.... Capital Budgeting at YES Bank
.... Capital Budgeting at YES Bank
.... Capital Budgeting at YES Bank
WITH REFERENCE TO
YES BANK
Yes Bank
Address: Shop No.31/2, Mayank Towers,
Near YES BANKBank, Raj Bhavan Rd,
Lumbini Classic Apartment, Somajiguda,
Hyderabad, Telangana 500082
Phone:
TABLE OF CONTENTS
CHAPTER
1
2
TITLE
INTRODUCTION
INDUSTRY PROFILE & COMPANY
3
4
PROFILE
REVIEW OF LITERATURE
RESEARCH METHODOLOGY
NEED OF THE STUDY
LIMITATIONS OF THE STUDY
RESEARCH DESIGN
DATA ANALYSIS &
6
7
INTERPRETATIOIN
OBSERVATIONS & CONCLUSION
BIBLIOGRAPHY
.INTRODUCTION:
An efficient allocation of capital is the most important finance function in the modern
times. It involves decisions to commit the firms funds to the long term assets. Such
decisions are of considerable importance to the firm since they tend to determine its
size by influencing its growth, profitability and risk.
MEANING:
Capital budgeting is a required managerial tool. One duty of a financial manager is to
choose investments with satisfactory cash flows and rates of return. Therefore, a
financial manager must be able to decide whether an investment is worth undertaking
and be able to choose intelligently between two or more alternatives. To do this, a
sound procedure to evaluate, compare, and select projects is needed. This procedure
is called capital budgeting.
capital budgeting is also known as Investment Decision Making, Capital Expenditure
Decision, Planning Capital Expenditure and Analysis of Capital Expenditure.
DEFINITION:
According to Charles T.Horngreen, Capital budgeting is long term planning for
making and financing proposed capital outlays.
According to Lynch, Capital budgeting consists in planning development of
available capital for the purpose of maximizing the long term profitability of the
concern.
NATURE OF INVESTMENTS:
The investment decisions of a firm are generally known as the capital budgeting, or
capital expenditure decisions. A capital budgeting decision may be defined as the
firms decisions to invest its current funds most efficiently in the long term assets in
anticipation of an expected flow of benefits over a series of years. The long term
assets are those which affect the firms operations beyond the one year period
CONCEPT OF CAPITAL BUDGETING:
The term capital budgeting refers to long term planning for proposed capital outlays
and their financing. Thus, it includes both rising of long term funds as well as their
utilization. It is the decision making process by which the firm evaluate the purchase
of major fixed assets firms decision to invest its current funds of. It involves addition,
disposition, modification and replacement of long term or fixed assets. However, it
should be noted that investment in current assets necessitated on account of
investment in a fixed asset, it also to be taken as a capital budgeting decision.
Capital budgeting is a many sided activity. It includes searching for new and
more profitable investment proposals, investigating engineering and marketing
considerations predict and making economic analysis to determine the potential of
each investment proposal.
1
Identify
Investment
Proposals
2
Screen
Proposals
7
Review
Performance
CAPITAL
BUDGETING
PROCESS
6
Implement
The
Proposals
3
Evaluate
Various
Proposals
4
Fix
Priorities
5
Final
Approval
CHAPTER 2
INDUSTRY PROFILE
&
COMPANY PROFILE
INDUSTRY PROFILE:
Banking in India in the modern sense originated in the last decades of the 18th
century. Among the first banks were the Bank of Hindustan, which was
established in 1770 and liquidated in 1829-32; and the General Bank of India,
established in 1786 but failed in 1791.
The largest bank, and the oldest still in existence, is the State Bank of
India (S.B.I). It originated as the Bank of Calcutta in June 1806. In 1809, it was
renamed as the Bank of Bengal. This was one of the three banks funded by
a presidency government, the other two were the Bank of Bombay and
the Bank of Madras. The three banks were merged in 1921 to form the Imperial
Bank of India, which upon India's independence, became the State Bank of
India in 1955. For many years the presidency banks had acted as quasi-central
banks, as did their successors, until the Reserve Bank of India was established
in 1935, under the Reserve Bank of India Act, 1934
In 1960, the State Banks of India was given control of eight state-associated
banks under the State Bank of India (Subsidiary Banks) Act, 1959. These are
now called its associate banks. In 1969 the Indian government nationalised 14
major private banks. In 1980, 6 more private banks were nationalised. These
nationalised banks are the majority of lenders in the Indian economy. They
dominate the banking sector because of their large size and widespread
networks.
