CONTENTS:

CHAPTER
NO.
1.1

NAME OF THE CONCEPT

Introduction
Objectives of the study

1.2
1.3

Need of the study

Scope of the study

II
III
IV

PAGE

1.4
2.1
2.2
3.1
3.2

Methodology of the study

Review of Literature
About Asset Liability Management
Industry Profile
Company Profile
Data analysis & Interpretation
Findings
Suggestions
Limitations
Annexure
Bibiliography

NO.

CHAPTER-I
INTRODUCTION

INTRODUCTION TO CAPITAL BUDGETING

INTRODUCTION:
Among the various business decisions capital budgeting decisions are
critical and crucial decisions. Therefore special care must be taken while taking these
decisions.
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CONCEPT AND MEANING:

The term capital budgeting refers to long term planning for
proposal capital outlay and their financing. It includes rising long-term funds and their
utilization. It may be defined as firms, formal process of acquisition and investment of
capital.
Capital Budgeting may also be defined as The decision making process which the firm
evaluates the purchase of major fixed assets. It involves firms decision to invest its
current funds for addition, disposition, modification and replacement of fixed assets.
It deals exactly with major investment proposals, which are essentially long-term
projects and incurred among the available market opportunities.
Capital budgeting is the process of making investment decision in capital expenditure. A
Capital expenditure may be defined as an expenditure, the benefits of which are expected
to be received over a period of time exceeding one year. The main characteristic of a
Capital expenditure is that the expenditure is incurred at the one point of time whereas
benefits of the expenditure are related at different point of time in future.
In simple language we may say that a capital expenditure is an expenditure incurred for
acquiring or improving the fixed assets, the benefits of which are to be received over a
number of years in future

SCOPE OF THE STUDY:

The efficient allocation of capital is the most important financial function in

the modern times. It involves decision to commit the firms, since they stand the longterm assets such decision are of considerable importance to the firm since they send
to determine its value and size by influencing its growth, probability and growth.

The scope of the study is limited to collecting the financial data of ULTRATECH
CEMENTS for four years and budgeted figures of each year.

NEED AND IMPORTANCE:

Capital Budgeting means planning for capital assets. Capital Budgeting decisions are
vital to an organization as to include the decision as to:

Weather or not funds should be invested in long term projects such as settings
of an industry, purchase of plant and machinery etc.,

Analyze the proposals for expansion or creating additions capacities.

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To decide the replacement of permanent assets such as building and

equipments.

To make financial analysis of various proposals regarding capital investment

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

OBJECTIVES OF THE STUDY:

Capital Budgeting decisions are based on the objective of efficient utilization of resources
by reducing costs. Therefore capital expenditure decision can be two types
(1)

Expenditure which increases revenue

(2)

Expenditure which reduces costs.

There is difference between capital expenditure increasing revenue and capital

expenditure reducing costs. The former has more uncertainty when compared to the later.
The overall objective of capital expenditure is to maximize the firms profits and thus
optimizing the return on investment. This objective can be achieved either by increased
revenue or by reducing costs

METHODOLOGY:
At each point of time a business firm has a number of proposals regarding various
projects in which, it can invest funds. But the funds available with the firm are always
limited and are not possible to invest trend in the entire proposal at a time. Hence it is
very essential to select from amongst the various competing proposals, those that gives
the highest benefits. The crux of capital budgeting is the allocation of available resources
to various proposals. There are many considerations, economic as well as non-economic,
7

which influence the capital budgeting decision in the profitability of the prospective
investment.
Yet the right involved in the proposals cannot be ignored, profitability and risk are
directly related, i.e. higher profitability the greater the risk and vice versa there are
several methods for evaluating and ranking the capital investment proposals.

LIMITATIONS:
(1) All the techniques of capital budgeting presume that various investment proposals
under consideration that are mutually exclusive which may not practically be true
in some particular circumstances.
(2) The techniques of capital budgeting requires estimation of future cash inflows
and out flows. The future is always uncertain and the data collected for future may
not be exact. Obviously, the result based upon wrong data can not be good.
(3) There are certain factors like morale of employees, goodwill of the firm, etc.,
which cannot be correctly qualified but which otherwise substantially influence
the capital decision.
(4) Urgency is another limitation in evaluation of capital investment decision.
(5) Uncertainty and risk pose the biggest limitation to the techniques of capital
budgeting.

CHAPTER - II
REVIEW OF LITERATURE

Methods of Capital Budgeting

(1) Traditional methods:
Pay back period
Average rate return method
(2) Discount cash flow method
Net present value method
Initial rate return method
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 Profitability index method

Data collection:
Primary data: - The primary data is the data which is collected, by interviewing
directly with the organizations concerned executives. This is the direct information
gathered from the organization.

Secondary data: - The secondary data is the data which is gathered

from publications and websites.

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

KINDS OF CB DECISIONS:
Capital Budgeting refers to the total process of generating, evaluating, selecting and
following up on capital expenditure alternatives basically; the firm may be confronted
with three types of capital budgeting decisions
Accept reject decisions

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

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

Mutually exclusive project decision

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

(iii Capital Rationing Decision

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

limitations keeping in view the objectives of maximizing the value of
firms.

NATURE OF INVESTMENT DECISSIONS

The investment decisions of a firm are generally known as the capital
budgeting, or capital expenditure decisions. A capital budgeting decision may be defined
as the firms decision to invest its current funds most efficiently in the long term assets in
anticipation of an expected flow of benefits over a series of years. The long term assets
are those that affect the firms operations beyond the one year period. The firms
investment decisions would generally include expansion, acquisition, modernization and
replacement of the long-term assets.
Sale of a division or business (divestment) is also as an investment
decision. Decisions like the change in the methods of sales distribution, or an
12

advertisement campaign or a research and development programme have long-term

implications for the firms expenditures and benefits, and therefore, they should also be
evaluated as investment decisions. It is important to note that investment in the long-term
assets invariably requires large funds to be tied up in the current assets such as
inventories and receivables. As such, investment in the fixed and current assets is one
single activity.

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

The exchange of current funds for future benefits.

The funds are invested in long-term assets.

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

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

They influence the firms growth in the long run

They affect the risk of the firm

They involve commitment of large amount of funds

They are irreversible, or reversible at substantial loss

They are among the most difficult decisions to make.

Growth
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The effects of investment decisions extend in to the future and have to be

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

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

Funding
Investment decisions generally involve large amount of funds, which make it
imperative for the firm to plan its investment programmers very carefully and make an
advance arrangements for procuring finances internally or externally.

Irreversibility
Most investment decisions are irreversible. It is difficult to find a market for
such capital items once they have been acquired. The firm will incur heavy losses if such
assets are scrapped.

Complexity
Investment decisions are among the firms most difficult decisions. They
are an assessment of future events, which are difficult to predict. It is really a complex
problem to Economic, political, social and technological forces cause the uncertainty in
cash flow estimation.
14

TYPES OF INVESTEMENT DECISIONS

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

Expansion of existing business

Expansion of new business

Replacement and modernization.

Expansion and Diversification

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

Replacement and Modernization;

The main objective of modernization and replacement is to improve operating efficiency
and reduces costs. Cost savings will reflect in the increased profits, but the firms revenue
may remain unchanged. Assets become outdated and obsolete with technological
changes. The firm must decide to replace those assets with new assets that operate more
economically.
If a cement company changes from semi-automatic drying equipment to
finally automatic drying equipment, it is an example of modernization and replacement.

15

Replacement decisions help to introduce more efficient and economical

assets and therefore, are also called as cost reduction investments. 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

Mutually Exclusive Investments

Mutually exclusive investments serve the same purpose and
compete with each other. If one investment is undertaken, others will have to be
excluded. A company may, for example, either use a more labour-intensive, semiautomatic machine, or employ a more capital-intensive, highly automatic machine
for production. Choosing the semi-automatic machine precludes the acceptance of
the highly automatic machine.

Independent Investments
Independent investments serve different purposes and do not
compete with each other. For example, a heavy engineering company may be
considering expansion of its plant capacity to manufacture additional excavators and
addition of new production facilities to manufacture a new product - light
commercial vehicles. Depending on their profitability and availability of funds, the
company can undertake both investments.

