61671000 Capital Budgeting Project Not Having Page No

CHAPTER 1

INTRODUCTION

1.1 INTRODUCTION OF THE STUDY

Every organization irrespective of its size and mission can be

viewed as a financial entity management of an organization. Financial

management focuses not only on the improvement of funds but also on

their efficient use with the objective of maximizing the owners’ wealth.

The allocation of funds is therefore an important function of financial

management. The allocation of funds involves the commitment of funds

to assets and activities.

There are two types of Investment decision;

1. Management of current assets or Working capital management.

2. Long term investment decision.

This is widely known as capital budgeting or capital budgeting. It

means as to whether or not money should be invested in long term

project. This part is devoted to an in-depth and comparative decision of

capital budgeting/capital expenditure management.

1.2 CAPITAL BUDGETING

1.2.1 MEANING

Capital Budgeting is the process of making investment decisions in

capital expenditure. In other words capital budgeting is the planning of

expenditure or the benefit of which spreads over a number of years. A

capital expenditure may be defined as an expenditure the benefit of which

are expected to be received over a period of time exceeding one year. The

main characteristics of a capital expenditure are that the expenditure is

incurred at one point of time whereas benefits of the expenditure are

realized at different points of time in future. Capital expenditure involves

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

decisions are also called Long-Term Investment Decision.Capital

budgeting involves the planning and control of capital expenditure.

DEFINITION

R.M.LYNCH has defined capital Budgeting as “Capital Budgeting

consists of employment of available capital for the purpose of

maximizing the long term profitability of the firm”.

Capital Budgeting is a many-sided activity. It includes searching

for new and more profitable investment proposals, investigating,

engineering and marketing considerations to predict the consequences of

accepting the investment and making economic analysis to determine the

profit potential of each investment proposal.

Its basic features can be summarized as follows;

1. It has the potentiality of making large anticipated profits.

2. It involves a high degree of risk.

3. It involves a relatively long-time period between the initial outlay

and the anticipated return.

Capital Budgeting consists of planning and the development of

available capital for the purpose of maximizing the long-term profitability

of the firm.

1.2.2 NEED AND IMPORTANCE OF CAPITAL BUDGETING

Capital Budgeting means planning for capital assets. Capital

Budgeting decisions are vital to any organization as they include the

decision to;

1. Whether or not funds should be invested in long term projects

such as setting of an industry, purchase of plant and machinery

etc.,

2. Analyze the proposal for expansion or creating additional

capacity.

3. To decide the replacement of permanent assets such as building

and equipments.

4. To make financial analysis of various proposal regarding capital

investments so as to choose the best out of many alternative

proposals.

The importance of capital Budgeting can be well understood from

the fact that an unsound investment decision may prove to be fatal to the

very existence of the concern. The need, significance or importance of

capital budgeting arises mainly due to the following.

1. Large Investments

Capital budgeting decisions, generally involves large investment of

funds. But the funds available with the firm are always limited and the

demand for funds exceeds the resources. Hence it is very important for a

firm to plan and control its capital expenditure.

2. Long-term commitment of Funds

Capital expenditure involves not only large amounts of funds but

also funds for long-term or more or less on permanent basis. The long-

term commitment of funds increases the financial risk involved in the

investment decision.

3. Irreversible Nature

The capital expenditure decisions are of irreversible nature. Once

the decisions for acquiring a permanent asset is taken, it became very

difficult to dispose of these assets without incurring heavy losses.

4. Long-term Effect of profitability

The investment decisions taken today not only affects present

profit but also the future profitability of the business. A profitable project

selection is fatal to the business.

5. Difficulties of investment decisions

The long term investment decisions are more difficult to take

because,

1. Decision extends to a series of years beyond the current

accounting period.

2. Uncertainties of future and

3. Higher degree of risk.

6. National Importance

An investment decision through taken by individual concerns is of

national importance because it determines employment, economic

activities and economic growth.

7. Effect on cost structure

By taking a capital expenditure decision, a firm commits itself to a

sizeable amount of fixed cost in terms of interest, supervisors salary,

insurance, building rent etc. If the investment turns out to be unsuccessful

in future or produces less than anticipated profits, the firm will have to

bear the burden of fixed cost.

8. Impact on firms’ competitive strength

The capital budgeting decisions affect the capacity and strength of

a firm to face competition. It is so because the capital investment

decisions affect the future profits and costs of the firm. This will

ultimately affect the firms competitive strength.

9. Cost control

In capital budgeting there is a regular comparison of budgeted and

actual expenditures. Therefore cost control is facilitated through capital

budgeting.

10. Wealth Maximization

The basic objective of financial management is to maximize the

wealth of the shareholders. Capital budgeting helps to achieve this basic

objective. Capital budgeting avoids over investments and under

investments in fixed assets. In this way capital budgeting protects the

interest of the shareholders and of the enterprise.

1.2.3 STEPS IN CAPITAL BUDGETING

Capital budgeting is a complex process. it involves decision

relating to the investment of current funds for the benefit to be achieved

in future which is always uncertain. Capital budgeting is a six step

process. The following steps are involved in capital budgeting;

1. Project generation

The capital budgeting process begins with generation or

identification of investment proposals. This involves a continuous

search for investment opportunities which are compatible with firm’s

objectives.

2. Project screening

Each proposal is then subject to a preliminary screening process in

order to assess whether it is technically feasible, resources required are

available, and expected returns are adequate to compensate for the risks

involved.

3. Project evaluation

After screening of project ideas or investment proposals the next

step is to evaluate the profitability of each proposal. This involves two

steps;

a.Estimation of cost and benefit in terms of cash flows

b. Selecting an appropriate criterion to judge the desirability of the

project.

4. Project selection

After evaluation the next step is the selection and the approval of

the best proposal. In actual practice all capital budgeting decision are

made at multiple levels and are finally approved by top management.

5. Project execution and implementation

After the selection of project funds are allocated for them and a

capital budget is prepared. It is the duties of the top management or

capital budgeting committee to ensure that funds are spend in

accordance with allocation made in the capital budget.

6. Performance review

After the implementation of the project, its progress must be

reviewed at periodical intervals. The follow-up or review is made by

comparing actual performance with the budget estimates.

1.2.4 OPERATING BUDGET AND CAPITAL BUDGET

Most of the large firms prepare two different budgets each year.

1. OPERATING BUDGET

Operating budget shows planned operations for the forthcoming

period and includes sales, production, production cost, and selling and

distribution overhead budgets. Capital budgets deals exclusively with

major investment proposals.

2. CAPITAL EXPENDITURE BUDGET

Capital Expenditure is a type of functional budget. It is the firm’s

formal plan for the expenditure of money for purchase of fixed assets.

The budget is prepared after taking in to account the available production

capacities, probable reallocation of existing resources and possible

improvements in production techniques. If required, separate budgets can

be prepared for each item of capital assets such as a building budget, a

plant and machinery budget etc.

1.2.5 OBJECTIVES OF CAPITAL EXPENDITURE BUDGET

The objectives of Capital Expenditure Budget are as follows.

1. It determines the capital projects on which work can be started

during the budget period after taking in to account their urgency

and the expected rate of return on each project.

2. It estimates the expenditure that would have to be incurred on

capital projects approved by the management together with the

source or sources from which the required funds would be

obtained.

