CAPITAL BUDGETING

CAPITAL BUDGETING

CONTENTSChapter noTopic namePage No

Chapter 1

INTRODUCTION

REVIEW OF LITERATURE1-33-26

Chapter 2

COMPANY PROFILE

INDUSTRY PROFILE

26-3939-41

Chapter 3

RESEARCH METHODOLOGY

NEED FOR THE STUDY

OBJECTIVES OF THE STUDY

SCOPE OF THE STUDY

METHODOLOGY

LIMITATIONS OF THE STUDY41-4444-4545-46

46-47

47-48

48-49

Chapter 4

DATA ANALYSIS AND INTERPRETATION

49-61

Chapter 5

FINDINGS AND SUGGESTIONS61-64

Chapter 6

CONCLUSION

BIBLIOGRAPHY64-67

Chapter 1

INTRODUCTION

REVIEW OF LITERATURE

INTRODUCTION:

Capital budgeting is the process of making investment decisions in Capital Expenditures viz., acquisition of permanent assets as plant & Machinery, Land & Building etc., Expansion, improvement or alteration in the fixed assets, replacement assets, research and development project cost.

Thus capital expenditure involves non-flexible long term commitment of funds.

Capital Budgeting is concerned with the allocation of the firms scarce financial resources among the available market opportunities. The consideration of investments opportunities involves the comparison of the expected future streams of earning from a project with the immediate and subsequent streams of earning from a project with the immediate and subsequent stream of expenditures for it.

Definition of capital budgeting:

Capital budgeting involves a current investment in which the benefits are expected to be received beyond one year in the future. It suggests that the investment in any asset with a life of less than a year, fails into realm of working capital management, whereas any asset with a life of more than one year involves capital budgeting. JAMES C. VAN HORNE The capital budget is essentially a list of what management believes to be worthwhile projects for the acquisition of new capital assets together with the estimated cost of each project . ROBERT N.ANTHONYCAPITALBUDGETING:

According to M.Y.KHAN and P.K.JAIN

Conventional investment projects are those projects which cash out flows are confined to the initial period.

Independent projects are all profitable projects that can be accepted.

The capital budgeting results would be unrealistic if the impact of inflation is not correctly factored in the analysis. The cash flow estimates will not reflect the purchasing power. Therefore cash flow should be adjusted to accommodate the inflation factor so that the capital budgeting decision reflects the true picture.

According to Weston and Brigham

Capital budgeting involves the entire process of planning expenditure whose

Returns are expected to extend beyond one year

According to Charles T.Horngren

Capital budgeting is the long term planning for making and financing proposed capital outlays.

According to Robert Anthony

The capital budgeting is a list of what management believes to be worth while projects for the acquisition of new capital assets together with the estimated cost of each project.

Capital budgetary (or investment appraisal) is the planning process used to determine whether a firm's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is budget for major capital, or investment, expenditures.

Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. (Article)

The author's main objective is to present a general overview of the main capital budgeting concepts rather than to provide a "how to do" recipe collection for practitioners actively involved in the management of real investment projects.

Capital budgeting features:

It involve commitment of large amounts of funds.

It are irreversible or reversible at substantial loss. It influence' the firm's growth in long run.

It affect the risk of the firm.

The main objectives of capital expenditure projects are:1. To optimize and determine the capital projects that are feasible 2. To estimate the experience involved3. To restrict the capital expenditure on projects within authorized limits.

4.These methods use the incremental cash flows from each potential investment, or projectPHASES OF CAPITAL BUDGETING:Capital budgeting is a complex process, which may be divided into six broad phases viz: planning, analysis, selection, financing, Implementation and review.

PLANNING:

The planning pace of firms capital budgeting process is concerned with the articulation of its board investment strategy and the generation and preliminary screening of project proposals. This provides the frame work which shapes, guides and circumscribes the identification for individual project opportunities. Once a project proposal is identified, it needs to be examined.

To begin with a preliminary project analysis is done. A prelude to the full a down feasibility study, the exercise is meant to access

Whether the project is prima facie worthwhile to justify study ? What aspects of the project are critical to its viability and hence in depth investigation is warranted.?ANALYSIS:

If the preliminary screening suggests that the project is prima facie worthwhile a detailed analysis of the marketing, technical, financial, economic, and ecological aspects is undertaken. The focus of the phase of capital budgeting is on gathering, preparing and summarizing relevant information about various project proposals which are being considered for inclusion in the capital budget. SELECTION:

Selection follows and often overlaps. It addresses the question:

Is the project, worthwhile? A wide range of appraisal criteria has been suggested to judge the worthiness of the project. They are divided in to two broad categories, viz: non-discounting criteria and

discounting criteria. The principal non-discounting criteria are the PBP and accounting rate of return. The key discounting criteria are the NPV, the IRR and the benefit cost ratio.

The apply the various appraisal criteria suitable cut - off values (hurdle rate, target rate and cost of capital) have to be specified. These are essentially a function of the mix of financing and level of project risk, while the former can be defined with relative ease. The later truly test the ability of the project evaluator. Indeed, despite a wide range of tools and techniques for risk analysis (sensitivity analysis, Monte Carlo simulation, decision tree analysis, portfolio theory, capital asset pricing model and so on), risk analysis remains the most intractable part of the project evaluation exercise.

FINANCING: Once a project is selected, suitable financing arrangements have to be made. The two broad sources of finance for a project are equity and debt. Equity (referred to as shareholders funds) which consist of paid up capital, share premium, and retained earnings. IMPLEMENTATION:

The implementation phase for an industrial project, which involves setting up of manufacturing facilities, consists of several stages:

(1). Project and engineering designs

(2). Negotiations and contracting

(3). Construction

(4). Training

(5). Plant commissioning

1. Adequate Formulation of Projects: A major reason for the delay is, inadequate formulation of projects. Put differently, if the necessary homework in terms of preliminary studies and comprehensive and detailed formulation of the projects is not done, many surprises and shocks are likely to spring on the way. Hence, the need for adequate formulation of the project cannot be overemphasized.

