INTRODUCTION

FINANCE:
In our present day economy, finance is defined as the provision of money at the time
when it is required. Every enterprise, whether big, medium and small, needs finance to carry on
its operations and to achieve its targets. In fact, finance is so indispensable today that it is rightly
said that it is the life blood of an enterprise. Without adequate finances, no enterprise can
possibly accomplish its objectives.
“Business finance can be broadly is defined as the activity concerned with planning,
raising, controlling and administering of the funds used in the business”.
“Business finance is that business activity that concerned with the acquisition and
conservation of capital funds in meeting financial needs and over all objectives of a business
enterprise”.
FINANCIAL MANAGEMENT:
From the various definitions of the term business finance given above, it can be
concluded that term business finance mainly involves, raising of funds and their effective
utilization keeping in view the overall objectives of the firm. This requires great caution and
wisdom on the part of management. The management makes use of various financial techniques,
devices, etc. for administering the financial affairs of the firm in the most effective, efficient way.
Financial management means the entire gamut of managerial efforts devoted to the management
of finance – both its sources and uses of the enterprise.

CAPITAL BUDGETING:

An efficient allocation of capital is the most important finance function in modern times.
It involves decisions to commit firm’s funds to long-term assets. Such decisions are tend to
determine the value of company/firm by influencing its growth, profitability & risk.

Investment decisions are generally known as capital budgeting or capital expenditure

decisions. It is clever decisions to invest current in long term assets expecting long-term benefits
firm’s investment decisions would generally include expansion, acquisition, modernization and
replacement of long-term assets.
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 Such decisions can be investment decisions, financing decisions or operating decisions.
Investment decisions deal with investment of organization’s resources in Long tern (fixed) Assets
and / or Short term (Current) Assets. Decisions pertaining to investment in Short term Assets fall
under “Working Capital Management”. Decisions pertaining to investment in Long term Assets
are classified as “Capital Budgeting” decisions.

Capital budgeting decisions are related to allocation of investible funds to different long-term
assets. They have long-term implications and affect the future growth and profitability of the
firm.

In evaluating such investment proposals, it is important to carefully consider the expected

benefits of investment against the expenses associated with it.

Organizations are frequently faced with Capital Budgeting decisions. Any decision that requires
the use of resources is a capital budgeting decisions. Capital budgeting is more or less a
continuous process in any growing concern.

NEED FOR THE STUDY

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 The Project study is undertaken to analyze and understand the Capital Budgeting
process in cement manufacturing sector, which gives mean exposure to practical
implication of theory knowledge.
 To know about the company’s operation of using various Capital Budgeting
techniques.
 To know how the company gets funds from various resources.
 To meet over head expenses.
 To hold finished and spare parts etc.
 To pay selling & distribution expenses.

OBJECTIVES OF THE STUDY

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

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

 To measure the present value of rupee invested.

 To understand an item wise study of the company and financial performance of the
company.

 To make suggestion if any for improving the financial position of the company.
 To understand the practical usage of capital budgeting techniques

 To understand the nature of risk and uncertainty

METHODOLOGY OF THE STUDY

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 Methodology is an intensive and purposeful search for knowledge and for the
understanding of social and physical phenomenon. It is the method for the discovery of true
values in a scientific way. There are two sources of data,
i) Primary Sources and
ii) Secondary Sources

Primary Data
The data which is collected at first hand for the purpose of the study is known as primary data.
Primary data which is collected through interaction with the assistant financial manager
of 3F company.
Primary sources

It is also called as first handed information; the data is collected through the
observation in the organization and interview with officials. By asking question with the
accounts and other persons in the financial department. Apart from these some information is

collected through the seminars, which were held by 3F company.

Secondary Data
The data which is corrected by some one previously is called by secondary Data. It is
already available in the form of internal records of the company and other publications.

Secondary sources

The secondary data have been collected through the various books, magazines,
brouchers & websites

LIMITATIONS OF THE STUDY

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  Lack of time is another limiting factor, i.e, the schedule period of 8 weeks are not
sufficient to make the study independently regarding Capital Budgeting in 3F company.
 The busy schedule of the officials in the 3F company is another limiting factor. Due to
the busy schedule officials restricted me to collect the complete information about
organization.
 Non-availability of confidential financial data.
 The study is conducted in a short period, which was not detailed in all aspects.
 All the techniques of capital budgeting are not used in. Therefore it was possible to
explain only few methods of capital budgeting.

INDUSTRY PROFILE
Introduction
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 Maruti Suzuki is India’s number one leading automobile manufacturer and the market
leader in the car segment both in terms of volume of vehicle and revenue earned. Until recently
18.28% of the company was owned by the Indian government and 54.2% by the Suzuki of Japan.
The Indian Govt. held an initial public offering of 25% of the company in June 2003. As of 10
May 2007 government of India sold its complete share to Indian financial Institution. With this
govt. Of India has no longer stake in Maruti Udyog.
Maruti Udyog Limited (MUL) was established in February 1981, though the actual production
was started in 1983 with the Maruti 800 based on the Suzuki Alto Kei Car which at that time was
the only modern car available in India. Its only competitor was Hindustan Motor’s Ambassador
and the Premier Padmini were both around 25 years out of date at that point.Through 2004 ,
Maruti Suzuki had produced over 5 Million vehicles. Maruti Suzuki are sold in India and
various several other countries depending upon export orders. Models similar to Maruti Suzuki
( but not manufactured by Maruti udyog) are sold by Suzuki Motors corporation and
manufactured in Pakistan and other south Asian countries.
The company anually exports more than 50,000 cars and has an extremely large domestic market
in India selling over 7,30,000 cars anually. Maruti 800 till 2004 was the India’s largest selling
compact car ever since it was launched in 1983. More than a Million unit of this car have been
sold worldwide so far. Currently Maruti Suzuki Alto tops the sales chart and Maruti Suzuki
Swift is the largest selling car in A2 segment.Due to large number of Maruti 800’s sold in the
Indian market the term “Maruti” is commonly used to refer to this compact car model. Till
recently the term “ Maruti” in popular Indian culture in India, Hindu’s lord Hanuman is known
as “Maruti” was associated with Maruti 800 model.

Manufacturing Facilities
Its manufacturing facilities are located at two facilities, “Gurgoan” and “Manesar” south of
Delhi. Maruti Suzuki’s Gurgoan facility has an installed capacity of 3,50,000 units per annum.
The Manesar facility launched in February 2007 comprises a vehicle assembly plant with a
capacity of 1,00,000 units per year and a Diesel Engine plant with an annual capacity of 1,00,000
engines and transimission. Manesar and Gurgoan facility have a combined capacity to produce
over 7,00,000 units annually.More than a half of the cars sold in India are Maruti Suzuki cars.

