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INTRODUCTION
A project is an activity sufficiently self- contained to permit financial and commercial analysis. In most cases projects represent expenditure of capital funds by pre- existing entities which want to expand or improve their operation. In general a project is an activity in which, we will spend money in expectation of returns and which logically seems to lead itself to planning. Financing and implementation as a unit, is a specific activity with a specific point and a specific ending point intended to accomplish a specific objective. To take up a new project, involves a capital investment decision and it is the top managements duty to make a situation and feasibility analysis of that particular project and means of financing and implementing it financing is a rapidly expanding field, which focuses not on the credit status of a company, but on cash flows that will be generated by a specific project. Capital budgeting has its origins in the natural resource and infrastructure sectors. The current demand for infrastructure and capital investments is being fueled by deregulation in the power, telecommunications, and transportation sectors, by the globalization of product markets and the need for manufacturing scale, and by the privatization of government owned entities in developed and developing countries. The capital budgeting decision procedure basically involves the evaluation of the desirability of an investment proposal. It is obvious that the firm most have a systematic procedure for making capital budgeting decisions. The procedure for making capital budgeting decisions. The procedure must be consistent with the objective of wealth maximization. In view of the significance of capital budgeting decisions, the procedure must consist of step by step analysis.
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INDUSTRY PROFILE
Absence of a market strategy, inadequate export infrastructure and unstable supply base are giving Indian mango growers a run for their money, more Soils, Nutrition, and Fertilizer in the international markets where the Indian king of fruits is still to take its place. While India produces over 11m metric tones of mangoes annually around 63% of world produce, its export share is just 0.11%. However, APEDA has identified UK, Germany, the Holland, France, Italy and Belgium for mango exports and plans aggressive marketing strategies there. APEDA is making all efforts to make available latest packaging and processing technology for our produce India is one of the largest producers of Tropical fruits in the world and has established the image in the international market. Due to its own advantages in climatic conditions, India can produce wide variety of fruits and vegetables. Unfortunately, the processing technologies and storage facilities, available are still primitive and enough importance has not been accorded for this industry, which has tremendous growth potential. Only recently, both the central and state governments have realized the importance and taken steps through wide variety of measures for the growth of the industry. Andhra Pradesh, where the plant is coming up, is known for variety of quality fruits particularly for Mango, Papaya, Guava, etc., With the support of Govt. bodies, many small-scale industries (overall capacity of upto 1000M.Tons of fruit pulp by canning process) have been established since 1970 by leading formers and fruit traders for processing the tropical fruits. In the early 1970s India started exporting this tropical fruit products to Gulf countries. However, could not able to meet advanced international market requirements to enter into Europe and American countries due to inferior product quality. Even the response in the GULF countries has not seen the potential growth year by year due to quality related issues. From the year 1995, Indian manufacturers realized on the technological gap in meeting the international standards when compared with competitive producers of same products from North America, Peru, Brazil & Egypt. Necessary steps were then initiated in
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establishing the new technologies called Aseptic Fruit Pulp to compete in international markets. Nevertheless, today there are many small scale industries producing low quality fruit pulps (canned pulp) and struggling to approach advanced international markets. Though, the successful organizations like Foods & Inns, Clean foodsetc could establish Aseptic process with latest technologies at that point of time, the plants have not been designed completely to meet international standards. Mango, the most important fruit of India, is grown in an area of 1.23 million ha with an annual production of 10.99 million tonnes, which accounts for 57.18 per cent of the total world production. This paper presents information on area and production, cultivars, hybrids and clone, agro techniques, disorders, insect pests and diseases, harvest and postharvest management, export, problems and prospects of growing mango in India.
World total 34.9 Key ~ 2011 data India ranks second, next only to China, with a production of 47 million tonnes from an area of 4.13 million ha during the year 2011 and accounting for 8.04 per cent of the total area under fruits in the world (51.36 mill ha) and 9.34 per cent of the total world fruit production (503.28 million tonnes). However, Banana, orange grapes and apple VIMAT, Chittoor Page 3
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were the major fruits of the world accounting for 14.45, 13.23, 13.01, 12.36 per cent of total world fruit production. Mango accounted for only 3.11 of the total area under the fruits and 2.15 per cent of the total world fruit production. The total production of mango in the word was 26.11 million tonnes out of which India alone produced 10.02 million tonnes, accounting for 38.38 per cent and ranked first. The total area production of mango in the world was 26.574 million tonnes from an area of 3.69 million ha out of which India alone accounted for 40.64 per cent in terms of production and 43.36 per cent in terms of occupied area, making it the largest producer of mangoes in the world. China, Thailand, Mexico, Pakistan, Indonesia, Philippines and Brazil were other important mango producers accounting for 13.48, 6.40, 5.65, 4.10, 3.79,3.64 and 3.20 per cent of the total world mango production, respectively. Amongst the commercial producers of mango, the highest productivity of mango was found to be in Brazil, followed by Pakistan, Mexico and China. Highest productivity of mango was observed in Cape Verde Is. (45.00 MT/ha), followed by Samoa (40.00 MT/ha), Guatemala (26.75 MT/ha), Palestine (25.00 mt/ha), Peru (22.76 MT/ha) and Israel (20.00 Mt/ha). However, the productivity was lower in the countries producing mangoes commercially. Amongst the commercial producers of mangoes, the Brazil had highest productivity viz. 12.50 Mt/ha followed by Pakistan (10.37 MT/ha), Mexico (8.65 Mt/ha) and China (8.56 Mt/ha). The productivity in India was only 6.75 MT/ha, which was considerably lower vis a-vis other countries of the world. Concerted efforts are to be made to increase the productivity of mango to meet national standards and increase its availability for the domestic as well as export market.
