CONTENTS

Particulars Page No.

Introduction 2

Task 1 3

Task 2 17

Task 3 24

Task 4

Bibliography 30

Page | 1

INTRODUCTIONI choose Published Accounts of Reliance Company for financial analysis. Because it is a biggest Indian company which have worldwide business. The published account of this company has show in Indian currency (Rupee). It has 14% share in Indian total exports. It pays 4.8% of the total indirect revenue. So, I select this company for my analysis. The detail is given in next page.

Page | 2

Task 1

a) The published accounts of reliance company are given below:-

Balance sheet(Rs crore)

Mar ' 13 Mar ' 12

Equity share capital 3,229.00 3,271.00

Share application money 25.00 -

Preference share capital - -

Reserves & surplus 1,76,766.00 1,59,698.00

Secured loans 2,422.00 6,969.00

Unsecured loans 52,101.00 51,658.00

Total 2,34,543.00 2,21,596.00

Gross block 1,87,607.00 2,09,552.00

Less : revaluation reserve - 3,127.00

Less : accumulated depreciation 77,859.00 91,770.00

Net block 1,09,748.00 1,14,655.00

Capital work-in-progress 19,116.00 4,885.00

Investments 52,509.00 54,008.00

Current assets, loans & advances 1,37,138.00 1,18,550.00

Less : current liabilities & provisions 83,968.00 70,502.00

Total net current assets 53,170.00 48,048.00

Miscellaneous expenses not written - -

Total 2,34,543.00 2,21,596.00

Book value of unquoted investments 32,551.00 23,339.00

Market value of quoted investments 20,789.00 31,439.00

Page | 3

Mar ' 13 Mar ' 12

Contingent liabilities 54,600.00 45,831.00

Number of equity shares outstanding (Lacs) 32286.63 32710.59Profit & loss account(Rs crore)

Mar ' 13 Mar ' 12

Operating income 3,60,297.00 3,29,932.00

Material consumed 3,07,111.00 2,78,865.00

Manufacturing expenses 7,166.00 6,651.00

Personnel expenses 3,354.00 2,857.00

Selling expenses - 5,393.00

Administrative expenses 11,879.00 2,372.00

Expenses capitalized - -37.00

Cost of sales 3,29,510.00 2,96,101.00

Operating profit 30,787.00 33,831.00

Other recurring income 7,998.00 4,557.00

Adjusted PBDIT 38,785.00 38,388.00

Financial expenses 3,036.00 2,668.00

Depreciation 9,465.00 11,394.00

Other write offs - -

Adjusted PBT 26,284.00 24,326.00

Tax charges 5,281.00 5,710.00

Adjusted PAT 21,003.00 18,616.00

Non recurring items - 1,424.00

Other non cash adjustments - -

Reported net profit 21,003.00 20,040.00

Earnings before appropriation 29,728.00 26,554.00

Page | 4

Mar ' 13 Mar ' 12

Equity dividend 2,628.00 2,531.00

Preference dividend - -

Dividend tax 447.00 410.00

Retained earnings 26,653.00 23,613.00

Ratio Analysis

MEANING OF RATIO A ratio is a simple arithmetical expression of the relationship of

one number to another. For example , if the current asset of a firm on a given date are $500000 and the current liabilities are $ 250000, then the ratio of current assets to current liabilities will work out to be 500000/250000 or 2:1.

NATURE OF RATIO ANALYSIS Ratio analysis is a technique of analysis and interpretation of financial

statements. Calculation of mere ratios does not serve any purpose, unless several appropriate ratios are analyzed and interpreted. The following are the four steps involved in the ratios analysis:-

i) Selection of relevant data from the financial statements depending upon the objective of the analysis. ii) Calculation of appropriate ratios from the above data. iii) Comparison of the calculated ratios with the ratios of the same firm in the past. Or with other firms. iv) Interpretation of the ratios. * LIQUIDITY RATIOS

1) Current Ratio >> This ratio is also known as working capital or 2:1. This ratio reveals the adequacy of current assets to pay off all current liabilities. Formula to calculate this ratio is:

i) Current Ratio = Current Assets Current Liabilities

(Rs. Crore) Page | 5

2013 2012

C.A. 1,37,138 1,18,550

C.L. 83,968 70,502

Ratio 1.63:1 1.68:1

Current Ratio

INTERPRETATION

The Current ratio is very popular and good indicator of liquidity position of the enterprise. Very high current ratio is not desirable as it shall mean less efficient use of funds. The current ratio of company is below from standard ration (2:1). So, it is not satisfactory position. And second thing is that it reduce as compare to past year (2012).

