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INTRODUCTION OF THE STUDY:- As we know that the finance is a life blood of every
organization, whether this finance is utilize in proper way or not we can see with the help of Capital Budgeting.
A budget is as a comprehensive and coordinated plan, expressed in financial terms, for the operation and resources of an organization for some specified period in the future. There are many methods or techniques to analyze the Capital of the organization.
The Capital budgeting is a set of accounts in the Organizational Financial Management System (FMS) that are used to record all revenues, expenditures, assets, and liabilities associated with Capital Projects.
In the MBA course in plant, training is mandatory because the students face the practical situation which financial manager face in real life.
As a rule of University pune, pune every student are supposed to go for their summer training of their choice and interest.
During this, period student get an excellent opportunity of learning through observation of real life problem and tacking those problem for the benefit of the organization.
OBJECTIVE OF THE STUDY :-
SCOPE OF THE STUDY:- The scope of the study extends to the business of M/S Warana
Bazar. The study conducted during the year 2010. This study
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incorporated with in its scope and exhaustive capital budgeting of the organization.
This study falls in the area of Warana Bazars. All budgets have been studied with respect to Warana Bazars.
RESEARCH METHODOLOGY: Research method may be explained all those techniques that are
used conduct a research.Research methodology refers to the behavior and instruments
used in selecting and constructing research technique.The task of data collection begins after a research problem has
been defined and research design / plan chalked out while deciding about the method of data collected to be used for.
In this study two types of data are considered.1. Primary data,2. Secondary data.
Primary data:- The primary data are those collected fresh and first time, and
thus they are original in character. The source of primary data is collected where through the actual
work experience in the company and discussion with the executive, offers and the managers in the organization.
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The technique used for collection of the primary data is interviewing technique.
Mostly the interviewing technique is used to collect the information related to fresh cases but sometimes if the information is required in relation with old cases, which is useful for the study the same method is adopted.
Secondary data :- The secondary data is that which is already been recorded in the
different files of the organization and these are already been passed through statistical process.
The secondary data is collected from various sources; these sources are reference books, annual report of the company and through internet. Some booklets and pamphlets of the organization are also referred for collection of secondary data.
LIMITATION OF THE STUDY :- Time constraint :-
The time required for the study of capital budgeting is a large as compared to the analysis of the other methods. This is the one of the limitation of the capital budgeting.
Lack of information :-To maintain the secrecy of the organization many statements were not available to the researcher at the time of research.
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INTRODUCTION TO THE ORGANIZATION
1. LATE SHREE TATYASAHEB KORE:- Shree Tatyasaheb Kore, founder of Warana Complex, was a great
personality having vision for the prosperity of rural people. He is the only person of unmatched qualities who worked day night for upliftment of rural people.
Warana Co-Operative Complex at Waranagar in 30 Kms, situated at Northwest of Kolhapur in Maharashtra. In 1955 a Co-Operative Sugar factory number of other Co-Operative industries were started such as WAGPOS food processing, Milk & Milk Products Processing, Warana Bazaars etc. Warana Complex was established for the purpose of providing recruitment to the people, to provide consumer oriented product and
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services to share-holder and employees and of the societies (Especially Warana Bank, Bazaar, Education, Educational industries etc.)
2. INTRODUCTION OF WARANA BAZAR:- As Tatyasaheb Kore had vision for development of rural people after
starting Co-Operative, Sugar factory, he observed that the people have to travel long way to Kolhapur, Sangali etc. For purchasing goods required to meet day to day needs. Even Quality Goods At Reasonable rates with pleasant service.
Thus the first departmental stores in Rural area of Maharashtra was started in Warananagar. Warana Bazaar was started at Waranagar it with initial share capital of Rs.6,42,125 and Funds of Rs. 3,07,688 in the year 1978, with the assistance of the Consultancy and promotional cell of the N.C.C.F. Ltd., New Delhi.
3. OBJECTIVE BEHIND ESTABLISHING WARANA BAZAR:-
To supply quality goods at fair & reasonable price to the Consumer. To make available all types of goods at single place i.e. Departmental
stores To save the Time and Money of the people . To provide good service and common rate to all Customers. To provide defined credit facility to employees by way of salary
deduction at source. To ensure quality and guarantee for products such as seeds, fertilizers,
electronic goods etc.