2. Use of the Principle of Responsibility Accounting: Assigning specific responsibilities to the project managers for completing the project within the defined time frame and cost limits is helpful in expeditious execution and cost control.

3.Use of Network Techniques: For project planning and control two basic techniques are available - PERT(Programmer Evaluation Review Technique)

and CPM (Critical Path Method). These techniques have, of late, merged add are been referred to by a common terminology, i.e. Network Techniques. With the help of these techniques monitoring becomes easier.

CAPITAL BUDGETING PROCESS

1. Identification of Investment Proposals: The capital budgeting process begins with the identification of investment proposals. The proposal or the idea about potential investment opportunities may originate from the top management or may come from the rank and file worker of any department or from any officer of the organization. The departmental head analyses the various proposals in the light of the corporate strategies and submits the suitable proposals to the Capital Expenditure Planning Committee in case of large organizations or to the officers concerned with the process of long-term investment decisions.

2. Screening the Proposals. The Expenditure Planning Committee screens the various proposals received from different departments. The committee views these proposals from various angles to ensure that these are in accordance with the corporate strategies or selection criterion of the firm and also do not lead to departmental imbalances.3. Analyses / Evaluation of Various Proposals. The next step in the capital budgeting process is to evaluate the profitability of various proposals. There are many methods which may be used for this purpose such as pay back period method, rate of return method, net present value method, internal rate of return method etc.

It should, however, be noted that the various proposals to he evaluated may be classified as: Independent proposals Contingent or dependent proposals and

Mutually exclusive proposals. Independent proposals are those which do not compete with one another and the same may be either accepted or rejected on the basis of a minimum return on investment required. The contingent proposals are those whose acceptance depends upon the acceptance of one or more other proposals, e.g., further investment in building or machineries may have to be undertaken as a result of expansion programme.

Mutually exclusive proposals are those which compete with each other and one of those may have to be selected at the cost of the other.

4. Fixing Priorities from best alternatives:- After evaluating various proposals, the unprofitable or uneconomic proposals may be rejected straight away. But it may not be possible for the firm to invest immediately in all the acceptable proposals due-to limitation of funds. Hence, it is very essential to rank the various proposals and to establish priorities after considering urgency, risk and profitability involved therein

5. Final Approval and Preparation of Capital Expenditure Budget:- Proposals meet in a the evaluation and other criteria are finally approved to be included in the Capital Expending; Budget. However, proposals involving smaller investment may be decided at the lower levels for expeditious action. The capita! Expenditure budget lays down the amount of estimated expenditure to he incurred on fixed assets during the budget period.6. Implementing Proposal:- Preparation of a capital expenditure budgeting and incorporation of a particular proposal in the budget does not itself authorize to go ahead with the implementation of the project. A request for authority to spend the amount should further be made to the Capital expenditure committee which may like to review the profitability of the project in the changed circumstances.Further, while implementing the project, it is better to assign responsibilities for completing the project within the given time frame and cost

limit so as to avoid unnecessary delays and cost over runs. Network techniques used in the project management such as PERT and CPM can also be applied to control and monitor the implementation of the projects.

7. Performance Review:- The last stage in the process of capital budgeting is the evaluation of the performance of the project. The evaluation is made through post completion audit by way of comparison of actual expenditure on the project with the budgeted one and also by comparing the actual return from the investment with the anticipated return. The unfavorable variances, if any should be looked into and the causes of the same be identified so that corrective action may he taken in future.

8. Choosing basis for futuristic Capital Budgeting Decisions:- This process is assumed as basis for any future Capital Investment Decisions for better opportunities.

IMPORTANCE AND SIGNIFICANCE OF CAPITAL BUDGETING:Capital budgeting decisions are more critical and crucial. Hence they require utmost care while taking the same. They can be mainly attributed to the following reasons:1. Involvement of heavy funds2. Long term implication3. Irreversible decision4. Uncertain future events1. Involvement of heavy funds: The capital budgeting decisions involve large capital outlays. In such cases the firm should carefully plan its investment programs. Incorrect decisions can jeopardize the survival of the firm since huge funds get locked up for long periods.

2. Long Term Implication:- The effect of Capital Budgeting Decision will be felt by the firm over a long period; they have decision influence on the rate and direction of the growth of the firm. The short term decisions will take long term applications.

3. Irreversible Decision:- Capital Budgeting decisions are irreversible because it is very difficult to find a market for the capital asset. Once the decisions are made the company has to abide by the

Decision. These decisions cannot be reversed without incurring substantial losses.

4. Uncertain future events:- These decisions require an assessment of future events which are uncertain. It is really a difficult task to estimate the probable future events, probable benefits and costs accurately in quantitative terms. Thus, since the future is uncertain these decisions become very crucial.

The term Capital Budgeting includes both planning for proposed capital outlay as well as financing the project.

CAPITAL BUDGETING TECHNIQUES:The following are the techniques used for the evaluation of the Capital Budget.1 Traditional Non-discounted methods2. Time adjusted Discounted Cash Flow methodPAY BACK PERIOD: Pay Back Period method is a traditional method of evaluation of Capital budgeting decisions. The terms pay back or payout or payoff refers to the period in which 5th project will generate the necessary cash to recoup the initial investment.

The PBP for a project is the time from the initial cash outflow to Invest in it until the time when its cash inflows add up to the initial cash Outflow. In other words, how long it takes to get your money back. The PBP method is also referred to as the pay off period or the capital recovery period.

The annual cash flows are calculated by taking into account the amount of net income on account of the asset i.e. cash flows is before depreciation but after tax.

Merits:

This method is simple to understand and easy to calculate. This method makes it clear that no profit arises till the pay back oft period is over. This inference is very useful for new companies in deciding when they should start paying dividends. This method is very useful in evaluation of those projects which involve high uncertainty Pay Back period is very useful in the CS cases of political instability, rapid technological development etc where the gestation period of projects is very long. This method prefers investments in short term periods. Therefore, it reduces the possibility of loss on account of, obsolescence.Demerits: PBP method ignores the returns that are generated by the project after its PBP. This method does not take in to account "Time Value of Money". This method also ignores the risks of the future cash flows.

