52898062 Summer Inplant 2007 Preeti Desai

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The West Coast Paper Mills Ltd.

K.L.E. SOCIETY’S

INSTITUTE OF MANAGEMENT STUDIES AND

RESEARCH,HUBLI – 580031

MASTER OF BUSINESS ADMINISTRATION(Recognized by AICTE, New Delhi and Affiliated to Karnatak University, Dharwad)

A PROJECT REPORT ON

“Analysis of Capital Budgeting And

Investment Decisions”

At“The West Coast Paper Mills Limited, Dandeli”Submitted in partial fulfillment of the requirement of

Master of Business AdministrationKarnataka University, DHARWAD

2006-2007

COMPANY GUIDE INSTITUTE GUIDE

Mr. R.D.SARDA Prof. Mona Agarwal WCPM LTD., Dandeli Faculty in Finance

SUBMITTED BY;

Ms. Preeti D. Desai

Exam No: MBA06002057

KLES’s INSTITUTE OF MANAGEMENT STUDIES & RESEARCH, HUBLI 1






DECLARATION

I the undersigned have completed the project entitled “Analysis of Capital

Budgeting and Investment Decisions” undertaken at “THE WEST COAST

PAPER MILLS LTD., DANDELI” Submitted in partial fulfill of the requirement

for the award of the Degree in Master of Business Administration to the

Karnataka University, Dharwad.

The project work is original & the conclusions drawn are based on the data &

information collected by me.

Place: Hubli

Date: (Preeti D. Desai)





ACKNOWLEDGEMENT

This is to express my sincere gratitude to all those who have helped me for the

successful completion and presentation of this project report.

I am profoundly thankful to our Director Dr. M. M. Bagali for his encouragement in

bringing out this Project Report.

My sincere thanks to Shri S K Bangurji, Chairman, The West Coast Paper Mills

Ltd., & Shri. Kanhaiya Lal Chandakji, Executive Director, The West Coast Paper

Mills Ltd., for permitting me to undergo practical training in their company.

I wish to record my sincere thanks to Shri. Umakant A. Pai (Manager-Personnel) for

helping me to carry on my project.

I am deeply indebted to Shri. R. D. Sardaji, (Asst. Vice President-Accounts &

Finance) The WCPM Ltd., for his valuable information and guidance.I am indebted to Shri. Suket Parwal (Manager-Cost Accounts & Finance) and

Shri.Vitthal S. Bang (Internal Audit Officer) for their valuable suggestions and

guidance without which the project would not have been completed.

I am thankful to Shri. Samarth(HR Manager) and Shri. Rakesh Verma for their

valuable information and help.

My thanks due to Prof. Mona Agarwal, Institute Guide for her kind & valuable

suggestions in bringing out this project report.

I sincerely acknowledge the help received from all the employees in collecting data

and information and cooperation in completing this project.

I am highly indebted to my parents and friends for their valuable help, suggestions

and support throughout the preparation of this Project Report.





TABLE OF CONTENTS:

SL. NO.CONTENT PAGE NUMBERS

1 Executive Summary 1-2

2Objectives, Methodology and scopeof the study

3-4

3. Introduction to the topic 5-6

4.Industry Profile 7-8

5. Company Profile 9-35

6. Theoretical Aspects of CapitalBudgeting and Investment Decisions.

36-53

7.Capital Budgeting and InvestmentDecisions at WCPM.

54-57

8. Analysis 58-70

9. Findings 71

10. Recommendations 72

11.Conclusions 73

12. Limitations of the study 74

13.Bibliography 75





EXECUTIVE SUMMARY

Capital assets are expensive, have a long life, can lock in an organization in terms of

alternative or emerging technology and have cost streams that involve the future costs

of financing as well as the present.

The total cost of a capital asset over time may include sizeable operating expense. Its

acquisition can distort operational planning if not adequately considered at the

planning phase. As such, capital requires some special treatment both from the

budgeting and accounting perspective.

A capital budget is a plan for the acquisition of buildings and equipment that will be

used by the organization in one or more years beyond the year of acquisition. This is

actually both a budget and a plan: often future year expenditures are not listed for

approval, but for information, while the current or upcoming year is often moreconcrete and detailed, intended to be the actual expenditures for the period.

“Analysis of Capital budgeting and investment decisions”- a study undertaken at

the West Coast Paper Mills Ltd., Dandeli, to know the ompany’s present & past

rational decisions taken for investments in projects and to analyse capital budgeting

practices followed.

My Objective was to study the capital budgeting evaluation techniques and how the

time value of money and cost of capital is being considered while making evaluation

decisions.

Methodology used are Primary data which were collected by interacting with the

company officials and secondary data were collected from company’s websites and

other referance books.







“TITLE OF THE PROJECT”

“Analysis of Capital Budgeting and Investment Decisions at

WCPM Ltd., “Dandeli.

OBJECTIVES AND SUB-OBJECTIVES

OBJECTIVE

To know what is Capital Budgeting & to assess the factors to be considered when

making investment decisions.

SUB-OBJECTIVES

• To study the importance of Capital Budgeting in making decisions.

• To outline the steps involved in Capital Budgeting & planning investment

decisions

• To analyze the evaluation methods for capital budgeting decisions.

• To know the concept of cost of capital.

• To know the concept of “Time value of Money”.





METHODOLOGY:

Data collection:

There are two types of data.

1. Primary data

2. Secondary data

1. Primary data:

Primary data are the data’s collected for the first time and are not available in the

secondary source. The necessary relevant information has been collected throughdiscussions with the concerned department people.

2. Secondary data:

Secondary data are the data’s that are developed for some purpose other than

helping to solve the problem at hand.

The data collection method in this project is of by using the secondary sources of

data such as company’s annual reports, balance sheet, Profit and Loss account.

SCOPE OF THE STUDY:

In this project report an attempt is made to understand the Capital Budgeting &

Investment Decisions followed by the West Coast Paper Mills Ltd., Dandeli. The

study is also made to understand investment decisions pertaining to the financial

position & result of operation.





INTRODUCTION TO THE TOPIC

Capital Budgeting decisions pertain to fixed/long-term assets which by definition

refer to assets which are in operation, and yield a return, over a period of time,usually, exceeding one year.

Capital Budgeting is the process of evaluating and selecting long-term investments

that are consistent with the goal of share holders (owners) wealth maximization. They

involve a current outlay or series of outlays of cash resources in return for an

anticipated flow of future benefits. These benefits may be either in the form of

increased revenues or reduced costs.

Budgets are an important tool of profit planning. Budgeting, as a tool of planning, is

closely related to the broader system of planning in an organization. Planning

involves the specification of the basic objectives that the organization will pursue and

the fundamental policies that will guide it.

IMPORTANCE

Capital Budgeting decisions are of paramount importance in financial decision

making. In the first place, such decisions affect the profitability of a firm. They also

have a bearing on the competitive position of the enterprise mainly because of the fact

that they relate to fixed assets. Fixed Assets represent, in a sense, the true earning

assets of the firm. They enable the firm to generate finished goods that can be

ultimately being sold for profit. It determines the future destiny of the company. An

opportune investment decision can yield spectacular returns. On the other hand, an ill-

advised decision can endanger the very survival even of the large firms.

Capital Budgeting involves costs, & the majority of the firms have scarce capital

resources. This underlines the need for thoughtful, wise & correct investment

decisions, as an incorrect decision would not only result in losses, but also prevent the





firm from earning profits form other investments which could not be undertaken for

want of funds.

The following report is the outcome of two month educational study on Capital

Budgeting & Investment Decisions undertaken at The West Coast Paper Mills Ltd.,

Dandeli.







INDIAN SCENARIO

Indian industries contribution to the global paper production is presently just 2%. This

offers a good potential for the paper makers in India. The signs are already visible asthe industry is growing at a faster rate in India (around 5% per year) than in rest of

the world (around 3%). The role the government is crucial in the Indian paper

industry as it plays the role of regulator, supplier (the wood supplying forests are

owned by the government) and the buyer (government is the single largest buyer of

paper).

The domination of small paper mills was high in India till nineties. But now these

have faded into oblivion, as they did not have the economies of scale. As compared to1995’s production- 2.7 million tons- a growth of 5% can be reported for 1996. In this

year the government made radical changes in the import tariffs by reducing the duty

in paper. Further the minority slashed down customs duty on the other papers from 60

to 20 percent and the newsprint was allowed to be imported at zero percent duty.

As a result, traders started importing writing, painting and coated variety of paper in

huge quantities at zero percent duty. Due to prevailing depressed international trade,

imported material was cheaper as compared to the Indian material and also

availability was an additional benefit of credit which ran into months at a significant

low rate of interest. Thus price took a downward trend and inventories started piling

up.

However the demand growth for paper and paperboard is stable. The growth rate for

the different variety of paper and paperboard is witnessing the structural changes as a

major paper manufacturers plan and execute consolidation/restructuring measures.





PROFILE OF THE WCPM LIMITED

The West Coast Paper Mill Limited came into existence on 22.03.1955. This Mill islocated at Dandeli in the middest of forest area of Uttar Kannada district of

Karnataka. Dandeli is 56kms from Dharwad and from Pune-Bangalore Pune highway

No.4 31kms from Alnavar railway station on Miraj – Bangalore Network.

In 1956 the factory started with an authorized capital of Rs.5 crores and the trial

production commenced with effect from 18th November 1958. Shri Morarji Desai,

Hon. Finance Minister, Union Government has inaugurated the factory on 19 th May1959. There after regular production continued.

The availability of basic raw material like Bamboo and the wood in abundance and

the availability of water in al seasons from the Kali river and the railway link to

transport raw materials as well as finished products promoted the promoters to set up

this huge plant in this remote forest area.

Bangur- Somani Groups promoted the West Coast Paper Mills Ltd. It is one of the

renounced and reputed companies in the paper industry. It is one of the large- scale

companies in India.





BRIEF HISTORY OF WEST COAST PAPER MILLS LTD.,

The mill is the brain child of Shri. A.D.Chowdari, when he visited Dandeli, he found

that Dandeli could host a good paper mill of moderate capacity production. His

conceptualization crystallized into the establishment of WEST COAST PAPER

MILLS LIMITED. An incorporated company under the Indian Companies Act 1914,

with its registered office at first in Mumbai and later it was shifted to Dandeli. During

those days there was no rain throughout the year and there was no road link to any

place. After some development there began a single bus to Hubli in a day.