Area, Production and productivity of mango in major mango producing countries of the world during 2011 Sl. No. Countries Area Production Productivity
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Mill. ha 1 2 India China 1.6 0.419 Prop. (%) 43.36 11.35 (Mill. tons) 10.8 3.582 Prop. (%) 40.64 13.48 MT/ha 6.75 8.56
International Markets for Indian Mango Asian producers find it easier to expand sales to the European Union. Europes acceptance of different varieties is greater, because of a large demand from Asian immigrant groups. Phytosanitary restrictions are less stringent. Transportation costs are not as big a factor in exporting mangoes to the European Union as in exporting to the United States market: for example, India and Pakistan are able to compete with nonAsian suppliers to the European Union, whereas proximity gives Mexico and Haiti a clear advantage in supplying to the United States market. Fifty-four percent of European Union imports enter during the periods May to July and November to December, with peak imports in June. French imports reach peak in April and May, whereas United Kingdom imports are concentrated during the May to July. German imports are spread more evenly throughout the year. Of the top suppliers, Brazil provided chiefly during the period November to December, the United States during June to October, South Africa during January to April and Venezuela during April to July. Pakistan supplies the majority of its exports to the European Union during June and July; Indian exports take place mainly during the month of May. Although a lions share of Indian mango goes to the Gulf countries, efforts are being made to exploit European, American and Asian markets. About 13,000 MT of Alphonso variety is exported to Middle East, UK and Netherlands every year. The different products of mango which are exported include mango chutney, pickles, jam, squash, pulp, juice, nectar and slices. These are being exported to U.K., U.S.A., Kuwait and Russia. Besides these, the fresh mangoes are being exported to Bangladesh, Bahrain, France, Kuwait, Malaysia, Nepal, Singapore and U.K.
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Hyderabad, March 31: Despite an expected low production of mangoes this year, the total exports of mangos from Andhra Pradesh is likely to see a 100 per cent jump over last year. Unlike last year, due to adoption of better pest management techniques and awareness of qualitative produce, the mango growers from the state are hoping for better price realization from other countries during this season. "Last year, the total production of mangoes was about 32 lakh tonnes with instances of three times of flowering during the season. This led to good production but this year the output is expected to fall by about one-third over last year’s production," according to sources. "But low volume in production will not reflect on the exports," said APEDA officials. However, it is too early to predict on exports. The production is based on the rate of flowering and climatic conditions during harvest period, they said. The reasons...
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ANDHRA PRADESH ASSAM BIHAR CHANDIGARH CHHATISHGARH D & N HAVELI GOA GUJARAT HARYANA HIMACHAL PRADESH JAMMU & KASHMIR JHARKHAND KARNATAKA KERALA MADHYA PRADESH MAHARASHTRA NAGALAND ORRISA PONDICHERRY PUNJAB RAJASTHAN TAMIL NADU TRIPURA UTTAR PRADESH UTTRANCHAL WEST BENGAL TOTAL 480.40 4.60 146.00 0.00 43.30 1.20 4.60 121.50 9.10 38.70 10.70 15.10 153.80 63.80 14.20 474.50 0.30 177.60 0.40 6.40 5.90 132.70 4.30 276.40 38.40 88.10 2312.30 4058.30 46.50 995.90 0.40 191.80 12.50 7.60 856.70 64.60 24.00 12.10 254.30 1694.00 373.20 127.80 597.00 0.40 577.50 6.80 93.50 93.00 636.30 13.20 3588.00 120.80 578.00 15026.80
COMPANY PROFILE
History of Food and Inns Pvt. Ltd.
The division combines people with vast experience in agric-trading with the FOODS AND INNS (P) Ltd Groups credibility to justify its premier standing in the trading arena. The division was set up in 1967 and since then has handled a wide range of products - such as Sesame Seeds, Processed Fruits, Food grains, Aqua etc.
