively with major investment proposals, which are

essentially, long term projects and are concerned with the allocation of firm’s scarce
financial resources among the available market opportunities.

FEATURES OF CAPITAL BUDGETING:

Capital budgeting is a many-sided activity. It includes searching for new or

more profitable investment proposals, investigating engineering and marketing

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consideration to predict the consequences of accepting the investment and making
economic analysis to determine the profit potential of each investment proposals. Its
basic features can be summarized as follows.

A. Potentiality of making large anticipated profits i.e., the possibility of anticipating

future profits.

B. Involves high degree of risk. A high degree of risk is involved since future is
uncertain.

C. Involves relatively long period between outlay and anticipated returns. There is a
long gap between cash outflow and future cash inflows.

On the basis of the above discussion it can be concluded that capital

budgeting consists in planning the development of available capital for the purpose of
maximizing the long –term profitability of the firm.

Capital budget is also called as capital expenditure budget. Operating

budget shows planned operation, in the coming period where as capital budget deals
exclusively with the major investment proposals. It assesses the economies of capital
expenditure and investment.

CASES OF CAPITAL BUDGETING DECISIONS

A business organization has a face quite the problem of capital investment

decisions. Capital investment refers to the investment in projects whose results would
be available only after a year. The investment in these projects are quite heavy and to
be immediately, but the returns will be available only after a period of time. The
following are some of the cases where heavy capital investment may be necessary:

A. Replacements:

Replacements of fixed assets may become necessary either on account of their

being worm out or becoming out dated an account of new technology.

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B. Expansion:

A firm may have to expand its production capacity on account of high demand
for its products and inadequate production capacity. This will need additional capital
investment.

C. Diversification:

A business may like to reduce its risk by operating in several markets rather than
in a single market .In such an event, capital investment may become necessary for
purchase of new machinery and facilities to handle the new products.

D. Research and development:

Large sums of money may have to be expanded for research and development in
case of those industries where technology is rapidly changing. In case large sum of
money are needed for equipment, these proposals will normally be included in the
capital budget.

E. Miscellaneous:

A firm may have to invest money in projects, which do not directly helps in
achieving profit-oriented goals. For example, installation of pollution control
equipment may be necessary on account of legal requirements. Thus, founds will be
required for such purpose also.

MEANING OF CAPITAL BUDGETING

The long-term investment decision of the firm is generally know as the

capital budgeting or capital expenditure decision. A Capital budgeting decision may
be defined as “the firm’s decisions to invest its current fund most efficiently in the
long term assets anticipation of an expected flow of benefits over a series of years”.

1. The exchange of current funds for future benefits.

2. The funds are invested in long-term assets.

3. The future benefits will occur to other firm over a series of years.

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IMPORTANCE OF CAPITAL BUDGETING

Capital budgeting decisions are among the most critical business

decisions. Special care should be taken in taking these decisions on account of the
following reasons:

1. Involvement of heavy funds:

Capital budgeting decision requires large capital outlay. It is therefore,

absolutely necessary that the firm should carefully plan its investment program so that
it may get the finance at the right time and they are put to most profitable use.

2. Long term implication:

The firm will feel the effects capital budgeting decisions over a long period,
and therefore, they have a decisive influence on the rate and directions for the growth
of the firm.

3. Irreversible decisions:

In most cases capital budgeting decisions are irreversible. This is because it

is very difficult to find a market for the capital assets.

4. Most difficult to make:

The capital budgeting decisions require an assessment of future events,

which are uncertain. It is really a difficult task to estimate the probable future events,
the probable benefit and cost accurately in quantitative term because of economic,
political, social and technological factors

PROBLEMS & DIFFICULTIES IN CAPITAL BUDGETING:

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.

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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.
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.

CAPITAL BUDGETING APPRAISAL MATHODS

It views of the significance of capital decision, it is absolutely

necessary that the method adopted for appraisal of capital investment proposal is a
sound one.

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 There are several methods for evaluating and ranking the capital
investment proposals. In case of all these methods the main emphasis is on the return
which will be derived on the capital invested in the projects.

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

(A)TRADITIONAL APPROACH:

I. 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 term pay back refers to the period in which the project will generate
the necessary cash to recoup the initial investment. The payback 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.

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 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 payback 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.
 As a ranking method it gives highest rank to a project which has lowest
payback period, and lowest rank to a project with highest payback period.
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.

Advantages:

 Simple to understand and easy to calculate.

 A Firm, which has shortage of funds, funds this method very useful. Project,
which it marks quickly return, is preferred.
 This method costs less as it requires only very little effort for its computation.

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Disadvantages:

 This method does not take into consideration the cash flow beyond the
payback period.
 It gives over emphasis for liquidity.
 It does not take into consideration the time value of m

II. ACCOUNTING RATE OF RETURN (OR) AVERAGE RATE OF

RETURN (ARR) :

This method is also known as Average Rate of Return and Return On

Investment (ROI) as average of the net-profit after taxes over the whole of the
economics life of the project are taken. Under this method return, is expressed as
percentage of capital or Investment.

Average rate of return on investment=Averageannualprofit/Investment*100

Average investment=original investment/2

Average annual profit =Total cash inflows/number of years

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.
Advantages:

 It is the simple to understand and easy to calculated.

 It uses the entire earnings of a project in calculating rate of return.
 As this method is based upon accounting concept of profit it can be readily
calculated from financial data.

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Disadvantages:

 This should is like payback period method, ignores the time value of money.
 It ignores the timing of returns
 This method cannot be applied to a situation where investment in a project is
to be made in parts.

(B)MODERN APPROACH:

I NET PRESENT VALUE (NPV):

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

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 One with higher NPV is selected.
Advantages:

 It recognizes the time value of money.

 It takes into the account the earnings over the entire life of the project.
 It takes into consideration the objective of maximization of wealth of the
shareholders.

Disadvantages:

 As compared to the traditional methods the net present value method is more
difficult to understand and operate.
 It may not give good results while comparing project with the unequal lives
and investment.
 It is not easy to determine an appropriate discount rate.

II 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.

Internal Rate of Return = A+C-0/C-D (B-A)

Where, A = Lower Trial Rate

C = Present Value Cash Inflows at Lower Trial Rate

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 O = Original Investment
D = Present Value Cash Inflows at Higher Trial Rate
B = Higher Trial Rate
Acceptance Rule:
Accept if r > k
Reject if r < k
May accept if r = k
Where r = rate return
k = opportunity cost of capital
Advantages:

 Like the net present value method, it takes into account the time value of
money.
 It considers the profitability of the project for its entire economic life and
hence enables evaluating of true profitability.
 It provides for uniform ranking of various proposals due to the percentages
rate of returns.

Disadvantages:

 It is difficult to understand and is most difficult method of evaluation of

investment proposal.
 The results of NPV method and IRR method may differ when projects differ
when in size, life and timing of cash flow.

III PROFITABILITY INDEX (OR) BENEFIT COST RATIO:

Profitability index is one of the methods of evaluating the investment

proposal. It is also called as benefit cost ratio and measures the relationship between
present values of cash out flow.

Thus, it can be calculated by using the following formula.

Present Value of Cash inflows

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

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Acceptance Rule:
Accept if PI > 1
Reject if PI < 1
May accept if PI = 1
Profitability Index is a relative measure of projects profitability.
Advantages

 PI considers the time value of money.

 PI considers analysis all cash flows of entire life.
 PI makes the right in the case of different amount of cash outlay of different
project.
 PI ascertains the exact rate of return of the project.

Disadvantages

 It is difficult to understand interest rate or discount rate.

 It is difficult to calculate profitability index if two projects having different
useful life.

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 that almost all companies used by back.
 With pay back and/or other techniques, about 2/3rd 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 technique
 One large manufacturing and marketing organization mentioned that
conditions of its business were such that DCF techniques were not needed.

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  Yet another company stated that replacement projects were very frequent in
the company, and it was not considered necessary to use DCF techniques for
evaluating such projects. techniques in India included difficulty in
understanding & using threes techniques, lack of qualified professionals &
unwillingness of top management to use DCF techniques
CAPITAL BUDGETING PROCESS:
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 ache 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.

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  Usually it 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.
Indian Companies use regular project reports for controlling capital expenditure
reports may be quarterly, half-yearly, monthly, bi-monthly continuous reporting.

 Expenditure to date
 Stage and physical completion
 Approved total cost
 Revised total cost

DECISION MAKING LEVEL:

For planning and control purpose three levels of Decision making have been
identified:

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  Operating
 Administrative Strategic
 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.

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 NEED FOR THE STUDY

Capital investments, representing the growing edge of a business, are

deemed to be very important for three inter- related reasons.

 To avoid the risk and decrease the cost and expenditure of firms.

 To know how much investment need in the project and investments.

 To expanding the operations by investments.

 To determine the influence firm growth in the long term consequences capital

investment decisions have considerable impact on what the firm can do in

future.

 They affect the risk of the firm; it is difficult to reverse capital investment

decisions because the market for used capital investments is ill organized and

/or most of the capital equipments bought by a firm to meet its specific

requirements.

 Capital investment decisions involve substantial out lays.

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 SCOPE OF THE STUDY

The study has been conducted to understand the position of the

industry and various functional areas of the company and their
operations. The study mainly focuses on capital budgeting of the
company.

Keep in view the accessibility and availability of the data sources

100% has been chosen for the purpose of the study. This study represents
of five years and it is limited only to the perception of the personal
belonging to “Capital budgeting of “Akula Boards Limited”.

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 OBJECTIVES OF THE STUDY

The following are the supplementary or additional objective to the primary

object.

 To know whether the organization is utilizing its monetary resources or not.

 To know the technique adopted by the Akula Boards Limited while investing
a capital on a particular project.
 To know present and previous position of the Akula Boards Limited before
implementing the project.
 To determine the capital project those are feasible.
 To estimate the expenditure involved.
 To restrict the capital expenditure on project within an authorized limit.

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 METHODOLOGY OF THE STUDY

The data obtained for the study can be divided into two groups.

 Primary Data
 Secondary Data

PRIMARY DATA:

Primary data consists of information from the discussion with the heads of the
departments, official and staff.

SECONDARY DATA:

The secondary data comprises of information obtained from the annual report
documents maintained by the Akula Boards Limited; The basic understanding of the
objective referred from different publication from professional institution in study one
fourth of the total information obtained from primary data and rest from secondary
data.

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 LIMITATIONS OF THE STUDY

 Lack of time is another limiting factor, i.e., the schedule period of 8 weeks are
not sufficient to make the study independently regarding Capital Budgeting in
AKULA BOARDS.
 The busy schedule of the officials in the AKULA BOARDS is another
limiting factor. Due to the busy schedule officials restricted me to collect the
complete information about organization.
 The data mostly consists of secondary information
 Study is concentrated only on financial aspects of the company.
 All the techniques of capital budgeting are not used in AKULA BOARDS.
Therefore it was possible to explain only few methods of capital budgeting.

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 CHAPTERIZATION

The entire research work will run into five chapters. The first one on
Introduction brings out the importance of the study, and states its objectives and
hypotheses. It also includes methodology and limitations. Chapter II will contain
previous reviews, history of the Problems. A Quick look on subjective well-being will
also be carried out in chapter II. Chapter III will be a methodological part of the study.
Analysis and Discussions is to be done in chapter IV. Findings, Conclusions and
Suggestions for further Research will be presented in Chapter V followed by
Bibliography and References.

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CHAPTER-2

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 REVIEW OF LITERATURE

Mao (1970) in his study illustrates the differences in capital budgeting theory and
practice. There have been invented many applications to improvise the
capital budgetingtechniquesand procedures. Inthis paper we are very eager to show th
e disparity between capital budgetingtheory and capital budgeting in practice.

Klammer, Thomas P. (1972) surveyed a sample of 369 firms from the 1969 Comp
stat listing of manufacturing firms that appeared in significant industry groups and
made at least $1 million of capital expenditures in each of the five years 1963-1967.
Respondents were asked to identify the capital budgeting techniques in use in 1959,
1964, and 1970. The results indicated an increased use of techniques that incorporated
the present value (Klammer, 1984).

