Abstract:

Capital budgeting is a critical process for companies aiming to make informed investment
decisions that align with their long-term strategic goals. This abstract provides an overview of
the capital budgeting practices employed by Kesoram Industries Limited, a prominent industrial
conglomerate.
Kesoram Industries Limited operates in diverse sectors, including cement, tires, and rayon,
necessitating a robust capital budgeting framework to allocate resources effectively. This study
delves into the methodologies, tools, and criteria utilized by Kesoram Industries Limited in
evaluating and selecting capital projects.
The analysis includes an exploration of the company's risk assessment mechanisms,
incorporating factors such as market volatility, regulatory changes, and technological
advancements. Kesoram Industries Limited's approach to incorporating the time value of money,
discount rate determination, and sensitivity analysis is also examined to shed light on the rigor
applied in project evaluation.
Furthermore, the abstract outlines Kesoram Industries Limited's strategies for optimizing its
capital structure, considering debt and equity components in financing capital projects. The study
investigates the company's efforts to strike a balance between minimizing the cost of capital and
maintaining financial flexibility.
In addition, the abstract discusses the role of key performance indicators (KPIs) and metrics used
by Kesoram Industries Limited to monitor the post-implementation performance of capital
projects. This includes an examination of financial metrics, project timelines, and deviations
from initial projections, highlighting the company's commitment to continuous improvement and
adaptive management.
The findings from this comprehensive analysis contribute to the understanding of how Kesoram
Industries Limited navigates the complexities of capital budgeting in a multi-sector environment.
The insights derived from this study may be valuable for industry practitioners, academics, and
policymakers seeking to enhance their knowledge of effective capital allocation strategies in
diverse business contexts.
INTRODUCTION
 CAPITAL BUDGEING:

An efficient allocation of capital is the most important finance function in modern times.
It involves decisions to commit firm’s funds to long-term assets. Such decisions are tend to
determine the value of company/firm by influencing its growth, profitability & risk.

Investment decisions are generally known as capital budgeting or capital expenditure

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

Such decisions can be investment decisions, financing decisions or operating decisions.

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

Capital budgeting decisions are related to allocation of investible funds to different long-term
assets. They have long-term implications and affect the future growth and profitability of the
firm.

In evaluating such investment proposals, it is important to carefully consider the expected

benefits of investment against the expenses associated with it.

Organizations are frequently faced with Capital Budgeting decisions. Any decision that requires
the use of resources is a capital budgeting decisions. Capital budgeting is more or less a
continuous process in any growing concern.
NEED FOR THE STUDY
 The Project study is undertaken to analyze and understand the Capital Budgeting
process in cement manufacturing sector, which gives mean exposure to practical
implication of theory knowledge.
 To know about the company’s operation of using various Capital Budgeting
techniques.
 To know how the company gets funds from various resources.

OBJECTIVES OF THE STUDY

 To study the relevance of capital budgeting in evaluating the project for project
finance

 To study the technique of capital budgeting for decision- making.

 To measure the present value of rupee invested.

 To understand an item wise study of the company financial performance of the

company.

 To make suggestion if any for improving the financial position if the company.
 To understand the practical usage of capital budgeting techniques

 To understand the nature of risk and uncertainty

METHODOLOGY

To achieve aforesaid objective the following methodology has been adopted. The
information for this report has been collected through the primary and secondary sources.

Primary sources

It is also called as first handed information; the data is collected through the
observation in the organization and interview with officials. By asking question with the
accounts and other persons in the financial department. A part from these some information is
collected through the seminars, which were held by KESORAM

Secondary sources

The secondary data have been collected through the various books, magazines,
brouchers & websites
LIMITATION OF THE STUDY :

 Lack of time is another limiting factor, ie., the schedule period of 8 weeks are not
sufficient to make the study independently regarding Capital Budgeting in KESORAM.
 The busy schedule of the officials in the KESORAM is another limiting factor. Due to
the busy schedule officials restricted me to collect the complete information about
organization.
 Non-availability of confidential financial data.
 The study is conducted in a short period, which was not detailed in all aspects.
 All the techniques of capital budgeting are not used in KESORAM. Therefore it was
possible to explain only few methods of capital budgeting.
 CHAPTER II
REVIEW OF LITERATURE

I have divided my literature review into two parts:

1. Foreign Studies
2. Indian Studies
Literature Review: Foreign Studies
Klammer, Thomas P. (1972) surveyed a sample of 369 firms from the 1969 Compustat listing
of manufacturing firms that appeared in significant industry groups and made at least $1 million
of capital expenditures in each of the five years 1963-1967. Respondents were asked to identify
the capital budgeting techniques in use in 1959, 1964, and 1970. The results indicated an
increased use of techniques that incorporated the present value (Klammer, 1984)
Fremgen James (1973) surveyed a random sample of 250 business firms that were in the 1969
edition of Dun and Bradsheet’s Reference Book of Corporate Management. Questionnaire were
sent to companies engaged in manufacturing, retailing, mining, transportation, land development,
entertainment, public utilities and conglomerates to study the capital budgeting models used,
stages of the capital budgeting process, and the methods used to adjust for risk. He found that
firms considered the Internal Rate of Return model to be the most important model for decision-
making. He also found that the majority of firms increased their profitability requirements to
adjust for risk and considered defining a project and determining the cash flow projections as the
most important and most difficult stage of the capital budgeting process.
Petty J William, Scott David P., and Bird Monroe M. (1975) examined responses from 109
controllers of 1971 Fortune 500 (by sells dollars) firms concerning the techniques their
companies used to evaluate new and existing product lines. They found that Internal Rate of
Return was the method preferred for evaluating all projects. Moreover, they found that present
value techniques were used more frequently to evaluate new product lines than existing product
lines.
Gitman Lawrence G. and John R. Forrester Jr. (1977) analysed the responses from 110 firms
who replied to their survey of the 600 companies that Forbes reported as having the greatest
stock price growth over the 1971-1979 periods. The survey containing questions related to
capital budgeting techniques, the division of responsibility for capital budgeting decisions, the
most important and most difficult stages of capital budgeting, the cut-off rate and the methods
used to assess risk. They found that the DCF techniques were the most popular methods for
evaluating projects, especially the IRR. However, many firms still used the PBP method as a
backup or secondary approach. The majority of the companies that responded to the survey
indicated that the Finance Department was responsible for analysing capital budgeting projects.
Respondents also indicated that project definition and cash flow estimation was the most difficult
and most critical stage of the capital budgeting process. The majority of the firms had a cost of
capital or cut-off rate between 10 and 15%, and they most often adjusted for risk by increasing
the minimum acceptable rate of return on capital projects.

Kim Suk H. and Farragher Edward (1981) surveyed the 1979 Fortune 100 CFO about their
1975 and 1979 usage of techniques for evaluating capital budgeting projects. They found that in
both years, the majority of the firms relied on a DCF method (either the IRR or the NPV) as the
primary method and the payback as the secondary method.
Marc Ross (1986) in an in-depth study of the capital budgeting projects of 12 large
manufacturing firms, he found that although techniques that incorporated discounted cash flow
were used to some extent, firms relied rather heavily on the simplistic payback model, especially
for smaller projects. In addition, when discounted cash flow techniques were used, they were
often simplified. For example, some firms’ simplifying assumptions include the use of the same
economic life for all projects even though the actual lives might be different. Further, firms often
did not adjust their analysis for risk. Surveys results also indicate that project approval at many
firms (in eight out of twelve firms studied) follow different criteria depending on the locus of the
decision.
Wong, Farragher and Leung (1987) surveyed a sample of large corporations in Hong Kong,
Malaysia and Singapore in 1985. They found that PBP was the most popular primary technique
for evaluating and ranking projects in Malaysia. In Hong Kong, they found PBP and ARR to be
equally the most popular. They concluded that, in contrast to US companies where DCF
techniques are significantly more popular than non-DCF techniques as primary evaluation
measures, companies in Hong Kong, Malaysia and Singapore prefer to use several methods as
primary measures in evaluating and ranking proposed investment projects. It is also observed
that companies in Hong Kong, Malaysia and Singapore do not undertake much risk analysis,
neither attempting to assess risk nor adjust evaluation criteria to reflect risk. The most popular
risk assessment techniques were sensitivity analysis and scenario analysis (high-medium-low
forecasts).
Stanley (1990) has studied capital budgeting techniques used by small business firms in the
1990s. According to Eugene Brigham, in his book ‘Fundamentals of Financial Management’ in
the chapter “Capital Budgeting in the Small Business Firms” , capital budgeting may be more
important to the smaller firm than its larger counterparts because of the lack of diversification in
a smaller firm. He says that a mistake in one project may not be offset by successes in others. His
intention of the study is to ascertain where small firms stand today in regard to capital budgeting
techniques as opposed to prior decades. He selected 850 small firms out of which he received
232 usable responses to the study. As per his findings, a number of patterns relating to capital
budgeting by smaller firms are worthy to note. The firms continue to be dependent on the
payback method as the primary method of analysis. This is not necessarily evidence of a lack of
sophistication, as much as it is a reflection of the financial pressures put on the small business
owner by financial institutions. The question to be answered is not always how profitable the
project is, but how quickly a loan can be paid back. Small business owners have increased
sophistication as over 27% use discounted cash flow as the primary method of analysis. Stanley
opines that their conclusions may, at times, be somewhat misleading due to an inappropriate
discount rate. Small firms take risk very seriously which is reflected by a higher required rate of
return for risky projects.

