INTRODUCTION

CAPITAL BUDGETING
Capital budgeting is the process of making investment decision in
capital expenditure. The capital expenditure is the benefits of which are
expected to be received over period of time exceeding one year, like cost
of acquisition of permanent

assets as land and buildings, plant and

machinery etc.
Capital expenditure involves non flexible long term commitment of
funds. Capital budgeting involves the planning and control of capital
expenditure. It is the process of deciding whether or not to commit
resource to a particular long term project whose benefits are to be realized
over a period of business firm.
According to T.J.HORNGREN defines capital budgeting is the
long term planning for making and proposed capital outlays.
PROCESS OF CAPITAL BUDGETING
Capital budgeting is a complex process. The capital budgeting
process involves generation of investment proposals, estimation of cash
flows for the proposals, evaluation of cash flows, selection of projects
based on acceptance criterion, finally the continual revolution of
investment after their acceptance. The steps involved in capital budgeting
are as follows:

CAPITAL BUDGETING PROCESS STEPS ARE

Project generation.
Project evaluation.
Project selection.
Project execution.

PROJECT GENERATION
In the project generation, the company has to identify the proposals
to the under taken depending upon its future plans of activity. After
identification of the proposal, they can be grouped according to the
following categories. There are

Replacement of equipment.
Expansion.
Diversification.
Research and development.

REPLACEMENT OF EQUIPMENT
In this case, the exiting out-dated equipment and machinery may be
replaced by purchasing new and modern equipment.
EXPANSION
The company can go for increasing additional capacity in the
existing product line by purchasing additional equipment.

DIVERSIFICATION
2

The company can diversify its product lines by way of producing

various products and entering into different markets. For this purpose, it
has to acquire the fixed assets to enable producing new products.
RESEARCH AND DEVELOPMENT
The company can go for installation of research and development
wing by incurring heavy expenditure, with a view to innovate new
methods of production, new products etc.
PROJECT EVALUATION
The process of project evaluation involves two steps. There are
Estimations of benefits & calculations.
Selection.
ESTIMATION OF BENEFITS AND COSTS
These must be measured in terms of cash flows. Benefits to be
received are measured in terms of cash inflows, and costs to be incurred
are measured in terms of cash out flows.
SELECTION
Selection is an appropriate criterion to judge the desirability of the
project.
PROJECT SELECTION
The selection and screening procedure would differ from firm to
firm. Due to lot of importance of capital budgeting decision the final
approval of the project may generally rest on the top management of the
company.
PROJECT EXECUTION
3

In the project execution the top management is responsible for

effective utilization of funds allocated for the project. Further to have an
effective control, it is necessary to prepare monthly budget reports to
show clearly the total amount appropriated, amount spent and the amount
unspent.
IMPORTANCE OF CAPITAL BUDGETING
Capital budgeting means planning for capital assets. Capital
decisions are vital to any organization as they include decisions as to:
Analyze the proposal for expansion or creating additional
capacities.
To make financial analysis of various proposals regarding capital
investments so as to choose the best out of many alternative
proposals
To decide the replacement of permanent assets such as building and
equipments
The search for new and more profitable investment proposal
To make an economic analysis to determine the profitable potential
of each investment proposal
Whether or not funds should be invested in long term projects such
as setting of a industry, purchase of plant and machinery etc..,

NEED FOR THE STUDY

Capital investments, representing the growing edge of a business,
are deemed to be very important for three inter-related reasons.
To avoid the risk and decrease the cost and expenditure of firms.
To know how much investment need in the project and
investments.
To expanding the operations by investments.
To get more profits in the long term investments.
To dont repeat the past mistakes and helps to minimize the
wastages.
The influence firm growth in the long term consequences capital
investment decisions have considerable impact on what the firm
can do in future.
They affect the risk of firm; it is difficult to reverse capital
investment decisions because the market for used capital
investments is ill organized, and /or most of the capital equipments
bought by a firm to meet its specific requirements.
Capital investment decision involves substantial out lays.
Sree Akkamamba Textile Limited is a growing concern, capital
budgeting is more or less a continuous process and it is carried out by
different functional areas of management such a production, marketing,
engineering, financial management etc. All the relevant functional
departments play a crucial role in the capital budgeting decision process.

SCOPE OF THE STUDY

The study has been conducted to understand the position of the
industry and various functional areas of the company and their
operations. The study mainly focuses on working capital of the company.
Keep in view the accessibility and availability of the data sources
100% has been chosen for the purpose of the study. This study causes
2010-15 and it is limited only to the perception of the personal belonging
to Capital budgeting of Sree Akkamamba Textiles Limited.

OBJECTIVES OF THE STUDY

To describe the organizational profile of Sree Akkamamba Textiles

limited.
To discuss the importance of the management of capital budgeting.
Determination of proposal and investments, inflows and outflows.
To evaluate the investment proposal by using capital budgeting
techniques.
To summarize and to suggest for the better investment proposal.

METHODOLOGY
Methodology is a systematic procedure if collecting information in
order to analyze and verify a phenomenon. The methodology designed
for my project entitled capital budgeting of Sree Akkamamba Textiles
limited was based on two sources namely.
Primary sources
Secondary sources
PRIMARY SOURCES
It is the information collected directly without any references. It is
mainly through interactions with concerned officers & staff, either
individually or collectively some of the information has been verified or
supplemented with personal observation. These sources include
Through interactions with the various department managers of
SAP.
Guidelines given by the project guide, Sri A.MURTHY,
Asst.Manager (staff), budget section, labour officer.
SECONDARY SOURCES
This data is from the number of books and records of the company,
the annual reports published by the company and other magazines. The
secondary data is obtained from the following.
Collection of required data from annual records, monthly records,
monthly records, internal.
Published book or profile of Sree Akkamamba Textiles Limited.
Other books and journals and magazines.
Annual reports of the company.
LIMITATIONS OF THE STUDY

Though the project is completed successfully a few limitations may

be there.
Since the procedure and polices of the company will not allow to
disclose confidential financial information, the project has to be
completed with the available data given to us.
The period of study that is 8 weeks is not enough to conduct
detailed study of the project.
The study is carried basing on the information and documents
provided by the organization and based on the interaction with the
various employees of the respective departments.
Lacks of knowledge. Some of the lack full-fledged knowledge of
the concept and is difficult to collect a specific opinion from them.

INDUSTRY PROFILE
PROFILE OF TEXTILE INDUSTRY IN INDIA

Cotton textile industry is one of the oldest and largest during the
last 3 decades. The textile industry still occupies a key position in the
economy of the country industries in India. Which has made rapid strides
during the century of its existence? At the end of March 2001 there were
1846 mills in the country (1565 spinning mills and 281 composite mills).
At present the industry provides direct employment to provide
direct employment to nearly 18 lakhs workers. It also provide indirect
employment to many millions like the cotton growers, processors,
handlooms and power looms weavers who alone are estimated five
million and innumerable cloth dealers and shop keepers. The industry
contributes in ever increasing measure to the central and state government
by way of taxes and duties.
Being one of the oldest industries it has history of over 150 years.
It occupies a unique position in the world export, where India has a 24%
share in the global cotton yarn market. It has an influence on agriculture
because of its requirements of machinery, dyes and chemicals and
synthetic fibers. Thus the industry has playing important role both in
economic prosperity of the country and in the supply of essential
commodities for the entire population.
The cotton textile industry consists of 3 distinct categories in the
organized sectors. There are
Spinning mills.
Coarse and medium composite mills.
Fine and super fine composite mills.
Spinning mills are generally small size in size, coarse and medium
composite mills are not able to adjust their cost in the face or rising prices
of raw materials and increases in wages consequently many of them
became uneconomic units and ran into difficulties. Fine and super fine

10

composite mills use foreign cotton. They are not subject to stock
restriction and can therefore carry on stable production program.
India has been a manufacturing nation and exports of the fine
cotton fabrics to all the nations of the civilized world.
The first mill in India was setup by C. N. DAVAR in 1854 with an
Englishmen as his partner. It was Davars mills which laid the
foundations for strong and growing textiles industry in Bombay and soon
after in other regions of India. The Bombay mills owner association is the
first mill formed association in India in the year 1875.
INDIAN TEXTILE INDUSTRY

Cotton textile

Man made

Organized Sector

Silk

Woolen

Jute

Decentralized Sector

Cotton Mills (private

Public co-operative)

Hand looms

Power looms
(Cloth)

Spinning Mills

Composite Mills

(Yarn)

(Yarn & Cotton)

THE INDUSTRY
Indian textile industry can be divided into several segments, some
of which can be listed as below.
Cotton textiles.
Silk textiles.
11

Woolen textiles.
Readymade garments.
Hand-crafted textiles.
Jute and coir.
India textile industry is one of the leading in the world.

