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ISO-OSI 7-Layer Network Architecture

This lecture introduces the ISO-OSI layered architecture of Networks. According to the ISOstandards, networks have been divided into 7 layers depending on the complexity of thefucntionality each of these layers provide. The detailed description of each of these layers isgiven in the notes below. We will first list the layers as defined by the standard in theincreasing order of function complexity:

1. Physical Layer2. Data Link Layer

3. Network Layer

4. Transport Layer

5. Session Layer

6. Presentation Layer

7. Application Layer

Physical Layer This layer is the lowest layer in the OSI model. It helps in the transmission of

data between two machines that are communicating through a physical medium,

which can be optical fibres,copper wire or wireless etc. The following are the

main functions of the physical layer:

1. Hardware Specification: The details of the physical cables, networkinterface cards, wireless radios, etc are a part of this layer.

Coaxial Cable Hybrid Cable Wireless Card Network Card

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http://www.cse.iitk.ac.in/users/dheeraj/cs425/lec01.html#physical

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2. Encoding and Signalling: How are the bits encoded in the medium isalso decided by this layer. For example, on the coppar wire medium, wecan use differnet voltage levels for a certain time interval to represent '0'and '1'. We may use +5mV for 1nsec to represent '1' and -5mV for 1nsecto represent '0'. All the issues of modulation is dealt with in this layer. eg,

we may use Binary phase shift keying for the representation of '1' and '0'rather than using different volatage levels if we have to transfer in RFwaves.

Binary Phase Shift Keying

3. Data Transmission and Reception: The transfer of each bit of data isthe responsibility of this layer. This layer assures the transmissoin of eachbit with a high probability . The transmission of the bits is not completelyreliable as their is no error correction in this layer.

4. Topology and Network Design: The network design is the integral partof the physical layer. Which part of the network is the router going to beplaced, where the switches will be used, where we will put the hubs, howmany machines is each switch going to handle, what server is going to be

placed where, and many such concerns are to be taken care of by thephysical layer. The variosu kinds of netopologies that we decide to usemay be ring, bus, star or a hybrid of these topologies depending on ourrequirements.

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Data Link Layer

This layer provides reliable transmission of a packet by using the services of the

physical layer which transmits bits over the medium in an unreliable fashion.

This layer is concerned with :

1. Framing : Breaking input data into frames (typically a few hundred bytes)and caring about the frame boundaries and the size of each frame.

2. Acknowledgment : Sent by the receiving end to inform the source that theframe was received without any error.

3. Sequence Numbering : To acknowledge which frame was received.

4. Error Detection : The frames may be damaged, lost or duplicated leadingto errors.The error control is on link to link basis.

5. Retransmission : The packet is retransmitted if the source fails to receiveacknowledgment.

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6. Flow Control : Necessary for a fast transmitter to keep pace with a slowreceiver.

Data Link Layer

Network Layer

Its basic functions are routing and congestion control.

Routing: This deals with determining how packets will be routed (transferred)

from source to destination. It can be of three types :

• Static : Routes are based on static tables that are "wired into" the networkand are rarely changed.

• Dynamic : All packets of one application can follow different routesdepending upon the topology of the network, the shortest path and thecurrent network load.

• Semi-Dynamic : A route is chosen at the start of each conversation andthen all the packets of the application follow the same route.

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Routing

The services provided by the network can be of two types :

• Connection less service: Each packet of an application is treated as anindependent entity. On each packet of the application the destinationaddress is provided and the packet is routed.

• Connection oriented service: Here, first a connection is established andthen all packets of the application follow the same route. To understandthe above concept, we can also draw an analogy from the real life.Connection oriented service is modeled after the telephone system. Allvoice packets go on the same path after the connection is established tillthe connection is hung up. It acts like a tube ; the sender pushes the

objects in at one end and the receiver takes them out in the same order atthe other end. Connection less service is modeled after the postal system.Each letter carries the destination address and is routed independent of allthe others. Here, it is possible that the letter sent first is delayed so thatthe second letter reaches the destination before the first letter.

Congestion Control: A router can be connected to 4-5 networks. If all the

networks send packet at the same time with maximum rate possible then the

router may not be able to handle all the packets and may drop some/all packets.

In this context the dropping of the packets should be minimized and the source

whose packet was dropped should be informed. The control of such congestion is

also a function of the network layer. Other issues related with this layer aretransmitting time, delays, jittering.

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Internetworking: Internetworks are multiple networks that are connected in

such a way that they act as one large network, connecting multiple office or

department networks. Internetworks are connected by networking hardware

such as routers, switches, and bridges.Internetworking is a solution born of three

networking problems: isolated LANs, duplication of resources, and the lack of acentralized network management system. With connected LANs, companies no

longer have to duplicate programs or resources on each network. This in turn

gives way to managing the network from one central location instead of trying to

manage each separate LAN. We should be able to transmit any packet from one

network to any other network even if they follow different protocols or use

different addressing modes.

Inter-Networking

Network Layer does not guarantee that the packet will reach its intended

destination. There are no reliability guarantees.

Transport LayerIts functions are :

• Multiplexing / Demultiplexing : Normally the transport layer will createdistinct network connection for each transport connection required by thesession layer. The transport layer may either create multiple networkconnections (to improve throughput) or it may multiplex several transportconnections onto the same network connection (because creating andmaintaining networks may be expensive). In the latter case,demultiplexing will be required at the receiving end. A point to note hereis that communication is always carried out between two processes and

not between two machines. This is also known as process-to-processcommunication.

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• Fragmentation and Re-assembly : The data accepted by the transportlayer from the session layer is split up into smaller units (fragmentation) if needed and then passed to the network layer. Correspondingly, the dataprovided by the network layer to the transport layer on the receiving sideis re-assembled.

Fragmentation Reassembly

• Types of service : The transport layer also decides the type of servicethat should be provided to the session layer. The service may be perfectlyreliable, or may be reliable within certain tolerances or may not be reliableat all. The message may or may not be received in the order in which itwas sent. The decision regarding the type of service to be provided istaken at the time when the connection is established.

• Error Control : If reliable service is provided then error detection anderror recovery operations are also performed. It provides error control

mechanism on end to end basis.

• Flow Control : A fast host cannot keep pace with a slow one. Hence, thisis a mechanism to regulate the flow of information.

• Connection Establishment / Release : The transport layer alsoestablishes and releases the connection across the network. This requiressome sort of naming mechanism so that a process on one machine canindicate with whom it wants to communicate.