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The company is a subsidiary of Suzuki Motors Corporation of Japan which owns 54.2 percent of
Maruti Suzuki. The rest is owned by the Public and Finance Institution.It was listed on the
Bombay ( now Mumbai) stock exchange in India.
During 2007-08 Maruti Suzuki sold 7,64,842 cars of which 53,024 are exported in all. Over Six
Million Maruti Suzuki cars on Indian roads since the first car was rolled out on 14 December
1983.
Products Offered
Maruti Suzuki offers 15 models and they are, Maruti 800, Alto, Wagon R, Zen Estilo, A Star,
Ritz, Swift, Swift Dzire, SX4, Omni, Eeco, Gypsy and Grand Vitara.Out of these models
Grand Vitara is imported from Japan a completely built unit (CBU). Swift, Swift Dzire , A Star
and SX4 are manufactured in Manesar and the remaining models such as Maruti 800, Alto,
Wagon R, Zen Estilo, Ritz, Omni , Eecoetc are manufactured at Gurgoan Plant.
Human Resources
Nearly 75,000 people are employed directly by the Maruti Suzuki and its Partner. It has been
rated first in customer satisfaction among all car makers in India from 1999 to 2009 by J.D.
Power Asia Pacific.

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History

Around 1970, Sanjay Gandhi, Political advisor and younger son to then Prime minister of India,
Indira Gandhi , envisioned the manufacture of an indigenous , cost – effective , low maintenance
compact car for the Indian middle class. Indira Gandhi’s cabinet passed a uninamous resolution
for the devlopment and production of “people’s car”. Sanjay Gandhi’s company was christened
Maruti Limited. The name of the car was choosen as “Maruti”, after the name of a hindu deity
named Marut.
At that time Hindustan Motor’s Ambassador was the cheif car and the company had came out
with a new enterant , the Premium Padmini which was slowly gaining a part of the market share
dominated by the Ambassador. For the next ten years the Indian car market had stagnated at a
volume of of 30,000 to 40,000 cars for the decade ending 1983.
Sanjay Gandhi was awarded the exclusive contract and licence to design, devlop and
manufacture the “People’s car.This exclusive right of production generated some criticism in
certain quaters, which was directly targeted at Indira Gandhi . Over the next few years the
company was sidelined due to the Bangladesh Liberation war and the emergency.
In the early days under the powerful patronage of Sanjay Gandhi, the company was provided
with free land , tax breaks , and funds. Till the end of 1970’s the company had not started the
production and a prototype test model was met with criticism and skepticism.The company went
into liquidation in 1977. The media perceived it to be another area of growing corruption.
Unfortunately Maruti started to fly only after the death of Sanjay Gandhi, when Suzuki joined
the Govt. Of India as a joint venture parteners with 50% share.
After the death of Sanjay Gandhi, Indira Gandhi decided that the project should not be allowed
to die. Maruti entered into collaboration with Suzuki Motors . The collaboration heralded a
resolution in the Indian car industry by the production of “Maruti 800”.
The car went into sale on December 14,1983. It created record by taking 13 months to go from
design to rolling out car from a production line. By the year 1994 the company had sold upto
1,96,820 cars, mostly by selling its cheif product the “Maruti 800”. By March 1994, it produced
one million vehicle , becoming the first Indian company to cross this milestone. It reaches the 2
million mark in October 1997, and rolled out its 4th million vehicle an ALTO (LX) on April 19,
2003.

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Maruti Udyog Ltd. is the premium car company in India. Maruti Udyog Limited (MUL) was
established in February 1981 through an act of parliament. The Company entered into
collaboration with Suzuki Motors of Japan to manufacture cars.The main objectives behind
formation of Maruti Udyog Limited was to meet the growing demand of a personal mode of
transport caused by the lack of an efficient Public Transport System.
Today Maruti Udyog Limited is garneshing share of automobile market in India. It has
completely revolutionised the Indian car market and has brought out numerous model to cater to
every section of society. These ranges from Economy cars to Luxury cars to Super SUV’s.

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 COMPANY PROFILE

Around 1970, Sanjay Gandhi, political advisor and younger son to the then Prime
minister of India, Indira Gandhi, envisioned the manufacture of an indigenous, cost effective,
low maintenance compact car for the Indian middle class. Indira Gandhi’s cabinet passed an
uninamous resolution for the development and production of “Peoples car”. Sanjay Gandhi’s
company was christened Maruti Limited. The name of the car was was chosen as Maruti, after a
hindu deity named Marut.
Unfortunately Sanjay Gandhi died without fulfilling his dream. After this death , Indira
Gandhi decided that the project should not be allowed to die. Maruti entered into collaboration
with the Suzuki Motors of Japan. The collaboration heralded a resolution in the Indian car
industry by producing Maruti 800. The car went into sale on 14 December 1983. And from
1980’s to till day today Maruti’s have dominated the Indian Automobile industry as well as
automobile market.

Stock Exchange on which company is listed

Maruti Suzuki is listed on Bombay stock exchange now Mumbai. It is also listed on NYSE
( New York Stock Exchange) as well as stock exchange of Japan.

Vision, Mission and Core values of Maruti Suzuki

Vision:-
Vision of any company is those values on which company works. As the Maruti Udyog Limited
(MUL) is started by governmental initiatives it tends to be more consumer oriented and hence
cost- effective, but on the other hand Suzuki’s participation ensures not only need of profit, but
the need of maximum profit. The only way of Nora’s dilemma of selecting principles for the
company’s working vision was to maximize profit and sales and hence Maruti Udyog Limited
(MUL) declared its vision as:-
“The leader in the Indian Automobile Industry, creating Customer Delight one and shareholder’s
wealth two eventually become pride of India. Customer Delight One is making sure that
Performance, after sales service and customer are best and beyond expectations, shareholder’s
wealth two is the prime concern for running business smoothly. Maruti Udyog Limited (MUL)

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knows this and understands “Customer Is King” , he can change the future of any company
hence goes company’s brand line : COUNT ON US!
Mission:-
Mission is the statement of any organisation’s purpose , what is want to accomplish in the larger
environment and its goal which are specific , realistic, and motivating. Missions are described
over Visions and Visions demand certain objectives. The main Objectives / Mission of Maruti
Udyog Limited are:-
1. Modernisation of Indian Automobile Industry.
2. Developing cars faster and selling for less.
3. Production of fuel- efficient vehicles to conserve scarce resources.
4. Production of large number of motor vehicles which are necessary for the Economic
Growth.
5. Market penetration, Market developments, similar product development and
diversification.
6. Parter relation management, value chain, value delivery networks.