Currently it is estimated to be around US $52 billion and is also projected

to be around US $115 billion by the year 2012. The current domestic
market of textile in India is expected to be increased to US $60 billion by
2012 from the current US $34.6 billion. The textile export of the country
was around US $19.14 billion in 2006-07, which saw a stiff rise to reach
US $22.13 in 2007-08. The share of exports is also expected to increase
from 4% to 7% within 2012. Following are area, production and
productivity of cotton in India during the last six decades.

Year

1950-51
1960-61
1970-71
1980-81
1990-91
2000-01

Area in lakhs Production

in Yield KGs per

hectares

lakhs bales of hectare

56.48
76.78
76.05
78.24
74.39
85.76

170 KGs
30.62
56.41
47.63
78.60
117.00
140.00
12

92
124
106
170
267
278

2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09

87.30
76.67
76.30
87.86
86.77
91.44
94.39
93.73

158.00
136.00
179.00
243.00
244.00
280.00
315.00
290.00

308
302
399
470
478
521
567
526

Though during the year 2008-09, the industry had to face

adverse agro climatic conditions, it succeeded in producing 290 lakhs
bales of cotton comparing to 315 lakhs bales last year, yet managed to
retain its position as worlds second highest cotton producer.

TEXTILE

INDUSTRY

IN

INDIA

SCENARIO

The organized cotton textile industry is one of our oldest and most
family established major industries at the end of March 1994 there were
1,775 mills in the country (906 spindles and 269 composite mills) with 28
millions spindles and 1.6 lakhs labor. There were 132 closed mills by the
end of March 1994.
In India textile industry is predominant cotton based 70 percent of
the fabric production of cotton, carries from the year depending upon
rainfall and weather conditions and price fluctuations in raw cotton effect
the industry production of yarn in almost entirely in the organized sector
13

and over the year. It has showing a steadily rising trend as for example
from 1600 million kgs in 1993-94 to nearly 28,000 million meters in
1993-94.
PERSPECTIVE OF INDIAN TEXTILE INDUSTRY
Textile industry is the largest industry of modern India. It
contributes about 4 percent of GDP, 20 percent of total output, and
together with carpets in handicrafts it has a share of 38 percent in total
value of escorts. The first cotton mill in India was setup in Calcutta 1818.
However, Indian textile industry plays a pivotal role through its
contribution of about 14 percent to industrial production, 4 percent to
GDP and 16.63 percent to export earnings. Its share in global textiles and
apparel is 3.9 percent and 3 percent respectively. It provides direct
employment to over 35 million people. Textile sector is the second largest
provider of employment after agriculture.
The close linkage of the industry to agriculture and the ancient
culture and tradition of the country make the Indian textiles sector unique
in comparison with the textiles industry of other countries. This industry
is growing by 9% -10% and the pace would be increase to 16 percent in
the coming years. This also provides the industry with the capacity to
produce a variety of products suitable to different market segments, both
within and outside the country. Ahmadabad had 19 percent of mills are
providing employment to 113.6 percent of the workers outside the
Bombay city. Some mills located in shaper, Baroda and other centers in
Maharashtra.

14

India textile industry contributes to be predominantly cotton based

as 65 percent of fabric consumption in the country is being against the
world average of 46.5 percent.
PRESENT TEXTILE INDUSTRY
The Indian textile industry faced troubles time during the year
1998 with the East Asian currency crisis drying up orders raising the
spectacular of recession the spectacular and several governments
decisions virtually remaining on paper.Some moment was however made
in handling for textile up graduation fund (TUF) and cotton technology
mission with India getting a miracle booster after the Europeans union
(EU) decides to develop to drop the three years old and anti dumping
proceedings against unbleached cotton grew fabrics exports.

Cotton

production during the current year, despite the losses suffered by growers
lost year and month India continuing to perform poorly on the production
front due to post attract and water logging in fields.
Cotton further trading was revived after 32 years with the
trading company commencing on Dec 5th, but problems of poor turnover
during the first few days is worrying East Indian Cotton Association
(EICA), which is running the exchange. As stated earlier cotton textile
industry provides employment too many people with the introduction of
NIFT (National Institute of fashion Technology). It got very big contracts
for the quality products due to this it provides employment to all the
handloom weavers for the several of the clothing garments.
INDIAN TEXTILE INDUSTRY FACTS

15

 India retained its position as worlds second highest cotton

producer.
Acreage under cotton reduced about 1% during 2008-09.
The productivity of cotton which was growing up over the years
has decreased in 2008-09.
Substantial increase of minimum support prices (MSPs).
Cotton exports couldnt pick up owing to disparity in domestic and
international cotton prices.
Imports of cotton were limited to shortage in supply of extra long
staple cottons.
14% of the industrial products and in India is done by the textile
industry.
High exports and foreign revenue comes from the textile industry
in India. 38% of the countrys total export is coming from textile
industry.
There are around 1200 million medium to large scale textile
companies in India.

STRENGTHS OF INDIAN TEXTILE INDUSTRY

Tradition in textiles and long operating experience.

Large and growing domestic market.
Strong raw material base.
Production across entire textile value chain.
Stable, low-risk Company, safe for business growth.
Easy availability of abundant raw materials like cotton, wool, silk,

jute.
Widely prevalent social customs.
Variety of distinct local culture.
Constructive geographic and climatic conditions.
Large domestic market and very low import content.
Flexible textile manufacturing systems.

16

WEAKNESS OF INDIAN TEXTILE INDUSTRY

Increased global competition in the post 2005 trade regime under

WTO.
Imports of cheap textiles from other Asian neighbors.
Use of outdated manufacturing technology.
Poor supply chain management.
Huge unorganized and decentralized sector.
High production cost with respect to other Asian competitors.

THE TEXTILE COMMISSION ORGANIZATION

The functions of the organization are many and diverse they are:
To adverse the government and planning commission on the targets
of production for the various five years plans.
To scrutinize proposals from mills

few

expansions

recommendations new installations for licensing exercise control

the pattern of production.
To ensure adequate supply of raw materials to the industry and to
make recommendations to government in this regard.
To collect and publish all relevant statistical data relating to
production stocks imports etc. In the administrative authority for
implementing of government policies with regard to all textile
industry.
It also helps for the small scale industry spinning mills to face
textile industries. This is done by giving large contracts in favor of
the small firms.

17

Cotton textile industry being the largest industry in India has

spread partially all over the parts of the country it is monthly localized in
the states of Maharashtra and Gujarat. In recent years cotton textile
industry has also spread to a number of other states like Madhya Pradesh,
Bihar, Kerala, Andhra Pradesh, Uttar Pradesh and Tamil Nadu.