3. It restricts the capital expenditure on projects within authorized

limits.

CONTROL OVER EXPENDITURE THROUGH CAPITAL

EXPENDITURE BUDGET

The capital expenditure budget primarily ensures that only such

projects are taken in hand which are either expected to increase or

maintain the rate of return on capital employed. Each proposed project is

appraised and only essential project or projects likely to increase the

profitability of the organization are included in the budget. In order to

control expenditure on each project, the following procedure is adopted.

1. A project sheet is maintained for each project.

2. In order to ensure that the expenditure on different project is properly

analyzed.

3. The expenditure incurred on the project is regularly entered on the

project sheets from various sources such as invoices of assets

purchased, bill for delivery charges etc.,

4. The management is periodically informed about expenditure incurred

in respect of each project under appropriate heads.

5. In case project cost is expected to increase; a supplementary sanction

for the same is obtained.

6. In financial books the total expenditure incurred on all projects is

separately recorded.

1.2.6 TACTICAL AND STRATEGIC INVESTMENT DECISION

Investment decision can be classified as,

i. Tactical Decision

A Tactical Decision generally involves a relatively small amount of

funds and does not constitute a major departure from the past practices of

the company.

ii. Strategic Decision

A Strategic Investment Decision involves a large sum of money

and may also result in a major departure from the past practices of the

company. Acceptance of a Strategic Investment Decision involves a

significant change in the company’s expected profits associated with a

high degree of risk.

1.2.7 RATIONALE OF CAPITAL EXPENDITURE

Efficiency is the rationale underlying all capital decisions. A firm

has to continuously invest in new plant or machinery for expansion of its

operations or replace worn-out machinery for maintaining and improving

its efficiency. The overall objective is to maximize the firm’s profits and

thus optimizing the return on investment. This objective can be achieved

either by increased revenues or by cost reduction. Thus capital

expenditure can be of two types;

1. Expenditure Increasing Revenue

2. Expenditure Reducing Cost

1.2.8 KINDS OF CAPITAL INVESTMENT PROPOSALS

A firm may have several investment proposals for its

consideration. It may adopt one of them, some of them or all of them

depending upon whether they are independent, contingent or dependent

or mutually exclusive.

1. INDEPENDENT PROPOSALS

These are proposals which do not compete with one another in a

way that acceptance of one precludes the possibility of acceptance of

another. In case of such proposals the firm may straight away “accept or

reject” a proposals on the basis of minimum return on investment

required. All these proposals which give a higher return than a certain

desired rate of return are accepted and the rest are rejected.

2. CONTINGENT OR DEPENDENT PROPOSALS

These are proposals whose acceptance depends on the acceptance

of one or more other proposals. When a contingent investment proposal is

made, it should also contain the proposal on which it is dependent in

order to have a better perspective of the situation.

3. MUTUALLY EXCLUSIVE PROPOSALS

These proposals which compete with each other in a way that the

acceptance of one precludes the acceptance of other or others. Two or

more mutually exclusive proposals cannot both or all be accepted. Some

techniques have to be used for selecting the better or the best one. Once

this is done, other alternative automatically gets eliminated.

4. REPLACEMENT PROPOSALS

These aim at improving operating efficiency and reducing costs.

These are called cost reduction decisions.

5. EXPANSION PROPOSALS

This refers to adding capacity to existing product line.

6. DIVERSIFICATION PROPOSALS

Diversification means operating in several markets rather than a

single market. It may also involve adding new products to the existing

products. Diversification decisions require evaluation of proposals to

diversify in to new product lines, new markets etc., for reducing the risk

of failure.

7. CAPITAL RATIONING PROPOSALS

Capital rationing means distribution of capital in favour of some

acceptable proposals. A firm cannot afford to undertake all profitable

proposals because it has limited funds to invest. In such a case, these

various investment proposals compete for limited funds and the firm has

to ration them. Thus the situation where the firm is not able to finance all

the profitable investment opportunities due to limited resources is known

as capital rationing.

1.2.9 FACTORS AFFECTING CAPITAL INVESTMENT

DECISIONS

The following are the four important factors which are generally

taken in to account while making a capital investment decision.

1. The Amount of Investment

In case a firm has unlimited funds for investment it can accept all

capital investment proposals which give a rate of return higher than the

minimum acceptable or cut-off rate.

2. Minimum Rate of Return on Investment

The management expects a minimum rate of return on the capital

investment. The minimum rate of return is usually decided on the basis of

the cost of capital.

3. Return Expected from the Investment

Capital investment decisions are made in anticipation of increased

return in the future. It is therefore necessary to estimate the future return

or benefits accruing from the investment proposals while evaluating the

capital investment proposals.

4. Ranking of the Investment Proposals

When a number of projects appear to be acceptable on the basis of

their profitability the project will be ranked in the order of their

profitability in order to determine the most profitable project.

1.2.10 METHODS OF CAPITAL BUDGETING OR EVALUATION

OF INVESTMENT PROPOSALS

A business firm has a number of proposals regarding various

projects in which it can invest funds. But the funds available with the firm

are always limited and it is not possible to invest funds in all the

proposals at a time. The most widely accepted techniques used in

estimating the cost returns of investment projects can be grouped under

two categories;

1. TRADITIONAL METHODS

I. Payback Period Method

II. Average rate of Return Method

2. DISCOUNTED CASH FLOW METHODS

I. Net Present Value Method

II. Internal rate of Return Method

III. Profitability Index Method

I. PAY BACK PERIOD METHOD

The payback period method is the simplest method of evaluating

investment proposals. Payback period represents the number of years

required to recover the original investment. The payback period is also

called Pay Out or Pay off Period. This period is calculated by dividing the

cost of the project by the annual earnings after tax but before

depreciation. Under this method the project is ranked on the basis of the

length of the payback period. A project with the shortest payback period

will be given the highest rank.

METHODS OF COMPUTATION OF PAYBACK PERIOD

There are two ways of calculating the payback period.

a. When annual cash inflow is constant

The formula is find out the payback period if the project generates

constant annual cash inflow is;

Original cost of the project

Payback period = Annual cash inflow

Annual cash inflow is the annual earning (profit depreciation and

after taxes) before

b. When annual cash inflow is not constant

If the annual cash inflows are unequal the payback period can be

found out by adding up the cash inflows until the total is equal to the

initial cash outlay of the project.

ADVANTAGES OF PAYBACK PERIOD

1. Simple to understand and easy to calculate.

2. It reduces the chances of loss through obsolescence.

3. A firm which has shortage of funds find this method very useful.

4. This method costs less as it requires only very little effort for its

Computation.

DISADVANTAGES

1. This method does not take in to consideration the cash inflows beyond

the payback period.

2. It does not take in to consideration the time value of money. It

considers the same amount received in the second year and third year as

equal.

3. It gives over emphasis for liquidity.

ACCEPTANCE RULE

The following are the Payback [P.B.Rules]

Accept P.B<cut-off rate

Reject P.B>cut-off rate

May Accept P.B<cut-off rate

Cut-off rate

Cut-off rate is the rate below which a project would not be

accepted. If ten percentages the desired rate of return, the cut-off rate is

10%.The cut-off point may also be in terms of period. If the management

desires that the investment in the project should be recouped in three

years, the period of three years would be taken as the cut-off period. A

project incapable of generating necessary cash to pay for the initial

investment in the project with in three years will not be accepted.