AVERAGE RATE OF RETURN (ARR):This is a traditional method of capital budget evaluation. According to this method the capital investment proposals are judged on the basis of their relative profitability. The capital employed and related Income are determined

According to Generally Accepted Accounting Principles and practices over the entire life of the project and then the average yield is calculated. Such a rate is called as accounting rate of return or average rate of return or simply ARR.

ARR FORMULA: Annual Average Net Earnings

1. ------------------------------------------- X 100

Net Investment

(or)

Annual Average Net Earnings

2. ------------------------------------------- X 100

Average Investment

Net Investment

Where Average Investment = -----------------------------------2

(Or)

Net investment + scrap value/2

This method takes into account the earnings expected from the investment over their whole life. It is known as Accounting Rate of Return method for the reason that under this method, the accounting

concept of profit, net profit as per Profit & Loss a/c arrived at after depreciation and tax is used rather than cash inflows.

According to this method various projects are ranked in order of the rate of earnings or rate of return. The project with the higher rate of return is selected.

The amount of average investment can be calculated by any of the following methods:

Net Investment

1. ---------------------------------------

2

Net Investment + Scrap Value

2. ---------------------------------------------

2

Accept / Reject Criteria:

Business Enterprises normally fix a minimum rate of return. Any project expected to give a return below it will be straight away objected. In case of several projects may be ranked in a descending.

Merits:-

1. This method takes into account savings over the entire economic life of the asset. Hence it provides a better comparison of the project as compared to the pay back method.

2. The method embodies the concept of Net Earnings, while evaluating the capital investment projects which are absent in case of all other methods.Demerits:

1. The method does not take into account the time value of money. Thus, it has to same fundamental defect as that of the pay - back method.2. There are different methods for calculating the Accounting Rate of Return due to diverse concepts of investments as well as earnings. Each method gives different results. This reduces the reliability of the method.

NET PRESENT VALUE (NPV):

NPV method or net present value method is one of the discounted cash flow methods. This method is considered to be one of the best methods of evaluating the capital investment proposals.

NPV method aids in value additivity. That means, the discountary process facilitates measuring cash inflows in terms of PV, i.e. in terms of equivalent current rupees. Therefore NPV of projects can be added. For eg: NPV ( A + B ) = NPV ( A ) + NPV ( B )

If we know the NPVs of individual projects, the value of the firm will increase by the sum of their NPVs. We can also say that if we know the value of individual assets, the firms value can simply be found by adding their values. The value-additively is an important

property of an investment criterion because it means that each project can be evaluated independent of others on its own merit.

Under this method the cash inflows and outflows associated with each project are first calculated as follows:

1

P.V.= ------------------

(1+r)n

Where PV = Present Value

r= Rate of Interest or Discount Rate

n= No. of years

The Present value for No. of years is then

A1

A2 A3

An

P.V.= ------------------ + ----------- + ------------ + .. .+ ---------------

(1+r) (1+r)2 (1+r)3

(1+r)n

Note :Where A1, A2, A3 An are future net cash flows before depreciation but before tax.

The cash inflows and out flows are then converted to the present values using a discounting factor. This rate of return is considered as the cut off rate and is generally determined on the basis of the cost of capital adjusted for risk element. The cash inflows that are considered are adjusted to arrive at the cash flow after tax.CFAT or cash flow after tax is arrived at by deducting depreciation interest and tax from EBIT and Tax. The residue is called Profit After Tax (PAT). Depreciation is added to PAT to arrive at cash flow after tax (CFAT).NPV method uses CFAT's. NPV is the difference between the present value of cash inflows and present value of cash outflows. The NPV method discounts cash flows occurring at different points of time to provide for comparability. By calculating the present value of all cash flows and aggregate then, the NPV of the Project is calculated.

This method is superior to PBP method since it takes into account the time value of money. However, it is more complicated. The identification and use of the correct discounting factor (usually the cost of capital for the given project) is another issue. In spite

of these limitations, the NPV method is used very widely because it provides an efficient means of estimating project viability.

Merits:

Tells whether the investment will increase the firms' value. This method considers all the cash flows of the project.

Also considers the time value of money

Takes into account the risk less of future cash flows.

Demerits: This method requires an estimate of the cost of capital in order to calculate the net present value. This is expressed in terms of rupees and not as a percentage.

Criteria for Decision making of NPV:

IFThis means thatAnd there upon

NPV>0The investment is expected to increase shareholders wealthShould accept the project.

NPV1The investment is expected to increase shareholders wealth.Should accept the project.

PI Target Period

ARRARR > Target RateARR < Target Rate

NPVNPV > 0NPV < 0

IRRIRR > Cost of capitalIRR < Cost of capital

Profitability IndexPI > 1PI < 1

Chapter 2

COMPANY PROFILE

INDUSTRY PROFILE

SREE RAYALASEEMA ALKALIS & ALLIED CHEMICALS LIMITEDIntroduction:

SREE RAYALASEEMA ALKALIS & ALLIED CHEMICALS LTD The torch bearer of the conglomerate, is the only Indian manufacturer of calcium Hypochlorite, and one of the very few in the world. A state-of-the-art sodium process technology developed through in house R&D efforts helps the company in manufacturing the product with a chlorine content of 65% to 70%. SREE RAYALASEEMA ALKALIS & ALLIED CHEMICALS LTD Exports calcium Hypochlorite countries all across the global viz, Australia, Bangladesh, Belgium, china, Colombia, Cyprus, Durban England, France, Germany, Hungary, Iran, Kenya, Korea, Malaysia, Mauritius, Netherlands, Oman, Peru, Philippines, Qatar, Sri Lanka, Saudi Arabia, Singapore, Tanzania, Thailand, USA, etc. the certificate of merit awarded by CHEMEXCIL for out standing export performance reinforces its status as a galvanized export house.