4. Features of warana bazaars:- It is the first departmental stores established in India in rural area. Nearly 80% participation in shareholder of women. Employee 60% women are in staff. Audit class ‘A’ since beginning.
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Bazaar having 10,000 sq. ft. selling area. Total sales of all the units are nearly 16 lacks per day. A store having training center for various Bazaars as well as
consultancy wing. More than 4000 Customers per day.
5. ADDITIONAL ACTIVITIES Barcode system, STD/ISD/PCO Booths, Xerox Service. Organization of demonstration of various types of goods & various
awareness camps. Consumer meeting every year. Implementation of different schemes for sales promotion. Food testing laboratory. Children park.
6. HRD FUNCTION – STAFF TRAINING & DEVELOPMENT
Consumer Co-op. Movement needs trained staff. In order to get trained staff they have started a training centre under the name & style Vilasrao Tatyasaheb Kore Consumer Co-op.
Training Centre in the year 1996 every year salesman programme of one month duration is conducted in the centre.
NABARD & Shivaji University Kolhapur has approved this programme.
First Ten students of every batch absorbed in Warana Bazaar.
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7. CONSULTANCY & IN STORE TRANING Warana Bazaar has provided consultancy & in store training too
many Co-op. Bazaars, to name in few. Raigad Bazaar, Alibag. Raigad Bazaar, Pen. Tarun Bharat Bazaar, Sangali. Lonavala Bazaar, Lonavala. Bardes Bazaar, Goa. Bagayat Bazaar, Goa. Jawahar Bazaar, Dhule. Malavani Bazaar, Malvan. Shivshankar Bazaar, Akluj.
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8. THE BOARD OF DIRECTORES:- The board of Directors is handling all the management carefully of the Bazaar.The Board of Directors is as:
Chair person 01 Vice Chairperson 01 Female Directors 12 Mal Directors 07 General Manager Ex. Officer 01 Employees Representatives 04
26
After the election of Board of Directors Chairman and Vice Chairman is selected from them. At present 13 members of Board of Directors are women & Chair Person is women.
Board meeting are called every month for discussing ideas of facilities in stores. Board meeting records are regularly maintained.
The board has constituted sub-committee to look after day to day management of stores.
They are as follows:
Purchase sub-committee 07
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Staff selection sub-committee o7 Branch committee 06 Audit committee 07
9. MEMBERSHIP AND SHARE CAPITAL: Total membership of stores consisted of 10110 member out of which
is nearly 80% of them are women. The total share capital of organization is 1, 14, 56,615.
10. INCENTIVE BENEFITS & ACTIVITIES FOR MEMBER/ASSOCIATE MEMBER.
Sr. No.
Description
2 8% rebate on the purchase of festival goods at the time of Gudhi
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Padva3 10 % cash rebate coupons for use of throughout the year. Total 26%
investment in share in the society (for ‘A’ class members).4 Haldi-Kunku Ceremony for lady members at the time of Makar
Sankrant.5 Purchase Rebate to customers 0.5%
11.Incentive & Benefits To the staff:
Sr. No. Description Percent1 Provident Fund 12.02 Bonus 25.03 Incentive 12.54 House Rent Allowance 05.05 Pension Scheme 05.0
Total 59.5 34 days leave Three Months Maternity leave On job Training for the college students Insurance policy for staff Performance incentive.
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Share Holder
Board of Director
Chairman
Vice Chairman
General Manager
Branch Manager
Other Employee
Chief Cashier
Chief Auditor
Sales Manager
Accounts Manager
Purchase Manager
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MEANING
THEROTICAL BACKGROUND Budget:
Budgets are an important tool of profit planning. Is closely related to the broader system of planning is an organization. Planning involves the specification of the basic objective that the organization will pursue and the fundamental policies that will guide it. It involves four stages:
Objective Goals Strategies Plans / Budget
“A budget is defined as a comprehensive and coordinated plan, expressed in financial terms, for the operation and resources of an enterprise for some specified period in the future”.