* SOLVENCY RATIO

1) Debt Equity Ratio: - It measures the relationship between borrowed funds and internal owners’ funds. Higher equity shall mean a higher stake of owners and may be a healthy sign. Method to calculate this ratio is:

Debt – Equity Ratio = Outsiders funds

Shareholders ‘funds

(Rs. Crore)

2013 2012

Debt 54523 58627

Equity 180020 162969

Ratio 0.30:1 0.36:1

Page | 6

INTERPRETATION

In the year 2013, debt equity ratio of company is low as compared to previous year. Which means there is higher owners’ stake and indicates healthy sign of company’s position.

2) R eserve to capital ratio: - This ratio establishes between reserves and capital. Higher proportion of reserves shows financial soundness because:

i) Unit shall be able to meet future losses as and when suffered.

ii) Unit can expand, grow, diversify as it may desire. The formula is given below:-

Reserve /Capital

(Rs.Crore)

2013 2012

Reserve 176766 1,59,698

Capital 3254 3271

Ratio 54.32:1 48.82:1

INTERPRETATION

The upward trend of ratio reveals highest proportion of reserves. It shows that company has sufficient safety margin to meet its future losses in contingency and may also utilize its funds / reserves for expansion and diversification.

3) Solvency ratio: - Solvency is the term which is used to describe the financial position of any business which is capable to meet outside obligations in full out of its own assets. Solvency ratio is computed as under

Debt / Total Assets

(Rs. Crore)

Page | 7

2013 2008

Debt 54523 58627

Total assets 2,34,543 2,21,596

Ratio .23:1 .26:1

INTERPRETATION

Lower solvency ratio is always desirable because lower ratio means more the company is able to meet its debt obligations out its own funds and the company has no need to depend on outsiders and to pay fixed interest on borrowings.

6) Proprietary ratio: - This ratio establishes relationship between proprietor’s funds to total resources of the unit. This ratio highlights that what is the proportion of proprietors and outsiders in financing the total business. Formula to calculate ratio is:

Proprietor’s funds /total assets

(Rs. Crore)

2013 2012

Equity 180020 162969

Total assets 2,34,543 2,21,596

Ratio 0.76:1 0.73:1

INTERPRETATION

Proprietary ratio has increase as compare to previous year. It interpret that there is sound financial position. It is important indicator for

Page | 8

measuring the long term solvency of the firm. There is no standard of it yet 60 % to 75% of total assets should be financed by shareholders fund.

*PROFITABILITY RATIO:-

In general terms efficiency, in business is measured by profitability. Low profitability may arise due to lack of control over expenses. Bankers and other financial institutions looks at the profitability ratio as an indicator whether or not firm earns substantially more than it pays interest for use of borrowed funds and whether ultimate repayment of their debt appears reasonably certain. This ratio also indicates return which owners get on their investment.

i) Net Profit ratio>> this ratio expresses relationship between net profit and sales. This ratio indicates what proportion of net sales is left for owners after all expenses have been met. It is calculated as follows:

Net Profit/ Gross receipts

( Rs.Crore)

2013 2012

Net Profit 21,003 18,616

Gross Receipts 3,60,297 3,29,932

Ratio 5.82% 5.64%

INTERPRETATION

There is upward trend in profit from 2012 to 2013 which shows increasing profitability of company.

