Capital Budgeting

INTRODUCTION

Financial management is the management of activities related to the planning

and management of financial institutions. Finance is the foundation of many

businesses. Finance is the lifeblood of commerce. The work of financial management

is concerned with the process of obtaining the necessary resources and their strategic

use, as well as increasing the profitability of the company, thereby increasing the

profitability of its owners. Potential members of the company. Managers apply this

topic because the most important decisions of the company are those related to

finance and the understanding of financial management gives them insight and

analysis to make good decisions.

o FINANCIAL MANAGEMENT

Financial Management emerged as a distinct field of study at the turn of this

century many eminent persons defined it in the following ways.

o DEFINITIONS

According the BONNEVILE AND DEWEY: “Financing consists in the rising,

providing and managing of all the money, capital or funds of any kind to be used in

connection with the business”.

According to Prof. EZRASOLOMAN: “Financial Management is concerned

with the efficient use of any important economic resource, namely capital funds”.

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o FINANCE FUNCTIONS

It may be difficult to separate the finance functions from production, marketing

and other functions, but the functions themselves can be readily identified. The

functions of raising funds investing them in assets and distributing returns earned from

assets to shareholders are respectively known as.

1. Long – term assets-mix (or) Investment Decision

2. Capital – Mix (or) Financing Decision

3. Profit allocation (or) Dividend Decision

4. Short – term asset –Mix (or) Liquidity Decision

GOALS OF FINANCIAL MANAGEMENT

● Maximize the value of the firm to its equity shareholders.

● Maximization of profit

● Maximization of earnings per share.

● Maximization of return on equity (defined as equity earnings/net worth)

● Maintenance of liquid assets in the firm.

● Ensuring maximum operational efficiency through planning directing and

controlling of the utilization of the funds.

● Building up of adequate reserves for financing growth and expansion.

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Capital Budgeting

Effective capital allocation is the most important aspect of financial performance

in today's world. It includes the bank's decision to invest in long-term assets. These
decisions are very important to companies because they determine the size of the
company, often affecting the growth, profitability and risk of the company.

MEANING:-
Capital expenditures are an important aspect of property management. One of
the responsibilities of a fund manager is to select investments that are attractive in terms
of revenue and cost of return. Therefore, the finance manager must be able to determine
whether the investment is appropriate and make informed choices between two or more
options. This requires a robust process for evaluating, comparing and selecting projects.
This process is called capital investment.

DEFINITION:-

According to Charles T.Horngreen, “Capital budgeting is long term planning for

making and financing proposed capital outlays.”
According to Lynch, “Capital budgeting consists in planning development of
available capital for the purpose of maximizing the long term profitability of the
concern.”

An efficient allocation of capital is the most important finance function in

modern times. It involves decisions to commit firm’s funds to long-term assets. Such
decisions are tend to determine the value of company/firm by influencing its growth,

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profitability & risk. Investment decisions are generally known as capital budgeting or
capital expenditure decisions. It is clever decisions to invest current in long term assets
expecting long-term benefits firm’s investment decisions would generally include
expansion, acquisition, modernization and replacement of long-term assets.

These decisions can be investment decisions, financial decisions or operational

decisions. Investment decisions involve investing the organization's resources in long-
term (short-term) and/or short-term (current) assets. Decisions to invest in short-term
assets fall under "investment management". Decisions about investing in long-term
assets are classified as "capital expenditure" decisions. Investment decisions relate to the
allocation of capital gains to different fixed-term assets.
They have long-term implications and affect the future growth and profitability of the
company. When evaluating such proposals, it is important to carefully consider both the
expected return on investment and the costs involved. Organizations are constantly
faced with financial decisions. Every decision that requires the use of resources is an
investment decision. In any growing concern, capital expenditure is more or less a
continuous process.

Some of the examples of Capital Expenditure are:

● Cost of acquisition of permanent assets as land and buildings.

● Cost of addition, expansion, improvement or alteration in the fixed assets.

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Industry Profile

The Indian pharmaceutical industry today is in the front rank of India’s science
based industry with wide ranging capabilities in the complex field of drugs
manufacturing and technology. It ranks very high in the world, in terms of technology,
quality and range of medicines manufactured from simple headaches pills to
sophisticated antibiotics and complex cardiac compounds, almost every type of
medicines is now made in India.The organized sector of the pharmaceutical industry has
played a key role in promoting and sustaining development in this vital field.
International companies associated with a sector have stimulated, assisted and
spearheaded this dynamic development in the past 53 years and helped to put India on
the pharmaceutical map of the world. The pharmaceutical industry in India provides
excellent facilities. It has quality producers and regulatory authorities in U.S.A and U.K
approve many units. It has a pool of personnel with high managerial and technical
competence, as also skilled work force.It track record of development particularly in the
area of improved cost-beneficial chemical synthesis for various drug molecules is
excellent. It provides a wide variety of bulk drugs and exports sophisticated bulk drugs.
The Indian market has some unique advantages. India has 61 years old democracy. It
has an educated work force and English is commonly used. It has a solid legal
framework and strong financial markets. Professional services are easily available.
The country is now committed to free market economy and globalization. Above
all, it has 70 million middle class markets, which is continuously growing. For the first

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time in many years the international pharmaceutical industry, is finding great

opportunities in India. The process of consolidation power, which has become
generalized phenomenon in the world pharmaceutical industry, has started taking place
in India. The pharmaceutical industry, with its rich scientific talent and research
capabilities, supported by intellectual property protection regime, is well set to mark its
place as a sunrise industry.

THE GROWTH SCENARIO:

India’s US$ 3.1 billion pharmaceutical industry growing at the rate of 14% per
annum. It is one of the largest most advanced among the development countries. Over
20,000 registered pharmaceutical manufactures exist in the country. The domestic
pharmaceutical industry output is expected to exceed Rs. 260 billion in the financial
year 2002, which accounts nearly 1.3% of the pharmaceutical sector. Of this, bulk drugs
will accounts for Rs.54 billion (21%) formulations, the remaining Rs.210 billion (79%).
In financial year 2001, imports for Rs.20 billion while exports were Rs.87 billion.

STEPS TO STRENGTHEN THE INDUSTRY:

India Company needs to attain the right product mix for sustained future growth.
Core competencies will play an important role in determining the future of many Indian
pharmaceutical companies in the post product patent regime after 2005. Indian
companies in an effort to consolidate their position will have to increasing the look at
merger acquisition options of either companies or products. This would help them to
offset loss of new products options, improve their R&D effort and improve distribution
to penetrate markets. R&D has always taken the back seat amongst Indian
pharmaceutical companies. In order to say competitive, the future Indian companies will
have refocus and invest heavily in R&D. The Indian pharmaceutical industries also
need to take advantage of the researcher advances in Bio-technology and IT. The future

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of the industry will also be determined by how well it market it’s products to several
regions and distribute risk, I’s forward and backward integration capabilities, it’s R&D,
it’s consolidation through mergers and acquisition, co-marketing and licensing
agreement. Profit margins plays vary widely in both domestic and export sales due to
many factors.

EXPORTS:

More than 60% of counterfeit medicines in India are exported. India's

pharmaceutical exports amount to about 87 billion rupees, of which about 55% are
preparations and 45% more raw materials. In 2000, exports increased by 21%. India's
imports of drugs reached Rs 1,000 crore.

In 2001 it was $20.3 billion. Imports have grown at an annual growth rate of
only 2% over the past five years. Raw material exports have decreased in recent years.
Pharmaceutical exports at Rs. 1989-1999. Consolidated to make 49780 from Rs. The
export value of 46 essential drugs, pharmaceuticals and quality drugs increased by
11.19% compared to last year's exports, reaching Rupees 6,152.