Fremgen James (1973) surveyed a random sample of 250 business firms that were in
the 1969 edition of Dun and Bradsheet’s Reference Book of Corporate Management.
Questionnaire were sent to companies engaged in manufacturing, retailing, mining,
transportation, land development, entertainment, public utilities and conglomerates to
study the capital budgeting models used, stages of the capital budgeting process, and
the methods used to adjust for risk. He found that firms considered the Internal Rate
of Return model to be the most important model for decision-making. He also found
that the majority of firms increased their profitability requirements to adjust for risk
and considered defining a project and determining the cash flow projections as the
most important and most difficult stage of the capital budgeting process.

Petty J William, Scott David P., and Bird Monroe M. (1975) examined responses
from 109 controllers of 1971 Fortune 500 (by sells dollars) firms concerning the
techniques their companies used to evaluate new and existing product lines. They
found that Internal Rate of Return was the method preferred for evaluating all
projects. Moreover, they found that present value techniques were used more
frequently to evaluate new product lines than existing product lines.

Gitman Lawrence G. and John R. Forrester Jr. (1977) analyzed the responses
from 110 firms who replied to their survey of the 600 companies that Forbes reported
as having the greatest stock price growth over the 1971-1979 periods. The survey

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containing questions related to capital budgeting techniques, the division of
responsibility for capital budgeting decisions, the most important and most difficult
stages of capital budgeting, the cut-off rate and the methods used to assess risk. They
found that the DCF techniques were the most popular methods for evaluating projects,
especially the IRR. However, many firms still used the PBP method as a backup or
secondary approach. The majority of the companies that responded to the survey
indicated that the Finance Department was responsible for analyzing capital budgeting
projects. Respondents also indicated that project definition and cash flow estimation
was the most difficult and most critical stage of the capital budgeting process. The
majority of the firms had a cost of capital or cut-off rate between 10 and 15%, and
they most often adjusted for risk by increasing the minimum acceptable rate of return
on capital projects.

Kim Suk H. and Farragher Edward (1981) surveyed the 1979 Fortune 100 CFO
about their 1975 and 1979 usage of techniques for evaluating capital budgeting
projects. They found that in both years, the majority of the firms relied on a DCF
method (either the IRR or the NPV) as the primary method and the payback as the
secondary method.

Marc Ross (1986) In an in-depth study of the capital budgeting projects of 12 large
manufacturing firms, he found that although techniques that incorporated discounted
cash flow were used to some extent, firms relied rather heavily on the simplistic
payback model, especially for smaller projects. In addition, when discounted cash
flow techniques were used, they were often simplified. For example, some firms’
simplifying assumptions include the use of the same economic life for all projects
even though the actual lives might be different. Further, firms often did not adjust
their analysis for risk. Surveys results also indicate that project approval at many
firms (in eight out of twelve firms studied) follow different criteria depending on the
locus of the decision.

Wong, Farragher and Leung (1987) surveyed a sample of large corporations in

Hong Kong, Malaysia and Singapore in 1985. They found that PBP was the most
popular primary technique for evaluating and ranking projects in Malaysia. In Hong
Kong, they found PBP and ARR to be equally the most popular. They concluded that,
in contrast to US companies where DCF techniques are significantly more popular

26
than non-DCF techniques as primary evaluation measures, companies in Hong Kong,
Malaysia and Singapore prefer to use several methods as primary measures in
evaluating and ranking proposed investment projects. It is also observed that
companies in Hong Kong, Malaysia and Singapore do not undertake much risk
analysis, neither attempting to assess risk nor adjust evaluation criteria to reflect risk.
The most popular risk assessment techniques were sensitivity analysis and scenario
analysis (high-medium-low forecasts).

Sahu P K (1989) has done a study on Capital budgeting in corporate sector in the
state of Orissa. He made an attempt to study the trends in fixed investment and its
financing between 1960-61 to 1973-74. He took a sample of 15 companies. It was
observed that routine investments were financed through internal sources of funds
while investments for the growth purpose are financed through the external sources of
funds. Short term financing is generally used for financing fixed investments only
during growth periods and that too for short periods. It was observed that PBP and
ARR were the methods generally preferred by firms followed by discounting methods
NPV and IRR.

Stanley (1990) has studied capital budgeting techniques used by small business firms
in the 1990s. According to Eugene Brigham, in his book ‘Fundamentals of Financial
Management’ in the chapter “Capital Budgeting in the Small Business Firms” , capital
budgeting may be more important to the smaller firm than its larger counterparts
because of the lack of diversification in a smaller firm. He says that a mistake in one
project may not be offset by successes in others. His intention of the study is to
ascertain where small firms stand today in regard to capital budgeting techniques as
opposed to prior decades. He selected 850 small firms out of which he received 232
usable responses to the study. As per his findings, a number of patterns relating to
capital budgeting by smaller firms are worthy to note. The firms continue to be
dependent on the payback method as the primary method of analysis. This is not
necessarily evidence of a lack of sophistication, as much as it is a reflection of the
financial pressures put on the small business owner by financial institutions. The
question to be answered is not always how profitable the project is, but how quickly a
loan can be paid back. Small business owners have increased sophistication as over
27% use discounted cash flow as the primary method of analysis. Stanley opines that
their conclusions may, at times, be somewhat misleading due to an inappropriate

27
discount rate. Small firms take risk very seriously which is reflected by a higher
required rate of return for risky projects.

Jog and Srivastava (1991) provide direct empirical evidence on the capital budgeting
process based upon a survey of large Canadian corporations. They explored many
issues viz., the use of capital budgeting techniques, cash flow forecasting methods,
risk analysis techniques and methods used to estimate the cost of capital and the cost
of equity. His findings are most firms used multiple capital budgeting methods to
assess capital investments; DCF methods were employed by more than 75% of our
respondents to evaluate projects such as expansion-existing operations, expansion-
new operations, foreign operations and leasing. It appears that the propensity to use
DCF techniques increases with the complexity of the decision of the DCF methods,
IRR was used more frequently than NPV in most cases, of the two rules of thumb, he
observed little use of ARR. Payback is used much more frequently in conjunction
with DCF methods. According to them, the use of DCF methods has become a norm
in Canadian firms and that multiple evaluation criteria are being commonly used.
Management’s subjective estimates are used as often to generate a cash flow forecast
as quantitative methods. Sensitivity analysis is the most popular technique among
quantitative methods used in cash flow estimation, possibly reflecting the popularity
of pc-based spreadsheet programs. The estimation of cost of capital also seems to be
based more often on judgment than on any formal models. A significant number of
firms use non-standard discount rates, i.e., rates other than the WACC and those using
it seem to rely on judgmental or non-standard methods of estimation for their cost of
equity, the standard methods being either the CAPM or the dividend growth model.
Compared to previous studies, he found the usage rate for DCF methods is higher.
However, the use of subjective, judgmental and nonstandard techniques in the
estimation of cash flows, risk analysis and the estimation of the appropriate cost of
capital continues to be high.

Bierman (1993) finds that 73 of 74 Fortune 100 firms use discounted cash flow
(DCF) analysis, with internal rate of return (IRR) being preferred over net present
value(NPV). The pay back period method also remains a very popular method in
practice, though not as a primary technique. 93 per cent of the respondents use
company-wide WACC for discounting free cash flows and 72 per cent use the
discount rate applicable to project based on its risk characteristics.

28
Bierman Harold (1993) surveyed Fortune 500 industrial companies regarding the
capital budgeting methods used by these firms in 1993. He found that every
responding firm used some type of DCF method. The payback period was used by 84
percent of his surveyed companies. However, no company used it as the primary
method, and most companies gave the greatest weight to a DCF method. 99 percent of
the Fortune 500 companies used IRR, while 85 percent used NPV. Thus, most firms
actually used both methods. 93 percent of companies calculated a weighted average
cost of capital as part of their capital budgeting process. A few companies apparently
used the same WACC for all projects, but 73 per cent adjusted the corporate WACC
to account for project risk, and 23 per cent made adjustments to reflect divisional risk.

Drury, Braund and Tayles’ (1993) survey of 300 manufacturing companies with
annual sales exceeding £20 million indicates that payback (86%) and IRR (80%) are
the most widely used project appraisal methodologies. The most widely used project
risk analysis technique is sensitivity analysis. Forty-nine per cent of the respondents
do not use statistical analysis for risk analysis and 95 per cent of the respondents
never use either CAPM or Monte Carlo simulation due to lack of understanding.

Petry and Sprow’s (1993) study of 151 firms listed in the 1990 Business Week 1,000
firms indicates that about 60 per cent of the firms use the traditional payback period
either as a primary or as a secondary method for capital budgeting decisions. Ninety
per cent of the firms use NPV and IRR either as a primary or as a secondary capital
budgeting decision methodology. Most of the financial managers indicated that either
they had not heard of the problems of IRR (multiple rates of return, NPV and IRR
conflict) or such problems rarely occurred.

Joe Walker, Richard Burns, and Chad Denson (1993) focused on small
companies. They noted that 21 percent of small companies used DCF. They also
observed that within their sample, the smaller the firm, the smaller the likelihood that
DCF would be used. The focal point of their study was why small companies use
DCF so much less frequently than large firms. The three most frequently cited
reasons, according to the survey, were (1) small firms’ preoccupation with liquidity,
which is best indicated by payback, (2) a lack of familiarity with DCF methods, and
(3) a belief that small project sizes make DCF not worth the effort.

29
Jog & Srivastava (1995), in their article it is identified that capital budgeting and the
estimation of cost of capital are one of the most crucial financial decisions faced by
financial managers. In this study they show variation of uses capital budgeting
techniques used by Canadian corporations. Likely, in our study we show the
variations of uses capital budgeting techniques by different firms in accordance to
their requirement.

Richard Pike (1996) has done a longitudinal capital budgeting study based on
surveys conducted between 1975 and 1992 compiled by conducting cross-sectional
surveys on the same firms at approximately five yearly intervals. According to him,
over the 17-year review period, there have been the greatest changes in the areas of
risk analysis, NPV analysis and post-completion audits. The usage of DCF techniques
have increased with each survey. His other findings are that firm size is still
significantly associated with degree of use for DCF methods but not for payback and
the use of ARR is unchanged. It is suggested that firm size per se may not be the
direct causal factor in determining use of sophisticated methods; size of firm
influences the use of computer based capital budgeting packages which, in turn,
influence the use of discounting methods, sensitivity analysis, and risk analysis
techniques. Once size ceases to be associated with use of computers in capital
budgeting it is envisaged that it will also have far less impact on capital budgeting
technique usage rates. He has reported the general increase in so-called sophisticated
capital budgeting techniques to a point where the gap between theory and practice is
trivial, at least for large firms due to three main factors viz., technical, educational and
economic. This paper has sought to provide a more reliable and comprehensive
analysis of how capital budgeting practices in large UK companies have evolved in
recent years and, in so doing, provide a clearer backdrop against which earlier studies
can be interpreted and future studies enacted.

John J Binder and J. Scott Chaput (1996) in their article ‘A Positive analysis of
Corporate Capital Budgeting Practices’ theoretically and empirically investigates the
choice of capital budgeting methods by large US corporations over time. Simple
economic analysis indicates that there are costs and benefits to using the various
decision rules that are commonly found in the corporate world. This analysis makes
predictions about how capital budgeting practices will change over time, which they
test by relating the percentage of large firms that use DCF rules to several variables

30
that measure these costs/benefits. Empirically they find that, controlling for
differences in the respondents across surveys, the use of DCF methods is positively
correlated with both the AAA bond yield (i.e. the cost of ignoring the time value of
money) and positively related to measures of how well these methods are understood
in the corporate world (e.g., the percentage of MBAs in the population). According to
them, increased uncertainty causes firms to use non-DCF rules more heavily. Their
findings are consistent with the hypothesis that firms do a cost-benefit calculation
when determining which capital budgeting rule(s) to employ. These rules can help
reorient academic thinking away from looking at some popular capital budgeting
methods as wrong and move it more toward explaining why real world practice has
been and is as it is. The hypotheses presented by them suggest new directions for
surveys of corporate capital budgeting practices. That is, beyond asking firms to list
the methods they use it would be interesting to explore in more detail which methods
are used for different types of projects and why. They says that additional surveys of
this type may provide valuable new insight into firms’ choice of capital budgeting
methods.

