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SESSION: 2017-2018
DEPARTMENT OF MANAGEMENT
CH. BANSI LAL UNIVERSITY, BHIWANI
Established by the Government of Haryana under Act No. 25 of 20
CBLU/MBA/2017/……………. DATE:-
DECLARATION
(Sunil kumar)
Signature of faculty
Countersigned
In-charge, MBA
ACKNOWLEDGEMENT
The project of this nature is arduous task stretching over a period of time and takes
the effort and co-operation of many person. Although this project report is being
brought in my name, it bears an in print of guidance and co-operation of many person.
The contribution made by such person is immeasurable.
(sunil kumar)
PREFACE
Practical work experience is the integral part of individual learning. An individual who is
learning managerial concepts has to undergo this practical experience for being a future
executive.
(Sunil kumar)
CONTENTS
1. INDUSTRY PROFILE
2. COMPANY PROFILE
4. OBJETIVES OF STUDY
5. LIMITATION
6. RESEARCH METHODOLOGY
7. DATA ANALYSIS
9. BIBLIOGRAPHY
10. ANNEXURE
CAPITAL BUDGETING
PROFIABILITY INDEX
Profitabily index is very similar to NPV.Both the methods discount per cash flows to the
present .It is also known as “ benefit costs ratio “.The index no. represents the “bong of the
buck “ of the project ,present value benefit for its dollar of initial investment .If PI is less
than one ,the project earns less than required rate and is rejected.If PI is equal to one the
projects earns just the required rate
PI=DCF/NINV
Note that :
1. When PI = 1,NPV=0
2. When PI > 1,NPV>0
When considering mutually exclusive project of different sizes, NPV methods should be
used , because the project that will contribute most to firm value must be selected. On the
other hand, when capital is scarce,and several independent projects are under consideration
,PI may be a good method. In that case ,using PI would guarantee that we do not over look
smaller, but profitable projects ,in favour of larger but less profitable projects.
Internal rate of return
The internal rate of return is defined as the rate which a projects discounted
net cash flows equal its net investment . As a matter of fact ,IRR for projects
–in most ways –is similar to YTM for bonds .
When a projects NPV is equal to zero ,then its IRR is equal to the
required rate.
When a project NPV is negative ,IRR is lower than the required
rate .
When a project NPV is positive ,its IRR is greater the required rate
IRR is a very widely used method . Its main advantage is that it is easy to interpret . It gives
a percentage return for every project .This is easier to interpret than a dollar amount ,and
makes comparing project easier .If the IRR is more than or equal to required rate ,project is
accepted .Otherwise ,the project is rejected .
The main problem with IRR is that when caqsh flows are uneven ,it can be calculated only by
trial and error , or using a computer. Another disadvantage is that is assumeds that
intermediate cash flows are reinvestested at IRR , As opposed to the required rate .TThis is
not always a realistic assumtions .
Payback period
PB is the amount of time until cumulative net cash flow from a project equal initial
investments. For example, a projects with $50000 initial investments generates $20k in the
first year ,$10k per year for the next five years. The payback period would than be 4 years,
because the sum of all cash flows in the first 4 years equals the initials investments.
PB is hardly ever used as the main criterion for the capital budgeting decisions. Its main
advantages is that it gives an estimateof the amount of time it will take the projects to free up
the initial investments that was laid out for it. This may be important if financial manager is
concerned with liquidity of the firm. The main disadvantage is that it gives equak weight to
all cash flows,regardless of when they are generated .Another disadvantage is that it
essentially ignores all cash flows tjhat will be generated after the payback period.
INDUSTRY PROFILE
The history of textile is as old as human civilization itself. Initially used for protection against
nature, textile was required increasingly it satisfy men’s aesthetic need for color and
ornamentation in his apparel surroundings.
The transition from the purely functional to the decorative use of textile has been
accompanied by a shift in the manufacture of textile from the highly individualization and
specialization cottage craft to a mechanized and large scale operation. The creative genius of
many person from all walks of life has contributed to this evolution. These change are closely
interlaced with event in other spheres. In the story of mankind, Breath taking invention have
been made, was fought, international rivalries generated, punitive laws passed &personal
triumphs & tragedies enacted, the textile industries has been the cause of some shapes and
has been shaped by others.