Calcium Hypochlorite touches vital facets of human existence and is of proven importance in many areas of day to day activities. SREE RAYALASEEMA ALKALIS & ALLIED CHEMICALS LTD Has a distinctive edge in the manufacture of this product, thanks to the twin advantage of indigenous raw materials availability and supply of some galvanized chemicals by Sree Rayalaseema Alkalis and allied chemicals ltd.

The company is also a front-raking producer of Monochord acetic acid. Manufactured by the scientific crystallizer technology, the product meets international quality standards. Monochord acetic acid is used by all leading manufacturers of Non-steroid Anti-inflammatory drug, other pharmaceuticals, pesticides, organic chemicals etc.

The vision

To empower ourselves with excellence and to thes, grow and reach the pinnacle of market leadership.

The Mission

To provide products and services of international standards through pioneering innovations, while keeping in sight, our responsibility towards the society we dwell in.

ZLIST OF COMPANIES

Sree Rayalaseema Alkalies and Allied Chemicals Ltd

Sree Rayalaseema HI-STRENGTH HYPO Ltd.

Sree Rayalaseema Dutch kessenbow Ltd.

Sree Rayalaseema galaxy projects Ltd.

Sree Rayalaseema Agrochemicals (p) Ltd.

TGV Projects and investments Pvt. Ltd.

TGV info systems Ltd.

Brilliant Industries Ltd.

Brilliant securities Ltd.

Gowri Gopal Apollo Hospital.

Sree Maruthi Marine industries Ltd.

CHAIRMAN'S FOREWORD:

The new age enterprise has thrown open the doors to a world of seamless opportunities. Time and space barriers no longer hold any significance. Thanks to the pervasiveness of IT and the advent of the Internet, there's never been more to learn. Or to utilize. Or to provide. Knowledge, and its acquisition, is at hand.

It is indeed heartening that India has kept pace with the sweeping changes in the global economy. Throwing open its doors to globalization has meant the advent of multinational corporate giants. The Indian economy is already gearing itself, both qualitatively and quantitatively, to put up a fierce competition. Given our manpower and natural resources base, there is little that can stop us from emerging winners. At TGV, we aim to harness this power to bring our clients, customers and associates closer to the line of satisfaction. Without limits, without restrictions.

Having proved our credentials as quality service/product providers in fields as varied as chemicals and hospitality, finance and healthcare, real estate and IT, we are all set to make our mark in the power sector too. The success of our initial forays in this direction has invested us with the confidence to undertake projects of greater dimension and magnitude in the near future

THE HUMAN TOUCH

The TGV conglomerate is headed by the dynamic and versatile personality, Tumbalam Gooty Venkatesh (TGV). An entrepreneur par excellence, his track record spans a very illustrious three-decade period during which he has notched up achievements and accolades galore. "There is no substitute for hard work" is what this simple man believes in, and has staunchly displayed in deed during his vibrant career.

The diversity of activities within the conglomerate portrays his vast experience and understanding of various streams of knowledge and his ability to harness the same for the generation of economic and social wealth. A shining example of his futuristic bent of mind is the pioneering of the Bipolar Membrane Cell Technology in the manufacture of Caustic Soda and allied products in India.

The philanthropic facet of TG Venkatesh has come to the fore on innumerable occasions. A host of educational institutions have been established under his aegis. He is closely associated with national programs for human well-being such as immunizations, eye camps, family planning measures etc. To safeguard the health of his employees, he has mooted a unique 'Non-smoking and Non-Alcoholic Allowance' that'll be forwarded to the wife/parent of each of those who desist from indulging in the hazardous activity. He is also credited with mooting the Gowri Gopal Educational Society that has set up a number of educational institutions under its umbrella including Lakshmi Venkatesh TG College of Physiotherapy, affiliated to the Govt. of Andhra Pradesh. A Nursing College, coming up as part of Lakshmi Venkatesh TG Educational Academy, re-establishes TG Venkatesh's humane nature.

His dynamism, his obvious compassion for his people and his sense of service for his state have earned for TG Venkatesh, the coveted position of a member of the Andhra Pradesh Legislative Assembly. Recognition has poured in from various corners of the country.

He was honoured as the Jaycees Man of the Year for his invaluable contribution to social welfare. The Best Entrepreneur Award, FICCI Award, Industrial Promotion Award, Kinnera Award, Vijayshree Award, Udyogshree Award, Rajiv Ratna Award and scores of others speak for his deep involvement in whatever he undertakes to do. The Best Sales Tax payer Award proves his uprightness as a responsible Indian citizen.

The TGV scion TG Bharath, is a new age visionary. Overseas education - a post graduation in Business Administration with International Management as elective - and work experience, plus a disciplined Indian upbringing have inculcated in him, a deep sense of values and an abiding respect for the state-of-the-art. A combination that has worked wonders for the conglomerate. As the Chairman and Managing Director of SREE RAYALASEEMA ALKALIS & ALLIED CHEMICALS LTD and as Chairman for TGV Infosystems Ltd., TGV Projects and Investments Pvt. Ltd., Sree Rayalaseema Dutch Kassenbouw Ltd. and Brilliant Securities Ltd., he has commandeered the companies to the highest echelons of achievement within two years. Turnover has doubled, resulting in phenomenal profit soaring as in the case of Sree Rayalaseema Hi-strength Hypo Ltd., thanks to the imaginative cost-cutting measures introduced by him. Brilliant Securities has established many branches under his able steering. TG Bharath aims at making the conglomerate a force to reckon with in the very near future, and spares no effort in this direction.

THE CONGLOMERATE

The USD 150 million/Rupees 750 crores TGV onglomerate, backed by a rich and varied experience spanning more than two glorious decades, is a rapidly growing, well-diversified one, with interests in Chemicals, Financial services, Merchant Banking, Securities, Real Estate, Power,

Pharmaceuticals, Healthcare, Hospitality, Entertainment, Information Technology, Personal Products, Salt and Aquaculture. A constant effort to keep

pace with change underlines all its endeavours. A 3000+ strong manpower base strengthens the conglomerate's resolve to excel.