Cost-benefit analysis suggests that DCF methods will be used more frequently for
large projects, where the total cost of using an inaccurate method is large, as opposed
to small projects. Similarly, firms may use different methods for short-term projects
than for long-term projects. He also suggests to examine capital budgeting methods
across different countries.

Colin Drury and Mike Tayles (1996) has focused a light on some of unresolved
issues on capital budgeting in UK and examined the impact of company size on the
use of financial appraisal techniques. They conducted a postal questionnaire survey
which can provide an overview of current management accounting practices in UK
companies. They mailed their questionnaire to 866 business units and a total 303
usable responses were received (a response rate of 35%). Their survey findings in
respect of the 46 largest organizations indicated that 63% always used IRR, 50%
always used NPV and 30% always used the payback method. The sample included in
this survey included responses from a wide range of organizations of different size.
Most of organizations used a combination of appraisal techniques. 86% of those
organizations that ‘often’ or ‘always ‘used the unadjusted payback method combined
it with a discounting method. The survey findings also indicate that non discounting

31
methods continue to be used by both smaller and larger organizations. The survey also
sought to ascertain the approaches that were used for dealing with project risk.
Sensitivity analysis was ‘often’ or ‘always’ used by 82% of the larger organizations
compared with 30% for the smaller organizations. The survey findings suggest that
theoretically sound capital budgeting techniques are more likely to be used by larger
organizations rather than by smaller organizations. The impact of company size on the
use of investment appraisal techniques has been examined and the survey findings
suggest that many firms appear to deal with inflation incorrectly when appraising
capital investments. This survey has provided useful attention-directing information
by identifying topics that require most in-depth research. They have suggested that in
order to understand more fully the role that financial criteria play in the capital
investment decision-making process, future studies should widen the scope beyond
economic rationality and examine the broader political and social roles that financial
information plays within organizations in the investment decision-making process.

Kester, George W & Chong Tsui Kai (1996) has studied Capital Budgeting
Practices of Listed Firms in Singapore. They took a sample size of 211 companies and
the survey resulted in 54 responses. They found that the responding executives in
Singapore considered IRR and payback to be equally important for evaluating and
ranking capital investment projects. For assessing risk, Scenario analysis and
Sensitivity analysis were perceived to be the two most important techniques while
more sophisticated probabilistic technique were seldom used by companies. In
selecting the discount rates for project evaluation, about half the executives indicated
that their firms based a project’s minimum acceptable rate of return on the cost of the
specific capital used to finance the project. Multiple risk-adjusted discount rate are
used by only 37.8% of respondents and the majority adjusted for risk by classifying
projects into subjectively-defined risk categories. None of the respondents used the
CAPM to determine project discount rates. In estimating the cost of equity capital, a
major component of a firm’s WACC, the results were split evenly between the
dividend yield plus expected growth rate and risk premium methods. Only 17% of the
respondents indicated that their firms used the CAPM to estimate the cost of equity
capital. The survey results also indicated that most of the firms evaluating project cash
flows on an after-tax basis and the majority of firms do not practice capital rationing.

32
Kester and Chang (1999) survey 226 CEOs from Australia, Hongkong, Indonesia,
Malaysia, Philippinnes, and Singapore and find that DCF techniques such as
NPV/IRR are the most important techniques for project appraisal except in Hong
Kong and Singapore. Sensitivity analysis and scenario analysis are found to be the
most important tool for project risk assessment in all the countries. Nearly 72 per cent
of the respondents in Australia use CAPM to calculate the cost of equity. The risk
premium method (cost of debt plus risk premium) is most popular in Indonesia
(53.4%) and Philippines (58.6%). The dividend yield plus growth rate method is the
most popular method in Hong Kong (53.8%).

Block Stanley (2000) has analyzed the capital budgeting policies of 146 multinational
companies in light of current financial theory. He has examined that some of the
actions that MNCs take in the capital budgeting area are the logical extensions of
domestic practices into the international area, while others appear to be misguided
changes to normal capital budgeting procedures. According to his study, there are a
number of misapplications such as applying corporate wide weighted average cost of
capital to foreign affiliate cash flows rather than to cash flows actually remitted to the
corporations. Also, risk is frequently measured on a local project basis (in a foreign
country) rather than considering the portfolio effect on the total corporations. Of the
146 survey respondents in this study, 68.7% believe that international investments
increase the risk exposure of the firm and establish policies on that premise. Finally,
he has shown that the survey respondents hedge against the uncertainty of the
procedures by adding a premium to the weighted average cost of capital as computed
by financial analysts given the inconsistent procedures that are often utilized in going
from domestic to international capital budgeting.

Arnold Glen C. and Hatzopoulos Panos D. (2000) has done a study of The Theory
Practice Gap in Capital Budgeting: Evidence from the United Kingdom to consider
the extent to which modern investment appraisal techniques are being employed by
the most significant UK corporations. It also explores some of the reasons for the
continuing high use of traditional, rule-of-thumb techniques, alongside DCF
techniques. They selected 300 UK companies taken from the Times 1000 (1996)
ranked according to capital employed. Out of these companies, their response rate was
32.4%. The results of their research had been compared with Pike (1982, 1988 and
1996) and McIntyre and Coulthurst (1985) as they have similar characteristics.

33
Surprisingly in contrast to other studies, they observed a reduction in the use of PBP
at high level. This survey even presents evidence that the theory-practice gap has been
narrowed. Over 90% of SMEs are using either NPV or IRR. 97% of large firms use
NPV compared with 84% which employ IRR. Thus NPV has overtaken IRR as the
most widely used method. This study revealed that 67% of firms using three or more
methods. They observed a wide theory-practice gap concerning the use of risk
analysis techniques. While textbooks and academics papers advocate the use of
probability analysis but in their study it seems managers’ revealed hesitancy of using
it on behavioral, practical, and theoretical ground. Over three-quarters of the firms
surveyed adjust for inflation either by specifying cashflows in constant price terms
applying a real rate of return or by expressing cashflows in inflated price terms and
discounting at the market rate of return. Capital expenditure ceilings are placed on
operating units which lead to the rejection of viable projects in the case of 49% of
firms. Thus the central aim of this study is to generate new evidence concerning the
capital investment practices of UK firms.

Graham and Harvey (2001) surveyed 392 chief financial officers (CFOs) about their
companies’ corporate practices. Of these firms, 26% has sales less than $100 million,
32% had sales between $100 million and $1billlion, and 42% exceeded $1billion. The
CFOs were asked to indicate how frequently they use different approaches for
estimating the cost of equity: 73.5 per cent use the Capital Asset Pricing Model
(CAPM), 34.3 per cent use a multi beta version of the CAPM, and 15.7 per cent use
the dividend model.

The CFOs also use a variety of risk adjustment techniques, but most still choose to
use a single hurdle rate to evaluate all corporate projects. The CFOs were also asked
about the capital budgeting techniques they use. Most use NPV (74.9 per cent) and
IRR (75.7 per cent) to evaluate projects, but many (56.7per cent) also use the payback
approach. These results confirm that most firms use more than one approach to
evaluate projects.

The survey also found important differences between the practices of small firms (less
than $ 1 million in sales) and large firms (more than $1 billion in sales). Consistent
with earlier studies, Graham and Harvey found that small firms are more likely to rely

34
on the payback approach, while large firms are more likely to rely on the NPV and/or
IRR.

The firms with high debt ratios are significantly more likely to use NPV and IRR than
firms with low debt ratios. They find that CEOs with MBA are more likely than
nonMBA CEOs to use NPV technique. Small firms use cost of equity capital based on
“what investors tell us they require”. CEOs with MBAs use CAPM as against non-
MBA CEOs. Nearly 58% of the respondents use the company-wide discount rate to
evaluate the projects though the project may have different risk characteristics. Large
firms are more likely to use risk-adjusted discount rate than small firms.

Ryan Patricia A and Ryan Glenn P. (2002) have examined the capital budgeting
decision methods used by the Fortune 1000 companies. According to him,
management views NPV as the most preferred (96%) capital budgeting tool, which
represents alignment between corporate America and academia and even alignment of
theory and practice. Firms with larger capital budgets tend to favour NPV and IRR.
PBP is used at least half of the time by 74.5% of the respondents. Fourth in popularity
was the discounted payback model used atleast half of the time by 56.7% of the
companies. Finally at least half time usage was reported for the three models as
follows. PI ranks fifth at 43.9%, followed by ARR at 33.3% and finally, MIRR at
21.9%.

In case of Advanced Capital Budgeting methods, the sensitivity analysis was the most
popular tool followed by scenario analysis. Inflation adjusted cash flows were used by
46.6% respondents on a regular basis. EVA was used by over half of respondents
while MVA was used by approximately one third. Incremental IRRs were used by
47.3% of the respondents, while simulation models were used by 37.2%. PERT/CPM
charting and Decision trees were each used by about 31% of the firms while the more
complex mathematical models such as liner programming and option models receive
less corporate acceptance. As per Ryans, it appears that the views of academics and
senior financial managers of Fortune 1000 companies on basic capital budgeting
techniques are in stronger agreement. Discounted capital budgeting methods are
generally preferred over non-discounted techniques which may reflect the increased
financial sophistication and availability of inexpensive computer technology. The vast

35
majority of respondents agree that WACC is the best starting point to determine the
appropriate discount rate.

Akalu Mehari Mekonnen (2002) has made an attempt to evaluate the capacity of
standard investment appraisal methods indicating the existence of gap between theory
and practice of capital budgeting. He observed that when the amount of spending is
large and the life of a project is longer, companies tend to use more quantitative and
advanced appraisal methods. Most of the companies (65.8%) use multiple models of
appraisal out of 217 respondents for reducing the chance of discrepancy between
actual and estimated revenue and cost of a project. The survey reveals the existence of
correlation between number of times that a project is monitored and its value
discrepancy. More than 30% of respondents surveyed reports that the NPV method
creates larger discrepancy among the standard appraisal methods. The survey result
shows the growing trend in the use of value management technique. Further, it
revealed the absence of uniformity in the use of valuation methods throughout the
project life span. More than half of the samples perform project appraisal and
subsequent project evaluation by two different sets of models which creates confusion
in the interpretation of the progress result of a project and make companies to keep
running value-destroying projects.

Stanley Block (2003) has studied the use of capital budgeting procedures between
industries. Three hundred two Fortune 1000 companies responded to a survey
organized by Stanley along industry lines viz., Energy, Manufacturing, Finance,
Utilities, Technology, Retail, Healthcare, Transportation. This study emphasizes that
just as industry patterns affect financing decisions (debt vs. equity), they also affect
capital budgeting decisions. In this study, the author developed the breakdown of
industries after a careful analysis of performance metrics, size variations, operational
procedures and management strategy. In this study of eight major industrial
classifications covering 302 Fortune 1000 companies, Five key areas related to capital
budgeting were covered. In each case, a statistical test was employed to determine
whether there was a difference in methodology between industries. Overall, this study
shows that, just as industry characteristics often affect the financing patterns of firms
(debt vs. equity), they also affect the asset deployment decisions. This study brings
the left-hand side of the balance sheet upto the level of the right-hand side in terms of
industry analysis.