India has very large textile industry, one of the largest in the world. It is largest organized
industry in India. The Textile industry in India traditionally, after agriculture is the only
industry that has generated huge employment for both skilled and unskilled labor in textiles.
The textile industry continues to be the second largest employment generating sector in India.
It offers direct employment to over 35 million in the country. The share of textiles in total
exports was 11.04% during April–July 2010, as per the Ministry of Textiles. During 2009-
2010, Indian textiles industry was pegged at US$55 billion, 64% of which services domestic
demand. In 2010, there were 2,500 textile weaving factories and 4,135 textile finishing
factories in all of India.
The industry presents an interesting picture of coexistence of four sectors. Which are
khadi handlooms, power looms and organized mills, and cotton textiles, is the source of raw
material for all these industrial firms? Presently the value of cotton textile made in the
country me more than Rs. 3,500 crore per annum. The consumption has been shifting
consistently towards modern blended dyed and printed goods. In general there has an upward
shift in clothing taste and consumers now prefer good quality and durable products. This has
promoted several entrepreneurs in textile industry to change their product mix.
Textile constitutes an important sector in India's exports. Textile and garments are the
single largest category of products exported from garment export industry in particular is
showing penman growth year after year. Realizing its export significance and employment
potential, the government delicensed the cotton textile industry including power looms.
Encouragement to export of cotton textile and garments became an important part of the new
policy. Under new policy sophist Ted garment manufacturing machines, which not
manufactured in India, are now allowed to be important under the open general license
(OGL) Moreover, the new policy has allowed large firms to setup garment-manufacturing
units, provided they export 50% of their production.
History :-
The archaeological surveys and studies have found that the people of Harrapan Civilization
knew weaving and the spinning of cotton four thousand years ago. There was textile trade in
India during the early centuries. A block printed and resist-dyed fabrics, whose origin is from
Gujarat is found in tombs of Fostat, Egypt.
This proves that Indian export of cotton textiles to the Egypt or the Nile Civilization in
medieval times were to a large extent. Large quantity of north Indian silk were traded through
the silk route in China to the western countries.
The Indian silk were often exchanged with the western countries for their spices in the barter
system. During the late 17th and 18th century there were large export of the Indian cotton to
the western countries to meet the need of the European industries during industrial
revolution..
There was also export of Indian silk, Muslin cloth of Bengal, Bihar and Orissa to other
countries by the East Indian company. Bhilwara is known as textile city.
The Cotton Sector: It is the second most developed sector in the Indian Textile
industries. It provides employment to huge amount of people but its productions and
employment is seasonal depending upon the seasonal nature of the production.
The Handloom Sector: It is well developed and is mainly dependent on the SHGs
for their funds. Its market share is 13% of the total cloth produced in India.
The Woolen Sector: India is the 7th largest producer of the wool in the world. India
also produces 1.8% of the world's total wool.
The Jute Sector: The jute or the golden fiber in India is mainly produced in the
Eastern states of India like Assam and West Bengal. India is the largest producer of
jute in the world.
Silk Sector: India is the 2nd largest producer of silk in the world. India produces
18% of the world's total silk. Mulberry, Eri, Tasar, and Muga are the main types of
silk produced in the country. It is a labor-intensive sector.
US$ 29 billion corporation, the Aditya Birla Group is in the League of Fortune 500. It is
anchored by an extraordinary force of 130,000 employees, belonging to 30 different
nationalities. In the year 2009, the Group was ranked among the top six great places for
leaders in the Asia-Pacific region, in a study conducted by Hewitt Associates, RBL Group
and Fortune magazine. In India, the Group has been adjudged the best employer in India and
among the top 20 in Asia by the Hewitt-Economic Times and Wall Street Journal Study
2007.
Over 60 per cent of the Group's revenues flow from its overseas operations. The Group
operates in 25 countries – India, UK, Germany, Hungary, Brazil, Italy, France, Luxembourg,
Switzerland, Australia, USA, Canada, Egypt, China, Thailand, Laos, Indonesia, Philippines,
Dubai, Singapore, Myanmar, Bangladesh, Vietnam, Malaysia and Korea.