The company was promoted by Shri Digvijay Cement Company limited Sikka,

Gujarat state in 1955. Originally the plant was designed to manufacture 18000 MT

per year of writing, printing and packaging paper. The trial production started in

November 1958 and commercial production from may 1959. The company was

granted license in December 1964 for 45,000 MT/P.A. The company also

implemented the crash programme in 1974 to increase production capacity to 60,000

MT/P.A. 1974 to increase production capacity to 6,000 M.T. Again the license

capacity was re-endorsed for 69,000 MT/PA in November 1991 on the basis of actual

production. The paper industry has been de-licensed from July 1997. The installed

capacity is now about 1, 20,000 MT.

West Coast Paper Mills is not the first industry at Dandeli. In the year 1927, Dandeli

Ferro Alloys was started and later after a decade in the 1947, Indian Plywood’s

Limited was started. Yet another decade later WCPM was started to stand against

industrial establishment in this region. In the year 1957, the company production was

started with a capacity of 18,000 tonnes of paper per year. Gradually in the year

1959, the company further stepped up its production to 60,000 tonnes per year.

On the manpower part in addition to West Coast Paper Mills there were also major

industries like Ballarpur Industries producing vital chemicals required for paper plant,

water treatment chemicals rendering employment potential in this region and





establishment of Kaiga Nuclear Plant Project etc. , have been additional source of

employment with this background, the Karnataka Power Corporation, project work at

Ganeshgudi, Ambikanagar, Bommanahalli pickup dam etc. has provided to the progress of this part of north Kanara district.

Despite these challenges, West coast paper mills has consciously decided to make the

biggest investment in its existence in commissioning a 1,20,000 tonnes per annum

paper plant and a 2,40,000 tonnes per annum pulp plant with supporting infrastructure

in the recent days. The expected production is around 3,20,000 tonnes per annum.

BUSINESS SEGMENT REVIEW

West Coast Paper Mills has two businesses

a) Paper

b) Telecom Cables

Paper: Its paper plant is situated at Dandeli in Uttara Kannada district in Karnataka

with an installed capacity of 1, 06,000 TPA of paper and paperboard and 57,750 TPA

of duplex board.

Telecom Cables: The Company manufactures optical fibre (83,500 km JFTC

capacity) and jelly-filled telecom cables (15,42,000 ckm capacity) at its plant in

Mysore.

The West Coast Paper Mills Ltd., although dependent heavily on trees for supply of

raw materials, remains one of the foremost ecology conscious concern in the country.With the threats of ozone depletion and global warming, the company has taken a

number of steps to protect ecology as well as to ensure steady supply of raw material.

The natural forests in India being under tremendous pressure, the Company has

started a programme of distributing quality seedlings of fast growing species like

Eucalyptus, Casurina, Acacia and Subabul (which are the raw materials of the plant).

The beneficiaries are owners of low yielding local agricultural lands in the vicinity of





the plant, i.e. Uttar Kannada, part of Shimoga, Belgaum and Dharwar districts. The

target is to distribute to the tune of 4 million quality seedlings.

The Company has implemented Clonal Technology to achieve the following:

• Supply genetically high quality planting stock.

• Improve land productivity and yields from pulpwood plantation

• Provide fuel wood etc. for local use

• Improve the economic conditions of the growers through clonal plantation

• Encourage overall tree forming practices.

The company has been playing a very active role in developing the backward district

of Uttar Kannada. Stabilizing fly-ash dumps by biological means, developing better

drainage systems, organizing education from primary to graduate, including pulp and

paper technology course, facilities for needy children, organizing various social

awareness programmes etc. are some of the steps it has taken to manifest its

commitments to social and environmental causes.

COMPANY’S VISION:

To excel in serving the growing demands of paper and paper products worldwide and

enhance shareholder value with consistent and sustained performance.

QUALITY POLICY OF THE COMPANY:

The company is committed to provide quality products and services at optimum costand to continually improve the quality management system through TQM approach

for ensuring customers satisfaction on a sustained basis.





ENVIRONMENTAL POLICY OF THE COMPANY:

The West Coast Paper Mills Ltd., Dandeli, Karnataka is committed to:

a) Comply with all applicable environmental legislation.

-

b) Continually improve upon the environmental performance by:

i) Afforestation by social and farm forestry on degraded and unproductive lands by

clonal technology supported by micro and macro propagation.

ii) Recycle critical resources like water, lime mud and pulp mill fibrous solid waste.iii) Set environmental objectives and targets and periodically review them

iv) Upgrade all plants with state of the art technologies and operating practices to

minimize generation of pollution at source.

v ) Generate and use energy efficiently and to become self sufficient in power.

vi) Green belt development to protect and preserve the ecosystem.

ACHIEVEMENTS OF THE COMPANY:

• First in Asia to install twin-wire Papriformer paper machine.

• First in India to use synthetic wire on paper machine.

• First in India to install Drum Chipper (supplied by Pallmann, Germany), Disk

Refiners, Rotary Limekiln to reburn lime sludge, 330 TPD Sids Chemical

Recovery Boiler and FBC Coal-fired Boiler.• First in India to establish and use sulphuric acid as a protective agent in

conventional bleaching.

• First in India to use 100% hardwood in place of 100% bamboo.

• First to have well equipped Research Centre attached with a paper mill.

• First to have captive plantation.

• First to have chemical Recovery Boiler of 500 Solids per day capacity.





PRODUCT CLASSIFICATION:

Paper is classified into two heads (based on its end use) – a) Writing /printing

b) Industrial and speciality grades.

The industrial variety accounts for high volumes and holds the potential for above

average growth ; the writing/printing category provides high margins; specialized

grades provide increasing volumes and high realizations.

Writing/printing paper:Classified into creamwove, maplitho (branded copier) and coated varieties.

Industrial paper:

Classified into Paperboard and Kraft; Paperboard can be subdivided into Duplex

Board with Grey Back, White Board and MG Poster/Board.

Speciality paper:

Comprises security and tissue paper.

Paper segment Characteristics Suited

for

End use Demand drivers

Writing and

printingCreamwove Non-surface-sized

wood free paper

Black

and

white printing

Text books and

notebooks

Government

accounts for a

sizeable shareof demand.

Maplitho Surface-sized

paper

Printing Premium

notebooks,

writing pads,

diaries, calendars

and annual

reports.

Demand is

linked to

economic

growth and

national

literacy.Coated paper Surface coated High Printing publicity Demand





with a solution

facilitating its end

use

quality

printing

material, books,

magazines and

office stationery

among others.

influenced by

corporate

margins and

health of thenational

economy.

Industrial

paper

Kraft paper Brown paper Packaging purposes

Corrugated boxes and

carry bags

Driven by industrialgrowth from

horticulture,textile,food,

and edible oils,

consumer durables and

FMCG businesses.Duplex

Board

Combination

of two or

more layers

of different

furnish

Packaging

purposes

Small

cartons for

the retail

market

Driven by the industrial

demand as a packaging

material from the

pharma, cigarettes

hosiery and matchbox.

Demand





Manufacturing Process of Paper:

The main raw materials used are eucalyptus, bamboo & other tropical woods.They are chipped & cooked in bath digester using a conventional surface process. The

chips are cooked at about 160 degree centigrade temp using steam & cooking

chemicals like caustic soda & sodium shipmate etc.

The unbleached pulp obtained from this washed, screened & cleaned to

remove impurities & also to recover spent cooking chemical. The clean unbleached

pulp is either pumped to paper machine for producing unbleached varieties of paper or bleached in a four bleach plants & then bleached pulp is pumped to paper machine

for manufacturing varieties of papers.

The spent chemical are processed in chemical recovery section where in the

chemicals are recovered using burnt time. Vast heat is utilized for generating steam in

the vast heat recovery boiled unbleached & bleached pulp from pulp mill is taken to

stock preparation section where refining is carried out necessary additives are addedto make the stock suitable for manufacturing paper, the stock is then pumped to

paper machine comprising to wire part, press part, & dryer section.

The paper thus produced is wound on rewinder for sitting in to sheets &

further finished &pulled in the finishing section.





OTHER ESTABLISHMENT AND SISTER CONCERNS - MILE

STONES

1955: Promotion of West Coast Paper Mill Limited

1959: Commercialization of Operation

1972: The commissioning of a well equipped R&D Centre managed by a well

qualified team and recognition by the Department of Science & Technology,Government of India

1989: Amendment of Karnataka Forest Act, leaving the Company without an assured

supply of Bamboo from 1989. The Company develops a new technology that

eliminates the need of bamboo in paper making. Recipient of the Award for higher

productivity and energy conservation in the industry.

1994: Completion of the first phase of a modernization cum diversification

programme of rebuilding of paper machine adopting state of the art technology and

installing modern machinery for the manufacture of value added speciality paper.

1995: Installation and commissioning of a 75 TPD Duplex Board Machine helping

develop a new product light weight coated Duplex Board through the use of eco-

friendly recycled fibres.

Commissioning of Nine DG sets of 1 MV each to augment captive power generation.

1998: Commissioning of a 250 TDP bleach plant to make high bright paper.

Commissioning of one 3.8 MW capacity multi-fuel based Power generating set for

power self sufficiency.

1999: Commissioning of one 4.0 MW Multi-fuel based power generating set with a

complete self-sufficiency in power requirement.





2000: Installation of the falling film evaporators a modern evaporation technique for

steam recovery.Commissioning of a 4.0 MW Multi-fuel based power plant. Rebuilding of the paper

machine for enhancing capacity by 5000tpa.

2001: Installation of new 500 TPD Chemical recovery Boiler for the generation of

steam and power.

2002: Installation of a 100 TPD Duplex Board Machine and a 350 TPD Brown Stock

Washing equipments.

QUALITY CERTIFICATIONS:

ISO 9001 Certification

The Company has been certified to ISO 9001 (2000) Quality Management System

International certificate by Det Norske Veritas, The Netherlands, effective from

November 2003. This certificate was valid up to November 2006.