Jog and Srivastava (1991) provide direct empirical evidence on the capital budgeting process
based upon a survey of large Canadian corporations. They explored many issues viz., the use of
capital budgeting techniques, cash flow forecasting methods, risk analysis techniques and
methods used to estimate the cost of capital and the cost of equity. His findings are most firms
used multiple capital budgeting methods to assess capital investments; DCF methods were
employed by more than 75% of our respondents to evaluate projects such as expansion-existing
operations, expansion-new operations, foreign operations and leasing. It appears that the
propensity to use DCF techniques increases with the complexity of the decision of the DCF
methods, IRR was used more frequently than NPV in most cases, of the two rules of thumb, he
observed little use of ARR. Payback is used much more frequently in conjunction with DCF
methods. According to them, the use of DCF methods has become a norm in Canadian firms and
that multiple evaluation criteria are being commonly used. Management’s subjective estimates
are used as often to generate a cash flow forecast as quantitative methods. Sensitivity analysis is
the most popular technique among quantitative methods used in cash flow estimation, possibly
reflecting the popularity of pc-based spreadsheet programs. The estimation of cost of capital also
seems to be based more often on judgment than on any formal models. A significant number of
firms use non-standard discount rates, i.e., rates other than the WACC and those using it seem to
rely on judgmental or non-standard methods of estimation for their cost of equity, the standard
methods being either the CAPM or the dividend growth model. Compared to previous studies, he
found the usage rate for DCF methods is higher. However, the use of subjective, judgmental and
nonstandard techniques in the estimation of cash flows, risk analysis and the estimation of the
appropriate cost of capital continues to be high.
Bierman (1993) finds that 73 of 74 Fortune 100 firms use discounted cash flow (DCF) analysis,
with internal rate of return (IRR) being preferred over net present value(NPV). The payback
period method also remains a very popular method in practice, though not as a primary
technique. 93 per cent of the respondents use company-wide WACC for discounting free cash
flows and 72 per cent use the discount rate applicable to project based on its risk characteristics.
Bierman Harold (1993) surveyed Fortune 500 industrial companies regarding the capital
budgeting methods used by these firms in 1993. He found that every responding firm used some
type of DCF method. The payback period was used by 84 percent of his surveyed companies.
However, no company used it as the primary method, and most companies gave the greatest
weight to a DCF method. 99 percent of the Fortune 500 companies used IRR, while 85 percent
used NPV. Thus, most firms actually used both methods. 93 percent of companies calculated a
weighted average cost of capital as part of their capital budgeting process. A few companies
apparently used the same WACC for all projects, but 73 per cent adjusted the corporate WACC
to account for project risk, and 23 per cent made adjustments to reflect divisional risk.
Drury, Braund and Tayles’ (1993) survey of 300 manufacturing companies with annual sales
exceeding £20 million indicates that payback (86%) and IRR (80%) are the most widely used
project appraisal methodologies. The most widely used project risk analysis technique is
sensitivity analysis. Forty-nine per cent of the respondents do not use statistical analysis for risk
analysis and 95 per cent of the respondents never use either CAPM or Monte Carlo simulation
due to lack of understanding.
Petry and Sprow’s (1993) study of 151 firms listed in the 1990 Business Week 1,000 firms
indicates that about 60 per cent of the firms use the traditional payback period either as a primary
or as a secondary method for capital budgeting decisions. Ninety per cent of the firms use NPV
and IRR either as a primary or as a secondary capital budgeting decision methodology. Most of
the financial managers indicated that either they had not heard of the problems of IRR (multiple
rates of return, NPV and IRR conflict) or such problems rarely occurred.
Joe Walker, Richard Burns, and Chad Denson (1993) focused on small companies. They
noted that 21 percent of small companies used DCF. They also observed that within their sample,
the smaller the firm, the smaller the likelihood that DCF would be used. The focal point of their
study was why small companies use DCF so much less frequently than large firms. The three
most frequently cited reasons, according to the survey, were (1) small firms’ preoccupation with
liquidity, which is best indicated by payback, (2) a lack of familiarity with DCF methods, and (3)
a belief that small project sizes make DCF not worth the effort.
Richard Pike (1996) has done a longitudinal capital budgeting study based on surveys
conducted between 1975 and 1992 compiled by conducting cross-sectional surveys on the same
firms at approximately five yearly intervals. According to him, over the 17-year review period,
there have been the greatest changes in the areas of risk analysis, NPV analysis and post-
completion audits. The usage of DCF techniques have increased with each survey. His other
findings are that firm size is still significantly associated with degree of use for DCF methods but
not for payback and the use of ARR is unchanged. It is suggested that firm size per se may not be
the direct causal factor in determining use of sophisticated methods; size of firm influences the
use of computer based capital budgeting packages which, in turn, influence the use of
discounting methods, sensitivity analysis, and risk analysis techniques. Once size ceases to be
associated with use of computers in capital budgeting it is envisaged that it will also have far less
impact on capital budgeting technique usage rates. He has reported the general increase in so-
called sophisticated capital budgeting techniques to a point where the gap between theory and
practice is trivial, at least for large firms due to three main factors viz., technical, educational and
economic. This paper has sought to provide a more reliable and comprehensive analysis of how
capital budgeting practices in large UK companies have evolved in recent years and, in so doing,
provide a clearer backdrop against which earlier studies can be interpreted and future studies
enacted.
John J Binder and J. Scott Chaput (1996) in their article ‘A Positive analysis of Corporate
Capital Budgeting Practices’ theoretically and empirically investigates the choice of capital
budgeting methods by large US corporations over time. Simple economic analysis indicates that
there are costs and benefits to using the various decision rules that are commonly found in the
corporate world. This analysis makes predictions about how capital budgeting practices will
change over time, which they test by relating the percentage of large firms that use DCF rules to
several variables that measure these costs/benefits. Empirically they find that, controlling for
differences in the respondents across surveys, the use of DCF methods is positively correlated
with both the AAA bond yield (i.e. the cost of ignoring the time value of money) and positively
related to measures of how well these methods are understood in the corporate world (e.g., the
percentage of MBAs in the population). According to them, increased uncertainty causes firms to
use non-DCF rules more heavily. Their findings are consistent with the hypothesis that firms do
a cost-benefit calculation when determining which capital budgeting rule(s) to employ. These
rules can help reorient academic thinking away from looking at some popular capital budgeting
methods as wrong and move it more toward explaining why real world practice has been and is
as it is. The hypotheses presented by them suggest new directions for surveys of corporate capital
budgeting practices. That is, beyond asking firms to list the methods they use it would be
interesting to explore in more detail which methods are used for different types of projects and
why. They says that additional surveys of this type may provide valuable new insight into firms’
choice of capital budgeting methods.
Cost-benefit analysis suggests that DCF methods will be used more frequently for large projects,
where the total cost of using an inaccurate method is large, as opposed to small projects.
Similarly, firms may use different methods for short-term projects than for longterm projects. He
also suggests to examine capital budgeting methods across different countries.
Colin Drury and Mike Tayles (1996) has focused a light on some of unresolved issues on
capital budgeting in UK and examined the impact of company size on the use of financial
appraisal techniques. They conducted a postal questionnaire survey which can provide an
overview of current management accounting practices in UK companies. They mailed their
questionnaire to 866 business units and a total 303 usable responses were received (a response
rate of 35%). Their survey findings in respect of the 46 largest organizations indicated that 63%
always used IRR, 50% always used NPV and 30% always used the payback method. The sample
included in this survey included responses from a wide range of organizations of different size.
Most of organizations used a combination of appraisal techniques. 86% of those organizations
that ‘often’ or ‘always’ used the unadjusted payback method combined it with a discounting
method. The survey findings also indicate that non discounting methods continue to be used by
both smaller and larger organizations.
The survey also sought to ascertain the approaches that were used for dealing with project risk.
Sensitivity analysis was ‘often’ or ‘always’ used by 82% of the larger organizations compared
with 30% for the smaller organizations. The survey findings suggest that theoretically sound
capital budgeting techniques are more likely to be used by larger organizations rather than by
smaller organizations. The impact of company size on the use of investment appraisal techniques
has been examined and the survey findings suggest that many firms appear to deal with inflation
incorrectly when appraising capital investments. This survey has provided useful attention-
directing information by identifying topics that require most in-depth research. They have
suggested that in order to understand more fully the role that financial criteria play in the capital
investment decision-making process, future studies should widen the scope beyond economic
rationality and examine the broader political and social roles that financial information plays
within organizations in the investment decision-making process.
Kester, George W & Chong Tsui Kai (1996) has studied Capital Budgeting Practices of Listed
Firms in Singapore. They took a sample size of 211 companies and the survey resulted in 54
responses. They found that the responding executives in Singapore considered IRR and payback
to be equally important for evaluating and ranking capital investment projects. For assessing risk,
Scenario analysis and Sensitivity analysis were perceived to be the two most important
techniques while more sophisticated probabilistic technique were seldom used by companies.
In selecting the discount rates for project evaluation, about half the executives indicated that their
firms based a project’s minimum acceptable rate of return on the cost of the specific capital used
to finance the project. Multiple risk-adjusted discount rate are used by only 37.8% of respondents
and the majority adjusted for risk by classifying projects into subjectively-defined risk
categories. None of the respondents used the CAPM to determine project discount rates. In
estimating the cost of equity capital, a major component of a firm’s WACC, the results were split
evenly between the dividend yield plus expected growth rate and risk premium methods. Only
17% of the respondents indicated that their firms used the CAPM to estimate the cost of equity
capital. The survey results also indicated that most of the firms evaluating project cash flows on
an after-tax basis and the majority of firms do not practice capital rationing.
Kester and Chang (1999) survey 226 CEOs from Australia, Hong Kong, Indonesia, Malaysia,
Philippines, and Singapore and find that DCF techniques such as NPV/IRR are the most
important techniques for project appraisal except in Hong Kong and Singapore. Sensitivity
analysis and scenario analysis are found to be the most important tool for project risk assessment
in all the countries. Nearly 72 per cent of the respondents in Australia use CAPM to calculate the
cost of equity. The risk premium method (cost of debt plus risk premium) is most popular in
Indonesia (53.4%) and Philippines (58.6%). The dividend yield plus growth rate method is the
most popular method in Hong Kong (53.8%).
Block Stanley (2000) has analysed the capital budgeting policies of 146 multinational
companies in light of current financial theory. He has examined that some of the actions that
MNCs take in the capital budgeting area are the logical extensions of domestic practices into the
international area, while others appear to be misguided changes to normal capital budgeting
procedures. According to his study, there are a number of misapplications such as applying
corporate wide weighted average cost of capital to foreign affiliate cash flows rather than to cash
flows actually remitted to the corporations. Also, risk is frequently measured on a local project
basis (in a foreign country) rather than considering the portfolio effect on the total corporations.
Of the 146 survey respondents in this study, 68.7% believe that international investments
increase the risk exposure of the firm and establish policies on that premise. Finally, he has
shown that the survey respondents hedge against the uncertainty of the procedures by adding a
premium to the weighted average cost of capital as computed by financial analysts given the
inconsistent procedures that are often utilized in going from domestic to international capital
budgeting.
Arnold Glen C. and Hatzopoulos Panos D. (2000) has done a study of The Theory Practice
Gap in Capital Budgeting: Evidence from the United Kingdom to consider the extent to which
modern investment appraisal techniques are being employed by the most significant UK
corporations. It also explores some of the reasons for the continuing high use of traditional, rule-
of-thumb techniques, alongside DCF techniques. They selected 300 UK companies taken from
the Times 1000 (1996) ranked according to capital employed. Out of these companies, their
response rate was 32.4%. The results of their research had been compared with Pike (1982, 1988
and 1996) and McIntyre and Coulthurst (1985) as they have similar characteristics. Surprisingly
in contrast to other studies, they observed a reduction in the use of PBP at high level. This survey
even presents evidence that the theory-practice gap has been narrowed. Over 90% of SMEs are
using either NPV or IRR. 97% of large firms use NPV compared with 84% which employ IRR.
Thus NPV has overtaken IRR as the most widely used method. This study revealed that 67% of
firms using three or more methods. They observed a wide theory-practice gap concerning the use
of risk analysis techniques. While textbooks and academics papers advocate the use of
probability analysis but in their study it seems managers’ revealed hesitancy of using it on
behavioural, practical, and theoretical ground. Over three-quarters of the firms surveyed adjust
for inflation either by specifying cash flows in constant price terms applying a real rate of return
or by expressing cash flows in inflated price terms and discounting at the market rate of return.
Capital expenditure ceilings are placed on operating units which lead to the rejection of viable
projects in the case of 49% of firms. Thus the central aim of this study is to generate new
evidence concerning the capital investment practices of UK firms.
Graham and Harvey (2001) surveyed 392 chief financial officers (CFOs) about their
companies’ corporate practices. Of these firms, 26% has sales less than $100 million, 32% had
sales between $100 million and $1billlion, and 42% exceeded $1billion. The CFOs were asked to
indicate how frequently they use different approaches for estimating the cost of equity: 73.5 per
cent use the Capital Asset Pricing Model (CAPM), 34.3 per cent use a multi beta version of the
CAPM, and 15.7 per cent use the dividend model. The CFOs also use a variety of risk
adjustment techniques, but most still choose to use a single hurdle rate to evaluate all corporate
projects.
The CFOs were also asked about the capital budgeting techniques they use. Most use NPV (74.9
per cent) and IRR (75.7 per cent) to evaluate projects, but many (56.7per cent) also use the
payback approach. These results confirm that most firms use more than one approach to evaluate
projects.
The survey also found important differences between the practices of small firms (less than $ 1
million in sales) and large firms (more than $1 billion in sales). Consistent with earlier studies,
Graham and Harvey found that small firms are more likely to rely on the payback approach,
while large firms are more likely to rely on the NPV and/or IRR.
The firms with high debt ratios are significantly more likely to use NPV and IRR than firms with
low debt ratios. They find that CEOs with MBA are more likely than non MBA CEOs to use
NPV technique. Small firms use cost of equity capital based on “what investors tell us they