According to this definition, the essential elements of a budget are:
Plan Operations and resources Financial terms Specified future period Comprehensiveness Coordination
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Capital Budget
Financial management is largely concerned with financing, dividend and investment decisions of the firm with some overall goal in mind. Corporate finance theory has developed around a goal of maximizing the market value of the firm to its shareholders. Capital budgeting decision pertain to fixed/long-term assets which by definition refer to assets which are in operation, and yield a return, over a period of time usually exceeding one year. They, therefore, involve a current outlay or series of outlays of cash resources in return for an anticipated flow of future benefits. In other words the capital budgeting is employed to evaluate expenditure decision which involve current outlays but are likely to produce benefits over a period of time longer than one year.
“Capital budgeting is a process of evaluating and selecting long-term investments that are consistent with the goal of shareholders (owners) wealth maximization”.
Funds are invested in both short-term and long term assets. Capital budgeting is primarily concerned with sizable investment in long-term assets. These assets may be tangible items such as property, plant or equipment or intangible ones such as new technology, patents or trademarks. Investment process such as new technology, testing-
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through which new technology and new product are created may also be viewed as investment in intangible assets.
BUDGETING
OVERVIEW Brief description
This toolkit provides guidelines on how to go about developing and monitoring a budget. It will help you with an overall organizational budget as well as with a budget for a specific project. It includes tools for estimating costs as well as tips for ensuring that your budgets meet the needs of your project or organization. In the examples section we give actual examples of budgets and how they can be monitored.
Why have toolkits on budgeting?Budgeting is the key to financial management. The toolkit will help you plan, develop and use budgets effectively in your organization. If you have a sound understanding of the principles of budgeting, you will be well on the way to sound financial management. If you use this toolkit in conjunction with other toolkits, as indicated, you will increase the capacity of your organization to manage its finances effectively. You will also increase its ability to survive through foresight and planning.
Who should use this toolkit?This toolkit is aimed specifically at people who have had little or no experience with budgeting. Perhaps you have not been involved in running an organization, project or department before. Or perhaps you have not been involved in the financial management side of the work before. Now you are faced with the task of developing a budget, or budgets, and you are not quite sure where to start. If you are in a situation like this, then this toolkit will be useful for you.
When will this toolkit be useful? After you have done the strategic planning for your organization, and your action planning and you need to know how much money you will require in order doing what you have planned. When you need to work out how much it SIMS, MBA Page 14
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will cost to run a particular project or department. When you want to ask a donor to support a particular aspect of your work.
BASIC PRINCIPLES
Could we have spent less last year and still achieved the same results, or better?
Have we wasted money in the past? If so, can we avoid doing so in the future?
In this section of the toolkit, we look at: What is a budget, who should be involved in budgeting, and why do
we budget? The operational plans Estimating costs Sources of finance.
Why budget?
Why is it important for an organization, project or department to have a budget?
a. The budget is an essential management tool. Without a budget, you are like a pilot navigating in the dark without instruments.
b. The budget tells you how much money you need to carry out your activities.
c. The budget forces you to be rigorous in thinking through the implications of your activity planning.
d. There are times when the realities of the budgeting process force you to rethink your action plans.
e. Used properly, the budget tells you when you will need certain amounts of money to carry out your activities.
f. The budget enables you to monitor your income and expenditure and identify any problems.
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g. The budget is a basis for financial accountability and transparency. When everyone can see how much should have been spent and received, they can ask informed questions about discrepancies.
h. You cannot raise money from donors unless you have a budget. Donors use the budget as a basis for deciding whether what you are asking for is reasonable and well-planned.
