1

A study on

“CAPITAL BUDGETING DECISIONS”

With reference to

The Krishna District Milk Producers Mutually Aided Cooperative

Union .Ltd, VIJAYAWADA.

A Project Report Submitted to

Jawaharlal Nehru Technological University, Kakinada in partial

fulfillment of the requirements for the award of the Degree of

MASTER OF BUSINESS ADMINISTRATION

Submitted by

M.P.V.S.SIVADURGAPRASAD

REGD NO:12K61E0054

Under the guidance of

N.SURESH BABU

ASSCOCIATE PROFESSOR

Department of Management studies

DEPARTMENT OF MANAGEMENT STUDIES

SASI INSTITUTE OF TECHNOLOGY & ENGINEERING

((AApppprroovveedd bbyy AAIICCTTEE,, NNeeww DDeellhhii aanndd AAffffiilliiaatteedd ttoo JJNNTTUU,, KKaakkiinnaaddaa))

TTAADDEEPPAALLLLIIGGUUDDEEMM –– 553344110011WW..GG..DDTT..

2013

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DEPARTMENT OF MANAGEMENT STUDIES

CERTIFICATE

This is to certify that the project work entitled, A study on “CAPITAL

BUDGETING DECISIONS” With reference to The Krishna District Milk

Producers Mutually Aided Cooperative Union .Ltd, VIJAYAWADA.

submitted by M.P.V.S.SIVADURGAPRASAD(12K61E0054),, examined and

adjudged sufficient as partial fulfillment for the award of the Master of

Business Administration, by Jawaharlal Nehru Technological University,

Kakinada from SASI INSTITUTE OF TECHNOLOGY&

ENGINEERING Tadepalligudem.

INTERNAL GUIDE HEAD

Department of Management Studies.

INTERNAL EXAMINER EXTERNAL EXAMINER

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DECLARATION

I hereby declare that the project entitled “CAPITAL BUDGETING

DECISIONS” With reference to The Krishna District Milk Producers

Mutually Aided Cooperative Union .Ltd, VIJAYAWADA. is an original

and independent work done by me and has been submitted to the

Department of Management Studies, SASI INSTITUTE OF

TECHNOLOGY & ENGINEERING affiliated to Jawaharlal Nehru

Technological University, Kakinada in partial fulfillment for the award of

degree of “MASTER OF BUSINESS ADMINISTRATION”.

I also declare that this project is the result of my own effort and is not

submitted to any other University for the award of any Degree or Diploma.

Place: M.P.V.S.SIVADURGAPRASAD

Date: REGD NO: 12K61E0054

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ACKNOWLEDGMENT

I take this opportunity to acknowledge, all the people who rendered their valuable advice

in bringing the project to function.

As a part of the curriculum at SASI INSTITUTE OF TECHONOLOGY AND

ENGINEERING, affiliated to JNTUK-Kakinada the project enables us to enhance our

skills, expand our knowledge by applying various theories, concepts and laws to real life

scenario which would further prepare us to face the extremely ‘Competitive Corporate

World’ in the near future.

I express my sincere thanks to Sri. B.VENUGOPALA KRISHNA, Chairman

SASI INSTITUTE OF TECHONOLOGY AND ENGINEERING, Tadepalligudem,

for giving me an opportunity to undertake this project work.

I express my gratitude to Dr. K. BANU PRASAD, Principal, SASI INSTITUTE OF

TECHONOLOGY AND ENGINEERING, Tadepalligudem, for his valuable support

in pursuing my project work.

I would like to express my gratitude to Sri P. RAMAKRISHNA, Head -

Department of Management Studies, SASI INSTITUTE OF TECHNOLOGY AND

ENGINEERING, for permitting me to pursue my project in K.C.P SUGARS AND

CORPORATION LTD.

I owe a deep sense of gratitude to my project guide Sri N.SURESH BABU,

Associate Professor in Department of Management Studies, SASI INSTITUTE OF

TECHNOLOGY AND ENGINEERING, Tadepalligudem, for his cooperation at each

and every stage of my work and for his patience and immense support in completing this

project.

I have tried my level best to put my experience and analysis in writing this report. I

am grateful Mr. S.RAHAMATHULLA Senior Accounts Officer for helping me to learn

and explore many fields.

Finally I wish to express my thanks to all the members of the faculty of

department of Business Administration for their valuable suggestions in bringing out my

project in most successful manner.

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CONTENTS

PAGE NO

CHAPTER – I

INTRODUCTION 1-11

NEED FOR THE STUDY

SCOPE OF THE STUDY

OBJECTIVES OF THE STUDY

METHODOLOGY OF THE STUDY

LIMITATION OF THE STUDY

CHAPTER – II

INDUSTRY PROFILE 12-16

CHAPTER – III

PROFILE OF THE ORGANISATION 17-26

CHAPTER – IV

THEORETICAL FRAME WORK 27-40

CHAPTER – V

DATA ANALYSIS & INTERPRETATION 41-66

CHAPTER – VI

FINDINGS & SUGGESTIONS

BIBLIOGRAPHY

6

CHAPTER – 1

INTRODUCTION

NEED FOR THE STUDY

SCOPE OF THE STUDY

OBJECTIVES OF THE STUDY

METHODOLOGY OF THE STUDY

LIMITATIONS OF THE STUDY

7

CHAPTER – II

INDUSTRY PROFILE

8

CHAPTER – III

COMPANY PROFILE

9

CHAPTER – IV

THEORETICAL FRAME WORK

10

CHAPTER – V

DATA ANALYSIS & INTERPRETATION

11

CHAPTER – VI

FINDINGS & SUGGESTIONS

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INTRODUCTION

Finance is regarded as “THE LIFE BLOOD OF BUSINESS ENTERPRISE”.

Finance function has become so important that it has given birth to financial management

as a separate subject. So, this subject is acquiring universal applicability. Financial

Management is that managerial activity which is concerned with the planning and

controlling of the firm’s financial resources. As a separate activity or discipline is of

recent origin it was a branch of economics till 1890. Still today it has no unique

knowledge of its own, and it draws heavily on economy for its theoretical concepts.

The subject of financial management is of immense interest to both academicians

and practicing managers. It is of great interest to academicians because the subject is still

developing, and there are still certain areas where controversies exist for which no

unanimous solutions have been reached as yet. Practicing Managers are interested in this

subject because among the most crucial decisions of the firm are those which relate to

finance and an understanding of the theory of financial management provides them with

conceptual and analytical insights.

SCOPE OF FINANCE MANAGEMENT:

Firms create manufacturing capacities for production for goods; some provide

services to customers. They sell their goods or services to earn profits. They raise funds

to acquire manufacturing and other facilities. Thus, the three most important activities of

a business firm are:

Production

Marketing

Finance

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A firm secures whatever capital it needs and employees it (finance activity) in

activities that generate returns on invested capital (production and marketing activities).

A business firm thus is an entity that engages in activities to perform the functions of

finance, production and marketing. The raising of capital funds and using them for

generating returns to the supplies of funds is called the finance function of the firm.

FUNCTION OF FINANCIAL MANAGEMENT

TWO SIGNIFICANT CONTRIBUTION TO THE DEVELOPMENT OF

MODERN THEORY OF FINANCIAL MANAGEMENT ARE:

Theory of Portfolio Management developed by Harry Markowitz in 1950, which deals

with portfolio selection with risky investment. This theory uses statistical concepts to

quantify the risk-return characteristics of holding a group/portfolio of securities,

investment or assets.

The theory of Leverage and Valuation of Fire developed by Modigliani and Miller in

1958. They have shown by introducing analytical approach as to how the financial

decision making in any firm be oriented towards maximization of the value of the firm

and the maximization of the shareholders wealth.

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TYPE OF FINANCIAL ACTIONS:

1. The Financial Management of trading or manufacturing firms

2. Financial Management of Financial Institutions.

3. Financial activities relating to investment activities.

INTERNATIONAL FINANCE:

PUBLIC FINANCE:

Functions are broadly classified into three groups. Those relating to resource

allocation, those covering the financing of these investments and these determining how

much cash are taken out and how much reinvested.

Investment decision

Financing decision

Dividend decision

Liquidity decision

I)INVESTMENT DECISION:

Firms have scarce resources that must be allocated among competitive uses. The

financial management provides a frame work for firms to take these decisions wisely.

The investment decisions include not only those that create revenues and profits (e.g.

introducing a new product line) but also those that save money.

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So, the investment decisions are the decisions relating to assets composition of

the firm. Assets can be classified into fixed assets and current assets, and therefore the

investment decisions can also be bifurcated into Capital Budgeting decisions and the

Working Capital Management.

The Capital Budgeting decisions are more crucial for any firm. A finance

manager may be asked to decide about.

1. Which asset should be purchased out of different alternative options;

2. To buy an asset or to get it on lease;

3. To produce a part of the final product or to procure it from some other supplier;

4. To buy or not an other firm as a running concern;

5. Proposal of merger of other group firms to avail the synergies of consolidation.

Working Capital Management, on the other hand, deals with the Management of

current assets of the firm. Though the current assets do not contribute directly to the

earnings, yet their existence is necessitated for the proper, efficient and optimum

utilization of fixed assets. There are dangers of both the excessive working capital as well

as the shortage of working capital. A finance manager has to ensure sufficient and

adequate working capital to the firm.

II) FINANCING DECISIONS:

As firms make decisions concerning where to invest these resources, they have

also to decide two they should raise resources. There are two main sources of finance for

any firm, the shareholders funds and the borrowed funds. The borrowed funds are always

repayable and require payment of a committed cost in the form of interest on a periodic

basis. The borrowed funds are relatively cheaper but always entail risk.

The risk is known as the financial risk i.e., the risk of insolvency due to non-

payment of interest or non-repayment of capital amount. The shareholders fund is the

main source of funds to any firm.

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This may comprise of the equity share capital, preference share capital and the

accumulated profits. Firms usually adopt a policy of employing both the borrowed funds

as well as the shareholders funds to finance their activities. The employment of these

sources in combination is also known as financial management.

