BY

Shanjuvikashini K P -- 17BC315
J48
• Capital budgeting is the planning process used to determine
whether an organizations long term investments such as
new machinery , replacement machinery ,new plants new
products and research development projects are worth the
funding of cash through the firms capitalization structure
(debt ,equity or retained earnings)..
• The process involves analyzing a project’s cash inflows and
outflows to determine whether the expected return meets a
set benchmark.
• It may defined as “the firms formal financial process for the
acquisition and investment of capital”
 Capital budgeting
techniques

Traditional /non- Discounted cash

discounted cash flow flow

Payback period Net present value

Profitability Index
Accounting
rate of return Internal rate of
return (IRR)

Modified IRR
Discounted payback
Equivalent annualized
benefit/cost method
• This research was done by Indian Institute of Management
Bangalore (IIBM) in 2017.
• This research is based on a sample of 77 Indian companies listed
on the Bombay Stock Exchange(BSE).
• Results reveal that corporate practitioners largely follow the
capital budgeting practices proposed by academic theory.
• Discounted cash flow techniques of net present value and
internal rate of return and risk adjusted sensitivity analysis are
most popular. Weighted average cost of capital as cost of capital
is most favored.
• Out of the 29 companies that acknowledged NPV and IRR
contradiction, nearly52%(15) stated that they prefer NPV while
48%(14) preferred IRR incases of contradiction. Indian companies
seem to be equally divided on the issue of NPV IRR contradiction
and both the methods are preferred in almost equal proportion in
case of such situations.
MODEL PROJECT ESTIMATE:
NAME OF THE PROJECT : EXPANSION OF MOBILE SERVICE IN A.P
COVERAGE : FOR 10 DISTRICTS

JUSTIFICATION : there has been tremendous increase in mobile

usage after the Andhra state is divided into two. In order to cater
the need and improve the profitability ,this project is taken up.

the necessary equipment and cables will be purchased by open

tender.
LAND(FREE HOLD) 10900
LAND(LEASE HOLD) 1600
BUILDING 53050
APPARATUS AND PLANT 218400
MOTOR VECHICLES AND LAUNCHES 150
CABLES 136450
LINES AND WIRES 10300
INSTALATION TEST EQUIPMENT 2100
MASTS AND AERIALS 28100
OFFICE MACHINARY ND EQUIPMENT 600
ELECTRICAL FITTINGS 21000
FURNITURE AND FIXTURES 500
COMPUTERS 2250
DECOMMISSIONED ASSETS 10700
SUBSCRIBER INSTALLATION 3900
Total 500000
CELLULAR
A)PRE PAID 81600
B)POST PAID 19200
C)VAS AND OTHERS 7200
D)INTER CONNECTION USAGE 12000
CHARGES
TOTAL 120000
 REMUNARATION (STAFF) 4200
RENT (BUILDING)-TOWER SITES 3000
LEASE CHARGES 500
RATES AND TAXES 4800
POWERFUELVECHICLE RUNNING EXP. 24000
REPAIRS AND MAINTANACE :
A)BUILDING 1325
B)PLANT AND NACHINARY 3400
C)CABLES 2050
D)OTHERS 2925
TOTAL 84000

NOTE:
1.capital outlay is taken in proportion to the figures in the BSNL fixed assets schedule
2014-15 .
2.anticipated revenue and expenditures is in proportion to the expenditure of 2014-15.
Cash flows= total revenue – total expenses In 000’s
=120000-84000
=36000
Pay back period = capital investment/ annual cash flows
= 500000/36000
=13.88 years

ARR= Average return during the period

----------------------------------------------------
Average investment
Where, Average investment = original investment /2
=500000/2
=250000
ARR = (18000/250000)*100
=7.2%
YEAR CASH FLOWS PVF@ 10% PV OF CF’S
0 --- 500000 1 --- 500000
1 36000 0.909 32724
2 36000 0.826 29736
3 36000 0.751 27036
4 36000 0.683 24588
5 36000 0.621 22356
6 36000 0.565 20304
7 36000 0.513 18468
8 36000 0.467 16812
9 36000 0.424 15264
10 36000 0.386 13896
11 36000 0.350 12600
12 36000 0.319 11484
13 36000 0.290 10440
14 36000 0.263 9468
NPV 234824
YEAR CASH FLOW PV @ 10% PV OF CF’S PV@ 15% PV OF CF’S
O --- 500000 1 --- 500000 1 --- 500000
1 36000 0.909 32724 0.870 31320
2 36000 0.826 29736 0.756 27216
3 36000 0.751 27036 0.658 23688
4 36000 0.683 24588 0.572 20592
5 36000 0.621 22356 0.497 17892
6 36000 0.565 20304 0.432 15552
7 36000 0.513 18468 0.376 13536
8 36000 0.467 16812 0.327 11772
9 36000 0.424 15264 0.284 10224
10 36000 0.386 13896 0.247 8892
11 36000 0.350 12600 0.215 7740
12 36000 0.319 11484 0.187 6732
13 36000 0.290 10440 0.163 5868
14 36000 0.263 9468 0.140 5040
234824 --293936
IRR= Lower rate + present value at lower rate
---------------------------------------------- * diff in rates
PV at lower rate – PV at higher rate
234824
= 12% + ------------------------* (15-10)%
23484 + 293936
= 12.22%

PI = 1 + NPV
----------------------------
Initial investment
= 1 + 234824/500000
= 1.47
From the above ,we observe that profitability index is 1.47 which is greater
than one. hence the project is accepted . In BSNL , capital budgeting as a
whole cannot be analyzed based on traditional methods mentioned above
since projects are decentralized at SSA/circle levels accordingly. Taking this
as a constraint ,the following analysis based on capital investment and
physical performance is made.
Following points are observed from capital budgeting
The project i.e. expansion of mobile services in telangana is generating an
unequal cash flows for past 14 years
The initial investment is 50 crores.
• The ARR is 7.2% which is greater than the company’s rate of return
• Discounted payback period is 13.88 years.
• NPV and IRR are Positive for the proposal
• The PI is 1.47 >1
• Financial position of bsnl is not good from past three years. But there is
good coordination among departments.
• The remuneration to staff of the company cannot be controlled. This is
one of the reasons for net profit decreasing year by year.
• BSNL is concentrating in increasing revenue form operations.
• Telephone connections are decreased in the year 2013-14.
• There should be improvement in working process of BSNL, because
working process is taking time.
• BSNL should provide training to the employees. So, they can get
information about new technology to improve the working process.
• The company should provide network services in the rural and urban
areas, so that there is a chance to increase the profits.
• The company gained higher profits in past years but it’s decreasing
when it compared to others.
• The company failed to attract new customers to its products. It can try to
attract young people by launching youth orientated schemes.
• Maintain the company in profitable position by maintaining net present
value (NPV).
• There should be proper communication between various departments
and responsibility centers.
• BSNL should use proper budgeting control system to evaluate profitable
projects.