A detailed analysis of Capital Budgeting
issue 3

A detailed analysis of Capital Budgeting

Laxmi Zanzad

Student, Jhulelal Institute of Technology

Prof. Geetika Bhutani

Assistant Professor, Department of Business Management,

Jhulelal Institute of Technology, Nagpur

ABSTRACT

In today’s highly competitive business environment long-term capital investments have become a critical issue. Organizations are still making efforts to understand suitable capital budgeting techniques. The importance has been given to capital investment for the creation of shareholder wealth for individual firms. It is vital to investigate the practices used to evaluate the projects. The sample is selected from manufacturing; pharmaceuticals and chemicals, and textile sectors. The study is exploratory nature.

Capital budgeting techniques i.e., Pay Back Period (PBP); Accounting Rate of Return (ARR); Net Present Value (NPV); Internal Rate of Return (IRR) and Profitability Index (PI) methods have been used as the techniques of capital budgeting. Finally, the results show that NPV method is the most dominant capital budgeting technique according to the perception of executives of all sectors. It has been found that the executives mostly prefer NPV and IRR methods of capital budgeting from the companies of the manufacturing, pharmaceutical and chemical sectors, whereas the executives of the textile sector prefer the NPV method for evaluating capital budgeting. Further, this study attempts to give a sector wise solution with the help of a model for capital budgeting practices.

Keywords:  Capital Budgeting Practices, Investment Decisions

INTRODUCTION

The importance has been given to capital investment for the creation of shareholder wealthfor individual firms. It is vital to investigate the practices used to evaluate the projects. Theinternal rate of return (IRR) and net present value (NPV) have long been the accepted capitalbudgeting measures preferred by corporate management and financial theorists, respectively.While corporate management prefers the relevancy of a yield-based capitalbudgetingmethod, such as the IRR, financial theorists, based on orthodox economic theory, endorse theNPV method. Financial theorists havelong stipulated conditions in which certain capitalbudgeting methods are superior to others. However, the violation of assumptions created inthe theorist’s conditions may significantly affect the consistency and superiority oftheselected capital budgeting method.

In today’s highly competitive business environment long-term capital investments havebecome a critical issue. Organizations are still making efforts to understand suitable capitalbudgeting techniques. Organizations are still unable to get proper feedback from theirexecutives regarding capital budgeting techniques

OBJECTIVE OF THE STUDY

  1. To study the liquidity position of the company
  2. To study the earning capacity or profitability of the company.
  3. To know the financial strength and solvency of the company.

HYPOTHESIS OF THE STUDY

Study on capital budgeting help in taking decision regarding future plan.

SCOPE OF THE STUDY

  1. The success of a business depends on the capital budgeting decision taken by the management.
  2. The requirement for relevant information and analysis of capital budgeting has paned the way for a series of method to assist firms in amassing the best of the allocated resources.
  3. Popular methods of capital budgeting include not present value (NPV) discounted cash flows (DCF), internal rate of returns (IRR) and payback period.
  4. While working with capital budgeting, a firm is involved in valuation of its business.
  5. The importance of capital budgeting is not the mechanism used.

DATA ANALYSIS AND INTERPRETATION

NET PRESENT VALUE

Net present value calculation

Ans: The present value of cash flows during the period of 5years is Rs. = 1,43,511

INTERPRETATION

Net present value is calculate of the five years.Net present value calculate by the cash flow and present value of cash flow. Present value of cash flow calculation is regarding to cash flows and this is the  present value of cash flows. Present value of cash flows total is the Net Present Value of five years.

  • Internal rate of return

Project A and project B cost a corporation Rs.1,40,000/- and Rs.1,20,000/-respectively. Their cash flows are given below

Project-A : Present value of cash flows calculation

Graph of project A calculation

Project-B:Present value of cash flow calculation

Graph of project B calculation

INTERPRETATION

Internal rate of return is calculate the two years projects A and B. Project A calculate by the two percentage 10%and15%of present value of cash flows total is Rs.1,43,511 and Rs.1,26,720.Same as project B calculate by the two percentage 16% and20% of present value, and 16% and 20% present value of cash flows total is Rs.1,21,903 andRs.1,11,309

Internal rate of return is calculate by the project A and B. calculation result of internal rate of return is the 11.04%and16.71%

PAYBACK PERIOD:

1. Year 2014-2015

As payback period is in negative

Therefore payback period for investment will be doubled

Ans:- 9years 4months

2. Year 2015-2016

 = 4.90

Ans :-  4years 9months

3. Year 2016-2017

Pay back period is in negative

Therefore pay back period for investment will be doubled

Ans:- 15years 4months

4.Year 2017-2018

                                  =   1.69

Ans : 1years7months

5. Year 2018-2019

Pay back period is negative

Therefore pay back period for investment will be doubled

Ans: 4years8months.