II. AVERAGE RATE OF RETURN (ARR) METHOD

This method otherwise called the Rate of Return Method, takes in

to account the earnings expected from the investment over the entire life

time of the asset. The various projects are ranked in order of the rate of

returns. The project with the higher rate of return is accepted. Average

Rate of Return is found out by dividing the average income after

depreciation and taxes, i.e. the accounting profit, by the Average

Investment.

Average Annual Earnings ARR = x 100 Average Investment

Where;

Average Annual Earnings is the total of anticipated annual earnings

after depreciation and tax (accounting profit) divided by the number of

years.

Average Investment means

i. If there is no salvage (Scrap value)

Total Investment

2

ii. If there is scrap value

Total Investment-Scrap Value

+ Scrap Value

2

iii. If there is additional working capital

Total Investment-Scrap Value

+ Scrap +Additional Working Capital

2

ADVANTAGES OF AVERAGE RATE OF RETURN (ARR)

METHOD

1. It is easy to calculate and simple to understand.

2. Emphasis is placed on the profitability of the project and not on

liquidity.

3. The earnings over the entire life of the project is considered for

ascertaining the Average Rate of Return.

4. This method makes use of the accounting profit.

DISADVANTAGES

1. Like the payback period method this method also ignores the time

value of money. The averaging technique gives equal weight to profits

occurring at different periods.

2. This averaging technique ignores the fluctuations in profits of various

years.

3. It makes use of the accounting profits, not cash flows, in evaluating the

project.

1. DISCOUNTED CASH FLOW METHODS

The payback period method and the Average rate of Return

Method do not take in to consideration the time value of money. They

give equal weight to the present and the future flow of incomes. The

discounted cash flow methods are based on the concept that a rupee

earned today is more worth than a rupee earned tomorrow. These

methods take in to consideration the profitability and also the time value

of money.

I. NET PRESENT VALUE (NPV) METHOD

The Net Present Value Method (NPV) gives consideration to the

time value of money. It views that the cash flows of different years differ

in value and they become comparable only when the present equivalent

values of these cash flows of different periods are ascertained. For this

the net cash inflows of various periods are discounted using the required

rate of return, which is a predetermined rate .If the present value of

expected cash inflows exceeds the initial cost of the project, the project is

accepted.

NPV = Present value of cash inflows-Present value of initial investment

STEPS IN NET PRESENT VALUE (NPV) METHOD

1. Determine an appropriate rate of interest to discount cash flows.

2. Compute the present value of total investment outlay (i.e., cash

outflow) at the determined discounting rate.

3. Compute the present value of total cash inflows (profit before

depreciation and after tax) at the above determined discount rate.

4. Subtract the present value of cash outflow (cost of investment) from

the present value of cash inflows to arrive at the net present value.

5.If the net present value is negative i.e., the present value cash outflow is

more than the present value of cash inflow the project proposals will be

rejected .If net present value is zero or positive the proposal can be

accepted.

6. If the projects are ranked the project with the maximum positive net

present value should be chosen.

ADVANTAGES OF NET PRESENT VALUE METHOD

1. It considers the time value of money.

2. It considers the earnings over the entire life of the project.

3. Helpful in comparing two projects requiring same amount of cash

outflows.

DISADVANTAGES

1. Not helpful in comparing two projects with different cash outflows.

2. This method may be misleading is in comparing the projects of

unequal lives.

II. INTERNAL RATE OF RETURN (IRR) METHOD

The Internal Rate of Return for an investment proposal is that

discount rate which equates the present value of cash inflows with the

present value of cash outflows of the investment. The Internal Rate of

Return is compared with a required rate of return. If the Internal Rate of

Return of the investment proposal is more than the required rate of return

the project is rejected. If more than one project is proposed, the one

which gives the highest internal rate must be accepted.

It can be calculated by the following formula

P1-QIRR = L+ x D

P1-P2

Where,

L = Lower rate of discount

P1 = Present value of cash inflows at lower rate of discount

P2 = Present value at higher discount rate

Q = Initial Investment

D = Difference in rate

ADVANTAGES OF INTERNAL RATE OF RETURN

1. It considers the time value of money.

2. The earnings over the entire life of project is considered.

3. Effective for comparing projects of different life periods and different

timings of cash inflows.

DISADVANTAGES

1. Difficult to calculate.

2. This method presumes that the earnings are reinvested at the rate

earned by the investment which is not always true.

Accept or Reject Rule

Internal Rate of Return is the maximum rate of interest which an

organization can afford to pay on the capital invested in a project. A

project would qualify to be accepted if Internal Rate of Return exceeds

the cut-off rate. While evaluating two or more projects, a project giving a

higher Internal Rate of Return would be preferred. This is because higher

the rate of return, the more profitable is the investment.

III. PROFITABILITY INDEX METHOD

Present Value of Cash Inflows

Profitability Index =

Present Value of Cash Outflows

This is also called Benefit-Cost ratio. This is slight modification of

the Net Present Value Method. The present value of cash inflows and

cash outflows are calculated as under the NPV method. The Profitability

Index is the ratio of the present value of future cash inflow to the present

value of the cash outflow, i.e., initial cost of the project.

If the Profitability index is equal to or more than one proposal the

proposal will be accepted. If there are more than one investment

proposals, the one with the highest profitability index will be preferred.

This method is also known as Benefit-Cost ratio because the

numerator measures benefits and the denominator measures costs. ”It is

the ratio of the present value of cash inflow at the required rate of return

to the initial cash outflow of the investment.

1.3 OBJECTIVES OF THE STUDY

The study consisted of the following objectives.

1. To review the projected cash flow statement.

2. To estimate the future project cost.

3. To review the projected profitability.

4. To review the project using the Evaluation Techniques.

5. To set a basis for future capital budgeting.

1.4 IMPORTANCE OF THE STUDY

Capital budgeting is concerned with heavy expenditure decisions.

The benefits or returns from such expenditure are expected to be derived

over many years in future. It requires careful planning and exercise. A

mistake in capital budgeting can prove fatal to the enterprise. The big size

of expenditure involved underlines the importance of capital budgeting.

Capital expenditure decisions are vital to any organization as they include

the decisions to;

a. Analyze the proposal for expansion or creating additional

capacity.

b. To make financial analysis of various proposals regarding

capital investments so as to choose the best out of many

alternative proposals.

c. To decide about the replacement of capital asset.

d. It helps to facilitate the cost control.

1.5 SCOPE OF THE STUDY

This study highlights the review of capital budgeting and capital

expenditure management of the company. Capital expenditure decisions

require careful planning and control. Such long term planning and control

of capital expenditure is called Capital Budgeting. The study also helps to

understand how the company estimates the future project cost. The study

also helps to understand the analysis of the alternative proposals and

deciding whether or not to commit funds to a particular investment

proposal whose benefits are to be realized over a period of time longer

than one year. The capital budgeting is based on some tools namely

Payback period, Average Rate of Return, Net Present Value, Profitability

Index, and Internal Rate of Return.

1.6 LIMITATIONS OF THE STUDY

The study has the following limitations.

1. The analysis was done with the secondary data derived only from

published annual reports.

2. This study is confined only to Parisons Roller and Flour Mills Pvt.

Ltd.

3. The estimates of profitability of investment proposals are not

accurate.