ROLE OF TEXTILE INDUSTRY IN INDIA

Role of textile industry in India GDP has been quit beneficial in the
economic life of the country. The world wide trade of textiles and
clothing has boosted up the GDP of India to a great extent as this sector
has brought in a huge amount of revenue in the country. In the past one
year, there has been a massive up surge in the textile industry of India.
The US $37 billion in 2004-05 to US $49 billion in 2006-07. During this
era, the local market witnessed a growth of US $7 billion that is from US
$23 billion to US $30 billion. The export market increased from US $14
billion to US $19 billion in the same period.
The role of textile industry in India GDP had been under growing a
moderate increase till the year 2004-05. But ever since 2005-06, Indian
textiles industry has been witnessing a robust growth and reached almost
US $17 billion during the same period from US $14 billion in 2004-05.
At present, Indian textile industry holds 3.5 to 4 percent share in the total
textile production across the globe and 3 percent share in the export
18

production of clothing. The growth in textile production is predicted to

touch US $19.62 billion during 2006-07. USA is known to be the largest
purchaser of Indian textiles.
The role of textile industry in India GDP also includes a hike in the
investment flow both in the domestic market and the export production of
textiles. The investment range in the Indian textile industry has increased
from US $2.94 billion to US $7.85 billion within 3 years, from 2004-07.
It has been assumed that by the year 2012, the investment ratio in textile
industry is most likely to touch US $38.14 billion.
INDIAS WORLD MARKET SHARE IN TEXTILE INDUSTRY

25
20
15
10
5
0

The world market share in spite of the Chinese dominance,

India has a fair opportunity to grab a substantial stake in the projected
garment market share. According to PHD chamber of commerce and
19

industry(PHDCCI), post-MFA Indias market share in the US is expected

to go up to 15 percent from the present 4 percent. In the EU, the market
share increase is expected to be 50 percent from the current 6 percent to a
9 percent.
INDIAN TEXTILES TARGETS TO ACHIEVE BY END OF 11TH
FIVE YEAR PLAN (2007-12)

Market size of US $115 billion.

Export target US $55 billion.
Domestic market US $60 billion.
Indian market share in world textiles trade to grow from 3% to 8%.
12 million additional jobs.
Investment Rs.1, 50,600 crores.

TEXTILE EXPORT TARGET (IN BILLIONS)

Year ( April, March)
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02

Target
19.73
15.565
15.16
16.31
15.05
13.72

Achievement
19.62*
17.80
17.80
13.16
12.41
10.76

THE FUTURE OF THE TEXTILE INDUSTRY

India has the largest area of about 90 lakhs hectare under cotton
civilization. But introduction it is only third place, next to china and US..
the main reason is the lower yield of around 300 kg per hectare compared
to average of 560 kg per hectare the percent yield in Pakistan is 563 kg,
china 910 kg, the US 686 kg, Australia 1,482 kg and Israel 1,814 kg.

20

The significance of the textile industry is also due to its

contribution in the industrial production employment. Currently, it is the
second largest employment provider after agriculture and provides
employment to more than 30mn people. Prospect considering the
continual capital investments in the textile industry, the govt. of India
may extend the technology up gradation fund scheme (TUFS) by the end
of the 11th five year plan in order to support the industry. Indian textile
industry is massively investing to meet the targeted output of $85 billion
by the end of 2010, aiming exports of $ 50 billion.
There is huge development foreseen in Indian textile exports
from the $17 billion attained in 2005-06 to $50 billion by 2009-10. The
estimation for the exports in the current financial year is about $19
billion. There is substantial potential in India exports of technical textiles
and home textiles, as most European companies want to set up facilities
near by the emerging markets, such as china and India. The global
demand for apparel and woven textiles is likely to grow by 25 percent by
year 2010 to over 35mn tons, and Asia will be responsible for 85 percent
output of this growth.
The woven products output will also rise in central and southern
American countries, however, at a responsible speed on the other hand, in
major developed countries the output of woven products will remain
stable.
Weaving process is conducted to make fabrics for a board range
of clothing assortment, including shirts, jeans, sportswear, skirts, dresses,
protective clothing etc, and also used in non-apparel uses like technical,
automotive, medical etc.
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BENEFITS OFFERED BY THE INDIAN TEXTILE INDUSTRY

India covers 61 percent of the international textile market.
India covers 22 percent of the global market.
India is known to be the third largest manufacturer of cotton across
the globe.
India claims to be the second largest manufacturer as well as
provider of cotton yarn and textiles in the world.
India holds around 25 percent share in the cotton yarn industry
across the globe.
India contributes to around 12 percent of the worlds production of
cotton yarn and textile.
The new age textile industry heavily depends on the synthetic
fibers produced as intermediary products by the petrochemical industry;
the textile industry has been revolutionized with the synthetic fibers
flooding the market. These synthetic fibers are long-chain polymers,
manufactured from petro-chemical derivatives. The artificial fibers
industry is one of the fastest growing segments of industry
internationally.

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COMPANY PROFILE
The Company SREE AKKAMAMBA TEXTILES LIMITED was
established in the year 1954. It is located in Venkatarayapuram, Tanuku
mandal, West Godavari district, Andhra Pradesh. The company went into
commercial production during the year 1956. Its initial capital is 73.64
lakhs with a capacity of 8,000 spindles. In the year 1958 it was increased
from 8,000 spindles to 17,200 spindles. Again it was increased in 1966
from 17,200 to 26,400 spindles. At present 86,304 spindles. The company
manufacturers yarn in both cone and hank forms. The present man power
is around 800 consisting of permanent workmen, Office staff, Managerial
staff and Trainees.
The reasons for selecting the location are many. As there were
very few at that time in Andhra Pradesh, the promoters thought of
establishing this firm. Abundant manpower and to facilitate employment
to the rural

people availability of raw material as the mill is located

nearer to fields. As the company is a manufacturer of textile products, it

requires the raw material in bulk. So it is located nearer to them. The
climate conditions are also a favor to the growth of cotton crops. Another
reason for the location of sit is the transportation. The mill is located to
the railways and roadways.
23

The company is equipped with latest technology and machinery to

produce quality yarn. The company runs three shifts per day. It is helping
the rural poor and get employment and paying decent wages when
compared to other sectors. The company has been purchasing quality raw
material which is mostly from Karnataka, Maharashtra and Andhra
Pradesh. It is supplying 75% of the yarn in cone form to power looms of
Mumbai and other places and 25% of the yarn in hank form to the
weavers (hand loom) in our state. The yarn is well received in the market
for the manufacturing saris, clothes and fabrics presently. The company is
being managed by Managing Director under the control and supervision
of chairman cum managing Director and the Board of Directors. The
percentage of spindles worked average is 95% resulting in more
production and better utilization of man power and machinery.
The main objective of the company is to purchase quality raw
materials and to supply best quality yarn to its customers. It also provides
employment opportunities to local people.
The company a awarded in the year, 1982-83 and 1983-84 by the
Chief Minister of Andhra Pradesh for best productivity and industrial
relations. It exports quality yarn to Nepal and Bangladesh.
MANPOWER PARTICULARS
S. NO
1.
2.
3.
4.
5.

CATEGORY
Managerial and supervisory
Office staff
Skilled and unskilled workers
Trainee staff
Trainee workmen
24

NO. OF EMPLOYEES
11
45
524
13
191

6.

Others(watch & ward & office boys)

TOTAL MANPOWER

25
809

OTHER PARTICULARS
1
2
3
4
5
6
7

Present capacity of spindles

Present share capital
Reserves and surplus
Turnover
Dividend rate
Profit after tax
Salaries and benefits paid

86,304
Rs.1,73,64,000
Rs.18,00,69,000
Rs.81,38,44,343
10%
Rs.24,96,114
to Rs.8,10,47,505

employees in the present year

Salaries and benefits paid

to Rs.5,59,97,149

9
10

employees in last year

Increase in salaries and benefits
Percentage of increase

25

Rs.29,52,148
4.00%

Sree Akkamamba Textiles Limited

Board of Directors
Sri.M.S.R.V.K.Ranga Rao

Managing Director

Sri.P.Narendranath Chowdary

Director

Sri.M.Narendranath

Director

Sri.J.Murali Mohan

Director

Sri.N.V.Soma Raju

Director

Sri.J.Suresh(w.e.f.28/7/2008)

Director

Bankers
Andhra bank
State bank of Hyderabad
State bank of India
Auditors
M/S Brahmayya &co,
Charted Accountants
VIJAYAWADA
Cost Auditors
M/S Narasimha Murthy&co,
HYDERABAD
Registered Office & Mills
Venkatarayapuram
TANUKU-534215
West Godavari District
Andhra Pradesh.