36
Ioannis T. Lazaridis (2004) had done a survey of capital budgeting practices of the
firms in Cyprus. He found that only 30.19% of the sample firms use capital budgeting
techniques for all their investment decisions, while 50.94% of the firms use evaluation
methods for only some types of investment above a certain cost level. Unfortunately,
18.99% of the companies do not use any evaluation method for their investment
projects. The survey shows that 54.43% of projects evaluation is done by a simplified
evaluation technique and that 36.71% of the companies use the PBP technique.
Among the methods that take into account the time value of money, the NPV method
is the one most companies prefer (11.39%). Total statistical risk analysis is being
adopted by 31.67% of the firms. The survey with respect to the cost of capital, an
important element in the use of the capital budgeting techniques, shows that is
determined basically according to the cost of borrowing (30.95%), while 3.57% of the
companies believe that determining the cost of capital does not affect their profits. He
has concluded that SMEs in Cyprus do not follow scientific evaluation techniques for
their investment projects probably due to lack of familiarity with such methods. These
findings indicate the need for training and educating the managers of the firms in the
capital budgeting area of financial management.

Vaihekoski Mika and Liljeblom Eva (2004) conducted a survey of 144 companies
listed on the Helsinki Stock Exchange to examine the practice of the use of
investment evaluation methods and required rate of return in Finnish. The results
show that the Finnish companies still lag behind US and Swedish companies in their
use of the NPV, and the IRR method, even though it has become more commonly
used during the last ten years. The PBP method and IRR are the two most popular
primary methods used to evaluate investment projects. CAPM is used in surprisingly
few companies, and 27% of the companies have not even defined their required rate
of return on equity. The CAPM or multibeta model is used only in some 40% of the
companies as the primary or secondary method in setting the cost of equity capital.
The median required rate of return for the capital is between 12-14%. But more than
20% of the companies have a requirement above 20%.

Hogaboam, Liliya S. and Shook Steven R.(2004) examined the capital investment
practices of publicly owned forest products firms in the United States that trade stock
on the NYSE and NASDAQ in 2001 by replicating research reported by Cubbage and
Redmond in 1985. They obtained 19 valid responses (24% response rate) out of 79

37
firms selected to represent the forest products industry operating in the US. His
research revealed that the majority of firms (52.6%) perform formal analysis for
projects that are greater than $10,000. DCF techniques are the most preferred capital
budgeting decision criteria used in the forest products industry. IRR was ranked
highest by the majority of firms (52.9%) while 9 firms ranked either first or second in
evaluation criteria importance. Incase of mutually exclusive projects IRR (46.7%) was
considered as their primary choice in capital rationing. Some larger companies
indicated frequent use of more sophisticated evaluation methods, such as Economic
Value Analysis. The employee safety was the most important qualitative factor
influencing the investment decision of the firm followed by environmental
responsibility. The probability of not achieving a target return is the main reason an
investment is considered to be risky by more than three quarters of the 17
respondents; second was uncertain market potential followed by entering an
inexperienced area. The subjective approaches were selected for evaluating risky
investments by the respondents.

Hermes, N., Smid, P., Yao, L. (2006) compared the use of capital budgeting
techniques of Dutch and Chinese firms, using data obtained from a survey among 250
Dutch and 300 Chinese companies. They have analyzed the use of capital budgeting
techniques by companies in both countries from a comparative perspective to see
whether economic development matters. The empirical analysis provides evidence
that Dutch CFOs on an average use more sophisticated capital budgeting techniques
than Chinese CFOs do. Their findings suggest that the difference between Dutch and
Chinese firms is smaller than might have been expected based upon the differences in
the level of economic development between both countries, at least with respect to the
use of methods of estimating the cost of capital and the use of CAPM as the method
of estimating the cost of equity. The NPV method is more preferred by Chinese firms
while IRR method is more popular among Dutch firms.

Truong G., Partington and Peat M. (2006) surveyed Australian firms which
revealed that real options techniques have gained a toehold in Australian capital
budgeting but are not yet part of the mainstream. Projects are usually be evaluated
using NPV, but the company is likely to also use other techniques such as the PBP.
The project cash flow projections are made from three to ten years into the future. The
project cash flow will be discounted at the WACC as computed by the company, and

38
most companies will use the same discount rate across divisions. The discount rate
will also be assumed constant for the life of the project. The WACC will be based on
target weights for debt and equity. The CAPM will be used in estimating the cost of
capital, with the T-bond used as a proxy for the risk free rate, the beta estimate will be
obtained from public sources, and the market risk premium will be in the range of 6%
to 8%. Asset pricing models other than the CAPM will not be used in estimating the
cost of capital.

However, consistent with recent overseas studies, Graham and Harvey (2001) and
Bruner, et. Al. (1998) the CAPM is the most popular method used in estimating the
cost of capital in Australia. Kester et al (1999) found that 73% of companies surveyed
in six Asia Pacific countries, used CAPM. Compared to two previous surveys of US
companies, Gitman and Mercurio (1982) and Gitman and Vandenberg (2000),
increasing popularity of the CAPM model is apparent.

Lord Beverley R. and Boyd Jennifer R. (2004) surveyed half of the New Zealand
local authorities to find out how they undertook capital budgeting. This study was
later extended to all New Zealand local authorities. Results of the two surveys show
that 75% of local authorities use cost-benefit analysis and NPV in financially
evaluating capital investments. However, compared to studies of the private sector,
there is a greater focus on qualitative aspects of decision-making. Post-audits were
also highly used, but with a focus on quantitative information.

Cooper William D., Morgan Robert G., Regman Alonzo, Smith Margart (2001)
has done a study to assess the current level of capital budgeting sophistication in
Corporate America. A survey questionnaire was sent to the CFOs of the Fortune 500
companies. They received response from 113 companies having a response rate of
23%. As per the results of their study, the most commonly used primary capital
budgeting evaluation technique is the IRR (57%). The second most popular technique
is the PBP (20%). The most popular backup technique is the PBP (23%), which is
slightly more popular than the IRR and the NPV (21%). Many firms use a team
approach to evaluate capital projects. The largest number of their respondents believes
that project definition and cashflow estimation is the most important and difficult
stage of the capital budgeting process. Majority of the firms used cutoff rate between
10% and 15%. The most popular method of handling risk in the capital budgeting

39
process identified by 33% of the respondents was to increase the required rate of
return of cost of capital.

Dhankar R S (1995) examined methods of evaluating investments and uncertainty in

Indian companies. He selected a sample of 75 firms. His findings revealed that 33%
of firms used non-discounted methods like PBP and ARR whereas 16% of companies
were using modern DCF techniques. Moreover, almost 50% of the companies
incorporated risk by ‘Adjusting the Discount Rate’ and ‘Capital Asset Pricing Model’.

U. Rao Cherukuri’s (1996) survey of 74 Indian companies revealed that 51% use
IRR as project appraisal criterion. Firms typically use (92% or more) multiple
evaluation methods. ARR and PBP are widely used as supplementary decision
criteria. WACC is the discount rate used by 35% of the sample firms. The most
widely used discount rate is 15%, and over 50% use an after-tax rate. About three-
fifths of the respondents explicitly consider risk in capital project analysis and mostly
use sensitivity analysis for purposes of risk assessment. The most popular method
used by respondents to adjust for risk is shortening the PBP followed by increasing
the required rate of return. 35% of the respondents included leasing in the capital
budgeting process. A few Indian firms in his survey also used none of the methods
listed on questionnaire. They were using profitability and cash flow analysis for
assessing capital expenditure. Apart from the formal budgeting techniques due
weightage is given to qualitative aspects like quality improvement expected from the
capital expenditure, capital expenditure for enhanced safely and capital expenditure to
meet statutory requirements and for benefit to the company’s personnel from health
considerations and social benefits like housing. The favorite capital budgeting
methods of earlier years, ARR (about 19%) and PBP (about 38%) have been used as
primary methods.

C Prabhakara Babu & Aradhana Sharma (1996) had done an empirical study on
capital budgeting practices in Indian Industry. The authors have conducted a survey of
73 companies in and around Delhi and Chandigarh. They used personal interview
method. It has been found by them that 90% of companies have been using capital
budgeting methods. Around 73% of the companies have been using DCF methods.
The popular investment appraisal methods are the ‘IRR’ and the ‘PBP’, used either
individually or jointly. Around 70% executives felt that it is possible to estimate

40
accurately the cash flows associated with each capital investment separately. They
have observed that capital investment proposals are prepared by the concerned
departments and the final decision is vested with other personnel/committee. The
popular discount rate used by the firms is ‘the term lending rate of financial
institutions’ closely followed by ‘cost of capital’. The most often used method to
resolve the uncertainty in the future returns seems to be ‘inflating or deflating the
future cash flows’-and it is followed by the use of ‘sensitivity analysis’. Most of the
executives (around 75%) appreciate the suitability of the DCF technique in our
country.

Jain P K and Kumar M (1998) has done a comparative study of capital budgeting
practices in Indian context and observed that 25% of sample companies invested for
expansion and diversification and firms were making regular investments for
replacement and maintenance. The selected sample companies preference for
evaluating capital budgeting projects were PBP, due to its simplicity, easy
understanding, less cost and less time, followed by NPV and IRR. Companies
preferred WACC followed by ‘Arbitrary rate’ and ‘Marginal cost of additional funds’
as cutoff rate for discounting the projects. For adjusting risk, the ‘sensitivity analysis’
was preferred followed by ‘Higher cut off rate’ and ‘Shorter Pay Back Period’.

Pike (1996) in his study he said capital budgeting does not have the intention to
present the current position rather than it tries to find relations between investment
practices and organizational variables for example firm size, capital intensity and
environmental uncertainty and performance. In our study, we also want to find out
what is the importance of capital budgeting in our arena for practicing
or running business. And also want to find out how capital budgeting effects the
performance of the firm.

Arnold & Hatzopoulos (2000) in their study they show that the capital budgeting
techniques used by United Kingdom firms. This research tends to show that there is
significant

41
theorypractice gap in the use of capital budgeting or project appraisal methods. This st
udy alsofocuses the area of capital rationing and hurdle rates.

The most important decisions that a financial manager face is the proper allocation or
budgeting of their capital. Ryan P.A, & Ryan, G. P. (2002) in their studies shows that
the financial manager prefers IRR and non-discounted payback models over net
present value. In our study we would show what methods are tend to be used by our
financial managers in different industry. And try to find out whether they use multiple
methods to get the optimal methods.

Graham & Harvey (2002), in their study it is shown that NPV has more importance
compared to other project evaluation method. Criteria such as financial flexibility and
credit ratings are considered to be important debt policy factors. In our study, we try
to show that the most used or important methods over the other the project evaluation
method.

Sandahl & Sjögren (2003), in their article they talked about the method through
which the Swedish corporations adapt the capital budgeting practice is the prime
concern of the study. The resultant part of the study shows that public sector
companies are mostly uses Discounted Cash Flow (DCF) method. In this case, the
researchers find out that Payback period method is the most used in most of the
companies. According to the study, the use of NPV method has increased over the
years.

Hermes, Smid & Yao (2007), in their paper shows the comparison of the uses of
capital budgeting techniques of Dutch and Chinese companies. For the purpose of the
paper theresearcher obtain data from a survey among 250 Dutch and 300 Chinese
companies. The aim was to analyze the use of techniques by companies in both
countries from a comparative perspective to see economic development differs in two
countries. In our study we focus only to companies of a single country (Bangladesh)
to see comparison of efficiency of techniques used by the firms.

Lam, K. C., Wang & Lam, M. C. K. (2007), in their very study, it is found out that
payback period appeared to be the most used techniques by most of the firms. It links
to our study awe also want to show the most used techniques by our firms.

42
Brijlal (2008), in their study it is prominent that there are several techniques
commonly used to evaluate capital budgeting projects. For the evaluation Payback
period (PBP), Accounting Rate of Return (ARR), Present value, Internal Rate of
Return (IRR), and Profitability Index are commonly used. From their study they
found that Discounted PBP and IRR proved as superior over NPV. In our paper we
also try to go through the basic capital budgeting techniques and find out the superior
techniques that used by most of the firms.