The Aditya Birla Group is the world’s largest producer of VSF, commanding a 24 per cent
global market share. Grasim, with an aggregate capacity of 333,975 tpa has a global market
share of 11 per cent. It is also the second largest producer of caustic soda (which is used in
the production of VSF) in India.
In cement, Grasim along with its subsidiary UltraTech Cement Ltd. has a capacity of 49
million tpa and is a leading cement player in India. In July 2004, Grasim acquired a majority
stake and management control in UltraTech Cement Limited. One of the largest of its kind in
the cement sector, this acquisition catapulted the Aditya Birla Group to the top of the league
in India.
The cement business of the Group is being restructured in a phased manner. In the first phase,
Grasim's cement business is being demerged into Samruddhi Cement Limited, a subsidiary of
Grasim. In the second phase, Samruddhi Cement Limited will amalgamate with UltraTech.
Upon completion of restructuring, the cement business will be consolidated in UltraTech, a
pure play cement company.
HISTORY
Grasim Industries Limited was incorporated in 1948; Grasim is the largest exporter of
Viscose Rayon Fiber in the country, with exports to over 50 countries. Grasim is
headquartered in Nagda, Madhya Pradesh and also has a plant at Kharach ( Kosamba,
Gujarat) and Harihar, Davangere in the state of Karnataka.
Indo-Thai Synthetics Company Ltd was incorporated in 1969 in Thailand, started operations
in 1970, this was Aditya Birla Group's first foray into international venture. Aditya Birla
Group incorporated P.T. Elegant Textiles in 1973 in Indonesia. In late 1990s and later, the
focus was the textile business following the end of Multi-Fiber Arrangement (MFA). AV Cell
Inc., a joint venture between Aditya Birla Group and Tembec, Canada, established operations
in 1998 to produce softwood and hardwood pulp for the purpose of internal consumption
among different units of the Group.
Together, Aditya Birla Group and Tembec, Canada acquired AV Nackawic Inc., which
produces dissolving pulp. Grasim Industries Ltd. supplies Viscose Staple Fiber (VSP). The
Aditya Birla Group's VSF manufacturing plants are in Thailand, Indonesia, India and China.
The Group's VSF business operates through its three companies – Grasim Industries in India,
Thai Rayon Corporation in Thailand and Indo Bharat Rayon in Indonesia, which also
oversees its Chinese operations at Birla Jingwei Fibres, China.
In 2003, its Chemical Division was awarded the "Best of all" Rajiv Gandhi National Quality
Award.
Vision
“To actively contribute to the social and economic development of the communities in which
we operate. In so doing, build a better, sustainable way of life for the weaker sections of
society and raise the country’s human development index”.
Originally a textile manufacturer, Grasim has successfully diversified into VSF, cement
and chemicals.
The Aditya Birla Group is the ninth-largest cement producer in the world
2.2.4-MISSION OF GRASIM
The company is based in Bhiwani, India. Grasim Bhiwani Textiles Limited is a subsidiary of Grasim
Industries Limited.
History:-
The erstwhile Punjab cotton Mills at Bhiwani in Haryana was taken over by Grasim
Industries 1964. Subsiquently, its product mix was changed from cotton to polyester/ viscose
suiting. Today with a capacity of over 40,000 spindles of yarn and over 160 looms of fabric,
Bhiwani Textile Mills (BTM) caters to a large market in India. Its brand- Graviera Suiting- is
well-received in Middle East, South East Asia, Cyprus, latin America and Mauritius as well.
The first to introduce Synthetic Denims and Polyester Jute Suiting, the Unit intends to
diversify into fancy yarn spinning and blended design suiting using fibres like silk, cotton ,
flax and jute. A leader in Yarn and fabric - right from its inception- BTM's brands include
Adonis, and Sumo.
2.3.2-Grasim Bhiwani Textile Ltd. is equipped with:-
World Class spindles.
Dornier Looms (Germany) and Sluzer Looms ( Switzerland ).
Computerised matching systems and sophisticated jet- dyeing machines in its
Processing unit.
Computer Aided Design packages in its Fabric Developmnt Section.
GBTL promotes the mega fashion event “Graviera Mr. India"- the winner of this
Event participates in the spublicised event; it has provided a boost to the image of the
compay’s image
Objectives establish the goals and the aims of the business and determine the shape of
future events. Objectives are the way of achieving motives for profit of social service.