4. Researcher finds it is difficult if the company is not revealing the

facts about the future course of action.

5. It is difficult to calculate the cost of capital and to estimate the rate

of return.

1.7 REVIEW OF LITERATURE

The concept of Capital Budgeting being a very sensitive area of

finance has outreached the attention of many researchers .A number of

studies has been conducted on the subject. However briefing such studies

will highlight the importance of the present study. It should safeguard to

avoid the wrong choice of the project and investment to made. It is

necessary for the management to give proper attention to capital

budgeting.

The reason for the popularity of Payback period in the order of

significance were stated to be its, simplicity to use and understand, its

emphasis on the early recovery of investment and focus on risk. It was

also found that one third of companies always insisted on the

computations of Payback periods for all projects. For about two-third

companies standard Payback period ranged between three and five years.

The reason for the secondary role of Discounted Cash Flow

techniques in India included difficulty in understanding and using these

techniques, due to lack of qualified professional and unwillingness of top

management to use Discounted Cash Flow techniques.

One large manufacturing and marketing organization mentioned

that conditions of its business were such that Discounted Cash Flow

techniques were not needed. Yet another company stated that replacement

projects were very frequent in the company and it was not considered

necessary to use Discounted Cash Flow technique for evaluating such

projects.

The present investment appraisal in practice is raising certain

questions in the context.

1. How much importance is assigned to economic analysis of capital

expenditure in practice?

2. What methods are used for analyzing capital expenditure in practice

and what is the reason for underlying these methods?

The answers of the above questions are based on a survey of

twenty firms varying on several dimensions like industry category, size,

financial performance and capital intensity. From these firms, executives,

responsible for capital investment evaluation and capital budget

preparation were interviewed.

CHAPTER 2

PROFILE OF THE COMPANY

HISTORY OF PARISONS GROUP

The PARISONS GROUP has its corporate office at 6/1183,

Cherooty road Calicut. The Group name, which became a household

name already, is derived from the name of late Kunchipary, the illustrious

scion from a well-known business family in North Kerala. The group was

founded by his industrious sons namely. Mr. N.K. Mohammed Ali, Mr.

N.K. Asharaf, Mr. N.K .Khalid and Mr. N.K .Haris.

Beginning in 1982, it has grown in to a multi-crore Groups with the

distinction as the largest producers and marketers of wheat products and

edible oils in South India. They have diversified their activities in to

Information Technology, Infrastructure Development and Leasing, and

lately plantations.

The directors are well experienced in processing and trading in

food products especially in the field of edible oils and wheat products.

They have a proven track record in planning, implementing and running

new projects successfully. The Group also has a reputation of taking over

sick units and reviving them with in a short span of time. They have a

strong team of professional and techno crafts to support them in ventures.

The products of Parisons are well accepted in the market in various

brand names owing to the quality levels. The Group at present has five

roller mills for wheat products with a total capacity of about 600 tones

per day and their installed capacity for edible oil refining is 480 tones per

day, which is utilized well over 100%.They also have a large trading

houses in big bazaar, Calicut. Apart from the corporate office in Calicut

the Group also has an office at Cochin to look after its import activities.

The plants of the Group have adopted state of technology. As a part

of its infrastructure related projects, the group has completed the setting

up of 14000 MT tank farms for storage of liquid cargo at the Beypore

Port.

The Group is a major importer of vegetable oils. Enthused by the

success of their projects at Beypore port, the Groups are on the process of

setting up of 50000 K L tank farm at Willington Islands at the site

allotted by Cochin Port Trust. By setting up of their own facilities for

storage at Cochin port, the Group also intends to achieve economy in

their existing operations and also to earn additional revenue by leasing

out the facilities to others apart from contributing to the growth of Cochin

Port.

PARISONS ROLLER AND FLOUR MILLS (P) LTD

Having established a steady foothold in trading business, they

decided to embark on a strategic business expansion mission and set up

the Parisons Roller flour mills(P) Limited, at West hill, Calicut in

October 1992.It began operation with an installed capacity of 80 M T per

day. In 1995 this capacity has expanded to 100 M T per day and again in

to 120 in the year 1997.

A modern state of art facility located at West hill, Calicut

producing 3000 T P A of high quality wheat products, this Rs.350 million

company markets the famous ultra premium ‘Parisons Liberty’ brand of

wheat products viz, Maida, Sooji and Atta. The company apart from

feeding bulk market also markets the products in consumer packs packed

in high tech automated packing facility. The turnover of the company for

the year ended 31-03-2003 is Rs.8795.91 Lakhs. This plant has an

extensive lab to ensure the quality of the products.

Apart from the milling unit the company has also successfully

acquired a silo storage system and has completed the setting up of 14000

M T tank farms for storage of liquid cargo at the Beypore port. The

company has also put in to operation 1200 Kiloliter capacity oil tanker

“KUNCHIPARY” at the Beypore Port which has helped the Group to

source a major portion of its imports through the Beypore Port.

PRODUCTS OF PARISONS COMPANY

A firm markets products to maximize its profits through consumer

satisfaction. The products must be capable of satisfying the consumer’s

wants. So Parisons treats the product, as a bundle of utilities. The

Products of the Parisons would satisfy the needs and wants of the

consumers.

The various products provided by Parisons Company are,

Atta

Maida

Sooji

Bran

Vanaspathy

Bakery shortening

Parisons tea

Others

DIAGRAM SHOWING THE PROPORTION OF EACH PRODUCT

IN THE TOTAL PRODUCTS OFFERED

CHART 1

.

23%

5%

10%

13%14%

10%

5%

10%

10%

MAIDA ATTA SOOJI

BRAN VANASPATHY PALMOLIEN

BAKERY SHORTENING PARISONS TEA OTHERS

MARKETING ASPECTS OF PARISONS GROUP

PRICING POLICY

Price is the most important device that a firm can use to expand its

market. If the price is set too high a seller may be thrown out of the

market .If it is too low, his income may not cover cost.

The company determines the price of its products by taking

following matters in to consideration.

Price of the competitors products.

Price in the international market.

Cost of production and distribution

Price of different items in the product line.

Market trends and the budget of the firm.

TRANSPORTATION

The raw materials that are collected or imported from Malaysia and

Indonesia are transported through ships to Cochin and Beypore Port.

There has no problem in the transportation of raw material. Raw material

is imported in bulk quantities.

DISTRIBUTION SYSTEM OF THE COMPANY

Channels of distribution mean the path or network through which

the products are made available to the consumers. The company has good

distribution agencies; the company is also engaged in direct distribution.

The company’s distribution objective is to make available the right

goods to the right place at the least cost.

Retailers

Retailers are the last link in the chain of distribution. The retailers

of wheat products purchase this company’s products. The company offers

attractive discounts and other concessional benefits to increase its market.

Agents

The company’s one third of business done mainly through their

own efficient agents. Agent s are spread out in the different parts of

Kerala and also in the states of Karnataka and Tamilnadu.70% of the

production of the company are being sold in Kerala and of the balance

25% are being sold in Tamilnadu and 5% are in Karnataka. In Tamilnadu

and Karnataka dealings are done through agents. In Kerala most of the

products are sold as consumer packed products mostly as direct

marketing.

Wholesalers

Wholesaler is a trader who purchase goods in bulk quantity from

manufacturers and sell them to the retailers. They purchase the goods

from manufactures directly but generally do not sell the goods to

consumers directly.