Core Values :-
 Customer Obsession
 Fast, Flexible and First Mover
 Innovation and Creativity
 Networking and Partnership
 Openness and Learning

1.3.3 Company Board Of Directors

Mr.Shinzo Nakanishi Managing Director (M.D) and Chief

Executive Officer (C.E.O)
Mr. R.C. Bhargava Chairman
Mr.Maninder Singh Banga Director
Mr.AmalGanguli Director
Mr.D.S.Brar Director
Mr. Keiichi Asai Director
Mr. Osamu Suzuki Director
Mr.ShujiOishi Director
Ms.PallaviShroff Director

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Mr. Kenichi Ayukawa Director
Mr. Tsuneo Ohashi Director and Management Executive Officer

MILESTONES
2005  The fiftieth lakh car rolls out in April, 2005

 Growth in overall sales by 15.8%

2004  New (non A/C) variant of Alto

 Alto becomes India's new best-selling car

 LPG variant of 'Omni Cargo'

 Versa 5-seater, a new variant

 Baleno LXi, a new variant

 Maruti closed the financial year 2003-04 with an annual sale of

472122 units, the highest ever since the company began operations
20 years ago

2003  New Suzuki Grand Vitara XL-7

 Redesigned and all-new Zen

 New upgraded WagonR

 Enters into partnership with State Bank of India

 Production of 4 millionth vehicles. Listed on BSE and NSE after a

public issue oversubscribed 10 times

2002  WagonR Pride

 Esteem Diesel. All other variants upgraded

 Maruti Insurance. Two new subsidiaries started: Maruti Insurance

Distributor Services and Maruti Insurance Brokers Limited

 Alto Spin LXi, with electronic power steering

 Special edition of Maruti 800, India’s first colour-coordinated car

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  Maruti True value in Mumbai

 Maruti Finance in Mumbai with 10 finance companies

 Suzuki Motor Corporation (SMC) increases its stake in Maruti to

54.2 percent

2001  Zen LXi

 Maruti True Value launched in Bangalore and Delhi

 Maruti Versa, India’s first luxury MPV

 Alto Spin LXi, with electronic power steering

 Alto VXi

 Customer information centers launched in Hyderabad, Bangalore

and Chennai

 Launch of versa

2000  First car company in India to launch a Call Center

 New Alto

 Altura, a luxury estate car

 IDTR (Institute of Driving Training and Research) launched jointly

with the Delhi government to promote safe driving habits

1999  Maruti 800 EX ( 796cc, hatchback car)

 Zen LX (993cc, hatchback car)

 Zen VXi (993cc, hatchback car with power steering)

 Omni XL ( 796cc, MUV, high roof)

 Baleno (1600cc, 3 Box Car)

 Wagon R

 Launch of Maruti - Suzuki innovative traffic beat in Delhi and

Chennai as social initiatives

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1998  Maruti launches website as part of CRM initiatives

 Zen D (1527 cc diesel, hatchback car)

 Zen VX & Zen VX Automatic

 New (Omni & Omni E) (796cc, MUV)

 Launch of website as part of CRM initiatives

1997  1998 Esteem (1299cc, 3 box car) LX, VX and AX

 New Maruti 800 (796cc,hatchback Car) Standard and Deluxe

 Produced the 2 millionth vehicle since the commencement of

production

1996  Gypsy (E) (970cc, 4WD 8 seater)

 Omni (E) (796cc, MUV, 8 seater)

 Gypsy King (1298cc, 4WD, off road vehicle)

 Zen Automatic (993cc, hatchback car)

 Esteem 1.3L (1298 cc, 3 box Car)AX

 Launch of 24-hour emergency on-road vehicle service

1995  Esteem 1.3L (1298 cc, 3 box car)VX

 With the launch of second plant, installed capacity reached 200,000

units

1994  Esteem1.3L (1298cc, 3 box car)LX

 Produced the 1 millionth vehicle since the commencement of

production

1993  Zen (993cc, hatchback Car), which was later exported in Europe
and elsewhere as the Alto

1992  SMC increases its stake in Maruti to 50 percent

1991  Reaches cumulative indigenisation of 65 percent for all vehicles

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 produced

1990  Maruti 1000(970cc, 3 box), India’s first contemporary sedan

1988  Installed capacity increased to 100,000 units

1987  Exported first lot of 500 cars to Hungary

1986  Maruti 800 ( New Model-796cc, hatchback Car)

 Produced 100,000 vehicles (cumulative production)

1985  Launch of Maruti Gypsy (970cc, 4WD off-road vehicle)

1984  Omni, a 796cc MUV

 Installed capacity reached 40,000 units

1983  Maruti 800, a 796 cc hatchback, India’s first affordable car.

 Production was started under JVA

1982  License and JV agreement signed between Maruti Udyog Ltd. and
SMC of Japan

AWARDS

2005
Number one in JD Power SSI for the second consecutive year
Number one in JD Power CSI for the sixth time in a row - the only car to
win
it so many times
M800, WagonR and Swift topped their segments in the TNS Total
Customer Satisfaction Study
Leadership in the JD Power Initial Quality Study - Alto number one in
its
segment for the 2nd time in a row, Esteem number one in its segment for
the 3rd year in a row, Swift number one in the premium compact

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 segment
WagonR and Esteem top their segments in the JD Power APEAL study
TNS ranks Maruti 4th in the Corporate Reputation Strength (CSR) study
(#1 in Auto sector)-Feb 05
Maruti bagged the "Manufacturer of the year" award from Autocar-
CNBC
( 2nd time in a row)-Feb 05
First Indian car manufacturer to reach 5 million vehicles sales
Business World ranks Maruti among top five most respected companies
in
India-Oct 04
Maruti ranked among top ten (Rank7) greenest companies in India by
Business Today - Sep '04

2004
Maruti Suzuki was No. 1 in Customer atisfaction, No. 1 in Sales
Satisfaction No.1 in Product Quality (Esteem and Alto) and No. 1 in
Product Appeal (Esteem and Wagon R)
No. 1 in Total Customer Satisfaction (Maruti 800, Zen and Alto)
Business World ranked us among the country's five most respected
companies
Business World ranked us the country's most respected automobile
company
Voted Manufacturer of the year by CNBC
Voted one of India's Greenest Companies by Business Today-AC
Nielson ORG-MARG

