PROJECT REPORT

ON
CAPTAL BUDGETING
AT

ODISHA SMALL INDUSTRIES CORPORATION

SUBMITTED TO THE

INSTITUTE OF MANAGEMENT AND INFORMATION

TECHNOLOGY
MASTER IN BUSINESS ADMINISTRATION
2018-20
By
Name: PRIYADARSINI MAHAKUD
University Roll No: 1806102059
Registration No: 1806102059
Under the Guidance of
Name of Internal Guide Name of External Guide
MRS. TANVI CHAWDA TAPAN KUMAR DAS
FACULTY MEMBER JOINT MANAGER FINANCE
(FINANCE) OSIC, CUTTACK

1
 No. /OSIC/Fin/2019
July 31, 2019

CERTIFICATE

This is to certify that Priyadarsini Mahakud a MBA(finance), student of

Institute of Management and Information Technology, Cuttack has
undergone Internship Training on Capital Budgeting of OSIC in the
Finance Wing of The Odisha Small Scale Industry, Cuttack for a period
from 18.06.2018 to 30.06.2018.

I wish her all success in life.

Tapan Kumar Das

J Manager(Finance)

The Odisha Small Industries Corporations Ltd.

(A Silver Category Government of Odisha Undertaking)
(An ISO: 9001:2008 certified Govt. Company) Industrial Estate, Madhupatna, Cuttack-753010, Tel
No:2343084, 2343084, Fax: 91-571-2341875/2342561 e-mail: osicltd@gmail.comwebsite:
www.osicltd.in

2
3
 CERTIFICATE OF THE GUIDE

Mentor/Guide Name: Mrs. Tanvi Chawda

Designation: Faculty of IMIT, Cuttack.

This is to certify that the project report entitled “CAPITAL

BUDGETING” has been prepared by Priyadrshini Mahakud under
my supervision and guidance, for the fulfilment of master in business
administration. Her work is satisfactory.

Date: Signature of Guide

4
 ACKOWLEDGEMENT
I acknowledge in the indebtness gratitude to my internal guide
Mrs. Tanvi Chawda (finance) for extending her cooperation and help for
successful completion of the project.

I would like to express my sincere gratitude to OSIC for his

valuable suggestion as well as I would like to thank Mr. Tapan Kumar
Das, OSIC for his advises and guidance in carrying out this project.

I would also like to thank Smt. Subhashree Nayak, OSIC for giving
me an opportunity to undertake a project in OSIC, Cuttack. I am also
thankful to the staff members of finance department for their immense
support and assistance, for giving some time from his busy schedule to
explain me intricacies of the topic and guidance me to complete my
project successfully.

Once again I express my sincere thanks and wholehearted

gratitude to all those persons with whom I was associated during my
project & I’m very thankful from the core of my heart to my parents for
their immense support & blessing for which I could able to complete my
project.

Name- Priyadarsini Mahakud

Roll no- 1806102059

5
 DECLARATION

I do hereby declare that the project study entitled “CAPITAL

BUDGETING” is being submitted by me to IMIT, Cuttack for partial
fulfilment of MASTER IN BUSINESS ADMINISTRATION. This is
based on the study undertaken by me, and the information presented in
this report is true to the best of my knowledge and belief. This report has
neither been submitted nor published anywhere else. This report is a
part of my course curriculum and the main objective of conducting this
study is to know about the financial management of OSIC through a
detail study. The information and data used in the report was collected
from published “Annual Report”, financial statement and various articles
of the OSIC. This report shall be used for academic purpose only.

Name- Priyadarsini Mahakud

Regd no- 1806102059

6
 TABLE OF CONTENTS
SR NO. TOPIC PAGE

1 GUIDE CERTIFICATE I
2 ACKOWLEDGEMENT II
3 DECLARATION III
4 TABLE OF CONTENTS IV
CHAPTER-1
INTRODUCTION 1-3
1.1 RATIONAL OF THE STUDY
1.2 OBJECTIVE OF THE STUDY
1.3 EXPECTED CONTRIBUTION OF THE
STUDY
CHAPTER-2
COMPANY PROFILE 4-6
2.1 COMPANY OVERVIEW
2.2 MISSION
2.3 VISION
2.4 FUNCTION OF OSIC

CHAPTER-3
LITERATURE REVIEW
WORKING CAPITAL THEORY 7-24
CHAPTER-4
RESEARCH METHODOLOGY & DATA 25-33
ANALYSIS
CHAPTER-5
FINDINGS AND CONCLUSION OF THE 34-35
STUDY
CHAPTER-6
BIBILOGRAPHY 36

7
 CHAPTER 1

INTRODUCTION

1.1 INTRODUCTION OF THE STUDY

Every organization irrespective of its size and mission can be viewed as a

financial entity management of an organization. Financial management
focuses not only on the improvement of funds but also on their efficient use
with the objective of maximizing the owners’ wealth. The allocation of funds
is therefore an important function of financial management. The allocation
of funds involves the commitment of funds to assets and activities.

There are two types of Investment decision:

1. Management of current assets or Working capital management.
2. Long term investment decision.

Long term investment decisions are widely known as capital budgeting or

capital expenditure budgeting. It means as to whether or not money should be
invested in long term project. This part is devoted to an in-depth and
comparative decision of capital budgeting/capital expenditure management.

A project is an activity sufficiently self- contained to permit financial and

commercial analysis. In most cases projects represent expenditure of capital
funds by pre-existing entities which want to expand or improve their operation.

In general a project is an activity in which, we will spend money in expectation

of returns and which logically seems to lead itself to planning. Financing and
implementation as a unit, is a specific activity with a specific point and a
specific ending point intended to accomplish a specific objective.