The conglomerate's quality consciousness and achievements have not gone unrecognised. National Awards for Unity, Safety, Scientific & Industrial Research, Environmental Protection, Research and Development and Energy Conservation, adorn the office walls as testimonials of its dedicated efforts in these directions. The conglomerate has also made significant philanthropic contributions to the society.SREE RAYALASEEMA ALKALIS & ALLIED CHEMICALS LTD was incorporated on 24 October, 1986 as a public limited company and obtained its certificate commencement of business on 30 October, 1986.

Initially the company has set up facilities for manufacture of chemicals and later on the company has diversified into generation of power through wind turbines and biomass.

Promotion

Mr. T G Venkatesh, who hails from an industrial family promoted SRAACL. He is bestowed with experience in the art of industrial management. Since its inception, he bestowed all the devotion and hard work and ensured that the company worked at optimum capacity and post a stellar performance, both in financial and technical areas

Technology:

The company has very strong Research and Development team. They have won nation level awards in Research and Development. They are only manufactures of Calcium Hypochlorite in India using the Sodium process. There are very few companies in the world with this level of technology. Our other division benefit from the cutting edge research.

Main products:

The main products include Sulphuric Acid, Oleum, Chioro Sulphonic Aid, Calcium Hypochlorite, Stable Bleaching powder, Monochloro Acetic Acid, Bleach Liquor, MCA, Sodium Hypo, Hydrochloric Acid and Non-Ferric alum.

Geared up for Exports:

SREE RAYALASEEMA ALKALIS & ALLIED CHEMICALS LTD, the torch bearer of the conglomerate, is only indina manufacturer of C alcium Hypochlorite, and one of the very few in the world. A state of the art sodium process technology developed through in house Research Development efforts helps the company in manufacturing the product with a chlorine content of 65% to 70% SREE RAYALASEEMA ALKALIS & ALLIED CHEMICALS LTD, exports Calcium Hypochlorite to countries all across the globe Viz. Australla, Bangladesh, Belgium, Brunei, China, Colombia, Cyprus,

Durban, England, France, Germany, Hungary, Iran, Kenya, Korea, Malaysia, Mauritius, Netherlands, Oman, Peru, Philippines, Sri Lanka, Saudi Arabia, Singapore, Tanzania, Thailand, USA, Vietnam, etc. the certificate of Merit awarded by CHEMEXCIL for outstanding export performance reinforces its status as a recognized export house.

Calcium Hypoclorite touches vital facets of human existence and its of proven importance in many areas of day-to-day activity. SREE RAYALASEEMA ALKALIS & ALLIED CHEMICALS LTDhas distinctive edge in the maucfacture of this product, thanks to the twin advantages of indigenous raw materials availability and

supply of some specialized chemicals by Sree Rayalaseema Alkalis and Allied Chemicals Ltd.

The company is also a front-ranking producer of Monochioro Actic Acid. Manufactured by the scientific Crystallizer technology, the product meets international

quality standards. All leading manufacturer of Non-Seroid Anti-Inflammatory Drugs, other pharmaceuticals, pesticides, organ chemicals, etc use Monochloro Acetic Acids.

Product Range and Applications: Calcium Hypochlorite (Gramules and Tablets) Stable Bleaching Powder Monochloro Acetic Acid Chloro Sulphonic Acid Oleum 23%, 30% and 65% Bromine Battery and commercial grades Sulphuric AcidCalcium Hypochlorite is used extensively in aquaculture, textile, leather, Paper and Sugar Industries. Stable Bleaching powder has taker in sanitization, water treatment, and aquaculture and pesticide markers. Chloro Sulphonic Acid Caters to the Pharmaceutical, and dyes & Intermediaries Industry. Producers of dyes & intermediaries, soaps and detergents, explosives and others use application in various industries including petrochemicals, dye intermediates photography, pesticides, pharmaceuticals, bleaching of paper, pulp and others. Sulphuric Acid

finds widespread usage in sulphonation, fertilizer industry, as an intermediary in pharmaceutical industry amongst others

Production Capacity:Product

installed Capacity

(Tons Per annum)

Calcium Hypoclorite

19800

Stable Bleaching Powder

14850

Monochloro Acetic Acid

5445

Sulphuric Acid

49500

Chloro Sulphonic Acid

26400

SREE RAYALASEEMA ALKALIS & ALLIED CHEMICALS LTDhas provided capacitors and also uses steam for refrigeration to conserve energy. Brick lined CSA operating efficiencies. A 9 MW biomass powder project at Kurnool cater to the companys growing power requirements.

SREE RAYALASEEMA ALKALIS & ALLIED CHEMICALS LTDadheres to all international standards of quality. The ISO 14001 certification for Environmental Management and the ISO 9002 certification for Quality systems bear out the companys commitment to ensuring quality of implacable standards.

PROFILE OF THE COMPANIES The TGV group companies with an asset base of Rs 750 crores are headed by the companies.

SREE RAYALASEEMA ALKALIES & ALLIED CHEMICALS LTD

SRAACL was incorporated on 24 Jan 1981 in the state of AP & certificate of commencement of business was obtained on 8 July 1981. SAACL was pioneering venture with bipolar membranes cell technology in an Indian Alkali Industry. SRAACL, which is engaged in manufacture of caustic soda, chlorine & hydrochloric acid, is an existing profit making & dividend paying company.

Sree Rayalaseema HI-STRENGTH HYPO Ltd

SRAACL formerly known as itachi HI- strength Hypo Ltd was incorporated on 24 Oct 1993 in the state of A.P and certificate of commencent of Business was obtain on 30 Oct 1986. The name chaing has taken place in the year 1993 and the same has been approved by bits members at their annual general meeting on 30 dec 1993. SRAACL is engaged with bleaching power, sulphuric acid etc.

SREE MARUTHI MARINE INDUSTRIES LTD:

SMMLI formerly as maruthi crystal salt company ltd was incorporated in 1973 in the state of Tamil nadu. SMMIL is a joint venture project with TIDCO Chennai stock exchange. It was a loss making company which was taken over TGV in May 1990. And it was successfully profits.