2003
Maruti 800, Maruti Zen and Maruti Esteem make it to the top 10
automotive brands in "Most Trusted Brand survey 2003"
J D Power ranked 3 models of Maruti on top: Wagonr, Zen and Esteem
Maruti 800 and Wagonr top in NFO Total Customer Satisfaction Study
2003.
MUL tops in J D Power CSI (2001) for 4th time in a row

2001
MUL tops in J D Power CSI (2001) for 2nd time in a row: another
international first

2000
Maruti bags JD Power CSI - 1st rank; unique achievement by market

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 leader anywhere in the world

1999
MSM launched as model workshop in India; achieves highest CSI rating.
Central Board of Excise & Customs awards Maruti with
"SammanPatra", for contribution to exchequer and being an ideal tax
assessee

1998
CII's Business Excellence Award

1996
Maruti wins INSSAN award for "Excellence in Suggestion Scheme"
Awarded the Star Trading House status by Ministry of Commerce

1994-95
Engineering Exports Promotion Council's award for export performance

1994
Best Canteen award among Haryana Industries as part of employee
welfare

1992-93
Engineering Exports Promotion Council's award for export performance.

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ORGANISATION STRUCTURE

Maruti Udyog Limited has a flat organisation structure with a maximum of three levels. The
Organisation Structure of Maruti Udyog Limited is follows:-

MANAGING DIRECTOR

Manufacturing Financial General

Director Controller Manager

DGMs/AGMs DGMs/AGMs DGMs /AGMs

Managers / AM Managers /AM Managers / AM

Engineers and
Sr. Executives Sr. Executives Sr. Executives

Jr. Executives Jr. Executives Jr. Executives

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THE PRODUCTION PROCESS AT MARUTI

Recruitment and Selection Process Of Maruti Suzuki

Meaning of recruitment
It is a process of searching the potential candidate and offers him or her the job. It is positive in
nature in the Indian context. Process of identifying and hiring best qualified candidate for a job
vacancy in a most timely and cost effective manner.

Meaning of Selection
It is the process of searching the potential candidate. It is negative in nature in the Indian context
but positive in U.S context.

Steps involved in the Selection Process

Selection process consists a series of steps and at each stage facts may come into light that may
lead to rejection of the application of the applicants. It is a series of successive hurdles or
barriers which an applicant must have to cross.

A) Preliminary Interview (Screening Applications) :- Initial screening is done to weed

out totally undesirable or unqualified candidate at the outset. It is essentially a sorting
process in which prospective candidate are given necessary information about the nature
of the job and the organisation at the same time, the necessary information is also elicited
from the candidate about their education, skills, experience, salary expected and the like .
It helps to determine whether it is worthwhile for a candidate to fill up the application
form.

B) Application Form :- Application form is a traditional and widely used device for
collecting information about the candidate. It should provide all the information relevant

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 to selection, where refeErence for caste, religion, birth place, may be avoided as it may
be regarded an evidence of description.

C) Selection Test :- Psychological test are being increasingly used in employee selection
where a test may evolve some aspects of an individual’s attitude , behaviour and
performance. Tests are useful when the number of applicants is large as at the best it
reveals that the candidate who scores above the predetermined cutoff points are likely to
be more successful than those scoring below the cut off points.

D) Employee Interview:- Interview is an essential element of selection and no selection

procedure is complete without one or more personal interview, where the information
collected through application letter or application forms and test can be crossed checked
in the interview.

E) Medical Examination :- Applicants who have crossed the above stage are sent for the
physical medical examination either to the company’s physician or to a medical officer
approved for the purpose . Such examination serves the following purpose :-

1) It determines whether the candidate is physically fit to perform the job where those
who are physically unfit are rejected.
2) It prevents the employement of people suffering from contagious diseases.
3) It identifies candidate who are are otherwise suitable but requires specific job due to
physical handicaps and allergies.

F) Reference Checks :- The applicants are asked to mention in his application form, the
names and address of two or more persons who knows him very well. These may be their
previous employer , heads of educational institution or public figures. These people are
requested to give their opinion about the candidate without incurring any liabilities.

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 G) Final Approval :-In most of the Organisations, selection process is carried out by the
Human resource department, where the decision of the departments are recommendatory.
The candidate shortlisted by the department are finally approved by the executive of the
concerned department or the unit.

H) Employment :- Employment is offered in the form of an appointment letter mentioning

the post, the rank, the salary, grade, the date by which the candidate should join and other
terms and condition in briefs.

I) Induction :-The process of receiving employee when they begin work introducing thm to
the company and to their colleagues and informing them of the activities, customes and
traditions of the company is called “ induction”.

J) Follow ups :- All selection should be validated by follow ups, it is a stage where
employee is asked how he or she feels about progress to the date and the worker’s
immediate supervisor is asked for comments which is compared with the notes taken at
the time of selection.

Training and Devlopment Programs of Maruti Suzuki

TRAINING & DEVELOPMENT

 Annual Training Plan - All Levels
 Training customised to meet Organisational Objectives
 Topics selected based on Vision, Values & Departmental Feedback of Company-wide
Managers
 Competency Mapping to identify Individual Training Needs
 Technical Training on latest Technologies abroad at SMC, Japan
 STRONG FOCUS ON TRAINING INITIATIVES

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 - Build a Learning Organisation
- Continuous Value Additions to Professional Skills
- Customised Training
- Training to the personnel of Business Partners

Overseas training
Training held in co-ordination with SMC, Japan and AOTS (Assoc. for Overseas Tech.
Scholarship)(covered 1600 employees under the various schemes)
 6 months SMC Training for Technicians - OJT in SMC, Japan (2 batches/yr of 50 each)
 9 months Javada Training for Press, Tool & Die Specialists - Design & Maintenance
 AOTS Managerial Training (4-10weeks) for Manager & above - Managerial Best
Practices
 AOTS Technical Training (3.5 to 6 months) for Supervisors & above - Technological
Knowhow
 R & D Training (2 yrs.) - Research on new Technologies
APPRAISAL & REWARD
Appraisal
 New Appraisal System based on KRAs & Targets
 Review of Targets at regular Intervals
 People Development an important KRA
Reward
 Promotions based on Performance
 Productivity & Profit-linked Incentive Schemes
 Training including Long-term SMC Japan Trg.
 Highest paid workforce in the Industry, if not the Country

LEADERSHIP
 Vision, Value & Team Building Workshops for Top Management
 CFT (Cross Functional Teams) of Managers for Major Thrust Areas
 Managers sent to Joint Ventures to upgrade their practices to MUL standards

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INTERNATIONAL BUSINESS

In August, 2003 Maruti crossed a milestone of exporting 300,000 vehicles since its first export in
1986. Europe is the largest destination of Maruti’s exports and coincidentally after the first
commercial shipment of 480 units to Hungary in 1987, the 300,00 mark was crossed by the
shipment of 571 units to the same country. The top ten destinations of the cumulative exports
have been Netherlands, Italy, Germany, Chile, U.K., Hungary, Nepal, Greece, France and Poland
in that order.