Main objectives of GRASIM BHIWANI TEXTILE LTD as in its Memorandum of
Association are:-
1) Increasing Productivity of workforce.
2) To introduce new products and create new markets.
3) Customer service and customer satisfaction.
4) Improving work culture among the employees.
5) Capitalizing on company strength and use of corporate assets.
6) Continuous innovation.
7) To provide growth rate of about 10% p.a.
8) Improve the advertising effectiveness.
9.) To ensure that a large proportion of its sales is directed towards the sectors and
urban sectors
CAPITAL BUDGETING
Financial management is largely concerned with financing, dividend and investment
decisions of the firm with some overall goal in mind. Corporate finance theory has developed
around a goal of maximizing the market value of the firm to its shareholders. This is also
known as shareholder wealth maximization.
Financing decision deals with the firm’s optimal capital structure in terms of debt and
equity. Dividend decisions relate to the form in which returns generated by the firm are
passed on the equity holders. Investment decisions deals with the way funds raised in
financial markets are employed in productive activities to achieve the firm’s overall goal; in
other words, how much should be invested and what assets should be invested in.
NATURE OF INVESTMENT DECISIONS
The investment decisions of a firm are generally known as the capital budgeting, or capital
expenditure decisions. A capital budgeting decisions may be defined as the firm’s decision to
invest its current funds most efficiently in the long term assets in anticipation of an flow of
benefits over a series of years.
The firm’s investment decisions would generally include expansion, modernization
and replacement of the long term assets. Sale of a division or business (divestment) is also as
an investment decision.
Decisions on investment, which take time to mature, have to be based on the returns
which that investment will make. Unless the project is for social reason only, if the
investment is unprofitable in the long run, it is unwise to invest in it now.
FEATURES OF CAPITAL BUDGETING DECISIONS
Capital budgeting decisions involve the exchange of current funds for the benefits to
be achieved in future.
The future benefits are expected to be realized over a series of years.
The funds are invested in non-flexible and long term activities.
They have a long term and significant effect on the profitability of the concern.
They involve generally huge funds.
They are irreversible decisions.
CAPITAL BUDGETING
5. Final approval
Proposals finally recommended by the committee are sent to the top management
along with the detailed report, both the capital expenditure and source of funds to
meet them.
6 Evaluation
Last but not the least important step in the capital budgeting process is an evaluation
of the programme after it has been fully implemented. Budget proposals and the net
investment in the projects are compared periodically and on the basis of such
evaluation, the budget figures may be reviewer and presented in a more realistic way.
LIMITTION OF CAPITAL BUDGETING
Capital budgeting techniques suffer from the following limitations:
i) All the techniques of capital budgeting presumes that various investment proposals
under consideration are mutually exclusive which may not practically be true in some
particular circumstances.
ii) The techniques of capital budgeting require estimation of future cash inflows and
outflows. The future is always uncertain and the data collected for future may not be
exact.
iii) There are certain factors like morale of the employees, goodwill of the firm etc, which
cannot be correctly quantified but which otherwise substantially influence the capital
decisions.
iv) Urgency is another limitation in the evaluation of capital investment decisions.
v) Uncertainty and risk pose the biggest limitation to the techniques of capital budgeting.
Expansion decision:
A decision concerning whether the firm should increase operations by adding new
products, additional machines, and so forth. Such decisions would expand operations.
Diversification decision:
These investments are meant to increase capacity and widen the distribution network.
Such investment call for an explicit forecast of growth. Since this can be risky and
complex, expansion projects normally warrant more careful analysis than replacement
projects. Decisions relating to such projects are taken by the top management.
Replacement decision:
A decision concerning whether an existing asset should replaced by a newer version
of the same machine or even a different type of machine that does the same thing as
the existing machine. Such replacements are generally made to maintain existing levels
of operations, although profitability might change due to changes in expenses (that is,
the new machine might be either more expensive or cheaper to operate than the
existing machine).
Independent investment:
The acceptance of an independent project does not affect the acceptance of any other
project that is, the project does not affect other projects. For example, if you have a
large sum of money in the bank that you would like to spend on yourself, say,
$150,000. You decide you are going to buy a car that costs about $30,000 and a new
stereo system for your house that costs less than $5,000. The decision to buy the car
does not affect the decision to buy the stereo—they are independent decisions.
