capital budjeting ultratech 2013

8/9/2019 Capital Budjeting Ultratech 2013

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CONTENTS:

CHAPTER

NO.

NAME OF THE CONCEPT

PAGE

NO.

I Introduction 1.1 Objectives o t!e stud" 1.# Need o t!e stud" 1.$ Sco%e o t!e stud" 1.& Met!odo'o(" o t!e stud"

II #.1 Revie) o *iter+ture #.# About Asset *i+bi'it" M+n+(e,ent

III $.1 Industr" Proi'e $.# Co,%+n" Proi'e

I- +t+ +n+'"sis / Inter%ret+tion Findin(s Su((estions

*i,it+tions

Anne0ure ibi'io(r+%!"

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CHAPTER-I

INTRODUCTION

INTRO2CTION TO CAPITA* 2GETING

INTRO2CTION:

Among the various business decisions caita! budgeting decisions are

critica! and crucia! decisions" There#ore secia! care must be ta$en %hi!e ta$ing these

decisions"

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CONCEPT AN MEANING:

The term caita! budgeting re#ers to '!ong term !anning #or

roosa! caita! out!a( and their #inancing" It inc!udes rising !ong-term #unds and their

uti!i)ation" It ma( be de#ined as #irm*s+ #orma! rocess o# ac,uisition and investment o#

caita!"

Caita! udgeting ma( a!so be de#ined as3The decision ma$ing rocess %hich the #irm

eva!uates the urchase o# ma.or #i/ed assets" It invo!ves #irm*s decision to invest its

current #unds #or addition+ disosition+ modi#ication and re!acement o# #i/ed assets0"

It dea!s e/act!( %ith ma.or investment roosa!s+ %hich are essentia!!( !ong-term

ro.ects and incurred among the avai!ab!e mar$et oortunities"

Caita! budgeting is the rocess o# ma$ing investment decision in caita! e/enditure" A

Caita! e/enditure ma( be de#ined as an e/enditure+ the bene#its o# %hich are e/ected

to be received over a eriod o# time e/ceeding one (ear" The main characteristic o# a

Caita! e/enditure is that the e/enditure is incurred at the one oint o# time %hereas

bene#its o# the e/enditure are re!ated at di##erent oint o# time in #uture"

In sim!e !anguage %e ma( sa( that a caita! e/enditure is an e/enditure incurred #or

ac,uiring or imroving the #i/ed assets+ the bene#its o# %hich are to be received over a

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SCOPE OF THE ST24:

The e##icient a!!ocation o# caita! is the most imortant #inancia! #unction in

the modern times" It invo!ves decision to commit the #irm*s+ since the( stand the !ong-

term assets such decision are o# considerab!e imortance to the #irm since the( send

to determine its va!ue and si)e b( in#!uencing its gro%th+ robabi!it( and gro%th"

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The scoe o# the stud( is !imited to co!!ecting the #inancia! data o# U3TRATECH

CE4ENT5 #or #our (ears and budgeted #igures o# each (ear"

NEE AN IMPORTANCE:

Caita! udgeting means !anning #or caita! assets" Caita! udgeting decisions are

vita! to an organi)ation as to inc!ude the decision as to6

7eather or not #unds shou!d be invested in !ong term ro.ects such as settings

o# an industr(+ urchase o# !ant and machiner( etc"+

Ana!()e the roosa!s #or e/ansion or creating additions caacities"

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There is di##erence bet%een caita! e/enditure increasing revenue and caita!

e/enditure reducing costs" The #ormer has more uncertaint( %hen comared to the !ater"

The overa!! ob.ective o# caita! e/enditure is to ma/imi)e the #irm*s ro#its and thus

otimi)ing the return on investment" This ob.ective can be achieved either b( increased

revenue or b( reducing costs

METHOO*OG4:

At each oint o# time a business #irm has a number o# roosa!s regarding various

ro.ects in %hich+ it can invest #unds" ut the #unds avai!ab!e %ith the #irm are a!%a(s

!imited and are not ossib!e to invest trend in the entire roosa! at a time" Hence it is

ver( essentia! to se!ect #rom amongst the various cometing roosa!s+ those that gives

the highest bene#its" The cru/ o# caita! budgeting is the a!!ocation o# avai!ab!e resources

to various roosa!s" There are man( considerations+ economic as %e!! as non-economic+

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%hich in#!uence the caita! budgeting decision in the ro#itabi!it( o# the rosective

investment"

>et the right invo!ved in the roosa!s cannot be ignored+ ro#itabi!it( and ris$ are

direct!( re!ated+ i"e" higher ro#itabi!it( the greater the ris$ and vice versa there aresevera! methods #or eva!uating and ran$ing the caita! investment roosa!s"

*IMITATIONS:

:1; A!! the techni,ues o# caita! budgeting resume that various investment roosa!s

under consideration that are mutua!!( e/c!usive %hich ma( not ractica!!( be true

in some articu!ar circumstances"

:&; The techni,ues o# caita! budgeting re,uires estimation o# #uture cash in#!o%s

and out #!o%s" The #uture is a!%a(s uncertain and the data co!!ected #or #uture ma(

not be e/act" Obvious!(+ the resu!t based uon %rong data can not be good"

:; There are certain #actors !i$e mora!e o# em!o(ees+ good%i!! o# the #irm+ etc"+

%hich cannot be correct!( ,ua!i#ied but %hich other%ise substantia!!( in#!uence

the caita! decision"

:2; Urgenc( is another !imitation in eva!uation o# caita! investment decision":8; Uncertaint( and ris$ ose the biggest !imitation to the techni,ues o# caita!

budgeting"

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CHAPTER 6 II

RE-IE7 OF *ITERAT2RE

Methods of Capital Budgeting

:1; Tr+dition+' ,et!ods6

Pa( bac$ eriod

Average rate return method

8#9 iscount c+s! 'o) ,et!od

Net resent va!ue method

Initia! rate return method

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Pro#itabi!it( inde/ method

+t+ co''ection:

Pri,+r" d+t+: 6 T!erimar( data is the data %hich is co!!ected+ b( intervie%ing

direct!( %ith the organi)ations concerned e/ecutives" This is the direct in#ormation

gathered #rom the organi)ation"

Second+r" d+t+: - The secondar( data is the data %hich is gathered

#rom ub!ications and %ebsites"

CAPITA* 2GETING:

A capital expenditureis an out!a( o# cash #or a ro.ect that is e/ected

to roduce a cash in#!o% over a eriod o# time e/ceeding one (ear" E/am!es o# ro.ects

inc!ude investments in roert(+ !ant+ and e,uiment+ research and deve!oment

ro.ects+ !arge advertising camaigns+ or an( other ro.ect that re,uires a caita!

e/enditure and generates a #uture cash #!o%"

ecause caita! e/enditures can be ver( !arge and have a signi#icant imact on the

#inancia! er#ormance o# the #irm+ great imortance is !aced on ro.ect se!ection" This

rocess is ca!!ed c+%it+' bud(etin("

;INS OF C ECISIONS:

Caita! udgeting re#ers to the tota! rocess o# generating+ eva!uating+ se!ecting and

#o!!o%ing u on caita! e/enditure a!ternatives basica!!( the #irm ma( be con#ronted

%ith three t(es o# caita! budgeting decisions

Acce%t reject decisions

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This is a #undamenta! decision in caita! budgeting" I# the ro.ect is acceted+ the

#irm invests in it i# the roosa! is re.ected+ the #irm does not invest in it" In genera!+

a!! those roosa!s+ %hich (ie!d rate o# return greater than a certain re,uired rate o#

return or cost o# caita!+ are accreted and rest are re.ected" ( a!(ing this criterion+

a!! indeendent ro.ects a!! acceted" Indeendent ro.ects are the ro.ects %hich do

not comete %ith one another in such a %a( that the accetance o# one ro.ect under

the ossibi!it( o# accetance o# another" Under the accet-re.ect decision+ the entire

indeendent ro.ect that satis#ies the minimum investment criterion shou!d be

im!emented"

ii Mutu+''" e0c'usive %roject decision

4utua!!( e/c!usive ro.ects are ro.ects %hich comete %ith other

ro.ects in such a %a( that the accetance o# one %hich e/c!ude the

accetance o# other ro.ects" The a!ternatives are mutua!!( e/c!usive and

on!( one ma( be chosen"

iii C+%it+' R+tionin( ecision

Caita! rationing is a situation %here a #irm has more investment roosa!s

than it can #inance" It ma( be de#ined as a situation %here a constraint in

!aced on the tota! si)e o# caita! investment during a articu!ar eriod" In

such a event the #irm has to se!ect combination o# investment roosa!s%hich rovides the highest net resent va!ue sub.ect to the budget

constraint #or the eriod" 5e!ecting or re.ecting the ro.ects #or this urose

%i!! re,uire the ta$ing o# the #o!!o%ing stes6

1; Ran$ing o# ro.ects according to ro#itabi!it( inde/ :PI; or Initia! rate

o# return :IRR;"

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&; 5e!ecting o# re.ects deends uon the ro#itabi!it( sub.ect to the budget