To take up a new project, involves a capital investment decision and it is the

top management’s duty to make a situation and feasibility analysis of that
particular project and means of financing and implementing it financing is a
rapidly expanding field, which focuses not on the credit status of a company,
but on cash flows that will be generated by a specific project. Capital budgeting
has its origins in the natural resource and infrastructure sectors. The
current demand for infrastructure and capital investments is being fuelled by
deregulation in the power, telecommunications, and transportation sectors, by
the globalization of product markets and the need for manufacturing scale, and
by the privatization of government owned entities in developed and developing
countries.

8
The capital budgeting decision procedure basically involves the evaluation of
the desirability of an investment proposal. It is obvious that the firm must have
a systematic procedure for making capital budgeting decisions.

The procedure must be consistent with the objective of wealth maximization. In

view of the significance of capital budgeting decisions, the procedure must
consist of step by step analysis.

1.2 Importance of investment decisions:-

Capital investments, representing the growing edge of a business, are deemed to

be very important for three inter- related reasons.

1. They influence firm growth in the long term consequences capital investment
decisions have considerable impact on what the firm can do in future.

2. They affect the risk of the firm; it is difficult to reverse capital investment
decisions because the market for used capital investments is ill organized and
/or most of the capital equipment’s bought by a firm to meet its specific
requirements.

3. Capital investment decisions involve substantial out lays.

“ODISHA SMALL INDUSTRIES AND CORPORATION” is a growing

concern, capital budgeting is more or less a continuous process and it is carried
out by different functional areas of management such a production, marketing,
engineering, financial management etc. All the relevant
functional departments play a crucial role in the capital budgeting decision
process.

1.3 Objectives of the study:-

1. To describe the organizational profile of “ODISHA SMALL INDUSTRIES

AND CORPORATION LTD.”

2. To discuss the importance of the management of capital budgeting.

3. Determination of proposal and investments, inflows and out flows.

4. To evaluate the investment proposal by using capital budgeting techniques.

5. To summarize and to suggest for the better investment proposal.

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1.4 Scope of the Study:-
This study highlights the review of capital budgeting and capital expenditure
management of the company. Capital expenditure decisions require careful
planning and control. Such long term planning and control of capital
expenditure is called Capital Budgeting. The study also helps to understand how
the analysis of the alternative proposals and deciding whether or not to commit
funds to a particular investment proposal whose benefits are to be realized over
a period of time longer than one year. The capital budgeting is based on some
tools namely Payback period, Average Rate of Return, Net Present Value,
Profitability Index, and Internal Rate of Return.

1.5 METHODOLOGY:-
The information for the study is obtained from two sources namely.

1. Primary Sources
2. Secondary Sources

1. 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.
a. Through interactions with the various department
managers of “ODISHA SMALL INDUSTRIES AND
CORPORATION LTD.”

b. Guidelines given by the Project Guide, Mr.Khirod

chandra Mallick
Dy. Manager, finance division.

2. Secondary Sources:

This data is from the number of books and records of the company,
the annual reports published by the company and other magazines.
The secondary data is obtained from the following.

10
 a. Collection of required data from annual records,
monthly records, internal published book or profile
of “ODISHA SMALL INDUSTRIES AND
CORPORATION LTD”.

b. Other books and journals and magazines.

c. Annual Reports of the company.

1.6 LIMITATIONS:-

Through the project was completed successfully with a few limitations

may.

a. Since the procedure and policies of the company will not allow
disclosing confidential financial information, the project has to
be completed with the available data given to us.
b. The period of study that is 6 weeks is not enough to conduct
detailed study of the project.
c. The study is carried is carried basing on the information and
documents provided by the organization and based on the
interaction with the various employees of the respective
departments.

CHAPTER-2
COMPANY PROFILE

ABOUT THE COMPANY

The Odisha small Industries Corporation Ltd. (OSIC) was established on 3rd
April, 1972 as wholly owned Corporation of Government of Odisha. The basic
objective of the Corporation is to aid, assist and promote the MSMEs in the
state for their sustained growth and development to gear up the industrialization
process in the state. Although there are a number of other State Corporations
looking after various aspects of industrial development, yet this is the only
Corporation in the State exclusively engaged in the development, of the
MSMEs which form the back bone of industrial sector in the state.

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The Odisha Small Industries Corporation Ltd. (OSIC) is a government of
Odisha’s silver category profit making PSU with annual turnover of more than
550.00 crore.

OBJECTIVE

The Odisha Small Industries Corporation Limited (OSIC) was incorporated on

3rd April, 1972 with main objective to aid, assist and promote the SSI units of
the state. It acts as the facilitator for the industrial growth of the MSMEs of the
State. Starting with a modest turnover of Rs.1.00 Crore in the year 1972-73, it
has reached a turnover of Rs.552.10 crore in the financial year 2015-16 and
earned a net profit of rs.6.90 crore (provisional). It is an ISO-9001-2008
certified Govt. of Odisha Undertaking. The corporation functions under the
administrative control of MSME Department, Govt. of Odisha.

ADDITIONAL INFORMATION

Company Name Odisha Small Industries and

Corporations

Products/Services Iron & Steel, Wire Rod, Bitumen

Country/Region India

State Odisha

City Cuttack

Telephone 0671-2341458/ 2342404/ 2344612

Fax 91-671-2341875/ 2342561

URL www.osicltd.in

Email osicltd@gmail.com
osicltd@rediffmail.com

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ESTABLISHMENT

 Head office is at Cuttack

 Branch offices are at Rasulgarh, Balasore, Sambalpur, Rourkela,

Bolangir, Jeypore, keonjhar, Anugul, Kesinga, Berhampur,
Mancheswar, and Baripada.