Contingent investment:
Contingent investments are dependent projects; the choice of one investment
necessitates undertaking one or more other investments. 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. for the employees to attract the work force. Thus,
building of factory also requires investment in facilities for employees. The total
expenditure will be treated as one single investment.
Research and development investment:
Traditionally, R&D projects absorbed a very small proportion of capital budget in
most Indian companies. Things however are changing. Companies are now allocating
more funds to R:&:D projects more so knowledge intensive industries. R&D are
characterized by numerous uncertainties and typically involve sequential decision on
the basis of managerial judgment.
METHODS OF INVESTMENT EVALUATION
A number of investment criteria (or capital budgeting techniques) are in use in practice. They
may be grouped in the following two categories:
i) Discounted Cash Flow (DCF) Criteria
Net Present Value (NPV)
Internal Rate of Return (IRR)
Profitability index (PI)
ii) Non-discounted Cash Flow Criteria
Payback
Discounted Payback
Accounting Rate of Return
n
Ct
C0
t 1 (1 k )
t
Where,
Ct = net cash inflow during the period
C0 = total initial investment costs
r = discount rate, and
t = number of time period
NPV may be positive, zero or negative. These three possibilities of net present
value are briefly explained below:
Positive NPV:
If present value of cash inflows is greater than the present value of the cash outflows,
the net present value is said to be positive and the investment proposal is considered
to be acceptable.
Zero NPV:
If present value of cash inflow is equal to present value of cash outflow, the net
present value is said to be zero and investment proposal is considered to be
acceptable.
Negative NPV:
If present value of cash inflow is less then present value of cash outflow, the net
present value is said to be negative and the investment proposal is rejected.
Internal rate of return (IRR) is the interest rate at which the net present value of all the
cash flows (both positive and negative) from a project or investment equal zero. IRR is the
discount rate that sets NPV to zero. The IRR differs from the NPV in that it results in finding
the internal yield of the potential investment. The IRR is calculated by discounting the net
cash flows using different discount rates till it gives a net present value of zero. Internal Rate
of Return or IRR is the investor's required rate of return which equates the initial cash outlay
with the present value of series of expected cash flows. In other words, IRR is the rate at
which the difference between initial cash outlay and present value of cash inflows in zero.
The internal rate of Return (IRR) is the discount rate that equals the present value of a future
steam of cash flows to the initial investment. In simple terms, discount rate is the rate at
which the Net present value of a project equals zero. It can be thought of as the annualized
rate of return (in percent) of an investment using compound interest rate calculations.
Acceptance rule:
The accept or reject rule, using the IRR method, is to accept the project if its internal rate of
return(r) is higher than the opportunity cost of capital (k). The project shall be rejected if its
internal rate is less than the opportunity cost of capital. The decision maker may remain
indifferent if the internal rate of return is equal to opportunity cost of capital.
3) Easy to understand:
Returns expressed in terms of percentage are easier to understand and communicate
for managers and shareholders compared to NPV, due to unfamiliarity with the
details of the appraisal techniques.
4) Maximum profitability of shareholders:
If there is only project which we have to select, if we check its IRR and it is higher
than its cut off rate, then it will give maximum profitability to shareholders
Key differences between the most popular methods, the NPV (Net Present Value) Method
and IRR (Internal Rate of Return) Method, include:
PROFITABLITY INDEX
Acceptance rule:
The following are the PI acceptance rules:
Accept the project when PI is greater than 1.
Reject the project when PI is less than 1.
May accept the project when PI is equal to 1.
The profitability index, also known as the benefit-cost ratio, is another measure that
uses a simple rule to evaluate cash flow results for a given project. In this case, the
profitability index rule would tell managers and executives to accept all projects that
have an index value that is equal to or greater than 1.
NPV VS PI METHOD
The NPV method and PI yield same accept or reject rules, because PI can be greater than one
only when the project net present value is positive. In case of marginal project, NPV will be
zero and PI will be equal to one. But a conflict may arise between the two methods if a choice
between mutually exclusive projects has to be made.