require”. CEOs with MBAs use CAPM as against non-MBA CEOs. Nearly 58% of the
respondents use the company-wide discount rate to evaluate the projects though the project may
have different risk characteristics. Large firms are more likely to use risk-adjusted discount rate
than small firms.
Ryan Patricia A and Ryan Glenn P. (2002) have examined the capital budgeting decision
methods used by the Fortune 1000 companies. According to him, management views NPV as the
most preferred (96%) capital budgeting tool, which represents
Alignment between corporate America and academia and even alignment of theory and practice.
Firms with larger capital budgets tend to favour NPV and IRR. PBP is used at least half of the
time by 74.5% of the respondents. Fourth in popularity was the discounted payback model used
at least half of the time by 56.7% of the companies. Finally at least half time usage was reported
for the three models as follows. PI ranks fifth at 43.9%, followed by ARR at 33.3% and finally,
MIRR at 21.9%.
In case of Advanced Capital Budgeting methods, the sensitivity analysis was the most popular
tool followed by scenario analysis. Inflation adjusted cash flows were used by 46.6%
respondents on a regular basis. EVA was used by over half of respondents while MVA was used
by approximately one third. Incremental IRRs were used by 47.3% of the respondents, while
simulation models were used by 37.2%. PERT/CPM charting and Decision trees were each used
by about 31% of the firms while the more complex mathematical models such as liner
programming and option models receive less corporate acceptance. As per Ryan’s, it appears that
the views of academics and senior financial managers of Fortune 1000 companies on basic
capital budgeting techniques are in stronger agreement. Discounted capital budgeting methods
are generally preferred over non-discounted techniques which may reflect the increased financial
sophistication and availability of inexpensive computer technology. The vast majority of
respondents agree that WACC is the best starting point to determine the appropriate discount
rate.
Stanley Block (2003) has studied the use of capital budgeting procedures between industries.
Three hundred two Fortune 1000 companies responded to a survey organized by Stanley along
industry lines viz., Energy, Manufacturing, Finance, Utilities, Technology, Retail, Healthcare,
and Transportation. This study emphasizes that just as industry patterns affect financing
decisions (debt vs. equity), they also affect capital budgeting decisions. In this study, the author
developed the breakdown of industries after a careful analysis of performance metrics, size
variations, operational procedures and management strategy. In this study of eight major
industrial classifications covering 302 Fortune 1000 companies, Five key areas related to capital
budgeting were covered. In each case, a statistical test was employed to determine whether there
was a difference in methodology between industries. Overall, this study shows that, just as
industry characteristics often affect the financing patterns of firms (debt vs. equity), they also
affect the asset deployment decisions.
This study brings the left-hand side of the balance sheet up to the level of the right-hand side in
terms of industry analysis.
Ioannis T. Lazaridis (2004) had done a survey of capital budgeting practices of the firms in
Cyprus. He found that only 30.19% of the sample firms use capital budgeting techniques for all
their investment decisions, while 50.94% of the firms use evaluation methods for only some
types of investment above a certain cost level. Unfortunately, 18.99% of the companies do not
use any evaluation method for their investment projects. The survey shows that 54.43% of
projects evaluation is done by a simplified evaluation technique and that 36.71% of the
companies use the PBP technique. Among the methods that take into account the time value of
money, the NPV method is the one most companies prefer (11.39%). Total statistical risk
analysis is being adopted by 31.67% of the firms. The survey with respect to the cost of capital,
an important element in the use of the capital budgeting techniques, shows that is determined
basically according to the cost of borrowing (30.95%), while 3.57% of the companies believe
that determining the cost of capital does not affect their profits. He has concluded that SMEs in
Cyprus do not follow scientific evaluation techniques for their investment projects probably due
to lack of familiarity with such methods. These findings indicate the need for training and
educating the managers of the firms in the capital budgeting area of financial management.
Hermes, N., Smid, P., Yao, L. (2006) compared the use of capital budgeting techniques of Dutch
and Chinese firms, using data obtained from a survey among 250 Dutch and 300 Chinese
companies. They have analysed the use of capital budgeting techniques by companies in both
countries from a comparative perspective to see whether economic development matters. The
empirical analysis provides evidence that Dutch CFOs on an average use more sophisticated
capital budgeting techniques than Chinese CFOs do. Their findings suggest that the difference
between Dutch and Chinese firms is smaller than might have been expected based upon the
differences in the level of economic development between both countries, at least with respect to
the use of methods of estimating the cost of capital and the use of CAPM as the method of
estimating the cost of equity. The NPV method is more preferred by Chinese firms while IRR
method is more popular among Dutch firms.
Truong G., Partington and Peat M. (2006) surveyed Australian firms which revealed that real
options techniques have gained a toehold in Australian capital budgeting but are not yet part of
the mainstream. Projects are usually be evaluated using NPV, but the company is likely to also
use other techniques such as the PBP. The project cash flow projections are made from three to
ten years into the future. The project cash flow will be discounted at the WACC as computed by
the company, and most companies will use the same discount rate across divisions. The discount
rate will also be assumed constant for the life of the project. The WACC will be based on target
weights for debt and equity. The CAPM will be used in estimating the cost of capital, with the T-
bond used as a proxy for the risk free rate, the beta estimate will be obtained from public sources,
and the market risk premium will be in the range of 6% to 8%. Asset pricing models other than
the CAPM will not be used in estimating the cost of capital.
However, consistent with recent overseas studies, Graham and Harvey (2001) and Bruner, Al.
(1998) the CAPM is the most popular method used in estimating the cost of capital in Australia.
Kester et al (1999) found that 73% of companies surveyed in six Asia Pacific countries, used
CAPM. Compared to two previous surveys of US companies, Gitman and Mercurio (1982) and
Gitman and Vandenberg (2000), increasing popularity of the CAPM model is apparent.
The largest number of their respondents believes that project definition and cash flow estimation
is the most important and difficult stage of the capital budgeting process. Majority of the firms
used cut-off rate between 10% and 15%. The most popular method of handling risk in the
capital budgeting process identified by 33% of the respondents was to increase the required rate
of return of cost of capital.
Literature Review: Indian Studies
Prasanna Chandra (1975) conducted a survey of twenty firms to examine the importance
assigned to economic analysis of capital expenditures, methods used and its rationale for
analysing capital expenditures and ways to improve economic analysis of capital expenditures.
The findings of the study reveals that the nature of economic analysis of capital expenditures
varies from project to project but in most of the firms surveyed the analysis is done in sketchy
terms. The most commonly used method for evaluating investments of small size is the PBP and
for large size investments the ARR is used as the principal criterion and the PBP is used as a
supplementary criterion. DCF techniques are gaining importance particularly in the evaluation of
large investments.
Several other criteria’s such as profit per rupee invested, cost saving per unit of product,
investment required to replace a worker are used for evaluating investments. Most of the firms
do not have fixed standards for acceptance/rejection of projects. The most common methods
used for incorporating the risk factor into the capital expenditure analysis are conservative
estimation of revenues, safety margin in cost figures, flexible investment yardsticks, acceptable
overall certainty index and judgement on three point estimates of rate of return.
Porwal L S (1976) had done an empirical study of the organizational, quantitative, qualitative,
and behavioural and control aspects of capital budgeting in large manufacturing public limited
companies in the private sector in India. He had selected 118 companies out of which 52
companies (44%) provided usable responses. The majority of the companies studied give more
importance to earning more profits or achieving a higher accounting rate of return on investment
in assets. The final authority to make a capital expenditure decision rests with the Board of
Directors (BOD) in case of four-fifths of the companies. Important key stages in the capital
expenditure process are (i) initiation, (ii) evaluation, (iii) approval and (iv) control. Though 44%
of the respondents ranked first preference for DCF techniques, however, most companies were
using combination of traditional and ‘theoretically correct’ economic evaluation techniques of
capital expenditure proposals. IRR is favoured for new product lines whereas ARR is most
favoured in case of existing product lines but PBP continues to be the next favoured technique.
Competitive position is the main non-financial factor that is given due consideration for the
capital budgeting decision. High profitability companies prefer ‘cost of funds used to finance the
expenditure’ more than the WACC for determining the cut-off point. Capital rationing is not
much of a problem in Indian industries. So far as risk in the capital budgeting is concerned,
uncertainty in the availability of inputs, inability to predict key factors and uncertainty in
government policy are reasons of project risk. Most companies in India are using one or more
methods for incorporating risk. The shorter payback period and higher cut-off rate are the
popular techniques used by companies in India. Priorities and higher rate of return are the two
main criteria for minimizing disappointment and perceived conflict among the departments of a
firm. For controlling capital expenditures, about two-thirds of the companies under study have
reported that they adopt post-audit.
Pandey I M (1989) in a study of the capital budgeting practices of fourteen medium to large size
companies in India, it was found that all companies, except one, used payback. With payback
and/or other techniques about two-thirds of companies used IRR and about two-fifths NPV. IRR
was found to be the second most popular method. The reasons for the popularity of payback in
order of significance were stated to be its simplicity to use and understand, its emphasis on the
early recovery of investment and focus on risk. It was found that one-third of companies always
insisted on the computation of payback for all projects, one-third for majority of projects and
remaining for some of the projects. For about two-thirds of companies’ standard payback ranged
between 3 and 5 years. According to his survey, reasons for the secondary role of DCF
techniques in India included difficulty in understanding and using these techniques, lack of
qualified professionals and unwillingness of top management to use DCF techniques. For capital
rationing it is found that most companies do not reject projects on account of capital shortage.
They face the problem of shortage of funds due to the management’s desire to limit capital
expenditure to internally generated funds or the reluctance to raise capital from outside. But
generally companies do not reject profitable projects under capital rationing; they postpone them
till funds become available. The most commonly used methods of risk analysis in practice are
sensitivity analysis and conservative forecasts. Except a few companies most companies do not
use the statistical and other sophisticated techniques for analysing risk in investment decisions.36
Dhankar R S (1995) examined methods of evaluating investments and uncertainty in Indian
companies. He selected a sample of 75 firms. His findings revealed that 33% of firms used non-
discounted methods like PBP and ARR whereas 16% of companies were using modern DCF
techniques. Moreover, almost 50% of the companies incorporated risk by ‘Adjusting the
Discount Rate’ and ‘Capital Asset Pricing Model’.
U. Rao Cherukuri’s (1996) survey of 74 Indian companies revealed that 51% use IRR as
project appraisal criterion. Firms typically use (92% or more) multiple evaluation methods. ARR
and PBP are widely used as supplementary decision criteria. WACC is the discount rate used by
35% of the sample firms. The most widely used discount rate is 15%, and over 50% use an after-
tax rate. About three-fifths of the respondents explicitly consider risk in capital project analysis
and mostly use sensitivity analysis for purposes of risk assessment. The most popular method
used by respondents to adjust for risk is shortening the PBP followed by increasing the required
rate of return. 35% of the respondents included leasing in the capital budgeting process. A few
Indian firms in his survey also used none of the methods listed on questionnaire. They were
using profitability and cash flow analysis for assessing capital expenditure. Apart from the
formal budgeting techniques due weightage is given to qualitative aspects like quality
improvement expected from the capital expenditure, capital expenditure for enhanced safely and
capital expenditure to meet statutory requirements and for benefit to the company’s personnel
from health considerations and social benefits like housing. The favourite capital budgeting
methods of earlier years, ARR (about 19%) and PBP (about 38%) have been used as primary
methods.
Jain P K and Kumar M (1998) has done a comparative study of capital budgeting practices in
Indian context and observed that 25% of sample companies invested for expansion and
diversification and firms were making regular investments for replacement and maintenance. The
selected sample companies preference for evaluating capital budgeting projects were PBP, due to
its simplicity, easy understanding, less cost and less time, followed by NPV and IRR. Companies
preferred WACC followed by ‘Arbitrary rate’ and ‘Marginal cost of additional funds’ as cut-off
rate for discounting the projects. For adjusting risk, the ‘sensitivity analysis’ was preferred
followed by ‘Higher cut off rate’ and ‘Shorter Pay Back Period’.
Anand Manoj (2002) surveyed 81 CFOs of India to find out their corporate finance practices
vis-à-vis capital budgeting decisions, cost of capital, capital structure, and dividend policy
decisions. It analysed the responses by the firm characteristics like firm size, profitability,
leverage, P/E ratio, CFO’s education, and the sector. The analysis reveals that practitioners do
use the basic corporate finance tools that the professional institutes and business schools have
taught for years to a great extent. It is also observed that the corporate finance practices vary with
firm size. As per his findings, the firms use DCF techniques more than before. They use multiple
criteria in their project choice decisions. 85% of the respondents consider IRR as a very
important/important project choice. About 65% of the respondents always or almost always use
NPV. The PBP method is also popular. Large firms are significantly more likely to use NPV than
small firms. Small firms are more likely to use PBP method than large firms. High growth firms
are more likely to use IRR than the low growth firms. The sensitivity analysis and scenario
analysis are most widely used techniques for assessing the project risk.
Gupta Sanjeev, Batra Roopali and Sharma Manisha (2007) has made an attempt to explore
which capital budgeting techniques is used by industries in Punjab, and the influence of factors
such as size of capital budget, age and nature of the company, and education and experience of
the CEO in capital budgeting decisions. They conducted a primary survey of 32 companies in
Punjab. Almost one-third of the companies had capital budget exceeding Rs. 100mn. Majority of
the sample companies still use non-discounted cash flow techniques like PBP and ARR. Only a
few companies use DCF, and among them very negligible number use NPV technique to
evaluate a new project. The most preferred discount rate is WACC. The most popular risk
incorporating technique is ‘Shorter PBP. Many companies feel that CEO education and
experience play an important role in selecting the capital budgeting technique. Further, the study
did not find any significant relationship between the size of capital budget and capital budgeting
methods adopted. Similarly, though at some instances it appears that young companies prefer
DCF techniques than the older ones, the same is not true in case of NPV method. Thus, age of
the company also does not influence the selection of the capital budgeting technique. Similarly
no significant relationship could be established between the nature of industry and investment
evaluation techniques.
 CONCEPTUAL FRAME-WORK