References of Images

• http://www.putergeek.com/.../ pci_combo_card_sm.jpg• http://blue.utb.edu/libertad/clipart/pi_wireless_pc_card_b.jpg

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• http://www.commscope.com/ images/hybrids.jpg hybrid cable

• http://www.cba.nau.edu/facstaff/maris-j/SavedStuff/Images/net_topo.gif

• http://www.ces.net/doc/2003/research/xl-unicast-routing.gif

• http://www.infinitygroup.com/images/internetworking.gif

• http://www.microway.com/.../ data_link_layer.gif

• http://searchnetworking.techtarget.com/WhatIs/images/coaxla.gif

• http://www.df.lth.se/~pkj/thesis_report/img13.gif

• http://www.df.lth.se/~pkj/ thesis_report/img12.gif

• http://www.ifla.org/VI/5/reports/rep3/rep3-2.gif

• http://msp.gsfc.nasa.gov/tdrss/bpsk.gif

CHAPTER 1

INTRODUCTION

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Capital project planning is the process by which companies allocate funds to

various investment projects designed to ensure profitability and growth.

Evaluation of such projects involves estimating their future benefits to the

company and comparing these with their costs.

In a competitive economy, the economic viability and prosperity of a company

depends upon the effectiveness and adequacy of capital expenditure evaluation

and fixed assets management.

Capital budgeting refers to planning the deployment of available capital for the

purpose of maximizing the long-term profitability of the firm. It is the firm’s

decision to invest its current funds most efficiently in long-term activities in

anticipation of future benefits over a series of years.

In other words, capital budget may be defined as the firm’s decision to invest its

current funds most efficiently in the long term assets in anticipation of an

expected flow of benefits over a series of years. Therefore, it involves a current

outlay or series of outlay of cash resources in return for an anticipated flow of

future benefits. capital budgeting is the process to identify, analysis and select

investment projects, whose returns (cash flows) are expected to extend beyond

9



one year. Firm’s investment decisions would generally a include expansion,

acquisition, modernization, replacement of fixed assets or long-term assets.

From the above definition, we may identify the basic features of capital

budgeting viz., potentially large anticipated benefits, relatively a high degree

risk, and a relatively long-time period between the initial outlay and anticipated

return.

SOURCES OF DATA:

Methodology is a systematic process of collecting information in order to

analyze and verifies a phenomenon. The collection of data is through two

principle sources. They are discussed as

1) Primary data

2) Secondary data

PRIMARY DATA:

The primary data needed for the study is gathered through interview with

concerned officers and staff, either individually or collectively, sum of the

information has been verified or supplemented with personal observation

conducting personal interviews with concerned officers of finance department

of “Azingo pvt ltd”.

SECONDARY DATA:

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The secondary data needed for the study was collected from published sources

such as, pamphlets of annual reports, returns and internal records, reference

from text books and journal management.

Further data needed for the study was collected from:-

Collection of required data from annual records of the company.

Reference from text books and journals relating to financial management

DIAGRAMITIC REPRESENTATION OF RESEARCH

METHODOLOGY:

TOOLS USED FOR ANALYZING:

Modern capital budgeting techniques are:

PI – Profitability Index

11



NPV – Net Present Value

IRR – Internal Rate of Return

IMPORTANCE OF THE STUDY:

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

be very important “THREE” inter-related factors

1) The influence firm growth in the long term consequences capital investment

decisions have considerable impact on what the firm can do in future.

2) They affect the risk of the firm; it is difficult to reverse capital investment

decisions because the market for used capital investment in ill organized or

most of the capital equipments bought by a firm to meet its specific

requirements.

3) Capital investment decisions involve substantial outlays.

In Azingo, capital budgeting is more or less a continuous process and it is

carried out by different functional areas of management such as production,

marketing, chemical engineering, financial management etc., all the relevant

functional departments play a crucial role in the capital budgeting decision

process.

12



OBJECTIVES OF THE STUDY:

To present theoretical framework relating to capital budgeting.

To evaluate the effectiveness of capital expenditure decisions of

company.

To provide support in order to accomplished the overall goal of the

capital budgeting system of Azingo Pvt Ltd

To evaluate the elements consider by the Azingo Pvt Ltd during

expansion of project.

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1.6 SCOPE OF THE STUDY:

The scope of study is limited to AZINGO Pvt Ltd. Hyderabad; it does

not relate to any other branches of the company.

Only certain numbers of projects are studied for the research.

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LIMITATIONS OF THE STUDY:

The major limitation is the time; the study was conducted within in 45

days.

The study is carried based on the information and documents provided by

the organization.

There was no scope of gathering current information, as the auditing has

not been done by time of project work.

The rationale underlying of capital budgeting decisions efficiency. Thus, a firm

must replace worn and obsolete plant and machinery, acquire fixed assets for

current and new products and make strategic investment decisions. This will

enable the firm to achieve its objective of maximizing profits either by way of

increased revenues or cost reductions. The quality of these decisions is

improved by capital budgeting. Capital budgeting decision can be of two types:

1) To those which expand revenues, and

To those which reduce costs

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CHAPTER-II

REVIEW OF LITERATURE:

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REVIEW OF LITERATURE:

“A case study on Modern Capital Budgeting Techniques” by Anita Shukla

- www.eassytown.com

From the study it has been indentified that if two investments has having

positive NPV and IRR is more than cost of capital then project having more

NPV will be accepted, because the IRR is biased towards with higher initial

cash flows, hence the IRR would be higher for those projects whose initial cash

flows are higher, yet that does not necessarily mean that those projects would

have the higher NPV. Here, we must consider a very important point: the

bottom line for any capital budgeting decision is accepting the project that

would create the highest added value for shareholders, hence the higher the

NPV, the more attractive the investment

“Capital Budgeting–Financial appraisal of Investments Projects” by Don

Dayananda, Steve Harrison.

"The results of this study demonstrated the importance of considering external

factors in the capital budgeting process. The role of local and national

governments must also be considered. This study will help others realize how

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important it is to include external factors in their capital budgeting analysis.

This can make the process difficult, especially if the superior does not

understand the importance of external variables that can affect the outcome of

the project."

“Research on Importance of Capital Budgeting Techniques in

International Scale” by Ervin L.Black published in Journal of Accounting

and Finance, 7th Edition

The purpose of this research is to examine the application of capital budgeting

on an international scale. Capital budgeting involves the making of investment

decisions related to assets. The "capital" in capital budgeting refers to the

investment of resources in assets, while the budgeting refers to the analysis and

assessment of revenue inflows and outflows related to the proposed capital

investment over a specified period of time. The purpose of capital budgeting is

two-fold. First, the process must determine whether or not a proposed capital

investment will be a profitable one over the specified time period; and, second,

the process must provide management with a means of selecting between

investment alternatives.

18



CHAPTR-III

COMPANY PROFILE

19



THEORETICAL BACKGROUND OF THE TOPIC:

FEATURES OF CAPITAL BUDGETING PROCESS:

Capital budgeting decisions have the following features:

• It involves exchange of current funds for future a benefits.

• They benefit future periods.

•

They have the effect of increasing the capacity, efficiency, span of life

regarding future benefits.

• Funds are invested in long-term activities

Some of the examples of capital budgeting decision are:

• Introduction of a new product.

• Expansion of business by investing in plant and machinery.