The conformance of departmental processes to ISO 9001 (2000) QMS international

standard is due for re-assessment by Det Norske Veritas in November 2006 to

validate and grant further continuance of the certificate up to November 2009. The

necessary documentation, training and internal audits are being geared up for the

recertification audits scheduled in November 2006.

ISO 14001 (2004) EMS Certification:

The Company has been certified the ISO 14001(2004) Environmental Management

System international certificate effective from 22nd January 2006 for a period of three

years. The various departmental processes to meet conformity to this international

standard are being maintained and internally assessed at regular intervals to evaluate

effectiveness and sustainability.





OHSAS 18001 (1999) Certification:

The Company has embarked upon preparatory phase for getting certified toOccupational Health and Safety Assessment Series (OHSAS) 18001 (1999)

certificate. The preparatory work has been initiated for department wise

documentation, training and auditing in conformity with the requirements of this

international standard.

The necessary expertise and hands-on training had been planned and being carried out

in collaboration with Det Norske Veritas (DNV) Certification Body. The company

shall offer implementation of OHSAS 18001 (1999) system to DNV for pre-assessment in August 2007 and based o their findings, the final certification audit

shall be planned.

CORPORATE SOCIAL RESPONSIBILITY:

The company, over the past 50 years, has formulated its own philosophy of

discharging its social responsibility towards its area of operation in particular and thecommunity and environment around in general. As part of this continuing policy and

philosophy, the Company has initiated several proactive measures of social and

community service. These initiatives include the sponsoring and supporting of

Dandeli Education Society, which imparts quality education to thousands of pupils

and students in and around Dandeli from the pre-primary level to the post graduation

courses. The society’s schools and colleges have figured prominently on the

educational map of the state and the country with high academic standards, excellentdiscipline, fine infrastructure and committed faculty members.

The Company maintains its own residential colony around the mill site with decent

and adequate civic facilities and amenities such as roads, lights, water supply,

shopping complex, a full fledged hospital with a modern operation theatre, temples

community hall, auditorium etc. Rural Health services are provided to the surrounding

needy people of the villages with regular visits of doctors, free health check up and

medicines.





The company has also taken up the responsibility of providing drinking water supply

to near by villages through pipes, jointly with the government agencies. In addition to

these, the company continues to fund and support community and rural development projects, social service clubs, local educational institutions, a public library, medical

camps organized by government, semi-government and NGOs.

CORPORATE INFORMATION:

Board of Directors:

Shri S.K.Bangur, Chairman & Managing Director

Smt. Shashi Devi Bangur Shri V.N.Somani

Shri R.N.Mody

Shri C.K.Somany

Shri P.N.Kapadia

Shri Bodhishwar Rai

Shri Saurabh Bangur

Shri K.L.Chandak, Executive Director

Management Team:

Paper and Duplex Board Division

Shri B.S.Mundra, President (Operations)

Shri Vimal Kishore, President (Technical)

Shri J.K. Mandalia President (Corporate)

Shri V. Subbaih, Vice President (Marketing)

Telecom Cable Division

Shri V. Bangur, Chief Executive Officer

Shri M.K. Sethi, Vice President (Works)

AVP (Finance)& Company Secretary

Shri P.K.Mundra





Bankers:

Central Bank of IndiaOriental Bank of Commerce

State Bank of Mysore

Syndicate Bank

ICICI Bank

EXIM Bank

Auditors

Batliboi & Purohit

Chartered Accountants

Cost Auditors

Shri S. Sankaranarayanan

Cost Accountant

Legal Advisors

Khaitan & Co.

Registered Office

Bangur Nagar, Dandeli-581325

District. Uttar Kannada, Karnataka

Ph : 08284 231391-395

Fax : 08284-231225

E-mail : [email protected]

Corporate Office

Chandra Kiran, 4th floor, 10-A Kasturba Road

Bangalore-560 001

Ph: 080 22231828-1837, 22211760, Fax: 080 22231838

E-mail: [email protected]





DEPARTMENTAL STUDY:

PURCHASE DEPARTMENT:

Purchase Department plays an important role in management of the company. Any

big concern has a separate department known as purchase department. The efficiency

of this department can save more money by purchasing the right quality of items at

the right time and at a right price. This department is under the charge of purchase

officer and he has a staff under him to assist in carrying the various activities of the

department. This department is of great importance as the company has to perform all

its activities efficiently and smoothly.

The Purchase Officer has to take decisions regarding all the purchases of the

company. He has to select the right suppliers, the right quality of material and the

right quantity required for a particular period. The purchase officer follows the

described procedure for making the purchases of the company as and when this

department gets indent from the stores department or from consuming department

gets indent from the stores department for procurement of the items. The department

studies the indent and then it takes necessary steps to procure the items or material

required. The company has two sources of supply. One is external supply and the

other internal supply i.e. from its own workshop.

Procedure followed for purchasing the items:

1. Purchase activity shall be initiated after receiving indents from stores.

2. On the basis of indents, enquiries are floated on the approved sub contractors

or per decision taken by manager

3. Offers from supplies based on enquiry received either on phone or by

personal approach or some time in writing

4. Evaluation of an offers are done

5. To negotiated with suppliers for finalization of best possible rate the

proposals are kept for approval for high value orders.

6. Placement of order: After having scrutinized the details, the same is

communicated immediately to the party for immediate action. Then purchase

orders are mailed.





The Inventory Carrying Cost:

Storage Cost: 5%

Rate of Interest: 12%Wastage: 2%

Sundry Expenses: 2%

STORES DEPARTMENT:

It is a basically a service department. Stores department is maintained based on

nature of product and organization. They maintain the spares for differentdepartments like pulp mill, power house.

• The foremost objective of the store is to ensure materials at right

time so that there should not be any hindrance or stoppage of work

due to shortage of materials.

• The second objective of the stores is that the materials should be

arranged in a proper fashion and well preserved.

• Economy in investments.

• Better security arrangements.

• Less storage space.

The department has to perform various important functions which are as

follows.

a) Fixing code number to each material.

b) Raising indents as and when needed.c) Maintaining permanent card and stock card.

d) Issuing materials against issue vouchers raised by consuming departments.

e) Receipt and Inspection.

In general,

1) Visual Inspection: the goods which are bought from different places

should be checked whether it is in good condition or whether it is in a

damaged condition, otherwise insurance can be claimed.





2) Check the challan for quantity.

3) Inspection: Inspection should be done to know the materials brought

should be accepted or rejected.4) Storage of the accepted items. Rejected items should be stored

separately.

5) Rejected items should be sent back and asked to replace.

In the WCPM stores department is divided into following sections.

1. Machinery spares parts stores.

2. General stores

3. Chemical department

4. Stores receipt department

5. Automobile spare parts

INTERNAL AUDIT:

It is mainly concerned with checking the policies and practices of all the departments

within the organization, whether correct rules and regulations have been complied

with or not. It also suggests if any changes are to be made in any practices of the

department. Then the top management will decide whether the suggestions made by

the Internal Audit department are to be implemented or not.

External Auditors are different from internal auditors. Internal auditors will check

only about the internal policies of the organization but external auditors will be

appointed by government and they are responsible to check the statutory

requirements, whether they are complied by the company or not.

Basic Principles of internal audit:

1. Integrity, Objectivity and Independence

2. Confidentiality

3. Work performed by others.

4. Documentation

5. Planning

6. Evidence

7. Reporting





ACCOUNTS DEPARTMENT:

The hierarchy is as follows in the accounts department is as follows

Assistant Vice President

Accounts & Finance

Senior Manager

Accounts

Manager

Accounts

Section Officer

Senior Accounts Assistants

Accounts Assistants

The Accounts Department deals with all financial aspects of the firm. It is the main

department responsible for maintaining all accounts of the company. All Receipts &

expenditures relating to the company are recorded. It is the main department which

prepares budgets and assists management in investment decisions.





The overall functions performed by Accounts Department are:

• Preparing the Balance Sheet, P/L A/c, & other necessary A/c’s at the end

of the Accounting or Financial Year.• Maintaining cash &bank transactions.

• Pay slips.

• Preparing Payment, Receipt, & Journal Vouchers File.

• Dealing with Loans and other financial matters.

• Preparing Branch A/c’s of different branches.

• Dealing on T.D.S.

• Preparing Monthly Trial Balance.• Framing of Annual Report’s, etc.

COST ACCOUNTING SYSTEM

The costing department is essentially a link between the production department and

the management. The company is manufacturing different varieties of paper/ paper

board/ Duplex board which requires various types of raw materials and chemicals. A

process cost accounting system is followed upto the pulp stage. Thereafter batchcosting system is followed. Budgetary Control System is in vogue.


Processes

Pulp making fromraw materials

Paper makingFrom pulp

ProcessCosting

BatchCosting




When the material is received, stores inward receipt is prepared by the stores

department, checks the material and after approval, it is recorded in the stock cards.

Chemicals are tested in the laboratory for its quality. Valuation is done by the storesaccount department. The indenting departments draw the materials through the issue

vouchers. A monthly statement of consumption is prepared accordingly.

Detailed records for production and consumption of water, steam and power are

maintained production and service cost center wise classification of salaries and

wages are prepared.

The works overhead have been absorbed on the conversion cost basis in different

processes and service centers. The administration and selling and distribution

overheads are apportioned/ absorbed to final products on pre-determined basis i.e.,

machine hours, tonnes etc.

As such system followed can be considered as adequate to determine correctly the

cost of the products.

Following are the daily reports sent to the Costing Department

a. Raw materials yard report

b. Pulp Mill Operation

c. Production Report

d. Power house report

e. Steam consumption report

f. Energy generation and consumption reportg. Chemical Recovery

h. Duplex Board

The above are the different reports prepared in their respective departments daily and

are later forwarded to costing department. There are also some departments which

send their reports on monthly basis. For example, finishing house will take all the

reports into consideration. Daily production report is made in this department whichhelps the managers to take decisions for the future production.





HUMAN RESOURCE DEPARTMENT

The Establishment department is the department where the new employees arerecruited. The commercial and technical department sends a internal memo letter

regarding the type of employee needed. After receiving the letter the establishment

department gives the advertisement and details in the newspaper and other sources

and the selection process is carried on.

