Chapter 5

Performance Evaluation of Investment Decisions

The evaluation of the investment decisions is done by using two techniques

or tools. They are i) post-audit, and ii) post-performance evaluation. The main

objective of employing these tools is to ascertain the extent to which the actual

benefits accruing from a project are consistent with the expected or anticipated

benefits.1 However, a succinct difference could be seen among these two

concepts. A peep into the concept behind each tool or technique would help to

know the difference.

Kohler defines post-audit as, an audit at some point after the occurrence of

a transaction or group of transactions." Murdick and Deming viewed post-audit

as a check on whether the planned benefits are being realised after the project

has been operating for some periods of time.' According to Donald Istvan post-

audit of capital expenditure project is a study made to ascertain the actual

performance results to compare these results with those projected in the proposal

and to take action regarding any difference between the two.

The objectives of post-audit are:

> to assess the economic integrity of the project's actual operations vis-a-vis

the expected operations;

r to signal the gaps between actual and intended results in the form of

variance;

> to analyse the variance; by causes and if necessary, by responsibilities; and

> to initiate corrective action to bridge the potential gap between the expected

results and the actual results for the remaining useful life of the project.

I 17

The definitions and objectives of post-audit vividly indicate that the timing

has to be necessarily alter the project is completed and commercial production and

marketing has begun and a fiscal period, or some other relevant unit of time, has

lapsed.

The concept and objectives of performance evaluation are more or less

similar to post-audit. Yet there is a difference. While the post-audit is a typically

one-time execution, performance evaluation is done periodically. Performance

evaluation seeks to measure the performance of the project on an ongoing basis.

Both are expos! analysis techniques. They may not, of course, help in

undoing the past mistake but may help in preventing the history from repeating

itself by a careful analysis of the deviation of actual from planned performance.

Regular expos! analysis of capital projects:

i) provides a documented log of experience that may be valuable in

improving future decision-making;

ii) enables the firm in identifying individuals with superior abilities in

planning and forecasting;

iii) helps in discussing systematic biases in judgement;

iv) serves as a useful training ground for promoting executives, who need

broader business experience and exposure.

The spinning mills under study do not undertake post-audit or performance

evaluation of the capital expenditure decision. They can do such exercise as they

have an internal audit section and statistical quality control division. Yet they do

not do such an exercise for: i) they are more concerned with day-do-day affairs

of the organization; ii) funding agencies do not insist on such exercise; and

iii) the staff are busy with submission of other reports which the DHT insists.

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Yet, we make an attempt here to review the post-performance of capital

expenditure proposals mainly to analyse whether or not the mills could achieve the

target as specified in the proposals. The purpose is to ascertain the mills

performance against the forecast made and to draw the inferences which may

ultimately help in drawing lessons for the future guidance. We have selected

certain key variables for such analysis which include:

> Capacity utilisation > Production in quantity V Production in value > Cost of raw materials V Cost of labour > Cost of power and fuel r Factory over heads > Administrative and selling overheads > Sales in quantity > Sales in value > Gross profit "f Operating profit 'y Net profit > Debt-servicing capacity

Capacity Utilisation

The capacity utilisation helps to maximise the output in physical terms

obtainable from the given inputs under normal operating condition. It means

minimising idle hours and maximising productive activity to which the plan is

designed and efficient usage of men, machinery materials and money.5 Simply

stated it is the proportion of total capacity which has been gainfully utilized for the

production of required goods and services.6 Capacity utilisation is an important

indicator of the efficiency of operation of manufacturing enterprises.

Under-utilisation of capacity results in lower production, lower productivity and

high cost of production. This has a negative impact on sales and profit. On the

I I ' )

other hand fuller utilisation of capacity has a positive impact on production,

productivity, cost of production, sales and profit. For insatnce, every 10 per cent

increase in capacity utilisation is expected to bring an average saving in the

manufacturing cost to the extent of 3.5 paise per every spindle shift and it brings a

net saving of about one lakh rupees for a mill of 12,000 spindles and Rs.2 lakhs

for a mill of 25,000 spindles.