Contingent Investments
16

Contingent investments are dependent projects; the choice of one

investment necessitates undertaking one or more other investments. For example, if a
company decides to build a factory in a remote, backward area, if may have to invest
in houses, roads, hospitals, schools etc. for employees to attract the work force. Thus,
building of factory also requires investments in facilities for employees. The total
expenditure will be treated as one single investment.

Investment Evolution Criteria:

Three steps are involved in the evaluation of an investment:

Estimation of cash flows.

Estimation of the required rate of return (the opportunity cost of capital)

Application of a decision rule of making the choice.

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

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

Investment decision rule

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

17

It should consider all cash flows to determine the true profitability of the
project.

It should provide for an objective and unambiguous way of separating

good projects from bad projects.

It should help ranking of projects according to their true profitability.

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

it should be a criterion which is applicable to any conceivable investment

project independent of others.

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

Net present value(NPV)

Internal rate return(IRR)

Profitability index(PI)

2. Non discounted cash flow criteria

Payback period(PB)

Discounted payback period

Accounting rate of return(ARR)

Net Present Value

The Net Present Value technique involves discounting net cash flows for a
project, then subtracting net investment from the discounted net cash flows. The result is
called the Net Present Value (NPV). If the net present value is positive, adopting the
project would add to the value of the company. Whether the company chooses to do that
will depend on their selection strategies. If they pick all projects that add to the value of
18

the company they would choose all projects with positive net present values, even if that
value is just $1. On the other hand, if they have limited resources, they will rank the
projects and pick those with the highest NPV's.
The discount rate used most frequently is the company's cost of capital.
Net present value (NPV) or net present worth (NPW)[ is defined as the total present value
(PV) of a time series of cash flows. It is a standard method for using the time value of
money to appraise long-term projects. Used for capital budgeting, and widely throughout
economics, it measures the excess or shortfall of cash flows, in present value terms, once
financing charges are met.
The rate used to discount future cash flows to their present values is a key
variable of this process. A firm's weighted average cost of capital (after tax) is often used,
but many people believe that it is appropriate to use higher discount rates to adjust for
risk for riskier projects or other factors. A variable discount rate with higher rates applied
to cash flows occurring further along the time span might be used to reflect the yield
curve premium for long-term debt.

Internal Rate of Return

The internal rate of return (IRR) is a Capital budgeting metric used by firms to
decide whether they should make Investments. It is also called discounted cash flow rate
of return (DCFROR) or rate of return (ROR).

19

It is an indicator of the efficiency or quality of an investment, as opposed to Net present

value (NPV), which indicates value or magnitude.
The IRR is the annualized effective compounded return rate which can be earned on the
invested capital, i.e., the yield on the investment. Put another way, the internal rate of
return for an investment is the discount rate that makes the net present value of the
investment's income stream total to zero.
Another definition of IRR is the interest rate received for an investment consisting of
payments and income that occur at regular periods.
A project is a good investment proposition if its IRR is greater than the rate of return that
could be earned by alternate investments of equal risk (investing in other projects, buying
bonds, even putting the money in a bank account). Thus, the IRR should be compared to
any alternate costs of capital including an appropriate risk premium.
In general, if the IRR is greater than the project's cost of capital, or hurdle rate, the
project will add value for the company. In the context of savings and loans the IRR is also
called effective interest rate.
In cases where one project has a higher initial investment than a second mutually
exclusive project, the first project may have a lower IRR (expected return), but a higher
NPV (increase in shareholders' wealth) and should thus be accepted over the second
project (assuming no capital constraints).
IRR assumes reinvestment of positive cash flows during the project at the same
calculated IRR. When positive cash flows cannot be reinvested back into the project, IRR
overstates returns. IRR is best used for projects with singular positive cash flows at the
end of the project period.

Profitability index
Yet another time adjusted method of evaluating the investment proposals is the
benefit-cost (B/C) ratio or profitability index. Profitability index is the ratio of the present
20

value of cash inflows at the required rate of return, to the initial cash out flow of the
investment.

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

Time value it recognizes the time value of money.

Value maximization it is consistent with the share holder value

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

Relative profitability in the PI method since the present value of cash in

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

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

Payback period
The payback period is one of the most popular and widely recognized
traditional methods of evaluating investment proposals. Payback is the number of
years required to cover the original cash outlay invested in a project. If the project

21

generates constant annual cash inflows, the payback period can be computed by
dividing cash outlay by the annual cash inflow.

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

Evolution of payback period;.

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

Simplicity
The significant merit of payback is that it is simple to understand
and easy to calculate. The business executives consider the simplicity of
method as a virtue. This is evident from their heavy reliance on it for
appraising investment proposals in practice.

Cost effective
Payback method costs less than most of the sophisticated techniques that

require a lot of the analysts time and the use of computers.

22

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

Liquidity
The emphasis in payback is on the early recovery of the
investment. Thus, it gives an insight into the liquidity of the project. The
funds so released can be put to other uses.
In spite of its simplicity and the so, called virtues,
the payback may not be a desirable investment criterion since it suffers
from a number of serious limitations.

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

Discounted payback period

One of the serious objections to the payback method is that it does not discount the
cash flows for calculating the payback period. We can discount cash flows and then
calculate the payback.
23

The discounted pay back period is the no. of. Periods taken in recovering the
investment outlay on the present value basis. The discounted payback period still fails to
consider the cash flows occurring after the payback period.

Accounting rate of return

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

EVALUATION OF ARR METHOD

The ARR method may claim some merits:

24

Simplicity

the ARR method is simple to understand and use. It does not

involve complicated computations.

ACCOUNTING DATA
The ARR can be readily calculated from the accounting

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

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

calculating the projects profitability.

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

CASH FLOWS IGNORED

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

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

TIME VALUE IGNORED

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

procedure gives more weight age to the distant receipts.

ARBITRARY CUT-OFF

25

The firm employing the ARR rule uses an arbitrary cut-off yardstick.
Generally, the yardstick is the firms current return on its assets (book -value).
Because of this, the growth companies earning very high rates on their existing
assets may project profitable projects and the less profitable companies may
accepts bad projects.

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

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

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

Expansion projects
26

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

Diversification projects
These investments are aimed at producing new products or services or entering
into entirely new geographical areas. Often diversification projects entail substantial
risks, involve large outlays, and require considerable managerial effort and attention.
Given their strategic importance, such projects call for a very through evaluation, both
quantitative and qualitative. Further they require a significant involvement of the board of
directors.

Research and development projects

Traditionally, R&D projects observed a very small proportion of capital budget in
most Indian companies. Things, however, are changing. Companies are now allocating
more funds to R&D projects, more so in knowledge-intensive industries. R&D projects
are characterized by numerous uncertainties and typically involve sequential decision
making.
Hence the standard DCF analysis is not applicable to them. Such projects are
decided on the basis of managerial judgment. Firms which rely more on quantitative
methods use decision tree analysis and option analysis to evaluate R&D projects.