• Replacing and modernizing a process.

• Mechanization of process.

• Choice between alternative machines.

TYPES OF CAPITAL BUDETING DECISIONS:

Capital budgeting decisions are of paramount importance in financial decision

making. In first place they affect the profitability of the firm. They also have a

20



bearing on the competitive position of the firm because they relate to fixed

assets. The fixed assets are true goods than can ultimately be sold for-profit.

Generally the capital budgeting of investment decision includes addition,

disposition, modification, and replacement of fixed assets.

Diagram 1.1.1:

21



EXPANSION OF EXISTING BUSINESS:

A company may add capacity to its existing product lines to expand existing

operations. For example Siva Shakthi Bio Planttec may increase its plant

capacity to manufacture more detergents soaps & powder. It is an example of

related expansion.

EXPANSION OF NEW BUSINESS:

A Firm may expand its activities in a new business expansion of a new business

requires investment and new kind of production activating with in the firm. If

packing manufacturing company invests in a new plant and machinery to

produce ball bearings, which the firm has not manufactured before, this

represents expansion of new business or unrelated diversification. Sometimes

accompany acquires existing firms to expand its business.

REPLACEMENT AND MODERANIZATION:

The main objective of modernization and replacement is to improve operating

efficiency reduce costs. Cost savings will reflect in the increased profits, but the

firm’s revenue may remain unchanged. Assets become outdated and absolute

with technological changes. The firm must decide to replace those with new

assets that operate more economically. Replacement decisions help to introduce

more efficient and economical assets and therefore, are also called cost-

reduction investments.

22



However replacement decisions that involve substantial modernization and

technological improvements expand revenues as well as reduce costs. Yet

another useful way to classify investments is as follows:

Mutually exclusive investments

Independent investments

Contingent investments

FACTORS FOR CAPITAL BUDGETING:

Cost of acquisition of permanent asset as land and building, plant and

machinery, goodwill, etc.

Cost of addition, expansion, Improvement or alteration in the fixed assets.

Cost of replacement of permanent assets.

Research and development project cost, etc.

CAPITAL BUDGETING PROCESS:

23



The preparation of the capital budget is a process that lasts many months and is

intended to take into account neighborhood and bough needs as well as

organization wide. The process begin in the fall, when each of the segment

holds public hearings, each community board submits a statements of its capital

priorities for the next fiscal year to the managing director and appropriate

borough chairmen. The capital budgeting process involves 8 steps explained in

theoretic as follows:

1. Identification of investment proposals

2. Screen proposals

3. Evaluation of various proposals

4. Fixing priorities

5. Final approval

6. Implementing proposals

7. Performance review

8. Feed back

IDENTIFICATION OF INVESTMENT PROPOSALS:

24



The capital budgeting process begins with the identification of investment

proposals. The investment proposals are initiated from the top management or

from any officer of the organization. The department head analyses the various

proposals in the light of the corporate strategies and submit the suitable proposal

to the capital budgeting committee in case of large organizations concerned

with process of long-term investment proposals.

Identification of investment ideas it is helpful to

Monitor external environment regularly to scout investment

opportunities.

Formulate a well defined corporate strategy based on through

analysis of strengths, weaknesses, opportunities, and threats.

Share corporate strategy and respective with persons.

Motivate employees to make suggestions.

SCREEN PROPOSALS:

The expenditure planning committee screens the various proposals received

from different departments in different angles to ensure that these are in

selection criteria of the organization and also do not lead to department

imbalances.

EVALUATION OF VARIOUS PROPOSALS:

25



The next steps in capital budgeting process in to evaluate the probability of

various probability the independent proposals are those which do not complete

with one another and the same way be either accepted or rejected on the basic of

a minimum return on investment required.

FIXING PRIORITIES:

After evaluating various proposals, the unprofitable or uneconomic proposals

may be rejected straight away. But it may not be possible for the organization to

invest immediately in all the acceptable proposals due to limitations of funds.

Hence, it is very essential to rank the various proposals and to establish

priorities after considering urgency, risk & profitability involved the criteria

FINAL APPROVAL

Proposals meeting the evaluation and other criteria are finally approved to be

included in the capital expenditure budget. However proposals involving

smaller investment may be decided at the lower levels for expeditious action.

The capital expenditure budget lay down the amount of estimated expenditure

to be incurred on fixed assets during the budget period.

IMPLEMENTING PROPOSALS:

26



Preparation of a capital expenditure budgeting & incorporation of a particular

proposals in the budget does not itself authorize to go ahead with

implementation of the project. A request for authority to spend the amount

should be made to be the capital expenditure committee which may like to

review the profitability of the project in changed circumstances. In the

implementation of the projects networks techniques such as PERT & CPM are

applied for project management.

PERFORMANCE REVIEW:

In this stage the process of capital budgeting is the evaluation of the

performance of the project. The evaluation is made through post completion

audit by way of comparison of actual expenditure on the project with the

budgeted one, and also by comparing the actual return from the investment with

the anticipated return. The unfavorable variances if any should be looked into

and the causes the same is identified so that identified so that corrective action

may be taken in future.

It throws light on how realistic were the assumptions underlying the

project.

It provided a documented log of experience that is highly valuable for

decision making.

FEEDBACK:

27



In this stage, if once the performance review was completed and evaluated the

results were communicated and feedback was given to the top management.

GUIDELINES FOR CAPITAL BUDGETING:

There are many guidelines for capital budgeting process either it is long-term or

short- term plan.

The major points are:

Need and objectives of owner

Size of market in terms of existing & proposed product lines and

anticipated growth of the market share

Size of existing plants & plans for new plant sites and plant

Economic conditions which may affect the firm’s operations and

Business and financial risk associated with the replacement & existing

assets of the purchases of new assets

CONTENTS OF THE PROJECT REPORT:

Raw material

Market and marketing

Site of project

28



Project engineering dealing with technical aspects of the project

Location and layout of the project building

Building

Production capacity

Work schedule

CRITERIA FOR CAPITAL BUDGETING:

Potentially, there is a wide array of criteria for selecting projects. Some

shareholders may want the firm to select projects that will show immediate

surges in cash flow, others may want to emphasize long-term growth with little

importance on short-term performance viewed in this way; it would be quite

difficult to satisfy the differing interests of all the shareholders. Fortunately,

there is a solution.

METHODS FOR EVALUTION:

In view of the significance of capital budgeting decisions, it is absolutely

necessary that the method adopted for appraisal of capital investment proposals

is a sound one. Any appraisal method should provide for the following.

a) A basis of distinguishing between acceptable and non acceptable projects.29



b) Ranking of projects in order of their desirability.

c) Choosing among several alternatives

d) A criterion which is applicable to any conceivable project.

e) Recognizing the fact that bigger benefits are preferable to smaller ones

and early benefits to later ones.