The Indian banking sector is broadly classified into scheduled banks and nonscheduled banks. The scheduled banks are those which are included under the
2nd Schedule of the Reserve Bank of India Act, 1934. The scheduled banks are
further classified into: nationalised banks; State Bank of India and its
associates; Regional Rural Banks (RRBs); foreign banks; and other Indian
private sector banks.[6] The term commercial banks refers to both scheduled and
non-scheduled commercial banks which are regulated under the Banking
Regulation Act, 1949.
Generally banking in India is fairly mature in terms of supply, product range
and reach-even though reach in rural India and to the poor still remains a
challenge. The government has developed initiatives to address this through the
10
State Bank of India expanding its branch network and through the National
Bank for Agriculture and Rural Development with facilities likemicrofinance.
11
12
Bank type
Nationalised
banks
State Bank of
India
Number of
branches
Off-site
ATMs
Total ATMs
33,627
38,606
22,265
60,871
13,661
28,926
22,827
51,753
4,511
4,761
4,624
9,385
1,685
12,546
26,839
39,385
242
295
854
1,149
New private
sector banks
Foreign banks
TOTAL
On-site ATMs
53,726
85,134
13
77,409
1,62,543
14
COMPANY PROFILE:
INTRODUCTION:
Yes Bank, incorporated in 2004 by Rana Kapoor and Late Ashok Kapur, is a new age
private sector bank. Since inception Yes Bank has fructified into a Full Service
Commercial Bank that has steadily built Corporate and Institutional Banking,
Financial Markets, Investment Banking, Corporate Finance, Branch Banking,
Business and Transaction Banking, and Wealth Management business lines across
the country, and is well equipped to offer a range of products and services to
corporate and retail customers.
YES BANK offers a fullrange of clientfocused corporate banking services,
including working capital finance, specialized corporate finance, trade and
transactional services, treasury risk management services, investment banking
solutions and liquidity management solutions among others to a highly focused client
base.
The bank is part of global thought leadership forums like the Clinton Global Initiative
(CGI), Triple Bottom Line Investing (TBLI) and Tallberg Forum. Recently, it became
the first Indian Bank to become a signatory with the United Nations Environment
Programme (Financial Initiative).
As part of the differentiated strategy, Yes Bank has had a strong focus on
Development Banking, as is evident from the cuttingedge work that the Bank has
done in the area of Food & Agribusiness, Infrastructure, Microfinance, and
Sustainability which in most cases has been firstofits kind in India
Yes Bank has partnered with various companies for delivering quality products and
services namely Cash Tech, Cisco Systems, Gartner, Intel, iflex, Reuters, VSNL,
Wipro, De La Rue, Murex, Wincor Nixdorf and Sanovi.
The bank also has a widespread branch network of over 331 branches across 200
cities, with over 420 ATM's and 2 National Operating Centres in Mumbai and
Gurgaon.
Business Areas
Corporate and Institutional Banking The bank offers a broad range of financial and
risk management solutions to clients such as large Indian corporates and groups,
multinational companies, central and state governments, government bodies and
public sector enterprises.
Business Banking Yes Bank offers a range of products, services and resources to
small and medium businesses.
Corporate Finance It offers corporate finance solutions to various clients such as
local corporates, multinational companies, financial institutions and public sector
undertakings.
15
Retail Banking Under this, the bank offers wide range of products and services
such as saving account, current account, fixed deposit, retail loan, depository
services and many more.
Investment Banking Yes Bank offers investment banking services in area of
mergers and acquisitions, divestitures, private equity syndication and IPO advisory.
Awards & Recognitions :
In March 2014 The Bank was awarded the Ramkrishna Bajaj National Quality
(RBNQ) Business Excellence Award 2013 in the Services Category. Organized by
Indian Merchants Chamber, YES BANK is the only bank to win this prestigious
award in the history of the RBNQ Award.