!imitations $eeing in vie% the ob.ectives o# ma/imi)ing the va!ue o#

#irms"

NAT2RE OF IN-ESTMENT ECISSIONS

The investment decisions o# a #irm are genera!!( $no%n as the caita!

budgeting+ or caita! e/enditure decisions" A caita! budgeting decision ma( be de#ined

as the #irm*s decision to invest its current #unds most e##icient!( in the !ong term assets in

anticiation o# an e/ected #!o% o# bene#its over a series o# (ears" The !ong term assetsare those that a##ect the #irms oerations be(ond the one (ear eriod" The #irm*s

investment decisions %ou!d genera!!( inc!ude e/ansion+ ac,uisition+ moderni)ation and

re!acement o# the !ong-term assets"

5a!e o# a division or business :divestment; is a!so as an investment

decision" Decisions !i$e the change in the methods o# sa!es distribution+ or an

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advertisement camaign or a research and deve!oment rogramme have !ong-term

im!ications #or the #irm*s e/enditures and bene#its+ and there#ore+ the( shou!d a!so be

eva!uated as investment decisions" It is imortant to note that investment in the !ong-term

assets invariab!( re,uires !arge #unds to be tied u in the current assets such as

inventories and receivab!es" As such+ investment in the #i/ed and current assets is one

sing!e activit("

Fe+tures o Invest,ent ecisions:6

The #o!!o%ing are the #eatures o# investment decisions6

The e/change o# current #unds #or #uture bene#its"

The #unds are invested in !ong-term assets"

The #uture bene#its %i!! occur to the #irm over a series o# (ear"

I,%ort+nce o Invest,ent ecisions:6

Investment decisions re,uire secia! attention because o# the #o!!o%ing reasons"

The( in#!uence the #irms gro%th in the !ong run

The( a##ect the ris$ o# the #irm

The( invo!ve commitment o# !arge amount o# #unds

The( are irreversib!e+ or reversib!e at substantia! !oss

The( are among the most di##icu!t decisions to ma$e"

Gro)t!

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T4PES OF IN-ESTEMENT ECISIONS

There are man( %a(s to c!assi#( investments" One c!assi#ication is as #o!!o%s6

E/ansion o# e/isting business

E/ansion o# ne% business

Re!acement and moderni)ation"

E0%+nsion +nd iversiic+tion

A coman( ma( add caacit( to its e/isting roduct !ines to e/and e/isting

oerations" or e/am!e+ the u.arat 5tate erti!i)er Coman( :5C; ma( increase its!ant caacit( to manu#acture more urea" It is an e/am!e o# re!ated diversi#ication" A

#irm ma( e/and its activities in a ne% business" E/ansions o# a ne% business re,uire

investment in ne% roducts and a ne% $ind o# roduction activit( %ith in the #irm" I# a

ac$aging manu#acturing coman( invests in a ne% !ant and machiner( to roduce ba!!

bearings+ %hich the #irm business or unre!ated diversi#ication" 5ometimes a coman(

ac,uires e/isting #irms to e/and its business" In either case+ the #irm ma$es investment

in the e/ectation o# additiona! revenue" Investments in e/isting or ne% roducts ma(

a!so be ca!!ed as revenue-e/ansion investments"

Re%'+ce,ent +nd Moderni=+tion>

The main ob.ective o# moderni)ation and re!acement is to imrove oerating e##icienc(

and reduces costs" Cost savings %i!! re#!ect in the increased ro#its+ but the #irm*s revenue

ma( remain unchanged" Assets become outdated and obso!ete %ith techno!ogica!

changes" The #irm must decide to re!ace those assets %ith ne% assets that oerate moreeconomica!!("

I# a cement coman( changes #rom semi-automatic dr(ing e,uiment to

#ina!!( automatic dr(ing e,uiment+ it is an e/am!e o# moderni)ation and re!acement"

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Re!acement decisions he! to introduce more e##icient and economica!

assets and there#ore+ are a!so ca!!ed as cost reduction investments" Ho%ever+ re!acement

decisions that invo!ve substantia! moderni)ation and techno!ogica! imrovements e/and

revenues as %e!! as reduce costs"

4et +not!er useu' )+" to c'+ssi" invest,ents is +s o''o)s6

4utua!!( e/c!usive investments

Indeendent investments

Contingent investments

Mutu+''" E0c'usive Invest,ents

4utua!!( e/c!usive investments serve the same urose and

comete %ith each other" I# one investment is underta$en+ others %i!! have to be

e/c!uded" A coman( ma(+ #or e/am!e+ either use a more !abour-intensive+ semi-

automatic machine+ or em!o( a more caita!-intensive+ high!( automatic machine

#or roduction" Choosing the semi-automatic machine rec!udes the accetance o#

the high!( automatic machine"

Inde%endent Invest,ents

Indeendent investments serve di##erent uroses and do not

comete %ith each other" or e/am!e+ a heav( engineering coman( ma( be

considering e/ansion o# its !ant caacit( to manu#acture additiona! e/cavators and

addition o# ne% roduction #aci!ities to manu#acture a ne% roduct - !ight

commercia! vehic!es" Deending on their ro#itabi!it( and avai!abi!it( o# #unds+ the

coman( can underta$e both investments"

Contin(ent Invest,ents

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Contingent investments are deendent ro.ects the choice o# one

investment necessitates underta$ing one or more other investments" or e/am!e+ i# a

coman( decides to bui!d a #actor( in a remote+ bac$%ard area+ i# ma( have to invest

in houses+ roads+ hosita!s+ schoo!s etc" #or em!o(ees to attract the %or$ #orce" Thus+

bui!ding o# #actor( a!so re,uires investments in #aci!ities #or em!o(ees" The tota!

e/enditure %i!! be treated as one sing!e investment"

Invest,ent Evo'ution Criteri+:

T!ree ste%s +re invo'ved in t!e ev+'u+tion o +n invest,ent:

Estimation o# cash #!o%s"

Estimation o# the re,uired rate o# return :the oortunit( cost o# caita!;

A!ication o# a decision ru!e o# ma$ing the choice"

The #irst t%o stes+ discussed in the subse,uent chaters+ are assumed as

given" Thus+ our discussion in this chater is con#ined to the third ste"

5eci#ica!!(+ %e #ocus on the merits and demerits o# various decision ru!es"

Invest,ent decision ru'e

The investment decision ru!es ma( be re#erred to as caita! budgeting

techni,ues+ or investment criteria" A sound araisa! techni,ue shou!d be used to

measure the economic %orth o# an investment ro.ect" The essentia! roert( o#a sound techni,ue is that it shou!d ma/imi)e the share ho!der*s %ea!th" The

#o!!o%ing other characteristics shou!d a!so be ossessed b( a sound investment

eva!uation criterion"

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It shou!d consider a!! cash #!o%s to determine the true ro#itabi!it( o# the

ro.ect"

It shou!d rovide #or an ob.ective and unambiguous %a( o# searating

good ro.ects #rom bad ro.ects"

It shou!d he! ran$ing o# ro.ects according to their true ro#itabi!it("

It shou!d recogni)e the #act that bigger cash #!o%s are re#erab!e to

sma!!er ones and ear!( cash #!o%s are re#erab!e to !ater ones"

it shou!d be a criterion %hich is a!icab!e to an( conceivab!e investment

ro.ect indeendent o# others"

Ev+'u+tion criteri+

A number o# investment criteria :or caita! budgeting techni,ues; are in

use in ractice" The( ma( be groued in the #o!!o%ing t%o categories"

1. iscounted c+s! 'o) criteri+

Net resent va!ue:NP;

Interna! rate return:IRR;

Pro#itabi!it( inde/:PI;

#. Non discounted c+s! 'o) criteri+

Pa(bac$ eriod:P;

Discounted a(bac$ eriod

Accounting rate o# return:ARR;

Net Present -+'ue

The Net Present a!ue techni,ue invo!ves discounting net cash #!o%s #or a

ro.ect+ then subtracting net investment #rom the discounted net cash #!o%s" The resu!t is

ca!!ed the Net Present a!ue :NP;" I# the net resent va!ue is ositive+ adoting the

ro.ect %ou!d add to the va!ue o# the coman(" 7hether the coman( chooses to do that

%i!! deend on their se!ection strategies" I# the( ic$ a!! ro.ects that add to the va!ue o#

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It is an indicator o# the e##icienc( or ,ua!it( o# an investment+ as oosed to Net resent

va!ue :NP;+ %hich indicates va!ue or magnitude"

The IRR is the annua!i)ed e##ective comounded return rate %hich can be earned on the

invested caita!+ i"e"+ the (ie!don the investment" Put another %a(+ the interna! rate o#

return #or an investment is the discount rate that ma$es the net resent va!ue o# the

investmentGs income stream tota! to )ero"

Another de#inition o# IRR is the interest rate received #or an investment consisting o#

a(ments and income that occur at regu!ar eriods"