The procedure for the selection of candidate is as follows:

1) Recruitment

2) Call Letter 3) Interview

4) Selection

5) Offer of appointment

6) Training

Sections of Human Resource/ Industrial Relations department are

1) Time office

2) Industrial Relation

3) Welfare

4) HRD

1) Time Office

The time office department deals with the time keeping of various employees in

the factory. Every worker should be punctual and proper attendance of the worker

is a must.

At WCPM, employees are provided with the punch cards. They have to punch the

cards in the punching machine while entering the premises and also while leaving

the premises after the working hours.

Time office takes care of the following functions apart from the above

1) Record Maintenance

2) Pay Role

3) Wage and Salary Administration

4) Leave

5) Maintenance of Registers





2) Industrial Relations

Also called as the personnel department, is mainly concerned with the maintenance of

the record of individual employee. Each detail regarding the employee’s personnel aswell as academic and employment is filed.

It includes marks cards, appointment letter, promotion letter, performance appraisal

report and so on.

3) Welfare

The facilities organized for the welfare of the employee’s can be divided into two

categories.

1) Statutory Welfare Facilities

Statutory welfare facilities are those which are to be enforced compulsorily

because of the directives of the government. The facilities which are obligatory on

the part of employer to his employees are drinking water facility, washing facility,

dress room, canteen, first aid, etc.

2) Non Statutory Welfare Facilities

The non statutory welfare facilities are those which are undertaken by the

employer, governmental agencies and the private welfare organizations. These

facilities include education, housing facility, co-operative society, shopping

complex, banking facility, cultural activities, sports, employer’s club, transport

facility, reading room, loan facility etc.

Training committee

A committee has been formed in order to access, evolve, co-ordinate and meet the

training needs to bring in visible improvements in understanding the shop floor.

Training Requirements

1. The training need has to be spelt out with clarity.

Training can be imparted on any of the following areas

• Technical competencies

• Safety training

• ISO initiatives

• Legal requirements and compliance

• Behavioral aspects







Credit Policies at WCPM

The credit policies include the following:

•

The pay will be given 30 days period for the payment without interest• If the party makes the payment in 15 days then the company will give 3% cash

discount

• If the party makes payment in between 16-21 days then the company will give

1.5% cash discount

• If the party makes the payment within 21-30 days then there is no cash

discount and even the interest will not be charged.

•

If the party makes the payment within 30 days then the company will provide15 days grace period for the payment by charging 21% of interest

• If the party does not make the payment in 45 days then the company will

charge interest for the whole 45 days at the rate of 21%

SALES ACCOUNT DEPARTMENT

Basically the sales account department is accounts related to the sales made by thecompany. A copy of challan or excise invoice is received from the paper godown

department.

Then the trade discount, special discount, additional discount or cash discount

provided to the customers, if allowed, will be mentioned in the customer order. Such

deductions are respectively made.

After deducting all discounts, on the remaining amount Excise Duty of 16% basic

excise and 0.125% cess is charged. Incase the goods are being transmitted outsideKarnataka then CST is also charged

In case the goods are exported the invoice is being prepared in the same manner but

there will be some exemptions provided on the excise duty.

Finally after providing for all adjustments, the commercial invoice is prepared and is

sent to the concerned party or distributor for the payment of goods sold to them.





SAFETY DEPARTMENT

The West Coast Paper Mills Limited considers safety as the main function of their productivity. The Executive Director of the company is considered as occupier of the

company. Apart from that the factory manager is considered as representing occupier.

The Industrial Safety department works under president technical, which is the top

most authority of the production. The safety officer has been appointed as per the

factory’s Act, 1948 Sec 40 B. The qualifications of the Safety Officer are as per

Karnataka Factories Rules 1969 Rule No 88A.

The company is very much interested to eliminate hazards in the work environment.

The following are the tools which are being utilized to eliminate hazards.

1. Safety Survey

2. Intermittent Safety Inspections

3. Periodical Safety Inspections

4. Safety Audit (Internal)

5. Safety Audit (External)

6. Hazard and Operability Study (hazop study)





SWOT ANALYSIS.

Strengths:

•

History of the organization.• Experienced Mill – 45 years.

• Availability of Labor.

• Cheap Labour.

• Loyal Work force

• Employee Attrition rate is low.

• Strong Dealership network

• Quick decision making process.

• Location Advantage: Government policies, State Development Schemes

• Availability of resources.

• Huge domestic consumer base.

• Low cost manufacturing destination.

• Decade old culture in paper manufacturing

Weakness:

• No proper HRD management

• Low safety level

• Brand Management - lacking

• Technological Obsolescence.

• Old thoughts only & no induction of fresh blood in the Company.

•

Delay in getting jobs done.• Logistics problem.

• Need for Empowerment – for the employees.

• Communication process is bad.

• Promotion policy is not good – given on seniority basis & not on performance.

• House Keeping

• Unwillingness of the staff to change to new practices.

• Weak Marketing Team – only focus on sales & not on marketing plans.





• No Strategic Vision.

Opportunities:

•

Technological up gradation• Going in for branding strategy.

• Foreign market expansion.

• HRD management

• Online ordering process.

• Performance based evaluation, Promotion, & increments in the salary.

• Implementation of LAN for connectivity.

• Product expansion.

• Market Expansion – (up country market like In Orissa - interior parts of Orissa

apart from Cuttack, in U.P. market expansion in areas like Allahabad,

Lucknow.

• Planning for Personnel Relations Activity.

• Advertisements for better communication for the market & also for the brand

building exercise.

• The Company can reduce man power by say half, ask the remaining workforce

to give twice the output & pay them double the salary that is paid now – a Co.

can save 25% of the cost directly & also can get a lot of other kinds of

advantages”

Threats:

• Entry of foreign players.

• Excess man power

• Losses in resources – water, inputs, repulping cost.

• Bottom line Erosion.

• Use of best available technology (BAT) by the competitors.

• Product substitutions

• Stringent environment laws as per CREP guidelines.





ENTERPRISE RESOURCE PLANNING:

Managing information is one of the major tasks of a company. In any company,

information is obtained at various levels and is also processed at various levels.

While some information may have relevance only to a particular department or

business unit, most of the information is required to be used or analyzed by more

than one department or business unit before a company finalize an order of

procurement, plans of investments etc. today, most of the companies including

THE WEST COAST PAPER MILLS LTD have adopted Enterprise Resource

Planning

It is normal to find different departments in a company using different standalone

software solutions customized to their specific needs. The Human Resource

department is concerned with the management of employees and their benefits;

the Finance department is concerned with the income and expenditure of the

company and so on.

- West Coast has embarked on an ERP solution to enhance informed

decision making

- Solution to connect all branches, dealers, suppliers across the country

- To enable the company to know what inventory is lying where for timely

allocation

- To enable volumes to be scaled without increasing people

- Rs.250 lakhs ERP solution being commissioned by Tata Consultancy

Service Ltd.

Thus having an integrated system for the company will eliminate the following

problems:-

a) Wastage of time and effort in re-entry of data at various points.

b) Chance of mistakes is more as the data is entered multiple times.

c) Data may look different in different programmes depending on how it

is entered.





THEORETICAL ASPECTS OF CAPITAL BUDGETING AND

INVESTMENT DECISIONS:

INTRODUCTION

The term 'Capital Budgeting' is used interchangeably with capital expenditure

management, capital expenditure decision, long term investment decision,

management of fixed assets, etc. It may be defined as "planning, evaluation and

selection of capital expenditure proposals." Capital budgeting involves a currentoutlay or serves as outlays of cash resources in return for an anticipated flow of future

benefits.

In other words, the system of capital budgeting is employed to evaluate expenditure

decisions which involve current outlays, but likely to produce benefits over a period

of time longer than one year. These benefits may be either in the form of increased

revenue or reduction in costs. Capital expenditure management therefore includesaddition, disposition, modification and replacement of fixed assets.

Capital budgeting involves planning for investment in capital assets such as plant,

machinery and equipment. A choice often has to be made between different assets or

projects and capital budgeting allows financial managers to make a more reasoned

decision. This decision will very much hinge on the Company’s objectives (eg profit

maximization or risk minimization) and on the criteria’s to measure the consequences

of investment decisions (eg the number of years to recover the capital investment, the

rupee effect on profits, the increase in production, the reduction in marginal cost etc.)

Capital investment decisions involve planning, setting goals and priorities, arranging

financing, and identifying criteria for making long-term investments.

There are two types of capital investment projects:

Independent Projects that do not affect the cash flows of other projects







Performance review.

A) Identification of Potential Investment Opportunities:

The capital budgeting process begins with the identification of potential investment

opportunities. Typically, the planning body ( it may be an individual or a committee

organized formally or informally) develops estimates of future sales which serve as

the basis for setting production targets. This information in turn, is helpful in

identifying required investments in plant and equipment.

For imaginative identification of investment ideas it is helpful to

i) monitor external environment regularly to scout investment

opportunities,

ii) formulate a well defined corporate strategy based on a thorough

analysis of strengths, weaknesses, opportunities, and threats

iii) share corporate strategy and perspectives with persons who are

involved in the process of capital budgeting, and

iv) motivate employees to make suggestions.

B) Assembling of Investment Proposal:

Investment proposals identified by the production department and other

departments are usually submitted in a standardized capital investment proposal

form. Generally, most of the proposals before they reach the capital budgeting

committee or some body which assembles them are routed through several

persons. The purpose of routing a proposal through several persons is primarily to

ensure that the proposal is viewed from different angles. It also helps in creating aclimate for bringing about co-ordination of interrelated activities.

Investment proposals are usually classified into various categories for facilitating

decision-making, budgeting and control. An illustrative classification is given

below.

1. Replacement investments

2. Expansion investments





3. New product investments.

4. Obligatory and welfare investments.

C) Decision Making

Under this system, executives are vested with the power to okay investment

proposals up to certain limits.

D) Preparation of Capital Budget and Appropriations

Projects involving smaller outlays and which can be decided by executives at

lower levels are often covered by a blanket appropriation for expeditious action.

Projects involving larger outlays are included in the capital budget after necessary

approvals. Before undertaking such projects an appropriation order is usually

required. The purpose pf this check is mainly to ensure that the funds position of

the firm is satisfactory at the time of implementation. Further, it provides an

opportunity to review the project at the time of implementation.