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FOODS AND INNS (P) Ltd began its fruit processing operations in early 70s.However fruit processing operations have been given a special thrust since the last season with an emphasis on developing strategic partnerships across the value chain especially fruit procurement and processing. FOODS AND INNS (P) Ltd has established it's presence as a reliable and competitive exporter to Coca Cola, USA, Western Europe, Far East, Middle East etc.
technical assistance from research institutes in the food industry to support the farmers in achieving better quality and higher yields by developing the gardening and harvesting techniques. Further to educating farmers with latest horticultural techniques, FOODS AND INNS LTD is encouraging farmers to mobilize the fruits directly to the factory, thereby minimizing the fruit handling damages and high value realizations. The first phase has been completed, by setting up of state-of-the-art fruit processing plant to produce natural tropical fruit puree and concentrates.
Board of Directors
S. No 1 2 Name of the Director Field Marshal Sam Manekshaw - M.C. Mr.Utsav Dhupelia Chairman Director
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3 4 5 6 7 Mr. D.B. Engineer Mr.Raymond Simkins Mr.C.M.Maniar Mr. D.D. Trivedi Mr. M. B. Dalal
Mr. Utsav Dhupelia
affairs of the company, is the brain and brawl for taking the companys turnover from Rs.5Crores (USD1.1 MIO) to Rs.70Crores (USD 16 MIO) giving the status of government recognized EXPORT HOUSE. With the back up of technical and managerial support staff, the state of art technology implementation, innovative R & D and Lab facilities, the doyen guidance of Mr. Utsav coupled with the contribution of other directors, the company is poised for a steady and continuous growth graph moving upwards in all Para meters.
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Market Presence European Union United States of America Canada Australia Middle East including Iran & North Africa Japan & South Korea
Facility
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FOODS AND INNS Ltd processing facility is located in Chittoor, spread over an area of 15 acres. This place has been earmarked to host Integrated Food Complex of International standards. The facility currently has a tropical fruit Puree / Concentrate processing plant and the pack house for preparing the Fresh Fruits & Vegetables.
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upgrading themselves continuously to identify and introduce improved and innovative product offerings that would delight customers worldwide and comply with the leading global quality standards.
Pack House
FOODS AND INNS (P) Ltd has a set up a Fresh fruit and Vegetable processing facility from Grief, Spain. Fresh fruits including mangoes, bananas are processed along with tropical vegetables like Okra, Egg plant, Lemon, Bitter gourd etc. The facility also holds ripening chambers, pre cooling chambers and cold storage to handle fresh fruits and vegetables.
Water Management
Water is an essential & precious natural resource. It is a natures gift. Without water there is no life on the earth. It is as important to the fruit processing industry as to the living being. But, water is becoming scarce year by year due to increase n its consumption in industries & agriculture sectors & indiscriminate use /wastage by human beings, therefore, it needs a integrated& scientific approach for its management to use it so that undesirable wastage is avoided which helps us to save water for right utilization .
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Our main source of water is bore wells. The water is potable. Water from all bore wells is collected in a sump. From there it is pumped to over head tank to supply to various locations of use. To manage appropriately & conserve the water, we are taking following steps at various locations of its use:
Fruit Washing
The water is re-circulated after filtration up to it becomes dirty. This water is chl0rinated to control the contamination by continuous dosing of chlorine in the washing tub.
Steam Generation
Water for boiler feeding is treated in water softener to reduce the hardness. The steam condensate of evaporator is recycled to boiler to save water & energy as condensate will have high temperature.
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Waste Management
Our factory is equipped with aerobic effluent treatment plant of 250kl capacity. Effluent from all locations of water use is collected through inter connected drains in ET plant. It is aerated here & transferred to settlement tank for sedimentation of solid particles. The treated effluent is sent to oxidation pond. From pond, water is used for gardening & civil construction. The sludge is transferred to drying bed. The dried sludge is used as manure in our garden. The main feature of our company is that no effluent treated or untreated is released in public drains & therefore, does not pose any danger to surrounding environment & public.
The seeds & peels of good fruits are passed second time through a pulped to remove the remaining pulpy portion. The pulp extracted so & pumice are mixed & given an enzymatic treatment & centrifuge to remove the extraneous materials so that pulp can be used for making concentrate. This helps in improving the recovery out of fruits.
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Customer Focus
Loyalty and a strong relationship in business are built out of years of experience in a particular industry. FOODS AND INNS (P) Ltd expertise in the business and its contacts with Agents\Brokers, Blender-bottlers, End User, Off-shore logistical service providers has made the supply chain process extremely competitive. Given our renewed emphasis on this product line we are strengthening relationships in key markets across the buyer spectrum, understanding unique requirements and delivering value to select global customers.