The ideal way to fully utilise the capacity is to work the mills for 24 hours a

day in three shifts, taking 7 days as paid holidays in a year. The mill should work

358 days with 3 shifts of 8 hours duration in a year; 95 per cent of the installed

spindle capacity calculated foi 358 days for 3 shifts of 8 hours each should be the

standard spindle utilisation for spinning mills.

The mill immediately after completion of investment proposals may not be

able to fully utilise the standard capacity of 95 per cent. It is likely to face

pressures especially in the areas of raw materials, labour, power etc. But, in course

of time, it has to necessarily operate at the standard capacity. Taking all these into

consideration, the anticipated capacity utilisation should be slowly enhanced year

after year. For instance, in the case of 'establishment' of a new mill the mill is

expected to utilise fully the standard capacity in the 6th year from the date of

commissioning of the project. In the case of 'modernisation' the mill is expected

to operate at the standard capacity of 95 per cent immediately after the completion

of the process of 'modernisation'. For 'expansion' too, the mill has to operate at

the standard capacity from the date of commissioning of the project.

A comparison between expected and actual capacity utilisation is

presented in table 5.1. The mill under 'establishment' category, except in the 4th

year, has never been able to realise the standard capacity. It has been operating

well below the capacity in nine out often years.

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The mill which lias gone in for "expansion' miserably failed to achieve the

target fixed. The variance between the "projected" and "actual" has been

consistently negative and the actual capacity is awfully low when compared to the

proposed capacity utilisation.

The mill which has gone in for 'modernisation' too recorded a negative

variance in many of the years under review. But then, the percentage of variance

was less than one in many years.

The reasons for not achieving the standard capacity utilisation are almost

the same in all the three cases barring the case related to 'expansion' where the

major causes were labour absenteeism and want of raw materials. The reasons as

cited by the mills are: power shortage, labour absenteeism, cleaning and

maintenance, want of back stuff, want of spares, repairs, change of counts. Other

causes for not working 24 hours are roller lapping, condolence, load adjustment,

and tap stitching.

Production

The cotton textile industry is a highly sophisticated industry involving the

use of the modem technology. Production of fabrics is dependent on the

production of yarn of the desired quality, which in turn is dependent on the

procurement of the desired quality of cotton. The number of hanks of yarn that

weigh one pound measures the fineness of yam. This is known as its count.

A hank is 840 yards long and so, for example one pound of number 10s count

cotton yarn would unwind to 8400 yards. Thus, numbers for yarn are based on

length per unit weight and are higher for fine yams rather than the coarse ones.

The breaking load of a cotton yam depends only to a minor extent on the intrinsic

strength of the cotton fibre. The important features are count and twist.

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The counts, to which a given type of cotton can be spun commercially, depend

mainly on its staple length. The long cotton yields the finest yarn.

Spinning is an operation of forming a continuous thread by twisting

together several overlapping fibres of filaments. Before the fibre is spun it is

cleaned, straightened, then the preliminary processes including carding and in the

case of finer varieties of yarn combing is also completed.

The operation process is briefly stated. The highly comprised cotton is

reduced to the greatest possible state of division and impurities are removed. The

fibre is formed into a rope or sliver. The slivers are drawn between rollers to

alternate them and are sometimes combed to arrange the fibre in parallel rows and

to increase the regularity of the material. Sufficient twist is inserted into the

alternated slivers by rowing to make the thread fine and firm.

The mills under study spin 20s to 80s counts of yam. The estimated

production as found in the project proposal for the mill under 'establishment'

categoiy has been slowly enhanced from 12.59 lakhs kg to 19.65 lakhs kg in the

5th year. In subsequent years, the production estimate has been stabilised at 20.29

lakhs kg. This is done in tune with the enhancement and stabilisation of estimated

capacity utilisation. A comparison between estimated production and actual

production shows negative variance indicating that the mill has never been able to

achieve the estimated production (except in the 4th year-). It must be noted that

the estimated production could not be achieved not because the estimates

are unrealistic; but because of other factors-the main factor being under

utilisation of capacity. The variation ranged between -0.66 per cent and -86.17

per cent over a period of 10 years (Table 5.2).