The Alto, which meets the Euro-3 norms, has been very popular in Europe where a landmark
200,000 vehicle were exported till March 2003. Even in the highly developed and competitive
markets of Netherlands, UK, Germany, France and Italy Maruti vehicles have made a mark.
Though the main market for the Maruti vehicles is Europe, where it is selling over 70% of its
exported quantity, it is exporting in over 70 countries.

Maruti has entered some unconventional markets like Angola, Benin, Djibouti, Ethiopia,
Morocco, Uganda, Chile, Costa Rica and El Salvador. The Middle-East region has also opened
up and is showing good potential for growth. Some markets in this region where Maruti is, are
Saudi Arabia, Kuwait, Bahrain, Qatar and UAE.

The markets outside of Europe that have large quantities, in the current year, are Algeria, Saudi
Arabia, Srilanka and Bangladesh. Maruti exported more than 51,000 vehicles in 2008-09 which
was 59% higher than last year. In the financial year 2008-09 Maruti exports contributed to more
than 10% of total Maruti sales.

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 Continent wise export of Maruti Udyog
Limited Since inception

Graph 1.1

Graph showing the Continent wise export of Maruti Udyog Limited Since Inception.
Description :-
Asia 12%
Africa 7%
America 9%
Europe 70%
Oceania 2%
Refrence :- Official website of Maruti Suzuki
(www.marutisuzuki.com)

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 THEORETICAL FRAME WORK
CAPITAL BUDGTING:
An efficient allocation of capital is the most important finance function in modern times.
It involves decisions to commit firm’s funds to long-term assets. Such decisions are tend to
determine the value of company/firm by influencing its growth, profitability & risk.

Investment decisions are generally known as capital budgeting or capital expenditure

decisions. It is clever decisions to invest current in long term assets expecting long-term benefits
firm’s investment decisions would generally include expansion, acquisition, modernization and
replacement of long-term assets.

Such decisions can be investment decisions, financing decisions or operating decisions.

Investment decisions deal with investment of organization’s resources in Long tern (fixed) Assets
and / or Short term (Current) Assets. Decisions pertaining to investment in Short term Assets fall
under “Working Capital Management”. Decisions pertaining to investment in Long term Assets
are classified as “Capital Budgeting” decisions.

Capital budgeting decisions are related to allocation of investible funds to different long-term
assets. They have long-term implications and affect the future growth and profitability of the
firm.

In evaluating such investment proposals, it is important to carefully consider the expected

benefits of investment against the expenses associated with it.Organizations are frequently faced
with Capital Budgeting decisions. Any decision that requires the use of resources is a capital
budgeting decisions. Capital budgeting is more or less a continuous process in any growing
concern.

For Example: Purchase of Land is an example of Capital Budgeting decision. Similarly

replacement of outdated equipment with modern machines, purchase of a brand or business,
computerization and networking the organization, investment in research and development of a

26
product launch of a major promotional campaign etc are all example of Capital Budgeting
decisions.

However, in all cases, the decisions have a long-term impact on the performance of the
organization. Even a single wrong decision may in danger the existence of the firm as a
profitable entity.

IMPORTANCE OF CAPITAL BUDGETING:

There are several factors that make capital budgeting decisions among the critical decisions to be
taken by the management. The importance of capital budgeting can be understood from the
following aspects of capital budgeting decisions.

1. Long Term Implications: Capital Budgeting decisions have long term effects on the risk
and return composition of the firm. These decisions affect the future position of the firm
to a considerable extent. The finance manger is also committing to the future needs for
funds of that project.
2. Substantial Commitments: The capital budgeting decisions generally involve large
commitment of funds. As a result, substantial portion of capital funds is blocked.
3. Irreversible Decisions: Most of the capital budgeting decisions are irreversible
decisions. Once taken the firm may not be in a position to revert back unless it is ready to
absorb heavy losses which may result due to abandoning a project midway.

4. After the Capacity and Strength to Compete: Capital budgeting decisions affect the
capacity and strength of a firm to face competition. A firm may loose competitiveness if
the decision to modernize is delayed.

PROBLEMS & DIFFICULTIES IN CAPITAL BUDGETING:

1. Future uncertainty: Capital Budgeting decisions involve long-term commitments. There

is lot of uncertainty in the long term. The uncertainty may be with reference to cost of the

27
 project, future expected returns, future competition, legal provisions, political situation
etc.
1. Time Element: The implications of a Capital Budgeting decision are scattered over a long
period. The cost and benefits of a decision may occur at different point of time. The cost of a
project is incurred immediately. However, the investment is recovered over a number of
years. The future benefits have to be adjusted to make them comparable with the cost. Longer
the time period involved, greater would be the uncertainty.
3. Difficulty in Quantification of Impact: The finance manger may face difficulties in
measuring the cost and benefits of projects in quantitative terms.
Example: The new product proposed to be launched by a firm may result in increase or
decrease in sales of other products already being sold by the same firm. It is very
difficult to ascertain the extent of impact as the sales of other products may also be
influenced by factors other than the launch of the new product.

ASSUMPTIONS IN CAPITAL BUDGETING:

The Capital Budgeting decision process is a multi-faceted and analytical process. A number of
assumptions are required to be made.

1. Certainty with respect to cost & Benefits: It is very difficult to estimate the cost and
benefits of a proposal beyond 2-3 years in future.
2. Profit Motive : Another assumption is that the capital budgeting decisions are taken with
a primary motive of increasing the profit of the firm.

The activities can be listed as follows:

 Dis-investments i.e., sale of division or business.
 Change in methods of sales distribution.
 Undertakings an advertisement campaign.
 Research & Development programs.
 Launching new projects.

28
  Diversification.
 Cost reduction.

FEATURES OF INVESTMENT DECISIONS:

 The exchange of current funds for future benefits.

 The funds are invested in long-term assets.
 The future benefits will occur to the firm over a series of years.

IMPORTANT OF INVESTMENT DECISIONS:

 They influence the firm’s growth in long run.