Who should be involved in budgeting?Budgeting is a difficult and responsible job. Your organization’s ability to do what it has planned to do and to survive financially depends on the budgeting process. Whoever does the budgeting must:.Understand the values, strategy and plans of the organization or project; Understand what it means to be cost effective and cost efficient Understand what is involved in generating and raising funds.To ensure you have all these understandings, it is usually a good idea to have a small budgeting team. This may only mean that one person does a draft budget which is then discussed and commented on by the team. The following would normally be involved in the budgeting process:The Finance Manager and/or Bookkeeper;The Project Manager and/or Director of the organization or department.Where staff lack confidence to do the budgeting, then Board members can be brought in.Some Boards have a Finance Committee or a Budget Sub-Committee. It is a good idea to have someone on your Board with financial skills. S/he can then help the staff with budgeting.The budget is the business of everyone in the organization.
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The planning cycle should look something like this:
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Capital Budgeting
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Capital Budgeting is a project selection exercise performed by the business enterprise.
Capital budgeting uses the concept of present value to select the projects. Capital budgeting uses tools such as payback period, net present value,
internal rate of return, profitability index to select projects.
Capital Budgeting process:
1
2
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Goal of the Firm
Maximization Shareholder wealth or value of the firm
Financing Decision Dividend Decision
Long-term investments Short-term investments
Investment Decision
CAPITAL BUDGETING
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Study of the Objectives
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Capital Budgeting
Monitor Implement Make a Decision
MonitorImplement
Strategic planning
Continue, expand or abandon project
Corporate goal
Facilitation, monitoring, control and review
Post-implementation audit
Accept
Implementation
Qualitative factors, judgments and gut felling
Reject
Financial appraisal, Quantitative analysis, project evaluation or project or project analysis
Preliminary screening
Investment opportunities
Accept/reject decision on the projects
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Define the capital budgeting decision within the broader perspective of financial management.
Describe how the net present value contributes to increasing share holder wealth.
Classify investment projects on the basis of how they influence the investment decision process.
Sketch out a board overview of the capital budgeting process. Identify the financial appraisal of projects as one of the critically
important and complex stages in the capital budgeting process. Appreciate the important of using computer spreadsheet packages
such as excel for capital budgeting computation. Gain a broad overview of how the material in this book is organized.
Learning objective of capital Budgeting:
Capital
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Non discounted Methods
Relevant cash flowsEstimation
Discounted Method
ProjectClassifications
CapitalBudgeting
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Importance Of Capital Budgeting: Strategic direction Long term decision and effects last longtime It might have serious financial consequences
Kinds of capital budgeting decisions:
1. Accept-reject decisions: Business firm is confronted with alternative investment proposals. If the proposal is accepted, the firm incur the investment and not otherwise. Broadly, all those investment proposals which yield a rate of return greater than cost of capital are accepted and the others are rejected. Under this criterion, all the independent proposals are accepted.
2. Mutually exclusive decisions: It includes all those projects which compete with each other in a way that acceptance of one precludes the acceptance of other or others. Thus, some technique has to be used for selecting the best among all and eliminates other alternatives.
3. Capital rationing decisions: Capital budgeting decision is a simple process in those firms where fund is not the constraint, but in majority of the cases, firms have fixed capital budget. So large amount of projects compete for these limited budgets. So the firm rations them in a manner so as to maximize the long run returns. Thus, capital rationing refers to the situations where the firm has more acceptable investment requiring greater amount of finance than is available with the firm. It is concerned with the selection of a group of investment out of many investment proposals ranked in the descending order of the rate or return.
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Capital budgeting success• Flow of ideas• Proper incentive• Screening• Selection by priority
Does all projects require capital budgeting?
• Cost of capital budgeting should be considered• Simple or complicated decisions• Value of investment to the firm
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Independent & mutually exclusive projects? Projects are: In dependent, if the cash flows of one are unaffected by the
acceptance of the other. Mutually exclusive, if the cash flows of one can be adversely
impacted by the acceptance of the other.
Capital budgeting decision rules• Payback period• Discounted payback period• NPV• IRR• MIRR• Profitability index
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1.Payback period :
The number of years required to recover a project’s cost,or how long does it take to get the business’s money back?
Computation Of Payback Period • When the cash inflows are uneven, the cumulative cash inflows are to be arrived at and then the payback period has to be calculated through interpolation. Here payback period is the time when cumulative cash inflows are equal to the outflows. i.e.