Outstanding Business Sustainability Achievement Karlsruhe Sustainable Finance
Awards Germany, 2013
Jamnalal Bajaj Uchit Vyavahar Puraskar (Service EnterprisesLarge) Council for Fair
Business Practices (CFBP) 2012
Financial Institutions Syndicated Deal of the Year, Asia Pacific Region Asia Pacific
Loan Market Association (APLMA) 2012
Global Business Excellence Award, Dubai, 2013
Sustainability Award, London, 2012 Golden Peacock
Institutional Excellence
YES BANK receives the 'Fastest Growing Bank' Award third year in a row at
22, 2011 in Singapore. The bank received awards in the following categories:
Talent Management
2) YES BANK received 'The Asian Banker Technology Implementation Awards 2011'
Won the Best Multichannel Capability Project Award for increasing its
distribution and optimizing its mobile banking services
16
Won the Best Financial Supply Chain Project Award for streamlining a clients
business processes into a single work flow, automating remittances and allowing
for faster and more accurate reconciliation
3) YES BANKs Chief Information Security Officer ranked as one of the Top 100
CISOs at the TOP 100 CISO Awards 2011.
4) YES BANK receives significant recognition at The Banker Technology Awards
2011
17
CHAPTER 3
REVIEW OF LITERATURE
18
Capital Budgeting
Techniques
Traditional or nondiscounting
TRADITIONAL OR NON-DISCOUNTING:
A. PAY BACK PERIOD:
The payback is one of the most popular and widely recognized traditional methods of
evaluating investment proposals. It is defined as the number of years required to
recover the original cash outlay invested in a project. If the project generates constant
annual cash inflows, the payback period can be computed by dividing cash outlay by
the annual cash inflows.
Payback period = Initial investment
Annual cash flow
19
20
Alternatively, it can be found out dividing the total of the investments book value
after depreciation by the life of the project. The accounting rate of return, thus, is an
average rate and can be determined by the following equation:
ARR=Average annual income (after tax & depreciation)
Average investment
Where,
Average investment = Original investment
2
ACCEPT OR REJECT CRITERION
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 the minimum rate.
This method would rank a project as number one if it has highest ARR and lowest
rank would be signed to the project with lowest ARR.
EVALUATION OF ARR METHOD
It is simple to understand and use
The ARR can be readily calculated form the accounting data; unlike in the
NPV and IRR methods, no adjustments are required to arrive at cash flows of
the project.
The ARR rule incorporates the entire stream of in calculating the projects
profitability.
ADVANTAGES:
It is very simple to understand and easy to calculate.
It uses the entire earnings of a project in calculating rate of return and hence
gives a true view of profitability.
As this method is based upon accounting profit, it can be readily calculated
from the financial data.
DISADVANTAGES:
It ignores the time value of money.
It does not take in to account the cash flows, which are more important than
the accounting profits.
It ignores the period in which the profit are earned as a 20% rate of return in 2
years is considered to be better than 18%rate of return in 12 years.
This method cannot be applied to a situation where investment in project is to be
made in parts.
DISCOUNTED CASH FLOW METHOD:
Discounted cash flow method or time adjusted technique is an improvement over pay
back method and ARR. In evaluating investment projects, it is important to consider
the timing of returns on investment. Discounted cash flow technique takes into
account both the interest factor and the return after the pay back period. Following are
the methods of discounted cash flow method:
21
22
It is the rate of discount which reduces the net present value of an investment to zero.
It is called internal rate because it depends mainly on the outlay and proceeds
associated with the project and not on any rate determined outside the investment.
Other terms used to describe the IRR method are yield of an investment, marginal
efficiency of capital, rate of return over cost, time adjusted rate of return and so on.
The concept of internal rate of return is quite simple to understand in the case of a one
period project.
CALCULATION OF INTERNAL RATE OF RETURN:
Calculate cash flow after tax
Calculate fake payback period or factor by dividing the initial investment by average
cash flows.
Look for the factor in the present value annuity table in the years column until you
arrive at a figure which is closest to the fake payback period.
Calculate NPV at that percentage
If NPV is positive take a rate higher and if NPV is negative take a rate lower and once
again calculate NPV
Continue step4 until you arrive two rates, one giving positive NPV and another
negative NPV.
Use interpolating to arrive at the actual IRR i.e.. actual IRR can be calculated by
using the following formula.