26

PRODUCTS MANUFACTURED
The mill produces quality cotton yarn and blended spun yarn. Both
the power looms and handlooms are well received in the Indian market as
well as in the International markets. To meet high quality yarn
requirement, the company is producing combed yarn also. It is supplying
75% of the yarn in the CONE form to power looms of Mumbai and other
places and 25% of the yarn in the in the HANK form to weavers
handlooms in our state. The yarn is well received in the market for the
manufacturing of the saris, dhoti sand other fabrics
The company was imported technology. It imports its technology
from LMW-Lakshmi machinery work, Coimbatore. This is a famous
manufacturing company of textile machinery works. We cannot say that
this company a total pollution free. As it is a textile industry, there will be
some sound pollution from it. The company is awarded in the years 198283 and1983-84 by the Chief Minister of Andhra Pradesh for the best
productivity and industrial relations. It exports quality yarn to NEPAL
and BANGLADESH.
MANUFACTURING PROCESS
A. Mixing
The raw material i.e. cotton bales are opened and made into stakes
and kept for conditioning at mixing room.
B. Blow Room
Here the cotton which are received in bakes is opened up
mechanically the fibers for, different bales is bladed at the stage. In
essence the process consists of the opening and beat in the compressed
27

tufts of fibered achieve cleaning. Uniformity to an extent and blending.

The output from of laplaylindrical roll or is led directly, via chute for the
carding stage.
C. Carding
This process forms a the web of fiber which is conducted into a
rope is called silver, the carding machine essentially consists of a series of
cylinders which have wire mounted on them and which rotates counter to
each other. This action effects the completes opening extent of
penalization or fibers also taken of parallelization of fibers also takes
place at this stage in fibers also taken place at this stage in addition to
increasing uniform its for unit.
D. Combing
This process is only used for processing long staple finer to make
yarn counts. General candid slingers are drafted together to form a small
lap. These laps are taken to combed with fire mental teeth. This remover
slot fibers and removes any foreign particles combing also improves fiber
alignment. The combed fiber is again condensed into silver and taken to
the draw frame.
E. Drawing
In this process carded combed silver if draw in order the fibers in
the longitudinal direction about eight silver are sill timorously fed to a
series of roller pair as each successive pairs to rotating at increasing speed
this achieving attenuation and blending. Sometimes blending of fiber is
also done at this stage. Depending on the count of the yarn to be spun a
silver many be drawn once, twice or thrice.

28

F. Spinning
This is conventional spinning process and still the best for medium
and fine counts. The drawn silver is fed to a speed frame. Then to an
inter and finally to the ring frame the moving pass through gear driven
drafting rolls. The yarn guide and through a rotator draft the spindles. The
speed of the feed drafts the relative rpm of the feed. The draft the relative
rpm of the spindles and traveler determine twist and count of the yarn.
G. Winding
The fobbing form the ring frame are small in size and too low a
quality of yarn to facilitate continuous running of subsequent machines,
hence this yarn is would into larger packages conical or cylindrical. This
winding speeds and tensions applied the yarn breaks at weak spots and it
is them reprieved or knotted on the machine. The wound yarn is often raw
into smaller pins for use as weft in shuttle weaving looms.
H. Packing
Cones are packed in form of bound and hanks are packed in the
form of bales.
MARKETING DEPARTMENT
The company has department at Mumbai, Chennai, Varanasi and
Calcutta. 75% of the products are sold at deports and rest of the products
are sold at local markets for weaving purpose. The cotton yarn, viscose
and polyester yarn market has been expanding, opening venues in both
domestic and international circles for market. The major buyers of the
companys products are weavers and power looms.
29

The customers are mainly concentrated in the western region of the

country. This is also making a mark in southern region exports have
increased over the year. The company has markets in area like Mumbai,
Ahmadabad, Chennai, Calcutta etc. the product range from yarn of
different letters.
COMPETITORS
Super Spinning mills limited Hindupur and G.T.N Hyderabad,
local

competitors

like

Satyanarayana

spinning

mills

limited

Venkatarayapuram, Chowdary spinning mills limited, Gamini textiles

limited. It become necessary to carefully work out pricing and credit
polices to face such competition, eventhough the market demand for
products is higher than the supply. The key market areas for product of
SAT LTD are as follows: Mumbai, Chennai. The company getting orders
from yarn and it also exports its products to Sri Lanka, Bangladesh and
Malaysia and planning to set up market in European countries.
HUMAN RESOURCE MANAGEMENT
Human resource management is that branch of management,
which is responsible on a staff basis for concentrating on those aspects of
operations, which are primarily, concerned with a relationship of
management to employees and employees to employees and the
development of the individual and the group. The objective is to attain
maximum Individual development, desirable working relationship
between employers and employees, and effective molding of human
resources as contrasted with physical resources.

30

HUMAN RESOURCE POLICY

The main focus of HR policy concentrates on enhancing
productivity and result oriented performances. The organization has
formulated an integrated HR strategy which rests on four important
aspects of HR namely, team building, commitment, motivation and
human relations. All efforts are taken by the organization to ensure a
smooth flow of functioning by implementing and following the above
mentioned concepts.
PROCEDURE FOR TAKING ATTENDANCE
Punch cards are placed on boards as per shift and EDP nos.
Workmen come before 10 minutes according to their schedule
times and punch the card at time of office.
Those workmen who do not punch the card shall be marked absent
in from No. 25(muster register) those who punch the card shall be
marked present in the muster register.
SHIFT TIMINGS
1st shift

12:00

Mid

Night- 30 minutes interval

2 shift
3rd shift

8:00A.M
8:00A.M-4:00P.M
4:00P.M-12:00Mid

30 minutes interval
30 minutes interval

General shift

Night
7:30A.M-5:00P.M

1and1/2 hour interval

nd

SHIFT ROTATION
31

 Is done once in a week. Those who work in 1 st shift will change to

3rd shift in the following week.
Those who work in 3rd shift will change to 2nd shift in the following
week.
Those who work in 2nd shift will change to 1st shift in the following
week.
LEAVE OFFICE MANAGEMENT
If any workman works 240 days in a calendar year he shall be
eligible to get one day earned leave for every 20 days worked. Maximum
earned leaves workman gets 15 days in a year. As per agreement
workman have given three casual leaves per year. Workman can
accumulate up to 30 days. Earned leaves over and above they can on
cash.
LEAVE ADMINISTRATION
Category
Workman
Staff
Officers

No. of Leaves
15 EL
03 CL

Availability
No Limit
Only Three Chances

15 EL
12 CL

Only Three Chances

No Limit

30 EL
12 CL

Only Three Chances

No Limit

HOLIDAY ADMINISTRATION
As per the terms of agreement there are 09 paid holidays in a
calendar year. A general notice shall be displayed on the notice board
32

before one day of the paid holiday. After 3 rd shift the factory shall be
closed (12:00mid night). Again the workman resumes with 1 st shift of the
paid holiday.
QUALITY POLICY
We are committed to achieve continual improvement and enhance
customer satisfaction through
Leadership with technological up gradation.
Complying with applicable statuary and regular requirements.
Manufacture and supply of consistent quality combed cotton and
blended yarn complying with customer requirements.
Inoculation of total quality culture at all levels.

PROFILE OF THE COMPANY

Name

: Sree Akkamamba Textile limited.

33

Location

: Venkatarayapuram, Tanuku,

Started on date

: 18th April 1954.

Date of commercial production

: September, 1, 1956.

Starting size

: 8000 spindles.

Present spindles size

: 90000.