Paybacks = year before recovery + uncovered cost at start of year Cash flow during the year
Payback Reciprocal Rate • The payback period is stated in terms of years. This can be stated in terms of percentage also. This is the payback reciprocal rate. • Reciprocal of payback period = [1/payback period] x 100
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Capital Rationing Situation
• Select the projects which have payback periods lower than or equivalent to the stipulated payback period. • Arrange these selected projects in increasing order of their respective payback periods. • Select those projects from the top of the list till the capital Budget are exhausted.
Decision Rules :
. Mutually Exclusive Projects :In the case of two mutually exclusive projects, the one with a lower
payback period is accepted, when the respective payback periods are less than or equivalent to the stipulated payback period.
Determination of Stipulated Payback Period • Stipulated payback period, broadly, depends on the nature of the business/industry with respect to the product, technology used and speed at which technological changes occur, rate of product obsolescence etc.
• Stipulated payback period is, thus, determined by the management’s capacity to evaluate the environment vis-a-vis the enterprise's products, markets and distribution channels and identify the ideal-business design and specify the time target.
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Advantages Of Payback Period • It is easy to understand and apply. The concept of recovery is familiar to every decision-maker.
• Business enterprises facing uncertainty - both of product and technology - will benefit by the use of payback period method since the stress in this technique is on early recovery of investment. So enterprises facing technological obsolescence and product obsolescence - as in electronics/computer industry - prefer payback period method. • Liquidity requirement requires earlier cash flows. Hence, enterprises having high liquidity requirement prefer this tool since it involves minimal waiting time for recovery of cash outflows as the emphasis is on early recoupment of investment.
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Disadvantages Of Payback Period
• The time value of money is ignored. For example, in the case of project
• A Rs.500 received at the end of 2nd and 3rd years are given same weight age. Broadly a rupee received in the first year and during any other year within the payback period is given same weight. But it is common knowledge that a rupee received today has higher value than a rupee to be received in future.
• But this drawback can be set right by using the discounted payback period method. The discounted payback period method looks at recovery of initial investment after considering the time value of inflows.
• Another important drawback of the payback period method is that it ignores the cash inflows received beyond the payback period. In its emphasis on early recovery, it often rejects projects offering higher total cash inflow.
• Investment decision is essentially concerned with a comparison of rate of return promised by a project with the cost of acquiring funds required by that project. Payback period is essentially a time concept; it does not consider the rate of return.
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2. ACCOUNTING RATE OF RETURN
Accounting rate of return is the rate arrived at by expressing the average annual net profit (after tax) as given in the income statement as a percentage of the total investment or average investment. The accounting rate of return is based on accounting profits. Accounting profits are different from the cash flows from a project and hence, in many instances, accounting rate of return might not be used as a project evaluation decision. Accounting rate of return does find a place in business decision making when the returns expected are accounting profits and not merely the cash flows.
o Computation Of Accounting Rate Of Returno
• The accounting rate of return using total investment. or Sometimes average rate of return is calculated by using the following
A.R.R. = Net profit after tax Average Investment
Where average investment = total investment divided by 2 Decision Rules
A. Capital Rationing Situation • Select the projects whose rates of return are higher than the cut-off rate • Arrange them in the declining order of their rate of return and • Select projects starting from the top of the list till the capital available is exhausted.
B. No Capital Rationing Situation
Select all projects whose rate of return are higher than the cut-off rate. C. Mutually Exclusive Projects
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Select the one that offers highest rate of return.
• Accounting Rate Of Return – Advantages o It Is Easy To Calculate. o The Percentage Return Is More Familiar To The Executives.
Accounting Rate of Return – Disadvantages • The definition of cash inflows is erroneous; it takes into account profit after
tax only. It, therefore, fails to present the true return. • Definition of investment is ambiguous and fluctuating. The decision could
be biased towards a specific project, could use average investment to double the rate of return and thereby multiply the chances of its acceptances.
• Time value of money is not considered here.
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3. NET PRESENT VALUE (NPV) Net present value of an investment/project is the difference between present value of cash inflows and cash outflows. The present values of cash flows are obtained at a discount rate equivalent to the cost of capital.