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

Capital Budgeting: eight steps

27

Introduction
Until now, this web site has broken one of the cardinal rules of financial management.
This page corrects for that problem and presents now, the first part of the subject of
Capital Budgeting.
Many books and chapters and web pages purport to discuss capital budgeting when in
reality all they do is discuss CAPITAL INVESTMENT APPRAISAL. There's nothing
wrong with a discussion of the CIA methods except that authors have a duty to point out
that CIA methods are only one part of a multi stage process: the capital budgeting
process.
A discussion of CIA and nothing else means that capital budgeting decisions are being
discussed out of context. That is, by ignoring the earlier and later parts of capital
budgeting, we are never assess where capital budgeting project come from, how
alternatives are found and evaluated, how we really choose which project to choose
and then we never review the projects and how they have been implemented.
28

Definition
Capital budgeting relates to the investment in assets or an organization that is relatively
large. That is, a new asset or project will amount in value to a significant proportion of
the total assets of the organization.
The International Federation of Accountants, IFAC, defines capital expenditures as
Investments to acquire fixed or long lived assets from which a stream of benefits is
expected. Such expenditures represent an organization's commitment to produce and sell
future products and engage in other activities. Capital expenditure decisions, therefore,
form a foundation for the future profitability of a company.
Projects don't just fall out of thin air: someone has to have them. The main point here is
that successful, dynamic and growing companies are constantly on the lookout for new
projects to consider. In the largest organizations there are entire departments looking for
alternatives and opportunities.
2 Look for suitable projects
Once someone has had the idea to invest, the next step is to look at suitable projects:
projects that complement current business, projects that are completely different to
current business and so on. Initially, all possibilities will be considered: along the lines of
a brainstorming exercise.
As time goes by, and as corporate objectives allow, the initial list of potential projects will
be whittled down to a more manageable number.
3 Identify and consider alternatives
Having found a few projects to consider, the organization will investigate any number of
different ways of carrying them out. After all, the first idea probably won't either be the
last or the best. Creativity is the order of the day here, as organizations attempt to start off
on the best footing.
29

As the diagram suggests, at each of these first three stages, we need to consider whether
what we are proposing fits in with corporate objectives. There is no point in thinking of a
project that conflicts with, say, the growth objective or the profitability objective or even
an environmental objective.
A lot of data will be generated in this stage and this data will be fed into stage four:
Capital Investment Appraisal.
4 Capital Investment Appraisal
This is the number crunching stage in which we use some or all of the following methods
Payback (PB)
accounting rate of return (ARR)
Net present value (NPV)
Internal rate of return (IRR)
Profitability Index (PI)
There are other techniques of course; but the technique to be used will depend on a range
of things, including the knowledge and sophistication of the management of the
organization, the availability of computers and the size and complexity of the project
under review.
For more information here, go to my page on CIA once you have finished this page.
5 Analysis of feasibility
Stage four is the number crunching stage. This stage is where the decision is made as to
which project is to be assessed as acceptable. That is, which project is feasible?
In order to choose the project, management needs some hurdles:
What must the payback be
What rate of ARR is acceptable
30

 What is the NPV cut off

What IRR is the least that we can accept
What PI is the least that we can accept
and so on.
Some projects will be discarded as a result of this stage. For example, if the PB cut off is,
say, 2 years, and a project has a PB of 3 years, it will be rejected. The same is true of the
ARR, NPV, IRR and PI.
Capital rationing might be a problem here, too, if the organization has general cash flow
problems.
Capital Budgeting Policy Manual
Let's pause at this point to make the point that what we have just said about cut off rates
and so on come from formal procedures and documents. One such formal document is
the Capital Budgeting Policy Manual, in which formal procedures and rules are
established to assure that all proposals are reviewed fairly and consistently. The manual
helps to ensure that managers and supervisors who make proposals need to know what
the organization expects the proposals to contain, and on what basis their proposed
projects will be judged.
The managers who have the authority to approve specific projects need to exercise that
responsibility in the context of an overall organizational capital expenditure policy.

In outline, the policy manual should include specifications for:

1. an annually updated forecast of capital expenditures
2. the appropriation steps
31

3. the appraisal method(s) to be used to evaluate proposals

4. the minimum acceptable rate(s) of return on projects of various risk
5. the limits of authority
6. the control of capital expenditures
7. the procedure to be followed when accepted projects will be subject to an actual
performance review after implementation
(See IFAC document The Capital Expenditure Decision October 1989 for full details of
the manual)
6 Choose the project
Once we have determined the feasible/acceptable projects, we then have to make a
decision of which to accept.
If we have capital rationing problems, we might be restricted to one project only. If we
have no cash problems, we might choose two or more.
Whatever the cash position, we would like to invest in all projects that have a positive
NPV, whose IRR is greater than our cut off rate and so on.
7 Monitor the project
As with any part of the organization, the project must be monitored as it progresses. If the
project can be kept as a separate part of the business, it might be classed as its own
department or division and it might have its own performance reports prepared for it. If
it's to be absorbed within one or more parts of the organization then it could be difficult to
monitor it separately: this is something that management has to decide as they implement
their new projects.
8 Post completion audit
The final stage: once the project has been up and running for six months or a year or so,
there must be a post completion audit or a post audit. A post audit looks at the project
32

from start to finish: stages 1 - 7 and looks at how it was thought of, analyzed, chosen,
implemented, and monitored and so on.
The purpose of the post audit is to test whether capital budgeting procedures have been
fully and fairly applied to the project under review.
Of course, any weaknesses that might be found during the post audit might be specific to
one project or they might relate to capital budgeting systems for the organization as a
whole. In the latter case, the auditor will report back to his superiors and to management
that systems need to be overhauled as a result of what has been found.

33

CHAPTER III
INDUSTRY/ COMPANY PROFILE

INDUSTRY PROFILE

34

In the most general sense of the word, a cement is a binder, a

substance which sets and hardens independently, and can bind other materials together.
The word "cement" traces to the Romans, who used the term "opus caementicium" to
describe masonry which resembled concrete and was made from crushed rock with burnt
lime as binder. The volcanic ash and pulverized brick additives which were added to the
burnt lime to obtain a hydraulic binder were later referred to as cementum, cimentum,
cment and cement. Cements used in construction are characterized as hydraulic or nonhydraulic.
The most important use of cement is the production of mortar and concretethe bonding
of natural or artificial aggregates to form a strong building material which is durable in
the face of normal environmental effects.
Concrete should not be confused with cement because the term cement refers only to the
dry powder substance used to bind the aggregate materials of concrete. Upon the addition
of water and/or additives the cement mixture is referred to as concrete, especially if
aggregates have been added.
It is uncertain where it was first discovered that a combination of hydrated non-hydraulic
lime and a pozzolan produces a hydraulic mixture (see also: Pozzolanic reaction), but
concrete made from such mixtures was first used on a large scale by Roman
engineers.They used both natural pozzolans (trass or pumice) and artificial pozzolans
(ground brick or pottery) in these concretes. Many excellent examples of structures made
from these concretes are still standing, notably the huge monolithic dome of the Pantheon
in Rome and the massive Baths of Caracalla. The vast system of Roman aqueducts also
made extensive use of hydraulic cement. The use of structural concrete disappeared in
medieval Europe, although weak pozzolanic concretes continued to be used as a core fill
in stone walls and columns.

Modern cement
35

Modern hydraulic cements began to be developed from the start of the Industrial
Revolution (around 1800), driven by three main needs:
Hydraulic renders for finishing brick buildings in wet climates
Hydraulic mortars for masonry construction of harbor works etc, in contact with sea
water.
Development of strong concretes.
In Britain particularly, good quality building stone became ever more expensive during a
period of rapid growth, and it became a common practice to construct prestige buildings
from the new industrial bricks, and to finish them with a stucco to imitate stone.
Hydraulic limes were favored for this, but the need for a fast set time encouraged the
development of new cements. Most famous was Parker's "Roman cement." This was
developed by James Parker in the 1780s, and finally patented in 1796. It was, in fact,
nothing like any material used by the Romans, but was a "Natural cement" made by
burning septaria - nodules that are found in certain clay deposits, and that contain both
clay minerals and calcium carbonate. The burnt nodules were ground to a fine powder.
This product, made into a mortar with sand, set in 515 minutes. The success of "Roman
Cement" led other manufacturers to develop rival products by burning artificial mixtures
of clay and chalk.
John Smeaton made an important contribution to the development of cements when he
was planning the construction of the third Eddystone Lighthouse (1755-9) in the English
Channel. He needed a hydraulic mortar that would set and develop some strength in the
twelve hour period between successive high tides. He performed an exhaustive market
research on the available hydraulic limes, visiting their production sites, and noted that
the "hydraulicity" of the lime was directly related to the clay content of the limestone
from which it was made. Smeaton was a civil engineer by profession, and took the idea
no further. Apparently unaware of Smeaton's work, the same principle was identified by
Louis Vicat in the first decade of the nineteenth century. Vicat went on to devise a method
of combining chalk and clay into an intimate mixture, and, burning this, produced an
"artificial cement" in 1817. James Frost,orking in Britain, produced what he called
"British cement" in a similar manner around the same time, but did not obtain a patent
until 1822. In 1824, Joseph Aspdin patented a similar material, which he called Portland
36