III) DIVIDEND DECISIONS:

Another major area of the decision marking by a finance manager is known as the

Dividend decisions which deal with the appropriation of after tax profits. These profits

are available to be distributed.

NATURE OF THE FINANCE MANAGEMENT:-

The nature of finance management is refers to its relationship with related.

Display like an economics, Accounting and other subject matters. Finance management

and integral part of overall management.

The relation between financial management and other related displain.

Is shown fig.

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Financial Management

(Decision Making Area)

Fig no.1.1

Leads to Wealth Maximization

Capital Budgeting

1.Investment Decision

Working Capital

Cost of Capital

2. Financing Decision

Capital Structure

3.Dividend Decision

4. Financial Statement Analysis

(Risk & Returns)

Other Related Subjects

1. Production

2. Marketing

3. Human Resources

4. Research &

Develop

Related Subjects

1. Economics

Micro

Macro

2. Accounting

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THE IDENTIFICATION OF THE RELEVANT GROUPS:

The various groups which may have stakes in the financial decisions making of a

firm and therefore required to be3 considered while taking financial decisions are:

The shareholders

The debt investors,

The employees,

The customer and the suppliers,

The public,

The Government, and

The Management

OBJECTIVE OF THE FINANCIAL DECISION MAKING

The following two are often considered as the objectives of the financial management.

The maximization of the profits of the firm, and

The maximization of the shareholders wealth

MAXIMIZATION OF THE PROFITS OF THE FIRM:

For any business firm, the maximization of the profits is often considered as the

implied objective and therefore it is natural to retain the maximization of profit as the

goal of the financial also.

The profit maximization as the objective of financial management has a built in

favour for its choice. The profit is regarded as yard stick for the economic efficiency of

any form. If all business firm of the society are working towards profit maximization

then the economic resources of the society as a whole would have been most efficiently,

economically and profitably used. The profit maximization by one firm and if targeted

by all, will ensure the maximization of the welfare of the society. So, the profit

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maximization as objective of financial management will result inefficient allocation of

resources not only from the point of view of the firm but also for the society as such.

It ignores the risk.

The profit maximization concentrates on the profitability only and ignores the

financing aspect of that decision and the risk associated with that financing.

It ignores the timings of costs and returns and thereby ignores the time value of money

The profit maximization as an objective is ague and ambiguous.

The profit maximization may widen the gap between the perception of the

management and that of the shareholders.

The profit maximization borrows the concept of profit from the field of accounting

and tends to concentrate on the immediate effect of a financial decisions as reflected in

thus the increase in the profit of that year or in near future.

MAXIMIZATION OF SHAREHOLDER WEALTH:

This objective is generally expressed in term of maximization of the value of a

share of a firm. It is necessary to know and determine as to how the maximization of

shareholders wealth is to be measured.

The measure of wealth which is used in financial management is the concept of

economic value. The economic value is defined as the present value of the future cash

flows generated by a decision, discounted as appropriate rate of discount which reflects

the degree of associated risk. This measure of economic value is based on cash flows

rather than profit. The economic value concept is objective in its approach and also takes

into account the timing of cash flows and the level of risk through the discounting

process.

PROFIT MAXIMIZATION VERSUS WEALTH MAXIMIZATION:

The objective of profit maximization measures the performance of a firm by a

looking at its total profit. The objective of maximization of the shareholders wealth is

operational and objective in its approach. A firm that wishes to maximize the profits may

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opt to pay no dividend and to reinvest the retained earnings, whereas a firm that wishes to

maximize the shareholders wealth may pay regular dividends.

THE CHANGING ROLE OF FINANCIAL MANAGEMENT:

Many changes in the contemporary world, financial management has undergone

significant changes over the years. The financial management has a very limited role in

business enterprise. Finance Manger is responsible only for maintaining financial records,

preparing reports of the company’s status, performance and arranging funds recorded by

company so that it would meet its obligations in time.

Financial Manager as a matter of act was regarded as specializes officers in the

company concerned only with administering sources of funds, he has called upon only

when the company experimental the problem relates the financial managers to locate the

suitable sources for funds and additional funds. The emphasis on decision making has

continued in recent years.

First there was been increased belief the cost of capital producer the required accurate

measurement of the cost of capital.

Secondly, capital has been in short supplies the old interest in the ways of raising funds.

Thirdly, there was has been a continued managerial activity that has led to revealed

interests in takeovers.

Fourthly, accelerated progress in transportation and communication has brought the

countries of the world close together

They in turn have stimulated interest in the international finance.

..

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IMPORTANCE OF FINANCIAL MANGEMENT:

Finance Management is of greater importance on the present corporate world. It

is a science of money, which permits the authorizes to go further.

SIGNIFICANCE OF FINANCIAL MANAGEMENT CAN BE

SUMMARISED AS:

It assists in the assessment of financial needs of industry large or small and

indicates the internal and external resources for meeting them. It assesses the efficiency

and effectiveness of the financial institution in mobilizing individual or corporate science.

It also prescribes various means for such mobilization of savings into desirable

investment channels.

It assists the management while investing the funds in profitable projects by

analyzing the viability of that project through capital budgeting techniques. It permits the

management to safeguard against the interest of shareholders by properly utilizing the

funds procured from different sources and it also regulates and controls the funds to get

maximize use.

INTRODUCTION TO CAPITAL BUDGETING

The term Capital Budgeting means planning for capital assets. The capital

budgeting decision as to whether or not money should be invested in long-term projects

such as an airliner is planning to buy a fleet of jet aircrafts, a commercial bank is thinking

of an ambitious computerization programme. It includes a financial analysis of the

various proposals regarding capital expenditure to evaluate their impact on the financial

condition of the company and to choose the best out of various alternatives. The finance

manager has various tools and techniques by means of which he assists the management

in taking proper capital budgeting decisions.

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DEFINITIONS:

“Capital Budgeting is the process of generating, evaluating, selected from

following a upon the capital expenditure alternatives”.

------> L.J.Gedman.

“Capital Budgeting is the long term planning for making and finance proced

capital outlays “.

-------> Charles.T.Hongra.

“Capital budgeting generally refers to accuring input with long term returns”.

In any growing concern, capital budgeting is more or less a continuous process

and it is carried out by different functional areas of management such as production,

marketing, engineering, financial management etc. All the relevant functional

departments play a crucial role in the capital budgeting decision process of any

organization, yet for the time being, only the financial aspects of capital budgeting

decision are considered to discuss.

The role of a finance manager in the capital budgeting basically lies in the process

of critically and in-depth analysis and evaluation of various alternative proposals and then

to select one out of these. As already stated, the basic objectives of financial management

is to maximize the wealth of the share holders, therefore the objectives of capital

budgeting is to select those long term investment projects that are expected to make

maximum contribution to the wealth of the shareholders in the long run.

FEATURES OF CAPITAL BUDGETING:

The important features, which distinguish capital budgeting decisions in other Day-

to-day decisions, are

Capital budgeting decisions involve the exchange of current funds for the benefits to

be achieved in future.

The future benefits are expected and are to be realized over a series of years.

The funds are invested in non-flexible long-term funds.

They have a long terms and significant effect on the profitability of the concern.

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They involve huge funds.

They are irreversible decisions. They are strategic decisions associated with high

degree of risk.

IMPORTANCE OF CAPITAL BUDGETING:

The importance of capital budgeting can be understood from the fact that an

unsound investment decision may prove to be fatal to the very existence of the

organization.

The importance of capital budgeting arises mainly due to the following:

1. LARGE INVESTMENT:

Capital budgeting decision, generally involves large investment of funds. But the

funds available with the firm are scarce and the demand for funds are exceeds resources.

Hence, it is very important for a firm to plan and control its capital expenditure.

2. LONG TERM COMMITMENT OF FUNDS:

Capital expenditure involves not only large amount of funds but also funds for long-

term or a permanent basis. The long-term commitment of funds increases the financial

risk involved in the investment decision.

3. IRREVERSIBLE NATURE:

The Capital expenditure decisions are of irreversible nature. Once, the decision

for acquiring a permanent asset is taken, it becomes very difficult to dispose of these

assets without incurring heavy losses.

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4. LONG TERM EFFECT ON PROFITABILITY:

Capital budgeting decision has a long term and significant effect on the

profitability of a concern. Not only the present earnings of the firm are affected by the

investments in capital assets but also the future growth and profitability of the firm

depends up to the investment decision taken today. Capital budgeting decision has utmost

importance to avoid over or under investment in fixed assets.

5. DIFFICULTIES OF INVESTMENT DECISION:

The long terms investment decisions are difficult to be taken because

uncertainties of future and higher degree of risk.

6. NATIONAL IMPORTANCE:

Investment decision though taken by individual concern is of national importance

because it determines employment, economic activities and economic growth.

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NEED FOR THE STUDY

The need for the study is as follows:

Vijaya dairy is big manufacturing unit with varying milk based products

are being produced.

The requirement of capital for each department is very high in an

organization like Vijaya dairy

Therefore, I have under taken my study in this organization to understand

the requirements of capital and its effective allocation of resources in

capital budgeting.

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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 capital budgeting of company.

Keep in view the accessibility and availability of the data sources 10% has been

chosen for the purpose of study. In this study to know the company’s financial position,

and which amount is capable to investing every year. To study of the profitability of the

company after expansion of the projects This study causes 2007-12 and it is limited only

to the perception of the personal belonging to KSMPCU Ltd,.

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OBJECTIVES OF THE STUDY

The objectives of the study are as follows

To describe the organization profile of KSMPCU Ltd.

To discuss the importance of management of capital budgeting.

Determination of proposal and investments inflows and our follows.

To evaluating the investment proposals by using capital budgeting techniques.

To summarize and suggest for the better investment proposals.

.

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METHODOLOGY OF STUDY

The information for the study is obtained from 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.

1. through interaction with the various department managers of Vijay a Dairy.