MANAGEMENT

 Chairman:- Sj. Ramakrushna Dasmohapatra

 Managing Director:- Sj.Prasanna Kumar Jena(IAS)

FUNCTION OF OSIC

OSIC is working with the following:

i. To provide quality raw material to MSMEs of the State.

ii. To provide quality building material to MSME sector.
iii. To assist in marketing the products of the MSME sector.
iv. To act as syndicate leader of MSMEs as per the IPR of the
Govt. of Odisha
v. To act as a Nodal Agency for subcontract exchange for
MSME sector and large Industries.

VISION

To aid, assist and promote the MSMEs of the state as per Government
mandate.

MISSION

i. To provide quality raw material to MSME sector.

ii. To provide marketing assistance to MSME sector.
iii. To market the MSMEs produces by creating common brand
name with quality assurance.

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 CHAPTER-3
CAPITAL BUDGETING
4.1 MEANING

Capital Budgeting is the process of making investment decisions in capital

expenditure. A capital expenditure may be defined as an expenditure the benefit
of which are expected to be received over a period of time exceeding one year.
The main characteristics of a capital expenditure are that the expenditure is
incurred at one point of time whereas benefits of the expenditure are realized at
different points of time in future. Capital expenditure involves non-flexible long
term commitment of funds. Thus capital expenditure decisions are also called
Long-Term Investment Decision. Capital budgeting involves the planning and
control of capital expenditure.

DEFINITION:
R.M.LYNCH has defined capital Budgeting as “Capital
Budgeting consists of employment of available capital for the purpose
of maximizing the long term profitability of the firm”.

Capital Budgeting is a many-sided activity. It includes searching for new and

more profitable investment proposals, investigating, engineering and marketing
considerations to predict the consequences of accepting the investment and
making economic analysis to determine the profit potential of each investment
proposal.

Its basic features can be summarized as follows;

1. It has the potentiality of making large anticipated profits.
2. It involves a high degree of risk.
3. It involves a relatively long-time period between the initial outlay and the
anticipated return.

Capital Budgeting consists of planning and the development of available capital

for the purpose of maximizing the long-term profitability of the firm.

4.2 NEED AND IMPORTANCE OF CAPITAL BUDGETING

Capital Budgeting means planning for capital assets. Capital Budgeting

decisions are vital to any organization as they include the decision to;

14
 1.Whether or not funds should be invested in long term projects such as
setting of an industry, purchase of plant and machinery etc.,

2. Analyse the proposal for expansion or creating additional capacity.

3. To decide the replacement of permanent assets such as building and

equipment’s.
4. To make financial analysis of various proposal regarding capital
investments so as to choose the best out of many alternative proposals.
The importance of capital Budgeting can be well understood from the fact that
an 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.

1. Large Investments
Capital budgeting decisions, generally involves large investment of funds.
But the funds available with the firm are always limited and the demand
for funds exceeds the 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 amounts of funds but also
funds for long-term or more or less on 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

decisions for acquiring a permanent asset is taken, it became very
difficult to dispose of these assets without incurring heavy losses.

4. Long-term Effect of profitability

The investment decisions taken today not only affects present profit but
also the future profitability of the business. A profitable project selection
is fatal to the business.

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5. Difficulties of investment decisions

The long term investment decisions are more difficult to take because,

1. Decision extends to a series of years beyond the current accounting

period.
2. Uncertainties of future and
3. Higher degree of risk.

6. National Importance

An investment decision through taken by individual concerns is of

national importance because it determines employment, economic
activities and economic growth.

7. Effect on cost structure

By taking a capital expenditure decision, a firm commits itself to a size

able amount of fixed cost in terms of interest, supervisors salary,
insurance, building rent etc. If the investment turns out to be unsuccessful
in future or produces less than anticipated profits, the firm will have to
bear the burden of fixed cost.

8. Impact on firm’s

Competitive strength the capital budgeting decisions affect the capacity

and strength of a firm to face competition. It is so because the capital
investment decisions affect the future profits and costs of the firm. This
will ultimately affect the firm’s competitive strength.

9. Cost control

In capital budgeting there is a regular comparison of budgeted and actual

expenditures. Therefore cost control is facilitated through capital
budgeting.

10. Wealth Maximization

The basic objective of financial management is to maximize the wealth of

the shareholders. Capital budgeting helps to achieve this basic objective.
Capital budgeting avoids over investments and under investments in fixed

16
 assets. In this way capital budgeting protects the interest of the
shareholders and of the enterprise.

4.3 STEPS IN CAPITAL BUDGETING

Capital budgeting is a complex process. It involves decision relating to the

investment of current funds for the benefit to be achieved in future which is
always uncertain. Capital budgeting is a six step process. The following steps
are involved in capital budgeting;
1. Project generation

The capital budgeting process begins with generation or identification ofi

nvestment proposals. This involves a continuous search for investment
opportunities which are compatible with firm’s objectives.

2. Project screening

Each proposal is then subject to a preliminary screening process in order

to assess whether it is technically feasible, resources required are
available, and expected returns are adequate to compensate for the risks
involved.

3. Project evaluation

After screening of project ideas or investment proposals the next step is to

evaluate the profitability of each proposal. This involves two steps;

a. Estimation of cost and benefit in terms of cash flows

b. Selecting an appropriate criterion to judge the desirability of the

project.

4. Project selection

After evaluation the next step is the selection and the approval of the best
proposal. In actual practice all capital budgeting decision are made at
multiple levels and are finally approved by top management.

5. Project execution and implementation

17
 After the selection of project funds are allocated for them and a capital
budget is prepared. It is the duties of the top management or capital
budgeting committee to ensure that funds are spend in accordance with
allocation made in the capital budget.

6. Performance review

After the implementation of the project, its progress must be reviewed at

periodical intervals. The follow-up or review is made by comparing
actual performance with the budget estimates.