 They effect the risk of the firm.
 They involve commitment of large amount of funds.
 They are irreversible, or reversible at substantial loss.
 They are among the most difficult decisions to make.

TYPE OF INVESTMENT DECISIONS:

 Expansion of existing business.
 Expansion of new business.
 Replacement & Modernization.

INVESTMENT EVALUATION CRITERIA:

 Estimation of cash flows.

 Estimation of the required rate of return.
 Application of a decision rule for making the choice.

Consideration of cash flows is to determine true profitability of the project and it is an

unambiguous way of identifying good projects from the pool. Ranking is possible it should

29
 recognize the fact that bigger cash flows are preferable to smaller ones & early cash flows are
referable to later ones I should help to choose among mutually exclusive projects that which
maximizes the shareholders wealth. It should be a criterion which is applicable to any
considerable investment project independent of other.There are number of techniques that are
in use in practice. The chart of techniques can be outlined as follows:

Capital Budgeting Techniques:

Traditional Approach Modern Approach

(or) (or)
Non-Discounted Cash Flows Disconnected Cash Flows

Pay Back Period (PB) Net Present Value (NPV)

Accounting Rate of Return (ARR) Internal Rate of Return

Profitability Index (PI)
Discounted Payable Period

NET PRESENT VALUE :

The Net Present value method is a classic economic method of evaluating the investment
proposals. It is one of the methods of discounted cash flow. It recognizes the importance of time
value of money”.

It correctly postulates that cash flows arising of different time period, differ in value and
are comparable only when their equivalent i.e., present values are found out.

The following steps are involved in the calculation of NPV:

 Cash flows of the investment project should be forecasted based on realistic assumptions.
 An appropriate rate of interest should be selected to discount the cash flows, generally
this will be the “ Cost of capital rate” of the company.

30
  The present value of inflows and out flows of an investment proposal, has to be computed
by discounting them with an appropriate cost of capital rate.
 The Net Present value is the difference between the “Present Value of Cash inflows” and
the present value of cash outflows.
 Net present value should be found out by subtracting present value of cash outflows from
present value of cash inflows. The project should be accepted if NPV is positive.

NPV = Present Value of Cash inflow – Present value of the cash outflow
Acceptance Rule:
Accept if NPV > 0
Reject if NPV < 0
May accept if NPV = 0
One with higher NPV is selected.
INTERNAL RATE OF RETURN METHOD:
The internal rate of return (IRR) method is another discounted cash flow technique .This
method is based on the principle of present value. It takes into account of the magnitude &
timing of cash flows.

IRR nothing but the rate of interest that equates the present value of future periodic net
cash flows, with the present value of the capital investment expenditure required to undertake a
project.

The concept of internal rate of return is quite simple to understand in the case of one-
period project.

Acceptance Rule:
Accept if r > k
Reject if r < k
May accept if r = k
where r = rate return
k = opportunity cost of capital

31
PROFITABILITY INDEX (OR) BENEFIT COST RATIO:
Yet another time-adjusted method of evaluating the investment proposals is the benefit-
cost (B/C) ratio of profitability index PI). It is benefit cost ratio. It is ratio of present value of
future net cash inflows at the required rate of return, to the initial cash outflow of the investment.

Present Value of Cash inflows

PI = -----------------------------------------
Present Value of Cash outflows
Acceptance Rule :

Accept if PI > 1
Reject if PI < 1
May accept if PI = 1
Profitability Index is a relative measure of projects profitability.

PAY BACK PERIODE METHOD:

One of the top concerns of any person or organization investing a large amount of money
would be the time by which the money will come back. The concern making the investment
would want that at least the capital invested is recovered as early as possible. The pay back
period is defined as the period required for the proposal’s cumulative cash flows to be equal to its
cash outflows. In other words, the payback period is the length of time required to recover the
initial cost of the project. The payback period is usually stated in terms of number of years. It can
also be stated as the period required for a proposal to ‘break even’ on its net investment.
The payback period is the number of years it takes the firm to recover its original investment
by net returns before depreciation, but after taxes.
If project generates constant annual cash inflows, the pay back period is completed as follows:
Initial Investment
Pay Back = ------------------------
Annual cash inflow
In case of unequal cash inflows, the payback period can be found out by adding up the
cash inflows until the total is equal to initial cash outlay.

Acceptance Rule:
32
  Accept if calculated value is less than standard fixed by management otherwise reject it.
 If the payback period calculated for a project is less than the maximum payback period
set up by the company it can be accepted.
 As a ranking method it gives highest rank to a project which has lowest pay back period,
and lowest rank to a project with highest pay back period.

DISCOUNTED PAY BACK PERIOD:

One of the serious objections to pay back method is that it does not discount the
cash flows. Hence discounted pay back period has come into existence. The number of periods
taken in recovering the investment outlay on the present value basis is called the discounted
pay back period.
Discounted Pay Back rule is better as it does discount the cash flows until the outlay is
recovered.
ACCOUNTING RATE OF RETURN (OR)
AVERAGE RATE OF RETURN (ARR) :
It is also known as return on investment (ROI). It is an accounting method, which uses the
accounting information revealed by the financial statements to measure the profitability of an
investment proposal. According to Solomon, ARR on an investment can be calculated as “ the
ratio of accounting net income to the initial investment i.e.” .
Average Net Income
ARR = ---------------------------
Average Investment
Average Income = Average of after tax profit
Average Investment = Half of Original Investment

Acceptance Rule:
 Accept if calculated rate is higher than minimum rate established by the management.
 It can reject the projects with an ARR lower than the expected rate of return.
 This method can also help, the management to rank the proposals on the basis of ARR.

33
  A highest rank will be given to a project with highest ARR, whereas a lowest rank to a
project with lowest ARR.

CAPITAL BUDGETING METHODS IN PRACTICE

 In a study of the capital budgeting practices of fourteen medium to large size companies
in India, it was found tat almost all companies used by back.

 With pay back and/or other techniques, about 2/3 rd of companies used IRR and about 2/5th
NPV. IRR s found to be second most popular method.

 Pay back gained significance because of is simplicity to use & understand, its emphasis
on the early recovery of investment & focus on risk.

 It was found that 1/3rd of companies always insisted on computation of pay back for all
projects, 1/3rd for majority of projects & remaining for some of the projects.

 Reasons for secondary of DCF techniques in India included difficulty in understanding &
using threes techniques, lack of qualified professionals & unwillingness of top
management to use DCF techniques.