2. Guidelines give by the project guide ch. Venkateswarlu.

Secondary Sources:

This Data id from the number of books and records of the company the annual report

published by the company and other magazines. The secondary data is obtained from the

following.

Collection of required data from annual record ,monthly records

internal

Other books and journals and magazines

Annual report of the company.

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LIMITATIONS OF THE STUDY

As the information is highly confidential, the information provided by the

management is limited. Hence some of the conclusions are based on assumptions

that are taken under the guidance team of Vijay a Dairy.

For evaluation of the project I have followed the guidelines given by the Project

Appraisal Division of the Planning, which are mentioned here after.

This study is confined only to Finance and Planning departments of Vijay a

Dairy

Time taken for this study is 6 weeks, which is found to be less, as Capital

Budgeting is a vast topic.

Tool and Techniques of Capital Budgeting are implemented only under the

Construction stage of Vijay a Dairy.

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PROFILE OF MILK INDUSTRY

The food processing industry is one of the largest industries in India. It is ranked

fifth in terms of production, consumption, export and expected growth.

The industry size has been estimated at US $70 billion by the Government of

India, contributing 6% in total industries production. The industry directly employs 1.6

million people. The food processing industry covers sectors such as agriculture,

horticulture, plantation, animal husbandry and fisheries. It also includes other industries

that use agriculture inputs for manufacturing of edible products. The ministry of food

processing of government of India includes the following as part of the industries.

Dairy, Fruits & Vegetables processing.

Grain processing.

Meat & Poultry processing

Fisheries.

Consumer foods including packaged foods, Beverages and packed

drinking water.

While the industry is large in size, it is still at a nascent in terms of development

of the country’s total agriculture and food produce only 2% goes in to processing for

value addition. The highest share of processed food is in the dairy sector, where 37% of

the total produce is processed.

In the dairy sector, most of the processing is done by the UN organized sector.

The share of organized sector is less than 15%; it is expected to rise rapidly. Among the

milk products manufacturing by the organized sector are ghee, butter, cheese, ice-

creams, milk powders malted milk food, condensed milk and infant foods.

CASE INDIA’S FOOD PROCESSING INDUSTRY

The share of the organized and unorganized sectors varies across different

segments of the industries. The industry is estimated to grow at 9.12 % on the basis of an

estimated G.D.P. growth rate of 6 to 8%. Value addition of food products is expected to

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increase from the current 8% to 35% by the end of 2025. Fruit and Vegetable processing

which is currently around 2% of total production will increase to 10% by 2010 and

opening of the retail sector, the food processing sector is a key focus are for the

Government of India.

The importance of the sector is further enhanced by the fact that over 65% of

country’s population depends upon agricultural activity for livelihood. The industry

Government efforts have been to focus on commercialization and value addition of raw

agricultural produce, minimize pre/post harvest wastage, generate employment and

export growth in this sector through a number of regulatory and fiscal incentives.

DAIRY INDUSTRY IN INDIA

The developed countries in the world have recognized the important of live stock

enterprise and have developed around their agriculture, progressive and forward looking

livestock enterprise. The domestication of animal for making the food requirements was

the beginning of the agriculture in the world.

STEPS OF DAIRY DEVELOPMENT

In India, there was no progress in the dairy industry before independence,

Government of India realized the necessity of increasing milk production and by products

there by availing substantial job opportunities to the urban and rural community. The

Government of India has focused much more attention on dairy development

programmed by allocating more funds in the 4th and 5th fine year plans.

The Government of India during 1970 have launched massive programmed via.

Flood 1 and operation flood 2 with the help of European Nations and world production

programmed costing Rs.500 Cores. The Government of India has undertaken various

schemes through organization and institutions viz., India dairy corporation , India Dairy

Development Board, Animal Husbandry Department of all states, private sector,

organization of milk producers, co- operative and dairy plant, national dairy research

institute. These programmed enable for immediate development in dairy activities, dairy

development in our country with the help of effective marketing system.

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OPERATION FLOOD PROGRAME IN INDIA

In order to build a viable and self sustaining national dairy industry and co-

operative lines the NDDB launched a project christened operation flood mobilized from

the sale of products based in foreign food donations in the form of skin milk powder and

butter oil. Operation flood, the largest development programmed undertaken in the world,

was initiated closely on hells.

Green Revolution in the country. Against the back drop of huge surplus of milk

production in the highly developed milk producing countries in the west and dandling per

capita. Milk availability at home with its pledge to provide milk to one all, it was

considered the world’s largest dairy development programmed. It spurred the India dairy

industry to launch a “While Revolution”.

The establishment of milk producers off co-operative societies to link dairy

development with milk marketing formed the central plant of the project which gave into

a vigorous mild co-operative movement under the basis of NDDB. This was a unique

development effort which was initiated at the grass root level-the village-and went up to

the “Dairy Federation” of a state with its operational effectiveness ascending at every

step.

According to the agreement signed by food programmed (W.F.P) and

Government of India the W.F.P will arrange to supply 126000.00 metric tons of butter oil

which the corporation will handle on behalf of the Government utilization of

commodities would generate funds estimated at Rs.954 million during the project period.

These funds are to be investing in the plan of operations agreed by the W.F.P in

Government. The project aims at the improvement of milk marketing I the organized

sector especially in the four major cities extended over ten states I.e., Punjab, Tamil

Nadu, Andhra Pradesh, Maharashtra and Gujarat.

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Phase

Operation Flood-1

Operation Flood-2

Operation Flood-3

Ducati On

July 1970 To

March 1981

April 1981 To

March 1985

April 1985 To

March 1990

Funds

1165.00

2772.00

6013.00

(Disbursed)

(Disbursed)

(Disbursed)

Table: 2.1

The important of dairy development in India was recognized internationally in the

holding of the 58th annual session of the international. (I, D.C) at New Delhi in 1974. The

19th international dairy congress was a particular significance to India as its main theme

was “Dairying as an instrument of social and economic change”.

SUBTAINABILITY OF DAIRY MRKETING CO-OPERATIVE

BUSINESS ORGANISATIONS IN NEW ECONOMIC

ENVIRONMENT

Dairy marketing co-operative business organization could be able to achieve

sustainability particularly in the new economic environment, through adopting

professionalization and modern operational management practices and administration.

However, they must be made more sustainable, productive and profitability to

meet the needs of the new economic environment.

34

1998-99

63.08(….)

194(----)

1999-00

66.2(3.76)

197(1.55)

2000-01

69.1(4.38)

202(2.54)

2001-02

72.1(4.34)

207(2.50)

2002-03

75.4(4.58)

213(2.90)

2003-04

78.3(3.85)

217(1.90)

2004-05

80.6(3.00)

220(1.40)

20005-06

84.4(4.71)

225(2.30)

2006-07

86.2(2.13)

230(2.22)

2007-08

88.1(2.20)

231(0.43)

2008-09

91.0(3.30)

232(0.43)

2009-10

93.2(3.51)

235(0.32)

2010-11

95.1(3.70)

237(0.26)

35

MILK PRODUCTION AND PER CAPITA AVAILABILITY

Provisional: figure in parenthesis indicate growth rate

Source : State/ U.T. Animal Husbandry Department, 2008

It is heartening to note that the milk production and per capital availability of milk

is showing increase trend. The effect and impact of while revolution have been felt in

many milk shed regions of the country. Due to the positive policy changes in the dairy

sector, the country has self sufficiency in milk production.

INSTITUTIONAL SUPPORT TO CO-OPERATIVE DAIRYING INDIAN DAIRY

CORPORATION

The Indian dairy corporation (I.D.C) was setup under company’s act, on

immediate need to setup IDC was to handle the popularly known as “Operation Flood”.

Thus it became mainly a financing cum promotional of the central Government.

THE MAIN OBJECTIVES OF INDIAN DAIRY CORPORATION:

To promote dairy industry on the countries.

To assist the state Government and other organization including co-

operative societies interested in the promote of dairy industry to meet the

requirement of milk and milk products.

To provide a package of technical inputs for enhancement of milk

production. Resettlement of city based cattle in the rural areas.

To assist in expanding the capacity and operations of existing dairies in

the cities and rural.

NATIONAL DAIRY DEVELOPMENT BOARD (NDDB):-

At the time of inauguration of cattle feed factory at Kanjari in October, 1964, the

late Lal Bahadur Shastri, and the prime minister of India made an unscheduled visit to

milk production co-operative society and stayed there overnight. He was impressed by

the socioeconomic changes brought by milk co-operative in Kaira District, and desired to

have a national dairy development board is the chief executive of the organization who is

supported by professionals to carry out board’s activities

36

ANAND PATTERN DAIRY DEVELOPMENET

The formation of Anand pattern of milk co-operative was landed with the

organization of the kaira District co-operative milk produces limited at processing and

marketing are controlled by milk producers themselves. Anand. In this pattern, the

functions of dairying milk production procurement.

KAIRA DISTRICT CO-OPERATIVE MILK PRODUCERS UNION

LIMITED (A.M.U.I):

Amul symbolizes the successful struggle of kaira district farmers to earn a fair

price for their products. It reached its climax in 1945. The milk was then by a private

trade Mr. Pestonji Edurji person through contractors for Bombay milk scheme. At a

general meeting of members, representatives are selected to form a managing committee,

which manager the day to milk collection and its testing concepts, sold cattle feed.

FUTURE FOCUS:-

India is the largest producer of milk in the world. Milk and milk products

accounting for a significant 17 percent of India’s total expenditure on food. India’s total

milk production is projected to grow to 108million tones by end 2007 important position

in the global at US $ 133 million is estimated to be growing at 8-10 percent per annum.

The cheese market is estimated to be US $ 110 million in value terms and an

estimated 54000 tones in volume terms, and has been growing at a compound annual

growth rate (C.A.G.R) of 8-9 percent during 1999 -2003. The growth in urban in areas

has been higher at about 15 percent per annum. The ice cream market in India is

estimated to be about US $ 199 million per annum.