4.4 OPERATING BUDGET AND CAPITAL BUDGET

Most of the large firms prepare two different budgets each year.
1. OPERATING BUDGET

Operating budget shows planned operations for the forthcoming period

and includes sales, production, production cost, and selling and
distribution overhead budgets. Capital budgets deals exclusively with
major investment proposals.

2. CAPITAL EXPENDITURE BUDGET

Capital Expenditure is a type of functional budget. It is the firm’s formal

Plan for the expenditure of money for purchase of fixed assets. The
budget is prepared after taking in to account the available production
capacities, probable reallocation of existing resources and possible
improvements introduction techniques. If required, separate budgets can
be prepared for each item of capital assets such as a building budget, a
plant and machinery budget etc.

4.5 OBJECTIVES OF CAPITAL EXPENDITURE BUDGET

The objectives of Capital Expenditure Budget are as follows.

1. It determines the capital projects on which work can be started during the
budget period after taking in to account their urgency and the expected
rate of return on each project.

18
 2. It estimates the expenditure that would have to be incurred on capital
projects approved by the management together with the source or sources
from which the required funds would be obtained.
3. It restricts the capital expenditure on projects within authorized limits.

CONTROL OVER EXPENDITURE THROUGH CAPITAL

EXPENDITURE BUDGET

The capital expenditure budget primarily ensures that only such projects
are taken in hand which are either expected to increase or maintain the rate of
return on capital employed. Each proposed project is appraised and only
essential project or projects likely to increase the profitability of the
organization are included in the budget. In order to control expenditure on each
project, the following procedure is adopted.

1. A project sheet is maintained for each project.

2. In order to ensure that the expenditure on different project is properly

analysed.
3. The expenditure incurred on the project is regularly entered on the project
sheets from various sources such as invoices of assets purchased, bill for
delivery charges etc.
4. The management is periodically informed about expenditure incurred in
respect of each project under appropriate heads.
5. In case project cost is expected to increase; a supplementary sanction for the
same is obtained.
6. In financial books the total expenditure incurred on all projects is separately
recorded.

4.6 TACTICAL AND STRATEGIC INVESTMENT DECISION

Investment decision can be classified as,

1. Tactical Decision

A Tactical Decision generally involves a relatively small amount of funds

and does not constitute a major departure from the past practices of the
company.

2. Strategic Decision
19
 A Strategic Investment Decision involves a large sum of money and may
also result in a major departure from the past practices of the company.
Acceptance of a Strategic Investment Decision involves a significant
change in the company’s expected profits associated with a high degree
of risk.

4.7 RATIONALE OF CAPITAL EXPENDITURE

Efficiency is the rationale underlying all capital decisions. A firm has to

continuously invest in new plant or machinery for expansion of its operations or
replace worn-out machinery for maintaining and improving its efficiency. The
overall objective is to maximize the firm’s profits and thus optimizing the return
on investment. This objective can be achieved either by increased revenues or
by cost reduction. Thus capital expenditure can be of two types;

1. Expenditure Increasing Revenue

2. Expenditure Reducing Cost
4.8 KINDS OF CAPITAL INVESTMENT PROPOSALS

A firm may have several investment proposals for its consideration. It may
adopt one of them, some of them or all of them depending upon whether they
are independent, contingent or dependent or mutually exclusive.

1. INDEPENDENT PROPOSALS

These are proposals which do not compete with one another in a way that
acceptance of one precludes the possibility of acceptance of another. In
case of such proposals the firm may straight away “accept or reject” a
proposals on the basis of minimum return on investment required. All
these proposals which give a higher return than a certain desired rate of
return are accepted and the rest are rejected.

2. CONTINGENT OR DEPENDENT PROPOSALS

These are proposals whose acceptance depends on the acceptance of one

or more other proposals. When a contingent investment proposal is made,
it should also contain the proposal on which it is dependent in order to
have a better perspective of the situation.

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 3. MUTUALLY EXCLUSIVE PROPOSALS

These proposals which compete with each other in a way that the
acceptance of one precludes the acceptance of other or others. Two or
more mutually exclusive proposals cannot both or all be accepted. Some
techniques have to be used for selecting the better or the best one. Once
this is done, other alternative automatically gets eliminated.

4. REPLACEMENT PROPOSALS

These aim at improving operating efficiency and reducing costs. These

are called cost reduction decisions.

5. EXPANSION PROPOSALS
This refers to adding capacity to existing product line.

6. DIVERSIFICATION PROPOSALS

Diversification means operating in several markets rather than a single

market. It may also involve adding new products to the existing products.
Diversification decisions require evaluation of proposals to diversify in to
new product lines, new markets etc., for reducing the risk of failure.

7. CAPITAL RATIONING PROPOSALS

Capital rationing means distribution of capital in favour of some

acceptable proposals. A firm cannot afford to undertake all profitable
proposals because it has limited funds to invest. In such a case, these
various investment proposals compete for limited funds and the firm has
to ration them. Thus the situation where the firm is not able to finance all
the profitable investment opportunities due to limited resources is known
as capital rationing.

4.9 FACTORS AFFECTING CAPITAL INVESTMENT DECISIONS

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The following are the four important factors which are generally taken in to
account while making a capital investment decision.

1. The Amount of Investment

In case a firm has unlimited funds for investment it can accept all capital
investment proposals which give a rate of return higher than the
minimum acceptable or cut-off rate.

2. Minimum Rate of Return on Investment

The management expects a minimum rate of return on the capital

investment. The minimum rate of return is usually decided on the basis of
the cost of capital.

3. Return Expected from the Investment

Capital investment decisions are made in anticipation of increased return

in the future. It is therefore necessary to estimate the future return or
benefits accruing from the investment proposals while evaluating the
capital investment proposals.