cement, because the render made from it was in color similar to the prestigious Portland
stone.
All the above products could not compete with lime/pozzolan concretes because of fastsetting (giving insufficient time for placement) and low early strengths (requiring a delay
of many weeks before formwork could be removed). Hydraulic limes, "natural" cements
and "artificial" cements all rely upon their belite content for strength development. Belite
develops strength slowly. Because they were burned at temperatures below 1250 C, they
contained no alite, which is responsible for early strength in modern cements. The first
cement to consistently contain alite was made by Joseph Aspdin's son William in the
early 1840s. This was what we call today "modern" Portland cement. Because of the air
of mystery with which William Aspdin surrounded his product, others (e.g. Vicat and I C
Johnson) have claimed precedence in this invention, but recent analysis of both his
concrete and raw cement have shown that William Aspdin's product made at Northfleet,
Kent was a true alite-based cement. However, Aspdin's methods were "rule-of-thumb":
Vicat is responsible for establishing the chemical basis of these cements, and Johnson
established the importance of sintering the mix in the kiln.
William Aspdin's innovation was counter-intuitive for manufacturers of "artificial
cements", because they required more lime in the mix (a problem for his father), because
they required a much higher kiln temperature (and therefore more fuel) and because the
resulting clinker was very hard and rapidly wore down the millstones which were the
only available grinding technology of the time. Manufacturing costs were therefore
considerably higher, but the product set reasonably slowly and developed strength
quickly, thus opening up a market for use in concrete. The use of concrete in construction
grew rapidly from 1850 onwards, and was soon the dominant use for cements. Thus
Portland cement began its predominant role. it is made from water and sand

Types of modern cement

37

Portland cement
Cement is made by heating limestone (calcium carbonate), with small quantities of other
materials (such as clay) to 1450C in a kiln, in a process known as calcination, whereby a
molecule of carbon dioxide is liberated from the calcium carbonate to form calcium
oxide, or lime, which is then blended with the other materials that have been included in
the mix . The resulting hard substance, called 'clinker', is then ground with a small
amount of gypsum into a powder to make 'Ordinary Portland Cement', the most
commonly used type of cement (often referred to as OPC).
Portland cement is a basic ingredient of concrete, mortar and most non-speciality grout.
The most common use for Portland cement is in the production of concrete. Concrete is a
composite material consisting of aggregate (gravel and sand), cement, and water. As a
construction material, concrete can be cast in almost any shape desired, and once
hardened, can become a structural (load bearing) element. Portland cement may be gray
or white.
Portland cement blends
These are often available as inter-ground mixtures from cement manufacturers, but
similar formulations are often also mixed from the ground components at the concrete
mixing plant.
Portland blastfurnace cement contains up to 70% ground granulated blast furnace slag,
with the rest Portland clinker and a little gypsum. All compositions produce high ultimate
strength, but as slag content is increased, early strength is reduced, while sulfate
resistance increases and heat evolution diminishes. Used as an economic alternative to
Portland sulfate-resisting and low-heat cements.
Portland flyash cement contains up to 30% fly ash. The fly ash is pozzolanic, so that
ultimate strength is maintained. Because fly ash addition allows a lower concrete water
content, early strength can also be maintained. Where good quality cheap fly ash is
available, this can be an economic alternative to ordinary Portland cement.
Portland pozzolan cement includes fly ash cement, since fly ash is a pozzolan, but also
includes cements made from other natural or artificial pozzolans. In countries where
volcanic ashes are available (e.g. Italy, Chile, Mexico, the Philippines) these cements are
often the most common form in use.
38

Portland silica fume cement. Addition of silica fume can yield exceptionally high
strengths, and cements containing 5-20% silica fume are occasionally produced.
However, silica fume is more usually added to Portland cement at the concrete mixer.
Masonry cements are used for preparing bricklaying mortars and stuccos, and must not
be used in concrete. They are usually complex proprietary formulations containing
Portland clinker and a number of other ingredients that may include limestone, hydrated
lime, air entrainers, retarders, waterproofers and coloring agents. They are formulated to
yield workable mortars that allow rapid and consistent masonry work. Subtle variations
of Masonry cement in the US are Plastic Cements and Stucco Cements. These are
designed to produce controlled bond with masonry blocks.
Expansive cements contain, in addition to Portland clinker, expansive clinkers (usually
sulfoaluminate clinkers), and are designed to offset the effects of drying shrinkage that is
normally encountered with hydraulic cements. This allows large floor slabs (up to 60 m
square) to be prepared without contraction joints.
White blended cements may be made using white clinker and white supplementary
materials such as high-purity metakaolin.
Colored cements are used for decorative purposes. In some standards, the addition of
pigments to produce "colored Portland cement" is allowed. In other standards (e.g.
ASTM), pigments are not allowed constituents of Portland cement, and colored cements
are sold as "blended hydraulic cements".
Very finely ground cements are made from mixtures of cement with sand or with slag or
other pozzolan type minerals which are extremely finely ground together. Such cements
can have the same physical characteristics as normal cement but with 50% less cement
particularly due to their increased surface area for the chemical reaction. Even with
intensive grinding they can use up to 50% less energy to fabricate than ordinary Portland
cements.
Non-Portland hydraulic cements
Pozzolan-lime cements. Mixtures of ground pozzolan and lime are the cements used by
the Romans, and are to be found in Roman structures still standing (e.g. the Pantheon in
Rome). They develop strength slowly, but their ultimate strength can be very high. The

39

hydration products that produce strength are essentially the same as those produced by
Portland cement.
Slag-lime cements. Ground granulated blast furnace slag is not hydraulic on its own, but
is "activated" by addition of alkalis, most economically using lime. They are similar to
pozzolan lime cements in their properties. Only granulated slag (i.e. water-quenched,
glassy slag) is effective as a cement component.
Supersulfated cements. These contain about 80% ground granulated blast furnace slag,
15% gypsum or anhydrite and a little Portland clinker or lime as an activator. They
produce strength by formation of ettringite, with strength growth similar to a slow
Portland cement. They exhibit good resistance to aggressive agents, including sulfate.
Calcium aluminate cements are hydraulic cements made primarily from limestone and
bauxite. The active ingredients are monocalcium aluminate CaAl 2O4 (CaO Al2O3 or CA
in Cement chemist notation, CCN) and mayenite Ca12Al14O33 (12 CaO 7 Al2O3 , or C12A7
in CCN). Strength forms by hydration to calcium aluminate hydrates. They are welladapted for use in refractory (high-temperature resistant) concretes, e.g. for furnace
linings.
Calcium sulfoaluminate cements are made from clinkers that include ye'elimite
(Ca4(AlO2)6SO4 or C4A3

in Cement chemist's notation) as a primary phase. They are

used in expansive cements, in ultra-high early strength cements, and in "low-energy"

cements. Hydration produces ettringite, and specialized physical properties (such as
expansion or rapid reaction) are obtained by adjustment of the availability of calcium and
sulfate ions. Their use as a low-energy alternative to Portland cement has been pioneered
in China, where several million tonnes per year are produced. Energy requirements are
lower because of the lower kiln temperatures required for reaction, and the lower amount
of limestone (which must be endothermically decarbonated) in the mix. In addition, the
lower limestone content and lower fuel consumption leads to a CO 2 emission around half
that associated with Portland clinker. However, SO2 emissions are usually significantly
higher.
"Natural" Cements correspond to certain cements of the pre-Portland era, produced by
burning argillaceous limestones at moderate temperatures. The level of clay components
in the limestone (around 30-35%) is such that large amounts of belite (the low-early
40

strength, high-late strength mineral in Portland cement) are formed without the formation
of excessive amounts of free lime. As with any natural material, such cements have
highly variable properties.
Geopolymer cements are made from mixtures of water-soluble alkali metal silicates and
aluminosilicate mineral powders such as fly ash and metakaolin.