There are several methods for evaluating the investment proposals. In case of all

these methods the main emphasis is on the return which will be derived on the

capital invested in the project

30



CAPITAL BUDGETING TECHNIQUES:

The capital budgeting techniques are of two types:

1. Non DCF criteria

2. DCF criteria

NON DCF CRITERIA

(a) Payback period:

Payback period is one of the most popular and widely recognized traditional

methods of evaluation investment proposals. Pay back period is the number of

years required to recover the original cash outlay invested in a project.

If the project generates constant annual cash flows, the pay back period can be

computed by dividing cash outlay by the annual cash inflows.

Payback period =

C

C o

inflowscashAnnual

investmentInitial

oC = Initial investment

C = Annual cash inflows

In the case of unequal cash inflows, the pay back period can be found out by

adding up the cash inflow until the total is equal to the initial cash outlay.

Merits:

31



1) This method is simple to understand and easy to calculate.

2) Surplus arises only if the initial investment is fully recovered. Hence,

there is no profit on any project unless the payback period is over.

3) When funds are limited, projects having shorter payback period should be

selected, since they can be rotated more number of times.

4) This method is focuses on projects which generate cash inflows in earlier

years.

5) As time period of cash flows increases, risk and uncertainty also

increases.

LIMITATIONS

1) It stresses on capital recovery rather than profitability.

2) It does not consider the return from the project after its payback period.

3) Administrative difficulties may be faced in determining the maximum

acceptable pay back period.

(b) Accounting Rate of Return (ARR):

The accounting rate of return (ARR) also known as the return on

investment (ROI) uses accounting information, as revealed by financial

statements, to measure to profitability of an investment. The accounting rate of

return is the ratio of the average after fax profit divided by the average

32



investment. The average investment would be equal to half of the original

investment if it were depreciated constantly.

A R R = 100 investmentAverage

IncomeAverage×

Merits:

1) This method is simple to understand.

2) It is easy to operate and compute.

3) Income throughout the project life is considered.

4) It can be readily calculated using the accounting data.

Limitations:

1) It doesn’t consider cash inflows which are important in project evaluation

rather than PAT.

2) It takes the rough average of profits of future years. The pattern or

fluctuations in profits are ignored.

3) It ignores time value of money, which is important in capital budgeting

decisions.

DFC CRITERIA:

(a) Net Present value (NPV):

33



The NPV present value (NPV) method is the classic method of evaluating the

investment proposals. DCF technique that explicitly recognizes the time value

at different time periods differ in value and comparable only when their

equipment present values – are found out.

N.P.V = 0n

n

3

3

2

21

k)(1

C.........

k)(1

C

k)(1

C

k)(1

CC −

+

++

++

++

+

NPV = ∑= −+

n

ioC k

C

01

1

)1(

NPV = Net present value

fiC = Cash flows occurring at time

k = the discount rate

n = life of the project in years

0C = Cash outlay

Merits:

1) NPV method takes account the time value of money.

2) All cash inflows are considered.

3) All cash inflows are converted into present value.

34



4) It satisfies value additivity principle i.e., NPV of two or more projects can

be added.

Limitations:

1) It may not satisfactory answer when the projects being compared

involved different amounts of investment.

2) It is difficult to use.

3) It may mislead when dealing with alternative projects or limited funds.

4) It involves difficult calculations.

5) It involves forecasting cash flows and applications of discount rate

(b) Internal Rate of Return (IRR):

The internal rate of return (IRR) method is another discounted cash flow

technique which takes account of the magnitude and thing of cash flows, other

terms used to describe the IRR method are yield on an investment, marginal

efficiency of capital, rate of return over cost, time – adjusted rate of internal

return and soon.

NPV = ∑= +

++

+

n

0in1

fi

)k 1(

WCSV

)k 1(

C

Where

fiC

= Cash flows occurring at different point of time

35



k = the discount rate

n = life of the project in year

0C = Cash out lay

SV & WC = Salvage value and working capital at the end of the n years.

IRR = L + )LH() ba(

A−

−

Where

L = Lower discount rate at which NPV is positive

H = Higher discount rate at which NPV is negative

A = NPV at lower discount rate, L

B = NPV at higher discount rate, H

Merits:

1) This method considers the time value of money.

2) All cash flows are considered.

3) It has psychological appeal to the users.

36



4) The percentage figure calculated under this method is more meaningful

and acceptable, because it satisfies them in terms of rate of return on

capital.

Limitations:

1) It may not give unique answer in all situations.

2) It is difficult to understand and use in practices.

3) It implies that the intermediate cash inflows generated by the project.

(C) Profitability index (PI):

Yet another time – adjusted method of evaluating the investment proposals is

the benefit – cost (B/C.) ratio or profitability index (PI) Profitability index is the

ratio of the present valued of cash inflows, at the required rate of return, to the

initial cash out of the investment.

PI =outlayCashIntial

inflowCashof PV

Where PV = Present Value

Merits:

1) This method considers the time value of money.

2) All cash inflows are considered.

37



3) It is a better evaluation technique than NPV.

Limitations:

1) It fails as a guide in resolving capital rationing when projects are

indivisible.

COMMITTEE IN CAPITAL BUDGETING:

CAPITAL COMMITMENT PLAN:

The progress of projects included in the capital budget, a capital commitment

plan is issued three times a year. The commitment plan lays out the anticipated

implementation schedule for there current fiscal and the next three years. The

38



first commitment plan is published within 90days of the adoption of the capital

budget. Updated commitment plans are issued in January & April along with

the company’s budget proposals.

The commitment plan translates the appropriations approved under the adopted

capital budget into schedule for implementing individual projects. The fact that

funds are appropriated for a project in the capital budget does not necessarily

mean that work will start or be completed that fiscal year. He choice of

priorities and timing of projects is decided by office management & budget in

consultation with the agencies along with considerations of how much the

managing director thinks the organization can afford to append on capital

projects overall.

The capital commitment plan lays out the anticipated implemented schedule for

capital projects and is one source of information on how far along projects are

although not a consistent or always useful one. The adopted commitment plan is

usually published in September, & then updated in January & April.

In the capital budgeting for every two adjacent years there will be gap. The gap

between authorized commitments and the target is presented in capital

commitment plan as diminishing over the course of the year plan, in practice

many of the “unattained commitments” will be rolled over into the next year’s

plan, so that the current year gap will remain large. The gap has grown in recent

year exceeding in last two executive capital plans.

39



KINDS OF CAPITAL BUDGETING:

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

selecting and following up a capital expenditure alternatives. The firm allocates

or budgets financial recourses to new investment proposals. Basically, the firm

may be confronted with three types of capital budgeting decisions:-

The accept or reject decision,

The mutually exclusive choice decisions, and

The capital rationing decision

The time period creates some problems in estimating discount rates &

establishing equivalences.