Truong, Partington & Peat (2008), in their study they find that NPV, IRR and
Payback are the most used and popular techniques in evaluating a project. The cost of
capital is measured through CAPM and other asset pricing models are not used. The
WACC is usually based on target weights for debt and equity.

Holmen & Pramborg (2009), in this very research paper shows how Swedish firms’
use capital budgeting techniques for foreign direct investments. In this paper it
is proved by the researcher that the increasing political risk the uses of NPV decreases
and the uses of Payback method increases as the political risk increases. In our
study, we also see that payback has have frequent usage some of the firms despite it
had theoretical drawbacks.

Verma, Gupta & Batra (2009), in their very study it examines the capital
budgeting method with the incorporation risk in investment proposals. In this
research, they have discovered that the manufacturing companies use capital
budgeting techniques irrespective of the fact that the method is discounted or non-
discounted. They also show relationships between factors like age of CFO and the
methods used by the company.

Hall & Millard (2010), in their article they study the application of capital budgeting
process among a sample of sample of South African industrial firms listed on the JSE
securities exchange for almost 10 years. NPV is founded to be most recognized
methods over IRR which is proved by the incorporation of this method by many
companies.

Bennouna, Meredith & Marchant (2010), they try to evaluate current techniques in
capital budget decision making in Canada. They also figured out the fact that sound fi
nancialmanagement and capital investment decision making are critical factors for

43
survival and long-term success for firms. Our study also show that sound financial
management lead to long-term success of the firm.

Andor, Mohanty & Toth (2015), in their paper, they reported that they get the
survey results from executives of companies I ten countries in Central and Eastern
Europe (CEE)Bulgaria, Croatia, Csech Republic, Hungary, Lativa, Lithunia, Poland,
Romania, Slovak Republic, and Slovenia regarding their capital budgeting
practices. The findings of their survey indicate that capital budgeting practices in
Central Eastern European (CEE) countries tend to be influenced mostly by firm size
and multinational culture. In our study we would like to show the capital budgeting
practices of different firms rather than different country. And would also try to find
out influential factor of capital budgeting practices.

Yasmin (2015) , in her descriptive research she emphasizes on capital

budgeting practices of the companies in Bangladesh. From the research it is evident
that NPV and IRR are the dominating methods of capital budgeting. However
Payback Period (PBP) is used by many of the companies. In our study, we try to
figure out the dominating methods of capital budgeting and will focus on the other
methods to show the actual practice of capital budgeting in Bangladeshi companies.

Neelakantam (2015), In his very study, the researcher tends to show the importance
of cost of capital as it is directly related to the current interest rate which has a great
impact on
capital budgeting decision. The researcher also illustrates the reasons for why capital
budgeting decisions are crucial to a firm’s success.

de Andrés, de Fuente & San Martín (2015). Capital budgeting practices in

Spain.BRQ Business Research Quarterly,18(1), 37-56. In this study, the researcher
seeks to shed light on the capital budgeting techniques used by Spanish
companies. This paper also describes about the theory and practice gap of capital
budgeting techniques. From the result of the study we see that payback method seems
to be the most used tools whereas the uses of real options is very low.

44
CHAPTER-3

45
 INDUSTRY PROFILE

INTRODUCTION OF PAPER INDUSTRY

The world is becoming increasingly dependent upon communication and
information. Paper has presently consequential roll to play. The increase in literacy growing
trend of higher ratios of professional and technical jobs in working force and growing economic
activity are bound to raise the consumption of paper.

Indeed it involves itself in a wide range of activities from the WHITE HOUSE
office releases to kindergarten copy writing.

EVOLUTION OF PAPER MAKING

Paper owes its origin etymologically to PAPYRUS an adequate plant grows

abundance in the delta of NILE in EGYPT. The back sand leaves of plant were woven and
passed into a sheet to be used as writing material by ancient Egyptians in 500 B.C.

The art of paper making first developed by China in 200B.C. and made from bark
leaves of Mulberry tree. In751AD the Arabs and Europeans acquired from the Chinese prisoners.
In 1799 Robert Nicholas of France invented paper machine.

In751AD the Arabs and Europeans acquired from the Chinese prisoners. In 1799
Robert Nicholas of France invented paper machine.

BRIEF HISTORY OF PAPER INDUSTRY:-

Up to year 105 A.D. the product “paper” was not well know and till then things
were written on tree leaves.

In 751 A.D. the Arabs imported the knowledge of paper working with the help
of Chinese. Later the arty of paper making was spread to European and central countries of
world started in 1336 A.D in Germany, and later it was spread to other countries of the
world.

46
 Chlorine gas waste was first used in 1729 A.D. for the bleaching of the pulp.
Robert Nicholas was the scientist who designed the first paper machine of the world in
1799 A.D. Present paper machine was designed by Brumen Donkilu after a series of
efforts.

In 1862 A.D. the road pulping process was introduced in England. The
consumption of Rosin to Aluminium was started in 1900 A.D. After a number of technical
methods, the present paper industry reached its present position.

HISTORY OF PAPER INDUSTRY IN INDIA:-

Nothing can be said about the first paper Mill in India. But it was said that
William Varner, in 1812 started the first paper Mill at Berhampur with the help of
Kagazius in 1932.

Four dive machines were installed and introduced in India. “Royal back paper
mill” was started at Hubli in 1870 and was merged in telethon paper mills. Telethon paper
mills started the preparation of pulp from bamboo in 1912 and later the remaining paper
mills were established.

ABOUT PAPER:

ORIGIN OF PAPER:

“The word paper derives from the Egyptian word ‘PAPYRUS’. The ancient
Egyptians used papyrus sheets made from the stem tissue of the plant Cyprus papyrus
about five thousand years back. The Aryans used dried and processed palm leaves and
thick bark sheets of the blot paper for writing.

However the credit of paper inventing goes to the Chinese scholar ‘Tsai
Lone’. He invented the paper in 105 A.D. he pressed rotten bark lamp in to pulp and
pressed out the liquid. The pulp then remained was made dry in the sun light and the
resulting uneven rough sheet was found better for writing. That was the first sheet of paper
produced.

47
 The first paper machine was the result of experiment done by partnership
consisting of John Gramble, Hall and really found rises and over engineer Brayanb
Donkin of Donking and hall in 1803.

MANUFACTURING PROCESS:-

The basic raw materials used are straw, pulp, bagasse, waste paper, gunny, and
wood pulp sheets.

1) Paddy straw ----------> East & West Godavari, Krishna district.

2) Bagasse ----------> Hanuman junction, Chagallu, Chelluru, Nellore.

3) Waste paper ----------> Vijayawada, Rajahmundry.

4) Gunny ----------> Akiveedu, Ravulapalem, Guntur.

5) Wood pulp sheets ----------> J.K. paper mills.

RAW MATERIALS:-

The raw materials bagasses are cut into pieces by cutters, and passes through
depicter where the pith is remove from the bagasse. The gets cleaned, dewatered and then
taken to MCD digester through conveyor belts. In MCD digester chemicals like caustic
soda (11%) is added and steam is passed and cooks the material for 2 hours. The capacity
of the MCD digester is 4.0 to 4.5 metric tons. Here the colour of the pulp is black. The
cooked pulp is taken to RPS tower, then SDR refiner, and the waste in pulp is detected and
separated.

The raw material straw is also processed in similar manner. The straw is cut in
to pieces by cutters, passes through shuttle conveyor to Rotary digester. Chemicals like
caustic soda (5.5%), sodium sulphite (1.5%) is added and cooked for 2 hours.

The Rotary digester rotates and mixes the material. The capacity of the Rotary
digester is 3.5 metric tons. The steam is given at 7 kgs pressure to the pulp, and then the
pulp is taken to blow tank. Thus the sub outputs are obtained.

48
 The sub out puts of bagasse, straw, waste paper, and gunny are mixed for
stock preparation. The sub outputs are mixed in the following ratios.

Straw & bagasse ----------> 70 % (straw – 20%, bagasse – 50%)

Waste paper ----------> 20 %

Gunny ----------> 10 %

In the S.R box various chemicals are added, they are

Alum ---------> 5 to 6 %

Fortified rosin dyes ----------> 1%

Whitening agent ----------> 4 kgs

The pulp is passed to the head box, here the pulp has only 3% of paper and
rest is water so, water is separated from the pulp by various methods like press part dryer
part, calendars, pope reel, re-winders. Thus the paper rolls are obtained. Now the sheet
cutter cuts the paper rolls in different required sizes. The paper sheets are taken finishing
house and packing take place. The each packet contains 500 sheets. The packets
dispatched.

CLASSIFICATION OF PAPER:-

In this modern era, paper is used for a variety of purposes, paper, and a
uniquely useful product, preserves information and thoughts. It plays a vital role in the
protection of the environment as paper is eco friendly product.

It can be classified as follows.

1. Cultural paper:
It includes paper used for books and printing and writing etc.

2. Industrial paper:

It includes paper used for bag making, warping paper, and craft paper folding
Bag, paper newsprint etc.

49
3. Structural paper:
It includes wallpaper tissue paper, towel paper and the like.

HISTORICAL DEVELOPMENT OF PAPER

YEAR DEVELOPMENT

200 B.C
T Sai Luna founded birth of paper concept in China.
100 A.D Traces of authentic are the paper making process.

1798A.D Patent issued to Nicholas- Louis Robert for first continuous

paper machine.

1803-1807 A.D Patents issued 4chinese brothers for improving continuous paper
machine.

1829A.D Patents issued to john Dickinson for cylinder paper

machine.(England)

1840A.D Ground wood pulping method developed.

1854A.D First manufacturing of pulp wood use soda process.

1867A.D Patent issued to Benjamin Tilghmon for sulphite pulping

process.

1884A.D Invention of craft pulping process by Carl Paul.

1976A.D Bi-Sulphate pulping and Oxygen dezincification of agro-based

industries.

Orange-salvo pulping of bagasse with recovery.

1984 A.D

HISTORY OF PAPER MACHINE IN INDIA

The art of papermaking reached India through Arabs but kept secret by few
families in Punjab& Kashmir. Handmade paper was prevalent in Akbar’s regime. In

50
India paper was initially made from the BIRCH tree back. In 1812 William Karley
started paper machine in Singapore in West Bengal

PAPER INDUSTRY IN GLOBAL PERSPECTIVE

PER CAPITA CONSUMPTION (KG)

COUNTRY
CANADA 251

GERMANY 205

SWIZERLAND 168

JAPAN 153

ENGLAND 135

GREECE 79

SINGAPORE 60

USSR 32

BRAZIL 26

EGYPT 10

CHINA 5

INDIA 3.5

INDONESIA 3

India per capital consumption per annum of paper is merely 3.5 kg as against
334kg of US, 224 kg of Japan,134kg Taiwan, 12kg of China, 805kg of Philippines,
17kg of Thailand,31kg of Malaysia,150kg of Newzeland,140kgof Hong Kong and
150kg of Australia and other countries.

In Concrete terms, more than 60%of the trade of pulp wood more than 50% of
the trade of the paper and paper board more than 80%of the trade of news print and
more than 60%of printing and writing paper are controlled by 4 to5 nations on either

51
side of the transactions. Low per capital consumption of the south is the underlying on
either side of the transaction.

PAPER INDUSTRY IN INDIAN SCENARIO

During the First World War (1914-1918) the industry made a progress on
account of heavy demand but inconsequent years. Paper industry in India is little
over 100 years old. Initially it was started as cottage industry and later developed
in private and joint sector.

Now the government has inclined to develop the industry in public sector. The
growth may be studied in terms of installed capacity, production capital,
employment and literacy.

DEVELOPMENT OF PAPER INDUSTRY IN INDIA

According to historic records the first paper mill was set up in 1812AD. It was
only after 1870’s manufacturing of papers gain momentum with the establishment of
“ROYAL BASE PAPER MILL” at Holly which was later merged with Tita ghar
paper mill from than words the production of paper has been constantly demand of
paper 1 the country.
At present about 288 mills are in function with over all installed capacity of
2450lakh tones. Out of this huge amount of production capacity 40%of the production
is from small-scale mills and only 2mills are given under taking.