India's pharmaceutical industry ranks second in the world in terms of production

and Indian production potential. India's biotech industry grew by 17% in 2009-10
compared to the previous year and its revenue reached 137 billion rupees ($3 billion).
Biopharmaceuticals made the largest contribution at Rs 8,829 accounting for 60% of the
market growth, followed by bioservices at Rs 88,290.

2,639 crore and Rs 1,936 crore for bio-farming. The first chemical company was
Bengal Chemicals and Pharmaceutical Works, which was founded in Kolkata in 1930
and still exists today as one of the 5 state pharmaceutical companies. For the next 60
years, most of India's medicines were imported by multinational companies, either in
bulk or in bulk. The government began encouraging Indian companies to develop

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pharmaceuticals in the early 1960s and passed the Patent Law in 1970, making the
industry what it is today.

Patent law eliminates substantive patents for food and medicine, and their
duration is reduced to five to seven years while process patents are protected. Due to the
lack of patent protection, the Indian market fell out of favor with the different
companies that once did business and started to replace them when Indian companies
withdrew. With their expertise in reverse engineering new processes for low-cost drugs,
they have carved out a niche in the Indian and global markets. The industry as a whole
has followed this business model, although some large companies have made small
strides in the use of new drugs.

Top 10 Pharmaceutical’s in India

1. Cadila Health Care

2. Cipla

3. Aurobindo Pharma

4. Lupin Laboratories

5. Cadila Healthcare

6. Dr. Reddy Laboratories

7. Piramal Healthcare

8. Glaxo Smith Kline

9. Sun Pharmaceuticals Industries

In 2002, more than 20,000 pharmaceutical companies in India sold formulations

and APIs worth US$9 billion. Among them, 85% of the preparations are sold to India
and more than 60% of APIs are exported, mainly to the United States and Russia. Most
business participants are SMEs; The 250 largest companies control 70% of the Indian
market. As a result of the Patent Law of 1970, multinational companies have only 35%
market share compared to 70% market share 30 years ago. Most of the pharmaceutical

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companies operating in India, even multinational companies, employ almost Indians,

from the lowest to the top management.

Considering the social structure, the organizational hierarchy is very strict. Like many
other industries in India, domestic pharmaceutical companies are mostly a mix of public
and private sector players. Although most of these companies are publicly traded
companies, leadership is passed down from father to son and majority owned by the
founding family.

In terms of global trade, India currently has a share of only 1-2% but is growing at
around 10% per year. Taking its place on the world stage with its innovatively
developed generic drugs and active pharmaceutical ingredients (APIs), India now aims
to be a major player in contract development and research as well as outsourced clinical
trials. India has 74 US FDA approved manufacturing facilities, more than any other
country outside the US. In 2005, about 20% of all New Drug Applications (ANDA)
submitted to the FDA were submitted by Indian companies. Despite growth in other
areas, generics still hold a large share. Global Insight, a London-based research firm,
predicts that India's share of the global pharmaceutical market will increase from 4
percent to 33 percent by 2007.

Patents:-

As its core business expanded, the business had to adapt its business model to
recent changes in the work environment. The first major change was the 1st January
2005 amendment to the Indian Patent Law, which brought back product patents for the
first time since 1972. The law took effect before the deadline set by the WTO's Trade-
Related Intellectual Property Rights (TRIPS) agreement, which provides 20 years of
patent protection for products and processes. Under the new law, India will have to
recognize not only new patents but also all patents filed after January 1, 1995. Indian
companies have established themselves in the domestic market by destroying their
product patents and are expected to lose $650 million in the local pharmaceutical market
for those with knowledge over the next few years. The new patent law in the domestic
industry led to a clear separation. Multinationals have taken advantage of new patent
protection to target patient populations that only make up 12% of the market.

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Meanwhile, Indian companies have chosen to promote their existing products and target
the urban and rural population.

Product development:-

Companies are also starting to adapt their production processes to the new
environment. For years, companies have entered the global market by researching
competitors for patented drugs and then filing lawsuits to challenge the patents. This
approach is not yet affected by the new patent process and is expected to increase in the
future. But those who could afford it set their sights on a higher goal: the discovery of
new molecules. Despite huge investments, companies are tempted by the promise of
high profits and the recognition of legitimate competitors in the international market.
Local companies are increasingly investing in R&D activities or forming partnerships to
take advantage of these opportunities.

Small and medium enterprises:-

While the overall future is good, the outlook for small and medium enterprises
(SMEs) is not so good. The excise tax structure has changed and companies now have to
pay 16% tax on the maximum retail price (MRP) of their products, rather than the
original ex-factory price. As a result, larger companies cut production and major
operations shifted to companies located in the four tax-free states of Himachal Pradesh,
Jammu and Kashmir, Uttarakhand and Jharkhand. While SMEs deal with tax standards,
they also meet the July 1 deadline to comply with the revised Schedule M Good
Manufacturing Practices (GMP). Although this should be good for consumers and the
economy as a whole, SMEs struggled to find money to develop their production
facilities, resulting in many shutdowns. Others have invested money to harmonize their
facilities, but these operations are located in non-tax-exempt states, making it difficult to
compete after the new tax.

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Challenges:-

All these changes will ultimately benefit the Indian pharmaceutical industry,
which has suffered from lax regulation and a large number of counterfeit drugs in the
past. They brought the business to a level that required international competition.
However, they also reveal some of the shortcomings of today's business world. Its main
weakness is its underdeveloped new molecular discovery program. Even after increased
investment, Ranbaxy and Dr. Reddy's spends only 5-10% of its revenue on R&D and
lags behind Western pharmaceutical companies like Pfizer, which spent more on
research last year than the entire Indian pharmaceutical industry combined. The
difference is too large to be explained by differences in cost and comes at a time when
advances in genomics are making research tools more expensive than ever before. The
drug discovery process is further hampered by the incompetence of molecular scientists.
Indian pharmaceutical companies are still not involved in training, which is important
for the development of Western medicine, because the training materials are
disconnected from business life.

R&D:-

Both central and state governments of India recognize R&D as the key driver of
growth in their pharmaceutical industries and provide tax breaks for R&D related
expenditure. They also made other deals, such as lowering the cost of sending money
and lowering the cost of controlled drugs. However, government support is not the only
thing that Indian pharmaceutical companies benefit from. Companies can also take the
IT industry and collaborate with them to discover new molecules.

Labor force:-

India's greatest strength is its people. India also has a cheap, well-educated,
English-speaking [only percentage, see] workforce that is the basis of its competitive
advantage. While molecular biologists are incompetent, there are many chemists who
are equally important in the discovery process. There is also the effect of the brain drain,

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where scientists turn from abroad to accept lower positions in Indian companies. While
there, researchers trained abroad can pass on the benefits of their knowledge and
experience to anyone working with them. India's rich are also spreading their profits to
other parts of the pharmaceutical industry. India has one of the largest and most diverse
populations in the world, so it can recruit medical staff faster and conduct clinical trials
at a lower cost than Western countries. Indian companies are just starting to use
leverage.

SWOT OF INDIAN PHARMACEUTICAL INDUSTRY:-

Strengths:-

● Cost competitiveness

● Well developed industry with strong manufacturing base

● Well established network of laboratories and R&D infrastructure, strong

motivated scientific force

● Self reliant technology for production

● Access to pool of highly trained scientists

● Strong marketing and distribution network

● Rich biodiversity

● Low r&d costs

● Competencies in chemistry and process development

● Cost effective technologies for bulk drugs production and well developed capital

equipment industry

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● Increasingly, India is being regarded as a manufacturing base by global

pharmaceutical companies.
Weakness:-

● Low investments in innovative R&D.