CRITERIAN TABLE:

In the evaluation process or capital budgeting techniques there will be a criteria

to accept or reject the project. The criteria will be expressed as:

Table 1.1.1

Criterion/Method Accept Reject

Pay Back Period (PBP) < Target Period > Target Period

Accounting Rate of Return

(ARR)

> Target Rate < Target Rate

Net Present Value (NPV) > 0 < 0

Internal Rate of Return (IRR) > Cost Of

Capital

< Cost Of

Capital40



Profitability index (PI) > 1 < 1

COMPANY PROFILE:

Sri Mahesh Veerina (CEO)

41



Mahesh is the founder and CEO of Azingo, Inc. Mahesh is a seasoned Silicon

Valley entrepreneur and technology executive with over 18 years experience in

the technology industry.

Prior to Azingo, Mahesh was Vice President at Nokia Internet Communications

for the small office products division. Mahesh has founded two successful

technology companies over the last 10 years. Mahesh was the Founder,

President and CEO of Ramp Networks, Inc. (NASDAQ: RAMP) from 1996-

2001. Ramp Networks was a pioneer in the Internet access and security

appliances for the small office and enterprise remote office market segments.

Mahesh grew Ramp from a small technology startup to a publicly traded

company with market capitalization of over US$450M.

Nokia (NYSE: NOK) acquired Ramp Networks in 2001. Mahesh was founding

CEO and Chairman of FlowWise Networks, Inc., an IP routing acceleration

company from 1994-1997. Network Equipment Technologies (NASDAQ:

NET) acquired FlowWise Networks in 1998. Early in his career Mahesh held

several engineering and technology lead positions at Amdahl Corporation and

Synoptics. Mahesh has also co-founded, advised, and served on the boards of

several venture-backed technology startups in Silicon Valley. Mahesh has a MS

degree in Computer Engineering from Purdue University, West Lafayette. He

also holds a MS degree in Electronics from Andhra University, India.

42



1.3.1 INTRODUCTION:

Azingo is developing solutions for the fastest growing segments of the

mobile software market including cellular feature phones and lower-cost

Smartphone’s. Azingo enables its customers to demonstrate and launch new

mobile products in less time and at lower costs with the ability to tailor a

product’s features and user experience to the needs of specific market segments.

One Stop Solution:

Azingo uniquely offers a one-stop solution for designing and commercializing

new mobile phone products. Azingo Mobile, Azingo's next-generation Linux

platform, together with comprehensive engineering services significantly reduce

development costs and shorten delivery schedules for chipset and handset

manufacturers, integrators, and operators. Azingo helps its customers deliver

43



Internet-enabled, rich user experiences to entertain, inform, and enrich the lives

of mobile phone users worldwide.

World-Class Management Team:

Azingo was founded in 2005 and is managed by a team of seasoned high-tech

entrepreneurs and industry executives from world-class mobile, IP, and systems

companies such as Nokia, Motorola, and AT&T Bell Labs.

1.3.2 ABOUT AZINGO:

Azingo is a privately held company with the backing of Garnett and Helfrich

Capital, a leading private equity firm. The company is headquartered in

Sunnyvale, California and has development centers in Pune and Hyderabad,

India. Azingo was originally named Celunite, Inc. The company changed its

name on January 2nd, 2008.

PRODUCTS:

Azingo Mobile 2.0

44

http://www.azingo.com/products/mobile_web_browser.shtml



Azingo Mobile 2.0 is the industry’s most portable, customizable, and

configurable open mobile platform. Azingo Mobile 2.0 was designed to reduce

the time and costs to create unique, cost-effective mobile phone products with

advanced, Internet-enabled multimedia capabilities.

Azingo Mobile 2.0 includes...

• a Linux kernel

• comprehensive mobile middleware

• an application framework

• a broad suite of mobile applications,

• SDKs for mobile software development

• application developer workbench tools

Azingo Mobile Products

• Platform

• Application Suite

• Browser

• Web Runtime

• Flash Runtime

• Operator Packs

KEY CAPABILITIES:

Mobile Internet – Azingo lowers the cost to use the Internet while on the go by

delivering advanced mobile browser services, Web widgets, and a rich set of

user interface features to make interacting with Internet content easy while

offering operators new service opportunities.

Multimedia Support – Azingo Mobile 2.0 supports the ability to play or

stream music and video in mid-tier phones, capabilities normally found only in

more expensive, high-end Smartphone’s.45

http://www.azingo.com/products/sdk.shtml

http://www.azingo.com/products/sdk.shtml



Broad Platform Support – Azingo Mobile 2.0 already runs on several of the

industry’s leading 2G and 3G chipsets. For other platforms, team can port

Azingo Mobile 2.0 to new handset and chipset designs and can deliver market-

specific solutions using the highly configurable features of the platform.

Mobile Optimization – Azingo Mobile 2.0 is optimized for memory footprint

and application launch performance, and includes fine-grain power management

tools.

Security – Azingo Mobile 2.0 includes a secure embedded architecture and full

support for wireless and IP security standards.

Seamless Integration – Azingo offers customers the choice of using its

Azingo Mobile 2.0 software with tightly integrated modules along with the

flexibility to leverage rich industry standard APIs to combine Azingo Mobile

2.0 with customer developed or third party modules to satisfy specialized

requirements.

Service Adaptation – Azingo Mobile 2.0 was designed to rapidly simplify and

shorten the creation of operator-branded service packs.

SERVICES:

Azingo’s team of Linux and mobile application experts provide custom

development solutions based on industry standard development platforms

46



allowing teams to quickly develop, test, debug, and deploy new devices,

applications, and services. Azingo’s engineering team is uniquely qualified

across all areas of Linux and modern mobile architectures.

Azingo's team has in-depth knowledge and expertise with...

• Multiple processor architectures (ARM,

ARC, StrongARM, xScale, MIPS, PowerPC,

x86) and related tools

• Linux kernels

• Open-source middleware technologies

• Advanced graphics and multimedia drivers

• Application models

• Java

• Web browsing

• Mobile applications

Engineering and consulting services can be tailored to meet a wide range of

mobile development needs, even under tight schedules. The result is that

Azingo customers gain significant time-to-market advantages.

Azingo's mobile Linux R&D services include...