INTERPRETATION

Calculate the pay back period of five year sin a projective years pay back period calculation is 2014-2015= -4.83, 2015-2016= 4.90, 2016-2017 = -7.84, 2017-2018= -1.69, 2018-2019= -2.45 and this amount has been calculate in year and month, But three years pay back period calculation is negative. There for negative pay back period for investment will be doubled and pay back period is doubled in the year of 2015, 2016 and 2017.There for answer of the pay back period calculation is regarding to the year of 2014-15=9years4months, 2015-16=4years9months, 2016-17=15years4months, 2017-18=1years7months, 2018-19=4years8months.

SUGGESTIONS

This study has been taken up with main intention of analyzing of capital budgeting of Indorama synthetics(i)limited.the findings are the result od analyzing the data of five years with respect of the financial operational efficiency and profitability of the company.the description of the findings of the studies is given below.

Net present value

Net present value calculates on the basis of annual cash flow. In every year cash flow is increased and decreased, first year cash flow is minimum but second year cash flow is maximum. In third year cash flow is decreased, but fourth year and fifth year cash flow is increased.net preseviability of the project, if the value of net present value is positive except. In the project net present value calculated as Rs.1,43,511/- so the project can be accepted.

Internal rate of return

Internal rate of return is calculated according two projects. in project A the present value of cash flow considered as 10% and 15%.in the project A first year cash flow is maximum. in the same is project B calculate the present value as 16% and 20% and this project the cash flow of fourth year is maximum. internal rate of return method is a break even point at  which net present value is zero. it has been seen that higher internal rate of return mainly greater than the cost of capital attracts borrowers to the project. In the project data analysis of the internal rate of return than project A 10% and 15% present value of cash flow of Rs.1,43,511/- and 1,26,720/-.the second project B calculation of the 16% and 20% present value of cash flow of Rs.1,21,903/- and 1,11,309/-.in this project the internal rate of return calculation of the project A & B is 11.04% and 16.71%.the study helps to take to decision regarding the project A & B, as internal rate of return of project B is higher. there for project B is selected.

Pay Back Period

As pay back period method not considered the time value of money thus its simplest method to understand and judge the pay back period of the project .the project under consideration shows pay back period of 5 years (60months).which is quite good as the cost of period is covered in less span of time. pay back period calculation is the basis of investment and annual cash inflow. data analysis of the capital budgeting help in taking decision regarding future plan and company done it’s investment in the basis of its future plan .in these where annual cash inflow is negative and the pay back period calculation is also found to be negative. hence negative pay back period for investment well double.

CONCLUSION

Indo Rama Synthetics (India) Limited has been a leading manufacturer and supplier in the country’s fast growing polyester sector since the last two decades of its operations and is today India’s second largest dedicated polyester manufacturer having carved a niche in the market place for its unmatched quality offerings.

The company’s world-class integrated polyester plant located at Butibori (Nagpur) is one of the finest in the country. Set up in technical collaboration with DuPont of USA and Toyobo of Japan, Indo Rama’s product offerings include Polyester Staple Fibre, Partially Oriented Yarn, Fully Drawn Yarn, Draw Texturized Yarn and Polyester Chips. As part of the recent expansion with a project cost of Rs.1000 crores, the capacity has now been doubled to 6 lakh tonnes per annum of Polyester Staple Fibre and Partially Oriented Yarn. The expansion has been executed in alliance with Zimmer AG and Barmag, leading technology providers from Germany.

Apart from being a dominant player in the domestic market, Indo Rama has a significant presence in the major overseas markets, resulting out of a long Driven by the passion to seek new challenges, Indo Rama has recently forayed into the energy sector and has an installed cogeneration capacity of 82 MW. Considering the exponential growth in demand for energy in the country, the company aims to establish itself as a force to be reckoned with in the energy sector in the times to come.

REFERENCES

  1. Financial Management:- Khan & Jain
  2. Fundamental of Financial Management:- Harje.J
  3. Financial Management:- Prasanna Chandra
  4. Financial Management:- Chaoudhary and kalyani

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