A ro.ect is a good investment roosition i# its IRR is greater than the rate o# return that

cou!d be earned b( a!ternate investments o# e,ua! ris$ :investing in other ro.ects+ bu(ing

bonds+ even utting the mone( in a ban$ account;" Thus+ the IRR shou!d be comared to

an( a!ternate costs o# caita! inc!uding an aroriate ris$ remium"

In genera!+ i# the IRR is greater than the ro.ectGs cost o# caita!+ or hurdle rate, the

ro.ect %i!! add va!ue #or the coman(" In the conte/t o# savings and !oans the IRR is a!so

ca!!ed e##ective interest rate"

In cases %here one ro.ect has a higher initia! investment than a second mutua!!(

e/c!usive ro.ect+ the #irst ro.ect ma( have a !o%er IRR :e/ected return;+ but a higher

NP :increase in shareho!dersG %ea!th; and shou!d thus be acceted over the second

ro.ect :assuming no caita! constraints;"

IRR assumes reinvestment o# ositive cash #!o%s during the ro.ect at the same

ca!cu!ated IRR" 7hen ositive cash #!o%s cannot be reinvested bac$ into the ro.ect+ IRR

overstates returns" IRR is best used #or ro.ects %ith singu!ar ositive cash #!o%s at the

end o# the ro.ect eriod"

Proit+bi'it" inde0

>et another time ad.usted method o# eva!uating the investment roosa!s is the

bene#it-cost :C; ratio or ro#itabi!it( inde/" Pro#itabi!it( inde/ is the ratio o# the resent

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va!ue o# cash in#!o%s at the re,uired rate o# return+ to the initia! cash out #!o% o# the

investment"

Ev+'u+tion o PI ,et!od

3i$e the NP and IRR ru!es+ PI is a concetua!!( sound method o# arising

investment ro.ects" It is a variation o# the NP method and re,uires the same

comutations as the NP method"

Ti,e v+'ueit recogni)es the time va!ue o# mone("

-+'ue ,+0i,i=+tion it is consistent %ith the share ho!der va!ue

ma/imi)ation rinci!e" A ro.ect %ith PI greater than one %i!! have

ositive NP and i# acceted it %i!! increase share ho!ders %ea!th"

Re'+tive %roit+bi'it"in the PI method since the resent va!ue o# cash in

#!o%s is divided b( the initia! cash out #!o% + it is a re!ative measure o#

ro.ect*s ro#itabi!it("

3i$e NP method PI criterion a!so re,uires ca!cu!ation o# cash #!o%s and

estimate o# the discount rate"

P+"b+c< %eriod

The a(bac$ eriod is one o# the most ou!ar and %ide!( recogni)ed

traditiona! methods o# eva!uating investment roosa!s" Pa(bac$ is the number o#

(ears re,uired to cover the origina! cash out!a( invested in a ro.ect" I# the ro.ect

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generates constant annua! cash in#!o%s+ the a(bac$ eriod can be comuted b(

dividing cash out!a( b( the annua! cash in#!o%"

Evo'ution o %+"b+c"

Pa( bac$ is a ou!ar investment criterion in ractice" It is considered to have

certain virtues"

Si,%'icit"

The signi#icant merit o# a(bac$ is that it is sim!e to understand

and eas( to ca!cu!ate" The business e/ecutives consider the sim!icit( o#

method as a virtue" This is evident #rom their heav( re!iance on it #or

araising investment roosa!s in ractice"

Cost eective

Pa(bac$ method costs !ess than most o# the sohisticated techni,ues that

re,uire a !ot o# the ana!(st*s time and the use o# comuters"

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S!ort6ter,

E##ects a coman( can have more #avorab!e short-run e##ects on

earnings er share b( setting u a shorter standard a(bac$ eriod" It

shou!d+ ho%ever+ be remembered that this ma( not be a %ise !ong-term

o!ic( as the coman( ma( have to sacri#ice its #uture gro%th #or current

earnings"

*i?uidit"

The emhasis in a(bac$ is on the ear!( recover( o# the

investment" Thus+ it gives an insight into the !i,uidit( o# the ro.ect" The#unds so re!eased can be ut to other uses"

In site o# its sim!icit( and the so+ ca!!ed virtues+

the a(bac$ ma( not be a desirab!e investment criterion since it su##ers

#rom a number o# serious !imitations"

. Ris< s!ie'd

The ris$ o# the ro.ect can be tac$!ed b( having a shorter standard

a(bac$ eriod" As it ma( be in a ensured guarant( against its !oss" A

coman( has to invest in man( ro.ects %here the cash in#!o%s and !i#e

e/ectancies are high!( uncertain" Under such circumstances+ a( bac$

ma( become imortant+ not so much as a measure o# ro#itabi!it( but+ as a

means o# estab!ishing an uer bound on the accetab!e degree o# ris$"

iscounted %+"b+c< %eriod

One o# the serious ob.ections to the a(bac$ method is that it does not discount the

cash #!o%s #or ca!cu!ating the a(bac$ eriod" 7e can discount cash #!o%s and then

ca!cu!ate the a(bac$"

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The discounted a( bac$ eriod is the no" o#" Periods ta$en in recovering the

investment out!a( on the resent va!ue basis" The discounted a(bac$ eriod sti!! #ai!s to

consider the cash #!o%s occurring a#ter the a(bac$ eriod"

Accountin( r+te o return

The +ccountin( r+te o return:ARR; a!so $no%n as the return oninvest,ent

:ROI; uses accounting in#ormation as revea!ed b( #inancia! statements+ to measure the

ro#itabi!it( o# an investment" The accounting rate o# return is the ratio o# the average

a#ter ta/ ro#it divided b( the average investment" The average investment %ou!d be

e,ua! to ha!# o# the origina! investment i# it %ere dereciated constant!(" A!ternative!(+ it

can be #ound out b( dividing the tota! i# the investment*s boo$ va!ues a#ter dereciation

be the !i#e o# the ro.ect"

E-A*2ATION OF ARR METHO

The ARR method ma( c!aim some merits6

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Si,%'icit" the ARR method is sim!e to understand and use" It does not

invo!ve com!icated comutations"

ACCO2NTING ATA

The ARR can be readi!( ca!cu!ated #rom the accounting

data+ un!i$e in the NP and IRR methods+ no ad.ustments are re,uired to arrive at

cash #!o%s o# the ro.ect"

ACCO2NTING PROFITAI*IT4

The ARR ru!e incororates the entire stream o# income in

ca!cu!ating the ro.ect*s ro#itabi!it("

The ARR is a method common!( understood b( accountants and

#re,uent!( used as a er#ormance measure" As decision criterion+ ho% ever it has

serious short comings"

CASH F*O7S IGNORE

The ARR method uses accounting ro#its+ not cash #!o%s+ in araising

the ro.ects" Accounting ro#its are based on arbitrar( assumtions and choices

and a!so inc!ude non-cash items" It is+ there #ore in aroriate to re!a( on them

#or measuring the accetabi!it( o# the investment ro.ects"

TIME -A*2E IGNORE

The averaging income ignores the time va!ue o# mone(" In #act+ this

rocedure gives more %eight age to the distant receits"

ARITRAR4 C2T6OFF

&8


26/74


27/74

These investments are meant to increase caacit( andor %iden the distribution

net%or$" 5uch investments ca!! #or an e/ansion ro.ects norma!!( %arrant more care#u!

ana!(sis than re!acement ro.ects" Decisions re!ating to such ro.ects are ta$en b( the

to management"

iversiic+tion %rojects

These investments are aimed at roducing ne% roducts or services or entering

into entire!( ne% geograhica! areas" O#ten diversi#ication ro.ects entai! substantia!

ris$s+ invo!ve !arge out!a(s+ and re,uire considerab!e manageria! e##ort and attention"

iven their strategic imortance+ such ro.ects ca!! #or a ver( through eva!uation+ both

,uantitative and ,ua!itative" urther the( re,uire a signi#icant invo!vement o# the board o#

directors"

Rese+rc! +nd deve'o%,ent %rojects

Traditiona!!(+ RKD ro.ects observed a ver( sma!! roortion o# caita! budget in

most Indian comanies" Things+ ho%ever+ are changing" Comanies are no% a!!ocating

more #unds to RKD ro.ects+ more so in $no%!edge-intensive industries" RKD ro.ects

are characteri)ed b( numerous uncertainties and t(ica!!( invo!ve se,uentia! decision

ma$ing"

Hence the standard DC ana!(sis is not a!icab!e to them" 5uch ro.ects are

decided on the basis o# manageria! .udgment" irms %hich re!( more on ,uantitative

methods use decision tree ana!(sis and otion ana!(sis to eva!uate RKD ro.ects"

Misce''+neous %rojects

This is a catch-a!! categor( that inc!udes items !i$e interior decoration+

recreationa! #aci!ities+ e/ecutive aircra#ts+ !andscaed gardens+ and so on" There is nostandard aroach #or eva!uating these ro.ects and decisions regarding them are based

on ersona! re#erences o# to managemen

Caita! udgeting6 eight stes

&=


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Introduction

Unti! no%+ this %eb site has bro$en one o# the cardina! ru!es o# #inancia! management"

This age corrects #or that rob!em and resents no%+ the #irst art o# the sub.ect o#