A few corporate employers, including MNCs, are now focusing on this market.

For example, Nestle and Britannia have forayed into emerging segments such as Ultra

Heated Treatment (U.H.T) and flavored milk. Ultra Heat Treated (U.H.T) milk is

becoming popular and the market is estimated at US $ 33.4 million (Rs. 1.5 billion).

The growth and future potential in the dairy sector have resulted in significant

investment into this sector in the last decade. Total investment in the dairy sector during

1991-2002 was around US $ 3.3 million. Current consumer trends like increasing

urbanization indicate that this segment will continue to be attractive in the future.

37

DAIRY INDUSTRIES IN ANDHRA PRADESH:-

In Andhra Pradesh, agriculture is the major activity and the dairy industry has a

natural link with it as it is a complementary activity. The progressive farmers of Andhra

Pradesh are known for their scientific and technological applications in the forms. In the

initial stages, the dairy development was looked after by ministry of Animal Husbandry,

but the responsibility was soon shifted to a Directorate. At that time of the industry was

mostly in the hands of private individuals and the quality and price of milk was highly

variable.

A pilot projects at Hyderabad and Vijayawada came into existence with the gift of

milk processing units from UNICEF. These projects gave a new turn to the industry and

soon chilling centers were established in Krishna District. Later, co-operative dairies

were started in Nellore, Chittoor, Warangal and Kurnool.

Dairy development become a part of ministry of agriculture and food at the state

level activates of the central dairy, its other dairy units and the co-operative dairies came

into scrutiny in 1971.

A.P.DAIRY DEVELOPMENT CO – OPERATIVE LIMITED:-

The Genesis:

A state –wide enterprise of co-operative for dairy development co-operative

federation (A.P.D.D.C.F), as an enterprise of one million farmers for dairy development,

had its genesis in 1981, with a three –tier co-operative structure.

38

DAIRY CO – OPERATIVE STRUCTURE:-

Apex Body

State level

District Level

Ten Unions

Village level Milk

Producers

9228 societies

Co-operative societies

fig. no:- 2.1

OBJECTIVES:

To organize co – operative of milk producers at village and district level.

Provide essential inputs to enhance milk production feed and fodder production.

Grass breeding programs. Veterinary aid, and take up development programs to

provide effective leadership and management skill to the milk producers to help

them manage their own 9200 co-operatives.

Development infrastructure for processing of milk and manufacture of dairy

products and market wholesome and quality milk and milk products.

Fulfill the consumer needs of liquid mild products in the products in the state.

Develop new products and packaging lines in time with the changing scenario of

consumer market and needs.

Integrate dairy development with overall rural development effort and provide

greater employment to the rural poor.

Today, there are 7000 co-operative with 300 all women co-operative and a

membership of over 8 lacks people across the state.

APDDE AT A GLANCE

--A.P.D.D.C.F

Milk Unions

39

District milk unions 10 No.

Milk sheds 5 No.

Milk products factories 7 No.

District dairies 9 No.

Major dairies 2 No.

Milk chilling centers 63 No.

Chilling capacity 11.37 LLPD

Processing capacity 50.06 LLPD

Milk products factories 17.50 LLPD

District dairies 3.24 LLPD

Major dairies 3.50 LLPD

Total processing capacity 24.24 LLPD

Milk collection routes 421 No.

Milk procedures co-operative

Societies

4270 No.

Milk procedures associations 4958 No.

Milk collection centers 9228 No.

Turnover 1999-00 637.43Crores

Table:- 2.3 Apdde at a Glance

PROFILE OF VIJAYA DAIRY

40

The Krishna District Milk Producers Mutually Aided Cooperative Union Ltd

(Reg. No.2001/355) is popularly known as Milk Project / Vijay a Dairy. It is also called

as Krishna Milk Union. This is a District Comparative engaged in procurement of Milk,

processing, liquid milk sales manufacturing of milk products and marketing.

Milk is a highly perishable commodity requiring utmost care for its handling and

timely disposal. The Krishna Milk Union has a large scale of operations as a rural dairy

industry having a status of public utility service. It has an annual business turnover of

Rs.180 Cores as of 2006-2007.

In view of the industrial status and essential service of Krishna Milk Union in the

District, a study on its Funds flow analysis management is interestingly undertaken with

facts and figures.

The Krishna District in Andhra Pradesh is endowed with rich agricultural and

livestock wealth are two main planks to keep the district ahead of others in the state.

Agriculture and dairying is a subsidiary occupation for the majority of people in the

district. Most of them are marginal, landless, poor farmers and labourers.

The Krishna District has great potential for milk production with a substantial

marketable surplus to tap. The market oriented milk production is the key livestock

activity to generate is mainly dairy oriented. It is livelihood security to the rural poor and

buffers the risks due to crop failure.

CATTLE POPULATION IN KRISHNA (2011-12):-

BREEDABLE ANIMALS

POPULATION (Rs In Lakes)

Buffaloes

4.14

Cows

0.38

Total

4.52

Table:- 3.1 Cattle population in Krishna

The organized dairying in Krishna District commenced in 1965 by the state

Government with the assistance of UNICEF. (United Nations International Children

Emergency Fund).

41

Under a pilot project named INTERGRATED MILK PROJECT

HYDERABAD AND VIJAYAWADA (1960). A milk supply scheme was introduced in

1965 to organize milk collection from the village, to process at chilling centre and supply

pasteurized milk to the consumers at Vijayawada and Hyderabad.

The Milk Supply Scheme was a success with its services to the producers and

quality supplies to the consumers. The initial procurement network was gradually

extended to all over the district within a span of 5 years. The “Milk Product Factory” first

of its kind South Indian was established and commissioned in Vijayawada by 1969.

Starting with a tiny procurement of 243 litters of milk on 11-2-1965 under the

Milk Chilling Centre, pamarru, the collection in the District has surpassed one lake

installed capacity of Milk Products Factory, Vijayawada within two years i.e. in 1971

necessitating additional capacities.

The Units were Under Dairy Development Department (1971). The products

manufactured Milk Products Factory, Vijayawada such as Butter, Ghee, Skim Milk

Powder, Whole Milk Powder and Infant Milk Food with the brand name VIJAYA earned

appreciation of consumers all over the country.

The VIJAYA became synonym for superior quality competing AMUL. The Milk

Project is a buzz word among the public all over the region. The expansion of milk

products factory, to meet the increased handing needs has been taken up later under

OPERATION FOOD Programmed by National Dairy Development Board (NDDB).

EXISTING INFRASTRUCTURAL FACILITIE IN KRISHANA UNION:

42

S .NO

NAME OF THE FACILITY

UNIT

CAPACITY

I.

MILK CHILLING

1

Pamarru

Litters / Day

50000

2

Verrankilock

Litters / Day

18000

3

Gudlavalleru

Litters / Day

18000

4

Hanuman Junction

Litters / Day

18000

5

Chillakallu

Litters / Day

12000

6

Tiruvuru

Litters / Day

12000

TOTAL CHILLING

128000

43

II.

MILK PROCESSING

Lakes Litters /

Day

2.50

III.

GHEE MANUFACTURE

MITs /Day

18.00

IV.

MILK DRYING

MITs /Day

22.00

V.

U.H.T. MILK

MITs /Day

45000

VI.

CATTLE FEED MIXNG FACILITY

1

Bubhavaram

MITs /Day

30.00

2

Gudlavalleru

MITs /Day

18.00

TOTAL

48.00

44

Procurement net work:

(2008-09)

Milk coop societies

676

Milk producers associations

320

Procurement routes

35

Women coop societies

103

Table:- 3.2 Krishana Union Infrastructure facilities

ORGANIZATION:

Integrated Milk Project (1960).

Dairy Development Department (1971).

A P Dairy Development Corporation Ltd (1974).

A P Dairy Development Co. Op Federation Ltd (1981).

There was a big retinue of 1850 staff in different categories working under the

Dairy Units in the District under the administrative control of AP Dairy Development

Corporation (APDDC) a State Government Under taken in 1974.

The replication PF Anand Pattern Dairy Cooperation in Krishna District has its

beginning with the all out support of NDDB. Primary Milk Produces cooperative society

at village level and District Milk Producer’s cooperative union at District level and AP

Dairy Development Cooperative Federation at State level have come in to begin.

45

ANAND PATTER

FEDERATION

(STATE LEVEL)

UNION

(DISTRICT LEVEL)

SOCIETY

(VILLAGE LEVEL)

Fig. No:- 3.1

The structured and institutional reforms that are part and parcel of NDDB took

few years to unfold Krishna Milk Union in Federation an Apex Body under APCS, 1964,

(Andhra Pradesh Cooperative Societies Act, 1964).

The management of dairy units in Krishna District transferred to the respective

democratically elected Board of Management with assets and liabilities and staff as is

where is with effect from 08-02-1985. The producer is the owner of the business.

46

AND LIABILITIES AS AN 8-02-1985:

S.NO

LIABILITIES

Amount

(Rs. In lakes)

ASSETS

Amount

(Rs. In

lakes)

1

Loans Transferred

from APDDCF

231.21

Assets Hyd. From

APDDCF

173.96

2

Net Value of Assets

Transferred

184.12

Assets Hyd. From

APDDCF

241.37

TOTAL

415.33

TOTAL

415.33

Table:- 3.3 Assets and Liabilities As an 8-02-1985

The Unions has to function as per the bye-laws. The APDDCF is the Apex

Body, Marketing within the district is of the union and outside the state it is controlled by

Federation. The operation area of the union is restricted to Krishna District only.

The Union with inherent problems had undergone travails in 80s and 90s for

survival. The performance of Federation towards its constituent union was deplorable.

The Federation has been impeded by various institutional and management weakness.

Unfortunately, it has adopted the view of “Let us get through the crisis together”.

Krishna Union was running with abnormal staff cost of 22 per cent over its

turnover which is unbearable and against the industrial norms threatening the very

existence of the union.