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PRODUCT PROFILE
Fruit Products
Alphonso
Totapuri
Guava
Papaya
Products Of Vegetables
Fruit Seasons
Mar
Apr
May
June
July
Aug
Sept
Oct Nov
Dec
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REVIEW OF LITERATURE
Capital Budgeting
CB is a long term investment made by the organization in different projects and it helps the firm in evaluating the projects under taken by different techniques. According to Weston and Brigham CB involves the entire process of planning expenditures whose returns are expected to extend beyond one year. The CB decisions include replacement, expansion, diversification research and development and miscellaneous proposals. Feature of Capital Budgeting The important features, which distinguish capital budgeting decision in other daytoday decision, are Capital budgeting decision involves the exchange of current funds for the benefit to be achieved in future. The futures benefits are expected and are to be realized over a series of years. The funds are invested in non-flexible long-term funds. They have a long term and significant effect on the profitability of the concern. They involve huge funds. They are irreversible decisions. They are strategic decision associated with high degree of risk.
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2. Long term commitment of funds Capital expenditure involves not only large amount of funds but also funds for long-term or a permanent basis. The long-term commitment of funds increases the financial risk involved in the investment decision. 3. Irreversible Nature The capital expenditure decisions are of irreversible nature. Once, the decision for acquiring a permanent asset is taken, it becomes very difficult to impose of these assets without incurring heavy losses. 4. Long term effect on profitability Capital budgeting decision has a long term and significant effect on the profitability of a concern. Not only the present earnings of the firm are affected by the investment in capital assets but also the future growth and profitability of the firm depends up to the investment decision taken today. 5. Difference of investment decision The long-term investment decision are difficult to be taken because uncertainties of future and higher degree of risk. 6. Notional Importance: Investment decision though taken by individual concern is of national importance because it determines employment, economic activities and economic growth. Kinds Of Capital Budgeting Every capital budgeting decision is a specific decision in the situation, for a given firm and with given parameters and therefore, almost infinite number of types or forms of capital budgeting decision may occur. Some projects affect other projects of the firm is considering and analyzing. The project may also be classified as revenue generating or cost reducing projects can be categorized as follows:
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(i) From the point of view of firms existence: The capital budgeting decision may be taken by a newly incorporated firm or by an already existing firm. New Firm: A newly incorporated firm may be required to take different decision such as selection of a plant to be installed, capacity utilization at initial stages, to set up or not simultaneously the ancillary unity etc. Existing Firm: A firm which already exists may be required to take various decisions from time to time meet the challenge of competition or changing environment. These decisions may be: Replacements and Modernization Decision This is a common type of a capital budgeting decision. All types of plant and machineries eventually require replacement. If the existing plant is to be replaced because of the economic life of the plant is over, then the decisions may be known as a replacement decision. However, if an existing plant is to be replaced because it has become technologically outdated (though the economic life may not be over) the decision any be known as a modernization decision. In case of a replacement decision, the objective is to restore the same or higher capacity, whereas in case of modernization decision, the objectives are to increase the efficiency and/or cost reduction. In general, the replacement decision and the modernization decision are also known as reduction decisions. (ii) Expansion: Sometimes, the firm may be interested in increasing the Installed production capacity so as to increase the market share. In such a case, the finance manager is required to evaluate the expansion program in terms of marginal costs and marginal benefits. cost
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i. Diversification Sometimes, the firm may be interested to diversify into new product lines, new markets; production of spares parts etc. in such a case, the finance manager is required to evaluate not only the marginal cost and benefits, but also the effect of diversification on the existing market share and profitability. Both the expansion and diversification decisions may be also be known as revenue increasing decisions. The capital budgeting may also be classified from the point of view of the decision situation as follows: Independent Project Decision This is a fundamental decision in Capital Budgeting. It also called as accept /reject criterion. If the project is accepted, the firm invests in it. In general all these proposals, which yield a rate of return greater than a certain required rate of return on cost of capital, are accepted and the rest are rejected. By applying this criterion all independent projects with one in such a way that the acceptance of one precludes the possibility of acceptance of another. Under the accept-reject decision all independent projects that satisfy the minimum investment criterion should be implemented. (ii) Mutually Exclusive Projects Decision Mutually Exclusive project are those, which compete with other projects in such a way that the acceptance of one will exclude the acceptance of the other projects. The alternatively are mutually exclusive and only one may be chosen. Suppose a company is intending to buy a new machine. There are three competing brands, each with a different initial investment adopting costs. The three machines represent mutually exclusive alternatives as only one of these can be selected. It may be noted here that the mutually exclusive projects decisions are not independent of the accept-reject decisions. (iii) Capital Rationing Decision In a situation where the firm has unlimited funds all independent investment proposals yielding return greater than some pre-determined levels are accepted. However this situation does not prevail in most of the business firms in actual practice. They have a fixed capital budget. Page 21
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A large number of investment proposals compete for these limited funds, the firm must therefore ration them. The firm allocates funds to projects in a manner that it maximizes long run returns; this rationing refers to a situation in which a firm has more acceptance investment than it can finance. It is concerned with the selection of a group of investment proposals acceptable. Under the accept-reject decision capital rationing employees ranking of the acceptable investment projects. The project can be ranked on the basis of a predetermined criterion such as the rate of return. The project is ranked in the descending order of the rate of return.