Caita! udgeting"

4an( boo$s and chaters and %eb ages urort to discuss caita! budgeting %hen in

rea!it( a!! the( do is discuss CAPITA3 INE5T4ENT APPRAI5A3" ThereGs nothing

%rong %ith a discussion o# the CIA methods e/cet that authors have a dut( to oint out

that CIA methods are on!( one art o# a mu!ti stage rocess6 the caita! budgeting

rocess"

A discussion o# CIA and nothing e!se means that caita! budgeting decisions are being

discussed out o# conte/t" That is+ b( ignoring the ear!ier and !ater arts o# caita!

budgeting+ %e are never assess %here caita! budgeting ro.ect come #rom+ ho%

a!ternatives are #ound and eva!uated+ ho% %e rea!!( choose %hich ro.ect to choose L

and then %e never revie% the ro.ects and ho% the( have been im!emented"

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De#inition

Caita! budgeting re!ates to the investment in assets or an organi)ation that is re!ative!(

!arge" That is+ a ne% asset or ro.ect %i!! amount in va!ue to a signi#icant roortion o#

the tota! assets o# the organi)ation"

The Internationa! ederation o# Accountants+ IAC+ de#ines caita! e/enditures as

Investments to ac,uire #i/ed or !ong !ived assets #rom %hich a stream o# bene#its is

e/ected" 5uch e/enditures reresent an organi)ationGs commitment to roduce and se!!

#uture roducts and engage in other activities" Caita! e/enditure decisions+ there#ore+

#orm a #oundation #or the #uture ro#itabi!it( o# a coman("

Pro.ects donGt .ust #a!! out o# thin air6 someone has to have them" The main oint here is

that success#u!+ d(namic and gro%ing comanies are constant!( on the !oo$out #or ne%

ro.ects to consider" In the !argest organi)ations there are entire deartments !oo$ing #or

a!ternatives and oortunities"

& 3oo$ #or suitab!e ro.ects

Once someone has had the idea to invest+ the ne/t ste is to !oo$ at suitab!e ro.ects6ro.ects that com!ement current business+ ro.ects that are com!ete!( di##erent to

current business and so on" Initia!!(+ a!! ossibi!ities %i!! be considered6 a!ong the !ines o#

a brainstorming e/ercise"

As time goes b(+ and as cororate ob.ectives a!!o%+ the initia! !ist o# otentia! ro.ects %i!!

be %hitt!ed do%n to a more manageab!e number"

Identi#( and consider a!ternatives

Having #ound a #e% ro.ects to consider+ the organi)ation %i!! investigate an( number o#

di##erent %a(s o# carr(ing them out" A#ter a!!+ the #irst idea robab!( %onGt either be the

!ast or the best" Creativit( is the order o# the da( here+ as organi)ations attemt to start o##

on the best #ooting"

&@


30/74

As the diagram suggests+ at each o# these #irst three stages+ %e need to consider %hether

%hat %e are roosing #its in %ith cororate ob.ectives" There is no oint in thin$ing o# a

ro.ect that con#!icts %ith+ sa(+ the gro%th ob.ective or the ro#itabi!it( ob.ective or even

an environmenta! ob.ective"

A !ot o# data %i!! be generated in this stage and this data %i!! be #ed into stage #our6

Caita! Investment Araisa!"

2 Caita! Investment Araisa!

This is the number crunching stage in %hich %e use some or a!! o# the #o!!o%ing methods

Pa(bac$ :P;

accounting rate o# return :ARR;

Net resent va!ue :NP;

Interna! rate o# return :IRR;

Pro#itabi!it( Inde/ :PI;

There are other techni,ues o# course but the techni,ue to be used %i!! deend on a range

o# things+ inc!uding the $no%!edge and sohistication o# the management o# the

organi)ation+ the avai!abi!it( o# comuters and the si)e and com!e/it( o# the ro.ect

under revie%"

or more in#ormation here+ go to m( age on CIA once (ou have #inished this age"

8 Ana!(sis o# #easibi!it(

5tage #our is the number crunching stage" This stage is %here the decision is made as to

%hich ro.ect is to be assessed as accetab!e" That is+ %hich ro.ect is #easib!eM

In order to choose the ro.ect+ management needs some hurd!es6

7hat must the a(bac$ be

7hat rate o# ARR is accetab!e

B


31/74

7hat is the NP cut o##

7hat IRR is the !east that %e can accet

7hat PI is the !east that %e can accet

and so on"

5ome ro.ects %i!! be discarded as a resu!t o# this stage" or e/am!e+ i# the P cut o## is+

sa(+ & (ears+ and a ro.ect has a P o# (ears+ it %i!! be re.ected" The same is true o# the

ARR+ NP+ IRR and PI"

Caita! rationing might be a rob!em here+ too+ i# the organi)ation has genera! cash #!o%

rob!ems"

Capital Budgeting Policy Manual

3etGs ause at this oint to ma$e the oint that %hat %e have .ust said about cut o## rates

and so on come #rom #orma! rocedures and documents" One such #orma! document is

the Caita! udgeting Po!ic( 4anua!+ in %hich #orma! rocedures and ru!es are

estab!ished to assure that a!! roosa!s are revie%ed #air!( and consistent!(" The manua!

he!s to ensure that managers and suervisors %ho ma$e roosa!s need to $no% %hat

the organi)ation e/ects the roosa!s to contain+ and on %hat basis their roosed

ro.ects %i!! be .udged"

The managers %ho have the authorit( to arove seci#ic ro.ects need to e/ercise that

resonsibi!it( in the conte/t o# an overa!! organi)ationa! caita! e/enditure o!ic("

In out!ine+ the o!ic( manua! shou!d inc!ude seci#ications #or6

1" an annua!!( udated #orecast o# caita! e/enditures

&" the aroriation stes

1


32/74

" the araisa! method:s; to be used to eva!uate roosa!s

2" the minimum accetab!e rate:s; o# return on ro.ects o# various ris$

8" the !imits o# authorit(


33/74

#rom start to #inish6 stages 1 - = and !oo$s at ho% it %as thought o#+ ana!()ed+ chosen+

im!emented+ and monitored and so on"

The urose o# the ost audit is to test %hether caita! budgeting rocedures have been

#u!!( and #air!( a!ied to the ro.ect under revie%"

O# course+ an( %ea$nesses that might be #ound during the ost audit might be seci#ic to

one ro.ect or the( might re!ate to caita! budgeting s(stems #or the organi)ation as a

%ho!e" In the !atter case+ the auditor %i!! reort bac$ to his sueriors and to management

that s(stems need to be overhau!ed as a resu!t o# %hat has been #ound"


34/74

CHAPTER @ III

IN2STR4 COMPAN4 PROFI*E

IN2STR4 PROFI*E

2


35/74

In the most genera! sense o# the %ord+ a ce,entis a binder+ a

substance %hich sets and hardens indeendent!(+ and can bind other materia!s together"

The %ord cement traces to the Romans+ %ho used the term ous caementicium to

describe masonr( %hich resemb!ed concrete and %as made #rom crushed roc$ %ith burnt

!imeas binder" The vo!canic ash and u!veri)ed bric$ additives %hich %ere added to the

burnt !ime to obtain a h(drau!ic binder %ere !ater re#erred to as cementum+ cimentum+

cment and cement" Cements used in construction are characteri)ed as !"dr+u'icor non6

!"dr+u'ic"

The most imortant use o# cement is the roduction o# mortarand concretethe bonding

o# natura! or arti#icia! aggregates to #orm a strong bui!ding materia! %hich is durab!e in

the #ace o# norma! environmenta! e##ects"

Concreteshou!d not be con#used %ith cement because the term cementre#ers on!( to the

dr( o%der substance used to bind the aggregate materia!s o# concrete" Uon the addition

o# %ater andor additives the cement mi/ture is re#erred to as concrete+ esecia!!( i#

aggregates have been added"

It is uncertain %here it %as #irst discovered that a combination o# h(drated non-h(drau!ic

!imeand ao))o!anroduces a h(drau!ic mi/ture :see a!so6 Po))o!anic reaction;+ but

concrete made #rom such mi/tures %as #irst used on a !arge sca!e b( Roman

engineers"The( used both natura! o))o!ans :trass or umice; and arti#icia! o))o!ans

:ground bric$ or otter(; in these concretes" 4an( e/ce!!ent e/am!es o# structures made

#rom these concretes are sti!! standing+ notab!( the huge mono!ithic dome o# the Pantheon

in Romeand the massive aths o# Caraca!!a" The vast s(stem o# Roman a,ueductsa!so

made e/tensive use o# h(drau!ic cement" The use o# structura! concrete disaeared in

medieva! Euroe+ a!though %ea$ o))o!anic concretes continued to be used as a core #i!!

in stone %a!!s and co!umns"

