CHAPTER - I

INTRODUCTION

INTRODUCTION TO BUDGETING
BUDGETING: Budgeting is nothing but technique of expressing largely in
financial terms of management plans for operating & financing the enterprise
during periods of time. It is relating active and stresses what should happen, it
has an easements of Wishful Thinking injected into it knowingly as it used a
motivation device. It is prepared by the office of the controller which
coordinates the control function. It is prepared for a period of one year.
An estimation of the revenue & expenses over a
specified future period of time. A budget can be made for a person, a family or
a group of people, a business, government, country or multinational
organization or just about anything else that makes & spends. Money budgets
are a microeconomic concept that show the tradeoff made when one good is
exchanged for another. A surplus budget means profits are anticipated, a
balanced budget means revenue are expected to equal expenses; and a
deficit budget means expenses will exceed revenue. Budgets are usually
compiled and re-evaluated on a periodic basis. Adjustments are made to
budgets based on the goals of the budgeting organization. In some cases,
budget makers are happy to operate at a deficit, while in other cases,
operating at a deficit is seen as financially irresponsible.
Definition of Budgeting: Budgeting is the formulation of plans for future activity that
seek to substitute carefully constructed objectives for hit and miss
performance and provide yard sticks by which deviations from planned
achievements can be measured.

INTRODUCTION TO CAPITAL BUDGETING

INTRODUCTION:
Among the various business decisions capital budgeting
decisions are critical and crucial decisions. Therefore special care must be
taken while taking these decisions.
CONCEPT AND MEANING:
The term capital budgeting refers to long term planning
for proposal capital outlay and their financing. It includes rising long-term
funds and their utilization. It may be defined as firms, formal process of
acquisition and investment of capital.
Capital Budgeting may also be defined as The decision making process
which the firm evaluates the purchase of major fixed assets. It involves
firms decision to invest its current funds for addition, disposition,
modification and replacement of fixed assets.
It deals exactly with major investment proposals, which are essentially longterm projects and incurred among the available market opportunities.
Capital budgeting is the process of making investment decision in capital
expenditure. A Capital expenditure may be defined as an expenditure, the
benefits of which are expected to be received over a period of time exceeding
one year. The main characteristic of a Capital expenditure is that the
expenditure is incurred at the one point of time whereas benefits of the
expenditure are related at different point of time in future.

NEED AND IMPORTANCE:

Capital Budgeting means planning for capital assets. Capital Budgeting

decisions are vital to an organization as to include the decision as to:

Weather or not funds should be invested in long term projects such

as settings of an industry, purchase of plant and machinery etc.,

Analyze the proposals for expansion or creating additions

capacities.

To decide the replacement of permanent assets such as building

and equipments.

To make financial analysis of various proposals regarding capital

investment so as to choose the best out of many alternative
proposals.

OBJECTIVES OF THE STUDY

1. To make effective utilization of resources.

2. Evaluate the proposal and to see whether the capital invested yields
more returns than determined.
3. To make the proposals which are more benefitable for the firms?
.
4.

To evaluate the company growth and make the decision to gain the
company in the long run.

Scope of study:
Main financial function in modern times is allocation of capital in
efficient resources.
Which is the most crucial step in the firm? These decisions involve heavy
involvement of funds so these long term decisions have a great implication
on the growth and profitability of the firm.
Scope of the study is limited in collecting the financial data of Bevcon wayors
for five years and the budgeted figures for each year.

METHODOLOGY:

At each point of time 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 is not possible to invest trend in
the entire proposal at a time. Hence it is very essential to select from amongst
the various competing proposals, those that gives the highest benefits. The
crux of capital budgeting is the allocation of available resources to various
proposals. There are many considerations, economic as well as noneconomic, which influence the capital budgeting decision in the profitability of
the prospective investment.
Yet the right involved in the proposals cannot be ignored, profitability and risk
are directly related, i.e. higher profitability the greater the risk and vice versa
there are several methods for evaluating and ranking the capital investment
proposals.

Data collection
Primary data:
primary data is the data which is collected by
interviewing the concerned executives and this data is gathered from the
organization.

Secondary data:
secondary data is data gathered from the publications and the concerned
websites.
6

LIMITATIONS:

All the techniques of capital budgeting presume that various investment

proposals under consideration that are mutually exclusive which may
not practically be true in some particular circumstances.

The techniques of capital budgeting requires estimation of future cash

inflows and out flows. The future is always uncertain, and the data
collected for future may not be exact. Obviously, the result based upon
wrong data cannot be good.

There are certain factors like morale of employees, goodwill of the firm,
etc., which cannot be correctly qualified but which otherwise
substantially influence the capital decision.

Urgency is another limitation in evaluation of capital investment

decision.

Uncertainty and risk pose the biggest limitation to the techniques of

capital budgeting.