4. Ranking of the Investment Proposals

When a number of projects appear to be acceptable on the basis of their

profitability the project will be ranked in the order of their profitability in
order to determine the most profitable project.

4.10 METHODS OF CAPITAL BUDGETING OR EVALUATION OF

INVESTMENT PROPOSALS

A business firm has a number of proposals regarding various projects in which

it can invest funds. But the funds available with the firm are always limited and
it is not possible to invest funds in all the proposals at a time. The most widely
accepted techniques used in estimating the cost returns of investment projects
can be grouped under two categories;

22
1. TRADITIONAL METHODS (NON DISCOUNTED CASH FLOW)
a. Payback Period Method
b. Average rate of Return Method

2. MODERN METHODS (DISCOUNTED CASH FLOW)

a. Net Present Value Method
b. Internal rate of Return Method
c. Profitability Index Method

1. TRADITIONAL METHODS (NON DISCOUNTED CASH

FLOW)

A. PAY BACK PERIOD METHOD

The payback period method is the simplest method of evaluating investment

proposals. Payback period represents the number of years required to recover
the original investment. The payback period is also called Pay Out or Pay off
Period. This period is calculated by dividing the cost of the project by the
annual earnings after tax but before depreciation. Under this method the
project is ranked on the basis of the length of the payback period. A project
with the shortest payback period will be given the highest rank.

METHODS OF COMPUTATION OF PAYBACK PERIOD

There are two ways of calculating the payback period.

a. When annual cash inflow is constant
The formula is find out the payback period if the project generates
constant annual cash inflow is;
Original cost of the project
Payback period = Annual cash inflow

Annual cash inflow is the annual earning (profit depreciation and after taxes)
before

b. When annual cash inflow is not constant

If the annual cash inflows are unequal the payback period can be found
out by adding up the cash inflows until the total is equal to the initial cash
outlay of the project.

ADVANTAGES OF PAYBACK PERIOD

1. Simple to understand and easy to calculate.
2. It reduces the chances of loss through obsolescence.

23
 3. A firm which has shortage of funds find this method very useful.
4. This method costs less as it requires only very little effort for its
Computation.

DISADVANTAGES
1. This method does not take in to consideration the cash inflows beyond the
payback period.
2. It does not take in to consideration the time value of money. It considers
the same amount received in the second year and third year as equal.
3. It gives over emphasis for liquidity.

ACCEPTANCE RULE
The following are the Payback [P.B.Rules]
Accept P.B<cut-off rate
Reject P.B>cut-off rate
May Accept P.B<cut-off rate

Cut-off rate

Cut-off rate is the rate below which a project would not be accepted. If ten
percentages is the desired rate of return, the cut-off rate is 10%.The cut-off
point may also be in terms of period. If the management desires that the
investment in the project should be recouped in three years, the period of three
years would be taken as the cut-off period. A project incapable of generating
necessary cash to pay for the initial investment in the project with-in three years
will not be accepted.

B. AVERAGE RATE OF RETURN (ARR) METHOD

This method otherwise called the Rate of Return Method, takes in to account the
earnings expected from the investment over the entire life time of the asset. The
various projects are ranked in order of the rate of returns. The project with the
higher rate of return is accepted. Average Rate of Return is found out by
dividing the average income after depreciation and taxes, i.e. the accounting
profit, by the Average Investment.

Average Annual Earnings

ARR = x 100
Average Investment
Where;

24
Average Annual Earnings is the total of anticipated annual earnings after
depreciation and tax (accounting profit) divided by the number of years.
Average Investment means
i. If there is no salvage (Scrap value)
Total Investment

ii. If there is scrap value

Total Investment-Scrap Value
+ Scrap Value
2
iii. If there is additional working capital

Total Investment-Scrap Value

+ Scrap +Additional Working Capital
2

ADVANTAGES OF AVERAGE RATE OF RETURN(ARR) METHOD

1. It is easy to calculate and simple to understand.
2. Emphasis is placed on the profitability of the project and not on liquidity.
3. The earnings over the entire life of the project is considered for
4. Ascertaining the Average Rate of Return.
5. This method makes use of the accounting profit.

DISADVANTAGES
1. Like the payback period method this method also ignores the time value
of money. The averaging technique gives equal weight to profits
occurring at different periods.
2. This averaging technique ignores the fluctuations in profits of various
years.
3. It makes use of the accounting profits, not cash flows, in evaluating the
project.

2. DISCOUNTED CASH FLOW METHODS

The payback period method and the Average rate of Return Method do not take
in to consideration the time value of money. They give equal weight to the
present and the future flow of incomes. The discounted cash flow methods are

25
based on the concept that a rupee earned today is more worth than a rupee
earned tomorrow. These methods take in to consideration the profitability and
also the time value of money.
I. NET PRESENT VALUE (NPV) METHOD

The Net Present Value Method (NPV) gives consideration to the time
value of money. It views that the cash flows of different years differ in
value and they become comparable only when the present equivalent
values of these cash flows of different periods are ascertained. For this
the net cash inflows of various periods are discounted using the
required rate of return, which is a predetermined rate .If the present
value of expected cash inflows exceeds the initial cost of the project,
the project is accepted.

NPV= Present value of cash inflows – Present value of initial

investment

STEPS IN NET PRESENT VALUE (NPV) METHOD

1. Determine an appropriate rate of interest to discount cash flows.

2. Compute the present value of total investment outlay (i.e., cash outflow)
at the determined discounting rate.
3. Compute the present value of total cash inflows (profit before
depreciation and after tax) at the above determined discount rate.

4. Subtract the present value of cash outflow (cost of investment) from the
present value of cash inflows to arrive at the net present value.