Only 47 mills have an annual installed capacity of 10000 tones. According to

recent survey India was in back seat its comparison of America, Canada, Sweden and
Japan India is in back seat because of large population and high literacy.

PER CAPITA CONSUMPTION OF PAPER IN INDIA

According to Arun gosh paper per capital consumption may be regarded as an
index of country’s cultural, educational and economical level. Per capital
consumption depends upon developments, per capital depend upon development in
the industrial production national income, literacy and growth of population.

52
 Presently India’s per capital consumption of paper is around 5kg in
comparison to 18kg USA 32kg and world average of 47.7kg.

PER CAPITA CONSUMPTION OF PAPER IN INDIA

YEAR CONSUMPTION (KG)

1951 0.46

1961 0.87

1970 1.40

1980 1.39

1985 1.76

1990 1.29

1995 2.20

1999 3.40

2000 5.00

2005 6.50

PRESENT INDUSTRY POSITION

Paper industry is fragmented with a capacity of mills ranging from less than
10T to 600 TPD. There are 380 paper mills, which lakh are producing paper in our
country. The rate of growth of paper is around 5% per annum.

The overall installed capacity of is around 44 lakh tones while the production
is around 32.5 lakh tones. Out of which 29-lakh tones are paper and paperboard and
3.5 lakh tones comprises of newsprint. Raw Materials being used by the paper mill
around 37% of the production are dependent on wood, 31% depended on agro and
remaining 32% is depended on upon waster paper.

53
 According to Hindu Survey of Indian Industry 1997 it was mentioned that
around 3.0 kg. is likely to go up to 4.0 kg. by the year 2000. The demands for paper
and various paper products are likely to increase to 67.5 Lakh tones by the year 2005.

Indian Paper Industry

Paper and Paper Board News Print

Stand Board Glazed

Cultural Industrial Board Speciality

Writing Printing wrapping packaging

Indian Industry produces all the above types of papers. The number
of mills producing various products is clearly explained in given table.

Product No. Of units TOTAL

OPEN CLOSE

Board 43 7 50

Cultural 136 41 177

Industrial 165 21 186

Special 12 3 15

It is quite clear from the above table that out of all different types products
available in the Indian paper industry, industrial paper is most after product after
product, and is being produced by large number of paper mills.

54
PAPER INDUSTRY IN ANDHRA PRADESH

AP is the 5th largest and 4th population state in India. AP ranks as the 10th
literacy. AP obtained the cheapest subsidy i.e. 14.05 crores in 1986-87 under the
scheme of decentralization. Paper mills are well dispensed with every alternative
district has at least one unit.

AP is the most developed states I terms of paper production .It is often

provided excellent platform for the development of paper mills. The state now
contains 21 paper mills scattered all over the state. It place 5th position of paper mills.

In AP 15 mills out of 21 mills, which are remaining has been expectation of

work excellence, as they remained close these days. AP stands second in terms of
installed capacity. The installed capacity of AP is 4.43Lakh tonnes per annum.

The different mils situated in AP and then installed capacities are clearly
mentioned below.

55
 LIST OF PAPER MILLS IN AP
Sl. NAME LOCATION CAPACIT
NO Y (TPA)
1 M/S CHARMINAR PAPER MILL LTD MEDAK 3000

2 M/S CIRCAR PAPER MILL LTD NELLORE 10000

3 M/S COASTAL PAPER MILL LTD KADIAM 10000

4 M/S DELTA PAPER MILL LTD VENDRA 18000

5 M/S GUARDIAN PAPER MILL LTD BAMMURU 10000

6 M/S ITC-BHADRACHALAM PAPER BOARD BHADRACHALAM 83923

MILL LTD

7 M/S JYOTHI CELLULOSE LTD MEDAK 2700

8 M/S KOLLERU PAPER MILL LTD ELURU -

9 M/S PENNAR PAPER MILL LTD 10000

CUDDAPH
10 M/S RAYALASEEMAPAPER MILL LTD KURNOOL -

11 M/S ROLEX PAPER MILL (P) LTD PALAKOL 6500

12 M/S NAGARJUNA PAPER MILL LTD PATHANCHERUVU 10000

13 M/S SANDEEP PAPER MILL LTD PATHANCHERUVU 4950

14 M/S SHREE PAPER MILL LTD RANGAMPETA 4000

15 M/S SRI LSP LTD BODEN 15500

16 M/S SURYACHANDRA PAPER MILL LTD MANDAPETA 6000

17 M/S APPM RAJAMUNDRY 101447

18 M/SSRI SIRIPUR PAPER MILL LTD SIRIPUR 71000

19 M/S TELANGANA PAPER MILL LTD KHAMMAM 10000

20 M/S VAMSADHARA PAPER MILL LTD SRIKAKULAM 7500

56
 YEAR PRODUCTION (IN LAKHS)

2002-03 79.00

2003-02 113.50

2004-05 284.50

2005-06 434.12

2006-07 623.40

So it is clear that the leading paper machines in terms of production are the
APPML and ITC-BPBL will no doubt make up AP the leader in production of paper
in India.

PAPER INDUSTRY IN W.G.DT

In the early 1970’s when country was faced with a paper famine, the
government adopted a policy of encouraging small paper mills because of short
generation period, the use of cheap and second hand machinery readily available in
foreign countries.

W.G.Dt. is considered as Rice Bowl of AP70% of population in the district

depends upon primarily on Agriculture for livelihood.

Since the small paper mills are agro based ones, like straw, because, jute stalks
for making paper; there was a lot of potentiality for paper industry in the district.
Today there are 3units existing in the district.

 M/S DELTA PAPER MILL LTD

 M/S ROLEX PAPER MILL LTD
 M/S GOWRIPATNAM PAPER MILL LTD

All these units are agro based industries. More over these units are
incorporated as small paper mills with an installed capacity of about 10 to 20 TPD.

57
NEWS PRINT CONSUMPTION

 The country first news print factory at NEPA Nagar with a capacity of 3000
tonnes per annum began production in 1956.

 Mysore paper mill in Karnataka and Hindustan paper mill in Kerala with
installed capacity of 75000&80000 tonnes per annum.

58
PAPER INDUSTRY IN INDIA AT A GLANCE
SL.NO. NAME OF THE STATE UNITS INSTALLED PRODUCTION
CAPACITY

1 ANDHRA PRADESH 21 4.106 2.173

2 ASSAM 04 2.208 1.084

3 BIHAR 08 0.915 0.024

4 GUJARAT 45 2.743 1.673

5 HARYANA 17 1.496 1.110

6 KARNATAKA 15 1.933 1.770

7 JAMMU&KASHMIR 01 0.033 0.009

8 HIMACHAL PRADESH 13 0.094 0.215

9 KERALA 03 0.393 -

10 MADHYA PRADESH 15 1.813 0.991

11 MAHARASTRA 52 4.677 3.555

12 NAGALAND 01 0.030 0.218

13 ORISSA 07 2.136 -

14 PUNJAB 17 1.378 0.820

15 RAJASTAHAN 09 1.433 0.064

16 TAMILNADU 21 2.051 1.616

17 UTTAR PRADESH 58 3.120 2.092

18 WEST BENGAL 21 2.051 1.616

19 CHANDIGARH 01 0.030 0.016

59
FUTURE PROSPECTS OF INDUSTRIES IN INDIA

Paper demand in the country is bound to grow at a fast pace as the economy is
growing at about 4 or 5%annually and the middle-income group is expanding day to
day. India has one of the lowest per capital consumption of paper at meagre 2.1kg
compared to 20kg in Japan. Therefore the most studies on the paper industry have
concluded that paper demand would grow at fast pace. Hence to meet this need or
demand the changes must be brought into the paper industries. It is said that
government must take good policies

To increase to production quantity and quality of the product more and more
good technology must be imported new capacity have to be created and old capacity
must be modernized.

60
 COMPANY PROFILE

AKULA BOARDS LIMITED

Akula Boards Limited is a private limited company with registered office

at P.B.No-35-35/1, Tanuku, West Godavari district, Andhra Pradesh. The company is
promoted by Sri. A.G.V.V.N Satyanarayana, Smt.A.Vani Kumari, Sri Ch. Ravinder,
Sri K.Govind Rao and Sri T.Subrahmanyam. Sri. A.G.V.V.N Satyanarayana is the
chief promoter and is the Managing Director of ABL. ABL appointed Sri
D.V.Ramana as their Technical director and to assist them in various technical
matters.

Akula Boards Limited (ABL) was established in the year 1998 to

manufacture the Writing and Kraft Papers of different cultural varieties such as Cream
wove, Deluxe Cream Wove, Azur Wove, Azur Laid, and News Print. The Company
Raw Materials like Rosin, Alum, Dyes and other chemicals.

The main objective of the Company is to purchase quality raw materials

and to supply best quality paper to its customers. It also provides employment
opportunities to local people.

It has gone into the actual commercial production in April 2006.The

capital investment put into this was a total of Rs.1619.24 lakhs from all sources. From
then onwards there has been an advent of golden era for the establishment, unhindered
hard work, keeping on track with the technological innovations, and proper
management has seen to that the company achieves rapid growth. It stands today as
one of the most progressive industries in the district with a turnover of 52 to 60
Tonnes

The installed capacity of the proposed paper mill is 10000 Tonnes per
year based on working of 3 shifts per day and 300 days per year.

ABL identified reputed machinery i.e.S.P.Engineers (SPE) for supply

of the main equipment to various plants in similar line i.e. writing paper, Kraft paper
etc...

61
 The demand for paper is cyclical and this cycle has been on a global up trend
since early 2003.The demand for paper is influenced by various macro economic
factors like national economic growth, industrial production, promotional
expenditure, population growth and the Governments allocation for the educational
sector.

PROMOTERS BACKGROUND:

ABL is promoted by Sri A.G.V.VC.N Satayanarayana,

Smt.AVanikumari, Sri Ch.Ravinder, Sri K.Govindrao and Sri T.subrahmanyam.

Sri A.G.V.V.N. Satyanarayana:

Sri Satyanarayana is a commerce Graduate aged about 43 years and he is

young and dynamic. Sri Akula Ganapathi Vera Venkata Naga Satyanarayana is a
well known personality in the west Godavari district having various interest in
business such as Film Theaters,Hotel,Film Distribution,Construction,Real Estate
Development and Rice milling. He was the president, District co-operative central
bank, Eluru from 1995 to 2004.During his tenure as president of the said bank has
bagged the award for the performance in co-operative sector at national level from
NABARD.

He is the force behind the promotion of ABL and he wills take policy
decisions of the company in the capacity of Managing Director. He will look after the
day-to-day transactions of the company with the help of technical and managerial
person’s .He is having wide contracts with industrialists, farmers and businessmen of
West Godavari, East Godavari and Krishna Districts.

SMT.A.VANI KUMARI:

Smt, Vani Kumari aged about 39years wife of

SRI.A.G.V.V.N.Satyanarayana is also a Graduate and she is Managing Director of
Ravi raj Enterprises private Limited and Akula construction Limited .She is the
Chairperson of the Vani Co-operative Urban Bank Ltd; Tanuku. She is capable of
handling administrative affairs of the company and she will look after administration
of the company.
62
SRI CH, RAVINDER:

Sri Ravinder aged about 43years is a graduate in Business

Administration and he is young and dynamic .He is basically a builder and real estate
developer in Hyderabad .He has successfully completed various commercial and
residential real estate development ventures in Hyderabad.

SRI K.GOVIND RAO:

Sri Kotikalapudi Govind Rao aged about 30years is businessman from

Bhimavaram having interests in exhibition of motion pictures and contractor for
mining department. He is the managing partner of Natraj Theatre, Bhimavaram.

SRI T.SUBHRAHMANYAM:

Sri.Subrahmanyam aged about 45years is an agriculturist from Tanuku town and is

having good contacts with farmers of the area.