CHAPTER II
REVIEW OF LITERATURE

CAPITAL BUDGETING:

A capital expenditure is an outlay of cash for a project that is

expected to produce a cash inflow over a period of time exceeding one year.
Examples of projects include investments in property, plant, and equipment,
research and development projects, large advertising campaigns, or any other
project that requires a capital expenditure and generates a future cash flow.
Because capital expenditures can be very large and have a significant impact on
the financial performance of the firm, great importance is placed on project
selection. This process is called capital budgeting.
KINDS OF CB DECISIONS:

Capital Budgeting refers to the total process of generating, evaluating, selecting

and following up on capital expenditure alternatives basically; the firm may be
confronted with three types of capital budgeting decisions
i

Accept reject decisions

This is a fundamental decision in capital budgeting. If the project is

accepted, the firm invests in it; if the proposal is rejected, the firm does not
invest in it. In general, all those proposals, which yield rate of return greater
than a certain required rate of return or cost of capital, are accreted and rest
are rejected. By applying this criterion, all independent projects all accepted.
Independent projects are the projects which do not compete with one another
in such a way that the acceptance of one project under the possibility of
acceptance of another. Under the accept-reject decision, the entire
independent project that satisfies the minimum investment criterion should be
implemented.
9

Mutually exclusive project decision

Mutually exclusive projects are projects which compete with other
projects in such a way that the acceptance of one which exclude
the acceptance of other projects. The alternatives are mutually
exclusive and only one may be chosen.

ii

Capital Rationing Decision

Capital rationing is a situation where a firm has more investment

proposals than it can finance. It may be defined as a situation where
a constraint in placed on the total size of capital investment during a
particular period. In such a event the firm has to select combination
of investment proposals which provides the highest net present
value subject to the budget constraint for the period. Selecting or
rejecting the projects for this purpose will require the taking of the
following steps:
1 Ranking of projects according to profitability index (PI) or Initial
rate of return (IRR).

2 Selecting of rejects depends upon the profitability subject to the

budget limitations keeping in view the objectives of maximizing
the value of firms.
NATURE OF INVESTMENT DECISSIONS

10

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 decision 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 that affect the firms
operations beyond the one year period. The firms investment decisions would
generally include expansion, acquisition, modernization and replacement of the
long-term assets.
Sale of a division or business (divestment) is also as an
investment decision. Decisions like the change in the methods of sales
distribution, or an advertisement campaign or a research and development
programme have long-term implications for the firms expenditures and benefits,
and therefore, they should also be evaluated as investment decisions. It is
important to note that investment in the long-term assets invariably requires large
funds to be tied up in the current assets such as inventories and receivables. As
such, investment in the fixed and current assets is one single activity.

Features of Investment Decisions:The following are the features of investment decisions:

The exchange of current funds for future benefits.

The funds are invested in long-term assets.

The future benefits will occur to the firm over a series of years.

11

Importance of Investment Decisions:Investment decisions require special attention because of the following reasons.

They influence the firms growth in the long run

They affect the risk of the firm

They involve commitment of large amount of funds

They are irreversible, or reversible at substantial loss

They are among the most difficult decisions to make.

Growth
The effects of investment decisions extend in to the future and have
to be endured for a long period than the consequences of the current operating
expenditure. A firms decision to invest in long-term assets has a decisive
influence on the rate and direction of its growth. A wrong decision can prove
disastrous for the continued survival of the firm; unwanted or unprofitable
expansion of assets will result in heavy operating costs of the firm. On the other
hand, inadequate investment in assets would make it difficult for the firm to
complete successfully and maintain its market share.

Risk
A long-term commitment of funds may also change the risk complexity
of the firm. If the adoption of an investment increases average gain but causes
frequent fluctuations in its earnings, the firm will become more risky. Thus,
investment decisions shape the basic character of a firm.

12

.
Funding
Investment decisions generally involve large amount of funds, which
make it imperative for the firm to plan its investment programmes very carefully
and make an advance arrangements for procuring finances internally or
externally.
Irreversibility
Most investment decisions are irreversible. It is difficult to find a
market for such capital items once they have been acquired. The firm will incur
heavy losses if such assets are scrapped.
Complexity
Investment decisions are among the firms most difficult
decisions. They are an assessment of future events, which are difficult to predict.
It is really a complex problem to Economic, political, social and technological
forces cause the uncertainty in cash flow estimation.

TYPES OF INVESTEMENT DECISIONS

There are many ways to classify investments. One classification is as follows:

Expansion of existing business

Expansion of new business

Replacement and modernization.

13

Expansion and Diversification

A company may add capacity to its existing product lines to expand
existing operations. For example, the Gujarat State Fertilizer Company (GSFC)
may increase its plant capacity to manufacture more urea. It is an example of
related diversification. A firm may expand its activities in a new business.
Expansions of a new business require investment in new products and a new
kind of production activity with in the firm. If a packaging manufacturing company
invests in a new plant and machinery to produce ball bearings, which the firm
business or unrelated diversification. Sometimes a company acquires existing
firms to expand its business. In either case, the firm makes investment in the
expectation of additional revenue. Investments in existing or new products may
also be called as revenue-expansion investments.
t and Modernization

The main objective of modernization and replacement is to improve

operating efficiency and reduces costs. Cost savings will reflect in the increased
profits, but the firms revenue may remain unchanged. Assets become outdated
and obsolete with technological changes. The firm must decide to replace those
assets with new assets that operate more economically.

14

Yet another useful way to classify investments is as follows:

Mutually exclusive investments

Independent investments

Contingent investments.

Mutually Exclusive Investments

Mutually exclusive investments serve the same purpose and
compete with each other. If one investment is undertaken, others will have to
be excluded. A company may, for example, either use a more labourintensive, semi-automatic machine, or employ a more capital-intensive,
highly automatic machine for production. Choosing the semi-automatic
machine precludes the acceptance of the highly automatic machine.
Independent Investments
Independent investments serve different purposes and do
not compete with each other. For example, a heavy engineering company
may be considering expansion of its plant capacity to manufacture additional
excavators and addition of new production facilities to manufacture a new
product-light commercial vehicles. Depending on their profitability and
availability of funds, the company can undertake both investments.

Contingent Investments
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,
15

if may have to invest in houses, roads, hospitals, schools etc. for employees
to attract the work force. Thus, building of factory also requires investments
in facilities for employees. The total expenditure will be treated as one single
investment.