THE TGV PROJECTS AND INVESTMENTS LTD :

VVPIL formally had known as VV Tran investment Ltd was incorporated on 12 may 1986 in the state of A.P VVPIL is engaged in the manufacture of Chlorinated paraffin & hydrochloric acid VVPIL is also engaged in the hire purchase and investments. A 3 star hotel with a commercial complex of 200 shops located in the heart of the Kurnool is a unit of the company.

BRILLIANT INDUSTRIES LTD: Brilliant industries formerly known as brilliant industries ltd was incorporated on 1 Feb. 1998 in the state of A.P BIL is engaged in the investment in bottling and sale of hydrogen gas. BIL is engaged in investments, hire purchase, leasing etc. BIL is category merchant banker with branch offices at Bangalore, Mumbai, Chennai and Delhi. The Bulk drug project of the company is under implementation.

SREE RAYALSEEMA DUTCH KASENBOW LTD

SRDKL formerly known as sree bleaching chemicals ltd was incorporated on 3 Sep 1990 in the state of A.P. SRCKL is engaged in the manufacture of stable Bleaching power at its plant located at Gondiparla, Kurnool.

SREE RAYALASEEMA GLAXY PROJECTS LTD:

SRGPL is a SSI-Exporter engaged in the manufacture of industrial grade non ferric alum, commonly known as aluminum sulphate. SRGPL is in its purest form and comes in fine white power, and crystalline forms. The companies manufacturing capacity stands at impressive of 12000 TPA.

SREE RAYALASEEMA AGRO- CHEMICALS LTD :

The company helps farmers to get better yields by manufacturing agro chemicals of proven quality. It is efficient and potency have been certified by the central tobacco research institute by the Gujarat agricultural university.INDUSTRY PROFILE

Caustic Soda and Chlorine are the two basic products widely used in the chemical industry in INDIA. Either as raw material or as auxiliary chemical Caustic Soda is mainly used in the manufacture of Pulp and Paper, Newsprint, Viscose, Yarn, Staple fiber, Aluminum, Cotton Textile, Toilet and Laundry Soaps Detergents, Dyestuffs, Drugs and Pharmaceuticals, Vanaspathi, Petroleum Refining etc.

Chlorine is used in the manufacture of PVC, Pulp and paper, Bleaching Powder, Textiles and Host of other inorganic and Organic Chlorinated Compounds like metallic, Chlorides, Refrigerants, Chlorinated Solvents etc. Large quantities of Chlorine are also used for water purification.

Commercial Production of Caustic Soda in the country started in 1941 with the commissioning of the five Tones per day plants. One near Calcutta (at Rishra) and the other as Metture Dam (Tamilnadu). Process in new capacity installation was rather slow in early years, and till the early six tees, the requirements were being mostly met through imports, ranging in the region of 60,000 to 90,000 TPA. Installed capacity increased from 1.40 lakh tons in 1960 to 3.9 lakh tones in 1975.

Indigenous production also rose, sharply, with the result that dependence of imports was completely avoided since 1970. Today, there are 40 Caustic Soda manufacturing units in the Country. With the total annual installed capacity of over 22.72 lakh tones, which is almost double the capacity of the decade back. The Industry has also been constantly striving towards improved energy utilization and better environmental protection that is simply proved by the fact energy efficient and pollution free membranes process technology forms about 66% of total installed capacity in INDIA today.

The major task facing the Caustic Chlorine industry now is to increase the gainful utilization of chlorine in value added products to international levels.

Presently the other unit which produces in the process of Bleaching Powder apart from Dutch Kassenbouw is Sree Rayalaseema Hypo Industry, Konark Industry Limited, Orissa and others are in Delhi, Calcutta, Madya Pradesh and Chennai.

Bleaching powder, white or nearly white powder that is usually a mixture of calcium chloride hypo chlorite, CaCl(OCl); calcium hypo chlorite, Ca(OCl)2; and calcium Chloride, CaCl2, sometimes called chloride of lime, it can be prepared by reacting calcium hydroxide or slaked lime, Ca(OH)2, with chlorine gas C12. It is used as a strong bleaching agent, as disinfectant. And in making javelle water, Bleaching powder was first produced in 1799 by Charles Tennant in Glasgow, Scotland Bleaching powder.

A white powder that decomposes on contact with water and has the characteristic Oder of gaseous chlorine: regarded when dry, as mixed calcium hypo chlorite chloride, used as commercial bleach for wood pulp, textiles, oils and soaps, and in laundering as decolorizer and disinfectant. Also called chloride of lime, chlorinated lime, calcium oxychloride.

The major task facing the caustic chlorine industry now is to increase the gainful utilization of chlorine in value added products to international levels. The industry growth rate is 5% a mess, chlorine-bleached products such as paper towels and napkins often come to the rescue. Chlorine, which wipes out a board array of micro organism, bacteria and viruses. Chlorine, chemistry also may provide the floats. Patio furniture and suntan lotion that make an afternoon by the pool more enjoyable. Presently the other units, which produce in the process of bleaching powder apart from Sree Rayalaseema Hi-Strength &Hypo Limited, Sree Rayalaseema Alkalies and Allied Chemicals limited, Konark Industry limited, Orissa Kunji Behari Chemicals (PVT) limited, Bangalore and others are in Delhi, Calcutta, Madhya Pradesh and Chennai.

Chapter 3

RESEARCH METHODOLOGY

NEED FOR THE STUDY

OBJECTIVES OF THE STUDY

SCOPE OF THE STUDY

METHODOLOGY

LIMITATIONS OF THE STUDY

RESEARCH METHODOLOGY:

DATA SOURCES

Research can be defined as

Methodical, unbiased and compete investigation of subject matter to establish principles

Investigation of a problems to discuss pertinent information to help solve it .

The term methodical, refers to carefully planned procedures (should consistently follow the same procedure). The will facilitate the comparison of results of similar investigation over a period of similar investigations, over a period of time as that are arrived at by other researches investigating similar problems in various parts of the same country of in any corner of the world .

Both primary data and secondary data was collected from carious sources for conducting the study . Primary data was collected from the company, whereas the secondary data was collected from various newspapers, journals textbooks and websites.