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Difficulty in Quantification of Impact The finance manager may face difficulties in measuring the cost and benefits of projects in quantitative terms. For example, the new products 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 factor other than the launch of the new products. Assumption In Capital Budgeting The capital budgeting decision process is a multi-faceted and analytical process. A number of assumptions are required to be made. These assumptions constitute a general set of condition within which the financial aspects of different proposals are to be evaluated. Some of these assumptions are: 1. Certainty With Respect To Cost and Benefits: It is very difficult to estimate the cost and benefits of a proposal beyond 2-3 years in future. However, for a capital budgeting decision, it is assumed that the estimate of cost and benefits are reasonably accurate and certain. 2. Profit Motive Another assumption is that the capital budgeting decisions are taken with a primary motive of increasing the profit of the firm. No other motive or goal influences the decision of the finance manager. 3. No Capital Rationing The capital Budgeting decisions in the present chapter assume that there is no scarcity of capital. It assumes that a proposal will be accepted or rejected in the strength of its merits alone. The proposal will not be considered in combination with other proposals to the maximum utilization of available funds. Capital Budgeting Process Capital budgeting is complex process as it involves decision relating to the Investment of current funds for the benefit for the benefit to be achieved in Future and
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the future are always uncertain. However, the following procedure may be adopted in the process of Capital Budgeting. Identification of Investment Proposals The capital budgeting process begins with the identification of investment Proposals. The proposal about potential investment opportunities may originate either from top management or from any officer of the organization. The departmental head analysis various proposals in the light of the corporate strategies and submits the suitable proposals to the capital expenditure planning. Screening Proposals The expenditure planning committee screens the various proposals received from different departments. The committee reviews these proposals from various angles to ensure that these are in accordance with the corporate strategies or selection criterion of the firm and also do not lead departmental imbalances. Evaluation of Various Proposals The next step in the capital budgeting process is to various proposals. The method, which may be used for this purpose such as, payback period method, rate of return method, N.P.V and I.R.R etc. Fixing Priorities After evaluating various proposals, the unprofitable uneconomical proposal may be rejected and it may not be possible for the firm to invest immediately in all the acceptable proposals due to limitation of funds. Therefore, it essential to rank the project/proposals after considering urgency, risk and profitability involved in there. Final Approval And Preparation Of Capital Expenditure Budget Proposals meeting the evaluation and other criteria are approved to be included in the capital expenditure budget. The expenditure budget lays down the amount of estimated expenditure to be incurred on fixed assets during the budget period.
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Implementing proposals Preparation of a capital expenditure budget and incorporation of a particular Proposal in the budget doesnt itself authorize to go ahead with the implementation of the project. A request for the authority to spend the amount should be made to the capital Expenditure committee, which reviews the profitability of the project in the changed circumstances. Responsibilities should be assigned while implementing the project in order to avoid unnecessary delays and cost overruns. Network technique likes PERT and CPM can be applied to control and monitor the implementation of the projects. Performance Review The last stage in the process of capital budgeting is the evaluation of the performance of the project. The evaluation is made by comparing actual and budget expenditures and also by comparing actual anticipated returns. The unfavorable variances, if any should be looked in to and the causes of the same be identified so that corrective action may be taken in future.
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Time adjusted or discounted technique: a. Net Present Value method (N.P.V) b. Internal Rate of Return method (I.R.R) c. Profitability Index method (P.I)
Advantages
Simple to understand and easy to calculate. It saves in cost; it requires lesser time and labour as compared to other methods of capital budgeting. In this method, as a project with a shorter payback period is preferred to the one having a longer pay back period, it reduces the loss through obsolescence. Due to its short- time approach, this method is particularly suited to a firm which has shortage of cash or whose liquidity position is not good.
Disadvantages
It does not take into account the cash inflows earned after the payback period and hence the true profitability of the project cannot be correctly assessed.
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This method ignores the time value of the money and does not consider the magnitude and timing of cash inflows. It does not take into account the cost of capital, which is very important in making sound investment decision. It is difficult to determine the minimum acceptable payback period, which is subjective decision.