Investment Evolution Criteria:

Three steps are involved in the evaluation of an investment:
Estimation of cash flows.
Estimation of the required rate of return (the opportunity cost of
capital)
Application of a decision rule of making the choice.

The first two steps, discussed in the subsequent chapters, are

assumed as given. Thus, our discussion in this chapter is confined to the
third step. Specifically, we focus on the merits and demerits of various
decision rules.

16

Investment decision rule

The investment decision rules may be referred to as capital
budgeting techniques, or investment criteria. A sound appraisal technique
should be used to measure the economic worth of an investment project.
The essential property of a sound technique is that it should maximize
the share holders wealth. The following other characteristics should also
be possessed by a sound investment evaluation criterion.

It should consider all cash flows to determine the true profitability

of the project.

It should provide for an objective and unambiguous way of

separating good projects from bad projects.

It should help ranking of projects according to their true

profitability.

It should recognize the fact that bigger cash flows are preferable
to smaller ones and early cash flows are preferable to later ones.

it should be a criterion which is applicable to any conceivable

investment project independent of others.

17

Evaluation criteria
A number of investment criteria (or capital budgeting techniques) are
in use in practice. They may be grouped in the following two categories.
1 Discounted cash flow criteria

Net present value(NPV)

Internal rate return(IRR)

Profitability index(PI)

2 Non discounted cash flow criteria

Payback period(PB)

Discounted payback period

Accounting rate of return(ARR)

Net Present Value

The Net Present Value technique involves discounting net cash

flows for a project, then subtracting net investment from the discounted net cash
flows. The result is called the Net Present Value (NPV). If the net present value is
positive, adopting the project would add to the value of the company. Whether
the company chooses to do that will depend on their selection strategies. If they
pick all projects that add to the value of the company they would choose all
projects with positive net present values, even if that value is just $1. On the
other hand, if they have limited resources, they will rank the projects and pick
those with the highest NPV's.
The discount rate used most frequently is the company's cost of capital.

18

Net present value (NPV) or net present worth (NPW)[ is defined as the total
present value (PV) of a time series of cash flows. It is a standard method for
using the time value of money to appraise long-term projects. Used for capital
budgeting, and widely throughout economics, it measures the excess or shortfall
of cash flows, in present value terms, once financing charges are met.
The rate used to discount future cash flows to their present values is
a key variable of this process. A firm's weighted average cost of capital (after tax)
is often used, but many people believe that it is appropriate to use higher
discount rates to adjust for risk for riskier projects or other factors. A variable
discount rate with higher rates applied to cash flows occurring further along the
time span might be used to reflect the yield curve premium for long-term debt.

Internal Rate of Return

The internal rate of return (IRR) is a Capital budgeting metric used by
firms to decide whether they should make Investments. It is also called
discounted cash flow rate of return (DCFROR) or rate of return (ROR).
It is an indicator of the efficiency or quality of an investment, as opposed to Net
present value (NPV), which indicates value or magnitude.
The IRR is the annualized effective compounded return rate which can be earned
on the invested capital, i.e., the yield on the investment. Put another way, the
internal rate of return for an investment is the discount rate that makes the net
present value of the investment's income stream total to zero.
Another definition of IRR is the interest rate received for an investment consisting
of payments and income that occur at regular periods.

19

A project is a good investment proposition if its IRR is greater than the rate of

return that could be earned by alternate investments of equal risk (investing in other projects,
buying bonds, even putting the money in a bank account). Thus, the IRR should be compared to
any alternate costs of capital including an appropriate risk premium.
In general, if the IRR is greater than the project's cost of capital, or hurdle rate, the project will add
value for the company.
In the context of savings and loans the IRR is also called effective interest rate.
In cases where one project has a higher initial investment than a second mutually exclusive
project, the first project may have a lower IRR (expected return), but a higher NPV (increase in
shareholders' wealth) and should thus be accepted over the second project (assuming no capital
constraints).
IRR assumes reinvestment of positive cash flows during the project at the same calculated IRR.
When positive cash flows cannot be reinvested back into the project, IRR overstates returns. IRR
is best used for projects with singular positive cash flows at the end of the project period.

Profitability index
Yet another time adjusted method of evaluating the investment proposals is the benefitcost (B/C) ratio or profitability index. Profitability index 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.

20

Evaluation of PI method
Like the NPV and IRR rules, PI is a conceptually sound method of arising
investment projects. It is a variation of the NPV method and requires the
same computations as the NPV method.

Time value it recognizes the time value of money.

Value maximization it is consistent with the share holder value

maximization principle. A project with PI greater than one will have
positive NPV and if accepted it will increase share holders wealth.

Relative profitability in the PI method since the present value of

cash in flows is divided by the initial cash out flow , it is a relative
measure of projects profitability.

Like NPV method PI criterion also requires calculation of cash flows and
estimate of the discount rate.

Payback period
The payback period is one of the most popular and widely
recognized traditional methods of evaluating investment proposals.
Payback is the number of years required to cover 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 inflow.

21

Evolution of payback:
Many firms use the payback period as an investment
evaluation criterion and a method of ranking projects. They compare the
projects payback with pre-determined standard pay back. The would be
accepted if its payback period is less than the maximum or standard pay
back period set by management as a ranking method. It gives highest
ranking to the project, which has the shortest payback period and lowest
ranking to the project with highest payback period. Thus if the firm has
to choose between two mutually exclusive projects, the project with
shorter pay back period will be selected.

Evolution of payback period.

Pay back is a popular investment criterion in practice. It is considered to
have certain virtues.

Simplicity
The significant merit of payback is that it is simple 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 practice.