SOURCES OF DATA

Primary data (collected from company)

Secondary data

Tools for data collection:

Secondary Data:

Observations

Reference books

Journals

WebsitesNEED OF THE STUDY

In a previous entry I talked about the importance of having an emergency fund consisting of six months of expenses. This is not to be touch except in an extreme emergency. Today I am going to talk to you about another savings account you should have but this one you will tap into on a regular basis and that is your capital equipment fund.

Depending on the type of business you have you will either have a great need for capital or a small need but you still need to have a fund set up to save the money for these important purchases.

One regular reoccurring capital expense is computers. Computers either have to be replaced or heavily upgraded every three to five years. Every month you should be setting aside money for future computer needs. This not only includes the computer itself but also printers, copiers, scanners, etc. and anything else your business may use.

Here are the steps to take in order to start saving for your capital needs. First thing to do is figure out when youre going to need a new piece of equipment. Then you set a budget for how much youre going to spend. If its something that you buy on a regular basis you have a good basic idea on cost. If not, do some research and add a little padding incase of price increases or changes in needs.

The rest is pretty simple. Just divide the amount you need by the number of time periods before the purchase and you have the amount you need to save each time period. If you need a $1000 in 10 months and you will put away money every month then you need to put away $100.00 each month.

By using this system you will be ready for those major purchases and they will not take you by surprise. By budgeting for your big purchases and having your emergency fund, you will be ready when something major happens. After all like Dave Ramsey says, its when your not financial prepared that Murphy will come calling.

OBJECTIVES: To use various traditional and modern capital budgeting decision techniques like Pay Back Period, Average Rate of Return, Net Present Value, Internal Rate of Return and Profitability Index to evaluate the project

Estimate the costs and benefits of the project the Project. Asses the riskiness of The project

Calculate the cost of capital Compute the criteria of merit and judge whether the project is good or bad It estimates the expenditure that would have to be incurred on capital projects approved by the management together with the source from which the required Founds would be obtained. It restricts the capital expenditure on projects within authorized limits.SCOPE:

The Scope of the study is limited to only to this organization.

The report is confined itself to study for period of 2005-06 to 2010-11 As most of the financial information is considered confidential, the access to the information was restricted only to the available Financial Statements and cross information provided Managing Partner and the Employees. The scope of study is ITC Ltd to collecting financial data published in annual reports of the company with reference to the objectives stated above and an analysis of data with a view to understand the solutions by applying various Appraisal Methods in Capital Budgeting.METHODOLOGY:

This study was only done in SREERAYALASEEMA ALKALIES&ALLIED CHEMICALS LTD., KURNOOL. The Methodology followed includes annual reports of the firm and the data is secondary.

The data was analyzed by using the techniques of Capital Budgeting such as pay back period, Average Rate of Return and Profitability index.

Period of Study:

The period covered by the study extends over five years from the period of 2005-2006 and 2010-2011 The consideration for restricting the study to this period is that the latest for manageable consideration and investigation are available for this period.

Collection of Data:

Collection of data relating to Financial Statements of the SREE RAYALASEEM ALKALIES &ALLIED CHEMICALS LTD KURNOOL has been collected though annual reports from 2005-2006 to 2010-2011 which was obtained from the company.

Plan of Study:

In the present work an attempt is made to study the analysis of financial statements

SREE RAYALASEEMA ALKALIES&ALLIED CHEMICAL LTD., KURNOOL.

LIMITATIONS:

The information provided in the company balance sheet is only the date source available.

The information available in the balance sheets has taken from the published annual report, so it has only limitations.

Since financial matters are sensitive in nature the same could not be acquired easily.

There is only two months period to finished the project, due to lack of time in depth of financial matters have not been touched

It has been difficult to analyze the future cash flows.

The Net Present Value is calculated with an assumption that the Average Indian Investor expects 10% rate of return.

The Profitability Index is calculated with the Initial Investment and 10% rate of return.

Chapter 4

DATA ANALYSIS

AND

INTERPRETATION

DATA ANALYSIS & INTERPRETATION

Initial investment =245.00PAY BACK PERIOD:

(Rs in Lakhs)YEAR

CFAT

CUMULATIVE CFAT

2005-0686.93

86.93

2006-0791.97

178.90

2007-0871.15

250.06

2008-09195.29

445.35

2009-10276.75

722.10

2010-11487.68

1209.78

Calculation :

Initial Investment

=245.00

Amount to be recovered unto

The end of 2nd year

=178.90

Amount to be recovered in 3rd year

(Remaining balance)

=66.10 (245.00178.90)

Cash flow in 3rd year

=71.15

Amount to be required

Pay Back Period

= Basic year +

Next year cash inflow

Time required for 66.1

= 11.14 month

66.10

= 2 + 12

71.15

= 2+11.14 months

= 2 yeas 11 months

= Nearly 3 years

INTERPRETATION: The Pay Back Period of the project is 2 years 11 months approximately. From Liquidity point of view, it is a good sign because generally we give emphasis for an early recovery of the investment.

YEARAfter Depreciation & Tax

(Rs in lakhs)

2005-0619.88

2006-0718.20

2007-0860.42

2008-0923.60

2009-01023.59

2010-1115.22

Net Profit106.91

ACCOUNTING OR AVERAGE RATE OF RETURN:-

Calculation:

Average Annual Cash Flows

ARR = ------------------------------------------- X 100

Average Investment

Average Annual Total Annual Cash Flow 106.91

Cash flows

= -----------------------------------= -----------

No. of years

6

=17.81

Net Investment

Average Investment

=--------------------------------

2Initial Investment

= 245.00

245.00

= ---------- = 122.5

2

17.81Average Rate of Return = --------- X 100

122.50

= 14.54%

Average Annual cash flows

ARR = ---------------------------------------- X 100

Initial Investment

17.81

=

------------ X 100

245.00

= 7.26 % INTERPRETATION

The Average Rate of Return of the Project is 14.54 % or 7.26 %. As per the accounting Rate of Return the yield on the project is low in both the method. In this expected give a return below it will be straight away rejected.