The Union ventured to prune the surplus manpower by implementing VRS

(Voluntary Retirement Scheme) in a phased manner with an outlay of Rs.10 Cores. The

State Government and NDDB funded one third of the total investment.

47

STAFF COST:

Year

1985

1992

2001

2007

No. Of Employees

1850

1800

1100

570

Salary Cost Per Annum

(In Lakes)

289

670

1629

2400

Table :- 3.4 Staff Cost

Krishna union adopted several measures to discharge its liabilities and to have

a turnaround so as to herald a new path to get better and assured return to the member

produce to these produce MILK building well Government producer centric institutions

with its Mission and Vision.

TABLE ON VRS:

Phase

No. Of Employees Retired

1st to 5th

650

2006-07 on words

70

TOTAL

720

Table:- 3.5 Table on VRS

48

MISSION & VISION:

Mission:

“Farmer’s prosperity through technical innovations and customer orientation

with specific focus on quality and cost”

Vision:

Dairying in the district to be the major instrument of strengthening rural

economy and marking available safe milk and milk product.

Quality Policy:

Aiming to be a technologically advanced dairy with global outlook providing

products and services of highest quality delighting the customer.

THE KRISHNA UNION HAS SUCCESSFULLY:

Evolved long term policies to encourage and augment milk production

and productivity in the District.

Improved efficiency in reducing the cost of operation, at every stage

from rural farmer to urban customer.

Increased the availability of milk and milk producers every nook and

corner of District.

Development and restructured manpower of organization to achieve

competitive edge.

Consolidated the cooperative structure among the dairy farmer.

DAIRY COOPERATIVES ORGANIZED:

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

630

634

636

636

676

682

Table:- 3.6 Dairy Cooperatives Organized

49

FARMER MEMBERS:

Year

No. Of Farmers

2007-08

11870

2008-09

119000

2009-10

125000

2010-11

128286

2011-12

131272

2012-13

137143

Table:- 3.7 Farmer Members

PROCUREMENT PRICE INCREASE:

Year

MILK PRICE KG. FAT Rs.

2007-08

175.00

2008-09

185.00

2009-10

195.00

2010-11

200.00

2011-12

215.00

2012-13 255.00

50

Most of the Village Dairy Cooperative Societies are viable and managed by

the producer receiving better technical know-how. The Government has enacted

APMACS Act, 1995. (Andhra Pradesh Mutually Aided Cooperative Societies Act, 1995),

which provides autonomy to the cooperatives. As per the policy and directives from the

state Government / federation, the Dairy Cooperative registered under APCS Act, 1964

were converted into APMACS Act, 1995. The Krishna Milk Union also with the wishes

of its member producers.

Elections are being held as per byelaws to board of management of Krishna

Union APMACS Act, 1995.

51

General Body

Board of Union

Managing Committee Of Village

Society

Member Producer in the Society

Fig. No:- 3.2

The Board of Management is translating its concepts in to realities as we study further.

52

The union was under tremendous pressure at a stag to reformulate independently

under the APMACS Act, 1995 since 2001. Both the state Federation and Government

have adopted different stance towards the unions under the APMACS Act, as the

Federation can no longer exercise control over the Unions as they enjoy autonomy in

their affairs.

The cooperation and coordination to the union from the APDDCF is lacking

Relation between Union and Federation strained. Several hurdles were created in

marketing activities of the union in order to affect its fiscal status to organize the

business.

The State Government has finally promulgated an Ordinance in Feb 2006 de-

linking the Dairy Cooperative only from the APMACS Act, 1995 and bringing them back

into the APCS Act, 1964 under which they can have full administrative control.

The Union approached the high court in the matter and their appeal was allowed

and dismissed the ordinance issued as unconstitutional. Since them the Government and

the Federation were adopted a vindictive attitude towards the union in all its spheres. The

Krishna Milk Union is taking tentative steps address the potent yet potential question of

autonomy under the APMACS Act.

The framers of Krishna District have so much faith and trust in Krishna and

giving their produce in maximum in spite of private players. The Union has sustained of

70 per cent in procurement and 60 per cent in liquid milk marketing.

The Krishna Union is distinctly place in the dairy map of Andhra Pradesh by its

continuous growth. The Union is trying to maintain a long time position with regard to

short term difficulties faced in organization the union and the industry in the district.

It is poised to avail of the producer’s confidence, the resources and the network to

pursue its mission of serving the production there by socio-economic growth dairy and

industry in general. The Krishna Union is translating its concepts into reality as go in

detail.

53

THE KRISHNA UNION HAS THE SALIENT FEATURE:

Turnover of Business reached to Rs.164 Cores in 2006-07.

Daily Average milk procurement 185000 lets.

Highest milk procurement 3100000 lets.

Daily Average milk sales 164000 lets.

Obtained ISO: 9001:2000 and HACCA.

Milk is inherently one of the best “Good for you “foods in today’s market

place. Changing consumer food habits, preferences increasing health

consciousness and also the upsurge in the economy are leading to dramatic

changes primarily on need of the consumer’s purchasing power and product

quality.

Vijaya the renowned brand of Krishna Milk Union has strong equity

among consumers. It has been able to make an impact despite the premium

pricing. The brand offer, good margin to the traders. Union has a direct liquid

milk market of 80 per cent out of its procurement. It is converting surplus milk in

to diverse products. Fig no. 3.5

54

PRODUCT MIX OF UNION

Market Milk

Vijaya Gold* Vijaya Special*Vijaya

Premium

*

Vijaya Economy* Vijaya Low Fat

Long Life Products

UHT MILK in 1st it pack* UHT Milk in

2000ml pack*

UHT Low Fat Milk

Fresh Milk Products

Basundi*Curd*Lassi*Butter Milk*

Sterilized Flavoured Milk

Fresh Milk Products

Cooking Butter*Milk Cake*

Skim Milk Powder*

Paneer*Doodh Peda*Ghee.

55

With its wise-polices maintaining equilibrium between supply and demand

throughout the year without imposing restrictions in the supplies of milk and milk

products.

Milk production has risen but productivity is low. Effort is on for quality

in milk production upstream of the processing plant. Union is involved in

producing good products establishing quality by upstream integration with good

hygiene practice given by cooperatives. For downstream side, the check at plant

and market level too exists. Quality is equally valued by one and all in the set up.

The employee’s quality consciousness and commitment makes the

products superior in spite of stiff competition from various other brands in the

domestic market. After initial focus on the home markets, and attaining

considerable and is now targeting on the oversees market.

0

20

40

60

80

100

120

140

160

180

2006-07 2008-09 03-Feb 05-Apr 07-Jun

Series 3

Series 2

Series 1

fig no:- 3.6

The Union is publishing a monthly News Magazine titled: Krishna Ksheeravani a

media on various aspects of dairying to the member producers.

The dairy livestock development is very much linked with veterinary. The stable /

sustained income being provided by Krishna Union to the Dairy Farmers is creating an

56

enthusiasm among the farmers it rear quality breed for higher yield. Comparing to the

cattle population the scale of our veterinary services to the farmer is not up to the mark

for various reasons.

The increasing shortage of qualified veterinary and paramedical staff, inadequate

veterinary dispensaries restricted budgetary allocations for Animal Husbandry and

paucity of funds for Vet-Medicare are a few constraints that need to be addressed with by

state Government.

The Krishna Union realizing the important to input services to the farmers for

sustained milk production is deploying veterinarians at each Milk Chilling Centre for

animal health care service in the clustered villages.

Imparting training to the staff of Dairy Cooperative in veterinary First Aid

Artificial Insemination.

Supplying balance feed for animals.

Providing fodder seed and slips.

Organizing Mass veterinary camps.

Subsidizing Cattle insurance premium.

Inducting Murrah breeding bull to upgrade the local breed.

WOMEN EMPOWERMENT:

Women are exclusively manning 104 Dairy Cooperatives which provides them

empowerment.

57

ORGANISATION:-

As shown fig, 3.7

Milk Products Factory Functional Chart Raw Milk Reception Dock:

Receives Raw Milk / Chilled Milk from sources.

Tests initial keeping quality, accepts for further process and weight milk

received.

Collection samples for fat & SNF analysis by QCL for determination of

value payable.

Pumps to processing section for further treatment of milk.

Managing Director

production

sales produt plant Finance

personnel

Maintenance

58

PROCESSING:

As shown fig 3.8

BUTTER:

Obtains cream and ripens for Butter Making.

Produces white Butter, packs in 20 Kg blocks and stores.

GHEE:

Coverts butter and cream into ghee maintaining,’AG’ Mark standards.

Packs in Bulk pack (15Kg) and small consumer packs for market.

POWDER:

Draws milk from processing section and spay dry into SMP, WMP.

Stores milk for other operations / utilities

Reconstitution and Recimbining of milk

Standardization / Toning of milk as per different standards for marketing

Homogenization

Cream separation

Pasteurization

59

Packs in 25Kg poly lines for further disposal.

ASEPTIC PACKING STATION:

Treats milk at Ultra High Temp and packs aseptically for long shelf life

without refrigeration.

Undertakes custom packaging of beverages.

PRA PACK:

Packing of different quality / type of milk in sachets and in cans for

market.

Storage of secreted milk for distribution.

BI- PRODUCTS:

Manufactures various traditional products to meet market demand.

CIP (Cleaning in – place).

Cleaning all dairy equipment after each day’s operation to ensure hygiene

and sanitation for further operation.

FG Section (Finished Goods).

Stock all finished product for subsequent release as per requirements /

indents.

STORES (General and Mechanical):

Keeps inventory, supplies packing material for different products, chemicals,

equipment, spares required in the dairy operations regularly.

ENGINEERING DEPARTMENT:

BOILER: Generates steam required for dairy operations.

ELECTRICAL: Monitors power supplies for all operational needs.

REFRIGERATION: Refrigeration requirements of the Dairy.

MANITENANCE: Look- after both the trouble shooting and preventive

maintenance of dairy plant for smooth and uninterrupted operations.