Cost effective
Payback method costs less than most of the
sophisticated techniques that require a lot of the analysts time and
the use of computers.

22

 Short-term
Effects a company can have more favorable short-run
effects on earnings per share by setting up a shorter standard
payback period. It should, however, be remembered that this may
not be a wise long-term policy as the company may have to sacrifice
its future growth for current earnings.

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.
In spite of its simplicity and the so, called
virtues, the payback may not be a desirable investment criterion
since it suffers from a number of serious limitations.

Risk shield
The risk of the project can be tackled by having a shorter
standard payback period. As it may be in a ensured guaranty
against its loss. A company has to invest in many projects where
the cash inflows and life expectancies are highly uncertain. Under
such circumstances, pay back may become important, not so much
as a measure of profitability but, as a means of establishing an
upper bound on the acceptable degree of risk.

23

Discounted pay back period

One of the serious objections to the payback method is that
it does not discount the cash flows for calculating the payback period. We
can discount cash flows and then calculate the payback.
The discounted pay back period is the no. of. Periods taken in recovering the
investment outlay on the present value basis. The discounted payback period still
fails to consider the cash flows occurring after the payback period.

Accounting rate of return

The accounting rate of return (ARR) also known as the return on
investment (ROI) uses accounting information as revealed by financial
statements, to measure the profitability of an investment. The accounting rate of
return is the ratio of the average after tax profit divided by the average
investment. The average investment would be equal to half of the original
investment if it were depreciated constantly. Alternatively, it can be found out by
dividing the total if the investments book values after depreciation be the life of
the project.

24

EVALUATION OF ARR METHOD

The ARR method may claim some merits:

Simplicity

the ARR method is simple to understand and use. It does

not involve complicated computations.

ACCOUNTING DATA
The ARR can be readily calculated from the

accounting data, unlike in the NPV and IRR methods, no adjustments are
required to arrive at cash flows of the project.

ACCOUNTING PROFITABILITY
The ARR rule incorporates the entire stream of income in

calculating the projects profitability.

The ARR is a method commonly understood by accountants
and frequently used as a performance measure. As decision criterion, how
ever it has serious short comings.

CASH FLOWS IGNORED

The ARR method uses accounting profits, not cash flows, in

appraising the projects. Accounting profits are based on arbitrary

assumptions and choices and also include non-cash items. It is, there fore
in appropriate to relay on them for measuring the acceptability of the
investment projects.

25

TIME VALUE IGNORED

The averaging income ignores the time value of money. In fact, this

procedure gives more weight age to the distant receipts.

ARBITRARY CUT-OFF
The firm employing the ARR rule uses an arbitrary cut-off

yardstick. Generally, the yardstick is the firms current return on its assets
(book -value). Because of this, the growth companies earning very high
rates on their existing assets may project profitable projects and the less
profitable companies may accepts bad projects.

PROJECT CLASSIFICATION
Project classification entails time and effort the costs incurred in this
exercise must be justified by the benefits from it. Certain projects, given their
complexity and magnitude, may warrant a detailed analysis; others may call for a
relatively simple analysis. Hence firms normally classify projects into different
categories. Each category is then analyzed somewhat differently.
While the system of classification may vary from one firm to another, the
following categories are found in cost classification.

Mandatory investments
26

These are expenditures required to comply with statutory requirements.

Examples of such investments are pollution control equipment, medical
dispensary, fire fitting equipment, crche in factory premises and so on. These
are often non-revenue producing investments. In analyzing such investments the
focus is mainly on finding the most cost-effective way of fulfilling a given statutory
need.

Replacement projects
Firms routinely invest in equipments means meant to obsolete and
inefficient equipment, even though they may be a serviceable condition. The
objective of such investments is to reduce costs (of labor, raw material and
power), increase yield and improve quality. Replacement projects can be
evaluated in a fairly straightforward manner, through at times the analysis may be
quite detailed.

Expansion projects
These investments are meant to increase capacity and/or widen the
distribution network. Such investments call for an expansion projects normally
warrant more careful analysis than replacement projects. Decisions relating to
such projects are taken by the top management.

27

Diversification projects
These investments are aimed at producing new products or
services or entering into entirely new geographical areas. Often diversification
projects

entail

substantial

risks,

involve

large

outlays,

and

require

considerable managerial effort and attention. Given their strategic importance,

such projects call for a very through evaluation, both quantitative and
qualitative. Further they require a significant involvement of the board of
directors.

Research and development projects

Traditionally, R&D projects observed 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 in knowledgeintensive

industries.

R&D

projects

are

characterized

by

numerous

uncertainties and typically involve sequential decision making.

Hence the standard DCF analysis is not applicable to them. Such
projects are decided on the basis of managerial judgment. Firms which rely
more on quantitative methods use decision tree analysis and option analysis
to evaluate R&D projects.

Miscellaneous projects
This is a catch-all category that includes items like interior
decoration, recreational facilities, executive aircrafts, landscaped gardens,
and so on. There is no standard approach for evaluating these projects and
decisions regarding them are based on personal preferences of top
management.

28

CHAPTER III
COMPANY PROFILE

29

Company profile:
Bevcon Wayors Pvt Ltd, Hyderabad is a major player /
manufacturer of Material Handling Equipments in the India. Bevcon
is

also

one

of

the

fastest

growing

SME.