COMPANY PROFILE
41

ULTRATECH CEMENT:
UltraTech Cement Limited has an annual capacity of 18.2 million tonnes. It manufactures
and markets Ordinary Portland Cement, Portland Blast Furnace Slag Cement and
Portland Pozzalana Cement. It also manufactures ready mix concrete (RMC).
UltraTech Cement Limited has five integrated plants, six grinding units and three
terminals two in India and one in Sri Lanka.
UltraTech Cement is the countrys largest exporter of cement clinker. The export markets
span countries around the Indian Ocean, Africa, Europe and the Middle East.
UltraTechs subsidiaries are Dakshin Cement Limited and UltraTech Ceylinco (P)
Limited.
The roots of the Aditya Birla Group date back to the 19th century in the picturesque town
of Pilani, set amidst the Rajasthan desert. It was here that Seth Shiv Narayan Birla started
trading in cotton, laying the foundation for the House of Birlas.
Through India's arduous times of the 1850s, the Birla business expanded rapidly. In the
early part of the 20th century, our Group's founding father, Ghanshyamdas Birla, set up
industries in critical sectors such as textiles and fibre, aluminium, cement and chemicals.
As a close confidante of Mahatma Gandhi, he played an active role in the Indian freedom
struggle. He represented India at the first and second round-table conference in London,
along with Gandhiji. It was at "Birla House" in Delhi that the luminaries of the Indian
freedom struggle often met to plot the downfall of the British Raj.
Ghanshyamdas Birla found no contradiction in pursuing business goals with the
dedication of a saint, emerging as one of the foremost industrialists of pre-independence
India. The principles by which he lived were soaked up by his grandson, Aditya Vikram
Birla, our Group's legendary leader.
Aditya Vikram Birla: putting India on the world map
A formidable force in Indian industry, Mr. Aditya Birla dared to
42

dream of setting up a global business empire at the age of 24. He was the first to put
Indian business on the world map, as far back as 1969, long before globalisation became
a buzzword in India.
In the then vibrant and free market South East Asian countries, he ventured to set up
world-class production bases. He had foreseen the winds of change and staked the future
of his business on a competitive, free market driven economy order. He put Indian
business on the globe, 22 years before economic liberalisation was formally introduced
by the former Prime Minister, Mr. Narasimha Rao and the former Union Finance
Minister, Dr. Manmohan Singh. He set up 19 companies outside India, in Thailand,
Malaysia, Indonesia, the Philippines and Egypt.
Interestingly, for Mr. Aditya Birla, globalisation meant more than just geographic reach.
He believed that a business could be global even whilst being based in India. Therefore,
back in his home-territory, he drove single-mindedly to put together the building blocks
to make our Indian business a global force. Under his stewardship, his companies rose to
be the world's largest producer of viscose staple fibre, the largest refiner of palm oil, the
third largest producer of insulators and the sixth largest producer of carbon black. In
India, they attained the status of the largest single producer of viscose filament yarn, apart
from being a producer of cement, grey cement and rayon grade pulp. The Group is also
the largest producer of aluminium in the private sector, the lowest first cost producers in
the world and the only producer of linen in the textile industry in India.
At the time of his untimely demise, the Group's revenues crossed Rs.8,000 crore globally,
with assets of over Rs.9,000 crore, comprising of 55 benchmark quality plants, an
employee strength of 75,000 and a shareholder community of 600,000.
Most importantly, his companies earned respect and admiration of the people, as one of
India's finest business houses, and the first Indian International Group globally. Through
this outstanding record of enterprise, he helped create enormous wealth for the nation,
and respect for Indian entrepreneurship in South East Asia. In his time, his success was
unmatched by any other industrialist in India.
43

That India attains respectable rank among the developed nations, was a dream he forever
cherished. He was proud of India and took equal pride in being an Indian.
Under the leadership of our Chairman, Mr. Kumar Mangalam Birla, the Group has
sustained and established a leadership position in its key businesses through continuous
value-creation. Spearheaded by Grasim, Hindalco, Aditya Birla Nuvo, Indo Gulf
Fertilisers and companies in Thailand, Malaysia, Indonesia, the Philippines and Egypt,
the Aditya Birla Group is a leader in a swathe of products viscose staple fibre,
aluminium, cement, copper, carbon black, palm oil, insulators, garments. And with
successful forays into financial services, telecom, software and BPO, the Group is today
one of Asia's most diversified business groups.
Board of Directors
:: Mr. Kumar Mangalam Birla, Chairman
:: Mrs. Rajashree Birla
:: Mr. R. C. Bhargava
:: Mr. G. M. Dave
:: Mr. N. J. Jhaveri
:: Mr. S. B. Mathur
:: Mr. V. T. Moorthy
:: Mr. O. P. Puranmalka
:: Mr. S. Rajgopal
:: Mr. D. D. Rathi
:: Mr. S. Misra, Managing Director
Executive President & Chief Financial Officer
:: Mr. K. C. Birla
Chief Manufacturing Officer
:: R.K. Shah
Chief Marketing Officer
:: Mr. O. P. Puranmalka
Company Secretary
:: Mr. S. K. Chatterjee
Our vision

44

"To actively contribute to the social and economic development of the communities
in which we operate. In so doing, build a better, sustainable way of life for the
weaker sections of society and raise the country's human development index."
Mrs. Rajashree Birla, Chairperson,
The Aditya Birla Centre for Community Initiatives and Rural Development
Making a difference
Before Corporate Social Responsibility found a place in corporate lexion, it was already
textured into our Group's value systems. As early as the 1940s, our founding father Shri
G.D Birla espoused the trusteeship concept of management. Simply stated, this entails
that the wealth that one generates and holds is to be held as in a trust for our multiple
stakeholders. With regard to CSR, this means investing part of our profits beyond
business, for the larger good of society.
While carrying forward this philosophy, his grandson, Aditya Birla weaved in the concept
of 'sustainable livelihood', which transcended cheque book philanthropy. In his view, it
was unwise to keep on giving endlessly. Instead, he felt that channelising resources to
ensure that people have the wherewithal to make both ends meet would be more
productive. He would say, "Give a hungry man fish for a day, he will eat it and the next
day, he would be hungry again. Instead if you taught him how to fish, he would be able to
feed himself and his family for a lifetime."
Taking these practices forward, our chairman
Mr. Kumar Mangalam Birla institutionalised the concept of triple bottom line
accountability represented by economic success, environmental responsibility and social
commitment. In a holistic way thus, the interests of all the stakeholders have been
textured into our Group's fabric.
The footprint of our social work today straddles over 3,700 villages, reaching out to more
than 7 million people annually. Our community work is a way of telling the people
among whom we operate that We Care.
45

Our strategy
Our projects are carried out under the aegis of the "Aditya Birla Centre for Community
Initiatives and Rural Development", led by Mrs. Rajashree Birla. The Centre provides the
strategic direction, and the thrust areas for our work ensuring performance management
as well.
Our focus is on the all-round development of the communities around our plants located
mostly in distant rural areas and tribal belts. All our Group companies - Grasim,
Hindalco, Aditya Birla Nuvo, Indo Gulf and UltraTech have Rural Development Cells
which are the implementation bodies.
Projects are planned after a participatory need assessment of the communities around the
plants. Each project has a one-year and a three-year rolling plan, with milestones and
measurable targets. The objective is to phase out our presence over a period of time and
hand over the reins of further development to the people. This also enables us to widen
our reach. Along with internal performance assessment mechanisms, our projects are
audited by reputed external agencies, who measure it on qualitative and quantitative
parameters, helping us gauge the effectiveness and providing excellent inputs.
Our partners in development are government bodies, district authorities, village
panchayats and the end beneficiaries -- the villagers. The Government has, in their 5-year
plans, special funds earmarked for human development and we recourse to many of
these. At the same time, we network and collaborate with like-minded bilateral and
unilateral agencies to share ideas, draw from each other's experiences, and ensure that
efforts are not duplicated. At another level, this provides a platform for advocacy. Some
of the agencies we have collaborated with are UNFPA, SIFSA, CARE India, Habitat for
Humanity International, Unicef and the World Bank.
Our focus areas
Our rural development activities span five key areas and our single-minded goal here is to
help build model villages that can stand on their own feet. Our focus areas are healthcare,
education, sustainable livelihood, infrastructure and espousing social causes.
46

The name Aditya Birla evokes all that is positive in business and in life. It exemplifies
integrity, quality, performance, perfection and above all character.