IRR
Present value _
Cash
at lower rate
out flow X diff. in the rates
Present value _ present value
at lower rate
at higher rate
The more simple words, IRR can be calculated by trial an error method
Which means the unknown discount factor which makes NPV=0 con be calculated by
substituting various values which is tedious process. Therefore the above method may
be used.
ACCEPT OR REJECT CRITERION:
The accept or reject rule, using the IRR method, is to accept the project if its internal
rate of return is higher than the opportunity cost of capital(r>k) note k is also known
as the required rate of return, or cutoff, or hurdle rate.
The project shall be rejected if its internal rate of return is lower than the opportunity
cost of capital (r<k). The decision maker may be indifferent if the internal rate of
return is equal to opportunity cost of capital.
Thus, the IRR rule is
Accept if r>k
Reject if r<k
May accept if r=k
EVALUATION OF IRR METHOD:
It recognizes the time value of money
It considers all cash flows occurring over the entire life of the project to
calculate its rate of return
23
ADVANTAGES:
It takes into account, the time value of money and can be applied in situation
with even and even cash flows.
It considers the profitability of the projects for its entire economic life.
The determination of cost of capital is not a pre-requisite for the use of this
method.
It provide for uniform ranking of proposals due to the percentage rate of
return.
This method is also compatible with the objective of maximum profitability.
DISADVANTAGES:
It is difficult to understand and operate.
The results of NPV and IRR methods may differ when the projects under
evaluation differ in their size, life and timings of cash flows.
This method is based on the assumption that the earnings are reinvested at the
IRR for the remaining life of the project, which is not a justified assumption.
PROFITABILITY INDEX:
Yet another time adjusted method of evaluating the investment proposals is the benefit
cost ratio or profitability index (PI).
It is the ratio of the present value of cash inflows, at the required rate of return, to the
initial cash out flow of the investment. It may be the gross or net. Net=gross-1
The formula to calculate benefit cost ratio or profitability index is as follows:
PI= PRESENT VALUE OF CASH INFLOWS
INITIAL CASH OUTLAY
ACCEPT OR REJECT CRITERION:
The following are the PI acceptance rules:
Accept if PI>1
Reject if PI<1
May accept if PI=1
When PI is greater than one, then the project will have net present value.
EVALUATION OF PI METHOD:
It recognizes the time value of money
It is a variation of the NPV method, and requires the same computation as the NPV
method.
In the PI method, since the present value of cash inflows is divided by the initial cash
out flows, it is a relative measure of projects profitability.
ADVANTAGES:
Unlike net present value, the profitability index method is used to rank the
projects even when the costs of the projects differ significantly.
24
25
26
DIVERSIFICATION: Some times, the firm may be interested to diversify into new
product lines, markets, production of spare parts etc. in such case, the finance
manager is required to evaluate not only the marginal cost and benefits , but also the
effect of diversification on the existing market share and profitability. Both the
expansion and diversification decisions may also be known as revenue increasing
decisions.
2. FROM THE POINT OF VIEW OF DECISION SITUATION:
The capital budgeting decision may also be classified from the point of view of the
decision situation as follows:
MUTUALLY EXCLUSIVE DECISIONS:
Two or more alternative proposals are said to be mutually exclusive when acceptance
of one alternative result in automatic rejection of all other proposals. The mutually
exclusive decisions occur when a firm has more than one alternative but competitive
proposal before it. For example, if a company is considering investment in one of two
temperature control system, acceptance of one system will rule out the acceptance of
another.
Thus, two or more mutually exclusive proposals cannot both or all be accepted. Some
technique has to be used for selecting the better or the one. Once this is done, other
alternative automatically get eliminated.
CONTINGENT DECISIONS OR DEPENDENT PROPOSALS:
These are proposals whose acceptance depends on the acceptance of one or more
other proposals. For example a new machine may have to be purchased on account of
substantial expansion of plant.
In this case investment in the machine is dependent upon expansion of plant. 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. Any capital
budgeting decision must be evaluated by the finance manager in its totality. The
contingent decision, if any, must be considered and evaluated simultaneously.
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 accept or reject a proposal on the basis of a maximum return on
investment required.