Established in 1991, Bevcon had a steady growth and now

have established as one of the leading Material Handling, Crushing
and Screening Systems Company in India.
Equipments Manufactured
Bevcon Wayors is into the Business of Bulk Material
Handling, Crushing, and Screening Equipment for all sectors of
industries. Bevcon Wayors Designs, Manufactures, Supplies and
undertakes Erection & commissioning at customers site. All
Equipments and products undergo rigorous quality control checks
and are manufactured to the highest Engineering Standards.
MCs expertise is outstanding in following project areas:
masonry / Concrete dams spill ways, tunneling, formation of earth
dams and bunds, canals, bridges, roads and buildings. Befittingly,
the company has the privilege of working for or on behalf of such
infrastructure majors as the Tehri Hydro power Development
Corporation, steel Authority of India Limited, NTPC, NHPC, Reliance,
and Engineering projects India Limited.
MCs expertise, virtually in all areas of civil and engineering
construction, is best reflected in the successful execution of
following projects.

Rs.350 Cores Koteshwar Dam for the Tehri Hydro Electric power
project in Uttaranchal,

30

Rs.250 - Crores project for transportation of iron ore form Kalta

iron ore mines to SAIL in orissa state engaging an unprecedented
workforce of 4000 people.

Rs.150-crores project for construction of B.G. single Line Tunnel

No.5 (Bakkal Tunnel) form Km 43.040 to 48.940 on the KatraLaole section of the Udahampur srinagar- Baramulla Rail Link.

Mr. Ramesh plans to bank from when the change of

Rs.8-crores Owk Reservoir Complex in Andhra Pradesh, and

Rs22-cores project for construction of barrage across ponnai

River near
Kalavagunta, Chittoor district in Andhra Pradesh.

VISION & MISSION OF THE ORGANIZATION

We envisage being a market leader by 2010 in Bulk
Material

Processing

&

Handling

Solutions

through

satisfying

Customers, Stakeholders and Employee needs.

Our Outlook for the vision:
As a part of our vision we are bringing in the business &
manufacturing

expertise

from

Global

Players

and

forge

new

business alliances to bring in Futuristic Technologies to Indian

Markets. We have Technology tie-ups with companies such as
Burwell Technologies of Australia, Sunland - China, Friedrich &
Noma - Germany, Statec Austria, Nergeco France-Australia,
Thermo stop - Canada.

31

Bevcon has the Professional and Competent Staff with Skills

on par with International Standards to gear up for the above.
Our Mission is to create Smarter Engineering Solutions
evolved by a technology

driven team. The Mission is achieved by

the following edicts

Strong Engineering and Design base.

Strict conformance and compliance to quality of equipment

and

work

procedures.

Excellence in service to customers

Honesty, integrity and transparency in all relationships.

Respect for the individual.

Quality is not a mere label for us but it is an Organic

Reality.
We provide Turnkey Solutions for Your Bulk Material
Handling needs for
Crushing | Screening | Conveying
Our expertise is based on nearly decade and half experience in
designing custom material handling solutions for various sectors
of Industry.

32

The

Turnkey

Material

Handling

Solutions can be a combination of Crushing - Screening Conveying

Systems

coupled

with

Pneumatic

Handling

and

cartridge dust extraction system are Engineered and Executed to

your

needs.

Write to us at [email protected] or call us on 040

23732628, 23747643, 09246260342 so that we can depute our
Application Engineer from the nearest Bevcon office to you.

OUR PROMOTORS
P SUNEEL LAKSHMAN
Managing Director
A Mechanical Engineer from BITS Pilani with 25 years of experience
in Engineering Sector, especially in Material Handling Industry.
He is the driving force behind the company and has a clear vision of
making our organization as the best Project Engineering Company
in Bulk Material Handling, Dust Extraction and Pneumatic Handling.
Y.SRINIVASREDDY
Technical Director
33

A Mechanical Engineer with 20 years experience in material

handling equipments technology. He is the founder director of the
company and heads our manufacturing facility.
His forte is Design and Engineering for complex Material
Handling requirements. He is also the key force in new product
development at our company

34

35

BEVCON WAYORS ORGANISATION STRUCTURE

DEPARTMENTS OF BW

BW MANAGEMENT

Bevcon Wayors
Regulatory Board

BEVCON WAYORS
Cherlapalli

Complete
Aided
institute

Research &
Development
Sector

Industrial Sector

Board of directors:
Mr. C. M. Ramesh, Chairman & Managing Director

36

Services support
Sector

Operating efficiently out of a network of corporate and project offices

across the country, Ramesh presents the picture of a cutting edge
entrepreneur endowed with exemplary vision, leadership, resource
mobilization, and management skills.
Current diversification plans of Mr.Ramesh include tapping the
excellent

hydropower

generation

opportunities

that

the

highly

progressive State of Sikkim is unfolding.

Mr. C.M. Rajesh Director
Mr. C.M. Rajesh, Director of Bevcon Wayors Limited A
graduate in the Arts from Andhra Loyola College, Vijayawada, Andhra
Pradesh is the current successful Director of the profit-making Bevcon
Power Projects Limited in Khammam district of Andhra Pradesh. He
brings a sharp sense of focus, dynamism, dedication and competitive
spirit to the company to shape into a successful, professionally
managed enterprise.
A hands-on leader, Mr. Rajeshs experience is significant in successful
management of the 6 MW Bio-Mass-based electricity project in
Khammam. This project is recognized as the most significant in its
class for implementation of the power industrys best practices.
focus and business:
Power generation, irrigation and highways will dominate the
development agendas of the Indian Government at the center as Well
as in States and Union Territories. Consequently, the Bevcon Groups
business strategy too will revolve around these areas. In the crucial
power sector, Bevcons associated company Bevcon power projects
Limited has developed a successful 6 MB bio-mass based electricity
project in Khammam district of Andhra Pradesh. Bevcon Groups
37