N.P.V. (NET PRESENT VALUE):-NPV = Present value of cash inflows - Initial Investment

PV Factor=10%

(Rs in Lakhs)

NPV

=PV Cash inflows - Initial Investment

Initial Investment=245.00

NPV

=682.02 - 245.00=437.02

YEARCASH INFLOWSP.V FACTOR AT 10%P.V. CASH INFLOWS

2005-0686.930.90979.02

2006-0791.970.82675.96

2007-0871.150.75153.43

2008-09195.290.68377.29

2009-10276.750.621121.27

2010-11487.680.564275.05

N.P.V. of Cash Inflows682.02

INTERPRETATION:-

The Net Present Value of the Project (at assumed P.V.Factor 10%) is 682.02 lakes i.e. more than the initial investment of 245.00 Lakes

The positive NPV indicates that cash inflows are generated at a rate higher than the opportunity cost of capital. In this project the present value of future returns for 6 years period of work is more then the initial investment.

Of all the methods, NPV is the best measure of projects for true profitability. And the positive sign indicates so

IRR (Internal Rate of Return:YEARCASH INFLOWSDIS. FACTOR AT

29%P.V.CASH FLOWS

(Rs in Lakhs)

2005-0686.930.77567.37

2006-0791.970.60155.27

2007-0871.150.46633.15

2008-09195.290.36170.49

2009-10276.750.28077.49

2010-11487.680.217105.82

Total Present Value :409.59

At 29% P.V. Factor:

INTERPRETATION:-

At 29% discounting factor the Present Value for 6 years is Rs. 409.59 Lakhs which is very near to the initial investment Rs.245.00 Lakhs. Hence the IRR is 29% (approx)IRR (Internal Rate of Return:

At 30% P.V. Factor:

(Rs. In Lakhs)

YEARCASH INFLOWSDIS. FACTOR AT 30 %P.V. CASH FLOWS

2005-0686.930.76966.84

2006-0791.970.59254.44

2007-0871.150.45532.37

2008-09195.290.35068.35

2009-10276.750.26974.44

2010-11487.680.207100.95

Total Present Value 397.39

Calculation: 245.00 - 409.59

IRR = 29 + ---------------------- 29-30

409.59 - 397.39

164.59

=29 + -------------

12.2

=29 + 13.49

=42.49%

INTERPRETATION:-

At 30% P.V. factors the Present Value of 6 years returns is 397.39 Lkhs, hence the rate of interest should be low. internal rate of return interest is 42.49% .

PROFITABILITY INDEX (P.I.):

At an assumed rate of 10%Calculation:

Present Value of Cash inflows

P.I.=--------------------------------------------

Initial Investment

Initial Investment=245.00

Present Value of Cash inflows=788.70

788.70

P.I.=-------------

245.00P.I.=3.21%

(Rs. in Lakhs)

YEARCASH INFLOWSP.V FACTOR AT 10 %P.V. CASH FLOWS

2005-0686.930.90979.02

2006-0791.970.82675.96

2007-0871.150.75153.43

2008-09195.290.683133.38

2009-10276.750.621171.86

2010-11487.680.564275.05

N.P.V. of Cash Inflows788.70

Interpretation:-

If Profitability Index is greater than 1, the project should be acceptable, but it is 3.21 which is near to 3.5 if the project is accepted it may increase the share holders wealth

Chapter 5

FINDINGS

AND

SUGGESTIONS

FINDINGS The Pay Back Period of the project is 2 years 11 months (or) 3 Years approximately. It is observed that company is able to increase its profits year to year.

The Average Rate of Return of the project is 7.26% (or) 14.54%

The Internal Rate if Return of the Project is 42.49%

The Net Present Value of Project (at an assumed P.V. factor 10%) is 682.02

Profitability Index is 3.21 %

Internal rate of return of the project 6 years returns (PV factor 30%) 397.39

Internal rate of return discounting (PV Factor 29%) Rs.409.59

The project accepted increase the share holder wealth is 3.5

SUGGESTIONS

The company should choose the project by considering the growth and profitability.

The company should analyze the profitability and risk associated with the project.

The company should identify the capital investment through Capital Budgeting.

Profitability is directly related to risk, higher the profits, greater the risk or uncertainty. Hence, proper assessment of risk and uncertainty is very important. Hence if necessary Risk- Adjusted Discount Rate may also considered for every Capital Budgeting Decision.

The factors like morale of the employees, Goodwill of the firm substantially influence the Capital Budgeting decision, hence the firm should be very cautious

Chapter 6

CONCLUSION

BIBLIOGRAPHY

CONCLUSION

The project report is based on the capital budgeting of SREE RAYALASEEMA ALKALIES & ALIED CHEMICALS LTD. The calculated tools are payback period, ARR, Profitability index, and Net present value and Internal rate of return . These can be measured the company performance. The overall performance of the company position is good and also the company try to concentrate of the cash inflows side because of the net present value are satisfactory to the company.

Finally concluded that the above thesis of the company performance is good.

BIBLIOGRAPHY

Capital Budgeting: M.Y.Khan&P.K.Jain

Financial management- Fifth edition(9.3-9.39)Tata MC GRAW-Hill Publishing Company Limited.

Capital Budgeting: I.M.Pandey 8th edition-vikas publishing house private limited.

Capital Budgeting: Articles

Project management: Prasanna Chandra 5th Edition Tata MC GRAW-Hill Publishing Company Limited.

Web Sites

www.google.com

www.tgvgroup .com

PLANNING

ANALYSIS

SELECTION

FINANCING

IMPLEMENTATION

REVIEW

Investment Criteria/ Capital Budgeting Techniques

Accounting Rate of Return

Payback Period

Internal Rate of Return

Benefit Ratio

Net Present Value

Non-Discounting Criteria

Discounting Criteria

Initial capital / Investment

Pay Back Period =

Annual Cash inflows

VIKRAMASIMHAPRI UNIVERSITY PG CENTRE KAVALIPage 51