Mba finance project report on capital budgeting pdf

It is an abstract economic concept, and, as such, has many different definitions and classifications, but the unifying feature of capital is that it has a certain value, so it in itself is a type of wealth, and it has the potential of generating more wealth. Features of Capital: Capital has the following features. Capital is a man made. Capital is a perishable. Capital is a human control possible. Capital is a mobile. Capital is a human sacrifice.

Capital is a scarce. Capital is a passive factor. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business.

No business can run successfully without an adequate amount of working capital. There is operative aspects of working capital i.

Working capital management as usually concerned with administration of the current assets as well as current liabilities. The area includes the requirement of funds from various resources and to utilize them in all result oriented manner.

It can be stated without exaggeration that effective working capital management is the short requirement of long term success. The importance of working capital management is indisputable; Business liability relies on its ability to effective management of receivables, inventory, and payables. By minimizing the amount of funds tied up in current assets. Firms are able to reduce financing costs or increase the funds available for expansion. Many managerial efforts are put into bringing non-optimal level of current assets and liabilities back towards their optimal levels.

It consists broadly of that portion of assets of a business which are used in or related to its current operations. It refers to funds which are used during an accounting period to generate a current income of a type which is consistent with major purpose of a firm existence.

Positive working capital means that the company is able to pay off its short-term liabilities companies that have a lot of working capital will be more successful since they can expand and improve their operations. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets.

It is concerned with the administration of current assets and current liabilities. It has the main following objectives- 1. To maximize profit of the firm. To help in timely payment of bills. To maintain sufficient current assets. To ensure adequate liquidity of the firms. It protects the solvency of the firm. To discharge current liabilities. To increase the value of the firm. To minimize the risk of business. To purchase raw materials, spare parts and other component. A manufacturing firm needs raw-materials and other components parts for the purpose of converting them in to final products, for this purpose it requires working capital.

Trading concern requires less working capital. To meet over head expenses. Working capital is required to meet recurring over head expenses such as cost of fuel, power, office expenses and other manufacturing expenses. To hold finished and spare parts etc. Stock represents current asset. So for that adequate quantity of working capital is required. It includes cost of packing, commission etc. Working capital is required to pay wages, salaries and other charges.

It is helpful in maintain uncertainties involved in business field. The major thrust of course is on the management of current assets. This Is understandable because current liabilities arise in the context of current assets. To be sure, fixed asset investmentWorking and long term Capital financing are responsive to variation in sales.

However, this relationship is not as close and direct as it is in the case of working capital components. On The Basis of Concepts 1 Gross Working Capital Gross working capital is the amount of funds invested in various components of current assets. Current assets includes Cash in hand and cash at bank, Inventories, Bills receivables, Sundry debtors, short term loans and advances. This concept has the following advantages:- i. Financial managers are profoundly concerned with the current assets.

Gross working capital provides the correct amount of working capital at the right time. It enables a firm to realize the greatest return on its investment.

It helps in the fixation of various areas of financial responsibility. It enables a firm to plan and control funds and to maximize the return on investment. For these advantages, gross working capital has become a more acceptable concept in financial management. Current liabilities are those that are expected to mature within an accounting year and include creditors, bills payable and outstanding expenses. Working Capital Management is no doubt significant for all firms, but its significance is enhanced in cases of small firms.

A small firm has more investment in current assets than fixed assets and therefore current assets should be efficiently managed. The working capital needs increase as the firm grows. As sales grow, the firm needs to invest more in debtors and inventories. The finance manager should be aware of such needs and finance them quickly. Every firm has to maintain a minimum level of raw material, work- in-process, finished goods and cash balance.

This minimum level of current assts is called permanent or fixed working capital as this part of working is permanently blocked in current assets. As the business grow the requirements of working capital also increases due to increase in current assets.

The need for initial working capital is for every company to consolidate its position. Regular working capital refers to the minimum amount of liquid capital required to keep up the circulation of the capital from the cash inventories to accounts receivable and from account receivables to back again cash. It consists of adequate cash balance on hand and at bank, adequate stock of raw materials and finished goods and amount of receivables. It may be divided into two types.