Computation Of Net Present Value (Npv) • Let 'b' be the cash outflow in period 't' where t = 0,1,2,....n • 'B' is the present value of cash outflows • 'c' be the cash inflow in period’t’=0, 1, 2 ...n • 'C' be the present value of cash inflows • 'K' be the cost of capital • Then
n ct
Present value of cash inflows=C=∑ t=0 (1+K)t
n bt
Present value of cash outflows=B=∑ t=0 (1+k)t
Net present value=(C-B) orNPV= Present values of cash inflows – Initial cash outflows.
Computation Of Net Present Value (Npv) • When the cash outflow is required for only one year i.e., in the present year, then the Net
present value is calculated as follows:
N ct
Net present value=∑ -I t=o (1+K)t
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"I" is the initial investment (cash outflow) required by the project.
Decision Rules A. "Capital Rationing" situation
Select projects whose NPV is positive or equivalent to zero. Arrange in the descending order of NPVs. Select Projects starting from the list till the capital budget allows. B. "No capital Rationing" Situation
Select every project whose NPV >= 0 C. Mutually Exclusive Projects
Select the one with a higher NPV.
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Internal Rate of Return Method (IRR)# Motivation:! “Internal” in that it is a rate of return that depends on the CFsof the project.! Return on investment (ROI) is a very intuitively appealingconcept; measured in % terms.
ROI ’= profit investment
! Easy to determine profit if you have single CF in future. Whatabout if we have multi-period payoffs?
Thus, when examining the return on a project, we need anew tool that would incorporate all the cash flows of aproject.
Definition of IRR : IRR is defined as that particular k, such thatthe project breaks-even, i.e., when NPV = 0.Thus,
N1
IRR=r1 + X (r2-r1) N1+N2
NPV - 0 - CF0 + CF 1 + CF 2 + …… + CF N
(1 + IRR) (1 + IRR)2 (1 + IRR)N
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Decision Rule:
IRR Criterion: Choose projects with IRR higher than cost offinancing.Decision Rules A. "Capital Rationing" Situation Select those projects whose IRR (r) = k, where k is the cost of capital. Arrange all the projects in the descending order of their Internal Rate of Return. Select projects from the top till the capital budget allows. B. "No Capital Rationing" Situation Accept every project whose IRR (r) = k, where k is the cost of capital. C. Mutually Exclusive Projects Select the one with higher IRR.
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Profitability IndexDefinition: Profitability Index (PI) is the ratio of the present valueof future cash flows and the initial cost of a project: PV PVPI = = −CF0 I0 .Decision Criterion Using PI• For independent projects: Accept all projects with PI greaterthan one (this is identical to the NPV rule)• For mutually exclusive projects: Among the projects with PIgreater than one, accept the one with the highest PI.Problems with PIPI gives the same answer as NPV when(1) There is only one cash outflow, which is at time 0(2) Only one project is under consideration.PI scales projects by their initial investments. The scaling canlead to wrong answers in comparing mutually exclusive projects.
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DATA ANALYSIS AND INTERPRETATION
INTRODUCTION:-Capital budgeting is a process in which complex set of information break down into simple information and in interpretation ; the explantion are given for analyzed data.Data and interpretation of this report is based on the research that was conducted in kolhapur during the year 2010 when research thet was doing in the summer training in Warana Bazar concern in kolhapur. For finding the capital budgeting of the firm for expantion of firm the researcher is provided with all financial docoments of the firm.This data and interpretation is based on the documents provided by the company which include Balance sheet, profit and loss account and sales budget of the firm. The research consuls last three years balane sheet, profit and loss accont and sales budget of the firm to reach up to real conclusion.
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Warana bazaar is a consumers’ oriented store. Due to the increase in population in Kolhapur organization has decided to expand a business. With the following changes in the operating parameters’ are forecasted.
Increase in projected sales revenue by the 25 per cent due to faster developing Kolhapur.
10 percent increases selling expenses to support increased sale. 10 percent increases administrative expenses to support increased
sale. Increases variable expenses, 15 percent as a result of stoking of
goods and setting up of additional maintenance facility. The cost of new product would be required acquisition of product
Rs. 65 core Tax rate is 35%. Depreciation charge 32 lakh per annum. PV. rate is 10%.