combined capabilities in civil engineering; power generation and

highway building provide an excellent platform for power project
development, particularly in Sikkim given the state Governments
progressive energy policy.
The central and provincial realize that hydroelectric power
projects established in the Southern and western parts of India are
increasingly becoming unviable primarily because of poor river
flows. Therefore, the Government of India has decided to encourage
hydroelectric power projects in the Himalayan region that is
endowed with perennial rivers, so necessary to make power
projects meaningful to all from the generator to the consumer.
To make power projects meaningful to all from the
generator to the consumer. To acquire an edge in the highly
competitive infrastructure industry, Bevcon Wayors Limited, entered
into an MOU with National projects constructions Corporation. The
MOU entitles the company to 10% price/purchase preference in all
bids submitted by NPCC on MCs behalf significantly done to be
constructed by NTPC and hydropower projects in
Northeast India shall constitute BW s thrust areas for the next
three years. Participation in these projects will call for extraordinary
expertise and resource mobilization. Bevcon Wayors has the
confidence to generate both. Needless to stress, success in such
mega projects could steer Bevcon Wayors to the companys stated
goal of industry leadership.

Bevcon Industries Limited

details of works on hand as on 30.11.2010

38

rs. in crores
si.n
name of the work
o

Value of

Value of

Value of

work

work

work to

awarded

executed

be
executed

Transportation of iron ore

1

from KALTA IRON MINES

250.00

46.76

203.24

to SAIL in Orissa State

Construction
of
civil
2

works of DAM spillway

and power house at near

335.00

99.34

235.66

152.29

34.34

117.95

77.04

48.55

228

58.32

13.31

45.01

rishikesh, uttranchal sate

Construction
of
B.G.
single line tunnel No.5
(Bakkal
3

tunnel)

from

Km43.040 to 48.940 on
the katra-laole section of
the udahampur srinagar

baramulla

Rail

Link

project
Investigation preparation
of hydraulic particulars,
4

design

and

drawings

excavation of HNSS Main

5

Canal from Km15.00 km

Investigation,
preparation of hydraulic
particulars,

design

and

drawings and excavation

of HNSS Main canal from
Km

176.000

192.000
construction

to

Km

including
of

CM&CD
39

works

and

distributor

system to feed an ayacut

of 20,900 acres khariff
I.D.(package No33)

Awards & Achievements:

BHARTIYA SHIROMANI
PURASKAR
This certificate of Excellence for
40

Enhancing the image of India presented by

Dr.Bhishma Narain Singh
(Honble Former Governor of Tamil Nadu & Assam)
to
Bevcon Wayors

Awarded by the Institute of Economic Studies (IES),

New Delhi at the time of the Seminar on
Economic Development
held on 13th February 2008 at New Delhi.

IES
President

Executive Director

Partners:

Progressive Constructions Limited

Ga India Limited

Mytas

NPCC

41

Clients:

Konkan Railway Corporation Limited

Tehri Hydro Development Corporation

Steel Authority of India Limited

NTPC

Milestones:
Engaging 4000 workers, executing the largest manual
labor contract in India at Kalta Iron Ore mines in Orissa
Construction of the district in AP much ahead of the
scheduled time. The comprises at paleru, Gollaleru and
Thimmaraju earth dams.
Executing all subcontracts efficiently to become principal
contractor with the potential of bidding for awards worth
Rs.200 Crores independently.
Large plant and machinery base to undertake any super
Infrastructure project.
Reservoir of trained, motivated and dedicated manpower to
undertake projects of any complexity or magnitude.

42

CHAPTER - IV
DATA ANALYSIS AND
INTERPRETATIONS

CASH FLOW STATEMENT FOR BEVCON WAYORS PVT LTDFROM

2010-11 TO 2014-15

sno

Particulars

(RS IN MN)

2010-11

201112

2012-13

2013-14

201415

381.98

656.30

600.10

617.68

637.82

Cashinflow
1.

Sales turnover (revenue)

43

2.

3.

4.

5.

Other income

2.42

2.31

1.21

0.42

10.06

TOTAL

384.4

658.61

601.31

618.10

647.88

(LESS)increase\decreasei
n stock
OTHER INCOME

22.48

(9.24)

38.69

35.25

38.37

406.89

649.37

640.00

653.35

686.25

LESS OPERATING
EXPENSES
CASH FLOW BEFORE TAX

340.95

492.27

538.59

545.36

435.13

65.94

157.10

101.41

107.89

251.12

(Less) depreciation

11.28

12.81

16.87

18.17

18.50

Taxable income

54.66

144.29

84.54

89.82

232.62

Less tax

3.50

11.00

8.50

10.50

10.95

Loss on sales of assets

4.11

0.29

0.00

0.00

0.00

Earning after tax

47.05

133.00

76.04

79.32

221.67

(Add) depreciation

11.28

12.81

16.87

18.17

18.50

Cash flow after tax

58.33

145.81

92.91

97.49

240.17

Note : (cashfoutflows and cash flows after tax is taken as intital

investment for capital budgeting calculations)

44

BEVCON WAYORS PVT LTD has entail investment of 470.00millions

And the annual cash flows from 2010-15 then the pay back period may be
calculated as follows.
Payback period:
Calculation of cash flow after taxes (cfat)
(RS IN MN)
Serial no

Years

Cash flows

Cumulative cash

2010-11

58.33

flows
58.33

2011-12

145.81

204.14

2012-13

92.91

297.06

2013-14

97.49

394.55

2014-15

240.17

634.72

From the table it shows that pay back periods lies the 4 th and 5th year with 394.55
and 634.72 i.e intial investments of 470 millions
The amount has been recovered in the fourth year and the
remaining amount in FIFTH YEAR (470.00 - 394.55= 75.45)
recovered in 2 years. This means the pay back period lies between
4TH YEAR and 5th year The payback period is computed below:

Difference in cash flows

45

PBP = Actual year + ------------------------Next year cash flows

PBP = 4

75.45
240.17

4+ 0.314 = 4.314 YEARS

Pay back period (PBP) = 4.31 YEARS

ACCEPT REJECT CRITERION:

Pay back is used as criterion to to accept or reject an investment
Proposal. A proposal for the pay back which is more than the
standards predetermined by the management.