The capital required to meet the seasonal needs of the enterprise is known as seasonal Working capital. Solvency of the business: Adequate working capital helps in maintaining the solvency of the business by providing uninterrupted of production. Goodwill : Sufficient amount of working capital enables a firm to make prompt payments and makes and maintain the goodwill.

Easy loans: Adequate working capital leads to high solvency and credit standing can arrange loans from banks and other on easy and favorable terms. Cash discounts: Adequate working capital also enables a concern to avail cash discounts on the purchases and hence reduces cost. Regular Supply of Raw Material: Sufficient working capital ensures regular supply of raw material and continuous production.

Regular payment of salaries, wages and other day to day commitments: It leads to the satisfaction of the employees and raises the morale of its employees, increases their efficiency, reduces wastage and costs and enhances production and profits. Exploitation of favorable market conditions: If a firm is having adequate working capital then it can exploit the favorable market conditions such as purchasing its requirements in bulk when the prices are lower and holdings its inventories for higher prices.

Ability to Face Crises: A concern can face the situation during the depression. Quick and regular return on investments: Sufficient working capital enables a concern to pay quick and regular of dividends to its investors and gains confidence of the investors and can raise more funds in future. High morale: Adequate working capital brings an environment of securities, confidence, high morale which results in overall efficiency in a business. It permits the carrying of inventories at a level that would enable a business to serve satisfactorily the needs of its customers.

It enables a company to operate its business more efficiently because there is no delay in obtaining materials etc; because of credit difficulties. It stagnates the growth and it becomes difficult for the firm to undertake profitable projects for non-availability of working capital funds.

Paucity of working capital funds renders the firm unable to avail attractive credit opportunities. The firm loses its reputation when it is not in a position to honor it short-term obligations thereby leading to tight credit terms. Excessive working capital raises problems. It results in unnecessary accumulation of inventories. Thus chances of inventory mishandling, waste, theft and losses increase. Indication of defective credit policy and slack collection period.

Consequently, it results in higher incidence of bad debts, adversely affecting profits, 3. Makes the management complacent which degenerates in to managerial inefficiency. The tendencies of accumulating inventories to make a speculative profit, which tends to liberalize the dividend policy, make it difficult for the concern to cope in the future when it is not able to make speculative profits.

The firms must have sufficient funds on hand to meet its immediate needs. The following aspects have to be taken into consideration while estimating the working capital requirements. They are: 1. Total costs incurred on material, wages and overheads. The length of time for which raw material are to remain in stores before they are issued for production. The length of the production cycle or work-in-process, i. The length of sales cycle during which finished goods to be kept waiting for sales.

The average period of credit allowed to customers. The amount of cash required paying day-today expenses of the business. The average amount of cash required to make advance payments. The average credit period expected to be allowed by suppliers.

Time lag in the payment of wages and other expenses. Working capital cycle or operating cycle indicates the length or time between companies paying for materials entering into stock and receiving the cash from sales of finished goods. In that BCM, it was financing the working capital from the following four common sources. They are, 1. The firm has a good relationship with the trade creditors. So that suppliers send the goods to the firm for the payment to be received in future as per the agreement or sales invoice.

In this way, the firm generates the short-term finances from the trade creditors. It is an easy and convenient method to finance and it is informal and spontaneous source of finance for the firm. Such an advance received from the customers constitutes one of the short-term sources of finance. Seller can utilize the advance money so collected for meeting these urgent financial obligations.

These factors are explained below. Nature of Business: The Nature of the business effects the working capital requirements to a great extent. For instance public utilities like railways, electric companies, etc. BCM is a production firm, there for working capital required is more in period of production as compared to other period. Production Policies: The production policies also determine the Working capital requirement.

Through the production schedule i. The BCM has small production process. Credit Policy: The credit policy relating to sales and affects the working capital. The credit policy influence the requirement of working capital in two ways: 1. Credit terms available to the firm from its creditors. The credit terms granted to customers have a bearing on the Magnitude of Working capital by determining the level of book debts. The credit sales results is higher book debts re available higher book debt means more Working capital.