ACCEPT-REJECT DECISIONS:
An accept-reject decision occurs when a proposal is independently accepted or
rejected with out regard any other alternative proposal. This type of decision is made
when (i) proposals cost and benefit neither affect nor are affected by the cost and
benefits of other proposals, and (ii) accepting or rejecting one proposal has not impact
on the desirability of other proposals, and (iii) the different proposals being
considered are competitive.
RATIONALE FOR 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 objectives are to
maximize the profits and thus optimizing the return on investment. Thus capital
expenditure can be of two types:
27
28
Cash inflows
20000
30000
40000
50000
80000
Initial investment = 200000
Amount received up to the 4th year = 140000
Amount to be received in 5th year = 60000
(200000-140000)
29
Project-Y:
Year
1
2
3
4
5
Cash inflows
20000
40000
50000
70000
40000
30
300000 X100
1300000
= 23.076%
This method is based on accounting information rather upon cash flows. This method
is simple and makes use of readily available accounting information. Once average
return is expected it can be readily compared with the expected return, to determine
whether a particular proposal for capital expenditure should be accepted or rejected.
DISCOUNTED PAY BACK PERIOD
Discounted cash flow method or time adjusted technique is an improvement over pay
back method and ARR. In evaluating investment projects, it is important to consider
the timing of returns on investment. Discounted cash flow technique takes into
account both the interest factor and the return after the payback period.
TO ILLUSTRATE:
The Alpha Company Ltd. is considering the purchase of a new machine. Two
alternative machines (A and B) have been suggested each costing Rs.400000. Earning
after taxation is expected to be as follows:
YEAR
1
2
3
4
5
The company has a target of return on capital of 10% and on this basis. You are
required to compare the probability of the machines and state which alternative you
consider financially preferable.
SOLUTION:
The profitability of the machine can be compared on the basis of net present value of
cash inflows as follows:
Year
1
2
3
4
5
31
Present
value
109200
132000
150000
81600
49600
523200
Machine-B
523200
(400000)
118400
518400
400000
(400000)
123200
= 523200
400000
1.29
= 1.30
The net present values as well as the profitability index are higher in case of Machine
B and hence Machine B will be preferred.
1
70000
0.909
2
80000
0.826
3
120000
0.751
4
90000
0.683
5
60000
0.621
You are required to calculate the present value at 10% and advise the company
SOLUTION:
Years
Earnings
before
dep.& tax
1
2
3
4
5
70000
80000
120000
90000
60000
40000
40000
40000
40000
40000
30000
40000
80000
50000
20000
32
12000
16000
32000
20000
8000
18000
24000
48000
30000
12000
Cash
Flows
(EAT+
Dep.)
58000
64000
88000
70000
52000
PV
@
10%
0.909
0.826
0.751
0.683
0.621
PV
of
Cash
Flow
52722
52864
66088
47810
32292
= 251776
= (200000)
= 51776
PV of cash inflows
PV of cash outflows
TO ILLUSTRATE:
The initial cash outlay of a project is Rs.50000 and it generates cash inflows of
Rs.20000, Rs.15000, Rs.25000 and Rs.10000 in four years. Using present value index
method, appraise profitability of the proposed investment assuming 10% rate of
discount.
SOLUTION:
Calculations of present values and profitability index:
Year
Cash Inflows
Present Value Factor @10%
1
20000
0.909
2
15000
0.826
3
25000
0.751
4
10000
0.683
Profitability Index = Present value of Cash Inflows
Initial Cash Outlay
= 56175
50000
Profitability Index = 1.1235
As the P.I is higher than 1, the proposal can be accepted.
33
Present Value
18180
12390
18775
6830
56175
The Internal Rate of Return (IRR) method is another discounted cash flow technique,
which makes account of the magnitude and timing of cash flows. Others terms used to
describe the IRR Method are yield on investment, marginal efficiency of capital, rate
of return over cost and so on. The concept of internal rate of return is quite simple to
understand in the case of one-period projects.