● Lack of resources to compete with mncs for new drug discovery research and to

commercialize molecules on a worldwide basis.

● Lack of strong linkages between industry and academia.

● Lack of culture of innovation in the industry

● Low medical expenditure and healthcare spend in the country

● Inadequate regulatory standards

● Production of spurious and low quality drugs tarnishes the image of industry at

home and abroad.

Opportunities:-

● Significant export potential

● Licensing deals with mncs

● Marketing alliances to sell mnc products in domestic market

● Contract manufacturing arrangements with mncs

● Potential for developing India as a centre for international clinical trials

● Niche player in global pharmaceutical R&D.

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● Strong base of scientific as well as technical manpower and also due to

pioneering work done in process development

● Supply of generic drugs to developed markets

Threats:-

● Product patent regime poses serious challenge to domestic industry unless it

invests in research and development.

● R&D efforts of Indian pharmaceutical companies hampered by lack of enabling

regulatory requirement.

● Entrants of newer players in highly fragmented market.

Veterinary medicine :

Veterinary science is a branch of science that deals with the medicine, surgery,
public health, dentistry, diagnosis and treatment of wild and non-human animals,
including mammals, mammals and domestic animals. Veterinarians are called
veterinarians. In most developed countries, veterinarians are highly skilled and
professional. Veterinary science contributes to human health by monitoring and
controlling zoonotic diseases (diseases transmitted from non-human animals to
humans), and veterinarians often collaborate with medical professionals.

History :

The Egyptian Cajon papyrus (1900 BC) and the Vedic texts of ancient India
provide one of the earliest written records of veterinary medicine. One of Ashoka's
words says: "King Piadassia (Ashoka) built two kinds of hospitals everywhere, hospitals
for people and hospitals for animals, where there were no herbs to treat people and
animals, he ordered them to buy and plant." The Talmud says there were no mares
exported from Egypt during the Roman period, but there is early evidence like this.

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Modern veterinary medicine :

The patient returns home protected by better feelings of himself (and others) in a
cage filled with litter, food, and water until he is cleared of multiple surgeries.

Today's veterinarians benefit from advanced diagnostic and treatment methods

in many types. Pets today can receive advanced medical, dental, and surgical
procedures, including insulin injections, root canals, hip replacements, cataract removal,
and pacemakers.

The veterinary specialization has become more common in recent years.

Currently, 20 veterinary specialties are recognized by the American Veterinary Medical
Association (AVMA), including anesthesia, behavior, dermatology, emergency and
critical care, internal medicine, cardiology, oncology, ophthalmology, neurology,
radiology, and surgery. To become a specialist, a veterinarian must complete additional
training in the form of internships and residency after graduating from veterinary
school, followed by passing a rigorous exam.

Veterinarians help ensure the quality, quantity and safety of food by monitoring
the health of livestock and inspecting the meat itself. Veterinary scientists hold
important positions in biology, chemistry, agriculture and medicine. Equine veterinary
medicine is also a specialty in many countries. Equine medical work is often associated
with physical and orthopedic problems, digestive disorders (such as equine colic, which
is the cause of death in pet horses), and respiratory diseases and infections.

Zoological medicine includes the health care of wild animals and wild animals
and is a specialized veterinary medicine whose importance and difficulty has increased
in recent years due to the increasing protection of wildlife.

Today's veterinarian :

According to customer surveys, veterinarians are listed as one of the most

respected in the United States. Veterinarians are encouraged to take an oath[4] in which
they pledge to use their knowledge and skills to help people by protecting the

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environment, food safety and public health, as well as protecting the health of all
animals. Many veterinarians today have made a longstanding commitment to working
hard to keep that promise in their practice. There are many personal qualities that
contribute to the success of veterinarians, the most important of which are imagination,
good communication skills and management skills. Having a scientific mind requires a
desire to know and know wisdom.

A career in veterinary medicine involves lifelong learning, so an interest in

animal science is a must and a genuine love and understanding of animals is essential.
Good communication skills are important because veterinarians must be able to meet,
talk and work with all people and individuals. Compassion is important to success at
work because they will work directly with animal user members of the community who
will have a good relationship with their animals. Many areas of the profession require
veterinarians to manage other employees and the entire business. These jobs are more
rewarding and easier if they have a basic management or leadership background. A
study was performed in attempts to discover professional identity and professionals'
workplace learning based on a theoretical proposal. Veterinarians were found to
approach workplace learning differently according to two key variables: perceived
alignment with professional identity and perceived importance to professional practice.
Differences were evident when comparing how veterinarians approached learning about
the medical aspects of their profession in contrast to practice management that consisted
of nonmedical disciplines that are a definite part of veterinary practice. It was common
for these veterinarians to associate their professional identity with scientific, medical,
clinical disciplines, but less common for these veterinarians to include the nonmedical
disciplines.

This study by Hoskin and Anderson-Gough (2004) helped to explain the effects
of disciplinary action on workplace learning. They found that educational systems that
produce members of established disciplines tend to be highly specialized. This then
resulted in significant influence on the type of content that is transmitted in the process
of becoming qualified to practice a professional discipline. Furthermore, Lewis and
Klausner (2003) found that veterinary schools

In the United States recognize that it is their role to be gatekeepers of the

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profession. They are beginning to understand the full responsibility for selecting
candidates who have the skills to capitalize on their education and build a successful
career. It is their responsibility because it is their institution that has a significant
amount of influence in the type or personality of the individual that will then graduate
with a degree to practice animal medicine. This personality is then directly correlated to
whether or not the graduate succeeds in their profession or does not succeed.

Overview :

According to the American Veterinary Medical Association, about three-quarters

of veterinarians work in an individual or group practice. The rest are employees of other
institutions, including veterinary schools, medical schools, research institutes, pet food
companies, and pharmaceutical companies. The U.S. Bureau of Labor Statistics reports
that the U.S. government employs approximately 1,400 civilian veterinarians, most of
them in the Departments of Agriculture, Health and Human Services, and Homeland
Security. State and local governments also employ veterinarians.

Employment is expected to increase more than average and much faster in

comparison to other career options, ensuring job opportunities in the field of veterinary
medicine. It has been stated that this expected increase is near 35% over the next
decade; it is a direct result of the increase of certain pet populations, such as cats, and
the increased amount of pet owners willing to purchase pet insurance, which then
increases the amount of treatment that the owner is willing to fund. Additionally,
modern veterinary medicine has caught up to human medicine in many areas such as
cancer treatment, preventative dental care, hip replacements, transplants, and blood
transfusions. These medical advances have encouraged pet owners to take advantage of
these new medical possibilities, likewise increasing the need for veterinary care because
of the increased demand. One other area of increased demand for veterinarians in seen
in the continued support for public health and food and animal safety, CDC national
disease control programs, and biomedical research on human health problems.

These careers need to be considered because there are only 28 accredited

veterinary schools in the US and only five in Canada, making entry into veterinary
school very competitive. Fewer schools produce fewer graduates each year; this

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averages about 2,700 graduates per academic year in the United States.

The different areas of veterinarians continue to evolve, including which doctors

tend to these areas and the hours they usually work. Recent graduates remain interested
in pets or small animals as they love working with animals and living/working in big
cities. So, things look good in urban and suburban areas, but look better in rural areas
because there are fewer vets competing for jobs in those areas.