On the other hand, if liberal credit terms are available from the suppliers of goods [Trade creditors], the need for working capital is less. The working capital requirements of business are, thus, affected by the terms of purchase and sale, and the role given to credit by a company in its dealings with Creditors and Debtors. In BCM company raw materials are purchased with a credit or cash and finished goods are sold on cash basis and also credit basis. Changes in Technology: Technology used in manufacturing process is mainly determined need of working capital.

Modernize technology needs low working capital, where as old and traditional technology needs greater working capital. The size of the business unit is also important factor in influencing the working capital needs of a firm.

Large Scale Industries requires huge amount of working capital compared to Small scale Industries. Growth and Expansion: The growth in volume and growth in working capital go hand in hand, however, the change may not be proportionate and the increased need for working capital is felt right from the initial stages of growth. Dividend Policy: Another appropriation of profits which has a bearing on working capital is dividend payment. Payment of dividend utilizes cash while retaining profits acts as a source as working capital Thus working capital gets affected by dividend policies.

The BCM follows liberal dividend policy will require more working capital than company that follows a strict dividend policy. Supply Conditions: If supply of raw material and spares is timely and adequate, the firm can get by with a comparatively low inventory level. If supply is scarce and unpredictable or available during particular seasons, the firm will have to obtain raw material when it is available.

It is essential to keep larger stocks increasing working capital requirements. Market Conditions: The level of competition existing in the market also influences working capital requirement. When competition is high, the company should have enough inventories of finished goods to meet a certain level of demand.

It thus has greater working capital needs. But this factor has not applied in these technological and competitive days. Business Cycle: The working capital requirements are also determined by the nature of the business cycle. Business fluctuations lead to cyclical and seasonal changes which, in turn, cause a shift in the working capital position, particularly for temporary working capital the variations in the business conditions may be in two directions: 1.

Upward phase when boom condition prevail, 2. Downswing phase when economic activity is marked by a decline. Profit Level: Profit level also affects the working capital requirements as a concern higher profit margin results in higher generation of internal funds and more contributing to working capital. It is difficult to lay down the exact procedure of determining such an amount. This would primarily be based on the motives of holding cash balances of the business firm, attitude of management towards risk, the access to the borrowing sources in times of need and past experience.

Average credit period approximates to half-a- month. In the case of Selling Overheads, the relevant item would be sales volume instead of Production Volume.

Cash is the Basic input needed to keep the business running in the continuous basis, it is also the ultimate output expected to be realized by selling or product manufactured by the firm. The firm should keep sufficient cash neither more nor less. Thus a major function of the financial manager is to maintain a sound cash position. The term cash includes coins, currency and cheques held by the firm and balances in its bank account. Transaction Motive: A company is always entering into transactions with other entities.

Credit purchases and Sales , other transactions cause immediate inflows and outflows. So firms keep a certain amount of cash so as to deal with routine transactions where immediate cash payment is required. Precautionary Motive: Contingencies have a habit of cropping up when least expected. A sudden fire may break out, accidents may happen, employees may go on a strike, creditors may present bills earlier than expected or the debtors may make payments earlier than warranted.

The company has to be prepared to meet these contingencies to minimize the losses. For this purpose companies generally maintain some amount in the form of Cash. Speculative Motive: Firms also maintain cash balances in order to take advantage of opportunities that do not take place in the course of routine business activities. For example, there may be a sudden decrease in the price of Raw Materials which is not expected to last long or the firm may want to invest in securities of other companies when the price is just right.

These transactions are purely of speculative nature for which the firms need cash. In order to protect the solvency of the firm and also to maximize the profitability. Following are some of the objectives of cash management. To meet day to day cash requirements.

To provide for unexpected payments. To maximize profits on available investment opportunities. To protect the solvency of the firm and build up image. To minimize operational cost of cash management. To ensure effective utilization of available cash resources. It is prepared for future period to know the estimated amount of cash that may be required.