CAPITAL BUDGEING:
An efficient allocation of capital is the most important finance function in modern times.
It involves decisions to commit firm’s funds to long-term assets. Such decisions are tend to
determine the value of company/firm by influencing its growth, profitability & risk.

Investment decisions are generally known as capital budgeting or capital expenditure

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

Such decisions can be investment decisions, financing decisions or operating decisions.

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

Capital budgeting decisions are related to allocation of investible funds to different long-term
assets. They have long-term implications and affect the future growth and profitability of the
firm.

In evaluating such investment proposals, it is important to carefully consider the expected

benefits of investment against the expenses associated with it.Organizations are frequently faced
with Capital Budgeting decisions. Any decision that requires the use of resources is a capital
budgeting decisions. Capital budgeting is more or less a continuous process in any growing
concern.

For Example: Purchase of Land is an example of Capital Budgeting decision. Similarly

replacement of outdated equipment with modern machines, purchase of a brand or business,
computerization and networking the organization, investment in research and development of a
product launch of a major promotional campaign etc are all example of Capital Budgeting
decisions.
However, in all cases, the decisions have a long-term impact on the performance of the
organization. Even a single wrong decision may in danger the existence of the firm as a
profitable entity.

IMPORTANCE OF CAPITAL BUDGETING:

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

1. Long Term Implications: Capital Budgeting decisions have long term effects on the risk
and return composition of the firm. These decisions affect the future position of the firm
to a considerable extent. The finance manger is also committing to the future needs for
funds of that project.
2. Substantial Commitments: The capital budgeting decisions generally involve large
commitment of funds. As a result, substantial portion of capital funds is blocked.
3. Irreversible Decisions: Most of the capital budgeting decisions are irreversible
decisions. Once taken the firm may not be in a position to revert back unless it is ready to
absorb heavy losses which may result due to abandoning a project midway.

4. After the Capacity and Strength to Compete: Capital budgeting decisions affect the
capacity and strength of a firm to face competition. A firm may loose competitiveness if
the decision to modernize is delayed.

PROBLEMS & DIFFICULTIES IN CAPITAL BUDGETING:

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

is lot of uncertainty in the long term. The uncertainty may be with reference to cost of the
project, future expected returns, future competition, legal provisions, political situation
etc.
1. Time Element: The implications of a Capital Budgeting decision are scattered over a long
period. The cost and benefits of a decision may occur at different point of time. The cost of a
project is incurred immediately. However, the investment is recovered over a number of
years. The future benefits have to be adjusted to make them comparable with the cost.
Longer the time period involved, greater would be the uncertainty.
3. Difficulty in Quantification of Impact: The finance manger may face difficulties in
measuring the cost and benefits of projects in quantitative terms.
Example: The new product proposed to be launched by a firm may result in increase or
decrease in sales of other products already being sold by the same firm. It is very
difficult to ascertain the extent of impact as the sales of other products may also be
influenced by factors other than the launch of the new product.