Our logo is the symbolic reflection of these traits. It is the cornerstone of our corporate
identity. It helps us leverage the unique Aditya Birla brand and endows us with a
distinctive visual image.
Depicted in vibrant, earthy colours, it is very arresting and shows the sun rising over two
circles. An inner circle symbolising the internal universe of the Aditya Birla Group, an
outer circle symbolising the external universe, and a dynamic meeting of rays converging
and diverging between the two.
Through its wide usage, we create a consistent, impact-oriented Group image. This
undoubtedly enhances our profile among our internal and external stakeholders.

Our corporate logo thus serves as an umbrella for our Group. It signals the common
values and beliefs that guide our behaviour in all our entrepreneurial activities. It embeds
a sense of pride, unity and belonging in all of our 130,000 colleagues spanning 25
countries and 30 nationalities across the globe. Our logo is our best calling card that
opens the gateway to the world.

Group companies
:: Grasim Industries Ltd.
:: Hindalco Industries Ltd.
:: Aditya Birla Nuvo Ltd.
:: UltraTech Cement Ltd.

47

Indian companies
:: Aditya Birla Minacs IT Services Ltd.
:: Aditya Birla Minacs Worldwide Limited
:: Essel Mining & Industries Ltd
:: Idea Cellular Ltd.
:: Aditya Birla Insulators
:: Aditya Birla Retail Limited
:: Aditya Birla Chemicals (India) Limited

International companies
Thailand
:: Thai Rayon
:: Indo Thai Synthetics
:: Thai Acrylic Fibre
:: Thai Carbon Black
:: Aditya Birla Chemicals (Thailand) Ltd.
:: Thai Peroxide
Philippines
:: Indo Phil Group of companies
:: Pan Century Surfactants Inc.
Indonesia
:: PT Indo Bharat Rayon
:: PT Elegant Textile Industry
:: PT Sunrise Bumi Textiles
:: PT Indo Liberty Textiles
:: PT Indo Raya Kimia
Egypt
:: Alexandria Carbon Black Company S.A.E
:: Alexandria Fiber Company S.A.E
48

China
:: Liaoning Birla Carbon
:: Birla Jingwei Fibres Company Limited
:: Aditya Birla Grasun Chemicals (Fangchenggang) Ltd.

Canada
:: A.V. Group
Australia
:: Aditya Birla Minerals Ltd.
Laos
:: Birla Laos Pulp & Plantations Company Limited
North and South America, Europe and Asia
:: Novelis Inc.
Singapore
:: Swiss Singapore Overseas Enterprises Pte Ltd. (SSOE)
Joint ventures
:: Birla Sun Life Insurance Company
:: Birla Sun Life Asset Management Company
:: Aditya Birla Money Mart Limited
:: Tanfac Industries Limited
UltraTech is India's largest exporter of cement clinker. The company's production
facilities are spread across eleven integrated plants, one white cement plant, one
clinkerisation plant in UAE, fifteen grinding units, and five terminals four in India and
one in Sri Lanka. Most of the plants have ISO 9001, ISO 14001 and OHSAS 18001
certification. In addition, two plants have received ISO 27001 certification and four have
received SA 8000 certification. The process is currently underway for the remaining
plants. The company exports over 2.5 million tonnes per annum, which is about 30 per
cent of the country's total exports. The export market comprises of countries around the
Indian Ocean, Africa, Europe and the Middle East. Export is a thrust area in the
company's strategy for growth.
49

UltraTech's products include Ordinary Portland cement, Portland Pozzolana cement and
Portland blast furnace slag cement.

Ordinary Portland cement

Portland blast furnace slag cement

Portland Pozzolana cement

Cement to European and Sri Lankan norms

Ordinary Portland cement

Ordinary portland cement is the most commonly used cement for a wide range of
applications. These applications cover dry-lean mixes, general-purpose ready-mixes, and
even high strength pre-cast and pre-stressed concrete.
Portland blast furnace slag cement
Portland blast-furnace slag cement contains up to 70 per cent of finely ground, granulated
blast-furnace slag, a nonmetallic product consisting essentially of silicates and aluminosilicates of calcium. Slag brings with it the advantage of the energy invested in the slag
making. Grinding slag for cement replacement takes only 25 per cent of the energy
needed to manufacture portland cement. Using slag cement to replace a portion of
portland cement in a concrete mixture is a useful method to make concrete better and
more consistent. Portland blast-furnace slag cement has a lighter colour, better concrete
workability, easier finishability, higher compressive and flexural strength, lower
permeability, improved resistance to aggressive chemicals and more consistent plastic
and hardened consistency.
Portland Pozzolana cement
Portland pozzolana cement is ordinary portland cement blended with pozzolanic
materials (power-station fly ash, burnt clays, ash from burnt plant material or silicious
earths), either together or separately. Portland clinker is ground with gypsum and
pozzolanic materials which, though they do not have cementing properties in themselves,
50

combine chemically with portland cement in the presence of water to form extra strong
cementing material which resists wet cracking, thermal cracking and has a high degree of
cohesion and workability in concrete and mortar.
"As a Group we have always operated and continue to operate our businesses as
Trustees with a deep rooted obligation to synergise growth with responsibility."
Mr Kumar Mangalam Birla, Chairman, Aditya Birla Group
The cement industry relies heavily on natural resources to fuel its operations. As these
dwindle, the imperative is clear alternative sources of energy have to be sought out
and the use of existing resources has to be reduced, or eliminated altogether. Only then
can sustainable business be carried out, and a corporate can truly say it is contributing to
the preservation of the environment.
UltraTech takes its responsibility to conserve the environment very seriously, and its ecofriendly approach is evident across all spheres of its operations. Its major thrust has been
to identify alternatives to achieve set objectives and thereby reduce its carbon footprint.
These are done through:
::
::
::
::
::
::

Waste management
Energy management
Water conservation
Biodiversity management
Afforestation
Reduction in emissions

Importantly, UltraTech has set a target of 2.96 per cent reduction in CO 2 emission
intensity, at a rate of 0.5 per cent annually, up to 2015-16, with 2010-10 as the baseline
year. This will also include CO2 emissions from the recently acquired ETA Star Cement
and upcoming projects.

51

Our strategy
Our projects are carried out under the aegis of the "Aditya Birla Centre for Community
Initiatives and Rural Development", led by Mrs. Rajashree Birla. The Centre provides the
strategic direction, and the thrust areas for our work ensuring performance management
as well.
Our focus is on the all-round development of the communities around our plants located
mostly in distant rural areas and tribal belts. All our Group companies - Grasim,
Hindalco, Aditya Birla Nuvo and UltraTech have Rural Development Cells which are the
implementation bodies.
Projects are planned after a participatory need assessment of the communities around the
plants. Each project has a one-year and a three-year rolling plan, with milestones and
measurable targets. The objective is to phase out our presence over a period of time and
hand over the reins of further development to the people. This also enables us to widen
our reach. Along with internal performance assessment mechanisms, our projects are
audited by reputed external agencies, who measure it on qualitative and quantitative
parameters, helping us gauge the effectiveness and providing excellent inputs.
Our partners in development are government bodies, district authorities, village
panchayats and the end beneficiaries the villagers. The Government has, in their 5year plans, special funds earmarked for human development and we recourse to many of
these. At the same time, we network and collaborate with like-minded bilateral and
unilateral agencies to share ideas, draw from each other's experiences, and ensure that
efforts are not duplicated. At another level, this provides a platform for advocacy. Some
of the agencies we have collaborated with are UNFPA, SIFSA, CARE India, Habitat for
Humanity International, Unicef and the World Bank.
Our vision
"To actively contribute to the social and economic development of the communities
in which we operate. In so doing, build a better, sustainable way of life for the
weaker sections of society and raise the country's human development index."
52

 Mrs. Rajashree Birla, Chairperson,

The Aditya Birla Centre for Community Initiatives and Rural Development
Making a difference Before Corporate Social Responsibility found a place in corporate
lexicon, it was already textured into our Group's value systems. As early as the 1940s, our
founding father Shri G.D Birla espoused the trusteeship concept of management. Simply
stated, this entails that the wealth that one generates and holds is to be held as in a trust
for our multiple stakeholders. With regard to CSR, this means investing part of our profits
beyond business, for the larger good of society.
While carrying forward this philosophy, our legendary leader, Mr. Aditya Birla, weaved
in the concept of 'sustainable livelihood', which transcended cheque book philanthropy. In
his view, it was unwise to keep on giving endlessly. Instead, he felt that channelising
resources to ensure that people have the wherewithal to make both ends meet would be
more productive. He would say, "Give a hungry man fish for a day, he will eat it and the
next day, he would be hungry again. Instead if you taught him how to fish, he would be
able to feed himself and his family for a lifetime."
Taking these practices forward, our chairman
Mr. Kumar Mangalam Birla institutionalised the concept of triple bottom line
accountability represented by economic success, environmental responsibility and social
commitment. In a holistic way thus, the interests of all the stakeholders have been
textured into our Group's fabric.
The footprint of our social work today spans 2,500 villages in India, reaching out to
seven million people annually. Our community work is a way of telling the people among
whom we operate that We Care.