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The production estimates for the mill under 'expansion' category was fixed

at 8.65 lakhs kg. The estimate has been consistent and uniform for all years under

review. But then, the mill concerned has n ;ver been able to achieve the estimated

production in all the eight years under review. The variation was negative; and the

percentage of variation was irore than 50 per cent in all the years under review.

The estimated production for the mill under 'modernisation' category was

36.15 lakhs kg. The mill is a big one with a high spindleage capacity. Yet, it could

not achieve the projected production level. Though the variation was less than 10

per cent in many of the years under review, it increased steadily especially at the

latter part of the review.

Thus, the mills under study could not achieve the targets set and the

projections made and this resulted in low capacity utilisation.

Having made a comparison between the expected production and actual

production in quantitative terms, we will present an analysis of the variance

between expected production and actual production in terms of value.

The variance in the case of 'establishment' has been positive in all the years

except in the first year. The variance was very high in the 8th year where the

actual production value was Rs. 1167.07 lakhs against the estimated production

value of Rs.462.03 lakhs, the percentage of the variation being 152.59. The

percentage of variation was high in the subsequent years also (Table 5.3).

In the case of mills under 'expansion' category, the actual value of

production was much lower than the estimated value of production in the first four

years under review. In the subsequent years the actual value of production was

more than the estimated value of production. The percentage of variance was

highest in the 6th year with 49 per cent.

i26

The variance in the case of the mill under 'modernisation' was positive and

high in many of the years under review, the percentage of variance was more than

75 in many of the years under review.

The analysis of variance between 'estimated' and 'actual' value of

production indicates that the actual cost of production has been much higher than

the estimated cost of production. An important factor for rise in the cost of

production is under-utilisation of the capacity.

Yet another reason for the wide variation between 'estimated' and 'actual'

production value could be attributed to escalation in the different components of

cost of production and faulty estimation of the components. The cost of production

consists of five important components. They are: i) raw materials cost; ii) labour

cost; iii) cost of utilities; iv) factory overheads and; v) administrative and selling

overhead cost. An analysis of the 'estimated' cost and 'actual' cost of these five

components would help us to understand the reasons for wider variation between

the 'estimated'and 'actual'cost of production.

While presenting the analysis we would first indicate die assumptions made

by each mill for estimating the different components of cost of production which

would be followed by the comparison between 'estimated' and 'actual' cost of the

components.

Cost of Raw Materials

Estimation of the cost of raw materials in the 'establishment' category is

based on two years average of production of cooperative spinning mills in Tamil

Nadu and the latest trend in cotton prices.

The raw materiel cost in the case of the 'establishment' decision was fixed

at Rs. 100.36 lakhs in the first year after the commencement of the production. The

value of the estimated raw material cost has been enhanced year after year taking

into account the capacity utilisation and the trend in the price of the raw material.

I 2 K

Thus llic estimated raw materia! cost was Rs.323.99 lakh in the fifth year and

Rs.367.40 lakh in the 10th year (Table 5.4).

The actual raw material cost has never been nearer to the estimated cost.

There has been wider variation between estimated and actual raw material cost and

the actual cost was consistently higher than the estimated cost. The actual cost was

double the estimated cost in the 511 year; and in subsequent years actual cost

exhibited more or less a similar trend. In fact the actual raw material cost should

have been well within the estimated cost, as the mill could not fully utilise the

estimated plant capacity.

Why was the actual raw material cost be higher than the estimated cost?

One possible reason is that the mill did not scientifically estimate the raw material

cost.

The mill under 'expansion' category did not make assumptions to calculate

the raw material cost. The estimated raw material cost has been consistent and

uniform for all the ten years. The mill has assumed that it would operate 90

per cent of the installed capacity throughout the project period. But then, they

have failed to consider the trend in the price of raw materials and the inflationary

trend which affect the cost of raw materials. Here again, the mill concerned

has failed to scientifically estimate the cost of raw materials.