TO ILLUSTRATE:
Initial Investment
Life of the Asset
Rs.60000
4 years
15000
20000
30000
20000
SOLUTION:
Cash Flow Table at various Assumed Discount Rates of 10%, 12%, 14% & 15%
Year
1
2
3
4
Annual
Cash
Flow
15000
20000
30000
20000
The present value of net cash flows at 14% rate of discount is Rs.60595 and at 15%
rate of discount it is Rs.59285. So the initial cost of investment which is Rs.60000
falls in between these two discount rates. At 14% the NPV is +595 but at 15% the
NPV is -715, we may say that
IRR=
Present value _
at lower rate
Present value
_
at lower rate
IRR= 14% +
Cash
out flow X diff. in the rates
present value
at higher rate
595
X (15% - 14 %)
595 + 715
= 14.45%
34
CHAPTER 4
RESEARCH METHODOLOGY
35
36
37
RESEARCH DESIGN:
To achieve aforesaid objective the following methodology has been adopted. The
information for this report has been collected through the primary and secondary
sources.
Primary sources
It is also called as first handed information; the data is collected through the
observation in the organization and interview with officials. By asking question with
the accountants and other persons in the financial department. A part from these some
information is collected through the seminars, which were held by YES BANK.
Secondary sources
Secondary data has been collected from various sources such as:
Business magazines
Websites
Annual reports
In order to gain information on current practices and problems, the area chosen for
study are the emerging and competitive companies in and around Hyderabad City.
38
39
CHAPTER 4
DATA ANALYSIS
&
INTERPRETATION
40
YES BANK involved in industrial financing. They extend term loans for acquiring
fixed assets and also working capital term loans. When they are to extend term loans
for acquiring fixed assets like land building, machinery etc they appraise the project to
establish the financial, economic and technically viability of the project while
extending long term loans YES BANKuse capital budgeting techniques. The basic
idea of using capital budgeting is to compare ,whether, the amount invested on the
project at certain rate of return is more or less when compared to the required rate of
return
At YES BANK internal rate of return method is used to appraise an industrial
project. The internal rate of return calculated is compared with the required rate of
return. If the internal rate of return calculated is more than the required rate of return,
the project is accepted if not, it should be rejected. Here it needs to be explained the
meaning of required rate of return. Generally, the concerns required rate of return is
the concerns cost of capital and the cost of capital is the rate of return on a project
that will have unchanged the market price of shares. Thus, the cost of capital is the
required rate of return needed to justify the use of capital.
The cost of capital on term loans is the interest rate that is changed on
disbursal of funds. YES BANKchange interest rates ranging from 11% to 14.5%
depends upon the nature of the project and scheme of financial assistance. Therefore
the cost of capital on loans and advances is the interest rate changed by the term
lending institutions. Hence, the required rate of return is the interest rate changed by
the financial institutions for extending term loan assistance. For example, if the YES
BANKchanges interest at 14%, then the concerns cost of capital or required rate of
return is 14%. This required rate is compared at the concerns internal rate of returns.
Extending or rejecting the proposal depends upon the more or less of the IRR over the
cost of capital. Therefore the viability of the project is determined among other
parameters with reference to the rate of earnings over the desired rate of return that is
the earnings expected over the cost of capital of the project that is interest rate. It is
always seen that the earnings made by the project is more than the interest rate to
accept the project other wise the project is rejected.
USE OF IRR TECHNIQUE IS EXPLAINED WITH THE HELP OF THE
FOLLOWING EXAMPLE
M/S ventech private limited has approached YES BANKfor a term loan RS. 1500
lakhs for expansion of their existing paper mill at Hyderabad. The total project cost of
the expansion is worked at RS.2060 lakhs and the overall project cost is worked at
RS.3003 lakhs as given below:
(RS in lakhs)
Project cost
Existing
Proposed
Total
Land
70.00
--70.00
Buildings
233.00
200.00
433.00
Plant & machinery
518.00
1580.00
2098.00
41
Factory equipment
Electrical
Computers & furniture
Vehicles
Deposits
Working capital margin
4.00
20.00
7.00
21.00
30.00
40.00
943.00
----------280.00
2060.00
4.00
20.00
7.00
21.00
30.00
320.00
3003.00
The project has been appraised by YES BANK and worked out the following
economics for the project:
Capacity utilisation = 90%
Sales = RS.3314 lakhs
MANUFACTURING EXPENSES (A)
(RS. In lakhs)
Raw materials
1553.00
Con
31.00
Power & fuel
303.00
Wages
50.00
Repairs & maintenance
54.00
Taxes
42.00
Other inputs
42.00
2076.00
ADMINISTRATIVE EXPENSES (B)
(RS. In lakhs)
Management remunerating
Salaries
Other expenses
Total cost of production (A+B)
Gross profit
FINANCIAL EXPENSES
Interest on term loans
Interest on bank borrowing
12.00
22.00
42.00
76.00
2151.00
1163.00
230.00
65.00
Depreciation
Operating profit
Provision for taxation
Profit after tax
Net profit before taxes
Interest added back, but after depreciation
295.00
868.00
355.00
513.00
173.00
340.00
808.00
Existing
175.00
76.00
proposed
407.00
153.00
42
(RS. In lakhs)
Total
582.00
229.00
494.00
198.00
943.00
1500.00
--2060.00
1994.00
198.00
3003.00
1ST
YR
808
355
1163
2ND
YR
914
311
1225.