Cash budget is a statement of estimated cash inflows and outflows relating to a future period. It gives information about the amount of cash expected to be received and the amount of cash expected to be paid out by a firm for a given period. Cash budgeting indicates probably cash receipts and cash payments for an under consideration.

It is a statement of budgeted cash receipts and cash payment resulting in either positive or negative cash or for a week or for a year and so on. Trade credit arises when a company sales its products or services on credit and does not receive cash immediately. It is an essential marketing tool, acting as a bridge for the moment of goods through production and distribution stages to customers.

The receivables include three characteristics 1 It involve element of risk which should be carefully analysis. To the buyer, the economic value in goods or services passes immediately at the time of sale, while seller expects an equivalent value to be received later on.

The cash payment for goods or serves received by the buyer will be made by him in a future period. A company gives trade credit to protect its sales from the competitors and to attract the potential customers to buy its products at favorable terms. Trade credit creates receivables or book debts that the company is accepted to collect in the near future. The interval between the date of sale and the date of payment has to be financed out of working capital as substantial amounts are tied up in trade debtors.

It needs careful analysis and proper management. In BCM ltd. Inventories are thus one of the major elements, which help the firm in obtaining the desired level of sales. Inventories includes raw materials, semi finished goods, finished products. In company there should be an optimum level of investment for any asset, whether it is plant, cash or inventories. Again inadequate disrupts production and causes losses in sales.

It implies that while the management should try to pursue financial objective of turning inventory as quickly as possible, it should at the same time ensure sufficient inventories to satisfy production and sales demand. The main objectives of inventory management are operational and financial. The operational mean that means that the materials and spares should be available in sufficient quantity so that work is not disrupted for want of inventory.

Clear cut account ability should be fixed at various levels of the organization. The benefits or advantages of holding inventories area as follows. Reducing orders cost. Continuous production. To avoid loss. Availing quantity discount. It enables the firm to avoid scarcity of goods meant for either production o sale.

Risks of holding inventories can be put as follows. Material cost 2. Order cost 3. Storage cost 4. Obsolescence 6. Spoilage In the BCM, each of the above mentioned costs have to be controlled through efficient inventory management technique.

That is: Economic Order Quantity EOQ : This refers to the optimal ordering quantity that will incur the minimum total cost order cost and carrying cost for an item of inventory. With the increase in the order size, the ordering cost decreases but the carrying cost increases and the optimal order, quantity is determined where these two costs are equal.

The company is always tried to keep an eye on the level of safety stock and the lead-time associated with the orders made. The following table provides the data relating to the net working capital of BCM. In the year huge increase in the N. C is C in the year the company has C the N. C of the company is increasing compared to the previous years, in the year the company has Alexander Hall first presented it in in Federal Reserve Bulletin.

The term ratio refers to the numerical or quantitative relationship between two accounting figures. Ratio analysis of financial statements stands for the process of determining and presenting the relationship of items and group of items in the statements.

Note: I have used the ratio analysis in this project in order to substantiate the managing of working capital. For this, I used some of the ratios to get the required output.

Various working capital ratios used by me are as follows: 1. Liquidity refers to the ability of a firm to meet its current obligations as and when these become due. The short-term obligations are met by realizing amounts from current, floating or circulating assets.

Following are the ratios which can help to assess the ability of a firm to meet its current liabilities. Current ratio 2.

Absolute liquid ratio 2. Inventory Turnover Ratio. Working Capital Turnover Ratio. It indicates the availability of current assets in rupees for every one rupee of current liabilities. A ratio of greater than one means that the firm has more current assets than current liabilities claims against them. A standard ratio between them is This shows the current ratio increases every year but in the year the current ratio was dropped to 2.

In the year the current ratio has increases 2. The current ratio is above the standard ratio i. An asset is liquid if it can be converted in to cash immediately without a loss of value; Inventories are considered to be less liquid.