Junior veterinarians can tackle tough evening or weekend positions to

accommodate the long working hours many locations have. While there are
veterinarians working in salaried jobs in veterinary stores, others have to work long and
hard to build a good customer base. There are very few large vets than partner or junior
vets. This is directly related to the fact that most people do not want to live/work in the
countryside or in remote areas. However, the prospects for work in large animal practice
are good due to the trends described earlier.

Finally, veterinarians trained or qualified in food safety and security, animal

health and welfare, and public health and epidemiology should have the opportunity to
work in one of the government departments.

Threatening veterinary shortage :

A shortage of veterinarians who treat farm animals is stressing the nation's food
inspection system. This shortage is becoming so severe that it is prompting the Federal
Government to offer bonuses and cover moving expenses to fill hundreds of empty
employment opportunities. The shortage is mainly due to veterinarians choosing to live
in metropolitan areas and pursue a practice specializing in pets or small animals. The
main scarcity is seen in veterinarians who treat farm animals or work as government
inspectors. The shortage is most severe in the USA's Farm Belt, which is in the rural
areas of the Midwest that is responsible for much of the nation’s meat production.

The American Veterinary Medical Association reports that nearly 500 cities
have too many pets but no vets to treat them. Statistics prove that veterinarians in

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private practice often earn a higher starting salary than veterinarians in public practice,
but after nearly 10 years of practice, both are on par. The BLS also reported that the
demand for veterinarians will rise to 22,000 by 2016. This will make it one of the
greatest professions. The 28 veterinary schools in the country produce about 2,700
graduates each year, and this has not changed in three years. What has changed,
however, is that baby boomers, the generation most employed in animal husbandry, are
quickly retiring, causing animal shortages.

Gender distribution:

Veterinary medicine has historically been the world of men. Today, veterinary
schools are dominated by women, and by 2005 they were becoming the majority. For
example, 62 of the 77 new doctors at Tufts University were women, 75 percent of the
class of 2002 were women, and 81 percent of UC Davis's were women. According to
the Labor Law, the number of female veterinarians has more than doubled since 1991 to
24,356, while the number of male veterinarians has fallen by 15 percent to 33,461.
Depending on the demographics of the applicants and the gender distribution of the
various veterinary schools, this trend will continue.

The transition of women to veterinary medicine in the majority has created some
negative effects in areas such as livestock and veterinary sector, causing them to become
victims. This is because women do not enter these areas and therefore do not make
complaints that affect society as a whole.

Earnings :

Veterinarian salaries continued from 2005 to 2007, but the upward trend is not
expected to continue between 2007 and 2009. Veterinarian salaries vary based on a
person's experience, responsibilities, geographic location, and field of work. Especially
at the end of 2007, veterinarians working in the private sector earn more than other
professions, and men still earn more than women.

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ANTI- ANTI- CARDIO-VASCULAR

INFECTIVES RETROVIRALS SYSTEM
Anti-Bacterial Anti-retroviral Anti-Hyper lipo proteinimcs
Anti-Biotic Anti-Hypertensive
Anti-Fungal Anti-Thrombotic
Anti-Viral Beta-Blocker
Cephalosporin
Anti-Hyper lipo proteinimcs
s
Fluro-
Quinolons

The company is amongst the top five pharmaceutical companies of India and also has

the following distinctions.

● One of the largest vertically integrated pharmaceutical companies in the world

● One of the largest manufacturers of APIs from Asia and India’s No.1

● Amongst the worlds top five manufacturers of semi-synthetic penicillin’s,

cephalosporins and anti-viral.

● Strong R&D with significant breakthroughs in resolving complex chemistry challenges

and developing non-infringing processes.

● Over 100 APIs exported to over 100 countries.

● Asia’s largest facility in a single well connected location.

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Unit- US FDA (USA), WHO, UK MHRA

1
Unit- US FDA
1A
Unit- USFDA, UK MHRA, ANVISA (Brazil), MCC (South Africa),
3. Health Canada.
Unit US FDA
5A
Unit- US FDA, WHO, Health Canada
6
Unit- US FDA, MCC (South Africa), Health Canada,
6B ANVISA(Brazil), NAM (Finland)
Unit- US FDA, WHO, UK MHRA
8
Unit US FDA, WHO, UK MHRA
11A
Unit- US FDA, Health Canada, UK MHRA, ANVISA (Brazil), WHO
12

(Source: Aurobindo Pharma Ltd. Reports)

In addition to the above, the Special Economic Zone (SEZ) project at Jedcherla in

Andhra Pradesh is expected to be ready in the second half of the current financial year, adding

to the manufacturing capacity. Around the same time, the production facility at Dayton in U.S.A

which has been inspected by regulatory authorities is set to commence production.

The net worth of the Company stood at Rs. 994.1 Billion as at March 31, 2008, a growth of over

14.35 % in three years.

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LONG TERM GROWTH STRATEGIES

● Develop a broad portfolio of DMFs/ANDAs through non-infringing processes and

intellectual properties and become a significant player in the generics market, especially

in the regulated markets.

● Manage cost efficiently in a mega-manufacturing environment approved by

USFDA/European regulatory authorities; and in the process, enhance the attractiveness

of AurobindoPharma to alliance partners.

DESIGN OF THE STUDY

NEED FOR THE STUDY

Capital planning is important because it must be responsible, another reason to invest their
assets in the business without understanding the risks and benefits involved, will make investors
think more about themselves because if the person has no opportunity to remove value, if there
is no way for the business to survive in a tough business environment, their choice will be good.

Investment decision can be defined as a company's decision to invest in the best current money
and well-performing long-term assets with the expectation of income in the next few years.

GKCE, Sullurupet 24
 Capital Budgeting

Long-term assets are those that affect the company's operations for more than one year.
Investment decisions for companies often include expansion, purchasing new construction and
swapping long-term assets. Selling a division or business is also an investment decision.

Decisions such as changes in sales, advertising or research and development programs have a
long-term impact on the company's expenses and revenues and should therefore be considered
investment decisions.

Scope of the study

The study has been conducted from in formation over a period of 5 years from financial
year 2018-2019 to 2022-2023.

Capital investments, representing the growing edge of a business, are deemed to be very
important three interrelated factors

● The influence of firm growth in the long term consequences like capital investment
decisions have considerable impact on what the firm can do in future.

● They affect the risk of the firm, it is difficult to reverse capital investment decisions
because the market for used capital investment in ill organized or most of the capital

GKCE, Sullurupet 25
Capital Budgeting

equipments bought by a firm to meet its specific requirements.

Capital investment decisions involves substantial outlays.

Objectives of the study

● To evaluate the cash inflows and outflows of the company.

● To determine the average rate of return.

● To analyze the company’s investment decisions by applying capital budgeting

techniques.

● To determine the net cash available for the investment purpose.

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

GKCE, Sullurupet 26
Capital Budgeting

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

GKCE, Sullurupet 27
Capital Budgeting

28
Capital Budgeting

● Payback period.

● Accounting rate of return.

● Net present value.

● Internal rate of return.

● Profitability Index

Limitations of the study

● A strong unwillingness on the part of the company officials, to participate and aid the

research.

● The study is limited only to one company Aurobindo Pharma.

● The project work has been confined mainly to export analysis of the firm in respect of
export procedures and potentials..

● The study is conducted in a short period, which was not detailed all aspects.

● A strong unwillingness on the part of the company officials, to participate and aid the

research.

29
 Capital Budgeting

REVIEW OF LITERATURE

Capital Budgeting:
The term capital budget refers to the long-term planning of capital use and financing.

Therefore, it includes long-term inflation and long-term expenditure. It is a decision-making

process in which a business evaluates the purchase of large assets and decides to invest its

existing funds. It includes the addition, disposal, modification and modification of fixed or

permanent assets. However, it is worth noting that investment in current assets is necessary for

investment in fixed assets and should be considered as a capital investment decision.