3RD
YR
937
267
1204
4TH
YR
963
229
1191
5TH
YR
981.01
196.35
1177.37
6TH
YR
995
169
1163
(RS. In lakhs)
7TH 8TH
YR
YR
1003 1008
145
124
1148 1132
O year
1st year
3rd year
(RS. In lakhs)
2683
920
52
3655
43
benefits
Net benefits
construction
1st
2nd
3rd
4th
5th
6th
7th
8th
9th
10th
11th
12th
13th
14th
15th
2683.25
920.00
51.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
1162.57
1225.45
1203.76
1190.87
1177.37
1163.16
1148.28
1132.62
1132.62
1132.62
1132.62
1132.62
1132.62
1132.62
2333.21
-2683.25
242.57
1174.34
1203.76
1190.87
1177.37
1163.16
1148.28
1132.62
1132.62
1132.62
1132.62
1132.62
1132.62
1132.62
2333.21
44
Discounted
benefits
-2683.25
180.34
649.05
494.62
363.78
267.38
196.38
144.13
105.69
78.57
58.41
43.43
32.39
24.00
17.84
27.33
CHAPTER 5
OBSERVATIONS
&
CONCLUSIONS
45
OBSERVATIONS:
The IRR for the instant project proposal is worked out at 34.5%
The cost of capital or cut off rate is interest rate charged by YES BANK that is 12%
Since the IRR is more than the cost of capital the project is accepted for financial
assistance
Suitability of IRR technique to project finance:
One of the discounted capital budgeting techniques, the IRR is widely used in project
finance proposals because of its suitability. It is defined rate of discount at which the
present values of inflows are equal to present value of out flows.
In project finance decisions it is easy to determine the cost of capital,
which is equivalent to the interest rate charged. Therefore it is easy to calculate the
present values of inflows and outflows by discounting the values at the cost of capital.
The projects whose IRR is more than the cut off rate is accepted and vice versa. The
data required for arriving at the cash flows are easily calculated and thus the decision
making is fast.
Where as another model, capital budgeting technique net present value
methods is most suitable for decisions involved buying machinery items etc. Selection
of automatic or manual machinery.
In view of the above YES BANK is using IRR technique for their project finance
proposals.
46
The discounted cash flow technique includes Net Present Value, Internal Rate Of
Return, Profitability Index.
In YES BANK a project is appraised to examine the financial viability of the project.
YES BANKworks out Internal Rate Of Return in appraisal of the project among the
capital budgeting technique.
An accept-reject criterion has been applied for all the capital budgeting methods.
The result in this case study suggests that the project can be accepted.
The corporation may consider using of other capital budgeting techniques like Pay
Back Period, Average Rate Of Return, Net Present Value, Profitability Index in the
appraisal of the project, which will enhance the quality of the appraisal.
47
CONCLUSIONS
All the techniques of capital budgeting presume that various investment
proposals under consideration are mutually exclusive which may not
practically be true in some particular circumstances.
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. Obviously the results based upon wrong data may not be
good.
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 decision.
Urgency is another limitation in the evaluation of capital investment decisions.
Uncertainty and risk pose the biggest limitation to the techniques of capital
budgeting.
48
CHAPTER 7
BIBLOGRAPHY
49
BIBLOGRAPHY:
Financial Management
Management Accountancy
Financial Management
Advanced Accountancy
Financial Management
Management Accountancy
-------
I.M. Pandey
Khan & Jain
S.N. Maheshwari
S.P. Jain & K.V. Narayana
Prasanna Chandra
Sharma & Shashi K. Gupta
50