Mill area

: 21 acres.

Affliatory firm

: Andhra Sugars.

Total Employees

: 825.

Shifts

: 3 shifts.

Production capacity

: 10 tons per day.

Power Consumption

: 44000 units.

Water Consumption

: 50000gallons.

Capacity Utilization

: 95.72%

Cone Yarn

: 76%

Hank Yarn

: 24%

Turn over

: 35 corers per year

SALES CENTERS
Cone yarn

: Bombay, Madras, Icchalakaranjji.

Hank yarn

: Chirala, Mangalagiri, Guntur.

CONCEPTUAL FRAME WORK

CAPITAL BUDGETING
34

Capital budgeting is the firms decision to invest in long term

funds most efficiently as well as project in anticipation of the follow the
future benefits over a series of year. Capital budgeting is the process thus
means identification from analysis and selects the investment and project
whose returns are expected to extend beyond one year.
An efficient allocation of capital is the most important finance
function in the modern times. It involves decisions to commit the firms
funds to the long-term assets. Capital budgeting for investment decisions
is of considerable importance to the firm since they tend to determine its
value by influencing its growth, evaluation of capital budgeting decisions.
NATURE OF CAPITAL BUDGETING
The nature of capital budgeting involves the following elements:
To involve exchange of current funds for future benefits
They benefits for future periods.
They have the effect of increasing capacity, efficiency and span of
life regarding for future benefits.
To invest in long term alternatives.

OBJECTIVES OF INVESTMENT DECISIONS

Understand the nature and importance of investment decisions.

35

 Explain the methods of calculating Net Present Value (NPV) and

Internal Rate of Return (IRR).
Show the implicated of net present value and internal rate of return.
Describe the Non-DCF evaluation criteria. Payback period
Accounting Rate of Return (ARR).
Institute the competition of the discounted payback.
Compare and contract NPV and IRR and emphasize the superiority
of NPV rule.
PROCESS OF CAPITAL BUDGETING
Capital budgeting is a complex process. The capital budgeting
process involves generation of investment proposals, estimation of cash
flows for the proposals, evaluation of cash flows, selection of projects
based on acceptance criterion, finally the continual revolution of
investment after their acceptance. The steps involved in capital budgeting
are as follows:

CAPITAL BUDGETING PROCESS STEPS ARE

Project generation.
Project evaluation.
Project selection.
Project execution.

PROJECT GENERATION
In the project generation, the company has to identify the proposals
to the under taken depending upon its future plans of activity. After

36

identification of the proposal, they can be grouped according to the

following categories. There are

Replacement of equipment.
Expansion.
Diversification.
Research and development.

REPLACEMENT OF EQUIPMENT
In this case, the exiting out-dated equipment and machinery may be
replaced by purchasing new and modern equipment.
EXPANSION
The company can go for increasing additional capacity in the
existing product line by purchasing additional equipment.
DIVERSIFICATION
The company can diversify its product lines by way of producing
various products and entering into different markets. For this purpose, it
has to acquire the fixed assets to enable producing new products.
RESEARCH AND DEVELOPMENT
The company can go for installation of research and development
wing by incurring heavy expenditure, with a view to innovate new
methods of production, new products etc.
PROJECT EVALUATION
The process of project evaluation involves two steps. There are
Estimations of benefits & calculations.
Selection.
37

ESTIMATION OF BENEFITS AND COSTS

These must be measured in terms of cash flows. Benefits to be
received are measured in terms of cash inflows, and costs to be incurred
are measured in terms of cash out flows.
SELECTION
Selection is an appropriate criterion to judge the desirability of the
project.
PROJECT SELECTION
The selection and screening procedure would differ from firm to
firm. Due to lot of importance of capital budgeting decision the final
approval of the project may generally rest on the top management of the
company.
PROJECT EXECUTION
In the project execution the top management is responsible for
effective utilization of funds allocated for the project. Further to have an
effective control, it is necessary to prepare monthly budget reports to
show clearly the total amount appropriated, amount spent and the amount
unspent.
COMPONENTS OF CAPITAL BUDGETING

Initial investment outlay.

Net operating benefits or savings from the operations.
Terminal cash flow.
The net present value technique.

38

INITIAL INVESTMENT
It includes the cash required to acquire the new equipment or build
the new plant less any net cash proceeds from the disposal of the replaced
equipment. The initial outlay also includes any additional working capital
related to the new equipment. Only changes that occur at the beginning of
the project are included as part of the initial investment outlay. Any
additional working capital needed or no longer needed in a future period
its accounted for as a cash outflow or cash inflow during that period.
NET CASH BENEFITS OR SAVINGS FROM THE OPERATION
The incremental change in operating revenues minus the
incremental change in operating cost = incremental net revenue minus
(taxes) plus or minus (changes in the working capital and other
agreements).
TERMINAL CASH FLOW
It includes the net cash generated from the sale of the assets, tax
effects from the termination of the asset and the release of net working
capital.

THE NET PRESENT VALUE TECHNIQUE

Although there are several methods used in capital budgeting, the
Net Present Value technique is more commonly used. Under this method
a project with a positive NPV implies that it is worth investing in.
TECHNIQUES OF CAPITAL BUDGETING
39

Capital budgeting techniques are two types. There are:

Traditional approach or non-discounted cash flow approach.
Modern approach or discounted cash flow approach.
TRADITIONAL APPROACH OR NON-DISCOUNTED CASH
FLOW APPROACH
In this traditional approach or non-discounted cash flow approach
are again have two types:
Payback period.
ARR(accounting rate of return or average rate of return)
PAYBACK PERIOD
Payback period is one of the most popular and widely recognize of
evaluating investment proposals. It may be defined as that period required
to recovery the original cash outflow invested in a project. In other words
it is the minimum required number of year to convey the original cash
outlay invested in a project. The cash flow after taxation is used to
compute payback period.
Payback period can be calculated in two ways. There are:
When the cash flows are uniform.
When the cash flows are not uniform.
THE CASH FLOWS ARE UNIFORM
When the cash flows are uniform means stream of each year is
equal are annuity in all year, or project life. In this situation the following
formula is used to calculate the payback period.
Payback period = original investment / constant annual cash flow.

40

THE CASH FLOWS ARE NOT UNIFORM

When the cash flows are not uniform means the cash flows after
taxes are unequal or not uniform over the project life period. Payback
period is calculated by the process of cumulative cash flows.
Payback period = year before full recovery + (unrecovered amount of
investment / cash inflow the year).
ACCEPT OR REJECT CRITERIA
Project is based on the comparison of calculate payback period
with maximum or standard payback period.
Calculate payback period is less than the standard payback period.
Hence the project is accepted.
Calculate payback period is more than the standard payback
period. Hence the project is rejected.
Calculate payback period is equal to the standard payback period.
Hence the project is considered.
ADVANTAGES
Payback period is very simple and easy to understand.
Cost investment in calculating payback period is very less as
compare to sophisticated method.
DISADVANTAGES
Payback period is ignores cash flows after payback period.
Payback period is not appropriate method or the measuring of an
investment.
Payback period is does not take consideration of time value of
money.

41

 Payback period is not consistent with the objective maximizing

share holder wealth.
ACCOUNTING RATE OF RETURN
Accounting rate of return is uses the accounting information as
rivals by the financial statements to measure the profitability of the
investment proposals.
Accounting rate of return is also called as average rate of return or
return investment. Average annual earning after depreciation and taxes
are used to calculate Accounting rate of return. It is measured in terms of
percentage.
Accounting rate of return can be calculated in two ways. There are:
When it is clearly mention accounting rate of return.
When it is clearly mention average rate of return.
CLEARLY MENTION ACCOUNTING RATE OF RETURN
Accounting rate of return = average annual profit / original investment *
100.
Average annual profit = total cash inflows / number of years.
CLEARLY MENTION AVERAGE RATE OF RETURN
Average rate of return on investment = average annual profit / average
investment * 100.
Average investment = original investment / 2.
Average annual profit = total cash inflows / number of years.
ACCEPT OR REJECT CRITERIA
Project is based on the comparison of calculate accounting rate of
return with predetermine accounting rate of return or cutoff point.
42

 Calculate accounting rate of return is greater than the cutoff point.