5. If the net present value is negative i.e., the present value cash outflow is
more than the present value of cash inflow the project proposals will be
rejected .If net present value is zero or positive the proposal can be
accepted.
6. If the projects are ranked the project with the maximum positive net
present value should be chosen.

ADVANTAGES OF NET PRESENT VALUE METHOD

1. It considers the time value of money.

2. It considers the earnings over the entire life of the project.3.

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 3. Helpful in comparing two projects requiring same amount of cash
outflows.

DISADVANTAGES OF NET PRESENT VALUE METHOD

1. Not helpful in comparing two projects with different cash outflows.

2. This method may be misleading is in comparing the projects of unequal
lives.

II. INTERNAL RATE OF RETURN (IRR) METHOD

The Internal Rate of Return for an investment proposal is that discount

rate which equates the present value of cash inflows with the present
value of cash outflows of the investment. The Internal Rate of Return
is compared with a required rate of return. If the Internal Rate of
Return of the investment proposal is more than the required rate of
return the project is rejected. If more than one project is proposed, the
one which gives the highest internal rate must be accepted.

It can be calculated by the following formula

P1-Q
IRR = L + xD
P1-P2

Where,
L = Lower rate of discount
P1 = Present value of cash inflows at lower rate of discount
P2 = Present value at higher discount rate
Q = Initial Investment
D = Difference in rate

ADVANTAGES OF INTERNAL RATE OF RETURN

1. It considers the time value of money.

2. The earnings over the entire life of project are considered.
3. Effective for comparing projects of different life periods and different
timings in timings of cash inflows.

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DISADVANTAGES

1. Difficult to calculate.
2. This method presumes that the earnings are reinvested at the rate
earned by the investment which is not always true.

Accept or Reject Rule

Internal Rate of Return is the maximum rate of interest which an organization

can afford to pay on the capital invested in a project. A project would qualify to
be accepted if Internal Rate of Return exceeds the cut-off rate. While evaluating
two or more projects, a project giving a higher Internal Rate of Return would be
preferred. This is because higher the rate of return, the more profitable is the
investment.

III. PROFITABILITY INDEX METHOD

Present Value of Cash Inflows

Profitability Index =
Present Value of Cash Outflows

This is also called Benefit-Cost ratio. This is slight modification of the Net
Present Value Method. The present value of cash inflows and cash out flows are
calculated as under the NPV method. The Profitability Index is the ratio of the
present value of future cash inflow to the present value of the cash outflow, i.e.,
initial cost of the project.

If the Profitability index is equal to or more than one proposal the proposal will
be accepted. If there are more than one investment proposals, the one with the
highest profitability index will be preferred. This method is also known as
Benefit-Cost ratio because the numerator measures benefits and the
denominator measures costs. ”It is the ratio of the present value of cash inflow
at the required rate of return to the initial cash outflow of the investment.

4.11 Cost Effective Analysis

In the cost effectiveness analysis the project selection or technological choice,

only the costs of two or more alternative choices are considered treating the
benefits as identical. This approach is used when the acquisition of how to

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minimize the costs for undertaking an activity at a given discount rates in case
the benefits and operating costs are given, one can minimize the capital cost to
obtain given discount.

4.12 RISK AND UNCERTAINITY IN CAPITAL BUDGETING

All the techniques of capital budgeting requires the estimation of future cash
inflow and cash outflows. The cash flows are estimated abased on the following
factors.
1. Expected economic life of the project.

2. Salvage value of the asset at the end of the economic life.

3. Capacity of the product.

4. Selling price of the product.

5. Production cost.

6. Depreciation.

7. Rate of Taxation
8. Future demand of the product,

But due to uncertainties about the future the estimates of demand, production,
sales costs, selling price, etc. cannot be exact, for example a product may
become obsolete much earlier than anticipated due to unexpected technological
developments all these elements of uncertainties have to be take into account in
the form of forcible risk while making an investment decision. But some
allowances for the element of risk have to be proved.

4.13 FACTORS INFLUENCING CAPITAL EXPENDITURE

DESCISIONS:

There are many factors financial as well as non-financial which influence the
capital expenditure decisions and the profitability of the proposal yet, there are
many other factors which have to be taken into consideration while taking a
capital expenditure decisions.
They are

1. URGENCY

29
Sometime an investment is to be made due to urgency for the survival of the
firm or to avoid heavy losses. In such circumstances, proper evaluation cannot
be made through profitability tests. Examples of each urgency are breakdown of
some plant and machinery fire accidents etc.

2. DEGREE OF UNCERTAINTY

Profitability is directly related to risk, higher the profits, greater is the risker
uncertainty.

3. INTANGIBLE FACTORS

Sometimes, a capital expenditure has to be made due to certain emotional and

intangible factors such as safety and welfare of the workers, prestigious
projects, social welfare, goodwill of the firm etc.

4.15 CAPITAL EXPENDITURE CONTROL

Capital expenditure involves no-flexible long-term commitments of funds. The

success of an enterprise in the long run depends up on the effectiveness with
which the management makes capital expenditure decision. Capital expenditure
decisions are very important as their impact is more or less permanent on the
wellbeing and economic health of the enterprise. Because of this large scale
mechanization and automation and importance of capital expenditure for
increase in the profitability of a concern. It has become essential to maintain an
effective system of capital expenditure control.

4.16 OBJECTIVES CONTROL OF CAPITAL EXPENDITURE

 To make an estimate of capital expenditure and to see that the total cash
outlay is within the financial resources of the enterprise.

 To ensure timely cash inflows for the projects so that no availability of

cash may not be problem in the implementation of the problem.

 To ensure that all capital expenditure is properly sanctioned.

 To properly coordinate the projects of various departments.