E) Implementation

Translating an investment proposal into a concrete project is a complex, time

consuming, and risk-fraught task. Delay in implementation, which are common,

can lead to substantial cost overruns. For expeditious implementation at a

reasonable cost, the following are helpful.

1) Adequate formulation of projects:

2) Use of the principle of responsibility accounting:

3) Use of network techniques:

F) Performance Review:

Performance review, or post completion audit, is a feedback device. It is a means

for comparing actual performance with projected performance. It may be

conducted, most appropriately, when the operations of the project have stabilized.

It is useful in several ways:

i) It throws light on how realistic were the assumptions underlying the

project





ii) It provides a documented log of experience that is highly valuable for

decision making

iii) It helps in uncovering judgmental biases

iv) It induces a desired caution among project sponsors.

Importance

Capital budgeting is of paramount importance in financial decision making. Special

care should be taken in making these decisions on account of the following reasons:

Growth: the effect of investment decisions extend into the future and have to

be endured for a longer period than the consequences of the current operating

expenditure. 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 to the firm. On the other hand, inadequate investment in assets

would make it difficult for the firm to compete 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 fir will become more risky.

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 arrangement 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.

Complexity: investment decisions are among the firm’s most difficult

decisions. It is really a complex problem to correctly estimate the future cash

flow of an investment. The uncertainty in cash flow is caused by economic,

political, social and technological forces.

Investment decision though taken by individual concerns is one of national

importance because it determines employment, economic activities and

economic growth.





CAPITAL BUDGET DECISION:

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

selecting ad following up on capital expenditure alternatives. The firm allocates or

budgets financial resources to new investment proposals. Basically, the firm may be

confronted with three types of capital budgeting decisions:

i) Accept-Reject Decision

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

would invest in it; if the proposal is rejected, the firm does not invest in it. In general,

not compete with one another in such a way that the acceptance of one precludes the

possibility of acceptance of another. Under the accept-reject decision, all independent

projects that satisfy the minimum investment criterion should be implemented.

ii) Mutually Exclusive Project Decisions

Mutually Exclusive Projects are those which compete with other projects in such a

way that the acceptance of one will exclude the acceptance of the other projects. The

alternatives are mutually exclusive and only one may be chosen. Mutually exclusive

investment decisions acquire significance when more than one proposal is acceptable

under the accept-reject decision. Then, some technique has to determine the best one.

The acceptance of this “best” alternative eliminates the other alternative.

iii) Capital Rationing Decision

In a situation where the firm has unlimited funds, all independent investment

proposals yielding return greater than some predetermined level are accepted. They

have a fixed Capital Budget. A large number of investment proposals compete for

these limited funds. The firm allocates funds to projects in a manner that it

maximizes long-run returns. Thus capital rationing refers to a situation in which afirm has more acceptable investments than it can finance. It is concerned with the





selection of a group of investment proposals out of many investment proposals

acceptable under the accept-reject decisions. Capital rationing employs ranking of the

acceptable investment projects. The projects can be ranked on the basis of a

predetermined criterion such as the rate of return. The projects are ranked in thedescending order of the rate of return.

Kinds of capital budgeting proposals

1. Replacement / modification of fixed assets - e.g. worn out, obsolete are replaced

at appropriate time.

2. Expansion - involves an addition of capacity to existing production facilities.

3. Modernization of investment expenditure - they make it easier for a firm to

reduce cost and may coincide with replacement decision.

4. Strategic investment proposal - these are capital budgeting decisions which do

not assume that the return will be immediate or measured over a long period of time.

Strategic investments are defensive, offensive and mixed motive decision. The

vertical integration of a firm is an example of defensive investment in which a

continuous source of raw materials is assumed. Horizontal combinations are offensive

investments for they ensure a firm's internal and external growth respectively. Mixed

motive investments are outlays on research and development programmes.

5. Diversification of business - means operating in several markets or firm one

market into another market. It may even amount to changing product lines.

6. Research and development - where the technology is rapidly changing, research

and development area is a continuous activity in any firm. Usually large sums of

money are invested in research and development activities which lead to capital

budgeting decisions.





EVALUATION TECHNIQUES:

There are several methods of evaluating and ranking the capital investment proposals.

The basic approach is to compare the investment of the project with the returnsderived thereof. The following are main methods generally adopted in investment

evaluation.

The methods of appraising capital expenditure proposals can be classified into two

broad categories.

I) Traditional

II) Time adjusted

The latter are more popularly known as discounted cash flow (DCF) techniques as

they take the time factor into account.

The first category includes

i) average rate of return method and

ii) pay back period method

The second category includes

i) net present value method

ii) internal rate of return

iii) profitability index





I) Accounting or Average Rate of Return:

Return on investment method overcomes the deficiencies of payback period methodin the sense that it considers the earnings of a project over its entire economic life.

1. The return on investment is estimated i.e., earnings or profits estimated from an

investment proposal during its economic life, after providing for depreciation and

taxes. It means net profit from estimation are as per the accounting principles.

2. The rate of return is compared with cut off rate as determined by the management.

Cut off rate is the minimum rate of return on investment. It should be generated froma profit which is generally the firm's cost of capital. Cost of capital 15% - cut off rate

of return = 15%. The comparison helps management to rank the various projects and

select the most profitable one. If return on investment proposal is less than the cut off

rate, it is rejected and accepted if it is equal or more than the cut off rate. In case of

mutually exclusive alternative projects, the projects with higher rate of return are

selected.

II) Pay Back Period:

The pay back period /method is the exact amount of time required for a firm to

recover it s initial investment in a project as calculated from cash inflows.

The pay back method (PB) is a traditional method of capital budgeting. It is the

simplest and perhaps, the most widely employed, quantitative method of appraising

capital expenditure decisions. This method answers the question: How many year s

will it take for the cash benefits to pay the original cost of an investment, normally

disregarding salvage value? Cash benefits here represent cash flow after tax ignoring

interest payment Thus, the pay back method (PB) measures the number of years

required for the CFAT to pay back the original outlay required in an investment

proposal.

There are two ways of calculating the PB period. The first method can be applied

when the cash flow stream is in the nature of annuity for each year of the project’s





life, that is, CFAT are uniform. In such a situation, the initial cost of the investment is

divided by the constant annual cash flow:

The second method is used when a project’s cash flows are not uniform (mixedstream) but vary from year to year. In such a situation, PB is calculated by the

process of cumulating cash flows till the time when cumulative cash flows become

equal to the original investment outlay.

Accept- Reject Criterion.

The pay back period can be used as a decision criterion to accept or reject investment

proposals. One application of this technique is to compare the actual pay back with a

predetermined pay back that is the pay back set up by the management in terms of the

maximum period during which the initial investment must be recovered. If the actual

pay back period is less than the predetermined pay back, the project would be

accepted; if not , it would be rejected. Alternatively, the pay back can be used as a

ranking method. When mutually exclusive projects are under consideration, they

may be ranked according to the length of the pay back period. Thus, the project

having the shortest pay back may be assigned rank one, followed in that order.

Evaluation:

The pay back method has certain merits. It is easy to calculate and simple to

understand.

Moreover, the pay back method is an improvement over the Average rate of return

approach. Its superiority arises due to the fact that it is based on cash flow analysis.

The pay back approach, however, suffers from serious limitations. Its major shortcomings are as follows:

The first major short coming of the pay back method is that:

i) it completely ignores all cash inflows after the pay back period. This can be very

misleading in capital budgeting evaluations.

ii) In fact, the projects differ widely in respect of cash flows generated after the pay

back period. The cash flow for project X stops at the end of the third year, while that

of Y continues up to the sixth year. Obviously, the firm would prefer project Y because it makes available to the firm Cash flows of Rs. 12000 in years 4 through 6,





whereas project X does not yield any cash inflow after the third year. Under the pay

back method, however both the projects would be given equal ranking, which is

apparently incorrect. Therefore, it cannot be regarded as a measure of profitability.Its failure lies in the fact that it does not consider the total benefits accruing from the

project.

iii) Another deficiency of the pay back method is that it does not measure correctly

even the cash flows expected to be received within the pay back period as it does not

differentiate between projects in terms of the timing or the magnitude of cash flows.

It considers only the recovery period as a whole. This happens because it does not

discount the future cash inflows but rather treats a rupee received in the second or

third year as valuable as a rupee received in the first year. In other words to the extent

the pay back method fails to consider the pattern of cash inflows, it ignores the time

value of money.

iv) Another failure of the payback method is that it does not take into consideration

the entire life of the project during which cash flows are generated. As a result the

project with large inflows in the later part of their lives may be rejected in favor of

less profitable projects which happen to generate a larger proportion of their cash

inflows in the earlier part of their lives

v) It does not reflect all the relevant dimensions of profitability.

The above weakness notwithstanding the payback period method can be gainfully

employed under certain conditions.

1. Where the long term outlook, say in excess of 3 years is extremely hazy, the

payback method may be useful.

2. Likewise this method may be very appropriate for the firm suffering from a

liquidity crisis. A firm with limited liquid assets and no ability to raise additional

funds, will nevertheless wish to undertake capital projects in the hope of easing the

crisis might use payback as a selection criterion because it emphasizes quick recovery

of firm's original outlay.

3. Payback period method may also be beneficial in taking capital budgeting decisions

for firms which lay more emphasis on short-run earning performance rather than its





long-term growth. In brief, the payback period is a measure of liquidity of

investments rather than their profitability.

4. Finally the payback period is useful apart from measuring liquidity, in making

calculation in certain situations. For instance the IRR can be computed easily by payback period. The payback method is a good approximation of IRR which

otherwise requires a trial approach.

5. It is used as a quick method of approximation in screening proposals.

6. This method makes it clear that no profits arise till the payback period is over. This

helps companies in deciding when they should start paying dividends.

7. This method reduces the possibility of loss on account of obsolescence as the

method prefers investment in short-term project.

Discounted cash flow / Time adjusted techniques

The distinguished characteristic of the discounted cash flow capital budgeting

technique is that they take into consideration the time value of money while

evaluating the cost and benefits of a project. In between firm or another, all these

methods require cash flows to be discounted at a certain rate of popularity called cost

of capital. Cost of capital is the minimum discount rate that must be earned on a

project that leaves are discounted to their present values only on the ground that a

rupee received at a future date is worth less than a rupee received today.