EDIBLE OIL MAKING PROCESS

The refining of crude vegetable oils can be divided in to two

stages.

Degumming and Neutralization

Water Washing

Bleaching

Deodorizing

1. Degumming and Neutralization

It is the process for the removal of the gum percent in the Crude

Fatty Oil. Neutralization is intended mainly for de-acidifying crude fatty

oils or degummed oils. The process is carried out for the chemical

reaction of the fatty acid with sodium hydroxide at a temperature of

above 60 degree Celsius. It is carried out in centrifugal separators for

maximum recovery of neutral oils. The output of the reaction is alkali

salts of fatty acids and glycerin. The caustic oil mixture is centrifuged to

remove neutral oils from water-soluble soaps Proteins, color bodies and

lipids.

2. Water Washing

The neutral oils are further processed by water washing to

remove the soaps content in the oil.

3. Bleaching

The materials used for bleaching are fullers’ earth and activated

carbon. This is to remove the color segments in the neutralized product.

In order to protect the refined oils against oxidization, bleaching is

generally conducted under vacuum.

4. Deodorizing

The process is steam distillation. This is to remove relatively

odoriferous and flavored substances from the relatively non volatile oils.

The refined oil is then packed in to containers of different sizes according

to market requirements.

CHART 2

ORGANISATIONAL STRUCTURE OF PARISONS

GROUP

DIRECTOR(Technical)

MANAGING DIRECTOR

DIRECTOR(Plant)

DIRECTOR(Marketing)

GENERAL MANAGER

MARKETINGMANAGER

PRODUCTIONMANAGER

FINANCEMANAGER

PLANTMANAGER

MARKETINGEXECUTIVES

PRODUCTIONSTAFF

PLANTSUPERVISOR

WORKERSASSISTANT

FINANCEMANAGER

WORKERS

SECRETARY ACCOUNTINGASSISTANT

CASHIER

CHAPTER 3

RESEARCH METHODOLOGY

3.1 RESEARCH

Research in common parlance refers to a search for knowledge. It is

an organized enquiry carried out to provide information for solving a

particular problem.

3.2 RESEARCH DESIGN

A research design is programme which guides the investigator in

the process of collecting, analyzing and interpreting the observation. It is

needed to facilitate the smooth sailing of the various research operations

thereby making research as efficient as possible.

This study follows descriptive and analytical research design where

in the researcher has to use facts and information already available and

analyze there to make a critical evaluation of the material.

DESCRIPTIVE RESEARCH

These Studies often involving the description of extend of the

association between two or more variable, descriptive information also

often provides a sound basis for making predictions for the solutions of

given problems. The design used in descriptive can employ one or more

of them following sources information

i. Secondary Data

ii. Surveys

Here, the data collected by for the analysis are secondary data,

which will be more relevant in the analysis of financial policies and

performance of the company

ACCOUNTING RESEARCH

It include a study of the effects on financial statement and financial

reporting which result from different choices of accounting methods, it

may lead to development of new methods of presenting financial

information relevant to the research purposes with economy in procedure.

PERIOD OF STUDY

Last five years financial performance is considered for the study to

estimate the future capital budgeting requirements.

NATURE OF ANALYSIS

The nature of analysis is based on the “Evaluation Techniques”

3.3 ANALYTICAL TOOL APPLIED

A. DISCOUNTED CASH FLOW METHOD

a. Net Present Value.

b. Internal Rate of Return.

c. Profitability Index.

B. NON DISCOUNTED CASH FLOW METHOD

a. Payback Period.

b. Average Rate of Return.

DATA COLLECTION

The primary data was collected from the various departments like

Finance, Marketing, stores, and Production and department.

The secondary data was collected from the annual report of the

company for the study.

CHAPTER 4

ANALYSIS AND INTERPRETATION OF DATA

4.1 ALLOCATION OF OVERHEADS

1. Electricity and depreciation are taken as variable overhead by Parisons

even though first one is semi-fixed and the other one is fixed overhead.

2. Traveling expenses, Motor Vehicle expenses, Printing and Stationery,

Interest and Finance charges, General expenses, Distribution charges,

Advertisement are taken as fixed overheads by Parisons even though

these expenses may vary according to time to time.

3. Telephone charges are taken as fixed overhead by Parisons even

though these are semi-fixed overhead.

TABLE 1

ALLOCATION OF OVERHEADS (2003)

ParticularsAmount(In

Rupees)Amount(In Rupees)

1.Labour Overhead Direct Labour 15,78,5512.Other Direct Expenses Production Expenses 4,30,463 Postage 3,43,814 Repairs and Maintenance 24,80,772 Electricity 25,65,512 Storage Expenses 13,451 Depreciation 36,81,196 95,15,2083.Fixed Overhead Salary 9,23,364 Traveling Expenses 1,60,126 Motor vehicle expenses 4,71,399 Printing and Stationery 2,41,010 Interest and Financial Charges 74,88,493 Insurance 15,21,971 Telephone charges 3,43,813

Rent, rates and Taxes 2,76,731 Distribution Charges 1,07,29,885 Advertisement Charges 19,44,071 Audit Fee 56,575 General Expenses 42,670 2,42,00,108

Total 3,53,54,709

4.2 STATEMENT OF COST

Cost sheet is a document which provides for the assembly of

the estimated detailed cost in respect of a cost centre or a cost unit. It is a

detailed statement of the elements of cost arranged in a logical order

under different heads. It is only a memorandum statement and does not

form part of the double entry system. Additional columns can be provided

to indicate cost per unit at different stages of production or to enable

comparison to be made of the current costs with that of historical costs.

ADVANTAGES

1. It indicates the break-up of the total cost by elements, i.e. material,

labour, overhead etc.,

2. It discloses the total cost and cost per unit of the unit produced.

3. It facilitates comparison.

4. It helps the management in fixing selling prices.

5. It acts as a guide to the management and helps in formulating

production policy.

6. It enables to keep control over cost of production.

7. It helps the businessman to submit quotations with reasonable

degree of accuracy against tenders for the supply of rules.

8. It is a simple and useful medium of communication of costs to

various levels of management.

TABLE 2

FIXED COST (2003-2007)

Particulars 2003 2004 2005 2006 2007

Freehold Land 1,11,49,002 1,11,49,002 1,11,49,002 1,11,49,002 1,11,49,002

Building-Office 35,58969 35,58,969 35,58,969 35,58,969 35,58,969

Building-Factory 61,13,571 61,13,571 61,13,571 61,13,571 61,13,571

Barge 1,64,32,723 1,64,32,723 1,64,32,723 1,64,32,723 1,64,32,723

Miscellaneous Fixed Asset 10,39,528 10,59424 10,63434 10,80955 11,08,635

Plant and Machinery 3,04,47,438 3,04,47,438 3,36,92,009 3,42,63,639 3,49,35,424

Computer 6,00,776 6,03,178 7,23,078 10,00,273 11,68,819

Storage Tank 1,10,76,911 1,20,84,142 2,93,95,167 3,03,29,340 3,03,29,340

Utilities 24,65,277 28,65,433 31,78,910 32,43,927 33,43,074

Vehicles 10,85,629 1,18,09,703 1,18,09,703 1,35,86,479 1,47,95,879

Furniture 3,29,733 3,69,098 4,10,703 4,49,926 4,71,476

Total 8,42,99,557 9,64,92,681 11,75,27,299 12,12,08,804 12,34,06,912

FIXED COST (2003-2007)