Budgeting is a multifaceted activity. It includes coming up with new, more profitable ideas,

checking engineering forecasts and business theories, and performing financial analysis to

determine the feasibility of each investment proposal.

Investment decisions are related to the allocation of capital to different fixed-term assets. They

have long-term implications and affect the future growth and profitability of the company.

30
 Capital Budgeting

When evaluating such proposals, it is important to carefully consider both the expected return

on investment and the costs involved. Organizations are constantly faced with financial

decisions. Every decision that requires the use of resources is an investment decision. In any

growing concern, capital expenditure is more or less a continuous process.

Atexon and Cole,2005 :

Over the last 50 years, many researchers have been involved and central studies have

developed many theories (eg Myers, 1977; Myers, 1984; Jensen, 1986; Ritta Let, 1991;

Graham and Harvey, 2001; Myers, 2003;

Bornholet ,2013:
However, because of globalization, ecological changes and strategic progressed

innovative improvements, recently created hypotheses and models today don't have any

significant bearing and a large number of them condemn and practice their training.

Wassenhov, 1995:
An intriguing precedent represented by Brownne, de Jong and Koedizzak (2004), is

that Nobel Prize winning ideas, for example, the Capital Property Pricing Model and Capital

Structural Theories are lauded and educated in homerooms, however at what degree these

praised thoughts are to some degree obscure in their approach to corporate board rooms "

(Page 72) Radayika capital planning techniques for diminishing the aggressiveness of cutting

31
 Capital Budgeting

edge generation innovation and receiving increasingly about the preclusions and has been

censured by Western establishments.

Kursite, 2011:
Several examination researchers center around their crucial grants and their execution

of the speculation hypothesis spending plan (e.g., Mookiezy and Henderson, 1987; Arnold and

Hatzopoloss, 2000; Graham and Harvey, 2001; Cooper, Morgan, Redman and Smith, 2002 ;

Brown and others., 2004; Kersey, 2011).

Emmanuel, Harris, and Comecach:

According to performance, business operations must respond to changes in order to be

supported, encouraged and developed in the world economy (Ghahremani, Agai, & Abedzad,

2012). Capital options are more diverse, including more cash in the long run (eg Peterson and

Fabazzi, 2002, Cooper et al., 2002).

2002; Dayanand, Irons, Harrison, Herbon, & Roland, 2002), these options make it

important for companies to focus on big change and long-term growth. Capital speculation

chooses to adopt acquisitions, new office investment, new production, new innovation, and use

new business processes or a combination of these (Emanuel et al., 2010). The use of capital

choice is important for survival and long-term success because of the many differences often

referred to as fragility.

Hakka, 2006 :
The global monetary emergency reflects this reality. One of analysts' weakest concerns

is how to identify, capture and measure the negative impact of long-term business. Because of

the many variables, capital expenditure risk selection is critical to survival and long-term

success and is often referred to as negative.

Segelod, 1997:

32
 Capital Budgeting

The choice to invest in capital speculation is due to the high level of financial support

that is fair in the leadership. It is used to analyze time estimates, methods, routines and

strategies, check the accuracy of the project, evaluate planning, and manage project risk with

clear instructions (such as the capital budget).

Dickerson, 1963:
The use of complex strategies based on the concept of weakness and difference (Singh,

Jain, & Yadav, 2012; Zhang, Huang & Tang, 2011; Kerstite, 2011; For venture capital, Bock,

201 and truck; al., 2002; Arnold & Hatzopollos, 2000; Mao, 1970.

Verbeten, 2006:
In the period of full-scale globalization and vicious challenge (Verma, Gupta and Batra,

2009), propelled improvements in innovation, other macroeconomic components and statistic

factors have imbued capital planning rehearses.

Slope, 2008:
In the realm of geo-political, social and monetary vulnerabilities, the procedure of
progress of vital monetary administration requires an amendment of fundamental speculations
(e.g., successful market thought, fama, 1970) all through the customary limits of budgetary
administration

Kester and Robins, 2011:

Through constrained credit and different sources in the present dubious and testing

monetary condition, the gainfulness and achievement of proposed capital speculations should

be assessed legitimately and to convey restricted capital up until this point.

Diggerson, 1963:
Number of organizations used to evaluate speculative projects. However, constructing

theoretical models and using this design as training is still problematic Using meetings to

33
 Capital Budgeting

control the process in the classroom, mainly with the narrator's attention, stage, stage and focus

on what (and what).

Young, Ashby, Boz and Grayson, 2002 :

Some hypotheses recently created don't have any significant bearing today. Over the

most recent two decades corporate practices are not reliable with authoritative practices, almost

certainly they are not quite the same as speculations. This investigation gives orderly audit on

the writing of capital planning rehearses distributed over the most recent two decades. By

utilizing the convention to manage the class procedure, for the most part by the attentiveness of

the commentator, the stage, the full straightforwardness of the stage, and the watchfulness of

what (and what).

Atril, 2009:
Over the most recent twenty years (1993-2013), the spending hypothesis is

characterized by many expanded applications dependent on the hazard and vulnerability

brought about by worldwide monetary, innovative and propelled scholastic changes, for

example, expansion chance, financing cost and hazard rate trade. Capital spending plan is

spine for monetary administration. The cutting edge money related administration hypothesis

by and large accept the amplification of the abundance of the association's proprietor.

Easterby-Smith etal :
2002Another vital philosophical thought is the possibility of epistemology. It will ask

about worthy learning in a specific field.

Blakey, 2007:
Information can be found by examining the relevant documents. After that, it presents

an overview and analyzes the article when it comes to free marketing ideas. This research uses

34
 Capital Budgeting

a method to learn hypotheses to solve the problem. Truth is not independent of individual

reason, so not all analyzes can be compared with one another.

Miles and Huberman's (1984):

A plan including feasibility, mitigation, demonstration and closure is adopted. The 363 case

studies were reduced to 201 according to the established criteria and disrupted the coding

process. Present value is the ratio of total income to the current estimate of future income

(Alan, 2004). Charles et al. (2009) examines the NPV strategy to determine the plan's positive

cash flow or loss and calculate the expected return on future constraints and current needs.

Colin (2006):
NPV is a direct way to pay for the quality of the positive effects of the results of a
business transaction.

Characteristics of Capital Budgeting:

Growth:-
A company's decision to invest in long-term assets is a growth and development
decision. A wrong decision can seriously damage the survival of the company. Unnecessary or
profitable expansion will increase the operating costs of the company. On the other hand,
investment in assets will make it harder for the company to compete and manage its business.
Companies are riskier if they accept investments that increase the average return but cause
frequent changes. Therefore, the investment decision determines the risk characteristics of the
research findings. Investment decisions often involve large amounts of capital, requiring
companies to prepare their proposals in advance and prepare internal or external financing in
advance.

Irreversibility:-
Most investment decisions are irreversible. Once these resources are available, finding

a job is difficult. If these assets become obsolete, the company will suffer serious losses.The

35
 Capital Budgeting

decision to invest once cannot be reversed or undone, but at a great loss.

Complexity:-
Another important feature of the investment decision is that it is the most complex decision.

Such decisions are a measure of future events that are difficult to predict. Predicting the future

financial performance of an investment is a difficult problem. Money shortages are caused by

economics, politics, and technology.

Need and Importance of Capital Budgeting:-

Budgeting decisions are often considered the most important aspect of a business's

financial management. Every decision that requires the use of resources is an investment

decision; Therefore, the use of financial resources includes everything from a decision abroad

in one cloud to a computer office in another. The importance of investment decisions is

obvious as they can affect the long-term results of the business. There are many factors and

considerations that make the investment decision the most important for a financial manager.