53

CHAPTER IV
DATA ANALYSIS
&
INTERPRETATION

54

ULTRATECH CEMENTS MINES CASHFLOW STATEMENT FOR THE YEARS

2009-2010 TO 2013-2014
(Rs. In crorers)
SI.NO PARTICULARS
2009-2010 2010-2011 2011-2012 2012-2013 2013-2014
Cash inflow:
1.
2.

3.

4.

5.

6.

7.

8.

Sales turnover
(revenue)
Other income

3413.73

3629.10

3790.55

4499.67

5500.39

319.29

330.38

316.37

384.48

470.99

Total:

3733.02

3959.48

4106.92

4884.15

5971.38

Add: Closing stock

49.94

110.56

82.25

13.11

14.25

Total:

3782.96

4070.04

4189.17

4897.26

5985.63

Less:
operating 16.56
stock
Other income:
3766.40

49.94

110.56

82.25

13.11

4078.61

4815.01

5972.52

Less:
operating 57.56
expenses
Cash flow before 3708.84
tax:

58.51

83.36

87.18

80.63

3961.59

3995.25

4727.83

5891.89

217.75

244.77

249.19

3777.5

4483.06

5642.70

Less: depreciation

4020.10

194.82

212.60

Taxable income:

3514.02

Less: tax

3.36

11.31

7.29

2.03

3.28

Earnings after tax:

3510.66

3737.68

3770.21

4481.03

5639.42

212.60

217.75

244.77

249.19

3987.96

4725.8

5888.61

Add: depreciation
Cash flow after tax:

3748.99

194.82
3705.48

3950.28

NOTE: (Cash flows after tax has been taken as an initial investment or cash out flows for
the calculation of capital budgeting techniques)
55

TRADITIONAL CAPITAL BUDGETING APPRISAL METHODS

RELATED TO RDTK Project

1. PAY BACK PERIOD METHOD:

Payback period method is a traditional method of evaluation of capital
budgeting decision. The term payback or pay out or payoff refers to the
period in which the project will generate the necessary cash and recoup the
initial investment or the cash out flows.
To calculate the pay period, the cumulative cash flows will be
calculated and by using interpolation the exact period may be calculated.
The ULTRATECH has Rs. 7683.708 lacks of initial investment and the
annual cash flows for the years 2008 to 2013. Then the payback period is
calculated as follows:

CALCULATION OF PAY BACK PERIOD OF ULTRATECH CEMENTS MINES

SI .NO

YEAR

(Rs. In crorers)
CASH INFLOW CUMULATIVE
CASH FLOWWS

2009-2010

3705.48

3705.48

20010-2011

3950.28

7655.76

2011-2012

3987.96

11643.72

2012-2013

4725.80

16369.52

2013-2014

5888.61

22258.13

56

The above table shows that, the initial investment RS.4451.626 Lacks lies
between first and second years with Rs. 3705.48and 7655.76 lacks
The amount has been recovered in the first year and the remaining
amount in second year (1907.896-1311.533=596.363)

Difference in cash flows

PBP = Actual (Base) year + ---------------------------------Next year cash flows
746.146
1 + ------------3950.28

PBP =

1 + 0.1884

1.1884 year

Payback period (PBP) = 1.1884 year.

ACCEPT-REJECT CRITERION:
PBP can be used as a criterion to accept or reject an investment
proposal. A proposal whose actual payback period is more than what is predetermined by the management.
PBP thus, is useful for the management to accept the investment
decision on the ULTRATECH and also to assist the management to know
that the initial investment is recovered in 1.1884years.

57

II. ACCOUNTING OR AVERAGE RATE OF RETURN METHOD:

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

Annual average net earnings

---------------------------------- X 100
Original investment

(ii)

Annual average net earnings

----------------------------------- X 100
Average investment

(iii)

Increase in expected future annual net earnings

----------------------------------------------------------- X 100
Initial increase in required investment
The term average annual net earnings are the average of the earnings after depreciation
and tax. Over the whole of the economic life of the project order and these giving on
ARR above the required rate may be accepted.
The amount of average investment can be calculated according to any of
the following methods:
(a)
(b)

Original investment
-----------------------2
Original investment +scrap value
-----------------------------------------2

(c) Original investment +scrap value + net additional + scrap value

Working capital
--------------------------------------------------------------------------------2
58

Cash flows of the ULTRATECH CEMENTS are shown in cash flow statement. ARR
is calculated as follows:

YEARS

Statement showing calculation of ARR

\
(Rs. In lakes)
EARNINGS AFTER TAX (EAT)

2009-2010

3510.66

20010-2011

3737.68

2011-2012

3770.21

2012-2013

4481.03

2013-2014

5639.42

TOTAL

21139.00

ARR

Average annual EATS

= ------------------------------- x 100
Average investment

Total amount
Average Annual EATS = --------------------No of years

21139.00
= -----------------5
Average investment =4451.626
4227.8
ARR = ---------------- X 100
4451.626

= 95%

Average Rate of Return = 95%

59

= 4227.8

ACCEPT-REJECT CRIT ARR method allows ULTRATECH to fix a minimum

rate of return. Any project expected to give a return below it will be straight away
rejected. The average rate of return is as good as 95% of ULTRATECH depicts
the prospects of management efficiency.
TIME ADJUSTED (OR) DISCOUNTED CASH FLOW METHOD:
The time adjusted or discounted cash flow methods take into accounts the
profitability time value of money. These methods are also called the modern methods of
capital budgeting.

1. NET PRESENT VALUE METHOD: (NPV)

Net present value method or NPV is one of the discounted cash flows methods.
The method is considered to be one of the best of evaluating the capital
investment proposals. Under this method cash inflows and outflows associated
with each project are first calculated.
ROLE OF DISCOUNTING FACTOR:
The cash inflows and out flows are converted to the present values using
discounting factor which is the actuary discount factor of Regulated display tool
kit project of ULTRATECH CEMENTS is 8%.
The rate of return is considered as cut off rate or required rate or rate
generally determined on the basis of cost of capital to allow for the risk element
involved in the project.

60

STEPS FOR CALCULATION OF NPV:

1) Calculation of each cash flows after taxes of three years, which is arrived at
by deducting depreciation, interest and tax from earnings
before tax and interest (EBIT). This residue is profit after tax to arrive at
cash flow after tax.
2) This cash flow after tax are multiplied with the values obtained from the
Table (the present value annuity table against the 8% actuary discount
Rate i.e. in the case of project.
3) NPV is derived by deducting the sum of present values from the initial
Investment.
4) Initial investments are the sum of cash flows of three years shown in
Capital expenditure table
Let us assume the discount rate be 10%:

61

Statement showing calculation of NPV.