BOARD OF DIRECTORS:

A.G.V.V.N.SATYANARAYANA MANAGING DIRECTOR

A.VANI KUMARI DIRECTOR

K.GOVINDA RAO DIRECTOR

D.V.RAMANA TECHNICAL DIRECTOR

MEANS OF FINANCE:

ABL is proposed to be set as under. The following proposed means of finance:

Share Capital Rs.544.24 lakhs

Term loans from SBH Rs.1075.00 lakhs

Total Rs. 1619.24 lakhs

63
 The promoters and associate propose to bring in Rs.554.24 lakhs
towards equity participation.ABL seeks term loan assistance of Rs.1075.00 lakhs
from SBH.The promoter’s contribution which works out to 33.61% is considered
reasonable.

DEBT: EQUITY RATIO:

Promoters contribution Rs. 544.25 Lakhs

Debt Rs. 1075.00 Lakhs

DER of 1.97:1 is within the acceptable norms of the bankers.

Departmentation:

Plant engineer is responsible for the entire production activities. The function
of plant engineer is to rectify mechanical defects, to make machinery running
smoothly and their maintained and co ordination of production activities. Plant
engineer is maintaining his functions which two assistance i.e., department in charge
and the supervisor. Each part of production section is under control of section in
charge, directly to plant engineer.

PRODUCTS MANUFACTURED

The products of ABL are as follows:

 Cream Wove
 Deluxe Cream Wove
 Azur Wove
 Azur Laid
 News Print.

64
 MARKETING STRATEGY

ABL proposes to market their products at a slightly reduces prices

compared to the established companies for easy penetration into the market. The
existing market prices and the projected selling prices are given below.

Product Estimating market Project Selling Price of

price (Rs.Tons) ABL (Rs.Tons)

Cream Wove ordinary 27,500 to 28,000 26,000

Delux Cream Wove 30,000 to31,000 27,500

News Print 21500 to 22,000 20,500

ABL proposes to appoint dealers in various locations for marketing the

products.

65
 MANUFACTURING PROCESS

The pulp and paper making process is based on establish technology.

PROCESS FLOSHEET FOR THE MANUFACTURE OF

WRITING, PRINTING&NEWS PRINT PAPER

The entire paper manufacturing process can be broadly classified into distinct
operations like waste paper pulp making, paper making and finishing.

Waste Paper Pulp making:

66
 Waste paper, as per the quality of the paper required to be manufactured, is charged
to Hydro pulper along with waste and chemicals to make homogenous slurry called
pulp. The proportions of waste paper imported and the indigenously available waste
are appropriately mixed depending on the quality of the product. The pulp is passed
through a high density cleaner for removal of heavy impurities and then passed
through coarse screening system to remove plastics and other impurities. The coarse
screened pulp having consistency of 2% is thickened and stored in a chest. pulp is
then passed through a kneading system at higher consistency around 30% where
bleaching chemicals are also added .The kneaded pulp is then sent to floatation
deinking plant for removal of ink from pulp. Pulp is then passed through fine screens
for further removal of impurities pulp is then washed and stored in a storage chest.

Paper Making:

The pulp derived from the pulping process is diluted to 0.50 to 1%

consistency and then fed to the paper machines. The pulp slurry flows into the head
box of the paper machine and then distributed on a moving endless wire mesh for
dewatering the slurry and to form a layer of wet sheet of required gram mage .The
stock leaves wire as a web of paper with a dry solid content of 20%.

The paper web is then passed through the press section where the web is
passed between number of press rolls to squeeze out of the water .Dry solid content
of about 95% is accomplished by pressing the paper web against steam heated drying
cylinders. After the dyer section the paper is calendared to give final surface
characteristics. The paper is rolled into jumbo rolls. The manufactured paper is then
cut /rolled depending on the final requirement.

Finishing:

The parents reel which are wound on paper machine pope reel are rewound
on a reminder for small reels as per the market orders .The reels are loaded on to a
Sheet cutter for commercial sheets .The reels/sheets are packed and dispatched to
market.

67
 INFRASTRUCTURE&UTILITES

1. Raw-Materials:

The major raw-material for paper manufacturing is waste paper .The required
quantity is available from various dealers in Rajahmundry, Kakinada, Vijayawada,
Visakhapatnam, Hyderabad and Chennai. The other inputs like Rosin, Alum, Dyes
and other chemicals are also available without any problem at Rajahmundry and
Vijayawada .Imported waste paper and indigenous waste paper is selected as per the
quality requirements of product. On an average, the imported waste paper accounts
for 40% of the raw materials and the balance being sourced from the waste paper
available indigenously. About 13% wastage of raw material is assumed during the
process of manufacturing.

2 .Power:

Electrical power shall be obtained from the Easter power Distribution

company of Andhra Pradesh ltd. from nearby sub-station .The promoters purpose to
acquire Diesel Generator set or required capacity to have uninterrupted power supply
for smooth and continuous operation of the plant. Power requirement is 700 Kw/ T of
paper produced .The Eastern power Distribution Company of Andhra Pradesh Ltd.
has sanctioned for supply of 600 KVA power. Cost per unit of power is Rs.4.30

3 Fuel:

East and west Godavari Districts are major rice growing districts of Andhra
Pradesh and paddy husk is available in plenty in these districts. ABL purposes to
install a fluidized bed boiler, which is capable of handling paddy husk also as fuel.
However ABL can also obtain coal from singareni collieries Ltd as an alternative fuel.
The steam requirement is 2T/T of Paper produced.

4. Water:

The fresh water requirement for this unit is very much less, since the process
selected is recycling process. About 80% of water can be recycled in this process.
Water table in this area is very high and total required water can be obtained from two
bore wells available in the site itself.

68
5. Transportation &other facilities:

The factory site is located near National Highway NH-5, connecting Chennai
and Calcutta and is about 40 kilo Meters from Rajahmundry and 70 kilometres from
Eluru towns .Both Rajahmundry and Eluru are well connected by Rail to other
places of the state and also other parts of the country.AS such there in no problem of
communication and transportation.

6. Effluent Treatment and disposal:

ABL does not envisage problem/in disposing the mills effluent without contending or
polluting any public sources, since the proposed process is recycling process .The
small quantity of the effluent, which comes out of the mill will be neutralized and
used for the plantation inside the factory premises.ABL has already obtained the
consent from APPCB vide NO.3281/PCB/20-VSP/Tech-2005-408 dated 28.05.2005

7 .Manpower:

Rajahmundry, Uluru and Bhimavaram are major towns nearer to the unit.
Since the places are industrially developed areas, technical and skilled people are
available without any difficulty.ABL proposes to engage the services of-personnel at
various levels for smooth operation of the company.

ABL proposed to employ 31 skilled personnel and 52 semi skilled personnel.

A part from this ABL shall also employ about 48 casual labours. The proposed
manpower arrangements are considered adequate.

SHIFT TIMINGS

1st Shift 6.00 A.M.to 2.00 P.M

2nd Shift 2.00 P.M. to 10.00 P.M.

3rd Shift 10.00 P.M. to 6.00 A.M

General Shift 8.30 A.M. TO 5.30 P.M.

69
WAGE ADMINISTRATION IN ABL

Sino Description No Monthly Bill

A Skilled Labour
A Pulp mill operators 4 14000
B Paper Machine 4 14000
C Remainder /Sheet cutter operators 3 7500
D Boiler operators 3 7500
E Mechanical Filters 7 17500
F Electricians 7 17500
G Laboratory Technicians 3 6000
B Semi Skilled Labour
A Pulp mills Asst. Operations 7 12600
B Paper machine Asst.Operations 12 21600
C Conversion Section Asst.Operations 3 5400
D Boiler Asst. Operations 4 7200
E Finishing & Packing 8 14400
F Engineering Helpers 12 21600
G Watch & Ward 6 9000
C Casual Labour 48 72000
Sub Total 247800
Add benefits@20% 49560
Sub Total 297360
Grand Total of Wages/Year(Rs.In Lakhs 35.68

FINANCIAL DEPARTMENT

Though the company was started with the initial share capital with 544.24
lakhs and it consists of reserves and surplus with the amount of 372.97 lakhs. In the
year 2009-2010the Company got net profit 96 lakhs.

And it is having 204,359,576 fixed assets and 1 13,349,130 current assets till
2009-2010 and the country consists current liabilities 64,102,232.

70
 So the company has the working capital 468.17 lakhs in the current year. The
company has following financial institution that is State Bank of Hyderabad, Tanuku.

No specific impact has taken place because of depreciation of rupee on the

financial position of organization. The finance department has been with for pro and
other language especially with the package of Tally9.0

The company disposes its profits in to two types:

 Inform of surplus and reinvestment

 20 per cent bonus to the worker.

71
 PROJECT COST
SL.NO Particulars Amount( In Lakhs)
1 Land and Site Development
A Cost of 13.08 AC Of land 35.00
B Land Development Charges 15.00
C Internal Roads and approach roads 10.00
Sub Total 60.00
2 Buildings & Civil works
A Main building for pulp making and paper manufacture 150.00
B Waste paper god own 25.00
C Boiler house 10.00
D Time office, Rest room, canteen etc 8.50
E RCC, tanks and chests 40.00
F Machine foundations 28.00
G Fiber recovery and effluent treatment system 9.00
H Building electrification and lighting 2.50
I Cable trenches and drains 7.00
J Compound wall 6.00
K Main gates and other gates 1.00
Sub Total 287.00
3 Plant &Machinery
A Waste paper pulping and approach flow system 150.00
B Paper machine 414.00
C Auxiliary equipment for paper machine 20.00
D Chemical preparation plant 6.00
E Water supply and distribution system 6.00
F Fluidized bed boiler and steam piping 60.00
G Piping and fitting 20.00
H Paper conversion section 50.00
I Electrical items such as motors, switch gear etc 180.00
J Taxes, transport, insurance etc 90.61
K Erection& commissioning 30.61
Sub Total 1026.61
4 Other Fixed Assets
A Office furniture and others 4.00
B Vehicles 6.00
Sub Total 10.00
5 Preliminary &Preoperative Expenses
A Company incorporation expenses 8.00
B Project Report 4.00
C Technical &Engg. Services 10.00
D Interest during construction 39.42
Sub Total 61.42
6 Deposits
A Elec. Deposits 20.00
B Telephone Deposits 0.50
C Other deposits 4.00
Sub Total 24.50
7 Contingencies (4% on civil works and plant &machinery) 52.54
8 Working capital margin 96.88
Grand Total 1619.24

72
SWOT ANALYSIS OF ABL:

STRENGTHS

1. Promoters have several years of experience in business and are resourceful

well known is business circles and have vide contacts with farmers.
2. Appointed an experienced Technical Director to help the company in all the
technical matters, who has executed the following paper mills since 1991:

a) Imami paper mills Ltd, Bangalore-70 TPD

b) Sri Rama Lingeswara paper boards (P) Ltd, Dwarapudi-20 TPD
c) Vinayaka paper &Boards, Kanararam-20 TPD
d) Sri Rama Chandra paper Mills Ltd, Yeditha-50 TDP
e) Rajahmundry paper mill Ltd, Parigali peta -25 TDP

3. The proposed process is based on waster paper recycling and hence does not
have the environmental problems as in the case of a grass-root plant i.e. starting
from wood pulp.

WEAKNESS

Promoters by themselves do not have experience in the proposed

line.ABL has already taken steps in appointing a competent. Technical Director to
overcome this weakness.

OPPORTUNITY

Paper is industry is on a comeback trail .Demand for upstream market

for market for paper products such as tissue paper, tea bags, fitter paper, light weight
coated paper etc is growing up. These developments are expected to give fillip to the
industry.

THREATS

In view of the encouraging demand, several leading players have

already announced expansion.ABL is expected to face this threat and compete in the
market. In view of low capital costs and also since it is based on waste paper

73
recycling, ABL is expected to stand up to this competition in the market.ABL
proposes to market their products at a slightly lesser prices compared to the
established players for penetration in to the market.