The assumption made to estimate the raw material cost under

'modernisation' categoiy is the average price of cotton (base year). The raw

material cost has been the same for the last seven years of estimation which means

that the mill has not considered the trend in the prices of the raw materials.

A comparison between the estimated and actual raw material cost indicates that

actual cost has been veiy high when compared to the estimated cost in almost all

the years under review. The actual raw material cost, should have been less than

or nearer to the estimated cost.

I2 l>

Labour Cost

The mill under 'establishment' category has assumed 3 per cent increase

each year for calculating the labour cost. A comparison of estimated and actual

cost reveals a wide variation. The actual cost was lesser than the estimated cost

for the first four years under review. But then, after the fourth year, the actual

labour cost was much higher than the estimated cost. The percentage of variation

has recorded a sharp increase. For instance, the percentage of variation was 6.17

in the fifth year while it was 137 per cent in the tenth year. This reveals two

things: i) estimate might not have been realistic; and ii) the mill concerned did not

exercise control to bring down the labour cost. It must also be noted that estimated

labour cost has been calculated based on the assumption that the mill would work

at 95 per cent of the capacity after the 6lh year. However, the actual capacity

utilisation has been lesser thai the estimated capacity. This could have resulted in

the reduction of actual labour cost when compared to the estimated cost. But

unfortunately this did not happen.

The mill under 'expansion' category has not made any assumption for

estimating the labour cost. The estimated labour cost has been uniform especially

during the last 6 years. The actual cost has been always more than the estimated

cost. Hence tire percentage of variation has increased over a period.

For estimating labour cost, the mill under 'modernisation' categoiy has

assumed 5 per cent increase in salary per year. The percentage of variation under

this categoiy also has been high. The actual cost was higher than the estimated

cost (Table 5.5).

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Cost of Power and Fuel

The mill under 'establishment' category has assumed 3 per cent rise in

power and fuel cost every three years for estimation. The analysis of variance

indicates that there is a wide difference between the estimated and actual cost.

The actual cost was very much higher than the estimated cost in many of the years

under review. The variation was as high as 255 per cent in the 10th year -around

two and half times higher than the estimated cost of power and fuel.

The mill under 'expansion' categoiy did not make any assumption on

estimating the cost of power and fuel. It has been the same (Rs.21.82 lakhs) for all

the years under review. Here also, the actual cost was higher than the estimated

cost. The percentage of variance too increased from 33.37 in 4th year to 81.65 in

the 8th year indicating the mill's failure to exercise control over the cost of power

and fuel. The null under 'modernisation' categoiy also did not follow any realistic

assumption to estimate the cost of power and fuel. The estimated cost of power

and fuel remained the same (Rs.209.53 lakhs) from the 4th year to the 10th year of

the project period. The variation between 'estimated1 and 'actual' revealed the

same trend as we witnessed in the other two categories of mills (Table 5.6).

V

Hi

Factory Overheads

The mill under 'establishment' category has assumed around 3 per cent

increase in factory overheads for estimating the factory overheads. The variation

between the estimated and actual factory overheads indicates that die actual cost

was less than the estimated cost in the first four years of the project period;

whereas actual cost was higher than the estimated cost in the next five years.

The mill under 'expansion' category, it seems, had not followed any base

for estimating the factory overheads. The variation shows that the actual factory

overhead cost was less than the estimated cost throughout the project period.

The mill under 'modernisation' category also has not considered any

criteria for estimating the factory overhead cost. The analysis of variance

exhibits a mixed trend, hi certain years the actual cost was less than the estimated

cost while in the other the actual cost was more than the estimated cost

(Table 5.7).

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Administrative and Selling Overheads

The mill under 'establishment' category has considered around 4 per cent

increase in administrative and selling overheads. The actual administrative and

selling overhead cost was higher than the projected cost in all the years. However,

the variation of the actual cost was very wider in the last five years due to working

of the more number of administrative staff and selling expenses.

In the case of 'expansion' category, around 14 per cent increase was

considered for the first four years of the project. In the remaining period, the

administrative and selling overhead cost was stable; whereas, the actual cost

shows an abnormal increase.