The necessity and importance of capital expenditure can be illustrated as follows:

Long Term Effects:-

Perhaps the most important aspect of capital investment decisions and the reason for

capital expenditure is that this decision reduces the long-term impact of the company's risk and

return. These decisions affect the company's risk and return composition. Since financial

decisions have long-term consequences, these decisions greatly affect the company. Finance

managers are making capital decisions, committing to their future impact.

Substantial Commitments:-
Investment decisions often involve multiple financial commitments and therefore a
36
 Capital Budgeting

significant portion of capital is invested in investment decisions. Therefore, investment

decisions require more attention, otherwise the business will suffer serious damage in the

future. The return may not be enough to justify the capital investment.

Irreversible Decisions:-
Most investment decisions are irreversible. Once taken, the company will not be able

to recover unless it is prepared for the serious damage that could result from aborting the

project. For this reason, financial decisions should only be made after considering and

evaluating all the details of the project, otherwise financial results can be achieved.

Affect Capacity And Strength To Compete :

Capital decisions affect the company's ability and strength to resist competition. If

routine decisions are delayed or wrong, companies can lose competitiveness. Likewise, a

timely decision to take on a smaller competitor can result in a monopoly position for the

company. Therefore, investment decisions involve an uncertain resource commitment and are

subject to significant risks. These decisions can have a significant impact on the company's

profits. These decision-making processes and strategies are based on predictive analytics.

Large Investments:-
Capital investment decisions often involve large investments. But the money in a

company is always limited and needs more money than capital. Therefore, it is very important

for businesses to plan and manage expenditures.

National Importance:

Although individual investors' investment decisions are important in the country, as

they determine employment, trade and economic growth. Therefore, we can say that if capital

resources are not used, the company will be affected by operational losses. The correct timing

of property purchases, transfers, additions and replacements is critical.

37
 Capital Budgeting

Capital Budgeting Process:-

Capital Budgeting is a complex process because it involves making decisions regarding the
investment of current capital for future and uncertain benefits. However, the following
methods can be used in the investment process.:

1.Identification of Investment Proposals:-

The capital budgeting process begins with the identification of investment proposals.

Investment opportunities have to be identified or created; they do not occur automatically.

Investment proposal of various types may originate at different levels within a firm. Most

38
 Capital Budgeting

proposals, in the nature of cost reduction or replacement or process or product improvement

takes place at plant level. The contribution of top management in generating investment ideas

is generally confined to expansion or diversification projects. The proposal may originate

systematically in a firm.

In view of the fact that enough investment proposals should be generated to employ the firm’s

funds fully well and efficiently, a systematic procedure for generating proposal may be

evolved by a firm. In a number of Indian companies, more than 50% of the investment ideas

are generated at the plant level. Indian companies uses a variety of methods to encourage idea

generation.

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, selection criterion of the firm and also do

not lead to department aim balances.

3.Evaluation of Various Proposals:-

The evaluation of projects should be performed by group of experts who have no axe to

grind. For example, the production people may generally interested in having the most modern

type of equipment and increased production even of productivity is expected to below and

goods cannot be sold this attitude can bias their estimates of cash flows of the proposed

projects.

Similarly, marketing executives may be too optimistic about the sales prospects of

goods manufactured, and over estimate the benefits of a proposed new product. It is therefore,

necessary to ensure that projects are scrutinized by an impartial group and that objectivity is

maintained in the evaluation process. A company in practice should take all care in selecting a

method or methods of investment evaluation. The criterion or criteria selected should be a true
39
 Capital Budgeting

measure of evaluating if the investment is profitable(in terms of cash flows), and it should lead

the net increase in the company’s wealth(that is, its benefits should exceeds its costs adjusted

for time value and risk).

4.Fixing Priorities:-
Ineffective or ineffective bids will be rejected after several bids have been evaluated.

However, due to financial constraints, the company may not be able to invest in all deals

immediately. That's why it's important to identify and prioritize multiple requests after

considering urgency, risk, and potential benefits.

5.Final Approval and Preparation of Capital Expenditure Budget:-

Proposals meeting the evaluation and standards are finally approved and included in the

Capital Budget. But small investment ideas can be considered with minimal expenditure.

Capital expenditure shows the estimated expenditure on fixed assets during the expenditure

period.

6. Implementing Proposal:

Additional funding requests should be made to the Committee regarding the use of

funds that should review the results of the project, planning the use of the budget and providing

specific ideas to allow the continuation of the project that does not exist independently in the

budget. Also, when implementing a project, it is recommended to assign responsibility for

completing the project within the set time and cost limits to avoid unnecessary delays and cost

overruns. Web technologies used in project management such as PRRT and CPM can also be

used to manage and monitor progress.

40
 Capital Budgeting

DATA ANALYSIS AND INTERPRETATION

Payback period method:

A number of capital Budgeting techniques are used in practice they may be grouped

as follows:

● Payback period
● Average Rate of Return(ARR)
● Net Present Value (NPV)
● Internal rate of return (IRR).
● Profitability Index (PI)

Payback period method:

The Payback come times called as pay out or pay of period method represents the

period in which total investment in permanent assets payback itself. this method based on the

principle that every capital expenditure pays itself back with in a certain period out of the

additional earnings generated from the capital assets.

41
 Capital Budgeting

PBP = Base Year + Required CFAT

Next Year CFAT

Average rate of return method:

This method takes into accounts the earning from the investments over the whole

life it is known as average rate of return method because under this method the concept of

accounting profit (NP after tax and Depreciation ) 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

ARR = Average Net Income

Average Investment

Average Income = Average of after tax profit

Average Investment = Half of original Investment

Net present value:

The net present value method is a classic economic method of evaluating the

investment proposals. It is one of the methods of discounted cash flow. It recognises the

importance of the time value of the money.

42
 Capital Budgeting

It correctly postulates that cash flow arising of different time period differ in

value and are comparable only when their equivalent i.e., present values are found out.

NPV= Present Value of cash inflow -Present Value of cash Outflow

Internal rate of return method:

The Internal Rate of return method is another discounted cash flow technique.

This method is based on the principle of present value. It takes account of the magnitude and

timing of cash flows.

IRR Nothing but the rate of interest that equates the present value of future

periodic net cash flows, With the present value of the capital investment expenditure required to

undertake a project.

IRR = LR + PV of cash inflows at lower rate - PV of cash outflow * (HR - LR)

PV of cash inflows at lower rate - PV of cash inflow at higher rate

Profitability Index:
Yet another time-adjusted method of evaluating the investment proposals is the benefit

cost (B/C) ratio of profitability index PI . It is the benefit cost ratio of present value of future net

cash inflows at the required rate of return, to the initial cash outflow of the investment.

PI = Present value of cash inflows

Present value of cash outflows

43
 Capital Budgeting

All these methods of capital budgeting techniques are explained in detail below:

1.Payback Period method:

One of the top concerns of any person or organization investing a large amount of money

would be the time by which the money will come back. The concern making the investment

would want that at least the capital invested is recovered as early as possible.

The payback period is defined as the period required for the proposal's cumulative cash

flows to be equal to its cash outflows. In other words, the payback period is the length of time

required to recover the initial cost of the projects. The payback period is usually stated in terms

of number of years. It can also be stated as the period required for a proposal to 'break even' on

its net investment.

The payback period is the number of years it takes the firm to recover its original

investment by net returns before depreciation, but after taxes.

If project generates constant annual cash inflows, the payback period is completed

as follows:

Payback = Initial Investment

Annual cash Inflow

In incase of unequal cash inflows, the payback period can be found out by adding up the

cash inflows until the total is equal to initial cash outlay.