Ii) Fixed assets to net worth ratio: The ratio indicates the extent to which shareholders’ funds are sunk into fixed assets. Generally, purchase of fixed assets should be financed by shareholders’ equity. If ratio is less than 100% it means working capital is provided by shareholders’ funds. If ratio is more than 100% it means that owner‘s funds are not sufficient to finance fixed assets & firm has to depend on outsiders. Ratio‘s formula is:

Fixed assets/ Shareholders ‘FundPage | 9

(Rs.Crore)

2013 2012

Fixed assets1,09,748 1,14,655

Shareholders’ fund 180020 162969

Ratio 0.61:1 0.70:1

INTERPRETATION

The downward trend of ratio indicates that fixed assets proportion is coming down as compared to net worth,& the working capital is provided by shareholders ‘ funds.

vii)Return on shareholders ‘ investment : The profitability from the view point of shareholders is judge through this ratio .This ratio is useful in making investment decisions .This ratio is also used in finding out whether the shareholders are getting adequate return on their money or not. Ratio is computed as under:

Net profit after tax /Shareholders ‘funds

(Rs.Crore)

2013 2012

Net Profit after tax 21,003 18,616

Shareholders’ fund 180020 162969

Ratio 11.67% 11.42%

INTERPRETATION

Page | 10

This ratio shows that more profit available in the year 2013 as compared to 2012 years. The overall profitability position of the company has start increasing.

Task b)

Business Structure and Financial Structure of the company

* Financial Structure of the company:-Financial structure consists of the sources or instruments from which any company can raise finance. There are many types of securities and debts instruments are available. The main are:-a) Ownership Securities: - These are those securities which have ownership rights on the properties of the company. 1. Equity share capital: - The holders of these shares are the real owners of the company. They have voting rights. They get flexible rate of return on its investment. These are highly risky securities.2. Preference share capital: - They get preference from equity share capital in the payment of dividend and capital at the time of liquidation. They get fixed rate of dividend on their investment.b) Debt securities: - The holders of these instruments are treated as debt of the company. They are not owner of the company. The main instruments are:-1. Bonds: - These are issued by government for a fixed period. They get fixed rate of interest.2. Debentures: - It is also long tern debt securities. It can be issued by companies. They also get fixed rate of interest.3. Loans from banks: Company can also loan from bank for short term requirements.4. Mortgage: A company can also take loan by keeping securities to lender.The financial structure of Reliance Company.

1. The main sources of finance of the company are:-*Equity share capital.

Page | 11

*Secured Loans*Unsecured Loans

2. It has no Preference share capital.3. The authorized share capital of the company is Rs.5000 Crore. 4. The issued capital of the company in 2012 is Rs.3271 Crore but in 2013 is Rs.3229 crore. It shows that some the portion of share is repaid.5. The secured loan in 2012 is 6969 crore but in 2013 is 2422 crore. This shows that the financial position of the company is strong .So it repaid loans in a one year. 6. The unsecured loan in 2012 is 51658 crore and in 2013 is 52101 crore. This shows that company can raise more finance from unsecured loan in 2013 as compare to previous year.7. The company uses more debt securities as compare to ownership securities.

The Business structure of Reliance Company is given below:-

A Business structure provides the framework which enables the business to function as an integrated unit by regulating and coordinating the responsibilities of individuals and departments like finance, sales, purchasing, and department.

The business structure of reliance company is given below:-The organizational structure of company consists of executive directors, on-executive directors for departments managers are responsible for departmental growth each segment have directors which work independently. In the nutshell, it follow divisional structure.

Divisional Structure:-In these activities are grouped according to the types of products manufactured or geographic areas. In this each division becomes a self contained block. Each division has a separate set of functional departments. The main features are:-

*Strengthens corporate financial control.

* Management by exception.

*It motivates and boosts the morale.

Page | 12

General Manager

Divisional area

Reporting requirement for structure

Compare with other possible structuresThe company presently uses d divisional organization structure. The other possible structures are:-

1. Functional organization: - The organization, in which line authority and staff authority exist together, is known as Functional organization. To sum up, functional expert are given limited form of line authority in different departments to perform certain specialized functions .The main feature are:-

* It is complex in nature.

* It has two types of managers – line manager and specialist manager.

* Work divided into parts.

* It is suitable for large organizations.

Page | 13

Divisional areaDivisional area

R+D Dept.

R+D Dept. R+D Dept.Prod. Dept.

Prod. Dept. Prod. Dept.

Fina. Dept. Fina. Dept.Fina. Dept.

Mktg. Dept. Mktg. Dept.Mktg. Dept.

Per. Dept. Per. Dept. Per. Dept.