Project c Project d
PV cash inflow 100000 50000
Initially cash 50000 20000
outflow
NPV 50000 30000
PI 100000 =2.0 50000 =2.5
500000 20000
Project c should be accepted if we use NPV method, but project d is preferable
according to PI method.
The NPV method should be preferred expect under capital rationing, because the net present
value represent the net increase in the firms wealth. In our illustration, project c contributes
all that project d contributes plus additional net present value of Rs 20000 (Rs50000-
Rs30000) at an incremental cost of Rs 50000 (Rs100000-Rs50000).
PAYBACK (PB)
The payback method of investment appraisal, used for evaluating capital projects,
calculates the annual returns from the initiation of the project until the accumulated
returns are equal to the cost of the investment, at which time the investment is said to
have been paid back. The PB method is generally used as a comparison of two or
more projects and has a wide acceptance as a rule of thumb. The payback period is
defined as the time required recovering the initial investment in a project from
operations.
One of the oldest and most widely used methods to evaluate a capital investment
proposal is the Payback Period, as the name implies it refers to the time required to
recover the initial investment or the initial cash outlay as it is called in financial
terms.
Formula:
Payback = Initial Investment
Annual Cash Flow
Acceptance rule:
Many firms use the payback period as an investment evaluation criterion and a method of
ranking projects. They compare the project’s payback with a predetermined, standard
payback. The project would be accepted if its payback period is less than the maximum or
standard payback period set by management. As a ranking method, it gives highest ranking to
the project with highest payback period. Thus, if the firm has to choose between two
mutually exclusive projects, the project with shorter payback period will be selected.
Example:
Payback Period Example
Let us illustrate finding payback period with an example investment proposal. Let us
say you were offered a series of cash inflows at the end of each of the next four years
as $5000, $4000, $3000, and $1000. Say the initial cash outlay for this proposal is
$10,000.
1 5000 5000
2 4000 9000
3 3000 12000
4 1000 13000
We add up the cash inflows beginning after the initial cash outlay in the cumulative
cash inflows column
We keep an eye on this last column and track the last year for which the cumulative
total does not exceed the initial cash outlay
We compute the part or fraction of the next year's cash inflow need to payback the
initial cash outlay by taking the initial cash outlay less the cumulative total in the last
step then divide this amount by the next years cash inflow.
E.g., ( $10,000 - $9,000 ) / $3,000 = 0.334
To now obtain the payback period in years , we take the figure from the last step and
add it to the year from the step 2. Thus our payback period is 2 + .334 = 2.334 years
ADVANTAGES OF PAYBACK METHOD
1) Simplicity:
The most significant merit of payback is that it is simple to understand and easy to
understand and easy to calculate. The business executives consider the simplicity of
method as a virtue. This is evident from their heavy reliance on it for appraising
investment proposals in practices.
2) Cost effective:
Payback method costs less than most of the sophisticated techniques that require a
lot of the analyst’s time and the use of computers.
36
3) Short term effect:
A company can have more favourable short-term effects on earning per share by
setting up a shorter standard payback period.
4) Liquidity:
The emphasis in payback is on the early recovery of the investment. Thus, it gives
an insight into the liquidity of the project. The funds so released can be put to other
uses.
DISCOUNTED PAYBACK
One of the serious objection to the payback method is that is does not discount the cash flow
calculating the payback period. The discount payback period is the number of period taken in
recovering the investment outlay on the present value basis. The discounted payback period
still to consider the cash flow occurring after the payback period.
Example:
Let us illustrate finding Discounted Payback Period with an example investment proposal.
Let us say you were offered a series of cash inflows at the end of each of the next four years
as Rs 6000, Rs2000, Rs1000, and Rs5000 Say the Initial Cost Outlay for this proposal is
Rs8000
We add up the discounted cash inflows beginning after the initial cash outlay in the
cumulative cash inflows column
We keep an eye on this last column and track the last year for which the cumulative
total does not exceed the initial cash outlay.
We compute the part or fraction of the next year's cash inflow need to payback the
initial cash outlay by taking the initial cash outlay less the cumulative total in the last
step then divide this amount by the next years cash inflow
To know obtain the discounted payback period we take the figure from the last step
and add it to the year thus the discounted payback period is 3+.105=3.105yr
Instead of represent the years as decimal value we could represent the Discounted
Payback Period in years and months this way. We take the fraction o105 and multiply
it by 12 to get the months which is 1.26 months.