Accounting Rate Of Return Method This method takes into account the earnings from the investment over the whole life. It is known as average rate of return method because under this method the concept of accounting profit (NP after tax and depreciation) is used rather than cash inflows. According to this method, various projects are ranked in order of the rate of earnings or rate of return. Decision Rule The project with higher rate of return is selected and vice-versa. The return on investment method can be in several ways, as Under this method average profit after tax and depreciation is calculated and then it is divided by the total capital out lay. Average Annual Profits (after dep.& tax) ------------------------- ---x 100 Average Investment
It is very simple to understand and easy to calculate. It uses the entire earnings of a project in calculating rate of return and hence gives a true view of profitability. As this method is based upon accounting profit, it can be readily calculated from the financial data.
Capital Budgeting
It ignores the time value of money. It does not take in to account the cash flows, which are more important than the accounting profits. It ignores the period in which the profit are earned as a 20% rate of return in 2 years is considered to be better than 18%rate of return in 12 years. This method cannot be applied to a situation where investment in project is to be made in parts.
It recognizes the time value of money and is suitable to apply in a situation with uniform cash outflows and uneven cash inflows. It takes in to account the earnings over the entire life of the project and gives the true view if the profitability of the investment Takes in to consideration the objective of maximum profitability.
Disadvantages
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More difficult to understand and operate. It may not give good results while comparing projects with unequal investment of funds. It is not easy to determine an appropriate discount rate.
Internal Rate Of Return Method The internal rate of return method is also a modern technique of capital budgeting that takes in to account the time value of money. It is also known as time- adjusted rate of return or trial and error yield method. Under this method the cash flows of a project are discounted at a suitable rate by hit and trial method, which equates the net present value so calculated to the amount of the investment. The internal rate of return can be defined as that rate of discount at which the present value of cash inflows is equal to the present value of cash outflow. Decision Rule: Accept the proposal having the higher rate of return and vice versa. If IRR>K, accept project. K=cost of capital. If IRR<K, reject project Determination of IRR a) When annual cash flows are equal over the life of the asset. Initial Outlay FACTOR = -------------------------------- x 100 Annual Cash inflow b) When the annual cash flows are unequal over the life of the asset: PV of cash inflows at lower rate PV of cash out flows IRR = LR+ --------------------------------------------------------(hr-lr)
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The steps are involved here are: 1. Prepare the cash flows table using assumed discount rate to discount the net cash flows to the present value. 2. Find out the NPV, & if the NPV is positive, apply higher rate of discount. 3. If the higher discount rate still gives a positive NPV increases the discount rate further. Until the NPV becomes zero. 4. If the NPV is negative, at a higher rate, NPV lies between these two rates. Advantages
It takes into account, the time value of money and can be applied in situation with even and even cash flows. It considers the profitability of the projects for its entire economic life. The determination of cost of capital is not a pre-requisite for the use of this method. It provide for uniform ranking of proposals due to the percentage rate of return. This method is also compatible with the objective of maximum profitability.
Disadvantages
It is difficult to understand and operate. The results of NPV and IRR methods my differ when the projects under evaluation differ in their size, life and timings of cash flows.
This method is based on the assumption that the earnings are reinvested at the IRR for the remaining life of the project, which is not a justified assumption.
Profitability Index method or Benefit Cost Ratio Method: It is also a time-adjusted method of evaluating the investment proposals. PI also called benefit cost ratio or desirability factor is the relationship between present value of cash inflows and the present values of cash outflows. Thus
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PV of cash inflows Profitability index = ----------------------------PV of cash outflows NPV Net profitability index = --------------------------Initial Outlay Advantages
Unlike net present value, the profitability index method is used to rank the projects even when the costs of the projects differ significantly.
It recognizes the time value of money and is suitable to applied in a situation with uniform cash outflow and uneven cash inflows.
It takes into account the earnings over the entire life of the project and gives the true view of the profitability of the investment. Takes into consideration the objectives of maximum profitability.
DISADVANTAGES:
It may not give good results while comparing projects with unequal investment funds.