Board of directors

Page | 14

Chief

Manager

Personal Manager

Finance Manager

Production Manager

Sales Manager

Production control manager

Plant services manager

Advertising manager

Sales promotion manager

Factory manager

Factory manager

Area sales manager

Area sales manager

line authority

Functional

2. Hierarchy Structure: - In this type of structure, subordinates are placed at various levels within the organization. Many workers have worked under one person. It is use span of control method. The main features are:-

*Clearly defined authority and responsibility function.

* Specialized managers are used.

*Increase loyalty of employees towards their departments.

Page | 15

Chief Executive

ManagerManagerManager

Assistant manager

Assistant manager

Assistant manager

Assistant manager

Staff Staff Staff Staff Staff Staff Staff

3. Tall structure: - A tall structure, as the number of employees increase, calling for more number of rings in the ladder of organizational structure. It has maximum layers from top to bottom employing more and more people. The main features are:-

*It has communication problem.

* The people become slow moving.

* Highest cost of production.

Advantages of the structure of the company

It is making use of dual authority and accountability. As a result it dismisses the bureaucratic system and welcomes direct relations with employees.

As there is inter play of line and functional officers, the quality of decisions undergoes a change for better especially when conflicts crop-up.

It encourages empowerment resulting in high morale and motivation adding to quality decisions and implementation.

It combines the merits of different structures such as flexibility , better communication , close – knit working , quick response and greater coordination.

Page | 16

Task c)

After comparison two years’ figures, the following results regarding reliance company finance has been find out.1. The main sources of Long –tern financing:- it can use the following primary sources of long – tern financing : Shares (Equity ), Debentures, Retained Earnings, Debts from financial institutions, and so on.

(ii) Short – tern financing: - For maintains cost, it uses short –tern bank loan, commercial papers and factoring receivables etc. A firm must arrange this type of finance in advance.

(iii) Spontaneous financing: - It refers to automatic sources of short – tern funds. It includes trade credit and outstanding expenses. Since the sources of this type of finance are cost- free, most of the firms would prefer to use it in order to finance its current assets and try utilize it as for as possible.

2. Company uses financial budgetary control system serve as a useful instrument for evaluating the performance and comparing the actual performance with standards so established. In this method , financial activities should be sub-divided into smaller

Page | 17

activities and powers , duties and responsibilities be delegated to the subordinate officers , proper control on financial performance should also be administrated . Various methods are:-

Budgetary control Cost-control analysis Standard accounting. Capital budgeting Risk analysis in capital budgeting.

3. The company mainly prefers to take debt securities in the time of need of finance as show in the statements. The company repaid some portion of equity shares.4. The rate of earning of the company is too high. So, it can use ploughing back of profit as finance source. 5. The financial cost of company has been increased from the previous year. It show that company pay high rate of interest. It use more finance fro external sources.6. The earning per share of reliance company in 2013 is Rs.101.45 and in Rs.133.49.

Task dAdvise the investors

An investor wants to invest £50000The interest rate of business on securities is 10 %( approximately). But the interest rate of local banks is 9.25% (approximately). If investor invest in business, his annual return is £50000* 10% = £5000. But If he invest in deposit account of local bank, Then his return is £50000* 9.25%= £4625. On the local bank deposit, ha has to paid tax on interest. But from business, company paid tax on your interest. So, it is prefer to invest in business if you are risk taker. But you are risk averser then invest in current accountTask eSuitable sources of finance for business.The company requires additional finance £500000. The company wants to select best suitable option for it. The main sources are available are:-

1. Share market: - If we issue equity share capital. Then, it is highly risky source. So, cost of capital is also high. It considers as costly source. But it get flexible rate of dividend. If you have no profit, no need to pay dividend. They are the real owner of the company.

Page | 18

2. Debentures/bonds: - It get fixed rate of interest. It can issue for fixed period of time. But, the rate of interest is too high of it and company has to given as some assets as securities.

3. Bank loan: - The rate of interest is low as compare to debentures. But security has also given. You can not carry forward the interest to next year. The next thing is that bank only provides short term finance. £500000 is a big amount for bank loan.

4. Retained profit: - The profitability position of the company is strong. So, company can use retained earning for finance. It is cost free source of finance.