60

QUALITY CONTROL LABORATORY (QCL):-

Overseas ensuring rigorous quality control checks as per relative Laws /

Acts at several of production and operations.

Product gets out after the clearance by QCL.

Stringent check adopted on purchase and supply of stores material for the

organization.

CIVIL:

o Executes all civil of works for up-keeping of units.

TRANSPORT:

Provides limited transport facilities.

SECURITY:

Shoulders responsibility of security and vigilance in the dairy and units to

prevent untoward incidents of any nature.

61

THEORETICAL FRAME WORK OF CAPITAL

BUDGETING

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

modern times. It involves decisions to commit the firm’s 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 INVESTMENT DECISIONS:

The investment decisions of a firm are generally known as the capital budgeting,

or capital expenditure decisions. A capital budgeting decision may be defined as the

firm’s decision to invest its current funds most benefits over a series of years. The long-

term assets are those that affect the firm’s operational beyond the one year period.

Investment decisions generally include expansion, acquisition modernization and

replacement of the long-term assets. Sale of a division or business (Divestment) is also an

investment decision. Decision like the change in the methods of sales distribution, or an

advertisement campaign or a research and development program have long-term

implications for the firm’s expenditure and benefit, and therefore , they should also be

evaluated as investment decisions.

For example:

Management may be considering proposal to build a recreation room for

employees. The decision in this case will be based on qualitative factors, such as

management employee relation, with less consideration on direct financial returns.

However most investment proposal considered by management will require quantitative

estimates of the benefits to derive from accepting the project. Bad decision can be

determine to the organization over a long period.

62

FEATURES OF CAPITAL BUDGETING:

The important features, which distinguish capital budgeting decision in

other day-today decision, are capital budgeting decision involves the

exchange of current funds for the benefit to be achieved in future.

The futures benefits are expected and are to be realized over a series of years.

The fund is invested in non-flexible long-term funds. They have a long term

and significant effect on the profitability of the concern. They involve huge

funds.

They are irreversible decisions. They are strategic decision associated with

high degree of risk.

OBJECTIVES OF CAPITAL BUDGETING

Understand the nature and importance of investment decisions.

Explain the methods of calculating net present value(NPV) and internal

rate of return (IRR).

Describe the Non-DCF evaluation criteria. Payback Period and 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.

NEED OF CAPITAL BUDGETING

The importance of capital budgeting can be well understood from the fact that

unsound investment decision may prove to be fatal to the very existence of the concern.

The need, significance or importance of capital budgeting arises mainly due to the

following.

Large investments

Long-term commitment of funds

Irreversible nature

Long-term effect on profitability

Difficulties of investment decisions.

National importance.

63

PROCESS OF CAPITAL BUDGETING:

Capital Budgeting is a complex process which may be divided into the following

phases.

Identication of investment proposal.

Screening the propsal.

Evaluation of various proposals.

Fixing priorities.

Final approval & preparation of capital expenditure budget.

Implementing proposal.

Performance review.

64

IDENTIFICATION OF INVESTMENT:

The capital budgeting process begins with the identification of investment

proposal.

The proposal or idea potential investment opportunities may originate from the top of

management or from any officers of the organization. Capital expenditures planning

committee in the case of large organization or the officers concerned with the process of

long-term investment decision.

SCREENING THE PROPOSAL:

The expenditures planning committee screens the various proposals received from

different departments. The committee view these proposals from various angles to ensure

that these are in accordance with the corporate strategies or selection criterion of the firm

and also do not lead to the department imbalances.

EVALUATION OF VARIOUS PROPOSALS:

The next step in the capital budgeting process is to evaluate the profitability of

various proposals. Net present value method, internal rate of return, etc.

It should be classified as below.

Independent proposals.

Contingent or dependent proposals and

Mutually exclusive proposals.

FIXING PRIORITIES:

After evaluating various proposals, the unprofitable proposals may be rejected

straight away. But it may not be possible for the firm to invest immediately in the all the

acceptable proposals due to limitation of funds.

FINAL APPROVAL & PREPARATION OF CAPITAL

EXPENDITURE BUDGET:

Proposals meeting the evaluation and other criteria are finally approved to be

included in the capital expenditure budget. The capital expenditures a budget lays down

65

the amount of the estimation expenditures to be incurred on fixed assets during the

budget period.

IMPLEMENTING PROPOSALS:

Translating an investment proposal into a concrete project is a complex, time

consuming, and risk- fraught task.

Adequate formulation of projects:

The major reason for delay is insinuate formulation of project put differently, if

necessary homework in terms of preliminary comprehensive and detailed formulation of

the project

Use of the principle of responsibility accounting:

Assigning specific responsibility to project managers for completing the project

within the defined time-frame and cost limits is helpful for expeditious execution and

cost control.

Use of Network Techniques:

For project planning and control several network techniques like PERT

(Programme Evaluation Review Techniques) and CPM (Critical Path Method) are

available.

PERFORMANCE REVIEW:

Performance review, or post – completion audit, is a feedback device. It is a

means for comparing actual performance with projected performance.

It is useful several ways, are.

It throws light on how realistic were the assumptions underlying the

progect.

It provided a documented log of experience that is highly valuable for

decision making.

66

IMPORTANCE OF INVESTMENT DECISIONS:

Investment decisions require special attention because of the following reasons.

They influence the firm’s growth in the long term.

They affect 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.

TYPES OF INVESTMENT DECISIONS:

There are many ways to classify investment one classification is as follows;

Expansion of existing business.

Expansion of new business.

Replacement and modernization.

Expansion and Diversifications:

A company may add capacity to its existing product lines to expand

existing operations. For example of related diversification.

A firm expand is activities in a new business expansion of a new business requires

investment in new kind of production activating within the firm. If packing

manufacturing company invests in a new plant and machinery to produces ball bearings,

which the firm has not manufactured before, this represents expansion of new business or

inrelated diversification. Sometimes a company acquires existing firms to expand its

business.

Replacement and modernization:

The main objective of modernization and replacement is to improve operating

efficiency reduce costs. Assets become outdated and absolute with new assets that

operate more economically. Replacement decisions help to introduce more efficient and

economical assets and therefore, are also called cost-reduction investments.

67

How ever replacement decisions that involve substantial modernization and

technological improvements expand revenues as well as reduce costs.

Yet another useful way to classify investment is as follows;

Mutually exclusive investments.

Independent investment.

Contingent investment.

Mutually exclusive investments:

Mutually exclusive investment serves the same purpose and compete with

each other. If one investment understands others will have to be excluded.

Accompany May, for example, either use a more labour intensive, semi-automatic

machine, or employ a more capital intensive, highly automatic machine for

production.

Independent investments:

Independent investment serve different purposes and do not compete with

each other. For example, a heavy engineering company may have been

considering expansion of its plant capacity to manufacture additional excavators

and addition of new production facilities to manufacture a new product.

Contingent investment:

Contingent investment are dependent projects, the choice of one

investment necessitates understanding one or more other investment for example,

if a company decides to build a factory in a remote, backward area, it may have to

invest in houses, roads, hospitals, schools, etc., and the total expenditure will be

treated as one single investment.

68

INVESTMENT EVALUATION CRITERIA:

Three steps are involved in the evaluation of investment.

Estimation of cash flows

Estimation of the required rate of return.

(The opportunity cost of capital)

Application of a decision rule for making the choice.

PROJECT CASH FLOWS

Project cash flows are defined as the financial costs and benefits associated with a

project the estimation of costs and benefits are made with the help of inputs provided by

marketing, production, engineering, costing, purchase, taxation, and other departments.

The project cash out flows where as the benefits are denoted as cash inflows. The future

cost and benefits associated with each project are as follows.

Capital costs

Operating costs

Revenue

Depreciation

Residual value

An investment decision implies the choice of an appraisal technique and the

projects life. The objective and techinique must be related to define period. The

life of the project may be determined by taking into consideration the following

factors.

Technological obsolescence

Physical deterioration

A decline in demand for the out put of the project.

No matter how good a company maintenance policy, its technological forecasting

ability, uncertainty will always be present because of the difficultly in predicting the

duration of a project.

69

To allow realistic appraisal, the value of cash payment or receipt must be related

to the time when the transfer takes place. In particular, it must be recognized that Rs.1

received at some future data because Rs. 1 received today could be concept of “time

value of money” the process of converting future sums in to their present equipment is

known as discounting. Which is to determine the present value of future cash flows?

BASIC PRINCIPLES FOR MEASURING PROJECT CASH FLOWS

For the developing, the project cash flow principles must be kept in mind:

1).INCREMENTAL PRINCIPLE

The cash flows of a project must be measured in incremental terms. To ascertain a

projects incremental cash flows, one has to look at what happened to the cash flow of

the firm “with the project and with out project”and not before the project and after the

project as is some times done. The difference between the two reflected incremental

cash flows attributable to the project.

Project cash flows for year t=

Cash flow for the firm with the project for year t-Cash flow for the firm with out the

project for year t.

2).LONG TERM FUNDS PRINCIPLES

A project may be evaluated form various ppoint of view totl funds point of

view,long term; funds point of view,and euity point of view the measurement of cash

flows as well as the determination of the discount rate for evaluating the cash flows

depends on the point of view of long term funds (which are provide by equity stock

holders,preference stock holders,debent;ures holders.In addition,term lending institutions)

because the principle focuses of such evaluation is normally on the profitability of long-

term funds.

3) EXCLUSION OF FINANCING COSTS PRINCIPLE:

When cash flows relating to long-term funds are being defined, financing costs of

long-term funds should be excluded from the analysis. The question arises why? The

weighted average cost of capital used for evaluating the cash flows takes in to account the

cost of long-term funds. Put differently, the weighted average cost of capital. Hence, if

70

interest on long- term debt and dividend on eqity capital are deducted in defining the cash

flows, the cost of long- term funds will be counted twice.

The exclusion of financing costs principle means that.

Interest on long-term debts is ignored while computing profits and taxes

and.