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Past revenue and expenses data .
Table NO: 1
Past data
Yearsales (core)
Administrative Expenses
Selling Expenses
Variable Expenses
1 79.99 0.96 2.51 0.382 81.67 1.05 2.86 0.393 86.49 1.09 3.06 0.374 91.41 1.16 2.83 0.34
Chart NO:1
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Chart No.2
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Table No: 2
Projected Data
Year sales (core) Administrative Expenses Selling Expenses Variable Expenses
1 97.81 1.17 3.03 0.362 105.62 1.26 3.27 0.393 117.24 1.40 3.63 0.444 131.31 1.57 4.07 0.495 148.38 1.78 4.59 0.55
Chart No: 3
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Chart No:4
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Table No: 3
Incremental Cash Flow After Tax And Net Present Value
Particular 1 2 3 4 5
Incremental sales revenue(.25*projected sales revenue) 24.45 26.41 29.31 32.83 37.10less : Incremental administrative expenses (.10*selling exp)less : Incremental selling expenses (.10*Admin exp)less : Incremental selling expenses (.15*Variable exp)less depreciation
0.12 0.13 0.14 0.16 0.160.30 0.33 0.36 0.41 0.460.05 0.06 0.07 0.07 0.08
0.32 0.32 0.32 0.32 0.32Earnings before tax 23.66 25.57 28.42 31.87 36.08
less taxes
7.10 7.67 8.53 9.56 10.82
earnings after tax 16.56 17.90 19.90 22.31 25.25 CFAT 16.88 18.22 20.22 22.63 25.57pv factors .10 0.909 0.826 0.751 0.683 0.621 present value 15.34 15.05 15.18 15.46 15.88Total present value 76.91
less cash outflow 65
Net present value 11.91
D.S.& K.G.P’S . SIMS, MBAPage 43
UNIVERSITY OF PUNE, PUNE
Chart No: 5
D.S.& K.G.P’S . SIMS, MBAPage 44
UNIVERSITY OF PUNE, PUNE
EVALUATION TECHINIQUES :
1. Average Rate Of Return:
Average annual profit after taxesARR= X 100 Average investment over the life of the project
Table No: 4
Particular Rs(core)Cost 65Annual Estimated Income After Depreciation And Taxes
116.8818.2220.2222.6325.25
2345
103.2Estimated Life 5
Average Income 20.64Average Investment 65 ARR % 31.75
D.S.& K.G.P’S . SIMS, MBAPage 45
UNIVERSITY OF PUNE, PUNE
2. Payback period
Paybacks = year before recovery + uncovered cost at start of year Cash flow during the year
Table No:5
Particular Rs (core) CCF
D.S.& K.G.P’S . SIMS, MBAPage 46
UNIVERSITY OF PUNE, PUNE
Total Cost 65
Cash Inflows (CFAT)
1 15.59 15.59
2 16.83 32.42
3 18.68 51.1
4 20.92 72.02
5 23.66 95.68
Paybacks periods = 3year+8 months
D.S.& K.G.P’S . SIMS, MBAPage 47
UNIVERSITY OF PUNE, PUNE
3. Profitability index Present value of cash inflowsPI= Present value of cash outflows
=95.68/65
=1.47
D.S.& K.G.P’S . SIMS, MBAPage 48
UNIVERSITY OF PUNE, PUNE
4. Initial Rate Of Return
N1
IRR=r1 + X (r2-r1) N1+N2
Table No: 6
YEAR Cash Flow PV Rate (17%) CCF
1 16.88 0.855 14.43
2 18.22 0.731 13.32
3 20.22 0.624 12.62
4 22.63 0.534 12.08
5 25.25 0.456 11.51
63.97
65
-1.03
11.91
= 10 + X (17-10)
11.91 + (-1.03)
=17.66
D.S.& K.G.P’S . SIMS, MBAPage 49
UNIVERSITY OF PUNE, PUNE
Chart No: 8
D.S.& K.G.P’S . SIMS, MBAPage 50