With regard to 'modernisation' programme 3 per cent increase was

considered every year. There was a great variation between the actual cost and

projected cost. The actual cost was always higher than the projected cost with a

variation of 44 per cent in the first year of the project and 75 per cent in the

seventh year of the project.

The administrative and selling overheads in all the three mills, was not

scientifically forecasted, as the actual cost is much higher than the projected cost

Table 5.8).

An analysis of the assumptions made to estimate the different components

rf cost of production and the variation between estimated and actual costs clearly

"eveals that:

r estimates are not based on realistic assumptions

> assumptions vary according to the nature of investment decision.

'> criteria are not followed in making assumptions.

> serious attention has not been paid in making assumptions.

1.17

r wider variations are observed between the estimated and actual costs.

r the variations have not been studied and necessary control has not been

exercised.

All these have ultimately resulted in a sharp rise in the cost of all the

components which resulted in the escalation of cost of production.

Sales

Every management should have a consistent sales policy. The advantages

of a good sales policy are a stable market, maximum price for the quantity

produced, less frequent complaints and disputes and less trouble in sales during

market depressions. A good sales policy should include the following elements

viz., die channel of distribution, price policy, credit facilities, service facility, sales

promotion and sales territories. The channel of distribution is the route by which

the product passes from the manufacturer to the consumer. It may be direct in

cases where the manufacturer has his own retail shop or indirect where

intermediaries are employed.

The cooperative spinning mills should produce two types of yam-hank yam

and cone yarn. 50 per cent of the hank yam produced by the cooperative spinning

mills have been generally routed through the channel consisting of the COOPTEX

~> Retail Societies-> Weavers, hi a sense it is partly a protected market. The

remaining quantity of hank yarn and cone yam is sold in the open market at the

prevailing rate but not less than the rate fixed by the DHT. The mills under study

have opened sales depots for cone yam at Bombay and sell die cone yam through

the depot/agent as per directions from DHT. This enables them not only to avoid

double sales tax but also to have the yam for quick delivery.

139

It was reported that whenever the yarn market picked up, the mills were prevented

from selling yarn in the open market, but were required to sell the yarn to the

Cooptex at the rate fixed by DMT. However, the Cooptex did not come forward to

rescue the mills when the market was dull. Thus, although the mills, have 'partly

protected market' they are affected by the restrictive sales policy of the DHT.

The mill while estimating the sales takes into account its market area and

the price policy adopted. An analysis of estimated sales and actual sales in

quantitative terms for three different investment decisions clearly show that actual

sales in all the categories fall short of estimated sales. The percentage of variation

is quite high in the "expansion' category followed by the 'establishment' and the

'modernisation' category. Such a wide variation is likely to affect the profitability

of each of the investment decision (Table 5.9).

Comparison between the estimated sales value and actual sales value

however provides a different picture. The variance between estimated sales and

actual sales by value in the 'establishment' category was negative in the first three

years under review. However, it exhibited a positive variance in the remaining

years. The actual sale was much higher than the estimated sales during the last

three years under review (Table 5.10).

The mill under the 'expansion' category registered a negative variance in

the first four years under review. The actual sales was very low when compared to

projected sales. However, in later years the position improved and the mill has a

positive variance though the extent of variance was low.

The mill, which has gone in for 'modernisation', registered a positive

variance throughout the period under study. The actual value of sales was much

higher than the estimated value of sales. For instance, the sales was Rs.3627.77

lakhs as against the estimated sales of Rs.2043.24 lakhs - the variance being 77.55

per cent. High positive variance can be attributed to rise in the price of the yam.

141

Gross Profit

Gross Profit is the difference between net sales and the cost of the goods

sold. A sufficient margin of gross profit is essential to meet operating expenses

and to have a sufficient amount of operating profit. This in turn would help the

organisation to meet the obligations towards the lenders and owners.