The expected dividends are deemed irrelevant in cash flow analysis.

While dividends pose no. Difficulty as they come only from profit after taxes, interest

needs to be handled properly since interest is usually deducted in the process of arriving

at profit after tax, an amount equal to interest

(1-tax rate) should be added back to the figure of profit after tax that is

Profit before interest and tax (1-tax rate)

= (profit before interest tax + interest) (1-tax rate)

= profit after tax + interest (1 – tax rate)

4). POST – TAX PRINCIPLE

Tax payment like the one other payment must be properly deducted in deriving

the cash flows that is cash flows must be defined in post – tax terms.

71

EVALUATION OF CRITERIA:

A number of investment criteria (or capital budgeting techniques) are in use in

practice. They may be grouped in the following two categories.

CAPITAL BUDGETING TECHNIQUES:-

As shown fig, 4.2

CRITERIAN TABLE:

In the evaluation, process or capital budgeting techniques there will be a criteria

to accept or reject the project. The criteria will be expressed as:

CRITERIA / METHOD Accept Reject

Payback period (PBP) < target period >target period

Accounting rate of return (ARR) >target rate < target rate

Net present value (NPV) .>0 <0

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

Profitability index (PI) >1 <1

Table:- 4.1 Criteria table

Capital Budgeting Techniques

Non-DCF Criteria

Pay Back Period

A.R.R

DCF Criteria

NPV I.R.R P.I.

72

Non – DCF Criteria:

Payback Period (PB):

The payback period (PB) is one of the most popular and widely recognized

traditional methods of evaluation investment proposals. Payback is the number of year

required to recover the original cash outlay invested in a project.

Payback Period calculated may be two ways in long-term investment procedure.

When cash flow after taxes uniform.

When cash flow after taxes not- uniform.

1. When cash flow after taxes uniform:

When cash flow after taxes for a total life period of project is uniform, you can

use the following formula, to ascertain the payback period.

Original Investment (Co)

Payback Period = -----------------------------------------

Annual cash flow after taxes (C)

Where:

Co: Original Investment

C: Annual Cash flow after taxes

When cash flow after taxes not – Uniform:

When cash flows after taxes of the project total life period is not uniform.

You can use the following formula,

Accepted & Rejected of Payback Period:

Calculate Payback Period is less than standard payback period the project

is accepted.

Calculate Payback Period is grater than standard payback period project is

rejected.

Calculate equal to standard payback period the project will be conceder.

73

Advantages:

It is simple very is easy to understand.

Cost involvement in calculating payback period is very less.

As compare to sophisticated method.

Limitations:

It ignores cash after taxes, after calculation payback period.

It does not concedred the time value of money.

It is not consistence with objective of maximising share holder wealth.

It not appropriate method of measuring profitable investment proposal.

Accounting Rate of Returns:-

Accounting Rate of Returns uses accounting information as reviled by financial

statement measures. The profitability of the investment proposal is also known as return

on investment also non rate of investing some times is it known as average rate of return.

Average annual earnings after depreciation taxes, are used to be calculated ARR is

measured in terms of percentage.

1. Whenever is clearly mencations that Accounting Rate of Returns:

Average Earning after depreciation & taxes

ARR = ------------------------------------------------------------ * 100

Original Investment

Where: Original Investment = Cost of asset + additional working + transportation

Charges + installation charges

2. Whenever is clearly mencation as Average Rate of Return:-

74

Average Earning after depreciation & taxes

ARR = -------------------------------------------------------- *100

Average ( Half of the ) Investment

Where:

Cost of asset – Scrap value

Average investment = ------------------------------------ + Additional value + Transport

2 charges + Working Capital

+ Scrap value

Accepted & Rejected Role:-

Calculation Accounting Rate of Return is greater than cut of rate should be

accepted.

Calculation ARR is less than the cut of rate should be rejected.

Calculation ARR is equal to the cut of rate should be considered.

Advantages:

Information cans easly drawn from accounting records.

Taken into accounting all profits are life period of the projects.

Limitations:

It is ignores of time value of money.

Doesn’t allowed profits to all amount investment.

Doesn’t fulfill the objective of wealth maximization.

Doesn’t deference’s the size of the investment requires each project.

75

DISCOUNTING CASH FLOW (DCF) TECHNIQUES:-

Modern & Discounting cash flow techniques taken to consideration almost all

deference’s, are traditional methods almost with consider all benefits and cost occurring

during the project entail life period.

Modern techniques sub-divided into three types, are

Net Present Value

Internal Rate of Return

Profitability Index

Net Present Value Method (NPV):-

The NPV one of the most important that method, evaluation of long-term

investment proposals in discounted cash flow techniques. NPV is also known as

discounted benefit cost ratio method. NPV can be defined as present value benefits.

NPV = Present value of benefits – Present value of cash inflow.

Present value cash inflows find out using cost of capital in an appropriate rate of

discount and subtract present value of cash outflows and subtract present value of cash

outflows from the cash inflows and find the NPV which may be +ve or –ve.

NPV = Cash inflows after taxes multiple with appropriate – Cash Outflow

discount rate and its total

Steps involved in calculation of NPV:-

Forecasting of cash inflows after investment project based on realistic assumption.

Calculation cost of capital which is useful as discounting factor by conversion of

feature cash inflows.

Cash flows in calculation using cost of capital as discounted rate.

Find out NPV by separating present value of cash outflows present value of cash

inflows.

76

Acceptance & Rejected Role:-

NPV > 0 Project is accepted.

NPV < 0 Project is rejected.

NPV = 0 Project is Considered.

Advantages:-

We tax into accounting the time value of money.

Uses all cash inflows occurring over the entire project.

Is particular useful for the selection of mutually exclusive project.

It is consistence with of shareholders wealth.

Limitations:-

With is default to under stand compared with payback period & ARR.

In case of projects involving different give deflectable.

Internal Rate of Returns (IRR):-

This is another important discount cash flow technique of capital budgeting

discount. IRR can be defined as that rate which equities the present value of cash inflows

with the present value of cash outflows of an investment proposal of investment proposal.

It is the rate at which the NPV of investment proposal is ‘0’. It is computed by the

following formula.

C

IRR = A + ------------- (B-A)

C – D

Where:

C = Positive NPV

D = NPV value Negative

B = Rate of return at high price.

They approach is to selected any rate of interest to compute the present value of

cash inflows. If the calculated present than the present value of cash outflows present

value of cash inflows is higher than, the present value of cash outflows as higher rate.

77

NPV becomes is ‘0’ the IRR to be determined at which NPV is ‘0’.

Acceptance & Rejected Rule:-

IRR > 0 Project should be accepted.

IRR < 0 Project should be rejected.

IRR = 0 Project should be considered.

Advantages:-

It considered the time value of money.

It considered cash flow over entire.

It is also comparable with firm’s object of maximising owner’s welfare.

The IRR subjected the maximum rate of return and gives fairly good idea regarding

the profitability idea.

Limitations:-

Difficult to calculating and understand.

It mayn’t give any a concepts all situations.

If the project refers either expected life are cash outlays and times of cash flows.

Profitable Index Method (P.I.):-

Which is another discounted cash flows method of evaluating investment

proposal? It is also known as discounted cash ratio method these simallry to NPV

method. It is the ratio of present value of cash inflows at the required rate of return the

intial cash outflow of the investment proposal.

NPV method is not relivable method is evaluating project requiring unequal

investment profitability index the ratio which is derived by the present value of cash

inflows by present value of cash outflows.

78

PVCIF

P.I. = ----------------------

PVCOF

Where,

P.I. = Profitable Index

PVCIF = Present Value of Cash flow Index.

PVCOF = Present Value of Cash flow Outflow.

Accepted & Rejected Role:-

PI > 1 Project Should be excepted.

PI < 1 Project Should be rejected.

PI = 1 Project should be concedered.

Advantages:-

It gives the concederation of time value of money.

It considered all cash flows to determine the profitable index.

It helps to rank project according to the PI.

Limitations:-

It is concestance with objectives of maximation of share holder wealth.

It is also used to choice meatually exclusive projects by the calculating the

incremental benit cash flows.

79

DATA ANALYSIS AND INTTERPRETATION

PAY BACK PERIOD:

The pay back period is calculated as follows.

Unrecovered Amount of Investment

Payback Period = Year before recovery investment + -------------------------------------------

Cash flow after taxes for next period.

Calculation of pay back period:

Show the fig. 5.1

YEARS

INCOME

(PAT) (Rs)

In Lakhs

DEPRECIATION

(Rs in Lakhs)

CASH

INFLOW (Rs)

CUMULATIVE

CASH

INFLOWS (Rs)

in Lakhs

2008-

2009

8,06,058.84

14,40,862.05

22,46,920.89

22,46,920.81

2009-

2010

26,27,247.73

12,02,029.78

38,29,277.51

60,76,198.4

2010-

2011

9,59,515.33

11,07,716.00

20,67,231.33

81,43,429.73

2011-

2012

2,14,76,850.73

12,99,383.03

2,27,76,233.76

3,09,19,663.49

2012-

2013

2,97,85,848.70

18,35,383.13

3,16,21,231.83

6,25,40,895.32

Source: Annual reports of KDMPCU Ltd...

80

Initial out lay = 3, 28, 63,671

19, 44,007.51

Pay back period = 4 +

3, 16, 21,231.83

= 4 + 0.061

= 4.06Months

Fig no:- 5.1

Criteria for evaluation:

The pay back period computed for a project is less than the pay back period set by

management of the company, it would be accepted. A project actual pay back period is

more than the determined period by the management, it will be rejected.

Decision:

The standard payback period is set by the company for considering expansion

project is five years, where as actual pay back period is 4.06 months. Hence we accept

the project.

Conclusion: - Accept the project.

0

1

2

3

4

5

6

standeredpay back actual pay back

2011-2012

2011-2012

2012-2013

2012-13

81

AVERAGE RATE OF RETURN:

ARR is usually taken the earnings expected from the investment throughout the

whole life period.