ASSUMPTIONS IN CAPITAL BUDGETING:

The Capital Budgeting decision process is a multi-faceted and analytical process. A number of
assumptions are required to be made.

1. Certainty with respect to cost & Benefits: It is very difficult to estimate the cost and
benefits of a proposal beyond 2-3 years in future.
2. Profit Motive : Another assumption is that the capital budgeting decisions are taken with
a primary motive of increasing the profit of the firm.

The activities can be listed as follows:

 Dis-investments i.e., sale of division or business.
 Change in methods of sales distribution.
 Undertakings an advertisement campaign.
 Research & Development programs.
 Launching new projects.
 Diversification.
 Cost reduction.
FEATURES OF INVESTMENT DECISIONS:

 The exchange of current funds for future benefits.

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

IMPORTANT OF INVESTMENT DECISIONS:

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

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

TYPE OF INVESTMENT DECISIONS:

 Expansion of existing business.
 Expansion of new business.
 Replacement & Modernization.

INVESTMENT EVALUATION CRITERIA:

 Estimation of cash flows.

 Estimation of the required rate of return.
 Application of a decision rule for making the choice.

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

unambiguous way of identifying good projects from the pool. Ranking is possible it should
recognize the fact that bigger cash flows are preferable to smaller ones & early cash flows are
referable to later ones I should help to choose among mutually exclusive projects that which
 maximizes the shareholders wealth. It should be a criterion which is applicable to any
considerable investment project independent of other.There are number of techniques that are
in use in practice. The chart of techniques can be outlined as follows:

Capital Budgeting Techniques:

Traditional Approach Modern Approach

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

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

Accounting Rate of Return (ARR)Internal Rate of Return

Profitability Index (PI)
Discounted Payable Period

NET PRESENT VALUE :

The Net Present value method is a classic economic method of evaluating the investment
proposals. It is one of the methods of discounted cash flow. It recognizes the importance of time
value of money”.

It correctly postulates that cash flows arising of different time period, differ in value and
are comparable only when their equivalent i.e., present values are found out.

The following steps are involved in the calculation of NPV:

 Cash flows of the investment project should be forecasted based on realistic assumptions.
 An appropriate rate of interest should be selected to discount the cash flows, generally
this will be the “ Cost of capital rate” of the company.
  The present value of inflows and out flows of an investment proposal, has to be computed
by discounting them with an appropriate cost of capital rate.
 The Net Present value is the difference between the “Present Value of Cash inflows” and
the present value of cash outflows.
 Net present value should be found out by subtracting present value of cash outflows from
present value of cash inflows. The project should be accepted if NPV is positive.

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

Acceptance Rule:
Accept if NPV > 0
Reject if NPV < 0
May accept if NPV = 0
One with higher NPV is selected.

INTERNAL RATE OF RETURN METHOD:

The internal rate of return (IRR) method is another discounted cash flow technique .This
method is based on the principle of present value. It takes into account of the magnitude &
timing of cash flows.

IRR nothing but the rate of interest that equates the present value of future periodic net
cash flows, with the present value of the capital investment expenditure required to undertake a
project.

The concept of internal rate of return is quite simple to understand in the case of one-
period project.

Acceptance Rule:
Accept if r > k
Reject if r < k
May accept if r = k
 where r = rate return
k = opportunity cost of capital

PROFITABILITY INDEX (OR) BENEFIT COST RATIO:

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

Present Value of Cash inflows

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

Acceptance Rule :

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

Profitability Index is a relative measure of projects profitability.

PAY BACK PERIODE METHOD:

One of the top concerns of any person or organization investing a large amount of money
would be the time by which the money will come back. The concern making the investment
would want that at least the capital invested is recovered as early as possible. The pay back
period is defined as the period required for the proposal’s cumulative cash flows to be equal to
its cash outflows. In other words, the payback period is the length of time required to recover
the initial cost of the project. The payback period is usually stated in terms of number of years.
It can also be stated as the period required for a proposal to ‘break even’ on its net investment.
 The payback period is the number of years it takes the firm to recover its original investment
by net returns before depreciation, but after taxes.
If project generates constant annual cash inflows, the pay back period is completed as follows:

Initial Investment
Pay Back = ------------------------
Annual cash inflow
In case of unequal cash inflows, the payback period can be found out by adding up the
cash inflows until the total is equal to initial cash outlay.

Acceptance Rule:
 Accept if calculated value is less than standard fixed by management otherwise reject it.
 If the payback period calculated for a project is less than the maximum payback period
set up by the company it can be accepted.
 As a ranking method it gives highest rank to a project which has lowest pay back period,
and lowest rank to a project with highest pay back period.

DISCOUNTED PAY BACK PERIOD:

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

ACCOUNTING RATE OF RETURN (OR)

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

Average Net Income

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

Average Income = Average of after tax profit

Average Investment = Half of Original Investment

Acceptance Rule:

 Accept if calculated rate is higher than minimum rate established by the management.
 It can reject the projects with an ARR lower than the expected rate of return.
 This method can also help, the management to rank the proposals on the basis of ARR.
 A highest rank will be given to a project with highest ARR, whereas a lowest rank to a
project with lowest ARR.
 CAPITAL BUDGETING METHODS IN PRACTICE
 In a study of the capital budgeting practices of fourteen medium to large size companies
in India, it was found tat almost all companies used by back.

 With pay back and/or other techniques, about 2/3 rd of companies used IRR and about 2/5 th
NPV. IRR s found to be second most popular method.

 Pay back gained significance because of is simplicity to use & understand, its emphasis
on the early recovery of investment & focus on risk.

 It was found that 1/3rd of companies always insisted on computation of pay back for all
projects, 1/3rd for majority of projects & remaining for some of the projects.

 Reasons for secondary of DCF techniques in India included difficulty in understanding &
using threes techniques, lack of qualified professionals & unwillingness of top
management to use DCF techniques.

 One large manufacturing and marketing organization mentioned that conditions of its
business were such that DCF techniques were not needed.

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

CAPITAL BUDGETING PROCESS:

Atleast five phases of capital expenditure planning & control can be identified:

 Identification ( or Organization ) of investment opportunities.

 Development of forecasts of benefits and costs.
 Evaluation of the net benefits.
 Authorization for progressing and spending capital expenditure.
 Control of capital projects.

INVESTMENT IDEAS:
Investment opportunities have to be identified or created investment proposals arise at
different levels within a firm.

Nature of Idea Level

Cost reduction ------
Replacement Plant Level
Process/Product Development ( 50% in India cover this level)
Expansion Top management
Diversification In India, it is insignificant
New Product Marketing Dept., ( or) Plant Manager

Replacing an old
Machine ( or)
Improving the Factory Level.
Production techniques.

Investment proposals should be generated to employ the firm’s funds fully well & efficiently.
FORECASTING :

Cash flow estimates should be development by operating managers with the help of
finance executives. Risk associated should be properly handled. Estimation of cash flows
requires collection and analysis of all qualitative and quantitative data, both financial and non-
financial in nature. MIS provide such data.

Correct treatment should be given to :

 Additional working capital

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

EVALUATION :
Group of experts who have no ake to grind should be taken in selecting the methods of
evaluation as NPV, IRR, PI, Pay Back, ARR & Discounted Pay Back.

Pay Back period is used as “Primary” method & IRR/NPV as “Secondary” method in
India. The following are to be given due importance.

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

 Usually if is computed by means of weighted Average cost of Capital (WACC)
 Opportunity cost of capital should be based on risky ness of cash flow of investment
proposals.
 Assessment of risk is an important aspect. Sensitivity Analysis & Conservative for
costs are two important methods used in India.
AUTHORIZATION:
Screening and selecting may differ from one company to another. When large sums are
involved usually final approval rests with top management. Delegation of approval authority
may be effected subject to the amount of outlay. Budgetary control should be rigidly exercised.
CONTROL AND MONITORY:
A Capital projects reporting system is required to review and monitor the performance of
investment projects after completion and during their life. Follow up comparison of the actual
performance with original estimates to ensure better forecasting besides sharpening the
techniques for improving future forecasts. As a result company may re-praise its projects and
take necessary action.

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

 Expenditure to date
 Stage and physical completion
 Approved total cost
 Revised total cost
DECISION MAKING LEVEL:

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

 Operating
 Administrative
 Strategic

OPERATING CAPITAL BUDGETING:

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

management.

ADMINISTRATIVE CAPITAL BUDGETING:

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

STRATEGIC CAPITAL BUDGETING:

Involves large investment as acquisition of new business or expansion in a new time of

business, handled by top management unique nature.

Long Term Capital Budgeting In KESORAM

PRE – INVESTMNET STAGE:

In a planned economy, as in India, the identification of public sector projects needs to be

done within the overall framework of national the sectoral planning. All projects of every sector
need to be identified scientifically at the time of plan formulation. In actual practice, however, it
is observed that ‘identification’ stage is the most neglected stage of the project planning.
 The five year plans indicate the broad strategy of planning economic growth rate and
other basic objectives to be achieved during the plan period. The macro level planning exercise
undertaken at the beginning of every five year plan indicates broadly the role of each sector’s
physical targets to be achieved and financial outlays, which could be made available for the
development of the sector during the plan period.

The identification of a project in the Five Year Plan is not the sanction of the project for
implementation. It provides only the ‘green signal’ for the preparation of feasibility report (FR0
for appraisal and investment decision. A preliminary scrutiny of the FR of the project is done in
the Ministry and thereafter copies of the feasibility report are submitted to the appraising
agencies, viz., Planning Commission, Bureau of Public Enterprises and the Plan Finance
Division of the Ministry of Finance.

Thus the organizational responsibility for identifying these projects rests with the
concerned administrative ministry, in consultation with its public enterprises.

The essential steps for project identification and preparation relates to studying (i) imports
(ii) substitutes (iii) available and raw material (iv) available technology and skills (v) inter-
industry relationship (vi) existing industry (vii) development plans (viii) old projects etc.

It may be mentioned that in actual practice, these steps are hardly scientifically studied
and followed by the administrative ministry public sector undertaking at the time of project
identification. The public sector projects many a time come spontaneously on the basis of ideas
and possibilities of demand or availability of some raw materials and not an outcome of
scientific investigation and systematic search for feasible projects.