The DCF method is forward-looking and depends more future expectations rather
than historical results.
The DCF method is more inward-looking, relying on the fundamental expectations
of the business or asset, and is influenced to a lesser extent by volatile external
factors.
The DCF analysis is focused on cash flow generation and is less affected by
accounting practices and assumptions.
The DCF method allows expected (and different) operating strategies to be
factored into the valuation.
The DCF analysis also allows different components of a business or synergies to
be valued separately.
Case Example
Initial Investment =$8000
Calculation
Acceptance rule:
As an accept or reject criterion, this method will accept all those projects whose ARR is
higher than the minimum rate established by the management and reject those projects which
have ARR less than minimum rate. This method would rank a project as number one if it has
highest ARR and lowest rank would be assigned to the project with lowest ARR.
5) Market Condition:
Market conditions can have a significant impact on a company's capital-structure
condition. Suppose a firm needs to borrow funds for a new plant. If the market is
struggling, meaning investors are limiting companies' access to capital because of
market concerns, the interest rate to borrow may be higher than a company would
want to pay. In that situation, it may be prudent for a company to wait until market
conditions return to a more normal state before the company tries to access funds for
the plant.
6) Sales Stability:
A firm whose sales are relatively stable can safely take on more debt and incur
higher fixed charges than a company with unstable stables; this factor has generally
been observed in terms of sales or earning variability as capital budgeting is
concern.
RESEARCH METHODOLOGY
Research Design
There are four types of research design which are as follows:
1. Exploratory Design.
2. Descriptive Design.
3. Diagnostic Design.
4. Casual & Experimental Design.
DATA COLLECTION
Data collection is a term used to describe a process of preparing and collecting business data
– for example as a part of a process improvement or similar project.
Data collection usually takes place early on in an improvement project, and is often
formalized through a data collection plan which often contains the following activity.
1. Pre collection activity – Agree goals, target data, definitions and methods.
2. Collection – data collection.
3. Present Findings – Usually involves some form of sorting analysis and/or
presentation.
There are mainly two types of collection of data which helps the researcher in studying his
research problem which are discussed below:
DATA COLLECTION
INTERVIEW QUESTIONNAIRE
In primary data collection, we collect the data our self using methods such as interviews and
questionnaires. The key point here is that the data collected is unique to us and our research
and, until we publish, no one else has access to it.
I have tried to collect the data using the methods such as questionnaires and interviews. The
key point here is that the data collected is unique and research and, no one else has access to
it. It is done to get the real scenario and to get the original data of present.
Interview:
This technique is primarily used to gain an understanding of the underlying reasons
and motivations for people’s attitudes, preferences or behavior.
The interview was done by asking a general question. I encourage the respondent to
talk freely.
I have used an unstructured format, the subsequent direction of the interview being
determined by the respondent’s initial reply, and come to know what is its initial is.
In simply, primary data is the data collected for the first time. It is fresh and originally
collected by the surveyor.
SAMPLING METHODOLOGY
Sampling Technique:
Initially, a rough draft was prepared keeping in mind the objective of the research. A pilot
study was done in order to know the accuracy of questionnaire. The final questionnaire was
arrived only after certain important changes were done.
Thus my sampling came out to be judgmental and continent.
Sampling Unit:
The respondents who were asked to fill out questionnaires are the sampling units. These
comprise of kartvyayogis of corporate HR, Guetermann India Pariwar, who had attended the
personality development workshop.
Sampling Size: A sample size of 45 employees was chosen. It was a non-probability sample.
Sampling Method: Random Sampling
SECONDARY DATA
All methods of data collection can supply quantitative data (numbers, statistics or financial)
or qualitative data (usually words or text). Quantitative data may often be presented in tabular
or graphical form. Secondary data is the data that has already been collected by someone else
for a different purpose to yours.
These are the types of data which are useful for every researcher while conducting a research
program. I also use both types of data and my research instruments are questionnaires and
interviews.
The limitations of the secondary data are also discussed. These limitations sometime creates
problem for the researcher.