So the pay back period which is calculated helps the management to

know the investment is recovered in 4.31 years which can be accepted.

46

AVERAGE RATE OF RETURN:

It is another traditional method of capital budgeting evaluation.

According to this method the capital investment proposals are judged on
the basis of their relative profitability. The capital employed and related
incomes are determined according to the commonly accepted accounting
principles and practices over the certain life of project and the average
yield is calculated. Such a rate is called the accounting rate of return or
the average return or ARR.
It may be calculated according to any one formula

(i)

annual average net earnings

Original investment

* 100

(ii) Annual average net earnings

* 100

Average investment

The term average annual net earnings are the average of the
earnings after depreciation and tax. Over the whole of the
economic life of the project order and these giving on ARR above
the required rate may be accepted.
The amount of average investment can be calculated according to
any of the following methods:
a

Original investment
-----------------------2
47

Original investment +scrap value

-----------------------------------------2

Cash flows of Bevcon wayors are shown in cash flow statement. ARR is
calculated as follows:
Statement showing calculation of ARR
YEARS

EARNINGS AFTER TAX (EAT)

Mar 2010-11
Mar 2011-12
Mar 2012-13
Mar 2013-14
Mar 2014-15
Total
ARR

47.05
133.00
76.04
79.32
221.67
557.08
=

Average annual EATS

------------------------------Original investment

Average Annual EATS =

(RS IN MILLIONS)

TOTAL AMOUNT
NO OF YEARS

557.08
5

= 111.41

Original investment = 470 millions( as shown above)

.
ARR=

111.41
470.00

= 0.23* 100

48

100

AVERAGE RATE OF RETURN

= 23%

ACCEPT REJECT CRITERION:

Average rate of return method allows the management of Bevcon
wayors

to fix a minimum rate of return. So any project below the

minimum rate is rejected finally the

and accepted

49

ARR WHICH IS 30% efficient

TIME ADJUSTED (OR) DISCOUNTED CASH FLOW METHOD:

The time adjusted or discounted cash flow methods into accounts the
profitability time value of money. These methods are also called the modern
methods of capital budgeting.
1 NET PRESENT VALUE METHOD: (NPV)
Net present value method or NPV is one of the discounted cash flows
method. The method is considered to be one of the best of evaluating
the capital investment proposals. Under this method cash inflows and
outflows associated with each project are first calculated.

Role of discounting factor:

The cash inflows and out flows are converted to the present values
using discounting factor which is the actuary discount factor of Bevcon
wayors is 9%
The rate of return is considered as cut off rate or required
rate or rate generally determined on the basis of cost of capital to allow
for the risk element involved in the project.

50

STEPS FOR CALCULATION OF NPV:

1 Calculation of each cash flows after taxes of three years, which is

arrived at by deducting depreciation, interest and tax from earnings
before tax and interest (EBIT). This residue is profit after tax to arrive at
cash flow after tax.

2) This cash flow after tax are multiplied with the values obtained from the
table (the present value annuity table against the 8% actuary discount
Rate i.e. in the case of project.

3) NPV is derived by deducting the sum of present values from the initial
Investment.

4) Initial investments are the sum of cash flows of three years shown in
Capital expenditure table i.e.

51

NPV AT 9%
STATEMENT SHOWING CALCULATION OF NPV
.
Serial no YEARS
CFATS
PVIF AT 9%

( RS IN MN)
PV` S

2010-11

58.33

0.917

53.48

2011-12

145.80

0.841

122.61

2012-13

92.92

0.772

71.73

2013-14

97.49

0.708

69.02

2014-15

240.17

0.649

155.87

Total

472.71

Less intial investment

470.00

Npv

2.71

Accept reject criterion: The accept reject decision of NPV is very simple.
If the NPV is positive the project should be accepted and if NPV is
negative the project should be accepted and if NPV is negative the project
should be rejected

NPV
NPV

<0

>0

(ACCEPT)

(REJECT)

Hence in the case of Bevcon wayors the project is npv is positive so the project
can be accepted.

52

INTERNAL RATE OF RETURN

Internal rate of return is that rate of return at which the sum of discounted cash
inflows equals to the sum of discounted cash outflows.
In this method the discount rate is not known but the cash inflows or outflows are
known.
Step 1
Calculate cash flow after tax.
Step 2:
Calculate fake pay back period
Step 3:
Look for the factor in the present value annuity table in the years
column until you arrive at the figure closest to fake pay back period.
Step 4:
Note the corresponding percentage.
Step 5:
Calculate npv at that percentage.
Step 6:
If npv is positive take a rate higher and calculate npv.
Step 7:
Continue step 5 until you arrive at two rates one giving positive and
other negative npv.
Step 8:
Actual irr can be calculated as
Lower rate +

present value at lower rate- cash outflows

* diff rate
Present value at lower rate-present value higher rate

53

FORMULATION OF STEPS:
STEP 1: Calculation of cash flows after taxes

YEARS

CASH FLOW AFTER TAXES (CFAT)