Merits

1. It takes into account all the benefits and costs occurring during the earnings for

profit, for an entire economic life of the project.

2. It takes into account the time factor while evaluating the profitability of a project,

in the sense that they recognize the fact that the value of a rupee received at a future

date is less than its present value.

3. They provide for uncertainty and risk as they recognize the time factor while

evaluating the profitability of investment proposals.

4. They are more scientific and dependable.





Demerits

1. They are complicated as they involve a good amount of calculations.

2. They do not correspond to the accounting concepts while recording costs andreserves.

3. They are not suitable for ranking projects regarding different capital outlay.

Discounted cash flow methods are suitable for evaluating projects when cash flows

are uneven. They are quite valuable for long term capital decisions.

III) Net Present Value:

NPV is found by subtracting a projects initial investment from the present value

of its cash inflows discounted at the firm’s cost of capital.

The cash inflow in different years are discounted (reduced) to their present value by

applying the appropriate discount factor or rate and the gross or total present value of

cash flows of different years are ascertained. The total present value of cash inflows

are compared with present value of cash outflows (cost of project) and the net present

value or the excess present value of the project and the difference between total

present value of cash inflow and present value of cash outflow is ascertained and on

this basis, the various investments proposals are ranked.

Cash inflow = earnings / profits of an investment after taxes but before depreciation

The present value of cash outflows = initial cost of investment and the comment of

project at various points of time

Decision rule

After ranking various investments proposals on basis on net present value, projects

with negative net present value (net present value of cash inflows less than their

original costs) are rejected and projects with positive NPV are considered acceptable.

In case of mutually exclusive alternative projects, projects with higher net present

value are selected. Net present value method is suitable for evaluating projects where

cash flows are uneven.





Merits

1. The most significant advantage is that it explicitly recognizes the time value of

money, e.g., total cash flows pertaining to two machines are equal but the net presentvalue are different because of differences of pattern of cash streams. The need for

recognizing the total value of money is thus satisfied.

2. It also fulfills the second attribute of a sound method of appraisal. In that it

considers the total benefits arising out of proposal over its life time.

3. It is particularly useful for selection of mutually exclusive projects.

4. This method of asset selection is instrumental for achieving the objective of

financial management, which is the maximization of the shareholder's wealth. In brief

the present value method is a theoretically correct technique in the selection of

investment proposals.

Demerits

1. It is difficult to calculate as well as to understand and use, in comparison with

payback method or average return method.

2. The second and more serious problem associated with present value method is that

it involves calculations of the required rate of return to discount the cash flows. The

discount rate is the most important element used in the calculation of the present value

because different discount rates will give different present values. The relative

desirability of a proposal will change with the change of discount rate. The

importance of the discount rate is thus obvious. But the calculation of required rate of

return pursuits serious problem. The cost of capital is generally the basis of the firm's

discount rate. The calculation of cost of capital is very complicated. In fact there is a

difference of opinion even regarding the exact method of calculating it.

3. Another shortcoming is that it is an absolute measure. This method will accept the project which has higher present value. But it is likely that this project may also

involve a larger initial outlay. Thus, in case of projects involving different outlays, the

present value may not give dependable results.

4. The present value method may also give satisfactory results in case of two projects

having different effective lives. The project with a shorter economic life is preferable,

other things being equal. It may be that, a project which has a higher present value

may also have a larger economic life, so that the funds will remain invested for longer





period while the alternative proposal may have shorter life but smaller present value.

In such situations the present value method may not reflect the true worth of

alternative proposals. This method is suitable for evaluating projects whose capitaloutlays or costs differ significantly.

IV) Internal Rate of Return:

The internal rate of return is the discount rate that equates the present values of

cash inflows with the initial investment associated with a project thereby causing

NPV=0.

The technique is also known as yield on investment, marginal efficiency value of capital, marginal productivity of capital, rate of return, time adjusted rate of return and

so on. Like net present value, internal rate of return method also considers the time

value of money for discounting the cash streams. The basis of the discount factor

however, is difficult in both cases. In the net present value method, the discount rate is

the required rate of return and being a predetermined rate, usually cost of capital and

its determinants are external to the proposal under consideration. The internal rate of

return on the other hand is based on facts which are internal to the proposal. In other

words, while arriving at the required rate of return for finding out the present value of

cash flows, inflows and outflows are not considered. But the IRR depends entirely on

the initial outlay and cash proceeds of project which is being evaluated for acceptance

or rejection. It is therefore appropriately referred to as internal rate of return. The IRR

is usually, the rate of return that a project earns. It is defined as the discount rate

which equates the aggregate present value of net cash inflows (CFAT) with the

aggregate present value of cash outflows of a project. In other words it is that rate

which gives the net present value zero. IRR is the rate at which the total of discounted

cash inflows equals the total of discounted cash outflows (the initial cost of

investment). It is used where the cost of investment and its annual cash inflows are

known but the rate of return or discounted rate is not known and is required to be

calculated.





Accept / Reject decision

The use of IRR as a criterion to accept capital investment decision involves a

comparison of actual IRR with required rate of return, also known as cut off rate or hurdle rate. The project should qualify to be accepted if the internal rate of return

exceeds the cut off rate. If the internal rate of return and the required rate of return be

equal, the firm is indifferent as to accept or reject the project. In case of mutually

exclusive or alternative projects, the project which has the highest IRR will be

selected provided its IRR is more than the cut off rate. In case there are budget

constraints, the projects are ranked in descending order of their IRR and are selected

subject to provisions.

Evaluation of IRR

1. Is a theoretically correct technique to evaluate capital expenditure decision .It

possesses the advantages which are offered by the NPV criterion such as, it considers

the time value of money and takes into account the total cash inflows and outflows.

2. In addition, the IRR is easier to understand. Business executives and non-technical

people understand the concept of IRR much more readily than they understand the

concept of NPV. For instance, Business X will understand the investment proposal in

a better way if it is said that the total IRR of Machine B is 21% and cost of capital is

10% instead of saying that NPV of Machine B is Rs. 15,396.

3. It itself provides a rate of return which is indicative of profitability of proposal. The

cost of capital enters the calculation later on.

4. It is consistent with overall objective of maximizing shareholders wealth.According to IRR, the acceptance / rejection of a project is based on a comparison of

IRR with required rate of return. The required rate of return is the minimum rate

which investors expect on their investment. In other words, if the actual IRR of an

investment proposal is equal to the rate expected by the investors, the share prices will

remain unchanged. Since, with IRR, only such projects are accepted which have IRR

of the required rate, therefore, the share prices will tend to rise. This will naturally

lead of maximization of shareholders wealth.





The IRR suffers from serious limitations:

1. It involves tedious calculations. It involves complicated computation problems

2. It produces multiple rates which can be confusing. This situation arises in the case

of non-conventional projects.

3. In evaluating mutually exclusive proposals, the project with highest IRR would be

picked up in exclusion of all others. However in practice it may not turn out to be the

most profitable and consistent with the objective of the firm i.e., maximization of

shareholders wealth.

4. Under IRR, it is assumed that all intermediate cash flows are reinvested at the IRR.It is rather ridiculous to think that the same firm has the ability to reinvest the cash

flows at different rates. The reinvestment rate assumption under the IRR is therefore

very unrealistic. Moreover it is not safe to assume always that intermediate cash flows

from the project may be reinvested at all. A portion of cash inflows may be paid out

as dividends, a portion may be tied up with current assets such as stock, cash, etc.

Clearly, the firm will get a wrong picture of the project if it assumes that it invests the

entire intermediate cash proceeds.

Further it is not safe to assume that they will be reinvested at the same rate of return

as the company is currently earning on its capital (IRR) or at the current cost of

capital (k).

NPV versus IRR

NPV indicates the excess of the total present value of future returns over the present

value of investments. IRR (or DFC rate) indicates on the other hand the rate at which

the cash flows (at present values) are generated in the business by a particular project.

Both NPV and IRR iron out the difference due to interest factor or say higher returns

in earlier years and higher returns in later years (though the total returns in absolute

terms may be around the same for several projects).

V) Profitability Index:

Profitability index measures the present value of returns per rupee invested.





It is similar to NPV approach. The profitability index approach measures the present

value of returns per rupee invested, while the NPV is based on the difference between

the present value of future cash inflows and the present value of cash outlays.

A major shortcoming of the NPV method is that, being an absolute measure, it is not a

reliable method to evaluate projects requiring different initial investments. The PI

method provides a solution to this kind of problem. It is, in other words a relative

measure. It may be defined as the ratio which is obtained dividing the present value

of future cash inflows by the present value of cash outlays.

The selection of projects with the PI method can also be done on the basis of ranking.

The highest rank will be given to the project with the highest PI, followed by others in

the same order.. Though it is common to define PI as the ratio of the PV of the cash

inflows divided by the PV of cash outflows, the PI may also be measured on the basis

of the net benefits of a project against its current cash outlay rather than its gross

benefits against its total cost over the life of the project. This aspect becomes very

important in situations of capital rationing. In such a situation, the decision rule

would be to accept the project if the PI is positive and reject the project if it is

negative.

Evaluation:

Like the other discounted cash flow techniques, the PI satisfies almost all the

requirements of a sound investment criterion. It considers all the elements of capital

budgeting, such as the time value of money, totality of benefits and so on. Although

based on NPV, it is a better evaluation technique than NPV in a situation of capital

rationing.







PROJECTS UNDER CONSIDERATION- RS 1100 CRORES

• Complete fiber line of 725 TPD bleached pulp capacity comprising of wood

chipper, chip screen, chip silo, modified batch cooking system, brown stock

washing & screening, oxygen delignification of pulp, ECF bleaching and

chlorine dioxide generation plant.

• New paper machine comprising continuous stock preparation, QCS & DCS

systems, converting equipments, mechanized handling paper in converting,

finishing and godown stages.• Black liquor evaporators of 160m3/hr water evaporation capacity.

• Chemical Recovery boiler of 1000TPD black liquor solid firing capacity.