 One large manufacturing and marketing organization mentioned that conditions of its
business were such that DCF 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 DCF techniques for evaluating such projects.
techniques in India included difficulty in understanding & using threes techniques, lack
of qualified professionals & unwillingness of top management to use DCF techniques.

34
PROCESS
CAPITAL BUDGETING PROCESS:
Atleast five phases of capital expenditure planning & control can be identified:

 Identification ( or Organization ) of investment opportunities.

 Development of forecasts of benefits and costs.
 Evaluation of the net benefits.
 Authorization for progressing and spending capital expenditure.
 Control of capital projects.
INVESTMENT IDEAS:
Investment opportunities have to be identified or created investment proposals arise at
different levels within a firm.

Nature of Idea Level

Cost reduction ------
Replacement Plant Level
Process/Product Development ( 50% in India cover this level)
Expansion Top management
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 firm’s 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

35
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.
 Depreciation
 Financial flows (to be distinguished from operation flows)

EVALUATION :
Group of experts who have no ake 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 if 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 MONITORY:

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 re-praise its projects and
take necessary action.
36
 Indian Companies use regular project reports for controlling capital expenditure reports
may be quarterly, half-yearly, monthly, bi-monthly 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
OPERATING CAPITAL BUDGETING:
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:

Involves large investment as acquisition of new business or expansion in a new time of

business, handled by top management unique nature.

Long Term Capital Budgeting In 3F

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.

37
 The five year plans indicate the broad strategy of planning economic growth rate and
other basic objectives to be achieved during the plan period. The macro level planning exercise
undertaken at the beginning of every five year plan indicates broadly the role of each sector’s
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 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. As a result, the investment
decisions for large projects in the past were taken on half-baked and ill-conceived projects and
time-over runs and cost-over runs of public sector projects have become a regular feature rather
than exception.

38
 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 analysed in the feasibility report, so as to enable the appraisal agency to carry out
(i) technical analysis – to determine whether the specification of technical parameters are
realistic, (ii) financial anaylsis – to determine whether the proposal is financially viable, (iii)
commercial analysis – to determine soundness of the product specifications, marketing plans and
organization structure and (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 analysed 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.

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 can not carry
out complete appraisal of an investment proposal.

39
 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 are also required to examine and give comments on the
investment proposals of public.

40
 DATA ANALYSIS AND INTERPRETATION
IMPORTANCE OF INVESTMENT DECISION:

1.Investment decision requires special attention because of the following reasons.

2.They influence the firm’s growth in the long term.
3.They effect the risk of the firm.
4.They involve commitment of large amount of funds.
5.They are irreversible, or reversible at substantial loss.
6.They are among the most difficult decisions to make.

INVESTMENT EVALUATION CRITERIA:

1.Three steps are involved in the evaluation of investment.

2.Estimation of cash flows.
3.Estimation of the required rate returns (the opportunity cost of capital) application of a
decision rule for making the choice.

EVALUTION OF INVESTMENT PROPOSAL:

At each of time a business firm has a number of proposals regarding various objects
in which it can invest funds. But the funds available with the firm are ways limited and it is not
possible to invest: Rinds in all he proposals at a time.

Hence, it is very essential to select amongst the various competing Proposals,

those which given highest benefits. Te crux of the capital budgeting is the location of
available non-econornic, which influence the capital budgeting .decisions. The crucial factor that
influences. the capital budgeting decision is the profitability of the prospective investment. Yet the

41
disk involved in the proposal in not be ignored because -profitability and risk are directly related,
i.e., higher. Ratability, the risk and vice-versa.

They are many evaluating profitability of capital investment proposals. The various
commonly used methods are as follows:

Non DCF criteria

a)Payback period

The payback period on of the most popular and widely recognized tradition
methods of evolution investment proposals. Payback period is the number of years required to
require the original cash outlay invested in a project.

In the project generates constant annual cash flows, the payback period can be
computed by dividing cash outlay by the annual cash inflows.

Initial investment
Initial Investment
Pay back = ------------------------
Annual cash Inflows

In the vase of unequal cash flows the payback period can be found out by adding up the cash
inflow until the total is equal to the initial cash outlay.

b)Accounting rate of returns (ARR):

The accounting rate of returns also known as the return on investment (ROI) uses
accounting information, as reveled by financial statements, to measure to profitability of an
investment the accounting rate of returns is the ratio of the average of tax profits divided by the
average investment.

Average earning (after tax)

ARR = ------------------------------------ x 100

42
 Average investment

DFC criteria

a)Net present value (NPV): The net present value is the classical method of
evaluating the investment proposals. If is a DCF technique that explicitly recognizes the
time value at different time periods differ in the value and comparable only when their
equipment present values – around out.

NPV= Total present value –project cost

(b) Internal Rate of Return (IRR):

The internal rate of return (IRR) method is another discounted cash flow technique
which takes account of the magnitude and thing of cash flows, other terms uses to describe the
IRR method are yield on an investment, marginal efficiently of capital, rate of return over cost,
time – adjusted rate of internal return and soon.

NPV at LR
IRR= LR+ --------------- x Different rate
Different NPV

LR= lower discount rate

NPV at LR = Net present value at lower rate

Different NPV = 2 Rates net present value difference

Different rate = 2 rates different

(C)PROFITABILITY INDEX (PI)

At another time – adjusted method of evaluating investment proposals is benefit –cost

(b/c) ratio of profitability index is the ratio of the present value cash inflows, the required rate of
return to the initial cash out of the investment

43
 present value
PI = -------------------
Project value

CRITERION TABLE:
In the evolution process or capital budgeting techniques there will be a criteria to accept or reject
the criteria will be access of

Criteria/Method Accepts Reject

Payback period (PBV) >Target period < target period

Accounting rate of return >Target time < target time

(ARR)

Net present value (NPV) >0 <0

Internal rate return (IRR) >cost of capital <cost of capital

Profitability index (PI) >1 <1

44
CALCULATION OF PAY BACK PERIOD

Year Income (PAT) Depreciation Cash in flow Cumulative cash

RS inflow RS
2011-12
1,21,45,984 3,99,19,638 5,20,65,622 5,20,65,622

2012-13
2,78,99,787 2,99,39,728 5,78,39,515 10,99,05,137

2013-14
2,10,44,578 2,24,54,796 4,34,99,374 15,34,04,511

2014-15
4,20,96,494 1,68,41,097 5,89,37,591 21,23,42,102

2015-16
9,51,66,792 1,26,30,823 10,77,97,615 32,01,39,717

Initial outlay (project cost) = 15,96,78,550

I.0-L.V
Pay back period = L+ --------------------------------
N.H.V-L.V

L = LOWER YEAR

IO = INITIAL OUTLAY

LV = LOWER YEAR VALUE

NHV = NEXT HIGHER YEAR VALUE

45
 = 3 + 159678550-153404511
-------------------------------
212342102 - 153404511

= 3 + 0.11

= 3.11 years

CRITERIA FOR EVALUATION

The pay back period computed is a project less than the pay back period set by the
management of the company, if would be accepted. A project actual pay back period more
than the determined by the management it will be rejected.