5. But all the project can not financed from it. Because unutilized reserves also use for many more purposes.

According to my knowledge, some portion of the project should be financed by retained earning (approximately 50%). Because company has huge reserves to invest. And for half, debentures should issue. Because after some time, you repaid the amount and ownership not share with more investors.Task fManagement of working capital

The position of working capital of company is given below:-

(Rs crore)

Mar ' 13 Mar ' 12Current assets, loans & advances 1,37,138.00 1,18,550.00Less : current liabilities & provisions

83,968.00 70,502.00

Total net current assets 53,170.00 48,048.00After detail study of it .The following point for the management of working capital has to be revealed.

If we compare the figure of two years, the requirement of working capital has been increased, because day to day expenditure and current assets has been increased.

If we check the practices of the company, then we find that the current ratio of the company is 1.63:1. It means for paying one rupee of current liability, company has 1.63 current assets are available. It is good, but not up to standard position. So, following point should be kept in mind for effective management.

a) The operating cycle of business (credit facilities) should be kept short. So that less requirement of working capital is needed.

b) If there is new project for expansion, then advance estimation of working capital is required.

c) The credit facility to customers for less days and credit facility from suppliers if for more days.

d) Proper inventory management should be implemented.e) Proper dividend policy should be made.

Page | 19

Task 2

a) Cash Flow Forecast

Page | 20

Cash budget which is prepared under this functional area is the cash budget. It is an estimate of the expected cash receipts and cash payment a during the budget period. Before preparing the cash budget, the following principles should be kept in mind: -

i) The period for which cash budget is prepared should be selected very carefully. As a general rule, the period covered by cash budget should neither be too long or too short.

ii) The items which should appear in the cash budget should be carefully decided. Naturally, all those items which do not involve cash flow will not be considered while preparing the cash budget. For example, depreciation etc.

A cash budget may be prepared in any of the following three methods:- 1) Receipts and payments method: - This method is useful for short term estimations. it lists the various estimated sources of cash receipts on one hand and the various estimated applications of cash on the other . The standard items which may appear on the cash budget prepared by this method may be stated as below:-

Cash Inflow Cash Outflow

Operating: Operating:Cash sales Payment to creditorsCollection from debtor cash purchases of raw materials Interest/ dividend received Wages / salariesNon- operating : Non – operating:

Issue of share / debentures Redemption of shares / debentures Receipt of loans / borrowings Loan installmentsSales of fixed assets Purchases of fixed assetsSales of investments Interest

TaxesDividends

Thus, finally cash budget appears in the form of opening cash balance, to which various estimated cash receipts are added, the estimated cash payments being deducted from this sum to arrive at the closing cash balance.

2) Balance sheet method: - This method useful for long term estimates. According to this method, the budgeted balance sheet is prepared for the following budget period, after considering the various terms viz. capital, long term liabilities, current liabilities. Fixed assets, current assets, but except cash. After both sides of balance sheet are balanced, the balancing figure indicates the estimated cash balance in hand at the end of that period. 3) Adjusted Profit / loses method: - This method also is useful for long term estimates. According to this method, the cash budget is prepared in the following way to show the estimated cash balance at the end of budget period. Opening cash balance

Page | 21

Add: Profit before depreciation, provisions and other non-cash expenses.Add: Decrease in current assets or increase in current liabilities Add: Capital receipts Add: Receipts of loans / borrowingsLess: Capital expenditure Less: Repayment of loan installmentsLess: Payment of dividends / taxesLess: Increase in current assets or decrease on current liabilities In other words, cash budget prepared as per this method is in form of cash flow statement.