• Complete mobile phone

integration and testing

• Board bring-up on mobile

platforms

• Compiler and tool-chain

optimizations for power,

footprint and performance

• Eclipse IDE development

47



• Developing comprehensive board

support packages for mobile

applications

• Custom driver development

• Porting Linux to target processors

• Custom kernel functionality

developmen

• Multimedia framework with

GStreamer and application

development

• Advanced browsing and Web

widget development: WebKit

• Tool-chain porting and

customization for GCC, GDB,

Binutils

• Development and customization

of development tools, including

compilers, debuggers,

configuration tools, and other

• Mobile platform software

engineering

• Application and middleware

development

• Comprehensive hardware and

software system integration

• Platform optimization and

tuning

• Integrating software to new

chipsets for evaluations and

demonstrations

• Project planning workshops

• Feasibility studies and

prototyping

• Architecture design

• Development of operator

branded service packs

• Turnkey solutions

48



utilities • Training

• Custom solution consulting

BOARD OF DIRECTORS:

DIRECTOR TERRY GARNET

DIRECTOR DEVID HELFRICH

CHIEF EXECUTIVE OFFICER MAHESH VEERINA

DIRECTOR T. MICHAEL NEVENS

Azingo Adds Former McKinsey Executive Mike Nevens to Board of

Directors

Sunnyvale, CA—May. 7, 2009 —Mobile Linux company Azingo today

announced the appointment of Mike Nevens to its board of directors. Nevens

brings to Azingo over 30 years of technology leadership and management

experience in building successful technology businesses. Nevens previously

served as a director (senior partner) of McKinsey & Co. He led McKinsey’s

global technology practice and served on the board of the McKinsey Global

Institute which conducts research on economic and policy issues.

“Mike Nevens is a strong technologist and business leader and we look forward

to benefiting from his insights and experience as a member of Azingo’s Board,”

said Terence Garnett, managing director and cofounder of Garnett & Helfrich

49



Capital. “His strategic counsel and direction has resulted in the success of many

Fortune 500 companies.”

"Azingo is an innovative and fast growing mobile software company,” said

Mike Nevens. “Azingo’s cross-platform strategy to create the foundation for a

Web 2.0 ecosystem is a powerful enabler of next generation mobile devices and

services.”

Nevens serves as a senior advisor to Permira on the Technology Sector. Permira

is an international private equity fund with 21 Billion Euros of funds under

management. He also serves on the board of directors of Borland Software

and Model N Software. He is a member of the executive committee of the board

of trustees of the San Jose Museum of Art and is president elect of that board.

He is a member of the board of ZER01: The Art and Technology Network, and

he is a member of the Advisory Council of the Mendoza College of Business at

the University of Notre Dame, where he has been an Adjunct Professor of

Corporate Governance and Strategy.

He holds a bachelor’s degree in physics from the University of Notre Dame and

a master of science in industrial administration from the Krannert School at

Purdue University where he was designated a Krannert Scholar.

Azingo develops and licenses leading edge software for mobile

devices. Azingo’s software suite includes a complete mobile operating

50



system, mobile browser and Web Runtime, as well as a mobile application

suite and developer tools. Azingo’s software products enable operators and

handset manufacturers to deliver customized mobile devices and services with a

rich Internet experience and a consistent user interface across their product

portfolios. The company is privately-held with headquarters in Sunnyvale,

California. Visit http://www.azingo.com

Azingo Joins OMTP to Advance Cross-Platform Mobile Web Services and

Application Development

Sunnyvale, CA—Mar. 30, 2009—Mobile Linux Company Azingo today

announced that it has joined OMTP to advance the BONDI initiative, which

ensures that developers can create secure mobile web applications and services

across different platforms and mobile devices.

Azingo has developed Azingo Mobile 2.0, an open mobile platform, to enable

handset makers to deliver next generation Web 2.0 experiences on mobile

phones. By joining OMTP, Azingo plans to contribute its expertise in open

mobile platform development to the BONDI specifications.

“We are pleased to join OMTP and plan to contribute our open mobile platform

and technology expertise to the BONDI initiative,” said Mahesh Veerina,

President and CEO of Azingo. “BONDI specifications will enable developers to

51

http://www.azingo.com/

http://www.azingo.com/



create secure web applications across a range of platforms and devices, which

will create a truly open eco system for developers.”

“Azingo is a great addition to the OMTP,” said Tim Raby, Managing Director

of the OMTP. “Azingo’s deep expertise in developing a mobile Linux platform

will significantly advance the BONDI initiative which will ensure that mobile

device users have access to innovative applications and services, regardless of

the platform or type of phone they use.”

Azingo Selected by Vodafone to Develop Mobile Applications for Linux

Platform

Sunnyvale, CA—Feb. 5, 2009 —Open Mobile OS Company Azingo today

announced that Vodafone, the world’s leading international mobile

communications group, has selected Azingo as a partner to develop applications

for mobile phones based on the LiMo platform.

“We are excited to partner with Azingo to develop cutting edge applications for

our mobile phones based on the LiMo platform,” said Guido Arnone, Director

of Terminals Technology at Vodafone. “We’re looking forward to working with

Azingo’s agile development teams to develop and deliver innovative

communications solutions for our customers.”

52



Both Azingo and Vodafone are core members of the LiMo Foundation, a

dedicated consortium of mobile industry leaders working together within an

open and transparent governance model—with shared leadership and shared

decision making—to deliver an open and globally consistent handset software

platform based upon Mobile Linux for use by the whole mobile industry.

“We are pleased that we were selected by Vodafone to develop innovative,

customized applications for LiMo platform based mobile phones,” said Mahesh

Veerina, President and CEO of Azingo. “Together with Vodafone, we’re

committed to delivering a range of exciting, appealing experiences for mobile

phone users.”

Azingo Launches Azingo Mobile 2.0, a Full Touch and Web Enabled

Mobile Operating System

Customizable User Experience and Touch Enabled Application Suite for

Mobile Phones

Sunnyvale, CA—Feb. 5, 2009 —Open Mobile OS company Azingo today

announced Azingo Mobile 2.0, a complete Linux based platform, which

includes the Azingo Browser, Azingo Web Runtime, Azingo Application Suite,

and Azingo Active Homescreen. Azingo Mobile 2.0 offers a comprehensive UI

toolkit enabling a full touch user experience and web widgets that can leverage

device specific services like telephony, messaging, multimedia and location

53



based services through the Azingo Web Runtime. Azingo’s products will be

demonstrated at the Mobile World Congress in Barcelona (booths 2.1D53 and

8B135), Feb. 16-19, 2009.

“We are excited to bring a full touch and web-enabled open mobile OS to

market,” said Mahesh Veerina, CEO of Azingo. “Azingo’s mobile platform and

software suite enable operators and handset manufacturers to deliver

customized mobile devices with a rich Internet experience and a consistent user

interface across their product portfolios.”

“Azingo has demonstrated leadership in the open mobile platform space by

bringing to market a full touch user experience for the LiMo platform,” said

Morgan Gillis, executive director of the LiMo Foundation. “The rich Web

Runtime environment and SDK of Azingo Mobile 2.0 will be instrumental in

enabling the LiMo developer ecosystem.”

Azingo Mobile 2.0 includes all of the software, development tools,

documentation and training required to design and commercialize new mobile

phone products. This new platform is based on the LiMo Foundation™ R1

Reference Implementation™ which is highly customizable to meet operator

requirements. Customers licensing Azingo Mobile 2.0 will receive the Azingo

Browser, Azingo Web Runtime, Azingo Active Homescreen and the Azingo

Application Suite.