4odern cement

8
http://en.wikipedia.org/wiki/Ancient_Romehttp://en.wikipedia.org/wiki/Calcium_oxidehttp://en.wikipedia.org/wiki/Mortar_(masonry)http://en.wikipedia.org/wiki/Mortar_(masonry)http://en.wikipedia.org/wiki/Concretehttp://en.wikipedia.org/wiki/Concretehttp://en.wikipedia.org/wiki/Concretehttp://en.wikipedia.org/wiki/Slaked_limehttp://en.wikipedia.org/wiki/Slaked_limehttp://en.wikipedia.org/wiki/Pozzolanhttp://en.wikipedia.org/wiki/Pozzolanic_reactionhttp://en.wikipedia.org/wiki/Roman_engineeringhttp://en.wikipedia.org/wiki/Roman_engineeringhttp://en.wikipedia.org/wiki/Trasshttp://en.wikipedia.org/wiki/Pumicehttp://en.wikipedia.org/wiki/Pantheon,_Romehttp://en.wikipedia.org/wiki/Romehttp://en.wikipedia.org/wiki/Baths_of_Caracallahttp://en.wikipedia.org/wiki/Roman_aqueducthttp://en.wikipedia.org/wiki/Ancient_Romehttp://en.wikipedia.org/wiki/Calcium_oxidehttp://en.wikipedia.org/wiki/Mortar_(masonry)http://en.wikipedia.org/wiki/Concretehttp://en.wikipedia.org/wiki/Concretehttp://en.wikipedia.org/wiki/Slaked_limehttp://en.wikipedia.org/wiki/Slaked_limehttp://en.wikipedia.org/wiki/Pozzolanhttp://en.wikipedia.org/wiki/Pozzolanic_reactionhttp://en.wikipedia.org/wiki/Roman_engineeringhttp://en.wikipedia.org/wiki/Roman_engineeringhttp://en.wikipedia.org/wiki/Trasshttp://en.wikipedia.org/wiki/Pumicehttp://en.wikipedia.org/wiki/Pantheon,_Romehttp://en.wikipedia.org/wiki/Romehttp://en.wikipedia.org/wiki/Baths_of_Caracallahttp://en.wikipedia.org/wiki/Roman_aqueduct


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4odern h(drau!ic cements began to be deve!oed #rom the start o# the Industria!

Revo!ution:around 1?BB;+ driven b( three main needs6

H(drau!ic renders#or #inishing bric$ bui!dings in %et c!imates

H(drau!ic mortars #or masonr( construction o# harbor %or$s etc+ in contact %ith sea

%ater"

Deve!oment o# strong concretes"

Inritainarticu!ar!(+ good ,ua!it( bui!ding stone became ever more e/ensive during a

eriod o# raid gro%th+ and it became a common ractice to construct restige bui!dings

#rom the ne% industria! bric$s+ and to #inish them %ith a stucco to imitate stone"

H(drau!ic !imes %ere #avored #or this+ but the need #or a #ast set time encouraged the

deve!oment o# ne% cements" 4ost #amous %as Par$erGs Roman cement" This %as

deve!oed b( Qames Par$erin the 1=?Bs+ and #ina!!( atented in 1=@


37/74

cement+ because the render made #rom it %as in co!or simi!ar to the restigious Port!and

stone"

A!! the above roducts cou!d not comete %ith !imeo))o!an concretes because o# #ast-

setting :giving insu##icient time #or !acement; and !o% ear!( strengths :re,uiring a de!a(

o# man( %ee$s be#ore #orm%or$ cou!d be removed;" H(drau!ic !imes+ natura! cements

and arti#icia! cements a!! re!( uon theirbe!itecontent #or strength deve!oment" e!ite

deve!os strength s!o%!(" ecause the( %ere burned at temeratures be!o% 1&8B C+ the(

contained no a!ite+ %hich is resonsib!e #or ear!( strength in modern cements" The #irst

cement to consistent!( contain a!ite %as made b( Qoseh AsdinGs son 7i!!iam in the

ear!( 1?2Bs" This %as %hat %e ca!! toda( modern Port!and cement" ecause o# the air

o# m(ster( %ith %hich 7i!!iam Asdin surrounded his roduct+ others :e"g" icat and I C

Qohnson; have c!aimed recedence in this invention+ but recent ana!(sis o# both his

concrete and ra% cement have sho%n that 7i!!iam AsdinGs roduct made at North#!eet+

Sent%as a true a!ite-based cement" Ho%ever+ AsdinGs methods %ere ru!e-o#-thumb6

icat is resonsib!e #or estab!ishing the chemica! basis o# these cements+ and Qohnson

estab!ished the imortance o# sintering the mi/ in the $i!n"

7i!!iam AsdinGs innovation %as counter-intuitive #or manu#acturers o# arti#icia!

cements+ because the( re,uired more !ime in the mi/ :a rob!em #or his #ather;+ because

the( re,uired a much higher $i!n temerature :and there#ore more #ue!; and because the

resu!ting c!in$er%as ver( hard and raid!( %ore do%n the mi!!stones %hich %ere the

on!( avai!ab!e grinding techno!og( o# the time" 4anu#acturing costs %ere there#ore

considerab!( higher+ but the roduct set reasonab!( s!o%!( and deve!oed strength

,uic$!(+ thus oening u a mar$et #or use in concrete" The use o# concrete in construction

gre% raid!( #rom 1?8B on%ards+ and %as soon the dominant use #or cements" Thus

Port!and cement began its redominant ro!e" it is made #rom %ater and sand

T(es o# modern cement

=
http://en.wikipedia.org/wiki/Portland_stonehttp://en.wikipedia.org/wiki/Portland_stonehttp://en.wikipedia.org/wiki/Belitehttp://en.wikipedia.org/wiki/Alitehttp://en.wikipedia.org/wiki/William_Aspdinhttp://en.wikipedia.org/wiki/Isaac_Charles_Johnsonhttp://en.wikipedia.org/wiki/Isaac_Charles_Johnsonhttp://en.wikipedia.org/wiki/Northfleethttp://en.wikipedia.org/wiki/Kenthttp://en.wikipedia.org/wiki/Clinker_(cement)http://en.wikipedia.org/wiki/Portland_stonehttp://en.wikipedia.org/wiki/Portland_stonehttp://en.wikipedia.org/wiki/Belitehttp://en.wikipedia.org/wiki/Alitehttp://en.wikipedia.org/wiki/William_Aspdinhttp://en.wikipedia.org/wiki/Isaac_Charles_Johnsonhttp://en.wikipedia.org/wiki/Isaac_Charles_Johnsonhttp://en.wikipedia.org/wiki/Northfleethttp://en.wikipedia.org/wiki/Kenthttp://en.wikipedia.org/wiki/Clinker_(cement)


38/74


39/74

Port'+nd si'ic+ u,e ce,ent" Addition o# si!ica #ume can (ie!d e/cetiona!!( high

strengths+ and cements containing 8-&B si!ica #ume are occasiona!!( roduced"

Ho%ever+ si!ica #ume is more usua!!( added to Port!and cement at the concrete mi/er"

M+sonr" ce,entsare used #or rearing bric$!a(ing mortarsand stuccos+ and must not

be used in concrete" The( are usua!!( com!e/ rorietar( #ormu!ations containing

Port!and c!in$er and a number o# other ingredients that ma( inc!ude !imestone+ h(drated

!ime+ air entrainers+ retarders+ %aterroo#ers and co!oring agents" The( are #ormu!ated to

(ie!d %or$ab!e mortars that a!!o% raid and consistent masonr( %or$" 5ubt!e variations

o# 4asonr( cement in the U5 are P!astic Cements and 5tucco Cements" These are

designed to roduce contro!!ed bond %ith masonr( b!oc$s"

E0%+nsive ce,entscontain+ in addition to Port!and c!in$er+ e/ansive c!in$ers :usua!!(

su!#oa!uminate c!in$ers;+ and are designed to o##set the e##ects o# dr(ing shrin$age that is

norma!!( encountered %ith h(drau!ic cements" This a!!o%s !arge #!oor s!abs :u to


40/74

h(dration roducts that roduce strength are essentia!!( the same as those roduced b(

Port!and cement"

S'+(6'i,e ce,ents.round granu!ated b!ast #urnace s!agis not h(drau!ic on its o%n+ but

is activated b( addition o# a!$a!is+ most economica!!( using !ime" The( are simi!ar to

o))o!an !ime cements in their roerties" On!( granu!ated s!ag :i"e" %ater-,uenched+

g!ass( s!ag; is e##ective as a cement comonent"

Su%ersu'+ted ce,ents.These contain about ?B ground granu!ated b!ast #urnace s!ag+

18 g(sum or anh(drite and a !itt!e Port!and c!in$er or !ime as an activator" The(

roduce strength b( #ormation o# ettringite+ %ith strength gro%th simi!ar to a s!o%

Port!and cement" The( e/hibit good resistance to aggressive agents+ inc!uding su!#ate"

Ca!cium a!uminate cementsare h(drau!ic cements made rimari!( #rom !imestone and

bau/ite" The active ingredients are monoca!cium a!uminate CaA!&O2:CaO A!&Oor CA

inCement chemist notation+ CCN; and ma(eniteCa1&A!12O:1& CaO = A!&O+ or C1&A=

in CCN;" 5trength #orms b( h(dration to ca!cium a!uminate h(drates" The( are %e!!-

adated #or use in re#ractor( :high-temerature resistant; concretes+ e"g" #or #urnace