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RESEARCH METHODOLOGY
The study of Capital Budgeting in Foods and Inns Ltd., has been carried out of studying the companies project reports, budget and revenue estimates. The study can broadly divided into two phase. 1) Primary Data 2) Secondary Data Primary Data The data which is collected at first had for the purpose of the study is known as primary data. Primary data which is collected through interaction with the assistant financial manager of Foods and Inns Ltd., Secondary Data The data which is corrected by some one previously is called by secondary Data. It is already available in the form of internal records of the company and other publications. Collecting relevant Annual Reports Analyzing the Collected data Drafting the report Updating the Final report Collecting the general information about Capital Budgeting from various standard text books Studying the project report of Foods and Inns Ltd.,
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Investment Estimated life of the project Estimated net cash flows 2007 2008 2009 2010 2011
1135 Millions 7 years Rs. In millions 405.56 393.91 325.02 321.29 824.08
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Capital Budgeting
1. Tradition (OR) Non Discounted Cash Flow Techniques
Pay back period method is one of the used popular methods in Traditional Cash flow techniques. Here the term pay back refers The number of years required recovering the original cash outlay invested in a project
Pay back period method can be calculated with the help of the following Formula. Cash out lay Payback period = ------------------------------------------Annual cash flows
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Capital Budgeting
COMPUTATION OF PAY BACK PERIOD
Years
Cash In Flow Values RSo In Millions 405.56 393.91 325.02 321.29 824.08
Cumulative Cash hi Flow Values Rs. In Millions 1052.37 1466.28 1771.30 2092.59 2916.67
The recovery of the investment falls with in between the third and fifth years. Therefore, the PB is 3 years plus a fraction of the fourth year. Payback Period = 3 years +[(1135-1052.37) / 393.91] -3 years + [ 2.63 s- 393.91] = = Interpretation: The Targeted Payback Period of the Project is 3 years 11 months. Here the total investment completely recovered with in a period of 3 years 2 months, which is less than the Targeted Period. So the Project is acceptable. 3 years + 0.20 years 3.20 years.
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Capital Budgeting
B) Accounting (OR) Average Rate Of Return (A.R.R) Method It is an accounting method which uses the accounting information revealed by the financial statements to measure the profitability of an investment proposal. It can be determined by dividing the average income after taxes by average investment that is the average book value after depreciation. According to Solomon, according rate of return on an investment can be calculated as the ratio of accounting net income to the initial investment. Accounting (OR) Average rate of return method can be calculated with the help of the following formula Average Income Average Rate Of Return (A.R.R) = ---------------------------------------X 100 Average Investment Here Total Profit Earned By the Project in All The Year Average Income =-----------------------------------------------------------------------Number Of Years Initial Investment Average Investment = --------------------------------2
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Capital Budgeting
Computation of Average Income Cash In Flow Values Rs. In Millions 405.56 393.91 325.02 321.29 824.08 2916.67 416.67
Years 2007 2008 2009 2010 2011 Total Income Average Income
Initial Investment Average Investment =---------------------------2 1135 millions = ------------------------2 = Rs. 56.75 millions
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Capital Budgeting
Average Income Average Rate of Return ( A.R.R) =--------------------------------- X 100 Average Investment 416.67 millions =------------------------------------- X 100 567.65
Interpretation The Average Rate of Return of the Project is 73.40% which is higher than the rate specified by the Foods and Inns Pvt Ltd., So the Project is acceptable.
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Capital Budgeting
2. Modern ( OR) Discounted Cash Flow Methods A) Net present value (N.P.V) Method Net present value method is the wildly used and more sophisticated project is the Evaluation techniques under discounted cash flow method. It is a superior method. Because the value of cash inflow are taken at discounted value of one rupee . Net present value is calculated by sub stating present value of cash inflow from present value of Cash out flows. It recognizes the impotence of time value of money.
According to Ezra Solomon, It is a present value of future returns, discounted At the required rate of return, minus the present value of the cost of the investment.
Net present value method can be calculated with the help of the following formula
N.P.V = Net Present Value of Cash Inflows Net Present Value of Cash Outflows
Capital Budgeting
Cash In Flow Years Values Rs. In Millions 2007 2008 2009 2010 2011 405.56 393.91 325.02 321.29 824.08 Discounted Value of 1/-At 10% Cost Of Capital 0.751 0.683 0621 0.564 0.513 Present Value Of cash in Flows Rs. in Millions 304.58 269.04 201.84 181.20 422.75 1964.47
N.P.V = Net Present Value of - Net Present Value of Cash Cash Inflows Outflows
Interpretation Based on Acceptance Rule of Net Present Value method we will accept the Project. The Present value of investment out lays and cash inflows are to be calculated using Net present values table. The decision criteria for accepting this project because the net present value Project is Positive value (AND) > 0. So this Project is acceptable. B) Internal Rate of Return ( I.R.R) Method :
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Capital Budgeting
The internal rate of return is to be determined by trial and error method. The following steps can be used for its computation.
Compute the present value of the cash flows from an investment, by using an arbitrarily selected interest rate.
Then compare the present value so obtained with investment cost. If the present value is higher than the cost, then the present value of inflows is to be determined by using higher rate.
This procedure is to be continued until the present value of the flows from the investment are approximately equal to its cost.