Hence the project is accepted.
Calculate accounting rate of return is less than the cutoff point.
Hence the project is rejected.
Calculate accounting rate of return is equal to the cutoff point.
Hence the project is considered.
ADVANTAGES
The most significant merit of accounting rate of return.
Accounting rate of return is very simple to understand and easily to
calculate.
Information can easily be draw from accounting records.
Accounting rate of return is takes into account all profits of the
project life period.
DISADVANTAGES
Accounting rate of return is ignores cash flows after payback period.
Accounting rate of return does not allow the profits to be
reinvested.
Accounting rate of return does not differentiated between the sizes
of the investment required for each project.
Accounting rate of return feels that 10%rate of return but 10 years
is more beneficial than 8% rate of return for 25 years.

MODERN

APPROACH

OR

DISCOUNTED

APPROACH

43

CASH

FLOW

Modern approach or discounted cash flow approach is take into

consideration almost all the deficiencies of the traditional methods and
consider all benefits and cost occurring during the project entire period.
This modern approach or discounted cash flow approach are
subdivided into 3 types. There are:
Net Present Value (NPV).
Internal rate of return (IRR) or trial and error method.
Profitability index (PI) or cost benefit ratio method.
NET PRESENT VALUE METHOD
Net Present Value method is the one of the most important method
for discount cash flow approaches. These are also called discount benefit
cost ratio method. Net Present Value method can be defined as present
value of benefits is subtracted from the present value of cash.
Net Present Value method is the process of calculating present
value of cash inflows using capital at an appropriate rate of discount and
subtracted present value of cash outflows from present value of cash
inflows and find Net Present Value which may be positive or negative.

STEPS INVOLVED IN CALCULATION OF NET PRESENT

VALUE
Forecasting of cash inflows of investment project based on
realistic assumption.
Calculation of cash flows using cost of capital as discounting rate
or factor.
44

 Finding out Net Present Value by subtracting present value of cash

outflows from the present value of cash inflows.
Net Present Value = total present value of cash inflows total outlay
(cash outflows).
ACCEPT OR REJECT CRITERIA
Project is based on the comparison of calculate Net Present Value
with the zero.
Calculate Net Present Value is greater than the zero. Hence the
project is accepted.
Calculate Net Present Value is less than the zero. Hence the project
is rejected.
Calculate Net Present Value is equal to the zero. Hence the project
is considered.
ADVANTAGES
Net Present Value takes considered for the time value of money.
Net Present Value is particularly useful for the selection mutually
exclusive process.
Net Present Value takes into consideration the changing discount
rate.
Net Present Value is consistent with the objective of maximization
share holders wealth.
DISADVANTAGES
Net Present Value is difficult to understand with compare with
payback period and accounting or average rate of return.
In case of project involving different cash outlays Net Present
Value method may not give dependable result.
Net Present Value doesnt give satisfactory results when
comparing two projects with different life period.
45

 Generally a project having shorter economic life would be

preferable other things being equal.
INTERNAL RATE OF RETURN (IRR) METHOD
Internal rate of return method adopted by JOAL DEAN takes
into accounts the magnitude and timing of cash flows this is another
important discounted cash flow technique of investment decisions.
Internal rate of return can be defined as that rate which equates the
present value of cash inflows with the present value of cash outflows of
an investment proposal. It is the rate out which the net present value of
invest mental proposal is zero.
Internal rate of return is calculated by using the following formula:
Internal rate of return = A+C/C-D (B-C)
Where; A = lower discounting factor.
B = higher.
C = NPV of lower trail.
D = NPV of higher trail.
If the value means rate can be calculated on trail and error basis the
approach is to select any rate of interest to compute the present value of
cash inflows if the calculated present value of the expected cash inflow is
lower than the present value of cash outflows a lower rate should be trail.
If the present value of cash inflows is higher than the present value
of cash outflows, a higher is to trail. Thus process will be repeated till the
present value of cash inflows equates with the present value of cash
outflows or NPV become zero. The rte of disking factor is determined the
NPV is zero.
ADVANTAGES
Internal rate of return is considered the time value of money.
46

 Internal rate of return is considered cash flows over the entry life of
the period.
The Internal rate of return suggest the maximum rate of return and
gives fairly good idea regarding the profitability of the period.
Internal rate of return is also the computable with forms objective
of maximizing owners welfare.
DISADVANTAGES
Difficulty to calculate and understand.
Internal rate of return may not give unique answers in all
situations.
Internal rate of return may yield result in consistence with the net
present value method.
PROFITABILITY INDEX (PI) METHOD
Profitability index is another method of important method for
discounted cash flow technique for evaluating investment proposal. It is
also known as discounted cash flow ratio. It similarly the NPV method it
is the ratio of the present rate of return to the initial cash outflow of the
investment proposal.
Profitability index method measures the present value of future
cash per rupee where as the net present value based on the difference
between present values of cash inflows and present value of cash
outflows. NPV method is not reliable to evaluate projects requiring
unequal initial investment.
Profitability index is the ratio, which is derived by present value of
cash inflows by present value of cash outflows.
ACCEPT OR REJECT CRITERIA

47

Project is based on the comparison of calculate profitability index

with the one.
Calculate profitability index is greater than the one. Hence the
project is accepted.
Calculate profitability index is less than the one. Hence the project
is rejected.
Calculate profitability index is equal to the one. Hence the project
is considered.
ADVANTAGES
The profitability index method satisfies almost all the requirements
of a sound investment.
Profitability index is gives consider the time value of money.
Profitability index consider the all cash flows to determine the
profitability index.
Profitability index helps to rank projects according to their
profitability index.
Profitability index consistent with the objectives maximization
share holders wealth.
DISADVANTAGES

It is difficult to understand interest rate or discount rate.

It is difficult to calculate profitability index if two projects having
different useful life.
Investment opportunities have to be identified or created
investment proposals arise at different levels within a firm.

Nature of Idea

Level
48

Cost reduction

------

Replacement

Plant Level

Process/Product Development

( 50% in India cover this level)

Expansion

Top Managment

Diversification

In India, it is insignificant

New Product

Marketing Dept., ( or) Plant

Manager

Replacing an old
Machine ( or)
Improving the

Factory Level

Production techniques.

Investment proposals should be generated to employ the firms

funds fully well & efficiently.

FORECASTING:
Cash flow estimates should be development by operating managers
with the help of finance executives. Risk associated should be properly
handled. Estimation of cash flows requires collection and analysis of all
qualitative and quantitative data, both financial and non-financial in
nature. MIS provide such data.

Correct treatment should be given to:

Additional working capital
Sale proceeds of existing assets.
49

 Depreciation
Financial flows (to be distinguished from operation flows)

EVALUATION:

Group of experts who have no ache to grind should be taken in

selecting the methods of evaluation as NPV, IRR, PI, Pay Back, ARR &
Discounted Pay Back.
Pay Back period is used as Primary method & IRR/NPV as
Secondary method in India.

The following are to be given due

importance.
For evaluation, minimum rate of return or cut-off is necessary.
Usually it is computed by means of weighted Average cost of
Capital (WACC)
Opportunity cost of capital should be based on risky ness of cash
flow of investment proposals.
Assessment of risk is an important aspect. Sensitivity Analysis &
Conservative for costs are two important methods used in India.

AUTHORIZATION:
Screening and selecting may differ from one company to another.
When large sums are involved usually final approval rests with top
management. Delegation of approval authority may be effected subject to
the amount of outlay. Budgetary control should be rigidly exercised.