A Comparison between projected and actual gross profit in 'establishment'

category clearly reveals that actual gross profit is very much less 'than the

projected gross profit. The projected gross profit shows an upward trend. The

expected gross profit in the first year was Rs.42.31 lakhs and Rs. 150.54 lakhs in

the 91'1 year. But the actual gross profit was Rs.3.70 lakhs in the first year and it

was Rs.- 40.85 lakhs in the 9lh year. Thus, we could find a very high negative

variation between the estimated gross profit and actual gross profit. The

percentage of variation was negative and very high especially in the 8lh and 9Ih

years (Table 5.11).

In the case of the 'expansion' category the actual gross profit has been

nowhere nearer to projected gross profit. The mill has continuously incurred gross

loss in seven out of the eight years under review. Hence, the percentage of

variance between the actual and projected gross profit was very high.

The mill under the 'modernisation' category exhibits a mixed trend. In a

few years, the actual gross profit was higher than the projected gross profit. But in

many years the actual gross profit was much lower than the projected gross profit.

For instance, the actual gross profit was Rs.307.32 lakhs in the first year against

the projected gross profit of Rs. 127.73 lakhs. The percentage of variation was

positive and high (140.60 percent). In the subsequent five years the actual gross

profit was less than the projected gross profit. The percentage of variation was

negative and was as high as -28.7 per cent in the sixth yea".

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In the subsequent two years, the percentage of variation was positive indicating

that the mill under the category of 'modernisation' was able to earn a higher gross

profit than the projected gross profit.

The overall picture that emerged from the analysis is that all the three

categories of mills which have undertaken different types of capital budgeting

decision could not realise the gross profit as anticipated and projected. The main

reasons are: i) higher cost of production, ii) fluctuation in price and sales.

Operating Profit

Operating profit is also known as profit before interest and tax. Gross profit

or trading profit minus operating cost gives operating profit. There is a fixed order

in die queue for distribution of operating profit viz., i) the lenders ii) the taxation

authorities, iii) the shareholders. Every organisation must have enough operating

profit to honour the obligation of the lenders. In other words, operating profit is

an yardstick to measure the debt-servicing capacity of the organisation. If an

organisation does not have the required operating profit, it may fail to honor the

obligations of the lenders and thus may face situation of bankruptcy called 'risk of

ruin'. Similarly the organisation after meeting the debt obligation must have

sufficient after interest and tax profit to pay reasonable dividend to the

shareholders. Of course, cooperative firms are not profit making organisations.

Yet, a cooperative firm, which regularly and consistently pays dividend to the

member shareholders, could be rated as a financially sound cooperative. It would

also be in a position to provide services to its members at a low cost. Hence, the

cooperative firms in their investment decisions must aim at sufficient operating

profit to fulfill the obligations towards lenders and member shareholders.

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Comparisons between projected and actual operating profit in all the three

investment decisions indicate that the mills have never been able to achieve the

projected operating profit. The actual operating profit was very much lower than

the projected operating profit. The situation was found to be worse in the k expansion' category. Failure to have sufficient gross profit and failure to control

costs are tire major causes for the fall in the operating profit (Table 5.12).

Net Profit

Net profit is the surplus available to the owners of the organisation after

meeting the entire obligations including the interest and tax. Though profit is not

the motive, the cooperative organisations must have sufficient profit margin for

building up reserves and for paying dividend to members. The long-time

survival and sustainability of the cooperative organisation does depend on the

continuous profit earning capacity of the cooperatives. The investment decisions

are mainly taken with an eye on making the cooperative a commercially viable

organisation. One of the criteria for measuring the viability of the cooperative

organisation is divisible profit.

All the three mills each having a different type of investment decision have

projected net profit over a period of ten years. The mill under the 'expansion'

category has estimated ever-increasing profit. Its projected profit was

Rs.50.54 lakhs in the first year and in the 10th year, it was Rs.225.55 lakhs. But

then, the mill has incurred loss throughout the projected period. The percentage of

variation was quite high (Table 5.13).

The mill under the 'establishment' category had projected net profit. But it

incurred loss in eight out of ten years. The actual loss was quite high in the last

year.