• Caustisizing section comprising liquor clarification equipments, rotary lime

kiln etc.

• Power plant comprising two boilers and one turbine to meet additional

requirement of steam and power.

• Additional equipment for effluent treatment plant, environmental protectionand to improve basic infrastructure.

The production capacity will go up to 3,20,000 TPA after completion of the said

investment programme as against 1,63,750 TPA at present.

The company goes for the expansion in order to

1) Meet the existing demand.

2) To be competitive in the market.3) To introduce new varieties of paper.

4) To introduce new technology.

5) For the sake of survival of the existing plant.





Sources of Funds at West Coast Paper Mills Ltd.

At West coast Paper Mills, Main Sources of funds are in the form of Equity; it has

raised the funds for the expansion programme from various financial institutions

namely,

• ICICI

• SBI

• IFC

The Company issues debentures only for heavy projects. The company also does not

allot Preference Shares; they make use of their own reserves.

• Company enjoys “Minimum Alternative Tax (MAT)”. In capital expenditure or

expansion projects the profits will be minimized or less. In such a case Government

will provide a provision of MAT for developing the economy. So tax rate is 11.33% .

• The company purchases new assets by hypothecating old assets with the Major banks

and raises the Long term loans or capital budgeting expenditures.





PROCEDURE FOLLOWED BY THE COMPANY IN CAPITAL BUDGETING

DECISIONS :

• Prepares “Requirement and priority” Assets & Equipments sheet

• Estimates the cost of the project

• Estimates the Funds requirement and availability of Funds.

• Technical Team establishes Standards for purchases and for the same Tenders

are invited.

• Preference is given to Quality but not for the Low Quoted Price in the Tender.

So, only Quality Parameters set by team is taken in to consideration in thecapital asset decisions.

• Assets are Hypothecated with Banks for raising funds.

• Some high cost machineries & equipments are purchased only from :

- Triveni Eng. Works Ltd., Bangalore

- Tata Honeywell Ltd., Pune

- Pallmann Machinef Abrik Co. ,Germany

- Marsh Engg. Works, Pune etc.- Voith Engg. Germany

- Metso, Sweden

• Almost , in financing projects company raises funds by a Joint hypothecation

on Raw-materials, semi-finished and finished products.





ANALYSIS:

Financial Results

(Rs.In lacs)

2005-2006 2004-2005Gross Profit 6922.42 5648.81Investment Fluctuation Reserve written

back

_ –

Balance brought forward 888.84 51.937811.26 5700.74

Allocations :

Depreciation 3695.08 1892.36Taxation -Current 300.00 295.00

-Deferred (275.60) 395.35Proposed Dividend 7 1341.10 1341.10Tax on Dividend 188.09 188.09Transfer to General Reserve 2500.00 700.00Balance carried forward 62.59 888.84

7811.26 5700.74

Dividend

The Directors recommend a dividend of Rs.15 per equity share of Rs.10 each for the

Year ended 31st March, 2006 subject to the members approval.

Performance

The performance of the company during the year under review has been satisfactory

compared to previous year due to increase in the production, sales, profitability, apart

from process efficiencies. The stabilization in the working of rebuilt paper machine

No. 1, coupled with reduced downtime contributed to increased production and sales.

Further, the higher sales realization VAT set off on inputs and performance efficiency

not only contributed in absorbing the increase in the inputs costs, but also added to the

bottom line of the Company. But for the hike in the rates of raw materials (wood),

petroleum products, chemicals and dyes and adverse exchange rate fluctuation, the

working results would have looked still brighter.

The Company had taken effective anticipatory measures to cut the costs by

commissioning various equipments at an outlay of Rs. 21.45 crores the partial benefits

of the same were derived during the year itself, which enabled it in containing the

increase in cost of production. Apart from the prudent and timely investment in plant





and equipments yielding the envisaged increase in production, discreet management

of working capital has also brought in the desired results. The interest charges are

inclusive of foreign exchange rate difference of Rs. 1.49 crores due to Rupee

depreciation; otherwise the net interest is lower by Rs.1.20 crores due to better management of working capital, which has contributed to reduction in the borrowing

by Rs. 68.39 crores.

Overcoming the increase in the input costs, the Company has posted the highest ever

gross profit of Rs. 69.22 crores as against Rs. 56.49 crores in the previous year i.e.,

increased by Rs. 12.73 crores – 23%. However the net profit increased by four

percent from Rs. 30.66 crores to Rs. 32.03 crores i.e., by Rs. 1.37 crores due to higher

provision of depreciation by Rs. 17.80 crores for duplex board.

Performance

The company ’s production of paper, paperboard and duplex board increased 6 per

cent from 1,63,714 MT in 2003-4 to 1,73,070 MT in 2004-5; the production would

have been still higher, but for the lower-than- envisaged output from the rebuilt paper

machine, whose throughput took a longer time to stabilize than was anticipated.

Correspondingly, the sale of paper, paperboard and duplex board increased from

1, 62,642 MT worth Rs.476.57 crores in 2003-4 to 1,68,315 MT valued at Rs.496.57

crores in 2004-5 (both inclusive of excise duty),an increase of Rs.20 crores or nearly 4

per cent of the company ’s turnover during the year under review.

Current year’s prospects

Production of paper, paperboard and duplex board in the first three months of current

year was 43589 MT as against 43753 MT in the previous year. The production of

OFC cable in the first three months increased from 1023 KM in 2005-06 to 1637 KM

in 2006-07, whereas JFT Cable production declined from 99038 CKm in the same

period of 2006-07. However, barring unforeseen circumstances, the bottom line of

the Company during the current year is likely to improve further due to the following

factors:

a) The government of India has reduced excise duty from 16% to 12% ad valorem on

paper and paper board, with effect from 1st March 2006 in order to encourage capacity

addition.





b) The sale prices of paper and duplex board have been increased during the current

year which has been absorbed by the market.

c) The commissioning of 15.5 MW turbine and other equipments i.e., Disc filters,

Blow Heat Recovery and steam Condensate Recovery System for digestors are givingthe desired benefits and same will be reflected for the full year in 2006-07 as against

partial benefit in the previous year.

Raw-materials:

The availability of raw material continued to be a matter of concern due to successive

three year drought across the stretches of Andhra Pradesh and Tamil Nadu. The

Company could procure 3.20 lac tonnes of wood as against 4.06 lac tonnes in the

previous year, which has resulted in drop in the stock of wood. The cost of wood has

gone up consecutively in the third year by 11%, due to increase in royalty,

procurement rates as well as freight charges. The freight rate has increased across the

board due to restriction on loading of trucks up to the actual pay-load. The freight

rate will further go up on account of upward revision in the fuel rates. The

procurement rates are also likely to go up in the current year due to stiff competition.

The company is concentrating on greening waste lands in core area, around 150 kms

radius from the factory. The seedlings distribution will go upto from 150.2 lacs in

2005-2006 to 225 lacs in 2006-2007. The farmers who cannot take up the plantation

on the waste lands are being encouraged to utilize the expertise of the company in

taking up high tech plantations free of cost.





The company’s production in 2006-07 is expected to improve in view of the

following factors:

• Recent expansion, the result of which stabilised during the year and is expected to

translate into higher output.

• Recent upward revision in selling prices is expected to enhance profitability.

• Introduction of VAT has marginally reduced production costs due to input costs

being set off.

• Stable input costs are expected to positively influence the company’s working,

barring unforeseen circumstances.

2004-05 review

In 2004-05, the price of raw materials increased 17 per cent over the previous year,

non-commensurate with the increase in product prices. This led to a decline in gross

profit by 7 per cent, countered in part by cost-cutting and enhanced productivity. As a

result, PAT strengthened by 8 per cent from Rs. 2844 lac in 2003-04 to Rs.3066 lac in

2004-05, with a lower provision for deferred tax and payout of corporate tax.

2004-05 vs 2003-04

The Company’s turnover increased from Rs.491.84 cr in 2003-04 to Rs.533.35 cr in

2004-05.The EBIDTA and profit after tax increased from Rs.63.77 cr to Rs.65.09 cr

and from Rs.28.44 cr to Rs.30.66 cr during the period. While gross profit margin

declined from 7.57 per cent in 2003-04 to 6.83 per cent in 2004-05, PAT margin

increased from 4.93 per cent to 5.58 per cent.

Surplus management

Internal accruals provide the cheapest source of funds, a precious resource in a

capital-intensive and cyclical business. To protect and retain the option of immediate

encashment, the Company invested its short-term surpluses into risk-free financial

instruments that were progressively liquidated to meet the long-term needs of the

business.





Margins

While the Company ’s PAT increased 7.8 per cent from Rs.28.44 cr in 2003-04 to

Rs.30.66 cr in 2004-05,net profit declined 5.2 per cent as there was no extraordinaryincome during 2004-05 which had been reflected in the books in 2003-

04.Also,margins were affected by the temporary shutdown of PM1 for rebuilding and

an increase in costs without a corresponding increase in realisations.

Capital employed

True success in a capital-intensive business comes from a company’s ability

to generate a return higher than what investors would ordinarily have derived out of

risk-free financial instruments. The company’s capital employed increased by 12.4

per cent, but PAT increased 7.8 per cent. The Company employed nearly Rs.35,000 of

capital per tonne of production in 2005-06 against Rs.32,000 in 2004-05,a result of

increasing investments, but still among the lowest in India ’s paper industry.

Capital structure

West Coast possesses one of the highest equity-capacity ratios in India’s

Paper industry. Every rupee of equity accounted for 1.83 kg of installed capacity as on

31 March 2005.The Company’s capital of Rs.8.94 cr

comprised equity shares only.

Reserves

Reserves and surplus represented the lowest cost of funds available with the

Company to grow the business, especially when created out of accruals (as opposed to

share premium reserves). The Company ’s reserves and surplus increased fromRs.140.36 cr in 2003-04 to Rs.155.73 cr in 2004-05 while its net worth increased

from Rs.149.30 cr in 2003-04 to Rs.164.67 cr in 2004-05.

However, the Company reported a decline in its return on net worth to 18.62 per cent

in 2004-05 compared to 19.05 per cent in 2003-04.