Acceptance Rule:

● Accept if calculated value is less than standard fixed by management otherwise reject it.

44
Capital Budgeting

● If the payback period calculated for a project is less than the maximum payback period

set up by the company it can be accepted.

● As a ranking method it gives highest rank to a project which has lowest payback period

and lowest rank to a project with highest payback period.

Table No-1
Table shows payback period for given project

Tot Dep Cas Cumulati

Years Tot al reci h
al ve Cash
atio Infl Inflow
sale asse
n ow
s ts
2018- 680 82 453 882 -2282
2019 9 93
2019- 639 88 452 127 -942
2020 6 41 5
2020- 835 99 467 123 287
2021 8 76 1
2021- 101 115 521 621 908
2022 46 79
2022- 805 114 548 129 2207
2023 6 83 9

Initial Outlay = 3100 lakhs

Payback period = Initial Investment (CO)

Annual cash flow (C)

= 2 + 942.98 = 2.77 Years

1230.61

45
 Capital Budgeting

Graph No:1

Graph Title Payback period of Project

Interpretation:
In the Payback method the Investment and the case inflows are fluctuating from year to

year whereas in the year 2018-19 it is 2282 and in the year 2022-23 is 2207. Cash inflows are

order of increasing to decreasing from 2018 and 2023

Criteria for evaluation:

PBP can be used as a criterion to accept or reject an investment proposal. A proposal
46
 Capital Budgeting

whose actual payback period is more than what is pre-determined by the management. PBP

thus, is useful for the management to accept the investment decision on the AUROBINDO

PHARMA LTD. and also to assist the management to know that the initial investment is

recovered in 2.12years.

Decision:
The life of the project is set by Works to 5 years, whereas the actual payback period of

2 years 8 months. Hence it was accepted

2. Accounting rate of return (OR) Average Rate of Return (ARR):

It is also known as return on investment (ROI). It is an accounting method, which uses

the accounting information revealed by the financial statements to measure the profitability of an

investment proposal. According to Solomon, ARR on an investment can be calculated as "The

ratio of accounting net income to the initial investment ic.;

ARR = Average net income

Average Investment

Average Income = Average of after tax profit

Average Investment = Half of Original Investment

47
Capital Budgeting

Table No-2

Table showing ARR for given project

48
Capital Budgeting

ARR = ( 1061 / 1550 ) * 100

= 68%

49
Capital Budgeting

50
 Capital Budgeting

● The Net Present value is the difference between the "Present Value of Cash inflows" and

the present value of cash outflows.

● Net present value should be found out by subtracting present value of cash outflows from

present value of cash inflows. The project should be accepted if NPV is positive.

NPV = Present Value of Cash inflow - Present Value of the Cash outflow.

Acceptance Rule:

Accept if NPV>0

Reject if NPV<0

May accept if NPV=0

One with higher NPV is selected.

51
Capital Budgeting

Table No-3

Table Shows NPV for given Project

52
Capital Budgeting

53
Capital Budgeting

54
 Capital Budgeting

This method is based on the principle of present value. It takes into account of the magnitude &

timing of cash flows. IRR nothing but the rate of interest that equates the present value of future

periodic net cash flows, with the present value of the capital investment expenditure required to

undertake a project. The concept of internal rate of return is quire simple to understand in the

case of one period project.

Acceptance Rule:

Accept if r>k

Reject if r<k

May accept if r-k

Where r = rate return

k = opportunity cost of capital

DETERMINATION OF IRR:
a) When annual cash flows are equal over the life of the asset.

Factor = Initial outlay * 100

Annual Cash inflow

b) When the annual cash flows are unequal over the life of the asset:

IRR = LR + PV of Cash Inflows at lower rate - PV of Cash outflow * (HR - LR)

PV of Cash inflows at lower rate - PV of Cash Inflow at Higher rate

55
Capital Budgeting

Table No-4
Table show IRR for given Project @ 12%

56
Capital Budgeting

Table No-5
Table shows IRR for given project @ 16%

PRESENT
YEARS CASH DCF(16%)
INFLOWS VALUE
2018-2019 882 0.862 760.34

2019-2020 1275 0.743 947.5

2020-2021 1231 0.640 788.64
2021-2022 621 0.552 342.97
2022-2023 1299 0.476 618.47
5308 TOTA 3457.97
L

Graph No-5

Graph Title: IRR for given Project @ 16%

57
 Capital Budgeting

Interpretation:

The above mentioned two graphs represents the present value of the cash flows at two

different factors i.e., 12% and 16%

IRR = L + ( A / (A-B)) * (H-L)

IRR = 12+ (1299 / (1299-618)) * (16 - 12)

IRR = 19

Criteria for Evaluation :

In this method the project accepted IRR is higher than its cost of capital or cut out rate. If

the project is rejected when the IRR is less than cost of capital.

Decision :
The calculated IRR is 21.14% but the cost of capital is 8% which is fixed by the

organization as IRR is greater than the cost of capital the project is accepted.

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 Capital Budgeting

5. PROFITABILITY INDEX :
Yet another time- adjusted method of evaluating the investment proposals is the benefits

cost (B/C) ratio of profitability index PI. It is a benefit cost ratio. It is the ratio of present value of

future net cash inflows at the required rate of return, to the initial cash outflow of the investment.

PI = Present Value of cash inflows

Present Value of cash outflows

Acceptance Rule:

Accept if PI>1

Reject if PI1

May accept if PI = 1

Table N0-6
59
Capital Budgeting

Table shows PI for given project

YEARS CASH IN PRESENT

FLOW (Rs DCF (12%)
VALUE
Lakhs)
2018-2019 882 0.892 787.5
2019-2020 1275 0.797 1016.5
2020-2021 1231 0.711 876.2
2021-2022 621 0.635 394.6
2022-2023 1299 0.567 737.1

Total 5308 TOTAL 3811.8

67

Profitability Index = PV of Cash Inflow

Initial Outlay

Profitability Index = 3811 / 3100

= 1.22

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Capital Budgeting

61
Capital Budgeting

SUGGESTIONS

1. As large sum of money is involved which influences the profitability of

the firm making capital budgeting an important task.

2. Long term investment once made cannot be reversed without significance

loss of invested capital. The investment becomes sunk and mistakes, rather than

being readily rectified, must often be born until the firm can be withdrawn

through depreciation charges or liquidation. It influences the whole conduct of

the business for the years to come.

3. Investment decision are the base on which the profit will be earned and

probably measured through the return on the capital. A proper mix of capital

investment is quite important to ensure adequate rate of return on investment,

calling for the need of capital budgeting.

4. The implication of long term investment decisions is more extensive than

those of short run decisions because of time factor involved, capital budgeting

decisions are subject to the higher degree of risk and uncertainty than short run

decision.

5. The NPV of the project is positive it is advisable to suggest selecting the

same type of the projects.

6. The accepted cost of capital for the company is 9% where as the actual
62
 Capital Budgeting

IRR is worked for the proposal is 19.62%, so it advised to maintain this in the

future also

CONCLUSION:

The spending plan is one of the key procedures for budgetary administration to

assess the proficiency of the undertaking. So purchasing new hardware, beginning

business, extending, changing the oldness of old apparatus. The cutting edge approach is

more successful than the customary technique on the grounds that the advanced strategy

is thinking about the time estimation of cash. The Capital Budget has its own impediment

thrown ever; its favorable circumstances spread its unfriendly impacts with its utilization.

In any case, in India, the capital spending procedure can not be utilized legitimately at the

dimension of institutional and administrative administration.