The interest rate that brings about this equality is the internal rate of return
Internal rate of Return method can be calculated with the help of the following formula
Excessive Value I.R.R Lower Discount Rate =---------------------------------- X Difference in Discount Rate Positive Value- Negative Value
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Capital Budgeting
Computation of Internal Rate of Return Cash In Flow Values Rs. In Millions 405.56 393.91 325.02 321.29 8243.08 Present Value Of Cash In Flows Rs. In Millions 197.91 151.26 98.16 80.00 163.67 1190.58 Discounted Value of/At 30% Cost Of Capital 0.455 0.350 0.269 0.207 0.159 Present Value Of Cash In Flows Rs. In Millions 184.52 137.87 87.43 66.50 131.02 1098.58
Years
Discounted Value of1/-At 27% Cost Of Capital 0.488 0.384 0.302 0.249 0.198
1190.58-1135 I.R.R = 27%+ -----------------------------------X (30-27) 1190.58-1098.58 1190.58-1135 = 27% + -------------------------------X (30-27) 1190.58-1098.58 = 27% + 0.60 (3) =27+1.8% =28.8% Interpretation Based on acceptance rule internal rate of Return method we will accept the Project. The project is accepted the IRR is more than the 10% for this project. A) Profitability Index (P.I) Method: VIMAT, Chittoor Page 46
Capital Budgeting
This method is also known as Benefit Cost Ratio According to Van Home, the Profitability index of a project is the ratio of the present value of future net cash flows to the Present value of initial cash outflows.
Profitability Index method can be calculated with the help of the following formula
Present Value of Cash Inflows Profitability Index (P.I) =------------------------------------------------Present Value Of cash Outflows
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Capital Budgeting
Cash In Flow Years Values Rs. In Millions 2007 2008 2009 2010 2011 405.56 393.91 325.02 321.29 824.08
Discounted Value of1/- At 10% Cost Of Capital 0..751 0.683 0.621 0.564 0.513
Present Value Of Cash In Flows Rs. In Millions 304.58 269.04 201.84 181.20 422.75 1964.47
Present value of Cash inflow Profitability Index ( P.I) = ---------------------------------------Present Value of Cash Outflows = 1964.47 millions ---------------------1135 millions Interpretation Based on acceptance rule Profitability index method we will accept the Project. Because the PI of the Project is greater than 1 that 1.73, so the project is accepted.
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Capital Budgeting
FINDINGS
The Targeted Payback period of the Project is 3 years 11 months. Here the total investment completely recovered with in a period of 3 years 2 months, which is less than the Targeted Period. So the Project is acceptable.
Average Rate Of Return (A.R.R) of the Project is 73.40% which is higher than the rate specified by the Foods and Inns Pvt Ltd., acceptable. So the Project is
Net Present Value (N.P.V) Method based on Acceptance rule of Net Present Value method we will accept the Project. The Present Value of investment out lays and cash inflows are to be calculated using Net present value table. The decision criteria for accepting this project because the Net present value Project is Positive value (AND) > 0. So this Project is acceptable.
Internal Rate of Return (I.R.R) Method Based on Acceptance rule Internal Rate of Return method we will accept the Project. The Project is accepted the IRR is more than the 10% for this project.
Profitability Index (P.I) Method Based on Acceptance rule Profitability Index method we will accept the Project. Because the PI of the Project is greater than 1 that 1.73, so the project is accepted.
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Capital Budgeting
SUGGESTION
As per my view I suggested like this The Firm needs to maintain adequate capital budgeting in order to meet its daily transactions. It is better to decrease debt content and need to raise equity capital. The firm needs to concentrate on debt collections to meet their business requirements. Firms management need to concentration on maximum utilization of all resources including raw material and inventory to get maximum benefits.
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Capital Budgeting
CONCLUSION
Capital budgeting is a difficult process to the investment of available funds. The benefit will attain only in the near future but, the future is uncertain. Even though the NPV and IRR methods yield better decision-making data based off them being sophisticated capital budgeting techniques, the payback method is not without a purpose. The payback method is a quick and easy way to filter a project to see if the time should be spent to further analyze whether the project should move forward. In the example, the payback period was almost half of what the maximum payback period was, so it was definitely a good candidate for further scrutiny. The NPV and IRR methods both give very good accept-reject results. However, IRR is the preferred method by most since its results are portrayed in rates of return, which most financial managers see as representative across the board.
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BIBLIOGRAPHY
1. S.P.Jain and K.L.Narang : Advanced Accountancy Volume II Kalyani Publishers 2. I M Pandey 3. S.P.Jain & K.L.Narang 4. Prasanna Chandra : Financial Management, 9 Edition, Vikas Publishing House Pvt.Ltd. : Cost and Management Accounting, Kalyani Publishers : Fundamentals of Financial Management Websites: www.google.com www.foodsandinns.com
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