!inings"

C+'ciu, su'o+'u,in+te ce,ents are made #rom c!in$ers that inc!ude (eGe!imite

:Ca2:A!O&;


41/74

strength+ high-!ate strength minera! in Port!and cement; are #ormed %ithout the #ormation

o# e/cessive amounts o# #ree !ime" As %ith an( natura! materia!+ such cements have

high!( variab!e roerties"

eoo!(merce,entsare made #rom mi/tures o# %ater-so!ub!e a!$a!i meta! si!icates and

a!uminosi!icate minera! o%ders such as#!( ashand meta$ao!in"

COMPAN4 PROFI*E

21
http://en.wikipedia.org/wiki/Geopolymershttp://en.wikipedia.org/wiki/Fly_ashhttp://en.wikipedia.org/wiki/Fly_ashhttp://en.wikipedia.org/wiki/Metakaolinhttp://en.wikipedia.org/wiki/Geopolymershttp://en.wikipedia.org/wiki/Fly_ashhttp://en.wikipedia.org/wiki/Metakaolin


42/74

2*TRATECH CEMENT:

U!traTech Cement 3imited has an annua! caacit( o# 1?"& mi!!ion tonnes" It manu#actures

and mar$ets Ordinar( Port!and Cement+ Port!and !ast urnace 5!ag Cement and

Port!and Po))a!ana Cement" It a!so manu#actures read( mi/ concrete :R4C;"

U!traTech Cement 3imited has #ive integrated !ants+ si/ grinding units and three

termina!s t%o in India and one in 5ri 3an$a"

U!traTech Cement is the countr(*s !argest e/orter o# cement c!in$er" The e/ort mar$ets

san countries around the Indian Ocean+ A#rica+ Euroe and the 4idd!e East"

U!traTech*s subsidiaries are Da$shin Cement 3imited and U!traTech Ce(!inco :P;

3imited"

The roots o# the Adit(a ir!a rou date bac$ to the 1@th centur( in the ictures,ue to%n

o# Pi!ani+ set amidst the Ra.asthan desert" It %as here that 5eth 5hiv Nara(an ir!a started

trading in cotton+ !a(ing the #oundation #or the House o# ir!as"

Through IndiaGs arduous times o# the 1?8Bs+ the ir!a business e/anded raid!(" In the

ear!( art o# the &Bth centur(+ our rouGs #ounding #ather+ hansh(amdas ir!a+ set u

industries in critica! sectors such as te/ti!es and #ibre+ a!uminium+ cement and chemica!s"

As a c!ose con#idante o# 4ahatma andhi+ he !a(ed an active ro!e in the Indian #reedom

strugg!e" He reresented India at the #irst and second round-tab!e con#erence in 3ondon+

a!ong %ith andhi.i" It %as at ir!a House in De!hi that the !uminaries o# the Indian

#reedom strugg!e o#ten met to !ot the do%n#a!! o# the ritish Ra."

hansh(amdas ir!a #ound no contradiction in ursuing business goa!s %ith the

dedication o# a saint+ emerging as one o# the #oremost industria!ists o# re-indeendence

India" The rinci!es b( %hich he !ived %ere soa$ed u b( his grandson+ Adit(a i$ram

ir!a+ our rouGs !egendar( !eader"

Adit"+ -i


43/74

dream o# setting u a g!oba! business emire at the age o# &2" He %as the #irst to ut

Indian business on the %or!d ma+ as #ar bac$ as 1@


44/74

That India attains resectab!e ran$ among the deve!oed nations+ %as a dream he #orever

cherished" He %as roud o# India and too$ e,ua! ride in being an Indian"

Under the !eadershi o# our Chairman+ 4r" Sumar 4anga!am ir!a+ the rou has

sustained and estab!ished a !eadershi osition in its $e( businesses through continuous

va!ue-creation" 5earheaded b( rasim+ Hinda!co+ Adit(a ir!a Nuvo+ Indo u!#

erti!isers and comanies in Thai!and+ 4a!a(sia+ Indonesia+ the Phi!iines and Eg(t+

the Adit(a ir!a rou is a !eader in a s%athe o# roducts viscose sta!e #ibre+

a!uminium+ cement+ coer+ carbon b!ac$+ a!m oi!+ insu!ators+ garments" And %ith

success#u! #ora(s into #inancia! services+ te!ecom+ so#t%are and PO+ the rou is toda(

one o# AsiaGs most diversi#ied business grous"

o+rd o irectors

:: 4r" Sumar 4anga!am ir!a+ Chairman

:: 4rs" Ra.ashree ir!a

:: 4r" R" C" hargava

:: 4r" " 4" Dave

:: 4r" N" Q" Qhaveri

:: 4r" 5" " 4athur

:: 4r" " T" 4oorth(

:: 4r" O" P" Puranma!$a:: 4r" 5" Ra.goa!

:: 4r" D" D" Rathi

:: 4r" 5" 4isra+ 4anaging Director

E0ecutive President / C!ie Fin+nci+' Oicer

:: 4r" S" C" ir!a

C!ie M+nu+cturin( Oicer

:: R"S" 5hah

C!ie M+r


45/74

BTo +ctive'" contribute to t!e soci+' +nd econo,ic deve'o%,ent o t!e co,,unities

in )!ic! )e o%er+te. In so doin( bui'd + better sust+in+b'e )+" o 'ie or t!e

)e+


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Our str+te("

Our ro.ects are carried out under the aegis o# the Adit(a ir!a Centre #or Communit(

Initiatives and Rura! Deve!oment+ !ed b( 4rs" Ra.ashree ir!a" The Centre rovides the

strategic direction+ and the thrust areas #or our %or$ ensuring er#ormance management

as %e!!"

Our #ocus is on the a!!-round deve!oment o# the communities around our !ants !ocated

most!( in distant rura! areas and triba! be!ts" A!! our rou comanies - rasim+

Hinda!co+ Adit(a ir!a Nuvo+ Indo u!# and U!traTech have Rura! Deve!oment Ce!!s

%hich are the im!ementation bodies"

Pro.ects are !anned a#ter a articiator( need assessment o# the communities around the!ants" Each ro.ect has a one-(ear and a three-(ear ro!!ing !an+ %ith mi!estones and

measurab!e targets" The ob.ective is to hase out our resence over a eriod o# time and

hand over the reins o# #urther deve!oment to the eo!e" This a!so enab!es us to %iden

our reach" A!ong %ith interna! er#ormance assessment mechanisms+ our ro.ects are

audited b( reuted e/terna! agencies+ %ho measure it on ,ua!itative and ,uantitative

arameters+ he!ing us gauge the e##ectiveness and roviding e/ce!!ent inuts"

Our artners in deve!oment are government bodies+ district authorities+ vi!!age

ancha(ats and the end bene#iciaries -- the vi!!agers" The overnment has+ in their 8-(ear

!ans+ secia! #unds earmar$ed #or human deve!oment and %e recourse to man( o#

these" At the same time+ %e net%or$ and co!!aborate %ith !i$e-minded bi!atera! and

uni!atera! agencies to share ideas+ dra% #rom each otherGs e/eriences+ and ensure that

e##orts are not du!icated" At another !eve!+ this rovides a !at#orm #or advocac(" 5ome

o# the agencies %e have co!!aborated %ith are UNPA+ 5I5A+ CARE India+ Habitat #or

Humanit( Internationa!+ Unice# and the 7or!d an$"

Our ocus +re+s

Our rura! deve!oment activities san #ive $e( areas and our sing!e-minded goa! here is to

he! bui!d mode! vi!!ages that can stand on their o%n #eet" Our #ocus areas are hea!thcare+

education+ sustainab!e !ive!ihood+ in#rastructure and esousing socia! causes"

2


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The name 'Adit(a ir!a0 evo$es a!! that is ositive in business and in !i#e" It e/em!i#ies

integrit(+ ,ua!it(+ er#ormance+ er#ection and above a!! character"

Our !ogo is the s(mbo!ic re#!ection o# these traits" It is the cornerstone o# our cororate

identit(" It he!s us !everage the uni,ue Adit(a ir!a brand and endo%s us %ith a

distinctive visua! image"

Deicted in vibrant+ earth( co!ours+ it is ver( arresting and sho%s the sun rising over t%o

circ!es" An inner circ!e s(mbo!ising the interna! universe o# the Adit(a ir!a rou+ an

outer circ!e s(mbo!ising the e/terna! universe+ and a d(namic meeting o# ra(s converging

and diverging bet%een the t%o"

Through its %ide usage+ %e create a consistent+ imact-oriented rou image" This

undoubted!( enhances our ro#i!e among our interna! and e/terna! sta$eho!ders"

Our cororate !ogo thus serves as an umbre!!a #or our rou" It signa!s the common

va!ues and be!ie#s that guide our behaviour in a!! our entrereneuria! activities" It embeds

a sense o# ride+ unit( and be!onging in a!! o# our 1B+BBB co!!eagues sanning &8

countries and B nationa!ities across the g!obe" Our !ogo is our best ca!!ing card that

oens the gate%a( to the %or!d"