I used First method for estimation of cash flow.Particulars July

£’000August£’000

September£’000

October£’000

November£’000

December£’000

Cash Inflow* Opening balance of cash* Cash received from customers* Bank Loan

Total receipts (a)

Cash outflow*Cost of good sold

*Salaries*Other overheads*Electricity charges* Payment of delivery van* Payment of bank loan

Total expenditures(b)

Closing balance of cash (a-b)

90

106

196

64204

88

108

108

114

222

64204

88

134

134

118135

387

6620420

25

115

272

272

124

396

70204

94

302

302

104

406

59204

135218

188

188

96

284

5420434

112

172

Page | 22

Notes for solving this problem:-

1. Depreciation is a non-cash item. So, it does not consider for cash flow estimation.2. The amount of bank loan for purchasing delivery van is not given .So, we assumed up to repayment of loan (£ 135000) in September.3. Purchase of inventory is not given. So, I assumed cost of good sold is taken as purchases. Opening stock and closing stock of inventories has been ignored.4. Trend of revision of sale is not given. So, I take actual sale as revised sale.5. Electricity charges in September is ( 6+6+8=20) and in December is (10+12+12=34)

Conclusion:-The cash position of the company is satisfactory. The company does not need to take bank loan for purchasing delivery van according to cash position. Company can finance by own cash. But if cost of delivery van is more then assumption, then the company have to take loan from bank.

Recommendations:-

The cash flow forecast statement estimate the cash position of the business. It does not consider the non-cash items like depreciation, reserves etc. So, it does not suitable for judging profitability. It only used for cash forecasting. The second thing keeps in mind that it ignore basic accounting concept of accrual basis.

We can say that the budget of Green ltd. for 6 months is a good one. It maintains cash balance in the case of nation recession. But it should use more financial sources. For example, it cash position is strong. So, It should take bank overdraft facility in the case of emergencies.

Page | 23

Task 3

* Method of Net Present Value (NPV)

This method is generally considered to be the best method for evaluating the capital investment projects. The following steps are involved in this method:-

1. Cash inflows and outflows for the entire economic life of the project are determined.

2. An appropriate discount rate is determined. It is generally taken to be equal to cost of capital.

3. The present value of cash inflows and cash outflows are then calculated with the help of discount rate.

4. Present value of all cash inflows are added together.

5. The net present value is the difference between the total present value of all future cash inflows and the total present value of future cash outflows.

# accepts or rejects criteria:-

1. When there is only one project. Accept a project of its NPV is positive (Because its present value of cash inflows is high than cash outflows) or vice versa.

2. When there is more than one project. The project should be accepted which gives highest positive NPV.

The Net present value of the project one is given below:-

Years Cash flows£ 000

Present value of Rs.1 @ 10%

Present value

0 (200) 1 (200)1 122.5 .909 111.352 62 .826 51.2123 68.5 .751 51.443 7 .751 5.257

Net present value 19.259

The Net present value of the project two is given below:-

Page | 24

Years Cash flows£ 000

Present value of Rs.1 @ 10%

Present value

0 (200) 1 (200)1 99 .909 89.9912 58.5 .826 48.3213 70.5 .751 52.94553 12 .751 9.012

Net present value 0.2695

Interpretation: - The net present value of the project one is more than project two. So, the Company should invest in project one. Because it is more profitable project as compare to other

Notes:-

1. Net present value methods, profit may be considered as Net profit after tax and before deprecation. So, value of depreciation should be added in the profit. So, depreciation of project one is

Depreciation 200-7/3 = £ 64.33 approximately £64 or £64.5

In second project 200-12/3 = £63 approximately. (I assumed the life of project is 3 years.

2. The cash inflow of Project one

Years Cash flows£000

1 (58+64.5=122.5)2 (-2+64=62)3 (4+64.5=68.5)3 7 (residual value)

The cash inflow of project two

Years Cash flows£ 000

1 (36+63=99)2 (-4+62.5=58.5)3 (8+62.5=70.5)3 12 (residual value)

2. Pack back period: - it is a traditional method of capital budgeting. It is the simplest and most widely employed quantitative method for appraising capital expenditure decisions. There are two ways of calculating the payback period:

Page | 25

a) When cash inflows are equal over the life of the project:-

Payback period = Initial cost of investment

Annual cash inflow

b) When cash inflows are unequal over the life of the project: In such a situation, payback period is calculated by the process of accumulating cash flows till the time when cumulative cash flows are equal to original investment outlay.

Payback period in this case is

Total investment 99000 $

Payback period = 55000+ 35000+ (9000/25000) = 2.36 years or 3 years

According to question,

The pay Back period of project one:-

= 122.5+62+ (200-122.5-62)/68.5= 2.23 years

The pay back period of project two:-

= 99+58.5+ (200-99-58.5)/70.5 = 2.60 years.