0

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2004

2005

2006

2007

CHART 3

TABLE 3

DEPRECIATION WORKINGS

2003 2004 2005 2006 2007

Machinery opening Balance

3,04,47,438 3,04,47,438 3,36,92,010 3,43,63,795 3,57,82,639

Additional during the

year- 32,44,572 6,71,785 14,18,844 -

Total 3,04,47,438 3,36,92,010 3,43,63,795 3,57,82,639 3,57,82,639

Depreciation 56,35,936 55,37,060 54,02,635 61,16,238 91,26,112

Clearing Balance

2,48,11,502 2,81,54,950 2,89,61,160 2,96,66,401 2,66,56,527

25000000

25500000

26000000

26500000

27000000

27500000

28000000

28500000

29000000

29500000

30000000

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2003 2004 2005 2006 2007

Years

DEPRECIATION WORKINGS

CHART 4

TABLE 4

INCOME AND EXPENDITURE (2003-2007)

Income:SalesInterest

Lorry ReceiptsMiscellaneous incomeCreditors written backStorage tank rentProfit on sale of vehicleBarge incomeDiscountForeign exchange fluctuationStock differential

Total

Expenditure:Raw materials consumedGoods purchasedWagesPower, fuel and waterConsumablesRepairs&maintenance(P&M)Laboratory expensesPest and RodentStorage expensesSalaries and AllowancesAdvertisement chargesPrinting and StationeryDepreciationPort expensesBarge expensesPostage and Telephone chargesTraveling expensesDirectorsOthersESIPFStaff welfareMedical expensesMotor vehicle expensesInsuranceDonation and CharitiesTax and License fee

2003

87,95,91,15724,36,12030,80,3887,52,406

2,224 -6,95,338

99,64330,860

3,17,569(-)15,11,227

88,54,94,478

51,92,51,73029,52,87,190

15,78,55176,96,538

86,58724,80,7722,76,731

21,40013,451

9,23,36419,44,0712,41,010

36,81,196 -

-

6,87,627

1,20,62439,50250,12576,269

4,96,36210,260

4,71,39915,21,971

26,2001,76,518

2004

81,37,95,53913,99,61420,12,46411,58,5783,99,273

6,0625,75,406

- -

29,80,535(-)2,35,473

82,56,91,998

29,06,15,71647,17,36,754

18,74,11080,91,549

67,06818,46,0213,67,627

18,20040,786

10,33,91814,37,2242,07,268

55,37,060--

6,09,300

46,8641,78,751

36,99887,261

3,79,6577,213

41,35,3681,53,503

20,2001,53,503

2005

68,59,11,77011,76,6519,27,8731,14,067 -

55,48,700 -1,23,469

37,296 -

26,62,876

69,65,02,702

25,43,57,83339,09,54,747

17,48,26182,06,2022,83,678

18,02,7626,37,679

19,45049,363

11,75,67711,45,6701,98,746

54,02,63524,828

1,72,965

6,15,323

98,57035,027

1,16,96095,381

4,62,5676,844

40,36,3091,80,210

6,5501,80,210

2006

50,45,63,87215,42,85015,37,3426,37,6263,72,199

1,71,51,09961,324

3,31,16142,326

1,39,877(-)12,89,454

52,50,90,222

23,50,49,02322,73,34,273

17,80,56690,55,874

55,09811,90,0136,48,664

24,18045,729

8,39,6479,34,6561,98,920

61,16,23828,534

7,47,568

4,92,528

1,40,86133,644

2,00,5231,57,5073,35,299

5,32647,89,132

94,77211,650

3,75,058

2007

168,57,45,56142,13,3977,35,2483,98,494

-210,00,000

60,1394,98,505

39,28857,17,13538,49,591

172,22,57,358

27,26,64,628136,15,13,097

20,95,31484,11,1631,73,1679,74,3798,18,171

22,6181,05,6893,02,599

18,78,5231,73,905

91,26,11225,443

9,05,793

3,37,726

1,94,29747,60367,125

2,19,4434,67,366

5,43847,24,7761,68,412

38,2501,23,808

Selling &Distribution expensesInterest and financial chargeAudit fees

Total

Profit Before depreciation and TaxDepreciationProfit After Depreciation Before TaxTaxProfit After Depreciation and TaxAdd: Depreciation

Profit After Tax

1,32,38,589

74,88,49356,575

85,79,43,105

2,75,51,373

36,81,196

2,38,70,17747,74,035

1,90,96,14236,81,196

2,27,77,338

1,29,41,369

67,70,45856,844

80,84,50,590

1,72,41,408

55,37,060

1,17,04,34823,40,870

93,63,47855,37,060

1,49,00,538

93,97,076

89,12,24658,830

69,03,82,593

61,20,109

54,02,635

7,17,4741,43,495

5,73,97954,02,635

59,76,614

1,23,74,101

1,15,21,20772,000

51,46,52,591

1,04,37,631

61,16,238

43,21,3938,64,279

34,57,11461,16,238

95,73,352

2,17,47,367

1,38,89,19896,173

170,13,17,583

2,09,39,775

91,26,112

1,18,13,66323,62,733

94,50,93091,26,112

1,85,77,042

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Years

INCOME AND EXPENDITURE

Income

Expenditure

CHART 5

TABLE 5

CASH FLOW STATEMENT

SOURCE OF FUNDS:

Profit Before Interest and TaxDepreciation for the yearEquity share capitalTerm Loan from Financial Institution

Total (A)

APPLICATION OF FUNDS:

Interest paymentRepayment of Term LoanIncrease in Fixed AssetIncrease in Current Asset

Total (B)

Net surplus/deficit(A-B)

2003

2,75,51,373

36,81,196

1,50,00,000

4,05,59,311

8,67,91,880

74,88,493

1,49,62,698

33,40,870

59,82,252

3,17,74,313

5,50,17,567

2004

1,72,41,408

55,37,060

3,00,00,000

8,59,83,952

13,87,62,420

67,70,458

4,27,59,728

37,18,624

67,51,991

6,00,00,801

7,87,61,619

2005

61,20,109

54,02,635

3,00,00,000

4,05,59,309

8,20,82,053

99,12,246

2,52,92,787

44,22,246

72,13,396

4,68,40,675

3,52,41,378

2006

1,04,37,631

61,16,238

3,00,00,000

3,04,44,291

7,69,98,160

95,55,050

1,83,66,018

55,88,484

81,77,378

4,16,86,930

3,53,11,230

2007

2,09,39,775

91,26,112

3,00,00,000

1,80,47,373

7,81,13,260

62,78,206

99,68,598

57,04,458

1,67,34,243

3,86,85,505

3,94,27,755

CHART 6

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CASH FLOW STATEMENT

TABLE 6

BALANCESHEET

LIABILITIES:

Share capitalReserves and SurplusDeferred tax liabilitySecured loansUnsecured loans

Total

ASSETS:

Fixed assets (Net)Current assets(Net)Loans and AdvancesInvestments

Total

2003

1,50,00,000

4,79,00,602

26,83,617 3,03,57,470

50,00,000

10,09,41,689

7,50,78,915

1,33,58,774

1,25,04,000

10,09,41,689

2004

3,00,00,000

5,50,08,033

34,02,256 6,69,62,698

50,00,000

16,03,72,987

8,00,93,837

6,77,75,150

1,25,04,000

16,03,72,987

2005

3,00,00,000

5,47,48,030

36,06,847 7,83,30,107

50,00,000

17,16,84,984

7,86,71,591

8,05,09,393

1,25,04,000

17,16,84,984

2006

3,00,00,000

5,61,37,315

37,28,688 7,38,13,902

76,29,991

17,13,09,896

7,30,83,107

8,57,22,789

1,25,04,000

17,13,09,896

2007

3,00,00,000

6,37,65,342

33,84,231 5,89,94,445

82,84,042

16,44,28,060

6,73,78,649

8,45,45,411

1,25,04,000

16,44,28,060

TABLE 7

CAPITAL INVESTMENT

MACHINERY (2003) 3,04,47,438

ADDITIONS (2004) -------

” (2005) 32,44,572

” (2006) 6,71,785

” (2007) 14,18,844

TOTAL Rs. 3,57,82,639

CHART 7

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CAPITAL INVESTMENT

REVIEW OF CAPITAL BUDGET DECISION FOR

PARISONS

1. Investment cost - Rs.3,57,82,639

2. Life of the project - 5years

3. Depreciation is charged on Diminishing Balance Method

4. Tax Rate - 20%

5. Discount Factor - 10%

TABLE 8

CASH FLOW

Year

2003

2004

2005

2006

2007

CFBDT

2,75,51,373

1,72,41,408

61,20,109

1,04,37,631

2,09,39,775

Depreciation

36,81,196

55,37,060

54,02,635

61,16,238

91,26,112

CFADBT

2,38,70,177

1,17,04,348

7,17,474

43,21,393

1,18,13,663

Taxes

47,74,035

23,40,870

1,43,495

8,64,279

23,62,733

CFATD

1,90,96,142

93,63,478

5,73,979

34,57,114

94,50,930

CFATBD

2,27,77,338

1,49,00,538

59,76,614

95,73,352

1,85,77,042

INTERPRETATION

First step is to determine the after-tax cash inflows which will result

from using the investment .To do so; we are required to compute net profits

(CFBT-Depreciation) on which the company is to pay taxes.

The tax rate is 20%.Then the amount of depreciation is to be added

back to the amount of cash flows after taxes (CFAT) as depreciation does

not involve any cash outflow.

CHART 8

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CASH FLOW

TABLE 9

1. PAYBACK PERIOD

To determine the number of years to recover the initial cash out

flow of Rs.3,57,82,639 crores we are constructing the following

cumulative cash flow tables.

INTERPRETATION

From the table it is clear that the recovery of the investment

between the first and second years. Therefore the Payback in 1year plus a

fraction of the 2nd years.

1,30,05,301Payback Period =

1,49,00,538

Payback Period = 1 year and 9 months.

YEAR CFATBD CUMULATIVE

CFATBD

2003 2,27,77,338 2,27,77,338

2004 1,49,00,538 3,76,77,876

2005 59,76,614 4,36,54,490

2006 95,73,352 5,32,27,842

2007 1,85,77,042 7,18,04,884

II. AVERAGE RATE OF RETURN

Average Annual Earnings ARR = x 100 Average investment

83,88,329 = x 100

1,78,91,320

ARR = 46.88%

Average Annual 1,90,96,142+ 93,63,478+ 5,73,979+ 34,57,114+ 94,50,930Earnings = 5

4,19,41,643 =

5

= Rs.83,88,329

3,57,82,639 Average Investment =

2

= Rs.1,78,91,320

INTERPRETATION

The Average Rate of Return of the project indicates

46.88%.Therefore the project earns a good profit in a short period of

time.

TABLE 10

III. NET PRESENT VALUE (NPV)

The below table contains the relevant calculations to determine

NPV Table in the Appendix (Present Value of Re.1) has been used to

determine the PV factor.

Year CFATBD Discount factor

at 10%

Present Value of

Cash Inflows

2003 2,27,77,338 0.909 2,07,04,600

2004 1,49,00,538 0.826 1,23,07,844

2005 59,76,614 0.751 44,88,437

2006 95,73,352 0.683 65,38,599

2007 1,85,77,042 0.621 1,15,36,343

5,55,75,823

Net Present Value = Present Value of Cash Inflows- Present Value of

cash outflows

= 4,81,43,364 – 3,57,82,639

N.P.V. = Rs.1,97,93,184

INTERPRETATION

The NPV of the project is Rs.1,97,93,184.The projects present

value of cash inflow (Rs.5,55,75,823) is greater than that of the present

value of cash outflows (Rs.3,57,82,639).Thus, it generates a positive Net

Present Value. So the NPV of Rs.1,97,93,184 adds to the wealth of the

owners.

TABLE 11

IV. PROFITABILITY INDEX METHOD

Year CFATBD PV factor at

10%

Present Value

of Cash Inflows

2003 2,27,77,338 0.909 2,07,04,600

2004 1,49,00,538 0.826 1,23,07,844

2005 59,76,614 0.751 44,88,437

2006 95,73,352 0.683 65,38,599

2007 1,85,77,042 0.621 1,15,36,343

5,55,75,823

Present value of Cash inflows Profitability index = Present Value of Cash outflows

5,55,75,823 =

3,57,82,639

= 1.55

INTERPRETATION

The profitability Index of the project is 1.55.Therefore it is

constant with the shareholders value maximization principle. It increases

the shareholders wealth.

TABLE 12

V. INTERNAL RATE OF RETURN

Year CFATBD PV factor

at 32%

Discounted

Cash inflow

PV factor

at 33%

Discounted

Cash

Inflow2003 2,27,77,338 0.757 1,72,42,445 0.752 1,71,28,558

2004 1,49,00,538 0.573 85,38,008 0.565 84,18,804

2005 59,76,614 0.434 25,93,850 0.425 25,40,061

2006 95,73,352 0.330 31,59,206 0.320 30,63,473

2007 1,85,77,042 0.250 46,44,260 0.240 44,58,490

3,61,77,769 3,56,09,386

P1-QIRR = L+ x D

P1-P2

3,61,77,769 - 3,57,82,639 = 32+ x 1 3,61,77,769 – 3,56,09,386

3,95,130 = 32+ x 1

5,68,383

= 32+ 0.69

IRR = 32.69%

P1-Q IRR = Lower Rate + x D

P1-P2

D = Difference between the percentages

P1= Present Value of Cash Inflow at highest percentage

Q = Present Value of Cash Outflow

P2= Present Value of cash Inflow at lowest percentage

INTERPRETATION

The IRR is 32.69%. Here the IRR is less than that of the

opportunity cost of the capital at 33% and therefore the shareholders

wealth will not be enhanced. It will enhance only when the IRR is greater

than the opportunity cost of capital.

CHAPTER 5

FINDINGS

1 It was found that the payback Period of the project is 1 year and 9

months.

2 The Payback Period shows that the initial investment can be

recovered with in a short period of time.

3 The investment is ideal because normally an investment should be

recoverable with in 5 years.

4. Average Rate of Return indicates 46.88%.Therefore the project earns

a good profit in short span of period.

5. Net Present Value of the project was Rs.1,97,93,184. This indicates

high profitability because it was >1.