54



The Azingo Browser is a complete Internet browser for all mobile platforms

both open and proprietary. Based on WebKit open source technology, the

Azingo Browser offers industry leading performance and desktop-class features

including, tabbed browsing, cookies, history, bookmarks, security, page

navigation, multimedia plug-ins and integration with Adobe Flash Lite.

Azingo Web Runtime is a WebKit based technology that installs and executes

web applications (widgets) on a variety of mobile platforms. With Azingo Web

Runtime, developers can create web applications using web technologies such

as AJAX, HTML, JavaScript, and CSS. Web Runtime applications behave like

native applications and deliver Web 2.0 experiences that can utilize Azingo’s

comprehensive set of APIs to access handset resources.

Azingo’s Active Homescreen radically extends the capabilities of a

conventional phone homescreen by allowing users to add and organize

pertinent, real-time information from the Internet and their phone for fast,

simple access. The Azingo Active Homescreen was designed to mimic the

familiar computer desktop experience through features such as a wider,

scrolling homescreen area, drag and drop, shortcuts, folders, and widgets. Users

also have one-touch access to content on their handset, including native, Web,

or Flash Lite applications, contacts, photos, music, videos, and messages.

55



The Azingo Applications Suite is available for all Linux based mobile

platforms. The Suite includes the following applications: Azingo Mobile

Entertainment, Azingo Mobile Productivity, Azingo Mobile Communications,

and Azingo Mobile System Applications.

• Azingo Mobile Entertainment provides music and video players,

camera, and photo gallery.

• Azingo Mobile Productivity delivers complete Personal Information

Management applications, including contacts, calendar, tasks, notes,

calculator, and alarm.

• Azingo Mobile Communications offers telephony, call log, SMS, MMS,

and email.

• Azingo Mobile System Applications include idle screen, main menu,

panel, phone settings, application and connectivity managers, and a file

browser.

1.4 NEED FOR THE STUDY:

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

commercial analysis. In most cases projects represent expenditure of capital

funds by pre-existing which want to expand or improve their operation.

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

of returns in which logically seems to lead it self planning. Financing and56



implementations as a unit, is a specific activity with a specific point and a

specific ending point intended to accomplish a specific objective of the study.

An efficient allocation of capital is the most important finance function in the

modern times. It involves decisions to commit the firm’s funds to the long-term

assets. Capital budgeting for investment decisions are of considerable

importance to the firm since hey tend to determine its value by influencing its

growth, evaluation of capital budgeting decisions.

A capital budgeting decisions may be defined as the firm’s decision to invest is

current funds most effectively & efficiently in the long – term assets in

anticipation of an expected flow of benefits over a series of years. The long-

term assets are those that affect the firm’s operations beyond the one year

period. The firm’s investment decisions would generally includes expansion,

acquisition modernization and replacement of long term assets. Sale of a

division or business is also an investment decision. Decision like the change in

the methods of sales distribution, or an advertisement campaign or research and

development program have long –term implications for the firm’s expenditure

and benefits, and therefore they should also be evaluated as investment

decisions.

57



CHAPTER -IV

DATA ANALYSIS58



PROBLEM 1:

Company is considering whether to buy the plant and machinery or to expand

the present plant and machinery.

The company decides to raise the 65% of investment with the help of

bank loan at an interest of 14% and remaining 35% by 16% debentures.

If the company decided to buy the plant the company has to incur an

initial outlay of Rs.45Crs having life of 4 years and it has to sell the old plant,

by this the company gets Rs.5Crs. The company expecting salvage value of

Rs.10Crs. at the end of fourth year.

59



If the company has decided to expand the present one it has to incur

initial outlay of Rs.35Crs the company expecting salvage value of Rs.3Crs at

the end of fourth year.

Evaluate whether the company has either to expand or to buy the plant &

machinery, if company expects that in both the cases a sale of 20000 units made

in first year and this will increase at a percentage of 20% up to 4 years. Each

unit can be sold at Rs 10000/-.

The company is considering corporate tax of 33.99% (including

surcharge) and following Straight Line Method for depreciation.

Case I: If the company buys a plant.

Calculation of Cash out Flow:

Investment to purchase new plant– Rs 45 Crs. Cash flow by sale of old

plant – Rs.5crs

Cash outflow (initial investment) – Rs.40 Crs

Calculation of depreciation:

60



yearsin Life

value salvageinvestment Intial −

= )(5.74

1040Crs=

−

Calculation of weighted average cost of capital:

(Kd*Wd) + (Kbl*Wbl)

Bank Loan = Rs. 26 Crs (40*65%) Debentures = Rs. 14 Crs (40*35%)

Amount(Rs inCrs)

Pre TaxCost Tax Post tax Cost Weights Cost

Bank Loan 26 14 0.34 9.24 0.65 6.006

Debenture 14 16 0.34 10.56 0.35 3.696

Weighted average Cost of Capital 9.702=10%

Interest payable = (26*14%) + (14*16%) = Rs 5.88Crs

Calculation of NPV and PI:

UNITS PRICE EBDIT DEP EBIT INT EBT

20000 10000 200000000 75000000 125000000 58800000 66200000

24000 10000 240000000 75000000 165000000 58800000 106200000

28800 10000 288000000 75000000 213000000 58800000 154200000

34560 10000 345600000 75000000 270600000 58800000 211800000

61



EBT TAX PAT DEPFREECASH FLOW

PVFACTOR

PV OFCASH FLOW

66200000 0.34 4369200075000000 118692000 0.909 107891028

106200000 0.34 70092000

75000000 145092000 0.823 119410716

154200000 0.34

101772000

75000000 176772000 0.756 133639632

211800000 0.34

139788000

75000000 214788000 0.683 146700204

Salvage Value at 4th year end 100000000 0.683 68300000

Cash inflow 575941580

Cash

outflow 400000000NPV 175941580

PI 1.43985395

Calculation of IRR:

As the cash inflows for a project are uneven we have to calculate Fake Par Back

Period.

Initial investment = Rs.40 Crs

Average Cash Inflows = Average CFAT

= (107891028+1194110716+133639632+146700204+68300000)/5

= 57.59/5 = 11.5188

Fake PBP = 40/11.518 = 3.472

We have to see the value 3.472 in the A4 table for 4 Years

This value will reflect in the A4 table at 6% for 4 Years.

Therefore the IRR for this alternative is 6%.