Average annual profits

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

Average investment

Calculation of ARR:

Show the fig. 5.2

YEARS

INCOME

(Rs in lakhs)

DEPRECIATION

(Rs in lakhs)

CASH

INFLOWS

(Rs in lakhs)

2008-09

8,06,058.84

14,40,862.05

-6,34,803

2009-10

26,27,247.73

12,02,029.78

1,45,218

2010-11

9,59,515.33

11,07,716.00

-1,48,201

2011-12

2,14,76,850.73

12,99,383.03

2,01,77,468

2012-13

2,97,85,848.70

18,35,383.13

2,79,50,466

Source:-Annual reports of KDMPCU Ltd...

82

4, 87, 70,148

AVERAGE PROFIT = -----------------------

6

= Rs 97, 54,030

3, 28, 63,671

AVERAGE INVESTMENT = ----------------------

2

= Rs 1, 64, 31,836

97, 54,030

ARR = ----------------------- X 100

1, 64, 31,836

= 0.59361 X 100

= 59.361%

Criteria for evaluation:-

The ARR is greater than cut of rate should be accepted. Calculation ARR is less

than the cut of rate should be rejecting. Calculation ARR is equal to the cut of rate the

project should be accepted. In the above calculation the ARR is 59.361%. If the above

calculation the ARR is 59.361%. If the actual ARR rate is greater than the cut of rate.

Decision:-

The project should be accepted, due to calculate the ARR is greater than cut of

rate.

Conclusion: - Accepted the project.

83

Calculation Return on Investment:-

Show the fig. 5.2 calculation ROI

YEARS

INCOME

(Rs in lakhs)

DEPRECIATION

(Rs in lakhs)

CASH

INFLOWS

(Rs in lakhs)

2008-09

8,06,058.84

14,40,862.05

-6,34,803

2009-10

26,27,247.73

12,02,029.78

1,45,218

2010-11

9,59,515.33

11,07,716.00

-1,48,201

2011-12

2,14,76,850.73

12,99,383.03

2,01,77,468

2012-13

2,97,85,848.70

18,35,383.13

2,79,50,466

Source: Annual reports of KDMPCU Ltd...

AVARAGE PROFIT

ROI = ---------------------------------------X 100

INITIAL INVESTMENT

5,6,72,339

ROI = ---------------------------- X100

42, 86, 36,698

84

=0.1205X100

= 12.05%

Criteria for evaluation:-

The ROI is greater than cut of rate should be accepted. Calculation ROI is less

than the cut of rate should be rejecting. Calculation ROI is equal to the cut of rate the

project should be accepted.

Decision:-

In the above calculation the ROI is 12.05%. If the actual ROI rate is greater than

the cut of rate the project should be accepted. Due to calculate the ROI is greater than cut

of rate.

Conclusion: - Accepted the project.

85

NET PRESENT VALUE:

The calculation of NET PRESENT VALUE is as follows, fig 5.4,

YEARS

CASH INFLOWS

(Rs in lakhs)

DCF (10%)

PRESENT VALUE

(Rs in lakhs)

2008-09

22,46,921

0.909

20,42,451

2009-10

38,29,278

0.826

31,62,984

2010-11

20,67,231

0.751

15,52,490

2011-12

2,27,76,234

0.683

1,55,56,168

2012-13

3,16,21,232

0.564

1,78,34,375

TOTAL

4,01,48,468

Source: Annual reports of KDMPCU Ltd..

NPV = Cash inflows – Cash Outflow

NPV = 4, 01, 48,468 – 3, 28, 63,671

= Rs 72, 84,797

86

Fig no:- 5.2

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. If the calculated NPV is equal to the

zero, the project is accepted.

Decision:

The calculated NPV is 72, 84, and 797.00. This value is greater than the zero.

Conclusion: - Accept the project.

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

1 2 3 4 5 6

DCF(12%)

YEARS

87

INTERNAL RATE OF RETURN:

The INTERNEL RATE OF RETURN IS AS FOLLOWS

C

IRR = A + ------------- (B-A)

C – D

Where:

C = Positive NPV

D = NPV value Negative

B = Rate of return at high price.

Calculation of IRR show the fig, 5.5

Source: Annual reports of KDMPCU Ltd,.

YEARS

CASH INFLOWS

(Rs in lakhs)

DCF(10%)

PRESENT VALUE

(Rs in lakhs)

2008-09

22,46,921

0.909

20,42,451

2009-10

38,29,278

0.826

31,62,984

2010-11

20,67,231

0.751

15,52,490

2011-12

2,27,76,234

0.683

1,55,56,168

2012-13

3,16,21,232

0.564

1,78,34,375

TOTAL

4,01,48,468

88

Source: Annual reports of KDMPCU Ltd…

The comparative analysis of DCF’s from the above two tables

Fig no:- 5.3

YEARS

CASH INFLOWS

(Rs in lakhs)

DCF(14%)

PRESENT VALUE

(Rs in lakhs)

2008-09

22,46,921

0.847

19,03,142

2009-10

38,29,278

0.718

27,49,422

2010-11

20,67,231

0.609

12,58,944

2011-12

2,27,76,234

0.516

1,17,52,537

2012-13

3,16,21,232

0.437

1,18,18,478

TOTAL

3,14,82,523

89

4,01,48,468

IRR =10 +--------------------------------------------X(18 - 10)

4,01,48,468 – 3,14,82,523

40148468

= 14+ ---------------------- X (8)

8665945

= 10 + 0.37

= 10.37%

Criteria and evaluation:

In this method the project is accepted when IRR is higher than its cost of capital

or cut out rule. If the project is not accepted when the IRR is less than cost of capital.

Decision:

The project is accepted because of the calculation of IRR is higher than its cost of

capital. The cost of capital fixed by management is 10%, the actual is more than its

standard.

Conclusion:

Accepted the project.

90

PROFITABILITY INDEX:

The profitability index is as follows:

Calculation of profitability index, show the fig, 5.6

YEARS

CASH INFLOW

(Rs in lakhs)

2008-09

22,46,921

2009-10

38,29,278

2010-11

20,67,231

2011-12

2,27,76,234

2012-13

3,16,21,232

Source: Annual reports of KDMPCU Ltd.,

PV OF CASH INFLOW

PI = --------------------------------------

INITIAL CASH OUTLAY

6,25,40,896

= ------------------------------

3,28,63,671

= 1.903%

91

Criteria for evaluation:

A project can be accepted if its PI index is greater than one. If the PI is less than

one we should reject the project. If the P.I is equal to one we should accepted the project.

Decision:

Profitability index proposed expansion project is found our 1.903 this is more

than the PI. The calculate profitable index is greater than the one.

Conclusion:

Hence we accept the project.

92

FINDINGS AND SUGGETIONS

FINDINGS:

The project completion cost is estimated to be Rs 3, 28, 63,671.

The payback period of the project in SAT in 4.06 months. The payback

period is less than the target period so the project may be accepted.

The NPV of the project is positive than the value of the capital.

The internal rate of return is 10.37% it is greater than the cost of capital

i.e., 10%. So the project accepted.

The profitability index is also more than 1 time return on investment. So

the project is accepted.

The estimated cash flows of the project include interest and tax.

The receivable index in KDMPCU Ltd is highly uneven. In some year it is

highly positive and in some year it is negative. The unevenness is not

good.

The Average Rate of Return is 59.36% it is greater than the cost of capital,

so the project is accepted.

93

SUGGESTIONS:

The capital recovery period is very good. The same system may be

adopted.

When taking 10.37% internal rate of return the net present value show

negative value. In that position of concern of when the project is rejected.

This based on to take the internal rate of return.

The payback period of the project in SAT in 4.06 months. The payback

period is less than the target period, so the project may be accepted.

The NPV of the project is positive than the value of the capital. Hence the

project was accepted.

The profitable Index value is less than 1, then opportunity for another

project.

The estimated cash flows of the project include interest and taxes are

considered due to accept or reject of investment proposes.

In KSMPCU Ltd, basing on the capital budgeting techniques like NPV,

IRR and P.I. their results the time value of money is assumed and

predicted in a proper way. This can be said basing on the positive results

occurred. Hence time value of money is satisfactory, so it can be

continued these techniques.

It is advised to minimize cost of capital of the company.

94

CONCLUSION

Based on the study in The Krishna District Milk Producers Mutually Aided

Cooperative Union .Ltd. there is forecasting project cash flow involves numerous

estimate and many individuals and departments participate in this exercise. The role of

the finance manager is to coordinate the efforts of various departments and obtain

information from them, ensure that the forecasts are based on a set of consistent

economic assumptions, keep to the exercise focused on relevant variables and minimize

the bias is inherent in cash flow forecasting.

In the study, I know that the company is following pay back period. Based on the

data shows that the company can use any criteria to get return on the investment.

The project “A study on Capital Budgeting” in The Krishna District Milk

Producers Mutually Aided Cooperative Union. Ltd, it is suggested to hold the company

in the same situation.

95

BIBLIOGRAPHY

FINANCIAL MANAGEMENT - I.M. Pandey

FINANCIAL MANAGEMENT - Prasanna Chandra

FINANCIAL MANAGEMENT - M.Y.Khan & Jain

FINANCIAL MANAGEMENT - V.K.Bhalla

FINANCIAL MANAGEMENT - Sudhindra bhat

FINANCIAL MANAGEMENT - I.C.A.I

‘PROJECTS’ (Preparation, appraisal, implementation) -- Prasanna Chandra

SOURCE OF FINANCE - Sharma & Guptha

SUCCESSFUL PROJECT - O.P.Kharbanda

PROJECT MANAGEMENT - Harey maylor

PROJECT PLANNING AND MANAGEMENT - M.Shaghil

Journals & Magazines:-

Finance India

Indian journal of commerce

The management accounting.

viklapa

WEBSITES:-

Www. Vijaya dairy.com;

Www. Investropedio.com;

Www. Business insider.com;