Because inventories normally require some time for realizing into cash. This ratio is also known as acid-test ratio. The standard quick ratio is Is considered satisfactory. The quick ratio is above the standard ratio i. Hence it shows that the liquidity position of the company is adequate. Absolute liquid assets include cash in hand and cash at bank. The standard ratio is 0. In the year the Absolute liquidity ratio has increases 0. Hence it shows that the liquidity position of the company is satisfactory.

This measures the efficiency of the sales and stock levels of a company. In case of such proposals the firm may straight away accept or reject a proposals on the basis of minimum return on investment required. All these proposals which give a higher return than a certain desired rate of return are accepted and the rest are rejected. When a contingent investment proposal is made, it should also contain the proposal on which it is dependent in order to have a better perspective of the situation.

Two or more mutually exclusive proposals cannot both or all be accepted. Some techniques have to be used for selecting the better or the best one. Once this is done, other alternative automatically gets eliminated. These are called cost reduction decisions. It may also involve adding new products to the existing products. Diversification decisions require evaluation of proposals to diversify in to new product lines, new markets etc.

A firm cannot afford to undertake all profitable proposals because it has limited funds to invest. In such a case, these various investment proposals compete for limited funds and the firm has to ration them. Thus the situation where the firm is not able to finance all the profitable investment opportunities due to limited resources is known as capital rationing. The Amount of Investment In case a firm has unlimited funds for investment it can accept all capital investment proposals which give a rate of return higher than the minimum acceptable or cut-off rate.

Minimum Rate of Return on Investment The management expects a minimum rate of return on the capital investment. The minimum rate of return is usually decided on the basis of the cost of capital.

Return Expected from the Investment Capital investment decisions are made in anticipation of increased return in the future. It is therefore necessary to estimate the future return or benefits accruing from the investment proposals while evaluating the capital investment proposals. Ranking of the Investment Proposals When a number of projects appear to be acceptable on the basis of their profitability the project will be ranked in the order of their profitability in order to determine the most profitable project.

But the funds available with the firm are always limited and it is not possible to invest funds in all the proposals at a time. The most widely accepted techniques used in estimating the cost returns of investment projects can be grouped under two categories; Payback Period Method b.

Average rate of Return Method. Net Present Value Method b. Internal rate of Return Method c. The payback period method is the simplest method of evaluating investment proposals. Payback period represents the number of years required to recover the original investment. The payback period is also called Pay Out or Pay off Period. This period is calculated by dividing the cost of the project by the annual earnings after tax but before depreciation. Under this method the project is ranked on the basis of the length of the payback period.

A project with the shortest payback period will be given the highest rank. When annual cash inflow is not constant If the annual cash inflows are unequal the payback period can be found out by adding up the cash inflows until the total is equal to the initial cash outlay of the project.

Simple to understand and easy to calculate. It reduces the chances of loss through obsolescence. A firm which has shortage of funds find this method very useful. This method costs less as it requires only very little effort for its Computation. This method does not take in to consideration the cash inflows beyond the payback period. It does not take in to consideration the time value of money.

It considers the same amount received in the second year and third year as equal. It gives over emphasis for liquidity. The cut-off point may also be in terms of period. If the management desires that the 42 P. A project incapable of generating necessary cash to pay for the initial investment in the project with-in three years will not be accepted.

The various projects are ranked in order of the rate of returns. The project with the higher rate of return is accepted. Average Rate of Return is found out by dividing the average income after depreciation and taxes, i. Where; Average Annual Earnings is the total of anticipated annual earnings after depreciation and tax accounting profit divided by the number of years.

Average Investment means i. If there is no salvage Scrap value Total Investment 2. It is easy to calculate and simple to understand. Emphasis is placed on the profitability of the project and not on liquidity. The earnings over the entire life of the project is considered for ascertaining the Average Rate of Return. This method makes use of the accounting profit. Like the payback period method this method also ignores the time value of money.

The averaging technique gives equal weight to profits occurring at different periods. This averaging technique ignores the fluctuations in profits of various years. It makes use of the accounting profits, not cash flows, in evaluating the project. They give equal weight to the present and the future flow of incomes. The discounted cash flow methods are based on the concept that a rupee earned today is more worth than a rupee earned tomorrow.