30
  To fix priorities among various projects and ensure their follow-up.

 To compare periodically actual expenditure with the budgeted ones so as

to avoid any excess expenditure.

 To measure the performance of the project.

 To ensure that sufficient amount of capital expenditure is incurred to keep

pace with rapid technological development.

 To prevent over expansion.

4.17 STEPS INVOLVED IN CONTROL OF CAPITAL

EXPENDITURE

 Preparation of capital expenditure budget.

 Proper authorization of capital expenditure.

 Recording and control of expenditure.

 Evaluation of performance.

CHAPTER-4
RESEARCH METHODOLOGY & DATA ANALYSIS
BUDGET: 2019-20
The main objectives of OSIC are to aid, assist and promote the MSMEs
to gear up the industrialisation process in the state of Odisha. Keeping these
objectives in view, the corporation has been extending support services to the
MSMEs in providing quality raw materials, marketing their finished products
and also executing construction work of different Govt. Departments, Rural
electrification work etc. The annual turnover of OSIC has gone up to Rs.
580.72crore in the year 2018-19 in comparison to Rs.520.18crore during the
year 2017-18. After decontrol of Iron & steel and impact of globalisation &

31
privatization, the corporation had to face the challenge of competition with
private business houses and in spite of all adversity, the corporation has been
able to withstand the threat. More over the working capital constraints increase
in salary and other administrative overheads stood as barrier for the corporation
to achieve the desired growth. But strategies has been planned out overcome the
problem and keeping all these aspects in vies, the corporation has prepared the
annual budget for the year 2019-20 and rededicated once again in its endeavour
to contribute to the industrial development in the state of Odisha.

The corporation has projected an annual turnover of Rs.650.37 crore during the
year 2019-20 with an estimated profit of Rs.7.10 crore as against the turnover of
Rs.580.72 crore and profit of Rs.6.59 crore in the financial year 2018-19. The
corporation has given more thrust on sale of TISCON bar and packed Bitumen
apart from increase in sale of raw materials through commercial division.

The corporation has also made strategies to improve the product marketing
activities by bagging more orders from DRDAs, R.E. Works and other activities
like brand marketing of ODI-FOOD & ODI-TECH, and pharmaceutical
materials. Target of Rs.143.60 crore is worked out for the year 2019-20 as
against achievement of Rs.125.00 crore in the financial year 2018-19. Also the
corporation has been entrusted with construction of Jara Nivas at Cuttack along
with other construction work of various Govt. departments.

In hand while the corporation has made strategies to improve the business
activities, on the other hand, through austerity measures the corporation has
planned to reduce the expenditure towards its overhead expenditure.

In a nutshell, the corporation has planned to achieve the business turnover and
profit in the year 2019-20 and to empower the micro, small medium enterprises
(MSME) sector with a view to the process of economic growth and employment
generation of the state.

32
BUDGET (2019-20) AT A GLANCE

(Rs. In Lakh) Qty. in MT

SI Particulars Budget 2018-19 ESTIMATED Budget for

FOR 2018-19 2019-20
N Qty. Value Qty. Value Qty. Value
O.
A COMMERCIAL
DIVISION
Direct sales of raw
materials:
i. Iron & 500.00 215.00 313.76 151.30 500.0 241.53
Steel 0 0 0
ii. TISCON 85000. 43370. 76445. 39295. 85000 43172.
Bar 00 40 907 07 .00 88
iii. Bitumen 20000. 6474.6 12268. 4212.0 14000 4662.7
00 0 411 7 .00 1

10550 50060. 89028. 43658. 99500 48077.

Sub- Total(A) 0.00 00 078 44 .00 12
B MARKETING
DIVISION
i. MSME 2400.0 1604.4 2800.0
product 0 6 0
ii. MEDICA 0.00 0.00 40.00
L
iii. Others(R. 17250. 10890. 11500.
E Work) 00 06 00
iv. EXPORT 50.00 0.00 0.00
v. Brand
marketing 50.00 5.61 20.00

19750. 1200.1 14360.

00 3 00
Sub-
Total(B)
C Consortium
marketing
i. Pharmace 0.00 0.00 0.00
utical
materials

33
 Sub- Total(C) 0.00 0.00 0.00
D Coal 0.00 0.00 0.00

0.00 0.00 0.00

Sub- Total(D)
E CONSTRUCTION
i. Sub- 5000.0 1913.1 2600.0
contract 0 0 0

5000.0 1913.1 2600.0

Sub- Total(E) 0 0 0
GRAND TOTAL 10550 74810. 89028. 58071. 99500 65037.
0.00 000 078 670 .00 119

BALANCE SHEET AS ON 31ST MARCH, 2018

Notes Figures as at the Figures as at the

Particulars No. end of current end of previous
reporting period reporting period
I.EQUITY AND LIABILITIES
(1) Shareholder’s fund
a. Share capital 5 231,133,100 260,613,100
b. Reserve and surplus 6 331,797,436 220,716’342
c. Money received against share - -
warrenties

(2)Share application money 7 - -

pending allotment

(3) Non- current liabilities 8

a. Long term borrowings 11,934,556 11,934,556

b. Deferred Tax liabilities(Net) 1,364,085 1,652,358
c. Other long term liabilities 335,039,100 310,921,347
d. Long term provisions 61,564,001 62,076,576
(4) Current liabilities 9

a. Short-term borrowings 10 307,134,162 175,335,903

b. Trade payables 11 1397,768,911 1,128,059,117
c. other current liabilities 12 685,525,871 681,680,193
d. Short- term provision 13 166,554,603 113,296,830
Total Equity & Liabilities 14 3529,815,825 2,966,286,830