62

CFAT Average

C

InflowsCashAverage

InvestmentInitialPBPFake 0==



Case II: If the company decides to expand the plant

Calculation of Cash out Flow:

Expansion to the old plant – Rs.35Crs

Calculation of depreciation:

yearsin Life

value salvageinvestment Intial −

= )(84

335Crs=

−


Amount(Rs inCrs)

Pre TaxCost Tax

Post taxCost Weights Cost

Bank Loan 22.75 14 0.66 9.24 0.65 6.006

Debenture 12.25 16 0.66 10.56 0.35 3.696

35 Cost of Capital 9.702

Interest payable: (22.75*14%) + (12.25*16%) = 3.185+1.96 = Rs. 5.145 Crs


UNITS PRICE EBDIT DEP EBIT INT EBT63



20000 10000200000000

80000000

120000000

51450000 68550000

24000 10000240000000

80000000

160000000

51450000 108550000

28800 10000288000000

80000000

208000000

51450000 156550000

34560 10000345600000

80000000

265600000

51450000 214150000

EBT TAX PAT DEPFREECASH FLOW

PVFACTOR

PV OF CASHFLOW

68550000 0.34 4524300080000000 125243000 0.909 113845887

108550000 0.34 71643000

80000000 151643000 0.823 124802189

156550000 0.34

103323000

80000000 183323000 0.756 138592188

214150000 0.34

141339000

80000000 221339000 0.683 151174537

Salvage Value at 4th year end 30000000 0.683 20490000

Cash inflow 548904801

Cash outflow 350000000

NPV 198904801

PI 1.5682

Calculation of IRR:

As for this also the cash inflows are uneven we have to calculate FPBP.

Average Cash inflows = Average CFAT

= (2113845887+124802189+138592188+151174537+20490000)/5

= 548904801/5= 137226200

64

CFAT Average

C

InflowsCashAverage




FBP = 350000000/ 137226200 = 2.55

This value will reflect in the A4 table nearly 9% for 4 years.

Therefore the IRR for this alternative is 9%.

Case I Case II

PI 1.439 1.568

NPV(Rs in Crs) Rs.175941580/- Rs.198904801/-

IRR 6% 9%

Form the above interpretation for the alternative Case II (to expand the present

plant) the PI, NPV are better than the Case I (to buy the plant), though in Case-

II IRR (9%) is less than cost of capital (10%) NPV is positive and PI greater

than 1st alternative, it is better for the company expand the old plant rather than

to buy the new plant.

65



PROBLEM 2:

DIVERSIFICATION:

The company decided to diversify its business activities by providing operating

soft ware to computers. For R&D of this service the company has to incur some

expenses which are as follows

• Purchase of systems costing to amount of Rs. 25Crs

• Recruitment of Soft ware developers amounting to Rs. 10Crs (for a

period of 5years)

• Infrastructure amounting to Rs. 15Crs

There will be no salvage value for the purchase of systems by the company and

following SLM method for depreciation. The company expects a sale of

software up to 10000 users for first year and this will increase at a percentage of

15% up to 5 years. In this case the OS can be sold at Rs 20000/-. The tax rate

for the company is corporate tax of 33.99%.

The company decides to raise the 65% of investment with the help of bank loan

at an interest of 14% and remaining 35% by 16% debentures.

Find out the feasibility of the project, if the company considering the project

for a 5 years.

66



SOLUTION:

Calculation of Cash out flow:

Purchase of systems costing to amount of 25Crs

Recruitment of Soft ware developers amounting to 10Crs

Infrastructure amounting to 15Crs

Total cash out flow = 25+10+15 = Rs 50Crs.


(Kd*Wd) + (Kbl*Wbl)

Bank Loan = Rs. 26 Crs (40*65%) Debentures = Rs. 14 Crs (40*35%)

Amount(Rs in

Crs)

Pre Tax

Cost Tax Post tax Cost Weights Cost

Bank

Loan 26 14 0.34 9.24 0.65 6.006

Debenture 14 16 0.34 10.56 0.35 3.696

Weighted average Cost of Capital 9.702=10%

Interest payable = (26*14%) + (14*16%) = Rs 5.88Crs

67



Calculation of Depreciation:

yearsin Life

value salvageinvestment Initial −

Initial investment = 25+15 = Rs. 40 Crs Salvage value - Nil

).(8.5

040 A P Crs Rs=

−


UnitsSold

Price EBIT DEP EBT INT PBT

10000 20000 200000000 8Cr 120000000 5880000 114120000

11500 20000 230000000 8Cr 150000000

5880000 144120000

13225 20000 264500000 8Cr 184500000

5880000 178620000

15208 20000 304160000 8Cr 224160000

5880000 218280000

17490 20000 349800000 8Cr 26980000

0

5880000 263920000

PBT TAX PAT DEP Cash Flow PV Factor CFAT

114120000 0.34 75319200 8Crs 155319200 0.909 141185152.8

144120000 0.34 95119200 8Crs 175119200 0.823 144123101.6

178620000 0.34117889200 8Crs 197889200 0.756 149604235.2

218280000 0.34 14406480 8Crs 224064800 0.683 153036258.4

68



0

263920000 0.34174187200 8Crs 254187200 0.621 157850251.2

Cash Inflow 745798999.2

Cashoutflow 500000000

NPV 245798999.2

PI 1.491597998

Calculation of IRR:

The cash inflows for the alternative that chosen are uneven, therefore we have

to calculate fake payback period.

Initial Investment = Rs. 50Crs

Average Cash Inflows = Average CFAT

(141185152.8+144123101.6+149604235.2+153036258.4+157850251.

2)/5

= 745798999.2/5 = 149159799.8/-

Fake payback period = 500000000/ 149159799.8 = 3.152

This value will reflect in the A4 table nearly 10% for 5 years.

IRR will be 10%.

INTERPRETATION:

69

CFAT Average

C

InflowsCashAverage




NPV Rs.245798999/-

PI 1.491

IRR 10%

From the above calculation it can be inferred that the NPV is Rs.245798999/-,

PI is 1.491 and IRR is 10%. The calculation resulted is positive. So there is

feasibility of the project and the operations can be diversified in the company.

70



CHAPTER -V

FINDINGS AND CONCLUSIONS:

71



FINDINGS:

1) The company is using modern capital budgeting techniques like PI, NPV,

and IRR for evaluating the project.

2) With the help of bank loan and debentures the company is raising the

required capital.

3) Company is considering cost of capital as present value factor.

4) The company expands the present plant rather than to purchase the new

plant.

5) The company diversified the operations as it was found that the project is

feasible.

6) The company is considering corporate tax for calculating the cash flows.

7) Straight line method is being used by the company for charging the

depreciation.

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CONCLUSION:

From the analysis it was concluded that in modern capital budgeting techniques

time value of money will be consider which tells the correct present value of

future money. When compared to debenture interest the bank loan is low, that’s

why the company is raising more of the investment through bank loan. As the

interest will be tax saving purpose, the company is raising the required

investment for purchasing the plant and machinery with the help of bank loan

and debentures.

RECOMMENDATIONS:

• Company has to raise the capital not only with the help of bank loan and

debentures and also by issuing shares, which means it has to go for IPO.

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BIBILOGRAPHY:

BIBILOGRAPHY:

1. “Financial management” by I.M.Pandey, 2nd Edition of Vikas publishers.

2. “Accountancy” by P.C.Tulsian 4th edition TATA McGraw Hill

publishers.

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WEBLIOGRAPHY:

1. http://www.azingo.com

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