These methods take in to consideration the profitability and also the time value of money. It views that the cash flows of different years differ in value and they become comparable only when the present equivalent values of these cash flows of different periods are ascertained. For this the net cash inflows of various periods are discounted using the required rate of return, which is a predetermined rate. If the present value of expected cash inflows exceeds the initial cost of the project, the project is accepted.

Determine an appropriate rate of interest to discount cash flows. Compute the present value of total investment outlay i. Compute the present value of total cash inflows profit before depreciation and after tax at the above determined discount rate.

Subtract the present value of cash outflow cost of investment from the present value of cash inflows to arrive at the net present value. If the net present value is negative i. If net present value is zero or positive the proposal can be accepted. If the projects are ranked the project with the maximum positive net present value should be chosen.

It considers the time value of money. It considers the earnings over the entire life of the project. Helpful in comparing two projects requiring same amount of cash outflows. Not helpful in comparing two projects with different cash outflows. This method may be misleading is in comparing the projects of unequal lives. The Internal Rate of Return is compared with a required rate of return. If the Internal Rate of Return of the investment proposal is more than the required rate of return the project is rejected.

If more than one project is proposed, the one which gives the highest internal rate must be accepted. The earnings over the entire life of project is considered. Effective for comparing projects of different life periods and. Difficult to calculate. This method presumes that the earnings are reinvested at the rate earned by the investment which is not always true.

Accept or Reject Rule Internal Rate of Return is the maximum rate of interest which an organization can afford to pay on the capital invested in a project. A project would qualify to be accepted if Internal Rate of Return exceeds the cut-off rate. While evaluating two or more projects, a project giving a higher Internal Rate of Return would be preferred. This is because higher the rate of return, the more profitable is the investment.

This is slight modification of the Net Present Value Method. The present value of cash inflows and cash outflows are calculated as under the NPV method. The Profitability Index is the ratio of the present value of future cash inflow to the present value of the cash outflow, i. If the Profitability index is equal to or more than one proposal the proposal will be accepted.

If there are more than one investment proposals, the one with the highest profitability index will be preferred. This method is also known as Benefit-Cost ratio because the numerator measures benefits and the denominator measures costs. It is the ratio of the present value of cash inflow at the required rate of return to the initial cash outflow of the investment.

This approach is used when the acquisition of how to minimize the costs for undertaking an activity at a given discount rates in case the benefits and operating costs are given, one can minimize the capital cost to obtain given discount.

Project planning is spread over a period of time and is not a one shot activity. The important stages in the life of a project are: 1. Its Identification Its initial formulation Its evaluation Whether to select or to project Its final formulation Its implementation Its completion and operation. The time taken for the entire process is the gestation period of the project. The process of identification of a project begins when we are seriously trying to overcome certain problems. They may be non- utilization to overcome available funds.

Plant capacity, expansion etc Contents of the project report: 1. Market and marketing Site of the project Project engineering dealing with technical aspects of the project. Location and layout of the project building Details of the cost of the Project Cost of land Cost of Building Cost of plant and machinery Engineering know how fee Expenses on training Erection supervision Miscellaneous fixed assets Preliminary expenses Pre-operative expenses Provision for contingencies.

The cash flows are estimated abased on the following factors. Expected economic life of the project. Salvage value of the asset at the end of the economic life. Capacity of the product. Selling price of the product. Production cost. Rate of Taxation But due to uncertainties about the future the estimates of demand, production, sales costs, selling price, etc cannot be exact, for example a product may become obsolete much earlier than anticipated due to un expected technological developments all these elements of uncertainties have to be take into account in the form of forcible risk while making an investment decision.

But some allowances for the element of risk have to be proved. They are 1. In such circumstances, proper evaluation cannot be made though profitability tests. Examples of each urgency are breakdown of some plant and machinery fire accidents etc.

Yet the investment has to be made. Sometimes project with some lower profitability may be selected due to constant flow of income as compared to another project with an irregular and uncertain inflow of income.