34
II. ASSETS
(1)Non-current Assets 15
a. Gross Block 69,442,996 66,800,594
b. Depreciation 52,401,683 50,864,041
c. Net Block 17,041,358 15,936,553
(2)Capital work-in-Progress 16
a. Non-current investments 5,788,365 5,942,365
b. Deferred tax assets(Net) - -
c. Long term loans and advances 17 312,471,651 285,728,584
d. Others non-current assets 18 198,131,220 209,707,429

(3) Current Assets

a. Current investment 19 - -
b. Inventories 20 126,170,150 96,512,083
c. Trade receivables 21 856,241,918 511,319,764
d. Cash and Cash Equivalents 22 1,112,004,508 1062,797,506
e. short term loans and advances 23 901,966,655 778,342,506
f. Other current assets 24 - -
TOTAL ASSETS 3,529,815,825 2,966,286,321

PROFIT & LOSS STATEMENT FOR THE YEAR ENDING 31 ST

MARCH 2018
SR. PARTICULARS NOTES Figures as at Figures as at
NO. NO. the end of the end of
current previous
reporting reporting
period period
I Revenue from operations 26 6,494,159,567 6,127,748,603
II Other Income 27 136,436,901 87,976,477

6,630,596,468 6,215,725,080
III Total Revenue

IV Expenses:

Cost of Material 28 1,104,726,147 1,210,780,174

Consumed

Purchase of Stock 29 5,148,372,033 4,715,307,036

Changes in Inventories of 30 (29,658,076) (24,340,968)
finished goods, Work-in -

35
 progress and stock in
trade
Employee benefit 31 104,067,351 95,422,999
expenses

Financial costs 32 19,125,140 5,440,578

Depreciation and 33 2,462,752 1,624,097

amortization
Other expenses 34 118,194,191 74,347,078

Total expenses(IV) 6,467,289,547 6,078,580,994

V Profit before exceptional (III-IV) 163,306,921 137,144,086

and extra ordinary items
and tax

VI Past year adjustment 35 91,986 260,215

account

VII Profit before extra- 163,214,935 136,883,870

ordinary items and tax,
(V-VI)

VIII Extra-ordinary items - -

IX Profit before tax, (VII- 163,214,935 136,883,870
VIII)
X Tax expenses
1. Current year - -
income tax
2. Deferred tax 53,257,773 44,604,549
3. Dividend 288,273 183,406
distribution tax
XI Profit(loss) from the 110,245,434 92,462,727
period from continuing (IX-X)
operations
XII Profit/(loss) from the - -
discontinuing operations
XIII Tax expenses of - -
discontinuing operations

XIV Profit/(loss) from - -

discontinuing operations

36
 (XII-XIII)
XV Proposed dividend - -

XVI Profit/(loss) for the 110,245,434 92,462,727

period (XI+XIV)
XVII Earning per equity share
1. Basic 97.38 81.67
2. Diluted

ANALYSIS OF AVERAGE RATE OF RETURN(ARR) AND

PAYBACK PERIOD
Calculation of Average Rate of Return

Average Annual Earnings

ARR= ×100
Average Investment

Year Profit After Tax Initial Average Rate of

Investment Return

2011 33324997 72368453 0.46

2012 35241131 175080399 0.20

2013 153526969 180236203 0.68

2014 79500394 46246000 1.72

2015 46222467 46246000 1.00

Calculation of Payback Period

Original Cost of the Project

Payback period=
Annual Cash Inflows

37
Year Initial Annual Cash Payback Period
Investments Inflow

2011 72368453 33324997 2.17

2012 175080399 35241131 4.97

2013 180236203 123526969 1.46

2014 4624600 79500394 0.58

2015 4624600 46222467 1.00

Interpretation:
If the payback period is shorter, then the company recovers its investment in
cash very sooner. Depending on the evaluation of projects by the company's
criteria the cash payback is said good or poor. From the above it is inferred that
the company have its highest pay back on 2012 with 4.97 or 5 years.
The current year (2015) Pay Back Period is found to be 1 year [20- 23]. This
shows that the company recovers its investment in 1 year.
Accounting Rate of Return (ARR)
ARR method uses accounting information as reveals by financial statements, to
measure the profitability of the investment proposals. It is also known as the
return on investment. Sometimes it is called as the Average rate of return.
(ARR)

38
 CHAPTER-5
FINDINGS AND CONCLUSION OF THE STUDY

FINDINGS
1. The current year (2015) Pay Back Period is found to be 1 year. This
shows that the company recovers its investment in 1 year.

2. Profitability Index being lesser than 1 indicates that for every one rupee
investment there will be a loss of 0.579 and hence the proposal is
rejected.

3. The current year (2015) Profit After Tax is decreased to 4.622 when
compared to the previous year (2014) with 7.950.

4. The Standard Deviation for Profit After Tax is 3.425679518 and Variance
for PAT is 11.73528016.

5. In the year 2015 the Investment has been decreased to 4.625.

6. The standard deviation of Investment is 6.089. The Variance is 37.071

7. Revenue is high in 2015 with 23.716 when compared to the previous

year 2014 with 21.965.

8. The Standard Deviation for Revenue is 14.25665841. The Variance is

203.252309

CONCLUSION
The planning process which is used to determine whether the long term
investments of an organization such as replacement machinery, products that
are new, new plants and research development projects are worth seeking is the
Investment appraisal or capital budgeting.

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 CHAPTER-6
BIBILOGRAPHY
The project report on “CAPITAL BUDGETING” is done from refer several
books and web sites, which are follows:-

BOOKS

Financial Management------ Sashi K. Gupta, R K Sharma, Neeti Gupta ,

Kalyani Publisher, Chapter-8

Websites

www.Google.com

www.osicltd.in

Annual Report

OSIC Annual Report 2014-2015

OSIC Annual Report 2015-2016

OSIC Annual Report 2016-2017

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