Grou% co,%+nies

:: rasim Industries 3td"

:: Hinda!co Industries 3td"

:: Adit(a ir!a Nuvo 3td"

:: U!traTech Cement 3td"

2=
http://www.grasim.com/index.htmhttp://www.hindalco.com/http://www.adityabirlanuvo.com/http://www.ultratechcement.com/http://www.grasim.com/index.htmhttp://www.hindalco.com/http://www.adityabirlanuvo.com/http://www.ultratechcement.com/


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U!traTechGs roducts inc!ude Ordinar( Port!and cement+ Port!and Po))o!ana cement and

Port!and b!ast #urnace s!ag cement"

Ordinar( Port!and cement

Port!and b!ast #urnace s!ag cement

Port!and Po))o!ana cement

Cement to Euroean and 5ri 3an$an norms

Ordin+r" Port'+nd ce,ent

Ordinar( ort!and cement is the most common!( used cement #or a %ide range o#

a!ications" These a!ications cover dr(-!ean mi/es+ genera!-urose read(-mi/es+ and

even high strength re-cast and re-stressed concrete"

Port'+nd b'+st urn+ce s'+( ce,ent

Port!and b!ast-#urnace s!ag cement contains u to =B er cent o# #ine!( ground+ granu!ated

b!ast-#urnace s!ag+ a nonmeta!!ic roduct consisting essentia!!( o# si!icates and a!umino-

si!icates o# ca!cium" 5!ag brings %ith it the advantage o# the energ( invested in the s!ag

ma$ing" rinding s!ag #or cement re!acement ta$es on!( &8 er cent o# the energ(needed to manu#acture ort!and cement" Using s!ag cement to re!ace a ortion o#

ort!and cement in a concrete mi/ture is a use#u! method to ma$e concrete better and

more consistent" Port!and b!ast-#urnace s!ag cement has a !ighter co!our+ better concrete

%or$abi!it(+ easier #inishabi!it(+ higher comressive and #!e/ura! strength+ !o%er

ermeabi!it(+ imroved resistance to aggressive chemica!s and more consistent !astic

and hardened consistenc("

Port'+nd Po==o'+n+ ce,ent

Port!and o))o!ana cement is ordinar( ort!and cement b!ended %ith o))o!anic

materia!s :o%er-station #!( ash+ burnt c!a(s+ ash #rom burnt !ant materia! or si!icious

earths;+ either together or searate!(" Port!and c!in$er is ground %ith g(sum and

o))o!anic materia!s %hich+ though the( do not have cementing roerties in themse!ves+

8B
http://www.ultratechcement.com/products/index.htm#3http://www.ultratechcement.com/products/index.htm#4http://www.ultratechcement.com/products/index.htm#5http://www.ultratechcement.com/products/index.htm#3http://www.ultratechcement.com/products/index.htm#4http://www.ultratechcement.com/products/index.htm#5


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combine chemica!!( %ith ort!and cement in the resence o# %ater to #orm e/tra strong

cementing materia! %hich resists %et crac$ing+ therma! crac$ing and has a high degree o#

cohesion and %or$abi!it( in concrete and mortar"

!s a "roup #e ha$e al#ays operated and continue to operate our %usinesses as

Trustees #ith a deep rooted o%ligation to synergise gro#th #ith responsi%ility.

Mr &umar Mangalam Birla, Chairman, !ditya Birla "roup

The cement industr( re!ies heavi!( on natura! resources to #ue! its oerations" As these

d%ind!e+ the imerative is c!ear a!ternative sources o# energ( have to be sought out

and the use o# e/isting resources has to be reduced+ or e!iminated a!together" On!( then

can sustainab!e business be carried out+ and a cororate can tru!( sa( it is contributing to

the reservation o# the environment"

U!traTech ta$es its resonsibi!it( to conserve the environment ver( serious!(+ and its eco-

#riend!( aroach is evident across a!! sheres o# its oerations" Its ma.or thrust has been

to identi#( a!ternatives to achieve set ob.ectives and thereb( reduce its carbon #ootrint"

These are done through6

:: 7aste management

:: Energ( management

:: 7ater conservation

:: iodiversit( management

:: A##orestation

:: Reduction in emissions

Imortant!(+ U!traTech has set a target o# &"@< er cent reduction in CO& emission

intensit(+ at a rate o# B"8 er cent annua!!(+ u to &B18-1


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Our str+te("

Our ro.ects are carried out under the aegis o# the Adit(a ir!a Centre #or Communit(

Initiatives and Rura! Deve!oment+ !ed b( 4rs" Ra.ashree ir!a" The Centre rovides the

strategic direction+ and the thrust areas #or our %or$ ensuring er#ormance management

as %e!!"

Our #ocus is on the a!!-round deve!oment o# the communities around our !ants !ocated

most!( in distant rura! areas and triba! be!ts" A!! our rou comanies - rasim+

Hinda!co+ Adit(a ir!a Nuvo and U!traTech have Rura! Deve!oment Ce!!s %hich are the

im!ementation bodies"

Pro.ects are !anned a#ter a articiator( need assessment o# the communities around the

!ants" Each ro.ect has a one-(ear and a three-(ear ro!!ing !an+ %ith mi!estones and

measurab!e targets" The ob.ective is to hase out our resence over a eriod o# time and

hand over the reins o# #urther deve!oment to the eo!e" This a!so enab!es us to %iden

our reach" A!ong %ith interna! er#ormance assessment mechanisms+ our ro.ects are

audited b( reuted e/terna! agencies+ %ho measure it on ,ua!itative and ,uantitative

arameters+ he!ing us gauge the e##ectiveness and roviding e/ce!!ent inuts"

Our artners in deve!oment are government bodies+ district authorities+ vi!!age

ancha(ats and the end bene#iciaries the vi!!agers" The overnment has+ in their 8-

(ear !ans+ secia! #unds earmar$ed #or human deve!oment and %e recourse to man( o#

these" At the same time+ %e net%or$ and co!!aborate %ith !i$e-minded bi!atera! and

uni!atera! agencies to share ideas+ dra% #rom each otherGs e/eriences+ and ensure that

e##orts are not du!icated" At another !eve!+ this rovides a !at#orm #or advocac(" 5ome

o# the agencies %e have co!!aborated %ith are UNPA+ 5I5A+ CARE India+ Habitat #or

Humanit( Internationa!+ Unice# and the 7or!d an$"

Our vision

BTo +ctive'" contribute to t!e soci+' +nd econo,ic deve'o%,ent o t!e co,,unities

in )!ic! )e o%er+te. In so doin( bui'd + better sust+in+b'e )+" o 'ie or t!e

)e+


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Mrs. Rajashree Birla+ Chairerson+

The Adit(a ir!a Centre #or Communit( Initiatives and Rura! Deve!oment

M+


54/74

CHAPTER IV

ATA ANA*4SIS

/

INTERPRETATION

82


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2*TRATECH CEMENTS MINES CASHF*O7 STATEMENT FOR THE 4EARS

#6#1 TO #1$6#1&

:Rs" In crorers;

5I"NO PARTICU3AR5 &BB@-&B1B

&B1B-&B11 &B11-&B1& &B1&-&B1 &B1-&B12

Cash in#!o%6

1" 5a!es turnover :revenue;

21"=


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TRAITIONA* CAPITA* 2GETING APPRISA* METHOS

RE*ATE TO RT; Project

1. PA4 AC; PERIO METHO:

Pa(bac$ eriod method is a traditiona! method o# eva!uation o# caita!

budgeting decision" The term a(bac$ or a( out or a(o## re#ers to the

eriod in %hich the ro.ect %i!! generate the necessar( cash and recou the

initia! investment or the cash out #!o%s"

To ca!cu!ate the a( eriod+ the cumu!ative cash #!o%s %i!! beca!cu!ated and b( using intero!ation the e/act eriod ma( be ca!cu!ated"

The U3TRATECH has Rs" =


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The above tab!e sho%s that+ the initia! investment R5"2281"


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II. ACCO2NTING OR A-ERAGE RATE OF RET2RN METHO:

It is another traditiona! method o# caita! budgeting eva!uation" According

to this method the caita! investment roosa!s are .udged on the basis o# their

re!ative ro#itabi!it(" The caita! em!o(ed and re!ated incomes are determinedaccording to the common!( acceted accounting rinci!es and ractices over the

certain !i#e o# ro.ect and the average (ie!d is ca!cu!ated" 5uch a rate is ca!!ed the

accounting rate o# return or the average return or ARR"

It ma( be ca!cu!ated according to an( one o# the #o!!o%ing methods6

:i; Annua! average net earnings

---------------------------------- X 1BBOrigina! investment

:ii; Annua! average net earnings----------------------------------- X 1BB Average investment

:iii; Increase in e/ected #uture annua! net earnings ----------------------------------------------------------- X 1BB Initia! increase in re,uired investment

The term average annua! net earnings are the average o# the earnings a#ter dereciation

and ta/" Over the %ho!e o# the economic !i#e o# the ro.ect order and these giving on

ARR above the re,uired rate ma( be acceted"

The amount o# average investment can be ca!cu!ated according to an( o#

the #o!!o%ing methods6

:a; Origina! investment------------------------

&:b; Origina! investment Wscra va!ue

------------------------------------------ &

:c; Origina! investment Wscra va!ue W net additiona! W scra va!ue 7or$ing caita! ---------------------------------------------------------------------------------

&

8?