PROJECT FORMULATION :

The second stage of “Project Cycle” viz. Project Formulation, is a pre-investment

exercise to determine whether to invest, where to invest, when to invest and how much to invest.
The project/feasibility reports are meant to provide required information for assessing technical,
financial, commercial, organization and economic viability of the project planning in India,
mainly because of relatively late realization of its importance. As a result, the investment
decisions for large projects in the past were taken on half-baked and ill-conceived projects and
time-over runs and cost-over runs of public sector projects have become a regular feature rather
than exception.

In early seventies along with the setting up of the Public Investment Board (PIB) the
Government created a new project Appraisal Division in the Planning Commission. This
Division prepared and circulated “Guidelines for preparing Feasibility Reports of Industrial
Projects” in 1974.
This guidelines, unlike earlier manual, indicates all the information and data required to be
presented and analysed in the feasibility report, so as to enable the appraisal agency to carry out
(i) technical analysis – to determine whether the specification of technical parameters are
realistic, (ii) financial anaylsis – to determine whether the proposal is financially viable, (iii)
commercial analysis – to determine soundness of the product specifications, marketing plans and
organization structure and (iv) economic analysis, to determine whether a project is worthwhile
from the point of view of nation and economy as a whole.

The guidelines describes in details, the information required to be given and analysed on
the following issues : (a) general information of the sector, (b) objective of the proposal, (c)
alternative ways, if any of attaining the objectives and better suitability of the proposed project,
(d) project description – gestation period, costs, technology proposed, anticipated life of the
project etc., (e) demand analysis, total demand / requirements of the country, including
anticipated imports and exports and share of the proposed project, (f) capital costs and norms
assumed, activity wise and year wise, (g) operating costs and norms, (h) revenue and benefits
estimation etc.
PROJECT APPRAISAL :
The appraisal of the project follows the formulation stage. The objective of the appraisal
process is not only to decide whether to accept or reject the investment proposal, but also to
recommend the ways in which the project can be redesigned or reformulated so as to ensure
better technical, financial, commercial and economic viabilities.

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

The need for project appraisal and investment decisions based on social profitability
arises mainly because of the basic characteristics of developing countries limited resources for
development and multiple needs – objective of planning being ‘Economic Growth with Social
Justice’. The project appraisal is a convenient and comprehensive fashion to achieve, the laid
down objectives of the economic development plan. The appraisal work presupposes availability
of a certain minimum among of reliable and up to date data in the country, as well as the
availability of trained persons to carry out the appraisal analysis.

As stated earlier the investment decision of public sector projects are required to be taken within
the approved plan frame work. The Project Appraisal Division (PAD) that prepares the
comprehensive appraisal note of projects of Central Plans was therefore set up in Planning
Commission. The Finance Ministry issues expenditure sanction for all investment proposals
within the frame work of annual budget. The plan Finance Division and the Bureau of Public
Enterprises of the Finance Ministry are also required to examine and give comments on the
investment proposals of public.
 CHAPTER III
INDUSTRY PROFILE
AND
COMPANY PROFILE
INTRODUCTION OF CEMENT:

The basic need of human being is food clothing and shelter love and affection /possession
is on never ending process for a human being.

As the time passes on human beings their wants and wishes also changed from ancient
times to modern times and among them the living pattern and costruction works also have been
changed from temporary construction of house to permanent construction and the basic material
used in construction is “Cement”.

Cement the word derived from a latin word ‘CEMENTTUM’ means stone chipping such
as we used in roman.

Cement the word as per oxford, it is commonly used is any substance applied for soft
stocking things. But cement means is most vital and important material for modern
constructions. It is a material which sets and hardness when mixed with water. Cement is
basically used in construction as a building agent. In ancient times clay bricks and stones have
been used for construction works.
The Romans were using a binding or a cementing material that would harden and water.
The first systematic effort was made by “SMEATON” who undertook the execution of a new
light house in 1756. He observed that
production obtained by during lime stone was the best cementing material for work under water.
 The construction in lost centuries was with Lime that was the main equipment used for
construction work. The ancient constructions like Tajmahal, Qutubminar, Mysore Palace, Red
fort, Charminar etc., the evidence of lime construction.

THE INDIAN CEMENT INDUSTRY:

By staring priduction in 1914 the story of India cement industry is a stage of continuous
of growth.
India is the fourth largest cement producer after China, Japan and U.S.A. so far annual
production and demand has been growing a pace at roughly 68 million tons with an installed
capacity of 82 millions tons.

In 1914 as the foundation of stable cement Industry was laid as sun above. It was Indian
Cement Company at Porbandar in Gujarat. In 1920, the cement marketing corporation was
formed to promote the sale and distribution of cement. A significant development was made in
1930 when all manufacturers mergers together to form the Associated Cement Company
Limited.
Cement Industry is the major Industry it has taken rapid strides for a modest beginning at
porbandar in 1914 to the 1980’s with over understanding out of the 60 units, 14 units are in the
public sectors remaining units are in private sector.
Indian endowed with cement grade lime stones (90 Billion tons ) and coal (190 Billion
tons ). The basic raw material required for cement manufacture and self sufficient in
manufacturing cement making machineries. During nineties it had a particular impressive
expansion with a growth rate of 10%.

The strength and vitality of cement Industry can be gouged by the intrest shown and
support given by World Bank, considering the excellent performance of the industry in utilizing
loans and achieving the objectives and targets. The World Bank is examine the feasibility of
providing a third line of credit for further upgrading Industry in varying areas, which will make it
global.
 Therefore, India today totally installed capacity of over 30 million tons, employing over a
100 thousand people directly and contributing amount of rupees 8 billion to India’s GDP.

TECHNOLOGY:

Cement may be manufactured employing three alternative technologies.

1. The largely out molded well process technology.

2. The more modern dry process that requires only 19% coal utilization.
3. The latest percallinator technology through which optimum utilization may be
achieved. Here the calcinatory or raw.

Material is partly or completed carried out before the feud enters the rotator kin besides saving
power, the adoption of this technology enable in increase in installed capacity by 30-35%, the
30,000 tons per day plants being setup in the country use this technology.

TECHNOLOGICAL CHANGES:
Continuous technological upgrading and assimilation of latest technology has been going
on in the cement industry. Presently 93% of the total capacity in the industry is based on modern
and environment friendly dry process technology and only 7% of the capacity is based on old
wet and semi-dry process technology.

There is tremendous scope for waste heat recovery in cement plants and there by
reduction in emission level. One project for co-generation of power utilizing waste heat in an
Insian cement plant is being implemented with Japanese assistance under Green Aid Plan. The
induction of advanced technology has helped the industry immensely to conserve energy and
fuel and to save materials substantially.
India is also producing different varieties of cement like Ordinary Portland Cement (OPC),
Portland Puzzling Cement (PPC), Portland Blast Furnace Slag Cement (PBFS), Oil Well
Cement, Rapid Hardening Portland Cement, Sulphate Resisting Portland Cement, White Cement
etc. production of these varieties of cement conform to the BIS Specifications. Also, some
cement plants have set up dedicated jetties for promoting bulk transportation and export.

TOTAL PRODUCTION:

The cement industry comprises of 125 large cement plants with an installed capacity of
148.28 million tons and more than 300 mini cement plants with an estimated capacity of 11.10
million tons per annum. The Cement Corporation of India, which is a Central Public Sector
Undertaking, has 10 units. There are 10 large cement plants owned by various state
Governments. The total installed capacity in the country as a whole is 159.38 million tons.

Actual cement production in 2017-18 was 116.35 million tons as against a production of
107.90 million tons in 2016-17, registering a growth rate of 8.84%. Major players in cement
production are Ambuja cement, Aditya cement, J K Cement and L & T cement.

Apart from meeting the entire domestic demand, the industry is also exporting cement
and clinker. The export of cement during 2016-17 and 2018-19 was 5.14 million tons and 6.92
million tons respectively. Export during April-May, 2005 was 1.35 million tons. Major exporters
were Gujarat Ambuja Cements Ltd. and L & T Ltd.

The planning commission for the formulation of X Five Year Plan constituted a
‘Working Group on Cement Industry’ for the development of cement industry. The Working
Group has identified following thrust areas for improving demand for cement;

1. Further push to housing developments programs;

2. Promotion of concrete Highways and roads, and
 3. Use of ready-mix concrete in large infrastructure projects.

Cement industry has been decontrolled from price and distribution on 1 st march 1989 and de-
licensed on 25th July 1991. However, the performance of the industry and prices of cement
are monitored regularly. Being a key infrastructure industry, the constraints faced by the

Actual cement production in 2017-18 was 116.35 million tons as against a production of
107.90 million tons in 2016-17, registering a growth rate of 8.84%. Major players in cement
production are Ambuja cement, Aditya cement, J K Cement and L & T cement.

Apart from meeting the entire domestic demand, the industry is also exporting cement
and clinker. The export of cement during 2016-17 and 2018-19 was 5.14 million tons and 6.92
million tons respectively. Export during April-May, 2005 was 1.35 million tons. Major exporters
were Gujarat Ambuja Cements Ltd. and L & T Ltd.
The planning commission for the formulation of X Five Year Plan constituted a
‘Working Group on Cement Industry’ for the development of cement industry. The Working
Group has identified following thrust areas for improving demand for cement;
4. Further push to housing developments programs;
5. Promotion of concrete Highways and roads, and
6. Use of ready-mix concrete in large infrastructure projects.
Cement industry has been decontrolled from price and distribution on 1 st march 1989 and de-
licensed on 25th July 1991. However, the performance of the industry and prices of cement are
monitored regularly. Being a key infrastructure industry, the constraints faced by the industry are
reviewed in the Infrastructure Coordination Committee meetings held in the Cabinet Secretariat
under the Chairmanship of Secretary (Coordination). The 444 Committee on Infrastructure also
reviews its performance.

DISTRIBUTION SYSTEM:
Distribution of cement was entirely under Government control until 1982. at present the
Industry has to make an agreement towards the levy quota which is to be sold compulsorily to
the Government the rest of the output or open market quota may be sold in the open market
evolved prices the output lifted by the Government is allocated state wise.