Now,
= $50000 $243000
(1+1%)12
= $562,750 - $243,000
= $319,750
Working note:
Rate is converted in to monthly basis because rate is given yearly basis and time is
given on monthly basis.
Present value of cash flow is find out on the basis of present value of annuity table.
=$10,451 - $8,320
=$2,131
Since NPV has appositive value there for project should be accepted.
1. Payback Period – Given the cash flows of the four projects, A, B, C, and D, and using the
Payback Period decision model, which projects do you accept and which projects do you
reject with a three year cut-off period for recapturing the initial cash outflow? Assume that
the cash flows are equally distributed over the year for Payback Period calculations.
2.
Projects A B C D
Cost $10,000 $25,000 $45,000 $100,000
Cash Flow Year One $4,000 $2,000 $10,000 $40,000
Cash Flow Year Two $4,000 $8,000 $15,000 $30,000
Cash Flow Year Three $4,000 $14,000 $20,000 $20,000
Cash Flow Year Four $4,000 $20,000 $20,000 $10,000
Cash Flow year Five $4,000 $26,000 $15,000 $0
Cash Flow Year Six $4,000 $32,000 $10,000 $0
Solution
projects under $25,000 and has a cut off period of 4 years for these small value projects. Two
projects, R and S are under consideration. The anticipated cash flows for these two projects
are listed below. If Graham Incorporated uses an 8% discount rate on these projects are they
accepted or rejected? If they use 12% discount rate? If they use a 16% discount rate? Why is
it necessary to only look at the first four years of the projects’ cash flows?
Solution at 8%
Solution at 16%
$251.58 and initial cost is not recovered in first four years, project rejected.
Because Graham Incorporated is using a four year cut-off period, only the first four years of
cash flow matter. If the first four years of anticipated cash flows are insufficient to cover the
initial outlay of cash, the project is rejected regardless of the cash flows in years five and
forward.
debating using Payback Period versus Discounted Payback Period for small dollar projects.
The Information Officer has submitted a new computer project of $15,000 cost. The cash
flows will be $5,000 each year for the next five years. The cut-off period used by Mathew
Incorporated is three years. The Information Officer states it doesn’t matter what model the
company uses for the decision, it is clearly an acceptable project. Demonstrate for the IO that
Solution
Calculate the Discounted Payback Period for the project at any positive discount rate,
say 1%...
= -$295.04 so the payback period is over 3 years and the project is a no-go!
switching from Payback Period to Discounted Payback Period for small dollar projects. The
cut-off period will remain at 3 years. Given the following four projects cash flows and using
a 10% discount rate, which projects that would have been accepted under Payback Period
Project Project
Cash Flows Project One Project Two Three Four
Initial cost $10,000 $15,000 $8,000 $18,000
Year One $4,000 $7,000 $3,000 $10,000
Year Two $4,000 $5,500 $3,500 $11,000
Year Three $4,000 $4,000 $4,000 $0
Solution
Calculate the Discounted Payback Periods of each project at 10% discount rate:
Project One
= -$52.60 so the discount payback period is over 3 years and the project is a no-go!
Project Two
= $327.58 so the discount payback period is 3 years and the project is a go!
Project Three
$618.33 so the discount payback period is over 3 years and the project is a no-go!
Project Four
Projects one and three will now be rejected using discounted payback period with a
6. Net Present Value – Swanson Industries has a project with the following projected cash
flows:
a. Using a 10% discount rate for this project and the NPV model should this
Solution
$150,000/1.104
$150,000/1.154
$150,000/1.204
7. Net Present Value – Campbell Industries has a project with the following projected cash
flows:
a. Using an 8% discount rate for this project and the NPV model should this
Solution
$135,000/1.084
$135,000/1.144
$135,000/1.204
8. Net Present Value – Swanson Industries has four potential projects all with an initial cost
of $2,000,000. The capital budget for the year will only allow Swanson industries to accept
one of the four projects. Given the discount rates and the future cash flows of each project,
Solution, find the NPV of each project and compare the NPVs.
$411,351.24 + $391,763.08
$425,055.13 + $389,958.83
$228,701.30 + $99,435.34
$406,259.18 + $406,999.18
REFERNCES:
Financial management
by I.M. Pandey
Business research
by C.R. Kothari