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60/74

ACCEPT6RE5ECT CRIT ARR method a!!o%s U3TRATECH to #i/ a minimum

rate o# return" An( ro.ect e/ected to give a return be!o% it %i!! be straight a%a(

re.ected" The average rate o# return is as good as @8 o# U3TRATECH deictsthe rosects o# management e##icienc("

TIME A52STE 8OR9 ISCO2NTE CASH F*O7 METHO:

The time ad.usted or discounted cash #!o% methods ta$e into accounts the

ro#itabi!it( time va!ue o# mone(" These methods are a!so ca!!ed the modern methods o#

caita! budgeting"

1. NET PRESENT -A*2E METHO: 8NP-9

Net resent va!ue method or NP is one o# the discounted cash #!o%s methods"

The method is considered to be one o# the best o# eva!uating the caita!

investment roosa!s" Under this method cash in#!o%s and out#!o%s associated

%ith each ro.ect are #irst ca!cu!ated"

RO*E OF ISCO2NTING FACTOR:

The cash in#!o%s and out #!o%s are converted to the resent va!ues using

discounting #actor %hich is the actuar( discount #actor o# Regu!ated dis!a( too!

$it ro.ect o# U3TRATECH CE4ENT5 is ?"

The rate o# return is considered as cut o## rate or re,uired rate or rate

genera!!( determined on the basis o# cost o# caita! to a!!o% #or the ris$ e!ement

invo!ved in the ro.ect"


61/74


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St+te,ent s!o)in( c+'cu'+tion o NP-. 8Rs. In '+

>EAR5 CAT*5 PI Z 1B P*5

&BB@-&B1B =B8"2? B"@B@


63/74

IRR is the rate the sum o# discounted cash in#!o%s e,ua!s the sum o#

discounted cash out#!o%s" It e,ua!s the resent va!ue o# cash in#!o% to resent va!ue

o# cash out#!o%s"

In this method discount rate is not $no%n+ but the cash in#!o%s and cash

out #!o%s are $no%n" It is the rate o# return+ %hich e,uates the resent va!ue o# cash

in#!o%s to out #!o%s or it+ is the rate o# return+ %hich renders NP TO ]ERO"

STEPS IN-O*-E IN THE CA*C2*ATION OF IRR:

1; Ca!cu!ation o# NP %ith given discount rate

&; Ca!cu!ation o# NP %ith assumed discount rate

; 5e!ect the higher NP o# both

2; 3et R be the higher discount rate

8; 3et R1 be the di##erence o# discount rates


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FORM2*ATION OF STEPS:

5TATE4ENT O 5HO7IN CA3CU3ATION NP Z??+?@+@B UNDERIRR 4ETHOD :R s corers;

>EAR5 Annua!CA Ts

Discount

Rate-??

Discount

Rate-?@

Discount

Rate-@B

P P P P P P

&BB@-&B1B =B8"2? B"82B8 &BB&"?1 B"8&@1 1@


65/74

ACCEPT6RE5ECT CRITERION:

IRR is the ma/imum rate o# interest+ %hich an organi)ation can a##ord to a(

on caita! invested in+ is acceted i# IRR e/ceeds the cuto## rates and re.ected i# it

is be!o% the cuto## rate"

The cuto## rate o# U3TRATECH CE4ENT5 is 1B+ %hich is !ess than the

IRR i"e ??"8 Hence the accetance o# U3TRATECH CE4ENT5 is ,uiet a

good investment decision ta$en b( management"

$. PROFITAI*IT4 INE: 8CR OR PI9

Pro#itabi!it( inde/ method is a!so $no%n as time ad.usted method o# eva!uating

the investment roosa!s" Pro#itabi!it( a!so ca!!ed as bene#it cost ratio :YC; in

re!ationshi bet%een resent va!ue o# cash in#!o%s and the resent va!ue o# cash out

#!o%s" Thus

Present va!ue o# cash in#!o%s

Pro#itabi!it( inde/ V -------------------------------------- Present va!ue o# cash out#!o%s"

:OR;

Present va!ue o# cash in#!o%s Pro#itabi!it( inde/ V - ---------------------------------------- Initia! cash out!a(


66/74


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ACCEPT6RE5ECT CRITERION6

There is a s!ight di##erence bet%een resent va!ue inde/ method andro#itabi!it( inde/ method" Under ro#itabi!it( inde/ method the resent va!ue o# cash

in#!o%s and cash out#!o%s are ta$en as accet-re.ect decision"

I"e" the accet re.ect criterion is6

I# Pro#itabi!it( Inde/ [ 1 :ACCEPT;"

Pro#itabi!it( Inde/ \ 1 :REQECT;"

The accetance o# b( the management is eva!uated through Pro#itabi!it( Inde/

method o# as the PI [ 1 :i"e""=B= (ears;

MERITS AN EMERITS:

This method is s!ight modi#ication o# net resent va!ue method" The net resent

va!ue method has one dra%bac$ that+ it is not eas( to ran$ the ro.ects on the basis o# this

method+ articu!ar!( %hen the costs o# the ro.ects di##er signi#icant!(" To eva!uate such

ro.ects+ the ro#itabi!it( inde/ method is most suitab!e" The other advantages and

disadvantages o# this ro.ect are simi!ar to net resent va!ue method"


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CHAPTER - FININGS

S2GGESTIONS

CONC*2SIONS

FININGS:


69/74

1" It is observed that the coman( is ab!e to increase its ro#its #rom (ear

to (ear"

&" The ross ro#its #rom &BB@ to &B12 increased #rom (ear to (ear

" It is observed that the comanies* net %orth is increasing considerab!("

2" ( observing the sources K a!ications+ it is c!ear that the coman( is active!(

increasing or standardi)ing its oerations"

8" PP can be used as a criterion to accet or re.ect an investment roosa!" A

roosa! %hose actua! a(bac$ eriod is more than %hat is re-determined b( the

management"


70/74

S2GGESTIONS

1" There are various deve!oments ta$ing in the industr( to cha!!enge so as

to the coman( shou!d deve!o as a #u!! #!edged research and deve!oeddeartment #or bringing techno!ogica! changes and imrovements in its

design K rocess"

&" The management has h(sica!!( veri#ied the stoc$ o# #inished goods and

%or$-in-rogress at the end o# the (ear"

" Coman( needs to identi#( the otentia! business revenue generation

%hich resu!ts to ro#it on oerations"

2" In resect o# service activities+ there is a reasonab!e s(stem o# recording

receits+ issues and consumtion o# materia!s and stores o# a!!ocation o#

materia!s consumed to the re!ative .ob" Commensurate %ith its si)e and

nature o# its business"

=B


71/74

CONC*2SIONS

The budgeting e/ercise in U3TRATECH a!so covers the !ong term caita!

budgets+ inc!uding annua! !anning and rovides !ong term !an #or a!ication o#

interna! resources and debt servicing trans!ated in to the cororate !an"

The scoe o# caita! budgeting a!so inc!udes e/enditure on !ant betterment+ and

renovation+ ba!ancing e,uiment+ caita! additions and commissioning e/enses

on tria! runs generating units"

To estab!ish a c!ose !in$ bet%een h(sica! rogress and monitor( out!a( and torovide the basis #or !an a!!ocation and budgetar( suort b( the government"

The manua! recommends the comutation o# NP at a cost o# caita! discount

rate seci#ied #rom time to time"

A sing!e discount rate shou!d not be used #or a!! the caacit( budgeting ro.ects"

The ana!(sis o# re!evant #acts and ,uanti#ications o# anticiated resu!ts and

bene#its+ ris$ #actors i# an(+ must be c!ear!( brought out"

easibi!it( reort o# the ro.ect is reared on the cost estimates and the cost o#

generation"

=1


72/74

ARE-IATIONS

PI Pro#itabi!it( inde/"

C Caita! budgeting

CFS Cash #!o%s"

CCFS Cumu!ative cash #!o%s"

EAT Earnings a#ter ta/"

EIT Earnings be#ore investment and ta/"

CFAT Cash #!o%s a#ter ta/"

P-S Present va!ue o# cash #!o%s"

P-IF Present va!ue o# in#!o%s"

PP Pa(bac$ eriod"

ARR Average rate return"

NP- Net resent va!ue"

IRR Interna! rate return"

C ene#it cost ratio"

=&


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I*IOGRAPH4

=


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I*IOGRAPH4

Pr+s+nn+ C!+ndr+ #J Fin+nci+' M+n+(e,ent T!eor" +nd Pr+ctice

Kt!Edition T+t+ McGr+) Hi''.

I.M. P+nde" : Fin+nci+' M+n+(e,ent -i

capital budjeting ultratech 2013

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