Subsequent to considering this theme, I comprehend the hugeness of the spending

plan. Ifigure capital aptitudes can be used in government organization ventures like

corporate and open organization administrations, open transportation administrations.

I for one figure dislikes to utilize this strategy later on because of absence of information.

Capital spending plans can be utilized from local dimensions to MNCs and this sentence

can express the significance of the capital spending plan.

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Capital Budgeting

ANNEXURE

BALANCE SHEET (IN LAKHS)

Particulars Mar- Mar-20 Mar- Mar- Mar-
19 21 22 23
ASSETS
NON-CURRENT
ASSETS :
1,83 2,034 2,163 2,490. 2,671
Property, plant and 9 .0 0 .0
equipment
Capital work-in- 409 439 344 83 1,142
progress 1
Intangible assets 100 110 16 129 173
9
Intangible assets
under development 143 120 11 97 156
6
Equity accounted
investments in 14 16 26 28 26
associates
Investments 105 106 120 97 11
0
Loans to employees 665 670 59 429 558
0
Security deposits 76 76 91 91 87
Other non-current 192 160 22 257 221
assets 1

Total Non-Current 3,543. 3,731.0 3,840 4,449. 5,144.

Assets 0 .0 0 0
CURRENT ASSETS
997 1,075 1,360 1,84 1,735
: 5
Inventories

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Capital Budgeting

Investments 886 1,192 1,501 1,52 1,618

4
Trade receivables 1,402 1,341 1,937 2,14 1,494
8
Cash and cash 449 336 304 47 57
equivalents 5 5
Bank balances - -
Loans to employees 778 738 702 65 54
6 3
Security deposits - - 3. 7.1 1.9
2
Others Financial 238 429 329 47 37
Assets 5 3
Total Current Assets 4,750. 5,111.0 6,136 7,130. 6,339
0 .2 1 .9
TOTAL ASSETS 8,293. 8,842.0 9,976 11,579 11,48
0 .2 .1 3.9
Particulars Mar- Mar-16 Mar- Mar- Mar-
15 17 18 19
LIABILITIES
NON-CURRENT 4 47 9 93 9
LIABILITIES : 7 3 3

Equity share capital

Reserves 3,367.0 4,070.0 4,557. 5,282. 5,125.
0 0 0
LT Debt 2,167.0 2,076.0 2,554. 3,128. 3,315.
0 0 9
Employee benefits 232. 247.0 158. 298.0 345.
0 0 0
Other long - term 920. 754.0 478. 560.0 750.
liabilities 0 0 0
Deferred tax 56.0 48.0 67. 43.1 59.0
liabilities (net) 2

Total Non-Current 6,789.0 7,242.0 7,907. 9,404. 9,687

Liabilities 2 1 .9
CURRENT
LIABILITIES :
52.0 95.0 111. 135.0 79.0
ST Debt 0
Trade 837 846 1,327 1,36 1,0
payables 7 32
Other financial 0 0 0 0 0
65
Capital Budgeting

liabilities
Non-Controlling -4 10 2 30 32
Interests 9
Other current 595 640 564 60 60
liabilities 5 7
Advance From 24.0 9 3 38 46
Customers 8
Total Current 1,504.0 1,600.0 2,069. 2,175. 1,796
Liabilities 0 0 .0
TOTAL 8,293.0 8,842.0 9,976. 11,579 11,483
LIABILITIES 2 .1 .9

66
Capital Budgeting

Profit & Loss A/c

(Income Statement)

Particulars Mar-19 Mar-20 Mar- Mar- Mar-

21 22 23
Revenue from 6,80 6,396 8,3 10,146 8,05
operations 9 58 6
Operating
expenses
Cost of 256 2436 32 4215 357
materials 8 81 7
consumed
Manufacturing 125 1155 14 1722 136
Expenses 9 66 1
Employee 91 932 10 1247 119
benefits 6 90 6
expenses
Other expenses 65 622 80 918 88
6 7 9
Total operating 5,39 5,14 6,64 8,102 7,02
expenses 9 5 4 3
EBITDA 1,410. 1,251.0 1,714. 2,044.00 1,033.
00 0 00 00
Interest 116.0 100.00 107.0 127.00 171.0
0 0 0
Depreciati
45 452 46 521 54
on and 3 7 8
amortisation
expenses
Other income 15 262 5 203 14
1 5 7
EBIT 992 961 1,19 1,599 461
5
Finance costs - - - - -
Share in
profit/(loss) - - - - -
of
associates,
net of tax
Gain on
dilution - - - - -
of
GKCE, Sullurupet
67
Capital Budgeting

interest
in an
associate
Profit before 992 961 1,19 1,599 461
tax 5
Tax expense (317 (250) (443 (560) (111)
) )
Profit after 675 711 752 1,039 350
tax / Net profit

GKCE, Sullurupet
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Capital Budgeting

GKCE, Sullurupet
69
Capital Budgeting

BIBLIOGRAPHY:

Reference:

1. Klammer, Thomas P. ”Empirical Evidence of the Adoption of Sophisticated

CapitalBudgetingTechniques,”TheJournal of Business,July 1972, 387-397.
2. Klammer, Thomas P. and Michael C. Walker, “The Continuing Increase in the Use
of SophisticatedCapitalBudgeting Techniques,“CaliforniaManagementReview,fall
1984, 137-148
3. Fremgen,James,“CapitalBudgetingPractices:ASurvey,”ManagementAccounting
, May 1973,19-25

GKCE, Sullurupet
70
Capital Budgeting

4. Petty,J.WilliamPetty,DavidP.Scott,andMonroeM.Bird,“TheCapitalExpenditureDeci
sion-
MakingProcessofLargeCorporations,”TheEngineeringEconomist,Spring1975,159-
171
5. Gitman, Lawrence G. and Forrester, John R. Jr.,”A Survey of Capital Budgeting
Techniques Used by MajorU.S.Firms”, FinancialManagement, Fall 1977.
6. Kim,SukH.andFarragher,EdwardJ,”CurrentCapitalBudgetingPractices,”Managemen
tAccounting, June1981, pg. 26-30
7. Ross Marc, Capital Budgeting Practices of Twelve Large Manufacturers,
FinancialManagement(winter1986)vol. 15, issue4, pp 15-22
8. Wong K A, Farragher E J and Leung R K C, Capital Investment Practices: A
Surveyof Large Corporations in Malaysia, Singapore and Hong Kong, Asia Pacific
JournalofManagement, January1987, pp 112-123
9. Block Stanley; Capital budgeting techniques used by small business firms in
the1990s,TheEngineering Economist, Summer 1997, v42 n4 p289(14)
10. Jog Vijay M and Srivastava Ashwani K., Capital budgeting practices in
corporateCanada,Financial Practice & Education,Fall/Winter1995, pp 37-43.

TextBooks:

● SeePorterfield,J,T,S.,Investment Decisions and capital costs,Prentice–hall,1965

● Bierman, H. and Smidit, S.,The capital Budgeting Decision ,macmillan,1975,p.73

● Brely, and Myers ,S.,Principles of corporate finance,McGraw Hill,1991,p.8.

● Copeland=,T.E.andWeston,J.F.,FinancialTheoryandcorporatePolicy,Addision-

weseley,1983,p.32.

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71
Capital Budgeting

● Gordon,Myron,Payoffperiodandrateofprofit,Journalofbusiness,XXVIII,No.4,pp.253-60

● Seerangaraian, c. and Msmpilly, paul, 1971.

WebSites:

● WWW.investopedia.com

● www.principlesofaccounting.com

● www.enterpenure.com

● www.aurobindo.com

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