2010-11

58.33

2011-12

145.81

2012-13

92.92

2013-14

97.49

2014-15

240.17

TOTAL

634.72

(Above table has already been calculated)

STEP 2: Calculation of fake payback period (FPBP):

Initial investment
FPBP = -----------------------------Average CFATS

Average CFATS =

Total amount
---------------------No of years

634.72
= ------------------5

Intial investment is 470 millions

54

= 126.94

Fake payback period

470.00
126.94

3.7025

3.7025 lies between 28% and 32% of IRR

STEP 3: Present value of taxes (PVAT) tables indicates the values closes to
3.7025 lies at 28%

Statement showing calculation of NPV @ 28% under IRR method

(Rs millions)
YEARS

CFATS

PVIF @ 28%

PVS

2010-11

58.33

0.781

45.55

2011-12

145.81

0.610

2012-13

92.92

0.476

44.22

2013-14

97.49

0..372

36.26

2014-15

240.17

0.291

69.88

Total

284.85

Intial investment

470.00

NPV

-185.15

88.94

The above NPV is negative.

Statement showing calculation of NPV @ 28% under IRR method

(Rs IN MNS)
55

YEARS

CFATS

PVIF @ 28%

PVS

2010-11

58.33

0.757

44.15

2011-12

145.80

0573

83.54

2012-13

92.92

0.434

40.32

2013-14

97.49

0.329

32.07

2014-15

240.17

0.249

59.80

TOTAL

259.88

Less intial
investment
NPV

470.00
-210.12

NPV IS NEGATIVE
ANNUITY LIES BETWEEN 28% AND 32%
Net present value of lower rate
IRR = Lower rate + ------------------------------------- x Difference in rates
Difference in present value
Cash inflows.
=

28+

284.85- 470.00
284.85- 210.12

28+

185.15/ 74.73

X4

IRR = 38%

56

( 32-28)

ACCEPT REJECT CRITERION:

IRR is the maximum rate of interest, which an organization can afford to
pay on capital invested in, is accepted if IRR exceeds the cutoff rates and
rejected if it is below the cutoff rate.
The cutoff rate of BEVCON WAYORS IS 9% which is less than the IRR
i.e 38.00 Hence the acceptance of project is quiet a good investment
decision taken by management.

3. PROFITABILITY INDEX: (BCR OR PI)

Profitability index method is also known as time adjusted method of

evaluating the investment proposals. Profitability also called as benefit cost ratio
(B\C) in relationship between present value of cash inflows and the present value
of cash out flows. Thus
Present value of cash inflows
Profitability index = -------------------------------------Present value of cash outflows.
(OR)
Present value of cash inflows
Profitability index = ----------------------------------------Initial cash outlay

CALCULATIONS OF BCR:
STEP1: Calculations of cash flows after taxes
57

STEP2: Calculations of Present values of cash inflows @ 8%.

STEP3: Application of the formula.
Statement for calculating of benefit cost ratio
YEARS
2010-11
2011-12
2012-13
2013-14
2014-15

Profitability index

CFATS
58.33
145.80
92.92
97.49
240.17
Total

PVIF @ 9%
0.917
0841
0.772
0.708
0.649

Present value of cash inflows

= -------------------------------------Initial cash outlay.

472.71
= -----------------470.00
Profitability index = 1year

58

= 1.00

PVS
53.48
122.61
71.73
69.02
155.87
472.71

ACCEPT-REJECT CRITERION:

There is a slight difference between present value index method and

profitability index method. Under profitability index method the present value of
cash inflows and cash outflows are taken as accept-reject decision.
i.e. the accept reject criterion is:
If Profitability Index

> 1 (ACCEPT).

Profitability Index

< 1 (REJECT).

The acceptance of by the management is evaluated through

Profitability Index method of as the PI > 1 (i.e. 1.00)

62

CHAPTER V
FINDINGS & SUGGESTIONS

63

FINDINGS
1

It is observed that company is able to increase the profits from year to

year continuously.

2 Even the gross profits from the year 2004-09 were consistently in
increasing mode.

3 It is observed that net worth of the company is considerably in good

mode.

4 By source and application of funds it is known that the company is

increasing its operations.

64

SUGGESTIONS
1. Various developments are taking place in the chemical industry so to pace
with the technological developments the company has to develop the full
fledged research department.
2. Company need to control operating expenses which may affect the
profitability of the firm.

3.

Management need to tap the opportunities in the industry which enhance

the growth of the company.

4. In respect of service activities the system of recording of receipts and

issues and delivery of items were considerable and need to be much
effective.

65

ABBREVIATIONS

PI

Profitability index.

CB

Capital budgeting

CFS

Cash flows.

CCFS

Cumulative cash flows.

EAT

Earnings after tax.

EBIT

Earnings before investment and tax.

CFAT

Cash flows after tax.

PVS

Present value of cash flows.

PVIF

Present value of inflows.

PBP

Pay back period.

ARR

Average rate return.

NPV

Net present value.

IRR

Internal rate return.

B/C

Benefit cost ratio.

66

BIBLIOGRAPHY

Prasanna Chandra, 2006, Financial Management Theory

and Practice,
6th Edition, Tata McGraw Hill.

I.M. Pandey : Financial Management, Vikas Publishers.

Brigham, E.F. and Ehrhardt.M.C., 2006, Financial

Management Theory and Practice, 10th Edition, Thomson
South-Western.

Khan M.Y., and Jain.P.K., 2007, Management Accounting,

IV edition, Tata Mc Graw Hill, New Delhi.

WEBSITES

www.google.com
www.Investopedia.com
www.wickipedia.com
www. bevcon wayors .com

67

68