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The mill under 'modernisation' too has projected net profit all through the

project period. But the actual profit has been nowhere near the projected net

profit.

There may be slight variance between the projected and actual profit. But

in the selected mills the variation has been quite high. This may indicate i) failure

on the part of the mills to realistically estimate the profit by carefully considering

the cost and revenue, ii) failures on the part of the mil! to achieve the target profit.

Debt Servicing Capacity

Efficiency of the financial management of a business is reflected by

its ability to generate enough cash flows to service various sources of funds.

While servicing of equity can be delayed for sometime failure to service debts

may eventually invite winding up proceedings. Lenders will feel less confident

if the debt service management of the enterprise is poor. It will have a continuous

negative effect upon the firm. As a result the sources of fund may dry up and the

average cost of capital of the firm will rise. Considering its importance it was felt

necessary to assess how best the mills is able to service its debts. The ratio used to

ascertain the debt servicing capacity of the mills is coverage ratio.

The ratio is unique in that it is a measure derived solely from the profit and

loss account. The interest charge is divided into Earnings Before Interest and Tax

(EBIT) figure to give the 'cover' expressed as 'so many times'. This ratio measures

a enterprise's ability to service those borrowings.

Three factors determine its value

^ the operating profit

5^ the total amount borrowed

>* the effective rate of interest.

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A highly profitable firm can have very adequate interest cover eventhough

the balance sheet may appear to be over-borrowed.

All the three mills have projected the interest coverage ratio. The projected

interest coverage ratio for the mill under the 'establishment' category was 0.46 in

the first year. The ratio rose and stood at 71.53 in the 10th year. This is

understandable because the interest is likely to come down as the debts are settled

in course of time. At the same time the profit is likely to go up over a period of

time. The fall in interest charges and rise in the operating profit over a period is

likely to increase the interest coverage ratio. The actual 'interest cover' was much

less when compared to the projected one; it was negative in some of the years

under review. The variation was negative and very wide. The poor operating profit

has adversely affected the debt-servicing capacity of the mill (Table 5.14).

The mill under 'expansion' was in a critical condition. The 'actual interest

coverage' has been consistently negative. It has never been nearer to projected

'interest coverage'. The variation between 'projected' and the 'actual' has also

been very high throughout the period under review.

The mill under the 'modernisation' categoiy had a high interest coverage in

the fourth year against the projected interest coverage of 2.40. The actual was

- 6.86 times. In all the remaining years the actual interest coverage has been much

lower than the projected interest coverage. The variation was negative and quite

high.

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Conclusion

The mills which implemented capital investment decisions have not made

post audit or performance evaluation of such decisions as they are very much

concerned with the day-to-day operations of the business. An attempt made to

review die post performance of three different capital expenditure proposals

clearly indicate that the mills have failed to achieve the targets set. We considered

14 key variables for post performance evaluation. The mills could not achieve the

targets set under each of the variable in many of the years under review. The high

performance of the mill largely depends on meticulous planning and control over

operations. The execution of capital budgeting decision has long-term implications

on the performance of die mills. Failure to evaluate performance and to initiate

corrective measures would have tremendous impact on the operations of the mills.

The chosen mills have failed on these fronts. Hence they suffer from losses.

References

1. Murthy, Guruprasad, Capital Investment Decisions in Indian Industry, Bombay: Himalaya Publishing House, 1985, p. 105

2. Kohler, Eric, A Dictionary for Accountants, New Jersey: Prentice Hall, 1970, p.328

3. Murdic and Deming, The Management of Capital Expenditures, Toronto: McGraw Hill, 1968, p.24

4. Istavan, Donald, Capital Expenditure Decisions, Ohio: University of Indiana Press, 1961, p.38

5. Tandon, G.L., "Improvement in Capacity Utilisation", Lok Udyog.'July, 1983, p.45

6. Joshi, Nawin Chandra, "Perspectives on Capacity Utilisation", Lok Udyog, Nov. 1985, p.38

7. Bhattacharya, Hrishikesh, Total Management by Ratios: An Integrated Approach, New Delhi: Sage Publishers, 1995, p.213