YEARS

CFATS

(Rs. In lakhs)

PVIF @ 10%

PVS

2009-2010

3705.48

0.909

3368.28

20010-2011

3950.28

0.826

3262.93

2011-2012

3987.96

0.7513

2996.15

2012-2013

4725.80

0.683

3227.72

2013-2014

5888.61

0.620

3650.90
TOTAL:

LESS: Initial Investment:

NPV:

16505.98
4451.62
12054.98

ACCEPT-REJECT CRITERION:
The accept -reject decision of NPV is very simple. If the NPV is positive then the
project should be accepted and if NPV is negative then the project should be
rejected
i.e .If

NPV > 0

(ACCEPT)
and

NPV < 0

(REJECT)

Hence in the case of ULTRATECH CEMENTS project it is visible that the

positive NPV shows the acceptance and importance of the project.

1. INTERNAL RATE OF RETURN METHOD: (IRR)

The internal rate of return method is also a modern technique of capital
budgeting that takes into account the time value of money. It is also known as
TIME ADGUSTED RATE OF RETURN, DISCOUNTED CASH FLOW,
DISCOUNTED RATE OF RETURN, YIELD METHOD and TRAIL
AND ERROR YIELD METHOD.
62

IRR is the rate the sum of discounted cash inflows equals the sum of
discounted cash outflows. It equals the present value of cash inflow to present value
of cash outflows.
In this method discount rate is not known, but the cash inflows and cash
out flows are known. It is the rate of return, which equates the present value of cash
inflows to out flows or it, is the rate of return, which renders NPV TO ZERO.

STEPS INVOLVED IN THE CALCULATION OF IRR:

1) Calculation of NPV with given discount rate
2) Calculation of NPV with assumed discount rate
3) Select the higher NPV of both
4) Let R be the higher discount rate
5) Let R1 be the difference of discount rates
6) Calculation of difference of P Vs (Always higher NPV-lower NPV)

Higher NP
IRR= R +

---------------------------- XR1
Difference of P V s.

8) Decision making(Accepting- Rejecting the proposal)

63

FORMULATION OF STEPS:
STATEMENT OF SHOWING CALCULATION NPV @88%,89%,90% UNDER
IRR METHOD
(R s corers)
YEARS
Annual
Discount
Discount
Discount
CFA Ts
Rate-88%
Rate-89%
Rate-90%
PVF

PV

PVF

PV

PVF

PV

2009-2010

3705.48

0.5405 2002.81

0.5291

1960.56

0.526

1949.08

20010-2011

3950.28

0.2921 1153.87

0.2799

1105.68

0.277

1094.22

2011-2012

3989.96

0.1579 630.01

0.1481

590.91

0.145

578.54

2012-2013

4725.80

0.0858 405.40

0.0783

370.03

0.076

359.16

2013-2014

5888.61

0.0461 271.46

0.0414

243.78

0.040

235.54

4463.55

4270.96

4216.54

From the above calculations the following can be observed.

PV 0f net cash flows at 88% is: 4463.55 lacks
PV 0f net cash flows at 89% is: 4270.96lacks

DECISION:
Since the initial investment RS.4451.626 lacks is lies between 88% and 89% the
company ULTRATECH can determine the IRR as 88.5%
Hence IRR=88.5%

64

ACCEPT-REJECT CRITERION:
IRR is the maximum rate of interest, which an organization can afford to pay
on capital invested in, is accepted if IRR exceeds the cutoff rates and rejected if it
is below the cutoff rate.
The cutoff rate of ULTRATECH CEMENTS is 10%, which is less than the
IRR i.e 88.5% Hence the acceptance of ULTRATECH CEMENTS is quiet a
good investment decision taken by management.

3. PROFITABILITY INDEX: (BCR OR PI)

Profitability index method is also known as time adjusted method of evaluating
the investment proposals. Profitability also called as benefit cost ratio (B\C) in
relationship between present value of cash inflows and the present value of cash out
flows. Thus
Present value of cash inflows
Profitability index =

-------------------------------------Present value of cash outflows.

(OR)

Profitability index

Present value of cash inflows

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

65

CALCULATIONS OF BCR:
STEP1: Calculations of cash flows after taxes
STEP2: Calculations of Present values of cash inflows @10%.
STEP3: Application of the formula.

Statement for calculating of benefit cost ratio

YEARS
2009-2010

CFATS
3705.48

PVIF @ 10%
0.909

PVS
3368.28

20010-2011

3950.28

0.826

3262.93

2011-2012

3989.96

0.751

2996.15

2012-2013

4725.80

0.683

3227.72

2013-2014

5888.61

0.620

3650.90

TOTAL:

16505.98

Profitability index

Present value of cash inflows

-------------------------------------Initial Investment

16505.98
= -----------------4451.62
Hence PI = 3.707 years.

66

= 3.707

ACCEPT-REJECT CRITERION:
There is a slight difference between present value index method and
profitability index method. Under profitability index method the present value of cash
inflows and cash outflows are taken as accept-reject decision.
I.e. the accept reject criterion is:
If Profitability Index
Profitability Index

> 1 (ACCEPT).
< 1

(REJECT).

The acceptance of by the management is evaluated through Profitability Index

method of as the PI > 1 (i.e.3.707 years)

MERITS AND DEMERITS:

This method is slight modification of net present value method. The net present
value method has one drawback that, it is not easy to rank the projects on the basis of this
method, particularly when the costs of the projects differ significantly. To evaluate such
projects, the profitability index method is most suitable. The other advantages and
disadvantages of this project are similar to net present value method.

67

CHAPTER - V
FINDINGS
SUGGESTIONS
CONCLUSIONS

FINDINGS:
68

1. It is observed that the company is able to increase its profits from year
to year.
2. The Gross profits from 2009 to 2014 increased from year to year
3. It is observed that the companies net worth is increasing considerably.
4. By observing the sources & applications, it is clear that the company is actively
increasing or standardizing its operations.

5. PBP can be used as a criterion to accept or reject an investment proposal. A

proposal whose actual payback period is more than what is pre-determined by the
management.

6. Since the initial investment RS.4451.626 lacks is lies between 88% and 89% the
company ULTRATECH can determine the IRR as 88.5%

69

SUGGESTIONS
1. There are various developments taking in the industry to challenge so as
to the company should develop as a full fledged research and developed
department for bringing technological changes and improvements in its
design & process.
2. The management has physically verified the stock of finished goods and
work-in-progress at the end of the year.
3. Company needs to identify the potential business revenue generation
which results to profit on operations.
4. In respect of service activities, there is a reasonable system of recording
receipts, issues and consumption of materials and stores of allocation of
materials consumed to the relative job. Commensurate with its size and
nature of its business.

70

CONCLUSIONS
The budgeting exercise in ULTRATECH also covers the long term capital
budgets, including annual planning and provides long term plan for application of
internal resources and debt servicing translated in to the corporate plan.
The scope of capital budgeting also includes expenditure on plant betterment, and
renovation, balancing equipment, capital additions and commissioning expenses
on trial runs generating units.
To establish a close link between physical progress and monitory outlay and to
provide the basis for plan allocation and budgetary support by the government.
The manual recommends the computation of NPV at a cost of capital / discount
rate specified from time to time.
A single discount rate should not be used for all the capacity budgeting projects.
The analysis of relevant facts and quantifications of anticipated results and
benefits, risk factors if any, must be clearly brought out.
Feasibility report of the project is prepared on the cost estimates and the cost of
generation.

71

ABBREVIATIONS

PI

Profitability index.

CB

Capital budgeting

CFS

Cash flows.

CCFS

Cumulative cash flows.

EAT

Earnings after tax.

EBIT

Earnings before investment and tax.

CFAT

Cash flows after tax.

PVS

Present value of cash flows.

PVIF

Present value of inflows.

PBP

Payback period.

ARR

Average rate return.

NPV

Net present value.

IRR

Internal rate return.

B/C

Benefit cost ratio.

72

BIBLIOGRAPHY

73

BIBLIOGRAPHY

Prasanna Chandra, 2007, Financial Management Theory and Practice,

6th Edition, Tata McGraw Hill.

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

Brigham, E.F. and Ehrhardt.M.C., 2007, Financial Management Theory and

Practice, 10th Edition, Thomson South-Western.

Khan M.Y., and Jain.P.K., 2008, Management Accounting, IV edition, Tata

Mc Graw Hill, New Delhi.

WEBSITES

www.google.com
www.ultratech Cements.com
www.wickipedia.com

74