Dividend Policy of the Firm

The Directors Recommend a Dividend of Rs. 15/- (Rupees Ten only) per EquityShares of Rs.10/-each. The dividend when received by the shareholders will be free of





tax in their hands and the Company will pay dividend distribution tax @12.50% plus

applicable surcharge on the dividend amount subject to relevant laws at the

appropriate time. The dividend payout will be highest ever by the company amongstthe Paper Mills in India.

For Calculation of the projection of EBDIT the WCPM outsourced the work to the

external agency i.e., SPV Consultants as well as the internal officers. The

Consultants took into consideration all the financial aspects of the Company relating

to the previous years.

Since the expansion programme is going on the consultants take into consideration

all the related financial information and the EBDIT is calculated as follows:

Projected EBDIT

PARTICULARS Amount is Rs.

INCOMESales XXXXXIncome from lease XX

Other Income XXXXTotal XXXXXX

EXPENDITURESRaw-Material Cost XXXXManufacturing Expenses XXXXPayments to Employees XXXXAdministrative Expenses XXXXExcise Duty XXXXInterest and Financing Charges XXXXDepreciation XXXX

Total XXXXX

Cash Flow Estimates:

Other things which needs to be considered while making cash estimates are





Tax Effect: The cash flows to be considered for purpose of capital budgeting are net

of taxes. Special consideration needs to be given to tax effects on cash flows if the

firm is incurring losses and therefore paying no taxes.

Effect of Overheads:

Another factor which merits special consideration in estimating cash flows is the

effect of overheads. The indirect expenses/ overheads are allocated to the different

products on the basis of wages paid, materials used, floor space occupied or some

other similar common factor.

Effect of Depreciation:

Depreciation although a non-cash item of cost, is deductible expenditure in

determining taxable income. Depreciation provisions are prescribed by the

Companies Act for accounting purposes and by the Income Tax Act for taxation

purposes.

CALCULATION OF EVALUATION TECHNIQUES FOR THE NEW

PROJECT





COST: Rs. 1100 crores

Project Cost: 1100 crores

Depreciation: 10% on 700 crores5% on 300 crores

20% on 100 crores

Tax rate : 11.33%

Cost of capital: 10%

Interest paid on loan: 8% on 725 crores.

Life of the project is: 16 years.

(Rs. In Crores)

Yr EBDIT Dept

’n

EBI

T

Int

@8

%

EB

T

Tax @

11.33

%

EAT Cash

Inflow

Cum

Inflow

1 175 105 70 58 12 1.3596 10.6404 115.644 115.6404

2 185 105 80 58 22 2.4926 19.5074 124.504 240.1478

3 195 105 90 58 32 3.6256 28.3744 133.374 373.5222

4 205 105 100 58 42 4.7586 37.2414 142.244 515.76365 215 105 110 58 52 5.8916 46.1084 151.104 666.8720

6 215 105 110 58 52 5.8916 46.1084 151.104 817.9804

7 215 105 110 58 52 5.8916 46.1084 151.104 969.0888

8 215 105 110 58 52 5.8916 46.1084 151.104 1120.1972

Note on MAT (Minimum Alternative Tax):







Year Discount @

10 %

Cash inflow in

Rs.

Discounted cash

inflow in Rs.

Cumulative cash

inflow in Rs.1 0.909 1156404000 1051171236 1051171236

2 0.826 1245074000 1028431124 20796023603 0.751 1333744000 1001641744 30812441044 0.683 1422414000 971508762 40527528665 0.621 1511084000 938383164 49911360306 0.564 1511084000 852251376 58433874067 0.513 1511084000 775186092 66185734988 0.467 1511084000 705676228 73242497269 0.424 1511084000 640699616 796494934210 0.386 1511084000 583278424 854822776611 0.350 1511084000 528879400 9077107166

12 0.319 1511084000 482035796 955914296213 0.290 1511084000 438214360 999735732214 0.263 1511084000 397415092 1039477241015 0.239 1511084000 361149076 1075592149016 0.218 1511084000 329416312 11085337800

CALCULATION OF DISCOUNTED PAY BACK PERIOD:

Discounted pay back period = 15 + (11000000000-10755921490)

(11085337800-10755921490)

=15 + 244078510329416310

= 15 +0.74

= 15.74

INTERPRETATION:

In DCF technique, the present value of cash inflow is compared with present value of

cash outflow. Here the present value of cash inflow is higher than the present value

of cash outflow. So the project is acceptable.

CALCULATION OF NET PRESENT VALUE:

NPV= ∑ PVCI - ∑ PVCO





=11085337800-11000000000

= 85337800

INTERPRETATION:

Under NPV, the decision rule to accept the project if the NPV is positive and reject if

it is negative. In WCPM, as per my calculations, the NPV is positive . So the project

is acceptable.

CALCULATION OF PROFITABILITY INDEX:

PI =Net present inflows

Net present outflows

= 11085337800

11000000000

= 1.00775

INTERPRETATION:

Under PI, a project will qualify for acceptance if its PI exceeds 1.

In WCPM, the project under consideration is having PI >1. So the project can be

undertaken.

CALCULATION OF INTERNAL RATE OF RETURN:

Pay Back Period = 7.866 years.

So it lies in between 9% and 10%.

Year Discount @ 9% Cash inflow Discounted cash

inflow

1 0.917 1156404000 10604224682 0.842 1245074000 1048352308





3 0.772 1333744000 10296503684 0.708 1422414000 10070691125 0.650 1511084000 982204600

6 0.596 1511084000 900606064

7 0.547 1511084000 8265629488 0.502 1511084000 7585641689 0.460 1511084000 69509864010 0.422 1511084000 63767744811 0.388 1511084000 58630059212 0.356 1511084000 53794590413 0.326 1511084000 49261338414 0.299 1511084000 45181411615 0.275 1511084000 41554810016 0.252 1511084000 380793168

Total = 11811223390

CALCULATION OF INTERNAL RATE OF RETURN:

IRR= Lowest rate+ (Highest rate –lowest rate) (PV @ lowest rate- Initial investment )

(PV @ lowest rate- PV @ highest rate)

= 9% + (10%-9%) (11811223390- 11000000000)

(11811223390-11085337800)

= 9% + 1% (811223390)

(725885590)

= 9% + 1.11756%

= 10.11756%





INTERPRETATION:

The IRR considers comparison of the actual IRR with the required rate of return. The

project would qualify to be accepted if the IRR (r) exceeds the cut off rate (k).In WCPM, IRR (10.12%) which is greater than the cut off rate (10%). So the project

can be accepted.





FINDINGS:

•

The company has good organization structure.

• The company has adopted Enterprise Resource Planning system through

which it is able to run its activities smoothly and efficiently.

• The capital budgeting decisions (evaluation techniques) of the company

are favorable for the expansion programme.

• As far as Expansion programme is concerned the company is very

professional and it has appointed external as well as internal experts to

check the feasibility of the project

• The Company issues debentures only for heavy projects. The company

also does not allot Preference Shares; they make use of their own

reserves.

• Company follows only Pay back period as a Capital Budgeting

Technique to select and make Capital budgeting Decisions.

• It has a rich experience in its Capital Asset Purchasing Policy.

•

The expansion programme will be funded by term loans of Rs. 725crores from banks and institutions and remaining Rs. 375 crores through

Equity and Internal Accruals totaling to Rs.1100 crores.

• Term loans are taken from I.C.I.C.I. bank by the way of hypothecation

on movable fixed assets of the company both present and future, whereas

Term loans from other banks are secured by a hypothecation on specific

movable fixed assets only.





.

RECOMMENDATIONS:

• The company can follow other capital budgeting techniques such as Net

present Value (NPV) and Internal rate of Return (IRR).

• The Net Present Value Method (NPV) can be used as it considers the present

value factor associated with cash flows.

• The Net Present Value (NPV) considers the total benefits arising out of the

proposal over its lifetime.

•

The internal rate of return provides a rate of return which is indicative of theProfitability of the proposal (If it is greater than cost of capital which indicates

profit).

• By knowing the Internal rate of return, the Company can decide how much

dividend can be given to its shareholders.

• By knowing the IRR of the Company (if it is more ) the shareholders can

`invest more in the company.

•

By Knowing the IRR of the company (if it more than required rate of return )the financial institutions can take decisions whether to invest in the firm or

not.





CONCLUSION

This report deals with the nuts and bolts of state budgeting practices--ways to make

the process of enacting and managing a budgeting work more smoothly. The report in

short tries to explain the capital budgeting. It is concerned with some issues in the

capital budget process that are common to all the industries and it reports on

procedures that the company has developed to strengthen the process.

Where it seems appropriate, this report recommends specific practices. The practices

recommended here couldn’t be expected in and of them to end revenue shortfalls,

ensure balanced budgets, or settle differences over policy. They can be helpful ineliminating procedural issues and allowing policymakers to focus on issues that need

attention, such as what the company really should be spending the investor's money

on. Budget techniques cannot respond to this kind of question. As a result, the main

principle of sound capital budgeting is to maintain flexibility.

The Company follows only a particular evaluation technique i.e., pay back period. But

pay back period has got certain limitations. It doesn’t consider the entire life of the

project. It also doesn’t consider the present value factor associated with the cash

flows.

So the company should follow certain advanced capital budgeting techniques such as

Net Present Value, Internal Rate of Return etc. which helps the firm to calculate or

evaluate the evaluation techniques.

Further the Company has very good policies that are be followed while makinginvestment decisions. It out sources the capital investment to the external agency

which helps the company to take relevant decisions.





LIMITATIONS OF THE STUDY:

Company is very rigid in providing the financial information.

As all the aspects of accounts and finance are secret they don’t disclose it to

outsiders.

As the corporate office is in Bangalore, no much of the financial aspects is

available here.

Since Company’s major investment decisions are confidential they are not

disclosed to outsiders.





│BIBLIOGRAPHY │

Company’s website ~ www.westcoastpaper.com

Other Websites like ~ www.google.com

Company’s Annual Reports

(2006-2005, 2005-2004, 2004-2003)

Financial Management…Theory & Practice- Prasanna Chandra

Financial Management…Text, Problems & Cases

- M Y Khan & P K Jain

Financial Management

- I M Pandey





Documents

52898062 Summer Inplant 2007 Preeti Desai