CONTROL AND MONITORING:

50

A Capital projects reporting system is required to review and

monitor the performance of investment projects after completion and
during their life. Follow up comparison of the actual performance with
original estimates to ensure better forecasting besides sharpening the
techniques for improving future forecasts. As a result company may repraise

its

projects

and

take

necessary

action.

Indian Companies use regular project reports for controlling

capital expenditure reports may be quarterly, half-yearly, monthly, bimonthly continuous reporting..

Expenditure to date
Stage and physical completion
Approved total cost
Revised total cost

DECISION MAKING LEVEL:

For planning and control purpose three levels of Decision making have
been identified:
Operating
Administrative Strategic
Strategic

OPERATING CAPITAL BUDGETING:

51

It includes routine minor expenditure, as office equipment handled

by lower level management.

ADMINISTRATIVE CAPITAL BUDGETING:

Falls in between these two levels involves medium size

investments such as business handled by middle level management.

STRATEGIC CAPITAL BUDGETING:

It involves large investment as acquisition of new business or

expansion in a new time of business, handled by top management unique
nature.

PRE INVESTMNET STAGE:

In a planned economy, as in India, the identification of public
sector projects needs to be done within the overall framework of national
the sectoral planning. All projects of every sector need to be identified
scientifically at the time of plan formulation. In actual practice, however,
it is observed that identification stage is the most neglected stage of the
project planning.

The five year plans indicate the broad strategy of planning

economic growth rate and other basic objectives to be achieved during
52

the plan period. The macro level planning exercise undertaken at the
beginning of every five year plan indicates broadly the role of each
sectors physical targets to be achieved and financial outlays, which could
be made available for the development of the sector during the plan
period.

The identification of a project in the Five Year Plan is not the

sanction of the project for implementation. It provides only the green
signal for the preparation of feasibility report (FR0 for appraisal and
investment decision. A preliminary scrutiny of the FR of the project is
done in the Ministry and thereafter copies of the feasibility report are
submitted to the appraising agencies, viz., Planning Commission, Bureau
of Public Enterprises and the Plan Finance Division of the Ministry of
Finance.

Thus the organizational responsibility for identifying these

projects rests with the concerned administrative ministry, in consultation
with its public enterprises.

The essential steps for project identification and preparation

relates to studying (i) imports (ii) substitutes (iii) available and raw
material (iv) available technology and skills

(v) inter-industry

relationship (vi) existing industry (vii) development plans (viii) old

projects etc.

It may be mentioned that in actual practice, these steps are hardly

scientifically studied and followed by the administrative ministry public
sector undertaking at the time of project identification. The public sector
53

projects many a time come spontaneously on the basis of ideas and

possibilities of demand or availability of some raw materials and not an
outcome of scientific investigation and systematic search for feasible
projects.

PROJECT FORMULATION :

The second stage of Project Cycle viz. Project Formulation, is a

pre-investment exercise to determine whether to invest, where to invest,
when to invest and how much to invest. The project/feasibility reports
are meant to provide required information for assessing technical,
financial, commercial, organization and economic viability of the project
planning in India, mainly because of relatively late realization of its
importance.
In early seventies along with the setting up of the Public
Investment Board (PIB) the Government created a new project Appraisal
Division in the Planning Commission.

This Division prepared and

circulated Guidelines for preparing Feasibility Reports of Industrial

Projects in 1974.This guidelines, unlike earlier manual, indicates all the
information and data required to be presented and analyzed in the
feasibility report, so as to enable the appraisal agency to carry out.

(i)

technical analysis to determine whether the specification of

(ii)

technical parameters are realistic,

financial analysis to determine whether the proposal is

(iii)

financially viable,
commercial analysis to determine soundness of the product
specifications, marketing plans and organization structure and

54

(iv)

Economic analysis, to determine whether a project is worthwhile

from the point of view of nation and economy as a whole.
The guidelines describes in details, the information required to be

given and analyzed on the following issues:

(a) General information of the sector,

(b) Objective of the proposal,
(c) Alternative ways, if any of attaining the objectives and better
suitability of the proposed project,
(d) Project description gestation period, costs, technology proposed,
anticipated life of the project etc.
(e) Demand analysis, total demand / requirements of the country,
including anticipated imports and exports and share of the proposed
project,
(f) Capital costs and norms assumed, activity wise and year wise,
(g) Operating costs and norms,
(h) Revenue and benefits estimation etc.

PROJECT APPRAISAL:

The appraisal of the project follows the formulation stage. The

objective of the appraisal process is not only to decide whether to accept
or reject the investment proposal, but also to recommend the ways in
which the project can be redesigned or reformulated so as to ensure better
technical, financial, commercial and economic viabilities.

55

The project appraised which is an essential tool for judicious

investment decisions and project selection is a multi-disciplinary task.
But many a times this is considered doubt, have played an important role
in contributing systematic methods for forecasting the future and
evolving appraisal methods to quantify socials costs and benefits, but
they alone cannot carry out complete appraisal of an investment proposal.
The need for project appraisal and investment decisions based on social
profitability arises mainly because of the basic characteristics of
developing countries limited resources for development and multiple
needs objective of planning being Economic Growth with Social
Justice.

The project appraisal is a convenient and comprehensive

fashion to achieve, the laid down objectives of the economic development

plan.
The appraisal work presupposes availability of a certain
minimum among of reliable and up to date data in the country, as well as
the availability of trained persons to carry out the appraisal analysis. As
stated earlier the investment decision of public sector projects are
required to be taken within the approved plan frame work. The Project
Appraisal Division (PAD) that prepares the comprehensive appraisal note
of projects of Central Plans was therefore set up in Planning Commission.
The Finance Ministry issues expenditure sanction for all
investment proposals within the frame work of annual budget. The plan
Finance Division and the Bureau of Public Enterprises of the Finance.
Ministry is also required to examine and give comments on the
investment proposals of public.

56

DATA ANALYSIS AND INTERPRETATION

ANALYSIS OF CAPITAL BUDGETING IN SAT LTD
PROJECT EXPANSION OF SAT LTD
SAT is operating at 56000 spindles at present. It is framed to:
Enhance its capacity to produce 56000 spindles by expansion.
The estimated cost of expansion is:
Approved cost: 10 crores.
PAYBACK PERIOD
The key steps involved in determining whether a project is work
while or not are estimate the cost and benefits of the project. Firstly we
have to assess the riskiness of the project, then calculate the cost of
57

capital and compute the criterion of merit and judge whether the project is
good or bad.
The payback period sometimes called as payout or payoff
methods. Represents the period in based on the principle that every
capital expenditure pays itself back within certain period out of the
additional earnings generated from the capital assets thus it measures the
period of time for the original cost of project, to recovered from the
additional earnings of the project itself under this methods various
investment are ranked according to the length of their payback period in
such a manner that the investment with a shorter payback period.

PROJECT COST (10CRS)

Year

of Income

the

Depreciation Cash

(profit

flow Cumulative

(income+

cash inflows

operation after tax)

depreciation

2010-11
2012-13
2013-14
2014-15

)
75452619
54244697
57051996
40747340

75452619
129697316
186749312
227496652

91471024

318967676

52758112 22694507
23743109 30501588
2105818 54946178
54160105
13412765

2015-16

38410601 53060423

PAYBACK PERIOD =
YEAR

BEFORE

FULL

RECOVERY

(UNRECOVERED

AMOUNT OF INVESTMENT/ CASH INFLOW THE YEAR)

=1+ (100000000-75452619)/129697316
=1+ 0.19
58

=1.19years

Cumulative cash inflows

350000000
300000000
250000000
200000000
150000000
100000000
50000000
0
2010-11

2012-13

2013-14

2014-15

2015-16

INTERPRETATION
It is assumed that the profit earning of the project will start from
2009-10. Taken consideration of incremental adjusted cash flow based on
base years, for calculation of PAYBACK PERIOD.
59

 From the data provided.