The success of an enterprise in the long run depends up on the effectiveness with which the management makes capital expenditure decision. Capital expenditure decisions are very important as their impact is more or less permanent on the well being and economic health of the enterprise. Because of this large scale mechanization and automation and importance of capital expenditure for increase in the profitability of a concern. It has become essential to maintain an effective system of capital expenditure control.

To ensure that all capital expenditure is properly sanctioned. To properly coordinate the projects of various departments To fix priorities among various projects and ensure their followup. To compare periodically actual expenditure with the budgeted ones so as to avoid any excess expenditure.

To measure the performance of the project. To ensure that sufficient amount of capital expenditure is incurred to keep pace with rapid technological development.

To prevent over expansion. Proper authorization of capital expenditure. Recording and control of expenditure. Evaluation of performance. The owner of the asset is called the lesser and the user the lesser 1 2 Operating leases Financial leases.

Operating leases are short-term no-cancel able leases where the risk of obsolescence in borne by the lesser Financial leases are long-term non-cancelable leases where any risk in the use of asset is borne by the lessee and he enjoys the return too.

Preliminary budget estimates for the year following the budget year. Normally, such schemes are included in the five-year plan of the company approved by the planning commission. Balancing facilities essentially to increase production. Operational requirements including material handling 4. Welfare 6. Minor works. These requirements should be protested term wise. Continuing township schemes New townships schemes. New schemes to be taken up in the budget year.

The schemes should fall in any of the above cartages giving details on physical and financial progress etc. Lease privies handy to those linens, which cannot obtain loan capital form normal sources. The pros and cons of leasing and buying are to be examined thoroughly before deciding the method of procurement i. The proposal of the project progress working capital, so, in general a project is considered as a mini firm is a part and parcel of the organization.

These are generally for a short period not exceeding the accounting period i. Trade Credit. Installment Credit. Commercial papers 5. Commercial banks 6. Cash Credits 7. Over Drafts 8. Public Deposits. Term Loans: Term loans are given by the financial institutions and banks, which form the primary source of long term debt for both private as well as the Government organizations. Term loans are generally employed to finance the acquisition of fixed assets that are generally repayable in less than 10 years.

In addition to short- term loans, company will raise medium term and long term loans. Creditor ship Securities or debt Capital.

Equity Capital is also known as owners capital in a firm. The holders of these shares are the real owners of the company. They have a control over the working of the company. Different ways to raise the equity capital. Seasoned offering Rights issue. Private placement Preferential allotment. These shares have certain preferences as compared to other type of shares.

Payment of Divided Repayment of the capital at the time of liquidation of the company. Debentures: Debentures are an alternative to the term loans and are instruments for raising the debt finance. Debenture holders are the creditors of a company and the company and the company have the obligations to pay the interest and principal at specified times.

Debentures provide more flexibility, with respect to maturity, interest rate, security and repayment Debentures may be fixed rate of interest or floating rate or may be zero rates. For existing company they need to raise funds through internal source. Such as retained earnings depreciation as a source of funds.

Finance is the lifeblood of the business. According to Howard and Upton Finance is that administrative area or set of administrative function in organizations which relate with the arrangements of cash and credit so that the organization may have the means to carry out of its objective as possible.

At present to carry out all the related activities, following four sectional heads are reporting to him for work connected to their Sections. All the four sectional heads independently report to Departmental Head. However, in case, Departmental Head happens on tour or on leave, the next senior sectional head takes the charge of the department and remaining here sectional head will report to him for all the work connected to their Sections.

Pay roll section 2. Raw materials 3. Works bill section 5. Purchase bill section 6. Here records of each employee are maintained regarding basic pay, leave encashment, medical, salary, increments, promotion based perks, etc. Sulphuric Acid 2. Phosphoric Acid 3. Ammonia 4. Potash 5.

MAP 6. Urea 7. Passing of bills of miscellaneous nature; Accounting of cash imprested and advances for expenses; Miscellaneous recoveries from outside agencies.