6. The Profitability Index of the project is also >1 i.e., 1.55.Thus it is

constant with the shareholders value maximization principle.

7. The Internal Rate of Return shows 32.69% .These are also ensures a

profitable investment.

8. The Internal Rate of Return is less than the opportunity cost of

capital. Therefore the shareholders wealth will not be enhanced. It

will enhance only when the IRR is greater than the opportunity cost

of capital.

9. a. Discounted Methods

i. Net Present Value = Rs.1,97,93,184

ii. Profitability Index = 1.55

iii. Internal Rate of Return = 32.69%

b. Non Discounted Methods

i. Payback Period = 1 year and 9 months

ii. Average Rate of Return = 46.88%

CHAPTER 6

SUGGESTIONS

1. The company may fix the time period for the capital asset for

replacement.

2. Net Present Value method is more suitable for the company for

making investment decision.

3. In future the company may follow the capital budget method before

making investment decisions.

4. The company may effectively use the available resources for

attaining maximum profit.

5. The company has to analyze the proposal for expansion or creating

additional capacity.

6. The company may plan and control its capital expenditure.

7. The company has to ensure that the funds are invested in long term

project or not.

8. The company may evaluate the estimation of cost and benefit in

terms of cash flows.

CHAPTER 7

CONCLUSION

The study reveals the capital budgeting or capital expenditure

management of Parisons Roller and Flour Mills Pvt.Ltd. The present

financial position of the company is good, because the company recovers

the initial investment with in a short period of time. The Profitability

Index and Internal Rate of Return show a profitable investment.

The company has to analyze the alternative proposals and also

make decisions as to whether or not money should be invested in long

term projects. Investment decisions are extremely important for the

company because a wrong managerial decision with regard to capital

expenditure may affect the future earnings, production, and investment

opportunities of the company.

Further research with regards to this company is possible only

when the company decides to invest in machineries and they should

understand the importance of Capital Budgeting.

PARISONS ROLLER AND FLOUR MILLS PVT. LTD, CALICUT

BALANCE SHEET AS AT 31St MARCH 2003

LIABILITIES: AMOUNT

Share Capital 1,50,00,000

Reserves and Surplus 4,79,00,602

Deferred tax liability 26,83,617

Secured Loans 3,03,57,470

Unsecured Loans 50,00,000

10,09,41,689

ASSETS:

Fixed Assets (Net) 7,50,78,915

Current Assets (Net)

Loans and Advances1,33,58,774

Investments 1,25,04,000

10,09,41,689



LIABILITIES: AMOUNT






16,03,72,987

ASSETS:





16,03,72,987



LIABILITIES: AMOUNT




Secured Loans 7,83,30.107


17,16,84,984

ASSETS:



Loans and Advances8.05,09,393


17,16,84,984



LIABILITIES: AMOUNT






17,13,09,896

ASSETS:





17,13,09,896



LIABILITIES: AMOUNT






16,44,28,060

ASSETS:





16,44,28,060

PARISONS ROLLER AND FLOUR MILLS PVT.LTD, CALICUT

PROFIT AND LOSS ACCOUNT

Income:SalesInterest

Lorry ReceiptsMiscellaneous incomeCreditors written backStorage tank rentProfit on sale of vehicleBarge incomeDiscountForeign exchange fluctuationStock differential

Total

Expenditure:Raw materials consumedGoods purchasedWagesPower, fuel and waterConsumablesRepairs&maintenance(P&M)Laboratory expensesPest and RodentStorage expensesSalaries and AllowancesAdvertisement chargesPrinting and StationeryDepreciationPort expensesBarge expensesPostage and Telephone chargesTraveling expensesDirectorsOthersESIPFStaff welfareMedical expensesMotor vehicle expensesInsuranceDonation and CharitiesTax and License fee

Selling &Distribution

2003

87,95,91,15724,36,12030,80,3887,52,406

2,224 -6,95,338

99,64330,860

3,17,569(-)15,11,227

88,54,94,478

51,92,51,73029,52,87,190

15,78,55176,96,538

86,58724,80,7722,76,731

21,40013,451

9,23,36419,44,0712,41,010

36,81,196 -

-

6,87,627

1,20,62439,50250,12576,269

4,96,36210,260

4,71,399 15,21,971 26,200

1,76,518

1,32,38,589

2004

81,37,95,53913,99,61420,12,46411,58,5783,99,273

6,0625,75,406

- -

29,80,535(-)2,35,473

82,56,91,998

29,06,15,71647,17,36,754

18,74,11080,91,549

67,06818,46,0213,67,627

18,20040,786

10,33,91814,37,2242,07,268

55,37,060--

6,09,300

46,8641,78,751

36,99887,261

3,79,6577,213

41,35,3681,53,503

20,2001,53,503

1,29,41,369

2005

68,59,11,77011,76,6519,27,8731,14,067 -

55,48,700 -1,23,469

37,296 -

26,62,876

69,65,02,702

25,43,57,83339,09,54,747

17,48,26182,06,2022,83,678

18,02,7626,37,679

19,45049,363

11,75,67711,45,6701,98,746

54,02,63524,828

1,72,965

6,15,323

98,57035,027

1,16,96095,381

4,62,5676,844

40,36,3091,80,210

6,5501,80,210

93,97,076

2006

50,45,63,87215,42,85015,37,3426,37,6263,72,199

1,71,51,09961,324

3,31,16142,326

1,39,877(-)12,89,454

52,50,90,222

23,50,49,02322,73,34,273

17,80,56690,55,874

55,09811,90,0136,48,664

24,18045,729

8,39,6479,34,6561,98,920

61,16,23828,534

7,47,568

4,92,528

1,40,86133,644

2,00,5231,57,5073,35,299

5,32647,89,132

94,77211,650

3,75,058

1,23,74,101

2007

168,57,45,56142,13,3977,35,2483,98,494

-210,00,000

60,1394,98,505

39,28857,17,13538,49,591

172,22,57,358

27,26,64,628136,15,13,097

20,95,31484,11,1631,73,1679,74,3798,18,171

22,6181,05,6893,02,599

18,78,5231,73,905

91,26,11225,443

9,05,793

3,37,726

1,94,29747,60367,125

2,19,4434,67,366

5,43847,24,7761,68,412

38,2501,23,808

2,17,47,367

expensesInterest and financial chargeAudit fees

Total

Profit Before depreciation and TaxDepreciationProfit After Depreciation Before TaxTaxProfit After Depreciation and TaxAdd: Depreciation

Profit After Tax

74,88,49356,575

85,79,43,105

2,75,51,373

36,81,196

2,38,70,17747,74,035

1,90,96,14236,81,196

2,27,77,338

67,70,45856,844

80,84,50,590

1,72,41,408

55,37,060

1,17,04,34823,40,870

93,63,47855,37,060

1,49,00,538

89,12,24658,830

69,03,82,593

61,20,109

54,02,635

7,17,4741,43,495

5,73,97954,02,635

59,76,614

1,15,21,20772,000

51,46,52,591

1,04,37,631

61,16,238

43,21,3938,64,279

34,57,11461,16,238

95,73,352

1,38,89,19896,173

170,13,17,583

2,09,39,775

91,26,112

1,18,13,66323,62,733

94,50,93091,26,112

1,85,77,042

61671000 Capital Budgeting Project Not Having Page No

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