Interpretation: - The project one is selected because the pay back period of this is less as compare to other.

* Internal rate of return method

It is defined as the discount rates that equate the present value of the expected future cash in flow to the cash outflows. In other words, it is that rate of discount which will cause the net present value of an investment to be zero. The method is given below:-

IRR = NPV of lower rate * Difference between two rates %

NPV at higher rate + NPV at lower rate

#accepts / rejects criteria

Page | 26

Internal rate of return should be compared with the required rate of return. if IRR is more than or equal to the cut off rate , then the project shall be accepted otherwise , it shall be rejected .

The internal rate of project one

Years Cash flows£ 000

Present value of Rs.1 @10 %

Present value Present value of Rs.1 @19%

Present value

1 122.5 .909 111.35 .84 102.92 62 .826 51.212 .706 43.7723 68.5 .751 51.44 .593 40.62053 7 .751 5.257 .593 4.151

present value 219.259 present value 191.4435IRR

10% + 219.259_-200_ * ( 19% - 10%)

219.259-191.4435

= 16.23%

The internal rate of return of project two

Years Cash flows£ 000

Present value of Rs.1 @10 %

Present value Present value of Rs.1 @19 %

Present value

1 99 .909 89.991 .84 83.162 58.5 .826 48.321 .706 41.3013 70.5 .751 52.9455 .593 41.80653 12 .751 9.012 .593 7.116

present value 200.2695 present value 173.3835

IRR

10% + 200.2695_-200_ * (19% - 10%)

200.2695-173.3835

= 10.1%

Page | 27

Interpretation: - The internal rate of return of project one is high as compare to project two. So Project one has to be selected.

* Return on capital employed: - return of capital employed method overcomes the deficiencies of pay back period in the sense that it considers the earnings of a project over its entire economic life. The return on capital employed is estimated i.e. earnings or profits estimated from an investment proposal during its economic life, after providing for depreciation and taxes. It means net profit from estimation is as per the accounting principles. The rate of return is compared with cut off rate as determined by the management. Cut off rate is minimum rate of return on investment. It should be generated from a profit which is generally the firm’s cost of capital. If return on investment proposal is less than the cut off rate, it is rejected and if it is equal or more than the cut off rate it is selected. Calculation of accounting rate of return is given below:-

1) When annual net profit remain constant

a) Accounting rate of return (ROI) = Annual profits *100

Net investment

b) Accounting rate of return = Annual profits *100

Average investment

Average investment = Net investment /2

2) When annual profit does not remain constant:-

a) Accounting rate of return = Average profits *100

Net investment

b) Accounting rate of return = Average profits *100

Average investment

The calculation of Project one is given below:-

1. Accounting rate of return = Average profit after deprecation / net investment *100

= (58+ (2) +4 /3) / 200*100

= 10%

The calculation of Project one is given below:-

Page | 28

1. Accounting rate of return = Average profit after deprecation / net investment *100

= (36+ (4) +8 /3) / 200*100

= 6.66%

Interpretation: - The rate of return of project one is high as compare to project two. So Project one has to be selected.

Recommendations:-

Thus, all the methods of capital budgeting has select same project. Project one has highest net present value, low payback period method, highest internal rate of return and also rate of return. So, project one has to be selected.

But if conflicting situation has to be arising, means all methods gives differ results. Then, higher Net present value will be selected. As the main aim of the organization is to maximize the shareholders wealth and internal rate of return method does not lead to wealth maximization.

Page | 29

BIBLIOGRAPHY

1) CHAWLA R.K., JUNEJA C.MOHAN ,” Financial Management” Kalyani Publication.2) GUPTA SHASHI K. & SHARMA R.K.,”Financial Management “ Kalyani Publication.3) VARSHENAREY P.N.,” Financial Management” Sultan Publication.4) Charles K. Vandyck,”Financial Management”U.K. Publication 5) Richard Sanzo ,”Ratio analysis for small business” U.K. Publication Websites:-

http:/www.publishedaccountsofrelianceindustry.com

http:/workingcapitalofrelancecompany.co.au

Page | 30

Page | 31