APPRASIAL CONCLUSIONS:

Appraisal of Capabilities of Promoters:

The Promoter Directors have rich in managing various business

enterprises successfully. They are resourceful. The promoters identified a Technical
Director to help them in all the technical matters and for implementation of the
Project.

Technical Appraisal:

The proposed process of manufacture is an established one. The

proposed civil works, plant and machinery, equipment have been design to suit the
proposed capacity. The estimates quotations submitted by the company are found to
be reasonable based on the prevailing market conditions. A majority of the equipment
is going to be supplied by SPE and suitable performance guarantee may be obtained
by SBH

Appraisal of Raw material availability:

The main raw material waste paper is available from various dealers.
Imported waste paper is also available from various local dealers. As such no problem
are envisaged in procuring the required raw materials. Other chemicals such as alum
and rosin are also available in domestic market from various dealers.

Financial Appraisal:

The Debt: Equity ratio works out to 1.97:1 which is as per the acceptable norms
of bankers. The project yields an IRR of 23% which is higher than the normal market
IRR for this type of project. The average DSCR for the project works out to 1.82,
which is above benchmark of 1.5.Further the project generates surplus for the
repayment of term loan and working capital along with interest thereon.

74
 COMPANY PROFILE AT A GLANCE

Name of the Company : Akula Boards (P) Limited

Address : Mandapaka Village, Tanuku

Date of Incorporation : 31st March 1988

Date of commercial production : April 2006

Promoters : Sri A.G.V.V.N.Satyanarayana

Smt A.Vani Kumari

Sri Ch.Ravinder

Sri K.Govinda Rao

Sri T.Subramanyam

Proposed Line of Manufacture : Writing Paper from waste paper recycling

Installed Capacity : 10,000 Tons/Year

Existing Line of Manufacture : Nill

Man Power : 131

Shifts : 3 shifts

Production Capacity : 30 tons per day

Power consumption : 700 units

Total Project Cost : 1619.24

Assistance sought from SBH : 1075

Bankers:

SBH [STATE BANK OF HYDERABAD]. TANUKU

75
Auditors:

M/S: CHOWDARY&RAO [VIJAYAWADA]

FACTORY AND REGISTRATION OFFICE:

MANDAPAKA-P.B.35-35/1,TANUKU-534211

WEST GODAVARI DISTRICT,

ANDHRA PRADESH.

Sales Centres:

Andhra Pradesh, Karnataka, Tamilnadu

76
CHAPTER-4

77
 DATA ANALYSIS AND INTERPRETATION

PAYBACK PERIOD:

The key steps involved in determining whether a project is work while or

not are estimate the cost and benefits of the project. Firstly we have to assess the
riskiness of the project, then calculate the cost of capital and compute the criterion of
merit and judge whether the project is good or bad.

The payback period sometimes called as payout or payoff period methods.

Represents the period in based on the principle that every capital expenditure pays
itself back within certain period out of the additional earnings generated from the
capital assets thus it measures the period of time for the original cost of project, to
recovered from the additional earnings of the project itself under this methods various
investment are ranked according to the length of their payback period in such a
manner that the investment with a shorter payback period.

78
Projectcost1619.24lakhs

Year Profit after tax Depreciation Net cash Cumulative cash

accruals accruals
2012-2013 390.39 66.97 457.36 45736.
2013-2014 375.26 66.97 442.23 899.59
2014-2015 360.62 66.97 427.57 1327.16
2015-2016 342.13 66.97 409.10 1736.26
2016-2017 1351.35 66.97 1418.32 3154.58

Payback period = year before full recovery + (unrecovered

amount of investment/cash inflow the year)

= 3+ (1619.24-1327.16)/1736.26

= 3+0.16 = 3.16years

INTERPRETATION:

It is assumed that the profit earning of the project will start from 2014-
15. Taken consideration of (incremental adjusted cash flow) i.e. expansion. Base
years, for calculation PAY BACK PERIOD.

 Estimated profits are taken from the data provided.

So the projected payback period is calculated as 3.16 years.

We should increase this period with same exception as there May be any
additional factor and other cause so rounding of 3.16 to 5 years will be right, so that it
will give more assistance to the calculation.

79
AVERAGE RATE OF RETURN

The accounting rate of return or average rate of return on investment is a measure of

0profitability, which relates income to investment both measured in accounting terms.

Projectcost 1619.24lakhs

Year Profit Depreciation Net cash Cumulative cash

after tax accruals accruals

2012-2013 390.39 66.97 457.36 45736.

2013-2014 375.26 66.97 442.23 899.59
2014-2015 360.62 66.97 427.57 1327.16
2015-2016 342.13 66.97 409.10 1736.26
2016-2017 1351.35 66.97 1418.32 3154.58

Averagerateofreturnoninvestment=Averageannualprofit/Averageinvestment*100

Average annual profit = Total cash inflows/number of years

= 3154.58/5

= 630.91

Average investment = original investment/2

= 1619.24/2

= 809.62

Average rate of return on investment = 630.91/809.62*100

= 77.92%

Accountingrateofreturn=Averageannualprofit/originalInvestment*100

=630.91/1619.24*100

=38.96%

INTERPRETATION:

It is more calculation taking total profit and taking average of it. It

show the return on an average as what an average income of the firm on Long run
basis with certain assumption 38.96% for any firm at long run is good but there must
be some increase in the future.

80
NET PRESENT VALUE

The net present value method is a modern method of

evaluating investment proposals. This method takes into consideration the time value
of money and attempts to calculate the return on investment by introducing the factor
of time element.

Projectcost1619.24lakhs

Year Profit Depreciation Present Cash Present Value

after tax Value factor Flow Cash Flows
12%
2012-2013 390.39 66.97 0.797 457.36 364.51
2013-2014 375.26 66.97 0.711 442.23 314.42
2014-2015 360.62 66.97 0.635 427.57 271.50
2015-2016 342.13 66.97 0.567 409.10 231.95
2016-2017 1351.35 66.97 0.506 1418.32 717.66

NPV = Present Value of Cash inflow – Present value of the cash outflow

= 1900.04-1619.24

= 280.80

INTERPRETATION:

It is the factor of Re.1 calculation at the end of the year. It will be

Value of Re.1 at the end of the year which is based interest rate, cost of Capital and
market state which is called as discounted rate to get an Discounted rate to get an
approximate decision. It should be taken in every calculation of project so that an
approximate. Decision can be taken. As it is more reliable the simple cash inflows
(profits)Net present value is less than the zero. Hence the expansion of project has
accepted. That means

NPV > 0

81
INTERNAL RATE OF RETURN

Internal rate return can be defined as that rate which equates the present value
of cash inflows with the present value of cash outflows of an investment proposal. It
is the rate at which the net present value of investmental proposal is zero.

Discount Rate is taken as 12%

Year Profit Depreciation Present Cash Present Value

after tax Value factor Flow Cash Flows
12%
2012-2013 390.39 66.97 0.797 457.36 364.51
2013-2014 375.26 66.97 0.711 442.23 314.42
2014-2015 360.62 66.97 0.635 427.57 271.50
2015-2016 342.13 66.97 0.567 409.10 231.95
2016-2017 1351.35 66.97 0.506 1418.32 717.66

NPV = Present Value of Cash inflow – Present value of the cash outflow

=1900.04-1619.24

= 280.80

82
 Discount rate taken as 23%

Year Profit Depreciation Present Cash Present Value

after tax Value factor Flow Cash Flows
23%
2012-2013 390.39 66.97 0.660 457.36 301.85
2013-2014 375.26 66.97 0.537 442.23 237.47
2014-2015 360.62 66.97 0.436 427.57 186.42
2015-2016 342.13 66.97 0.355 409.10 145.26
2016-2017 1351.35 66.97 0.288 1418.32 408.47

NPV = Present Value of Cash inflow – Present value of the cash outflow

=1279.44-1619.24

= -339.80

Internal Rate of Return= A+C-0/C-D (B-A)

1900.04-1619.24

= 12+ ------------------------- (23-12)

1900.04-(-339.80)

= 12+ 280.80/2239.808 * 11

= 12+0.12(11)

= 13.32%

INTERPRETATION:

In this calculation, is done on the basis of Company information. Thus why

taking various percentages of present value factors. Hence an appropriate percentage
of Internal Rate of Return can be judge out. Calculated figure is 23%, at
market Uncertainty. The IRR is having less difference hence the expansion of project
has accepted. That means IRR=339.80

83
PROFITABILITY INDEX:

Profitability index method is used to evaluate the investment

proposal. It is the ratio of the present value of cash inflows, at the required rate of
return, to the initial cash out flows of the investment.

Project cost 1619.24 lakhs

Year Profit Depreciation Present Cash Present Value

after tax Value factor Flow Cash Flows
12%
2012-2013 390.39 66.97 0.797 457.36 364.51
2013-2014 375.26 66.97 0.711 442.23 314.42
2014-2015 360.62 66.97 0.635 427.57 271.50
2015-2016 342.13 66.97 0.567 409.10 231.95
2016-2017 1351.35 66.97 0.506 1418.32 717.66

Profitability Index = Cash Inflow/Cash Outflow

= 1900.04 /1619.21

= 1.17

INTERPRETATION:

In calculation of P.I. simple income is taken into

consideration that’s why P.I =1.17. P.I and it will be more reliable than old traditional
approach.

Profitability Index is greater than the one. Hence the expansion of project has accept
That means

PI > 1

84
CHAPTER-5

85
 FINDINGS

 It is found that project completion cost is estimated to be Rs 1619.24lakhs.

 It is found that company using straight line method (SIM) for depreciation.

 It is found that by calculating the payback period of the company project was
4 years &4 months.

 It is observed that by calculating average rate of return the average income of

the company is 38.96% & it was not in a satisfactory position.

 It is noticed that by calculating the net present value of the project is positive
then the value of the capital.

 It is observed that in profitability index method the company project is more

than 1 time return on investments.

 It is found that the company has maintaining Debt –Equity Ratio 1.97:1& it
is good ideal ratio.

 It is identified that the company fixed assets are not maintain properly.

86
 SUGGESTIONS

 It is suggested to the company to reduce the payback period by

concentrating on the short term funds& investments the money in the
liquidity Assets.

 It is recommended to the company to reduce their interest rates to increase

their incomes

 It is advised to the company to accept the project by considering Net present

value profitability Index because it shows an positive value..

 It is suggested to the company to maintain the some level of Debt – Equity

ratio for the future accepts.

 It is suggested to concentrate on fixed assets.

87
 CONCLUSION

In the present study I have analyzed the Capital Budgeting of Akula Boards
Pvt.Ltd. The study involves practical and conceptual over view of decisions
concerning current assets like cash and bank balance, inventories (like raw materials,
finished goods), sundry debtors, loans and advances, other current assets and current
liabilities like sundry creditors, securities and other deposits, other current liabilities
and provisions of Akula Boards Pvt.Ltd. Was with the objective of maximizing the
overall net profit of the bank. And complete synchronization and coordination among
the Capital Budgeting components which shall contribute to optimum level of
operations. Mismanagement of each or any of these components shall be detrimental
to the objectives of efficient operation, profitability and maximization of overall value
of the bank. The Capital Budgeting limits would be considered only after the project
nearing completion and after ensuring control over the inventory. The inventory is a
great concern for Akula Boards Pvt.Ltd and it needs proper procurement and
management.

88
 BIBLIOGRAPHY

NAME OF THE BOOK NAME OF THE PUBLISHER

AUTHOR

FINANCIAL MANAGEMENT I.M.PANDEY VIKAS PUBLISHING

HOUSE PVT.,LTD.,

FINANCIAL MANAGEMENT KHAN & JAIN TATA MC GRAWHILL

FINANCIAL MANAGEMENT PRASANNA CHANDRA TATA MC GRAWHILL

OTHER SOURCES:

Annual Reports of Akula Boards Limited (ABL)

Web site

www.google.com

89