For cash flow we have deducted depreciation from profit and then
cumulative profit.
So the project PAYBACK PERIOD is calculated as 1.19years. We
should increase this period with same exception as there may be any
additional factor and other cause so rounding of 1.19 to 3 years will be
right, so that it will give more assistance to the calculation.

AVERAGE RATE OF RETURN

The accounting rate of return or average rate of return on
investment is a measure of profitability, which relates income to
investment both measured in accounting returns.
PROJECT COST (10CRS)
Income
Year

of (profit

the

Cash
Depreciation

after tax)

flow

(income+

Cumulative

depreciation)

cash inflows

operation
2010-11

52758112

22694507

75452619

75452619

2012-13

23743109

30501588

54244697

129697316

2013-14

2105818

54946178

57051996

186749312

60

2014-15

-13412765

54160105

40747340

227496652

2015-16

38410601

53060423

91471024

318967676

AVERAGE RATE OF RETURN ON INVESTMENT =

AVERAGE ANNUAL PROFIT

X 100

AVERAGE INVESTMENT
Average annual profit

Total cash inflow

Number of years

Average investment

318967676/5

63793535.2

original investment/2

100000000/2

50000000.

Average rate of return on investment = 63793535.2/50000000*100

= 127.58%.
Accounting rate of return =
Average annual profit
61

X 100

Original investment
= 63793535.2/100000000 X 100
= 63.793%.
INTERPRETATION
It is more calculation taking total profit and taking average of it. It
show the return on an average as what an average income of the firm on
long run basis with certain assumption 63.793% for any firm at long run
is good but there must be some decrease as future is not certain.

NET PRESENT VALUE

The net present value method is a modern method of evaluating
investment proposals. This method takes into consideration the time value
of money and attempts to calculate the return on investment by
introducing the factor of time element.

PROJECT COST (10CRS)

Year of the

Income (profit

operation

after tax)

Depreciation

Present

Cash

flow

value

(income+

factor@

depreciation)

Present value
of cash inflow

55%

2010-11

52758112

22694507

0.645

75452619

48666939

2012-13

23743109

30501588

0.416

54244697

22565794

2013-14

2105818

54946178

0.268

57051996

15289935

62

2014-15

-13412765

54160105

0.173

40747340

7049290

2015-16

38410601

53060423

0.111

91471024

10153284

Present value of cash inflow

50000000
45000000
40000000
35000000
30000000
25000000
20000000
15000000
10000000
5000000
0
2010-11

2012-13

2013-14

2014-15

2015-16

NET PRESENT VALUE =

TOTAL PRESENT VALUE OF CASH INFLOWS TOTAL OUTLAY
= 103725242-100000000
= 3725242.
63

INTERPRETATION
It is the factor of Re.1 calculation at the end of the year. It will be
value of Re.1 at the end of the year which is interest rate, coat of capital
and market state which is called as discounted rate to get an approximate
decision. It should be taken in every calculation of project so that an
approximate. Decision can be taken. As it is more reliable the simple cash
inflows (profits).
NPV is greater than the zero. Hence the expansion of project has
accepted. That means: NPV>ZERO.
INTERNAL RATE OF RETURN
Internal rate of return can be defined as that rate which equates
the present value of cash inflows with the present value of cash outflows
of an investment proposal. It is the rate at which the net present value of
invest mental proposal is zero.

PROJECT COST (10CRS)

Year

of Present

the

value

operation factor@

Present value Present

Cash

of

(income+

cash value

inflow

55%

2010-11
2012-13
2013-14
2014-15
2015-16

0.645
0.416
0.218
0.173
0.111

factor@

flow Present

0.634
0.401
0.255
0.160
0.102

64

of

depreciation) cash

57.81%

48666939
22565794
15289935
7049290
10153284

value
inflow

75452619
54244697
57051996
40747340
91471024

47836960
21752123
14548258
6519574
9330044

0.7
0.6
0.5
0.4
0.3

Tax value factor@

55%

0.2

Tax value
factor@57.81%

0.1
0

NET PRESENT VALUE =

TOTAL PRESENT VALUE OF CASH - TOTAL QUALITY
= 103725242-100000000
= 3725242.
NET PRESENT VALUE =
65

TOTAL PRESENT VALUE OF CASH INFLOWS - TOTAL OUTLAY

= 99986959-100000000
= -13041
INTERNAL RATE OF RETURN = A+C/C-D (B-C)
= 55+3725242/3725242-(-13041)(57.81-55)
=55+0.99(2.81)
= 57.78%

INTERPRETATION
In this calculation, is done on the basis of trail and errors. Thus
why taking various percentages of present value factors. Hence an
appropriate percentage of internal rates of return can be judge out.
Calculated figure is 57.78%, so we can take it as 57.81%cause at market
uncertainty. The internal rate of return is having less difference hence the
expansion of project has accepted. That means IRR = 13041.

66

PROFITABILITY INDEX

Profitability index is used to evaluate the investment proposal. It is

the ratio of the present value of cash inflows, at the required rate of
return, to the initial cash outflows of the investment.
PROJECT COST (10CRS)
Depreciation

Year of the Income

operation

(profit

after

tax)

Present

Cash

flow Present value of

value

(income+

factor@

depreciation)

cash inflow

55%

2010-11
2012-13
2013-14
2014-15
2015-16

52758112
23743109
2105818
-13412765
38410601

22694507
30501588
54946178
54160105
53060423

67

0.645
0.416
0.268
0.173
0.111

75452619
54244697
57051996
40747340
91471024

48666939
22565794
15289935
7049290
10153284

Present value of cash inflow

50000000
45000000
40000000
35000000
30000000
25000000
20000000
15000000
10000000
5000000
0
2010-11

2012-13

2013-14

2014-15

2015-16

PROFITABILITY INDEX = CASH INFLOW / CASH OUTFLOW

= 103725242/100000000
= 1.037.
INTERPRETATION
In calculation of profitability index simple income is taken into
consideration thats why PI = 1.037. But it is not correct as per practical
study .so discounted rate will help to get a good path to get approximate
PI and it will be more reliable than old traditional approach.
PI is greater than the one. Hence the expansion of project has accepted.
That means: PI>ONE.

68

FINDINGS
It is observed that the project completion cost is estimated to be
Rs.10CRs.
It is found that the payback period of the project in SAT is 2 years
and 7 months.
It is observed that by calculating average rate of return the average
income of the company is 63.79%. & it was a satisfactory position.

It is noticed that by calculating the net present value of the project

is positive then the value of the capital.

It is identified that the profitability index is also more than 1 times

returns on the investment.
It is noticed that the estimated cash flows of the project include
interest and tax.
It is identified that the company fixed assets are not maintain
properly.

SUGGESTIONS
69

 It is suggested to the company the payback period of the project in

SAT is 2 years and 7 months. The payback period is less than the
target period. So the project may be accepted.
It is recommended to the company the net present value of the
project is positive than the value of the capital. Hence the project
was accepted.
It is suggested to the company when taking 57.81% rate of return
the net present value shown negative value. In that position of
concern when the project is rejected this based on to take the
internal rate of return.

It is recommended to the company to reduce their interest rates to

increase their incomes.

It is advised to the company to accept the project by considering

Net present value profitability Index because it shows an positive
value.

It is suggested to the company to concentrate on fixed assets.

BIBLIOGRAPHY

70

NAME OF THE BOOK

NAME OF THE
AUTHOR

FINANCIAL MANAGEMENT

I.M.PANDEY

PUBLISHER

VIKAS PUBLISHING
HOUSE PVT.,LTD.,

FINANCIAL MANAGEMENT

KHAN & JAIN

TATA MC GRAWHILL

FINANCIAL MANAGEMENT

S.N.MAHESWARI

SULTAN CHAND &

SONS

OTHER SOURCES
ANNUAL REPORTS OF SREE AKKAMAMBA TEXTILES
LIMITED.
INFORMATION

BROCHURE

OF

SREE

TEXTILES LIMITED.
WEBSITE
www.sreeakkamambatextiles.com

71

AKKAMAMBA