NEED AND IMPORTANCE:

In India we see rapid industrial development in the last few centuries. Indian industry is
growing at considerable ratio which reveals India is a developing country. And there are
different industrial sectors are playing a vital role for the economy’s development. They are steel
cement SOF. Information Technology Medical Science etc.

One among them was “CEMENT INDUSTRY” which plays a vital role for the country’s
development. In India cement industry is growing rationally and marketing is the king pin of all
activities particularly to the business because of this changes in the external environment i.e.,
social, political, legal, technical and international environment and changes in marketing. There
is increased in the salaries in all most in every market leading to competition is aspects of price,
promotion etc., which help to increase the standard of living of people.
The manufacturers of Cement like Kesoram cement, India limited, Orient limited,
Ultratech etc. are providing cement and they are distributing cement through wide network of
dealers.

Kesoram cements are doing its business from decades and it is continuously contributing
to the national economy. In even Industry now a days there is no special interest for particularly
department like production or manufacturing but know a days total quality management plays a
vital for the company’s success.

Distribution channel which plays a vital role for the company success. Distribution
channels are link between the company and consumers.
 COMPANY PROFILE
PROFILE OF THE COMPANY

One among the industrial gains in the country today serving the nation on the industrial front
kesoram industries limited has a tenured and extent full history dating hock to the twenties when
the industrial house of Birla’s enquired it.With only a Textile mill under its banner in 1924,it
grew from strength and spread its activities to newer fields like Rayon pulp Transparent
Paper.Spun pipes and Refectory Tyres oil mills and refinery Extraction.

Looking to the wide gap between the demand and supply of vital commodity cement
which it plays on important role in Nation Building, the government Private entrepreneurs to
argument the cement production Kesoram rose to the occasion and decided to set up few cement
plants in the country.

Kesoram cement is one of the prestigious units in the renowned Kesoram industries
group that is one of India’s leaden industrial conglomerates, under the leadership of
Mr.B.K.Birla, the famous personality of Indian Industry, who owes branches all over India.

Kesoram cement Industry is one of the leading manufactures of cement in India Kesoram
cement is a division of Kesoram Industries limited. It is a dry process cement plant. It is located
at Basant Nagar in Karimnagar District of Andhra Pradesh with the plant capacity is 8.26 lakhs
tones per annum. It is 8Kms away from the Ramagundam Railway Station Lining Madras to
New Delhi.

PLANTS SETUP:
 The first cement point of Kesoram with a capacity of 2.1 lacks tones per annum
incorporating Humboldt’s suspension preheated system was committed during the year 1969.

The second unit was setup in the year 1971 with capacity of 2.1lacks tons which added
to the above plant capacities.

The third plant with a capacity of 2.5lacks tons per anum, which went on stream in the
year 1978.

The coal for this company is obtained by singareni collieries and the power is obtained
from APSEB. The power demand capacity for the factory is about 21M.W. Kesoram has got 20G
sets of 4MN each installed in the year1987.

Kesoram cement belongs to the Birla group companies one of the industrial giants in the
country.

Kesoram cement industries distinguished it self among the cement factories in India by
bagging the national productivity award for two successive years i.e., in 1985-86 and 87.
Kesoram cement also got the FAPCCI award for best family planning effort in the state for the
year 1987-88.

Kesoram also bagged NCBCN’S national award for energy conservation for the year
1989-90. The Kesoram industries look for the welfare of the employees and it provide various
facilities which the employees and it provide various facilities which the employee feels satisfied
with in the organization and after the work they fees satisfies the worker and works families by
providing various welfare schemes and by providing recreational facilities of a glace.

The company set up “Recreation Club” for the purpose of recrimination facilities two
auditoriums are provided for playing indoor games like chess, shuttle and caroms and for
organizing cultural functions and activities like drama, music, and dance centers etc.

It provides Library and reading rooms for the benefit of the

employees more than 5000 books are available in the library along with other Newspapers and
magazines.

They setup English and Telugu medium schools for the growth of workers child. The company
provides “Dispensary” with a qualified medical offer and Medical staff for the benefit of the
employees.
A House Journal in the name of Basant Nagar sam char is brought out quarterly where
an all important activities and information of the plant is published.

The company provides cooperative stores where the supply essential commodities like
rice, wheat, sugar, kerosene etc. at cash and credit basis.

They conduct games for twice a year on the occasion of 26 th January Republic Day and
15th August Independence Day in order to encourage the employees, outside of their workstation.

The family planning camps are held regularly with the help of the District Medical and
Health Authorities at the Government Hospital. It has got on award for their excellent service.

Not only the employees of the factory are taken care, butthe company plays a lot of
attention towards the rural development activities. Twelve villages are adopted and the company
has extended help in constructing temples, road, and giving programmers to the farmers, Eye
surgical camps health checkup schemes etc.

To keep the ecological balance, company has also undertaken massive tree plantation in
and around Basant Nagar and near by villages there by eliminating the pollution and they have
been nominated by the government of India for “VRUKSHAMITRA AWARD” but effort of an
industrial unit in the state for rural development 1994-95 presented by CM in march 1996.

BRANDS:

Kesoram brands with namely Birla Supreme and Birla supreme gold (53 grades) has
made a niche with outstanding quality and commands a premium in the market. The latest
offering, “Birla Shakthi” is also very well received and is the most sought offer brand now.
KESORAMS CAREER:

Kesoram has an outstanding track record. Achieving 100% capacity utilization in

productivity and energy conservation. It has provided its distinctions by bagging several awards
of national and state level are worthy.

AWARDS:

 National productivity award for 1985-86.

 National productivity award for 1986-87.
 National award for energy conservation for 1980-90.
 National award for mines safely 1985-86, 1986-87.
 Prestigious state award yajamanya ratna and but management award for the year
1980.
 Best FAPCCI award for but family planning effort in the state 1987-88.
 FAPCCI award for best workers welfare 1995-96.
 Best industrial productivity award of FAPCCI.
 Best management award of state government 1993.
 It has got “Vanamitra award” from the government of Andhra Pradesh.
KESORAM GROUP OF INDUSTRIES

a)Textiles Kesoram Industries Ltd,

42, Garden Reach Road
Calcutta-700034.

b)Rayon Kesoram Rayon Triennia (P.O.),

Dist : Hoogly, West Bengal.

c)Spun Pipes Kesoram Spun pipes & Foundries,

bansberia (P.O.), Dist: Hoogly,
West Bengal.

d)Cement Kesoram Cement,

Basantnagar-506187,
 Dist : Karimnagar, Andhra Pradesh

e)Cement Vasavadatta Cement,

Sedam-585222,
Dist : Gulbargah, Karnataka.

f) Tyres Birla Tyres,

Shivam Chambers,
53, Syed Amir Ali Avenue.
Calcutta-700029.

Product Profile

The main brands of cement manufactured are:

 RAASI GOLD (53 Grade)
 RAASI SUPER POWER
 RAASI 43 Grade cement.
All the brands are known for its best quality standards.

Human Resources

The Plant has well qualified, highly motivated manpower of 649 employees on its rolls. Out of
649 employees, 92 are executive cadre and remaining are in staff and workmen cadre. The KIL,
KNR manpower is known for their spirit and commitment.

Pollution Control

The Plant is commissioned for pollution free environment and installed all the required pollution
control equipment as per the statutory requirement. A separate team will regularly monitor and
maintain the said equipment.

Safety

The Plant maintains high standards of safety and good housekeeping methods in line with ‘5S’
techniques.
Contribution to the exchequer

KIL, KNR has been contributing around Rs.175.00 crores to the exchequer in the form of taxes,
royalty etc.

Township
KIL, KNR has a well planned township consisting of 378 quarters having facilities like
 School
 Hospital
 Temple
 Guest House
 Co-operative Stores
 Recreation Club
 Play Ground etc.

Rural Development

KIL, KNR as apart of Rural & Social Development Programme adopted 8 surrounding villages .
The company extends the facilities like
 Housing
 Water
 School
 Old age pension
 Roads etc;
By allocating a budget amount of about Rs.25.00 lakhs per annum.

Industrial Relations
KIL,KNR is known for its best Industrial Relations practices in this region and won many
awards from Govt. of A.P. and Chamber of Industries.

Norms
 Raw Mill Clinker Cement
 Lime stone 96%
 Iron ore 2.5%
 Laterite 1.5%
 Raw Mill 1.5 tonnes
 Coal 20%
 Clinker97%
 Gypsum 3%
 CHAPTER IV
DATA ANALYSIS
AND
INTERPRETATION
All finance activity commences with an investment proposal, which calls for a financial appraisal
of a project. Here, capital Budgeting has its role. Each one of the projects is appraised on
following basis”

 Cost Estimates.
 Cost Generations.

Cost Estimates :-

Feasibility Report of the project is prepared based on the cost of similar units prevailing
at the time of preparation of projects report of the latest costs are not available, the same should
be escalated. Collection of data with regard to the cost of the various equipment should from
part of a continuous planning so tat a realistic cost estimate is made for the project Reports for
civil works are generally based on KESORAM schedule of rates with reasonable premium there
on.

Cost of Generation :-
The financing of public sector company is generally based on Debt Equity of 3:1 the
general rate of interest chargeable by the central Government on loan components is 10.5%
( Now enhanced to 11%) . The plant life as provided under the Electricity Supply Act, 1948 is
25 years and depreciation based on this period has to be calculated on straight line method, on
90% of the cost fixed assets. The operation & maintenance expenses are generally of the order
2.5% of the capital cost based on the above assumptions, the cost of generation could be worked
out discounted cash flow basis taking 12% IRR (Internal Rate of Return). This rate has been
generally accepted by various appraising agencies of the power projects.

Feasibility Report based on above methodology and indicating site selection, coal
linkage, power distribution examined by Central Electricity Authority in all cases where
investment is Rs.1 Crore and above. Since KESORAM is public sector undertaking, all the
investment decisions have to be formally sanctioned by Government after PIB’s (Public
Investment Board’s) clearance.

SHARE CAPITAL :
The entire share capital is owned by Government of India. During the Year no addition
has been made. However the authorized capital has been increased from Rs. 80,000 million to
Rs.1,00,000 million and the face value or share has been split to Rs.10/- each from Rs.1000/-
each.