Criteria/Method Accept Reject

Payback period (PBP) >Target period <Target period

Interpretation:
The payback period is set by 3F for considering expansion project is 6 years, whereas actual
payback period is 3.11 years. Hence we accept the project

46
 A) Calculation of ARR:

Year Profit after tax

2014-15 1,21,45,984

2015-16 2,78,99,787

2016-17 2,10,44,578

2017-18 4,20,96,494

2018-19 9,51,66,792

Average investment = Avg net profit after tax

----------------------------- x 100
Avg investment

Total profits
Avg net profit = ------------------------
No of years

= 19,83,35,635
----------------------
5
= 39,670,727

Avg investment = investment

------------------
2
= 15,96,78,550
------------------
47
 2
= 7,98,39,275

39670727
ARR = --------------- x 100
79839275
= 49.6 % or 50 %
According to this method ARR is higher than minimum rate of return established by the
management are accepted. If reject the project have less ARR than the minimum rate set by the
management.
Criteria / Method Accept Reject

Accounting rate of return  Target rate < Target rate

(ARR)

Interpretation:
The card ARR set by 3F management by 20% the actual ARR is 50 % is higher than the standard
ARR set by the management hence we accept the project.
(B) Calculation of NPV:
Year CIF DCF (25%) Present Value

2014-15 5,20,65,622 0.8 4,16,52,498

2015-16 5,78,39,515 0.64 3,70,17,290

2016-17 4,34,99,374 0.512 2,22,71,679

2017-18 5,89,37,591 0.41 2,41,64,412

2018-19 10,77,97,615 0.328 3,53,57,618

48
 TOTAL= 16,04,63,497

NPV = Total Present Value – Project value

Project value = 15,96,78,550
= 16,04,63,497 - 15,96,78,550
NPV = 7,84,947
Criteria for evaluation:
In case of calculated NPV is positive or zero, the project should be accepted. If the calculated
NPV is negative the project is rejected.
Criteria / Method Accept Reject

Net present Value (NPV)  0 <0

Interpretation:
NPV proposed explanation project is found our 784947 is the positive value. Hence we accept
the project.
(C) Calculation of IRR:

Year CIF DCF(25%) Present value Cash

Flows
2014-15 52065622 0.8 41652498

2015-16 57839515 0.64 37017290

2016-17 43499374 0.512 22271679

2017-18 58937591 0.410 24164412

2018-19 107797615 0.328 35357618

49
Total = 160463497
Project cost = 159678550
Net present value= 784947

YEAR CIF DF@26% PV

2014-15 52065622 0.794 41340104

2015-16 57839515 0.630 36438894

2016-17 43499374 0.500 21749687

2017-18 58937591 0.397 23398224

2018-19 107797615 0.315 33956249

Total value = 156883158

Project cost= 159678550
Net present value= -2795392

IRR = NPV at LR — Initial outlay

LR+ --------------------------------- x different rate
PVLDR - PVHDR
Where

LR = Lower Rate
NPV at LR = net Present at Lower rate

50
PVHDR = Present value at higher discount rate
PVLDR = present value at lower discount rate
160463497—159678550
= 25 + ---------------------------------- x 26-25
160463497—156883158
784947
= 25 + ------------- x1
3580339

= 25 + 0.219
= 25.219%

Criteria for evaluation:

In the method the project is accepted when IRR is higher than its cost of capital or cut out rate. If
the project is not accepted when IRR is less than cost of capital.

Criteria / Method Accept Reject

Internal rate of return (IRR)  Cost of capital < cost of capital

Interpretation:
The project is accepted because of the calculation IRR is higher than its cost of capital. The cost
of capital fixed by management is 9% the actual is more than its standard. Hence the project is
accepted.
(D) Calculation of profitability index:

Year CIF
2014-15 52065622

2015-16 57839515

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 2016-17 43499374

2017-18 58937591

2018-19 107797615

Total = 160463497
present value cash inflows
PI = -------------------------------------
Project cost

Present value = 160463497

Project value = 159678550

160463497
PI = --------------------
159678550

= 1.0049
Criteria for evaluation:
A project can be accepted if its PI index is greater than one. If PI is less than one we should reject
the project.

Criteria / method Accept Reject

Profitability index (PI) >1 <1

Interpretation:
Profitability index proposed explanation project is found our 1.0049 this is more than the PI.
Hence we accept the project.

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 FINDINGS

It is observed that the payback period has given time for their company is 6 years and but
the present payback period is 3.11 years for the company.

 It is observed that the required rate of ARR (Accounting Rate Of Return) is 20%

and the present ARR of the company is 50%.

 It is observed that the required rate of IRR ( Internal Rate Of Return) is 9% and

the present IRR of the company is 25.22%.

 It is observed that the NPV (Net Present Value) is 7,84,947 it is positive value.

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  It is observed that the PI(Profitability Index) is 1 and the present PI of the

company is 1.0049.
 It is observed that the company should not use the risk adjusted techniques.

SUGGESTIONS

 The present payback period is in satisfactory level therefore I strongly suggest to the

management to keep maintain this level.

 The ARR is satisfactory level so I suggested to management should need to continue this

level.
 It is recommended that the IRR is taken from the 26% and 25% and the project is ahead

that the optimum level of the Internal Rate is 25%, So it is better position of the IRR in

Maruthi Suzuki motors.

 It is advised that the NPV position is better in the organization, and the value of NPV is

reasonable for the cost of capital.

 The Profitability index (PI) is satisfactory level so I suggested to management should

need to continue this level.

 I suggested to management better decision can be obtained if risk adjusted methods like

decision tree analysis and sensitivity analysis are used by the management.

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 BIBILIOGRAPHY

Financial Management -- I.M. Pandey

Management Accountancy -- Khan & Jain
Financial Management -- S.N. Maheshwari
Advanced Accountancy -- S.P. Jain & K.V. Narayana
Financial Management -- Prasanna Chandra

Management Accountancy -- Sharma & Shashi K. Gupta

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