Miscellaneous bills includes rates contracts for service contract for air conditioner, water coolers, weighing machines, franking machines, knitting of chairs, etc.

Others miscellaneous bills includes telephone rentals, STD calls, local calls, teleprinters , fax, service bills, advertisement bills, electricity bills, printing and block making bills, bills of travel agents, bills of canteen purchases, etc. Annual Contracts and Hiring of taxi, motors, etc. They have to keep record and maintain account. They check for the availability of budget and ascertain its necessity and critically for regular and smooth operations of the plants and activities of various departments.

Project Estimate: Ventured into the market and got a quote for Cr. And here the estimate of the project is crores. This includes Extension of Bagging Plant. Conveyor System for extended portion of Bagging plant.

Shed for covering extended Bagging Plant. STEP2: Project Finance and Source of Funds: The second step in the evaluation of the project is to find the funds to install or to establish a project. With a moratorium of one year and repayment schedule of 5 years. STEP3: Phasing of Capital Expenditure: The third step in the evaluation of the project is the phasing of the expenses or expenditure on the project. And here the project repayment schedule is.

Total 75 In terms of cost of Asset p. STEP6: Valuation of the Asset: The sixth step in the evaluation of the project is the valuation of the project at different times or at different periods at different years to come in the future. Pay-Back Period Method 2. Internal Rate Of Return. Pay Back Period: It is assumed that the profit earning of the project will start from We should increase this period with same exception as there may be any additional factor and other cause so rounding of 2.

Suggestion: Any project which has a pay-back period of 3 to 5 years is considered as a good project And here we have got a pay-back period of 2. So, the project can be considered. By taking various percentage of DCF. So that an appropriate percentage of Internal Rate of Return can be judge out. Calculated figure is It was found that the payback Period of the project is 2 year and 2 months. The Payback Period shows that the initial investment can be recovered within a short period of time.

The investment is ideal because normally an investment should be recoverable within 5 years. The Internal Rate of Return shows The company may fix the time period for the capital asset for replacement. The company may effectively use the available resources for attaining maximum profit. The company has to analyze the proposal for expansion or creating additional capacity.

The company may plan and control its capital expenditure. The company has to ensure that the funds must be invested in long term project or not. The company may evaluate the estimation of cost and benefit in terms of cash flows. Pandey Prasanna Chandra M. Gupta, R. Open navigation menu. Close suggestions Search Search. User Settings.

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Uploaded by shyampatricks. Did you find this document useful? Is this content inappropriate? Report this Document. Flag for inappropriate content. Download now. Original Title: Project on Capital Budgeting. Related titles. Carousel Previous Carousel Next. Jump to Page. Search inside document. The procedure must be consistent with the objective of wealth maximization. Secondary Sources Primary Sources: It is the information collected directly without any references.

Other books and Journals and magazines The c. Annual Reports of the company 1. DSCL Some of the other private companies engaged in the production of fertilizers in India are listed below: 1. The handling system also provides for discharging of MT of liquid cargo 3. Therefore cost control is facilitated through capital 4. Average rate of Return Method 2. Effective for comparing projects of different life periods and xD different timings in timings of cash inflows.

Its Identification Its initial formulation Its evaluation Whether to select or to project Its final formulation Its implementation Its completion and operation The time taken for the entire process is the gestation period of the project. Building Production capacity. Work Schedule Details of the cost of the Project Cost of land Cost of Building Cost of plant and machinery Engineering know how fee Expenses on training Erection supervision Miscellaneous fixed assets Preliminary expenses Pre-operative expenses Provision for contingencies 4.

Rate of Taxation 50 Future demand of the product, etc. The owner of the asset is called the lesser and the user the lesser 1 2 Operating leases Financial leases Operating leases are short-term no-cancel able leases where the risk of obsolescence in borne by the lesser Financial leases are long-term non-cancelable leases where any risk in the use of asset is borne by the lessee and he enjoys the return too.

Railway siding modification. Shed for covering extended portion of Bagging plant. Internal Rate Of Return 1.