ROLE OF FINANCE MANAGEMENT IN INVESTMENT

DECISIONS IN KESORAM:

Finance Manager is the number of a project team. He plays an important role in

investigation stage of the project, when various alternatives are analysed & the most optimum
solution is decided upon. The soundness upon the accuracy of the data & as a finance manager
has to questing and satisfy himself on the validity of the data.

The power projects are extremely capital intensive and before large resources are
committed to a scheme a detailed feasibility study need to be prepared covering-
  The need of the project
 The demand projections
 The alternatives of the site locations
 The broad parameters of the plant and equipment
 The cost estimates
 The viability of the scheme.

Cost Estimates :- Cost estimates and financial justification and returns of the projects are the
areas where financial management has to play its role. Cost estimates should be prepared by the
cost engineers and vetted by the finance manager. Cost engineering is a specialized filed &
need to be developed in the contest of power projects because of insufficient cost data on the
components of the projects.

This raises an important question of the present methodology of preparing the cost
estimates without any provision for price contingencies. Because of time lag between
preparation of cost estimates and investment decisions, after its scrutiny by the appraising
agencies, these estimates are already out of data and hence would need updating.

CAPITAL BUDGETING
EXAMPLE OF STAGE I & II

Sl. Schemes Outlay

1. Stage-I ( 3 x 20000 MT) 5,48,92,00,000

2. Stage- II( 3 x 50000 MT) 11,03,69,00,00

3. Stage-III( 1 x 50000MT) 1229.38(Millions)

Stage – I consisting outlay of 5,48,92,00,000 this is Recovered in 5 years of time.

RECOVERY OF PROJECTS (Stage-I):

Following calculations are under consider

Under Discounted Pay Back Period:
Stage – I ( 3 x 20000 )Outlay : 5,48,92,00,000

NET PRESENT VALUE:

Year Cash Inflows Dis. @12% Present Value of Cashflows

1 Rs. 1.129.384.000 0,892 Rs. 1.007.410.528

2 Rs. 1.310.895.000 0,797 Rs. 1.043.986.315

3 Rs. 1.761.879.000 0,711 Rs. 1.252.695.969

4 Rs. 1.732.086.000 0,635 Rs. 1.109.874.610

5 Rs. 2.193.061.000 0,567 Rs. 1.243.465.587

Present Value of Cash Flows Rs. 5.647.433.010

Less: Cash Outlay Rs. 5.489.200.000

Net Present Value Rs. 158.233.010

GRAPH 1:
Interpretation:
The Net Present Value is the difference between the “ Present value of cash inflows” and
“Present value of cash outflows.

PROFITABILITY INDEX ( P.I):

Year Investments (In Lakhs) Cash inflows(P.V.) Cash Out Flows (Initial)
2012-13 2,945,083.37 18180 20000
2013-14 3,040,293.17 24780 30000
2014-15 3,192,444.28 45070 60000
2015-16 3,071,183.11 54640 80000
2016-17 3,545,210.87 18630 30000
2017-18 9,025,874.00 161290 22000
2018-19 3,991,459.40 19210 33000
2019-20 4,038,114.20 11130 70000
2020-21 3,667,441.15 65420 40000
2021-22 7,338,000.00 19233 80000
2022-23 2,089,775.00 61323 60000
Total: 498896 525000
 P.V. of Cash Inflows
PI = ---------------------------
Initial Cash outlays

498896
= ---------- = 0.95
525000

GRAPH 2 :
Interpretation:
a) The profitability index of present value of cash inflows and cash out flows is
fluctuation from year to year in the year 2012-13 the present value of cash inflows
is 18180 were as in the year 2022-23 has been increased with 61323.
b) The highest cash inflows has been recorded in 2017-2018 as 161290 and lowest
has been recorded as 18180 in the year 2012-13.

PAY BACK PERIOD:

Year Investments (In Lakhs) Cash inflows(P.V.) Cash Out Flows (Initial)
2012-13 40,000.00 8000 20000
2013-14 60,000.00 1600 30000
2014-15 70,000.00 2200 60000
2015-16 20,000.00 4500 80000
2016-17 10,000.00 4000 30000
2017-18 66,000.00 3000 22000
2018-19 25,000.00 2900 33000
2019-20 12,000.00 1100 70000
2020-21 90,000.00 1600 40000
2021-22 30,000.00 1200 80000
2022-23 50,000.00 1800 60000
Total: 473,000.00 31900 525000
 Initial Investments
Pay Back Period = ---------------------------
Annual Cash inflows

40,000
= --------- 5 Years
8000

GRAPH 3:
Interpretation:

a) In the Pay Back method the Investment and the case inflows are fluctuating from
year to year where as in the year 2012-13 it is 40000 and in the year 2022-23 is
50000.
b) Cash inflows are in the order of increasing to decreasing from 2012-13 and 2022-
23.

AVERAGE RATE OF RETURN:

Year Investments (Lakhs) Average Income Cash Flows after Taxes
(Thousands)
2013-14 400,000.00 20000 100000
2014-15 480,000.00 15000 260000
2015-16 280,000.00 28000 440000
2016-17 240,000.00 85000 750000
2017-18 150,000.00 75000 160000
2018-19 260,000.00 64000 200000
2019-20 600,000.00 78000 300000
2020-21 100,000.00 25000 600000
2021-22 250,000.00 18000 800000
2022-23 520,000.00 22000 750000
Total 3,280,000.00 430000 4360000

Average Income
Average Rate of Return = ----------------------
Average Investments
 20000
= --------- = 0.06%
400000

GRAPH 4:

Interpretation:
a) Average rate of return is calculated based on Average income and Average investment
where as Average income in the year 2016-17 is 20000 and investments in the year 2022-
23 is 400000.
b) The value from 2016-17 and 2022-23 are fluctuating from year to year.

DISTRIBUTION OF REVENUE 2022-2023

Fuel
Generation
Administration
& Other Reatined earnings
Interest &Expenses
Depreciation
Finance
8% 2%
Charges Dividends
14% Fuel
Tax 51%
3% Tax

Dividends
5%
Interest & Finance
Reatined Charges
earnings
17% Depreciation

Generation
Administration & Other
Expenses
Interpretations:
 a) In the year 2022-23 the revenue is distributed in the form of fuel retained earning,
dividends is latest finance change, depreciation and for employees.

b) Where as in the year 2022-23 it is been fluctuated the rates compare to the year 2022-
23.

TABLE 7:
FY YEAR NET BLOCK (IN LAKS)
2017-18 284738
2018-19 323083
2019-20 328916
2020-21 386106
2021-22 400381
2022-23 520861

NET BLOCK AND GROSS FIXED ASSETS

Interpretations:

a) From 2019-2020 the net block and gross fixed assets is 328916.

b) Where as the Net Block and gross fixed asset is been increased in the year 2022-23.

TABLE 8:

FY YEAR NET SALES(IN LAKS)

2017-18 229055
2018-19 258117
2019-20 286453
2020-21 315400
2021-22 355502
2022-23 440302

NET WORTH AND NET ASSETS

Interpretations:

a) Net worth and net assets has been increasing from year to year from 2018-19 it is
229055 and compare to 2022-23 it has been increased to 440302.

b) By observing the chat we can say the net worth and net assets has been increasing
from 2018-19 to 2022-2023.
TABLE 9 :
FY YEAR PROFIT AFTER TAX
2017-18 34245
2018-19 37338
2019-20 35396
2020-21 36085
2021-22 52609
2022-23 72032

PROFIT AFTER TAX

Interpretations:

a) The chart show the increase value after the deduction of tax in the year 2022-23.

b) The Profit is changing from year to year in the year 2017-18 it is 34245 where as
increasing value in the year 2017-2018 and decreased, in the year 2022-23 the value is
increased.
 TABLE 10 :
FY YEAR POWER GENERATION (M UNITS)
2017-18 7470
2018-19 7080
2019-20 7090
2020-21 10923
2021-22 19790
2022-23 19237

GENERATION AND SALES

GENERATION IN MUS – SALES IN MILLIONS:

Interpretations:

a) On the X – airs year are been shown from 2017-18 to 2022-23 and the value has been
increasing from year to year.

b) In the year 2017-18 the generation and sale has been 7470 and the value has been
increasing year to year but 2022-2023 the value is decreasing.
FINDINGS, SUGGESTIONS
AND
CONCLUSION
 FINDINGS AND SUGESSTIONS

 The Corporate mission of KESORAM is to make available reliable and quality power in
increasingly large quantities. The company will spear head the process of accelerated
development of the power sector by expeditiously planning, implementing power project
and operating power stations economically and efficiently.
 As in project implementation, the station continued to excel in power generation with the
power station having reached its first goal of total capacity installation. Ramagundam is
generating power at consistently high plant load factor.
 The organization needs the capable personalities as management to lead to organization
successfully. The management make the plans and implement of these plans. These plans
are expressed in terms of long-term investment decisions.
 The special budgets are rarely used in the organization like long-term budgets, research &
development budget and budget and budget for constancy.
 From the Revenue budget for the year 2017-2018, it is clear that the Actual sales ( Rs.
168552.50 lacks) are more then the budgeted or Estimated sales ( Rs. 164208.54 lacks). It
is a good sign and the overall earnings of the budget indicate high volume over estimated.
 Fuel utilization is perfectly carry out in RSTPS. And Cash from Ash effectively carry out
the job.
 New projects acceptance consider on the basis of Return Benefits. Risk is evaluated while
considering the new projects.
 CONCLUSIONS

 Every organization has pre-determined set of objective and goals, but reaching those
objectives and goals only by proper planning and executing of the plans economically.

 With in a Short span of its existence, the corporation has commissioned 19502 MW as on
31st March, 2021 with an operating capacity of 19.9%. KESORAM today generate 24.9%
of nation’s electricity. KESORAM is presently executing 12 Cement manufacturing
Projects and 6 Gas based cement manufacturing projects with a total approved capacity
of 29,935 MT as on 31st March 2023.
BIBLIOGRAPHY
 References :

Financial accounting

Cost and management accounting

Financial accounting

Accounting for management

Website :

www.google.com
www.KESORAM.com
www.yahoofinance,com